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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM _____________ TO ______________
Commission File Number _______________
VIALOG CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
MASSACHUSETTS 04-3305282
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
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10 NEW ENGLAND BUSINESS CENTER, SUITE 302
Andover, MA 01810
(Address of principal executive offices)
(978) 975-3700
(Registrant's 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:
NONE
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 Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _________ No X
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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 Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of March 15, 1998 the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the Company was $11,558,615. The
aggregate market value has been computed based on a price per share of $5.75.
On such date the Company had 3,531,410 shares of common stock outstanding.
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PART I
This Annual Report on Form 10-K contains forward-looking statements as
defined by the Private Securities Litigation Reform Act of 1995. Forward-
looking statements should be read with the cautionary statements and important
factors included in this Form 10-K. (See Item 7. - Management's Discussion and
Analysis of Financial Condition and Results of Operations, Safe Harbor for
Forward-Looking Statements.) Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "estimates," "expects,"
"intends," "plans," "predicts," "projects," and similar expressions. The
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished.
ITEM 1. BUSINESS.
INTRODUCTION
VIALOG Corporation, a Massachusetts corporation, was founded on January 1,
1996 with the intention of becoming a leading provider of value-added electronic
group communications services. These services include audio, video and data
teleconferencing. On November 12, 1997, VIALOG Corporation acquired, in
separate transactions (the "Acquisitions"), six private conference service
bureaus (each, an "Acquired Company"; collectively, the "Acquired
Companies") in exchange for cash and shares of its common stock. Unless
otherwise indicated, (i) all references to "VIALOG Corporation" mean VIALOG
Corporation as a stand alone entity and (ii) all references to "VIALOG" or the
"Company" refer to VIALOG Corporation and include its consolidated
subsidiaries. Unless otherwise indicated, all share, per share and financial
information set forth in this Report has been adjusted to give effect to the
Acquisitions. A brief description of each of the Acquired Companies is set
forth below.
TELEPHONE BUSINESS MEETINGS, INC. D/B/A ACCESS CONFERENCE CALL SERVICE
("ACCESS"): Access is headquartered and maintains its operations center in
Reston, Virginia. Founded in 1987, Access had net revenues of approximately $9.1
million in 1996 and of approximately $12.6 million in 1997. Access specializes
in providing electronic group communications services to numerous organizations,
including financial institutions, government agencies, trade associations and
professional service firms. Access is also a leader among the Acquired Companies
in the development of video teleconferencing services. As of February 1, 1998,
Access had approximately 126 employees and approximately 1,512 ports of
teleconferencing capability.
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CONFERENCE SOURCE INTERNATIONAL, INC. ("CSI"): CSI is headquartered and
maintains its operations center in Atlanta, Georgia. Founded in 1992, CSI had
net revenues of approximately $5.9 million in 1996 and of approximately $6.4
million in 1997. CSI specializes in providing electronic group communications
services to certain facilities-based carriers and non-facilities-based
telecommunications providers. As of February 1, 1998, CSI had approximately 53
employees and approximately 1,440 ports of teleconferencing capability.
CALL POINTS, INC. ("CALL POINTS"): Call Points is headquartered and
maintains its operations center in Montgomery, Alabama. Founded in 1988, Call
Points had net revenues of approximately $7.5 million in 1996 and of
approximately $8.5 million in 1997. Call Points specializes in providing
electronic group communications services to the retail industry. As of February
1, 1998, Call Points had approximately 94 employees and approximately 2,389
ports of teleconferencing capability.
KENDALL SQUARE TELECONFERENCING, INC. D/B/A THE CONFERENCE CENTER ("TCC"):
TCC is headquartered and maintains its operations center in Cambridge,
Massachusetts. Founded in 1987, TCC had net revenues of approximately $3.4
million in 1996 and of approximately $4.1 million in 1997. TCC services a
general business clientele. As of February 1, 1998, TCC had approximately 42
employees and approximately 528 ports of teleconferencing capability.
AMERICAN CONFERENCING COMPANY, INC. D/B/A AMERICO ("AMERICO"): Americo is
headquartered and maintains its operations center in Oradell, New Jersey.
Founded in 1987, Americo had net revenues of approximately $1.7 million in 1996
and of approximately $2.2 million in 1997. Americo services a general business
clientele. As of February 1, 1998, Americo had approximately 42 employees and
approximately 456 ports of teleconferencing capability.
COMMUNICATION DEVELOPMENT CORPORATION ("CDC"): CDC is headquartered and
maintains its operations center in Danbury, Connecticut. Founded in 1990, CDC
had net revenues of approximately $1.5 million in 1996 and of approximately $2.1
million in 1997. CDC specializes in providing a range of electronic group
communications services and customized communications solutions to its clients,
the majority of whom are in the pharmaceutical industry. As of February 1, 1998,
CDC had approximately 27 employees and approximately 292 ports of
teleconferencing capability.
DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
VIALOG is a leading independent provider of electronic group communications
services, consisting primarily of operator-assisted audio teleconferencing, as
well as video, data and unattended audio teleconference services. The Company
has one of the largest and most geographically diverse networks of sales and
operations centers in the industry focused solely on the electronic group
communications market, and has approximately 6,617 ports of teleconferencing
capability (one "port" is required for each conference participant) and
state-of-the-art digital conferencing
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technology. The Company believes it differentiates itself from its competitors
by providing superior customer service and support as well as an extensive range
of enhanced and customized communications solutions. Combining these
capabilities with targeted marketing and relationship selling has allowed the
Company to capitalize on the growth in the developing teleconferencing services
industry and to build a large, stable client base of approximately 5,000
customers. The Company's customer base is diverse, ranging from Fortune 500
companies to medium and small businesses and institutions. Customers also
include certain major long distance telecommunications providers which have
outsourced their teleconferencing services to VIALOG.
The Company facilitates effective teleconferences through a combination of
technology, enhanced services and superior customer service. Operator-assisted
audio teleconferencing is the cornerstone of the Company's business and the
principal service which builds customer loyalty. The Company also offers
enhanced services such as digital replay of teleconferences, broadcast fax and
fulfillment services such as follow-up mailings or calls. Additionally, the
Company offers customized communications solutions, which include event
planning, auction formats, coaching and event rehearsal services. On a combined
historical basis, the Company derived approximately 95% of its 1997 net
revenues from audio and videoteleconference services and 5% of its 1997 net
revenues from related customized and enhanced services, respectively.
The Acquired Companies had a combined compound annual growth rate in net
revenues of 24.2% during the three-year period ended December 31, 1997 and pro
forma combined net revenues of $28.3 million and $35.9 million in 1996 and 1997,
respectively. VIALOG believes that the consolidation of the Acquired Companies
offers a number of significant synergies that will contribute to VIALOG's
continued growth in net revenues and cash flow. These synergies include
operating efficiencies such as reduced costs for long distance charges,
equipment and employee benefits. The Company also expects to benefit from
significantly enhanced marketing power by creating the critical mass necessary
to develop a brand name effectively, implement a national selling strategy and
offer a wide range of teleconference services. The Company intends to establish
its brand, VIALOG, as synonymous with superior electronic group communications
services. The Company also intends to capitalize on strong industry fundamentals
by leveraging its service capabilities, targeted selling approach and unique
industry position to continue to increase penetration of its existing customer
base and to win new customers, including those long distance service providers
that decide to outsource their teleconferencing services. In addition to
internal growth, the Company believes there is substantial opportunity to
consolidate the industry further through future acquisitions.
INDUSTRY OVERVIEW
Services
The electronic group communications industry provides a range of services to
facilitate multiparty communications with participants in different locations.
Through electronic group communications services, customers conduct routine
meetings, run training sessions, and share
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information where the traveling associated with assembling a group frequently or
on short notice makes face-to-face meetings too costly, impractical or
inconvenient. The International Teleconferencing Association ("ITCA") estimates
that total teleconferencing industry net revenues (including hardware, services
and network net revenues) in North America increased from $1.8 billion in 1992
to $5.1 billion in 1996. The primary electronic group communications services
available today are audio, video and data teleconferencing.
Audio teleconferencing. Industry sources estimate that total audio
teleconferencing net revenues attributable to the service segment (the segment
in which the Company competes) constituted approximately $1.7 billion in 1996.
An audio teleconference is established through specialized telephone equipment
known as a Multipoint Control Unit ("MCU") or "bridge." Prior to 1984, audio
teleconferencing was generally considered ineffective because only one person
could speak at a time. With the introduction of MCU technology in 1984, the
industry began to develop rapidly. Using MCU technology, the number of
participants in an audio teleconference can now vary from three to thousands.
The maximum number of participants is limited by the number of conference
"ports" available to the operator, with each participant using one port. Calls
may be established manually by an operator who places calls to, or receives
calls from, conference participants, each of whom occupies a single telephone
line and port. These lines are then "bridged" together through an MCU, which
permits simultaneous speaking by all participants, filters out the "echo" of
each participant's own speech, and equalizes sound volume and clarity. Advances
in MCU technology have not only eliminated many of the problems associated with
early audio teleconferencing, such as "clipping" (the loss of initial or
ending syllables of words) and loss of quality as lines were added, but also
have increased the number of available enhanced features. These technological
advances, combined with the greater overall awareness and acceptance of audio
teleconferencing as a business tool, have contributed to the increased usage of
teleconferencing over the last five years.
The demand for audio teleconferencing services has increased as a result of a
wide range of trends, including globalization of operations, increased workforce
training requirements, the advent of geographically dispersed work teams, shared
decision-making, and the growing role of strategic partnerships. Users of audio
teleconferencing are able to replace travel to existing meetings, with attendant
savings of actual and opportunity costs, and increase communication with parties
with whom they would otherwise not meet, thereby yielding greater organizational
productivity. The facilities, network and labor costs associated with audio
teleconferencing services, combined with a lack of expertise and a desire to
focus on their core businesses, have caused most organizations to outsource
audio teleconferencing.
Video teleconferencing. According to the ITCA, total video teleconferencing
net revenues were approximately $2.7 billion in 1996. Of the $2.7 billion in
1996, industry sources estimate that approximately $99 million was attributable
to the service segment in which the Company competes. The majority of these
revenues were attributed to dedicated network services for point-to-point video
meetings, which do not require any of the services offered by the Company. The
Company believes that the broad adoption of video teleconferencing as a meeting
tool has historically been constrained
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by several factors, including limited access to video sites, expensive and
proprietary equipment, limited and costly bandwidth, incompatibility of systems,
and poor video quality. Video teleconferencing was also generally limited to
small or broadcast meetings at fixed locations, except when implemented using
expensive two-way satellite technology.
The adoption of International Telecommunications Union ("ITU") standard
H.320 in 1991 and ITU standard H.323 in 1996 has facilitated systems
compatibility. By 1995, technological advances (which brought down the cost of
equipment and required bandwidth) combined with increased processing speed
(which improved quality) to permit the development of desktop video. Interactive
multipoint video teleconferencing also became feasible in 1995 with the
introduction of more cost-effective video MCU technology and low-cost, PC-based
video cameras and sound cards. The rapid deployment of compatible hardware,
reductions in cost, increases in available bandwidth, and improvements in
quality are all expected to accelerate the growth of the market for multipoint
video teleconferencing.
Data teleconferencing. Data teleconferencing, which enables multiple users
to collaborate using data and voice over a single, high bandwidth line, is the
most recent advance in teleconferencing. Industry sources estimate that total
data teleconferencing net revenues constituted approximately $180 million in
1996. Virtually all of these net revenues were related to proprietary software
and systems not offered by the Company. The adoption of ITU standard T.120 data
protocols and H.323 for multimedia conferencing and new Internet "groupware"
services and software are expected to facilitate greater adoption of data
teleconferencing.
Prior to the emergence of data teleconferencing, audio teleconference
participants were unable to share computer data during a conference call. New
standards allow data to travel over data networks on an interactive basis so
that multiple remote computers can manipulate the same program. For instance,
Intel's ProShare and Microsoft's NetMeeting allow remotely located personal
computers and/or work stations to share video and data interactively over the
Internet. The Company believes that these Internet data teleconferencing
programs will likely be used in conjunction with audio teleconferencing to allow
simultaneous group discussions during editing and display of documents. Also,
several manufacturers have introduced specialized application servers that
provide high quality mixed media teleconferencing.
SERVICE PROVIDERS
There are three categories of service providers in the North American
electronic group communications industry: (i) the IXCs, such as AT&T, MCI,
Sprint, WorldCom, Inc., Frontier and Cable & Wireless, (ii) the PCSBs, a group
of over 25 companies, excluding the Acquired Companies, and (iii) the
independent LECs, such as GTE and SNET. In addition, the RBOCs will be allowed
to provide long distance services, which the Company believes may lead to their
entry into the teleconferencing market, if they individually meet certain
requirements under the Telecommunications Act of 1996. See "Business--
Regulation."
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The IXCs are currently the largest providers of teleconferencing services,
constituting approximately 80% of the audio teleconferencing services market in
1995. The Company believes that the IXCs generate most of their business through
their position as the customer's long distance carrier. The IXCs generally do
not market teleconferencing services separately, but rather offer such services
as part of a "bundled" telecommunications offering. The IXCs have generally
not emphasized enhanced services or customized communications solutions to meet
individual customer needs. Rather, they have generally de-emphasized operator-
involved services (such as directory assistance and collect calls), and are
increasingly implementing automated systems and technology as a substitute for
traditional operator-intensive services.
The second category of providers of electronic group communications services
are the PCSBs. There are approximately 25 PCSBs, excluding the Acquired
Companies. PCSBs began entering the teleconferencing market in the mid-1980s
when businesses were beginning to find applications for teleconferencing due to
significant technological improvements in teleconferencing equipment. The number
of PCSBs increased in the late 1980s, taking advantage of a niche opportunity to
provide customized, high quality service and specialized applications. As a
result of their scale and limited access to capital, PCSBs tended to develop as
regional or industry-specific businesses. Due to technological changes facing
the teleconferencing industry, such as the introduction of video and data
service, the ability to secure necessary capital has become more critical.
Additionally, many PCSBs do not currently have the marketing expertise or
teleconferencing capacity to reach the critical mass which will allow them to
develop a national brand name and compete for and service large, national
accounts.
The third category of providers of electronic group communications services
are the independent LECs. Similar to the IXCs, the LECs have generally not
focused on teleconferencing, enhanced services or customized communications
solutions.
A potential new category of providers is the RBOCs. As a result of the Consent
Decree entered into by AT&T and the United States Department of Justice in 1982,
the RBOCs could not offer long distance services, which drastically limited
their teleconferencing potential. Under the Telecommunications Act of 1996, the
RBOCs will be allowed to provide in-region long distance services upon the
satisfaction of certain conditions. The Company believes that the ability of an
RBOC to gain immediate and significant teleconferencing market share upon
entrance into the long distance market will be enhanced by its status as the
incumbent provider of local services to its customers. While each RBOC will
determine whether to create a separate teleconferencing business unit or to
outsource this service, the Company believes that some of the new entrants will
elect to outsource teleconferencing services and focus on entering the long
distance market. To date, the Company has received requests for proposals to
provide teleconferencing services from four of the five RBOCs.
COMPETITIVE STRENGTHS
The Company believes that several characteristics differentiate it from many
of its competitors, including:
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Diverse and stable customer base. The Company has a diverse base of
customers that numbered approximately 5,000 in 1997, with no customer
representing greater than 10% of combined net revenues and the Company's top ten
customers representing less than 23% of combined net revenues. The Company
believes that it has created strong customer loyalty for its services through
its emphasis on superior customer service and the importance of such service to
its clients. This loyalty is demonstrated by VIALOG's record of attracting and
retaining significant clients, with low customer turnover.
Unique industry position. VIALOG believes that it is positioned as one of
the largest and most geographically diverse companies in the industry that
focuses solely on electronic group communications. The Company's largest
competitors are long distance service providers for whom teleconferencing
represents only a small fraction of their total revenues. VIALOG can focus its
capabilities and resources solely on teleconferencing, including its information
systems, capital equipment, hiring practices, training and marketing. The
Company believes that this focus offers significant flexibility and competitive
advantages in responding to the needs of customers. VIALOG is also well situated
to obtain future outsourcing contracts from long distance service providers
which the Company believes are reluctant to outsource to a long distance service
competitor, and would prefer to outsource to a larger, independent group
communications company with experience in managing the outsourcing process.
Superior customer service capabilities. The Company believes that it has a
core competency in its customer service capabilities, which stress operator
training, personalized service and anticipation of customer needs. VIALOG has
developed and refined the technological capabilities, procedures and management
information systems necessary to provide superior customer service, a factor
that is critical to both customer retention and new business. An example of
these capabilities is the Company's proprietary billing system for outsourced
services. VIALOG has spent several years developing and revising this software
and believes that no competitor can currently match the flexibility of this
system in meeting customer needs.
Broad range of services. The Company believes that it offers the most
comprehensive selection of audio, video and data teleconferencing services in
its industry, providing it with significant marketing advantages. VIALOG offers
the features and pricing options to meet a wide variety of customer needs. The
Company intends to remain at the forefront of the electronic group
communications industry by continuing to augment its existing service offerings
through the development and introduction of additional enhanced services and
customized communications solutions.
Experienced management team. VIALOG has one of the most experienced management
teams in the teleconferencing industry. The top 10 managers of the Company have
on average 14 years of experience within the teleconferencing/telecommunications
industry. This experience is critical to the Company's ability to implement its
business strategy, respond to industry trends and to identify and consummate
acquisition opportunities successfully.
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GROWTH STRATEGY
The Company's objective is to build upon its position as a leading independent
provider of electronic group communications services. Management plans to
achieve this goal by implementing the following initiatives:
Create a brand identity. The Company intends to establish its brand, VIALOG,
as synonymous with expertise in, and a focus on, electronic group
communications. The Company intends to distinguish its brand from those of the
IXCs and other competitors through the Company's responsive customer service,
focused service offerings and selling strategy.
Establish a national retail sales organization. The Company is in the process
of deploying a nationwide retail sales organization consisting of an outside
sales group and an inside sales group. The retail sales organization is expected
to be comprised of a vice president of retail sales, six regional sales
directors, twenty-eight senior account executives, fourteen sales support
specialists, one inside sales manager and eight inside sales people. The twenty-
eight senior account executives are expected to be geographically deployed under
the six regional sales directors throughout the United States. They will be
responsible for protecting and growing the revenue within their assigned
customer base. Each sales support specialist will work with two senior account
executives to ensure customer satisfaction and help facilitate "roll-outs" of
service within existing and new customer organizations. The inside sales group
has responsibility for all customers that do not meet the criteria established
for customers being serviced by the outside sales organization. Inside sales
will be responsible for the retention and growth of these customers.
The Company expects that the retail sales organization will receive a steady
stream of qualified leads generated by an array of marketing campaigns and
programs. A minimum of two direct marketing campaigns per year will account for
a significant percentage of new business lead generation. In addition to leads
generated by the marketing campaigns, the Company expects that the retail sales
organization will receive on-going leads from the following: a national Yellow
Pages program, trade shows, vertical trade publications, an interactive web site
and our customer referral program. The Company believes that its marketing
database will continually provide intelligence that will be critical to
maximizing the return on investment of every marketing effort and sales
resource. The Company believes that this disciplined approach to marketing and
sales will ensure greater penetration of existing customers and significantly
increase the Company's market share.
Capitalize on opportunities to provide outsourced services. In addition to
the retail sales organization, the Company has deployed a wholesale sales
organization which will capitalize on what the Company belives to be the
significant opportunity for revenue growth through the provisioning of
outsourced services to IXCs, LECs as well as RBOCs. The Company believes the
broad trend among long distance providers generally to outsource services such
as telemarketing and billing is likely to extend to teleconferencing as these
companies continue to move away from labor intensive activities. The Company has
hired a vice president of wholesale sales and three senior telecom sales
professionals
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who have extensive experience in the industry. This team of telecom sales
professionals will focus their efforts exclusively on growing the Company's
outsourced service base. The Company believes that, should the RBOCs become long
distance providers, competition will require that the RBOCs enter the market
quickly with a complete package of high quality telecommunications services,
including teleconferencing. Consequently, the Company believes that some RBOCs
will choose to outsource their electronic group communications requirements. The
Company believes that it is well-positioned to be competitive in obtaining
outsourced teleconferencing business, since it (i) is not a competitor with IXCs
or LECs in the long distance markets or with the RBOCs, (ii) has the capacity
and resources to handle significant teleconferencing volume, and (iii) already
has experience in providing services on an outsourced basis.
Expand through acquisitions. One element of the Company's strategy is to
continue consolidating the electronic group communications services industry in
order to increase market share, broaden geographic coverage and add new service
offerings. The Company will seek to acquire companies that provide high quality
service, have a significant customer base and utilize high quality technology.
The Company believes its acquisition experience and its knowledge of the
industry will be instrumental in identifying and successfully negotiating
additional acquisitions. The Company believes that it will be an attractive
acquirer for many closely-held PCSBs because of (i) the Company's increased
access to financial resources as a larger company, (ii) the Company's
decentralized operating structure, and (iii) the ability of the owner of the
business being acquired to participate in the Company's on-going business, while
at the same time realizing liquidity.
Capitalize on consolidation benefits. The Company expects to capitalize on
the benefits of its increased size, the combined experience of the Acquired
Companies and its diverse customer base. The Company believes that its size will
result in stronger bargaining power in areas such as long distance
telecommunications, equipment, employee benefits and marketing. The Company also
intends to improve allocation of personnel and equipment and to streamline
internal practices through coordination among the Acquired Companies. The
Company believes its combined experience and diverse customer base will allow it
to develop and rapidly deploy innovative new services. Management also intends
to cross-market services developed by any one of the Acquired Companies to all
of the Company's customers, to maximize capacity utilization and to integrate
pricing strategy.
THE COMPANY'S ELECTRONIC GROUP COMMUNICATIONS SERVICES
Audio Teleconferencing. The Company offers a broad range of audio
teleconferencing services and related services, primarily to businesses in the
financial, professional service and pharmaceutical industries as well as to
government agencies and trade associations. The Company generates revenues from
this service by charging on a per-line, per-minute basis similar to standard
telephone pricing practices.
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The Company's audio teleconference call services may be divided into three
major classifications: operator attended calls, unattended calls and enhanced
services. Within each major category there are several means of accessing the
conference call, as well as a number of operator assisted features and services
available upon the request of the customer.
Operator Attended Conference Calls. On operator attended conference calls,
the operator coordinates the call with the customer and provides support on the
call as required. Customers are given a choice of three different methods to
access an operator attended conference call. In the dial-out method, the
operator dials each participant and places each participant in the conference.
In the 800 Meet-Me method, the conference participants dial into the conference
using the same toll-free number. In the Meet-Me method, the conference call is
handled the same as 800 Meet-Me, but the participants dial in via their own long
distance service provider. Customers can also decide to mix the access methods
for participants. In an operator-attended conference call, the operator greets
each caller, conducts a roll call, and places each caller on the conference
call. The operator can offer a variety of features and enhanced services. For
example, the operator can gather information such as agenda items or weekly
sales figures from participants prior to joining a call, arrange for translation
services, conduct question and answer (Q&A) sessions, conduct polling sessions,
and relay all results back to the customer. If a conference participant
disconnects while a call is in session, the operator can immediately call that
participant to determine if the disconnect was unintentional and, if necessary,
re-establish the link. This feature is generally not offered on unattended
calls.
Unattended Conference Calls. Unattended conference calls refer to calls that
are not monitored by a Company operator. Each of the participants joins the
conference by dialing into a Company MCU and entering an assigned passcode. This
passcode directs participants to the correct conference and allows them to
participate in the conference without operator assistance. During certain
unattended calls, customers are still able to obtain operator assistance by
pressing "0". Customers may use either 800 Meet-Me or Meet-Me access modes to
join unattended conference calls.
Enhanced Services. The Company offers a wide range of enhanced services
(some of which were noted above), which allow customers to add value to their
conference calls. Enhanced services provided to customers are generally charged
on a fee basis. The following are examples of enhanced services.
. Q&A is often utilized on conference calls with a large number of
participants where an orderly forum for accepting questions is required.
This feature is appropriate, for example, during a review of a
corporation's quarterly financial results with a number of financial
analysts.
. Polling is a type of electronic counting using Touch-tone services and is
often provided for focus group sessions or educational applications.
. Digital recording and replay allows people who were unable to participate
in the call to dial in and listen to a recording of the call. Many
customers have the digital recording
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duplicated on tape or audio CD for distribution to interested parties. In
some cases, a CD ROM is pressed by another vendor, augmented with
interactive graphics, and used by the customer as a marketing or training
tool.
. Broadcast fax and fax on demand services provide distribution of
information to facsimile machines during or after a conference using the
Company's existing MCU facilities. Broadcast fax services are typically
used for the widespread distribution of press releases, earnings reports,
and other time-sensitive material.
. RSVP allows the Company to reserve places for participants on conference
calls and to gather information on such participants for its customers.
. Reminders can be sent to participants prior to a conference call via direct
call, fax or e-mail to ensure increased call attendance.
. Call transcripts of conference calls can be prepared and either printed or
downloaded onto a disk.
Customized Communications Solutions. The Company provides specialized event
management, production services and conference support services. Companies
wishing to conduct new product announcements, investor relations calls regarding
quarterly results, analyst briefings, press conferences, customer satisfaction
polls or large sales events use the Company's customized communications services
extensively. Large events, which combine many electronic group communications
services such as data teleconferencing, audio teleconferencing and digital
replay, may require weeks of planning. Training services are billed either on a
project or a per diem basis. The following are examples of customized
communications solutions.
. The Company works with clients to design events which maximize participant
interaction, provides information retrieval and assists in distributing
pre-conference handouts.
. Coaching and event rehearsal services personnel assist customer
spokespersons to prepare for a teleconference, provide public speaking
lessons, and arrange for professional speakers to ensure the proper
presentation of information and image.
. During a conference call, private line service allows an advisor to coach a
spokesperson privately about points to include or proper responses to
questions, without conference call participants hearing those comments.
. The Company provides customer training services such as introducing a new
customer to the effective use of a specific electronic group communications
service or to the detailed development of a teletraining application.
Video Teleconferencing. In 1996, the Company began to offer video
teleconferencing services, which enable remote sites equipped with ITU
standards-compliant video equipment to
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conduct interactive multipoint sharing of video images and audio among three or
more participants. This service, like audio teleconferencing, is charged on a
per-line, per-minute basis, with enhanced services charged on a fee basis. Video
teleconferencing requires the use of a video MCU and telecommunications
facilities of greater bandwidth than that required for a standard audio
teleconference. The Company has one MCU dedicated to video teleconferencing,
with approximately 72 ports of capacity. Video teleconferencing services
accounted for approximately $13,000 and $282,000 of the Acquired Companies'
combined net revenues in 1996 and 1997, respectively.
The Company's video teleconferencing services enable participants at multiple
locations to see and hear each other in a video conference. Generally, the
current speaker is displayed on the video monitors of the other participants in
the conference while the speaker's screen displays the previous speaker's image.
The Company also offers another video conferencing technique known as
"continuous presence," in which up to four participant locations appear
simultaneously on the four quadrants of a monitor for the duration of the
conference.
The Company believes that the use of multipoint video teleconferencing
services will grow in relationship to the installed base of compatible video
equipment. Industry sources estimate that over 230,000 video teleconferencing
units had been sold by the end of 1996. The following are examples of video
teleconferencing applications:
. Telemedicine, in which doctors in different hospitals videoconference to
discuss research, treatments, and surgery.
. Distance learning, in which classes are held over video, enabling students
to benefit from multiple teachers and to interact with students at other
locations.
. Computer aided design (CAD), in which civil engineers and architects
present designs to clients and project teams over live video for review.
Data Teleconferencing. In 1997, the Company began to offer data
teleconferencing services to its customers. Data teleconferences are established
between multiple computers through a server or data MCU and allow the
participants to review, discuss and modify spreadsheets or written text, or
design documents simultaneously on personal computers at different locations.
Data teleconferences are established through parallel data, audio or video links
or on a single high bandwidth line which carries both data and audio or video.
When the Company simultaneously provides audio and data using a data MCU for the
data teleconferencing application, the charges for the data and audio
connections are on a per-line, per-minute basis. When the Company is simply
augmenting a data teleconference with the audio component, the per-line, per-
minute charges are for the audio portion only.
New Internet "groupware" services and software based on industry standards,
such as T.120 and H.323, are expected to facilitate greater awareness and
adoption of data teleconferencing as an electronic group communications tool.
For instance, both Intel's ProShare and Microsoft's NetMeeting software services
allow remotely-located personal computers and/or work stations to
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interactively share video and data regardless of the location of each machine.
Also, several manufacturers have introduced specialized application software
that will provide high quality data teleconferencing.
SALES AND MARKETING
The Company's sales and marketing strategy will center on the establishment of
its brand, VIALOG, as synonymous with expertise in, and a focus on, electronic
group communications. The Company plans to launch a new corporate marketing
program focused on customers who have the potential for high usage. This
marketing program will utilize targeted database marketing techniques based on
the combined customer data of the Acquired Companies, emerging trends, and other
market segment information.
