<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to
COMMISSION FILE NUMBER 0-25372
COTELLIGENT GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-3173918
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 CALIFORNIA STREET, SUITE 2050
SAN FRANCISCO, CALIFORNIA 94111
(Address of principal executive offices) (Zip Code)
(415) 439-6400
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [_] NO [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $81,013,454 as of June 10, 1996.
The number of shares of the issuers common stock outstanding as of June 10,
1996 was 6,234,305.
DOCUMENTS INCORPORATED BY REFERENCE
There is incorporated by reference the registrants Proxy Statement for the 1996
Annual Meeting of Stockholders, expected to be filed with the Securities and
Exchange Commission within 120 days after the end of the registrants fiscal
year, in Part III hereof.
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PART I
ITEM 1. BUSINESS.
---------
Cotelligent Group, Inc. ("Cotelligent" or the "Company") is an independent
software professional services firm devoted primarily to providing computer
consulting and contract programming services. The Company owns four
subsidiaries: BFR Co., Inc. ("BFR"), Chamberlain Associates, Inc. ("CAI"), Data
Arts & Sciences, Inc. ("DASI") and Financial Data Systems, Inc. ("FDSI"), which
operate offices in eight metropolitan areas including Boston, New York, San
Francisco/Silicon Valley and Seattle. All four subsidiaries (the "Founding
Companies") were acquired simultaneously (the "Acquisitions") with the closing
of the Companys initial public offering of common stock (the "Offering") on
February 20, 1996.
The Company provides its clients with the services of technical personnel who
are skilled in implementing systems using a wide range of software development
and support services. These services include mainframe and mid-range software
development, personal computer and client/server applications development
support, telecommunications and help-desk support.
Serving clients across a broad spectrum of commercial industries throughout
the United States, the Company has provided significant services to companies in
the financial services, technology and telecommunications industries, including
such companies as AT&T, AT&T Wireless (formerly McCaw Cellular Communications),
Bellcore, Lucent Technologies, Microsoft, Pacific Bell and U S West. The Company
believes that its large and diverse client base presents excellent opportunities
for further marketing of its services. See Item 1, "Business-Business Strategy."
--------
The Company has eight operating offices located in eight states across the
United States and, at March 31, 1996, had a staff of approximately 700 persons,
including approximately 600 technical software professionals. In 1996, Company
employees provided approximately 1,047,000 hours of technical services for over
150 clients. The Company has provided services to approximately 100 clients
listed on the Fortune 1000 over the last 3 years. The Company's engagements are
supported, developed and managed by specialized teams from each of the Company's
offices.
THE INFORMATION TECHNOLOGY SERVICES MARKET
The Company competes in the information technology services market, which can
be divided into three categories: (i) pre-implementation services; (ii)
implementation services; and (iii) post-implementation services. The Company's
principal activities, computer consulting and contract programming, fall within
the implementation segment of the market.
Pre-Implementation Services
Services in this category include strategic planning and consulting,
requirements definition studies, systems planning and design for information
technology. These services are provided by a handful of national and
international professional services firms and normally command premium billing
rates. The professional staff of these firms are generally full-time employees.
Implementation Services
These services, which represent the Company's business focus, include project
management, software applications development, systems and network
implementation, systems integration and higher-level contract programming
services. This segment of the information technology services market is highly
fragmented and serviced by several thousand local and regional firms, as well as
a few national firms. Historically, the barriers to entry in this market have
been low. However, as technology has become more sophisticated, the barriers to
entry have grown. Firms in this market segment utilize full-time employees,
hourly employees and independent consultants in providing their services.
Post-Implementation Services
Services in this category include facilities management, systems maintenance,
help-desk assistance and education and training. This market is also highly
fragmented and has historically had, and continues to have, low barriers to
entry. Firms in this market segment utilize full-time employees, hourly
employees and independent consultants in executing their assignments.
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According to industry sources, worldwide spending for the Implementation
segment of the software professional services market in 1994 exceeded $38.0
billion and is projected to grow at a compound annual rate of 12% through 1999.
United States spending in this market segment in 1994 was approximately $17.7
billion and is also projected to grow at a compound annual rate of 12% through
1999. The principal buyers of implementation services are large businesses with
recurring information technology needs.
The Company's focus market is highly fragmented and without a dominant service
provider. Service providers in the information technology services industry vary
by market segment and geographic area and include several of the "Big Six"
accounting firms, the professional service groups of computer equipment
companies, large-scale system integrators, outsourcers and smaller regional and
niche firms.
THE INFORMATION TECHNOLOGY SERVICES ENVIRONMENT
The growth of information technology and the increasing importance of
generating timely business information has transformed the way businesses
operate. In the 1960s and 1970s, businesses' dependence on mainframe and mini-
computers resulted in the creation of large information services departments
supporting specialized applications and centralized computing environments.
Given the proprietary nature of the systems and their attendant customized
applications, these organizations were forced to build significant
infrastructure to support and enhance information services capabilities,
resulting in large expenditures of capital resources and the need for a highly
trained, dedicated staff.
In the mid-to-late 1980s, computing environments began to shift from
centralized mainframes and custom applications to decentralized, scaleable
architectures centered on low cost personal computers, client/server
architectures, local and wide area networks, shared databases and generally
available applications software packages. Such trends permitted individuals
greater access to business data and an enhanced ability to analyze and interact
with information. Though highly beneficial to end-users, the client/server
migration has proved problematic to information services managers due to
increased operational challenges, including the integration of multiple
computing platforms, networking protocols, databases and operating systems, as
well as the customization of off-the-shelf applications to conform to existing
business rules and reporting standards. Despite this shift away from the
centralized mainframe model, businesses are often required to maintain and
support certain legacy mainframe systems for a variety of business functions.
At the same time, external economic factors have forced large organizations to
focus on core competencies, trim workforces in the information technology
services area and rely more upon third parties for a variety of services. As a
result, information technology services managers are charged with developing and
supporting increasingly complex information technology systems and applications
of significant strategic value while working under budgetary pressures within
their own organizations.
Faced with the challenges of adequately serving the needs of their customers
and employees, companies are increasingly turning to skilled and experienced
outside organizations to help them appropriately staff and manage their
information technology projects. Outsourcing such projects provides the
following benefits:
. Provides Access to Specialized Skills on an As-Needed Basis. "As-needed
access" avoids both the need to maintain a larger permanent staff and
implementation delays involved with retraining staff as technologies and
applications change.
. Reduces Costs. Outsourcing converts fixed labor costs into variable costs
by better matching staffing levels to actual needs. Moreover, outsourcing
reduces the costs of recruiting, hiring and terminating permanent
employees.
. Allows Management to Focus on Core Business Issues. Outsourcing enables
management to focus on strategic business issues rather than on
maintaining or implementing changes in the information technology
infrastructure.
Recognizing the advantages applications development outsourcing affords
businesses in the United States, a large number of specialized computer
consulting firms has developed over the last 20 years. According to INPUT, an
international research firm, approximately 3,500 businesses with annual revenues
in excess of $1.0 million provide such services and expertise in the United
States.
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THE COTELLIGENT STRATEGY
In more recent years, however, the growth of local and regional computer
consulting firms has been hindered by a number of factors, including difficulty
in locating qualified personnel, limited access to capital and the lack of a
national presence. These limitations have made it more difficult for such firms
to provide services to large organizations, many of which have been decreasing
the number of vendors from whom they purchase services. The Company believes
that by acquiring computer consulting services businesses in diverse geographic
regions, it will create a unified entity which has the national presence,
capital, human resources and name recognition required to serve larger
organizations while retaining the local focus and management structures under
which these firms have developed.
BUSINESS STRATEGY
The Company's objective is to be a leading nationwide provider of computer
consulting and contract programming services. The following are key elements for
achieving this objective.
Maintain and Enhance Relationships with Existing Clients. The Company is
committed to consistently provide high quality services. The Company believes
that the quality of its services has enabled it to establish and maintain long-
term relationships with many of its clients. During 1994, 1995 and 1996,
approximately 85.7%, 85.0% and 90.8%, respectively, of the Company's revenues
were derived from clients to whom services or solutions had been provided in the
preceding year. In addition, the Company believes that the access and goodwill
derived from these client relationships provide it with significant advantages
in marketing additional services and solutions to such clients, both regionally
and nationally.
Operate with Decentralized Management Structure. The Company operates with a
decentralized management structure to provide superior client service and a
motivating environment for its professional staff. The Company believes that
many competitors have homogenized their operating office and professional
service operations, thereby reducing the quality of services, focus and
creativity provided to clients. Therefore, the Company permits its acquired
businesses to manage the professional services and technical aspects of their
respective businesses in a manner consistent with their historical practices and
as dictated by local market conditions. Finance, marketing, planning and
administrative support is managed or provided on a centralized basis. The
Company believes that this approach enables its acquired businesses to maintain
their high level of client service and contact, while allowing them to draw upon
the collective resources of the Company as a whole.
Share Information and Expertise. Each acquired company possesses unique
expertise in certain technologies or vertical markets. The Company fosters an
environment, structure and communications infrastructure to enable its
subsidiaries to continually share knowledge, expertise, resources and
information. The Company believes such activities allow its subsidiaries to
integrate new ideas and systems into their respective operations, thereby
enhancing opportunities for growth.
Focus on Large Clients; Expand Geographically. The Company has historically
focused its client marketing efforts on large companies with substantial
recurring needs for supplemental applications or software development services.
Over the last five years, the Company has qualified as an approved vendor for
more than 100 companies in the Fortune 1000. The combined resources and
geographic dispersion of its subsidiaries enables the Company to continue to
focus marketing efforts on clients requiring national service capabilities.
Since 1989, in order to respond to specific client needs, the Company has
opened four new offices. The Company intends to open additional offices in
selected markets, especially as national account relationships expand.
Management of these new offices will be drawn from staff of existing offices or
newly hired personnel, supported in either case by the Company's executive
management team. See Item 1, "Business--Marketing and Clients."
Pursue Strategic Alliances. The Company seeks to form strategic alliances with
companies where opportunities exist to jointly market the services and
capabilities of both organizations. For example, FDSI and Microsoft jointly
provided an office automation solution to Mount Hood Community College ("MHCC")
in Portland, Oregon. With FDSI as project manager, MHCC standardized and
implemented Microsoft's state-of-the-art technology for MHCC's desktop
configuration. In addition to each party receiving direct benefits from this
project, Microsoft created with MHCC a new training curriculum and MHCC has
increased its enrollment and has become the only "Certified Microsoft Academic
Training
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Center" in the State of Oregon. FDSI receives Microsoft product training from
MHCC for its technical staff. The project was the first in a series of tasks to
re-engineer the technical infrastructure of MHCC.
ACQUISITION STRATEGY
Recognizing the highly fragmented nature of its industry, the need for capital
and a wider geographic scope, as well as the evolving purchasing and outsourcing
patterns of its present and potential clients, the Company believes that there
are many independent firms that are attractive acquisition candidates. As part
of its strategic plan, the Company has commenced its acquisition program
utilizing a primary entry and tuck-in strategy for expansion into each of its
targeted metropolitan areas. A primary acquisition is an acquisition which
creates a significant presence for the Company in the geographic market in which
the acquisition candidate is located. A tuck-in acquisition is one in which the
candidate is located in a market where the Company already has a presence. A
tuck-in acquisition is also generally smaller in size than a primary
acquisition. The Company intends, where possible, to make a primary acquisition
in a targeted area by acquiring an established, high quality local company. In
most instances, the Company expects to retain the management, sales personnel
and name of the acquired company while seeking to improve the acquired company's
profitability by implementing the Company's business strategies, rather than
converting the local operation to a standardized national business model. The
Company also intends to make tuck-in acquisitions where feasible. The Company
expects to increase its revenues and margins by eliminating a substantial
portion of the costs associated with the revenues derived from acquired
companies.
The Company believes that the continued autonomy offered to acquisition
candidates as a result of the Company's decentralized management philosophy, the
access to the increased capital offered by association with a larger, publicly
traded company and the ability to affiliate with a more geographically diverse
company, will make the Company an attractive acquirer of additional
businesses. While the Company cannot be certain that its acquisition strategy
will be successful, it believes that acquisition opportunities exist. A
significant number of software professional services firms providing
applications consulting and contract services are locally or regionally based
organizations. As competitive pressures increase and as clients continue to seek
national service capabilities, such firms are expected to seek affiliation with
a nationwide organization.
As consideration for future acquisitions, the Company intends to use various
combinations of its Common Stock, cash and notes.
SERVICES
The Company offers services to clients in the pre-implementation and
implementation services segments of the information technology services
environment.
Contract Programming and Technical Staffing
The Company's primary business is to provide highly skilled and trained
technical professionals to augment the internal information technology and
telecommunications staff and end-user groups of major corporations. These
services accounted for approximately 87% of the Company's revenues in 1996. The
Company contracts with its clients to provide ad hoc staffing support for
positions requiring highly specialized computer skills, including applications
programming and development, client/server development, systems software
architecture and design, systems engineering, data and telecommunications
analysis, systems integration and Internet/World Wide Web expertise. The Company
helps its clients complete their development projects by providing both short-
term and long-term staffing from among the Company's technical professionals,
supplemented by its database of over 40,000 qualified professionals nationwide.
Computer Consulting
In addition to its primary business of providing technical personnel to
augment the needs of its clients, the Company also provides certain computer
consulting and systems/application design services. With the increasing
complexity of computer applications, many of the Company's clients find that
they are not able to manage their development projects without added assistance.
Among the services the Company provides in this segment are project management,
systems and business process re-engineering, relational database design and
implementation, hardware and software selection, creation of migration plans,
development of customized software applications and systems integration. The
Company has the
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resources and experience to plan and manage a project from conception through
completion, as well as the ability to enter a project midstream, assess its
status, develop a plan and successfully complete the project.
The Company also develops and implements open computer systems using
client/server architectures and integrating servers, mini- and mainframe
systems, workstations, terminals and communication gateways into complete,
flexible networks. The Company specializes in integrating local area network
environments into single heterogeneous networks and unifying enterprise networks
into wide area network environments. In addition, the Company offers client
support programs for facilities management, permanent placement and education
and training.
TECHNICAL PERSONNEL AND RECRUITMENT
Building and enhancing a database of skilled technical personnel is integral
to the Company's success. The Company uses traditional recruiting methods, such
as a presence at local and regional technical colleges, newspaper and technical
periodical classified advertising and participation in national and regional job
fair networks. It also employs less traditional methods, including the use of
the Internet through skill-specific user groups, World Wide Web page
advertisements, on-line and skills networks, resume referral services,
outplacement agencies and the Company's skills/resume retrieval networks. The
Company maintains a staff of 25 full-time recruiters in its operating offices.
Each applicant is interviewed by the Company's recruiting personnel. Technical
applicants are also required to complete a questionnaire regarding skill levels,
past professional experience, education, availability and are also asked to
provide technical references. Once qualified, the candidate's profile, and
relevant skills, and experience are scanned into a database which can be
searched based on a number of different criteria, including specific skills and
qualifications. The Company regularly updates its databases to reflect changes
in employee skills, experience or availability. To place employees in client
organizations more efficiently, the Company is in the process of linking its
subsidiaries' separate databases in a manner that will allow each subsidiary to
access and search another's database.
Through its operating subsidiaries, the Company maintains databases with over
40,000 technical personnel who have a wide range of skills, including the
following.
<TABLE>
<S> <C> <C>
Application Development Project Management Systems Administration
Business Analysis Software Engineering Systems Integration
Computer Programming Software Quality Assurance Systems Programming
Database Administration Software Testing Telecommunication Analysis
Data Analysis
</TABLE>
As of March 31, 1996, the Company had a staff of approximately 700 employees,
including approximately 600 technical software professionals.
Although the Company has been successful in attracting and retaining qualified
technical personnel in the past, competition for such personnel is intense.
Demand for qualified professionals conversant with new technologies outstrips
supply as additional skills are required to keep pace with evolving
technologies. There can be no assurance that, in the future, the Company will be
successful in attracting and retaining qualified technical personnel.
MARKETING AND CLIENTS
The Company focuses its marketing efforts on large businesses with substantial
recurring needs for applications or software development support. The
development needs of such businesses can provide opportunities for major
projects that extend for multiple years or generate additional assignments. The
Company also intends to begin to focus its marketing efforts on rapidly growing
mid-sized companies. With the implementation of client/server technology, the
Company believes that there is an increasing need among mid-sized companies for
technical assistance and applications support.
The Company markets its services through account managers located in each
operating office. Approximately 26 people are engaged in marketing full time. To
market its services more effectively and consistently, the Company implements an
account team strategy. Assigning a team to key accounts creates the opportunity
to service a client's needs more quickly and efficiently and provides as well as
providing more marketing opportunities because the client and Company personnel
know specifically who is responsible for the service activities and are
generally more aware of a client's technology staffing
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needs, methodologies and budgets. Account managers work as members of a team,
thereby permitting them to focus on identifying and understanding a client's
needs while other members of the team focus on finding qualified technical
personnel to meet the needs of the client. Performance bonuses and commissions
constitute a significant portion of the total compensation of account managers
and are based upon the profitability of the business generated.
The Company is expanding its marketing efforts by coordinating its
subsidiaries responses to requests for proposals from current clients. The
Company is pursuing new client accounts primarily in those geographic areas
presently serviced by its subsidiaries. The Company believes that its size will
create opportunities to more effectively compete in vendor list selection, large
contract programming assignments and project engagements.
The Company has historically derived a significant percentage of its total
revenue from a relatively small number of clients. In 1995, the Company's four
largest clients accounted for 30.6% of the Company's revenue. In 1996, the
Company generated approximately 50% of its revenue from its top 13 clients. In
accordance with industry practice, the Company's contracts are generally
terminable at will by clients without penalty. The Company does not believe that
backlog is material to its business. The loss of a significant client could have
a material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The commercial information technology services market is highly competitive,
fragmented and served by numerous firms, many of which serve only their
respective local markets. The market includes participants in a variety of
market segments, including systems consulting and integration firms,
professional service divisions of application software firms, the professional
service groups of computer equipment companies, facilities management and
management information systems outsourcing companies, certain "Big Six"
accounting firms and general management consulting firms. The Company's
competitors, which may vary depending on geographic region and the nature of the
service(s) being provided, may have significantly greater financial, technical
and marketing resources and generate greater revenues than the Company. The
majority of the Company's competition at the Founding Company level is made up
of smaller regional firms with a strong presence in their respective local
markets. The Company believes that as it grows and expands geographically, it
may compete with additional national, regional and local service providers.
The Company believes that the principal competitive factors in the information
technology services industry include quality of service, responsiveness to
client needs, speed of application software development, price, project
management capability, technical expertise, size and reputation. Pricing has its
greatest importance as a competitive factor in the area of professional service
staffing. The Company believes its ability to compete also depends in part on a
number of competitive factors outside its control, including the ability of its
competitors to hire, retain and motivate skilled technical and management
personnel, the ownership by competitors of software used by potential clients,
the price at which others offer comparable services and the extent of its
competitors' responsiveness to client needs.
Intense competition also exists for viable acquisition candidates. The Company
believes that its decentralized management philosophy and operating strategies
will make it an attractive acquirer of other computer consulting and contract
programming companies. However, no assurance can be given that the Company's
acquisition program will be successful or that the Company will be able to
compete effectively in its chosen market segments.
ITEM 2. PROPERTIES.
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The Company's principal executive offices and the headquarters of its four
subsidiaries are located in five facilities with an aggregate of approximately
34,800 square feet and are leased at aggregate current monthly rents of
approximately $55,000 for terms not expiring before the year 2000. The Company's
remaining five offices aggregate approximately 12,630 square feet and are leased
at aggregate current monthly annual rents of approximately $24,000 for various
terms, with no lease commitment extending past the year 2001. The Company
believes that its properties are adequate for its needs. Furthermore, the
Company believes that suitable additional or replacement space will be available
when required on terms the Company believes will be favorable.
ITEM 3. LEGAL PROCEEDINGS.
------------------
The Company is, from time to time, a party to litigation arising in the normal
course of its business. The Company is not presently subject to any material
litigation.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
----------------------------------------------------
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
---------------------------------------------------------------
MATTERS.
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The Company's Common Stock has traded on the NASDAQ National Market since
February 14, 1996, the date of the Company's initial public offering. On March
31, 1996, the last sale price of the Common Stock was $11.75 per share, as
published in The Wall Street Journal on April 1, 1996. At March 31, 1996, there
were 58 stockholders of record of the Company's Common Stock. The following
table sets forth the range of high and low sale prices for the Common Stock for
the period from February 14, 1996, through March 31, 1996 and the period from
April 1, 1996 through June 10, 1996.
<TABLE>
<CAPTION>
HIGH LOW
------------------------------
<S> <C> <C>
February 14, 1996 through
March 31, 1996.......................... $ 11.75 $ 8.25
======= ======
April 1, 1996 through June 10, 1996...... $ 21.50 $11.13
======= ======
</TABLE>
The Company intends to retain all of its earnings to finance the expansion of
its business and for general corporate purposes and does not anticipate paying
any dividends on its Common Stock for the foreseeable future. In addition, the
line of credit facility restricts the Companys ability to pay dividends without
the consent of the lender.
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ITEM 6. SELECTED FINANCIAL DATA.
------------------------
The Company was founded in February 1993 to create a nationwide computer
consulting and contract programming company. On February 20, 1996 Cotelligent
acquired BFR, CAI, DASI and FDSI (the "Founding Companies") simultaneously with
the completion of the Offering. These Founding Companies and Cotelligent,
for the periods prior to the Acquisitions (February 20, 1996), are herein
referred to as the "Combined Predecessor Companies". The historical financial
statements of the Combined Predecessor Companies have been combined for the
periods prior to the Acquisitions as if these companies had always been members
of the same operating group. However, during these periods presented, the
Combined Predecessor Companies were not under common control or management, and
one of the Founding Companies, BFR, was an S corporation through March 31, 1995
and therefore, not subject to federal income tax. Accordingly, the data
presented may not be comparable to or indicative of, the post-combination
results to be achieved by the Company. The financial data presented for the
Successor Cotelligent Group represents the results of the consolidated entity
subsequent to the Acquisitions (February 20, 1996).
The following selected financial data with respect to the Combined
Predecessor Companies combined statements of operations for the years ended
March 31, 1993, 1994 and 1995 and the period April 1, 1995 through February 19,
1996 and with respect to the Combined Predecessor Companies combined balance
sheets as of March 31, 1994 and 1995, have been audited by Price Waterhouse LLP.
The selected combined financial data with respect to the Combined Predecessor
Companies combined statements of operations for the year ended March 31, 1992,
and with respect to the Combined Predecessor Companies combined balance sheets
as of March 31, 1992 and 1993, have been derived from unaudited financial
statements which, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such data. In addition, the Cotelligent Group, Inc. consolidated
balance sheet as of March 31, 1996 has also been audited by Price Waterhouse
LLP. The Successor Cotelligent Group, Inc. consolidated statement of operations
for the period February 20, 1996 through March 31, 1996, as presented in the
following selected data, has been prepared by management and represents the
results of the consolidated entity subsequent to the Acquisitions.
The pro forma statement of operations has been derived from unaudited
financial data and gives effect to compensation differentials to employees
and former owners of the Combined Predecessor Companies, the planned
termination of contributions to retirement plans, incremental selling,
general and administrative costs of the corporate activities of Cotelligent and
adjustments to reflect income taxes at the effective statutory rate for the
combined entity.
The selected financial data for the individual Founding Companies and
Cotelligent for the years ended March 31, 1993, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996 have been derived from financial
statements of each of these companies and have been audited by Price Waterhouse
LLP. The selected financial data for the individual Founding Companies and
Cotelligent for the year ended March 31, 1992 have been derived from unaudited
financial statements of these companies which, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data.
The selected financial data provided should be read in conjunction with the
Cotelligent Group, Inc., financial statements, the Combined Predecessor
Companies financial statements, the individual financial statements of BFR, CAI,
DASI and FDSI, the related notes thereto and "Managements Discussion and
Analysis of Financial Condition and Results of Operations" in this Form 10-K.
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SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES (1) GROUP, INC. (2) PRO FORMA (3)
------------------------------------------------------------ --------------- -------------
YEAR ENDED MARCH 31,
---------------------------------------------
YEAR ENDED
APRIL 1, 1995- FEB 20, 1996- MARCH 31,
1992 1993 1994 1995 FEB 19, 1996 MAR 31, 1996 1996
--------- ---------- ---------- --------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.......................... $23,974 $31,138 $39,434 $50,028 $55,746 $ 8,265 $64,011
Cost of services.................. 18,030 23,090 29,941 38,488 42,362 6,173 48,236
------- ------- ------- ------- ------- -------- -------
Gross margin...................... 5,944 8,048 9,493 11,540 13,384 2,092 15,775
Selling, general and
administrative
expenses......................... 5,721 7,035 8,055 10,743 10,788 1,481 11,962
------- ------- ------- ------- ------- -------- -------
Operating income.................. 223 1,013 1,438 797 2,596 611 3,813
Other expense (income),
net.............................. 68 109 165 179 394 (25) 222
------- ------- ------- ------- ------- -------- -------
Income before provision
for income taxes................. 155 904 1,273 618 2,202 636 3,591
Provision for income taxes........ 58 211 339 393 1,952 125 1,436
------- ------- ------- ------- ------- -------- -------
Income from continuing
operations....................... 97 693 934 225 250 511 2,155
Discontinued operations (4)....... - (257) (285) (184) - - -
------- ------- ------- ------- ------- -------- -------
Net income........................ $ 97 $ 436 $ 649 $ 41 $ 250 $ 511 $ 2,155
======= ====== ====== ====== ===== ========= =======
Pro forma net income per
share (5)........................ $ .46
=======
UNAUDITED PRO FORMA DATA (6):
Income before provisions for
income taxes.................... $ 155 904 1,273 618 2,202
Provision for income taxes....... 65 328 566 333 881
------ ----- ------ ------ ------
Income from continuing operations 90 576 707 285 1,321
====== ===== ====== ====== ======
MARCH 31, MARCH 31,
-------------------------------------------- ---------
1992 1993 1994 1995 1996
------- -------- --------- -------- ---------
BALANCE SHEET DATA:
Working capital................. $ 2,309 $ 3,220 $ 3,806 $ 3,621 $17,363
Total assets.................... $ 3,427 $ 7,689 $ 8,936 $ 11,048 $27,991
Long-term debt, less
current portion................ $ 1,453 $ 1,535 $ 944 $ 838 $ 258
Stockholders' equity............ $ 2,303 $ 2,788 $ 3,532 $ 3,632 $18,050
</TABLE>
(1) As a result of the substantial continuing interests in the Company of the
former stockholders of FDSI, BFR, DASI, CAI and Cotelligent, (the "Combined
Predecessor Companies"), the historical financial information of the
Combined Predecessor Companies has been combined on a historical cost basis
for the periods presented. Financial data presented represents the results
of the Combined Predecessor Companies prior to the consummation of the
Acquisitions by Cotelligent Group, Inc. on February 20, 1996.
(2) Represents the statement of operations and balance sheet data of the
consolidated entity subsequent to the Acquisitions on February 20, 1996.
(3) Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement
plans; (iii) incremental selling, general and administrative costs
associated with Cotelligent corporate activities; and (iv) income taxes as
if the entities were combined and subject to the effective federal and
state statutory rates throughout the periods presented. See Notes to the
March 31, 1996 Cotelligent Group, Inc. financial statements which includes
the detailed pro forma statement of operations for the year ended March 31,
1996.
(4) Discontinued operations represent the results of a security system software
development and marketing subsidiary of FDSI which was spun off to FDSI
stockholders in June 1994. See note 14 of Notes to the Financial
Statements of the Combined Predecessor Companies.
(5) Pro forma weighted average shares outstanding used to determined pro forma
net income per share were 4,636,664. Shares used to calculate the weighted
average shares were as follows: (i) shares issued by Cotelligent prior to
the Offering, shares issued to the stockholders of the Founding Companies
in connection with the Acquisitions and shares sold in the Offering to pay
the cash portion of the consideration for the Founding Companies, were
considered outstanding for the entire period; (ii) additional shares sold
to the public in the Offering and (iii) dilution attributable to options to
purchase common stock in applying the treasury stock method.
(6) One of the Founding Companies, BFR, was an S corporation through March 31,
1995 and, accordingly, was not subject to federal income taxes. The
unaudited pro forma information is presented for the purpose of reflecting
a provision for income taxes as if all of the Founding Companies had been
subject to income tax for all periods presented, calculated in accordance
with FAS 109, based on tax laws that were in effect during the respective
periods.
11
<PAGE>
SELECTED FINANCIAL DATA
FOUNDING COMPANIES AND COTELLIGENT
(IN THOUSANDS)
The following table presents selected information for each of the Founding
Companies and Cotelligent for the five most recent fiscal years.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------------------------------------------------------- FEBRUARY 19,
1992 1993 1994 1995 1996
----------------------------------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
FDSI:
Revenues................... $6,119 $8,206 $11,191 $15,807 $16,468
Gross margin............... 1,659 2,362 2,955 3,541 4,314
Selling, general and
administrative expenses... 1,543 1,927 2,419 3,120 3,166
Income from continuing
operations................ 55 278 314 223 1,022
Net income................. 55 22 29 39 658
BFR:
Revenues................... $7,958 $10,138 $14,440 $15,221 $15,623
Gross margin............... 2,065 3,069 3,626 3,981 4,129
Selling, general and
administrative expenses... 2,047 2,648 2,833 4,173 3,589
Net income (loss).......... 17 364 681 (179) (702)
DASI:
Revenues................... $7,170 $9,396 $10,065 $12,437 $14,455
Gross margin............... 1,549 1,884 2,094 2,696 3,201
Selling, general and
administrative expenses... 1,427 1,694 1,862 2,195 2,344
Net income................. 47 71 80 235 442
CAI:
Revenues................... $2,727 $3,398 $ 3,738 $ 6,563 $ 9,200
Gross margin............... 671 733 818 1,322 1,740
Selling, general and
administrative expenses... 704 728 774 1,054 1,274
Net income (loss).......... (22) 17 26 147 275
COTELLIGENT:
Revenues................... -- -- -- -- --
Gross margin............... -- -- -- -- --
Selling, general and
administrative expenses... -- 38 167 201 415
Net income (loss).......... -- (38) (167) (201) (423)
</TABLE>
12
<PAGE>
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - -------------------------------------------------------------------------------
OF OPERATIONS.
- - --------------
Cotelligent was formed in February 1993 to create a nationwide computer
consulting and contract programming company. Cotelligent acquired,
simultaneously with the closing of its initial public offerings of common stock,
(the "Offering"), four established businesses (the Founding Companies) which
provide a wide variety of computer consulting services in various metropolitan
areas of the country. The Founding Companies have operated since 1975 (DASI),
1980 (CAI), 1982 (FDSI) and 1985 (BFR). During the periods discussed below,
except for the period February 20, 1996 through March 31, 1996, the Combined
Predecessor Companies were not under common control or management; therefore,
the data presented may not be comparable to or indicative of the post-
combination results to be achieved by the Company. The entire fiscal year ended
March 31, 1996 is compared to the entire fiscal year ended March 31, 1995
because, in the opinion of management, the consolidated period in fiscal 1996 is
not material to the year taken as a whole and there were no significant events
during the consolidated period that would make the results of operations during
such period inconsistant with the pre-consolidation results of operations.
The Company derives substantially all of its revenues from professional
service activities. The majority of these activities are provided under "time
and expense" billing arrangements, and revenues are recorded as work is
performed. Revenues are directly related to the total number of hours billed to
clients and the associated hourly billing rates. Hourly billing rates are
established for each service professional and such rates are a function of the
professional's skills, experience and the type of work performed. The Company's
principal costs are professional compensation directly related to the
performance of services and related expenses. Gross margins (revenues after
professional compensation and related expenses) are primarily a function of
hours billed to clients per professional employee or consultant, hourly billing
rates of those employees or consultants and employee or consultant compensation
relative to those billing rates. Gross margins can be adversely impacted if
service activities cannot be billed, if the Company is not effective in managing
its service activities or if fixed-fee engagements (which historically have not
constituted a significant portion of total revenues) are not properly priced.
Operating income (gross margin less selling, general and administrative
expenses) can be adversely impacted by administrative staff compensation,
expenses related to growing and expanding the Company's business, which may be
incurred before revenues are generated from such investment, or high levels of
unutilized time (work activities not chargeable to clients or unrelated to
client services) of full-time service professional employees.
From time to time, the Company has opened new operating or branch offices, and
it may open new offices in the future. Historically, a new office requires
approximately 12 months to reach break-even profitability. During such period, a
new office may lose on average $50,000 per month. There can be no assurance that
any new office will ever become profitable.
The Company's historical tax rates have been lower than statutory rates due to
the S corporation election BFR had in effect through March 31, 1995. The
Companys effective statutory tax rate as of April 1, 1995 is approximately 40%.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent (the "Combined
Predecessor Companies"), the historical financial information of the Combined
Predecessor Companies have been combined on a historical cost basis for all
periods presented. Accordingly, no goodwill has been recorded in combining these
businesses. In the future, the Company may be required to record goodwill to
account for the amount of the purchase price of acquired businesses which
exceeds the fair value of the assets of businesses which it may acquire.
Pro forma data reflect adjustments for the Acquisitions including: (i)
compensation differentials to former owners and employees of the Combined
Predecessor Companies; (ii) termination of contributions to retirement plans;
(iii) incremental selling, general and administrative costs associated with
Cotelligent corporate activities; and (iv) income taxes as if the entities were
combined and subject to the effective federal and state statutory rates
throughout the periods discussed.
As part of its strategic plan, the Company intends to acquire other computer
consulting and contract programming companies. Should the Company be successful
in acquiring such businesses, the period in which such acquisition is
consummated could be adversely impacted by costs associated with such
acquisition. In addition, financial periods subsequent to the completion of an
acquisition could be adversely impacted by costs and activities associated with
the assimilation and integration of the acquired company.
13
<PAGE>
As a professional services organization, the Company responds to service
demands from its clients. Accordingly, the Company has limited control over the
timing and circumstances under which its services are provided. Therefore, the
Company can experience volatility in its operating results from quarter to
quarter. The operating results for any quarter are not necessarily indicative of
the results for any future period.
RESULTS OF OPERATIONS
The following discusses the results of operations for the fiscal years
ended March 31, 1994, 1995 and 1996. For fiscal years ended March 31, 1994 and
1995, the results of operations represent the results of the Combined
Predecessor Companies . For the fiscal year ended March 31, 1996, the results of
operations represent the Combined Predecessor Companies, for the period April 1,
1995 through February 19, 1996 and have been combined with the results of the
Successor Cotelligent Group, Inc. for the period February 20, 1996 through March
31, 1996 subsequent to the Acquisitions.
The following table sets forth the percentage of net revenues represented by
items in the Company's statement of operations for the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------
PRO FORMA
1994 1995 1996 1996
-----------------------------------
<S> <C> <C> <C> <C>
Revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of services...................... 75.9 76.9 75.8 75.4
----- ----- ----- -----
Gross margin........................ 24.1 23.1 24.2 24.6
Selling, general and administrative
expenses............................. 20.4 21.5 19.2 18.7
----- ----- ----- -----
Operating income.................... 3.7 1.6 5.0 5.9
----- ----- ----- -----
Other expense, net.................... 0.4 0.3 0.6 0.3
----- ----- ----- -----
Income before provision for income
taxes................................ 3.3 1.3 4.4 5.6
----- ----- ----- -----
Provision for income taxes............ 0.9 0.8 3.2 2.2
Income from continuing operations..... 2.4% 0.5% 1.2% 3.4%
===== ===== ===== =====
</TABLE>
PRO FORMA COMBINED RESULTS OF OPERATIONS
PRO FORMA 1996 COMPARED TO HISTORICAL 1996
Revenues. Revenues were $64.0 million for 1996 on both a pro forma and
historical basis.
Gross Margin. The pro forma gross margin was 24.6% of pro forma revenues
compared to historical gross margin of 24.2% of historical revenues in 1996. The
increase in pro forma gross margin as a percentage of pro forma revenues
compared to historical 1996 results is primarily due to the renegotiation of
executive compensation arrangements in connection with the Acquisitions and
elimination of retirement fund contributions since the Company plans to make no
such contributions in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses on a pro forma basis were $12 million, or 18.7% of pro
forma revenues, compared to historical selling, general and administrative
expenses of $12.3 million, or 19.2% of historical revenues in 1996. The reduced
selling, general and administrative expenses on a pro forma basis reflect a
reduction in executive compensation from historical levels due to the
renegotiation of executive compensation arrangements in connection with the
Acquisitions and elimination of retirement fund contributions since the Company
plans to make no such contributions in the future. This reduction was partially
offset by estimated additional expenses related to Cotelligent's corporate
operating activities.
14
<PAGE>
Interest expense, Net. Net interest expense on a pro forma basis was $261,000,
or .4% of pro forma revenues, compared to historical net interest expense of
$408,000, or .6% of historical revenues in 1996. The reduced net interest
expense on a pro forma basis reflects the elimination of interest expense
associated with the borrowings of BFR's Employee Stock Ownership and Money
Purchase Plan.
Provision for Income Taxes. Provision for Income Taxes on a pro forma basis
were $1.4 million, or an effective tax rate of 40.0% of pro forma income before
provision for income taxes, compared to historical provision for income taxes of
$2.1 million, or an effective rate of 73.2% of income before provision for
income taxes in 1996. The reduced provision for income taxes on a pro forma
basis reflects an effective tax rate of 40% whereas the historical effective
rate includes a $925,000 liability recorded in April 1995 due to the termination
by BFR of its S corporation election and the inability of Cotelligent Group,
Inc. to recognize a tax benefit on net operating losses incurred prior to the
Acquisitions.
HISTORICAL COMBINED RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Revenues. Revenues increased $14.0 million, or 28%, to $64.0 million in 1996
from $50.0 million in 1995. The increase was primarily attributable to a 24.9%
increase in total client service hours provided to 1,047,000 hours in 1996 from
838,000 hours in 1995, and a 6.2% increase in the average hourly billing rate to
$60.78 in 1996 from $57.24 in 1995. The increase in hourly billing rate reflects
increased demand for employees and consultants with higher skill levels and a
more favorable economic climate. The increases discussed above were in addition
to an increase in placement fee revenues and were offset by the absence of $1.6
million of revenue from FDSI's fixed-price business.
Gross Margin. Gross margin increased $3.9 million, or 34.1%, to $15.5 million
in 1996 from $11.5 million in 1995, primarily as a result of an increase in
hours of service provided to clients. Gross margin as a percentage of revenues
increased to 24.2% in 1996 from 23.1% in 1995, principally due to hourly billing
rates having risen faster than compensation costs. These gains were partially
offset by a nonrecurring $297,000 contribution made to the BFR Plan and costs
(for which there were no revenues) incurred by FDSI in connection with winding
down its fixed-price hardware and software systems integration services it
provided primarily to government organizations which FDSI ceased providing in
1995 ("FDSI's fixed-price business").
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $1.6 million, or 14.2%, to $12.3 million in
1996 from $10.7 million in 1995. The increase in absolute dollars was primarily
due to increased compensation to existing staff and staff added to support
anticipated growth, increased occupancy expenses and related operating costs
associated with the Company's growth. Selling, general and administrative
expenses decreased as a percentage of revenues from 21.5% in 1995 to 19.2% in
1996, reflecting greater operating efficiencies and a larger revenue base. The
Company cannot be certain that such efficiencies can be sustained in the near
term as it undertakes to integrate the Founding Companies, expand geographically
and acquire other companies.
Interest Expense, Net. Interest expense, net of interest income, increased
$199,000 to $408,000 from $209,000 in 1995, reflecting increased borrowings
under the Company's various bank revolving credit facilities and $147,000
associated with contributions to the BFR Plan. The bank revolving credit
facilities borrowings were required to support the expansion of the Company's
infrastructure.
Provision for Income Taxes. The Company's provision for income taxes increased
$1.7 million to $2.1 million, an effective rate of 73.2%, in 1996, from
$393,000, an effective rate of 63.5%, in 1995. The increase in the provision
for income taxes is due to an increase in income before taxes to $2.8 million in
1996 from $618,000 in 1995 and the liability of $925,000 recorded in April 1995
due to the termination by BFR of its S corporation election. The Company's
effective statutory tax rate as of April 1, 1995 is 40%.
1995 COMPARED TO 1994
Revenues. Revenues increased $10.6 million, or 26.9% to $50.0 million in 1995
from $39.4 million in 1994. The increase was attributable to a 27.4% increase in
total client service hours provided to 838,000 in 1995 from 658,000 hours in
1994 and a 2.1% increase in the average hourly billing rate to $57.24 in 1995
from $56.04 in 1994. The increase in hours of service was primarily due to
greater utilization of personnel. The increase in hourly billing rate reflects
increased
15
<PAGE>
demand for employees and consultants with higher skill levels. The increases
discussed above were supplemented by a slight increase in placement fee revenues
and were offset by a decrease of $639,000 of revenue from $2.3 million in 1994
to $1.6 million in 1995 from FDSI's fixed-price business.
Gross Margin. Gross margin increased $2.0 million, or 21.6%, to $11.5 million
in 1995 from $9.5 million in 1994, primarily as a result of an increase in hours
of service provided to clients. Gross margin as a percentage of revenues
decreased from 24.1% in 1994 to 23.1% in 1995, principally due to compensation
costs which rose more rapidly than hourly billing rates due to increased
competition for qualified personnel, a $704,000 contribution made to the BFR
Plan and an increase in costs relative to revenues in connection with FDSI's
fixed-price business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $2.7 million, or 33.4%, to $10.7 million in
1995 from $8.0 million in 1994 primarily due to increased compensation to
existing staff, an increase in officers' compensation of $696,000, a $196,000
contribution made to the BFR Plan and an increase from $608,000 to $663,000 in
the costs incurred in connection with FDSI's fixed-price business. The increase
in officers' compensation consists of an increase of $790,000 paid by BFR in
anticipation of the termination of its S corporation election, increases
incurred by CAI and DASI of $81,000 and $51,000, respectively, and a decrease in
officers' compensation incurred by FDSI of $226,000. Selling, general and
administrative expenses increased as a percentage of revenues to 21.5% in 1995
from 20.4% in 1994, reflecting higher staffing levels and the factors described
above.
Interest Expense, Net. Interest expense, net of interest income, increased
$50,000 to $209,000 in 1995 from $159,000 in 1994 as a result of increased
borrowings under the Company's various bank revolving credit facilities. Such
borrowings were used to support operating activities.
Provision for Income Taxes. The Company's provision for income taxes increased
$54,000 to $393,000, an effective rate of 63.5%, in 1995 from $339,000, an
effective rate of 26.6%, in 1994. The effective tax rate increased significantly
because little benefit was derived from BFR's operating loss due to its S
corporation election, and no separate company tax benefit was obtained from
Cotelligent's separate company operating loss.
QUARTERLY OPERATING RESULTS 1996 AND 1995
The Companys results of operations may fluctuate significantly from quarter to
quarter. Revenues are generated from services provided in response to client
requests or events that occur without notice, and the Company's engagements,
generally billed on a time-and-expense basis, are terminable at any time by
clients. Revenues and operating margins for any particular quarter are generally
affected by staffing mix, resource requirements and timing and size of
engagements, and the results for any particular quarter are not necessarily
indicative of results for any other period. Quarterly results of operations for
the last two years are summarized below. Data for the fourth quarter of 1996 is
separated to distinguish the results of operation before and after the
Acquisition.
<TABLE>
<CAPTION>
(IN THOUSANDS)
- - -----------------------------------------------------------------------------------------------------------------------------------
SUCCESSOR
COTELLIGENT
COMBINED PREDECESSOR COMPANIES GROUP, INC.
- - -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1995 YEAR ENDED MARCH 31, 1996
- - -------------------------------------------------------------------- -------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD JAN 1- FEB 20-
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER FEB 19 MARCH 31
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $11,409 $11,654 $13,033 $ 13,941 $14,781 $15,855 $16,140 $ 8,970 $ 8,265
Gross Profit 2,754 3,015 3,269 2,511 3,357 3,669 4,192 2,166 2,092
Operating Income 543 331 538 (794) 619 637 1,022 (76) 636
- - -----------------------------------------------------------------------------------------------------------------------------------
Income from
continuing
operations $ 393 $ 288 $ 370 $ (826) $ 332 $ 332 $ 620 $ (116) $ 511
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth principally through cash flows from
operations, periodic borrowings under its credit facilities, related party
borrowings and sales of shares of common stock of the individual Founding
Companies.
The Company's primary sources of liquidity are cash, credit facilities and the
collection of its accounts receivable. Accounts receivable have grown as the
Company's operations have grown. Receivables were 67 days of revenue at March
31, 1996 and 1995. The Company's ability to reduce significantly the aging of
its outstanding receivables is limited because of a continuing general trend by
clients to slow their payment of invoices as a means of managing cash. Should
the Company not be able to bill and collect for its services on a timely basis,
the Company could draw upon available cash or existing credit facilities to
finance its operations.
Cash used by operating activities of Cotelligent and the Founding Companies
was $48,000 for the year ended March 31, 1996. The Company has supplemented cash
generated by operations periodically with short-term borrowings under various
credit facilities with banks. The average balance of such borrowings outstanding
was approximately $4.0 million and approximately $2.7 million during 1996 and
1995, respectively.
At March 31, 1996, the Company had $14.0 million in cash and cash equivalents
as compared to $603,000 at March 31, 1995 reflecting primarily the net cash
proceeds from the Offering. At March 31, 1996, the Company had short-term notes
payable under its bank revolving credit facilities and current installments of
long-term obligations outstanding in the amount of $2.4 million. Long-term
obligations, consisting primarily of capital lease obligations, totaled $258,000
at March 31, 1996 compared to $838,000 at March 31, 1995. The Company had
approximately $2.1 million available under bank credit facilities at March 31,
1996. The bank facilities bear interest at rates ranging from 8.25% to 9.75%
and are secured by accounts receivable, various assets of the Founding Companies
and are guaranteed by the principals of each of the Founding Companies. The
Company is not in default under any of its credit agreements.
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the Company's
separate banking relationships were consolidated into a single banking
relationship with a major bank. The single relationship will provide for a more
effective means of managing operating capital. The new relationship provides a
credit facility in the amount of $10.0 million for the Company, secured by
accounts receivable and other assets of the Company. Borrowings on the facility
will bear interest at the bank's prime rate. The Company intends to borrow from
time-to-time to meet normal operating needs, finance its receivables or to
effect acquisitions in connection with its acquisition strategy.
As of April 1, 1995, BFR terminated its S corporation election. As a result,
federal and state income taxes of approximately $925,000 are expected to be paid
ratably over the next four years.
The Company believes the remaining proceeds from the sale of Common Stock in
the Offering, together with existing sources of liquidity and funds generated
from operations, will provide adequate cash to fund its anticipated cash needs
for operations and acquisitions at least through the next six months.
RECENTLY ISSUED ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", which is required for fiscal years beginning after December 15,
1995 and adoption of the recognition and measurement provisions for non employee
transactions no later than December 15, 1995. The new standard defines a fair
value method of accounting for stock options and other equity instruments. Under
the fair value method, compensation cost is measured at the grant date based on
the fair value of the award and is recognized over the service period, which is
usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not required,
to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", but would be required to disclose in a note to the
financial statements pro forma net income earnings per share as if the Company
had applied the new method of accounting.
17
<PAGE>
The accounting requirements of the new method are effective for all employee
awards granted after the beginning of the fiscal year of adoption. The Company
plans to account for employee-stock based compensation under Accounting
Principles Board Opinion No. 25. Accordingly, the Company does not anticipate
that the adoption of the standard will have any material impact on the Company's
financial position, results of operations or cash flows.
18
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------
The remainder of this page is left intentionally blank.
19
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
COTELLIGENT GROUP, INC.
Report of Price Waterhouse LLP,
Independent Accountants................ 22
Consolidated Balance Sheet at
March 31, 1995 and 1996................ 23
Consolidated Statement of
Operations for the Years Ended March
31, 1994, 1995 and 1996................ 24
Consolidated Statement of
Stockholders' Equity for the Years
Ended March 31, 1994, 1995 and 1996.... 25
Consolidated Statement of Cash
Flows for the Years Ended March 31,
1994, 1995 and 1996.................... 26
Notes to Consolidated Financial
Statements............................. 27
COMBINED PREDECESSOR COMPANIES
Report of Price Waterhouse LLP,
Independent Accountants................ 36
Balance Sheet as of March 31, 1994
and 1995............................... 37
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995
Through February 19, 1996............... 38
Statement of Stockholders' Equity
for the Years Ended March 31, 1994
and 1995 and for the Period April 1, 1995
Through February 19, 1996............... 39
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 40
Notes to Financial Statements............ 42
FINANCIAL DATA SYSTEMS, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 53
Consolidated Balance Sheet as of
March 31, 1994 and 1995................. 54
Consolidated Statement of
Operations for the Years Ended March 31,
1994 and 1995, and for the Period
April 1, 1995 Through February 19, 1996. 55
Consolidated Statement of Stockholders'
Equity for the Years Ended
March 31, 1994 and 1995 and for
the Period April 1, 1995 Through
February 19, 1996....................... 56
Consolidated Statement of Cash
Flows for the Years Ended March 31,
1994 and 1995 and for the
Period April 1, 1995 Through
February 19, 1996....................... 57
Notes to Consolidated Financial
Statements.............................. 58
BFR CO., INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 66
Balance Sheet as of March 31, 1994
and 1995................................ 67
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 68
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 69
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 70
Notes to Financial Statements............ 71
</TABLE>
20
<PAGE>
COTELLIGENT GROUP, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DATA ARTS & SCIENCES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 77
Combined Balance Sheet as of
March 31, 1994 and 1995................. 78
Combined Statement of Operations
for the Years Ended March 31, 1994 and
1995, and for the Period April 1, 1995
Through February 19, 1996............... 79
Combined Statement of Stockholders'
Equity for the Years Ended March 31,
1994 and 1995 and for the
Period April 1, 1995 Through
February 19, 1996....................... 80
Combined Statement of Cash Flows
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 81
Notes to Financial Statements............ 82
CHAMBERLAIN ASSOCIATES, INC.
Report of Price Waterhouse LLP,
Independent Accountants................. 88
Balance Sheet as of March 31,
1994 and 1995........................... 89
Statement of Operations for the
Years Ended March 31, 1994 and 1995,
and for the Period April 1, 1995 Through
February 19, 1996....................... 90
Statement of Stockholders' Equity
for the Years Ended March 31, 1994 and
1995 and for the Period April 1, 1995
Through February 19, 1996............... 91
Statement of Cash Flows for the
Years Ended March 31, 1994 and 1995
and for the Period April 1, 1995 Through
February 19, 1996....................... 92
Notes to Financial Statements............ 93
</TABLE>
21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Cotelligent Group, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Cotelligent Group, Inc. and its subsidiaries at March 31, 1995 and 1996 and the
results of their operations and cash flows for each of the three years in the
period ended March 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
22
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
ASSETS 1995 1996
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 3,608 $14,005,920
Accounts receivable, less allowance for
doubtful accounts of $0 and $40,000... -- 11,681,000
Note receivable from stockholder....... -- 37,902
Note receivable from related party..... -- 104,844
Deferred income taxes.................. -- 286,138
Prepaid expenses and other current
assets................................ -- 517,398
----------- -----------
Total current assets................. 3,608 26,633,202
=========== ===========
Property and equipment, net............ -- 1,061,749
Deferred income taxes.................. -- 146,450
Other assets........................... -- 149,832
----------- -----------
Total assets......................... $ 3,608 $27,991,233
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term debt........................ $ 51,501 $ 2,408,765
Accounts payable....................... 27,140 573,901
Accrued compensation and related
payroll liabilities................... -- 3,096,652
Income taxes payable................... -- 1,168,192
Deferred income taxes.................. -- 846,041
Other accrued liabilities.............. -- 1,176,485
----------- -----------
Total current liabilities............ 78,641 9,270,036
=========== ===========
Long-term debt........................... -- 257,999
Deferred income taxes.................... -- 19,569
Other long-term liabilities.............. -- 393,484
Commitments and contingencies
(Notes 8 and 11)........................ -- --
Stockholders' equity:
Common Stock, $0.01 par value; 100,000,000
shares authorized; 574,662 and 6,216,305
shares outstanding, respectively...... 1,550 62,163
Preferred Stock, $0.01 par value; 500,000
shares authorized; none issued and
outstanding........................... -- --
Additional paid-in capital............. 328,955 18,305,299
Retained deficit....................... (405,538) (317,317)
----------- -----------
Total stockholders' equity (deficit). (75,033) 18,050,145
----------- -----------
Total liabilities and
stockholders' equity $ 3,608 $27,991,233
=========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
PRO FORMA
YEAR ENDED
YEAR ENDED MARCH 31, MARCH 31,
----------------------------------------------- 1996
1994 1995 1996 (NOTE 3)
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues. ........................ $ -- $ -- $8,265,303 $64,011,234
Cost of services.................. -- -- 6,173,229 48,236,177
--------- --------- ---------- -----------
Gross margin.................... -- -- 2,092,074 15,775,057
--------- --------- ---------- -----------
Selling, general and
administrative expenses........... 167,356 200,781 1,895,462 11,961,966
--------- --------- ---------- -----------
Operating income................. (167,356) (200,781) 196,612 3,813,091
--------- --------- ---------- -----------
Other (income) expense:
Interest expense................. -- -- 53,413 369,116
Interest income.................. (22) (116) (66,535) (108,063)
Other............................ -- -- (3,028) (39,203)
--------- --------- ---------- ------------
Total other.................... (22) (116) (16,150) 221,850
--------- --------- ---------- -----------
Income before provision for
income taxes...................... (167,334) (200,665) 212,762 3,591,241
--------- --------- ---------- -----------
Provision for income taxes......... -- -- 124,541 1,436,497
Net Income......................... $(167,334) $(200,665) $ 88,221 $ 2,154,744
========= ========= ========== ===========
Net Income per share............... $ .46
===========
Weighted average shares outstanding 4,636,664
===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL RETAINED STOCKHOLDERS'
PAID-IN EARNINGS EQUITY
COMMON STOCK CAPITAL (DEFICIT) (DEFICIT)
------------------------ ---------- --------- --------------
SHARES AMOUNT
---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994.............. 417,781 $ 1,127 $ 121,173 $(204,873) $ (82,573)
Issuance of common stock............... 156,881 423 207,782 -- 208,205
Net loss............................... -- -- -- (200,665) (200,665)
--------- ------- ----------- --------- -----------
Balance at March 31, 1995.............. 574,662 1,550 328,955 (405,538) (75,033)
Redistribution of capital for stock
dividend.............................. -- 4,197 (4,197) -- --
Issuance of common stock prior to
Offering.............................. 120,478 1,205 380,895 -- 382,100
Redemption of common stock prior to
Offering.............................. (74,140) (742) (119,258) (120,000)
Reclassification of Founding Companies'
equities on date of Acquisitions...... -- -- 4,307,367 -- 4,307,367
Issuance of common stock............... 5,595,305 55,953 16,753,488 -- 16,809,441
Distribution to Founding stockholders.. -- -- (3,491,951) -- (3,491,951)
Net income............................. -- -- -- 88,221 88,221
--------- ------- ----------- --------- -----------
Balance at March 31, 1996.............. 6,216,305 $62,163 $18,155,299 $(317,317) $17,900,145
========= ======= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
COTELLIGENT GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------
1994 1995 1996
---------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)..................... $ (167,334) $(200,665) $ 88,221
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization....... -- -- 43,573
Deferred income taxes, net.......... -- -- (584,067)
Changes in current assets and
liabilities:
Accounts receivable............... -- -- (1,278,350)
Prepaid expenses and other current
assets........................... -- -- (197,712)
Accounts payable and
accrued expenses................. 36,046 (12,406) 374,974
Income taxes payable.............. -- -- 335,997
Changes in other assets............. -- -- 21,994
---------- --------- ------------
Net cash (used in) operating
activities....................... (131,288) (213,071) (1,195,370)
---------- --------- ------------
Cash flows from investing activities:
Purchases of property and equipment... -- -- (380,222)
Advances to stockholder............... -- -- 25,519
Net advances to related parties....... -- -- (2,921)
Cash balances of subsidiaries at date
of Acquisition....................... -- -- 525,461
---------- --------- ------------
Net cash provided by investing
activities....................... -- -- 167,837
---------- --------- ------------
Cash flows from financing activities:
Proceeds from notes payable........... -- -- 64,414
Payments on long-term debt............ -- -- (4,788)
Payments on capital lease obligations. -- -- (10,716)
Net borrowings (repayments) on
short-term debt...................... -- -- 8,134
Proceeds from notes to related parties 41,650 4,851 449,560
Advances from related parties......... -- -- 397,800
Repayments with related parties....... -- -- (640,300)
Net proceeds from issuance of common
stock................................ 92,300 208,205 18,377,692
Repurchase of common stock............ -- -- (120,000)
Distribution to Founding stockholders. -- -- (3,491,951)
---------- --------- ------------
Net cash provided by financing
activities......................... 133,950 213,056 15,029,845
---------- --------- ------------
Net increase (decrease) in cash and
cash equivalents..................... 2,662 (15) 14,002,312
Cash and cash equivalents at
beginning of period.................. 961 3,623 3,608
---------- --------- ------------
Cash and cash equivalents at end of
period............................... $ 3,623 $ 3,608 $ 14,005,920
========== ========= ============
Supplemental disclosures of cash flow
information:
Interest paid......................... $ -- $ -- $ 59,540
Income taxes paid..................... $ -- $ -- $ 229,410
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
Cotelligent Group, Inc. ("Cotelligent or the Company") was formed to
create a professional services firm devoted to providing computer consulting and
contract programming services. On February 20, 1996, Cotelligent acquired (the
"Acquisitions") four companies (the "Founding Companies"): Financial Data
Systems, Inc. ("FDSI"), BFR Co., Inc. ("BFR"), Data Arts & Sciences, Inc.
("DASI") and Chamberlain Associates, Inc. ("CAI"). All outstanding shares of the
Founding Companies' capital stock were converted into shares of Cotelligent
Common Stock concurrently with the consummation of an initial public offering
(the "Offering") of such Common Stock.
The aggregate consideration paid by Cotelligent in these transactions was
$3,491,951 in cash, 3,206,875 shares of Common Stock of the Company and the
assumption of approximately $3.0 million in debt, for an aggregate value of
$35,303,905. The aggregate consideration for each of the Founding Companies was
as follows: BFR: $11,958,283, consisting of $1,450,000 paid in cash and
1,167,587 shares of Common Stock; CAI: $3,998,849, consisting of $300,000 paid
in cash, 388,761 shares of Common Stock and $200,000 in short-term and related-
party debt; DASI: $5,606,396, consisting of $400,000 paid in cash, 443,044
shares of Common Stock and $1,219,000 in short-term and related-party debt; and
FDSI: $13,740,377, consisting of $1,341,951 paid in cash, 1,207,483 shares of
Common Stock and $1,531,079 in short-term, long-term and related-party debt.
The accompanying consolidated financial statements include Cotelligent
Group, Inc. through the date of the Acquisitions, after which the financial
statements reflect the results of Cotelligent Group, Inc. and its wholly-owned
subsidiaries. Prior to the Acquisitions, the Company was a nonoperating entity
and incurred principally selling, general and administrative expenses. For the
period April 1, 1995 through February 19, 1996, the Company incurred $414,528 of
selling, general and administrative expenses and had a net loss before provision
for income taxes of $423,740.
As a result of the substantial continuing interests in the Company of the
former stockholders of BFR, CAI, DASI, FDSI and Cotelligent, the Acquisitions
have been accounted for on a historical cost basis.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
27
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of capitalized leases, is provided over the estimated useful lives
of the respective assets (generally ranging from five to ten years) on a
straight-line or an accelerated basis. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life of the respective
assets.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires the recognition
of deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the Offering as
discussed in Note 1. Earnings per share has been presented on a pro forma basis
only for the year ended March 31, 1996 (See Note 3).
NOTE 3-PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED)
The following unaudited pro forma combined financial statements presents
the results as if the Acquisitions referred to in Note 1, occurred on April 1,
1995. Unaudited pro forma adjustments are based upon historical information,
estimates and certain assumptions management deems appropriate. The unaudited
pro forma combined financial data presented herein are not necessarily
indicative of the results Cotelligent would have obtained had such events
occurred at the beginning of the period, as assumed, or of the future results of
Cotelligent. The pro forma combined financial statements should be read in
conjunction with the other financial statements and notes thereto appearing
elsewhere in the Form 10-K.
28
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR PRO FORMA PRO FORMA
COMPANIES ADJUSTMENTS COMBINED
----------- ----------- ---------
<S> <C> <C> <C>
Revenues......................................... $64,011,234 $ -- $64,011,234
Cost of services................................. 48,534,798 11,032 (a) 48,236,177
(309,653)(b)
----------- ---------- -----------
Gross margin................................... 15,476,436 298,621 15,775,057
Selling, general and administrative expenses..... 12,269,178 (231,676)(a) 11,961,966
(75,536)(b)
----------- ---------- -----------
Operating income............................... 3,207,258 605,833 3,813,091
Other (income) expense
Interest expense............................... 516,434 (147,318)(b) 369,116
Interest income................................ (108,063) -- (108,063)
Other.......................................... (39,203) -- (39,203)
----------- ---------- -----------
Total other expense............................ 369,168 (147,318) 221,850
----------- ---------- -----------
Income before provision for income taxes......... 2,838,090 753,151 3,591,241
Provision for income taxes....................... 2,076,485 (639,988)(c) 1,436,497
----------- ---------- -----------
Net Income....................................... $ 761,605 $1,393,139 $ 2,154,744
=========== ========== ===========
Net income per share............................. $ .46
===========
Weighted average shares outstanding.............. 4,636,664 (d)
===========
</TABLE>
(a) Adjustment to reflect the reduction in compensation to former owners
and employees ($924,255) as a result of the renegotiation of executive
compensation arrangements, consulting contract to a former employee and the
termination of contributions to employee benefit plans made in conjunction with
the transaction. These reductions are partially offset by increased expenses for
corporate operating activities ($703,000) related to the newly formed public
entity.
(b) Adjustment to eliminate $532,506 of expense recorded in connection with
BFR's Employee Stock Ownership and Money Purchase Plan. This Plan was converted
to a profit sharing plan in December 1995 and no future contributions will be
made.
(c) Adjustment to calculate the provision for income taxes on the combined
pro forma results at the effective statutory tax rates (40%).
(d) Pro forma weighted average shares outstanding used to determine pro
forma earnings per share were 4,636,664. Shares used to calculate the weighted
average shares were: (i) shares issued by Cotelligent prior to the Offering,
shares issued to the stockholders of the Founding Companies, in connection with
the Acquisitions and shares sold in the Offering to pay the cash portion of the
consideration of the Founding Companies were considered outstanding for the
entire period, (ii) additional shares sold to the public in the Offering and
(iii) dilution attributable to options to purchase common stock in applying the
treasury stock method.
29
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4-ALLOWANCE FOR DOUBTFUL ACCOUNTS
Allowance for doubtful accounts activity is as follows.
Balance, March 31, 1994 and 1995..... $ --
Balance of subsidiaries allowance
for doubtful accounts at Acquisition... 40,000
Charges to costs and expenses..... 4,109
Write-offs........................ (4,109)
-------
Balance at March 31, 1996......... $40,000
=======
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
MARCH 31,
------------------------------
1995 1996
------------- -------------
Automobiles................... $ -- $ 4,500
Equipment..................... -- 1,461,036
Furniture and fixtures........ -- 513,827
Leasehold improvements........ -- 313,783
------------ ----------
-- 2,293,146
Less: Accumulated depreciation
and amortization............. -- 1,231,397
============ ==========
$ -- $1,061,749
============ ==========
Depreciation and amortization expense for the year ended March 31, 1996 was
$43,573.
NOTE 6-CREDIT FACILITIES
Credit facilities consist of the following at March 31, 1996.
Short-Term Debt
MARCH 31,
---------------------------------
1995 1996
------------- ----------------
Note payable for consulting
services performed, which bears
interest at the rate of 10% from June $51,501 $ --
1995, and is due on completion of the
Offering...............................
Bank line of credit, with maximum
borrowings of $1,250,000, secured by
FDSI's accounts receivable, property
and equipment, and personally
guaranteed by several Cotelligent
stockholders who are also officers of
FDSI, due May 28, 1998. Interest at
the prime rate plus 1.50% per annum
(9.75% at March 31, 1996).............. -- 1,096,397
Bank line of credit, for borrowings up
to the lesser of $1,300,000 or
70% of the DASI's eligible
accounts receivable, secured by all
assets of DASI, as well as the
personal guarantees of two Cotelligent
stockholders who are also officers of
DASI, due May 31, 1996. Interest at
1.25% above the bank's base lending
rate (9.5% at March 31, 1996).......... -- 809,079
Bank line of credit, for
borrowings of up to $1,500,000,
secured by all of BFR's assets, due
May 31, 1996. Interest at bank's prime
rate of 8.25% at March 31, 1996........ -- 300,000
Capital lease obligations............... 100,401
Current portion of long-term debt....... -- 102,888
------- ----------
Total short-term debt............. $51,501 $2,408,765
======= ==========
30
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The lines of credit were executed pursuant to agreements that contain
various covenants that include, among other things, restrictions on additional
debt and distributions, and maintenance of certain financial ratios and net
worth requirements. The Subsidiaries were in compliance with all covenants at
March 31, 1996.
Long-Term Debt
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------
1995 1996
---------------- ---------------
<S> <C> <C>
Note payable to bank, monthly payments of $5,937, including interest at the bank's prime
rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing March 30, 1998 and secured by
FDSI's assets and the personal guarantee of several Cotelligent stockholders who are also
officers of FDSI............................................................................. $ -- $ 130,894
Note payable to bank, monthly payments of $2,482, including interest at the bank's prime
rate plus 2.25% (10.50% at March 31, 1996) per annum; maturing May 29, 1998 and secured by FDSI's
assets and the personal guarantees of several Cotelligent stockholders who are also officers of
FDSI......................................................................................... -- 56,024
Capital lease obligations..................................................................... -- 274,370
---- ---------
-- 461,288
Less: Current maturities...................................................................... -- (203,289)
---- ---------
Total long-term debt.......................................................................... $ -- $ 257,999
==== =========
</TABLE>
Total maturities of long-term debt are as follows.
YEAR ENDING YEAR ENDING
MARCH 31, MARCH 31,
1995 1996
------------ ------------
[S] [C] [C]
1997................. $ -- $ 203,289
1998................. -- 194,074
1999................. -- 40,574
2000................. -- 23,351
---- ----------
$ -- $ 461,288
==== ==========
NOTE 7-INCOME TAXES
Cotelligent will file a consolidated federal income tax return for periods
subsequent to the Acquisitions described in Note 1.
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1994 1995 1996
--------------------------------------
<S> <C> <C> <C>
Current:
Federal........................... $ -- $ -- $ 626,056
State............................. -- -- 131,967
-------- -------- ---------
-- -- $ 758,023
---------- --------- ---------
Deferred:
Federal........................... (57,000) (68,000) (486,093)
State............................. (10,000) (12,000) (107,389)
-------- -------- ---------
(67,000) (80,000) (593,482)
Valuation Allowance............... 67,000 80,000 (40,000)
-------- -------- ---------
Total provision for income taxes $ -- $ -- $ 124,541
======== ======== =========
</TABLE>
31
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1995 1996
-----------------------------
<S> <C> <C>
Allowance for doubtful accounts........... $ -- $ 16,471
Accrued liabilities....................... -- 286,117
Cash to accrual........................... -- (846,041)
Operating loss carryforward............... 147,000 317,000
Depreciation.............................. -- (19,569)
--------- ---------
Deferred tax asset (liability)........... 147,000 (246,022)
Valuation allowance....................... (147,000) (187,000)
--------- ---------
Net deferred tax assets (liabilities).... $ -- $(433,022)
========= =========
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory tax rate as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. federal statutory rate.................................. (34.0)% (34.0)% 34.0%
State taxes, net of federal income tax benefit............... -- -- 3.9%
Valuation allowance against net operating loss............... 34.0% 34.0% 18.5%
Nondeductible expenses....................................... -- -- 1.1%
Other........................................................ -- -- 1.0%
----- ----- ----
Effective tax rate......................................... (0.0)% (0.0)% 58.5%
===== ===== ====
</TABLE>
Prior to the Acquisitions, Cotelligent Group, Inc. had established a
valuation allowance against the tax assets associated with the net operating
losses of previous years due to the uncertainty of realization through future
income. Subsequent to the Acquisitions, the Company reversed a portion of the
valuation allowance as a result of the estimated utilization of the operating
losses against future taxable income.
32
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8-LEASE COMMITMENTS
Cotelligent leases various office space and certain equipment under
noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows.
<TABLE>
<CAPTION>
MARCH 31
-------------------------------------
CAPITAL LEASES OPERATING LEASES
-------------------------------------
<S> <C> <C>
1997............................... $131,663 $ 791,155
1998............................... 105,223 778,865
1999............................... 72,490 788,655
2000............................... 28,000 640,436
2001............................... -- 312,609
Thereafter......................... -- 31,700
-------- ----------
Total minimum lease payments....... 337,376 $3,343,420
==========
Less: Amounts representing interest (63,006)
--------
Present value of net minimum
lease payments.................... $274,370
========
</TABLE>
Rental expense under these leases was $73,094 for the year ended March 31,
1996.
NOTE 9-RELATED PARTIES
The Company recognized $5,000 in revenue for providing computer consulting
services to CyberSAFE (an entity owned in part by a few Cotelligent stockholders
who are also officers of FDSI) for the period subsequent to the Acquisitions
through March 31, 1996, all of which was included in accounts receivable at
March 31, 1996.
In May 1994, the Company negotiated a perpetual software marketing agreement
with CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments
of 15% of the purchase price for every copy licensed. For the period subsequent
to the Acquisitions through March 31, 1996, the Company paid no royalties to
CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1996 was $103,416. Included in interest income is $1,995 for the
period subsequent to the Acquisitions through March 31, 1996, on the advances.
The Company leases general offices, and transportation equipment under
operating leases, occupied or used by BFR, from a third party, which is mostly
owned by several Cotelligent stockholders who are also officers of BFR. Rental
expense under these leases was $19,750 for the period subsequent to the
Acquisitions through March 31, 1996. In addition, the Company leases certain
office equipment under capital leases from the same entity. Payments under these
capital leases for the period subsequent to the Acquisitions through March 31,
1996, were $5,953.
The Company leases office space, occupied by DASI, from the Strathmore Realty
Trust. Two Cotelligent stockholders, one of whom is an officer of DASI and the
other of whom is a Director of the Company, are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $11,700 for the period subsequent to the Acquisitions through
March 31, 1996.
NOTE 10-EMPLOYEE BENEFIT PLANS
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employees' behalf. BFR did not make any
contributions to the plan for the period subsequent to the Acquisitions through
March 31, 1996.
33
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BFR maintains a profit sharing plan for the benefit of substantially all
salaried employees. Contributions to the plan are made at the discretion of the
Company. The Company did not make any contributions to the plan for the period
subsequent to the Acquisitions through March 31, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the period subsequent to the Acquisitions through
March 31, 1996.
In September 1992, FDSI adopted a discretionary cash bonus profit sharing plan
for employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI made no contributions to this plan
for the period subsequent to the Acquisitions through March 31, 1996.
DASI maintains an unfunded, discretionary profit-sharing plan, which includes
substantially all full-time employees who have at least one year of continuous
service. No contributions were made to this plan for the period subsequent to
the Acquisitions through March 31, 1996.
In September 1995, Cotelligent's Board of Directors and stockholders
approved Cotelligent's 1995 Long-Term Incentive Plan (the "Plan"). The purpose
of the Plan is to provide directors, officers, key employees and consultants
with additional incentives by increasing their ownership interests in the
Company.
Effective as of September 8, 1995, Cotelligent granted to each of two officers
an option to purchase 92,676 shares of common stock at $2.70 per share. Such
options vest as follows: 18,536 on February 21, 1996, and thereafter, an
additional 18,535 shares on each subsequent February 21 until all 92,676 shares
have vested. The options are each exercisable for a period of seven years after
the effective date of the grant.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,000 shares of Common Stock at $9.00 per share. On various dates
subsequent to February 14, 1996, and through March 31, 1996, additional grants
of options to purchase 47,700 shares of Common Stock at prices ranging from
$9.00 to $10.25 were made to certain employees. Such options vest ratably over
four years on the anniversary of the option grant date. The term of each option
grant is determined by the Compensation Committee of the Board of Directors.
However, the term of any incentive stock option or a stock appreciation right
granted in tandem therewith, shall not exceed 10 years from the date of the
grant.
Each director who is not an employee of the Company receives an annual
retainer fee of $12,000. Effective January 12, 1996, each non-employee director
of the Company was granted an initial option under the Company's 1995 Long-Term
Incentive Plan to acquire 10,000 shares of Common Stock at an exercise price of
$10.00 per share. In addition, each non-employee director will receive an
automatic annual option grant under the 1995 Long-Term Incentive Plan to acquire
5,000 shares of Common Stock on the date of each of the Company's annual
meetings held after March 31, 1997. All of such options have or will have an
exercise price equal to the fair market value of the Common Stock on the date of
grant and, or will be, exercisable immediately except as limited by the rules
and regulations of the Securities Act and the Securities Exchange Act of 1934,
as amended, and will expire ten years from the date of grant. Directors are also
reimbursed for out-of-pocket expenses incurred in attending meetings of the
Board of Directors or committees thereof, or for other expenses incurred in
their capacity as directors.
NOTE 11-COMMITMENTS AND CONTINGENCIES
Employment Agreements
Each named executive officer has entered into an employment agreement with the
Company providing for an annual base salary of $150,000. Pursuant to such
employment agreements, each such officer is eligible to earn bonus compensation
payable out of a bonus pool determined by the Board of Directors or its
Compensation Committee. Bonuses will be determined by measuring, among other
objective and subjective measures, such officer's performance, the
34
<PAGE>
COTELLIGENT GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
performance of the local operation for which such officer has primary
responsibility and the Company's performance against targets. Each executive
officer employment agreement is for a term of three years and, unless terminated
or not renewed by the employee, shall continue thereafter on a year-to-year
basis on the same terms and conditions. In the event of a termination of
employment by the Company or a Founding Company, as the case may be, without
cause, such employee shall be entitled to receive from the Company or such
Founding Company, as the case may be, such employee's then current salary for
the remaining term of the agreement or for one year, whichever amount is
greater, without regard to whether the employee obtains subsequent employment.
In the event of change in control of the Company, if the employee is not given
at least five days notice of such change in control, the employee may elect to
terminate his employment and shall be entitled to receive a minimum of three
years, current base salary as compensation. In the event the employee is given
at least five days notice of such a change in control, the employee may elect to
terminate his employment agreement and receive a minimum of two years' current
salary as compensation.
Each executive officer employment agreement contains a covenant not to
compete with the Company for a period equivalent to the longer of two years
immediately following the termination of his employment or, in the case of a
termination without cause, for a period of one year following the termination of
his employment. If any court of competent jurisdiction determines that the
scope, time or territorial restrictions contained in the covenant are
unreasonable, the covenant not to compete shall be reduced to the maximum period
permitted by such court. The compensation to which such employee is entitled
shall nonetheless be paid to the employee.
In addition, certain of the principals of the Founding Companies who did
not become executive officers of the Company upon consummation of the
Acquisitions and the Offering remain executive officers of one of the Founding
Companies. Each of such individuals entered into an employment agreement with
such Founding Company effective upon consummation of the Acquisitions and the
Offering, with a base compensation not to exceed $150,000 per annum.
Consulting Contract
The Company entered into a consulting contract with a former employee of BFR
effective February 19, 1996, whereby the former employee is required to perform
certain management advisory services as required by and at the request of the
Company. Payments under the contract are $8,333 per month, continue through
December 2000 and have been fully recorded as an obligation of the Company as of
March 31, 1996.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Predecessor Companies' management, these matters
are not anticipated to have a material adverse effect on the financial position
or results of operations or cash flows of the Company.
NOTE 12-SUBSEQUENT EVENT
Cotelligent and each of the Founding Companies had separate banking
relationships through May 31, 1996. Effective June 1, 1996, the separate
banking relationships were consolidated into a single banking relationship with
a major bank, providing a more efficient means of managing operating capital.
The new relationship provides a credit facility in the amount of $10.0 million,
secured by accounts receivable and other assets of the company. Borrowings on
the facility bear interest at the bank's prime rate.
35
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
the Combined Predecessor Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of the Combined
Predecessor Companies at March 31, 1995 and 1994 and the results of their
operations and cash flows for the years ended March 31, 1995 and 1994 and for
the period April 1, 1995 through February 19, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
36
<PAGE>
COMBINED PREDECESSOR COMPANIES
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 230,133 $ 602,752
Accounts receivable, less allowance
for doubtful accounts of $40,000................. 7,086,545 9,202,012
Due from related party........................... -- 111,877
Deferred income taxes............................ 64,081 14,081
Net assets of discontinued business.............. 483,630 --
Prepaid expenses and other current assets........ 294,823 196,416
----------- -----------
Total current assets................... 8,159,212 10,127,138
----------- -----------
Property and equipment, net...................... 475,958 525,280
Deferred income taxes............................ 11,341 12,599
Other assets..................................... 289,574 382,773
----------- -----------
Total assets........................... $ 8,936,085 $11,047,790
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related party of $441,500 and $100,000
respectively..................................... $ 1,406,364 $ 2,414,852
Accounts payable................................. 764,286 683,547
Accrued compensation and
related payroll liabilities...................... 1,362,770 2,271,645
Income taxes payable............................. -- 81,890
Deferred income taxes............................ 369,147 453,487
Other accrued liabilities........................ 450,876 600,314
----------- -----------
Total current liabilities.............. 4,353,443 6,505,735
----------- -----------
Long-term debt, including notes payable
to related parties of $440,000............... 944,218 837,662
Deferred income taxes.............................. 106,700 72,000
Commitments and contingencies (Notes 8 and 12)..... -- --
Stockholders' equity:
Preferred stock.............................. 71,338 68,614
Common stock................................. 113,108 116,165
Additional paid-in capital................... 125,683 288,555
Retained earnings............................ 3,221,595 3,159,059
----------- -----------
Total stockholders' equity............. 3,531,724 3,632,393
----------- -----------
Total liabilities and
stockholders' equity................... $ 8,936,085 $11,047,790
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
37
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, APRIL 1, 1995 -
-------------------------------- FEBRUARY 19,
1994 1995 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Revenues....................................................... $39,434,234 $50,028,639 $55,745,931
Cost of services ............................................. 29,940,654 38,488,220 42,361,569
------------ -------------- --------------
Gross margin ......................................... 9,493,580 11,540,419 13,384,362
Selling, general and administrative expenses................... 8,055,171 10,743,231 10,788,244
------------ -------------- --------------
Operating income .................................... 1,438,409 797,188 2,596,118
Other (income) expense:
Interest expense ......................................... 194,363 246,508 472,266
Interest income .......................................... (35,748) (37,336) (41,561)
Other...................................................... 6,961 (29,866) (36,175)
----------- ------------- --------------
Total other expense .................................. 165,576 179,306 394,530
----------- ------------- --------------
Income before provision for income taxes ..................... 1,272,833 617,882 2,201,588
Provision for income taxes ................................... 339,103 392,565 1,951,944
------------ ------------- --------------
Income from continuing operations ............................ 933,730 225,317 249,644
Loss from operations of discontinued business (net of
applicable income tax benefit of $159,700 (1994)
and $80,100 (1995) respectively) ............................. (284,560) (184,004) --
------------ ------------- ---------------
Net income..................................................... $ 649,170 $ 41,313 $ 249,644
============ ============= ===============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
38
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------ --------------------------
SHARES AMOUNT SHARES AMOUNT
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993................... 100,395 $60,236 1,331,087 $ 106,658
Issuance of common stock.................... -- -- 93,409 252
Issuance of preferred stock................. 500 7,875 -- --
Issuance of preferred stock
charged to compensation expense............ 500 9,425 -- --
Conversion of preferred stock to
common stock............................... (2,143) (6,198) 2,143 6,198
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 99,252 71,338 1,426,639 113,108
Issuance of common stock.................... -- -- 123,526 333
Stock distribution of subsidiary............ -- -- -- --
Conversion of preferred stock to
common stock............................... (320) (2,724) 320 2,724
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at March 31, 1995................... 98,932 68,614 1,550,485 116,165
Dividends................................... -- -- -- --
Redistribution of capital for
stock dividend............................. -- -- -- 4,197
Issuance of common stock.................... -- -- 158,183 11,205
Issuance of preferred stock................. 400 14,000 -- --
Repurchase of common stock.................. -- -- (76,240) (5,717)
Purchase of BFR's ESOP shares............... -- -- -- --
Release of unearned shares to
BFR's ESOP.................................. -- -- -- --
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- -- --
Net income.................................. -- -- -- --
------------- -------------- ----------- ------------
Balance at February 19, 1996................ 99,332 $82,614 $1,632,428 $ 125,850
============= ============== =========== ============
</TABLE>
<TABLE>
<CAPTION>
ADDITIONAL UNEARNED TOTAL
PAID-IN RETAINED ESOP STOCKHOLDERS'
CAPITAL EARNINGS SHARES EQUITY
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at March 31, 1993................... $ 48,635 $2,572,425 $ $2,787,954
Issuance of common stock.................... 77,048 -- -- 77,300
Issuance of preferred stock................. -- -- -- 7,875
Issuance of preferred stock
charged to compensation expense............ -- -- -- 9,425
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 649,170 -- 649,170
------------- -------------- ----------- ------------
Balance at March 31, 1994................... 125,683 3,221,595 -- 3,531,724
Issuance of common stock.................... 162,872 -- -- 163,205
Stock distribution of subsidiary............ -- (103,849) -- (103,849)
Conversion of preferred stock to
common stock............................... -- -- -- --
Net income.................................. -- 41,313 -- 41,313
------------ -------------- ------------- ------------
Balance at March 31, 1995................... 288,555 3,159,059 -- 3,632,393
Dividends................................... -- (159,468) -- (159,468)
Redistribution of capital for
stock dividend............................. (4,197) -- -- --
Issuance of common stock.................... 382,895 -- -- 394,100
Issuance of preferred stock................. -- -- -- 14,000
Repurchase of common stock.................. (119,258) -- -- (124,975)
Purchase of BFR's ESOP shares............... -- -- (3,150,000) (3,150,000)
Release of unearned shares to
BFR's ESOP.................................. -- -- 1,114,286 1,114,286
Conversion of BFR's ESOP to
defined contribution plan.................. -- -- 2,035,714 2,035,714
Net income.................................. -- 249,644 -- 249,644
------------- -------------- ----------- ------------
Balance at February 19, 1996................ $547,995 $3,249,235 $ (0) $4,005,694
============= ============== =========== ============
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
39
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Years End
March 31,
-------------------------- April 1, 1995-
1994 1995 February 19, 1996
------------ ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 649,170 $ 41,313 $ 249,644
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 177,641 186,370 170,178
Loss (gain) on disposal of property and
equipment...................................... 2,176 655 (22,719)
Deferred income taxes, net...................... (26,751) 98,382 506,201
Preferred stock issued and charged to
compensation................................... 9,425 - 14,000
Changes in current assets and liabilities:
Accounts receivable............................ (1,685,432) (2,190,397) (1,200,457)
Prepaid expenses and other current assets...... (42,653) 117,378 469,590
Accounts payable and accrued expenses.......... 500,477 977,574 318,907
Income taxes payable........................... (81,602) 108,525 750,305
Deferred revenue................................ - - (168,405)
Changes in other assets......................... (25,463) (69,346) (480,510)
----------- ----------- -----------
Net cash provided by (used in) operating
activities................................... (523,012) (729,546) 606,734
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............... (113,814) (50,962) (502,344)
Proceeds from the sale of investments............ - 14,989 11,000
Cash surrender value of life insurance........... (16,146) (15,491) (22,325)
Advances to stockholders......................... - - 25,519
Net repayments from (advances to) related
parties......................................... 127,673 83,900 (19,544)
Changes in net assets of discontinued
operations...................................... (66,924) 184,004 -
Increase in deferred transaction costs, net of
related accounts payable........................ - - (932,545)
----------- ----------- -----------
Net cash provided by (used in) investing
activities................................... (69,211) 216,440 (1,440,239)
----------- ----------- -----------
Cash flows from financing activities:
Payments on long-term debt....................... (61,200) (165,199) (284,291)
Payments on capital lease obligations............ (48,304) (76,745) (77,382)
Net borrowings (advances) on short-term debt..... 240,614 622,964 716,294
Borrowings from related parties.................. - 341,500 172,474
Payments on loans with related parties........... (25,000) - -
Proceeds from issuance of common and preferred
stock........................................... 85,175 163,205 349,125
Repurchases of common stock....................... - - (120,000)
Net cash provided by (used in) financing
activities................................... 191,285 885,725 756,220
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents...................................... (400,938) 372,619 (77,285)
Cash and cash equivalents at beginning of
period........................................... 631,071 230,133 602,752
----------- ----------- -----------
Cash and cash equivalents at end of period........ $ 230,133 $ 602,752 $ 525,467
=========== =========== ===========
</TABLE>
40
<PAGE>
COMBINED PREDECESSOR COMPANIES
STATEMENT OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Fiscal Years End
March 31, April 1, 1995-
------------------ --------------
1994 1995 Feb 19, 1996
-------- -------- --------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid............................................. $183,811 $226,244 $462,241
Income taxes paid......................................... $184,506 $105,583 $765,808
Schedule of noncash investing and financing transactions:
Capital lease obligations incurred........................ $ 99,780 $179,241 $ -
Conversion of accounts receivable to note receivable...... $ - $ 74,903 $ -
Conversion of preferred stock to common stock............. $ 6,198 $ 2,724 $ -
Debt refinancing.......................................... $ - $178,986 $ -
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
41
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION
In February 1993, Cotelligent Group, Inc. ("Cotelligent" or the "Company")
was formed to create a professional services firm devoted to providing computer
consulting and contract programming services. On February 20, 1996, Cotelligent
acquired (the "Acquisitions") four companies (the "Founding Companies"):
Financial Data Systems, Inc. ("FDSI"), BFR Co., Inc. ("BFR"), Data Arts &
Sciences, Inc. ("DASI") and Chamberlain Associates, Inc. ("CAI"). All
outstanding shares of the Founding Companies capital stock were converted into
shares of Cotelligent Common Stock concurrently with the consummation of and the
initial public offering (the "Offering") of such Common Stock.
NOTE 2-BASIS OF PRESENTATION
As discussed above, simultaneously with the closing of the Offering,
Cotelligent acquired by merger each of the four operating businesses, FDSI, BFR,
DASI and CAI. The accompanying combined financial statements and related notes
to combined financial statements are presented on a combined basis without
giving effect to the Acquisitions or the Offering. The assets and liabilities of
the Predecessor Companies are reflected at their historical amounts.
Discontinued Business
A previous division of FDSI, CyberSAFE Corporation (CyberSAFE) was
incorporated and became a wholly-owned subsidiary of FDSI in December 1993. The
stock of this subsidiary was subsequently distributed to FDSI's stockholders on
June 1, 1994 in a tax-free reorganization. The financial results of the
operations of this entity have been presented as discontinued operations in the
Statement of Operations for all periods presented. See further discussion in
Note 14.
NOTE 3-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation, including
amortization of capitalized leases, is provided over the estimated useful lives
of the respective assets (generally ranging from five to ten years) on a
straight-line or an accelerated basis. Leasehold improvements are amortized over
the shorter of the lease term or the estimated useful life.
42
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). The asset and liability approach used in SFAS 109 requires the recognition
of deferred tax assets and liabilities for the tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities.
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly any federal income tax liabilities through this date
are the responsibility of BFR's stockholders. Effective April 1, 1995, BFR
terminated its S status. See further discussion in Note 7.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the Offering as
discussed in Note 1.
NOTE 4-ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the allowance for doubtful accounts is as follows.
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO BALANCE
BEGINNING COSTS AND WRITE- AT END
OF PERIOD EXPENSES OFFS OF PERIOD
---------- ---------- ------ ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1994........... $35,000 $10,000 $ -- $45,000
======= ======= ======== =======
Year ended March 31, 1995........... $45,000 $21,368 $(26,368) $40,000
======= ======= ======== =======
</TABLE>
43
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------
1994 1995
------------- --------------
<S> <C> <C>
Automobiles.............................. $ 64,150 $ 64,150
Equipment................................ 1,050,217 1,261,672
Furniture and fixtures................... 235,246 238,031
Leasehold improvements................... 59,015 36,539
---------- ----------
1,408,628 1,600,392
---------- ----------
Less: Accumulated depreciation and
amortization............................ 932,670 1,075,112
---------- ----------
$ 475,958 $ 525,280
========== ==========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1994 and
1995 and for the period April 1, 1995 through February 19, 1996 was $149,059,
$180,396 and $170,178 respectively.
44
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
1994 1995
----------- ----------
<S> <C> <C>
Bank line of credit, with maximum borrowings
of $1,250,000, secured by FDSI's accounts
receivable, property and equipment, and
personally guaranteed by FDSI's principal
stockholders. Interest at the prime rate
(6.25% and 9.00% at March 31, 1994 and
1995, respectively) plus 1.50% per
annum........................................ $ 430,964 $1,134,077
Bank line of credit, for borrowings up to the
lesser of $1,300,000 or 70% of the DASI's
eligible accounts receivable, secured by all
assets of DASI, as well as the personal
guarantees of DASI's stockholders. Interest
at 1.25% above the bank's base lending rate
(8.75% at March 31, 1995), prior to
January 31, 1995, 2.00% above the bank's base
lending rate (6.25% at March 31, 1994),
.50% fee on the unused portion............... 168,000 398,000
Bank line of credit, for borrowings of up to
$1,500,000, secured by all of BFR's assets.
Interest at prime plus .50% on (6.75%),
prime (9.00%) at March 31, 1994 and 1995,
respectively................................. 550,000 --
Bank line of credit for borrowings of up to
$300,000, guaranteed by the President and
Vice President of the CAI. Interest at
2.00% plus prime (11.00% as of March 31,
1995)........................................ -- 235,000
Note payable, interest at 10%, due upon
completion of initial public offering........ 46,650 51,501
Note payable to CAI's President (also a
stockholder) and his son, due on December 31,
1995. Interest at 2.00% plus prime (11.00%
at March 31, 1995)........................... -- 150,000
Notes payable to FDSI's principal stockholders,
unsecured, interest at 9.25%, due on demand
and subordinated to bank debt................ -- 191,500
Note payable to FDSI stockholder, personally
guaranteed by the principal stockholders of
FDSI, interest at 9.00%...................... 100,000 100,000
Current capital lease obligations............. 43,303 90,671
Current maturities on long-term debt.......... 67,447 64,103
---------- ----------
Total short-term debt............. $1,406,364 $2,414,852
========== ==========
</TABLE>
The lines of credit were executed pursuant to agreements that contain
various restrictive covenants that include, among other things, restrictions on
additional debt and distributions, and maintenance of certain financial ratios
and net worth requirements. The Predecessor Companies were in compliance with
all restrictive covenants for the periods presented.
45
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Long-Term Debt
Long-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1994 1995
-------------- ------------
<S> <C> <C>
Note payable to a bank; monthly payments of $5,937,
including interest at the bank's prime rate (9.00% at
March 31, 1995) plus 2.25% per annum; maturing
March 30, 1998 and secured by FDSI's assets and
the personal guarantee of FDSI's principal
stockholders............................................ $ -- $ 178,986
Note payable to a bank; monthly payments of $6,218,
including interest at the bank's prime rate (6.25% at
March 31, 1994) plus 2.75% per annum; refinanced in 1995 227,771 --
Loans payable to the officers and stockholders of DASI,
interest at the rate of 10.00% and payable monthly.
Principal amount matures as follows: $100,000 on
October 25, 1996, $140,000 on December 25, 1997 and
$200,000 on October 25, 2006. The $200,000 is
subordinated to DASI's line of credit................... 440,000 440,000
Automobile loan, interest at 9.75%, monthly principal and
interest payments of $1,060, assumed by a stockholder
of DASI in September 1995.............................. 22,121 10,983
Loan against the cash surrender value of DASI's officers'
life insurance policies................................. 105,276 --
Capital lease obligations................................ 259,800 362,467
---------- ----------
1,054,968 992,436
Less: Current maturities................................. (110,750) (154,774)
---------- ----------
Total long-term debt............................ $ 944,218 $ 837,662
========== ==========
</TABLE>
Total maturities of long-term debt are as follows.
YEAR ENDING
MARCH 31,
-----------
1997............................................. $ 64,103
1998............................................. 159,413
1999............................................. 206,453
2000............................................. --
2001............................................. --
Thereafter....................................... 200,000
---------
$ 629,969
=========
46
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES
The Predecessor Companies will file a consolidated federal income tax
return for periods subsequent to the Acquisitions. The Founding Companies will
file "short period" federal tax returns through the date prior to the
Acquisitions, February 20, 1996.
The provision (benefit) for income taxes on continuing operations is as
follows.
YEAR ENDED APRIL 1,
MARCH 31, 1995
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------ ------------
Current:
Federal........... $ 315,021 $ 333,455 $ 847,989
State............. 25,292 44,229 236,243
--------- --------- ----------
340,313 377,684 1,084,232
Deferred:
Federal........... (76,533) 12,209 947,243
State............. 75,323 2,672 (79,531)
--------- --------- ----------
(1,210) 14,881 867,712
--------- --------- ----------
Total provision
for income taxes $ 339,103 $ 392,565 $1,951,944
========= ========= ==========
Deferred tax assets (liabilities) are comprised of the following.
MARCH 31,
---------------------------
1994 1995
----------- -----------
Accounts receivable......................... $ (531,744) $ (812,991)
Accounts payable and accrued liabilities.... 160,451 242,034
Cash to accrual............................. (142,900) (111,700)
Operating loss carryforward................. 100,859 167,839
Depreciation................................ (6,259) (3,901)
Other....................................... 19,168 19,912
---------- -----------
Net deferred tax liability............. $ (400,425) $ (498,807)
========== ===========
The Company's effective income tax rate varied from the U.S. federal statutory
tax rate as a result of the following.
APRIL 1,
YEAR ENDED MARCH 31, 1995 -
-------------------- FEBRUARY 19,
1994 1995 1996
-------------------- ------------
U.S. federal statutory rate............ 34.0% 34.0% 34.0%
State taxes, net of federal income tax
benefit............................... 6.7 4.0 4.7
Nondeductible expenses................. 1.7 5.5 6.5
(Income) losses of S corporation....... (20.2) 10.2 --
Conversion to C corporation............ -- -- 42.0
Other.................................. 4.4 9.8 (.7)
----- ---- -----
Effective tax rate................ 26.6% 63.5% 86.5%
====== ==== ====
BFR was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly, any federal income tax liabilities through that date
were the responsibility of the stockholders of BFR. Appropriate provisions were
made for state income taxes. Effective April 1, 1995, BFR terminated its S
election. In connection with BFR's conversion from an S corporation to a C
corporation, approximately $925,000 of federal and state income taxes is
expected to be paid pro rata over the next four years. See Note 15 for Unaudited
Pro Forma Tax Information.
47
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--LEASE COMMITMENTS
The Predecessor Companies lease various office space and certain equipment
under noncancellable lease agreements which expire at various dates.
Future minimum rental payments under such leases are as follows.
YEAR ENDING MARCH 31,
---------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
1997.................................. $ 130,066 $ 442,016
1998.................................. 130,066 451,475
1999.................................. 103,626 434,160
2000.................................. 72,357 407,026
2001.................................. 43,000 370,100
--------- ----------
Total minimum lease payments..... 479,115 $2,104,777
==========
Less: Amounts representing interest... (116,648)
---------
Present value of net minimum
lease payments....................... $ 362,467
=========
Rental expense under these leases was $422,058, $462,352 and $497,458 for
each of the years ended March 31, 1994 and 1995 and for the period April 1, 1995
through February 19, 1996, respectively.
NOTE 9--RELATED PARTIES
FDSI recognized a total of $76,192 and $5,000 in revenue for providing
computer consulting services to CyberSAFE (an affiliated entity) during the year
ended March 31, 1995 and the period April 1, 1996 through February 19,
1996, respectively. At March 31, 1995, $59,720 was due from CyberSAFE for
services up through that date and is included in accounts receivable.
In May 1994, FDSI negotiated a perpetual software marketing agreement with
CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments of
15% of the purchase price for every copy licensed. For the year ended March 31,
1995 and for the period April 1, 1996 through February 19, 1996 FDSI paid no
royalties to CyberSAFE.
48
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In addition, FDSI has made short-term advances to CyberSAFE. The balance
due on these short-term advances, bearing interest at 9% per annum, at March 31,
1995 was $111,877. Included in other income is $41,265 for the year ended March
31, 1995 for management services provided to CyberSAFE. Included in interest
income was $7,335 and $16,208 for the year ended March 31, 1995 and for the
period April 1, 1995 through February 19, 1996 on the advances, respectively.
BFR leases its general offices, and certain computer and transportation
equipment under operating leases, from a third party, which is owned principally
by the former principal Stockholders of BFR. Rental expense under these leases
was $175,814, $176,104 and $174,874 for the years ended March 31, 1994 and 1995
and for the period April 1, 1995 through February 19, 1996, respectively.
Two former stockholders of FDSI each own in excess of 10% of the equity
interests in VoiceNet, Inc. ("VoiceNet"), a voicemail service bureau from
which FDSI obtained voicemail services. In 1995, consideration paid by FDSI to
VoiceNet was approximately $17,500. FDSI paid for services at VoiceNet's
advertised rates.
DASI leases its office space from the Strathmore Realty Trust. The former
stockholders of DASI are the sole trustees and beneficiaries of the Strathmore
Realty Trust. Rental expense recorded for this office space was $96,831, $97,462
and $92,673 for the years ended March 31, 1994 and 1995 and for the period April
1, 1995 through February 19, 1996, respectively. DASI renegotiated its lease
agreement for its office space with Strathmore Realty Trust (an affiliated
company) in November 1995. The provisions of the agreement allow for a five year
fixed term, with one successive option to extend the term for a period of five
years. The annual rental amount is $104,400 triple net, with a variable
provision for escalation.
NOTE 10--EMPLOYEE BENEFIT PLANS
BFR has a salary reduction plan (401(k)) for the benefit of all employees
after 30 days of service. The plan is non-contributory and is funded by the
amounts used to reduce employee salaries. In addition, BFR has the option to
contribute to the plan on the employee's behalf. BFR did not make any
contributions to the plan for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996.
BFR previously maintained an Employee Stock Ownership ("ESOP") and Money
Purchase Plan (the BFR Plan) which covered substantially all salaried employees.
Annual contributions to the ESOP were made at the discretion of BFR's Board of
Directors. The BFR Plan required fixed minimum annual contributions of 10% of
eligible payroll for the initial year ending March 31, 1995 and 5% of eligible
payroll for subsequent years. Employees' scheduled vesting of these benefits
occurs over seven years. In April 1995, the BFR Plan incurred a $2,250,000
liability to a bank with respect to the ESOP portion of the BFR Plan, which,
together with a $900,000 cash contribution from BFR, enabled the BFR Plan to
purchase all of the 300,000 outstanding shares of BFR's Class A common stock for
$3,150,000 from BFR's stockholders. The ESOP shares were allocated to
participants as contributions were made to the Plan. During the year ended March
31, 1995, BFR made contributions of $900,000 to the BFR Plan. As the debt was
repaid, shares were released from collateral and allocated to active employees
based upon the proportion of debt service paid in the year. BFR recorded
compensation expense equal to the market value of the shares at the release
date. On December 7, 1995, the BFR Plan was converted to a profit sharing plan.
Contributions to the BFR Plan are made at the discretion of the Company. The
Company did not make any contributions to the BFR Plan for the period from
December 7, 1995 through February 19, 1996.
FDSI maintains a discretionary profit-sharing (401(k)) plan which covers
all employees who have met minimum age and employment requirements. FDSI made no
contributions to this plan for the years ended March 31, 1994 and 1995 and the
period April 1, 1995 through February 19, 1996.
49
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In September 1992, FDSI adopted a cash bonus profit sharing plan for
employees who have completed 1,500 hours of service to FDSI and who are
employees of FDSI on the payout date. FDSI recorded $10,000, $24,000 and $30,000
of expense related to this Plan for the years ended March 31, 1994 and 1995 and
the period April 1, 1995 through February 19, 1996, respectively.
DASI maintains an unfunded profit-sharing plan, which includes substantially
all full-time employees who have at least one year of continuous service.
Contributions to the plan are made at the discretion of the Board of Directors,
based upon earnings levels. No contributions have been made for the years ended
March 31, 1994 and 1995 or for the period April 1, 1996 through February 19,
1996. DASI previously maintained a pension plan which was terminated in 1988 and
no further contributions made.
In September 1995, Cotelligent's Board of Directors and stockholders approved
Cotelligent's 1995 Long-Term Incentive Plan (the "Plan"). The purpose of the
Plan is to provide directors, officers, key employees and consultants with
additional incentives by increasing their ownership interests in the Company.
Effective as of September 8, 1995, Cotelligent granted to each of two officers
an option to purchase 92,676 shares of common stock at $2.70 per share. Such
options vest as follows: 18,536 one day after consummation of an initial public
offering of the Company's common stock and thereafter, an additional 18,535
shares on the annual anniversary of such initial vesting until all 92,676 shares
have vested. The options are each exercisable for a period of seven years after
the effective date of the grant. On May 2, 1996, one officer exercised the
option to purchase 18,000 shares of Common Stock.
On February 14, 1996, Cotelligent granted certain employees options to
purchase 196,200 shares of Common Stock at $9.00 per share. Such options vest
ratably over four years on the anniversary of the option grant date. The term
of each option grant is determined by the Compensation Committee of the Board of
Directors. However, the term of any incentive stock option or a stock
appreciation right granted in tandem therewith, shall not exceed 10 years from
the date of the grant.
NOTE 11--CAPITAL STRUCTURE
In November 1995, Cotelligent reincorporated in Delaware and increased the
number of authorized shares of common stock from 1,000,000 to 100,000,000,
authorized the issuance of up to 500,000 shares of preferred stock and exchanged
its then outstanding Class A and Class B shares for shares of a single class of
new common stock. Additionally, on November 29, 1995, Cotelligent's Board of
Directors declared a 2.71-for-one stock dividend to each stockholder of
Cotelligent's common stock. The financial statements have been adjusted to
reflect the changes resulting from the reincorporation and the stock dividend
for all periods presented.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Employment Agreements
Effective April 20, 1995, BFR entered into employment agreements with the
four shareholders and officers of BFR. The agreements provide for minimum annual
compensation of $464,000 in addition to directors compensation, potential salary
increases and bonuses. The agreements include noncompete clauses and continue
through years ranging between 2001 and 2021, assuming the maintenance of certain
ownership percentages. These employment agreements were terminated in connection
with the Acquisition by Cotelligent, and three of such officers entered into new
employment agreements and one entered into a consulting agreement.
DASI and its stockholders are parties to a stock purchase agreement which
is effective upon the death of a stockholder. The terms of the agreement require
DASI to buy $350,000 of DASI's stock held by the deceased stockholder's
50
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
estate and require the surviving stockholder to buy from the stockholder's
estate all of the remaining shares owned by the stockholder at that time. In
the event of a stockholder's death, the "fair market value" of the outstanding
stock of DASI will be equal to 60% of the average gross revenues of DASI for the
three most recent years preceding the stockholder's death; however, the value of
such stock shall not be less than the proceeds of the life insurance contracts
maintained on that stockholder. Since DASI's obligation to purchase common stock
from a deceased stockholder's estate will be fully funded by a life insurance
policy maintained by DASI, the related common stock has been classified as
permanent equity. This agreement was terminated upon the Acquisition of DASI by
Cotelligent and certain of the officers.
Consulting Contract
BFR entered into a consulting contract with a former employee effective
February 19, 1996, whereby the former employee is required to perform management
advisory services at the request of BFR. In connection with the contract, BFR
recorded a $470,000 charge to selling, general and administration expenses
during the period April 1, 1995 through February 19, 1996. Payments under the
contract are $ 8,333 per month and continue through December 2000.
Legal Matters
The Company is involved in various legal matters in the normal course of
business. In the opinion of the Predecessor Companies' management, these matters
are not anticipated to have a material adverse effect on the financial position
or results of operations or cash flows of the Company.
NOTE 13--SIGNIFICANT CLIENT
One client accounted for approximately 15% and 11% of the Combined Predecessor
Companies' revenues during the fiscal years ending March 31, 1994 and 1995,
respectively. During the period April 1, 1995 through February 19, 1996, no
individual client accounted for more than 10% of the Combined Predecessor
Companies' revenues.
NOTE 14--DISCONTINUED OPERATIONS
CyberSAFE was previously a separate business division of FDSI, which
developed and marketed security system software for a separate group of clients.
In December 1993, CyberSAFE was incorporated and became a wholly-owned
subsidiary of FDSI. Revenues for this business were approximately $117,000,
$861,000 and $84,000 for each of the fiscal years ended March 31, 1993, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the stock of this subsidiary
to its stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as "Net
assets from discontinued business" on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following.
Cash.......................................... $ 4,660
Accounts receivable........................... 209,892
Prepaid expenses and other current assets..... 28,797
Other assets.................................. 39,234
Capitalized software.......................... 497,203
Property and equipment........................ 144,284
Accounts payable and accrued liabilities...... (164,855)
Deferred income taxes......................... (103,300)
Long-term debt................................ (172,285)
----------
Net.................................... $ 483,630
==========
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its stockholders and this distribution has been reflected
appropriately in stockholders' equity.
51
<PAGE>
COMBINED PREDECESSOR COMPANIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma tax information is presented in accordance
with Statement of Financial Accounting Standards No. 109 ("SFAS 109") as if BFR
Co., Inc., an S corporation, had been a C corporation subject to federal and
state income taxes throughout the periods presented.
FISCAL YEAR
ENDED MARCH 31, APRIL 1, 1995-
-------------------- FEBRUARY 19,
1994 1995 1996
----------- --------- --------------
Income from continuing operations
before provision for income taxes.. $1,272,833 $ 617,882 $ 2,201,588
Provision for income taxes............ (565,975) (333,485) (1,023,100)
---------- --------- -----------
Income from continuing operations..... 706,858 284,397 1,178,488
Loss from operations on discontinued
business (net of applicable
income taxes)...................... (284,560) (184,004) --
---------- --------- -----------
Pro forma net income.................. $ 422,298 $ 100,393 $ 1,178,488
========== ========= ===========
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Financial Data Systems, Inc.
In our opinion, the accompanying consolidated balance sheet, and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Financial Data Systems, Inc. and its subsidiary at March 31, 1995 and 1994, and
the results of its operations and cash flows for each of the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. These consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
53
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, MARCH 31,
1994 1995
----------- -----------
ASSETS
Current assets:
Cash...................... $ 622 $ 86,141
Accounts receivable, less allowance for
doubtful accounts of $10,000............... 1,745,896 2,630,189
Receivable from related party................ -- 111,877
Current portion of note receivable........... -- 58,279
Deferred income taxes........................ 52,000 2,000
Prepaid expenses and other current assets.... 35,575 73,096
Net assets of discontinued business ......... 483,630 --
---------- ----------
Total current assets...................... 2,317,723 2,961,582
---------- ----------
Property and equipment, net.................... 139,474 272,396
Other assets................................... 32,283 70,634
---------- ----------
Total assets.............................. $2,489,480 $3,304,612
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related parties of $291,500 and $0,
respectively................................ $ 595,926 $1,533,709
Accounts payable............................. 162,637 87,958
Accrued compensation......................... 790,540 795,465
Income taxes payable......................... -- 26,600
Other accrued liabilities.................... 180,448 154,455
---------- ----------
Total current liabilities................. 1,729,551 2,598,187
---------- ----------
Long-term debt................................. 211,787 257,473
Deferred income taxes.......................... 106,700 72,000
---------- ----------
Total liabilities......................... 2,048,038 2,927,660
---------- ----------
Commitments (Note 7)........................... -- --
Stockholders' equity:
Series A preferred stock--no par value;
100,000 shares authorized, 85,000 shares
issued and outstanding....................... 8,500 8,500
Series C preferred stock--no par value;
500,000 shares authorized, 13,932 and 14,332
shares issued and outstanding, respectively . 62,838 60,114
Series A common stock--no par value;
1,000,000 shares authorized, 9,813 and
9,713 shares issued and outstanding,
respectively................................. 106,211 108,935
Retained earnings.............................. 263,893 199,403
---------- ----------
Total stockholders' equity................ 441,442 376,952
---------- ----------
Total liabilities and stockholders' equity $2,489,480 $3,304,612
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
54
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED
MARCH 31, APRIL 1, 1995 -
------------------------ FEBRUARY 19,
1994 1995 1996
------------------------- -----------
Revenues........................... $11,191,023 $15,807,642 $16,467,743
Cost of services................... 8,235,708 12,265,956 12,153,114
----------- ----------- -----------
Gross margin.................. 2,955,315 3,541,686 4,314,629
Selling, general and administrative
expenses.......................... 2,419,362 3,119,699 3,166,349
----------- ----------- ----------
Operating income.............. 535,953 421,987 1,148,280
----------- ----------- ----------
Other (income) expense:
Interest expense................. 60,771 117,445 157,991
Interest income.................. (12,967) (11,393) (18,772)
Other, net....................... 4,208 (29,428) (12,941)
----------- ----------- ----------
52,012 76,624 126,278
----------- ----------- ----------
Income from continuing operations
before income taxes............... 483,941 345,363 1,022,002
Income taxes....................... 170,000 122,000 364,000
----------- ----------- ----------
Income from continuing operations.. 313,941 223,363 658,002
Loss from operations of discontinued
business (net of applicable income
taxes of $159,700 and $80,100,
respectively) (Note 11)........... (284,560) (184,004) --
----------- ----------- ----------
Net income......................... $ 29,381 $ 39,359 $ 658,002
=========== =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
55
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------------------------- RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993.............. 100,395 $ 60,236 7,350 $ 100,013 $ 234,512 $ 394,761
Conversion of preferred stock to
common stock.......................... (2,143) (6,198) 2,143 6,198 -- --
Issuance of preferred stock............ 500 7,875 -- -- -- 7,875
Issuance of preferred stock charged to
compensation expense.................. 500 9,425 -- -- -- 9,425
Net income............................. -- -- -- -- 29,381 29,381
------- -------- ------ --------- --------- ----------
Balance at March 31, 1994.............. 99,252 71,338 9,493 106,211 263,893 441,442
Conversion of preferred stock to
common stock.......................... (320) (2,724) 320 2,724 -- --
Stock distribution of subsidiary....... -- -- -- -- (103,849) (103,849)
Net income............................. -- -- -- -- 39,359 39,359
-------- -------- ----- --------- ---------- ----------
Balance at March 31, 1995.............. 98,932 68,614 9,813 108,935 199,403 376,952
Issuance of Preference Stock........... 400 14,000 -- -- -- 14,000
Issuance of Common Stock............... -- -- 635 10,000 -- 10,000
Redemption of Common Stock............. -- -- (100) (2,975) -- (2,975)
Net Income............................. -- -- -- -- 658,002 658,002
-------- --------- ----- --------- ---------- -----------
Balance at February 19, 1996........... 98,332 $ 82,614 10,348 $ 115,960 $ 857,405 $ 1,055,979
======== ========= ====== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
56
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31,
-------------------------- APRIL 1,
1995-FEBRUARY
1994 1995 19, 1996
---------- ---------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 29,381 $ 39,359 $ 658,002
Adjustments to reconcile net income to net cash:
Depreciation and amortization ............................................... 79,511 82,512 85,664
Loss on disposal of property and equipment .................................. 4,208 655 --
Deferred income taxes ....................................................... (88,641) 15,300 (36,208)
Preferred stock issued and charged to compensation .......................... 9,425 -- 14,000
Change in current assets and liabilities:
Accounts receivable ....................................................... (606,176) (959,223) (374,058)
Prepaid expenses and other assets ......................................... 6,998 (50,194) 74,688
Accounts payable and accrued liabilities .................................. 577,723 (95,747) 16,465
Income taxes payable ...................................................... -- 26,600 320,308
Changes in other assets ..................................................... -- -- 1,051
---------- ---------- -------------
Net cash provided by (used in) operating activities .................... 12,429 (940,738) 759,912
---------- ---------- -------------
Cash flows from investing activities:
Property and equipment expenditures ........................................... (22,970) (30,704) (170,939)
Investment in Cotelligent ..................................................... (15,000) (15,000) --
Deferred transaction costs .................................................... -- -- (82,017)
Repayments from (advances to) related party ................................... -- 83,900 (19,544)
Advances to Cotelligent ....................................................... -- -- (336,158)
Change in net assets of discontinued business ................................. (66,924) 184,004 --
---------- ---------- -------------
Net cash provided by (used in) investing activities ..................... (104,894) 222,200 (608,658)
---------- ---------- -------------
Cash flows from financing activities:
Proceeds from long-term debt .................................................. -- -- --
Net borrowings on short-term debt ............................................. 130,964 703,113 173,938
Repayments on long-term debt .................................................. (51,932) (48,785) (43,303)
Payments under capital lease obligations ...................................... (17,377) (41,771) (47,138)
Borrowings from related parties ............................................... -- 191,500 --
Payments to related parties ................................................... -- -- (291,500)
Proceeds from issuance of preferred stock ..................................... 7,875 -- --
Proceeds from issuance of common stock ........................................ -- -- 10,000
Retirement of preferred stock ................................................. -- -- (2,975)
---------- ---------- -------------
Net cash provided by (used in) financing activities ..................... 69,530 804,057 (200,978)
---------- ---------- -------------
Net increase (decrease) in cash ................................................. (22,935) 85,519 (49,724)
Cash at beginning of period ..................................................... 23,557 622 86,141
---------- ---------- -------------
Cash at end of period ........................................................... $ 622 $ 86,141 $ 36,417
========== ========== =============
</TABLE>
Supplemental disclosures of cash flow information and non cash investing and
financing activities are described in Note 2.
The accompanying notes are an integral part of these consolidated financial
statements.