The Company is in the process of deploying a nationwide retail sales
organization consisting of an outside sales group and an inside sales group. The
retail sales organization is expected to be comprised of a vice president of
retail sales, six regional sales directors, twenty-eight senior account
executives, fourteen sales support specialists, one inside sales manager and
eight inside sales people. The twenty-eight senior account executives are
expected to be geographically deployed under the six regional sales directors
throughout the United States. They will be responsible for protecting and
growing the revenue within their assigned customer base. Each sales support
specialist will work with two senior account executives to ensure customer
satisfaction and help facilitate "roll-outs" of service within existing and new
customer organizations. The inside sales group has responsibility for all
customers that do not meet the criteria established for customers being serviced
by the outside sales organization. Inside sales will be responsible for the
retention and growth of these customers.
The Company expects that the retail sales organization will receive a steady
stream of qualified leads generated by an array of marketing campaigns and
programs. A minimum of two major marketing campaigns per year will account for a
significant percentage of new business lead generation. In addition to leads
generated by the marketing campaigns, the Company expects that the retail sales
organization will receive on-going leads from the following: a national Yellow
Pages program, trade shows, vertical trade publications, an interactive web site
and our customer referral program. The Company believes that its marketing
database will continually provide intelligence that will be critical to
maximizing the return on investment of every marketing effort and sales
resource. The Company believes that this disciplined approach to marketing and
sales will ensure greater penetration of existing customers and significantly
increase the Company's market share.
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In addition to the retail sales organization, the Company has deployed a
wholesale sales organization which will capitalize on what the Company believes
to be the significant opportunity for revenue growth through the provisioning of
outsourced services to IXCs, LECs, and RBOCs. The Company currently provides
outsourced audio teleconferencing services for one IXC, one RBOC, two LECs, and
several non-facilities based long distance providers. An important element of
the Company's marketing strategy will be to initiate additional outsourcing
alliances, both domestically and overseas, and to expand net revenues from its
existing alliances. These alliances could include the existing and future IXCs
in the U.S. and overseas, the LECs, the RBOCs and other non-facilities based
providers of equipment and services. In order to capitalize on this market the
Company has hired a vice president of wholesale sales and three senior telecom
sales executives who have extensive experience in the industry. This team of
telecom sales professionals will focus their efforts exclusively on growing the
Company's outsourced service base. The Company believes the broad trend among
telecommunications will extend to teleconferencing, as indicated by (i) existing
outsourcing of other services, such as billing and telemarketing, (ii) hiring
and downsizing trends in the IXCs, LECs and RBOCs as they move away from labor-
intensive activities, and (iii) increasing opportunities under the
Telecommunications Act of 1996 to provide telecommunication services in new
markets for the IXCs and RBOCs.
CUSTOMER SERVICE
The Company believes that it has successfully obtained and retained customers
due, in large measure, to quality customer service provided by a highly skilled
staff. Reservationists and operators become the Company's primary contacts with
its customers after the initial sales effort, thereby providing opportunities to
support the sales effort with personalized service. The Company uses a team
approach, whereby a customer can work with the same small group of customer
service personnel. In some cases, customers have become accustomed to working
with a particular reservationist or operator and insist upon continued
assistance from these specific individuals.
Reservationists assist the Company's customers in scheduling their
conferences. Reservationists access the conferencing system to determine time
and ports available and to confirm the teleconferences. Operators monitor calls
and provide the services requested in the reservation. Operators are also
trained to provide assistance to the moderator (usually the person initiating
the conference) to ensure a successful meeting. Supervisors are available to
assist in the setup and execution of a conference. The Company's staff is
trained to facilitate effective meetings through a combination of classroom,
mentoring, teaming, and on-the-job supervision.
CUSTOMERS
The Company has approximately 5,000 customers ranging in size from major
multinational corporations and Fortune 500 companies to small businesses,
professional organizations, public institutions and consumers. A breakdown of
the Company's top 20 customers by industry is as follows: health and
pharmaceutical (two), financial services (five), retail (five),
telecommunications (four), industrial (three) and high technology (one). No
account represented more
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than 10% of the Company's combined net revenues in 1997. The top 10 customers of
the Company represented approximately 28% and 23% of the Company's combined net
revenues in 1996 and 1997, respectively.
BILLING AND MANAGEMENT INFORMATION SYSTEMS
Most operational aspects of the electronic group communications business
are presently performed at each of the Acquired Companies, including purchasing,
accounting, billing, reservations, personnel, and service delivery functions.
Management of the Company intends to retain a decentralized organizational
structure, permitting most customer-related decisions to remain at the Acquired
Company level. The Company intends to centralize some administrative support
activities within the next 12-18 months in order to standardize its services,
improve customer service and reduce Company expenses.
The Acquired Companies presently perform the entire billing and collection
process for their respective customer receivables. The data needed to develop an
invoice is captured by and stored on each MCU and entered into the billing
system automatically or by the staff. This data includes the account number,
which identifies the entity paying for the call and the moderator number, which
identifies the person who organized the call. The MCU software creates a call
detail record which is augmented by the operator to capture any additional,
enhanced services. Billing is on a one minute increment basis for the duration
of each connected line. A billing database is maintained by each of the Acquired
Companies and used to customize billing formats to respond to individual
customer preferences. The frequency with which invoices are delivered to the
customer for payment varies by Acquired Company and by customer.
Each of the Acquired Companies validates its invoices against its telephone
bills to verify billing accuracy. Each Acquired Company also generates account
reports which detail payments and adjustments, credit status, aging of accounts
receivable, invoice analysis, commission summaries, and usage and rate profiles.
These detailed reports allow management to make business and marketing decisions
concerning extension of credit or additional sales contacts as customer usage
increases or decreases.
The Company believes that the flexibility and capabilities of its billing
systems represent a competitive advantage in allowing the Company to meet the
needs of its customers, particularly in the Company's outsourcing services
business. The Company has spent several years developing and refining the
proprietary software used in the billing services provided to long distance
service carriers that outsource their teleconferencing function to the Company.
The Company intends to transition the Acquired Companies' systems to a uniform
system on an individual basis over the next 12-18 months. Each of the Acquired
Companies will continue to process its results with the existing system until
the new centralized system has been implemented and management has verified that
the centralized system is performing at designed
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proficiency.
COMPETITION
The teleconferencing service industry is highly competitive and subject to
rapid change. The Company currently competes, or expects to compete in the near
future, with the following categories of companies: (i) IXCs, such as AT&T, MCI,
Sprint, Frontier and Cable & Wireless, and non-facilities based long distance
providers, such as Excel, (ii) independent LECs, such as GTE and SNET, and (iii)
other PCSBs. According to estimates from industry sources, the IXCs serviced
approximately 80% of the audio teleconferencing market in 1995. The IXCs
generally do not market teleconferencing services separately, but rather offer
such services as part of a "bundled" telecommunications offering. The IXCs have
not emphasized enhanced services or customized communications solutions to meet
customer needs. However, there can be no assurance that these competitors will
not alter their current strategies and begin to focus on services-specific
selling, customized solutions and operator-attended services, the occurrence of
any of which could increase competition. Under the Telecommunications Act of
1996, the RBOCs will also be allowed to provide long distance services within
the regions in which they also provide local exchange services ("in-region long
distance services") upon the satisfaction of certain conditions, including the
specific approval of the FCC, the introduction of or a defined potential for
facilities-based local competition, the offering of local services for resale,
and compliance with access and interconnection requirements for facilities-based
competitors. Upon entrance into the long distance market, the ability of an RBOC
to gain immediate and significant teleconferencing market share will be enhanced
by its status as the incumbent primary provider of local services to its
customers.
If the Company is able to expand its video and data teleconferencing service
offerings, it will encounter additional competition. Management expects that
there will be competition from existing providers of audio teleconferencing
services, as well as new competitors dedicated to video and/or data
teleconferencing. The Company believes that the principal competitive factors
influencing the market for its services are brand identity, quality of customer
service, breadth of service offerings, price and vendor reputation. There can be
no assurance that the Company will be able to compete successfully with respect
to any of these factors. Competition may result in significant price reductions,
decreased gross margins, loss of market share and reduced acceptance of the
Company's services.
The Company derived approximately 14% of its 1997 combined net revenues from
IXCs and LECs which outsource teleconferencing services provided to their
respective customers. These telecommunications companies have the financial
capability and expertise to deliver these teleconferencing services internally.
There can be no assurance that the Company's current IXC and LEC customers will
not insource the teleconferencing services now being provided by the Company and
pursue such market actively and in direct competition with the Company, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Moreover, part of the Company's growth is
projected to occur as RBOCs enter the
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long distance market and, as the Company believes, outsource their
teleconferencing services. There can be no assurance that any telecommunications
company able to offer teleconferencing services legally, now or in the future,
will choose to do so or that those choosing to do so will outsource their
teleconferencing services or choose the Company as their provider in case they
do outsource teleconferencing.
The Company also believes that many of its current and prospective customers
have sufficient resources to purchase the equipment and hire the personnel
necessary to establish and maintain teleconferencing capabilities sufficient to
meet their respective teleconferencing needs. If the manufacturers of PBXs
develop improved, cost-effective PBX capabilities for handling teleconferencing
calls with the quality of existing MCUs used in the teleconferencing business,
the Company's customers could choose to purchase such equipment and hire the
personnel necessary to service their teleconferencing needs through internal
telephone systems. The loss of such customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
Additionally, if Internet technology can be modified to accommodate multipoint
voice transmission comparable to existing MCUs used in the teleconferencing
business, there could be a material adverse effect on the Company's business,
financial condition and results of operations.
Many of the Company's current and potential competitors have substantially
greater financial, sales, marketing, managerial, operational and other
resources, as well as greater name recognition, than the Company and may be able
to respond more effectively than the Company to new or emerging technologies and
changes in customer requirements. In addition, such competitors may be capable
of initiating or withstanding significant price decreases or devoting
substantially greater resources than the Company to the development, promotion
and sale of new services. Because MCUs are not prohibitively expensive to
purchase or maintain, companies previously not involved in teleconferencing
could choose to enter the marketplace and compete with the Company. There can be
no assurance that new competitors will not enter the Company's markets or that
consolidations or alliances among current competitors will not create
significant new competition. In order to remain competitive, the Company will be
required to provide superior customer service and to respond effectively to the
introduction of new and improved services offered by its competitors. Any
failure of the Company to accomplish these tasks or otherwise to respond to
competitive threats may have a material adverse effect on the Company's
business, financial condition and results of operations.
SUPPLIERS
The Company's services require two material components which it purchases from
outside suppliers:
Telecommunications Services. A significant portion of the Company's direct
costs are attributable to the purchase of local and long distance telephone
services. The Acquired Companies have purchased telecommunications services from
a number of vendors, including AT&T, Sprint, MCI, Cable & Wireless and WorldCom.
The Company believes that multiple
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suppliers will continue to compete for the Company's telecommunications
contracts. Since the minutes of use generated by the Company will be
substantially higher than the largest of the Acquired Companies, the Company
believes that it will be able to negotiate telecommunications contracts with
lower prices and improved service guarantees. The Company anticipates that new
telecommunications contracts will be phased in over time as the existing
contracts at the Acquired Companies expire. However, there can be no assurance
that competition in the long distance services market will continue to increase,
that any increased competition will reduce the cost of long distance services or
that the Company's purchasing strategy will result in cost savings. If the costs
of long distance services increase over time, the Company's current purchasing
strategy, which calls for shorter-term contracts, may place it at a competitive
disadvantage with respect to competitors that have entered into longer-term
contracts for long distance services. There can be no assurance that the
Company's analysis of the future costs of long distance services will be
accurate, and the failure to predict future cost trends accurately could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Bridging Hardware and Software Support Systems. The Company uses MCU
equipment produced by four different manufacturers. At present, such equipment
is not functionally identical, but it is compatible with substantially all
network standards. Approximately 43% of all audio MCU systems used by the
Acquired Companies are manufactured by one vendor, MultiLink, Inc.
("MultiLink"), which was acquired by PictureTel Corporation in 1997. However,
a number of other vendors offer similar MCU equipment. The Company intends to
use its position as a substantial purchaser of MCU equipment to attempt to
negotiate a volume purchase contract with each selected manufacturer.
EMPLOYEES
On February 1, 1998, the Company had approximately 395 employees, of whom 11
were employed full time at its corporate headquarters, 156 were employed full
time in various management, supervisory, sales, support and administrative
positions, and 228 were employed full time or part time as operators or
reservationists. None of the Company's employees are represented by unions. The
Company has experienced no work stoppages and believes its relationships with
its employees are good.
REGULATION
In general, the telecommunications industry is subject to extensive regulation
by federal, state and local governments. Although there is little or no direct
regulation in the United States of the core electronic group communications
services offered by the Company, various government agencies, such as the FCC,
have jurisdiction over some of the Company's current and potential suppliers of
telecommunications services, and government regulation of those services has a
direct impact on the cost of the Company's electronic group communications
services.
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A central element of the Company's business strategy is to capitalize on
outsourcing opportunities. With the passage of the Telecommunications Act of
1996, the Company believes that the RBOCs will seek to enter the market for long
distance services and that competition in the markets for both local and long
distance telephone services will increase. In order to compete successfully in
those markets, the Company believes that the IXCs, LECs and RBOCs will be
required to devote more attention and resources to the provision of such
services and will therefore seek to outsource non-core services, such as audio
teleconferencing. Because the Company's outsourcing strategy depends on the
entrance of the RBOCs into the long distance market, any factor that delays or
prevents the entrance of the RBOCs into that market could impact the Company's
strategy. For example, the Telecommunications Act of 1996 imposes strict pre-
conditions to the provision of in-region long distance services by the RBOCs,
including the specific approval of the FCC, the introduction of facilities-based
local competition, the offering of local services for resale, compliance with
access and interconnection requirements for facilities-based competitors, and
the establishment of a separate operating subsidiary with separate financing,
management, employees, and books and records. There can be no assurance that the
RBOCs will be able to meet all of the requirements of the Telecommunications Act
of 1996 on a timely basis, if at all. Even if one or more RBOCs meets these
requirements, there can be no assurance that the entrance of such RBOCs into the
long distance market will cause any IXCs, LECs or RBOCs to seek to outsource
their audio teleconferencing services or that significant IXCs, LECs or RBOCs
will not continue to provide audio teleconferencing services in direct
competition with the Company. Finally, there can be no assurance that any IXCs,
LECs or RBOCs seeking to outsource audio teleconferencing services will obtain
such services from the Company. The failure of IXCs, LECs and RBOCs to outsource
audio teleconferencing services to the Company could have a material adverse
effect on the Company's growth strategy and business, financial condition and
results of operations.
The Telecommunications Act of 1996 is being contested both administratively
and in the courts, and opinions vary widely as to the effects and timing of
various aspects of the law. There can be no assurances at this time that the
Telecommunications Act of 1996 will create any opportunities for the Company,
that local access services will be provided by the IXCs, or that the RBOCs will
be able to offer long distance services, including teleconferencing. The
Telecommunications Act of 1996 has caused changes in the telecommunications
industry, and the Company is unable to predict the extent to which such changes
may ultimately affect its business. There can be no assurance that the FCC or
other government agencies will not seek in the future to regulate the prices,
conditions or other aspects of the electronic group communications services
offered by the Company, that the FCC will not impose registration, certification
or other requirements on the provision of those services, or that the Company
would be able to comply with any such requirements.
The Company is subject to laws and regulations that affect its ability to
provide certain of its enhanced services, such as those relating to the
recording of telephone calls. Changes in the current federal, state or local
legislation or regulation could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, government
regulations in countries other than the United States vary widely and may
restrict the Company's
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ability to offer its services in those countries. The Company believes that it
is currently in material compliance with applicable communications laws
and regulations.
ITEM 2. PROPERTIES.
The Company's corporate headquarters are located in approximately 2,600 square
feet of office space in Andover, Massachusetts under a lease expiring May 31,
1999. The Company operates six network equipment centers in leased locations in
the United States. The Company believes all of such locations are fully utilized
except for its approximately 41,000 square foot facility in Reston, Virginia,
which is approximately 75% utilized and its 12,000 square foot facility in
Oradell, New Jersey, which is approximately 80% utilized. The Company occupies
the equipment centers and other facilities under leases which provide for a
total of approximately 86,900 square feet at rates ranging from $5.00 to $23.00
per square foot with expiration dates, excluding month-to-month leases, ranging
from May 1999 to May 2008. The Company's total lease expense related to its
facilities was approximately $908,000 and $961,000 for the years ended December
31, 1996 and 1997, respectively. The Company believes its properties are
adequate for its needs. The Company's facilities are located either within one
mile of central telephone switching locations or on a sonet fiberoptic loop in
metropolitan locations. Each facility has dual sources of power or back-up
generating capabilities. While the Company's telephone and power requirements
may preclude it from locating in some areas, the Company believes alternative
locations are available for its facilities at competitive prices.
ITEM 3. LEGAL PROCEEDINGS.
Other than as described below, there are no material pending legal proceedings
to which the Company is a party or to which any of its properties are subject.
In connection with the acquisition of Call Points, one of the Acquired
Companies, the Company agreed to assume all disclosed liabilities with the
exception of any liabilities arising out of Equal Employment Opportunity
Commission ("EEOC") claims and litigation filed against Call Points and Ropir
Industries, Inc. ("Ropir"), the sole stockholder and parent corporation of
Call Points, by certain former and current employees. On or about October 30,
1997, 11 employees or former employees of Call Points filed claims in federal
district court against Call Points, Ropir and certain other parties named
therein. Complainants in these cases could seek to name the Company as a
defendant in such pending litigation and could seek to hold the Company liable
for damages resulting from the litigation as a successor in interest to Call
Points. In addition to equitable relief, the complainants are seeking back pay,
compensatory and punitive damages and attorneys fees based on allegations of
discrimination, retaliation and racially harassing atmosphere. Although the
Company believes it has defenses to any such claim, there can be no assurance
that any such defense would be successful. The principal stockholder of Call
Points has agreed to indemnify the Company from any liability relating to such
claims and $250,000 of the purchase price for the acquisition of Call
Points has been placed in escrow with a third party to secure such
indemnification obligations. In light
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of such indemnification, the Company does not believe that such claims, if
successful, would have a material adverse effect on the Company.
A former employee of CSI, one of the Acquired Companies, has claimed in
writing that he may be entitled to up to five percent of the stock of CSI, based
on an unsigned paper outlining possible employment terms. CSI's position is that
the only agreements with such employee were set forth in two successive executed
employment agreements, each of which had a specific provision that such
agreement was inclusive as to the terms of employment. The Company and CSI
believe that such claim is without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of the date of this Annual Report, there is no established public trading
market for the Company's common stock.
As of March 15, 1998, the Company's common stock was held by 79 holders of
record.
DIVIDENDS
The Company has not declared any dividends on any class of common equity
during the past two fiscal years and has no intention of paying dividends in the
foreseeable future. Additionally, pursuant to the terms of the Indenture dated
November 12, 1997 among VIALOG Corporation, each of the Acquired Companies and
State Street Bank and Trust Company, VIALOG is prohibited from declaring or
paying any dividends or distributions other than dividends or distributions
payable solely in certain qualified capital stock of the Company.
Sales of Unregistered Securities in 1997
On February 24, 1997, the Company issued to eight "accredited investors" (as
defined in Rule 501 under the Securities Act) promissory notes in the aggregate
principal amount of $500,000 bearing interest at 8.0% per annum and payable upon
the earlier of ten days following the closing of an initial public offering of
the Company's common stock or one year from their date of issuance (the
"February Notes"), together with warrants to purchase an aggregate of 111,118
shares of the Company's common stock at an exercise price of $4.50 per share
(the "February Warrants"). The February Notes were paid in November 1997. The
February Warrants expire on February 28, 1999 and contain anti-dilution
provisions. As of the date of this Annual Report, the February Warrants entitle
the holders thereof to purchase an aggregate of 33,450 additional shares of
common stock as a result of required anti-dilution adjustments. The February
Notes and February Warrants were issued to accredited investors only pursuant to
the registration exemption provided in Rule 506 of Regulation D under the
Securities Act.
In September 1997, the Company issued to fifteen accredited investors
subordinated convertible promissory notes in the aggregate principal amount of
$255,500 bearing interest at 10% per annum and payable upon the earlier to occur
of five days following (i) the closing of a sale of the Company's equity
securities or debt securities for an aggregate purchase price of $50.0 million
or more and (ii) January 1, 1998 (the "September Notes"). The September Notes
were convertible at the holder's option prior to and including the due date,
into the number of shares of the Company's common stock determined by dividing
the outstanding principal of the September Notes by $4.00. The September Notes
were issued solely to accredited investors pursuant to the registration
exemption provided under Rule 506 of Regulation D under the Securities Act.
All holders of the September Notes elected to convert the September Notes into
common stock simultaneously with the Company's unrelated sale in November 1997
of $75.0 million of
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senior notes and warrants as described below. The issuance of shares of the
Company's common stock issued upon the conversion of the September Notes was
exempt from registration pursuant to Section 4(2) of the Securities Act.
On November 12, 1997, the Company sold to Jefferies & Company, as initial
purchaser, 75,000 units, with each unit (a "Unit"; collectively, the "Units")
consisting of (i) a senior note due 2001 in the principal amount of $1,000
bearing interest at 12 3/4% per annum (a "Senior Note"; collectively, the
"Senior Notes"), and (ii) one warrant to purchase 10.0886 shares of the
Company's common stock, subject to adjustment in certain circumstances, at an
exercise price of $.01 par value per share (a "November Warrant"; collectively,
the "November Warrants"). Jefferies & Company paid $72.0 million for the Units,
or 96% of the principal amount of the Senior Notes. As additional compensation
to Jefferies & Company, the Company issued, for no additional consideration,
30,000 warrants to purchase 302,658 shares of the Company's common stock at an
initial exercise price of $.01 per share. The initial sale of the Units to
Jefferies & Company was made in reliance on the registration exemption provided
under Section 4(2) of the Securities Act.
Immediately upon the consummation of the sale of the Units, Jefferies &
Company offered and sold the Units at the face value of $1,000 per Unit to
certain "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act) and to a limited number of accredited investors pursuant to the
registration exemption provided under Section 4(2) of the Securities Act.
The November Warrants are exercisable on or after November 12, 1997. The
shares purchasable upon the exercise of the November Warrants and the exercise
price will be subject to adjustment in certain events including: (i) the
payment by the Company of dividends (or other distributions) on the common stock
of the Company payable in shares of such common stock or other shares of the
Company's capital stock, (ii) subdivisions, combinations and reclassifications
of the common stock, and (iii) the distribution to all holders of the common
stock of any the Company's assets, debt securities or any rights or warrants to
purchase securities (excluding cash dividends or other cash distributions from
current or retained earnings).
Subject to certain exceptions set forth in the warrant agreement under which
the November Warrants were issued, if the Company issues (i) shares of common
stock for a consideration per share less than the current market value per share
or (ii) any securities convertible into or exchangeable for common stock for a
consideration per share of common stock initially deliverable upon conversion or
exchange of such securities that is less than the current market value per share
on the date of issuance of such securities, the Company shall offer to sell to
each holder of warrants, at the same price and on the same terms offered to all
other prospective buyers (provided that the holder of warrants shall not be
required to buy any other securities in order to buy such common stock or
convertible securities), a portion of such common stock or convertible
securities that is equal to such holder's portion of the common stock then
outstanding if immediately prior thereto all the warrants had been exercised.
Each such holder may elect to buy all or any portion of the common stock or
convertible securities offered or may decline to purchase any.
24
<PAGE>
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another corporation,
each November Warrant will thereafter be exercisable for the right to receive
the kind and amount of shares of stock or other securities or property to which
such holder would have been entitled as a result of such consolidation, merger
or sale had the warrants been exercised immediately prior thereto.
See ITEM 13 - Certain Relationships and Transactions, Organization of the
Company, for a discussion of the issuance of shares of the Company's common
stock and options to purchase shares of the Company's common stock on November
12, 1997 in connection with the acquisitions of the Acquired Companies. All
such shares and options were issued under the registration exemption provided
under Section 4(2) of the Securities Act.
In addition to the options issued in connection with the acquisition of the
Acquired Companies, the Company issued options in 1997 to purchase an aggregate
of 396,000 shares of the Company's common stock to various employees or
consultants of the Company under the Company's 1996 Stock Plan. The exercise
price for the options range from $2.00 per share to $5.75 per share. The
vesting schedule for the options varies from recipient to recipient based on the
circumstances under which the options were granted and the identity of the
recipient. These options were issued in accordance with Section 4(2) of the
Securities Act or Rule 701 under Section 3(b) of the Securities Act.
USE OF PROCEEDS FROM REGISTERED OFFERINGS
As indicated in the preceding section, on November 12, 1997, the Company
completed the private sale of Units consisting of (i) an aggregate of $75.0
million principal amount of Senior Notes and (ii) warrants to purchase shares of
the Company's common stock. The Company used the proceeds from that private
sale to finance the cash portion of the purchase price for the Company's
acquisition of the Acquired Companies and the related acquisition expenses,
repay outstanding indebtedness, make capital expenditures and provide working
capital for the Company.
Pursuant to a Form S-4 Registration Statement declared effective by the
Securities and Exchange Commission on February 12, 1998, the Company commenced
on that date an exchange offer (the "Exchange Offer") whereby the Company
offered to exchange the Senior Notes for a like principal amount of registered
notes (the "Exchange Notes"). The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Senior Notes
except for certain transfer restrictions and registration rights relating to the
Senior Notes.
The Exchange Offer terminated on March 26, 1998. Prior to the termination,
all of the Senior Notes had been exchanged by investors for Exchange Notes.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes. The Senior Notes surrendered in exchange for the Exchange Notes
will be retired and canceled
25
<PAGE>
and cannot be reissued. Accordingly, the issuance of the Exchange Notes will not
result in any change in the capitalization of the Company.
No underwriter was involved in the Exchange Offer.
ITEM 6. SELECTED FINANCIAL DATA.
On November 12, 1997, VIALOG Corporation ("VIALOG") closed a private placement
of $75.0 million in Senior Notes due 2001 (the "Private Placement").
Contemporaneously with the closing of the Private Placement, VIALOG consummated
agreements to acquire (the "Acquisition") six private conference service bureaus
(the "Acquired Companies"), all of which became wholly-owned subsidiaries of
VIALOG Corporation. Prior to November 12, 1997, VIALOG did not conduct any
operations, and all activities related to the Acquisitions and the completion of
financing transactions to fund the Acquisitions.
The following selected financial data of VIALOG for the years ended December
31, 1996 and 1997 have been derived from the audited consolidated financial
statements of VIALOG Corporation included elsewhere in this Report.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997
---------- -----------
(in thousands, except share and
per share data)
<S> <C> <C>
VIALOG CORPORATION STATEMENT OF OPERATIONS DATA:
Net revenues $ - $ 4,816
Gross profit - 2,122
Selling, general and administrative expenses 1,308 7,249
Amortization of goodwill and intangibles - 306
Write-off of purchased in-process research and development - 8,000
--------- ----------
Operating loss (1,308) (13,433)
Interest income (expense), net 1 (1,866)
--------- ----------
Loss before income taxes (1,307) (15,299)
Income tax benefit (expense) 522 (522)
--------- ----------
Net loss $ (785) $ (15,821)
========= ==========
Net loss per share $ (0.38) $ (5.48)
========= ==========
Weighted average shares outstanding 2,088,146 2,889,005
========= ==========
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997
---------- -----------
(in thousands)
<S> <C> <C>
VIALOG CORPORATION BALANCE SHEET DATA:
Working capital (deficit) $ (249) $ 7,259
Total assets 1,263 75,083
Total debt, including current portion - 71,936
Stockholders' equity (deficit) 287 (4,882)
</TABLE>
26
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
VIALOG Corporation was founded on January 1, 1996 with the intention of
becoming a leading provider of value-added electronic group communications
services. These services include audio, video and data teleconferencing. On
November 12, 1997, VIALOG Corporation consummated agreements to acquire (the
"Acquisition") six private conference service bureaus (the "Acquired
Companies"), all of which became wholly-owned subsidiaries of VIALOG Corporation
(together, the "Company"). Through the six acquisitions, the Company established
one of the largest and most geographically diverse networks of sales and
operations centers focused solely on the electronic group communications market.
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and related notes thereto for the years ended December 31,
1996 and 1997 included elsewhere in this Report.
INTRODUCTION
The Company's net revenues are primarily derived from fees charged to
customers for audio and enhanced teleconferencing services. Cost of revenues
consists primarily of long distance telephone charges, salaries and benefits for
operators, and depreciation and maintenance of telephone bridging equipment.
Selling, general and administrative expenses consist primarily of compensation
and benefits to executive officers and certain employees, marketing expenses,
occupancy costs and professional fees.
Prior to the Acquisition, the Acquired Companies had been managed as
independent private companies, and, as such, their results of operations reflect
different tax structures (S corporations and C corporations) which have
influenced, among other things, their levels of historical compensation. Certain
officers and employees have agreed to reductions in their compensation and
benefits in connection with the organization of the Company and the
Acquisitions. The differential between the previous compensation and benefits of
these individuals and the compensation and benefits they have agreed to accept
subsequent to the Acquisitions is referred to as "Compensation Differential."
This Compensation Differential and the related income tax effect have been
reflected as pro forma adjustments in the Company's pro forma combined financial
statements included in Note 2 "Acquisitions" of the Notes to Consolidated
Financial Statements.