57
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Financial Data Systems, Inc. ("FDSI" or the "Company"), a Washington
corporation, commenced operations in 1982. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Basis of Presentation
A previous division of the Company, CyberSAFE, was incorporated and became
a wholly-owned subsidiary of the Company in December, 1993. The stock of this
subsidiary was subsequently distributed to its stockholders on June 1, 1994 in a
tax-free reorganization. The financial results of the operations of this entity
have been presented as discontinued operations in the Statement of Operations
for all periods presented. See further discussion in Note 11.
Property and Equipment
Property and equipment are carried at cost. The cost of maintenance and
repairs is charged to expense as incurred. Depreciation, including amortization
of capitalized leases, is provided over the estimated useful lives of the
respective assets (five to seven years) on a straight line or accelerated basis.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
58
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable for
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
Supplemental Disclosures of Cash Flow Information
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
---------------------------------------------
1994 1995 1996
---------------------------------------------
<S> <C> <C> <C>
Interest paid .................... $ 74,663 $ 117,795 $ 148,500
Federal income taxes (refunded)
paid ........................... $ (4,334) $ -- $ 71,906
</TABLE>
Supplemental schedule of noncash investing and financing activities is as
follows.
During 1995, the Company refinanced debt with a principal balance of
$178,986.
Capital lease obligations of $99,780 and $179,241 were incurred when the
Company entered into leases of new equipment in the years ended March 31, 1994
and 1995, respectively.
In 1995, the Company converted a trade accounts receivable into a note
receivable with a principal balance of $74,930.
The following assets and liabilities were transferred by the Company to
CyberSAFE, a wholly-owned subsidiary, in December 1993 in exchange for
10,000,000 shares of $.01 par value common stock.
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable ...................... $ 343,222
Prepaid expenses ......................... 21,927
Property and equipment, net .............. 81,796
Other assets ............................. 29,892
Software development costs, net .......... 503,148
Accounts payable and accrued expenses,
including $174,191 due to the Company .. (310,261)
Long-term debt and capital lease
obligations ............................. (120,287)
Deferred income taxes .................... (103,300)
---------
Net assets ........................ $ 446,137
=========
</TABLE>
On June 1, 1994, the Company distributed the stock of CyberSAFE to its
stockholders in a tax-free reorganization. The following is a summary of the
assets and liabilities of CyberSAFE as of that date.
<TABLE>
<CAPTION>
<S> <C>
Cash .................................... $ 1,095
Accounts receivable ..................... 141,740
Prepaid expenses and other current
assets ................................. 107,011
Property and equipment, net ............. 139,617
Other assets, net ....................... 37,926
Software development costs, net ......... 485,827
Accounts payable and accrued expenses,
including $240,385 due to the Company .. (543,936)
Long-term debt and capital
lease obligations ...................... (162,131)
Deferred income taxes .................... (103,300)
---------
Net reduction in retained
earnings ........................ $ 103,849
=========
</TABLE>
59
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
BALANCE AT TRANSFER BALANCE
BEGINNING CHARGED TO TO CYBER- AT END
OF PERIOD EXPENSE SAFE OF PERIOD
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended March 31, 1994 ........... $ 5,000 $10,000 $ -- $15,000
======= ======= ========= =======
Year ended March 31, 1995 ........... $15,000 $ -- $ (5,000) $10,000
======= ======= ========= =======
</TABLE>
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1994 1995
--------- --------
<S> <C> <C>
Equipment.......................... $233,327 $433,642
Furniture and fixtures............. 37,097 37,808
Leasehold improvements............. 22,476 --
-------- --------
292,900 471,450
Less: Accumulated depreciation and
amortization...................... (153,426) (199,054)
-------- ---------
$139,474 $272,396
======== =========
</TABLE>
Depreciation and amortization expense for the years ended March 31, 1994 and
1995 and for the period April 1, 1995 through February 19, 1996 was $50,929,
$76,538 and $85,664, respectively.
As described in Note 7, the Company leases certain equipment under capital
leases.
NOTE 5--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1994 1995
--------- ----------
<S> <C> <C>
Line of credit ........................... $430,964 $1,134,077
Equipment line of credit ................. -- --
Current capital lease obligations ........ 8,653 55,012
Current maturities on long-term debt ..... 56,309 53,120
Notes payable to related parties ......... 100,000 291,500
--------- ----------
$595,926 $1,533,709
========= ==========
</TABLE>
The Company's line of credit agreement with a bank provides for borrowings
up to a maximum amount of $1,250,000 based on eligible accounts receivable, at
the prime rate (6.25% and 9.00% at March 31, 1994 and 1995, respectively) plus
1.50% per annum. The agreement, which expires June 30, 1996, is secured
by accounts receivable, property and
60
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
equipment, and personally guaranteed by the Company's principal stockholders.
The agreement contains certain financial covenants with which the Company is in
compliance as of March 31, 1995.
In May 1995, the Company established a line of credit with a bank which
provides for borrowing of up to $75,000 for the purchase of furniture and
fixtures and equipment. The line bears an interest rate of prime plus 2.25% and
is secured by the Company's accounts with the bank.
During 1995, the Company borrowed a total of $191,500 from its principal
stockholders. The notes are unsecured, bear interest at 9.25% per annum payable
monthly, are due on demand and subordinated to the bank debt. Accrued interest
includes $748 of interest on these notes at March 31, 1995. Interest expense
included $14,025 related to these notes for the year ended March 31, 1995, and
$13,465 for the period April 1, 1995 through February 20, 1996.
The Company borrowed $100,000 from a stockholder in 1993. The note, which
required interest at 9% per annum payable monthly, was paid on September 15,
1995. Accrued interest included $370 at March 31, 1994 and $393 at March 31,
1995 related to this note. Interest expense for the years ended March 31, 1994
and 1995 included $9,000 and $9,000, respectively, related to this note.
Long-Term Debt
Long-term debt consists of.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------
1994 1995
-------------------------------------
<S> <C> <C>
Capital lease obligations...................... $ 48,978 $ 186,619
Note payable to a bank; monthly
payments of $5,937, including interest
at the bank's prime rate (9.00% at March 31,
1995) plus 2.25% per annum; maturing
March 30, 1998 and secured by the
Company's assets and the personal guarantee
of the Company's principal stockholders....... -- 178,986
Note payable to a bank; monthly payments of
$6,218, including interest at the bank's
prime rate (6.25% at March 31, 1994) plus
2.75% per annum; refinanced in 1995........... 227,771 --
---------- ----------
276,749 365,605
Less: Current maturities....................... (64,962) (108,132)
---------- ----------
$ 211,787 $ 257,473
========== ==========
</TABLE>
Principal maturities on notes payable over the next five years are as follows
(see Note 7 for capital lease obligations).
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, 1995
--------------
<S> <C>
1996...................................................... $ 53,120
1997...................................................... 59,413
1998...................................................... 66,453
---------
$ 178,986
=========
</TABLE>
61
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1-
---------------------------------------------- FEBRUARY 19,
1994 1995 1996
---------------- ----------------- ---------------
<S> <C> <C> <C>
Continuing operations:
Current--federal.................... $ 233,100 $ 190,200 $403,010
Deferred--federal................... (63,100) (68,200) (39,010)
---------- ----------- ----------
Total ......................... 170,000 122,000 364,000
Discontinued operations--federal ....... (159,700) (80,100) --
---------- ----------- ----------
Total provision for income taxes........ $ 10,300 $ 41,900 $364,000
========== =========== ==========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------
1994 1995
------------------ ---------------
<S> <C> <C>
Accrued liabilities .......................... $ 51,100 $ 54,600
Cash to accrual conversion ................... (142,900) (111,700)
Depreciation ................................. (17,600) (16,500)
Net operating loss carryforward ............... 48,200 --
Other ......................................... 6,500 3,600
------------------ --------------
Total ......................................... $ (54,700) $ (70,000)
================== ==============
</TABLE>
The Company's effective income tax rate for continuing operations varied
from the U.S. federal statutory rate as follows.
<TABLE>
<CAPTION>
APRIL 1-
YEAR ENDED MARCH 31, FEBRUARY 19,
------------------------------------------------- ----------------------
1994 1995 1996
------------------- -------------- ----------------------
<S> <C> <C> <C>
U.S. federal statutory rate. 34.0% 34.0% 34.0%
Non-deductible expenses..... .9 3.0 1.4
Other....................... .2 (1.7) 1.1
------------------- --------------- ----------------------
Effective income tax rate... 35.1% 35.3% 36.5%
=================== =============== ======================
</TABLE>
NOTE 7--LEASE COMMITMENTS
The Company leases business offices under long-term lease agreements. The
leases are classified as operating leases and expire between 1997 and 2001.
Under such leases, the Company is responsible for all executory costs
(insurance, taxes and maintenance) and pro rata common area charges. The Company
also leases furniture and equipment under leases classified as capital leases.
Property and equipment includes the following leased property under capital
leases.
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Equipment .................................... $ 57,779 $ 236,042
Less: Accumulated amortization ............... (10,867) (46,957)
----------- ------------
$ 46,912 $ 189,085
=========== ============
</TABLE>
62
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a schedule of future minimum lease payments for capital and
operating leases (with initial or remaining terms in excess of one year).
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
-------------------------
CAPITAL OPERATING
LEASES LEASES
---------- -------------
<S> <C> <C>
1997 ................................. $ 79,066 $172,172
1998 ................................. 79,066 202,368
1999 ................................. 52,626 198,662
2000 ................................. 21,357 201,026
2001 ................................. -- 179,100
--------------- -------------
Total minimum lease payments......... 232,115 953,328
=============
Less: Amounts representing interest... (45,496)
---------------
Present value of net minimum
lease payments ...................... $186,619
===============
</TABLE>
Rent expense amounted to $78,549, $108,630 and $188,038 respectively, for
the years ended March 31, 1994 and 1995 and for the period April 1, 1995 through
February 19, 1996, respectively.
NOTE 8--RELATED PARTY TRANSACTIONS
Three individuals own 79% of the outstanding Series A preferred stock, and
are referred to as the "principal stockholders."
For the year ended March 31, 1995, the Company recognized a total of $76,192
in revenue for providing computer consulting services to CyberSAFE. At March 31,
1995, $59,720 was due from CyberSAFE for these services and are included in
accounts receivable.
In May 1994, the Company negotiated a perpetual software marketing agreement
with CyberSAFE to sublicense CyberSAFE software in exchange for royalty payments
of 15% of the purchase price for every copy licensed. For the year ended March
31, 1995, and for the period April 1, 1995 through February 19, 1996, the
Company paid no royalties to CyberSAFE.
In addition, the Company has made short-term advances to CyberSAFE. The
balance due on these short-term advances, bearing interest at 9% per annum at
March 31, 1995 was $111,877. Included in other income is $41,265 for the year
ended March 31, 1995 for management services provided to CyberSAFE . Included
in interest income on the advances was $7,335 and $14,213 for the year ended
March 31, 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
Two stockholders of the Company each own in excess of 10% of the equity
interests in VoiceNet, Inc. ("VoiceNet"), a voicemail service bureau from
which FDSI obtained voicemail services. For the year ended March 31, 1995,
consideration paid by FDSI to VoiceNet was approximately $17,500. FDSI paid for
services at VoiceNet's advertised rates.
The Company carries its investment in Cotelligent (see Note 1) at cost. The
investment, which totaled $15,000 and $30,000 at March 31, 1994 and 1995,
respectively, is included in the "Other assets" in the accompanying Balance
Sheet.
NOTE 9--EMPLOYEE BENEFIT PLANS
The Company maintains a discretionary 401(k) profit-sharing plan which
covers all employees who have met minimum age and employment requirements. The
Company made no contributions to this plan, for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996.
63
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1992, the Company adopted a cash bonus profit-sharing plan for
employees who have completed 1,500 hours of service to the Company. Individuals
must be an employee of the Company on the payout date. The Company recorded
$10,000, $24,000 and $30,000 of expense related to this plan for the years ended
March 31, 1994 and 1995 and the period April 1, 1995 through February 19, 1996,
respectively.
NOTE 10--PREFERRED AND COMMON STOCK
In 1990, the Company's articles of incorporation were amended to allow for
new classes of stock. Holders of the Company's previously issued common stock
exchanged their shares for newly issued Series A voting preferred stock. Holders
of the Company's outstanding and exercisable stock options exchanged their
options for newly issued Series C voting preferred stock in conjunction with the
termination of the Company's stock option plan.
Holder of Series C preferred stock are required to convert their shares to
Series A common stock (voting) upon the termination of employment with the
Company.
The Company has authorized Series B and D preferred stock and Series B common
stock; each series of stock is unissued and has different rights. Series B and D
preferred and Series B common stock are nonvoting. The following summarizes the
authorized shares for each series of stock:
Preferred stock:
Series B, 100,000 shares authorized
Series D, 150,000 shares authorized
Common stock:
Series B, 150,000 shares authorized
NOTE 11--DISCONTINUED OPERATIONS
As discussed in Note 2, CyberSAFE was previously a separate business
division of FDSI, which developed and marketed security system software for a
separate group of customers. In December 1993, CyberSAFE was incorporated and
became a wholly-owned subsidiary of the Company. Revenues for this business were
approximately $861,000 and $84,000 for the fiscal years ended March 31, 1994 and
1995, respectively. Net assets of approximately $446,000 were transferred by
FDSI to the subsidiary. Management of FDSI subsequently decided to discontinue
this business segment and, accordingly, distributed the net assets to its
stockholders in a tax-free reorganization in June 1994.
Accordingly, the operating results of this business have been presented as
discontinued operations, net of applicable income taxes, for all periods
presented. The assets and liabilities of CyberSAFE have been presented as "Net
assets from discontinued business" on the March 31, 1994 balance sheet. These
March 31, 1994 assets consisted of the following:
<TABLE>
<S> <C>
Cash ............................. $ 4,660
Accounts receivable .............. 209,892
Prepaid expenses and other 28,797
current assets ..................
Other assets ..................... 39,234
Capitalized software ............. 497,203
Property and equipment ........... 144,284
Accounts payable and accrued
liabilities ..................... (164,855)
Deferred income taxes ............ (103,300)
Long-term debt ................... (172,285)
-----------
Net .......................... $ 483,630
===========
</TABLE>
64
<PAGE>
FINANCIAL DATA SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net assets of CyberSAFE at June 1994, which approximated $103,000, were
distributed to its shareholders and this distribution has been reflected
appropriately in stockholders' equity.
NOTE 12--SIGNIFICANT CLIENTS
During the year ended March 31, 1994, two clients accounted for 14% and 11%
of revenues, respectively, one client accounted for 26% of revenues for the year
ended March 31, 1995, and two clients accounted for 12% and 24% of revenue,
respectively, for the period April 1, 1995 through February 19, 1996.
Additionally, these clients accounted for approximately 22% and 23% of the
accounts receivable balance as of March 31, 1994 and 1995, respectively.
65
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
BFR Co., Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of BFR Co., Inc. at March 31, 1995 and
1994, and the results of its operations and cash flows for the years ended March
31, 1995 and 1994 and for the period April 1, 1995 through February 19, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
66
<PAGE>
BFR CO., INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............ $ 210,442 $ 466,885
Accounts receivable .................. 3,388,164 3,263,436
Prepaid expenses and other
current assets ...................... 167,819 13,411
------------- ------------
Total current assets .............. 3,766,425 3,743,732
------------- ------------
Property and equipment, net ............ 184,352 140,818
Other assets ........................... 119,567 138,723
------------- ------------
Total assets ...................... $4,070,344 $4,023,273
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt ...................... $ 584,650 $ 35,659
Accounts payable ..................... 191,448 71,840
Accrued payroll liabilities .......... 159,865 836,972
Deferred revenue ..................... -- 168,405
Deferred income taxes ................ 271,000 250,000
Other accrued liabilities ............ 243,764 255,962
------------- ------------
Total current liabilities ......... 1,450,727 1,618,838
------------- ------------
Capital lease obligations .............. 176,172 140,189
Commitments (Notes 6 and 9) ............ -- --
Stockholders' equity:
Common stock, no par value; 1,000,000
shares of Class A and
1,000,000 shares of Class B
authorized, 300,000 and 700,000
shares, issued and outstanding....... 1,000 1,000
Retained earnings .................... 2,442,445 2,263,246
------------- ------------
Total stockholders' equity ........ 2,443,445 2,264,246
------------- ------------
Total liabilities and stockholders'
equity ........................... $4,070,344 $4,023,273
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
67
<PAGE>
BFR CO., INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 1, 1995
FISCAL YEAR ENDED MARCH 31, FEBRUARY 19,
---------------------------------- ---------------
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Revenues................................ $14,440,051 $ 15,220,645 $ 15,622,785
Cost of services ...................... 10,813,662 11,239,778 11,494,132
------------ ------------- -------------
Gross margin ..................... 3,626,389 3,980,867 4,128,653
Selling, general and administrative
expenses........................... 2,832,816 4,173,345 3,589,339
------------ ------------- -------------
Operating income (loss) .......... 793,573 (192,478) 539,314
Other (income) expense:
Interest expense ...................... 53,228 33,109 181,713
Interest income ....................... (20,770) (25,388) (20,694)
Other, net ............................ 3,934 -- --
------------ ------------- -------------
36,392 7,721 161,019
------------ ------------- -------------
Income (loss) before provision
(benefit) for income taxes ........... 757,181 (200,199) 378,295
Provision (benefit) for income..........
taxes.................................. 76,000 (21,000) 1,080,162
------------ ------------- -------------
Net income (loss) ................ $ 681,181 $ (179,199) $ (701,867)
============ ============= =============
The accompanying notes are an integral part of these financial statements.
</TABLE>
68
<PAGE>
BFR CO., INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNEARNED TOTAL
RETAINED ESOP STOCKHOLDERS
COMMON STOCK EARNINGS SHARES EQUITY
------------------------------------- ------------- ------------- -------------
SHARES AMOUNT
----------------- ------------------
CLASS A CLASS B CLASS A CLASS B
-------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993........ 300,000 700,000 $300 $700 $ 1,761,264 $ -- $ 1,762,264
Net income ...................... -- -- -- -- 681,181 -- 681,181
------- ------- ---- ---- ----------- ----------- ------------
Balance at March 31, 1994 ....... 300,000 700,000 300 700 2,442,445 -- 2,443,445
Net loss ........................ -- -- -- -- (179,199) -- (179,199)
------- ------- ---- ---- ----------- ----------- ------------
Balance at March 31, 1995 ....... 300,000 700,000 300 700 2,263,246 -- 2,264,246
Purchase of ESOP shares ......... -- -- -- -- -- (3,150,000) (3,150,000)
Release of unearned shares
to ESOP ....................... -- -- -- -- -- 1,114,286 1,114,286
Conversion of ESOP to defined
contribution plan.............. -- -- -- -- -- 2,035,714 2,035,714
Dividends........................ -- -- -- -- (138,723) -- (138,723)
Net loss ........................ -- -- -- -- (701,867) -- (701,867)
------- ------- ---- ---- ----------- ----------- ------------
Balance at February 19, 1996..... 300,000 700,000 $300 $700 $ 1,422,656 $ 0 $ 1,423,656
------- ------- ---- ---- ----------- ----------- ------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
69
<PAGE>
BFR CO., INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
------------------------------------------
1994 1995 1996
------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................... $ 681,181 $(179,199) $(701,867)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........ 44,625 43,534 41,704
Deferred income taxes, net ........... 76,000 (21,000) 407,651
Changes in current assets and
liabilities:
Accounts receivable ................ (893,938) 124,728 (99,222)
Prepaid expenses and other current
assets ............................ (5,327) 154,408 331,860
Accounts payable and accrued
expenses .......................... (260,851) 569,697 356,642
Income taxes payable ............... -- -- 376,224
Deferred revenue ................... -- 168,405 (168,405)
Changes in other assets .............. (25,463) (19,156) (307,298)
--------- -------- ---------
Net cash provided by (used in)
operating activities............. (383,773) 841,417 237,289
--------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment ... (8,126) -- (121,757)
Net repayments from related
parties .............................. 127,673 -- --
Deferred transaction costs............. -- -- (274,355)
Investment in Cotelligent ............. -- -- (40,000)
Advances to Cotelligent................ -- -- (136,000)
--------- -------- ---------
Net cash flows provided by (used in)
investing activities................... 119,547 -- (572,112)
--------- -------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on
short-term debt ...................... 150,000 (550,000) 300,000
Payments on capital lease obligations.. (30,927) (34,974) (30,244)
--------- -------- ---------
Net cash provided by (used in)
financing activities.............. 119,073 (584,974) 269,756
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents............................ (145,153) 256,443 (65,067)
Cash and cash equivalents at beginning
of period ............................. 355,595 210,442 466,885
--------- -------- ---------
Cash and cash equivalents at end of
period................................. $ 210,442 $ 466,885 $ 401,818
========= ========= =========
Supplemental disclosures of cash flow
information:
Interest paid ......................... $ 28,784 $ 12,495 $ 181,713
Income taxes paid ..................... $ 25 $ 25 $ 439,500
</TABLE>
The accompanying notes are an integral part of these financial statements.
70
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
BFR Co., Inc. ("BFR" or the "Company"), a New Jersey corporation, was
incorporated and commenced operations in 1985. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the related assets (generally ranging from five to ten
years) on an accelerated basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables
arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as accounts
receivable amounts are deemed fully collectible and historical write-offs have
been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Deferred revenue at March 31, 1995 represents billings to clients under fixed
price contracts that have not been earned by the Company under its revenue
recognition policy.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
71
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
The Company was an S corporation through March 31, 1995 for federal income tax
purposes and, accordingly, any federal income tax liabilities through this date
are the responsibility of the stockholders. Appropriate provisions were made for
these periods for state income taxes. Effective April 1, 1995 the Company
terminated its S status and will be taxed as a C Corporation. See further
discussion in Note 5, Income Taxes.
NOTE 3--PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1994 1995
---------- --------
<S> <C> <C>
Computer equipment .............. $292,001 $292,001
Office equipment ................ 349,476 349,476
Leasehold improvements .......... 24,818 24,818
---------- --------
666,295 666,295
Less: Accumulated depreciation and
amortization..................... 481,943 525,477
---------- --------
$184,352 $140,818
========== ========
</TABLE>
Depreciation and amortization for the years ended March 31, 1994 and 1995 and
for the period April 1, 1995 through February 19, 1996 was $44,625,
$43,534 and $41,704, respectively.
Included in office equipment is approximately $307,000 of gross assets under
capital leases as of March 31, 1994.
NOTE 4--CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------------
1994 1995
--------- --------
<S> <C> <C>
Line of credit ................... $550,000 $ --
Current portion of capital lease
obligation ...................... 34,650 35,659
--------- --------
$584,650 $ 35,659
========= ========
</TABLE>
The Company's line of credit agreement with a bank provides for borrowings of
up to $1,500,000. The line of credit is secured by all of the Company's assets
not specifically pledged. The interest rate on this line of credit was 6.75%
(prime plus .50 %) and 9% (prime) at March 31, 1994 and 1995, respectively.
72
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, APRIL 1, 1995-
----------------------------- FEBRUARY 19,
1994 1995 1996
----------------------------- --------------
<S> <C> <C> <C>
Current:
Federal ...................... $ -- $ -- $ 192,879
State ........................ 76,000 (21,000) 117,968
------------- ------------- ------------
76,000 (21,000) 310,847
Deferred:
Federal ...................... -- -- 847,604
State ........................ -- -- (78,289)
------------- ------------- -----------
-- -- 769,315
------------- ------------- -----------
$ 76,000 $ (21,000) $1,080,162
============= ============= ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------------------
1994 1995
-------------- -------------
<S> <C> <C>
Current:
Cash to accrual ..................... $ -- $ --
Accounts receivable ................. (318,000) (293,700)
Accounts payable and accrued
expenses ........................... 43,000 24,700
Unearned revenue .................... -- 15,200
Other................................. 4,000 3,800
------------- ------------
Total ............................ $(271,000) $(250,000)
============= ============
</TABLE>
The Company's effective income tax rate varied from the statutory tax rate as
a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
---------------------- -----------------
1994 1995 1996
---------- ---------- -----------------
<S> <C> <C> <C>
U.S. Federal statutory rate.......... 34.0% 34.0% 34.0%
State statutory rate................. 9.0 9.0 6.9
Officers life insurance and other
nondeductible expenses.............. 1.0 1.5 (6.9)
Conversion to C corporation.......... -- -- 244.5
Other................................ -- -- (10.2)
----------- --------- ------------------
Effective tax rate................. 44.0% 44.5% 268.3%
=========== ========= ==================
</TABLE>
Also, in connection with the conversion from an S corporation (cash basis)
to a C corporation (accrual basis), approximately $925,000 of federal and state
income taxes is expected to be paid pro rata over the next four years. See Note
11 for Unaudited Pro Forma Income Tax Information.
73
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--LEASE COMMITMENTS
The Company leases its general offices, and certain computer and
transportation equipment under operating leases from an affiliate, which is
under common control. Rental expense under these leases was $175,814, $176,104
and $174,874 for the years ended March 31, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996, respectively.
Future minimum rental payments under such leases for the years ending March 31
are as follows.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
----------------------
<S> <C> <C>
1997 ............................ $ 51,000 $205,000
1998 ............................ 51,000 196,000
1999 ............................ 51,000 196,000
2000 ............................ 51,000 206,000
2001 ............................ 43,000 191,000
---------- --------
Total minimum lease payments. 247,000 $994,000
========
Less: Future interest ........... (71,152)
----------
Present value of net minimum lease
payments ........................ 175,848
Less: Current maturities ......... (35,659)
----------
$140,189
==========
</TABLE>
NOTE 7--COMMON STOCK
Effective March 31, 1995, the Company amended its Certificate of Incorporation
to provide for two classes of voting common stock (Class A and Class B) with the
authority to issue 1,000,000 shares of each class of common stock with no par
value. The existing shares outstanding were classified as Class B shares.
On April 20, 1995 the Company declared and effected a stock split of 3,000
shares of Class A common stock for each share of Class B common stock in the
form of a stock dividend. On April 20, 1995, the Company declared and effected a
7,000-for-1 stock split of the Class B common stock. This stock split has been
retroactively reflected in the Company's Balance Sheet and Statement of
Stockholders' Equity.
On April 20, 1995, the Employee Stock Ownership Plan and the Money Purchase
Plan (the Plan) purchased from the shareholders of the Company all of the
300,000 shares of Class A common stock for $3,150,000. In connection with the
transaction, the Plan received a $900,000 cash contribution from the Company and
assumed a $2,250,000 liability to a bank. The Company guaranteed this
obligation. Approximately 214,000 Class A shares are pledged to the bank, and
the loan will be repaid in 84 monthly installments plus interest at the banks
prime rate less .10%. See further discussion regarding this Plan in Note 8--
Retirement Plans.
NOTE 8--RETIREMENT PLANS
401(k)
The Company has a 401(k) plan for the benefit of all employees after 30 days
of service. The plan is non-contributory and is funded by the amounts used to
reduce employee salaries. In addition, the Company has the option to contribute
to the plan on the employee's behalf. The Company did not make any contributions
to the plan for the years ending March 31, 1994 and 1995 and for the period
April 1, 1995 through February 19, 1996.
74
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Employee Stock Ownership and Money Purchase Plan
The Company previously maintained an Employee Stock Ownership (ESOP) and Money
Purchase Plan (the Plan) which covered substantially all salaried employees.
Annual contributions to the ESOP were made at the discretion of the Company's
Board of Directors. The Plan required fixed minimum annual contributions of 10%
of eligible payroll for the initial year ending March 31, 1995 and 5% of
eligible payroll for subsequent years. Employees' scheduled vesting of these
benefits occurs over seven years. In April 1995, the Plan incurred a $2,250,000
liability to a bank with respect to the ESOP portion of the Plan, which,
together with a $900,000 cash contribution from the Company, enabled the Plan to
purchase all of the 300,000 outstanding shares of Class A common stock for
$3,150,000 from the stockholders. The ESOP shares were allocated to participants
as contributions were made to the Plan. During the year ended March 31, 1995,
the Company made contributions of $900,000 to this Plan. As the debt was repaid,
shares were released from collateral and allocated to active employees based
upon the proportion of debt service paid in the year. The Company recorded
compensation expense equal to the market value of the shares at the release
date. On December 7, 1995, the Plan was converted to a profit sharing plan.
Contributions to the Plan are made at the discretion of the Company. The
Company did not make any contributions to the Plan for the period from December
7, 1995 through February 19, 1996.
NOTE 9--COMMITMENTS
Employment Agreements
Effective April 20, 1995, the Company entered into employment agreements with
the four shareholders and officers of the Company. The agreements provided for
minimum annual compensation of $464,000 in addition to directors compensation,
potential salary increases and bonuses. The Agreements included non-compete
clauses and continued through years ranging between 2001 and 2021, assuming the
maintenance of certain ownership percentages. These employment agreements were
terminated in connection with the merger with Cotelligent and certain of the
officers entered into new employment contracts.
NOTE 10--MAJOR CLIENTS
During the year ended March 31, 1994, three major clients accounted for
approximately 33%, 25% and 13% of revenues, respectively, during 1995 three
clients accounted for approximately 34%, 25% and 12% of revenues, respectively,
and during the period April 1, 1995 through February 19, 1996 four clients
accounted for 27%, 23%, 21% and 15% respectively.
Additionally, these clients accounted for approximately 28%, 22% and 13% of
the accounts receivable balance as of March 31, 1994 and 34%, 24% and 18% of the
accounts receivable balance as of March 31, 1995, respectively.
75
<PAGE>
BFR CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--UNAUDITED PRO FORMA INCOME TAX INFORMATION
The following unaudited pro forma income tax information is presented in
accordance with Statement of Financial Accounting Standards No. 109 ("SFAS 109")
as if the Company had been a C corporation subject to federal and state income
taxes throughout the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
-----------------------------------------
1994 1995 1996
----------- ---------- ----------------
<S> <C> <C> <C>
Income (loss) before provision
(benefit) for income taxes ......... $757,181 $(200,199) $378,295
Provision (benefit) for income taxes.. 302,872 (80,080) 151,318
----------- ---------- ---------------
Pro forma net income (loss) ......... $454,309 $(120,119) $226,977
=========== =========== ===============
</TABLE>
76
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Data Arts & Sciences, Inc.
and Data Personnel, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the combined financial position of
Data Arts & Sciences, Inc. and Data Personnel, Inc. at March 31, 1995 and 1994,
and the results of their operations and cash flows for each of the years ended
March 31, 1995 and 1994 and for the period April 1, 1995 through February 19,
1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the companies' management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 20, 1996
77
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable, less allowance
for doubtful accounts of $30,000 ... $1,431,730 $2,043,211
Income taxes receivable ............ 26,635 --
Deferred income taxes .............. 12,081 12,081
Prepaid expenses and other current
assets ............................ 64,794 51,630
--------- -----------
Total current assets ............ 1,535,240 2,106,922
--------- -----------
Property and equipment, net .......... 112,918 79,531
Deferred income taxes ................ 11,341 12,599
Other assets........................... 137,675 228,166
--------- -----------
Total assets .................... $1,797,174 $2,427,218
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt .................... $ 179,138 $ 408,983
Accounts payable ................... 247,682 396,747
Accrued compensation ............... 323,669 401,116
Income taxes payable................. -- 55,290
---------- ----------
Total current liabilities ....... 750,489 1,262,136
---------- ----------
Long-term debt, including notes payable
to related parties of $440,000........ 556,259 440,000
---------- ----------
Total liabilities ................ 1,306,748 1,702,136
---------- ----------
Commitments and contingencies (Notes 7
and 9) .............................. -- --
Stockholders' equity:
Common stock--DASI, no par value;
12,500 shares authorized,
300 shares issued and outstanding.. 2,000 2,000
Common stock--DPI, no par value;
10,000 shares authorized,
2,000 shares issued and outstanding. 2,000 2,000
Retained earnings ................... 486,426 721,082
---------- ----------
Total stockholders' equity ....... 490,426 725,082
---------- ----------
Total liabilities and
stockholders' equity ............ $1,797,174 $2,427,218
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
78
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 1, 1995 -
MARCH 31, FEBRUARY 19,
------------------------- ---------------
1994 1995 1996
------------- ---------- ---------------
<S> <C> <C> <C>
Revenue................................. $10,065,043 $12,436,865 $14,455,636
Cost of services ....................... 7,971,100 9,740,902 11,254,223
----------- ----------- --------------
Gross margin ........................ 2,093,943 2,695,963 3,201,413
Selling, general and administrative.....
expenses ............................. 1,861,838 2,194,932 2,344,165
----------- ----------- --------------
Operating income ................. 232,105 501,031 857,248
Other (income) expense:
Interest expense .................... 80,013 80,150 109,318
Other, net............................ -- -- (22,719)
----------- ----------- --------------
80,013 80,150 86,599
----------- ----------- --------------
Income before provision for income
taxes ............................... 152,092 420,881 770,649
Provision for income taxes ........... 71,658 186,225 328,288
----------- ----------- --------------
Net income ........................... $ 80,434 $ 234,656 $ 442,361
=========== =========== ==============
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
79
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK COMMON STOCK RETAINED STOCKHOLDERS
DASI DPI EARNINGS EQUITY
---------------- --------------- ---------- -------------
SHARES AMOUNT SHARES AMOUNT
---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993. 300 $2,000 2,000 $ 2,000 $ 405,992 $ 409,992
Net income .............. -- -- -- -- 80,434 80,434
------ ------ ----- ------- ---------- ----------
Balance at March 31, 1994. 300 2,000 2,000 2,000 486,426 490,426
Net income .............. -- -- -- -- 234,656 234,656
------ ------ ----- ------- ---------- ----------
Balance at March 31, 1995. 300 2,000 2,000 2,000 721,082 725,082
Dividends ................ -- -- -- -- (20,745) (20,745)
Redemption................ -- -- (2,000) (2,000) -- (2,000)
Contributed Capital........ -- 2,000 -- -- -- 2,000
Net Income ............... -- -- -- -- 442,361 442,361
------ ------ ----- ------- ---------- ----------
Balance at February 19,
1996 .................... 300 $4,000 0 $ 0 $1,142,698 $1,146,698
====== ====== ===== ======= ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
80
<PAGE>
DATA ARTS & SCIENCES, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 1, 1995-
MARCH 31, FEBRUARY 19,
----------------------- -------------
1994 1995 1996
----------------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ........................... $ 80,434 $ 234,656 $ 442,361
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation ........................ 38,909 43,289 28,943
Gain on disposal of equipment ....... -- -- (22,719)
Deferred income taxes, net .......... (35,555) (1,258) (21,480)
Changes in current assets and
liabilities:
Accounts receivable ............... 50,713 (611,481) (463,964)
Prepaid expenses and other current
assets ........................... (44,324) 13,164 (15,418)
Accounts payable and accrued
expenses ......................... 35,724 226,512 (64,564)
Income taxes payable .............. (81,602) 81,925 30,517
Changes in other assets ............. -- (50,000) --
-------- -------- --------
Net cash provided by (used in)
operating activities.............. 44,299 (63,193) (86,324)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ... (66,916) (9,902) (40,600)
Proceeds from sale of equipment........ -- -- 11,000
Deferred transaction costs............. -- -- (25,119)
Investment in Cotelligent ............ -- (25,000) --
Advances to Cotelligent .............. -- -- (73,000)
Investment in cash surrender value of
life insurance ....................... (16,146) (15,491) (22,325)
-------- -------- --------
Net cash used in investing
activities ...................... (83,062) (50,393) (150,044)
-------- -------- --------
Cash flows from financing activities:
Net borrowings (payments) on
short-term debt....................... (82,000) 230,000 242,356
Payments on long-term debt ........... (9,268) (116,414) (5,988)
Payments on loan from related parties.. (25,000) -- --
-------- -------- --------
Net cash provided by (used in)
financing activities .............. (116,268) 113,586 236,368
-------- -------- --------
Net decrease in cash and cash
equivalents ........................... (155,031) -- --
Cash and cash equivalents at beginning
of period ............................. 155,031 -- --
-------- -------- --------
Cash and cash equivalents at end of
period ................................ $ -- $ -- $ --
======== ======== ========
Supplemental disclosures of cash flow
information:
Interest paid.......................... $ 80,013 $ 80,150 $ 109,318
Income taxes paid .................... $ 188,815 $ 105,558 $ 254,402
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
81
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--BUSINESS ORGANIZATION
Data Arts & Sciences, Inc. ("DASI" or the "Company"), a Massachusetts
corporation, commenced operations in 1975. The Company is a professional
services firm that provides computer consulting and contract programming
services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of an initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Basis of Combination
The accompanying financial statements include the accounts of Data Personnel,
Inc. ("DPI") which is owned and controlled by the stockholders of Data Arts &
Sciences, Inc. and which will also be included in the Acquisition by
Cotelligent. Accordingly, these entities have been combined and presented in the
accompanying financial statements. All intercompany balances and transactions
have been eliminated. On December 27, 1995, DPI was merged with DASI.
Cash and Cash Equivalents
The Company considers all highly liquid debt investments purchased with an
original maturity of three months or less to be cash equivalents. No such
investments were held at March 31, 1995 or 1994.
Property and Equipment
Property and equipment are recorded at cost. Maintenance and repair costs are
expensed as incurred. Depreciation of property and equipment is calculated using
the double declining balance method over the estimated useful lives of the
respective assets (generally over 5 years).
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. Receivables
arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
82
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
Revenue Recognition
Revenue is recognized as services are performed.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences by
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
NOTE 3-ALLOWANCE FOR DOUBTFUL ACCOUNTS AND NOTES RECEIVABLE:
The activity in the allowance for doubtful accounts and notes receivable is
as follows.
<TABLE>
<CAPTION>
BALANCE BALANCE
AT AT END
BEGINNING CHARGED TO OF
OF PERIOD EXPENSE WRITE-OFFS PERIOD
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Year ended
March 31, 1994........ $30,000 $ - $ - $30,000
======= ======== ======== =======
Year ended
March 31, 1995........ $30,000 $ 21,368 $(21,368) $30,000
======= ======== ======== =======
</TABLE>
NOTE 4-PROPERTY AND EQUIPMENT
Property and equipment consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1994 1995
-------- --------
<S> <C> <C>
Equipment................................... $187,016 $195,891
Furniture and fixtures...................... 80,301 81,328
Automobiles................................. 64,150 64,150
Leasehold improvements...................... 11,721 11,721
-------- --------
343,188 353,090
Less: Accumulated depreciation.............. 230,270 273,559
-------- --------
$112,918 $ 79,531
======== ========
</TABLE>
Depreciation expense for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996 was $38,909, $43,289 and
$28,943, respectively.
83
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Revolving line of credit.................................... $168,000 $398,000
Current maturities on long-term debt........................ 11,138 10,983
-------- --------
$179,138 $408,983
======== ========
</TABLE>
The Company's line of credit agreement with a bank expires May 31, 1996.
Borrowings under the line are limited to the lesser of $1,300,000 or 70% of the
Company's eligible accounts receivable, as defined in the line of credit
agreement, and are secured by all assets of the Company, as well as the personal
guarantees of the Company's stockholders. Borrowings bear interest at the rate
of 1.25% above the bank's base lending rate (8.754% at March 31, 1995), payable
monthly in arrears. Prior to January 31, 1995, borrowings under the line of
credit bore interest at the rate of 2% above the bank's base lending rate (6.25%
at March 31, 1994). Additionally, a fee of .50% per annum is payable quarterly
on the unused portion of the line of credit.
The line of credit agreement contains certain restrictive covenants,
including a limitation on incurrence of additional debt (unless subordinated to
the line of credit), restrictions on the amount of distributions which can be
made to the Company's stockholders, as well as the maintenance of certain
financial ratios and net worth requirements. The Company is currently in
compliance with such covenants.
Long-Term Debt
Long-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
------------------
1994 1995
-------- --------
<S> <C> <C>
Loans from officers and stockholders........................ $440,000 $440,000
Autombile loan.............................................. 22,121 10,983
Loan against cash surrender value of life insurance
policies................................................... 105,276 -
-------- --------
567,397 450,983
Less: Current portion....................................... 11,138 10,983
-------- --------
$556,259 $440,000
======== ========
</TABLE>
Loans from Officers
The Company has various loans payable to the officers and stockholders of
DASI. A total of $440,000 is outstanding at March 31, 1995 and 1994, $220,000 to
each stockholder. All of the loans bear interest at the rate of 10%, and
interest only is payable monthly until the maturity date, at which time all of
the principal is due. The loans contain no financial or restrictive covenants
and have the following maturity dates:
Due October 25, 1996................... $ 100,000
Due December 25, 1997.................. 140,000
Due October 25, 2006................... 200,000
---------
$ 440,000
=========
84
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The $200,000 loan due October 25, 2006 is subordinated to repayment of the
Company's revolving line of credit.
Additionally, the Company had borrowed $50,000 from one stockholder on
January 22, 1992 and again on March 10, 1993 under similar arrangements. All of
these loans were repaid during fiscal years 1993 and 1994.
Automobile Loan
The Company purchased an automobile in fiscal year 1992 for $4,000 in cash
and a loan of $42,005. The loan bore interest at the rate of 9.75% and required
monthly principal and interest payments of $1,060 through maturity in March
1996. The loan was secured by the automobile. The loan and the automobile were
transferred to a stockholder of the Company in September 1995.
Loan on Officers' Life Insurance Policies
In fiscal year 1992, the Company had borrowed approximately $105,000
against the cash surrender value of its officers' life insurance policies. These
loans bore interest rates which adjusted based on the Moody's Corporate Bond
Index. The loans were repaid in August 1994.
Total maturities of long-term debt are as follows.
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
------------
<S> <C>
1997.................. $ 10,983
1998.................. 100,000
1999.................. 140,000
2000.................. -
2001.................. -
Thereafter............ 200,000
--------
450,983
Less: Current
portion.............. 10,983
--------
Total long term debt.. $440,000
========
</TABLE>
NOTE 6-INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
Current:
Federal........................ $ 81,921 $143,255 $259,207
State.......................... 25,292 44,229 77,555
--------- -------- --------
107,213 187,484 336,762
--------- -------- ---------
Deferred:
Federal........................ (30,019) (1,063) (6,551)
State.......................... (5,536) (196) (1,778)
--------- -------- --------
(35,555) (1,259) (8,329)
--------- -------- --------
Provisions for income taxes....... $ 71,658 $186,225 $328,433
========= ======== ========
</TABLE>
85
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Deferred tax assets are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1994 1995
---------- ----------
<S> <C> <C>
Accounts receivable reserves.................... $ 12,081 $12,081
Accumulated depreciation........................ 11,341 12,599
-------- -------
Total deferred tax assets.................... $ 23,422 $24,680
======== =======
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
U.S. federal statutory rate....... 34.0% 34.0% 34.0%
State income taxes, net of federal
income tax benefit............... 7.3 6.8 6.5
Officers' life insurance and
nondeductible meals and
entertainment expenses........... 5.2 3.1 1.1
Other............................. 0.6 0.3 1.0
---- ---- ----
Effective tax rate................ 47.1% 44.2% 42.6%
==== ==== ====
</TABLE>
NOTE 7-LEASE COMMITMENTS
The Company leases certain automobiles under noncancelable operating leases
that expire at various dates through fiscal year 1998. Future minimum lease
payments are as follows.
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
------------
<S> <C>
1997.................. $17,766
1998.................. 4,584
1999.................. 2,292
-------
$24,642
=======
</TABLE>
The Company also leases its office space from a related party trust (see
Note 8). Rental payments on this office space are based upon the principal and
interest payments required under the trust's mortgage loans and the operating
expenses of the facility. The lease agreement was renegotiated in November of
1995. The provisions of the agreement allow for a five year fixed term, with one
successive option to extend the term for a period of five years. The annual
rental amount is $104,400, triple net, with a variable provision for escalation.
Total rent and lease expense recorded by the Company in fiscal years 1994
and 1995 and for the period April 1, 1995 through February 19, 1996 was
$112,864, $114,136 and $96,284, respectively.
NOTE 8-RELATED PARTY TRANSACTIONS
As described in Note 7, the Company leases its office space from the
Strathmore Realty Trust. The stockholders of DASI are the sole trustees and
beneficiaries of the Strathmore Realty Trust. Rental expense recorded for this
office space was $96,831, $97,462 and $92,700 for the years ended March 31, 1994
and 1995 and for the period April 1, 1995 through February 19, 1996,
respectively.
As described in Note 5, the Company has loans outstanding to its
stockholders totaling $440,000 at March 31, 1994 and 1995.
86
<PAGE>
DATA ARTS & SCIENCES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Pursuant to the definitive agreement referenced in Note 1, the Company
invested $5,000 and $25,000 during fiscal 1994 and 1995, respectively, in
Cotelligent's common stock. The investment is recorded at cost and included in
"Other assets" in the accompanying Combined Balance Sheet.
NOTE 9-COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal matters in the normal course of
business. As of March 31, 1995, as a result of a pending legal matter involving
a former employee of the Company, a court order required the Company to set
aside $50,000 in a restricted cash account, which is included in "Other assets".
The former employee claims that his relationship with the Company entitled him
to share in the profits of one of the divisions of the Company, and has asserted
damages of $200,000.
In the opinion of management, the resolution of the above matters will not
have a material adverse effect on the financial position or results of
operations or cash flows of the Company.
NOTE 10-EMPLOYEE BENEFIT PLANS
The Company maintains an unfunded profit sharing plan which includes
substantially all full-time employees who have at least one year of continuous
service. Contributions to the plan are made at the discretion of the Board of
Directors, based on earning levels. No contributions have been made for the
years ended March 31, 1994, 1995 or for the period April 1, 1995 through
February 19, 1996. The Company previously maintained a pension plan for certain
of its employees. This plan was terminated in 1988 and no further contributions
have been made.
NOTE 11-STOCK PURCHASE AGREEMENT
The Company and its stockholders were parties to a stock purchase agreement
which was effective upon the death of a stockholder. The terms of the agreement
required the Company to buy $350,000 of the Company's stock held by the deceased
stockholder's estate and required the surviving stockholder to buy from the
stockholder's estate all of the remaining shares owned by the stockholder at
that time. In the event of a stockholder's death, the "fair market value" of
the outstanding stock of the Company was to be equal to 60% of the average gross
sales of the Company for the three most recent years preceding the stockholder's
death; however, the value of such stock shall not be less than the proceeds of
the life insurance contracts maintained on that stockholder. Since the Company's
obligation to purchase common stock from a deceased stockholders' estate will be
fully funded by a life insurance policy maintained by the Company, the related
common stock has been classified as permanent equity. This agreement was
terminated upon the Acquisition by Cotelligent (see Note 1).
NOTE 12-SIGNIFICANT CLIENTS
Two clients each accounted for approximately 10% and 14% of revenues in
1994 and 1995. In addition, these clients accounted for approximately 26% and
19% of the accounts receivable balance at March 31, 1994 and 1995, respectively.
During the period April 1, 1995 through February 19, 1996 these two clients
accounted for approximately 16% and 10% of revenue, respectively.
NOTE 13-OTHER ASSETS
Included in "Other assets" on the accompanying Combined Balance Sheet is
the cash surrender value of certain life insurance policies held by the Company
on its officers. This cash surrender value totaled $132,675 and $148,166 at
March 31, 1994 and 1995, respectively. Increases in cash surrender value are
recorded as a reduction of annual insurance premium expense.
87
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Chamberlain Associates, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Chamberlain Associates, Inc. at
March 31, 1995 and 1994, and the results of its operations and cash flows for
the years ended March 31, 1995 and 1994 and for the period April 1, 1995 through
February 19, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Minneapolis, Minnesota
April 20, 1996
88
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1994 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 15,446 $ 46,118
Accounts receivable........................... 520,755 1,265,176
---------- ----------
Total current assets....................... 536,201 1,311,294
Property and equipment, net..................... 39,214 32,535
Other assets.................................... 20,049 10,250
---------- ----------
Total assets............................... $ 595,464 $1,354,079
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt, including notes payable to
related parties of $0 and $100,000,
respectively................................ $ - $ 385,000
Accounts payable, including overdraft of
$89,278 in 1994.............................. 126,473 99,862
Accrued compensation.......................... 85,196 238,092
Other accrued liabilities..................... 26,664 21,492
Deferred income taxes......................... 98,147 203,487
---------- ----------
Total current liabilities................. 336,480 947,933
---------- ----------
Commitments (Note 6)............................ - -
Stockholders' equity:
Common stock, $1.00 par value; 10,000 shares
authorized; 780 shares outstanding........... 780 780
Additional paid-in capital.................... 24,500 24,500
Retained earnings............................. 233,704 380,866
---------- ----------
Total stockholders' equity................ 258,984 406,146
---------- ----------
Total liabilities and stockholders'
equity................................... $595,464 $1,354,079
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
89
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
APRIL 1, 1995
YEAR ENDED MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues.......................... $3,738,117 $6,563,487 $9,199,763
Cost of services.................. 2,920,184 5,241,584 7,460,097
---------- ---------- ----------
Gross margin.................. 817,933 1,321,903 1,739,666
Selling, general and
administrative expenses.......... 773,799 1,054,474 1,273,862
---------- ---------- ----------
Operating income.............. 44,134 267,429 465,804
Other (income) expense:
Interest expense................ 351 15,804 13,999
Interest income................. (1,989) (439) (2,062)
Other, net...................... (1,181) (438) (515)
---------- ---------- ----------
(2,819) 14,927 11,422
---------- ---------- ----------
Income before provision for
income taxes..................... 46,953 252,502 454,382
Provision for income taxes........ 21,445 105,340 179,494
---------- ---------- ----------
Net income.................... $ 25,508 $ 147,162 $ 274,888
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
90
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID IN RETAINED STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS EQUITY
--------------------- ---------- -------- -------------
SHARES AMOUNT
----------- -------
<S> <C> <C> <C> <C> <C>
Balance at
March 31, 1993.... 780 $780 $24,500 $208,196 $233,476
Net income......... - - - 25,508 25,508
--- ---- ------- -------- --------
Balance at
March 31, 1994.... 780 780 24,500 233,704 258,984
Net income......... - - - 147,162 147,162
--- ---- ------- -------- --------
Balance at
March 31, 1995.... 780 780 24,500 380,866 406,146
Net income......... - - - 274,888 274,888
--- ---- ------- -------- --------
Balance at
February 19, 1996. 780 $780 $24,500 $655,754 $681,034
=== ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
91
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 1, 1995
MARCH 31, FEBRUARY 19,
------------------------- --------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 25,508 $ 147,162 $ 274,888
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation............................................ 14,596 17,035 13,867
Loss (gain) on disposal of property and
equipment.............................................. (2,032) - -
Deferred income taxes, net.............................. 87,647 220,520 156,238
Changes in current assets and liabilities:
Accounts receivable................................... (236,031) (744,421) (263,213)
Income tax payable.................................... (66,202) (115,180) 23,256
Accounts payable and accrued liabilities.............. 111,835 121,113 259,548
Changes in other assets................................. - (5,190) (27,486)
--------- --------- ---------
Net cash provided by (used in) operating activities. (64,679) (358,961) 437,098
--------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment....................... (15,802) (10,356) (32,530)
Deferred transaction costs................................ - - (25,660)
Proceeds from sale of investments......................... - 14,989 -
Advances to Cotelligent................................... - - (52,800)
--------- --------- ---------
Net cash used in investing activities............... (15,802) 4,633 (110,990)
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on short-term debt............ - 235,000 -
Repayments on long-term debt.............................. - - (235,000)
Borrowings from related parties........................... - 150,000 (50,000)
--------- --------- ---------
Net cash provided by (used in) financing
activities......................................... - 385,000 (285,000)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (80,481) 30,672 41,108
Cash and cash equivalents at beginning of period............ 95,927 15,446 46,118
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 15,446 $ 46,118 $ 87,226
========= ========= =========
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 351 $ 15,804 $ 13,465
</TABLE>
The accompanying notes are an integral part of these financial statements.
92
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-BUSINESS ORGANIZATION
Chamberlain Associates, Inc. ("CAI" or the "Company"), a California
corporation, was incorporated and commenced operations in 1980. The Company is a
professional services firm that provides computer consulting and contract
programming services.
The Company and its stockholders entered into a definitive agreement with
Cotelligent Group, Inc. ("Cotelligent") pursuant to which the Company merged
with Cotelligent (the "Acquisition"). All outstanding shares of the Company were
exchanged for cash and shares of Cotelligent's common stock concurrent with the
consummation of the initial public offering of the common stock of Cotelligent.
Cotelligent completed the initial public offering on February 14, 1996, and on
February 20, 1996, completed the Acquisition of the Company.
NOTE 2-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided over
the estimated useful lives of the respective assets (5 years for office
equipment and 7 years for furniture and equipment) on a straight-line basis.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Receivables arising from services provided to clients are not collateralized and
accordingly, the Company performs ongoing credit evaluations of its clients to
reduce the risk of loss.
Allowance for Doubtful Accounts
The Company does not maintain an allowance for doubtful accounts as
accounts receivable amounts are deemed fully collectible and historical
write-offs have been insignificant.
Revenue Recognition
Revenue is recognized as services are performed.
Earnings Per Share
Historical earnings per share has not been presented because it is not
considered to be meaningful as a result of the Acquisitions and the offering as
discussed in Note 1.
93
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The asset and liability approach used in SFAS 109 requires the
recognition of deferred tax assets and liabilities for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.
NOTE 3-PROPERTY AND EQUIPMENT
The property and equipment is comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Furniture and fixtures......................... $ 30,033 $ 32,298
Office equipment............................... 76,212 77,259
-------- --------
106,245 109,557
Less: Accumulated depreciation................. (67,031) (77,022)
-------- --------
$ 39,214 $ 32,535
======== ========
</TABLE>
Depreciation expense for the years ended March 31, 1994 and 1995 and for
the period April 1, 1995 through February 19, 1996 was $14,596, $17,035 and
$13,867, respectively.
NOTE 4-CREDIT FACILITIES
Short-Term Debt
Short-term debt consists of the following.
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1994 1995
---------- ----------
<S> <C> <C>
Line of credit................................. $ - $235,000
Notes payable to related party................. - 150,000
-------- --------
$ - $385,000
======== ========
</TABLE>
The Company's line of credit agreement with a bank provides for borrowings
of up to $300,000 at a rate of 2% plus prime and is guaranteed by the President
and Vice President of the Company. The interest rate was 11% at March 31, 1995.
The line of credit was renewed on September 15, 1995 with the same provisions.
Notes payable is comprised of a $100,000 and $50,000 note to the Company's
President (also a stockholder) and his son, respectively. These notes, which
mature on December 31, 1995, bear an interest rate of 2% plus prime, which was
11% at March 31, 1995.
94
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5-INCOME TAXES
The provision (benefit) for income taxes is as follows.
<TABLE>
<CAPTION>
APRIL 1,
YEAR ENDED MARCH 31, 1995-FEB. 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
Current:
Federal........................ $ - $ - $ 799
State.......................... - - 40,720
------- -------- --------
- - 41,519
Deferred:
Federal........................ 16,586 81,472 137,439
State.......................... 4,859 23,868 536
------- -------- --------
21,445 105,340 137,975
------- -------- --------
Total provision (benefit)
for income taxes........... $21,445 $105,340 $179,494
======= ======== ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following.
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1994 1995
--------- ---------
<S> <C> <C>
Current:
Accounts receivable........................ $(213,744) $(519,291)
Accounts payable........................... 16,088 40,988
Accrued compensation....................... 34,969 97,725
Other current liabilities.................. 10,944 8,821
Net operating loss carryforward............ 52,659 167,839
Other...................................... 937 431
--------- ---------
Total.................................... $ (98,147) $(203,487)
========= =========
</TABLE>
The Company's effective income tax rate varied from the U.S. federal
statutory rate as follows.
<TABLE>
<CAPTION>
YEAR ENDED APRIL 1,
MARCH 31, 1995-FEB. 19,
------------------------- --------------
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
U.S. federal statutory rate....... 34.0% 34.0% 34.0%
State income taxes, net of
federal income tax benefit....... 6.8 6.2 6.0
Nondeductible expenses............ 4.9 1.5 .3
Rate differentials................ - - .9
---- ---- ----
Effective tax rate................ 45.7% 41.7% 41.2%
==== ==== ====
</TABLE>
Prior to the merger with Cotelligent, the Company reported results of
operations on the cash basis of accounting for income tax purposes. Upon
completion of the Merger with Cotelligent, the Company will convert to an
accrual basis taxpayer as part of the Cotelligent combined entity. Accordingly,
cash to accrual differences that exist at the time of the Acquisition will be
recognized ratably over the next four years.
95
<PAGE>
CHAMBERLAIN ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6-LEASE COMMITMENTS
The Company maintains an operating lease for its office space and an
automobile. The future minimum lease payments under these operating leases are
as follows.
<TABLE>
<CAPTION>
YEAR
ENDING
MARCH 31,
---------
<S> <C>
1997...................................... $ 47,078
1998...................................... 48,523
1999...................................... 37,206
2000...................................... -
2001...................................... -
--------
$132,807
========
</TABLE>
For the years ended March 31, 1994, and 1995 and for the period
April 1, 1995 through February 19, 1996, the Company incurred expenses of
$54,831, $63,482 and $38,262 respectively, relating to the office and automobile
leases.
NOTE 7-SIGNIFICANT CLIENTS
During the year ended March 31, 1994, two clients accounted for
approximately 30% and 11% of revenue, respectively, and in 1995 three clients
accounted for approximately 13%, 12% and 10% of revenues, respectively. During
the period April 1, 1995 through February 19, 1996 three clients accounted for
approximately 24%, 12%, and 12% of revenues, respectively.