The Company, which has only conducted operations since November 12, 1997
(other than in connection with certain financing transactions, the issuance of
Senior Notes and the Acquisitions), intends to integrate certain operations and
administrative functions of the Acquired Companies over a period of time. This
integration process may present opportunities to reduce costs through the
elimination of duplicative functions and through economies of scale,
particularly from expected reductions in long distance telephone charges as
existing agreements entered into by the Acquired Companies lapse and are
replaced with new contracts negotiated by the Company. The Company is currently
27
<PAGE>
unable to quantify these savings. It is anticipated that these savings will be
partially offset by the costs related to the Company's new management. In
addition, it is anticipated that increased marketing costs will initially be
required to establish the Company's brand name in the marketplace. As a result
of these various costs and possible cost-savings, comparisons of historical
operating results may not be meaningful, and such results may not be indicative
of future performance.
VIALOG CORPORATION
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
VIALOG Corporation ("VIALOG") was incorporated on January 1, 1996. Prior to
the November 12, 1997 Acquisitions, VIALOG did not conduct any operations, and
all activities related to the Acquisitions and the completion of financing
transactions to fund the Acquisitions.
VIALOG incurred a net loss of $785,000 and $15.8 million for the years ended
December 31, 1996 and 1997, respectively. The 1996 net loss represented general
and administrative expenses, which consisted primarily of legal, travel,
salaries and consulting fees related to the organization of VIALOG Corporation
and the consummation of business combination agreements with the Acquired
Companies. The 1997 net loss included expenses incurred prior to the November
12, 1997 Acquisitions, as well as consolidated net revenues and expenses of the
Acquired Companies from the date of Acquisition through December 31, 1997. Of
the $15.8 million net loss, $4.1 million represented selling, general and
administrative expenses incurred prior to the Acquisition, and included
approximately $2.0 million related to an offering of VIALOG's common stock which
was terminated in early 1997. The remaining $11.4 million loss represented the
consolidated results of operations from the date of Acquisition through
December 31, 1997, and included $2.1 million of gross profit, $3.8 million of
selling, general and administrative expenses (including a $958,000 non-cash
charge relating to the modification of certain stock options and $306,000 of
amortization of goodwill and intangibles), an $8.0 million non-recurring charge
relating to the write-off of purchased in-process research and development, and
$1.7 million of interest expense relating to the Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated negative cash flows of $178,000 and $4.1 million from
operating activities for the years ended December 31, 1996 and 1997,
respectively. Cash flows used in investing activities of $7,000 and $53.8
million for the years ended December 31, 1996 and 1997, respectively, represent
cash paid in connection with the Acquisitions of $0 and $53.3 million,
respectively, as well as purchases of property and equipment of $7,000 and
$454,000, respectively. Cash provided by financing activities of $522,000 and
$67.1 million for the years ended December 31, 1996 and 1997, respectively,
represent issuance of long-term debt and common stock, offset by payments of
previously issued debt and payments of indebtedness of the Acquired Companies.
The Company's primary short-term liquidity requirements are working capital
needs, payments of interest and purchases of property and equipment. The
Company anticipates that its
28
<PAGE>
cash flows from operations will meet or exceed its short-term working capital
needs, debt service requirements and planned capital expenditures for property
and equipment.
The Company intends to continue pursuing attractive acquisition opportunities.
The timing, size or success of any acquisition and the associated potential
capital commitments are unpredictable. The Company plans to fund future
acquisitions primarily through a combination of working capital, cash flow from
operations and borrowings, as well as issuances of debt and/or equity
securities. However, no assurances can be given that such funds will be
available when required or on terms favorable to the Company.
The Company is highly leveraged and has a stockholders' deficit at December
31, 1997. This indebtedness requires the Company to dedicate a significant
portion of its cash flow from operations to service its indebtedness and makes
the Company more vulnerable to unfavorable changes in general economic
conditions.
The principal long-term liquidity requirements are payments for interest and
capital expenditures, as well as repayment of the Senior Notes which mature in
2001. The Company expects to meet its long-term liquidity requirements,
including repayment of the Senior Notes, through a combination of working
capital, cash flow from operations and borrowings, and issuances of debt and/or
equity securities. However, no assurances can be given that such funds will be
available when required or on terms favorable to the Company.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
The Company will utilize both internal and external resources to identify,
correct or reprogram, and test the systems for the year 2000 compliance. The
Company has performed a preliminary review of its existing computer programs to
address the year 2000 issue. Based on the preliminary review, the Company
believes that the year 2000 issue will not have a significant impact on the
operations or the financial results of the Company. The internally developed
computer programs used in the operations of the Company that are expected to be
used beyond the year 1999 are year 2000 compliant. Additionally, as part of the
integration of the Acquired Companies, the Company will be implementing common
systems in both the operations and financial management areas of the Company
within the next two years. The systems implemented or upgraded will all be year
2000 compliant, one of the criteria of the systems integration plan. The Company
will continue to assess the impact of the year 2000 issue as a part of the
systems integration plan. The Company is in the process of contacting all of its
software and hardware suppliers with regard to their respective year 2000
compliant programs.
Due to the relative low levels of inflation experienced in 1995, 1996 and
1997, inflation did not have a significant effect on the results of the combined
companies in those years.
29
<PAGE>
COMBINED ACQUIRED COMPANIES AND VIALOG CORPORATION
The combined Acquired Companies' and VIALOG Corporation's Statements of
Operations data for the years ended December 31, 1995, 1996 and 1997 do not
purport to present the financial results or the financial condition of the
combined Acquired Companies and VIALOG Corporation in accordance with generally
accepted accounting principles. Such data represents merely a summation of the
net revenues, cost of revenues and selling, general, and administrative expenses
of the individual Acquired Companies and VIALOG Corporation on an historical
basis, and excludes the effects of pro forma adjustments. This data will not be
comparable to and may not be indicative of the Company's post-combination
results of operations because (i) the Acquired Companies were not under common
control or management and had different tax structures (S corporations and C
corporations) and (ii) the Company used the purchase method of accounting to
record the Acquisitions.
RESULTS OF OPERATIONS--COMBINED ACQUIRED COMPANIES AND VIALOG CORPORATION
The following table sets forth (in thousands) certain unaudited combined data
of the Acquired Companies and VIALOG Corporation on an historical basis and such
data as a percentage of net revenues, excluding the effects of pro forma
adjustments for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net revenues $21,855 100.0% $29,005 100.0% $ 35,917 100.0%
Cost of revenues 13,143 60.1% 16,302 56.2% 20,272 56.4%
------- ----- ------- ----- ------- -----
Gross profit 8,712 39.9% 12,703 43.8% 15,645 43.6%
Selling, general and administrative
expenses 7,122 32.6% 10,558 36.4% 16,650 46.4%
Amortization of goodwill and
intangibles - 0.0% - 0.0% 306 0.9%
Write-off of purchased in-process
research and development - 0.0% - 0.0% 8,000 22.3%
------- ----- ------- ----- ------- -----
Operating income (loss) $ 1,590 7.3% $ 2,145 7.4% $(9,311) (25.9%)
======= ===== ======= ===== ======= =====
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. All Acquired Companies reflected an increase in net revenues
during the year ended December 31, 1997 compared to the year ended December 31,
1996. Combined net revenues increased $6.9 million, or 23.8%, from $29.0 million
in 1996 to $35.9 million in 1997. The major components of this increase were (i)
an increase in Access' net revenues of $3.5
30
<PAGE>
million, or 38.5%, from $9.1 million in 1996 to $12.6 million in 1997, which was
primarily attributable to sales of teleconferencing services to existing
customers and new customers, (ii) an increase in Call Points' net revenues of
$1.0 million, or 12.9%, from $7.5 million in 1996 to $8.5 million in 1997, which
was primarily attributable to sales of teleconferencing services to existing
customers and sales to new customers, and (iii) an increase in TCC's net
revenues of $725,000, or 21%, from $3.4 million in 1996 to $4.1 million in 1997,
which was primarily attributable to sales to existing customers and sales to new
customers. This growth was achieved despite the fact that TCC's net revenues for
1996 included $743,000 of net revenues from a portion of TCC's business that was
divested in December 1996.
Cost of revenues. Combined cost of revenues increased $4.0 million, or 24.4%,
from $16.3 million in 1996 to $20.3 million in 1997 and increased slightly as a
percentage of net revenues from 56.2% in 1996 to 56.4% in 1997. The dollar
increase was primarily attributable to (i) an increase in Access' cost of
revenues of $2.1 million, or 51.1%, from $4.1 million in 1996 to $6.2 million in
1997 related to the substantial investment made in personnel and related costs
associated with video teleconferencing and increased telecommunications and
personnel expense associated with the growth in revenues, (ii) an increase in
Americo's cost of revenues of $623,000, or 71.7%, from $869,000 in 1996 to $1.5
million in 1997 primarily due to telecommunications costs and personnel expenses
to support the current and expected call volume, and (iii) an increase in Call
Points' cost of revenues of $659,000, or 11.1%, from $5.9 million in 1996 to
$6.6 million in 1997, which was primarily attributable to increased
telecommunications costs and personnel expenses to support the increased call
volume.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $6.1 million, or 57.7%, from $10.6 million in
1996 to $16.7 million in 1997 and increased as a percentage of net revenues from
36.4% in 1996 to 46.4% in 1997. The dollar increase was primarily attributable
to (i) an increase in VIALOG Corporation's selling, general and administrative
expenses of $4.8 million from $1.3 million in 1996 to $6.1 million in 1997,
which was primarily attributable to a charge of approximately $2.0 million
related to an offering of common stock that was terminated in early 1997, a non-
cash charge of $958,000 related to modifications to certain outstanding stock
options, and increased staffing and associated expenses related to increased
activities to consummate business combination agreements and the Acquisition
agreements with the Acquired Companies, and (ii) an increase in Access' selling,
general and administrative expenses of $1.3 million, or 38.3% from $3.5 million
in 1996 to $4.8 million in 1997, which was primarily attributable to increased
personnel, outside services and advertising costs.
Amortization of goodwill and intangibles. Goodwill and intangibles result
from the excess of the purchase price over the net assets of the Acquired
Companies. Goodwill and intangibles are being amortized over periods ranging
from six to twenty years, beginning November 12, 1997.
Write-off of purchased in-process research and development. During the fourth
quarter of 1997, the Company recorded a non-recurring charge of $8.0 million
related to the fair value of purchased in-process research and development
associated with the Acquisitions.
31
<PAGE>
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net revenues. All Acquired Companies reflected an increase in net revenues
during 1996. Combined net revenues increased by $7.1 million, or 32.7%, from
$21.9 million in 1995 to $29.0 million in 1996. The major components of this
increase were (i) an increase in Access' net revenues of $2.6 million, or 39.4%,
from $6.5 million in 1995 to $9.1 million in 1996 resulting from additional
sales of audio teleconferencing services to existing customers and sales to new
customers, and (ii) an increase in CSI's revenues of $2.1 million, or 54.1%,
from $3.8 million in 1995 to $5.9 million in 1996 resulting from a $2.2 million
increase in net revenues from two significant customers, and (iii) an increase
in TCC's net revenues of $1.1 million, or 45.8%, from $2.3 million in 1995 to
$3.4 million in 1996 resulting from additional sales of audio teleconferencing
services to existing customers and sales to new customers.
Cost of revenues. Cost of revenues increased by $3.2 million, or 24.0%, from
$13.1 million in 1995 to $16.3 million in 1996 and decreased as a percentage of
net revenues from 60.1% in 1995 to 56.2% in 1996. The dollar increase in cost of
revenues was primarily attributable to (i) an increase in CSI's cost of revenues
of $906,000, or 48.3%, from $1.9 million in 1995 to $2.8 million in 1996
resulting from increased telecommunications costs associated with increased call
volumes and costs associated with the addition of nine operators, (ii) an
increase in Access' cost of revenues of $652,000, or 19.1%, from $3.4 million in
1995 to $4.1 million in 1996 resulting from increased telecommunications and
occupancy costs associated with increased call volumes, and (iii) an increase in
TCC's cost of revenues of $684,000, or 60.6%, from $1.1 million in 1995 to $1.8
million in 1996 resulting from increased telecommunications and personnel costs
associated with increased call volumes.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $3.4 million, or 48.2%, from $7.1 million
in 1995 to $10.5 million in 1996 and increased as a percentage of net revenues
from 32.6% in 1995 to 36.4% in 1996. The dollar and percentage increases in
selling, general and administrative expenses were primarily attributable to (i)
$1.3 million from VIALOG Corporation, which was formed on January 1, 1996 and
incurred expenses in connection with the consummation of business combination
agreements and the Acquisition agreements with the Acquired Companies, (ii) an
increase in Access' selling, general and administrative expenses of $873,000, or
33.8%, from $2.6 million in 1995 to $3.5 million in 1996 resulting primarily
from increases in occupancy costs and non-recurring executive compensation and
bad debt expenses and (iii) an increase in TCC's selling, general and
administrative expenses of $440,000, or 49.5%, from $889,000 in 1995 to $1.3
million in 1996 primarily attributable to the addition of two salespeople,
increased commissions and the hiring costs associated with additional staff.
32
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES--COMBINED ACQUIRED COMPANIES AND VIALOG
CORPORATION
The following table sets forth selected financial information (in thousands)
from the Acquired Companies' and VIALOG Corporation's cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
----------------- --------------- -------------
<S> <C> <C> <C>
Net cash provided by (used in):
Operating activities $ 2,619 $ 4,610 $ 2,185
Investment activities (2,014) (1,076) (57,052)
Financing activities 36 (2,821) 62,711
------- ------- --------
Net increase (decrease) in cash and cash equivalents $ 641 $ 713 $ 7,844
======= ======= ========
</TABLE>
All of the Acquired Companies had positive cash flows from operating
activities for all periods presented. Cash used in investing activities related
primarily to the acquisition of property and equipment in 1995 and 1996. In
1997, cash used in investing activities represents $3.7 million of acquisitions
of property and equipment, and $53.3 million related to the acquisition of the
Acquired Companies. Net cash provided by financing activities in 1995 represents
borrowings on long-term debt and credit lines and capital lease obligations to
finance the acquisition of capital equipment. Cash used in financing activities
in 1996 was applied to the repayment of long-term debt and capital lease
obligations and to the payment of dividends to stockholders. Cash provided by
financing activities in 1997 represents the issuance of a $75.0 million private
placement, offset by the repayment of long-term debt and capital lease
obligations and the payment of dividends to stockholders of the Acquired
Companies. The combined Acquired Companies and VIALOG Corporation had working
capital of $7.3 million at December 31, 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock Based Compensation" ("SFAS 123"). As permitted by
SFAS 123, the Company measures compensation cost in accordance with Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees". Therefore, the adoption of SFAS 123 was not material to the
Company's financial condition or results of operations; however, the proforma
impact on earnings and earnings per share have been disclosed in the Notes to
the Consolidated Financial Statements as required by SFAS 123 for companies that
continue to account for stock options under APB 25.
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." SFAS 128 establishes a different method
of computing net income (loss) per share than was required under the provisions
of Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company
presents both basic net income (loss) per share and diluted net income (loss)
per share. The impact on diluted net income (loss) per share was not material.
Prior periods presented have been restated to comply with provisions of SFAS
128.
In June 1997, the Financial Accounting Standards Board issued Statement 130
(SFAS 130), "Reporting Comprehensive Income," which establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Under this concept, all revenues,
expenses, gains and losses recognized during the period are included in income,
regardless of whether they are considered to be the results of operations of the
period. SFAS 130, which becomes effective for the Company in its year ending
December 31, 1998, is not expected to have a material impact on the consolidated
financial statements of the Company.
In June 1997, the Financial Accounting Standards Board issued Statement 131
(SFAS 131), "Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for the way that public business
enterprises report selected information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS 131, which
becomes effective for the Company in its year ending December 31, 1998, is
currently not expected to have a material impact on the Company's consolidated
financial statements and disclosures as the Company does not have multiple
reportable operating segments.
SAFE HARBOR FOR FORWARD LOOKING STATEMENTS
The Company is including the following cautionary statements to make
applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf, of the Company in this Annual Report on Form 10-K. Forward-
looking statements include statements concerning plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. Such forward-
looking statements may be identified, without limitation, by the use of the
words "anticipates," "estimates," "expects," "intends," "plans," "predicts,"
"projects," and similar expressions. From time to time, the Company may publish
or otherwise make available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether made by or on
behalf of the Company, are expressly qualified by these cautionary statements
and any other cautionary statements which may accompany the forward-looking
statements. In addition, the Company disclaims any obligation to update any
forward-looking statements to reflect events or circumstances after the date
hereof.
Forward-looking statements involve risks and uncertainties which could cause
actual results or outcomes to differ materially from those expressed in the
forward-looking statements. The
33
<PAGE>
Company's expectations, beliefs and projections are expressed in good faith and
are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to other
factors and matters discussed elsewhere herein, some of the important factors
that, in the view of the Company, could cause actual results to differ
materially from those discussed in the forward-looking statements include the
following:
Substantial Leverage and Ability to Service Debt. The Company is highly
leveraged, with substantial debt service in addition to operating expenses and
planned capital expenditures. The Acquired Companies have historically operated
at substantially lower levels of debt than that at which the Company currently
operates. The Company's level of indebtedness will have several important
effects on its future operations, including, without limitation, (i) a
substantial portion of the Company's cash flow from operations must be dedicated
to the payment of interest and principal on its indebtedness, (ii) covenants
contained in the Company's Indenture will require the Company to meet certain
financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets, and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities, (iii) the Company's leveraged position will
substantially increase its vulnerability to adverse changes in general economic,
industry and competitive conditions, and (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate and other purposes may be limited. The Company's ability to
meet its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic, industry and competitive conditions. There can be no assurance
that the Company's business will continue to generate cash flow at or above
current levels. If the Company is unable to generate sufficient cash flow from
operations in the future to service its debt, it may be required, among other
things, to seek additional financing in the debt or equity markets, to refinance
or restructure all or a portion of its indebtedness, including the Notes, to
sell selected assets, or to reduce or delay planned capital expenditures. There
can be no assurance that any such measures would be sufficient to enable the
Company to service its debt, or that any of these measures could be effected on
satisfactory terms, if at all.
Senior Credit Facility; Effective Subordination. The Company anticipates
entering into a credit facility to provide additional liquidity. The Company
has accepted a proposal and is currently negotiating the terms for a senior
credit facility ("Senior Credit Facility") (a revolving credit, term loan and
capital expenditures facility in the aggregate principal amount of $15.0
million). However, the Company has not yet entered into a binding agreement and,
accordingly, there can be no assurance that the Company will be able to obtain
the Senior Credit Facility, or any similar credit facility. If the Company is
unable to obtain a credit facility, it may be required to postpone and/or change
significant elements of its business strategy. In addition, the terms of the
proposed commitment for the Senior Credit Facility require a pledge of
substantially all of the assets of the Company and the Subsidiary Guarantors.
Accordingly, the Notes and Subsidiary Guarantees will be effectively
subordinated to the extent of the collateral used to secure such bank
indebtedness. In the event of a default on the Notes, or a bankruptcy,
liquidation or reorganization of the Company, such assets will be available to
satisfy obligations with respect to the indebtedness secured thereby before any
payment therefrom could be made on the Notes.
Absence of Consolidated Operating History; Difficulty of Integrating the
Acquired Companies. VIALOG Corporation was founded on January 1, 1996 and has
only conducted operations and generated revenues since November 12, 1997, the
date of the Acquisitions. The Acquired Companies operated as separate,
independent businesses prior to the closing of the Acquisitions. The Company
has used the purchase method of accounting to record the Acquisitions.
Consequently, the pro forma combined financial information contained in this
Report may not be indicative of the Company's future operating results and
financial condition. In addition, the Acquisition agreements place
restrictions on the Company's ability to make certain changes for a two-year
period following the Acquisitions. The successful and timely integration of
the operations of the Acquired Companies is critical to the Company's future
financial performance. There can be no assurance that the Company will be
successful in integrating any of the operations of the Acquired Companies or, if
integrated, that such combined operations will not demonstrate significant
operating inefficiencies. The failure of the Company to integrate the operations
of the Acquired Companies successfully could have a material adverse effect on
the Company's business, financial condition and results of operations.
Pretax Losses. Certain of the Acquired Companies incurred pretax losses in
1996 and 1995. There can be no assurance that such Acquired Companies will
achieve profitability going forward. The failure of such Acquired Companies to
achieve profitability will have a material adverse effect on the Company's
business, financial condition and results of operations.
Competition. The teleconferencing services industry is highly competitive
and subject to rapid change. The Company currently competes with companies
which have substantially greater financial, sales, marketing, managerial,
operational and other resources, as well as greater name recognition, than the
Company. As a result, potential competitors may be able to respond more
effectively than the Company to new or emerging technologies and changes in
customer requirements, to initiate or withstand significant price decreases or
to devote substantially greater resources than the Company in order to develop
and promote new services. There can be no assurance that new competitors,
including current customers that choose to insource their teleconferencing
services, will not enter the Company's markets or that consolidations or
alliances among current competitors will not create significant new
competition. In order to remain competitive, the Company will be required to
provide superior customer service and to respond effectively to the
introduction of new and improved services offered by its competitors. Any
failure of the Company to accomplish these tasks or otherwise to respond to
competitive threats could have a material adverse effect on the Company's
business, financial condition and results of operations.
Potential Acquisitions. One element of the Company's business strategy is to
acquire additional electronic group communications service businesses. However,
the Company is aware of only a limited number of potential acquisition
candidates. Certain of the Company's principal competitors have each recently
acquired a private conference service bureau ("PCSB"), which may increase
competition for the remaining acquisition opportunities in the teleconferencing
industry. Continued consolidation in the industry, and the potential entry of
RBOCs into the teleconferencing industry, may intensify such competition and
increase the price which the Company would have to pay in connection with any
future acquisitions. The Company currently has no binding agreements to effect
any acquisitions, although the Company is currently in discussions with several
acquisition candidates. During the course of negotiating and planning the
Acquisitions, VIALOG Corporation entered into discussions with a number of
PCSBs, including the Acquired Companies, regarding their possible participation
in the combination of the Acquired Companies. Discussions with any company which
did not participate in the Acquisitions could resume at any time and one or more
acquisitions could occur within a short period of time thereafter. However,
there can be no assurance that any discussions will in fact resume or that there
will be any additional acquisitions. The inability of the Company to implement
its acquisition strategy successfully or the failure to integrate new businesses
or operations into its current operations could have a material adverse effect
on the Company's business, financial condition and results of operations.
Technological Considerations. The Company currently derives a substantial
portion of its net revenues from the sale of audio teleconferencing services.
If the manufacturers of private branch exchanges ("PBXs"), the equipment used
by most businesses and institutions to handle their internal telephone
requirements, develop improved, cost-effective PBX capabilities for handling
teleconferencing calls with the quality and functionality of existing MCUs
used in the teleconferencing business, the Company's customers could choose to
purchase such equipment and hire the personnel necessary to service their
teleconferencing needs through internal telephone systems. The loss of such
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. Additionally, if Internet
technology can be modified to accommodate multipoint voice transmission with
audio quality comparable to that of MCUs used in the teleconferencing
business, the availability of such technology could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Long Distance Services Contracts. A significant portion of the Company's
direct costs are attributable to the purchase of local and long distance
telephone services. There can be no assurance that competition in the long
distance services market will continue to increase, that any increased
competition will reduce the cost of long distance services or that the
Company's purchasing strategy will result in cost savings. If the costs of
long distance services increase over time, the Company's current purchasing
strategy, which calls for shorter-term contracts, may place it at a
competitive disadvantage with respect to competitors that have entered into
longer-term contracts for long distance services. There can be no assurance
that the Company's analysis of the future costs of long distance services will
be accurate, and the failure to predict future cost trends accurately could
have a material adverse effect on the Company's business, financial condition
and results of operations. Certain of the Company's existing contracts have
remaining terms in excess of one year and require the Company to pay premiums
over current market rates for long distance services. These contracts impose
substantial monetary penalties for early termination. Although the Company
intends to attempt to renegotiate these contracts to obtain more favorable
rates, there can be no assurance that the Company will be able to do so. The
failure of the Company to renegotiate these contracts will require the Company
to continue to pay premiums over current market rates for long distance
services.
Regulation. In general, the telecommunications industry is subject to
extensive regulation by federal, state and local governments. Although there
is little or no direct regulation in the United States of the core electronic
group communications services offered by the Company, various government
agencies, such as the Federal Communications Commission (the "FCC"), have
jurisdiction over some of the Company's current and potential suppliers of
telecommunications services, and government regulation of those services may
have a direct impact on the cost of the Company's electronic group
communications services. The Telecommunications Act of 1996 is being contested
both administratively and in the courts, and opinions vary widely as to the
effects and timing of various aspects of the law. There can be no assurances
at this time that the Telecommunications Act of 1996 will create any
opportunities for the Company, that local access services will be provided by
the IXCs, or that the RBOCs will be able to offer long distance services
including teleconferencing. The Telecommunications Act of 1996 has effected
significant changes in the telecommunications industry and the Company is
unable to predict the extent to which such changes or the implementation of
the Telecommunications Act of 1996 by the FCC may ultimately affect its
business. There can be no assurance that the FCC or other government agencies
will not seek in the future to regulate the prices, conditions or other
aspects of the electronic group communications services offered by the
Company, that the FCC will not impose registration, certification or other
requirements on the provision of those services, or that the Company would be
able to comply with any such requirements. In addition, the Company is subject
to laws and regulations that affect its ability to provide certain of its
enhanced services, such as those relating to privacy and the recording of
telephone calls. Changes in the current federal, state or local legislation or
regulation could have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, government
regulations in countries other than the United States vary widely and may
restrict the Company's ability to offer its services in those countries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Set forth below is a listing of the Consolidated Financial Statements of
the Company with reference to the page numbers in this Form 10-K at which such
Statements are disclosed.
<TABLE>
<CAPTION>
PAGE NUMBERS
<S> <C>
Report of Management................................................................ 35
Independent Auditors' Report........................................................ 36
Consolidated Balance Sheets at December 31, 1996 and 1997........................... 37
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1997........................................................ 38
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1996 and 1997.................................................. 39
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997........................................................ 40
Notes to Consolidated Financial Statements.......................................... 42
</TABLE>
34
<PAGE>
REPORT OF MANAGEMENT
The accompanying consolidated financial statements and related information
of VIALOG Corporation and subsidiaries (the "Company") have been prepared by
management, which is responsible for their integrity and objectivity. The
statements have been prepared in conformity with generally accepted accounting
principles and necessarily include some amounts based on management's best
estimates and judgments.
Management is also responsible for maintaining a system of internal controls
as a fundamental requirement for the operational and financial integrity of
results. The Company has established and maintains a system of internal
controls designed to provide reasonable assurance that the books and records
reflect the transactions of the Company and that its established policies and
procedures are carefully followed. The Company's internal control system is
based upon standard procedures, policies and guidelines and organizational
structures that provide an appropriate division of responsibility and the
careful selection and training of qualified personnel.
The Company's accompanying consolidated financial statements have been audited
by KPMG Peat Marwick LLP, independent certified public accountants, whose audit
was made in accordance with generally accepted auditing standards. Management
has made available to KPMG Peat Marwick LLP all of the Company's financial
records and related data, as well as the minutes of stockholders' and directors'
meetings. Furthermore, management believes that all representations made to
KPMG Peat Marwick LLP during its audit were valid and appropriate. The Report of
Independent Public Accountants appears below.
Glenn D. Bolduc John J. Dion
Chief Executive Officer, Vice President - Finance
President and Treasurer
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
VIALOG Corporation:
We have audited the accompanying consolidated balance sheets of VIALOG
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for each of the years in the two-year period ended December 31, 1997.
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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of VIALOG
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the two-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
February 20, 1998
36
<PAGE>
VIALOG CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
---- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 337 $ 9,567
Accounts receivable, net of allowance for doubtful
accounts of $0 and $32, respectively - 5,686
Prepaid expenses - 156
Deferred offering costs 377 -
Other current assets 13 101
------ --------
Total current assets 727 15,510
Property and equipment, net 7 7,544
Deferred debt issuance costs - 7,324
Goodwill and intangible assets, net - 44,391
Deferred income taxes 522 -
Other assets 7 314
------ --------
Total assets $1,263 $ 75,083
====== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt $ - $ 397
Accounts payable 313 2,129
Accrued expenses 663 5,725
------ --------
Total current liabilities 976 8,251
Long-term debt, less current portion - 71,539
Other long-term liabilities - 175
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued and outstanding - -
Common stock, $0.01 par value, 30,000,000 shares
authorized; 2,695,300 and 3,486,380 shares,
respectively, issued and outstanding 28 35
Additional paid-in capital 1,044 11,689
Retained deficit (785) (16,606)
------ --------
Total stockholders' equity (deficit) 287 (4,882)
------ --------
Total liabilities and stockholders' equity (deficit) $1,263 $ 75,083
====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Net revenues $ - $ 4,816
Cost of revenues - 2,694
------- --------
Gross profit - 2,122
Selling, general and administrative expenses 1,308 7,249
Amortization of goodwill and intangibles - 306
Write-off of purchased in-process research and development - 8,000
------- --------
Operating loss (1,308) (13,433)
Interest income (expense), net 1 (1,866)
------- --------
Loss before income taxes (1,307) (15,299)
Income tax benefit (expense) 522 (522)
------- --------
Net loss $ (785) $(15,821)
======= ========
Net loss per share $ (0.38) $ (5.48)
======= ========
Weighted average shares outstanding 2,088,146 2,889,005
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
38
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT EQUITY (DEFICIT)
------ --------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Initial investment at incorporation on
January 1, 1996 1,332,800 $14 $ (7) $ - $ 7
Additional shares issued in connection
with initial capitalization 360,000 4 21 - 25
Issuance of common stock:
Contribution of common stock to
capital (250,000) (2) 2 - -
Outsiders by private placement dated
May 8, 1996 378,000 4 101 - 105
Outsiders by private placement dated
October 22, 1996 380,000 4 756 - 760
Employees in lieu of payment for
services 242,500 2 91 - 93
Consultants in lieu of payment for
services 177,000 2 28 - 30
Options exercised 75,000 - 2 - 2
Options granted to consultants - - 50 - 50
Net loss - - - (785) (785)
--------- --- ------- -------- --------
Balance at December 31, 1996 2,695,300 28 1,044 (785) 287
Options exercised 104,000 - 2 - 2
Conversion of 10% Subordinated
Convertible Notes Payable 127,750 1 254 - 255
Issuance of common stock in connection
with acquisitions 559,330 6 3,211 - 3,217
Warrants related to 8% Notes Payable
dated February 24, 1997 - - 129 - 129
Warrants related to 12 3/4% Senior Notes
Payable dated November 12, 1997 - - 6,091 - 6,091
Options granted to consultants - - 180 - 180
Options granted to employees - - 778 - 778
Net loss - - - (15,821) (15,821)
--------- --- ------- -------- --------
Balance at December 31, 1997 3,486,380 $35 $11,689 $(16,606) $ (4,882)
========= === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
39
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(785) $(15,821)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization - 273
Amortization of goodwill and intangibles - 306
Amortization of debt issuance costs and debt discount - 545
Provision for doubtful accounts - 32
Deferred income taxes (522) 522
Write-off of deferred offering costs - 377
Compensation expense for issuance of common stock and options 173 958
Write-off of purchased in-process research and development - 8,000
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable - (576)
Prepaid expenses and other current assets (13) (68)
Other assets (7) (64)
Accounts payable 313 (351)
Accrued expenses 663 1,716
Other long-term liabilities - 3
----- --------
Cash flows used in operating activities (178) (4,148)
----- --------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired - (53,308)
Additions to property and equipment (7) (454)
----- --------
Cash flows used in investing activities (7) (53,762)
----- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt and warrants - 75,755
Payments of long-term debt of businesses acquired - (2,239)
Payments of long-term debt - (533)
Proceeds from issuance of common stock 899 2
Deferred offering costs (377) -
Deferred debt issuance costs - (5,845)
----- --------
Cash flows provided by financing activities 522 67,140
----- --------
Net increase in cash and cash equivalents 337 9,230
Cash and cash equivalents at beginning of period - 337
----- --------
Cash and cash equivalents at end of period $ 337 $ 9,567
===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
VIALOG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1996 1997
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ - $ 72
======= =======
Taxes $ - $ 1
======= =======
Non-cash investing and financing transactions:
Conversion of 10% Subordinated Convertible Notes Payable $ - $ 256
======= =======
Issuance of common stock in connection with acquisitions $ - $ 3,217
======= =======
Issuance of warrants to the initial purchaser of the Senior
Notes and included in deferred debt issuance costs $ - $ 1,740
======= =======
Acquisitions of businesses:
Assets acquired $ - $66,523
Liabilities assumed and issued - (9,096)
Common stock issued - (3,217)
------- -------
Cash paid - 54,210
Less cash acquired - (902)
------- --------
Net cash paid for acquisitions of businesses $ - $ 53,308
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE>
VIALOG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
VIALOG Corporation ("VIALOG") was incorporated in Massachusetts on
January 1, 1996 as Interplay Corporation. In January 1997, the Company changed
its name to VIALOG Corporation. VIALOG was formed to create a national provider
of electronic group communications services, consisting primarily of operator-
assisted audio teleconferencing, as well as video, data and unattended audio
teleconference services. On November 12, 1997, VIALOG closed a private
placement of $75,000 in Senior Notes due in 2001 (the "Private Placement").
Contemporaneously with the closing of the Private Placement, VIALOG acquired six
group communications service providers located in the United States (See Note 2
"Acquisitions").
Prior to November 12, 1997, VIALOG did not conduct any operations, and
all activities related to the acquisitions and the completion of financing
transactions to fund the acquisitions.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of VIALOG and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
(C) MANAGEMENT ESTIMATES
Management of VIALOG has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(D) REVENUE RECOGNITION
Revenue from conference calls is recognized upon completion of the call.
Revenue from services is recognized upon performance of the service.
42
<PAGE>
(E) CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand and short-term
investments with original maturities of three months or less.
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation of property
and equipment is provided on a straight-line basis over the estimated useful
lives of the respective assets. The estimated useful lives are as follows:
three to ten years for office furniture, fixtures and equipment, five to ten
years for conferencing equipment, and three to seven years for computer
equipment. Capitalized lease equipment and leasehold improvements are amortized
over the lives of the leases, ranging from three to ten years.
(G) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets, including assembled workforce and
developed technology, result from the excess of the purchase price over the net
assets of businesses acquired. Goodwill and intangibles are being amortized on
a straight-line basis over periods ranging from six to twenty years, which
represent their estimated useful lives.
(H) RESEARCH AND DEVELOPMENT
VIALOG maintains technical support and engineering departments that, in
part, develop features and products for group communications. In accordance
with SFAS No. 2, Accounting for Research and Development Costs, VIALOG charges
to expense (included in cost of revenues) that portion of the department costs
which relate to research and development activities. Prior to the acquisition
of the businesses described in Note 2 "Acquisitions", VIALOG did not conduct any
research and development activities. Research and development costs for the
period ended December 31, 1997 reflect the activities of the acquired businesses
from November 12, 1997 through December 31, 1997 and were not significant.
(I) STOCK-BASED COMPENSATION
Effective January 1, 1996, VIALOG adopted the provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation". VIALOG has elected to continue to account for stock options at
intrinsic value under Accounting Principles Board Opinion No. 25 with disclosure
of the effects of fair value accounting on net income on a pro forma basis (See
Note 11 "Employee Benefit Plans").
43
<PAGE>
(J) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
VIALOG adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
during 1996. Adoption of this Statement did not have a material impact on
VIALOG's financial position, results of operations, or liquidity.
(L) LOSS PER SHARE
In 1997, VIALOG adopted the provisions of Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share". SFAS 128
requires the presentation of basic earnings per share and diluted earnings per
share for all periods presented. For the years ended December 31, 1996 and 1997,
the loss per share was calculated based on weighted average common shares
outstanding. Common stock equivalents were excluded from the diluted loss per
share calculation as they would be antidilutive. As a result, diluted loss per
share is the same as basic loss per share, and has not been presented
separately.
(2) ACQUISITIONS
On November 12, 1997, VIALOG acquired all of the issued and outstanding
stock of Telephone Business Meetings, Inc. ("Access"), Conference Source
International, Inc. ("CSI"), Kendall Square Teleconferencing, Inc. ("TCC"),
American Conferencing Company, Inc. ("Americo") and Communication Development
Corporation ("CDC"), and substantially all of the net assets of Call Points,
Inc. ("Call Points") (together, the "Acquired Companies"). These acquisitions
occurred contemporaneously with the closing of the Private Placement of a total
of $75,000 in Senior Notes due 2001 (See Note 6 "Long-Term Debt"). The
acquisitions were accounted for using the purchase method. The total purchase
price of the Acquired Companies consisted of $52,980 in cash paid to the
stockholders of the Acquired Companies (the "Sellers"), $448 of acquisition
costs, the issuance of 559,330 shares of common stock to the Sellers and
approximately $782 in cash related to tax reimbursements. The purchase price
exceeded the fair value of the net assets acquired by $52,694. The excess was
allocated to goodwill and other intangibles which are being amortized over
periods from 6 to 20 years. In addition, at the time of the acquisitions, VIALOG
repaid $2,239 of long-term debt of the Acquired Companies.
In connection with the acquisitions, VIALOG recorded a non-recurring
charge of $8,000 related to the fair value of purchased in-process research and
development. The in-process research and development had not yet reached
technological feasibility and had no alternative future use. The impact of this
non-recurring charge was a reduction of goodwill and related amortization
expense.
The operating results of the Acquired Companies have been included in the
Consolidated Statement of Operations from the date of acquisition. The
unaudited pro forma combined historical results for the years ended December 31,
1996 and 1997 below assume the acquisitions occurred at the beginning of fiscal
1996:
44
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) 1996 1997
- --------------------------------------------- ---- ----
<S> <C> <C>
Net revenues $28,298 $35,917
Cost of revenues 14,811 18,844
-------- --------
Gross profit 13,487 17,073
Selling, general and administrative expenses 9,425 15,621
Amortization of goodwill and intangibles 2,495 2,495
-------- --------
Operating income (loss) 1,567 (1,043)
Interest expense, net (12,637) (12,759)
-------- --------
Loss before income taxes (11,070) (13,802)
Income tax expense (benefit) (540) 522
-------- --------
Net loss $(10,530) $(14,324)
======== ========
Net loss per share $ (3.98) $ (4.26)
======== ========
Pro forma weighted average shares outstanding 2,647,476 3,362,284
========= =========
</TABLE>
The pro forma results include amortization of the goodwill and intangible
assets described above and interest expense on debt assumed issued to finance
the acquisitions. The pro forma results do not include the write-off of in-
process research and development expenses at the date of acquisition. The pro
forma results are not necessarily indicative of the results that would have been
obtained had these events actually occurred at the beginning of the periods
presented, nor are they necessarily indicative of future consolidated results.
(3) CASH AND CASH EQUIVALENTS
VIALOG classifies all investments with an original maturity of less than
ninety days as cash equivalents and values them at cost which approximates
market. VIALOG's policy is to invest cash primarily in income producing short-
term instruments and to keep uninvested cash balances at minimum levels.
(4) ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
Prior to the acquisitions discussed in Note 2 "Acquisitions", VIALOG had no
accounts receivable. At acquisition, the accounts receivable of the Acquired
Companies were recorded at fair market value. The allowance for doubtful
accounts at December 31, 1997 represents the provision charged to operations for
the period November 12, 1997 through December 31, 1997.
<TABLE>
<CAPTION>
BALANCE AT BEGINNING PROVISION CHARGED TO NET DEDUCTIONS BALANCE AT
OF PERIOD OPERATIONS FROM ALLOWANCE END OF PERIOD
--------- ---------- -------------- -------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1997 $ - $ 32 $ - $ 32
Year Ended December 31, 1996 $ - $ - $ - $ -
</TABLE>
45
<PAGE>
(5) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Office furniture and equipment $ 7 $ 869
Conferencing equipment - 5,163
Computer equipment - 697
Equipment under capital lease - 898
Leasehold improvements - 190
----- ------
7 7,817
Less: accumulated depreciation and amortization - (273)
----- ------
7 $7,544
===== ======
</TABLE>
(6) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
12 3/4% Senior Notes Payable, due 2001, net of
unamortized discount of $0 and $4,203, respectively $ - $70,797
Capitalized lease obligations - 1,044
Other long-term debt - 95
----- -------
Total long-term debt - 71,936
Less current portion - 397
----- -------
Total long-term debt, less current portion $ - $71,539
===== =======
</TABLE>
NOTES PAYABLE
On February 24, 1997, VIALOG issued $500 of 8% promissory notes due on the
earlier of (a) ten days following the closing of an initial public offering or
(b) one year from their issue date. Warrants to purchase 111,118 common shares
at an exercise price of $4.50 were issued in conjunction with the promissory
notes. The warrants may be exercised between November 1997 and February 1999.
In November 1997, the promissory notes were repaid, including accrued interest,
from the proceeds of the Private Placement, which was completed on November 12,
1997.
CONVERTIBLE BRIDGE FACILITY
In October 1997, VIALOG completed a private placement to certain of its
existing investors of $255.5 of 10% subordinated convertible promissory notes
due on the earlier of (a) five days after the closing of a sale of VIALOG's
equity securities or debt securities for an aggregate price of $50,000 or more,
or (b) January 1, 1998. The notes were convertible at the option of the holders
at any time prior to and including the due date into such number of shares of
VIALOG's
46
<PAGE>
common stock as determined by dividing the aggregate unpaid principal amount of
the notes by the conversion price of $2.00 per share, subject to adjustment
pursuant to the terms of the notes. In November 1997, the notes were converted
into 127,750 shares of VIALOG's common stock.
SENIOR NOTES PAYABLE
On November 12, 1997, VIALOG completed a Private Placement of $75,000 of
Senior Notes, Series A. The Senior Notes bear interest at 12 3/4% per annum,
payable semi-annually on May 15 and November 15 of each year, commencing May 15,
1998. The Senior Notes are guaranteed by the Acquired Companies and mature on
November 15, 2001 and are redeemable in whole or in part at the option of VIALOG
on or after November 15, 1999 at 110% of the principal amount thereof, and on or
after November 15, 2000 at 105% of the principal amount thereof, in each case
together with accrued interest to the date of redemption. In addition, there are
certain other early redemption options available to VIALOG at any time on or
prior to November 15, 1999, as specified in the indenture. Warrants to purchase
1,059,303 common shares at an exercise price of $.01 per share were issued in
conjunction with the Senior Notes. Of the total issued, 756,645 warrants were
attached to the Senior Notes and 302,658 were issued to the original purchaser
of the Senior Notes. The value of the warrants attached to the Senior Notes was
$4,351 and was recorded as debt discount and additional paid-in capital. The
value of the warrants issued to the initial purchaser of the Senior Notes was
$1,740 and was recorded as deferred debt issuance costs. The warrants may be
exercised between November 1997 and November 2001. The proceeds from the Senior
Notes were used to complete business acquisitions (see Note 2 "Acquisitions"),
repay outstanding indebtedness and fund working capital requirements. On
February 12, 1998, VIALOG offered to exchange Senior Notes Series B for Senior
Notes Series A (See Note 15 "Subsequent Event").
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net for the years ended December 31, 1996 and
1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Interest income $ 1 $ 56
Interest expense - (1,922)
----- -------
Interest income (expense), net 1 (1,866)
===== =======
</TABLE>
(7) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997 consist primarily of accrued
interest of $0 and $1,310, respectively; accrued payroll and related costs of
$257 and $1,119, respectively; accrued acquisition and financing related
expenses of $406 and $1,550, respectively; and other accrued expenses of $0 and
$1,746 respectively.
47
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES
VIALOG conducts its operations primarily in leased facilities under
operating lease arrangements expiring on various dates through May 2008.
Certain long-term capital leases have been included in Property and Equipment
and Long-Term Debt in the accompanying consolidated balance sheets.
Future minimum lease payments under capital and operating leases with
initial terms of one year or more are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
- ------------------------ -------------- ----------------
<S> <C> <C>
1998 $ 485 $1,035
1999 434 980
2000 232 938
2001 90 809
2002 1 750
Thereafter - 2,241
------ ------
Total minimum lease payments 1,242 $6,753
======
Less: Amount representing interest on capital leases 198
------
Present value of minimum lease payments at $1,044
December 31, 1997 ======
</TABLE>
Total operating lease rental expense for VIALOG for the years ended
December 31, 1996 and 1997 were $0 and $198, respectively.
(9) PROVISION FOR INCOME TAXES
Income tax (expense) benefit for the years ended December 31, 1996 and 1997
consists of the following:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
December 31, 1996:
Federal $ - $ 398 $ 398
State - 124 124
------- ----- -----
$ - $ 522 $ 522
======= ===== =====
December 31, 1997:
Federal $ - $ 398) $(398)
State - (124) (124)
------- ----- -----
$ - $(522) $(522)
======= ===== =====
</TABLE>
48
<PAGE>
Income tax benefit differed from the amounts computed by applying the U.S.
statutory federal income tax rate of 34% as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
---- ----
<S> <C> <C>
Computed "expected" tax benefit $ 445 $ 5,202
State and local income taxes, net of federal tax benefit 82 918
Non deductible amounts and other differences (5) (167)
Change in valuation allowance for deferred taxes
allocated to income tax expense - (6,469)
Other - (6)
----- -------
Tax benefit (expense) $ 522 $ (522)
===== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portion of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997
---- ----
<S> <C> <C>
Deferred tax asset:
Organizational expenditures and start-up costs $ 522 $ 2,029
Accrual to cash accounting adjustment - (162)
Purchased intangibles - 3,040
Net operating loss carry forwards - 1,563
Capital loss and charitable contribution carry forwards - 2
Property and equipment - (92)
Bad debts - 24
Original issue discount amortization - 13
Other - 52
Valuation allowance - (6,469)
----- -------
Net deferred tax assets $ 522 $ -
===== =======
</TABLE>
VIALOG had net operating loss carryforwards of $0 and $ 3,906 at December
31, 1996 and 1997, respectively, which expire in 2012.
In assessing the realizability of deferred tax assets, VIALOG considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based on management's projections for future
taxable income over the periods in which the deferred tax assets are deductible,
a valuation allowance has been established for the deferred tax assets.
(10) STOCKHOLDERS' EQUITY
(a) Sale of Common Stock
During 1996, VIALOG sold common stock through several private placements.
The proceeds of the sales were used primarily for expenses relating to the
business acquisition agreements and a proposed financing. A total of 758,000
shares of common stock were sold for aggregate net proceeds of $865.
49
<PAGE>
(b) Common Stock Grants
Between February and November 1996, VIALOG issued a total of 419,500 shares
of common stock to consultants and employees as an inducement to them to provide
services to VIALOG. Compensation expense of $123, which represents the estimated
fair market value of the stock granted, was recorded in connection with these
transactions.
(c) Common Stock Split
On October 16, 1997, the Board of Directors approved a 2-for-1 stock split
of VIALOG's common stock. All prior periods have been restated to reflect this
stock split effected as a recapitalization.
(d) Preferred Stock
On February 14, 1997, the stockholders voted to authorize 10,000,000 shares
of preferred stock. No shares of preferred stock are issued and outstanding.
(e) Warrants
During 1997, VIALOG issued warrants to purchase common stock in connection
with certain financing transactions (see Note 6 "Long-Term Debt").
(11) EMPLOYEE BENEFIT PLANS
(a) The 1996 Stock Plan
On February 14, 1996, the Board of Directors and VIALOG's stockholders
approved VIALOG's 1996 Stock Plan (the "Plan"). The purpose of the Plan is to
provide directors, officers, key employees, consultants and other service
providers with additional incentives by increasing their ownership interests in
VIALOG. Individual awards under the plan may take the form of one or more of:
(i) incentive stock options ("ISOs"); (ii) non-qualified stock options
("NQSOs"); (iii) stock appreciation rights ("SARs"); and (iv) restricted stock.
The Compensation Committee administers the Plan and generally selects the
individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of common stock that may be subject to
outstanding awards, determined immediately after the grant of any award, may not
exceed 3,000,000 and 3,250,000 shares as of December 31, 1996 and 1997,
respectively. Shares of common stock attributable to awards which have expired,
terminated or been canceled or forfeited are available for issuance or use in
connection with future awards.
The Plan will remain in effect until February 14, 2006 unless terminated
earlier by the Board of Directors. The Plan may be amended by the Board of
Directors without the consent of the stockholders of VIALOG, except that any
amendment, although effective when made, will be subject to stockholder approval
if required by any Federal or state law or regulation by the rules of any stock
exchange or automated quotation system on which the common stock may then be
listed or quoted.
50
<PAGE>
The following is a summary of stock option activity:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Options outstanding at December 31, 1995 - $ -
Granted 1,746,132 0.29
Exercised (75,000) 0.03
Canceled (576,000) 0.03
---------- --------
Options outstanding at December 31, 1996 1,095,132 0.45
Granted 763,849 4.14
Exercised (104,000) 0.03
Canceled (400,110) 1.03
--------- --------
Options outstanding at December 31, 1997 1,354,871 $ 2.39
========= ========
</TABLE>
The options generally vest in equal quarterly installments over 3 years and
have a 10 year term. At December 31, 1996 and 1997, 75,000 and 467,771 options,
respectively, were exercisable at weighted average exercise prices of $.2775 and
$1.03 per share, respectively. At December 31, 1997, there were 1,716,129
additional shares available for grant under the Plan.
The following is a summary of options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER WEIGHTED AVERAGE REMAINING NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
- --------------- ------------- --------------- ------------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.25 - $0.278 547,552 0.19 6.7 years 360,306 0.21
$2.00 387,470 2.00 9.4 43,720 2.00
$4.50 - $5.75 419,849 5.63 9.0 63,745 4.97
------------- -----------
1,354,871 2.39 467,771 1.03
============= ===========
</TABLE>
In 1996 VIALOG granted a total of 111,112 options to consultants.
Compensation expense of $50 has been recorded in connection with these
transactions in 1996. During 1997, modifications were made to the vesting and
expiration periods of certain outstanding options. Compensation expense of $958
has been recorded in 1997 in connection with these modifications.
VIALOG applies APB Opinion No. 25 accounting for stock issued to employees
in accounting for its Plan and, accordingly, compensation cost is only
recognized in the financial statements for stock options granted to employees
when the fair value on the grant date exceeds the exercise price. Had VIALOG
determined compensation cost based on the fair value at grant date for its stock
options under SFAS No. 123, its net loss would have been increased to the pro
forma amounts indicated below:
51
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
-------- ----------
<S> <C> <C>
Net loss
As reported $ (785) $ (15,821)
Pro forma $ (800) $ (15,901)
Loss per share
As reported $ (0.38) $ (5.48)
Pro forma $ (0.38) $ (5.50)
</TABLE>
The per share weighted-average fair value of stock options granted during
1996 and 1997, respectively, were $.135 and $1.00 for ISOs and $.37 and $1.30
for NQSOs on the date of grant using the minimum value option-pricing model with
the following weighted-average assumptions used for grants in 1996 and 1997,
respectively: no expected dividend yields for both periods, risk-free interest
rates of 6.1% and 5.88%, and expected lives of 5 years for both periods.
(b) Retirement Plan
Access, one of the Acquired Companies, maintains a defined contribution
retirement plan (the "Plan") under Section 401(k) of the Internal Revenue Code
which covers all eligible employees. Employee contributions are voluntary and
vest with the employee immediately. The Plan provides for matching
contributions by Access of 50% of employee contributions, up to certain limits
as defined in the Plan. Access' matching contributions vest over the employee's
period of service. Access' matching contributions to the Plan for the period
ended December 31, 1997 was $1.
Effective December 31, 1997, all employees became fully vested in Access'
matching contributions. Effective January 1, 1998, Access' matching
contributions were discontinued.
(c) Employment Agreements
Certain of the executive officers of VIALOG have entered into employment
agreements with VIALOG which provide for severance payments in the event their
employment is terminated prior to the expiration of their employment terms. The
severance terms range from six months to three years, depending on the timing
and circumstances of the termination.
(12) SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, VIALOG had one customer which
represented 8.4% of total net revenues.
(13) RELATED PARTY TRANSACTIONS
The following summarizes the significant related party transactions:
(a) During 1997 VIALOG paid $1,810 for legal fees to a firm having a
member who is also a director of VIALOG.
52
<PAGE>
(b) VIALOG has implemented a policy whereby neither VIALOG nor any
subsidiary (which includes the Acquired Companies) will enter into contracts or
business arrangements with persons or entities owned in whole or in part by
officers or directors of VIALOG or any subsidiary except on an arms-length basis
and with the approval of VIALOG's Board of Directors. VIALOG's bylaws require
that any approval must be by a majority of the independent directors then in
office who have no interest in such contract or transaction.
(14) LITIGATION
In connection with the acquisition of Call Points, one of the Acquired
Companies, VIALOG agreed to assume all disclosed liabilities with the exception
of any liabilities arising out of Equal Employment Opportunity Commission
("EEOC") claims and litigation filed against Call Points and Ropir Industries,
Inc. ("Ropir"), the sole stockholder and parent corporation of Call Points, by
certain former and current employees. On or about October 30, 1997, 11 employees
or former employees of Call Points filed claims in federal district court
against Call Points, Ropir and certain other parties named therein. Complainants
in these cases could seek to name VIALOG as a defendant in such pending
litigation and could seek to hold VIALOG liable for damages resulting from the
litigation as a successor in interest to Call Points. In addition to equitable
relief, the complainants are seeking back pay, compensatory and punitive damages
and attorneys fees based on allegations of discrimination, retaliation and
racially harassing atmosphere. Although VIALOG believes it has defenses to any
such claim, there can be no assurance that any such defense would be successful.
The principal stockholder of Call Points has agreed to indemnify VIALOG from any
liability relating to such claims and $250 of the purchase price for the
acquisition of Call Points has been placed in escrow with a third party to
secure such indemnification obligations. In light of such indemnification,
VIALOG does not believe that such claims, if successful, would have a material
adverse effect on VIALOG.
A former employee of CSI, one of the Acquired Companies, has claimed in
writing that he may be entitled to up to five percent of the stock of CSI, based
on an unsigned paper outlining possible employment terms. CSI's position is
that the only agreements with such employee were set forth in two successive
executed employment agreements, each of which had a specific provision that such
agreement was inclusive as to the terms of employment. VIALOG and CSI believe
that such claim is without merit.
(15) SUBSEQUENT EVENT
On February 12, 1998, VIALOG offered to exchange (the "Exchange Offer")
$75,000 of 12 3/4% Senior Notes Series B (the "Exchange Notes") for the
existing $75,000 of 12 3/4% Senior Notes Series A (the "Old Notes"). In
connection with the Exchange Offer, VIALOG filed with the Securities and
Exchange Commission a Registration Statement on Form S-4 for the registration of
the Exchange Notes under the Securities Act of 1933. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Old Notes except for certain transfer restrictions and registration rights
relating to the Old Notes. VIALOG did not receive any proceeds from the
Exchange Offer.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with regard to the
directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ------------------------------------------------------------
<S> <C> <C>
Glenn D. Bolduc(1)........................... 45 Chief Executive Officer, President, Treasurer and Director
John J. Dion................................. 39 Vice President--Finance
Robert F. Moore.............................. 43 Vice President--Marketing and Business Development
Gary G. Vilardi.............................. 43 Vice President--Sales
John R. Williams............................. 37 Vice President--Operations
Michael Shepherd............................. 34 Vice President - Wholesale Sales
C. Raymond Marvin............................ 59 Vice President
Joanna M. Jacobson(1)(2)..................... 38 Director
David L. Lougee(1)(2)........................ 58 Director
David L. Lipsky.............................. 52 Director and President--Americo
Patti R. Bisbano............................. 53 Director and President--CDC
William P. Pucci............................. 52 President--Access
Judy B. Crawford............................. 45 President--CSI
Courtney P. Snyder........................... 48 President--TCC
Olen E. Crawford............................. 45 President--Call Points, Inc.
</TABLE>
____________________
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
GLENN D. BOLDUC has served as Chief Executive Officer, President and a
Director of the Company since October 1, 1996 and as Treasurer since July 9,
1997. From July 1989 to September 1996, Mr. Bolduc served as Chief Financial
Officer of MutliLink, Inc., an independent supplier of audio conferencing
bridges.
JOHN J. DION has served as Vice President--Finance for the Company since
November 1996, and served as a Director from July 9, 1997 to November 12, 1997.
From August 1985 to August 1995, Mr. Dion served in various financial positions
for DSC Communications Corporation, a manufacturer of telecommunications
hardware and software. Mr. Dion's final position with DSC was Director of
Accounting.
ROBERT F. MOORE joined the Company on November 1, 1997 as Vice President--
Marketing and Business Development. Mr. Moore served as Vice President--Sales
and Marketing for Citizens Communication Corporation, a division of Citizens
Utilities, Inc. from March 1997 to October 31, 1997. From January 1994 to
February 1997, Mr. Moore was with Hill Holliday Connors Cosmopulos, Inc.
Advertising. For the 17 years prior to that, Mr. Moore served in
55
<PAGE>
various sales and marketing positions with Southern New England Telephone, the
last four years of which he served as President of SNET Mobility, Inc., the
cellular communications subsidiary of SNET.
GARY G. VILARDI has served as Vice President--Sales of the Company since
April 1, 1997. He has spent 17 years in sales and sales management and has
focused on audio, video, and document conferencing sales during the last eight
years. From October 1995 to December 1996 Mr. Vilardi was Vice President--Sales
with Video-On, Inc., a GE Capital Company specializing in video conferencing.
From June 1995 to October 1995 he served as Eastern Regional Vice President for
Network MCI teleconferencing, and from March 1990 to June 1995 he was Vice
President of U.S. Sales for Darome Teleconferencing.
JOHN R. WILLIAMS joined the Company on November 1, 1997 as Vice President--
Operations. Mr. Williams had served as General Manager of the Sprint Conference
Line, Sprint's audio conferencing service bureau business, since July 1995.
Prior to this assignment, Mr. Williams held positions in product development,
marketing, and strategic planning in the Sprint Long Distance Division. From
June 1984 to November 1989 he was a National Account Manager at IBM.
MICHAEL D. SHEPHERD joined the Company on February 2, 1998 as Vice
President- Wholesale Sales. Mr. Shepherd served as Vice President of Carrier
Sales at Citizens Communications Corporation, a division of Citizens Utilities
Companies, Inc. from November 1997 to February 1998. From April 1997 to November
of 1997, Mr. Shepherd served as Director - Major Accounts (Western Region) with
Citizens Communications Corporation where he was responsible for managing the
business relationships with AT&T Communications, Inc, U.S. West Communications,
Inc., Pacific Telesis, and several National Wireless Companies. From April 1986
to February 1995, Mr. Shepherd held various sales positions with WorldCom, Inc.,
and MCI Communications, Inc.