Additionally, these clients accounted for approximately 32% and 34% of the
accounts receivable balance at March 31, 1994 and 1995, respectively.
96
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE.
- - ---------------------
Not applicable.
97
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
---------------------------------------------------
(a) The information called for by Item 10 with respect to identification of
directors and executive officers of the Company is incorporated herein by
reference to the material under the caption "Election of Directors" in the
Company's Proxy Statement for its 1996 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission within 120 days after the
end of the registrant's fiscal year (the "1996 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
-----------------------
The information called for by Item 11 with respect to management
remuneration and transactions is incorporated herein by reference to the
material under the caption "Executive Compensation" in the 1996 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
---------------------------------------------------------------
The information called for by Item 12 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference
to the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information called for by Item 13 with respect to security ownership of
certain beneficial owners and management is incorporated herein by reference to
the material under the caption "Certain Holders of Voting Securities" in the
1996 Proxy Statement.
98
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
(a) 1. Financial Statements required by Item 14 are included and indexed
in Part II, Item 8.
(a) 2. Financial Statement Schedule
Included in Part IV of this report
Schedule II is omitted because the information is included in
the Notes to Consolidated Financial Statements.
(a) 3. EXHIBITS
1. The following is a list of all Exhibits filed as part of this report.
The Exhibits designated by an asterisk are management contracts and
compensatory plans and arrangements required to be filed as Exhibits
to this Form 10-K.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration Statement on
Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
10.1 Form of Employment Agreement between Cotelligent and James R.
Lavelle (Exhibit 10.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.2 Form of Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
</TABLE>
99
<PAGE>
10.3 Form of Employment Agreement between Cotelligent and Duane W. Bell
(Exhibit 10.3 of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.4 Form of Employment Agreement between Cotelligent and Daniel E.
Jackson (Exhibit 10.4 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.5 Form of Employment Agreement between BFR, Cotelligent and Jeffrey J.
Bernardis (contained in Exhibit 2.1) (Exhibit 10.5 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.6 Form of Employment Agreement between CAI, Cotelligent and John E.
Chamberlain (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda M.
Cassell (contained in Exhibit 2.2) (Exhibit 10.7 of the Registration
Statement on Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)*
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings, reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
(b) There were no reports on Form 8-K filed by the registrant during the last
quarter of the period covered by this report.
100
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
FRANCISCO, STATE OF CALIFORNIA ON THE 28TH DAY OF JUNE, 1996.
COTELLIGENT GROUP, INC.
BY: /S/ JAMES R. LAVELLE
----------------------------------
JAMES R. LAVELLE
CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
/S/ JAMES R. LAVELLE CHAIRMAN OF THE JUNE 28, 1996
- - ------------------------ BOARD OF DIRECTORS
JAMES R. LAVELLE AND CHIEF EXECUTIVE
OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
/S/ EDWARD E. FABER VICE CHAIRMAN OF THE JUNE 28, 1996
- - ------------------------ BOARD OF DIRECTORS
EDWARD E. FABER
/S/ MICHAEL L. EVANS PRESIDENT AND CHIEF JUNE 28, 1996
- - ------------------------ OPERATING OFFICER AND
MICHAEL L. EVANS DIRECTOR
/S/ DUANE W. BELL SENIOR VICE PRESIDENT AND JUNE 28, 1996
- - ------------------------ CHIEF FINANCIAL OFFICER
DUANE W. BELL (PRINCIPAL FINANCIAL
OFFICER) (PRINCIPAL
ACCOUNTING OFFICER)
/S/ DANIEL M. BEALS DIRECTOR JUNE 28, 1996
- - ------------------------
DANIEL M. BEALS
/S/ JEFFREY J. BERNARDIS DIRECTOR JUNE 28, 1996
- - ------------------------
JEFFREY J. BERNARDIS
/S/ LINDA M. CASSELL DIRECTOR JUNE 28, 1996
- - ------------------------
LINDA M. CASSELL
/S/ JOHN E. CHAMBERLAIN DIRECTOR JUNE 28, 1996
- - ------------------------
JOHN E. CHAMBERLAIN
/S/ ANTHONY M. FRANK DIRECTOR JUNE 28, 1996
- - ------------------------
ANTHONY M. FRANK
/S/ B. TOM GREEN DIRECTOR JUNE 28, 1996
- - ------------------------
B. TOM GREEN
/S/ BJORN E. NORDEMO DIRECTOR JUNE 28, 1996
- - ------------------------
BJORN E. NORDEMO
/S/ HARVEY L. POPPEL DIRECTOR JUNE 28, 1996
- - ------------------------
HARVEY L. POPPEL
101
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - ----------- -----------
<S> <C>
2.1 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., BFR Acquisition Corporation, and the Stockholders named
therein (Exhibit 2.1 of the Registration Statement of Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)
2.2 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Chamberlain
Associates, Inc., Chamberlain Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.2 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.3 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, BFR Co.,
Inc., Data Arts & Sciences, Inc., DASI Acquisition Corporation, and
the Stockholders named therein (Exhibit 2.3 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
2.4 Agreement and Plan of Reorganization dated as of December 8, 1995,
by and among Cotelligent Group, Inc., James R. Lavelle, Financial
Data Systems, Inc., FDSI Acquisition Corporation, and the
Stockholders named therein (Exhibit 2.4 of the Registration
Statement of Form S-1 (File No. 33-80267) effective February 16,
1996, is hereby incorporated by reference)
3.1 Certificate of Incorporation of Cotelligent (Exhibit 3.1
of the Registration Statement on Form S-1 (File No. 33-80267)
effective February 16, 1996, is hereby incorporated by reference)
3.2 By-laws of Cotelligent (Exhibit 3.2 of the Registration Statement on
Form S-1 (File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
4.1 Form of certificate evidencing ownership of Common Stock of
Cotelligent (Exhibit 4.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)
10.1 Form of Employment Agreement between Cotelligent and James R.
Lavelle (Exhibit 10.1 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.2 Form of Employment Agreement between Cotelligent and Michael L.
Evans (Exhibit 10.2 of the Registration Statement on Form S-1 (File
No. 33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.3 Form of Employment Agreement between Cotelligent and Duane W. Bell
(Exhibit 10.3 of the Registration Statement on Form S-1 (File No.
33-80267) effective February 16, 1996, is hereby incorporated by
reference)*
10.4 Form of Employment Agreement between Cotelligent and Daniel E.
Jackson (Exhibit 10.4 of the Registration Statement on Form S-1
(File No. 33-80267) effective February 16, 1996, is hereby
incorporated by reference)*
10.5 Form of Employment Agreement between BFR, Cotelligent and Jeffrey J.
Bernardis (contained in Exhibit 2.1) (Exhibit 10.5 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.6 Form of Employment Agreement between CAI, Cotelligent and John E.
Chamberlain (contained in Exhibit 2.2) (Exhibit 10.6 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.7 Form of Employment Agreement between CAI, Cotelligent and Linda
M. Cassell (contained in Exhibit 2.2) (Exhibit 10.7 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
</TABLE>
102
<PAGE>
10.8 Cotelligent 1995 Long-Term Incentive Plan (Exhibit 10.9 of the
Registration Statement on Form S-1 (File No. 33-80267) effective
February 16, 1996, is hereby incorporated by reference)*
10.9 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 7 Clyde Road.
10.10 Lease Agreement between BFR Properties and BFR Co., Inc. effective
April 1, 1995, at 31 Clyde Road.
10.11 Lease Agreement between Quinlan Properties, L.P. and BFR Co., Inc.
effective December 29, 1995.
10.12 Sublease Agreement between San Francisco Satellite Center and
Cotelligent Group, Inc. effective March 1, 1996.
10.13 Business Loan Agreement between Cotelligent Group, Inc. and U.S.
Bank of Washington, National Association effective May 1, 1996.
11.1 Statement re: computation of per share earnings , reference is made
to Note 3 of the Cotelligent Group, Inc. consolidated financial
statements contained in this Form 10-K.
21.1 Subsidiaries of the registrant
23.1 Consent of Price Waterhouse LLP
27.1 Financial Data Schedule
103
<PAGE>
EXHIBIT 10.9
<TABLE>
<C> <C> <C>
255--LEASE, FOR BUSINESS and COMMERCIAL USE ONLY A D G R --1 Copyright /c/ 1967 by ALL-STATE LEGAL
IND. OR CORP. (Revised Nov. 1986) SUPPLY CO.
(Not for Residential Use - One Commerce Drive, Cranford, N.J. 07016
N.J.S.A. 56: 12-1;46:8-48)
THIS LEASE AGREEMENT, made the 1st day of April 1995,
Between
B F R PROPERTIES
LANDLORD
residing or located at 7 Clyde Road
in the Township of Franklin Township in the County of Somerset and State of NJ, herein designated as the Landlord,
And
TENANT BFR SYSTEMS
residing or located at 7 Clyde Road in the Township of Franklin in the County of Somerset and State of New Jersey,
herein designated as the Tenant;
WITNESSETH THAT, the Landlord does hereby lease to the Tenant and the Tenant does hereby rent from the Landlord,
the following described premises:
The Professional Center at Somerset
PREMISES 7 Clyde Road, Suite 101 & 201
Somerset, NJ 08873
TERM for a term of 5 years commencing on April 1, 1995, and ending on March 31, 2000, to be used and occupied only and
for no other purpose than
USE Software Development and Maintenance
UPON THE FOLLOWING CONDITIONS AND COVENANTS:
1st: The Tenant covenants and agrees to pay to the Landlord, as rent for and during the term hereof, the sum of
$ in the following manner:
4207.50/mo. April 1, 1995 thru March 31, 1996 plus utilities
4527.95/mo. April 1, 1996 thru March 31, 1997 plus utilities
PAYMENT 4819.40/mo. April 1, 1997 thru March 31, 1998 plus utilities
OF RENT 5110.97/mo. April 1, 1998 thru March 31, 1999 plus utilities
5402.47/mo. April 1, 1999 thru March 31, 2000 plus utilities
REPAIRS 2nd: The Tenant has examined the premises and has entered into this lease without any representation on the part
AND CARE of the Landlord as to the condition thereof. The Tenant shall take good care of the premises and shall at the
Tenant's own cost and expense, make all repairs, including painting and decorating, and shall maintain the premises
in good condition and state of repair, and at the end or other expiration of the term hereof, shall deliver up the
rented premises in good order and condition, wear and tear from a reasonable use thereof, and damage by the elements
not resulting from the neglect or fault of the Tenant, excepted. The Tenant shall neither encumber nor obstruct the
sidewalks, driveways, yards, entrances, hallways and stairs, but shall keep and maintain the same in a clean
condition, free from debris, trash, refuse, snow and ice.
GLASS, ETC. 3rd: In case of the destruction of or any damage to the glass in the leased premises, or the destruction of or
DAMAGE damage of any kind whatsoever to the said premises, caused by the carelessness, negligence or improper conduct on the
REPAIRS part of the Tenant or the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or
successors, the Tenant shall repair the said damage or replace or restore any destroyed parts of the premises, as
speedily as possible, at the Tenant's own cost and expense.
ALTERATIONS 4th: No alterations, additions or improvements shall be made, and no climate regulating, air conditioning,
cooling, heating or sprinkler systems, television or radio antennas, heavy equipment, apparatus and fixtures, shall
IMPROVE- be installed in or attached to the leased premises, without the written consent of the Landlord. Unless otherwise
MENTS provided herein, all such alterations, additions or improvements and systems, when made, installed in or attached to
the said premises, shall belong to and become the property of the Landlord and shall be surrendered with the premises
and as part thereof upon the expiration or sooner termination of this lease, without hindrance, molestation or
injury.
SIGNS 5th: The Tenant shall not place nor allow to be placed any signs of any kind whatsoever, upon, in or about the
said premises or any part thereof, except of a design and structure and in or at such places as may be indicated and
consented to by the Landlord in writing. In case the Landlord or the Landlord's agents, employees or representatives
shall deem it necessary to remove any such signs in order to paint or make any repairs, alterations or improvements
in or upon said premises or any part thereof, they may be so removed, but shall be replaced at the Landlord's expense
when the said repairs, alterations or improvements shall have been completed. Any signs permitted by the Landlord
shall at all times conform with all municipal ordinances or other laws and regulations applicable thereto.
UTILITIES 6th: The Tenant shall pay when due all the rents or charges for water or other utilities used by the Tenant, which
are or may be assessed or imposed upon the leased premises or which are or may be charged to the Landlord by the
suppliers thereof during the term hereof, and if not paid, such rents or charges shall be added to and become payable
as additional rent with the installment of rent next due or within 30 days of demand therefor, whichever occurs
sooner.
COMPLIANCE 7th: The Tenant shall promptly comply with all laws, ordinances, rules, regulations, requirements and directives of
WITH LAWS the Federal, State and Municipal Governments or Public Authorities and of all their departments, bureaus and
ETC. subdivisions, applicable to and affecting the said premises, their use and occupancy, for the correction, prevention
and abatement of nuisances, violations or other grievances in, upon or connected with the said premises, during the
term hereof; and shall promptly comply with all orders, regulations, requirements and directives of the Board of
Fire Underwriters or similar authority and of any insurance companies which have issued or are about to issue
policies of insurance covering the said premises and its contents, for the prevention of fire or other casualty,
damage or injury, at the Tenant's own cost and expense.
LIABILITY 8th: The Tenant, at Tenant's own cost and expense, shall obtain or provide and keep in full force for the benefit
INSURANCE of the Landlord, during the term hereof, general public liability insurance, insuring the Landlord against any and
all liability or claims of liability arising out of, occasioned by or resulting from any accident or otherwise in or
about the leased premises, for injuries to any person or persons, for limits of not less than $500,000.00 for
injuries to one person and $1,000,000.00 for injuries to more than one person, in any one accident or occurrence, and
for loss or damage to the property of any person or persons, for not less than $1,000,000. The policy or policies of
insurance shall be of a company or companies authorized to do business in this State and shall be delivered to the
Landlord, together with evidence of the payment of the premiums therefor, not less than fifteen days prior to the
INDEMNI- commencement of the term hereof or of the date when the Tenant shall enter into possession, whichever occurs sooner.
FICATION At least fifteen days prior to the expiration or termination date of any policy, the Tenant shall deliver a renewal
or replacement policy with proof of the payment of the premium therefor. The Tenant also agrees to and shall save,
hold and keep harmless and indemnify the Landlord from and for any and all payments, expenses, costs, attorney fees
and from and for any and all claims and liability for losses or damage to property or injuries to persons occasioned
wholly or in part by or resulting from any acts or omissions by the Tenant or the Tenant's agents, employees, guests,
licensees, invitees, subtenants, assignees or successors, or for any cause or reason whatsoever arising out of or by
reason of the occupancy by the Tenant and the conduct of the Tenant's business.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
ASSIGNMENT 9th: The Tenant shall not, without the written consent of the Landlord, assign, mortgage or hypothecate this lease,
nor sublet or sublease the premises or any part thereof.
RESTRICTION 10th: The Tenant shall not occupy or use the leased premises or any part thereof, nor permit or suffer the same to
OF USE be occupied or used for any purposes other than as herein limited, nor for any purpose deemed unlawful, disreputable,
or extra hazardous, on account of fire or other casualty.
MORTGAGE 11th: This lease shall not be a lien against the said premises in respect to any mortgages that may hereafter be
PRIORITY placed upon said premises. The recording of such mortgage or mortgages shall have preference and precedence and be
superior and prior in lien to this lease, irrespective of the date of recording and the Tenant agrees to execute any
instruments, without cost, which may be deemed necessary or desirable, to further effect the subordination of this
lease to any such mortgage or mortgages. A refusal by the Tenant to execute such instruments shall entitle the
Landlord to the option of cancelling this lease, and the term hereof is hereby expressly limited accordingly.
CONDEMNATION 12th: If the land and premises leased herein, or of which the leased premises are a part, or any portion thereof,
shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for
EMINENT the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, the Landlord
DOMAIN shall grant an option to purchase and or shall sell and convey the said premises or any portion thereof, to the
governmental or other public authority, agency, body or public utility, seeking to take said land and premises or any
portion thereof, then this lease, at the option of the Landlord, shall terminate, and the term hereof shall end as of
such date as the Landlord shall fix by notice in writing; and the Tenant shall have no claim or right to claim or be
entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation
proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation
proceedings; and all rights of the Tenant to damages, if any, are hereby assigned to the Landlord. The Tenant agrees
to execute and deliver any instruments, at the expense of the Landlord, as may be deemed necessary or required to
expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other
public authority, agency, body or public utility seeking to take or acquire the said lands and premises or any
portion thereof. The Tenant covenants and agrees to vacate the said premises, remove all the Tenant's personal
property therefrom and deliver up peaceable possession thereof to the Landlord or to such other party designated by
the Landlord in the aforementioned notice. Failure by the Tenant to comply with any provisions in this clause shall
subject the Tenant to such costs, expenses, damages and losses as the Landlord may incur by reason of the Tenant's
breach hereof.
FIRE AND 13th: In case of fire or other casualty, the Tenant shall give immediate notice to the Landlord. If the premises
OTHER shall be partially damaged by fire, the elements or other casualty, the Landlord shall repair the same as speedily as
CASUALTY practicable, but the Tenant's obligation to pay the rent hereunder shall not cease. If, in the opinion of the
Landlord, the premises be so extensively and substantially damaged as to render them untenantable, then the rent
shall cease until such time as the premises shall be made tenantable by the Landlord. However, if, in the opinion of
the Landlord, the premises be totally destroyed or so extensively and substantially damaged as to require practically
a rebuilding thereof, then the rent shall be paid up to the time of such destruction and then and from thenceforth
this lease shall come to an end. In no event however, shall the provisions of this clause become effective or be
applicable, if the fire or other casualty and damage shall be the result of the carelessness, negligence or improper
conduct of the Tenant or the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or
successors. In such case, the Tenant's liability for the payment of the rent and the performance of all the
covenants, conditions and terms hereof on the Tenant's part to be performed shall continue and the Tenant shall be
liable to the Landlord for the damage and loss suffered by the Landlord. If the Tenant shall have been insured
against any of the risks herein covered, then the proceeds of such insurance shall be paid over to the Landlord to
the extent of the Landlord's costs and expenses to make the repairs hereunder, and such insurance carriers shall have
no recourse against the Landlord for reimbursement.
REIMBURSEMENT 14th: If the Tenant shall fail or refuse to comply with and perform any conditions and covenants of the within
OF LANDLORD lease, the Landlord may, if the Landlord so elects, carry out and perform such conditions and covenants, at the cost
and expense of the Tenant, and the said cost and expense shall be payable on demand, or at the option of the Landlord
shall be added to the installment of rent due immediately thereafter but in no case later than one month after such
demand, whichever occurs sooner, and shall be due and payable as such. This remedy shall be in addition to such
other remedies as the Landlord may have hereunder by reason of the breach by the Tenant of any of the covenants and
conditions in this lease contained.
INSPECTION 15th: The Tenant agrees that the Landlord and the Landlord's agents, employees or other representatives, shall
AND REPAIR have the right to enter into and upon the said premises or any part thereof, at all reasonable hours, for the purpose
of examining the same or making such repairs or alterations therein as may be necessary for the safety and
preservation thereof. This clause shall not be deemed to be a covenant by the Landlord nor be construed to create an
obligation on the part of the Landlord to make such inspection or repairs.
RIGHT TO 16th: The Tenant agrees to permit the Landlord and the Landlord's agents, employees or other representatives to
EXHIBIT show the premises to persons wishing to rent or purchase the same, and Tenant agrees that on and after
next preceding the expiration of the term hereof, the Landlord or the Landlord's agents, employees or other
representatives shall have the right to place notices on the front of said premises or any part thereof, offering
the premises for rent or for sale; and the Tenant hereby agrees to permit the same to remain thereon without
hindrance or molestation.
INCREASE OF 17th: If for any reason it shall be impossible to obtain fire and other hazard insurance on the buildings and
INSURANCE improvements on the leased premises, in an amount and in the form and in insurance companies acceptable to the
RATES Landlord, the Landlord may, if the Landlord so elects at any time thereafter, terminate this lease and the term
hereof, upon giving to the Tenant fifteen days notice in writing of the Landlord's intention so to do, and upon the
giving of such notice, this lease and the term thereof shall terminate. If by reason of the use to which the premises
are put by the Tenant or character of or the manner in which the Tenant's business is carried on, the insurance rates
for fire and other hazards shall be increased, the Tenant shall upon demand, pay to the Landlord, as rent, the
amounts by which the premiums for such insurance are increased. Such payment shall be paid with the next installment
of rent but in no case later than one month after such demand, whichever occurs sooner.
REMOVAL OF 18th: Any equipment, fixtures, goods or other property of the Tenant, not removed by the Tenant upon the
TENANT'S termination of this lease, or upon any quitting, vacating or abandonment of the premises by the Tenant or upon the
PROPERTY Tenant's eviction, shall be considered as abandoned and the Landlord shall have the right, without any notice to the
Tenant, to sell or otherwise dispose of the same, at the expense of the Tenant, and shall not be accountable to the
Tenant for any part of the proceeds of such sale, if any.
REMEDIES 19th: If there should occur any default on the part of the Tenant in the performance of any conditions and
UPON covenants herein contained, or if during the term hereof the premises or any part thereof shall be or become
TENANT'S abandoned or deserted, vacated or vacant, or should the Tenant be evicted by summary proceedings or otherwise, the
DEFAULT Landlord, in addition to any other remedies herein contained or as may be permitted by law, may either by force or
otherwise, without being liable for prosecution therefor, or for damages, re-enter the said premises and the same
have and again possess and enjoy; and as agent for the Tenant or otherwise, re-let the premises and receive the
rents therefor and apply the same, first to the payment of such expenses, reasonable attorney fees and costs, as the
Landlord may have been put to in re-entering and repossessing the same and in making such repairs and alterations as
may be necessary; and second to the payment of the rents due hereunder. The Tenant shall remain liable for such rents
as may be in arrears and also the rents as may accrue subsequent to the re-entry by the Landlord, to the extent of
the difference between the rents reserved hereunder and the rents, if any, received by the Landlord during the
remainder of the unexpired term hereof, after deducting the aforementioned expenses, fees and costs; the same to be
paid as such deficiencies arise and are ascertained each month.
TERMINATION 20th: Upon the occurrence of any of the contingencies set forth in the preceding clause, or should the Tenant be
ON DEFAULT adjudicated a bankrupt, insolvent or placed in receivership, or should proceedings be instituted by or against the
Tenant for bankruptcy, insolvency, receivership, agreement of composition or assignment for the benefit of creditors,
or if this lease or the estate of the Tenant hereunder shall pass to another by virtue of any court proceedings, writ
of execution, levy, sale, or by operation of law, the Landlord may, if the Landlord so elects, at any time
thereafter, terminate this lease and the term hereof, upon giving to the Tenant or to any trustee, receiver, assignee
or other person in charge of or acting as custodian of the assets or property of the Tenant, five days notice in
writing, of the Landlord's intention so to do. Upon the giving of such notice, this lease and the term hereof shall
end on the date fixed in such notice as if the said date was the date originally fixed in this lease for the
expiration hereof; and the Landlord shall have the right to remove all persons, goods, fixtures and chattels
therefrom, by force or otherwise, without liability for damages.
NON-LIABILITY 21st: The Landlord shall not be liable for any damage or injury which may be sustained by the Tenant or any other
OF LANDLORD person, as a consequence of the failure, breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste
or soil pipes, roof, drains, leaders, gutters, valleys, downspouts or the like or of the electrical, gas, power,
conveyor, refrigeration, sprinkler, airconditioning or heating systems, elevators or hoisting equipment; or by reason
of the elements; or resulting from the carelessness, negligence or improper conduct on the part of any other Tenant
or of the Landlord or the Landlord's or this or any other Tenant's agents, employees, guests, licensees, invitees,
subtenants, assignees or successors; or attributable to any interference with, interruption of or failure, beyond the
control of the landlord, of any services to be furnished or supplied by the Landlord.
NON-WAIVER 22nd: The various rights, remedies, options and elections of the Landlord, expressed herein, are cumulative, and
BY LANDLORD the failure of the Landlord to enforce strict performance by the Tenant of the conditions and covenants of this lease
or to exercise any election or option or to resort or have recourse to any remedy herein conferred or the acceptance
by the Landlord of any installment of rent after any breach by the Tenant, in any one or more instances, shall not be
construed or deemed to be a waiver or a relinquishment for the future by the Landlord of any such conditions and
covenants, options, elections or remedies, but the same shall continue in full force and effect.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
NON-PER- 23rd: This lease and the obligation of the Tenant to pay the rent hereunder and to comply with the covenants and
FORMANCE conditions hereof, shall not be affected, curtailed, impaired or excused because of the Landlord's inability to
BY LANDLORD supply any service or material called for herein, by reason of any rule, order, regulation or preemption by any
governmental entity, authority, department, agency or subdivision or for any delay which may arise by reason of
negotiations for the adjustment of any fire or other casualty loss or because of strikes or other labor trouble or
for any cause beyond the control of the Landlord.
VALIDITY OF 24th: The terms, conditions, covenants and provisions of this lease shall be deemed to be severable. If any
LEASE clause or provision herein contained shall be adjudged to be invalid or unenforceable by a court of competent
jurisdiction or by operation of any applicable law, it shall not affect the validity of any other clause or
provision herein, but such other clauses or provisions shall remain in full force and effect.
NOTICES 25th: All notices required under the terms of this lease shall be given and shall be complete by mailing such
notices by certified or registered mail, return receipt requested, to the address of the parties as shown at the
head of this lease, or to such other address as may be designated in writing, which notice of change of address
shall be given in the same manner.
TITLE AND 26th: The Landlord covenants and represents that the Landlord is the owner of the premises herein leased and has
QUIET the right and authority to enter into, execute and deliver this lease; and does further covenant that the Tenant on
ENJOYMENT paying the rent and performing the conditions and covenants herein contained, shall and may peaceably and quietly
have, hold and enjoy the leased premises for the term aforementioned.
ENTIRE 27th: This lease contains the entire contract between the parties. No representative, agent or employee of the
CONTRACT Landlord has been authorized to make any representations or promises with reference to the within letting or to
vary, alter or modify the terms hereof. No additions, changes or modifications, renewals or extensions hereof, shall
be binding unless reduced to writing and signed by the Landlord and the Tenant.
28th: If in any calendar year during the term and of any renewal or extension of the term hereof, the annual
municipal taxes assessed against the land and improvements leased hereunder or of which the premises herein leased
are a part, shall be greater than the municipal taxes assessed against the said lands and improvements for the
calendar year 1995, which is hereby designated as the base year, then, in addition to the rent herein fixed, the
Tenant agrees to pay a sum equal to 100% of the amount by which said tax exceeds the annual tax for the base year,
inclusive of any increase during any such calendar year. The said sum shall be considered as additional rent and
shall be paid in as many equal installments as there are months remaining in the calendar year in which said taxes
exceed the taxes for the base year, on the first day of each month in advance, during the remaining months of that
year. If the term hereof shall commence after the first day of January or shall terminate prior to the last day of
December in any year, then such additional rent resulting from a tax increase shall be proportionately adjusted for
the fraction of the calendar year involved.
MECHANICS' 29th: If any mechanics' or other liens shall be created or filed against the leased premises by reason of labor
LIENS performed or materials furnished for the Tenant in the erection, construction, completion, alteration, repair or
addition to any building or improvement, the Tenant shall upon demand, at the Tenant's own cost and expense, cause
such lien or liens to be satisfied and discharged of record together with any Notices of Intention that may have
been filed. Failure so to do, shall entitle the Landlord to resort to such remedies as are provided herein in the
case of any default of this lease, in addition to such as are permitted by law.
WAIVER OF 30th: The Tenant waives all rights of recovery against the Landlord or Landlord's agents, employees or other
SUBROGATION representatives, for any loss, damages or injury of any nature whatsoever to property or persons for which the
RIGHTS Tenant is insured. The Tenant shall obtain from Tenant's insurance carriers and will deliver to the Landlord,
waivers of the subrogation rights under the respective policies.
31st: The Tenant has this day deposited with the Landlord the sum of $ as security for the payment of the
rent hereunder and the full and faithful performance by the Tenant of the covenants and conditions on the part of
the Tenant to be performed. Said sum shall be returned to the Tenant, without interest, after the expiration of the
term hereof, provided that the Tenant has fully and faithfully performed all such covenants and conditions and is
not in arrears in rent. During the term hereof, the Landlord may, if the Landlord so elects, have recourse to such
security, to make good any default by the Tenant, in wich event the Tenant shall, on demand, promptly restore said
security to its original amount. Liability to repay said security to the Tenant shall run with the reversion and
SECURITY title to said premises, whether any change in ownership thereof be by voluntary alienation or as the result of
judicial sale, foreclosure or other proceedings, or the exercise of a right of taking or entry by any mortgagee. The
Landlord shall assign or transfer said security, for the benefit of the Tenant, to any subsequent owner or holder of
the reversion or title to said premises, in which case the assignee shall become liable for the repayment thereof as
herein provided, and the assignor shall be deemed to be released by the Tenant from all liability to return such
security. This provision shall be applicable to every alienation or change in title and shall in no wise be deemed
to permit the Landlord to retain the security after termination of the Landlord's ownership of the reversion or
title. The Tenant shall not mortgage, encumber or assign said security without the written consent of the Landlord.
32nd: Condominium Association dues shall be paid by the landlord. Any increase over base year 1995 shall be paid
by tenant for 1995 through 2000.
33rd: Lease Extension: Upon 120 days written notice prior to expiration of lease tenant will be given a 5 year
extension at $1.50 increase per sq. ft. per year, plus utilities. Any increases will be based on 1995 base year plus
tax and condo increase pass on.
34th: Tenant shall have the right of first refusal on any offer to purchase acceptable to Landlord (same term and
conditions) during the entire term or extension of this lease.
CONFORMATION
WITH The Landlord may pursue the relief or remedy sought in any invalid clause, by conforming the said clause with the
LAWS AND provisions of the statutes or the regulations of any governmental agency in such case made and provided as if the
REGULATIONS particular provisions of the applicable statutes or regulations were set forth herein at length.
In all references herein to any parties, persons, entities or corporations the use of any particular gender or the
plural or singular number is intended to include the appropriate gender or number as the text of the within
instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to
the benefit of and shall bind the respective parties hereto, and their heirs, executors, administrators, personal or
legal representatives, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, or caused these presents to be
signed by their proper corporate officers and their proper corporate seal to be hereto affixed, the day and year
first above written.
SIGNED, SEALED AND DELIVERED /s/ GLORIA C. O'DONNELL
IN THE PRESENCE OF _____________________________________________________
OR ATTESTED BY Landlord
/s/ CHARLES S. FOWLER CFO BFR SYSTEMS
___________________________________________________ ______________________________________________________
Tenant
______________________________________________________
</TABLE>
<PAGE>
STATE OF NEW JERSEY, COUNTY OF }SS.: BE IT REMEMBERED,
that on 19 , before me, the subscriber,
personally appeared
who, I am satisfied, the person named in and who executed the
within Instrument, and thereupon acknowledged that
signed, sealed and delivered the same as act and deed, for the uses
and purposes therein expressed.
-------------------------------------
STATE OF NEW JERSEY, COUNTY OF }SS.: BE IT REMEMBERED,
that on 19 , before me, the subscriber,
personally appeared
who, being by me duly sworn on h oath, deposes and makes proof to my
satisfaction, that he is the Secretary of
the Corporation named in the within Instrument; that
is the President of said Corporation;
that the execution, as well as the making of this Instrument, has been duly
authorized by a proper resolution of the Board of Directors of the said
Corporation; that deponent well knows the corporate seal of said Corporation;
and that the seal affixed to said Instrument is the proper corporate seal and
was thereto affixed and said Instrument signed and delivered by said
President as and for the voluntary act and deed of said Corporation, in
presence of deponent, who thereupon subscribed h name thereto as
attesting witness.
Sworn to and subscribed before me, }
the date aforesaid. }
- - ---------------------------------------- -------------------------------------
LEASE.
==============================
TO
==============================
Dated, , 19
==============================
Expires,
Rent, $
Prepared by:
ASSIGNMENT OF LEASE
For one dollar and other good and valuable consideration, the Tenant as
Assignor, assigns this Lease and all the Assignor's rights and privileges
therein, including any and all monies deposited with the Landlord as security,
subject to all the terms, covenants and conditions contained therein; and the
Assignee accepts this Assignment of Lease and assumes and agrees to comply with
and be bound by the terms, covenants and conditions in said Lease contained. The
signature of the Landlord hereto is evidence of the Landlord's consent to and
acceptance of this Assignment of Lease.
- - ------------------------------------- ---------------------------------------
Assignee Assignor
---------------------------------------
Landlord
<PAGE>
SIGNATURES The Landlord and the Tenant agree to the terms of
this Lease by signing below. If a party is a corporation,
this Lease is signed by its proper corporate officers and
its corporate seal is affixed.
Witnessed or attested by: ------------------------------------ [SEAL]
Landlord
BFR Properties
- - --------------------------------- ------------------------------------ [SEAL]
As to Landlord Landlord
GLORIA C. O'DONNELL
------------------------------------ [SEAL]
Tenant
BFR SYSTEMS
- - --------------------------------- ------------------------------------ [SEAL]
As to Tenant Tenant
GLORIA C. O'DONNELL
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
M879-BUSINESS LEASE, PLAIN LANGUAGE, 4-84 (C) 1984 JULIUS BLUMBERG, INC., PUBLISHER, NYC 10013
CONSULT YOUR LAWYER BE3FORE SIGNING THIS LEASE--IT HAS IMPORTANT LEGAL CONSEQUENCES.
BUSINESS LEASE
THE LESSOR AND THE LESSER AGREE TO LEASE THE * FOR THE TERM AND AT THE RENT STATED, AS FOLLOWS: (The words
Landlord and Tenant include all landlords and all tenants under this Lease.)
LESSOR BFR PROPERTIES LESSEE BFR CO., INC.
........................................... ..............................................
PRINT OR TYPE PRINT OR TYPE
7 CLYDE RD 7 CLYDE ROAD
........................................... ..............................................
ADDRESS SOMERSET, NJ 08873 RESIDENCE ADDRESS SOMERSET NJ 08873
........................................... ..............................................
ZIP
OFFICE FURNITURE AND EQUIPMENT
.................................................................................................................
.................................................................................................................
.................................................................................................................
IN THE BUILDING AT 7 CLYDE RD
..............................................................................................
ADDRESS
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
DATE OF LEASE 12-31 1990 RENT FOR THE TERM IS $259,786.44
TERM NINE YEARS THE RENT IS PAYABLE IN ADVANCE ON THE FIRST DAY OF
EACH MONTH, AS FOLLOWS:
BEGINNING 01-01 1991 MONTHLY RENTAL IS AS FOLLOWS:
ENDING 12-31 1999 DURING THE FOLLOWING PERIODS.
01/01/91 - 12/31/99 $2405.43/MO
SECURITY $...................... .....................................................
BROKER. THE LANDLORD AND THE TENANT RECOGNIZE........... .....................................................
N/A
........................................................ .....................................................
........................................................ .....................................................
as the Broker who brought about this Lease. The ........ .....................................................
...................... shall pay the Broker's commission. .....................................................
LIABILITY INSURANCE. Minimum amounts: for each person .....................................................
injured $.....N/A......., for any one accident
$..............., for property damage $.................. .....................................................
MUNICIPAL REAL ESTATE TAXES $ N/A
........................... .....................................................
BASE YEAR 19........ PERCENT OF INCREASE .....% .....................................................
USE OF RENTAL SPACE N/A
.........................................................................................................
.............................................................................................................................
.............................................................................................................................
ADDITIONAL AGREEMENTS........................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. Possession and Use 16. No Alterations
2. Delay in Giving of Possession 17. Signs
3. No Assignment or Subletting 18. Access to Rental Space
4. Rent and Additional Rent 19. Fire and Other Casualty
5. Security 20. Eminent Domain
6. Liability Insurance 21. Subordination to Mortgage
7. Unavailability of Fire Insurance, Rate Increases 22. Tenant's Certificate
8. Water Damage 23. Violation, Eviction, Re-entry and Damages
9. Liability of Landlord and Tenant 24. Notices
10. Real Estate Taxes 25. No Waiver
11. Acceptance of Rental Space 26. Survival
12. Quiet Enjoyment 27. End of Term
13. Utilities and Services 28. Binding
14. Tenant's Repairs, Maintenance, and Compliance 29. Full Agreement
15. Landlord's Repairs and Maintenance
</TABLE>
<PAGE>
EXHIBIT 10.10
<TABLE>
<C> <C> <C>
255--LEASE, FOR BUSINESS and COMMERCIAL USE ONLY A D G R --1 Copyright /c/ 1967 by ALL-STATE LEGAL
IND. OR CORP. (Revised Nov. 1986) SUPPLY CO.
(Not for Residential Use - One Commerce Drive, Cranford, N.J. 07016
N.J.S.A. 56: 12-1;46:8-48)
THIS LEASE AGREEMENT, made the 1st day of April 1995,
Between
BFR PROPERTIES
LANDLORD
residing or located at 31 Clyde Road
in the Township of Franklin in the County of Somerset and State of New Jersey, herein designated as the Landlord,
And
TENANT BFR SYSTEMS
residing or located at 31 Clyde Road in the Township of Franklin in the County of Somerset and State of New Jersey,
herein designated as the Tenant;
WITNESSETH THAT, the Landlord does hereby lease to the Tenant and the Tenant does hereby rent from the Landlord,
the following described premises:
The Professional Center at Somerset
PREMISES 31 Clyde Road, Suite 101 & 201
Somerset, NJ 08873
TERM for a term of 5 years commencing on February 10, 1995, and ending on January 31, 2000, to be used and occupied only
and for no other purpose than
USE Software Development and Maintenance
UPON THE FOLLOWING CONDITIONS AND COVENANTS:
1st: The Tenant covenants and agrees to pay to the Landlord, as rent for and during the term hereof, the sum of
$ in the following manner:
9,900.00/mo. February 10, 1995 thru January 31, 1996 plus utilities
10,549.00/mo. February 10, 1996 thru January 31, 1997 plus utilities
PAYMENT 11,228.20/mo. February 10, 1997 thru January 31, 1998 plus utilities
OF RENT 11,907.33/mo. February 10, 1998 thru January 31, 1999 plus utilities
12,586.45/mo. February 10, 1999 thru January 31, 2000 plus utilities
REPAIRS 2nd: The Tenant has examined the premises and has entered into this lease without any representation on the part
AND CARE of the Landlord as to the condition thereof. The Tenant shall take good care of the premises and shall at the
Tenant's own cost and expense, make all repairs, including painting and decorating, and shall maintain the premises
in good condition and state of repair, and at the end or other expiration of the term hereof, shall deliver up the
rented premises in good order and condition, wear and tear from a reasonable use thereof, and damage by the elements
not resulting from the neglect or fault of the Tenant, excepted. The Tenant shall neither encumber nor obstruct the
sidewalks, driveways, yards, entrances, hallways and stairs, but shall keep and maintain the same in a clean
condition, free from debris, trash, refuse, snow and ice.
GLASS, ETC. 3rd: In case of the destruction of or any damage to the glass in the leased premises, or the destruction of or
DAMAGE damage of any kind whatsoever to the said premises, caused by the carelessness, negligence or improper conduct on the
REPAIRS part of the Tenant or the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or
successors, the Tenant shall repair the said damage or replace or restore any destroyed parts of the premises, as
speedily as possible, at the Tenant's own cost and expense.
ALTERATIONS 4th: No alterations, additions or improvements shall be made, and no climate regulating, air conditioning,
cooling, heating or sprinkler systems, television or radio antennas, heavy equipment, apparatus and fixtures, shall
IMPROVE- be installed in or attached to the leased premises, without the written consent of the Landlord. Unless otherwise
MENTS provided herein, all such alterations, additions or improvements and systems, when made, installed in or attached to
the said premises, shall belong to and become the property of the Landlord and shall be surrendered with the premises
and as part thereof upon the expiration or sooner termination of this lease, without hindrance, molestation or
injury.
SIGNS 5th: The Tenant shall not place nor allow to be placed any signs of any kind whatsoever, upon, in or about the
said premises or any part thereof, except of a design and structure and in or at such places as may be indicated and
consented to by the Landlord in writing. In case the Landlord or the Landlord's agents, employees or representatives
shall deem it necessary to remove any such signs in order to paint or make any repairs, alterations or improvements
in or upon said premises or any part thereof, they may be so removed, but shall be replaced at the Landlord's expense
when the said repairs, alterations or improvements shall have been completed. Any signs permitted by the Landlord
shall at all times conform with all municipal ordinances or other laws and regulations applicable thereto.
UTILITIES 6th: The Tenant shall pay when due all the rents or charges for water or other utilities used by the Tenant, which
are or may be assessed or imposed upon the leased premises or which are or may be charged to the Landlord by the
suppliers thereof during the term hereof, and if not paid, such rents or charges shall be added to and become payable
as additional rent with the installment of rent next due or within 30 days of demand therefor, whichever occurs
sooner.
COMPLIANCE 7th: The Tenant shall promptly comply with all laws, ordinances, rules, regulations, requirements and directives of
WITH LAWS the Federal, State and Municipal Governments or Public Authorities and of all their departments, bureaus and
ETC. subdivisions, applicable to and affecting the said premises, their use and occupancy, for the correction, prevention
and abatement of nuisances, violations or other grievances in, upon or connected with the said premises, during the
term hereof; and shall promptly comply with all orders, regulations, requirements and directives of the Board of
Fire Underwriters or similar authority and of any insurance companies which have issued or are about to issue
policies of insurance covering the said premises and its contents, for the prevention of fire or other casualty,
damage or injury, at the Tenant's own cost and expense.
LIABILITY 8th: The Tenant, at Tenant's own cost and expense, shall obtain or provide and keep in full force for the benefit
INSURANCE of the Landlord, during the term hereof, general public liability insurance, insuring the Landlord against any and
all liability or claims of liability arising out of, occasioned by or resulting from any accident or otherwise in or
about the leased premises, for injuries to any person or persons, for limits of not less than $500,000.00 for
injuries to one person and $1,000,000.00 for injuries to more than one person, in any one accident or occurrence, and
for loss or damage to the property of any person or persons, for not less than $1,000,000.00. The policy or policies
of insurance shall be of a company or companies authorized to do business in this State and shall be delivered to the
Landlord, together with evidence of the payment of the premiums therefor, not less than fifteen days prior to the
INDEMNI- commencement of the term hereof or of the date when the Tenant shall enter into possession, whichever occurs sooner.
FICATION At least fifteen days prior to the expiration or termination date of any policy, the Tenant shall deliver a renewal
or replacement policy with proof of the payment of the premium therefor. The Tenant also agrees to and shall save,
hold and keep harmless and indemnify the Landlord from and for any and all payments, expenses, costs, attorney fees
and from and for any and all claims and liability for losses or damage to property or injuries to persons occasioned
wholly or in part by or resulting from any acts or omissions by the Tenant or the Tenant's agents, employees, guests,
licensees, invitees, subtenants, assignees or successors, or for any cause or reason whatsoever arising out of or by
reason of the occupancy by the Tenant and the conduct of the Tenant's business.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
ASSIGNMENT 9th: The Tenant shall not, without the written consent of the Landlord, assign, mortgage or hypothecate this lease,
nor sublet or sublease the premises or any part thereof.
RESTRICTION 10th: The Tenant shall not occupy or use the leased premises or any part thereof, nor permit or suffer the same to
OF USE be occupied or used for any purposes other than as herein limited, nor for any purpose deemed unlawful, disreputable,
or extra hazardous, on account of fire or other casualty.
MORTGAGE 11th: This lease shall not be a lien against the said premises in respect to any mortgages that may hereafter be
PRIORITY placed upon said premises. The recording of such mortgage or mortgages shall have preference and precedence and be
superior and prior in lien to this lease, irrespective of the date of recording and the Tenant agrees to execute any
instruments, without cost, which may be deemed necessary or desirable, to further effect the subordination of this
lease to any such mortgage or mortgages. A refusal by the Tenant to execute such instruments shall entitle the
Landlord to the option of cancelling this lease, and the term hereof is hereby expressly limited accordingly.
CONDEMNATION 12th: If the land and premises leased herein, or of which the leased premises are a part, or any portion thereof,
shall be taken under eminent domain or condemnation proceedings, or if suit or other action shall be instituted for
EMINENT the taking or condemnation thereof, or if in lieu of any formal condemnation proceedings or actions, the Landlord
DOMAIN shall grant an option to purchase and or shall sell and convey the said premises or any portion thereof, to the
governmental or other public authority, agency, body or public utility, seeking to take said land and premises or any
portion thereof, then this lease, at the option of the Landlord, shall terminate, and the term hereof shall end as of
such date as the Landlord shall fix by notice in writing; and the Tenant shall have no claim or right to claim or be
entitled to any portion of any amount which may be awarded as damages or paid as the result of such condemnation
proceedings or paid as the purchase price for such option, sale or conveyance in lieu of formal condemnation
proceedings; and all rights of the Tenant to damages, if any, are hereby assigned to the Landlord. The Tenant agrees
to execute and deliver any instruments, at the expense of the Landlord, as may be deemed necessary or required to
expedite any condemnation proceedings or to effectuate a proper transfer of title to such governmental or other
public authority, agency, body or public utility seeking to take or acquire the said lands and premises or any
portion thereof. The Tenant covenants and agrees to vacate the said premises, remove all the Tenant's personal
property therefrom and deliver up peaceable possession thereof to the Landlord or to such other party designated by
the Landlord in the aforementioned notice. Failure by the Tenant to comply with any provisions in this clause shall
subject the Tenant to such costs, expenses, damages and losses as the Landlord may incur by reason of the Tenant's
breach hereof.
FIRE AND 13th: In case of fire or other casualty, the Tenant shall give immediate notice to the Landlord. If the premises
OTHER shall be partially damaged by fire, the elements or other casualty, the Landlord shall repair the same as speedily as
CASUALTY practicable, but the Tenant's obligation to pay the rent hereunder shall not cease. If, in the opinion of the
Landlord, the premises be so extensively and substantially damaged as to render them untenantable, then the rent
shall cease until such time as the premises shall be made tenantable by the Landlord. However, if, in the opinion of
the Landlord, the premises be totally destroyed or so extensively and substantially damaged as to require practically
a rebuilding thereof, then the rent shall be paid up to the time of such destruction and then and from thenceforth
this lease shall come to an end. In no event however, shall the provisions of this clause become effective or be
applicable, if the fire or other casualty and damage shall be the result of the carelessness, negligence or improper
conduct of the Tenant or the Tenant's agents, employees, guests, licensees, invitees, subtenants, assignees or
successors. In such case, the Tenant's liability for the payment of the rent and the performance of all the
covenants, conditions and terms hereof on the Tenant's part to be performed shall continue and the Tenant shall Abe
liable to the Landlord for the damage and loss suffered by the Landlord. If the Tenant shall have been insured
against any of the risks herein covered, then the proceeds of such insurance shall be paid over to the Landlord to
the extent of the Landlord's costs and expenses to make the repairs hereunder, and such insurance carriers shall have
no recourse against the Landlord for reimbursement.
REIMBURSEMENT 14th: If the Tenant shall fail or refuse to comply with and perform any conditions and covenants of the within
OF LANDLORD lease, the Landlord may, if the Landlord so elects, carry out and perform such conditions and covenants, at the cost
and expense of the Tenant, and the said cost and expense shall be payable on demand, or at the option of the Landlord
shall be added to the installment of rent due immediately thereafter but in no case later than one month after such
demand, whichever occurs sooner, and shall be due and payable as such. This remedy shall be in addition to such
other remedies as the Landlord may have hereunder by reason of the breach by the Tenant of any of the covenants and
conditions in this lease contained.
INSPECTION 15th: The Tenant agrees that the Landlord and the Landlord's agents, employees or other representatives, shall
AND REPAIR have the right to enter into and upon the said premises or any part thereof, at all reasonable hours, for the purpose
of examining the same or making such repairs or alterations therein as may be necessary for the safety and
preservation thereof. This clause shall not be deemed to be a covenant by the Landlord nor be construed to create an
obligation on the part of the Landlord to make such inspection or repairs.
RIGHT TO 16th: The Tenant agrees to permit the Landlord and the Landlord's agents, employees or other representatives to
EXHIBIT show the premises to persons wishing to rent or purchase the same, and Tenant agrees that on and after next
preceding the expiration of the term hereof, the Landlord or the Landlord's agents, employees or other
representatives shall have the right to place notices on the front of said premises or any part thereof, offering
the premises for rent or for sale; and the Tenant hereby agrees to permit the same to remain thereon without
hindrance or molestation.
INCREASE OF 17th: If for any reason it shall be impossible to obtain fire and other hazard insurance on the buildings and
INSURANCE improvements on the leased premises, in an amount and in the form and in insurance companies acceptable to the
RATES Landlord, the Landlord may, if the Landlord so elects at any time thereafter, terminate this lease and the term
hereof, upon giving to the Tenant fifteen days notice in writing of the Landlord's intention so to do, and upon the
giving of such notice, this lease and the term thereof shall terminate. If by reason of the use to which the premises
are put by the Tenant or character of or the manner in which the Tenant's business is carried on, the insurance rates
for fire and other hazards shall be increased, the Tenant shall upon demand, pay to the Landlord, as rent, the
amounts by which the premiums for such insurance are increased. Such payment shall be paid with the next installment
of rent but in no case later than one month after such demand, whichever occurs sooner.
REMOVAL OF 18th: Any equipment, fixtures, goods or other property of the Tenant, not removed by the Tenant upon the
TENANT'S termination of this lease, or upon any quitting, vacating or abandonment of the premises by the Tenant or upon the
PROPERTY Tenant's eviction, shall be considered as abandoned and the Landlord shall have the right, without any notice to the
Tenant, to sell or otherwise dispose of the same, at the expense of the Tenant, and shall not be accountable to the
Tenant for any part of the proceeds of such sale, if any.
REMEDIES 19th: If there should occur any default on the part of the Tenant in the performance of any conditions and
UPON covenants herein contained, or if during the term hereof the premises or any part thereof shall be or become
TENANT'S abandoned or deserted, vacated or vacant, or should the Tenant be evicted by summary proceedings or otherwise, the
DEFAULT Landlord, in addition to any other remedies herein contained or as may be permitted by law, may either by force or
otherwise, without being liable for prosecution therefor, or for damages, re-enter the said premises and the same
have and again possess and enjoy; and as agent for the Tenant or otherwise, re-let the premises and receive the
rents therefor and apply the same, first to the payment of such expenses, reasonable attorney fees and costs, as the
Landlord may have been put to in re-entering and repossessing the same and in making such repairs and alterations as
may be necessary; and second to the payment of the rents due hereunder. The Tenant shall remain liable for such rents
as may be in arrears and also the rents as may accrue subsequent to the re-entry by the Landlord, to the extent of
the difference between the rents reserved hereunder and the rents, if any, received by the Landlord during the
remainder of the unexpired term hereof, after deducting the aforementioned expenses, fees and costs; the same to be
paid as such deficiencies arise and are ascertained each month.
TERMINATION 20th: Upon the occurrence of any of the contingencies set forth in the preceding clause, or should the Tenant be
ON DEFAULT adjudicated a bankrupt, insolvent or placed in receivership, or should proceedings be instituted by or against the
Tenant for bankruptcy, insolvency, receivership, agreement of composition or assignment for the benefit of creditors,
or if this lease or the estate of the Tenant hereunder shall pass to another by virtue of any court proceedings, writ
of execution, levy, sale, or by operation of law, the Landlord may, if the Landlord so elects, at any time
thereafter, terminate this lease and the term hereof, upon giving to the Tenant or to any trustee, receiver, assignee
or other person in charge of or acting as custodian of the assets or property of the Tenant, five days notice in
writing, of the Landlord's intention so to do. Upon the giving of such notice, this lease and the term hereof shall
end on the date fixed in such notice as if the said date was the date originally fixed in this lease for the
expiration hereof; and the Landlord shall have the right to remove all persons, goods, fixtures and chattels
therefrom, by force or otherwise, without liability for damages.
NON-LIABILITY 21st: The Landlord shall not be liable for any damage or injury which may be sustained by the Tenant or any other
OF LANDLORD person, as a consequence of the failure, breakage, leakage or obstruction of the water, plumbing, steam, sewer, waste
or soil pipes, roof, drains, leaders, gutters, valleys, downspouts or the like or of the electrical, gas, power,
conveyor, refrigeration, sprinkler, airconditioning or heating systems, elevators or hoisting equipment; or by reason
of the elements; or resulting from the carelessness, negligence or improper conduct on the part of any other Tenant
or of the Landlord or the Landlord's or this or any other Tenant's agents, employees, guests, licensees, invitees,
subtenants, assignees or successors; or attributable to any interference with, interruption of or failure, beyond the
control of the landlord, of any services to be furnished or supplied by the Landlord.
NON-WAIVER 22nd: The various rights, remedies, options and elections of the Landlord, expressed herein, are cumulative, and
BY LANDLORD the failure of the Landlord to enforce strict performance by the Tenant of the conditions and covenants of this lease
or to exercise any election or option or to resort or have recourse to any remedy herein conferred or the acceptance
by the Landlord of any installment of rent after any breach by the Tenant, in any one or more instances, shall not be
construed or deemed to be a waiver or a relinquishment for the future by the Landlord of any such conditions and
covenants, options, elections or remedies, but the same shall continue in full force and effect.
</TABLE>
<PAGE>
<TABLE>
<C> <S>
NON-PER- 23rd: This lease and the obligation of the Tenant to pay the rent hereunder and to comply with the covenants and
FORMANCE conditions hereof, shall not be affected, curtailed, impaired or excused because of the Landlord's inability to
BY LANDLORD supply any service or material called for herein, by reason of any rule, order, regulation or preemption by any
governmental entity, authority, department, agency or subdivision or for any delay which may arise by reason of
negotiations for the adjustment of any fire or other casualty loss or because of strikes or other labor trouble or
for any cause beyond the control of the Landlord.
VALIDITY OF 24th: The terms, conditions, covenants and provisions of this lease shall be deemed to be severable. If any
LEASE clause or provision herein contained shall be adjudged to be invalid or unenforceable by a court of competent
jurisdiction or by operation of any applicable law, it shall not affect the validity of any other clause or
provision herein, but such other clauses or provisions shall remain in full force and effect.
NOTICES 25th: All notices required under the terms of this lease shall be given and shall be complete by mailing such
notices by certified or registered mail, return receipt requested, to the address of the parties as shown at the
head of this lease, or to such other address as may be designated in writing, which notice of change of address
shall be given in the same manner.
TITLE AND 26th: The Landlord covenants and represents that the Landlord is the owner of the premises herein leased and has
QUIET the right and authority to enter into, execute and deliver this lease; and does further covenant that the Tenant on
ENJOYMENT paying the rent and performing the conditions and covenants herein contained, shall and may peaceably and quietly
have, hold and enjoy the leased premises for the term aforementioned.
ENTIRE 27th: This lease contains the entire contract between the parties. No representative, agent or employee of the
CONTRACT Landlord has been authorized to make any representations or promises with reference to the within letting or to
vary, alter or modify the terms hereof. No additions, changes or modifications, renewals or extensions hereof, shall
be binding unless reduced to writing and signed by the Landlord and the Tenant.
28th: If in any calendar year during the term and of any renewal or extension of the term hereof, the annual
municipal taxes assessed against the land and improvements leased hereunder or of which the premises herein leased
are a part, shall be greater than the municipal taxes assessed against the said lands and improvements for the
calendar year 1995, which is hereby designated as the base year, then, in addition to the rent herein fixed, the
Tenant agrees to pay a sum equal to 100% of the amount by which said tax exceeds the annual tax for the base year,
inclusive of any increase during any such calendar year. The said sum shall be considered as additional rent and
shall be paid in as many equal installments as there are months remaining in the calendar year in which said taxes
exceed the taxes for the base year, on the first day of each month in advance, during the remaining months of that
year. If the term hereof shall commence after the first day of January or shall terminate prior to the last day of
December in any year, then such additional rent resulting from a tax increase shall be proportionately adjusted for
the fraction of the calendar year involved.
MECHANICS' 29th: If any mechanics' or other liens shall be created or filed against the leased premises by reason of labor
LIENS performed or materials furnished for the Tenant in the erection, construction, completion, alteration, repair or
addition to any building or improvement, the Tenant shall upon demand, at the Tenant's own cost and expense, cause
such lien or liens to be satisfied and discharged of record together with any Notices of Intention that may have
been filed. Failure so to do, shall entitle the Landlord to resort to such remedies as are provided herein in the
case of any default of this lease, in addition to such as are permitted by law.
WAIVER OF 30th: The Tenant waives all rights of recovery against the Landlord or Landlord's agents, employees or other
SUBROGATION representatives, for any loss, damages or injury of any nature whatsoever to property or persons for which the
RIGHTS Tenant is insured. The Tenant shall obtain from Tenant's insurance carriers and will deliver to the Landlord,
waivers of the subrogation rights under the respective policies.