RAYMOND MARVIN has served as a Vice President of the Company since December
31, 1997. He founded Access in 1987 and served as President and Chief Executive
Officer of Access from its inception to December 31, 1997 and as a director of
Access from its inception to November 12, 1997.
JOANNA M. JACOBSON served as a consultant to VIALOG Corporation prior to,
and became a Director of the Company on November 12, 1997. Since April 1996, Ms.
Jacobson has been President of Keds, a distributor of athletic footwear and a
division of Stride-Rite Corporation. From February 1995 to March 1996, she was a
partner in Core Strategy Group, a strategic marketing consulting firm. From
December 1991 to September 1994, Ms. Jacobson was a Senior Vice President of
Marketing and Product Development for Converse, Inc., a distributor of athletic
footwear.
DAVID L. LOUGEE became a Director of the Company on November 12, 1997. Mr.
Lougee has been a partner of the law firm of Mirick, O'Connell, DeMallie &
Lougee, LLP since 1972. Mr. Lougee is also a director of Meridian Medical
Technology, Inc., a public company in the medical devices and drug delivery
business. Mirick, O'Connell, DeMallie & Lougee, LLP serves as outside general
counsel to VIALOG Corporation.
DAVID L. LIPSKY founded Americo in August 1987 and has served as President,
Chief Executive Officer and as a director of Americo since its inception. From
1983 until 1996, Mr. Lipsky also served as President and Chief Executive Officer
of Resource Objectives, Inc., a seller of communications equipment that merged
into Americo in 1996. Mr. Lipsky became a Director of the Company on November
12, 1997.
56
<PAGE>
PATTI R. BISBANO co-founded CDC in April 1990 and has served as President,
Treasurer and as a director of CDC since its inception. Ms. Bisbano became a
Director of the Company on November 12, 1997.
WILLIAM P. PUCCI has served as President of Access since December 31, 1997
and served as Vice President--Operations for the Company from May 1996 to
December 1997. Prior to joining the Company, Mr. Pucci spent 28 years in the
telecommunications industry with New England Telephone, AT&T, and NYNEX.
JUDY B. CRAWFORD co-founded CSI in February 1992 and has served as
President, Chief Executive Officer and as a director of CSI since its inception.
COURTNEY P. SNYDER founded TCC in 1987 and has served as President, Chief
Executive Officer and as a director of TCC since its inception.
OLEN E. CRAWFORD co-founded CSI in February 1992 and served as Executive
Vice President until his appointment as President of Call Points in November
1997. From March 1988 until January 1992, Mr. Crawford was a principal in
Crawford and Associates, a telecommunications consulting firm. During 1990 and
1991, Mr. Crawford served as Executive Vice President and General Manager of
Call Points. Between 1972 and 1988, Mr. Crawford held positions at South Central
Bell Telephone Company and other telecommunications related entities.
The Company's Board of Directors is divided into three classes, with one
class of directors elected each year at the annual meeting of stockholders for a
three-year term of office. All directors of one class hold their positions until
the annual meeting of stockholders at which the terms of the directors in such
class expire and until their respective successors are elected and qualified.
Mr. Lipsky serves in the class whose terms expire in 1998, Ms. Jacobson and Ms.
Bisbano serve in the class whose terms expire in 1999, and Mr. Bolduc and Mr.
Lougee serve in the class whose term expire in 2000. Executive officers of the
Company are elected annually by the Board of Directors and serve at the
discretion of the Board of Directors or until their successors are duly elected
and qualified.
On January 6, 1998, the Board of Directors established an Audit Committee
and a Compensation Committee. The Audit Committee will review the scope and
results of the annual audit of the Company's consolidated financial statements
conducted by the Company's independent accountants, proposed changes in the
Company's financial and accounting standards and principles, and the Company's
policies and procedures with respect to its internal accounting, auditing and
financial controls, and will make recommendations to the Board of Directors on
the engagement of the independent accountants, as well as other matters which
may come before it or as directed by the Board of Directors. The Compensation
Committee will administer the Company's compensation programs, including the
1996 Stock Plan, and will perform such other duties as may from time to time be
determined by the Board of Directors.
57
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
DIRECTOR COMPENSATION
Directors who are also employees of the Company or one of its subsidiaries
do not receive additional compensation for serving as directors. Each Director
who is not an employee of the Company or one of its subsidiaries has received
upon his or her election as a Director an option to purchase 12,000 shares of
common stock at its then fair market value, and will receive a fee of $500 for
attendance at each Board of Directors meeting and $250 for each committee
meeting (unless held on the same day as a Board of Directors meeting). Directors
are also reimbursed for out-of-pocket expenses incurred in attending meetings of
the Board of Directors or committees thereof or otherwise incurred in their
capacity as Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
On January 6, 1998, the Company's Board of Directors established a
Compensation Committee, consisting of Mr. Bolduc, Ms. Jacobson and Mr. Lougee.
Prior to the establishment of the Compensation Committee, decisions as to
executive compensation were made by the Board of Directors. From January 1, 1997
until February 21, 1997, the Board of Directors consisted of John J. Hassett,
Mr. Bolduc and Thomas M. Carroll. Mr. Carroll is the brother-in-law of Mr.
Hassett. On February 21, 1997, Mr. Carroll resigned as Director and was replaced
by Bruce T. Guzowski. On July 9, 1997, Mr. Guzowski resigned and was replaced by
John J. Dion. On November 12, 1997, John Dion and John Hassett resigned as
Directors, and David L. Lougee, Patti R. Bisbano, Joanna Jacobson and David L.
Lipsky were appointed Directors.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by the individual
who served as the Company's President during the year ended December 31, 1997
and the Company's four most highly-compensated executive officers other than the
President who were serving as executive officers on December 31, 1997 (the
"Named Executive Officers").
58
<PAGE>
SUMMARY COMPENSATION TABLE
FISCAL YEAR 1997
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
AWARDS PAYOUTS
------- -------
SECURITIES
RESTRICTED UNDERLYING ALL
OTHER ANNUAL STOCK OPTIONS/ OTHER
SALARY BONUS COMPENSATION AWARD(S) SARS COMPENSATION
NAME AND PRINCIPAL POSITION ($) ($) ($) ($)(3) (#) ($)
------------------------------- --- --- --- ------ --- ----
<S> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc......................... 33,000 270,000(1) (2) 0 75,000 0
President and CEO
C. Raymond Marvin....................... 242,000 121,000 (2) 0 0 0
Vice President
David L. Lipsky......................... 238,000 94,000 (2) 0 75,000 $5,218(5)
Director, President--Americo
Courtney P. Snyder...................... 145,000 0 (2) 0 75,000 $9,460(6)
President--TCC
Judy B. Crawford........................ 118,000 0 20,000(4) 0 0 $ 505(7)
President--CSI
</TABLE>
(1) Pursuant to an employment agreement executed by the Company and Mr. Bolduc
in 1996, Mr. Bolduc began to earn an annual salary of $250,000 and a monthly
automobile allowance of $1,000 effective November 12, 1997, the date of
closing of a private placement (the "Private Placement") of $75 million in
aggregate principal amount of 12 3/4% Senior Notes. In January 1998, the
Company paid Mr. Bolduc a one-time bonus equal to 1/365th of his annualized
salary and automobile allowance multiplied by the number of days from the
date of his employment by VIALOG Corporation to the closing of the Private
Placement.
(2) The aggregate amount of the Named Executive Officer's Compensation
reportable under this category falls below the reporting threshold under
Item 402(b)(2)(iii)(C)(1) of Regulation S-K.
(3) None of the Named Executive Officers received compensation for their
services in the form of restricted stock awards during the fiscal year ended
December 31, 1997. However, as of December 31, 1997, each of the Named
Executive Officers held restricted shares of the Company's common stock as
follows:
<TABLE>
<CAPTION>
VALUE($)
NAMED EXECUTIVE OFFICERS RESTRICTED SHARES(#) ($5.75/SHARE)
- ------------------------ -------------------- -------------
<S> <C> <C>
Glenn D. Bolduc............................................... 32,500 186,875
C. Raymond Marvin............................................. 0 0
David L. Lipsky............................................... 267,826 1,539,999
Courtney P. Snyder............................................ 48,780 280,485
Judy B. Crawford.............................................. 0 0
</TABLE>
59
<PAGE>
The Company has no current plans to pay dividends on the above-referenced
restricted shares.
(4) Consists of an aggregate auto allowance of approximately $17,000 and
aggregate country club dues of approximately $3,000.
(5) In 1997, Americo paid an aggregate of $2,545 in premiums on a split-dollar
term life insurance policy on the life of Mr. Lipsky. The proceeds of the
policy are to be divided equally between Americo and Mr. Lipsky's spouse.
Additionally, in 1997, Americo paid $2,673 in premiums on a term life
insurance policy on the life of Mr. Lipsky's spouse. The proceeds of that
policy are payable to Mr. Lipsky.
(6) In 1997, TCC paid an aggregate of $9,460 in premiums on a whole life
insurance policy on the life of Mr. Snyder. The proceeds of the policy are
payable to a beneficiary designated by Mr. Snyder. The policy's cash
surrender value, $27,114 as of March 1998, is payable to Mr. Snyder.
(7) In 1997, CSI paid an aggregate of $505 in premiums on a term life insurance
policy on the life of Ms. Crawford. The proceeds of the policy are payable
to a beneficiary designated by Ms. Crawford.
EMPLOYMENT AND NONCOMPETITION AGREEMENTS
The following table sets forth a summary of the terms of the employment
agreements that were entered into with the Named Executive Officers.
<TABLE>
<CAPTION>
NAME POSITION SALARY TERM
- ---- ------------------------- ----------- ----------
<S> <C> <C> <C>
Glenn D. Bolduc(1)......................... President and CEO--VIALOG $250,000 indefinite
C. Raymond Marvin(2)....................... Vice President--VIALOG $242,000 2 years
David L. Lipsky(3)......................... President--Americo $225,000 3 years
Courtney P. Snyder(4)...................... President--TCC $160,000 3 years
Judy B. Crawford(5)........................ President--CSI $255,000 1 year
</TABLE>
(1) Pursuant to an employment agreement executed by the Company and Mr. Bolduc
in 1996, Mr. Bolduc began to earn an annual salary of $250,000 and a monthly
automobile allowance of $1,000 upon the closing of the Private Placement. In
January, 1998, the Company paid Mr. Bolduc a one-time bonus equal to 1/365th
of his annualized salary and automobile allowance multiplied by the number
of days from the date of his employment by VIALOG Corporation to the closing
of the Private Placement. Mr. Bolduc's employment agreement also provides
for a severance payment of 18 months' then current salary and the
continuation of all fringe benefits for 18 months at the Company's expense
after the termination of his employment.
(2) Mr. Marvin's employment agreement provides that if Mr. Marvin's employment
terminates during the term of his employment other than for cause, death or
disability, he will be entitled to receive his base compensation and group
insurance benefits during a period equal to the greater of (i) one year or
(ii) the remainder of the term of his employment contract.
(3) Mr. Lipsky's employment agreement provides that if Mr. Lipsky's employment
is terminated by Americo other than for cause, disability or death, he will
be entitled to receive his base compensation and group insurance benefits
during a period equal to the greater of (i) one year or (ii) the remainder
of the term of his employment agreement. Mr. Lipsky is entitled to a monthly
automobile allowance of $750.
(4) Mr. Snyder's employment agreement provides that if Mr. Snyder's employment
is terminated by TCC other than for cause, disability or death, he will be
entitled to receive his base compensation and group insurance benefits
during a period equal to the greater of (i) one year or (ii) the remainder
of the term of the employment agreement. TCC also maintains a life insurance
policy on the life of Mr. Snyder in the face amount of $750,000, the
proceeds of which are payable to a beneficiary to be designated by him. He
is also entitled to a monthly automobile allowance of $400.
60
<PAGE>
(5) Ms. Crawford's employment agreement provides that if Ms. Crawford's
employment is terminated by CSI other than for cause, disability or death,
she will be entitled to receive her base compensation and group insurance
benefits during a period equal to the remainder of the term of her
employment agreement. CSI also maintains a life insurance policy on the life
of Ms. Crawford in the face amount of $1.0 million, the proceeds of which
are payable to a beneficiary to be designated by her. She is also entitled
to a monthly automobile allowance of $1,440.
1996 STOCK PLAN
On February 14, 1996, the Board of Directors and the Company's stockholders
approved the Company's 1996 Stock Plan (the ''Plan''). The purpose of the Plan
is to provide directors, officers, key employees, consultants and other service
providers with additional incentives by increasing their ownership interests in
the Company. Individual awards under the Plan may take the form of one or more
of (i) incentive stock options (''ISOs''), (ii) non-qualified stock options
(''NQSOs''), (iii) stock appreciation rights (''SARs'') and (iv) restricted
stock.
The Compensation Committee administers the Plan and generally selects the
individuals who will receive awards and the terms and conditions of those
awards. The maximum number of shares of common stock that may be issued or
issuable under the Plan, determined immediately after the grant of any award,
may not exceed 3,250,000 shares. Shares of common stock subject to awards which
have expired, terminated or been canceled or forfeited are available for
issuance or use in connection with future awards.
The Plan will remain in effect until February 14, 2006 unless terminated earlier
by the Board of Directors. The Plan may be amended by the Board of Directors
without the consent of the stockholders of the Company, except that any
amendment, although effective when made, will be subject to stockholder approval
if required by any Federal or state law or regulation or by the rules of any
stock exchange or automated quotation system on which the common stock may then
be listed or quoted.
The following table sets forth all options granted to the Named Executive
Officers in 1997:
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE
NUMBER OF OPTIONS VALUE AT ASSUMED
SECURITIES GRANTED TO ANNUAL RATES OF
UNDERLYING EMPLOYEES IN EXERCISE STOCK PRICE
NAME OPTIONS FISCAL PRICE EXPIRATION APPRECIATION FOR
- ---- GRANTED (#) YEAR(%) ($/SHARE)(1) DATE OPTION TERM (3)
----------- ------- ------------ ---- -------------------
5%($) 10%($)
------- -------
<S> <C> <C> <C> <C> <C> <C>
Glenn D. Bolduc............. 75,000 14.7(4) 2.00 (2) 94,334 239,061
C. Raymond Marvin........... 0 0 0 (2) -- --
David L. Lipsky............. 75,000 14.7(5) 5.75 (2) 271,211 687,301
Courtney P. Snyder.......... 75,000 14.7(5) 5.75 (2) 271,211 687,301
Judy B. Crawford............ 0 0 0 (2) -- --
</TABLE>
61
<PAGE>
(1) All options were granted at fair market value as determined by the Board of
Directors of the Company on the date of grant. The Board of Directors
determined the market value of the common stock based on various factors,
including the illiquid nature of an investment in the Company's common
stock, the absence of any operating history and the Company's future
prospects.
(2) All options granted to the Named Executive Officers terminate on the earlier
of (i) the date of termination of employment if the Named Executive Officer
ceases to be employed by the Company or (ii) 10 years from date of grant.
(3) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration of
their term, assuming the specified compounded rates of appreciation of the
Company's common stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not represent the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and common stock
holdings are dependent on timing of such exercise and future performance of
the Company's common stock. There can be no assurance that the rates of
appreciation assumed in this table can be achieved or that the amounts
reflected will be received by the Named Executive Officers. This table does
not take into account any appreciation in the price of the common stock from
the date of grant to current date. The values shown are net of the option
exercise price, but do not include deductions for taxes or other expenses
associated with the exercise.
(4) This option vests over a three year period vesting as to 25,000 shares on
the first anniversary of the grant date and as to 6,250 shares on the last
day of each quarter thereafter until the option has vested in full.
(5) This option vests over a three year period vesting as to 5,700 shares on
December 31, 1997 and as to 6,300 shares on the last day of each quarter
thereafter until the option has vested in full.
The following table sets forth the value of all unexercised options held by the
Named Executive Officers at the end of 1997:
1997 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF COMMON STOCK VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT IISCAL OPTIONS AT FISCAL
YEAR END (#) YEAR END ($)(1)
---------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn D. Bolduc ........................ 66,690 168,310 $381,601 $815,170
C. Raymond Marvin....................... 0 0 0 0
David L. Lipsky......................... 5,700 69,300 0 0
Courtney P. Snyder...................... 5,700 69,300 0 0
Judy B. Crawford........................ 0 0 0 0
</TABLE>
_________________________
62
<PAGE>
(1) There was no public trading market for the common stock on December 31,
1997. Accordingly, solely for the purposes of this table, the values in this
column have been calculated on the basis of a determination of the fair
market value of the common stock on December 31, 1997 ($5.75 per share),
less the aggregate exercise price of the options.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the beneficial
ownership of the common stock of the Company as of March 15, 1998 by (i) each
person known to the Company to beneficially own more than five percent of the
outstanding shares of common stock, (ii) each of the Company's Directors, (iii)
each Named Executive Officer, and (iv) all executive officers and Directors as a
group. All persons listed have an address in care of the Company's principal
executive office and have sole voting and investment power with respect to their
shares unless otherwise indicated. As of March 15, 1998, the Company had
outstanding 3,531,410 shares of common stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT
NAME BENEFICIALLY OWNED(1) OF CLASS
---- --------------------- --------
<S> <C> <C>
John J. Hassett.............................................. 937,762(2) 26.6
J. Michael Powell............................................ 327,800(3) 9.3
Reynolds E. Moulton.......................................... 187,500 5.3
Glenn D. Bolduc.............................................. 142,520(4) 4.0
David L. Lougee.............................................. 74,674(5) 2.1
Joanna M. Jacobson........................................... 6,000(6) *
David L. Lipsky.............................................. 279,826(7) 7.9
Patti R. Bisbano............................................. 62,594 1.8
Courtney P. Snyder........................................... 60,780(8) 1.6
C. Raymond Marvin............................................ 0 *
Judy B. Crawford............................................. 12,000(9) *
Jefferies & Company, Inc..................................... 358,145(10) 10.1
All executive officers and directors as a group (15 persons). 642,928 22.1
</TABLE>
__________________
* Less than 1%.
(1) Calculated pursuant to Rule 13d-3(d) under the Exchange Act. Under Rule 13d-
3(d), shares not outstanding which are subject to options, warrants, rights
or conversion privileges exercisable within 60 days are deemed outstanding
for the purpose of calculating the number and percentage owned by such
person, but not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) Includes 837,762 shares held by Mr. Hassett and 100,000 shares held by Susan
C. Hassett, the spouse of Mr. Hassett. Does not include 60,000 shares held
by J. Michael Powell as Trustee for Mr. Hassett's two minor children, as to
which Mr. Hassett disclaims beneficial ownership.
63
<PAGE>
(3) Includes 267,800 shares held by Mr. Powell individually and 60,000 shares
held by Mr. Powell as Trustee.
(4) Includes 32,500 shares held by Mr. Bolduc, 80,020 shares with respect to
which options held by Mr. Bolduc may be exercised as of June 1, 1998 and
30,000 shares held by Grace K. Bolduc, the spouse of Mr. Bolduc, as Trustee
for their three minor children.
(5) Includes 70,000 shares held by Mr. Lougee and 4,674 shares with respect to
which options held by Mr. Lougee may be exercised as of June 1, 1998.
(6) Includes 6,000 shares with respect to which options held by Ms. Jacobson
may be exercised as of June 1, 1998.
(7) Includes 267,826 shares issued to Mr. Lipsky in connection with the
Acquisitions and 12,000 shares with respect to which options granted to Mr.
Lipsky may be exercised as of June 1, 1998.
(8) Includes 48,780 shares issued to Mr. Snyder in connection with the
Acquisitions and 12,000 shares with respect to which options granted to Mr.
Snyder may be exercised as of June 1, 1998.
(9) Includes 12,000 shares with respect to which options granted to Ms.
Crawford on January 1, 1998 may be exercised as of June 1, 1998.
(10) Includes 358,145 shares with respect to which warrants issued to Jefferies
& Company, Inc. in connection with the Private Placement may be exercised.
ITEM 13. Certain Relationships and Related Transactions.
ORGANIZATION OF THE COMPANY
On November 12, 1997, VIALOG Corporation acquired (i) by merger, all of the
issued and outstanding stock of five Acquired Companies, and (ii) by purchase,
the assets of one Acquired Company. The aggregate consideration paid by VIALOG
Corporation for the Acquisitions was 559,330 shares of common stock valued at
$5.75 per share, approximately $53.0 million in cash and approximately $925,000
in cash related to tax reimbursements. The consideration paid was determined
through arm's length negotiations among VIALOG Corporation, the Acquired
Companies and the stockholders of the Acquired Companies, and was based upon a
multiple of each Acquired Company's historical net revenue adjusted to compare
each Acquired Company on a consistent basis. The purchase price of each Acquired
Company was generally based upon such company's customer base, current operating
results, geographic market, type and condition of its equipment and facilities,
and potential cost savings resulting from the Acquisitions. The following table
sets forth the approximate consideration paid for each of the Acquired
Companies.
64
<PAGE>
<TABLE>
<CAPTION>
NAME CASH CONSIDERATION SHARES
- ---- ------------------ ------
<S> <C> <C>
Access................................................ $19,000,000(1) --
CSI................................................... 18,675,000(2) --
Call Points........................................... 8,000,000(3) 21,000
TCC................................................... 3,645,000 166,156
Americo............................................... 1,260,000 267,826
CDC................................................... 2,400,000 104,348
----------- -------
Total Acquisition Consideration....................... $52,980,000 559,330
=========== =======
</TABLE>
_________________
(1) VIALOG Corporation and Access agreed to make an election under Section
338(h)(10) of the Code to treat the purchase and sale of the capital stock
of Access as a purchase and sale of assets. VIALOG Corporation agreed to
reimburse the stockholders of Access an amount, estimated to be $700,000,
equal to the difference between the taxes incurred by such stockholders as a
result of the Section 338(h)(10) election and the taxes which would have
been incurred by such stockholders had no Section 338(h)(10) election been
made, together with the costs incurred in connection with making such
calculations. Such reimbursements have not been included in the Total
Acquisition Consideration shown above.
(2) VIALOG Corporation and CSI agreed to make an election under Section
338(h)(10) of the Code to treat the purchase and sale of the capital stock
of CSI as a purchase and sale of assets. VIALOG Corporation has reimbursed
the stockholders of CSI $225,000, an amount estimated to equal the
difference between the taxes incurred by such stockholders as a result of
the Section 338(h)(10) election and the taxes which would have been incurred
by such stockholders had no Section 338(h)(10) election been made, together
with the costs incurred in connection with making such calculations. Such
reimbursements have not been included in the Total Acquisition Consideration
shown above.
(3) Ropir Industries, Inc., the principal stockholder of Call Points, received
$1.0 million of the cash consideration of $8.0 million as compensation for
entering into a noncompetition agreement with VIALOG Corporation.
From June 30, 1997 to September 30, 1997, certain of the Acquired Companies
made S corporation distributions of $936,000. Additional S corporation
distributions of approximately $751,000 were made prior to or upon the
consummation of the Acquisitions. In addition, during the course of operations,
certain of the Acquired Companies incurred indebtedness or entered into capital
leases which were guaranteed by their principal stockholders. At September 30,
1997, the aggregate amount of indebtedness and capital leases of the Acquired
Companies that was subject to such personal guarantees was approximately $3.5
million. The Company repaid approximately $2.2 million of such indebtedness upon
the closing of the Private Placement, and the Company agreed to use its best
efforts to cause all such guarantees to be released. If the Company cannot
obtain such releases, it has agreed to arrange for the discharge of such
indebtedness.
The following is a discussion of the material information regarding the
Acquired Companies and their principal stockholders:
65
<PAGE>
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with Access, whereby Access became a wholly owned subsidiary of VIALOG
Corporation and (ii) delivered to the stockholders of Access approximately $19.0
million in cash in exchange for their shares of Access. VIALOG Corporation
granted options for 142,850 shares of common stock exercisable at $5.75 per
share to certain key employees of Access. In the event the Company completes an
initial public offering of its shares or is acquired or otherwise merges with
another entity and the consideration for such transaction is less than $13.75
per share, such option holders will receive additional options exercisable at
$5.75 per share on a pro rata basis such that the total aggregate value of such
options equals $1.0 million. If an employee's employment is terminated, other
than by reason of death or disability, the option must be exercised within 90
days thereafter or it will expire. Such terminated employees will be entitled to
cash bonuses equal to the consideration required to be paid upon exercise of an
option if such option is exercised. On the date of the Acquisitions,
stockholders' equity of Access was approximately $2.1 million. The Company
repaid approximately $1.4 million of indebtedness of Access, of which C. Raymond
Marvin was the guarantor. Such indebtedness was to mature through 2000 and bore
interest at rates ranging from 9.25% to 9.5% per annum. From June 30, 1997 to
September 30, 1997, Access made S corporation tax distributions of $165,000.
Additional S corporation distributions of approximately $487,000 were made prior
to or upon the consummation of the Acquisitions. Mr. Marvin entered into a two-
year employment agreement with Access which included a covenant not to compete
expiring no earlier than the latter of the third anniversary of the merger or
one year after the expiration of his severance period under such agreement.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with CSI, whereby CSI became a wholly owned subsidiary of VIALOG Corporation and
(ii) delivered to the stockholders of CSI approximately $18.7 million in cash in
exchange for their shares of CSI. On the date of the Acquisitions, stockholders'
equity of CSI was approximately $260,000. Judy B. Crawford remained as President
of CSI following the closing of this Offering and received approximately $9.3
million in cash. The Company repaid approximately $500,000 of indebtedness of
CSI, of which Ms. Crawford was the guarantor. Such indebtedness was to mature in
2000 and bore interest at 9.5% per annum. In addition, Ms. Crawford had
guaranteed all of CSI's capital leases, which had remaining lease payments of
approximately $774,000. The Company agreed to arrange for the release of such
guarantees or to arrange for the discharge of indebtedness underlying such
guarantees. From June 30, 1997 to September 30, 1997, CSI made S corporation
profit and tax distributions of $757,000. Additional S corporation distributions
of approximately $123,000 were made prior to or upon the consummation of the
Acquisitions. Ms. Crawford entered into a one-year employment agreement with CSI
which included a covenant not to compete expiring no earlier than the third
anniversary of the merger.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to acquire
substantially all of the assets of, and assumed specified liabilities of, Call
Points, (ii) delivered to Call Points $7.0 million in cash and 21,000 shares of
common stock in exchange for such assets and (iii) delivered to the principal
stockholder of Call Points $1.0 million in cash in exchange for
66
<PAGE>
a noncompetition agreement. On the date of the Acquisitions, the net value of
the assets acquired from Call Points was approximately $2.4 million. VIALOG
Corporation obtained noncompetition agreements with a two-year noncompetition
period from the principal stockholder and a key employee of Call Points.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with TCC, whereby TCC became a wholly owned subsidiary of VIALOG Corporation and
(ii) delivered to the stockholders of TCC 166,156 shares of common stock and
approximately $3.6 million in cash in exchange for their shares of TCC. On the
date of the Acquisitions, stockholders' equity of TCC was approximately
$629,000. In 1996, TCC distributed certain technology and hardware with a net
book value of approximately $12,000 to certain stockholders of TCC. Courtney P.
Snyder remained as President of TCC and received 48,780 shares of common stock
and approximately $841,000 in cash. VIALOG Corporation granted to Mr. Snyder
options for 75,000 shares of common stock exercisable at the fair market value
as of the closing of the Private Placement as determined by the VIALOG
Corporation Board of Directors. Such options are exercisable for 5,700 shares on
December 31, 1997 and an additional 6,300 shares on the last day of each of the
11 calendar quarters thereafter. The options will expire on the third
anniversary of the Private Placement closing. John J. Hassett, a principal
stockholder of VIALOG Corporation and of TCC, received 44,512 shares of common
stock and approximately $768,000 in cash. See ''Principal Stockholders.'' The
Company repaid approximately $66,000 of indebtedness of TCC, of which Mr. Snyder
and Mr. Hassett were guarantors. Such indebtedness was to mature through 1999
and bore interest at rates ranging from 9.5% to 11% per annum. In addition, Mr.
Snyder and Mr. Hassett were guarantors of all of TCC's capital leases, which had
remaining lease payments of approximately $324,000. The Company agreed to
arrange for the release of such guarantees or to arrange for the discharge of
indebtedness underlying such guarantees. From June 30, 1997 to September 30,
1997, TCC made S corporation tax distributions of $14,000. Additional S
corporation distributions of approximately $142,000 were made prior to or upon
the consummation of the Acquisitions. Mr. Snyder entered into a three-year
employment agreement with TCC which included a covenant not to compete expiring
no earlier than the third anniversary of the merger or one year from the
expiration of his severance period under such agreement, whichever is the later
to occur. VIALOG Corporation has also obtained noncompetition agreements with a
two-year noncompetition period from certain other principal stockholders and/or
employees of TCC.
VIALOG Corporation (i) caused Americo to merge with and into a wholly owned
subsidiary of VIALOG Corporation and (ii) delivered to David L. Lipsky, the sole
stockholder of Americo, 267,826 shares of common stock and approximately $1.3
million in cash in exchange for his shares of Americo. On the date of the
Acquisitions, stockholders' deficit of Americo was approximately $273,000. Mr.
Lipsky remained as President of Americo. VIALOG Corporation granted to Mr.
Lipsky options for 75,000 shares of common stock, exercisable at the fair market
value as of the closing of the Private Placement as determined by the VIALOG
Corporation Board of Directors. Such options are exercisable for 5,700 shares on
December 31, 1997 and an additional 6,300 shares on the last day of each of the
11 calendar quarters thereafter. The options will expire on the third
anniversary of the closing of the Private Placement. The Company repaid
approximately $185,000 of indebtedness of Americo, of which Mr. Lipsky was a
guarantor. Such indebtedness
67
<PAGE>
was to mature at various times through June 2001 and bore interest at 10% per
annum. Mr. Lipsky entered into a three-year employment agreement with Americo
which included a covenant not to compete expiring no earlier than the latter of
the third anniversary of the merger or one year from the expiration of his
severance period under such agreement.
VIALOG Corporation (i) caused a subsidiary of VIALOG Corporation to merge
with CDC, whereby CDC became a wholly owned subsidiary of VIALOG Corporation and
(ii) delivered to the stockholders of CDC 104,348 shares of common stock and
approximately $2.4 million in cash in exchange for their shares of CDC. On the
date of the Acquisitions, stockholders' equity of CDC was approximately
$418,000. Patti R. Bisbano remained as President of CDC and received 52,174
shares of common stock and approximately $1.2 million in cash. Maurya Suda, a
principal stockholder of CDC, received 52,174 shares of common stock and
approximately $1.2 million in cash. VIALOG Corporation granted to Ms. Bisbano
and Ms. Suda options for an aggregate of 75,000 shares of common stock
exercisable at the fair market value as of the closing of the Private Placement
as determined by the VIALOG Corporation Board of Directors. Ms. Bisbano received
options for 62,500 shares which are exercisable for 5,212 shares on December 31,
1997 and an additional 5,208 shares on the last day of each of the 11 calendar
quarters thereafter. Ms. Suda received options for 12,500 shares, which are
exercisable for 3,125 shares on December 31, 1997 and an additional 3,125 shares
in the last day of each of the 3 calendar quarters thereafter. The options will
expire on the third anniversary of the closing of the Private Placement. The
Company repaid indebtedness of CDC, of which Ms. Bisbano was a guarantor, of
approximately $43,000. Such indebtedness was to mature in 2000 and bore interest
at 9.5% per annum. Ms. Bisbano entered into a three-year employment agreement
with CDC which included a covenant not to compete expiring on the later of one
year from the expiration of her employment agreement or two years from the
expiration of her severance period under such agreement. Ms. Suda entered into a
one-year employment agreement with CDC which included a covenant not to compete
expiring on the latter of one year from the expiration of her employment
agreement or two years from the expiration of her severance period under such
agreement.
The Company agreed with all of the Acquired Companies, except Call Points,
that for the two-year period following the closing of the Private Placement
there will be no (i) change in the location of an Acquired Company's facilities,
(ii) physical merging of any Acquired Company's operations with another
operation, (iii) change in the position of certain persons receiving employment
agreements authorized by the Acquisition Agreements, or (iv) reduction in work
force or termination of employment except as related to employee performance or
the contemplated reorganization of the combined sales/marketing staff or the
accounting function, without the approval of a majority in interest of the
respective Acquired Company's former stockholders. In the case of Call Points,
similar restrictions apply except that there are no restrictions with respect to
a change in the location of Call Points' facilities.
Additionally, VIALOG Corporation agreed to maintain the Acquired Companies'
respective employee incentive compensation, fringe benefits and severance
programs, or their substantial equivalent, through December 31, 1997.
68
<PAGE>
OTHER TRANSACTIONS
In December 1997, John J. Hassett began providing consulting services to the
Company for a monthly fee of $10,000. Mr. Hassett's consulting arrangement
terminates upon the consummation by the Company of an initial public offering of
its common stock.
TCC provides teleconferencing services to customers of a company owned by
Susan C. Hassett, spouse of John J. Hassett, for which TCC recorded revenues of
$86,000, $175,000 and $230,000 in 1995, 1996 and 1997, respectively.
On November 6, 1997, John J. Hassett entered into a stockholder agreement with
the Company that provides, among other things, that while any Notes remain
outstanding or any obligation of the Company or the Subsidiary Guarantors with
respect thereto remains unpaid finally and in full, (i) with respect to all
matters submitted to a vote of the stockholders of the Company regarding the
appointment, election or removal of directors or officers of the Company, Mr.
Hassett will vote any shares of voting stock of the Company over which he has
direct or indirect voting power in the same proportion as the votes cast in
favor of and against the particular matter voted upon, by all of the other
stockholders of the Company, and (ii) Mr. Hassett will not serve as a director
or officer of the Company or any subsidiary.
Glenn D. Bolduc, President and Chief Executive Officer of the Company, owned
approximately five percent of the issued and outstanding common stock of
MultiLink, a principal supplier of MCUs to the Company. In 1995, 1996 and 1997,
aggregate purchases of MCUs and ancillary services from MultiLink by the
Acquired Companies were approximately $889,000 and $811,000 and $878,000 ,
respectively. In 1997, MultiLink became a subsidiary of PictureTel Corporation.
David L. Lougee, one of the Company's Directors, is a partner of Mirick,
O'Connell, DeMallie & Lougee, llp, the law firm currently retained as the
Company's legal counsel. In 1997, the Company paid Mirick, O'Connell, DeMallie &
Lougee, LLP an aggregate of approximately $1.8 million in legal fees and
expenses in connection with general legal services, a withdrawn public offering,
the Acquisitions and the Private Placement.
COMPANY POLICY
The Company has implemented a policy whereby neither the Company nor any
subsidiary (which includes the Acquired Companies) will enter into contracts or
business arrangements with persons or entities owned in whole or in part by
officers or directors of the Company or any subsidiary except on an arms-length
basis and with the approval of the Company's Board of Directors. The Company's
Bylaws require that any approval must be by a majority of the independent
Directors then in office who have no interest in such contract or transaction.
69
<PAGE>
PART IV
ITEM 14. FINANCIAL STATEMENTS, SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS.
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
See index to Financial Statements under ITEM 8-Financial Statements
and Supplementary Data.
2. Financial Statement Schedules
All financial statement schedules have been omitted because they are
not required, not applicable, or the information to be included in the financial
statement schedules is included in the Consolidated Financial Statements or the
notes thereto.
3. Exhibits
See Exhibit Index.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Company in the last quarter
of 1997.
70
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
NUMBER+ Description
------ ---------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Reorganization By and Among VIALOG Corporation, TBMA Acquisition Corporation
and Telephone Business Meetings, Inc. and C. Raymond Marvin Dated as of September 8, 1997.
2.2 Amendment to Agreement and Plan of Reorganization By and Among VIALOG Corporation, TBMA Acquisition
Corporation, Telephone Business Meetings, Inc. and C. Raymond Marvin Dated as of October 20, 1997.
2.3 Letter Agreement Dated November 5, 1997 between VIALOG Corporation, Telephone Business Meetings,
Inc. and C. Raymond Marvin.
2.4 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, CSII
Acquisition Corporation and Conference Source International, Inc. and Judy B. Crawford and Olen E.
Crawford Dated as of September 8, 1997.
2.5 Amended and Restated Asset Purchase Agreement By and Among VIALOG Corporation, Call Points
Acquisition Corporation, Call Points, Inc. and Ropir Industries, Inc. Dated as of October 17, 1997.
2.6 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, KST
Acquisition Corporation, Kendall Square Teleconferencing, Inc., Courtney Snyder, Paul Ballantine,
John Hassett and Dwight Grader Dated as of September 30, 1997.
2.7 First Amendment to Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG
Corporation, KST Acquisition Corporation, Kendall Square Teleconferencing, Inc. and Courtney
Snyder, Paul Ballantine, John Hassett and Dwight Grader Dated October 24, 1997.
2.8 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, AMCS
Acquisition Corporation and American Conferencing Company, Inc. and David Lipsky Dated as of
September 30, 1997.
2.9 Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG Corporation, CDC
Acquisition Corporation and Communications Development Corporation and Patti R. Bisbano and Maurya
Suda Dated as of September 30, 1997.
2.10 First Amendment to Amended and Restated Agreement and Plan of Reorganization By and Among VIALOG
Corporation, CDC Acquisition Corporation, Communication Development Corporation and Patti R.
Bisbano and Maurya Suda Dated as of October 24, 1997.
3.1 Restated Articles of Organization of VIALOG Corporation.
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
3.2 Amended and Restated By-Laws of VIALOG Corporation.
3.3 Certificate of Incorporation of Communications Development Corporation.
3.4 By-Laws of Communication Development Corporation.
3.5 Articles of Incorporation of Conference Source International, Inc.
3.6 By-Laws of Conference Source International, Inc.
3.7 Unanimous Consent of Board of Directors of Conference Source International, Inc. Amending Section 2
of Article II of the By-Laws.
3.8 Certificate of Incorporation of Telephone Business Meetings, Inc.
3.9 Regulations of Telephone Business Meetings, Inc.
3.10 Articles of Organization of Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant, LTD)
3.11 Articles of Amendment of Certificate of Incorporation of Kendall Square Teleconferencing, Inc.
Changing the Name of the Company from Teleconversant, Ltd. To Kendall Square Teleconferencing, Inc.
3.12 Articles of Amendment of Certificate of Incorporation of Kendall Square Teleconferencing, Inc.
Deleting the Stock Transfer Restrictions in Article V in Their Entirety.
3.13 By-Laws of Kendall Square Teleconferencing, Inc.
3.14 Certificate of Incorporation of American Conferencing Company, Inc. (f/k/a AMCS Acquisition
Corporation)
3.15 Certificate of Merger of American Conferencing Company, Inc. Into AMCS Acquisition Corporation
Evidencing Name Change, Filed with the Secretary of State of Delaware.
3.16 By-Laws of American Conferencing Company, Inc.
3.17 Certificate of Incorporation of Call Points, Inc. (f/k/a Call Points Acquisition Corporation).
3.18 Certificate of Amendment of Certificate of Incorporation of Call Points Evidencing Name Change,
Filed with the Secretary of State of Delaware.
3.19 By-Laws of Call Points, Inc.
4.1 Indenture Dated as of November 12, 1997 Among VIALOG Corporation, Telephone Business Meetings, Inc.,
Conference Source International, Inc., Kendall Square Teleconferencing, Inc., American Conferencing
Company, Inc., Communication Development Corporation, Inc., Call Points, Inc. and State Street Bank
and Trust Company (including Forms of Series A Security and Series B Security attached to the
Indenture as Exhibits A-1 and A-2, respectively).
</TABLE>
72
<PAGE>
<TABLE>
<S> <C>
4.2 Unit Agreement Dated as of November 12, 1997 By and Among VIALOG Corporation, Telephone Business
Meetings, Inc., Conference Source International, Inc., Call Points, Inc., Kendall Square
Teleconferencing, Inc., American Conferencing Company, Inc., Communications Development
Corporation, and State Street Bank and Trust Company (including Form of Unit Certificate attached
to the Unit Agreement as Exhibit A).
4.3 Warrant Agreement Dated as of November 12, 1997 Between VIALOG Corporation and State Street Bank
and Trust Company (including Form of Warrant Certificate attached to the Warrant Agreement as
Exhibit A).
4.4 Security Holders' and Registration Rights Agreement Dated as of November 12, 1997 Among VIALOG
Corporation and Jefferies & Company, Inc.
4.5 Registration Rights Agreement Dated as of November 12, 1997 By and Among VIALOG Corporation,
Kendall Square Teleconferencing, Inc., AMCS Acquisition Corporation, Communication Development
Corporation, Telephone Business Meetings, Inc., Conference Source International, Inc., Call Points
Acquisition Corporation and Jefferies & Company, Inc.--see Exhibit 1.2.
4.6* Exchange Agent Agreement Dated as of February 9, 1998.
10.1 1996 Stock Plan of the Company.
10.2 Equipment Lease between CSI and Ally Capital Corporation Dated April 1, 1996.
10.3 Equipment Lease between CSI and The CIT Group/Equipment Financing, Inc. Dated November 11, 1996.
10.4 Equipment Lease between CSI and BSFS Equipment Leasing Dated April 8, 1996.
10.5 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco Funding Corp. Dated May 21, 1996.
10.6 Equipment Lease between TCC (f/k/a Teleconversant Ltd.) and Wasco Funding Corp. Dated July 20, 1995.
10.7 Lease between Aetna Life Insurance Company and ACCESS, as Amended, Dated December 6, 1994.
10.8 Lease Agreement between SPP Real Estate (Georgia II), Inc. and CSI Dated November 1, 1996.
10.9 Amended & Restated Employment Agreement By and Between VIALOG Corporation and Glenn D. Bolduc Dated
May 6, 1997.
10.10 Employment Agreement By and Between Telephone Business Meetings, Inc. and C. Raymond Marvin Dated
as of November 12, 1997.
10.11 Amendment to Employment Agreement between the Company and C. Raymond Marvin Effective as of
December 31, 1997.
10.12 Employment Agreement By and Between CSII Acquisition Corporation and Judy B. Crawford Dated as of
November 12, 1997.
</TABLE>
73
<PAGE>
<TABLE>
<S> <C>
10.13 Employment Agreement By and Between Kendall Square Teleconferencing, Inc. and Courtney Snyder Dated
November 12, 1997.
10.14 Employment Agreement By and Between American Conferencing Company, Inc. and David Lipsky Dated as
of November 12, 1997.
10.15 Employment Agreement By and Between Communication Development Corporation and Patti R. Bisbano
Dated as of November 12, 1997.
10.16 Employment Agreement By and Between the Company and William Pucci Dated as of October 1, 1996.
10.17 Employment Agreement By and Between the Company and John Dion Dated as of November 4, 1996.
10.18 Employment Agreement By and Between the Company and Gary Vilardi Dated as of April 1, 1997.
10.19 Employment Agreement By and Between the Company and Robert Moore Dated as of October 20, 1997.
10.20 Employment Agreement By and Between the Company and John Williams Dated as of October 14, 1997.
10.21* Employment Agreement By and Between Call Points, Inc. And Olen E. Crawford Dated as of November 20,
1997.
10.22 Stockholder Agreement By and Among John J. Hassett and VIALOG Corporation Dated as of November 6,
1997.
10.23 Form of Registration Rights Agreement between VIALOG Corporation and certain of its stockholders
specified in Schedules I and II attached thereto.
10.24 Lease Between Tower Investment Group and Communication Development Corp. Dated February 23, 1990,
Including Subsequent Modifications Thereto.
10.25 Lease Agreement by and Between 680-690 Kinderkamack Road and American Conferencing Company, Inc.
Dated June 1997.
10.26 Lease Between Robert A. Jones and K. George Najarian, Trustees of Old Cambridge Realty Trust and
Old Kendall Square Realty Trust, and Kendall Square Teleconferencing, Inc. (f/k/a Teleconversant,
Ltd.) Dated February 15, 1996.
10.27 Lease Between Ropir Communications and Call Points, Inc. Commencing May 1, 1995.
10.28 Amendment to Lease Between Ropir Industries, Inc. and Call Points, Inc.
10.29 Equipment Lease between Kendall Square Teleconferencing, Inc. and Wasco Funding Corp. Dated July
31, 1997.
10.30 Sublease between Eisai Research Institute of Boston, Inc. and VIALOG Corporation Dated as of August
20, 1997.
</TABLE>
74
<PAGE>
<TABLE>
<S> <C>
10.31** Assignment of Lease between Telephone Business Meetings, Inc. and CMC
Datacomm, Inc. dated as of March 13, 1998.
11.1** Statement regarding Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
27.1** Financial Data Schedule.
</TABLE>
_______________________
+ All non-marked Exhibits listed above are incorporated by reference to the
Exhibits to the Registration Statement on Form S-4 filed with the Securities
and Exchange Commission on January 9, 1998 (File No. 333-44041). All Exhibits
marked with an asterisk ("*") are incorporated by reference to the Exhibits to
Amendment No. 1 to the Registration Statement on Form S-4 filed with the
Securities and Exchange Commission on February 10, 1998 (File No. 333-44041).
All Exhibits marked with a double asterisk ("**"), are filed herewith.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VIALOG CORPORATION
By: /s/ Glenn D. Bolduc
_______________________________________
Glenn D. Bolduc, President and
Chief Executive Officer
Date: March 30, 1998
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 Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
By: /s/ Glenn D. Bolduc President, Chief Executive Officer, March 30, 1998
____________________________
Glenn D. Bolduc Treasurer and Director
By: /s/ John J. Dion Vice President-Finance, Principal March 30, 1998
____________________________
John J. Dion Financial Officer and Principal
Accounting Officer
By: /s/ Joanna M. Jacobson Director March 27, 1998
____________________________
Joanna M. Jacobson
By: /s/ David L. Lougee Director March 30, 1998
____________________________
David L. Lougee
By: /s/ David L. Lipsky Director March 30, 1998
____________________________
David L. Lipsky
By: /s/ Patti R. Bisbano Director March 27, 1998
____________________________
Patti R. Bisbano
</TABLE>
76
<PAGE>
EXHIBIT 10.31
ASSIGNMENT OF LEASE
-------------------
ASSIGNMENT OF LEASE, made as of the 13th day of March 1998, between CMC
DataComm Inc., a Delaware Corporation (hereafter "Assignor") and Telephone
Business Meetings, Inc., a Delaware Corporation (hereafter "Assignee").
W I T N E S S E T H :
WHEREAS, Assignor, as tenant, and Royco, Inc. (as successor to Aetna Life
Insurance Company, the "Landlord") entered into a Lease (hereafter the "Lease"),
dated July 1, 1995, as amended, a true and complete copy of which is attached
hereto and made a part hereof, pursuant to which Landlord leased to Assignor
certain premises known as suite 300 encompassing 25,141 square feet and basement
storage of 3,000 square feet at 1861 Wiehle Avenue, Reston, Virginia 22090, as
more particularly described in the Lease; and
WHEREAS, Assignor desires to assign the Lease to Assignee; and
WHEREAS, Assignor has agreed to sell to Assignee and Assignee has agreed to
purchase from Assignor, substantially all of the fixed assets of Assignor; and
WHEREAS, in connection with the aforesaid sale of fixed assets, Assignor
desires to assign all right, title and interest of Assignor as tenant, in, to
and under the Lease. The Assignee desires to assume all of the obligations on
the part of the Assignor under the Lease; and
WHEREAS, Canadian Marconi Company is the Guarantor of the Assignor's
obligations under the Lease; and
WHEREAS, Section 20 of the Lease requires the consent of the Landlord prior
to the assignment of the leased premises and the Assignor and the Assignee
desire to obtain the Landlord's consent to such assignment and to set forth
their understandings with respect to the terms of the assignment as more
particularly described herein.
NOW, THEREFORE, in consideration of payment set forth in Special
Stipulation No. 1 of APPENDIX "A" in and other good and valuable consideration
by each party to the other in hand paid, the receipt and sufficiency of which is
hereby acknowledged for this assignment and for the fixed assets set forth in
Special Stipulation No. 2 of APPENDIX "A", the parties hereto hereby covenant
and agree as follows:
1. ASSIGNMENT
Assignor hereby agrees to assign to Assignee, and Assignee agrees to accept
the assignment in accordance with all the terms and conditions contained in the
Lease, except as specifically provided for herein; and with each reference to
Landlord and Tenant in such Lease to be deemed to refer to the Landlord and the
Assignee; and together with all the following paragraphs set forth in this
Assignment, shall constitute the complete terms and conditions of the
Assignment. In the event of any conflict between the Lease and the Assignment,
the Assignment shall govern.
<PAGE>
2. LEASED PREMISES
For purposes of this Assignment, the leased premises consist of
approximately 25,141 rentable square feet on the third (3rd) floor and 3,000
rentable square feet of storage space on the basement floor at 1861 Wiehle
Avenue, Reston, Virginia.
3. TERM
From and after April 1, 1998 and with respect to periods from and after
April 1, 1998, until the termination of the Lease June 30, 2005, Assignee
assumes the Lease, shall be fully bound by the terms, covenants, agreements,
provisions and conditions therein, shall perform and observe all of the
covenants and conditions contained therein on the part of Assignor to be kept,
performed and observed and shall be liable for the payment of fixed rent,
additional rent and all other sums now or hereafter becoming payable thereunder.
In the event that prior to the termination of the Lease Canadian Marconi
Company is released from its obligation to guarantee the Lease, Landlord agrees
to honor the assignment and the terms of the Lease with and to Assignee.
4. RENT
Assignee agrees to pay to Landlord a monthly rent, additional rent and any
and all other increases in accordance with the terms of the Lease. The rent in
effect for the office space until June 30, 1998 is US$14.93 per square foot, and
from July 1, 1998 through June 30, 1999 is US$15.15 per square foot. The rent in
effect for the basement storage space until June 30, 1998 is US$4.57 per square
foot, and from July 1, 1998 through June 30, 1999 is US$4.68 per square foot.
Assignee also agrees to pay Assignor and Landlord US$2.70 per square foot
per year for 25,141 square feet of office space and US$1.00 per square foot per
year for 3,000 square feet of basement storage space, totalling US$70,880.70 per
annum, in monthly instalments of US$2,953.36 to each of the Assignor and the
Landlord, on or before the first day of each month until the termination of the
Lease .
5. CONDITION OF SPACE AT OCCUPANCY
Assignor agrees to deliver possession of the premises to the Assignee in
the "as is" condition of December 18, 1997 (the date of signing the Letter of
Intent) on April 1, 1998.
Landlord shall provide a statement of condition of the premises as of April
1, 1998, which statement of condition shall be the basis of the determination of
the condition of the premises on the date the Assignee delivers the premises to
the Landlord at termination of the Lease. Assignee shall have the right to
review and approve the statement of condition, such approval not to be
unreasonably withheld.
-2-
<PAGE>
6. CONDITION OF SPACE AT TERMINATION
Upon the expiration or termination of the Lease, Assignee shall deliver
possession of the premises to Landlord in the same general condition as of the
commencement date of the Assignment, subject to ordinary wear and tear and
damage by casualty.
7. ASSIGNMENT AND SUBLETTING
Assignee shall have subleasing and assignment rights as specified in the
Lease. Any sublease or assignment is subject to the prior consent in writing by
Canadian Marconi Company, such consent not to be unreasonably withheld, delayed
or conditioned.
Landlord agrees to waive any right to share with Assignee any rents arising
from the sublease of space. Assignor agrees to waive any right to share with
Assignee any rents arising from the sublease of space.
Prior to the date of the assignment, Assignor shall neither enter into nor
extend any sublease of space without the prior approval of the Assignee.
Assignee acknowledges the current subleases: (1) Marconi Communications Inc.,
expiring February 28, 1999; and (2) Integrated Chipware Inc. expiring June 30,
1998.
8. SECURITY PAYMENT
Until such date as the Lease Guaranty of Canadian Marconi Company has been
terminated, but in no case beyond June 30, 2005, Assignee agrees to have issued
in a form and by a financial institution acceptable to Canadian Marconi Company,
a standby letter of credit in the amount of US$125,000 in favour of Canadian
Marconi Company, 600 Dr. Frederik Philips Blvd., St. Laurent, Quebec H4M 2S9
Attention: Treasurer, for a period of one year from the date of the Assignment,
and to be extended annually thereafter until April 1, 2005 when the standby
letter of credit shall be extended for three months. The standby letter of
credit shall be callable upon demand by certification in writing by Canadian
Marconi Company that the Assignee is in default of this Assignment agreement, of
the Lease, or of both.
9. INDEMNIFICATION BY ASSIGNOR
Assignor shall indemnify, defend and hold Assignee harmless from and
against any claims, losses, damages, liabilities, costs and expenses, including,
without limitation, reasonable attorneys' fees, resulting from any claims
arising from or based on facts and circumstances existing prior to April 1, 1998
under the Lease .
10. INDEMNIFICATION BY ASSIGNEE
Assignee shall indemnify, defend and hold harmless Assignor, and any
principal, officer, director, shareholder or partner in Assignor or any
shareholder in such shareholder, from and against any claims, losses, damages,
liabilities, costs and expenses, including, without limitation, reasonable
attorneys' fees, resulting from any claims arising from or based on facts and
circumstances existing after March 31, 1998 under the Lease.
-3-
<PAGE>
11. USE OF PREMISES
Assignee shall use and occupy the premises solely for general office
purposes.
Assignee shall provide space commonly known as the Training Room and
adjacent storage room for Assignor's use during the period from April 1, 1998
through September 30, 1998. Assignor shall have access to the space through the
entrance used by Marconi Communications, Inc. Assignor shall pay for its
telephone use and other services. The Assignor shall deliver possession of the
space in its "as is" condition at the date of signing the Letter of Intent
December 18, 1997.
12. CHANGES
This Assignment may not be changed, modified, discharged or terminated
orally or in any manner other than by an agreement in writing signed by the
parties hereto or their respective successors and assigns, subject to the prior
consent in writing of Canadian Marconi Company, such consent not to be
unreasonably withheld.
The obligations of Canadian Marconi Company as Guarantor of the Lease shall
terminate at such time as the obligations of the parties to the Lease shall
terminate, or at such earlier time as Canadian Marconi Company is released from
its obligations as Guarantor of the Lease.
13. NOTICES
All notices, demands, or requests between and among the Assignor, Assignee
and the Guarantor shall be in writing by certified mail, addressed as follows:
CMC DATACOMM, INC. and CANADIAN MARCONI COMPANY
415 Legget Drive
Kanata, Ontario K2K 2B2
Attention: Mr. William May, General Manager
Telephone Facsimile e-mail
613/592-7446 613/592-7415 [email protected]
TELEPHONE BUSINESS MEETINGS, INC.
1861 Wiehle Avenue
Reston, Virginia 20190 - 5200
Attention: Mr. John Novack, Chief Financial Officer
Telephone Facsimile e-mail
703/736-7113 703/736-7101
14. CONSENT
This Assignment agreement is conditional and shall be given effect upon the
endorsement by the Landlord, by the Assignee's shareholder, Vialog Corporation,
and by Canadian Marconi Company, of the consents set forth below.
-4-
<PAGE>
15. OPTION TO EXTEND
Landlord agrees that Assignee assumes the rights to renew and to extend the
original Lease in accordance with, and subject to, the terms and conditions of
the Lease at such time Canadian Marconi Company is released from its obligations
as Guarantor of the Lease.
Canadian Marconi Company shall neither guarantee nor be construed to
guarantee or to extend the Lease Guaranty under any condition, or upon the
exercise of any option which the Assignee or its assigns may have.
16. FINANCIAL STATEMENTS
Assignee agrees to provide annual and semiannual financial statements to
Assignor.
Assignee agrees to inform Assignor of any purchases, acquisitions or
changes in business which would have a material effect on the business or
structure of Telephone Business Meetings, Inc. or its shareholders, including
any public offerings or restructuring. Assignee agrees to provide Assignor the
names of its businesses which will occupy the premises. As of the date of this
Assignment agreement, ACCESS Teleconferencing International is to occupy the
premises.
17. REASONABLE EFFORTS TO ASSIST GUARANTOR
Assignee agrees to use its "reasonable efforts" to enable Canadian
Marconi Company to be released as Guarantor of the Lease at the earliest
possible date. Assignee's "reasonable efforts" to induce the Landlord to
release the guaranty of Canadian Marconi Company will be limited solely to the
Assignee offering to have a standby letter of credit in an amount not to exceed
US$125,000 issued in the name of the Landlord in consideration of the Landlord
releasing Canadian Marconi Company from its obligation to guarantee the Lease.
If and when Landlord releases Canadian Marconi Company from its obligation as
Guarantor, Canadian Marconi Company and Assignor shall release Assignee from any
and all obligations of the Assignee to Assignor under Section 8 of the Lease.
18. ENTIRE AGREEMENT
This agreement embodies the entire agreement of the Assignor and Assignee
with respect to the subject matter of this Agreement, and it supersedes any
prior agreements whether written or oral with respect to the subject matter of
this Agreement. There are no agreements or understandings with respect to the
subject matter of this Agreement which are not set forth in this Agreement. This
Agreement may be modified only by a written instrument duly executed by the
Assignor and Assignee.
19. BINDING EFFECT
The terms and provisions of this Agreement will inure to the benefit of,
and will be binding upon, the successors, assigns, personal representatives,
heirs, devisees and legatees of the Assignor and Assignee.
-5-
<PAGE>
20. SEVERABILITY
If any term, provision, covenant or condition of this Agreement is held by
a court of competent jurisdiction to be invalid void or unenforceable, then,
such term, provision, covenant or condition shall be interpreted so as to be
enforceable to the fullest extent permitted by law, and the remaining terms,
provisions, covenants and conditions contained herein shall not be affected
thereby.
21. HEADINGS
The headings of the sections and subsections used in this Agreement are
inserted for the convenience of reference only and are not intended to affect
the meaning or interpretation of this agreement.
22. WAIVER
No waiver whatsoever shall be valid unless in writing and signed by the
party so waiving and then only to the extent in such writing specifically set
forth. No failure or delay on the part of any party hereto in exercising any
right, power or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise hereunder.
23. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Virginia.
24. REPRESENTATIONS AND WARRANTIES
The Assignor represents and warrants to the Assignee as follows:
Approval of Assignor; Binding Effect. Assignor has obtained all necessary
------------------------------------
authorizations and approvals required for the execution and delivery of this
agreement and the consummation of the transactions contemplated hereby. The
agreement has been duly executed and delivered by the Assignor and constitutes
the legal, valid and binding obligation of the Assignor, enforceable against the
Assignor in accordance with its terms.