31st: The Tenant has this day deposited with the Landlord the sum of $ as security for the payment of the
rent hereunder and the full and faithful performance by the Tenant of the covenants and conditions on the part of
the Tenant to be performed. Said sum shall be returned to the Tenant, without interest, after the expiration of the
term hereof, provided that the Tenant has fully and faithfully performed all such covenants and conditions and is
not in arrears in rent. During the term hereof, the Landlord may, if the Landlord so elects, have recourse to such
security, to make good any default by the Tenant, in which event the Tenant shall, on demand, promptly restore said
security to its original amount. Liability to repay said security to the Tenant shall run with the reversion and
SECURITY title to said premises, whether any change in ownership thereof be by voluntary alienation or as the result of
judicial sale, foreclosure or other proceedings, or the exercise of a right of taking or entry by any mortgagee. The
Landlord shall assign or transfer said security, for the benefit of the Tenant, to any subsequent owner or holder of
the reversion or title to said premises, in which case the assignee shall become liable for the repayment thereof as
herein provided, and the assignor shall be deemed to be released by the Tenant from all liability to return such
security. This provision shall be applicable to every alienation or change in title and shall in no wise be deemed
to permit the Landlord to retain the security after termination of the Landlord's ownership of the reversion or
title. The Tenant shall not mortgage, encumber or assign said security without the written consent of the Landlord.
32nd: Condominium Association dues shall be paid by the landlord. Any increase over base year 1995 shall be paid
by tenant for 1995 through 2000.
33rd: Lease Extension: Upon 120 days written notice prior to expiration of lease tenant will be given a 5 year
extension at $1.50 increase per sq. ft. per year, plus utilities. Any increases will be based on 1995 base year plus
tax and condo increase pass on.
34th: Tenant shall have the right of first refusal on any offer to purchase acceptable to Landlord (same term and
conditions) during the entire term or extension of this lease.
CONFORMATION
WITH The Landlord may pursue the relief or remedy sought in any invalid clause, by conforming the said clause with the
LAWS AND provisions of the statutes or the regulations of any governmental agency in such case made and provided as if the
REGULATIONS particular provisions of the applicable statutes or regulations were set forth herein at length.
In all references herein to any parties, persons, entities or corporations the use of any particular gender or the
plural or singular number is intended to include the appropriate gender or number as the text of the within
instrument may require. All the terms, covenants and conditions herein contained shall be for and shall inure to
the benefit of and shall bind the respective parties hereto, and their heirs, executors, administrators, personal or
legal representatives, successors and assigns.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals, or caused these presents to be
signed by their proper corporate officers and their proper corporate seal to be hereto affixed, the day and year
first above written.
SIGNED, SEALED AND DELIVERED /s/ GLORIA C. O'DONNELL
IN THE PRESENCE OF _____________________________________________________
OR ATTESTED BY Landlord
/s/ CHARLES FOWLER CFO BFO SYSTEMS
___________________________________________________ ______________________________________________________
Tenant
______________________________________________________
</TABLE>
<PAGE>
STATE OF NEW JERSEY, COUNTY OF }SS.: BE IT REMEMBERED,
that on 19 , before me, the subscriber,
personally appeared
who, I am satisfied, the person named in and who executed the
within Instrument, and thereupon acknowledged that
signed, sealed and delivered the same as act and deed, for the uses
and purposes therein expressed.
-------------------------------------
STATE OF NEW JERSEY, COUNTY OF }SS.: BE IT REMEMBERED,
that on 19 , before me, the subscriber,
personally appeared
who, being by me duly sworn on h oath, deposes and makes proof to my
satisfaction, that he is the Secretary of
the Corporation named in the within Instrument; that
is the President of said Corporation;
that the execution, as well as the making of this Instrument, has been duly
authorized by a proper resolution of the Board of Directors of the said
Corporation; that deponent well knows the corporate seal of said Corporation;
and that the seal affixed to said Instrument is the proper corporate seal and
was thereto affixed and said Instrument signed and delivered by said
President as and for the voluntary act and deed of said Corporation, in
presence of deponent, who thereupon subscribed h name thereto as
attesting witness.
Sworn to and subscribed before me, }
the date aforesaid. }
- - ---------------------------------------- -------------------------------------
LEASE.
==============================
TO
==============================
Dated, , 19
==============================
Expires,
Rent, $
Prepared by:
ASSIGNMENT OF LEASE
For one dollar and other good and valuable consideration, the Tenant as
Assignor, assigns this Lease and all the Assignor's rights and privileges
therein, including any and all monies deposited with the Landlord as security,
subject to all the terms, covenants and conditions contained therein; and the
Assignee accepts this Assignment of Lease and assumes and agrees to comply with
and be bound by the terms, covenants and conditions in said Lease contained. The
signature of the Landlord hereto is evidence of the Landlord's consent to and
acceptance of this Assignment of Lease.
- - ------------------------------------- ---------------------------------------
Assignee Assignor
---------------------------------------
Landlord
<PAGE>
SIGNATURES The Landlord and the Tenant agree to the terms of
this Lease by signing below. If a party is a corporation,
this Lease is signed by its proper corporate officers and
its corporate seal is affixed.
Witnessed or attested by: ------------------------------------ [SEAL]
Landlord
BFR Properties
- - --------------------------------- ------------------------------------ [SEAL]
As to Landlord Landlord
Gloria C. O'Donnell
------------------------------------ [SEAL]
Tenant
BFR Systems
- - --------------------------------- ------------------------------------ [SEAL]
As to Tenant Tenant
Gloria C. O'Donnell
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
M879-BUSINESS LEASE, PLAIN LANGUAGE, 4-84 (C) 1984 JULIUS BLUMBERG, INC., PUBLISHER, NYC 10013
CONSULT YOUR LAWYER BE3FORE SIGNING THIS LEASE--IT HAS IMPORTANT LEGAL CONSEQUENCES.
BUSINESS LEASE
THE LESSOR AND THE LESSEE AGREE TO LEASE THE * FOR THE TERM AND AT THE RENT STATED, AS FOLLOWS: (The words
Landlord and Tenant include all landlords and all tenants under this Lease.)
LESSOR BFR PROPERTIES LESSEE BFR CO., INC.
........................................... ..............................................
PRINT OR TYPE PRINT OR TYPE
7 CLYDE RD 7 CLYDE ROAD
........................................... ..............................................
ADDRESS SOMERSET, NJ 08873 RESIDENCE ADDRESS SOMERSET NJ 08873
........................................... ..............................................
ZIP
OFFICE FURNITURE AND EQUIPMENT
.................................................................................................................
.................................................................................................................
.................................................................................................................
IN THE BUILDING AT 31 CLYDE RD
..............................................................................................
ADDRESS
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
DATE OF LEASE 12-31 1989 RENT FOR THE TERM IS $199,450.08
TERM NINE YEARS THE RENT IS PAYABLE IN ADVANCE ON THE FIRST DAY OF
EACH MONTH, AS FOLLOWS:
BEGINNING 01-01 1990 MONTHLY RENTAL IS AS FOLLOWS:
ENDING 12-31 1999 DURING THE FOLLOWING PERIODS.
01/01/90 - 12/31/99 $1846.76/MO
SECURITY $
.............................................. .....................................................
BROKER. THE LANDLORD AND THE TENANT RECOGNIZE........... .....................................................
N/A
........................................................ .....................................................
........................................................ .....................................................
as the Broker who brought about this Lease. The ........ .....................................................
...................... shall pay the Broker's commission. .....................................................
LIABILITY INSURANCE. Minimum amounts: for each person .....................................................
injured $.......... N/A .........., for any one accident
$..............., for property damage $.................. .....................................................
MUNICIPAL REAL ESTATE TAXES $ ....... N/A ............... .....................................................
BASE YEAR 19 ......... PERCENT OF INCREASE ....... % .....................................................
USE OF RENTAL SPACE N/A
..........................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
ADDITIONAL AGREEMENTS .......................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
.............................................................................................................................
</TABLE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. Possession and Use 16. No Alterations
2. Delay in Giving of Possession 17. Signs
3. No Assignment or Subletting 18. Access to Rental Space
4. Rent and Additional Rent 19. Fire and Other Casualty
5. Security 20. Eminent Domain
6. Liability Insurance 21. Subordination to Mortgage
7. Unavailability of Fire Insurance, Rate Increases 22. Tenant's Certificate
8. Water Damage 23. Violation, Eviction, Re-entry and Damages
9. Liability of Landlord and Tenant 24. Notices
10. Real Estate Taxes 25. No Waiver
11. Acceptance of Rental Space 26. Survival
12. Quiet Enjoyment 27. End of Term
13. Utilities and Services 28. Binding
14. Tenant's Repairs, Maintenance, and Compliance 29. Full Agreement
15. Landlord's Repairs and Maintenance
</TABLE>
<PAGE>
EXHIBIT 10.11
AGREEMENT OF LEASE
between
QUINLAN PROPERTIES, L.P.
Landlord
and
BFR CO., INC.
Tenant
ALLEN CENTER
180 Allen Road
Liberty Corner, New Jersey 07938
<PAGE>
<TABLE>
<CAPTION>
INDEX
-----
Paragraph Caption Page
- - --------- ------- ----
<C> <S> <C>
1. Premises, Term and Purpose...................... 2
2. Rent............................................ 2
3. Operating Expenses.............................. 3
4. Completion of Improvements and Commencement
of Rent......................................... 6
5. Tenant Covenants As to Condition of Premises,
and Compliance with Laws........................ 7
6. Tenant Improvements, Alterations and Installa-
tions........................................... 7
7. Various Negative Covenants by Tenant............ 8
8. Various Affirmative Covenants of Tenant......... 8
9. Building Directory and Signage.................. 9
10. Casualty and Insurance.......................... 9
11. Indemnification................................. 10
12. Non-Liability of Landlord....................... 10
13. Remedies and Termination Upon Tenant Default ... 11
14. Remedies Cumulative; Non-Waiver By Landlord..... 12
15. Services; Electric Energy....................... 12
16. Subordination................................... 14
17. Landlord's Cure of Tenant Defaults.............. 14
18. Notices......................................... 14
19. Quiet Enjoyment................................. 15
20. Security Deposit................................ 15
21. Inspection and Entry by Landlord................ 15
22. Brokerage....................................... 16
23. Parking......................................... 16
24. Renewal Option.................................. 16
25. Landlord Inability to Perform................... 17
26. Condemnation.................................... 17
27. Assignment and Subletting....................... 17
28. Environmental Laws.............................. 18
29. Parties Bound................................... 19
30. Miscellaneous................................... 20
</TABLE>
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit
- - -------
A Floor Plan
A-1 Description of Land
B Rules and Regulations
C Project Holidays
D Janitorial Maintenance Specifications
Provided by Landlord
E ISRA Applicability/NonApplicability Affidavit
<PAGE>
LEASE AGREEMENT DATED DECEMBER 29, 1995
BETWEEN QUINLAN PROPERTIES, L.P. a N.J. Limited Partnership ("Landlord"),
having an office at Allen Center, 150 Allen Road, Liberty Corner, NJ 07938
and BFR CO., INC. ("Tenant" having an address at 7 Clyde Road, Somerset, NJ
08873.
PREAMBLE
--------
BASIC LEASE PROVISIONS AND DEFINITIONS.
In addition to other terms elsewhere defined in this Lease, the following
terms whenever used in this Lease should have only the meanings set forth in
this Preamble, unless such meanings are expressly modified, limited or expanded
elsewhere herein.
1. Premises or Demised Premises: Outlined in red on the floor plan
-----------------------------
annexed hereto and made a part hereof as Exhibit A consisting of 6,214 square
feet of Gross Rentable Area located on the first floor to be delivered on the
Commencement Date together with all fixtures, equipment, improvements and
installations attached thereto in the building located at 150 Allen Road in the
Township of Bernards, County of Somerset, New Jersey and having 188,512 square
feet of Gross Rentable Area, (the "Building").
2. Term: Five (5) years.
-----
3. Commencement Date: The later of January 1, 1996, or the date that
------------------
Landlord receives approval from its lender of the Lease.
4. Expiration Date: Noon on the last day of the calendar month
occurring immediately before five (5) years after the Commencement Date.
5. Permitted Use: General office purposes.
--------------
6. Fixed Rent:
-----------
<TABLE>
<CAPTION>
Year Rent per SF Annual Fixed Rent Monthly Fixed Rent
- - ------- ----------- ----------------- ------------------
<S> <C> <C> <C>
1 2 $17.62 $109,490.68 $ 9,124.22
3-5 $23.50 $146,029.00 $12,169.08
</TABLE>
7. Cafeteria Service Charge: One and one-half percent (1.5%) of
------------------------
Fixed Rent per month.
8. Late Charge: Four percent (4%) of the amount of the payment due.
------------
9. Tenant's Proportionate Share of Excess Expenses: Three and 30/100
------------------------------------------------
percent (3.30%) of the amount by which Expenses during any Lease Year exceed
Base Year Expenses. Such percentage is arrived at by dividing the Gross Rentable
Area of the Demised Premises then delivered (which for the purposes of this
Lease, is agreed to be 6,214 square feet) by (ii) the Gross Rentable Area of the
Building (which for the purposes of this Lease is agreed to be 188,512 square
feet).
10. Base Year: Calendar year 1996.
----------
11. Security Deposit: Twenty-One Thousand Two Hundred Ninety-Three and
-----------------
30/100 Dollars (21,293.30).
12. Tenant's S.I.C. Code and Address for Environmental Information (as
------------------------------------------------------------------
per most recent S.I.C. Manual as published by the United States Office of
- - -------------------------------------------------------------------------
Management & Budget} : 7379.
- - ----------------------
<PAGE>
13. Designated Brokers: Cushman & Wakefield and Jacobson, Goidfarb &
-------------------
Tanzman.
14. Number of Tenant Allocated Parking Spaces: Twenty-five (25) spaces,
------------------------------------------
consisting of two (2) covered exclusive space and two (2) non-covered exclusive
spaces ("Exclusive Spaces") and twenty one (21) non exclusive spaces ("Non
Exclusive Spaces").
The parties hereby agree to the following terms and conditions:
1. Premises, Term and Purpose.
---------------------------
(a) Landlord does hereby lease to Tenant, and Tenant does hereby lease
from Landlord, the Demised Premises located in the Building for the Term
commencing on the "Commencement Date" as defined in Subparagraph (b) of this
Paragraph 1, and ending on the Expiration Date, or such earlier date upon which
the Term may expire or be terminated pursuant to the provisions of this Lease or
pursuant to Law. The parcel of land on which the Building is located is
hereinafter called the "Land" and is more particularly described on Exhibit A-1
annexed hereto and made a part hereof.
(b) For purposes of this Lease the Commencement Date shall be the
later of (i) January 1, 1996 or (ii) the date that Landlord receives approval of
the Lease from its lender.
(c) The Demised Premises shall be used by Tenant for the Permitted Use
and for no other use or purpose. Tenant shall not use or occupy the Demised
Premises or any part thereof, for any purpose deemed unlawful, disreputable, or
extra-hazardous on account of fire or other casualty, or for any purposes which
shall impair the character of the Building. Tenant, at its sole cost and expense
shall obtain any consents, licenses, permits or approvals required to conduct
its business at the Demised Premises.
(d) The "Common Areas" of the Building shall be those parts of the
Building and other improvements designated by Landlord from time to time for the
common use of all tenants, including among other facilities, halls, lobbies,
delivery passages, drinking fountains, public toilets, and the like, and all
garages, parking lots, service buildings or similar improvements operated, owned
or maintained, in whole or in part, by Landlord, and all parkways, drives,
greenspaces, parks, fountains or other facilities owned, operated or maintained,
in whole or in part, by Landlord, or otherwise made available by Landlord for
use by all tenants of the Building, whether used in conjunction with the use of
such space by the occupants of other buildings or used exclusively by Tenants of
the Building, all of which facilities shall be subject to Landlord's reasonable
management and control and shall be operated and maintained for the benefit of
all tenants in a first class manner. Tenant, and its employees and invitees,
shall have the non-exclusive right to use the Common Areas, such use to be in
common with Landlord, other tenants of the Building and other persons entitled
to use the same.
(e) Notwithstanding any provision to the contrary contained herein,
Landlord has the right, at Landlord's sole cost and expense, either prior to the
Commencement Date or at any time during the term of this Lease, to relocate
Tenant to comparable space located in the Building on at least sixty (60) days
prior written notice to Tenant. In the event that Tenant is so relocated,
Landlord and Tenant shall enter into an agreement supplementing this Lease which
supplemental agreement shall amend the definition of "Demised Premises" as used
in this Lease to reflect the space in which Tenant is relocated. All other
provisions of this Lease shall remain in full force and effect.
2
<PAGE>
2. Rent.
----
To the extent provided herein the rent payable by Tenant pursuant to
this Lease is intended to be absolutely net to Landlord, and all other charges
and expenses imposed upon the Demised Premises incurred in connection with its
use, occupancy, care, maintenance, operation and control shall be paid by
Tenant, except as otherwise expressly provided herein.
(a) The rent reserved under this Lease for the Term hereof shall be
and consist of (a) the Fixed Rent payable in equal monthly installments in
advance, and the Cafeteria Service Charge (which shall constitute Additional
Rent hereunder) payable in equal monthly installments in advance, each to be
paid on the first day of each and every calendar month during the Term (except
that Tenant shall pay the first monthly installment of $9,124.22 upon signing
this Lease, which entire amount shall be the Fixed Rent payable for the portion
of January, 1996 that Tenant is in occupancy of the Premises, notwithstanding
any other provision of this Lease to the contrary); plus (b) such additional
rent ("Additional Rent") in an amount equal to Tenant's Proportionate Share of
Excess Expenses (as such terms are defined in Paragraph 3 of this Lease) and all
charges for services and utilities pursuant to Paragraph 15 hereof, and any
other charges as shall become due and payable hereunder, which Additional Rent
shall be payable as hereinafter provided, all to be paid to Landlord at its
office stated above, or such other place as Landlord may designate, in lawful
money of the United States of America; provided, however, that if the
Commencement Date shall occur on a date other than the first calendar day of a
month, the rent for the partial month commencing on the Commencement Date shall
be appropriately prorated on the basis of the monthly rent payable during the
first year of the Term.
(b) Tenant does hereby covenant and agree promptly to pay the Fixed
Rent, Additional Rent and any other charges herein reserved as and when the same
shall become due and payable, without demand therefor, and without any set-off
or deduction whatsoever. All Additional Rent and other charges payable
hereunder, which are not due and payable on a monthly basis during the Term,
unless otherwise specified herein, shall be due and payable within twenty (20)
days of delivery by Landlord to Tenant of notice to pay the same.
(c) In the event that any payment of Fixed Rent, Additional Rent or
any other charges shall be paid after the due date for same provided herein,
Tenant shall pay, together with such payment, the Late Charge and a like
additional Late Charge for each fifteen (15) days or portion thereof that such
payment shall remain unpaid.
3. Operating Expenses.
-------------------
a) For purposes of this Paragraph, the following definitions shall
apply:
"Base Year" shall mean the calendar year 1996.
-----------
"Base Year Expenses" shall mean the actual Expenses (as
--------------------
defined in this Paragraph 3) incurred during the Base Year and, if the Building
is less than ninety-five percent (95%) occupied at any time during the Base
Year, such expenses shall be adjusted to the extent necessary to reflect ninety-
five percent (95%) occupancy throughout such twelve (12) month period.
"Lease Year" shall mean each calendar year (or portion
------------
thereof) occurring during the Term.
"Real Estate Taxes" shall mean the taxes and assessments now
-------------------
or hereafter imposed upon the Land, the Building
3
<PAGE>
and other real property included with or located upon the Land. If, due to a
change in the method of taxation or assessment, any franchise, income, profit or
other tax, however designated, shall be substituted by the applicable taxing
authority in whole or in part, for the Real Estate Taxes now or hereafter
imposed on the Land, the Building or other real property included in the Land,
such franchise, income, profit or other tax shall be deemed to be included in
the term "Real Estate Taxes".
"Expenses" shall mean (i) Real Estate Taxes and (ii) the total of all
----------
the costs and expenses paid or incurred by Landlord with respect to the
management, operation, maintenance, and repair of the Building and the Land and
the services provided tenants therein, (excepting electrical energy expenses
paid directly by tenants (including Tenant) pursuant to Paragraph 15 of this
Lease and equivalent provisions of other leases) including, but not limited to,
the cost and expenses incurred for and with respect to: all utilities, including
without limitation, water, electricity, gas, lighting, sewer and waste disposal;
air conditioning, ventilation and heating (subject to the deduction hereinafter
described); lobby maintenance and cleaning; elevators; protection and security;
lobby decoration and interior and exterior landscape maintenance; snow removal,
parking lot maintenance, repairs, replacements and improvements which are
appropriate for the continued operation of the Building in a first-class manner;
maintenance and painting of non-tenant areas; fire, all risk coverage, boiler
and machinery, sprinkler, apparatus, public liability and property damages,
rental and plate glass insurance and any insurance required by a mortgagee;
supplies; wages, salaries, disability benefits, pensions, hospitalization,
retirement plans, group insurance, and other employee benefits respecting
employees of the Landlord up to and including the Building manager to the extent
the work performed by said employees is in connection with the management,
operation, maintenance or repair of the Building; uniforms and working clothes
for such employees and the cleaning thereof; expenses imposed on the Landlord
pursuant to law or to any collective bargaining agreement with respect to such
employees; workmen's compensation insurance, payroll, social security,
unemployment and other similar taxes with respect to such employees; the cost
for a bookkeeper and for an accountant; professional and consulting fees; legal
and auditing fees; association fees or dues; the expenses, including payments to
attorneys and appraisers, incurred by Landlord in connection with any
application or proceeding wherein Landlord obtains or seeks to obtain reduction
or refund of the real estate taxes payable or paid upon or against the Building;
management fees of the Building and any other expenses of any other kind
whatsoever reasonably incurred in managing, operating, maintaining and repairing
the Building and the Land. Landlord agrees that with respect to all maintenance,
repair, replacement and improvement expenses listed above involving contracts
or. individual expenditures exceeding $25,000.00, other than emergency repairs
Landlord shall obtain at least two competitive bids and shall utilize the lowest
responsible bidder for such work.
It is agreed, however, that the foregoing costs and expenses shall
exclude or have deducted from them, as the case may be and as shall be
appropriate:
(i) leasing commissions;
(ii) salaries for executives above the grade of Building
manager;
(iii) Building start-up or opening expenses:
(iv) expenditures for capital improvements except those which
under generally applied real estate practice are expensed or regarded as
deferred expenses and except for
4
<PAGE>
capital expenditures required by law in any of which cases the cost thereof
shall be included in Expenses for the calendar year in which the costs are
incurred and subsequent calendar years, on a straight line basis amortized over
an appropriate period not exceeding ten years, with an interest factor equal to
the prime commercial lending rate on 90 day loans announced by Citibank, N.A. as
its "prime rate" (hereinafter referred to as the "Prime Rate") at the time of
Landlord's having actually incurred said expenditure;
(v) amounts received by Landlord through proceeds of
insurance to the extent the proceeds are compensation for expenses which were
previously included in expenses hereunder;
(vi) cost of repairs or replacements incurred by reason of fire
or other casualty, to the extent which Landlord is compensated therefor through
proceeds of insurance, or caused by the exercise of the right of eminent domain;
(vii) advertising, and promotional expenditures;
(viii) legal fees for disputes with tenants and legal and auditing
fees, other than legal and auditing fees reasonably incurred in connection with
maintenance and operation of the Building or in connection with the preparation
of statements required pursuant to additional rent or lease escalation
provisions;
If Landlord shall purchase any item of capital equipment or make any
capital expenditure designed to result in savings or reductions in Expenses then
the costs for same shall be included in Expenses. The costs of such capital
equipment or capital expenditures are to be included in Expenses for the
calendar year in which the costs are incurred and subsequent calendar years, on
a straight line basis amortized over such period of time as reasonably can be
estimated as the time in which such savings or reductions in Expenses are
expected to equal Landlord's costs for such capital equipment or capital
expenditure, with an interest factor equal to the Prime Rate at the time of
Landlord's having actually incurred said costs. If Landlord shall lease any such
item of capital equipment designed to result in savings or reductions in
Expenses, then the rentals and other costs paid pursuant to leasing shall be
included in Expenses for the calendar year in which they were incurred.
Notwithstanding anything contained in this Lease to the contrary, Tenant shall
not be responsible for any portion of costs related to off-site capital
improvements.
If during all or part of any calendar year, Landlord shall not furnish
any particular item(s) of work or service (which would constitute an expense
hereunder) to portions of the Building, due to the fact that construction of the
Building is not completed, or such portions are not occupied or leased or
because such item of work or service is not required or desired by the tenant of
such portion, or such tenant is itself obtaining and providing such item of work
or service, or for other reasons, for the purposes of computing the Additional
Rent payable hereunder, the amount of the Expenses for such item for such period
shall be increased by an amount equal to the additional operating and
maintenance expenses which would reasonably have been incurred during such
period by Landlord if it had at its own expense furnished such item of work or
service to such portion of the Building.
(b) In the event (i) that the Commencement Date shall occur during a
calendar year, {ii) that the date of the expiration or other termination of
this Lease shall be a day other than the last day of a calendar year, or {iii)
of any increase or decrease (as herein provided) in the Area of the Demised
Premises or in the Gross Rentable Area of the Building, then in each such
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event in applying the provisions of this Article 3 with respect to any calendar
year in which such event shall have occurred, appropriate adjustments shall be
made to reflect the occurrence of such event on a basis consistent with the
principles underlying the provisions of this Article 3, taking into
consideration the portion of such calendar year which shall have elapsed prior
to the Commencement Date, the date of such expiration or other termination or
the date of such increase or decrease.
(c) Tenant shall be responsible for Tenant's Proportionate Share of
Excess Expenses during the Term as herein provided.
(1) For each Lease Year, or part thereof, Landlord shall send to
Tenant a statement of projected excess expenses, for the applicable Lease Year
(or portion thereof} over the Base Year Expenses (,,Projected Excess Expenses")
and shall indicate what the estimated amount of Tenant's Proportionate Share of
Excess Expenses shall be, said amounts to be paid in equal monthly installments
(rounded to the nearest whole dollar) in advance on the first day of each month
by Tenant as Additional Rent, commencing on the first anniversary of the
Commencement Date.
(2) Following the end of each Lease Year, Landlord shall send to
Tenant a statement of actual Expenses incurred for the prior Lease Year showing
Tenant's Proportionate Share of Excess Expenses due from Tenant, and, in the
case of the first Lease Year, a statement showing actual Base Year Expenses. In
the event the amount prepaid by Tenant exceeds the amount that was actually due
based upon actual year end cost, then Landlord shall pay to Tenant an amount
equal to the overcharge at the time such statement is delivered. In the event
Landlord has under-charged Tenant then Landlord shall provide Tenant with an
invoice stating the additional amount due, which amount shall be paid in full by
Tenant within twenty (20) days of receipt.
(d) Each and every of the amounts payable by Tenant pursuant to
Subparagraphs 3(c) (1} and 3(c) {2) above, whether requiring lump sum payment or
constituting projected monthly amounts, shall for all purposes be treated and
considered as Additional Rent and the failure of Tenant to pay the same as and
when due and without demand shall have the same effect as failure to pay any
installment of the Fixed Rent and shall afford Landlord all the remedies
provided in this Lease therefor, including, without limitation, the Late Charge
as provided in Paragraph 2(c) of this Lease.
(e) Tenant acknowledges and agrees that Landlord shall have the right
to change the period of the Lease Year, other than the Base Year, either before
or during the Term, to any other fiscal year or twelve month period. In the
event Landlord makes such change, then the same shall be effective upon written
notice to Tenant and, in such event, Tenant shall pay Tenant's Proportionate
Share of Excess Expenses for the period from the end of the initially designated
Lease Year, as last billed, to the beginning of the newly designated Lease Year,
prorated for such period, within twenty (20) days of the rendering by Landlord
of the bill for such interim period.
4. Completion of Improvements and Commencement of Rent.
----------------------------------------------------
(a) Landlord agrees to deliver the Demised Premises to Tenant
fully repainted, with building standard quality paint. Except for the work set
forth in this Paragraph 4(a), Tenant agrees to accept the Demised Premises in
their "AS-IS" condition, without other improvement by Landlord.
(b) Tenant shall occupy the Demised Premises no sooner than three
(3) days prior to the Commencement Date and no later than two (2) days after
the Commencement Date shall have
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occurred (the ccupancy Date") (but not prior to said date for purpose of
installing wiring and Tenant's personal property or otherwise with the express
consent of Landlord as provided herein). Tenant acknowledges and agrees that
Tenant's occupancy of the Demised Premises no later than the Occupancy Date is a
material consideration of Landlord entering into this Lease. If and when Tenant
shall take actual possession of the Demised Premises, it shall be conclusively
presumed that the same are in satisfactory condition.
5. Tenant Covenants As To Condition of Premises, and Compliance with
-----------------------------------------------------------------
Laws.
- - -----
(a) In the event that the Building or any of the equipment affixed
thereto or stored therein should be damaged as a result of any act of Tenant,
its agents, servants, employees, invitees or contractors, Tenant shall, upon
demand, pay to Landlord the cost of all required repairs, including structural
repairs. Tenant shall commit no act of waste and shall take good care of the
Demised Premises and the equipment affixed thereto and stored therein, shall
maintain the Demised Premises in good condition and state of repair, and at the
end or certain expiration of the term hereof, shall deliver up the Demised
Premises in good order and condition, wear and tear from a reasonable use
thereof excepted. Landlord shall perform, or cause to be performed, all such
maintenance and repairs and Tenant shall pay to Landlord the costs incurred
therefor immediately upon demand as Additional Rent.
(b) Tenant, at Tenant's expense, shall promptly comply with all laws,
rules, regulations and ordinances, of all governmental authorities or agencies
having jurisdiction over the Demised Premises, and of all insurance bodies
{including, without limitation, the Board of Fire Underwriters), at any time
duly issued or in force, applicable to the Demised Premises or any part thereof
or to Tenant's use thereof. For purposes of this Paragraph 5(b) , except to the
extent of any work done by or on behalf of Tenant and affecting the Excluded
Areas (as hereinafter defined) the Demised Premises shall not include anything
located above the drop ceiling and below the first floor slab, nor shall the
Demised Premises include exterior walls, curtain walls or window surfaces
(collectively, the exclusions from the Demised Premises are referred to herein
as "Excluded Areas"). Any work done by Tenant shall be considered part of the
Demised Premises regardless of location. Tenant, at Tenant's expense, shall
promptly comply with all laws, rules, regulations and ordinances, of all
governmental authorities or agencies having jurisdiction over the Demised
Premises, and of all insurance bodies (including, without limitation, the Board
of Fire Underwriters), at any time duly issued or in force, applicable to the
Excluded Areas or any part thereof as a result of Tenant's specific use of the
Demised Premises or as a result of alterations to the Demised Premises made by
or on behalf of Tenant.
6. Tenant Improvements, Alterations and Installations. All fixtures,
---------------------------------------------------
equipment, improvements, alterations, installations which are attached to the
Demised Premises, and any additions and appurtenances made by Tenant to the
Demised Premises shall become the property of Landlord upon installation. Not
later than the last day of the Term, Tenant shall, at its expense, remove from
the Demised Premises all of its personal property and such improvements as
Landlord elects to have removed unless Tenant shall have requested, at the time
of installation of such improvements, Landlord's consent not to remove same and
Landlord shall have granted such consent. Tenant, at its sole cost and expense,
shall repair injury done by or in connection with the installation or removal of
such improvements. Any equipment, fixtures, goods or other property of Tenant,
not removed by Tenant upon the termination of this Lease, or upon any quitting,
vacating or abandonment of the Demised Premises by Tenant, or upon Tenant's
eviction, shall be considered as abandoned and Landlord shall have
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the right, without any notice to Tenant, to sell or otherwise dispose of the
same, at the expense of Tenant, and shall not be accountable to Tenant for any
part of the proceeds of such sale, if any. Landlord may have any such property
stored at Tenant's risk and expense.
(b) Notwithstanding the provisions of Paragraph 6(a), Tenant, without
Landlord's prior consent, shall have the right to make non structural
alterations, installations, additions or improvements in or to the Demised
Premises that (i) involve a total cost of not more than Ten Thousand Dollars
(S10,000.00) , (ii} do not require a building permit to be issued by any
governmental authority to legally make same, and (ii) do not affect any existing
building systems outside the Demised Premises and do not impair or affect any
existing building systems within the Demised Premises. No other alterations,
installations, additions or improvements (structural or non-structural) shall be
made by Tenant without Landlord's express prior written approval, which Landlord
agrees shall not be unreasonably withheld. Tenant shall give Landlord prior
written notice of any proposed alterations, installations, additions or
improvements (hereinafter called "Alterations") with copies of proposed plans
and as-built plans upon completion of the Alterations. All such Alterations
shall be done at Tenant's sole expense and the making thereof shall not
interfere with the use of the Building by other tenants or disturb harmonious
labor relations with Landlord's employees, agents, contractors or
subcontractors. Tenant agrees to indemnify, defend and hold harmless Landlord
from any and all costs, expenses, claims, causes of action, damages and
liabilities of any type or nature whatsoever (including, but not limited to
attorneys' fees and costs of litigation) arising out of or relating to the
making of the Alterations by Tenant. Nothing herein contained shall be construed
as constituting the permission of Landlord for a mechanic or subcontractor to
file a lien claim against the Demised Premises and Tenant agrees to secure the
removal of any such lien which a contractor purports to file against said
premises by payment or otherwise pursuant to law. All such Alterations shall be
effected in compliance with all applicable laws, ordinances, rules and
regulations of governmental bodies having or asserting jurisdiction over the
Demised Premises.
7. Various Negative Covenants by Tenant. Tenant agrees that it shall
-------------------------------------
not, without Landlord's prior written consent:
(a) Do anything in or near the Demised Premises which will increase
the rate of fire insurance on the Building;
(b) Permit the accumulation of waste or refuse matter in or near the
Demised Premises except in containers provided therefor;
(c) Mortgage, hypothecate, pledge or encumber this Lease in whole or
in part; or
(d) Permit any signs, lettering or advertising matter to be erected
or attached to the Demised Premises;
(e) Encumber or obstruct the Common Areas surrounding the Demised
Premises nor cause same to be encumbered or obstructed, nor encumber or obstruct
any access ways to the Demised Premises, nor cause same to be encumbered or
obstructed.
8. Various Affirmative Covenants of Tenant.
----------------------------------------
Tenant covenants and agrees that Tenant will:
(a) At any time and from time to time, execute, acknowledge and
deliver to Landlord, or to anyone Landlord shall designate, a tenant estoppel
certificate in form reasonably acceptable to Landlord or financial institutions
requesting the same (on a form provided by such party) relating to matters
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customarily included in tenant estoppel certificates within fifteen (15) days of
receipt of Landlord's request accompanied by such certificate.
(b) Faithfully observe and comply with the rules and regulations
annexed hereto and made a part hereof as Exhibit "B" and such additional rules
and regulations as Landlord hereafter at any time or from time to time may
communicate in writing to Tenant, and which, in the reasonable judgment of
Landlord, shall be necessary or desirable for the reputation, safety, care or
appearance of the Building, or the preservation of good order therein, or the
operation or maintenance of the Building, or the equipment thereof, or the
comfort of tenants or others in the Building; provided, however, that in the
case of any conflict between the provisions of this Lease and any such rule or
regulation, the provisions of this Lease shall control. Nothing contained in
this Lease shall be construed to impose upon Landlord any duty or obligation to
enforce the rules and regulations or the terms, covenants or conditions in any
other lease as against any other tenant, and Landlord shall not be liable to
Tenant for violation of any rule or regulation by any other tenant, its
employees, agents, visitors, invitees, subtenants or licensees.
9. Building Directory and Signage. Landlord will, at the request of
-------------------------------
Tenant, maintain listings on the directory located within the Building of the
names of Tenant and any other firm, association or corporation in occupancy of
the Demised Premises or any part thereof as permitted hereunder. Landlord
shall not be required to list the names of any individuals on said Building
directory. The signage provided pursuant to this Paragraph 9, shall be
adequate, at all times, to direct visitors to the Demised Premises.
10. Casualty and Insurance.
-----------------------
(a) In the event of partial or total destruction of the Building or
the Demised Premises by reason of fire or any other cause Tenant shall
immediately notify Landlord of same and Landlord shall promptly restore and
rebuild the Building or the Demised Premises at Landlord's expense (but only to
the extent of the insurance proceeds covering such damage) unless Landlord
elects by notice to Tenant within ninety (90) days of said destruction not to
restore and rebuild the Demised Premises, and, in such case, this Lease shall
terminate. If Landlord elects to restore and rebuild the Demised Premises, then
during the period of restoration of any such area, and, if any portion of
Demised Premises are rendered untenantable by said damage, Tenant shall be
relieved of the obligation to pay that portion of the rent herein reserved which
relates to said untenantable area. If Landlord elects to restore and rebuild the
Demised Premises, Landlord shall, in the ninety (90) day notice period, provide
Tenant with Landlord's reasonable estimate of the time that such repair and
restoration will take. If such estimate is one year or less from the date of the
partial or total destruction, Tenant shall not have the right to terminate this
Lease provided such repair and restoration is actually completed within such one
year period. If such estimate is more than one year from the date of such
partial or total destruction, Tenant, by written notice to Landlord delivered
within thirty (30) days after Landlord provides its estimate to Tenant, may
elect to terminate this Lease, in which event this Lease shall terminate on the
tenth (10th) day after Tenant's termination notice as if such date were the
Expiration Date set forth herein. If Landlord's estimate is one year or less,
or if Landlord's estimate is more than one year and Tenant does not elect to
terminate this Lease in accordance with the terms of this Paragraph, Landlord
shall have the greater of one year or Landlord's estimate to complete the repair
and restoration of the Demised Premises. If such time period expires and the
Demised Premises has not been repaired and restored as provided herein, until
such time as the repair and restoration is complete (except for punch-list items
and other
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<PAGE>
minor items that do not affect the tenantability of the Demised Premises)
Tenant shall have the right to deliver to Landlord a written notice stating
that the Lease will terminate on the thirtieth (30th) day after the delivery
of such notice unless, before the end of such thirty (30) day period, the
Demised Premises is repaired and restored (except for punch-list items and
other minor items that do not affect the tenantability of the Demised
Premises). If such a notice is delivered and the Demised Premises is not
repaired and restored as aforesaid within such thirty (30) day period, this
Lease shall terminate on such thirtieth (30th) day as if such day were the
Expiration Date hereunder. If such a notice is delivered and the Demised
Premises is repaired and restored as aforesaid within such thirty {30) day
period, Tenant's termination notice shall be null and void and this Lease
shall continue in full force and effect in accordance with its terms.
(b) Tenant shall, at Tenant's sole cost and expense, but, except to
the extent prohibited by law with respect to workmen's compensation insurance,
for the mutual benefit of Landlord and Tenant and any Additional Insured (as
hereinafter defined) or any other additional insured as Landlord may from time
to time determine including the lessors under any ground leases or underlying
leases and any mortgagees, maintain or cause to be maintained (a}
comprehensive general liability insurance, including but not limited to,
premises, bodily injury, personal injury and contractual liability, coverages
for any and all injury resulted from any act or omission on the part of Tenant
or Tenant's contractors, licensees, agents, visitors or employees, on or about
the Demised Premises including such claims arising out of the construction of
improvements on the Demised Premises, such insurance to afford protection to
the limit of not less than One Million Dollars ($1,000,000.00) in respect to
injury or death to any one person and Five Million Dollars ($5,000,000.00) in
respect to injury or death to any number of persons or property damage arising
out of a single occurrence and Two Million Dollars ($2,000,000.00) in respect
to property damage; (b) workmen's compensation insurance covering all persons
employed in connection with the construction of any improvements by Tenant and
the operation of its business upon the Demised Premises and (c) "all risk"
coverage on all of Tenant's personal property, including, but not limited to,
standard fire and extended coverage insurance with vandalism and malicious
mischief endorsements on all Tenant's improvements and alterations in or about
the Demised Premises, to the extent of their full replacement value. In the
event Landlord, at any time during the term of the Lease, reasonably
determines that Tenant's insurance coverage is inadequate, based upon the
coverages being required by landlords of comparable buildings in the general
geographic area of the Building, Landlord shall have the right to require
Tenant to increase its insurance coverage. All such insurance shall, to the
extent permitted by law, name Landlord, any mortgagees and ground lessors of
the Land and the Building and their successors and assigns as additional
insureds (the Additional Insureds"} and shall be written by a good and solvent
insurance carrier authorized to do business in the State of New Jersey.
(c} Prior to the Commencement Date, and at least thirty (30) days
prior to the expiration date of any policy, Tenant shall furnish evidence of
such insurance and payment of premiums thereon to Landlord. Such insurance
shall be in form satisfactory to Landlord and without limitation, shall
provide that no cancellation or lapse thereof or change therein shall be
effective until after thirty (30) days' written notice to Landlord at the
address specified in Paragraph 18 of this Lease. Tenant waives all rights of
recovery against Landlord and the Additional Insureds for any loss, damages,
or injury of any nature whatsoever to property or persons for which the Tenant
is insured.
(d) During the term of this Lease, Tenant shall maintain in effect
in each insurance policy required under this Lease that relates to property
damage a waiver of subrogation in
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favor of Landlord and the Additional Insureds from its then-current insurance
carriers, and shall at all times furnish evidence of such currently effective
waiver to Landlord. Such waiver shall be in a form reasonably satisfactory to
the Landlord and without limitation, shall provide that no cancellation or lapse
thereof or change therein shall be effective until after thirty (30) days'
written notice to Landlord at the address, specified in Paragraph 18 of this
Lease. During the term of this Lease, Landlord shall maintain in effect in each
insurance policy required under this Lease that relates to property damage a
waiver of subrogation in favor of Tenant from its then-current insurance
carriers, and shall at all times furnish evidence of such currently effective
waiver to Tenant. Such waiver shall be in a form reasonably satisfactory to
Tenant and without limitation, shall provide that no cancellation or lapse
thereof or change therein shall be effective until after thirty (30) days'
written notice to Tenant at the address, specified in Paragraph 18 of this
Lease.
(e) Each insurance policy required to be maintained under this Lease
shall state that with respect to the interest of Landlord and the Additional
Insureds the insurance maintained pursuant to each such policy shall not be
invalidated by any action or inaction of Tenant and shall insure Landlord and
the Additional Insureds regardless of any breach or violation of any warranties,
declarations, conditions or exclusions by Tenant.
(f) Each insurance policy required to be maintained under this Lease
shall state that all provisions of each such insurance policy, except for the
limits of liability, shall operate in the same manner as if a separate policy
had been issued to each person or entity insured thereunder.
(g) Each insurance policy required to be maintained under this Lease
shall state that the insurance provided thereunder is primary insurance without
any right of contribution from any other insurance which may be carried by or
for the benefit of Landlord and the Additional Insureds.
(h) Each insurance policy required to be maintained under this Lease
shall recognize the indemnification set forth in Paragraph 11 of this Lease.
(i) Failure of Tenant to maintain any of the insurance required under
this Lease or to cause to be provided in any insurance policy the requirements
set forth in this Paragraph 10, shall constitute a default under this Lease
without any notice being required by Landlord.
11. Indemnification. Tenant shall indemnify, defend and hold harmless
----------------
Landlord, the Additional Insureds, any mortgagee, and any lessor under any
underlying leases or ground leases, from and against any expense (including,
without limitation, legal and collection fees), loss, liability or consequential
damages suffered or incurred as a result of or in connection with {i) any breach
by Tenant of its obligations contained in this Lease or {ii) its acts or the
acts of its agents, servants, invitees, contractors or employees.
12. Non-Liability of Landlord. Landlord shall not be liable for (and
--------------------------
Tenant shall make no claim for) any property damage which may be sustained by
Tenant or any other person, as a consequence of the failure, breakage, leakage,
inadequacy, defect or obstruction of the water, plumbing, steam, sewer, waste or
soil pipes, roof, drains, leaders, gutters, valleys, downspouts, or the like or
of the electrical, gas, power, conveyor, refrigeration, sprinkler, air
conditioning or heating systems, elevators or hoisting equipment; or by reason
of the elements; or resulting from the carelessness, negligence or improper
conduct on the part of any other tenant of Landlord or of the Landlord or
Landlord's or this or any other tenant's agents, employees, guests, licensees,
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invitees, subtenants, assignees or successors except for the willful misconduct
or gross negligence of Landlord; or attributable to any interference with,
interruption of or failure, except resulting from Landlord's negligence, of any
services or utilities to be furnished or supplied by Landlord. Tenant shall give
Land lord prompt written notice of the occurrence of any events set forth in
this Paragraph 12. Tenant shall indemnify Landlord from any expense (including
legal fees), loss, liability or damages suffered or incurred (a) in connection
with the claims brought by Tenant or other persons to the extent such other
person's property is located in the Demised Premises, against Landlord for
property damage, except for matters resulting from Landlord's willful misconduct
or gross negligence and (b) in connection with any claims for property damage
brought against Landlord by third parties to the extent such damage was caused
by Tenant.
13. Remedies and Termination Upon Tenant Default.
---------------------------------------------
(a) In the event that:
(1) Tenant shall default in the payment of (i) any Fixed Rent
or (ii) any Additional Rent or other charge payable monthly hereunder by Tenant
to Landlord, on any date upon which the same becomes due, and such default shall
continue for five (5) days after the same becomes due; or
(2) Tenant shall default in the payment of any Additional Rent
or any other charge payable hereunder which is not due and payable hereunder on
a monthly basis, on any date upon which the same becomes due, and such default
shall continue for five (5) days after Landlord shall have given to Tenant a
written notice specifying such default; or
(3) Tenant shall default in the due keeping, observing or
performing of any covenant, agreement, term, provision or condition of Paragraph
l(c) of this Lease on the part of Tenant to be kept, observed or performed, and
if such default shall continue and shall not be remedied by Tenant within 24
hours after Landlord shall have given to Tenant a written notice specifying the
same; or
(4) If during the term hereof the Demised Premises or any part
thereof shall be or become abandoned or deserted, vacated or vacant; or
(5) Tenant shall default in the due keeping, observing or
performing of any covenant, agreement, term, provision or condition of this
Lease on the part of Tenant to be kept, observed or performed {other than a
default of the character referred to in clauses (1), {2), (3) or (4) of this
Paragraph 13(a), and if such default shall continue and shall not be remedied by
Tenant within fifteen (15) days after Landlord shall have given to Tenant a
written notice specifying the same, provided, however, Tenant shall not be in
default hereof provided Tenant commences to cure said default within 15 days
after Landlord shall have given to Tenant a written notice specifying the same
and continues to thereafter diligently pursue same and remedies said default
within forty-five {45) days after Landlord shall have given to Tenant a written
notice specifying the same; or
(6) Should Tenant be evicted by summary proceedings or
otherwise;
then, Landlord may, in addition to any other remedies herein contained, as may
be permitted by law, without being liable for prosecution therefor, or for
damages, re-enter the Demised Premises and the same have and again possess and
enjoy; and as agent for Tenant or otherwise, re-let the Demised Premises and
receive the rents therefor and apply the same, first to the payment of such
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expenses, reasonable attorney fees and costs, as Landlord may have been put to
in re-entering and repossessing the same and in making such repairs and
alterations as may be necessary; and second to the payment of the rents due
hereunder. Tenant shall remain liable for such rents as may be in arrears and
also the rents as may accrue subsequent to the re-entry by Landlord, to the
extent of the difference between the rents reserved hereunder and the rents, if
any, received by Landlord during the remainder of the unexpired term hereof,
after deducting the aforementioned expenses, fees and costs; the same to be paid
as such deficiencies arise and are ascertained each month. Landlord, at its
option, may require Tenant to pay in a single lump sum payment at the time of
such expiration or re-entry as the case may be, a sum which represents the
present value (using a discount rate of 4% per annum) of the excess of the
aggregate of the Fixed Rent which would have been payable by Tenant for the
period commencing with such expiration or re-entry, as the case may be, and
ending on the originally fixed Expiration Date of the Term, over the aggregate
rental value of the Demised Premises for the same period.
(b) Upon the occurrence of any of the contingencies set forth in the
preceding clause, or should Tenant be adjudicated a bankrupt, insolvent or
placed in receivership, or should proceedings be instituted by or against Tenant
for bankruptcy, insolvency, receivership, agreement of composition or assignment
for the benefit of creditors, or if this Lease or the estate of Tenant hereunder
shall pass to another by virtue of any court proceedings, writ of execution,
levy, sale, or by operation of law except to the extent as may be permitted
hereunder, Landlord may, if Landlord so elects, at any time thereafter,
terminate this Lease and the term hereof, upon giving to Tenant or to any
trustee, receiver, assignee or other person in charge of or acting as custodian
of the assets or property of Tenant, five (5) days notice in writing, of
Landlord's intention so to do. Upon the giving of such notice, this Lease and
the term hereof shall end on the date fixed in such notice as if the said date
was the date originally fixed in this Lease for the expiration hereof; and
Landlord shall have the right to remove all person, goods, fixtures and chattels
therefrom, by force or otherwise without liability for damages.
14. Remedies Cumulative; Non-Waiver By Landlord. The various rights,
--------------------------------------------
remedies, options and elections of Landlord, expressed herein, are cumulative,
and the failure of Landlord to enforce strict performance by Tenant of the
conditions and covenants of this Agreement to exercise any election or option or
to resort or have recourse to any remedy herein conferred or the acceptance by
Landlord of any installment of rent after any breach by Tenant, in any one or
more instances, shall not be construed or deemed to be a waiver or a
relinquishment for the future by Landlord of any such conditions and covenants,
options, elections or remedies, but the same shall continue in full force and
effect. Tenant waives trial by jury in any action or proceeding arising out of
this Lease.
15. Services; Electric Energy.
--------------------------
(a) Landlord will: (i) supply heat for the warming of the Demised
Premises and the public portions of the Building during Business Hours in the
cold season, when and as required by law; (ii) furnish to, and distribute in,
the Demised Premises air conditioning during Business Hours when it may be
required for the comfortable occupancy of the Demised Premises by Tenant; (iii)
provide snow and ice removal for the parking area, sidewalks and driveways in a
reasonably expeditious manner; and (iv) provide refuse removal from a dumpster
to be provided on site to be used for normal paper waste attendant to an office
building. "Business Hours" as used in this Lease, means 8:00 A.M. to 6:00 P.M.
on weekdays and not including Saturdays, Sundays and those legal holidays listed
in Exhibit C annexed hereto and made a part hereof. Tenant agrees at all times
to cooperate fully with Landlord and to
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abide by all the regulations and requirements which Landlord may prescribe for
the proper functioning and protection of such air conditioning system. Landlord
will clean the Demised Premises in accordance with the cleaning schedule annexed
hereto as Exhibit D. The cost of the services and utilities provided pursuant to
this Paragraph 15(a) (except for the cost of electricity paid directly to
Landlord by Tenant pursuant to this Paragraph 15) is included in Expenses as
defined in Paragraph 3(a).
(b) Provided Tenant is not then in default of this Lease, Landlord
will provide to Tenant overtime services and utilities when and to the extent
reasonably requested by Tenant or when activated by Tenant's use of an overtime
thermostat and time clock and in accordance with such reasonable conditions as
shall be determined by Landlord. Tenant shall pay to Landlord, as Additional
Rent, a charge that, at the time of the execution of this Lease is $50.00 per
zone per hour and which may be increased by Landlord from time to time upon
written notice to Tenant for such additional service and utilities which charge
shall cover all costs and expenses of Landlord in providing such overtime
services, including, without limitation, the cost of the utility usage, the cost
of maintenance, repairs and inspections of such building systems and employee
and administrative costs related to such services. Such charge shall constitute
a direct charge to Tenant and not to an Expense pursuant to Paragraph 3.
(c) Landlord reserves the right, without liability to Tenant and
without constituting any claim of constructive eviction, to stop or interrupt
any heating, lighting, ventilating, air conditioning, gas, steam, power,
electricity, water or other service and to stop or interrupt the use of any
building or Building facilities at such times as may be necessary and for as
long as may reasonably be required by reason of accidents, strikes, or the
making of repairs, alterations or improvements, or inability to secure a proper
supply of fuel, gas, steam, water electricity, labor or supplies, or by reason
of an other similar or dissimilar cause beyond the reasonable control of
Landlord. No such stoppage or interruption shall entitle Tenant to any
diminution or abatement of rent or other compensation nor shall this Lease or
any of the obligations of Tenant be affected or reduced by reason of any such
stoppage or interruption.
(d) Landlord shall install transmission facilities in the Demised
Premises, so that electric energy may be used by Tenant in the Demised Premises
in such reasonable quantity as shall be sufficient to meet Tenant's ordinary
business needs for lighting and the operation of its business machines,
including photocopy equipment and computer and data processing equipment.
(e) Tenant shall pay, as Additional Rent, the total electricity
charges for the Demised Premises as determined pursuant to a separate
electricity sub-meter for the Demised Premises. Tenant shall pay its
proportionate share of Landlord's actual electricity charges for the building as
determined in accordance with the usage indicated by such sub-meter.
(f) In the event that Tenant shall require electric energy for use in
the Demised Premises in excess of the quantity to be initially designed to
furnish as herein provided and if, in Landlord's judgment such excess
requirements cannot be furnished unless additional risers, conduits, feeders,
switchboards and/or appurtenances are installed in the Building, Landlord, upon
written request of Tenant, will proceed with reasonable diligence to install
such additional riser, conduits, feeders, switchboards and/or appurtenances
provided the same and the use thereof shall be permitted by applicable laws and
insurance regulations and shall not cause permanent damage or injury to the
Building or the Demised Premises or cause or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations or repairs or
interfere with or disrupt other tenants or occupants of the
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Building, and Tenant agrees to pay all reasonable costs and expenses incurred by
Landlord in connection with such installation.
(g) In order that Landlord may at all times have all necessary
information which it requires in order to maintain and protect its equipment,
Tenant agrees that Tenant will not make any material alteration or material
addition to the electrical equipment and/or appliances in the Demised Premises
without the prior written consent of Landlord in each instance and will promptly
advise Landlord of any other alteration or addition to such electrical equipment
and/or appliances. Tenant agrees to advise Landlord in writing as to any
material change in the periods of use of the lighting fixtures and Tenant's
business machines and equipment.
(h) Landlord shall in no way be liable or responsible to Tenant for
any loss or damage or expense which Tenant may sustain or incur by reason of any
failure, inadequacy or defect in the character, quantity or supply of electric
energy furnished to the Demised Premises except for actual damage other than
property damage suffered by Tenant by reason of any negligence of Landlord.
16. Subordination. This Lease is subject and subordinate in all respects
--------------
to any underlying leases, ground leases, licenses or agreements, and to all
mortgages which may now or hereafter be placed on or affect such leases,
licenses or agreements or the Land or the Demised Premises and also to all
renewals, modifications, consolidations and extensions of such underlying
leases, ground lease, licenses, agreements, and mortgages. Although no
instrument or act on the part of Tenant shall be necessary to effectuate such
subordination, Tenant shall, nevertheless, execute and deliver such further
instruments confirming such subordination as may be desired by any holder of any
such mortgage or by a lessor, licensor or party to an agreement under any such
underlying lease, ground lease, license or agreement, respectively. Tenant
hereby appoints Landlord its attorney-in-fact, irrevocably, to execute and
deliver any such instrument on behalf of Tenant. If any underlying lease, ground
lease, license or agreement to which this agreement is subject and subordinate
terminates, or if any Mortgage to which this lease is subordinate is foreclosed,
Tenant shall, on timely request, attorn to the holder of the reversionary
interest or to the Mortgagee in possession, as the case may be.
17. Landlord's Cure of Tenant's Default. If Tenant shall fail or
------------------------------------
refuse to comply with and perform any conditions and covenants of this Lease,
Landlord may, if Landlord so elects, carry out and perform such conditions and
covenants, at the cost and expense of Tenant, and the said cost and expense
shall be payable on demand, or at the option of Landlord shall be added to the
installment of rent due immediately thereafter, but in no case later than one
month after such demand, whichever occurs sooner, and shall be due and payable
as such. This remedy shall be in addition to such other remedies as Landlord
may have hereunder by reason of the breach of Tenant of any of the covenants and
conditions in this Lease contained.
18. Notices. Any notice, demand, statement or other communication
--------
which under the terms of this Lease or under any statute or law must or may be
given shall be given by hand delivery to the respective parties as follows or by
registered or certified mail, return receipt requested, or by reputable private
overnight delivery service addressed to the respective parties as follows:
To Landlord: Quinlan Properties, L.P.
Allen Center
150 Allen Road
Liberty Corner, NJ 07938
Attn: Robert Quinlan
Victoria A. Morrison, Esq.
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Riker, Danzig, Scherer, Hyland & Perretti
One Speedwell Avenue
Headquarters Plaza
Morristown, NJ 07962-1981
TO Tenant: At its address stated above until the
Commencement Date; at the Demised Premises
thereafter.
Any such notice, demand, statement or other communication shall be deemed to
have been given or made upon hand delivery or on the second day after it is
deposited, postage paid, in the U.S. Mail, or delivered, charges prepaid or
charged to sender to a reputable private overnight delivery service, as the case
may be. Any of the above addresses may be changed at any time notice is given as
above provided.
19. Quiet Enjoyment. Landlord covenants that Tenant upon keeping and
----------------
performing each and every covenant, agreement, term, provision and condition
herein contained on the part and on behalf of Tenant to be kept and performed,
shall quietly enjoy the Demised Premises without hindrance or molestation by
Landlord or by any other person lawfully claiming by, through or under the same
subject to the covenants, agreements, terms, provisions and conditions of this
Lease and the effect of the application of same.