Taxes. Assignor has filed all federal, state and local tax returns required
-----
to be filed by it and has paid all federal, state and local income, sales,
franchise, social security, withholding, and unemployment insurance taxes, state
and local property taxes and any other taxes of any kind or description shown
thereon to be due and the Assignor has paid or provided for tax bills and
assessments received by it.
Title to Assets. Assignor is the lawful owner of, has good and valid record
---------------
and marketable title to, and has the full right to sell, convey, transfer,
assign and deliver the assets listed in Exhibit I and Exhibit II of Appendix
"A", without restrictions of any kind whatsoever.
-6-
<PAGE>
25. TELEPHONE SERVICE
Assignor agrees to provide telephone and other related services to its
present subtenants for the month of April 1998 at rates equal to those in effect
during March 1998.
26. TERMINATION OF POSSESSION
In the event of default by the Assignee of either the Lease, this
Assignment, or both, the Assignor shall have the right to terminate Assignee's
or any of its successor's right of possession of the premises at any time by
giving 30 days written notice to that effect and, if the Assignee has not cured
such default within such time frame, Assignor may re-enter or re-let the
premises or any part thereof.
27. CONTINUING LIABILITY; NO RELEASE
Notwithstanding any contrary provision contained in this Agreement (a)
Assignor shall remain liable to Landlord for the continued performance of all
duties and obligations of the Tenant under the Lease, and (b) Canadian Marconi
shall remain liable under its guaranty, as if this Assignment never existed.
IN WITNESS WHEREOF, Assignor and Assignee have duly executed this
Assignment in triplicate on March 13, 1998 to be effective as of April 1, 1998.
Assignor: CMC DataComm, Inc. Assignee: Telephone Business Meetings, Inc.
By: /s/ Marcia McKenzie By: /s/ John M. Novack
------------------------- -----------------------
By:____/s/__________________
-7-
<PAGE>
APPENDIX "A"
SPECIAL STIPULATIONS
--------------------
1. Property Acquisition Fee
Assignee shall pay Assignor US$160,000 in two payments: US $80,000 upon
execution of the Assignment agreement, to be held in escrow until the date of
the second payment; and US$80,000 on or before March 31, 1998.
2. Fixed Assets
The fixed assets to be conveyed from Assignor to Assignee are the
furniture, fixtures, and equipment covered by the attached appraisal (Exhibit I)
prepared by Margaret Nelson Whitmore, ASA, the total appraised value of which
comes to US$39,500, and the furniture, equipment and leasehold improvements
described in Exhibit II, the cost of Computer Room Build-out (including
specifically identified equipment), with a stated original cost of US$120,000.
3. Estoppel Certificate
Assignor and Landlord agree to sign Estoppel Certificates in the form of
Exhibit III prior to Assignee making payment of the Property Acquisition Fee
payments.
<PAGE>
EXHIBIT I
Margaret Nelson Whitmore, ASA
Accredited Senior Appraiser, American Society of Appraisers
Appraisals of Personal Property Antiques and Decorative Arts/Residential
Contents-General
P.O. BOX 16942, WASHINGTON, DC 20041-6942 43976 CLARY COURT, ASHBURN, VIRGINIA
20147-3315
TELEPHONE: (202) 363-7080 TELEPHONE: (703) 729-6713
JANUARY 10, 1998
MR. JOE GERSTLE
CMC DATACOM
1881 WHIELE AVENUE
RESTON, VIRGINIA
DETAIL OF ESTIMATE OF VALUE OF OFFICE FURNITURE AND FURNISHINGS:
FURNITURE IN OFFICE SPACES:
55 executive desks, 55 executive swivel chairs, 8 consoles, 83 arm chairs, 2
steno chairs, 12 plastic stack chairs. $11,500
10 small round conference tables with Formica tops, metal bases, 35 white
metal boards, 90bookcase units, 48 small work tables, 1 folding work table.
$6,435
Lateral filing cabinets, metal:
23 with two drawers, 5 with three drawers, 9 with four drawers, 4 with
five drawers
Also a four-drawer "safe: locking file cabinet $ 4,200
DIVIDER PANELS:
Fabric upholstered divider panels about three years old. All are five feet high.
64 panels three feet wide, 88 panels four feet wide, one panel 18 inches wide.
All in generally good condition as nearly as can be seen without moving
furniture. $ 8,500
RECEPTION ROOM:
Sofa and three small chairs, large framed three-panel photograph, small wood
table.
$665
THREE CONFERENCE ROOMS:
Two 7-foot oak conference tables, two consoles, 24 arm chairs, one tall easel on
steel legs.
Oval 12-foot conference table with Formica top, four metal bases; eleven leather
swivel chairs,
mahogany console table, mahogany console cabinet, mahogany cupboard stand for TV
and VCR,
folding white board with fabric upholstery on the reverse of side panels.
$7,500
<PAGE>
UTILITY AND STORAGE ROOMS:
Nine stacks of steel shelving, five work tables with Formica tops, one work
table with hutch above, two arm chairs.
$700
TOTAL VALUE: $39,500
MARGARET NELSON WHITMORE, ASA
<PAGE>
EXHIBIT I
Margaret Nelson Whitmore, ASA
Accredited Senior Appraiser, American Society of Appraisers
Appraisals of Personal Property Antiques and Decorative Arts/Residential
Contents-General
P.O. BOX 16942, WASHINGTON, DC 20041-6942 43976 CLARY COURT, ASHBURN, VIRGINIA
20147-3315
TELEPHONE: (202) 363-7080 TELEPHONE: (703) 729-6713
JANUARY 10, 1998
MR. JOE GERSTLE
CMC DATACOM
1881 WHIELE AVENUE
RESTON, VIRGINIA
DEAR MR. GERSTLE:
YOU HAVE ASKED THAT I ESTIMATE FAIR MARKET VALUE FOR FURNITURE AND FURNISHINGS
AT CMC DATA COM'S RESTON FACILITY, WITH THE THOUGHT THAT THOSE ITEMS WILL BE
OFFERED FOR SALE TO THE NEW OCCUPANT'S OF DATACOM'S SPACE WHEN THE PLANNED MOVE
TO CANADA IS MADE.
THE FURNITURE AND FURNISHINGS WERE INVENTORIED BY THE UNDERSIGNED ON DECEMBER
19, 1997. IN DETERMINING VALUE WE HAVE CONSIDERED THE COST TO REPLACE THE
ITEMS, THE AMOUNT THEY MIGHT BRING IF SOLD TO A DEALER IN USED OFFICE FURNITURE,
AND THEIR LIKELY VALUE IN USE TO A NEW OCCUPANT OF THE SPACE WHERE THEY ARE NOW
LOCATED. WE UNDERSTAND THAT MUCH OF THE FURNITURE IS TEN OR MORE YEARS OLD.
DIVIDER PANELS, RECEPTION ROOM FURNISHINGS AND SOME OTHER ITEMS ARE ABOUT THREE
YEARS OLD.
SUMMARY (DETAIL FOLLOWS)
<TABLE>
<S> <C>
Furniture in office spaces: $22,135.
Divider panels, approximately 550 run feet 8,500.
Reception room: 665.
Three conference rooms: 7500.
Utility and storage rooms: 700.
TOTAL
$39,500
</TABLE>
The undersigned attests that the examination was made and the report prepared to
the best of her knowledge and ability, in accordance with the Uniform Standards
of Professional Appraisal
<PAGE>
Practice, and that she has no financial interest in any of the items described,
other than proper fee for appraisal service. A statement of conditions and
limitations pertaining to this report is a part of the report.
A statement of the appraiser's qualifications is a part of the report. The
American Society of Appraisers has a mandatory recertification program for all
of its Senior members, with which program the appraiser is in compliance.
Margaret Nelson Whitmore, ASA
<PAGE>
EXHIBIT I
MARGARET NELSON WHITMORE, ASA
ACCREDITED SENIOR APPRAISER
AMERICAN SOCIETY OF APPRAISERS
Appraisals of Personal Property
Antiques and Decorative Arts, Residential Contents - General
43976 Clary Court, Ashburn, Virginia, 20147-3315
Telephone: (703)729-6713
P.O. Box 16942, Washington, DC 20041-6942
Telephone: (202)363-7080
QUALIFICATIONS
AMERICAN SOCIETY OF APPRAISERS: Accredited Senior Appraiser, tested and
certified expert in the areas of antiques, decorative arts, and general
residential contents. Designated Accredited Senior Appraiser 1985. Senior
Appraisers are required to recertify their professional designation on the basis
of continuing education and other requirements each five years, recertified
November, 1989 and November, 1994. President Washington, D.C. Chapter 1993-94.
Member American Society of Appraisers International Special Committee for
Personal Property, 1994-95.
PROFESSIONAL EXPERIENCE: Since 1977 independent personal property appraiser.
Staff, Miller & Arney Antiques, Inc., Washington, DC 1980-83. Appraisals of
personal property for estate, insurance, gift, sale, tax and other purposes in
Northern Virginia and other Washington DC Metropolitan jurisdictions.
In addition to areas of certified expertise, appraisal assignments completed
include valuations of furniture, furnishings and equipment in offices of
physicians, lawyers and other places of business.
Client lists includes attorneys, certified public accountants, businesses,
insurance agencies, museums, historic properties commissions, churches, The
White House, other local and Federal government agencies, and private citizens.
PROFESSIONAL EDUCATION: Academic study in pertinent professional and business
fields at Georgetown University and George Washington University. Participation
in seminars, lectures and workshops of the American Society of Appraisers,
Smithsonian Institution, Winterthur Guild, Homewood Museum at Johns Hopkins
University and others. Independent research and study in areas of particular
interest and/or involvement in work projects.
-o0o-
<PAGE>
EXHIBIT I
MARGARET NELSON WHITMORE, ASA
ACCREDITED SENIOR APPRAISER
AMERICAN SOCIETY OF APPRAISERS
Appraisals of Personal Property
Antiques and Decorative Arts, Residential Contents - General
43976 Clary Court, Ashburn, Virginia, 20147-3315
Telephone: (703)729-6713
P.O. Box 16942, Washington, DC 20041-6942
Telephone: (202)363-7080
CONDITIONS AND LIMITATIONS OF THE APPRAISAL REPORT
The appraiser assumes that the appraisal was authorized by the owner of the
property or his legally designated agent.
Court attendance and the giving of expert testimony are not included as part of
this report. Such services, when required, are available at fees determined in
individual situations.
The appraiser certifies that, to the best of her knowledge and belief, the
following statements apply to all appraisal reports prepared by her:
The analyses, opinions, conclusions and valuations in the report were
developed and the report prepared in conformity with the Uniform Standards
of Professional Appraisal Practice as promulgated by the Appraisal
Foundation.
The statements of fact in the appraisal report are true and correct.
The reported appraisal results are the appraiser's unbiased, professional
opinions.
Valuations do not represent any offer to buy or to arrange the sale of any
items and do not guarantee that sale of the items in any manner will result
in proceeds equal to the valuations stated.
The appraiser has no present nor contemplated future interest in the
objects which are the subject of the report, unless specified to the
contrary.
The appraiser does not have a personal or business bias or relationship
with the parties involved which would lead a reasonable person to questions
the objectivity and validity of the report.
The appraiser has made a personal, physical inspection of the objects
specified in the report, unless specified to the contrary.
The appraiser received no separate significant professional assistance
unless specified to the contrary.
<PAGE>
EXHIBIT II
COST OF COMPUTER ROOM BUILD-OUT
<TABLE>
<S> <C>
General conditions $ 4,687.00
Drywall and partitions 4,685.00
Wall treatments 893.00
Acoustical ceilings 1,643.00
Doors, frames 683.00
Carpentry 315.00
Floor coverings 420.00
Access floor 14,700.00
Electrical 16,450.00
Mechanical 29,610.00
Sprinkler 546.00
Concrete 368.00
----------
Total $ 120,000.00
============
</TABLE>
SPECIFIC EQUIPMENT INCLUDED IN COMPUTER ROOM BUILD-OUT
Uninteruptable power supply
Maintenance bypass switch
Bank of batteries
Power module distribution panel
Air conditioner
Dry-type power transformer 769G
I-Line power board
AC kilowatt-hour meter
Automated alarm system
Fire alarm annunciator
Automatic sprinkler system
Emergency lights
Emergency power off switch
Wall clock
Exit signs
Raised floor
<PAGE>
EXHIBIT III
ESTOPPEL CERTIFICATE
Reference is made to the Lease dated July 1, 1995, as amended, from ROYCO, INC.
(as successor to Aetna Life Insurance Company) as Landlord, to CMC DATACOMM INC,
as Tenant, with respect to Suite 300 (containing 25,141 square feet of office
space) and the basement storage area (containing 3,000 square feet), located at
1861 Wiehle Avenue, Reston, Virginia 20190 (the "Lease"). Terms used in this
Certificate which are defined in or by reference to the Lease have the same
meanings in this certificate as in the Lease.
The undersigned hereby ratifies the Lease and certifies that:
1. the Term of the Lease is ten (10) years;
2. the Beginning Date is July 1, 1995;
3. the Ending Date is June 30, 2005;
4. the Lease has one Option to renew for a term of five (5) years;
5. the premises are presently occupied by CMC DataComm Inc. and its
subtenants, Marconi Communications, Inc. and Integrated Chipware Inc.;
6. Base Rent through June 30, 1998, as adjusted and including Additional Rent
for taxes and operations, is US$14.93 per square foot per year for office
space and US$4.57 per square feet per year for basement space. Effective
July 1, 1998 for the year ended June 30, 1999, Base Rents, as adjusted,
will be US$15.15 and US$4.68, respectively;
7. all rent and other fees due to Royco, Inc. have been paid through March 31,
1998, with the exception of billings for meter readings, BW mechanical
invoices, and extra HVAC usage;
8. the lease is in full force and effect and has not been assigned, modified,
supplemented or amended in any way and represents the entire agreement
between Landlord and Tenant;
9. no default or event of default has been asserted by either party to the
Lease and, to the knowledge of the undersigned, no default or event of
default exists on the part of either party to the Lease;
10. no rent has been paid in advance of its due date under the Lease.
CMC DATACOMM INC ROYCO, INC.
By: /s/ Marcia McKenzie
-------------------
By: /s/ By: /s/ Joseph J. Kelly, VP
------------------- -------------------------
Date: March 13, 1998 Date: 3/13/98
------------------- ------------------------
<PAGE>
LEASE
BY AND BETWEEN
AETNA LIFE INSURANCE COMPANY
("LANDLORD")
AND
CMC DATACOMM INC.
("TENANT")
MULTI-TENANT OFFICE LEASE
1861 WIEHLE AVENUE
Reston, Virginia
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
ARTICLE
- -------
<S> <C>
1. TERMS
2. DELIVERY OF POSSESSION
3. PAYMENT OF RENT
4. SECURITY DEPOSIT
5. USES
6. LATE CHARGES
7. REPAIRS AND MAINTENANCE
8. UTILITIES AND SERVICES
9. COST OF SERVICES AND UTILITIES
10. PROPERTY TAXES
11. LIABILITY AND CASUALTY INSURANCE
12. FIRE INSURANCE - FIXTURES AND EQUIPMENT
13. DAMAGE OR DESTRUCTION
14. ALTERATIONS AND ADDITIONS: REMOVAL OF FIXTURES
15. ACCEPTANCE OF PREMISES
16. TENANT IMPROVEMENTS
17. ACCESS
18. WAIVER OF SUBROGATION
19. INDEMNIFICATION
20. ASSIGNMENT AND SUBLETTING
21. ADVERTISING
22. LIENS
23. DEFAULT
24. SUBORDINATION AND ATTORNMENT
25. SURRENDER OF POSSESSION
26. NON-WAIVER
27. HOLDOVER
28. CONDEMNATION
29. NOTICES
30. MORTGAGEE PROTECTION
31. COSTS AND ATTORNEYS' FEES
32. BROKERS
33. LANDLORD'S LIABILITY
34. ESTOPPEL CERTIFICATES
35. FINANCIAL STATEMENTS
36. TRANSFER OF LANDLORD'S INTEREST
37. RIGHT TO PERFORM
38. SALES AND AUCTIONS
39. ROOFTOP EQUIPMENT
40. SECURITY
41. AUTHORITY OF TENANT
</TABLE>
<PAGE>
<TABLE>
<S> <C>
42. NO ACCORD OR SATISFACTION
43. MODIFICATIONS FOR LENDER
44. PARKING
45. GENERAL PROVISIONS
46. RULES AND REGULATIONS
47. NO WARRANTIES OR REPRESENTATIONS BY LANDLORD
48. LANDLORD'S CONSENT OR APPROVAL
49. SIGNAGE
</TABLE>
<PAGE>
SCHEDULE OF EXHIBITS
--------------------
EXHIBIT A - LOCATION AND DIMENSIONS OF PREMISES
EXHIBIT B - SPECIAL STIPULATIONS
EXHIBIT C - WORK LETTER
EXHIBIT D - SCHEDULE OF JANITORIAL SERVICES
EXHIBIT E - ARCHITECT'S CERTIFICATE
EXHIBIT F - GUARANTY
EXHIBIT G - COMMENCEMENT DATE AGREEMENT
<PAGE>
LEASE SUMMARY SHEET
<TABLE>
<S> <C>
1. LANDLORD: AETNA LIFE INSURANCE COMPANY
C/O TRAMMELL CROW COMPANY
1115 30TH STREET, N.W.
WASHINGTON, D.C 20007
2. TENANT: CMC DATACOMM INC.
3. TENANT'S ADDRESS: SUITE 300
1861 WIEHLE AVENUE
RESTON, VIRGINIA 22090
4. PREMISES: APPROXIMATELY 25,141 RENTABLE SQUARE FEET TO BE
KNOWN AS SUITE 300 PLUS APPROXIMATELY 3,000
SQUARE FEET OF BASEMENT SPACE, 1861 WIEHLE
AVENUE, RESTON, VIRGINIA 22090
5. TERM OF LEASE: YEARS: TEN (10)
BEGINNING: JULY 1, 1995
ENDING: JUNE 30, 2005
OPTIONS TO RENEW: 1 FOR FIVE (5) YEARS
6. RENT: MINIMUM (BASE) MONTHLY RENT: SEE
SPECIAL STIPULATION NO. 1 AND NO. 2
ADDITIONAL RENT AND ESCALATION:
PRORATA SHARE OF OPERATING COSTS AND PROPERTY
TAXES
7. SECURITY DEPOSIT: NONE
8. PARKING: 110 SPACES OF WHICH 10 SHALL BE RESERVED SPACES:
SEE SECTION 44
9. BUILD-OUT ALLOWANCE: $22.50 PER RSF: SEE EXHIBIT C
</TABLE>
- FOR INFORMATIONAL PURPOSES ONLY -
<PAGE>
LEASE
-----
THIS LEASE (this "Lease") is made this ____ day of March, 1995, by and
between AETNA LIFE INSURANCE COMPANY, a Connecticut corporation, c/o Trammell
Crow Company, 1115 30th Street, N.W., Washington, D.C. 20007 and CMC DataComm
Inc., a ______ corporation ("Tenant"), having an address of 1953 Gallows Road,
Vienna, Virginia 22182 (prior to the Lease Commencement Date) (and the Premises
thereafter).
Landlord, for and in consideration of the rents and all other charges
and payments hereunder and of the covenants, agreements, terms, provisions and
conditions to be kept and performed hereunder by Tenant, demises and leases to
Tenant, and Tenant hereby hires and takes from Landlord, the premises described
below ("Premises"), subject to all matters hereinafter set forth and upon and
subject to the covenants, agreements, terms, provisions and conditions of this
Lease and written amendments thereto for the term hereinafter stated.
Landlord discloses to Tenant, and Tenant acknowledges, that Landlord
is the owner of record of the Building, as that term is defined below, and of
the Premises and that Trammell Crow Real Estate Services, Inc. (the "Manager")
is authorized to manage the Building and the Premises on behalf of Landlord.
1. TERMS.
-----
1.1. Premises. The Premises demised by this Lease are
--------
approximately Twenty Five Thousand One Hundred Forty One (25,141) rentable
square feet located on the third (3rd) floor and approximately Three Thousand
(3,000) square feet located in the basement (the "Basement Space") in the
building located at 1861 Wiehle Avenue, Reston, Virginia 22090 (the "Building"),
together with a non-exclusive right to use parking as provided herein and other
common areas. Hereinafter, all references to the "Premises" shall include the
"Basement Space" except with respect to Sections 9 and 10 of this Lease or
unless otherwise specifically excluded therefrom. The location and dimensions of
the Premises are shown on EXHIBIT A attached hereto and incorporated herein by
---------
reference.
1.2. Agreed Areas. The parties agree that the total rentable area
------------
of the Building, the area of the Premises, and the Tenant's percentage of the
Building are as follows:
Total rentable area of the Building: 73,685 sq. ft.;
Area of Premises (excluding the Basement Space): 25,141 sq. ft.; and
Tenant's percentage of the Building: 34.12%
<PAGE>
1.3. Lease Term. The parties agree that the term of this Lease
----------
(the "Term") shall be for ten (10) years (subject to adjustment pursuant to
Section 2 hereinbelow) and the Lease Commencement Date and the Lease Expiration
Date are as follows:
Lease Commencement Date: July 1, 1995
Lease Expiration Date: June 30, 2005
1.4. Base Rent. The basic rent ("Base Rent") for the Premises
---------
(excluding the Basement Space) and the Basement Space shall be as set forth in
Special Stipulation No. 1 and No. 2 of EXHIBIT B attached hereto and by this
---------
reference made a part hereof and thereafter shall increase as set forth in
EXHIBIT B. The term Base Rent shall be the sum of the Base Rent for the Premises
- ---------
(excluding the Basement Space) along with the Base Rent for the Basement Space.
In addition to the Base Rent, Tenant shall pay all amounts designated as
additional rent ("Additional Rent") under this Lease, including but not limited
to charges for additional services under Section 8.2, its prorata share of the
costs of services and utilities under Article 9 and Property Taxes under Article
10, all of which shall be deemed rent ("Rent") due under this Lease. No
Additional Rent shall be due with respect to the Basement Space.
1.5. Initial Payment. Tenant shall pay Landlord upon execution of
---------------
this Lease Sixteen Thousand Two Hundred Seventy Six and 54/100 Dollars
($16,276.54) representing the first month's Base Rent.
2. DELIVERY OF POSSESSION. If landlord is unable to deliver
----------------------
possession of the Premises to Tenant on the Lease Commencement Date, this Lease
shall not be void or voidable, nor shall Landlord be liable to Tenant for any
Loss or damage resulting therefrom (except that the Landlord shall pay Tenant a
penalty in the form of an abatement of two days of Base Rent for each day that
Landlord is late delivering possession after July 15, 1995, if such delay was
due to the acts or omissions of Landlord or its agents or contractors) but the
Lease Commencement Date and the Lease Expiration Date of the Term shall be
extended, as provided below, and in such event Tenant shall not be liable for
any rent or other charges due under this lease until such time as Landlord
tenders delivery of possession of the Premises to Tenant. should Landlord tender
possession of the premises to Tenant prior to the date specified as the Lease
Commencement Date, and Tenant elects to commence beneficial use of the Premises,
such prior occupancy shall be subject to all terms, covenants and conditions of
this Lease, including the payment of Rent.
In the event Landlord, for any reason, delivers possession of the
Premises in accordance with Section 15 of this Lease to Tenant after the Lease
Commencement Date, then the Lease Expiration Date shall be adjusted accordingly
such that the Term of this Lease shall commence upon the delivery of possession
to Tenant and expire ten (10) years from such date (except if the date
possession is delivered to Tenant is a date other than the first day of a
calendar
<PAGE>
month in which case the Lease Commencement Date shall be adjusted to the first
day of the next full calendar month and the Lease Expiration Date shall be
adjusted accordingly). Tenant shall acknowledge in writing such new Lease
Commencement Date and new Lease Expiration Date upon Landlord's request in a
form substantially similar to that in EXHIBIT G attached hereto and incorporated
---------
herein by reference.
3. PAYMENT OF RENT. Except as otherwise provided in this Lease,
---------------
Tenant shall pay Landlord the Rent and any other payments due under this Lease
without prior notice, deduction or offset, in lawful money of the United States
in advance on or before the first day of each month, except that the first
month's Base Rent shall be paid upon the execution hereof, at the address noted
in Section 29, or to such other party or at such other place as Landlord may
hereafter from time to time designate in writing. Rent and other amounts due
under this Lease for any partial month at the beginning or end of the Lease term
shall be prorated, on a per diem basis.
4. SECURITY DEPOSIT. [Intentionally deleted.]
----------------
5. USES.
----
5.1. Permitted Uses. The Premises are to be used only for
--------------
general office purposes (and additional office and office storage as to the
Basement Space) and for no other purpose without the prior written consent of
Landlord (hereinafter the "Permitted Uses"). No act shall be done in or about
the Premises that is unlawful or that will demonstrably increase the existing
rate of insurance on the Building. In the event of a breach of this covenant,
Tenant shall immediately cease the performance of such unlawful act or such act
that is increasing or has increased the existing rate of insurance and shall pay
to Landlord any and all increases in insurance premiums resulting from such
breach. Tenant shall not commit or allow to be committed any waste upon the
Premises, or any public or private nuisance or other act or thing which disturbs
the quiet enjoyment of any other tenant in the Building. If any of the Tenant's
office machines or equipment disturb any other tenant in the Building, then
Tenant shall provide adequate insulation, or take such other action as may be
necessary to eliminate the noise or disturbance at its sole cost and expense.
Except for ancillary computer equipment, LAN, and telephone for which Tenant
shall secure the necessary permits, Tenant shall not, without Landlord's prior
consent, install any equipment, machine, device, tank or vessel which is subject
to any federal, state or local permitting requirement. Tenant, at its expense,
shall comply with all laws, statutes, ordinances, governmental rules,
regulations or requirements governing the installation, operation and removal of
any such equipment, machine, device, tank or vessel. Tenant, at its expense,
shall comply with all laws, statutes, ordinances, governmental rules,
regulations or requirements, and the provisions of any recorded documents now
existing or hereafter in effect relating to its use, operation or occupancy of
the Premises and shall observe such reasonable rules and regulations as may be
adopted and made available to Tenant by Landlord from time to time for the
safety, care and cleanliness of the Premises or the Building and for the
preservation of good order therein.
<PAGE>
5.2. Hazardous Materials.
-------------------
5.2.1. As used in this Lease, the term "Hazardous
Materials" shall mean and include any substance that is or contains petroleum,
asbestos, polychlorinated biphenyls, lead, or any other substance, material or
waste which is now or is hereafter classified or considered to be hazardous or
toxic under any federal, state or local law, rule, regulation or ordinance
relating to pollution or the protection or regulation of human health, natural
resources or the environment (collectively "Environmental Laws") or poses or
threatens to pose a hazard to the health or safety of persons on the Premises or
any adjacent property.
5.2.2. Tenant agrees that during its use and occupancy of
the Premises it will not knowingly permit Hazardous Materials to be present on
or about the Premises except in a manner and quantity necessary for the ordinary
performance of Tenant's business and that it will comply with all Environmental
Laws relating to the use, storage or disposal of any such Hazardous Materials.
5.2.3. If Tenant's use of Hazardous Materials on or about
the Premises results in a release, discharge or disposal of Hazardous Materials
on, in, at, under, or emanating from, the Premises or the property in which the
Premises are located, Tenant agrees to investigate, clean up, remove or
remediate such Hazardous Materials in full compliance with (a) the requirements
of (i) all Environmental Laws and (ii) any governmental agency or authority
responsible for the enforcement of any Environmental Laws; and (b) any
additional requirements of Landlord that are reasonably necessary to protect the
value of the Premises or the property in which the Premises are located.
Landlord shall also have the right, but not the obligation, to take whatever
action with respect to any such Hazardous Materials that it deems reasonably
necessary to protect the value of the Premises or the property in which the
Premises are located. All costs and expenses paid or incurred by Landlord in the
exercise of such right shall be payable by Tenant upon demand.
5.2.4. Upon reasonable notice to Tenant (which shall be at
least twenty-four (24) hours except in cases of emergency), Landlord may inspect
the Premises for the purpose of determining whether there exists on the Premises
any Hazardous Materials or other condition or activity that is in violation of
the requirements of this Lease or of any Environmental Laws. The right granted
to Landlord herein to perform inspections shall not create a duty on Landlord's
part to inspect the Premises, or liability on the part of Landlord for Tenant's
use, storage or disposal of Hazardous Materials, it being understood that Tenant
shall be solely responsible for all liability in connection therewith.
5.2.5. Tenant shall surrender the Premises to Landlord upon
the expiration or earlier termination of this Lease free of debris, waste or
Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees, and in a condition which complies with all
Environmental Laws required to have been complied with by Tenant under this
Lease.
5.2.6. Tenant agrees to indemnify and hold harmless
Landlord from and against any and all claims, losses (including, without
limitation, loss in value of the Premises or
<PAGE>
the property in which the Premises are located), liabilities and expenses
(including reasonable attorney's fees) sustained by Landlord attributable to (i)
any Hazardous Materials placed on or about the Premises by Tenant or its agents,
employees, contractors or invitees or (ii) Tenant's breach of any provision of
this Section 5.2.
5.2.7. The provisions of this Section 5.2 shall survive the
expiration or earlier termination of this Lease.