20. Security Deposit. Tenant has this day deposited with Landlord the
-----------------
Security Deposit for the payment of the Fixed Rent, Additional Rent and other
charges hereunder and the full and faithful performance by Tenant of the
covenants and conditions on the part of Tenant to be performed. Said sum shall
be returned to Tenant, without interest, within fifteen (15) business days after
the expiration of the term hereof, provided that Tenant has fully and faithfully
performed all such covenants and conditions and is not in arrears in Fixed Rent,
Additional Rent and other charges. During the term hereof, Landlord may, if
Landlord so elects, have recourse to such security, to make good any default by
Tenant, in which event Tenant shall, on demand, promptly restore said security
to its original amount. Liability to repay said security to Tenant shall run
with the reversion and title to the Demised Premises, whether any change in
ownership thereof be by voluntary alienation or as the result of judicial sale,
foreclosure or other proceedings, or the exercise of a right of taking or entry
by any mortgagee. Landlord shall assign or transfer said security, for the
benefit of Tenant, to any subsequent owner or holder of the reversion or title
to Demised Premises, in which case the assignee shall become liable for the
repayment thereof as herein provided, and the assignor shall be deemed to be
released by Tenant from all liability to return such security.
21. Inspection and Entry by Landlord.
---------------------------------
(a) Subject to Tenant's reasonable security and confidentiality
requirements, Tenant agrees to permit Landlord and Landlord's agents, employees
or other representatives to show the Demised Premises to any lessor under any
underlying lease or ground lease or any mortgagee or any persons wishing to rent
or purchase the same, and Tenant agrees that on and after the ninth month next
preceding the expiration of the term hereof, Landlord or Landlord's agents,
employees or other representatives shall have the right to show the Demised
Premises to any prospective tenant or to place notices on the front o[ the
Building or any part thereof, offering the Demised Premises for rent or for
sale; and Tenant hereby agrees to permit the same to remain tbereon without
hindrance or molestation.
(b) Subject to Tenant's reasonable security and confidentiality
requirements, Tenant agrees that Landlord and Landlord's agents, employees or
other representatives, shall have
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thereof, at all reasonable hours, for the purpose of examining the same or
reading meters, or performing maintenance or making such repairs or alterations
therein as may he necessary for the safety and preservation thereof. This clause
shall not be deemed to be a covenant by Landlord nor be construed to create an
obligation on the part of Landlord to make such inspection or repairs.
22. Brokerage. Tenant and Landlord warrant and represent to each other
----------
that neither has dealt with any broker or brokers regarding the negotiation of
the within Lease other than the Designated Brokers. Landlord shall pay the
Designated Brokers a commission pursuant to a separate agreement. Tenant and
Landlord agree to be responsible for and to indemnify and save the other
harmless from and against any claim for a commission or other compensation by
any broker other than the Designated Brokers claiming to have negotiated with
the indemnifying party with respect to the Demised Premises or to have called
the said Demised Premises to Tenant's attention or to have called Tenant to
Landlord's attention.
23. Parking. Tenant shall have the right under this Lease to the
--------
exclusive use of the Exclusive Spaces and the non-exclusive use of the Non-
Exclusive Spaces in the parking lot of the Building in compliance with such
reasonable Rules and Regulations as Landlord may promulgate from time to time.
Landlord shall have the right to assign the location of said parking spaces or
may designate the location of same from time to time.
24. Intentionally Deleted.
----------------------
25. Landlord's Inability to Perform. This Lease and the obligation of
--------------------------------
Tenant to pay the rent hereunder and to comply with the covenants and conditions
hereof, shall not be affected, curtailed, impaired or excused because of the
Landlord's inability to supply any service or material called for herein, by
reason of any rule, order, regulation or preemption by any governmental entity,
authority, department, agency or subdivision or for any delay which may arise by
reason of negotiations for the adjustment of any fire or other casualty loss or
because of strikes or other labor trouble or for any cause beyond the control of
the Landlord.
26. Condemnation. If the Land, Building and Demised Premises leased
-------------
herein, or of which the Demised Premises is a part, or any portion thereof,
shall be taken under eminent domain or condemnation proceedings, or if suit or
other action shall be instituted for the taking or condemnation thereof, or if
in lieu of any formal condemnation proceedings or actions, Landlord shall grant
an option to purchase and or shall sell and convey the Land, Building and the
Demised Premises or any portion thereof, then this Lease, at the option of
Landlord shall terminate, and the term hereof shall end as of such date as
Landlord shall fix by notice in writing; and Tenant shall have no claim or right
to claim or be entitled to any portion of any amount which may be awarded as
damages or paid as the result of such condemnation proceedings or paid as the
purchase price for such option, sale or conveyance in lieu of formal
condemnation proceedings; and all rights of Tenant to damages, if any, are
hereby assigned to Landlord. Tenant agrees to execute and deliver any
instruments, at the expense of Landlord, as may be deemed necessary or required
to expedite any condemnation proceedings or to effectuate a proper transfer of
title to such governmental or other public authority, agency, body or public
utility seeking to take or acquire the Land, Building and Demised Premises or
any portion thereof. Tenant covenants and agrees to vacate the Demised Premises,
remove all Tenant's personal property therefrom and deliver up peaceable
possession thereof to Landlord or to such other party designated by Landlord in
the aforementioned notice. Failure by Tenant to comply with any provision in
this clause shall subject Tenant to such costs, expenses, damages and losses as
Landlord may incur by reason of Tenant's breach hereof.
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Notwithstanding the foregoing, nothing in this Paragraph 26 shall affect
Tenant's separate right to claim relocation costs under the applicable
relocation statute.
27. Assignment and Subletting.
--------------------------
(1) In the event that Tenant desires to assign or sublease the whole
of the Demised Premises to any other party the terms and conditions of such
assignment or sublease shall be communicated to Landlord in writing not less
than sixty (60) days prior to the effective date of any such assignment or
sublease, and, prior to such effective date, Landlord shall have the option,
exercisable in writing to Tenant, to recapture this Lease so that such
prospective assignee or sublessee shall then become the sole Tenant of Landlord
hereunder or alternatively to recapture said space and Tenant shall be fully
released from any and all obligations hereunder.
(2) In the event that the Landlord elects not to recapture the Lease
as hereinabove provided, Tenant may nevertheless assign this Lease or sublet the
whole {but not less than the whole) of the Demised Premises, subject to the
Landlord's prior written consent, which consent shall not be unreasonably
withheld, and subject to the consent of any mortgagee, or ground lessor and on
the basis of the following terms and conditions:
(a) Tenant shall provide to Landlord the name and address of the
assignee or sublessee.
(b) The assignee or sublessee shall assume, by written
instrument, all of the obligations of this Lease, and a copy of such assumption
agreement shall be furnished to Landlord at least ten (10) days prior to the
effective date of the assignment or sublease.
(c) Tenant and each assignee or sublessee shall be and remain
liable for the observance of all the covenants and provisions of this Lease,
including, but not limited to, the payment of Fixed Rent, Additional Rent and
other charges due hereunder through the entire term of this Lease, as the same
may be renewed, extended or otherwise modified.
(d) Tenant shall promptly pay to Landlord one hundred percent
(100%) of any consideration other than rent received for or a in connection with
any assignment or sublease, however denominated, and one hundred percent (100%)
of all of the rent, as and when received, in excess of the Fixed Rent required
to be paid by Tenant for the area assigned or sublet.
(e) In any event, the acceptance by Landlord of any rent from any
of the subtenants or the failure of Landlord to insist upon a strict performance
of any of the terms, conditions and covenants herein from any assignee or
subtenant shall not release Tenant herein, from any and all of the obligations
herein during and for the entire terms of this Lease.
(f) Tenant shall only assign or sublet the Demised Premises to an
an assignee or sublessee (1) whose financial status is acceptable to Landlord,
at Landlord's sole discretion, whether or not equal to or greater than that of
Tenant, and (2) whose use is the same use as Tenant's use, the quality of
Tenant's operations in the performance of said use to be reasonably acceptable
to Landlord.
(g) Landlord shall require Five Hundred and 00/100 ($500) Dollars
payment to cover its handling charges for each request for consent to any
assignment or sublet prior to its consideration of the same. Tenant acknowledges
that its sole remedy with respect to any assertion that Landlord's failure to
consent to any assignment or sublet is unreasonable shall be the
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remedy of specific performance and Tenant shall have no other claim or cause of
action against Landlord as a result of Landlord's actions in refusing to consent
thereto.
(h) The assignment or sublease shall provide that there shall be no
further assignments and/or subletting without Landlord's consent.
(3) Notwithstanding anything contained in this Paragraph 27 to the
contrary, Tenant shall have the right to assign this Lease to an entity
controlling, controlled by, or under common control with Tenant. Any assignment
in connection with a transaction of the nature permitted pursuant to the
preceding sentence, shall not be subject to the provisions of subsections, (1),
2(d) or 2(f) (1) hereof, but all other provisions of this Paragraph shall apply.
(4) Notwithstanding anything contained in this Paragraph 27 to the
contrary, Landlord and Tenant agree that Landlord will be conclusively deemed
reasonable in withholding its consent and Tenant shall have no right whatsoever
to sublet or assign this Lease to any ether tenant in the Building or any party
that has been shown other space in the Building (A) within the twelve (12) month
period immediately preceding the date upon which Tenant first is in contact with
such other party concerning the possibility of an assignment or sublet (B) at
any time after such first contact but before such other party and Tenant execute
a fully binding agreement of assignment or sublet subject to no contingencies
other than the contingency relating to Landlord's right of recapture and right
of approval as provided in this Paragraph 27.
28. Environmental Laws.
-------------------
(a) Tenant represents to Landlord that its Standard Industrial
Classification Code is accurately set forth in the Preamble to this Lease.
Tenant further represents that it does not use any "Hazardous Substances",
except in de minimis quantities for ordinary cleaning purposes. As used herein,
"Hazardous Substances" shall be defined as any "hazardous chemical," "hazardous
substance", "hazardous waste" or similar term as defined in the Comprehensive
Environmental Responsibility Compensation and Liability Act, as amended (42
U.S.C. 9601, et seq.), the New Jersey Industrial Site Recovery Act, as amended,
(N.J.S.A. 13:1K-6 et seq.) ("ISRA") , the New Jersey Spill Compensation and
Control Act, as amended, (N.J.S.A. 58:10-23.11, et seq.), any rules or
regulations promulgated thereunder, or in any other present or future applicable
federal, state or local law, rule, regulation or other requirement dealing with
environmental protection. Tenant understands that Landlord is relying on this
information to determine Landlord's and Tenant's obligations under environmental
laws, and agrees to provide Landlord with any additional or different
information needed to maintain the accuracy of the information provided to
Landlord. Tenant shall not conduct any operations that shall cause the Building
or the Demised Premises to be deemed an "industrial establishment" as defined in
ISRA. Notwithstanding the foregoing, in the event Tenant shall become an
"industrial establishment", unless the characterization of Tenant as an
"industrial establishment" results solely from a change in law, Landlord shall
have, in addition to any other remedies available, the right to immediately
terminate this Lease and Landlord shall a]so have the right to direct Tenant to
comply with ISRA, at Tenant's sole cost and expense, or in Landlord's sole
discretion, to comply with ISRA and to seek reimbursement of all costs and
expenses (including but not limited to, attorneys fees, consulting fees, filing
and/or review fees, and all remedial or investigative expenses) as a result of
such termination and any amount expended by Landlord shall be Additional Rent
hereunder.
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(b) In the event that any governmental authority, agency or
representative, or a prospective purchaser or mortgagee of the Property or any
part thereof or interest therein (an "Inquiring Person") requests or requires
information regarding the use of the Premises whether in connection with an
application of Landlord or otherwise (including, but not limited to, information
relating to the use of "Hazardous Substances" or the S.I.C. Code(s) of Tenant),
Tenant shall cooperate with Landlord in providing such information and shall
promptly and accurately complete any questionnaires, affidavits or other forms
of transmitting information requested or required by the Inquiring Person. This
cooperation shall include, but not be limited to, cooperation with Landlord in
order to provide and/or assist Landlord in providing any information required or
requested by the New Jersey Department of Environmental Protection in connection
with an application by Landlord for approval (or an official statement that such
approval is not required) of a transfer of the Property, any interest in the
Property, or any other matter requiring approval (or which Landlord desires
to ascertain does not require approval) under the Industrial Site Recovery Act
or any other law now or hereafter in existence, whether state or federal, which
law requires such approval for certain transactions. All information required to
be provided by Tenant hereunder shall be provided by Tenant to Landlord, at no
charge to Landlord, within 10 business days of Landlord's written request
therefor, such time period being of the essence. The parties agree that this is
a material covenant of this Lease and that the breach hereof may cause Landlord
substantial and irreparable harm.
(c) Tenant shall provide to Landlord, at least thirty {30) days in
advance of the Expiration Date, a complete executed affidavit in the form
attached hereto as Exhibit E, or such other form as may be required by the New
Jersey Department of Environmental Protection, to confirm that Tenant's
cessation of operations at the Premises is not subject to ISRA. Tenant shall
have no obligation to file said form with the New Jersey Department of
Environmental Protection. If Tenant does not comply with this subparagraph,
Tenant's right to possession of the Premises shall cease on the Expiration Date;
however, Tenant shall be required to pay an amount equal to two hundred percent
(200%) of Rent (which amount shall be considered Additional Rent) until Tenant
shall deliver such letter to Landlord. The parties agree that this is a material
covenant of this Lease and that the breach hereof may cause Landlord substantial
and irreparable harm.
(d) Notwithstanding Tenant's obligation pursuant to subparagraph (b)
above to cooperate with any Inquiring Person, Tenant shall be responsible for
compliance with ISRA with respect to the Demised Premises for any and all
closures of operations or transfers of ownership or operations at the Demised
Premises. Tenant shall indemnify and hold Landlord harmless from any cost,
expense, damage (direct or indirect) or claim (including, but not limited to,
reasonable attorneys' fees, filing or review fees, environmental consultant fees
and the cost of any assessment, investigation, sampling, remedial action,
remediation or other cleanup necessitated by Tenant's breach of this covenant)
arising or relating to such breach. This indemnity shall survive the
expiration or sooner termination of this Lease.
(e) Tenant shall allow Landlord, its agents, employees or independent
contractors, and/or representatives of any governmental authority, agency or
other body to enter the Premises at reasonable times upon reasonable telephonic
notice (except that governmental officials need only give such notice if it is
their usual policy to do so in similar cases) for the purpose of ascertaining
the "Hazardous Substances" and "Hazardous Materials" stored thereon, and to
ascertain the method by which they are stored, handled and disposed of. Tenant
shall make available to Landlord, its agents, employees and independent
contractors, as well as all governmental representatives, all manifests and
other
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documentary evidence relating to the use, storage, handling and disposal of any
"Hazardous Substances" or "Hazardous Materials" used on the Premises.
(f) Tenant covenants and agrees to use, store, handle and dispose of
all "Hazardous Substances" and "Hazardous Materials" brought onto the Property
by Tenant, its agents, employees or independent contractors, in full compliance
with all applicable laws, including, but not limited to, federal, state and
local environmental laws, and to indemnify Landlord and hold Landlord harmless
from any cost, expense, damage or claim (including, but not limited to,
reasonable attorneys' fees, environmental consultant fees and the cost of any
sampling and/or cleanup necessitated by Tenant's breach of this covenant}
arising from or relating to such breach. This indemnity shall survive the
expiration or sooner termination of this Lease.
(g) Landlord represents to Tenant that Landlord has not received any
notices from any governmental authority relating to the Land, the Building or
the Demised Premises alleging any violation of environmental law. Landlord
represents that to Landlord's actual knowledge (Tenant understanding that no
investigation has been made), no Hazardous Substances or Hazardous Materials,
including asbestos in friable form, are located at the Land or Building in
amounts requiring remediation under applicable law.
29. Parties Bound.
--------------
(a) The covenants, agreements, terms, provisions and conditions of
this Lease shall bind and benefit the respective successors, assigns and legal
representatives of the parties hereto with the same effect as if mentioned in
each instance where a party hereto is named or referred to except that no
violation of the provisions of Paragraph 7(c) hereof shall operate to vest any
rights in any successor, assignee or legal representative of Tenant and that the
provisions of this Paragraph 29 shall not be construed as modifying the
conditions contained in Paragraph 13 hereof.
(b) Tenant acknowledges and agrees that if Landlord shall be an
individual, joint venture, tenancy in common, firm, or partnership, general or
limited, there shall be no personal liability on such individual or on the
members of such joint venture, tenancy in common, firm or partnership in respect
of any of the covenants or conditions of this Lease; rather, Tenant agrees to
look solely to Landlord's estate and property in the Building (or the proceeds
thereof} for the satisfaction of Tenant's remedies arising out of or related to
this Lease.
(c) The term "Landlord" as used in this Lease means only the owner, or
the mortgagee in possession, for the time being of the Demised Premises (or the
owner of a lease of the Demised Premises) so that in the event of any sale or
sales of the Land, Building, or the Demised Premises or of said lease, or in the
event of a lease of the Land, Building or of the Demised Premises, the said
Landlord shall be and hereby is entirely freed and relieved of all covenants and
obligations of Landlord hereunder, and it shall be deemed and construed without
further agreement between the parties or their successors in interest, or
between the parties and the purchaser, at any such sale, or the said lessee of
the Land, Building or of the Demised Premises, that the purchaser or the lessee
of the same has assumed and agreed to carry out any and all covenants and
obligations of Landlord hereunder.
30. Lease Termination Contingency.
------------------------------
This Lease is subject to and conditioned upon the Landlord entering into
a valid and binding Lease Termination Agreement with Compression Labs, Inc.
which is applicable to the space currently being occupied by Compression Labs,
Inc. In the
21
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event such agreement is not fully executed by both parties on or before January
3, 1996, this Lease shall be null and void and shall be of no further force and
effect./*/This Lease is further subject to and conditioned upon the Landlord
receiving written approval of this Lease from its lender. In the event such
approval is not received by Landlord before January 16, 1996, this Lease shall
be null and void and shall be of no further force and effect.*
/*/ and tenant shall be refunded all monies paid hereunder.
31. Miscellaneous.
(a) This Lease contains the entire contract between the parties. No
representative, agent or employee of Landlord has been authorized to make any
representations or promises with reference to the leasing of the Demised
Premises or to vary, alter or modify the terms hereof. No additions, changes or
modlfica-tions, renewals, or extensions hereof, shall be binding unless reduced
to writing and signed by Landlord and Tenant.
(b) The terms, conditions, covenants and provisions of this Lease
shall be deemed to be severable. If any clause or provision herein contained be
adjudged to be invalid or unenforceable by a court of competent jurisdiction or
by operation of any applicable law, it shall not affect the validity of any
other clause or provision herein, but such other clauses or provisions shall
remain in full force and effect except to the extent that the invalidity or
unenforceability would result in a failure of consideration.
(c) Tenant shall not be entitled to exercise any right of termination
or other option granted to it by this Lease at any time when Tenant is in
default in the performance or observance of any of the covenants, agreement
terms, provisions or conditions on its part to be performed or observed under
this Lease.
(d) The paragraph headings in this Lease are for convenience only
and are not to be considered in construing the same.
(e) If, in connection with obtaining financing for the Project, a
banking, insurance or other recognized institutional lender shall request
reasonable modifications in this Lease as a condition to such financing, Tenant
will not unreasonably withhold, delay or defer its consent thereto, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest created or the conduct of
Tenant's business operations at the Demised Premises.
22
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Lease as
of the day and year first above written.
WITNESS: LANDLORD:
QUINLAN PROPERTIES, L.P.
BY SAMOS CORPORATION
MARILYN DAHM By: /s/ MICHAEL FIELD
- - --------------------------- ----------------------------
Name: Michael Field
Title: Vice President
WITNESS: TENANT:
BFR CO., INC.
GENE SHRIEDON By: /s/ CHARLES F. FOWLER
- - --------------------------- ----------------------------
Controller Name: Charles F. Fowler
Title: Vice President, CFO
23
<PAGE>
EXHIBIT "A"
FLOOR PLAN OF DEMI
[FLOOR PLAN APPEARS HERE]
A-1
<PAGE>
EXHIBIT "A-l"
-------------
All that parcel of land situate in the Township of Bernards, Somerset
County, New Jersey to be known as Lot 7.02, in Block 177 of that Township and
more particularly described as follows:
Beginning at a point in the Northerly sideline of New Jersey State
Highway Route No. 78 where said sideline is intersected by the line dividing the
hereindescribed Lot 7.02 to the West from Lot 7.01 of said Block 177 to the
East, thence along said sideline of Route 78 the following five (5) courses and
distances.
1) S 82 degrees 09'24"W, 39.83 feet to a point,
2) S 86 degrees 38'33"W, 300.17 feet to a point,
3) N 88 degrees 36'44"W, 302.03 feet to a point,
4) S 79 degrees 45'49"W, 577.17 feet to a point,
5) S 89 degrees 43'10"W, 716.42 feet to Lot 15 of said Block 177
Thence, along said Lot 15 N 3 degrees 39'10"W, 82.20 feet to Lands of
Public Service Electric and Gas Company.
Thence, along said lands and Lot 7.03 of said Block 177 N55 degrees
20'40"W, 2145.17 feet to Lot 7.01 of said Block 177.
Thence along said Lot 7.01 the following two (2) courses and distances:
1) S 6 degrees 05'50"E, 59.80 feet to a point,
2) S 8 degrees 06'46"E, 1131.95 feet to the point of beginning.
A-2
<PAGE>
EXHIBIT "B"
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice
shall be installed or displayed on any part of the
exterior or interior Common Areas of the Building without
the prior written consent of Landlord. Landlord shall
have the right to remove, at Tenant's expense and without
notice, any sign installed or displayed in violation of
this rule. All approved signs or lettering on doors and
walls shall be printed, painted, affixed or inscribed at
the expense of Tenant by a person chosen by Landlord.
2. No awning shall be permitted on any part of the Demised
Premises. Tenant shall not place anything against, near
or on any glass partitions, doors, windows or window
sills which may appear unsightly from outside the Demised
Premises and Tenant is specifically prohibited from
sitting or placing anything on the window sills of the
Demised Premises. Tenant shall not obstruct any windows,
doors, partitions or lights within the Demised Premises
which admit or reflect light into the hallways or other
Common Areas of the Building. Tenant shall not attach or
hang any curtains, blinds, shades or screens used in
connection with any window or door of the Demised
Premises without first obtaining the written consent of
Landlord. Said curtains, blinds or shades must be of a
quality, type, design and color and attached in a manner
approved by Landlord.
3. Landlord shall retain the right to control and prevent
access to the Building of all persons whose presence in
the judgment of Landlord would be prejudicial to the
safety, character, reputation and interests of the
Building and its tenants; provided that nothing herein
contained shall be construed to prevent such access to
persons with whom any tenant normally deals in the
ordinary course of its business, unless such persons are
engaged in illegal activities. No tenant and no employee
or invitee of any tenant shall go upon the roof of the
Building.
4. All cleaning and janitorial services for the Building and
the Demised Premises shall be provided exclusively
through Landlord, and except with the written consent of
Landlord, no person or persons other than those approved
by Landlord shall be employed by Tenant or permitted to
enter the Building for the purpose of cleaning the same.
Tenant shall not cause any unnecessary labor by careless-
ness or indifference to the good order and cleanliness of
the Demised Premises. Landlord shall not in any way be
responsible to any Tenant for any loss of property on the
Demised Premises, however occurring, or for any damage to
any Tenant's property by the janitor or any other
employee or any other person.
5. Landlord will furnish Tenant, free of charge, two (2)
keys (plus two (2) additional keys upon request) to each door lock in
the Demised Premises. Landlord may charge an additional amount $2.00
per key for any additional keys requested by Tenant. Tenant shall not
alter any lock or install a new additional lock or bolt on the entrance
door of its Demised Premises without written consent of Landlord unless
on Building Master key system and by contractor chosen by Landlord.
Tenant, upon the termination of its tenancy, shall deliver to Landlord
the keys of all doors which have been furnished to Tenant,
B-1
<PAGE>
and in the event of loss of any keys so furnished, shall
pay Landlord therefor.
6 If Tenant requires telegraphic, telephonic, burglar alarm
or similar services, it shall first obtain, and comply
with, Landlord's instructions in their installation.
7 No equipment, materials, furniture, packages, supplies,
merchandise or other property will be received in the
Building or carried in the elevators except between such
hours and in such elevators as may be designated by
Landlord.
8 Tenant shall not place a load upon any floor of the
Demised Premises which exceeds the load per square foot
which such floor was designed to carry and which is
allowed by law. Landlord shall have the right to
prescribe the weight, size and position of all equipment,
materials, furniture or other property brought into the
Building. Heavy objects shall, if considered necessary
by Landlord, stand on such platforms as determined by
Landlord to be necessary to properly distribute the
weight. Business machines and mechanical equipment
belonging to Tenant, which cause noise or vibration that
may be transmitted to the structure of the Building or to
any space therein to such a degree as to be objectionable
to Landlord or to any tenants in the Building, shall be
placed and maintained by Tenant, at Tenant's expense, on
vibration eliminators or other devices sufficient to
eliminate noise or vibration. The persons employed to
move such equipment in or out of the Building must be
acceptable to Landlord. Landlord will not be responsible
for loss of, or damage to, any such equipment or other
property from any cause, and all damage done to the
Building by maintaining or moving such equipment or other
property shall be repaired at the expense of Tenant.
9. Tenant shall not use or keep in the Demised Premises any
kerosene, gasoline or inflammable or combustible fluid or
material other than those limited quantities necessary
for the operation or maintenance of office equipment.
Tenant shall not use or permit to be used in the Demised
Premises any foul or noxious gas or substance, or permit
or allow the Demised Premises to be occupied or used in
a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors or
vibrations, nor shall Tenant bring into or keep in or
about the Demised Premises any birds or animals.
10 Tenant shall not use any method of heating or air-
conditioning other than that supplied by Landlord.
11 Tenant shall cooperate fully with Landlord to assure the
most effective operation of the Building's heating and
air conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Tenant
has actual notice, and shall refrain from attempting to
adjust controls other than room thermostats installed for
Tenant's use. Tenant shall keep corridor doors closed,
and shall close window coverings at the end of each
business day.
12 Landlord reserves the right, exercisable without notice
and without liability to Tenant, to change the name and
street address of the Building.
13 Landlord reserves the right to exclude from the Building
between the hours of 6 p.m. and 8 a.m. the following day,
or such other hours as may be established from time to time
by Landlord, and on Sundays and legal holidays, any
B-2
<PAGE>
person unless that person is known to the person or employee in charge of
the Building and has a pass or is properly identified. Tenant shall be
responsible for all persons for whom it requests passes and shall be
liable to Landlord for all acts of such persons. Landlord shall not be
liable for damages for any error with regard to the admission to or
exclusion from the Building of any person. Landlord reserves the right to
prevent access to the Building in case of invasion, mob, riot, public
excitement or other commotion by closing the doors or by other
appropriate action.
14. Tenant shall close and lock the doors of the Demised Premises and
entirely shut off all water faucets or other water apparatus, and
electricity, gas or air outlets before tenant and its employees leave the
Demised Premises. Tenant shall be responsible for any damage or injuries
sustained by other tenants or occupants of the Building or by Landlord
for noncompliance with this rule.
15. Tenant shall not obtain for use on the Demised Premises ice, drinking
water, food, beverage, towel or other similar services or
accept barbering or bootblacking services upon the Demised Premises,
except at such hours and under such regulations as may be fixed by
Landlord.
16. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
not be used for any purpose other than that for which they were
constructed and no foreign substance of any kind whatsoever shall be
thrown thereto. The expense of any breakage, stoppage or damage resulting
from the violation of this rule shall be borne by the tenant who, or
whose employees or invitees shall have caused it.
17. Tenant shall not sell, or permit the sale at retail, of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise
to the general public in or on the Demised Premises. Tenant shall not
make any room-to-room solicitation of business from other tenants in the
Building.
18. Tenant shall not install any radio or television antenna, satellite
dish, loudspeaker or other device on the roof or exterior walls of the
Building. Tenant shall not interfere with radio or television
broadcasting or reception from or in the Building or elsewhere.
19. Tenant shall not mark, drive nails, screw or drill into the partitions,
woodwork or plaster or in any way deface the Demised Premises or any part
thereof. Landlord reserves the right to direct electricians as to where
and how telephone and telegraph wires are to be introduced to the Demised
Premises. Tenant shall not cut or bore holes for wires. Tenant shall not
affix any floor covering to the floor of the Demised Premises in any
manner except as approved by Landlord. Tenant shall repair any damage
resulting from noncompliance with this rule.
20. Tenant shall not install, maintain or operate upon the
Demised Premises any vending machine without the written consent of
Landlord.
21. Canvassing, soliciting and distribution of handbills or any other
written material, and peddling in the Building are prohibited,
and each tenant shall cooperate to prevent same.
22. Landlord reserves the right to exclude or expel from the Building any
person who, in Landlord's judgment, is
B-3
<PAGE>
intoxicated or under the influence of liquor or drugs or
who is in violation of any of the Rules and Regulations
of the Building.
23. Tenant shall store all its trash, garbage and recyclable
material within the Demised Premises. Tenant shall not
place in any trash box or receptacle any material which
cannot be disposed of in the ordinary and customary
manner of trash and garbage disposal. All garbage and
refuse disposal shall be made in accordance with direc-
tions issued from time to time by Landlord. All recycla-
ble materials, as directed by Landlord, must be placed in
specially designated recycling containers, provided by
Tenant. Landlord reserves the right to refuse to collect
any trash, garbage, and/or recycling materials not
properly separated, as directed by Landlord.
24. The Demised Premises shall not be used for the storage of
merchandise held for sale to the general public, or for
lodging or for manufacturing of any kind, nor shall the
Demised Premises be used for any improper, immoral or
objectional purpose. No cooking shall be done or
permitted by any tenant on the Demised Premises, except
that use by Tenant of Underwriters' Laboratory-approved
equipment for brewing coffee, tea, hot chocolate and
similar beverages or use of a microwave oven shall be
permitted, provided that such equipment and use is in
accordance with all applicable federal, state, county and
city laws, codes, ordinances, rules and regulations.
25. Tenant shall not use in any space or in the public halls
of the Building any hand trucks except those equipped
with rubber tires and side guards or such other material-
handling equipment as Landlord may approve. Tenant shall
not bring any other vehicles of any kind into the
Building.
26. Without the written consent of Landlord, Tenant shall not
use the name of the Building in connection with or in
promoting or advertising the business of Tenant except as
Tenant's address.
27. Tenant shall comply with all safety fire protection and
evacuation procedures and regulations established by
Landlord or any governmental agency.
28. Tenant assumes any and all responsibility for protecting
the Demised Premises from theft, robbery and pilferage.
29. The requirements of Tenant will be attended to only upon
written application to the office of the Building Manager
by an authorized individual.
30. Tenant shall not park its vehicles in any parking areas
designated by Landlord as areas for parking by visitors
to the Building. Tenant shall not leave vehicles in the
Building parking areas overnight.
31. Landlord may waive any one or more of these Rules and
Regulations for the benefit of Tenant or any other
tenant, but no such waiver by Landlord shall be construed
as a waiver of such Rules and Regulations in favor of
Tenant or any other tenant, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations
against any or all of the tenants of the Building.
32. Tenant's employees, guests, contractors and invitees
shall not smoke in any common area of the Building, which
includes cafeterias, hallways, stairways, bathrooms, lobbies
and elevators. Tenant's employees, guests,
B-4
<PAGE>
contractors and invitees must refrain from smoking at all
entrances to the Building.
33. These Rules and Regulations are in addition to, and shall
not be construed to in any way modify or amend, in whole
or in part, the terms, covenants, agreements and condi-
tions of any lease of premises in the Building. In the
event of conflict between the provisions contained in
this Lease and these Rules and Regulations the provisions
of this Lease shall prevail.
34. Landlord reserves the right to make such other and
reasonable Rules and Regulations as, in its judgment, may
from time to time be needed for safety and security, for
care and cleanliness of the Building and the Complex and
for the preservation of good order therein. Tenant
agrees to abide by all such Rules and Regulations
hereinabove stated and any additional rules and regula-
tions which are adopted.
35. Tenant shall be responsible for the observance of all of
the foregoing rules by Tenant's employees, agents,
clients, customers, invitees and guests.
B-5
<PAGE>
EXHIBIT "C"
BUILDING HOLIDAYS
-----------------
New Years
Martin Luther King, Jr.'s Birthday
George Washington's Birthday
Memorial Day
Fourth of July
Labor Day
Thanksgiving
Christmas
C-1
<PAGE>
EXHIBIT "D"
-----------
JANITORIAL MAINTENANCE SPECIFICATIONS
PROVIDED BY LANDLORD
Daily Janitorial Services Monday through Friday
Entrance Lobby and all Offices
- - ------------------------------
1. Entrance lobby will be damp mopped and/or vacuumed
nightly.
2. Remove fingerprints and smudges from all entrance glass
doors.
3. Empty and clean waste receptacles, ashtrays. Dispose of
any items or boxes marked for refuse. Remove waste to a
designated area.
4. Sweep and dust mop all flooring. Damp mop any spills,
stains or marks.
5. Vacuum clean all carpeting.
6. Dust and wipe clean furniture: desks, chairs, tables,
bookcases, filing cabinets, etc.
7. Wash clean and polish all glass tops on desks and tables.
8. Dust all telephone equipment.
9. Dust all synthetic plastic on chairs and sofas.
10. Dust all paneling, moldings, baseboards, chair rails, and
window sills.
11. Wash clean and polish all water coolers and fountains.
12. Dust clean closets, shelves, coat racks.
13. Clean ventilation louvers on doors.
14. Sweep and wet mop all stairways and landings.
15. Sweep and wet mop/vacuum elevators nightly.
16. Maintain slop sinks and storage locker in clean and
orderly condition.
Lavatory Areas
--------------
1. Thoroughly scour, disinfect, wash and rinse clean: basins, bowls,
urinals and toilet seats including undersides and underlip of bowls
and urinals.
2. Clean, disinfect, and polish all bright work, enameled
surfaces, and stainless steel fixtures.
D-1
<PAGE>
EXHIBIT "D" CONTINUED
3. Mirrors and cabinets will be cleaned and polished.
4. Remove spots and stains from lavatory walls and parti-
tions.
5. Waste receptacles will be washed and disinfected.
6. Sweep, wash and rinse clean, using disinfectant cleaning
solution, all lavatory and kitchen flooring daily.
Special attention will be given to area of flooring
directly under urinals and behind toilet bowls.
7. Refill all soap, tissue and towel dispensers. (Supplies,
as needed, to be furnished by Landlord.)
Security
- - --------
1. Cleaning personnel will notify owner of any faulty locks, lighting and
electrical equipment, and any irregularities.
2. Upon completion of work, cleaning personnel will extin-
guish all lights (except those requested to be left on)
close all windows, lock all doors, and re-set alarm. The
cleaning personnel will sign and be responsible for keys
to the Building, and the keys will be maintained by a
person on the job.
General Conditions:
- - -------------------
Cleaning personnel will immediately report to the proper management any fires,
items in need of repair, hazardous conditions, leaky faucets, burned out lights,
or any other irregularities. All lost items which may be found will be turned in
immediately. Any equipment will be repaired, replaced or paid for at
Tenant's discretion. All company and Building regulations will be strictly
adhered to by Landlord's employees, and they will be instructed not to disturb
any papers on desks or cabinets of the clients. They will stay out of all areas
which are not under service and restricted or prohibited to their use.
Cleaning Procedures
- - -------------------
Cleaning personnel will perform all duties as outlined and on schedule.
Lobby and Front Entrance
- - ------------------------
Constant attention will be given to keeping lobby and front entrance areas as
clean and attractive as possible. Floors will be vacuumed/damp mopped daily.
Furniture in waiting rooms or lobby will be dusted and/or washed. Glass inserts
of main entrance doors will be cleaned daily.
D-2
<PAGE>
EXHIBIT "D" CONTINUED
Corridors and Stairwells
- - ------------------------
All hallway corridors will be cleaned daily. Stairwells will be given special
attention. They will be swept and/or vacuumed daily. Washing will be
performed as needed.
Elevators
- - ---------
All elevators will be thoroughly vacuumed daily. Paneled walls will be
polished as often as needed. Door grooves will be vacuumed out as needed.
Stainless steel will be polished.
Floors (All waxable areas)
- - ------
All waxable surface floors shall have an underwriter's approval, anti-slip floor
wax, or an approved resinous floor finish applied, finished and buffed every six
(6) months.
Dust Mopping
- - ------------
All floors will be dust mopped nightly, with specially treated long strand
cotton mops. These treated mops are replaced regularly with freshly treated
and laundered mop heads. This procedure insures the removal of all dust, leaving
a dust free floor. Special attention is given to out-of-the-way areas, such as
corners and baseboards.
Wet Mopping
- - -----------
All surface floor areas will be damp mopped when necessary. These surfaces will
be mopped, using an approved neutral soap solution with a disinfectant added,
which will insure a clean and germ-free floor surface.
Rugs
- - ----
All rugs are to be vacuumed nightly using a Eureka type vacuum cleaner.
Room Trim
- - ---------
All window sills, chair rails, baseboards, moldings, partitions, picture frames,
etc. below six foot heights, shall he dusted with a specially treated dust cloth
at regular intervals at least monthly. Over six foot heights, shall be dusted
quarterly, including tops of partitions, transoms and doors. All finger and hand
marks will be removed as necessary.
Venetian Blinds
- - ---------------
All venetian blinds shall be dusted annually.
Waste Receptacles
- - -----------------
Waste receptacles will be emptied, waste removed and placed at assigned
locations nightly. Plastic liners will be placed in all waste baskets and
replaced as needed.
D-3
<PAGE>
EXHIBIT "D" CONTINUED
Recycling Receptacles
- - ---------------------
Recycling receptacles will be emptied, recycling materials removed and placed
at assigned locations nightly.
Furniture and Equipment
- - -----------------------
All furniture and equipment shall be dusted and polished with specially treated
dust cloths and dusting tools. Soiled dust cloths are laundered and replaced as
needed, affording complete removal of the dust.
Sand Urns
- - ---------
Refuse will be removed and sifted, and outsides of all sand urns will be damp
wiped. Sand will be replaced or replenished as needed.
Ash Trays
- - ---------
All ash trays will be emptied and damp wiped nightly.
Drinking Fountains
- - ------------------
All drinking fountains will be thoroughly cleaned nightly, using a neutral
cleaning agent with disinfectant added to assure bacteria-free drinking
fountains.
Storage Space, Service Closet
- - -----------------------------
Space will be assigned for the storage of all bulk supplies and equipment
necessary for the performance of the work under this contract. All service areas
will be kept in a clean and orderly condition.
Supervision
- - -----------
Regular supervision is maintained over all working cleaning personnel. It is the
cleaning supervisor's job to see that all contracted services are performed as
scheduled and to record necessary information which is required. He also
coordinates Landlord's operation to insure no interference with Tenant's
operation. He will instruct, inspect, and correct any irregularities, check
supplies and equipment for proper operations, and act as liaison between
Landlord and cleaning personnel.
Supplies and Equipment
- - ----------------------
All of the following supplies are furnished by Landlord or cleaning service
Landlord may engage; vacuum cleaners, floor machines, window cleaning tools and
ladders, mop wringers and buckets, carpet sweepers, dust mops and tools, wet
mops, brushes, dust pans, brooms, steel wool, floor finishes, scouring powder,
disinfectants, floor soap, putty knives, janitor carts, hand towels, toilet
tissue, and hand soap.
D-4
<PAGE>
EXHIBIT "D" CONTINUED
---------------------
Window Washing
- - --------------
All interior windows, doors, skylights, including clear and opaque glass, panes
and interior partition glass in the common areas of the Building will be washed
semi-annually. This work is performed by specially trained individuals who are
equipped with the proper tools, ladders and other safety equipment to perform a
completely satisfactory job.
Window Washing
- - --------------
All exterior windows cleaned inside and outside each six months. Lobby doors
shall be washed inside and out once daily. Lobby windows shall be washed
inside and out once monthly.
Grounds Maintenance
- - -------------------
Outside landscaping, paving and walkways will be maintained by Landlord. Paved
areas and walks shall be kept free of debris and snow.
Insurance Coverage
- - ------------------
Cleaning service company will carry full insurance coverage for their
operations:
Workmen's Compensation - Statutory Limits
Public Liability Insurance - Bodily Injury
$100,000.00/$300,000.00
Property Damage Insurance - $25,000.00
Personal Bond in case of theft - $10,000.00 minimum
D-5
<PAGE>
EXHIBIT "E"
NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION
DIVISION OF HAZARDOUS WASTE MANAGEMENT
INDUSTRIAL SITE EVALUATION ELEMENT
CN 028, TRENTON, N.J. 08625-0028
ENVIRONMENTAL CLEANUP RESPONSIBILITY ACT (ECRA)
APPLICABILITY/NONAPPLICABILITY AFFIDAVIT
The purpose of this Affidavit is to obtain an Applicability/Nonapplicability
Determination from the New Jersey Department of Environmental Protection
pursuant to the Environmental Cleanup Responsibility Act, N.J.S.A. 13:1K-6 et
seq. and N.J.A.C. 7:26B 1.9. Fee is $200.
PLEASE TYPE OR PRINT
- - --------------------
Date __________________________
A. Determination of Applicability/Nonapplicability should be mailed to the
following:
Name __________________________________________________________________
Address _______________________________________________________________
City or Town _______________ County ___________________________________
State ___________ Zip Code _______ Tele. No. __________________________
B. Name of Business ______________________________________________________
Standard Industrial Classification (SIC) Number _______________________
C. Property Location for which request is being transmitted:
Street Address ________________________________________________________
Tax Block(s) ______________________ Tax Lot(s) ________________________
Municipality ______________________ County ____________________________
State __________________________________ Zip Code _____________________
D. Transaction for which the Applicability/Nonapplicability Determination is
requested: (Check appropriate transaction)
* Please attach a detailed description of these transactions.
** Please attach the most recent Consolidated Financial Statements.
for all companies involved in the proposed transaction.
<TABLE>
<CAPTION>
<C> <S> <C> <C>
1. ____ Sale of Property 7. ____ Bankruptcy
2. ____ Sale of Business 8. ____ Corporate Merger*
3. ____ Business Ceasing Operations 9. ____ Partnership Situation Change*
4. ____ Refinancing/Construction Loan 10. ____ Intra Family
5 ____ Sale of Stock in Corporation* 11. ____ Corporate Reorganization**
6. ____ Condemnation 12. ____ Sale of Assets**
</TABLE>
____ Other: (Explain) ________________________________________________
Date of Planned Transaction: _________________________________________
Purchaser:
Name _________________________________________________________________
Address ______________________________________________________________
City or Town _____________________ County ____________________________
State ______________ Zip Code ________________________________________
E-1
<PAGE>
E. Operations:
1.) The property owner and/or operator must completely describe in detail
the operations and processes conducted at the site including a list of all
tenants, their operations and processes, occupying any part of the property
since December 31, 1983. (Attach additional sheets, if necessary.)
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
2.) If the property described above is vacant land, is this property
contiguous to other property under the control of the person or business
described in F below:
____ Yes ____ No _______________________________
F. Current Owner of the Property for which an Applicability/Nonapplicability
Determination is requested:
Name _________________________________________________________________
Street Address _______________ Municipality __________________________
State ________ Zip Code ______ Tele. No. _____________________________
G. History
1. Previous Owners and history of on-site activities since December 31,
1983 (Attach additional sheets, if necessary):
NAME ADDRESS OPERATIONS
---- ------- ----------
__________________ ___________________________ _________________
__________________ ___________________________ _________________
2. Is this site currently or has this site previously been the subject of
any other ECRA review?
Please submit copies of previous submittals or approvals.
_____ Previous LNA Application _____ Negative Declaration
_____ Administrative Consent Order _____ Approved Cleanup Plan
_____ Active Case _____ No prior ECRA Review
H. Hazardous Substances or Wastes: (This information is only required if the
facility or business has a subject SIC.)
List all types and quantities of hazardous substances or wastes including
petroleum products that are generated, manufactured, refined, transported,
treated, stored, handled or disposed at the property, both above and below
ground, which are included in the Department's "Unified Hazardous Substance
List" and any amount of any waste substances required to be reported to the
Department on special waste manifest forms pursuant to N.J.A.C. 7:26-7.4,
designated as a hazardous waste pursuant to N.J.A.C. 7:26 7.4, designated
as a hazardous waste pursuant to N.J.A.C. 7:26-8, or as otherwise provided
by law. (Attach additional sheets if necessary.)
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
I. How is the building(s} heated? (Oil, Gas, Electric) If Oil, how many
tanks? ____________________________
Storage capacity of each _________ Above or below ground __________.
J. Was the building(s) ever heated by oil? _____ Yes _____ No If so, when?
____________________
E-2
<PAGE>
K. CERTIFICATIONS:
---------------
1. The following certification shall be signed by the highest ranking indivi-
dual at the site with overall responsibility for that site or activity.
Where there is no individual at the site with overall responsibility for
that site or activity, this certification shall be signed by the
individual having responsibility for the overall operation of the site or
activity.
I certify under penalty of law that the information provided in this
document is true, accurate and complete. I am aware that there are
significant civil penalties for knowingly submitting false, inaccurate or
incomplete information and that I am committing a crime of the fourth
degree if I make a written false statement which I do not believe to be
true. I am also aware that if I knowingly direct or authorize the
violation of N.J.S.A. 13:1K-6 st seq., I am personally liable for the
penalties set forth at N.J.S.A. 13:1K-13.
Typed/Printed Name ________________________ Title ___________________
Signature _________________________________ Date ____________________
Company ___________________________________
Sworn to and Subscribed Before Me
on this ___________________________________
Date of ___________________ of 19 _________
___________________________________________
Notary
2 The following certification shall be signed as follows:
1. For a corporation, by a principal executive officer of at least the
level of vice president;
2. For a partnership or sole proprietorship, by a general partner or the
proprietor, respectively; or
3. For a municipality, State, Federal or other public agency, by either a
principal executive officer or ranking elected official.
I certify under penalty of law that I have personally examined and am
familiar with the information submitted in this application and all
attached documents, and that based on my inquiry of those individuals
immediately responsible for obtaining the information, I believe that the
submitted information is true, accurate and complete. I am aware that there
are significant civil penalties for knowingly submitting false, inaccurate,
or incomplete information and that I am committing a crime of the fourth
degree if I make a written false statement which I do not believe to be
true. I am also aware that if I knowingly direct or authorize the
violation of N.J.S.A. 13:1K-6 et seq., I am personally liable for the
penalties set forth at N.J.S.A. 13:1K-13.
Typed/Printed Name ________________________ Title ___________________
Signature _________________________________ Date ____________________
Company ___________________________________
Sworn to and Subscribed Before Me
on this ___________________________________
Date of ___________________ of 19 _________
___________________________________________
Notary
Have you enclosed a check or money order for $200? _____ Yes _____ No
E-3
<PAGE>
FIRST AMENDMENT TO LEASE
This FIRST AMENDMENT TO LEASE dated February 3, 1996 by and between
QUINLAN PROPERTIES, L.P., a New Jersey Limited Partnership, having an office at
150 Allen Road, Liberty Corner, New Jersey 07938 ("Landlord"), and BFR CO., INC.
a New Jersey corporation, having an office at 150 Allen Center, Liberty Corner,
New Jersey 07938 ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a lease dated December 29,
1995, (the "Lease"), with a Commencement Date of January 5, 1996, for space
located at 150 Allen Road in the Township of Bernards, County of Somerset, New
Jersey, pursuant to which Landlord leased such space to Tenant on the terms and
conditions set forth therein;
WHEREAS, Tenant desires to expand the Premises and thereby to increase
the space of the Premises by leasing an additional 5,529 square feet of rentable
space from Landlord;
WHEREAS, Landlord and Tenant desire to amend the Lease to provide
Tenant with the additional space and make other changes in the Lease as set
forth herein;
NOW, THEREFORE, in consideration of One Dollar and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Expansion Space. (a) Tenant has elected to additionally
----------------
lease the portion of the building commonly known as the lobby level and
consisting of 5,529 square feet as shown on Exhibit A attached hereto and made a
part hereof (the "Expansion Space") on the terms of the Lease, as amended
hereby. All references in the Lease to the Demises Premises shall include the
Expansion Space.
2. Expansion Space Commencement Date. The Expansion Space
----------------------------------
Commencement Date shall be July 1, 1996.
3. Rent. Beginning on the Expansion Space Commencement Date, Fixed
-----
Rent shall be increased by Seventeen Dollars and 62/100 ($17.62) per square foot
of the Expansion Space per annum.
Therefore the aggregate Fixed Rent shall be Two Hundred Six Thousand Nine
Hundred Eleven and 66/100 Dollars ($206,911.66) per annum payable in equal
installments of Seventeen Thousand Two Hundred Forty-Two Dollars and 64/100
($17,242.64) per month payable in accordance with Section 2 of the Lease.
Beginning on the third anniversary of the Commencement Date (as defined in the
Lease) the Fixed Rent shall be increased in accordance with the Lease to
1
<PAGE>
Twenty Three Dollars and 50/100 ($23.50) per square foot per annum adjusted to
reflect the Expansion Space, or Two Hundred Seventy-Five Thousand Nine Hundred
Sixty and 50/100 Dollars ($275,960.50) per annum payable in equal installments
of Twenty-Two Thousand Nine Hundred Ninety-Six Dollars and 71/100 ($22,996.71)
per month payable in accordance with Section 2 of the Lease.
4. Tenant's Proportionate Share. From and after the Expansion Space
-----------------------------
Commencement Date, the Premises shall be deemed to include the Expansion Space
and Tenant's Percentage as defined in Paragraph 9 of the Preamble to the Lease
shall be increased to Six and Twenty-Three One-Hundredths percent (6.23%).
5. Security Deposit. Tenant shall on the Expansion Space
-----------------
Commencement Date deposit with Landlord the sum of Nine Thousand Four Hundred
Seventy-Three and 02/100 Dollars ($9,473.02) as an addition to the Security
Deposit, to be governed by Section 20 of the Lease. Therefore the aggregate
Security Deposit shall be Thirty Thousand Seven Hundred Sixty-Six and 32/100
Dollars ($30,766.32).
6. Number of Tenant Allocated Parking Spaces: From and after the
------------------------------------------
Expansion Space Commencement Date, Tenant shall have the right to forty-seven
(47) spaces, consisting of three (3) covered exclusive spaces and two (2) non-
covered exclusive spaces ("Exclusive Spaces") and forty-two (42) non-exclusive
spaces ("Non-Exclusive Spaces").
7. Tenant's Work. Tenant shall arrange and perform the work in the
--------------
Expansion Space necessary to prepare the Expansion Space for Tenant's occupancy
("Tenant's Work"). Notwithstanding the foregoing, Tenant shall use contractors
designated by Landlord for all work within the Demised Premises which affects
the Building structure and systems. All Tenant's Work shall be performed in
accordance with the provisions of Sections 5 and 6 of the Lease. Tenant shall be
entitled to an allowance of Two and 50/100 Dollars ($2.50) per rentable square
foot of the Expansion Space ("Tenant's Allowance"), being Thirteen Thousand
Eight Hundred Twenty-Two and 50/100 Dollars ($13,822.50). Landlord shall
reimburse Tenant for Tenant's Work, up to the Tenant's Allowance, within thirty
(30) days following the receipt by Landlord of an affidavit from the general
contractor performing said improvements setting forth (i) the actual cost of
Tenant's Work and (ii) that Tenant's Work has been completed in accordance with
Tenant's plans and specifications and that all subcontractors, laborers and
materialmen engaged in or supplying materials for said work have been paid in
full. In the event the aggregate cost of Tenant's Work is less than the Tenant's
Allowance, Tenant shall not be entitled to any credit or reimbursement in excess
of Tenant's Work.
8. Lease Reaffirmed. Except as otherwise expressly set forth herein
-----------------
and amended hereby, all terms and conditions of the
2
<PAGE>
Lease shall remain in full force and effect, shall be binding upon the parties
and shall govern the relationship of the parties with respect to the Demised
Premises including the Expansion Space. Wherever the terms of the Lease and this
First Amendment to Lease conflict, the terms of this First Amendment to Lease
shall govern and control.
9. Brokerage. Tenant and Landlord warrant and represent to
----------
each other that neither has dealt with any broker or brokers regarding the
negotiation of this First Amendment to Lease other than Cushman & Wakefield and
Jacobson, Goldfarb & Tanzman (collectively the "Broker"). Landlord shall pay
the Broker a commission pursuant to a separate agreement. Tenant and Landlord
agree to be responsible for and to indemnify and save the other harmless from
and against any claim for a commission or other compensation by any broker other
than the Broker, claiming to have negotiated with the indemnifying party with
respect to the Expansion Space or to have called the Expansion Space to Tenant's
attention or to have called Tenant to Landlord's attention.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above written.
WITNESS: LANDLORD:
QUINLAN PROPERTIES, L.P.
BY: SAMOS CORPORATION, General Partner
ROBERT A. COHN /s/ MICHAEL FIELD
- - ------------------------------ --------------------------------------
By: Michael Field
Its: Vice President
TENANT:
BFR CO., INC.
GENE SHERIDAN /s/ CHARLES F. FOWLER
- - ------------------------------ --------------------------------------
2/1/96 By: Charles F. Fowler
Controller Its: Executive Vice President, CFO
3
<PAGE>
EXHIBIT A
[DIAGRAM OF LEASED SPACE APPEARS HERE]
Expansion Space = [ ]
<PAGE>
QUINLAN PROPERTIES, L.P.
April 15th, 1996
BY HAND
-------
Mr. Charles F. Fowler
BFR Co., Inc.
150 Allen Road
Liberty Corner, NJ 07938
RE: 150 ALLEN ROAD
Liberty Corner, NJ 07938
Dear Charlie:
Attached please find an original copy of Second Amendment to Lease by and
between Quinlan Properties, L.P. and BFR Co., Inc. at above referenced
location.
Very sincerely yours,
/s/ JO ANN HALE
Jo Ann Hale
jh
att.
cc: Jodie Matthews
150 Allen Road
Liberty Corner, NJ 07938
9O8 604-2600
FAX 908 604-2601
<PAGE>
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE dated as of March 15, 1996 by and
between QUINLAN PROPERTIES, L.P., a New Jersey Limited Partnership, having an
office at 150 Allen Road, Liberty Corner, New Jersey 07938 ("Landlord"), and BFR
CO., INC. a New Jersey corporation, having an office at 150 Allen Center,
Liberty Corner, New Jersey 07938 ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a lease dated December 29,
1995 (the "Original Lease"), with a Commencement Date of January 5, 1996, for
space located at 150 Allen Road in the Township of Bernards, County of Somerset,
New Jersey, pursuant to which Landlord leased such space to Tenant on the terms
and conditions set forth therein;
WHEREAS, pursuant to that certain First Amendment to Lease dated
February 3, 1996 (the "First Amendment", the Original Lease as amended by the
First Amendment is hereinafter referred to as the "Lease"), Tenant agreed to,
among other things, expand the space leased by Tenant as set forth therein;
WHEREAS, Landlord and Tenant acknowledge a scrivener's error in
Paragraph 3 of the First Amendment;
WHEREAS, Landlord and Tenant desire to amend the Lease in order to
correct such error;
NOW, THEREFORE, in consideration of One Dollar and other good and
valuable consideration the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Correction. The third sentence of Paragraph 3 of the First
-----------
Amendment starting on line 8 of said paragraph is hereby deleted and replaced
with the following:
"Beginning on the second anniversary of the Commencement Date (as
defined in the Lease) the Fixed Rent shall be increased in accordance
with the Lease to Twenty Three Dollars and 50/100 ($23.50) per square
foot per annum adjusted to reflect the Expansion Space, or Two Hundred
Seventy-Five Thousand Nine Hundred Sixty and 50/100 Dollars
($275,960.50) per annum payable in equal installments of Twenty-Two
Thousand Nine Hundred Ninety-Six Dollars and 71/100 ($22,996.71) per
month payable in accordance with Section 2 of the Lease."
2. Lease Reaffirmed. Except as otherwise expressly set forth herein
-----------------
and amended hereby, all terms and conditions of the
1
<PAGE>
Lease shall remain in full force and effect, shall be binding upon the parties
and shall govern the relationship of the parties with respect to the Demised
Premises. Wherever the terms of the Lease and this Second Amendment to Lease
conflict, the terms of this Second Amendment to Lease shall govern and control.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date and year first above written.
WITNESS: LANDLORD:
QUINLAN PROPERTIES, L.P.
BY: SAMOS CORPORATION, General Partner
/s/ ROBERT QUINLAN
- - --------------------------------- --------------------------------------
By: Robert Quinlan
Its: President
TENANT:
BFR CO., INC.
/s/ CHARLES F. FOWLER
- - --------------------------------- --------------------------------------
By: C. F. Fowler
Its: Executive Vice President, CFO
2
<PAGE>
EXHIBIT 10.12
-------------
[LOGO OF CB COMMERCIAL APPEARS HERE]
1. PARTIES.
This Sublease, dated February 15, 1996 is made between San Francisco
----------- -- -------------
Satellite Center, A California Corporation ("Sublessor"), and CoTelligent
------------------------------------------ -----------
Group, Inc., A Delaware Corporation ("Sublessee").
-----------------------------------
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated May 28, 1991, wherein
------ --
101 California Venture, Hines Interests Limited Partnership ("Lessor")
-----------------------------------------------------------
leased to Sublessor the real property located in the City of San Francisco,
-------------
County of San Francisco, State of California, described as a portion of the
------------- ---------- ------------------
twentieth (20th) floor of 101 California Street and referred to as
------------------------------------------------------------------
"Exhibit B."
------------
___________________________________________________________________________
("Master Premises"). Said lease has been amended by the following
amendments None
----
___________________________________________________________________________
__________________________________________________________________________;
said lease and amendments are herein collectively referred to as the
"Master Lease" and are attached hereto as Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): referred to as "Exhibit B," approximately 10,281 square feet.
-------------------------------------------------------------
___________________________________________________________________________
__________________________________________________________________________.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has
not been amended or modified except as expressly set forth herein, that
Sublessor is not now, and as of the commencement of the Term hereof will
not be, in default or breach of any of the provisions of the Master Lease,
and that Sublessor has no Knowledge of any claim by Lessor that Sublessor
is in default or breach of any of the provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on March 1, 1996 ("Commencement
------- --
Date"), or when Lessor consents to this Sublease (if such consent is
required under the Master Lease), whichever shall last occur, and end on
May 31, 2001 ("Termination Date"), unless otherwise sooner terminated in
------ ----
accordance with the provisions of this Sublease. In the event the Term
commences on a date other than the Commencement Date, Sublessor and
Sublessee shall execute a memorandum setting forth the actual date of
commencement of the Term. Possession of the Premises ("Possession") shall
be delivered to Sublessee on the commencement of the Term. If for any
reason Sublessor does not deliver Possession to Sublessee on the
commencement of the Term, Sublessor shall not be subject to any liability
for such failure, the Termination Date shall not be extended by the delay,
and the validity of this Sublease shall not be impaired, but rent shall
abate until delivery of Possession. Notwithstanding the foregoing, if
Sublessor has not delivered Possession to Sublessee within thirty (30) days
after the Commencement Date, then at any time thereafter and before
delivery of Possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set forth
an effective date for such cancellation which shall be at least ten (10)
days after delivery of said notice to Sublessor. If Sublessor delivers
Possession to Sublessee on or before such effective date, this Sublease
shall remain in full force and effect. If Sublessor fails to deliver
Possession to Sublessee on or before such effective date, this Sublease
shall be cancelled, in which case all consideration previously paid by
Sublessee to Sublessor on account of this Sublease shall be returned to
Sublessee, this Sublease shall thereafter be of no further force or effect,
and Sublessor shall have no further liability to Sublessee on account of
such delay or cancellation. If Sublessor permits Sublessee to take
Possession prior to the commencement of the Term, such early Possession
shall not advance the Termination Date and shall be subject to the
provisions of this Sublease, including without limitation the payment of
rent.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum rent,
without deduction, setoff, notice, or demand, at 707 Sky Valley Drive,
---------------------
Vallejo, California 94589 or at such other place as Sublessor shall
-------------------------
designate from time to time by notice to Sublessee, the sum of
fifteen-thousand-eight-hundred-forty-nine and 87/100s
----------------------------------------------------------------------
Dollars($15,849.87) per month, in advance on the first day of each
---------
month of the Term. Sublessee shall pay to Sublessor upon execution of
this Sublease the sum of twenty-seven-thousand-one-hundred-ninety-nine
---------------------------------------------
and 75/100s Dollars($27,199.75) as rent for the third*(3rd) month and
----------- ---------- -------------------------
security deposit. If the Term begins or ends on a day other than the
-----------------
first or last day of a month, the rent for the partial months shall be
prorated on a per diem basis. Additional provisions: (* The first two
----------------
(2) months of this sublease term shall be rent free.)
-----------------------------------------------------
______________________________________________________________________
6.2 Operating Costs. If the Master Lease requires Sublessor to pay to
Lessor all or a portion of the expenses of operating the building
and/or project of which the Premises are a part ("Operating Costs"),
including but not limited to taxes, utilities, or insurance, then
Sublessee shall pay to Sublessor as additional rent based upon a 1996
-----------------
base year of the amounts payable by Sublessor for Operating Costs
---------
incurred during the Term. Such
<PAGE>
additional rent shall be payable as and when Operating Costs are
payable by Sublessor to Lessor. If the Master Lease provides for the
payment by Sublessor of Operating Costs on the basis of an estimate
thereof, then as and when adjustments between estimated and actual
Operating Costs are made under the Master Lease, the obligations of
Sublessor and Sublessee hereunder shall be adjusted in a like manner;
and if any such adjustment shall occur after the expiration or earlier
termination of the Term, then the obligations of Sublessor and
Sublessee under this Subsection 6.2 shall survive such expiration or
termination. Sublessor shall, upon request by Sublessee, furnish
Sublessee with copies of all statements submitted by Lessor of actual
or estimated Operating Costs during the Term.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease the
sum of eleven-thousand-three-hundred-forty-nine and 87/100s Dollars
-----------------------------------------------------
($11,349.87 ) as security for Sublessee's faithful performance of
-----------
Sublessee's obligations hereunder ("Security Deposit"). If Sublessee fails
to pay rent or other charges when due under this Sublease, or fails to
perform any of its other obligations hereunder, Sublessor may use or apply
all or any portion of the Security Deposit for the payment of any rent or
other amount then due hereunder and unpaid, for the payment of any other
sum for which Sublessor may become obligated by reason of Sublessee's
default or breach, or for any loss or damage sustained by Sublessor as a
result of Sublessee's default or breach. If Sublessor so uses any portion
of the Security Deposit, Sublessee shall, within ten (10) days after
written demand by Sublessor, restore the Security Deposit to the full
amount originally deposited, and Sublessee's failure to do so shall
constitute a default under this Sublease. Sublessor shall not be required
to keep the Security Deposit separate from its general accounts, and shall
have no obligation or liability for payment of interest on the Security
Deposit. In the event Sublessor assigns its interest in this Sublease,
Sublessor shall deliver to its assignee so much of the Security Deposit as
is then held by Sublessor. Within ten (10) days after the Term has
expired, or Sublessee has vacated the Premises, or any final adjustment
pursuant to Subsection 6.2 hereof has been made, whichever shall last
occur, and provided Sublessee is not then in default of any of its
obligations hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Sublessor, shall be returned to Sublessee or to
the last assignee, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office use, in
----------------------
accordance with the use provision of the Master Lease
----------------------------------------------------------, and for no
other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease of further sublet all of any part
of the Premises without the prior written consent of Sublessor (and the
consent of Lessor, if such is required under the terms of the Master
Lease).
10 OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated
into and made a part of this Sublease as if Sublessor were the lessor
thereunder, Sublessee the lessee thereunder, and the Premises the Master
Premises, except for the following:
None.
--------------------------------------------------------------------------
__________________________________________________________________________
__________________________________________________________________________
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are
applicable to the Premises, except that the obligation to pay rent to
Lessor under the Master Lease shall be considered performed by Sublessee to
the extent and in the amount rent is paid to Sublessor in accordance with
Section 6 of this Sublease. Sublessee shall not commit or suffer any act or
omission that will violate any of the provisions of the Master Lease.
Sublessor shall exercise due dilligence in attempting to cause Lessor to
perform its obligations under the Master Lease for the benefit of
Sublessee. If Master Lease terminates, this Sublease shall terminate and
the parties shall be relieved of any further liability or obligation under
this Sublease, provided however, that if the Master Lease terminates as a
result of default or breach by Sublessor or Sublessee under this Sublease
and/or the Master Lease, then the defaulting party shall be liable to the
nondefaulting party for the damage suffered as a result of such
termination. Notwithstanding the foregoing, if the Master Lease gives
Sublessor any right to terminate the Master Lease in the event of the
partial or total damage, destruction, or condemnation of the Master
Premises or the building or project of which the Master Premises are a
part, the exercise of such right by Sublessor shall not constitute a
default of breach of hereunder.
11. ATTORNEY'S FEES.
If Sublessor, Sublessee or Broker shall commence an action against the
other arising out of or in connection with this Sublese, the prevailing
party shall be entitled to recover its costs of suit and reasonable
attorney's fees.
12. AGENCY DISCLOSURE:
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except: CB
COMMERCIAL REAL ESTATE GROUP, INC., who represents Sublessee
---------
_______________________________________________________________________,
and CB Commercial Real Estate Group, Inc.
---------------------------------------------------------------, who
represents Sublessor
-------------------------------------------------------------
_______________________________________________________________________.
In the event that CB COMMERCIAL REAL ESTATE GROUP, INC. represents both
Sublessor and Sublessee, Sublessor and Sublessee hereby confirm that they
were timely advised of the dual representation and that they consent to the
same, and that they do not expect said broker to disclose to either of them
the confidential information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
consent is require under the terms of the Master Lease), Sublessor shall
pay Broker a real estate brokerage commission in accordance with
Sublessor's contract with Broker for the subleasing of the Premises, if
any, and otherwise in the amount of forty-six-thousand-nine-hundred-five
-------------------------------------
and 00/100s Dollars ($ 46,905.00 ), for services rendered in effecting
----------- ------------
this Sublease. Broker is hereby made a third party beneficiary of this
Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be
given by either party on the other hereunder shall be in writing. All
notices and demands by the Sublessor to Sublessee shall be sent by United
States Mail, postage prepaid, addressed to the Sublessee at the Premises,
and to the address hereinbelow, or to such other place as Sublesee may from
2
<PAGE>
time to time designate in a notice to the Sublessor. All notices and
demands by the Sublessee to Sublessor shall be sent by United States Mail,
postage prepaid, addressed to the Sublessor at the address set forth
herein, and to such other person or place as the Sublessor may from time to
designate in a notice to the Sublessee.
To Sublessor: 707 Sky Valley Drive, Vallejo, California 94589
--------------------------------------------------------------
To Sublessee: 101 California Street, Suite 2050, San Francisco, CA 94111
--------------------------------------------------------------
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR
WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER
THE TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment in Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and
The Americans With Disabilities Act.
San Francisco Satellite Center, Inc.
Sublessor: A California Corporation
-------------------------------------
By: [SIGNATURE ILLEGIBLE]
--------------------------------------------
Title: [ILLEGIBLE]
-----------------------------------------
By:____________________________________________
Title:_________________________________________
Date: FEBRUARY 22, 1996
------------------------------------------
CoTelligent Group, Inc.
Sublessee: A Delaware Corporation
-------------------------------------
By: /s/ J. R. Lavelle
--------------------------------------------
Title: President
-----------------------------------------
By: /s/ Duane W. Bell
--------------------------------------------
Title: Senior Vice President
-----------------------------------------
Date: FEBRUARY 21, 1996
------------------------------------------
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning further assignment or subletting. Lessor certifies that, as of the
date of Lessor's execution hereof, Sublessor is not in default or breach of any
of the provisions of the Master Lease, and that the Master Lease has not been
amended or modified except as expressly set forth in the foregoing Sublease.
Lessor:__________________________________________
By:______________________________________________
Title:___________________________________________
By:______________________________________________
Title:___________________________________________
Date:____________________________________________
- - --------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by
your attorney. No representation or recommendation is made by Broker as to
the legal sufficiency or tax consequences of this document or the
transaction to which it relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other
person, with experience in evaluating the condition of the property,
including the possible presence of asbestos, hazardous materials and
underground storage tanks.
- - --------------------------------------------------------------------------------
<PAGE>
EXHIBIT A
Date: May 28, 1991
[LOGO APPEARS HERE]
Tenant: San Francisco Satellite Center, Inc., a california
corporation, and Telecommunications Properties, a
California general partnership, as co-tenants
Basic Lease Address: 1333 Willow Pass Road, Suite 201
Information Concord, California 94520
Landlord: 101 California Venture
Address: Hines Interests Limited Partnership
101 California Street, Suite 4500
San Francisco, California 94111
Leased Premises: That portion of the twentieth (20th) floor of the 101
California Building shown on the floor plan attached as
Exhinit A.
Net Rentable Area: 10,471 square feet
Scheduled Term October 1, 1992
Commencement
Date:
Term Expiration May 31, 2001
Date:
Base Rental: See Section 3.03 and Addendum Item #1.
(a) First Adjustment Date Not Applicable
(b) Subsequent Adjustment Dates: Not Applicable
Tenant's Plan Not Applicable
Delivery Date:
Permitted Use: Executive and Administrative Office Uses
Security Deposit: None
<PAGE>
<TABLE>
<S> <C> <C> <C>
Table of Contents 1.01 Certain Terms.......................................................................... 1
1.03 Building............................................................................... 1
1.05 Common Areas........................................................................... 1
1.06 Fair Market Rental..................................................................... 1
1.07 Leased Premises........................................................................ 1
1.08 Net Rentable Area...................................................................... 1
1.09 Permitted Use.......................................................................... 1
1.10 Project................................................................................ 1
1.13 Tenant Extra Improvements.............................................................. 2
1.14 Tenant Improvements.................................................................... 2
1.16 Tenant's Proportionate Share........................................................... 2
1.17 Term................................................................................... 2
1.18 Term Commencement Date................................................................. 2
1.19 Other Terms............................................................................ 2
2.01 Landlord Leases........................................................................ 3
3.01 Term................................................................................... 3
3.02 Use.................................................................................... 3
3.03 Base Rental............................................................................ 3
3.04 Net Lease.............................................................................. 4
3.05 Basic Operating Cost................................................................... 4
3.06 Estimated Basic Operating Cost......................................................... 5
3.07 Adjustment For Variation Between Estimated And Actual.................................. 5
3.08 Computation Of Basic Operating Cost Adjustment......................................... 5
4.01 Basic Services......................................................................... 6
4.02 Window Coverings....................................................................... 7
4.03 Graphics............................................................................... 7
4.04 Tenant Extra Improvements.............................................................. 7
4.05 Repair Obligation...................................................................... 7
4.06 Peaceful Enjoyment..................................................................... 7
5.01 Payments By Tenant..................................................................... 7
5.04 Taxes On Personal Property And Tenant Extra Improvements............................... 8
5.05 Repairs By Tenants..................................................................... 8
5.06 Waste.................................................................................. 8
5.07 Assignment Or Sublease................................................................. 8
5.08 Alterations, Additions, Improvements................................................... 9
5.09 Compliance With Laws And Insurance Standards........................................... 9
5.10 Entry For Repairs, Inspection, Posting Notices, Etc. .................................. 9
5.11 No Nuisance............................................................................ 9
5.12 Subordination.......................................................................... 9
5.13 Estoppel Certificate................................................................... 10
5.15 Tenant's Remedies...................................................................... 10
5.16 Rules And Regulations.................................................................. 10
6.01 Casualty Insurance..................................................................... 11
</TABLE>
<PAGE>
1.13. "Tenant Extra Improvements"
(SEE ADDENDUM 1.14. "Tenant Improvements"
ITEM #3.)
1.16. "Tenants Proportionate Share" shall mean the
percentage which the Net Rentable Area of the Leased Premises
bears to ninety-five percent (95%) of the total Net Rentable
Area of the Project or to the total Net Rentable Area leased in
the Project (if such total is greater than ninety-five percent
(95%) of the total Net Rentable Area).
1.17. "Term" shall mean a period commencing with the Term
Commencement Date and ending on the Term Expiration Date
specified on the Basic Lease Information sheet.
* SPECIFIED IN 1.18. "Term Commencement Date" shall mean the date*
THE BASIC LEASE
INFORMATION. 1.19. Other terms used in the Lease shall have the meanings
herein given which shall include the following:
The term:
(a) "Additional Rental" is first used and defined in
Section 3.03;
(b) "Basic Operating Cost" is first used in Section
3.04 and defined in Section 3.05;
(c) "Basic Operating Cost Adjustment" is first used in
Section 3.04 and defined in Section 3.07;
(d) "Estimated Basic Operating Cost" is first used in
Section 3.03 and defined in Section 3.06;
(e) "First Mortgage Lender" is first used and defined
in Section 5.12;
(f) "Gross Rental" is first used and defined in
Section 3.03;
(g) "Rental" is first used and defined in Section
3.03.
In addition, the terms used in the Basic Lease Information
sheet attached to this Lease are incorporated herein by this
reference thereto.
(SEE ADDENDUM 2
ITEM #4.)
<PAGE>
<TABLE>
<S> <C> <C>
6.02 Liability Insurance............................................. 11
6.03 Arbitration of Fair Market Rental............................... 11
6.04 Indemnity....................................................... 12
6.05 Waiver Of Subrogation Rights.................................... 13
6.06 Condemnation And Loss Or Damage................................. 13
6.07 Damage Due to Fire,Etc. ........................................ 13
6.08 Default By Tenant............................................... 13
6.09 No Waiver....................................................... 15
6.10 Holding Over.................................................... 16
6.11 Attorney's Fees................................................. 16
6.12 Amendments...................................................... 16
6.13 Transfers By Landlord........................................... 16
6.15 Severability.................................................... 16
6.16 Notices......................................................... 16
6.17 No Joint Venture................................................ 17
6.18 Successors And Assigns.......................................... 17
6.19 Applicable Law.................................................. 17
6.20 Time Of The Essence............................................. 17
Signatures............................................................. 17
</TABLE>
<PAGE>
THIS LEASE is entered into as of the date hereof between
Landlord and Tenant.
Article 1.
Definitions 1.01. Certain terms used herein shall have the following
meanings:
1.03. "Building" shall mean the office tower and base building
to be known as 101 California which is located on the block
bounded by California, Davis, Pine and Front Streets in San
Francisco.
1.05. "Common Areas" shall mean the areas on individual floors
devoted to corridors, fire vestibules, elevator foyers,
lobbies, electric and telephone closets, restrooms, mechanical
rooms, janitor closets and other similar facilities for the
benefit of all tenants (or invitees) on the particular floor
and shall also mean those areas of the Building devoted to
mechanical and service rooms servicing more than one floor or
the Building as a whole.
1.06. "Fair Market Rental" shall mean the rate being charged in
the Project for comparable space, taking into consideration:
floor level, leasehold improvements or allowances provided or
to be provided, rental abatements,lease takeovers/assumptions,
moving expenses and other forms of rental concessions, proposed
term of lease, extent of service provided or to be provided,
the time the particular rate under consideration became or is
to become effective and any other relevant terms or conditions.
(See Addendum 1.07. "Leased Premises"
Item #2.)
1.08. "Net Rentable Area" shall mean the area or areas of space
within the Project determined as follows: (i) Net Rentable Area
on a single tenancy floor is determined by measuring from the
inside surface of the outer glass and extensions of the plane
thereof in non-glass areas to the inside surface of the
opposite outer glass and extensions of the plane thereof in
non-glass areas and shall include all areas within the outside
walls, excluding vertical penetrations such as building stairs,
elevator shafts, flues, vents, stacks, pipe shafts and vertical
ducts. Vertical penetrations which are for the specific use of
Tenant, such as special stairs or elevators, shall be included
as Net Rentable Area; and (ii) Net Rentable Area for a partial
floor shall include all space within the demising walls
(measured from the mid-point of demising walls and in the case
of exterior walls, measured as defined in (i) above), plus
Tenant's Proportionate Share of any Common Areas on such
floors. No deductions from Net Rentable Area shall be made for
columns or projections necessary to the Building. The Net
Rentable Area in the Leased Premises has been calculated on the
basis of the foregoing definition and is hereby stipulated for
all purposes hereof to be the amount stated on the Basic Lease
Information sheet .
1.09. "Permitted Use" shall mean the sole use for which Tenant
may utilize the Leased Premises as specified on the Basic Lease
Information sheet.
1.10. "Project" shall mean the Building and other improvements
located on the block bounded by California, Davis, Pine and
Front Streets, San Francisco, California.
1
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Article 2.
Lease 2.01. Landlord leases to Tenant and Tenant leases from
Landlord the Leased Premises upon all of the terms, covenants
and conditions set forth herein .
(See Addendum
Item #5.) Article 3.
Term, Use, Rental and Operating Costs.
Term 3.01. Term. The Term shall commence upon Term Commencement
Date and, except as otherwise provided herein or in any exhibit
or addendum hereto, shall continue in full force until the Term
(See Addendum Expiration Date.
Item #6.)
(See Addendum
Item #7.)
Use 3.02. Use. Tenant shall use the Leased Premises solely for
the Permitted Use and for no other use or purpose.
Base Rental 3.03. Base Rental. Tenant shall pay the Base Rental with
adjustments and in the manner hereinafter set forth.
(c) Tenant shall pay the Base Rental and Tenant's
Proportionate Share of the Estimated Basic Operating Costs
(hereinafter defined), in twelve (12) equal installments on the
first day of each calendar month during the Term and any
extensions or renewals thereof. The Base Rental, together with
Tenant's Proportionate Share of Estimated Basic Operating Costs
shall be collectively referred to as "Gross Rental". Tenant
shall pay Gross Rental to Landlord monthly in advance without
demand and without any reduction, abatement,counterclaim or set
off at the address specified on the Basic Lease Information
sheet or at such other address as may be desig-
3
<PAGE>
nated by Landlord in the manner provided for giving notice
under Section 6.16 hereof. All other obligations required to be
paid by Tenant to Landlord hereunder shall constitute rent,
shall be paid in the manner provided for herein, and shall be
collectively referred to as "Additional Rental". Gross Rental
and Additional Rental are collectively referred to herein as
"Rental". If the Term commences on other than the first day of
a month, then Gross Rental provided for such partial month
shall be prorated and the prorated installment shall be paid on
the first day of the calendar month next succeeding the Term
Commencement Date. If the Term terminates on other than the
last day of a calendar month, then Gross Rental provided for
such partial month shall be prorated and the prorated
installment shall be paid on the first day of the calendar
month next preceding the date of termination. All past-due
installments of Rental shall bear interest at the maximum rate
permitted by applicable law from the date due until paid.
Net Lease 3.04. Net Lease. This shall be a Net Lease and Base Rental
shall be paid to Landlord absolutely net of all costs and
expenses. The provisions for payment of Basic Operating Cost by
means of periodic payment of Tenant's Proportionate Share of
Estimated Basic Operating Cost and the Basic Operating Cost
Adjustment are intended to pass on to Tenant and reimburse
Landlord for all costs and expenses of the nature described in
Section 3.05 incurred in connection with ownership and
operation of the Project and such additional facilities now and
in subsequent years as may be determined by Landlord to be
necessary to the Project.
Basic 3.05. "Basic Operating Cost" shall mean all costs and
Operating Cost expenses of the nature hereinafter described, incurred in
connection with ownership and operation of the Project and such
additional facilities now and in subsequent years as may be
determined by Landlord to be necessary to the Project. All
costs and expenses shall be determined in accordance with
generally accepted accounting principles which shall be
consistently applied (with accruals appropriate to Landlord's
business). Basic Operating Cost as used herein shall mean all
expenses and costs (but not specific costs which are separately
billed to and paid by specific tenants) of every kind and
nature which Landlord shall pay or become obligated to pay
because of or in connection with the ownership and operation of
the Project and supporting facilities of the Project, including
but not limited to, the following:
(a) Wages, salaries and related expenses and benefits of
all on-site and off-site employees engaged in the operation,
maintenance and security of the Project, and the costs of an
office in the Project, incurred by Landlord.
(b) All supplies, materials and equipment rental used in
the operation and maintenance of the Project.
(c) Utilities, including water and power, heating,
lighting, air conditioning and ventilating the entire
Project.
(d) All maintenance,janitorial and service agreements for
the Project and the equipment therein, including, without
limitation, alarm service,window cleaning and elevator
maintenance.
(e) A management cost recovery equal to three percent (3%)
of all Rental derived from the Project.
(f) Project legal expense and accounting cost, including
the costs of audits by certified public accountants.
(g) All insurance premiums and costs, including but not
limited to, the premiums and cost of fire, casualty and
liability coverage and rental abatement and earthquake
insurance of Landlord elects to provide such coverage)
applicable to the Project and Landlord's personal property
used in connection therewith.
4
<PAGE>
(h) Repairs, replacements and general maintenance
(excluding repairs and general maintenance paid by proceeds
of insurance or by Tenant or other third parties, and
alterations attributable solely to tenants of the Project
other than Tenant).
(i) All maintenance costs relating to public and service
areas of the Project,including (but without limitation)
sidewalks, landscaping, service areas, mechanical rooms and
Building exteriors.
(j) All taxes, service payments in lieu of taxes, annual
or periodic license or use fees, excises, transit charges,
housing fund assessments, assessments, levies, fees or
charges, general and special, ordinary and extraordinary,
unforeseen, as well as foreseen, of any kind which ????
assessed, levied, charged, confirmed, or imposed by any
public authority upon the Project, its operations or the
Rental (or any portion or component thereof), except (i)
inheritance or estate taxes imposed upon or assessed against
the Project, or any part thereof or interest therein, and
(ii) taxes computed upon the basis of the net income derived
from the Project by Landlord or the owner of any interest
therein.
(k) Amortization (together with reasonable financing
charges) of capital improvements made to the Project
subsequent to the Term Commencement Date which will improve
the operating efficiency of the Project or which may be
required by governmental authorities.
Notwithstanding any other provision herein to the contrary,in
the event the Building is not fully occupied during any year of
the Term, an adjustment shall be made in computing the Basic
Operating Cost for such year so that the Basic Operating Cost
shall be computed for such year as though the Building had been
fully occupied during such year.
Basic Operating 3.06. "Estimated Basic Operating Cost" for any particular
Cost Adjustment year shall mean the Basic Operating Cost for such calendar year
as estimated by Landlord prior to commencement of such calendar
year.
3.07. Adjustment For Variation Between Estimated And Actual.
In the event that the Basic Operating Cost for any calendar
year during the Term differs from the Estimated Basic Operating
Cost for such calendar year, the Estimated Basic Operating Cost
shall be subtracted from the Basic Operating Cost and the
difference is referred to herein as the "Basic Operating Cost
Adjustment". If the Basic Operating Cost Adjustment is a
positive number (actual cost exceeds estimated cost) Tenant
shall pay to Landlord, pursuant to Landlord's billing therefor
(submitted pursuant to Section 3.08), as Rental for such year.
Tenant's Proportionate Share of the Basic Operating Cost
Adjustment within thirty (30) days after presentation of
Landlord's statement. If the Basic Operating Cost Adjustment is
a negative number (estimated cost exceeds actual cost), then
Landlord shall either (i) pay Tenant's Proportionate Share of
the Basic Operating Cost Adjustment to Tenant in cash within
ten (10) days after the Basic Operating Cost Adjustment is
finally determined, or (iii) allow Tenant's Proportionate Share
of the Basic Operating Cost Adjustment as a credit against the
next installments of Tenant's Proportionate Share of the Basic
Operating Cost Adjustment as a credit against the next
installments of Tenant's Proportionate Share of Estimated Basic
Operating Cost accruing hereunder. Should the Term commence or
terminate at any time other than the first day of a calendar
year, Tenant's Proportionate Share of the Basic Operating Cost
Adjustment shall be prorated for the exact number of calendar
days during such calendar year for which Tenant is obligated to
pay Gross Rental.
3.08. Computation Of Basic Operating Cost Adjustment.
Landlord shall, within a reasonable period of time after the
end of any calendar year for which Estimated Basic Operating
Cost differs from Basic Operating Cost, give written notice
thereof to Tenant, which notice shall also contain or be
accompanied by a statement of the Basic Operating Cost during
such calendar year (prepared by a certified public accountant),
and also accompanied by a computation of Basic Operating Cost
Adjustment. Landlord's failure to give such notice and
statement within a reasonable period of time after the closing
of any calendar year for which a Basic Operating Cost
Adjustment is due shall not release either party from the
obligation to make the adjustment provided for in Section 3.07.
5
<PAGE>
Article 4.
Landlord Covenants.
Basic Services 4.01. Basic Services. Landlord shall:
(a) Make customary arrangements with public utilities
and/or public agencies to furnish any electricity and water
utilized in operating the facilities serving the Leased
Premises.
(b) Furnish Tenant during Tenant's occupancy of the
Leased Premises:
(i) Hot and cold water at those points of supply
provided for general use of other tenants in the Project:
central heat and air conditioning in season, at such
times as Landlord normally furnishes these services to
other tenants in the Project and at such temperatures and
in such amounts as are considered by Landlord to be
standard or as may be limited or controlled by applicable
laws, ordinances, rules and regulations;
(ii) Routine maintenance, painting and electric
lighting service for all public areas and special service
areas of the Project in the manner and to the extent
deemed by Landlord to be standard.
(iii) Janitorial service on a five (5) week basis,
excluding holidays; provided, however, that if Tenant
Improvements are not consistent in quality and quantity
with the improvements regarded as standard for the
Building, Tenant shall pay any cleaning and janitorial
cost attributable thereto:
(iv) Electrical facilities to provide sufficient power
for typewriters and other office machines of similar low
electrical consumption, but not including electricity
required for electronic data processing equipment,
special lighting in excess of the improvements regarded
as standard for the Building and any other item of
electrical equipment which (singly) consumes more than 5
kilowatts per hour at rated capacity or requires a
voltage other than one hundred twenty (120) volts single
phase; and provided, however, that if the installation of
such electrical equipment requires additional air
conditioning capacity above that provided by the
improvements regarded as standard for the Building, then
the additional air conditioning installation and
operating costs shall be paid by Tenant;
(v) Initial lamps, bulbs, starters and ballasts used in
the Leased Premises; provided, however, that Tenant shall
reimburse Landlord for the cost and expense of
maintaining and replacing such lamps, bulbs starters and
ballasts;
(vi) Security for the Project; provided, however, that
Landlord shall not be liable to Tenant for losses due to
theft or burglary, or for damages done by unauthorized
persons in or on the Project; and
(vii) Public elevator service serving the floors on
which the Leased Premises are situated during Building
hours of operation, with a freight elevator serving the
floors at all times.
(c) Any heating, ventilation, air conditioning,
electrical or elevator service provided by Landlord to
Tenant (i) during hours other than Building hours of
operation, (ii) on Saturday afternoons, (iii) on Sundays or
(iv) on holidays shall be furnished upon the prior written
request of Tenant and at Tenant's sole cost and expense.
(d) In the event that Tenant desires any service in
amounts exceeding the basic services described in Section
4.01(b) as determined by Landlord and in the event that
Landlord elects to provide such additional services, Tenant
shall pay Landlord the cost of providing such additional
services.
(e) Landlord shall not be liable for damages to either
person or property nor shall Landlord be deemed to have
evicted Tenant nor shall there be any abatement of Rental
nor shall Tenant be relieved from performance of any
covenant on its part to be performed hereunder by reason of
(i) failure by Landlord to furnish defined services, (ii)
breakdown of equipment
6
<PAGE>
or machinery utilized in supplying services, or (iii)
cessation of services due to causes or circumstances beyond
the control of Landlord. Landlord shall use reasonable
diligence to make such repairs as may be required to
machinery or equipment within the Project to provide
restoration of services and, where the cessation or
interruption of service has occurred due to circumstances or
conditions beyond the Project boundaries, to cause the same
to be restored, by diligent application or request to the
provider thereof. In no event shall any mortgagee or the
beneficiary under any deed of trust referred to in Section
5.12 be or become liable for defaults of Landlord under this
Section 4.01(e).
Window 4.02. Window Coverings. All window coverings shall be as
Coverings provided by Landlord to the prior tenant and Tenant shall not
place or maintain any window coverings, blinds or drapes on any
window (other than those supplied by Landlord) without
Landlord's prior written approval. Tenant acknowledges that
breach of this covenant will directly and adversely affect the
exterior appearance of the Building.
Graphics 4.03. Graphics. Landlord shall provide appropriate
identification of Tenant's name and suite numerals at the main
entrance door to the Leased Premises. All graphics of Tenant
visible in or from public corridors or the exterior of the
Leased Premises shall be subject to Landlord's prior written
approval.
Tenant 4.04. Tenant Extra Improvements. Nothing herein contained
Extra shall be deemed to impose upon Landlord the obligation to
Improvements maintain insurance hereunder with respect to Tenant Extra
Improvements. Landlord shall not seek the benefits of
depreciation deductions or income tax credit allowances for
federal or state income tax reporting purposes with respect to
any Tenant Extra Improvements for which Tenant has fully
reimbursed Landlord under this Section 4.04.
4.05. Repair Obligation. Landlord's obligation with respect
Repair to repair shall be limited to (i) the structural portions of
Obligations the Building, (ii) utility installations to the outlets, and
(iii) Common Areas. After prior written notice to Tenant
(except in the event of an emergency), Landlord shall have the
right to perform hereunder and which Tenant fails or refuses to
perform in a timely and efficient manner. All costs incurred by
Landlord in performing any such repair for the account of
Tenant shall be repaid by Tenant to Landlord upon demand,
together with an amount equal to fifteen percent (15%) of such
costs to reimburse Landlord for its administration and
managerial effort.
Peaceful 4.06. Peaceful Enjoyment. Tenant shall peacefully have,
Enjoyment hold and enjoy the Leased Premises, subject to the other terms
hereof, provided that Tenant pays the Rental and performs all
of Tenant's covenants and agreements herein contained. This
covenant and any and all 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 Landlord's interest hereunder.
Article 5
Tenant Covenants.
Payments By 5.01. Payments By Tenant. Tenant shall pay Rental at the
Tenant times and in the manner herein provided. All obligations of
Tenant hereunder to make payments to Landlord shall constitute
Rental and failure to pay the same when due shall give rise to
the rights and remedies provided for in Section 6.08.
7
<PAGE>
Taxes On 5.04. Taxes on Personal Property and Tenant Extra
Personal Improvements. In addition to, and wholly apart from its
Property obligation to pay Tenant's Proportionate Share of Basic
Operating Costs. Tenant shall be responsible for and shall pay
prior to delinquency taxes or governmental service fees,
capital levies, or other charges imposed upon, levied with
respect to or assessed against its personal property and on the
value of its Tenants Extra Improvements. 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.
Repairs By 5.05. Repairs By Tenant. Tenant shall maintain and repair
Tenant the Leased Premises, keeping the same in good condition and,
upon expiration of the Term, surrendering the same to Landlord
in the same condition as when leased, reasonable wear and tear,
damage by fire, other insured casualty or the elements not
caused by Tenant, its agents, employees, invitees, and
licensees excepted. Tenant's obligation shall include, without
limitation, the obligation to maintain and repair all walls,
floors, ceilings and fixtures and to repair all damage caused
by Tenant, its agents, employees, invitees and licensees to the
utility outlets and other installations in the Leased Premises
or anywhere in the Project.
Waste 5.06. Waste. Tenant shall not commit or allow any waste or
damage to be committed on any portion of the Leased Premises.
Assignment Or 5.07. Assignment Or Sublease. In the event Tenant should
Subletting desire to assign this Lease or sublet the Leased Premises or
any part thereof. Tenant shall give Landlord written notice of
such desire at least ninety (90) days in advance of the date on
which Tenant desires to make such assignment or sublease.
Landlord shall then have a period of thirty (30) days following
receipt of such notice within which to notify Tenant in writing
that Landlord elects either (i) to terminate this Lease as to
the space so affected as of the date so specified by Tenant, in
which event Tenant will be relieved of all further obligations
hereunder as to such space, or (ii) to permit Tenant to assign
or sublet such space, subject, however, to prior written
approval of the proposed assignee or sublessee by Landlord,
such consent not to be unreasonably withheld so long as the use
of the Leased Premises by such proposed assignee or sublessee
would be a Permitted Use and the proposed assignee or sublessee
is of sound financial condition as determined by Landlord. If
Landlord should fail to notify Tenant in writing of such
election within said thirty (30) day period, Landlord shall be
deemed to have waived option (i) above, but written approval by
Landlord of the proposed assignee or sublessee shall be
required. Failure by Landlord to approve a proposed subtenant
or assignee shall not cause a termination of this Lease. Any
other rent or other consideration realized by Tenant under any
such sublease and assignment in excess of the Rental payable
hereunder, after amortization of the reasonable cost of Tenant
Extra Improvements for which Tenant has paid and reasonable
subletting and assignment costs, shall be divided and paid
ninety percent (90%) to Landlord
8
<PAGE>
and ten percent (10%) to Tenant. No assignment or subletting by
Tenant shall relieve Tenant of any obligation under this Lease.
Any assignment or subletting which conflicts with the
provisions hereof shall be void.
Alterations, 5.08. Alterations, Additions, Improvements, Tenant shall
Etc. not make or allow to be made any alterations or physical
additions in or to the Leased Premises without obtaining the
prior written consent of Landlord. Such alterations, physical
additions or improvements, when made to the Leased Premises by
Tenant, shall at once become the property of Landlord and shall
be surrendered to Landlord upon the termination of this Lease
by lapse of time or otherwise; provided, however, that this
clause shall not apply to movable equipment or furniture owned
by Tenant, including equipment specific to the
telecommunications business of Tenant. Tenant shall repair at
its sole cost and expense all damage caused to the Leased
Premises or the Project by removal of Tenant's movable
equipment or furniture and such other alterations and
additions as Tenant shall be allowed to remove from the Leased
Premises by Landlord.
Compliance 5.09. Compliance With Laws And Insurance Standards.
With Laws
And Insurance
Standards
(See Addendum
Item #8.)
Right Of Entry 5.10. Entry For Repairs, Inspection, Posting Notices, Etc.
Landlord, its agents and representatives, shall have the right
to enter the Leased Premises to inspect the same, to clean, to
perform such work as may be permitted or required hereunder, to
deal with emergencies, to post such notices as may be permitted
or required by law to prevent the perfection of liens against
Landlord's interest in the Project or to exhibit the Leased
Premises to prospective tenants, purchasers, encumbrancers or
others, or for any other purpose as Landlord may deem necessary
or desirable. Tenant shall not be entitled to any abatement or
reduction of Rental by reason thereof.
No Nuisance 5.11. No Nuisance.
(See Addendum
Item #9)
Subordination 5.12. Subordination.
(a) Tenant agrees that this Lease and the rights of
Tenant hereunder are subject and subordinate to the lien of
the holder of or beneficiary under a mortgage or deed of
trust under a first mortgage or first deed of trust which
now or in the future encumbers the Project (the "First
Mortgage Lender") and to any and all advances made
thereunder, and interest thereon, and all modifications,
renewals, supplements, consolidations and replacements
thereof. Tenant agrees, however, that the First Mortgage
Lender may at its option, unilaterally elect to subordinate,
in whole or in part, by an instrument in form and substance
satisfactory to such Lender, the lien of such first mortgage
or deed of trust to this Lease. In such case, Tenant agrees
to execute promptly and to deliver to Landlord or such First
Mortgage Lender any such subordination instrument or
instruments requested by such Lender and agrees that if it
fails or refuses to do so within 15 days after written
request therefor by Landlord or such Lender, such failure or
refusal shall constitute a default by Tenant under this
Lease, but such failure or refusal shall in no way affect
the validity or enforceability of any such subordination
made by such Lender.
(b) At any time during the term when the First Mortgage
Lender is not Teachers Insurance and Annuity Association of
America ("TIAA") (or a purchaser or successor of all or any
portion of such first mortgage or first deed of trust
delivered to TIAA as First Mortgage
9
<PAGE>
Lender) at the request of Tenant, any such First Mortgage
Lender shall agree that Tenant shall not be disturbed in its
possession hereunder, nor shall its rights be diminished or
its obligations enlarged, except as a result of a breach of
this Lease and application of the remedies provided for
herein.
Upon enforcement by such First Mortgage lender of any
rights or remedies held by it this Lease shall not terminate
and Tenant shall, upon the request of any person or party
succeeding to the interest of Landlord as a result of such
enforcement automatically become the tenant of such
successor in interest without change in the terms or change
in any other provisions of this Lease. Tenant shall execute
and deliver any instrument or instruments confirming the
attornment and continuation of this Lease provided for
herein which may be requested by such First Mortgage Lender
or successor in interest.
(c) Any successor in interest to any First Mortgage
Lender (including TIAA, its successors or assigns) shall not
be bound by (i) any payment of Gross Rental for more than
one (1) month in advance, or (ii) any amendment or
modification of this Lease made without the written consent
of such First Mortgage lender. Nothing herein contained
shall be deemed to impose upon the person or party
succeeding to the interest of Landlord as a result of the
enforcement of such first mortgage or first deed of trust by
any First Mortgage Lender (including TIAA, its successors or
assigns), any obligation for defaults on the part of
Landlord, and any person or party succeeding to possession
of the Project as a successor to Landlord shall be subject
to Landlord's obligations hereunder only during the period
of such persons' or party's ownership, such person or party
to have the benefit of Section 4.06, 5.15 and 6.12.
Estoppel 5.13. Estoppel Certificate. At Landlord's request, Tenant
Certificates shall execute estoppel certificates addressed to (i) any
mortgagee or prospective mortgagee of Landlord or, (ii) any
purchaser or prospective purchaser of all or any portion of, or
interest in, the Project, certifying as to such facts (if true)
and agreeing to such notice provisions and other matters as
such mortgagee(s) or purchaser(s) may reasonably require.
Tenant's 5.15. Tenant's Remedies. Tenant shall look solely to
Remedies Landlord's interest in the Project for the recovery of any
judgment from Landlord. Landlord, or if Landlord is a
partnership, its partners whether general or limited, or if
Landlord is a corporation, its directors, officers or
shareholders, shall never be personally liable for any such
judgment. Any lien obtained to enforce any such judgment and
any levy of execution thereon shall be subject and subordinate
to any lien, mortgage or deed of trust to which Section 5.12
applies or may apply.
Rules And 5.16. Rules And Regulations. At all times during the Term,
Regulations Tenant shall comply with rules and regulations for the Project
set forth in Exhibit C (and such amendments as Landlord may
adopt from time to time with copies thereof to be delivered to
Tenant) all of which are incorporated herein by reference.
(See Addendum
Items #10.,
#11. and #12.
10
<PAGE>
Article 6.
Casualty, Eminent Domain And Miscellaneous Matters.
Casualty 6.01. Casualty Insurance. Landlord shall, at all times
Insurance during the Term maintain a policy or policies of insurance with
the premiums thereon fully paid in advance, issued by and
binding upon a solvent insurance company with a Best and
Company Rating of "B" or better, insuring the Project against
loss or damage by fire, or other insurable hazards (which may
include earthquake loss if Landlord elects to maintain such
coverage) and contingencies for the full insurable value
thereof, or, in the alternative, insuring for eighty percent
(80%) of the replacement cost thereof (or such minimum amount
as shall be required to eliminate operation of coinsurance
provisions), provided that Landlord shall not be obligated to
insure any furniture, equipment, machinery, goods or supplies
not covered by this Lease which Tenant may bring or obtain upon
the Leased Premises, or any Tenant Extra Improvement or
alteration, addition or improvement which Tenant may make upon
the Leased Premises in accordance with the provision of this
Lease. If the annual premiums charged Landlord for such
casualty insurance exceed the standard premium rates because
the nature of Tenant's operations result in extra-hazardous
exposure, then Tenant shall upon receipt of appropriate premium
invoices reimburse Landlord for such increase in premium.
Liability 6.02. Liability Insurance. Landlord and Tenant shall each
Insurance maintain a policy or policies of comprehensive general
liability insurance with the premiums thereon fully paid on or
before the due date, issued by and binding upon a solvent
insurance company, such insurance to afford minimum protection
of not less than Five Million Dollars ($5,000,000) for personal
injury or death in any one occurrence and of not less than One
Million Dollars ($1,000,000) for property damage in any one
occurrence.
Arbitration 6.03. Arbitration Of Fair Market Rental. In the event that
Tenant disputes Tenant disputes the amount claimed by Landlord
as Fair Market Rental, Tenant may require that Landlord submit
the dispute to arbitration. The judgment or 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 and County of San Francisco in accordance with the
then prevailing rules of the American Arbitration Association
or its successor for arbitration of commercial disputes except
to the extent that the procedures mandated by said rules shall
be modified as follows:
(a) Tenant shall make demand for arbitration in writing
within thirty (30) business days after service of Landlord's
determination of Fair Market Rental given under Section
3.03(b), specifying therein the name and address of the
person to act as the arbitrator on its behalf. The
arbitrator shall be qualified as a real estate appraiser
familiar with the Far Market Rental of first-class
commercial office space in the downtown San Francisco area
who would qualify as an expert witness over objection to
give objection to give opinion testimony addressed to the
issue in a court of competent jurisdiction. Failure on the
part of Tenant to make a timely and proper demand for such
arbitration shall constitute a waiver of the right thereto.
Within ten (10) business days after the service of the
demand for arbitration, Landlord shall give notice to
Tenant, specifying the name and address of the person
designated by Landlord to act as arbitrator on its behalf
who shall be similarly qualified. If Landlord fails to
notify Tenant of the appointment of its arbitrator, within
or by the time above specified, then the arbitrator
appointed by Tenant shall be the arbitrator to determine the
issue.
(b) In the event that two (2) arbitrators are chosen
pursuant to Section 6.03(a) above, the arbitrators so chosen
shall meet within ten (10) business days after the second
arbitrator is appointed and, if within ten (10) business
days after such first meeting the two arbitrators shall be
unable to agree promptly upon a determination of Fair Market
Rental, they, themselves, shall appoint a third arbitrator,
who shall be a competent and impartial person with
qualifications similar to those required of the first two
arbitrators pursuant to Section
11
<PAGE>
6.03(a). In the event they are unable to agree upon such
appointment within five (5) business days after expiration
of said ten (10) 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 the then Chief Judge of the United States District Court
having jurisdiction over the City and County of San
Francisco, and the other party shall not raise any question
as to such Judge's full power and jurisdiction to entertain
the application for and make the appointment. The three (3)
arbitration shall decide the dispute if it has not
previously been resolved by following the procedure set
forth in Section 6.03 (c) below.
(c) Where an issue cannot be resolved by agreement
between the two arbitrators selected by Landlord and Tenant
or settlement between the parties during the course of
arbitration, the issue shall be resolved by the three
arbitrators in accordance with the following procedure. The
arbitrator selected by each of the parties shall state in
writing his determination of the Fair Market Rental
supported by the reasons therefor with counterpart copies of
each party. The arbitrators shall arrange for a simultaneous
exchange of such proposed resolutions. The role of the third
arbitrator shall be to select which of the two proposed
resolutions most closely approximates his determination of
Fair Market Rental. The third arbitrator shall have no right
to propose a middle ground or any modification of either of
the two proposed resolutions. The resolution he chooses as
most closely approximating his determination shall
constitute the decision of the arbitrators and be final and
binding upon the parties.
(d) In the event of a failure, refusal or inability of
any arbitrator to act, 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 fee and expenses of its respective
arbitrator and both shall share the fee and expenses of the
third arbitrator, if any, and the attorneys' fees and
expenses of counsel for the respective parties and of
witness shall be paid by the respective party engaging such
counsel or calling such witnesses.
(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
Rental, but any such consultation shall be made in the
presence of both parties with full right on their part to
cross-examine. The arbitrators shall have no power to modify
the provisions of this Lease.
Indemnity 6.04. Indemnity. Landlord shall not be liable to Tenant
for any loss or damage to person or property caused by theft,
fire, act of God, acts of the public enemy, riot, strike,
insurrection, war, court order, requisition or order of
governmental body or authority or for any damage or
inconvenlence which may arise through repair or alteration any
part of the Project or failure to make any such repair except
as expressly otherwise provided in Section 6.05 and Section
6.06. Tenant shall indemnify landlord and hold Landlord
harmless of and from any and all loss, cost, damage to property
occurring or resulting directly or indirectly from the use or
occupancy of the Leased Premises or activities of Tenant in or
about the Leased Premises or Project, such indemnity to
include, but without limitation, the obligation to provide all
costs of defense against any such claims provided, however,
that the foregoing indemnity shall not apply to any claims
arising by reason of the negligence or wrongful acts of
Landlord, Landlord's agents, contractors or employees
12
<PAGE>
to the extent such claims are covered by insurance. In
addition, Tenant shall hold and save Landlord harmless and
indemnify Landlord of and from any and all loss, cost, damages,
injury or expense arising out of or in any way related to
claims for 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
Leased Premises or the Project.
Subrogation 6.05. Waiver Of Subrogation Rights. Anything in this Lease
Waiver to the contrary, notwithstanding. Landlord and Tenant each
waives all rights of recovery, claim, action or cause of
action, against the other, its agents (including partners, both
general and limited), officers, directors, shareholders or
employees, for any loss or damage that may occur to the Leased
Premises, or any improvements thereto, or the Building or any
personal property of such party therein, by reason of fire, the
elements, or any other cause which could be insured against
under the terms of standard fire and extended coverage
insurance policies, regardless of cause or origin, including
negligence of the other party hereto, its agents, officers or
employees; and each party covenants that no insurer shall hold
any right of subrogation against such other party. Tenant shall
advise insurers of the foregoing and such waiver shall be a
part of each policy maintained by Tenant which applies to the
Leased Premises, any part of the Project or Tenant's use and
occupancy of any part thereof.
Condemnation 6.06. Condemnation And Loss Or Damage. If the Leased
And Casualty Premises or any portion of the Project shall be taken or
condemned for any public purpose to such an extent as to render
the Leased Premises untenantable as reasonably determined by
Landlord, this Lease shall, at the option of either party,
forthwith cease and terminate as of the date of taking. All
proceeds from any taking or condemnation of the Leased Premises
shall belong to and be paid to Landlord subject to the rights
of any mortgagee of Landlord's interest in the Project or the
beneficiary of any deed of trust which constitutes an
encumbrance thereon; provided, however, that Landlord shall
cooperate with Tenant if Tenant seeks to recover at its cost
and expense, proceeds, damages or awards paid to compensate for
damage to or taking of Tenant Extra Improvements for which
Tenant has paid hereunder, and any such amounts recovered shall
be paid to Tenant.
Damage Due To 6.07. Damage Due To Fire, Etc. In the event of a fire or
Fire, Etc. other casualty in the Leased Premises, Tenant shall immediately
give notice thereof to Landlord. If the Leased Premises,
through no fault of Tenant, its agents, employees, invitees or
visitors, shall be partially destroyed by fire or other
casualty so as to render the Leased Premises untenantable as
reasonably determined by Landlord, Gross Rental shall abate
proportionately until such time as the Leased Premises are made
tenantable as reasonably determined by Landlord. Except where
Landlord determines not to rebuild the Project and/or the
Leased Premises as hereinafter provided, Landlord shall use due
diligence to repair the same (except that Landlord shall have
no obligation to repair or replace Tenant Extra Improvements).
In the event of the total destruction of the Leases Premises,
or in the event of the partial destruction of the Leased
Premises or the Project and the same shall be so damaged that
Landlord shall decide not to rebuild, then Landlord shall have
no obligation to rebuild the Leased Premises and/or the Project
and all Gross Rental up to the time of such decision not to
rebuild shall be paid by Tenant and thenceforth this Lease
shall terminate. The proceeds from any insurance paid by reason
of damage to or destruction of the Building or any part
thereof, the Tenant Improvements (except Tenant Extra
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 Landlord's interest
in the Project or the beneficiary of any deed of trust which
constitutes an encumbrance thereon.
Default 6.08. Default By Tenant.
By Tenant (a) Events Of Default. The occurrence of any of the
following shall constitute an event of default on the part of
Tenant:
(1) Abandonment. Vacation or abandonment of the
Leased Premises for a continuous period in excess of five
(5) business days. Tenant waives any right to notice
Tenant may have
13
<PAGE>
under Section 1951.3 of the Civil Code of the State of
California, the terms of this subsection (a) being deemed
such notice to Tenant as required by said Section 1951.3;
(2) Nonpayment Of Rental. Failure to pay any
installment of Rental due and payable hereunder, upon the
date when said payment is due, such failure continuing for
a period of five (5) business days after written notice of
such failure; provided, however, that Landlord shall not
required to provide such notice more than twice during the
Term with respect to non-payment of Gross Rental, the third
such non-payment constituting default without requirement
of notice;
(3) Other Obligations. Failure to perform any
obligations, agreement or covenant under this Lease other
than those matters specified in Sections 6.08(a)(1) and
6.08(a)(2)--such failure continuing for fifteen (15)
business days after written notice of such failure (or 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);
(4) General Assignment. A general assignment by Tenant
for the benefit of creditors;
(5) Bankruptcy. The filing of any voluntary petition
in bankruptcy by Tenant, or the filing of an involuntary
petition by Tenant's creditors, which involuntary petition
remains undischarged for a period of thirty (30) days. In
the event that 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 any
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 Tenant's obligations under this Lease;
(6) Receivership. The employment of a receiver to take
possession of substantially all of Tenant's assets or the
Leased Premises, if such receivership remains undissolved
for a period of ten (10) business days after creation
thereof;
(7) Attachment. The attachment, execution or other
judicial seizure of all or substantially all of Tenant's
assets or the Leased Premises, if such attachment or other
seizure remains undismissed or undischarged for a period of
ten (10) business days after the levy thereof;
(8) 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 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.
(b) Remedies Upon Default.
(See Addendum
Item #13.)
14
<PAGE>
Waiver 6.09. No Waiver.
(See Addendum
Item #14.)
15
<PAGE>
Holding Over 6.10. Holding Over. In the event of holding over by Tenant
after expiration or termination of this Lease without the
written consent of Landlord. Tenant shall pay as hold-over
rental for each month of hold-over tenancy twice the Gross
Rental which Tenant was obligated to pay for the month
immediately preceding the end of the Term was obligated to pay
for the month or any part thereof of any such hold-over period.
No holding over by Tenant after the Term shall operate to
extend the Term. In the event of any authorized holding over.
Tenant shall indemnify Landlord against all claims for damages
by other tenant to whom Landlord may have leased all or any
part of the Leased Premises covered hereby effective upon the
termination of this Lease. Any holding over with the consent of
Landlord in writing shall thereafter constitute this Lease a
lease from month to month.
Attorneys' Fees 6.11. Attorney's Fees. In the event either party places
the enforcement of this Lease, or any part thereof, or the
collection of any Rental due, or to become due hereunder, or
recovery of the possession of the Leased Premises in the hands
of an attorney, or files suit upon the same, the prevailing
party shall recover its reasonable attorneys' fees and court
costs.
Amendments 6.12. Amendments. This Lease may not be altered, changed or
amended, except by an instrument in writing signed by both
parties hereto.
Transfers 6.13. Transfers By Landlord. Landlord shall have the right
By Landlord to transfer and assign, in whole or in part, all of its rights
and obligations hereunder and in the Project and in such event
and upon its transferee's agreement to be subject to Landlord's
obligations hereunder during the period of such transferee's
ownership (any such transferee to have the benefit of the
provisions of Section 4.06, 5.15 and of this Section 6.13) no
further liability or obligations shall thereafter accrue
against Landlord hereunder.
Severability 6.15. 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.
Notices 6.16. Notices. All notices, demands, consents and
approvals which may or are required to be given by either party
to the other hereunder shall be writing and shall be deemed to
have been fully given when deposited 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. Tenant
hereby appoints as its agent
16
<PAGE>
to receive the service of all dispossessory or distraint
proceedings and notices thereunder the person in charge of or
occupying the Leased Premises at the time, and, if no person
shall be in charge of or occupying the same, then such service
may be made by attaching the same on the main entrance of the
Leased Premises.
No Joint Venture 6.17. No Joint Venture. This Lease shall not be deemed or
construed to create or establish any relationship of
partnership or joint venture or similar relationship or
arrangement between Landlord and Tenant hereunder.
Successors 6.18. Successors And Assigns. 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, Tenant's assigns.
Applicable Law 6.19. Applicable Law. All rights and remedies of Landlord
under this Lease shall be construed and enforced according to
the laws of the State of California.
(See Addendum
Item #15.) Time 6.20. Time Of The Essence. Time is of the essence of each
and every covenant herein contained.
IN WITNESS WHEREOF, the parties hereto have executed this
(See Addendum Lease as of the day first above written.
Item #16.)
"Landlord"
101 CALIFORNIA VENTURE
By Its General Partner
HINES 101 CALIFORNIA, LTD.
a California limited partnership
By SIGNATURE NOT LEGIBLE
---------------------------------
"Tenant"
TELECOMMUNICATIONS PROPERTIES, a
California general partnership
By: WATSON COMMUNICATION SYSTEMS,
INC., a California corporation,
its a managing general partner
By: SIGNATURE NOT LEGIBLE
----------------------------
SAN FRANCISCO SATELLITE CENTER, INC.,
California corporation
By: SIGNATURE NOT LEGIBLE
----------------------------------
17
<PAGE>
EXHIBIT A
- - ---------
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT B
- - ---------
[FLOOR PLAN APPEARS HERE]
<PAGE>
<PAGE>
[LOGO] BUILDING RULES AND REGULATIONS
EXHIBIT C 1. The sidewalks, doorways, halls, stairways, vestibules and
other similar areas shall not be obstructed by any Tenant or used by
them for any purpose other than ingress to and egress from their
respective Leased Premises, and for going from one part of the
Building to another part.
2. Plumbing fixtures shall be used only for their designated
purpose, and no foreign substances of any kind shall be thrown therin.
Damage to any such fixture resulting from misuse by Tenant or any
employee or invitee of Tenant shall be repaired at the expense of
Tenant.
3. Signs, advertisements, graphics, or notices visible in or
from public corridors shall be subject to Landlord's written approval.
Nails, screws, and other attachments to the Building require prior
written consent from Landlord.
4. All contractors and technicians rendering any installation
service to Tenant shall be referred to Landlord for approval and
supervision prior to performing services. This applies to all work
performed in the Building, including, but not limited to, installation
of telephone, telegraph equipment, and electrical devices, as well as
all installations affecting floors, walls, woodwork, windows,
ceilings, and any other physical portion of the Building.
5. Movement in or out of the Building of furniture, office
equipment, or other bulky material which requires the use of
elevators, stairways, or Building entrance and lobby shall be
restricted to hours established by Landlord. All such movement shall
be under Landlord's supervision, and the use of an elevator for such
movements shall be restricted to the Building's freight elevators.
Prearrangements with Landlord should be made regarding the time,
method, and routing of movement, and Tenant shall assume all risks of
damage to articles moved and injury to persons or public resulting
from such moves. Landlord shall not be liable for any acts or damages
resulting from any such activity.
6. Any damage done to the Building by the movement of Tenant's
property, or done by Tenant's property while in the Building, shall be
repaired at Tenant's expense.
7. Corridor doors, when not in use, shall be kept closed.
8. Tenant shall cooperate with landlord in maintaining Leased
Premises. Tenant shall not employ any person for the purpose of such
cleaning other than the Building's cleaning and maintenance personnel.
9. To insure orderly operation of the Building, no deliveries
of water, soft drinks, newspapers, or other such items to any Leased
Premises shall be made except by persons appointed or approved by
Landlord.
10. Nothing shall be swept or thrown into the corridors, halls,
elevator shafts, or stairways. No birds, fish, or animals of any kind
shall be brought into or kept in, on or about the Leased Premises.
11. No machinery of any kind shall be operated by Tenant in the
Leased Premises without the prior written approval of the Landlord.
12. No cooking shall be done in the Leased Premises, except that
the use by Tenant of Underwriter's Laboratory approved equipment for
brewing coffee, tea, or other hot beverages shall be permitted,
provided such use is in accordance with all applicable codes, laws,
and ordinances.
13. Tenant shall not install any food, soft drink or other
vending machine within the Leased Premises.
14. Tenant shall not use or keep on its Leased Premises any
kerosene, gasoline, or inflammable or combustible fluid or material
other than quantities reasonably necessary for the operation
22
<PAGE>
and maintenance of office equipment. Tenant shall not use or keep any
noxious gas or substances in the Leased Premises, or permit the Leased
Premises to be used in a manner offensive or objectionable to Landlord
or other occupants of the Building by reason of noise, odors, or
vibrations, or interfere in any way with other Tenants or those having
business therein.
15. Tenants shall not tamper with or attempt to adjust
temperature control thermostats in the Leased Premises. Landlord shall
make adjustments in thermostats on call from Tenant.
16. Tenant shall comply with all requirements necessary for the
security of the Leased Premises, including the use of service passes
issued by Landlord for after hours movement of office
equipment/packages, and signing security register in Building lobby
after hours.
17. Landlord will furnish Tenant with a reasonable number of
initial keys for entrance doors into the Leased Premises, and may
charge Tenant for additional keys, thereafter. All such keys shall
remain the property of Landlord. No additional locks are allowed on
any door of the Leased Premises without Landlord's written permission
and Tenant shall not make any duplicate keys, except those provided by
Landlord. Upon termination of this Lease, Tenant shall surrender to
Landlord all keys to the Leased Premises, and give to Landlord the
combination of all locks for safes and vault doors, if any, in the
Leased Premises.
18. Landlord retains the right, without notice or liability to
any Tenant, to change the name and street address of the Building.
19. Canvassing, peddling, soliciting, and distribution of
handbills in the Building are prohibited, and each Tenant will
cooperate to prevent these activities.
20. The Building hours of operation are (excluding holidays):
8:00 A.M. to 6:00 P.M. Monday through Friday
9:00 A.M. to 1:00 P.M. Saturday
21. Landlord reserves the right to rescind any of these rules
and regulations and to make future rules and regulations required for
the safety, protection, and maintenance of the Building, the operation
and preservation of good order thereof, and the protection and comfort
of the tenants and their employees and visitors. Such rules and
regulations, when made and written notice given to tenant, shall be
binding as if originally included herein.*
* , provided that all such future rules and regulations shall apply uniformly
and in a non-discriminatory manner to all tenants of the Building.
23
<PAGE>
ADDENDUM TO LEASE
This Addendum forms an integral part of the Lease Agreement dated May 28,
1991, by and between 101 CALIFORNIA VENTURE, a general partnership, as Landlord,
and SAN FRANCISCO SATELLITE CENTER, INC., a California corporation, and
TELECOMMUNICATIONS PROPERTIES, a California general partnership, as Co-Tenants,
as fully as if this Addendum were physically incorporated in said Lease
Agreement (the "Lease").
ITEM #1. - BASIC LEASE INFORMATION - BASE RENT
- - ----------------------------------------------
The Base Rental per square foot of Net Rentable Area during the Term
shall be as follows:
<TABLE>
<CAPTION>
Time Period Base Rent
<S> <C>
October 1, 1992 to $15.00 per square foot of Net Rentable Area in
September 30, 1997 the Leased Premises as to 10,281 square
feet of such area;
October 1, 1992 to $7.50 per square foot of Net Rentable Area in
September 30, 1997 the Leased Premises as to 190 square
feet of such area;
October 1, 1997 to $16.00 per square foot of Net Rentable Area in
September 30, 1988 the Leased Premises as to 10,281 square
feet of such area;
October 1, 1997 to $8.00 per square foot of Net Rentable Area in
September 30, 1988 the Leased Premises as to 190 square
feet of such area;
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
October 1, 1998 to $17.00 per square foot of Net Rentable
September 30, 1999 Area in the Leased Premises as to
10,281 square feet of such area;
October 1, 1998 to $8.50 per square foot of Net Rentable
September 30, 1999 Area in the Leased Premises as to
190 square feet of such area;
October 1, 1999 to $18.00 per square foot of Net Rentable
May 31, 2001 Area in the Leased Premises as to
10,281 square feet of such area;
October 1, 1999 to $9.00 per square foot of Net Rentable
May 31, 2001 Area in the Leased Premises as to
190 square feet of such area.
</TABLE>
ITEM #2. - LEASED PREMISES.
- - ---------------------------
1.07. "Leased Premises" shall mean the floor area more particularly shown
on the Exhibit A floor plan attached hereto, unless the current tenant or
subtenant of the portion of such floor area (the "Southern Pacific Space")
described on the Exhibit B floor plan attached hereto does not surrender the
Southern Pacific Space to Landlord on or before the Term Commencement Date, in
which event: (i) the Southern Pacific Space shall be excluded from the "Leased
Premises" until such tenant or subtenant has surrendered the Southern Pacific
Space to Landlord and Landlord has delivered possession of the Southern Pacific
Space to Tenant; (ii) the Base Rental and Tenant's Proportionate Share of Basic
Operating Cost shall be proportionately reduced until such time as Landlord
delivers the Southern Pacific Space to Tenant; and, (iii) Landlord shall have no
liability to Tenant
- 2 -
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for the failure of Landlord to deliver the Southern Pacific Space to Tenant on
the Term Commencement Date, it being agreed that the reduction in Base Rental
and Tenant's Proportionate Share of Basic Operating Cost is sufficient and
agreed compensation to Tenant for such failure. Immediately upon such delivery,
the Southern Pacific Space shall become a part of the Leased Premises for the
purposes of this Lease, and the Base Rental and Tenant's Proportionate Share of
Basic Operating Cost shall be readjusted to take into account the increased Net
Rentable Area in the Leased Premises.
ITEM #3. - "TENANT EXTRA IMPROVEMENTS" AND "TENANT IMPROVEMENTS".
- - ----------------------------------------------------------------
1.13 "Tenant Extra Improvements" shall mean any interior improvements
constructed within the Leased Premises by Tenant after June 1, 1991.
1.14 "Tenant Improvements" shall mean the interior improvements existing
within the Leased Premises as of June 1, 1991. Tenant shall accept all interior
improvements existing within the Leased Premises on the Term Commencement Date
in their then "as is" condition, unless such improvements are then subject to
unrepaired damage of the kind referred to in Section 6.07, in which event the
duties of Landlord and Tenant with respect to the repair of such improvements
shall be governed by the Lease and sublease applicable to the Leased Premises
immediately before the Term Commencement Date.
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ITEM #4. - HAZARDOUS MATERIALS DEFINITIONS.
- - -------------------------------------------
1.20. "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 Project or to persons on or about the Project or (ii) cause the
Project 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" , "hazardous wastes", "hazardous
materials", "extremely hazardous waste", "restricted hazardous waste", or "toxic
substances" or word 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. (S)9601,
et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C.
(S)1801, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
(S)1251, et seq.; Sections 25115, 25117, 25122.7, 25140, 25249.8, 25281, 25316,
25501, and 25316 of the California Health and Safety Code; and Article 9 or
Article 11 of Title 22 of the Administrative Code, Division 4, Chapter 20; (d)
other chemical, material or substance, exposure to which is prohibited, limited
or regulated by any governmental authority or which may or could pose a hazard
to
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the health and safety of the occupants of the Project or the owners and/or
occupants of property adjacent to or surrounding the Project, or any other
Person coming upon the Project or adjacent property; and (e) other chemicals,
materials or substances which may or could pose a hazard to the environment.
1.21. "Hazardous Materials Claims" shall mean any enforcement, 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 Project relating to damage,
contribution, cost recovery compensation, loss or injury resulting from the
presence, release or discharge of any Hazardous Materials.
1.22. "Hazardous Materials Laws" shall mean any federal, state or local
laws, ordinances, regulations or policies 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
Project, including, without limitation, soil, groundwater and indoor and ambient
air conditions.
ITEM #5. - LANDLORD'S RESERVED RIGHTS.
- - --------------------------------------
2.02. Landlord's Reserved Rights. Landlord reserves from the leasehold
estate hereunder (i) all exterior walls and windows bounding the Leased
Premises, and all space located within the Leased Premises for vertical
penetrations, conduits, electric and
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all other utilities, air-conditioning, sinks or other Building facilities that
do not constitute Tenant Extra Improvements, the use thereof and access thereto
through the Leased Premises for operation, maintenance, repair or replacement
thereof, and (ii) the right from time to time, without unreasonable interference
with Tenant's use, to install, remove or relocate any of the foregoing for
service to any part of the Building to locations that will not materially
interfere with Tenant's use of the Leased Premises, to make alterations or
additions to and to build additional stories on the Building, to alter or
relocate any other Common Area facility or any other common facility, and to
make changes or alterations therein or enlargements thereof. Subject to the
rights of Tenant specified in this Lease, Landlord shall have the sole and
exclusive right to possession and control of the Common Areas and all other
public areas of the Project.
ITEM #6. - TERM.
- - ----------------
This Lease shall be conditioned upon the occupancy by San Francisco
Satellite Center, Inc., a California corporation, of the entire Leased Premises
(excluding only the Southern Pacific Space) on the day preceding the Term
Commencement Date. Such occupancy shall be pursuant to a sub-sublease of such
space from the tenant and subtenant thereof. The condition set forth in this
paragraph is intended to be for the benefit of Landlord and may be waived by
Landlord by the giving of written notice of such waiver to Tenant.
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ITEM #7. - RIGHT TO EXTEND AS TO AVAILABLE SPACE IN THE BUILDING.
- - -----------------------------------------------------------------
(a) In the event that Tenant desires to extend its tenancy in the
Building for an additional period of five (5) years, Tenant shall give Landlord
written notice of its desire so to extend at least twelve (12) months prior to
expiration of the then current Term. Tenant's notice shall state an amount of
Net Rentable Area which Tenant desires to lease for such period. Within thirty
(30) days of receipt of notice of Tenant's desire to extend, Landlord shall
notify Tenant in writing whether or not there will be space available within the
Building to accommodate the desire of Tenant to extend its tenancy, which space
shall contain not less than ninety percent (90%) nor more than one hundred ten
percent (110%) of the Net Rentable Area specified by Tenant in its notice to
Landlord; provided, however, that Landlord shall not be required to divide or
offer to divide for the use of Tenant any block of continuous space (for the
purposes of this subparagraph (a), shall mean the entire Net Rentable Area
contained within such block. The term "available", as used herein with respect
to any particular block of space within the Building, shall mean that: (i) a
third party tenant's lease has terminated, whether by expiration of the term of
such lease or any renewal option, right of first refusal, right of first
opportunity or agreement of expansion; (ii) such space has not immediately
thereafter been voluntarily relet by Landlord to such tenant or any subtenant
then in occupancy; (iii) no expansion right with respect to such space is
outstanding or has been exercised;
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cised and, (iv) the space is not required in the judgment of Landlord to
accommodate a tenant or prospective tenant which requires a greater amount of
space within the Building than the particular block of space, whether or not the
additional space required by such tenant or prospective tenant is adjacent to
the particular space or located elsewhere in the Building.
(b) In the event that Landlord notifies Tenant that there will be
space available to accommodate the desire of Tenant to extend its tenancy in the
Building, Landlord shall describe the space (the "Available Space") and shall
state the Base Rental to be applicable to the Available Space during the five
(5) year period immediately following the Term Expiration Date (which rate may
be constant throughout the period or increase in annual or longer increments).
Within thirty (30) days after receipt of such notice from Landlord, Tenant shall
have the right to (i) elect to lease the Available Space from Landlord for a
term of five (5) years, commencing as of the day immediately following the Term
Expiration Date on the same terms and conditions as set forth in this Lease,
save and except that the Base Rental shall be as stated by Landlord in its
notice to Tenant and that Tenant's Proportionate Share shall be adjusted to
reflect the difference, if any, between the Net Rentable Area of the Available
Space; (ii) elect to lease the Available Space from Landlord for a term of five
(5) years, commencing as of the day immediately following the Term Expiration
Date on the same terms and conditions as set forth in this Lease, save and
except that the Base Rental shall
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be the Fair Market Rental of the Available Space (with Fair Market Rental to be
determined by arbitration pursuant to Section 6.03 hereof) and that Tenant's
Proportionate Share shall be adjusted to reflect the difference, if any,
between the Net Rentable Area of the Leased Premises and the Net Rentable Area
of the Available Space; or, (iii) refuse to lease the Available Space. Failure
on the part of Tenant to elect in writing, within said thirty (30) day period,
either to lease the Available Space as provided in this subparagraph (b) or to
refuse to lease the Available Space, shall constitute an irrevocable election by
Tenant to refuse to lease the Available Space, and Tenant shall thereafter have
no further right to lease the Available Space or to give to Landlord any further
notice pursuant to subparagraph (a) above.
(c) In the event that Landlord notifies Tenant that no space will be
available as of the Term Expiration Date, then the Term of this Lease shall
terminate as of the Term Expiration Date and Tenant shall not have any right to
give a further notice to Landlord pursuant to subparagraph (a) above.
(d) In the event that Tenant has leased an Available Space for a term
of five (5) years commencing as of June 1, 2001 pursuant to subparagraphs (a)
and (b) above, Tenant shall thereafter have the right to give to Landlord one
additional notice pursuant to subparagraph (a) with respect to a second five (5)
year period commencing as of June 1, 2006.
(e) If Tenant leases the Available Space pursuant to subparagraphs
(a) and (b) above, Tenant shall take the Available
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Space in an "as is" condition, provided, however, that Landlord shall deliver
the Available Space in "broom clean" condition and that Tenant shall have the
right, at Tenant's expense, to install any required Tenant Improvements in
accordance with the provisions of Section 5.08 of the Lease and using the
customary procedure established by Landlord from time to time. All expenses
incurred by Tenant in moving to the Available Space shall be paid by Tenant.
(f) Tenant's rights with respect to the possible leasing of Available
Space shall be both: (i) upon condition that no monetary or other material event
of default exists hereunder (and no event or condition exists which could
constitute a monetary or other material event of default with the giving of
notice and/or expiration of a period of grace) at the time of the giving by
Tenant of the notice of its desire to extend its tenancy in the Building; and,
(ii) upon further condition that no monetary or other material event of default
exists hereunder (and no event or condition exists which could constitute a
monetary or other material event of default with the giving of notice and/or
expiration of a period of grace) at the commencement of the five (5) year period
for which Tenant has leased the Available Space.
ITEM #8. - COMPLIANCE WITH LAWS AND INSURANCE STANDARDS.
- - --------------------------------------------------------
5.09. Compliance With Laws And Insurance Standards.
(a) Tenant shall comply with all laws, ordinances, orders, rules and
regulations (state, federal, municipal or promulgated by other agencies or
bodies having or claiming
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jurisdiction) related to the use, condition or occupancy of the Leased Premises,
regardless of when they become effective, including, without limitation, all
Hazardous Materials Laws. Tenant shall promptly cure and satisfy all Hazardous
Materials Claims arising out of or by reason of the activities or businesses of
Tenant, its subtenants, or the agents, contractors, businesses or employees of
Tenant or any subtenant. Nothing done by Tenant in its use or occupancy of the
Leased Premises shall create, require or cause imposition of any requirement by
any public authority for structural or other upgrading of or improvement to the
Project.
(b) Tenant shall not occupy or use, or permit any portion of the
Leased Premises to be occupied or used, for any business or purpose that is
disreputable or productive of fire hazard, or permit anything to be done
that would increase the rate of fire or other insurance coverage on the
Project and/or its contents. If Tenant does or permits anything to be done
that shall increase the cost of any insurance policy required to be carried
hereunder, then Tenant shall reimburse Landlord, upon demand, for any such
additional premiums. Landlord shall deliver to Tenant a written statement
setting forth the amount of any such insurance cost increase and showing in
reasonable detail the manner in which it has been computed. Tenant shall
comply with all laws, ordinances, orders, rules and regulations (state,
federal, municipal or
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promulgated by other agencies or bodies having or claiming jurisdiction)
related to the use, condition or occupancy of the Leased Premises,
regardless of when they become effective, including, without limitation,
all applicable federal, state and local laws, regulations or ordinances
pertaining to air and water quality, Hazardous Materials, waste disposal,
air emissions and other environmental matters. Nothing done by Tenant in
its use or occupancy of the Leased Premises shall create, require or cause
imposition of any requirement by any public authority for structural or
other upgrading of or improvement to the Project.
ITEM #9. - NO NUISANCE.
- - -----------------------
5.11. No Nuisance. Tenant shall conduct its business and control its
agents, employees, invitees and visitors without creating any nuisance, or
interfering with, annoying, endangering or disturbing any other tenant or
Landlord in its operation of the Project. Tenant shall not place any loads upon
the floor, walls or ceiling of the Leased Premises that endanger the structure
nor place any harmful liquids or Hazardous Material in the drainage system of
the Building.
ITEM #10. - HAZARDOUS MATERIALS PROHIBITION.
- - --------------------------------------------
5.17. Prohibition And Indemnity With Respect To Hazardous Material. Tenant
shall not cause or permit any Hazardous Material to be brought upon, kept or
used in or about the Leased
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Premises or the Project by Tenant, its agents, employees, contractors or
invitees without the prior written consent of Landlord. For the purposes of this
Section 5.17, the "written consent of Landlord" shall mean a written consent
given by Landlord in response to a specific written request of Tenant which
describes the consent requested with specific reference to this Section 5.17 and
shall not mean any consent which could be inferred from the approval by Landlord
of any plans or specifications for Tenant Improvements or from any other consent
or approval given by Landlord in response to a request from Tenant which does
not specifically refer to this Section 5.17. If Tenant breaches the obligations
stated in the preceding sentence, or if contamination of the Leased Premises or
the Project by Hazardous Material occurs for which Tenant is legally liable to
Landlord for damage resulting therefrom, or if Tenant's activities or those of
its contractors, agents, employees, businesses (or those of its subtenants)
result in or cause a Hazardous Materials Claim, then Tenant shall indemnify,
defend, protect and hold Landlord harmless from any and all claims, judgments,
damages, penalties, fines, costs, liabilities or losses (including, without
limitation, diminution in value of the Leased Premises or the Project, damages
for the loss or restriction on use of rentable or usable space or of any amenity
of the Leased Premises or the Project, damages arising from any adverse impact
on marketing of space, and sums paid in settlement of claims, attorneys' fees,
consultants' fees and experts's fees) which arise during or after the Lease Term
as a result of such contamination.
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This indemnification of Landlord by Tenant includes, without limitation, costs
incurred in connection with any investigation of site conditions or any
clean-up, remedial, removal or restoration work required by any federal, state
or local governmental agency or political subdivision because of Hazardous
Material present in the soil or ground water on or under the Leased Premises or
the Project. The foregoing indemnity shall survive the expiration or earlier
termination of this Lease.
ITEM #11. - LIENS.
- - ------------------
5.18. Liens. Tenant shall keep the Leased Premises and the Project free
from any liens arising out of any (i) work performed or material furnished to or
for the Leased Premises, and (ii) obligations incurred by or for Tenant or any
person claiming through or under Tenant. Tenant shall, within ten (10) days
following 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. Landlord shall have the right at all times to post and keep
posted on the Leased Premises any notices permitted or required by law, or that
Landlord shall deem proper for the protection of Landlord, the Leased Premises,
the Project and any other party having an interest therein, from mechanics',
materialmen's and other liens. In addition to all other requirements contained
in this Lease, Tenant shall give to Landlord at least ten (10) business days
prior written notice before commencement of any construction on the Leased
Premises.
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ITEM #12. - SURRENDER OF THE LEASED PREMISES ON TERMINATION.
- - ------------------------------------------------------------
5.19. Surrender of the Leased Premises on Termination. On or before the
ninetieth (90th) day preceding the Term Expiration Date, Tenant shall notify
Landlord in writing of the precise date upon which Tenant plans to surrender the
Leased Premises to Landlord. On expiration of the Term, Tenant shall quit and
surrender the Leased Premises to Landlord, broom clean, in good order, condition
and repair as required by Section 5.05, with all of Tenant's movable equipment,
furniture, trade fixtures and other personal property removed therefrom. Unless
Tenant has obtained Landlord's agreement in writing that it can remove an
Alteration or item of Tenant Improvements, all Alterations and Tenant
Improvements shall be surrendered with the Leased Premises in good condition and
repair, excepting reasonable wear and tear and casualty damage not caused by
Tenant, its agents, employees, invitees or licensees. Any property of Tenant not
removed hereunder shall be deemed, at Landlord's option, to be abandoned by
Tenant and Landlord may store such property in Tenant's name at Tenant's
expense, and/or dispose of the same in any manner permitted by law. If Landlord
desires to have the Leased Premises, or any part or parts thereof, restored to a
condition that existed prior to installation of any Tenant Extra Improvements or
to their condition prior to making any Alteration thereto, Landlord shall so
notify Tenant in writing not later than sixty (60) days prior to the expiration
of the Term; and upon receipt of such notice, Tenant shall, at Tenant's sole
cost and expense, so restore the Leased Premises, or such part or parts thereof,
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before the end of the Term. Tenant shall repair at its sole cost and expense,
all damage caused to the Leased Premises or the Project by removal of Tenant's
movable equipment or furniture and such Tenant Improvements and Alterations as
Tenant shall be allowed or required to remove from the Leased Premises by
Landlord. If the Leased 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 harmless against all loss, liability, claim, cost or
expense (including attorneys' fees) resulting from or caused by Tenant's delay
or failure in so surrendering the Leased Premises, including, without
limitation, any claims made by any succeeding tenant due to such delay or
failure. Tenant acknowledges that Landlord will be attempting to lease the
Leased Premises with any such lease to be effective upon expiration of the Term,
and failure to surrender the Leased Premises could cause Landlord to incur
liability to such successor tenant for which Tenant shall be responsible
hereunder to the full extent thereof.
ITEM #13. - DEFAULT BY TENANT.
- - ------------------------------
Sections 6.08(b), 6.08(c), 6.08(d) and 6.08(e) are deleted from the Lease
and the following Sections are substituted in their place:
(b) Remedies Upon Default.
(1) 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
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specified herein) to terminate this Lease, and at any time thereafter recover
possession of the Leased 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 Leased Premises without prejudice to any of
the remedies that Landlord may have under this Lease, or at law or equity by
reason of Tenant's default or of such termination.
(2) Continuation After Default. Even though Tenant has breached
this Leased and/or abandoned the Leased Permises, this Lease shall continue in
effect for so long as Landlord does not terminate Tenant's right to possession
under Section 6.08(b)(1) hereof, and Landlord may enforce all of its rights and
remedies under this Lease, including (but without limitation) the right to
recover Rental as it becomes due. Landlord has the remedy described in Section
1951.4 of the Civil Code of the State of California or any successor code
section (Landlord may continue the Lease in effect after Tenant's breach and
abandonment and recover Rental as it becomes due, if Tenant has the right to
sublet or assign, subject only to reasonable limitations). Acts of maintenance,
preservation or efforts to lease the Leased Premises or the appointment of
receiver upon application of Landlord to protect Landlord's interest under this
Lease shall not constitute an election to terminate Tenant's right to
possession.
(c) Damages Upon Termination. Should Landlord terminate this Lease
pursuant to the provisions of Section 6.08(b)(1) hereof, Landlord shall have all
the rights and remedies of a
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landlord provided by Section 1951.2 of the Civil Code of the State of
California, or successor code section. Upon such termination, in addition to any
other rights and remedies to which Landlord may be entitled under applicable
law, Landlord shall be entitled to recover from Tenant: (i) the worth at the
time of award of the unpaid Rental and other amounts which had been earned at
the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid Rental which would have been earned after termination until the
time of award exceeds the amount of such Rental loss that the Tenant proves
could have been reasonably avoided; (iii) the worth at the time of award of the
amount by which the unpaid Rental for the balance of the Term after the time of
award exceeds the amount of such Rental loss that Tenant proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's 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 (i) and (ii) shall be computed with interest at eighteen percent
(18%) per annum or the highest lawful rate, whichever is the lower. The "worth
at the time of award" of the amount referred to in (iii) shall be computed by
discounting such amount at the "discount rate" of the Federal Reserve Bank of
San Francisco in effect as of the time of award plus one percent (1%) and, where
rental value is a material issue, shall be based upon competent appraisal
evidence.
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(d) Computation Of Rental For Purposes Of Default. For purposes of
computing unpaid Rental that would have accrued and become payable under this
Lease pursuant to the provisions of Section 6.08(c), unpaid Rental shall
consist of the sum of:
(1) the total Base Rental for the balance of the Term, plus
(2) a computation of the Basic Operating Cost for the balance of
the Term, the assumed Basic Operating Cost for the calendar year of the default
and each future calendar year in the Term to be equal to the Basic Operating
Cost 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 the San Francisco-Oakland-San Jose Area, 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.
(e) Late Charge. In addition to its other remedies, after written
notice of its intention to invoke this paragraph because of previous late
payments by Tenant, Landlord shall have the right to add to the amount of any
payment required to be made by Tenant hereunder that is not paid on or before
the date the same is due, an amount equal to Two Hundred Fifty Dollars ($250.00)
plus five percent (5%) of the delinquency for each month or portion thereof that
the delinquency remains outstand-
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ing, the parties agreeing that Landlord's damage by virtue of such delinquencies
would be difficult to compute and the amount stated herein represents a
reasonable estimate thereof. The late charge shall be due upon demand by
Landlord at any time after failure to pay any installment of Rental, and in the
case of Gross Rental, without waiting for expiration of the period specified in
Section 6.08(a)(2).
(f) Remedies Cumulative. All rights, privileges and elections or
remedies of the parties are cumulative and not alternative to the extent
permitted by law and except as otherwise provided herein.
ITEM #14. - NO WAIVER.
- - ----------------------
6.09 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 Landlord of an Event of Default, or any agreement, term, covenant or
condition contained in this Lease, shall be effective or binding on Landlord
unless made in writing and no such waiver shall be implied from any omission by
Landlord to take action with respect to such Event of Default or other such
matter. No express written waiver by Landlord 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
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express waiver. One or more written waivers by Landlord of any Event of Default,
or other matter, shall not be deemed to be a waiver of any Event of Default or
of any agreement, term, covenant or condition of this Lease, except as to the
payment of Rental so accepted, regardless of Landlord's knowledge of any
concurrent Event of Default or matter. No course of conduct between Landlord and
Tenant, and no acceptance of the keys to or possession of the Leased 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. 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.
ITEM #15. - APPLICABLE LAW.
- - ---------------------------
6.19. 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 California. 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 City and County of San Francisco,
California (excepting appellate courts).
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ITEM #16. - MISCELLANEOUS PROVISIONS.
- - -------------------------------------
6.21. Brokerage Commissions.
(a) Landlord hereby warrants and represents to Tenant that, with the
sole exception of an obligation to CB Commercial Real Estate Group, Inc. (which
Landlord will compensate in accordance with a separate agreement between CB
Commercial Real Estate Group, Inc. and Landlord), Landlord has not voluntarily
incurred, on its behalf or on behalf of Tenant or on behalf of both Landlord and
Tenant, any obligation to pay a commission or finder's fee to any real estate
broker or other person or entity in connection with this Lease, and Landlord
hereby agrees to indemnify, defend and hold Tenant harmless from claims for any
commission or finder's fee charges by any real estate broker or other person or
entity arising from an agreement, whether express or implied, between Landlord
and such broker or other person or entity or otherwise arising from the conduct
of Landlord.
(b) Tenant hereby warrants and represents to Landlord that, with the
sole exception of an obligation to CB Commercial Real Estate Group, Inc. (which
obligation will be fully satisfied by the performance by Landlord of its
obligation to compensate CB Commercial Real Estate Group, Inc. in accordance
with the separate agreement between that broker and Landlord), Tenant has not
voluntarily incurred, on its behalf or on behalf of Landlord or on behalf of
both Landlord and Tenant, any obligation to pay a commission or finder's fee to
any real estate broker or other person or entity in connection with this Lease,
and Tenant hereby agrees to indemnify, defend and hold Landlord harmless from
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claims for any commission or finder's fee charges by any real estate broker or
other person or entity arising from an agreement, whether express or implied,
between Tenant and such broker or other person or entity or otherwise arising
from the conduct of Tenant.
(c) Nothing in this Section 6.21 is intended by Landlord or Tenant to
be for the benefit of CB Commercial Real Estate Group, Inc. or any other third
party, except the successors and assigns of Landlord and Tenant.
6.22. Integration. 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 strictly for or against
any party.
6.23. 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 quitclaiming to Landlord all interest of
Tenant in the Leased Premises, the Project and this Lease.
- 23 -
<PAGE>
6.24. 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 Leased 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 Rental
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 Tenant's obligations hereunder.
6.25. 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 Landlord's sole option, shall either terminate all existing subleases or
subtenancies or shall operate as an assignment to Landlord of all such subleases
or subtenancies.
6.26. Memorandum Of Lease. Tenant shall, upon request of Landlord,
execute, acknowledge and deliver a short form memorandum of this Lease (and any
amendment hereto or consolidation hereof), in form suitable for recording. In no
event shall this Lease or any memorandum thereof be recorded without the prior
written consent of Landlord, and any attempt to do so shall constitute a default
by Tenant.
6.27. Survival. All of Tenant's covenants and obligations contained in
this Lease shall survive the expiration or earlier termination of this Lease. No
provision of this Lease providing for termination in certain events shall be
construed as a limita-
- 24 -
<PAGE>
tion or restriction of Landlord's rights and remedies at law or in equity
available upon a breach by Tenant of this Lease.
6.28. Financial Statements. If Landlord intends to sell all or any portion
of the Building or Project (or any interest therein), or obtain a loan secured
by the Building or Project (or any interest therein), then Tenant shall, within
fifteen (15) days of Landlord's 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 auditor's
statement, reflecting Tenant's then current financial condition, or the
financial condition of the individuals comprising Tenant, in such form and
detail as Landlord may reasonably request. In addition, if Landlord finances the
construction of improvements on and to the Building or Project, or otherwise
procures financing secured by the Building or Project, or otherwise procures
financing secured by the Building or Project, or any portion thereof or interest
therein, then the terms and provisions of this Lease may be subject to review
and approval by the financial source providing such financing.
6.29 Co-Tenancy.
(a) San Francisco Satellite Center, Inc., a California corporation,
and Telecommunications Properties, a California general partnership, are
co-tenants under this Lease. Telecommunications Properties, a California general
partnership, hereby appoints San Francisco Satellite Center, Inc., a California
corporation, as its agent in connection with all matters arising
- 25 -
<PAGE>
under this Lease. Such agency is for the benefit of Landlord, and shall be
irrevocable unless revoked with the express prior written consent of Landlord.
Telecommunications Properties, a California general partnership, hereby further
irrevocably appoints San Francisco Satellite Center, Inc., a California
corporation, as its agent for service of notices and of process in connection
with any matters or litigation arising under or in connection with this Lease or
the Leased Premises, including without limitation notice of default and notices
to quit, although notices served on Telecommunications Properties, a California
general partnership, in the manner required by law or by this Lease shall be
deemed served for all purposes. Any notice hereafter given to Landlord of the
existence of any dispute between the co-tenants under this Lease shall not
affect the agencies hereby created nor impair or otherwise affect the right or
ability of Landlord to rely on such agencies.
(b) San Francisco Satellite Center, Inc., a California corporation,
and Telecommunications Properties, a California general partnership, shall each
be jointly and severally liable for all obligations and liabilities of the
"Tenant" arising under or in connection with this Lease.
(c) The provisions of 5.07 of this Lease notwithstanding,
Telecommunications Properties, a California general partnership, may assign its
Interest as a co-tenant under this Lease to Watson Communications Systems, Inc.,
a California corporation, if, and only if, there has been no adverse change in
the financial condition of Watson Communications Systems, Inc., a
- 26 -
<PAGE>
California corporation, between the date of this Lease and the date of such
assignment. Landlord shall execute a written release of Telecommunications
Properties, a California general partnership, from any obligation or liability
thereafter arising under this Lease upon the presentation to Landlord of: (i) a
written assignment of its interest under in this Lease by Telecommunications
Properties, a California general partnership, to Watson Communications Systems,
Inc., a California corporation, (ii) a written assumption for the express
benefit of Landlord of each and every of the obligations of Telecommunications
Properties, a California general partnership, by Watson Communications Systems,
Inc., a California corporation, which assumption shall be in form and substance
reasonably satisfactory to counsel for Landlord; and, (iii) evidence reasonably
satisfactory to Landlord that there has been no adverse change in the financial
condition of Watson Communications Systems, Inc., a California corporation,
between the date of this Lease and the date of such assignment.
<PAGE>
EXHIBIT - B
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT 10.13
[LOGO OF U.S. BANK APPEARS HERE]
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- - ------------------------------------------------------------------------------------------------------------------------------------
Principal Loan date Maturity Loan No Call Collateral Account Officer Initials
$10,000,000.00 05-01-1996 03-31-2003 391-26 355 1897143806 61291 TC
- - ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender\s use only and do not limit the applicability
of this document to any particular loan or item
- - ------------------------------------------------------------------------------------------------------------------------------------
BORROWER: COTELLIGENT GROUP, INC. LENDER: U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
101 CALIFORNIA STREET, SUITE 2050 EAST KING COUNTY CORPORATE BANKING
SAN FRANCISCO, CA 94111 C/O 1420 5TH AVE.
WWH470
SEATTLE, WA 98101
====================================================================================================================================
</TABLE>
THIS BUSINESS LOAN AGREEMENT BETWEEN COTELLIGENT GROUP, INC. ("BORROWER")
AND U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION ("LENDER") IS MADE AND
EXECUTED ON THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR
COMMERCIAL LOANS FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN
OR LOANS AND OTHER FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE
DESCRIBED ON ANY EXHIBIT OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH
LOANS AND FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND
FINANCIAL ACCOMMODATIONS FROM LENDER TO BORROWER, ARE REFERRED TO IN THIS
AGREEMENT INDIVIDUALLY AS THE "LOAN" AND COLLECTIVELY AS THE "LOANS."
BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR
EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER REPRESENTATIONS,
WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B) THE
GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL
BE SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS
SHALL BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF
THIS AGREEMENT.
TERM. This Agreement shall be effective as of May 1, 1996, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meaning when used
in this Agreement. Terms to otherwise defined in this Agreement shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the
United States of America.
AGREEMENT. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this Business
Loan Agreement from time to time.
BORROWER. The word "Borrower" means COTELLIGENT GROUP, INC., The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates
of Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation an
amortization.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted in
the form of a security interest, mortgage, deed of trust, assignment,
pledge, chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any
other security or lien interest whatsoever whether created by law,
contract, or otherwise.
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT".
GRANTOR. The word "Grantor" means and includes without limitation each
and all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or anyone or more of them, as well as
all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may by obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred by
any statute of limitations; and whether such Indebtedness may be or
hereafter may become otherwise unenforceable.
LENDER. The word "Lender" means U.S. BANK OF WASHINGTON, NATIONAL
ASSOCIATION, its successors and assigns.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand
plus Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations
in favor of Lender, as well as any substitute, replacement or
refinancing note or notes therefor.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and
security interests securing Indebtedness owned by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet due
or being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of the Agreement titled "Indebtedness and Liens"; (e) liens and security
interests which, as of the date of this Agreement, have been disclosed
to and approved by the Lender in writing; and (f) those liens and
security interests which in the aggregate constitute an immaterial and
insignificant monetary amount with respect to the net value of
Borrower's assets.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1988 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written
agreement to indebtedness owned by Borrower to Lender in form and
substance acceptable to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's
total assets excluding all intangible assets (i.e., goodwill,
trademarks, patents, copyrights, organizational expenses, and similar
intangible items, but including leaseholds and leasehold improvements)
less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current
liabilities.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the
initial Loan Advance and each subsequent Loan Advance under this Agreement
shall be subject to the fulfillment to Lender's satisfaction of all of the
conditions set forth in this Agreement and in the Related
<PAGE>
05-01-1996 BUSINESS LOAN AGREEMENT PAGE 2
LOAN NO 391-26 (CONTINUED)
================================================================================
Documents.
LOAN DOCUMENTS. Borrower shall provide to Lender in form satisfactory to
Lender the following documents for the Loan: (a) the Note, (b) Security
Agreements granting to Lender security interests in the Collateral, (c)
Financing Statements perfecting Lender's Security Interests; (d)
evidence of insurance as required below; and (e) any other documents
required under this Agreement or by Lender or its counsel.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other documents
and instruments as Lender or its counsel, in their sole discretion, may
require.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
REPRESENTATIONS AND WARRANTIES. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
NO EVENT OF DEFAULT. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is
presently engaged or presently proposes to engage. Borrower also is
duly qualified as a foreign corporation and is in good standing in all
states in which the failure to so qualify would have a material adverse
effect on its businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental body;
and do not conflict with, result in a violation of, or constitute a
default under (a) any provision of its articles of incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (b) any law, governmental regulation, court decree, or
order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered will
constitute, legal, valid and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
PROPERTIES. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and
as accepted by Lender, and except for property tax liens for taxes not
presently due and payable, Borrower owns and has good title to all of
Borrower's properties free and clear of all Security Interests, and has
not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et seq., the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901, et seq., or other applicable state or Federal laws,
rules, or regulations adopted pursuant to any of the foregoing. Except
as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release
of any hazardous waste or substance by any person on, under, about or
from any of the properties, (b) Borrower has no knowledge of, or reason
to believe that there has been (i) any use, generation, manufacture,
storage, treatment, disposal, release, or threatened release of any
hazardous waste or substance on, under, about or from the properties by
any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters, (c) Neither Borrower nor any tenant,
contractor, agent or other authorized user of any of the properties
shall use, generate, manufacture, store, treat, dispose of, or release
any hazardous waste or substance on, under, about or from any of the
properties; and any such activity shall be conducted in compliance with
all applicable federal, state, and local laws, regulations, and
ordinances, including without limitation those laws, regulations and
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender
may deem appropriate to determine compliance of the properties with this
section of the Agreement. Any inspections or tests made by Lender shall
be at Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of
Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower
becomes liable for cleanup or other costs under any such laws, and (b)
agrees to indemnify and hold harmless Lender against any and all claims,
losses, liabilities, damages, penalties, and expenses which Lender may
directly or indirectly sustain or suffer resulting from a breach of this
section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release occurring
prior to Borrower's ownership or interest in the properties, whether or
not the same was or should have been known to Borrower. The provisions
of this section of the Agreement, including the obligation to indemnify,
shall survive the payment of the indebtedness and the termination or
expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
LITIGATION AND CLAIMS. No material litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event has
occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other events,
if any, that have been disclosed to and acknowledged by Lender in
writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and Note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are legally
enforceable in accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower
may have any liability complies in all material respects with all
applicable requirements of law and regulations, and (i) no Reportable
Event nor Prohibited Transaction (as defined in ERISA) has occurred with
respect to any such plan, (ii) Borrower has not withdrawn from any such
plan or initiated steps to do so, (iii) no steps have been taken to
terminate any such plan, and (iv) there are no unfunded liabilities
other than those previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 101 CALIFORNIA STREET, SUITE
2050, SAN FRANCISCO, CA 94111. Unless Borrower has designated otherwise
in writing this location is also the office or offices where Borrower
keeps its records concerning the Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in extending Loan Advances to
Borrower. Borrower further agrees that the foregoing representations and
warranties shall be continuing in nature and shall remain in full force
and effect until such time as Borrower's indebtedness shall be paid in
full, or until this Agreement shall be terminated in the manner provided
above, whichever is the last to occur.
<PAGE>
05-01-96 BUSINESS LOAN AGREEMENT PAGE 3
LOAN NO 391-26 (CONTINUED)
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower of the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS: Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender and, as soon
as available, but in no event later than forty five (45) days after the end
of each fiscal quarter, Borrower's balance sheet and profit and loss
statement for the period ended, prepared and certified as correct to the best
knowledge and belief by Borrower's chief financial officer or other officer
or person acceptable to Lender. All financial reports required to be provided
under this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables
inventory, schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less
than $10,000,000.00
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 1.00 to 1.00.
WORKING CAPITAL. Maintain Working Capital in excess of $10,000,000.00.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles applied on a
consistent basis, and certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages and
with insurance companies reasonably acceptable to Lender. Borrower, upon
request of Lender, will deliver to Lender from time to time the policies
or certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without
at least ten (10) days' prior written notice to Lender. Each insurance
policy also shall include an endorsement providing that coverage in
favor of Lender will not be impaired in any way by any act, omission or
default of Borrower or any other person. In connection with all policies
covering assets in which Lender holds or is offered security interest
for the Loans, Borrower will provide Lender with such loss payable or
other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current properly values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually) Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any other
party and notify Lender immediately in writing of any material default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income , or
profits. Provided however, Borrower will not be required to pay and discharge
any such assessment, tax, charge, levy, lien or claim so long as (a) the
legality and accuracy of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted accounting
practices. Borrower, upon demand of Lender, will furnish to Lender evidence
of payment of the assessments, taxes, charges, levies, liens and claims and
will authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges, levies,
liens and claims against Borrower's properties, income or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in material compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and other
laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
QUARTERLY and at the time of each disbursement of Loan proceeds with a
certificate executed by Borrower's chief financial officer, or other officer
or person acceptable to Lender, certifying that the representations and
warranties set forth in this Agreement are true and correct as of the date of
the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part to
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environmental
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of
<PAGE>
05-01-1996 BUSINESS LOAN AGREEMENT PAGE 4
LOAN NO 391-26 (CONTINUED)
================================================================================
Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, (c) pay any dividends on
Borrower's stock (other than dividends payable in its stock), provided,
however that notwithstanding the foregoing, but only so long as no Event of
Default has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in the
Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends
on its stock to its shareholders from time to time in amounts necessary to
enable the shareholders to pay income taxes and make estimated income tax
payments to satisfy their liabilities under federal and state law which arise
solely from their status as Shareholders of a Subchapter S Corporation
because of their ownership of shares of stock of Borrower, or (d) purchase or
retire any of Borrower's outstanding shares or alter or amend Borrower's
capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. Cotelligent must obtain USBW consent
prior to entering into any binding agreement to acquire or merge with another
company. Such consent will not be unreasonably withheld and will primarily be
necessary to ensure that financial covenant compliance is maintained upon
completion of the acquisition or merger.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement
or any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ACCESS LAWS. Without limiting the generality of any provision of this agreement
requiring Borrower to comply with applicable laws, rules, and regulations,
Borrower agrees that it will at all times comply with applicable laws relating
to disabled access including, but not limited to, all applicable titles of the
Americans with Disabilities Act of 1990.
STATUTE OF FRAUDS DISCLOSURE. ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN
MONEY, EXTEND CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE NOT
ENFORCEABLE UNDER WASHINGTON LAW.
ADDITIONAL NEGATIVE COVENANTS.
CURRENT LIABILITY. BORROWER AND LENDER AGREE THAT ANY AMOUNT OUTSTANDING UNDER
THE REVOLVING PORTION OF THIS LINE WILL BE CONSIDERED A CURRENT LIABILITY.
ADDITIONAL FEATURES OF FACILITY. PRIOR TO ACTIVATION OF THE TERM FEATURE OF
THIS LINE, THE COMPANY MUST DEMONSTRATE TO LENDER THAT HISTORICAL CASH FLOW AND
EBITDA (BASED ON THE TRAILING FOUR QUARTERS OF ACTIVITY) WAS SUFFICIENT TO
SATISFY THE FOLLOWING COVENANTS AFTER INCLUSION OF THE PROPOSED TERM DEBT AND
DEBT SERVICE. IF THE TERM FEATURE IS TO BE USED FOR A COMPANY ACQUISITION, THE
TARGET'S HISTORICAL CASH FLOW/EBITDA WILL BE COMBINED WITH COTELLIGENT.
THEREAFTER, AS LONG AS TERM AMOUNTS REMAIN OUTSTANDING, THESE COVENANTS WILL BE
MEASURED QUARTERLY BASED ON THE TRAILING FOUR QUARTERS OF ACTIVITY:
MINIMUM CASH FLOW COVERAGE (1) 1.25:1
MAXIMUM FUNDED DEBT/EBITDA (2) 2:1
1) DEFINED AS (NET INCOME AFTER TAX + DEPRECIATION EXPENSE + AMORTIZATION
EXPENSE + INTEREST EXPENSE - DIVIDENDS - UNFUNDED CAPITAL EXPENDITURES)/(CURRENT
PORTION OF LONG TERM DEBT + INTEREST EXPENSE).
2) FUNDED DEBT IS DEFINED AS ANY DEBT THAT REQUIRES AMORTIZATION PAYMENTS.
EBITDA STANDS FOR EARNINGS BEFORE INTEREST EXPENSE, TAX EXPENSE, DEPRECIATION
EXPENSE AND AMORTIZATION EXPENSE.
LOAN FEE. BORROWER AGREES TO THE FOLLOWING LOAN FEE STRUCTURE:
1) UPFRONT FEE EQUAL TO 1/4% OF THE COMMITMENT AMOUNT.
2) AN ANNUAL FEE EQUAL TO 1/4% OF THE COMMITMENT AMOUNT WILL BE COLLECTED AT THE
BEGINNING OF YEAR 2 (ASSUMED TO BE 5/31/97).
3) A 1/2% UPFRONT FEE WILL BE COLLECTED ON ANY PORTION OF THE LINE THAT IS TAKEN
AS A TERM LOAN.
PURPOSE OF CREDIT FACILITY. OPERATING LINE OF CREDIT FOR THE GENERAL CORPORATE
PURPOSES OF COTELLIGENT AND SUBSIDIARIES. ANY PORTION OF THIS LINE CAN BE
CONVERTED TO A 5 YEAR TERM LOAN DURING THE INITIAL PERIOD TO EXPIRY TO PROVIDE
FUNDING FOR FIXED ASSET ACQUISITIONS OR ACQUISITIONS OF OTHER COMPANIES.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the indebtedness against
any and all such accounts, if an event shall have occurred or be continuing.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or the Related Documents, or failure of Borrower to comply
with or to perform any other term, obligation, covenant or condition
contained in any other agreement between Lender and Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective obligations
under this Agreement or any of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or furnished
to Lender by or on behalf of Borrower or any Grantor under this Agreement or
the Related Documents is false or misleading in any material respect at the
time made or furnished, or becomes false or misleading without correction
thereof by the Borrower.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrower's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor
against any collateral securing the indebtedness, or by any governmental
agency. This includes a garnishment, attachment, or levy on or of any of
Borrower's deposit accounts with Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness.
CHANGE IN OWNERSHIP.
A "Change in Control" shall be deemed to have occurred if:
(i) any person or entity, other than Cotelligent or an employee
benefit plan of Cotelligent, acquires directly or indirectly the
Beneficial Ownership (as defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) of any voting security of the
Subsidiary and immediately after such acquisition such person or entity
is, directly or indirectly, the Beneficial Owner of voting securities
representing 50% or more of the total voting power of all of the then-
outstanding voting securities of the Subsidiary;
(ii) the individuals (A) who, as of the effective date of
Cotelligent's registration statement with respect to its initial public
offering, constitute the Board of Directors of Cotelligent (the
"Original Directors") or (B) who thereafter are elected to the Board of
Directors of Cotelligent and whose election, or nomination for election,
to the Board of Directors of Cotelligent was approved by a vote of at
least two-thirds (2/3) of the Original Directors then still in office
(such directors becoming "Additional Original Directors" immediately
following their election) or (C) who are elected to the Board of
Directors of Cotelligent and whose election, or nomination for election,
to the Board of Directors of Cotelligent was approved by a vote of at
least two-thirds (2/3) of the Original Directors and Additional Original
Directors then still in office (such directors also becoming "Additional
Original Directors" immediately following their election)(such
individuals being the "Continuing Directors"), cease for any reason to
constitute a majority of the members of the Board of Directors of
Cotelligent;
(iii) the stockholders of Cotelligent shall approve a merger,
consolidation, recapitalization, or reorganization of Cotelligent, a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not sought or obtained,
other than any such transaction which would result in at least 75% of
the total voting power represented by the voting securities of the
surviving entity outstanding immediately after such transaction being
Beneficially Owned by at least 75% of the holders of outstanding voting
securities of Cotelligent immediately prior to the transaction, with the
voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction; or
(iv) the stockholders of Cotelligent shall approve a plan of
complete liquidation of Cotelligent or an agreement for the sale or
disposition by Cotelligent of all or a substantial portion of
Cotelligent's assets (i.e., 50% or more of the total assets of
Cotelligent).
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement.
<PAGE>
05-01-1996 BUSINESS LOAN AGREEMENT Page 5
Loan No 391-26 (Continued)
AMENDMENTS. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement
shall be effective unless given in writing and signed by the party or parties
sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of King
County, the State of Washington. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed in accordance with the laws
of the State of Washington.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association, upon request of either party. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order, invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in any
court having jurisdiction. Nothing in this Agreement shall preclude any party
from seeking equitable relief from a court of competent jurisdiction. The
statute of limitations, estoppel, waiver, laches, and similar doctrines which
would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under this
Agreement shall be joint and several, and all references to Borrower shall
mean each and every Borrower. This means that each of the Borrowers signing
below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant to
this Agreement. Lender may pay someone else to help collect the Loans and to
enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's attorneys' fees and
Lender's legal expenses, whether or not there is a lawsuit, including
attorneys' fees for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated post-
judgment collection services. Borrower also will pay any court costs, in
addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be given
in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage prepaid,
addressed to the party to whom the notice is to be given at the address shown
above. Any party may change its address for notices under this Agreement by
giving formal written notice to the other parties, specifying that the
purpose of the notice is to change the party's address. To the extent
permitted by applicable law, if there is more than one Borrower, notice to
any Borrower will constitute notice to all Borrowers. For notice purposes,
Borrower will keep Lender informed at all times of Borrower's current
address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Agreement in
all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery to
Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MAY
1, 1996.
BORROWER:
COTELLIGENT GROUP, INC.
/s/ J. R. Lavelle /s/ Duane W. Bell
---------------------------
Authorized Officer
LENDER:
U.S. BANK OF WASHINGTON, NATIONAL ASSOCIATION
By: /s/ Tom W. Chalfant, V.P.
----------------------------
Authorized Officer
<PAGE>
- - --------------------------------------------------------------------------------
[LOGO FOR U.S. BANK APPEARS HERE] ATTACHMENT - REVOLVING CREDIT
ACCOUNTS RECEIVABLE/INVENTORY COLLATERAL
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
NAME OF BORROWER: ATTACHMENT TO LOAN AGREEMENT DATED:
COTELLIGENT GROUP, INC. 05/01/96
- - --------------------------------------------------------------------------------
U.S. Bank of Washington, National Association will grant revolving credit to
Borrower under the following provisions.
COLLATERAL
ACCOUNT RECEIVABLE:
Advance Rate 80% of Eligible Accounts
Eligible Accounts [_]CURRENT - 60 DAYS
[X]90 DAYS DOI
[_]OTHER
INELIGIBLE ACCOUNTS/AMOUNTS
[X]Accounts with 25% of outstanding amount over 60 days past due.
[X]Accounts due from officers, employees, affiliate companies and individuals.
[X]Accounts subject to set off.
[X]Accounts resulting from COD's, finance charges and consignment.
[X]Accounts due from foreign entities or individuals.
[X]Accounts due from Federal Government or agencies.
[X]Retainings.
[X]Dated BIllings.
[X]Progress Billings on contract receivable.
[X]Accounts subject to other Security interests.
[X]Credit over 90 days DOI.
[X]Cash Sales and Service Charges.
<TABLE>
<CAPTION>
<S> <C> <C>
INVENTORY: N/A
ADVANCE RATE 0% MAXIMUM AMOUNT$
ELIGIBLE INVENTORY-EXCLUDING CO-SIGNED, OBSOLETE OR [_]Raw Material 0% $0
OTHER NON SALABLE INVENTORY. [_]Work in Process 0% $0
ELIGIBLE INVENTORY IS TO BE PRICED AT THE LOWER OF COST OR MARKET. [_]Finished Goods 0% $0
OPERATING PARAMETERS:
ADVANCE BASIS [X]Borrower's Certificate MONTHLY (FREQUENCY)
---------------
[X]Agings MONTHLY (FREQUENCY)
---------------
[_]Other (FREQUENCY)
---------------
Bank Control Account [_]Yes [X]No
Agings [X]Account Receivable [X]Accounts Payable MONTHLY (FREQUENCY)
---------------
Certification of accounts will be periodically verified by the National Audit Company.
US. BANK OF WASHINGTON, NATIONAL ASSOCIATION COTELLIGENT GROUP, INC.
BY: /s/ Tony W. Chalfant By: Duane W. Bell
----------------------------------------- --------------------------------------------------
ITS: VICE PRESIDENT Its: SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
----------------------------------------- --------------------------------------------------
DATE: 5/29/96
-----------------------------------------
</TABLE>
<PAGE>
SUBSIDIARIES OF THE COMPANY-EXHIBIT 21.1
----------------------------------------
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION OF
SUBSIDIARY/1/ INCORPORATION OF ORGANIZATION
- - ----------------------------- ------------------------------
<S> <C>
BFR Co., Inc. New Jersey
Chamberlain Associates, Inc. California
Data Arts & Science, Inc. Massachusetts
Financial Data Systems, Inc. Washington
</TABLE>
- - ---------------------
/1/ All subsidiaries operate under the names listed. In addition, BFR Co., Inc.
conducts business as BFR Systems, and Financial Data Systems, Inc. conducts
business as FDSI Consulting.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-3388) of Cotelligent Group, Inc. of our reports
as listed below which appear in the Annual Report on Form 10-K.
COMPANY DATE
------- ----
Cotelligent Group, Inc. April 20, 1996
Combined Predecessor Companies April 20, 1996
Financial Data Systems, Inc. April 20, 1996
BFR Co., Inc. April 20, 1996
Data Arts & Sciences, Inc. April 20, 1996
Chamberlain Associates, Inc. April 20, 1996
[SIGNATURE OF PRICE WATERHOUSE LLP APPEARS HERE]
Price Waterhouse LLP
Minneapolis, Minnesota
June 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COTELLIGENT GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1996<F2>
<PERIOD-START> APR-01-1995<F2>
<PERIOD-END> MAR-31-1996<F2>
<CASH> 14,005,920
<SECURITIES> 0
<RECEIVABLES> 11,721,000
<ALLOWANCES> 40,000
<INVENTORY> 0
<CURRENT-ASSETS> 26,633,202
<PP&E> 2,293,146
<DEPRECIATION> 1,231,397
<TOTAL-ASSETS> 27,991,233
<CURRENT-LIABILITIES> 9,270,036
<BONDS> 0
0
0
<COMMON> 62,163
<OTHER-SE> 17,987,982
<TOTAL-LIABILITY-AND-EQUITY> 27,991,233
<SALES> 8,265,303
<TOTAL-REVENUES> 8,265,303
<CGS> 6,173,229
<TOTAL-COSTS> 8,068,691
<OTHER-EXPENSES> (69,563)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,413
<INCOME-PRETAX> 212,762
<INCOME-TAX> 124,541
<INCOME-CONTINUING> 88,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88,221
<EPS-PRIMARY> 0<F1>
<EPS-DILUTED> 0<F1>
<FN>
<F1>Historical earnings per share data are not provided for the period because
they are not considered meaningful due to Acquisitions during the period. See
Notes 2 and 3 to the Cotelligent Group, Inc., Consolidated Financial Statements.
<F2>Net income for the year ended March 31, 1996 includes Cotelligent Group,
Inc. for the year ended March 31, 1996, yet only the Predecessor Companies
subsequent to Acquisitions (February 20-March 31, 1996). See Cotelligent Group,
Inc. Consolidated Financial Statements.
</FN>
</TABLE>