5.2.8. Landlord has had a Phase I Environmental Assessment
performed on the Building by Environmental Management Group, Inc., independent
environmental engineering consultants, dated March 4, 1992 (the "Report"). A
copy of the Report has been furnished to Tenant and Tenant hereby expressly
acknowledges its receipt of the Report. Landlord does not make any
representation or warranty concerning the accuracy or thoroughness of the
Report, the information it contains, or of the methods employed by Environmental
Management Group, Inc. Landlord also makes no representation or warranty that
Landlord shall undertake or perform any action recommended in the Report.
Landlord expressly disclaims any obligation or responsibility, express or
implied, to update or supplement the Report or the information it contains.
Tenant covenants and agrees to keep the Report and the information it contains
confidential. Tenant shall not distribute or disseminate the Report or the
information it contains to any third party or make the Report or its contents
public knowledge without Landlord's prior written consent.
6. LATE CHARGES. Tenant hereby acknowledges that late payments to
------------
Landlord of rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. If any Rent or other sum due from Tenant is not received
on or before five (5) business days after its due date, then Tenant shall pay to
Landlord immediately upon Landlord's demand therefor a late charge in an amount
equal to five percent (5%) of such overdue amount, plus any attorneys' fees and
costs incurred by Landlord by reason of Tenant's failure to pay rent and other
charges when due hereunder; provided, however, landlord hereby waives the right
to collect the late charges for any two (2) months (consecutive or
nonconsecutive) during any twelve (12) month period.
7. REPAIRS AND MAINTENANCE. Landlord shall maintain, or cause to be
-----------------------
maintained, the common areas of the Building, such as lobbies, parking areas,
HVAC, ducts, elevators, stairs, and corridors, the roof, foundations, and
exterior walls of the Building, and the underground utility and sewer pipes
outside the exterior walls of the Building, if any, except any of such repairs
rendered necessary by the negligence or misconduct of Tenant, its agents,
customers, employees, independent contractors, guests or invitees, the repair of
which shall be paid for by Tenant within thirty (30) days of Landlord's written
demand. Subject to Landlord's right of access pursuant to Article 17, Tenant
shall be exclusively responsible for the interior of the Premises (except for
mechanical, electrical, plumbing, HVAC, fire and life safety, all building
standard lighting - bulbs, tubes, ballasts, lenses, hinges, locksets and
latchsets, ceiling grid and tile, windows and blinds), which shall be maintained
by Tenant in good order and repair, and Landlord shall be under no obligation to
inspect the Premises or, except as otherwise expressly provided in this Lease,
repair the Premises. Tenant shall promptly report in writing to
<PAGE>
Landlord any defective condition known to it which Landlord is required to
repair, and failure to so report such known defects shall make Tenant
responsible to Landlord for any liability incurred by Landlord by reason of such
conditions. Tenant hereby waives the right to make repairs at Landlord's expense
under any law, statute or ordinance now or hereafter in effect; Tenant's sole
right to repair is expressly set forth hereinbelow.
In the event that Landlord defaults under its obligations under
this Section, Tenant shall promptly notify Landlord in writing of such default
and Landlord shall have thirty (30) days within which to cure such default (or
if such default is not capable of being cured within such time, Landlord shall
diligently proceed to cure such default). In the event that Landlord does not
cure the default within such thirty (30) day period or does not diligently
proceed to cure such default if such default is not capable of being cured
within such thirty (30) day period, Tenant shall have the right to cure such
default on Landlord's behalf and Landlord shall promptly reimburse Tenant for
all reasonable, out-of-pocket expenses incurred by Tenant in connection with
such cure.
8. UTILITIES AND SERVICES.
----------------------
8.1. Service. From 8:00 a.m. to 6:00 p.m. on weekdays ("Normal
-------
Business Hours") and from 9:00 a.m. to 12:00 p.m. on Saturday ("Saturday
Mornings") (excluding legal holidays - New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day (and the Friday after) and
Christmas Day), Landlord shall furnish to the Premises electricity for lighting
and operation of customary and normal office machines including a computer room
with supplemental HVAC, water (except to the Basement Space), heat and air
conditioning, and elevator service. During all other hours, Landlord shall
furnish such service except for heat and air conditioning.
8.2. Additional Services. If requested by Tenant, Landlord shall
-------------------
furnish heat and air conditioning at times other than Normal Business Hours and
Saturday Mornings and the cost of such services as established by Landlord shall
be paid by Tenant as Additional Rent, payable promptly upon receipt of
Landlord's invoice. Landlord shall also provide toilet room supplies, window
washing at reasonable intervals, and customary Building janitorial service which
shall include those responsibilities set forth in EXHIBIT D attached hereto and
---------
by this reference made a part hereof. Other types of services provided or caused
to be provided by Landlord to Tenant which are in addition to the services
ordinarily provided Building tenants shall be payable as provided in Section
9.1.1.2 of this Lease. Landlord shall not be liable for any loss, injury or
damage to property caused by or resulting from any variation, interruption, or
failure of such services due to any cause whatsoever, or from failure to make
any repairs or perform any maintenance. In no event shall Landlord be liable to
Tenant for any damage to the Premises or for any loss, damage or injury to any
property therein or thereon occasioned by bursting, rupture, leakage or overflow
of any plumbing or other pipes or other similar cause in, above, upon or about
the Premises or the Building, except as may be caused by the negligence or
willful misconduct of Landlord. Notwithstanding anything to the contrary
contained in this Lease, if Tenant cannot reasonably use the Premises for
Tenant's intended business operations by reason of any interruption in services
to be provided by Landlord and such condition exists for
<PAGE>
five (5) business days, then Tenant's Base Rent shall be equitably abated for
that portion of the Premises that Tenant is unable to use for Tenant's intended
business operations until such service is restored to the Premises. Tenant shall
not, however, be entitled to any abatement of Base Rent if the interruption or
abatement in service or the failure by Landlord to furnish such service is the
result of force majeure or is the result of an interruption or abatement in
service of a public utility. By way of example only, there shall be no abatement
of Base Rent if Landlord is unable to furnish water or electricity to the
Premises if no water or electricity is then being made available to the Building
by the supplying utility company or municipality, except due to the action or
inaction of Landlord.
9. COST OF SERVICES AND UTILITIES.
------------------------------
9.1. Definitions. In addition to the Base Rent and other
-----------
Additional Rent as set forth in this Lease, during the second (2nd) Lease Year
and thereafter during the Term of this Lease, Tenant shall pay to Landlord its
prorata share of Operating Costs as Additional Rent under this Article 9. Said
prorata share shall be calculated as provided herein, using the following
definitions:
9.1.1. "Operating Costs" shall include Costs of Utilities
---------------
and Other Operating Costs.
9.1.1.1. "Costs of Utilities" shall mean all
------------------
expenses paid or incurred by Landlord, including any surcharges imposed, for
electricity, water, gas, sewers, oil and utility services for the Building, land
and parking and other common areas.
9.1.1.2. "Other Operating Costs" shall mean all
---------------------
other expenses paid or incurred by Landlord for maintaining, operating,
replacing, repairing, and managing (i) the Building, (ii) the personal property
used in conjunction therewith, (iii) the Building roof, or (iv) the land upon
which the Building is situated, including all curbs and sidewalks adjacent to
the same. Such costs shall include, without limitation, supplies, cleaning
services, garbage and trash collection, personal property taxes, replacement
lighting, maintenance and service contracts, wall and window washing, towel
service, machinery, equipment, a reasonable management fee (not to exceed four
percent (4%)), window glass replacement and repair, landscaping services of
independent contractors (including, without limitation, ice and snow removal),
compensation (including employment taxes and fringe benefits) of all persons who
perform regular and recurring duties in connection with the management,
operation, maintenance, replacement and repair of the Building, the personal
property and equipment used in conjunction therewith and the land upon which the
Building is situated and all curbs and sidewalks adjacent to the same, capital
improvements to the Building which are required by local or governmental
authorities or which are reasonably expected to reduce Operating Costs,
insurance premiums, repair, replacement and maintenance costs required by any
applicable federal, state or local law now or hereafter in effect, permits and
inspection fees, legal fees and costs incurred in connection with contesting the
amounts or the imposition of any Property Taxes (as defined in Article 10), and
accounting fees and any other expense or charge whether or not hereinbefore
described which, in accordance with generally accepted accounting and management
practices, would be considered
<PAGE>
an expense of maintaining, operating, replacing or repairing the Building, the
personal property and equipment used in conjunction therewith, and the land upon
which the Building is situated and all curbs and sidewalks adjacent to the same,
excluding: (a) Costs of any special services rendered to individual tenants
(including Tenant), for which a special, separate charge shall be made (and
which shall be payable by such tenant [including Tenant], as Additional Rent
within ten (10) days of written demand therefor); (b) Property Taxes; (c)
depreciation or amortization of costs required to be capitalized in accordance
with generally accepted accounting practices (except that Operating Costs shall
include amortization of any energy management system or other capital
improvements which are made pursuant to the requirement of any local or
governmental authority or which are reasonably expected to reduce Operating
Costs; (d) original construction costs of the Building; (e) interest and
amortization of funds borrowed by Landlord, whether secured or unsecured; (f)
reserves for repairs, maintenance and replacements; (g) costs or expenses
associated with leasing space in the Building or the sale of any interest in the
Building, including, without limitation, advertising and marketing, commissions,
or any amounts paid for or on behalf of a tenant such as space planning, moving
costs, rental and other tenant concessions; (h) ground rents; (i) amounts paid
to any partner, shareholder, officer or director of Landlord, for salary or
other compensation; (j) expenses for repairs, replacements or improvements
arising from the initial construction of the Building to the extent such
expenses are reimbursed to Landlord by virtue of warranties from contractors or
supplies; (k) any amounts paid to any person, firm or corporation related or
otherwise affiliated with Landlord or any general partner, officer or director
of Landlord or any of its general partners, to the extent same exceeds arms-
length competitive prices paid in the Washington, D.C. metropolitan area for the
services or goods provided; (l) accounting or legal fees incurred in tenant
disputes, or in procuring tenants, or for fees not related to the operation and
maintenance of the Building but personal to Landlord; (m) costs of repairs
incurred by reason of fire or other casualty or condemnation to the extent
Landlord receives compensation therefor through proceeds of insurance or
condemnation awards; (n) cost of renovating or otherwise improving space for new
tenants or in renovating space vacated by any tenant or any other work which
Landlord performs for any tenant; (o) costs relating to maintaining Landlord's
existence, either as a corporation, partnership, or other entity, such as
trustee's fees, annual fees, partnership organization or administration
expenses, deed recordation expenses, legal and accounting fees (other than with
respect to Building operations); (p) interest or penalties arising by reason of
Landlord's failure to timely pay any Operating Costs; (q) compensation paid to
clerks, attendants, sales persons or other persons on or in commercial
concessions (including the parking garage) operated in the Building; and (r)
depreciation of the Building or any equipment, machinery, fixtures or
improvements therein.
9.1.2. "Lease Year" shall mean the twelve-month period
----------
commencing on the Lease Commencement Date or anniversary thereof, as applicable,
and ending the last day of the twelfth month following the Lease Commencement
Date or anniversary thereof.
9.1.3. "Basic Services Year" shall mean the first Lease
------------------
Year.
9.1.4. "Actual Costs" shall mean the actual expenses paid
------------
or incurred by Landlord for Operating Costs during any Lease Year of the Term
hereof.
<PAGE>
9.1.5. "Actual Costs Allocable to the Premises" shall mean
--------------------------------------
the Tenant's share of the Actual Costs determined by multiplying Tenant's
percentage of the Building described in Section 1.2 by the Actual Costs.
9.1.6. "Estimated Costs Allocable to the Premises" shall
-----------------------------------------
mean Landlord's estimate of Actual Costs Allocable to the Premises for the
applicable Lease Year to be given by Landlord to Tenant pursuant to Section 9.3.
9.2. Base Amount. Operating Costs allocable to the Premises for
-----------
the Base Services Year shall be deemed the "Base Amount".
9.3. Additional Rent. Prior to the commencement of each Lease
---------------
Year (except the Base Services Year) during the Term hereof, Landlord shall
furnish Tenant a written statement of the Estimated Costs Allocable to the
Premises for such Lease Year and a calculation of the portion of Estimated Costs
Allocable to the Premises payable by Tenant as Additional Rent in accordance
with this Section. In advance of or before the first day of each month during
the Term hereof commencing on the first day of the first Lease Year following
the Base Services Year, Tenant shall pay as Additional Rent for each month
during each such Lease Year: one-twelfth (1/12th) of the Estimated Costs
Allocable to the Premises. If at any time or times during any such Lease Year,
it appears to Landlord that the Estimated Costs Allocable to the Premises will
vary from Landlord's estimate by more than five percent (5%) on an annualized
basis, Landlord may, by written notice to Tenant, revise its estimate for such
Lease Year and the portion of the Estimated Costs Allocable to the Premises
payable by Tenant as Additional Rent as provided herein for such Lease Year
shall be accordingly adjusted based on such revised estimate. Notwithstanding
the foregoing, in no event shall the increase in Tenant's portion of Actual
Costs Allocable to the Premises (exclusive of gas and electricity and Property
Taxes) in any Lease Year exceed the greater of (i) five percent (5%) of Tenant's
portion of the previous Lease Year's Actual Costs Allocable to the Premises or
(ii) such Lease Year's increase in the Consumer Price Index for All Urban
Consumers, U.S. City Average (the "Index"), published by the United States
Department of Labor's Bureau of Labor Statistics over the Index for the
preceding Lease Year. Increases in the cost of gas and electricity and Property
Taxes shall not be subject to any "cap" or limit.
9.4. Actual Costs. Within ninety (90) days after the close of
------------
each Lease Year during the Term hereof, Landlord shall deliver to Tenant a
written statement setting forth the Actual Costs Allocable to the Premises
during the preceding Lease Year. If such costs for any Lease Year exceed the
amounts paid by Tenant to Landlord pursuant to Section 9.3, Tenant shall pay the
amount of such excess to Landlord as Additional Rent within thirty (30) days
after receipt of such statement by Tenant. If such statement shows such costs to
be less than the amount paid by Tenant to Landlord pursuant to Section 9.3, then
the amount of such overpayment by Tenant shall be credited by Landlord to the
next Rent payable by Tenant. In the event such overpayment can not be fully
credited by Landlord to the next Rent payable by Tenant due to the expiration of
the Term of this Lease, any remaining overpayment shall be credited by Landlord
to any other charges due under this Lease and, to the extent no such charges
<PAGE>
are due, shall be refunded to Tenant by Landlord within thirty (30) days of the
Lease Expiration Date.
9.5. End of Term. If this Lease terminates on a day other than
-----------
the last day of a Lease Year, the amount of any adjustment to Estimated Costs
Allocable to the Premises with respect to the Lease Year in which such
termination occurs shall be prorated on the basis which the number of days from
the commencement of such Lease Year to and including such termination date bears
to 365; and any amount payable by Landlord to Tenant or Tenant to Landlord with
respect to such adjustment shall be payable within thirty (30) days after
delivery by Landlord to Tenant of the statement of Actual Costs Allocable to the
Premises with respect to such Lease Year.
9.6. Further Adjustment. In the event the average occupancy level
------------------
of the Building for the Base Services Year and/or any subsequent Lease Year was
not ninety five percent (95%) or more of full occupancy, then the portion of the
Actual Costs for such year which are dependent upon and vary according to the
level of occupancy of the Building shall be adjusted and apportioned among the
tenants by Landlord to reflect those variable costs which would have occurred
had the Building been ninety five percent (95%) occupied during such year.
9.7. Operating Expense Audit. Landlord agrees to keep accurate
-----------------------
books and records reflecting Operating Costs in accordance with sound and
generally accepted accounting principles consistently applied, and to make such
records, and reasonable supporting detail, available for a period of at least
two (2) years after the end of the Lease Year covered thereby, for examination
during normal business hours upon reasonable notice by Tenant and its
representatives; provided that any such examination or audit shall be at
Tenant's sole cost and expense, unless the audit discloses a discrepancy of four
percent (4%) or more then Landlord shall be responsible for the cost of the
audit. In addition, if the audit discloses any overpayment by Tenant, the
overpayment shall be promptly repaid to Tenant.
10. PROPERTY TAXES.
---------------
10.1. Contribution to Taxes. In addition to the Base Rent and
---------------------
other Additional Rent, during the second (2nd) Lease Year and thereafter during
the Term of this Lease, Tenant shall pay to Landlord its prorata share of
Property Taxes, as Additional Rent under this Article 10. Tenant's prorata share
of Property Taxes shall be determined as provided herein, utilizing the
following definitions:
10.1.1. "Property Taxes" shall mean any form of assessment,
license, fee, rent tax, excise, imposition, charge, levy, penalty (if a result
of Tenant's delinquency), or tax (other than net income, estate, succession,
inheritance, transfer or franchise taxes), including without limitation, all ad
valorem, sales and use, value added, single business, gross receipts,
transactions, sewer, privilege or similar taxes, imposed by any authority having
the direct or indirect power to tax, or by any city, county, state or federal
government or any improvement or other district or division thereof, on the
Building or any part thereof, the land, the parking area, or any other legal or
equitable interest of Landlord in the same. The term "Property Taxes" shall not
include any income, franchise, transfer, inheritance, capital stock or other tax
unless, due to a
<PAGE>
future change in the method of taxation, such a tax shall be levied against
Landlord in substitution for or in lieu of any tax which would otherwise
constitute "Property Taxes", in which event such income, franchise, transfer,
inheritance, capital stock or other tax shall be deemed to be included in the
term "Property Taxes" to the extent and only to that extent that such tax is
ascertained to be in lieu of or a substitute for what were previously "Property
Taxes"; provided, that the amount of such income, franchise, transfer,
inheritance, capital stock or other tax deemed to be included in the term
"Property Taxes" shall be determined as if the Building and the land upon which
the Building is located were the only assets of Landlord and as if the rent paid
hereunder were the only income of Landlord. The definition of "Property Taxes"
should assume that the Building is the only building on said land. If, however,
either assumption is not correct, then the "Property Taxes" attributable to the
Building shall be those allocated to the Building on the tax rolls or the
records of the tax assessor.
10.1.2. The term "Lease Year" shall mean the period defined
in Section 9.1.2.
10.1.3. The term "Base Tax Year" shall mean the period
defined in Section 9.1.3.
10.1.4. The term "Tenant's Share of Property Taxes" shall
mean the amount of Property Taxes payable during any Lease Year by Landlord
multiplied by Tenant's percentage of the Building described in Section 1.2.
10.2. Additional Rent for Estimated Increases in Tenant's Share
---------------------------------------------------------
of Property Taxes. Prior to the commencement of each Lease Year (except the Base
- -----------------
Tax Year), Landlord shall furnish Tenant with a written statement setting forth
the estimate of Tenant's Share of Property Taxes for such Lease Year. One-
twelfth (1/12th) of the amount of the estimate of Tenant's Share of Property
Taxes shall be payable by Tenant monthly as Additional Rent as provided in
Article 3.
10.3. Actual Property Taxes. Within ninety (90) days after the
---------------------
close of each Lease Year during the Term hereof, Landlord shall deliver to
Tenant a written statement setting forth Tenant's Share of Property Taxes during
the preceding Lease Year. If such amount ("Tenant's Actual Share") exceeds the
amount of Property Taxes actually paid by Tenant to Landlord pursuant to Section
10.2 hereof, Tenant shall pay the amount of such excess to Landlord as
Additional Rent within thirty (30) days after receipt of such statement by
Tenant. If such statement shows Tenant's Actual Share to be less than the
amounts paid by Tenant to Landlord pursuant to Section 10.2, then the amount of
such overpayment shall be credited by Landlord to the next Rent payable by
Tenant. In the event such overpayment can not be fully credited by Landlord to
the next monthly Rent or subsequent monthly Rent payable by Tenant due to the
expiration of the Term of this Lease, any remaining overpayment shall be
credited by Landlord, until such credit is used up, to any other charges due
under this Lease and, to the extent no such charges are due, shall be refunded
to Tenant by Landlord within thirty (30) days of the Lease Expiration Date.
<PAGE>
10.4. Taxes on Personal Property Paid for by Tenant and Not
-----------------------------------------------------
Reimbursed by Landlord. Tenant shall pay, prior to delinquency, all personal
- ----------------------
property taxes payable with respect to all property of Tenant located on the
Premises or the Building and shall provide promptly, upon request of Landlord,
written proof of such payment.
10.5. End of Term. If this Lease terminates on a day other than
-----------
the last day of a Lease Year, the amount of any adjustment between the estimated
and actual Tenant's Share of Property Taxes with respect to the Lease Year in
which such termination occurs shall be prorated on the basis of a 365-day year,
and any amount payable by Landlord to Tenant or Tenant to Landlord with respect
to such adjustment shall be payable within thirty (30) days after delivery by
Landlord to Tenant of the statement of Tenant's Share of Property Taxes with
respect to such Lease Year.
11. LIABILITY AND CASUALTY INSURANCE. Tenant shall, at Tenant's
--------------------------------
expense, obtain and keep in force during the Term of this Lease a policy of
comprehensive general liability insurance, including personal injury liability
and contractual liability insuring Landlord and Tenant against any liability
arising out of the use, occupancy or maintenance of the Premises. Such insurance
shall be in the amount of not less than One Million and No/100ths Dollars
($1,000,000.00) for bodily injury and property damage for any one accident or
occurrence. The limit of any of such insurance shall not limit the liability of
Tenant hereunder. If Tenant fails to procure and maintain such insurance,
Landlord may, but shall not be required to, procure and maintain the same, at
Tenant's expense to be reimbursed by Tenant as additional rent within thirty
(30) days of written demand. All insurance required to be obtained by Tenant
hereunder shall be issued by companies reasonably acceptable to Landlord. Prior
to the Lease Commencement Date, Tenant shall deliver to Landlord certificates of
liability insurance evidencing Tenant's compliance with this Section 11. No
policy shall be cancelable, allowed to lapse and/or expire and/or be subject to
reduction of coverage except upon thirty (30) days' prior written notice to
landlord. All such policies shall name Landlord as an additional insured and
shall be written as primary policies not contributing with and not in excess of
coverage limits if, in the reasonable opinion of Landlord, the coverage becomes
inadequate and is less than commonly maintained by tenants making similar uses
in the area of similar buildings. Tenant shall obtain any revised or increased
coverage required by landlord within thirty (30) days of any such notification
from Landlord.
12. FIRE INSURANCE - FIXTURES AND EQUIPMENT. Tenant shall maintain
---------------------------------------
in full force and effect on all Tenant's trade fixtures, equipment and personal
property on the Premises, a policy of all risk property insurance covering the
full replacement value of such property. During the Term of this Lease, the
proceeds from any such policy of insurance shall be used for the repair or
replacement of the fixtures and equipment so insured unless the damage and
destruction occurs within the last twelve (12) months of the Term. Landlord
shall have no interest in the insurance upon Tenant's equipment and fixtures and
will sign all documents reasonably necessary or proper in connection with the
settlement of any claim or loss by Tenant. Landlord will not carry insurance on
tenant's possessions. tenant shall furnish Landlord with a certificate of
insurance evidencing that the requirements set forth herein are in full force
and effect. upon demand, Tenant shall provide Landlord, at Tenant's expense,
with such increased
<PAGE>
amount of existing insurance, and such other insurance as Landlord or Landlord's
lender may reasonably require, to afford Landlord and Landlord's lender adequate
protection. Tenant shall provide Landlord with notice of loss or damage to
property immediately after such loss or damage occurs. No policy shall be
cancelable, allowed to lapse and/or expire and/or be subject to reduction of
coverage except upon thirty (30) days' prior written notice to Landlord.
13. DAMAGE OR DESTRUCTION.
---------------------
13.1. Casualty Damage - Insured. If the Building or Premises is
-------------------------
damaged by fire or other perils covered by extended coverage insurance the
following provisions shall apply:
13.1.1. Total Destruction. In the event of total
-----------------
destruction of the Building, Landlord shall elect either promptly to commence
repair and restoration of the Building and prosecute same diligently to
completion, in which event this Lease shall remain in full force and effect, or
not to repair or restore the Building, in which event this Lease shall
terminate. In either case, Landlord shall give Tenant written notice of its
intention within ninety (90) days after the occurrence of such destruction. If
Landlord elects not to restore the Building, this Lease shall be deemed to have
terminated as of the date of such total destruction.
13.1.2. Partial Destruction. In the event of a partial
-------------------
destruction of the Building to an extent not exceeding twenty-five percent (25%)
of the value thereof and if the damage thereto is such that the Building may be
repaired or restored within ninety (90) days from the date of such destruction
and Landlord will receive insurance proceeds sufficient to cover the cost of
such repairs, Landlord shall commence and proceed diligently with the work of
repair and restoration, in which event, this Lease shall continue in full force
and effect; or if such repair and restoration requires longer than ninety (90)
days or the cost thereof exceeds twenty-five percent (25%) of the value thereof,
Landlord may elect either to so repair and restore, in which event this Lease
shall continue in full force and effect, or not to repair or restore, in which
event this Lease shall terminate. In either case, Landlord shall give written
notice to Tenant of its intention within ninety days after the destruction
occurs. If Landlord elects to repair or restore the Building, this Lease shall
be deemed to have terminated as of the date of such partial destruction.
13.2. Termination. Upon any termination of this Lease under any
-----------
of the provisions of this Article, Tenant shall surrender the Premises in
accordance with the provisions of Article 25.
13.3. Rent Abatement. In the event of repair and restoration as
--------------
herein provided, the monthly installments of Rent shall be equitably abated
based on the amount of Tenant's loss of use of the Premises occasioned thereby;
provided, however, if the damage is due, directly or indirectly, to the fault or
neglect of Tenant, its officers, contractors, licensees, agents, servants,
employees, guests, invitees or visitors, there shall be no abatement of Rent
except to the extent Landlord receives proceeds from any applicable insurance
policy of Tenant to compensate Landlord for loss of Rent. Tenant shall not be
entitled to any compensation by Landlord or damages for loss of use of the whole
or any part of said Premises and/or any inconvenience or
<PAGE>
annoyance occasioned by such damage, repair or restoration, except those
occasioned by the negligence or willful misconduct of Landlord.
13.4. Delay. Tenant shall not be released from any of its
-----
obligations under this Lease except to the extent and upon the condition
expressly stated in this Article. Notwithstanding anything to the contrary
contained in this Article, if Landlord has elected to repair or restore and is
thereafter delayed or prevented from repairing or restoring within six (6)
months after the occurrence of such damage or destruction by reason of acts of
God, war, governmental restrictions, inability to procure the necessary labor or
materials, or other causes beyond the control of Landlord, Landlord shall, at
Landlord's option, be relieved of its obligation to make such repairs or
restoration and Tenant shall be released from its obligations under this Lease
as of the date of casualty.
13.5. Uninsured Damage. Notwithstanding anything to the contrary
----------------
contained in this Article, Landlord's obligation to repair and restore the
Building or the Premises is limited to the extent of insurance proceeds actually
received by Landlord.
13.6. Repair Obligation. If landlord is obligated to or elects
-----------------
to repair or restore as herein provided, Landlord shall repair or restore only
those portions of the Building and Premises which were originally provided at
Landlord's expense; and the repair and restoration of areas or items within the
Premises not provided at Landlord's expense shall be the obligation of Tenant.
13.7. End of Term. Notwithstanding anything to the contrary
-----------
contained in this Article, Landlord may elect to terminate this Lease in the
event of damage to the Building or the Premises occurring during the last (12)
months of the Term of the Lease or any extension thereof; and Landlord shall not
have any obligation to repair or restore the Premises or the Building during the
last twelve (12) months of the Term of this Lease or any extension thereof.
14. ALTERATIONS AND ADDITIONS: REMOVAL OF FIXTURES.
-----------------------------------------------
14.1. Consent Required. Tenant shall not make or allow to be
----------------
made any alterations, additions or improvements (collectively "Alterations") to
or on the Premises without first obtaining the written consent of Landlord,
except Tenant shall have the right to make minor nonstructural Alterations to
the interior of the Premises such as painting, wall covering, shelving,
carpeting or otherwise decorating without Landlord's written consent. Landlord
shall designate to Tenant, at the time Landlord consents to the Alterations,
which of the Alterations Landlord requires that Tenant remove upon the
expiration or earlier termination of this Lease pursuant to the terms of Section
14.5 hereof.
14.2. Request for Alterations. Any request for Alterations to be
-----------------------
made to the Premises by Tenant shall be made in writing, which shall include
detailed plans and specifications of the proposed Alterations prepared by an
architect approved by Landlord and licensed in the jurisdiction in which the
Premises is located, together with the names and addresses of the proposed
contractors and subcontractors, all of whom shall be approved and licensed as
aforesaid. Tenant shall upon demand reimburse Landlord as Additional Rent for
all
<PAGE>
reasonable cost and expense actually incurred in reviewing the plans and
specifications and inspecting the work on behalf of Landlord (by persons other
than employees of Landlord) including without limitation, the cost of any
engineers and/or architects retained by Landlord to review same and inspect the
work on behalf of Landlord.
14.3. Nature of Alterations. Any Alterations, including, but not
---------------------
limited to, wall covering, panel and built-in cabinet work (but excepting
moveable furniture and trade fixtures), shall be made at Tenant's sole expense,
according to plans and specifications approved in writing by Landlord, in
compliance with all applicable laws, by a licensed contractor, and in a good and
workmanlike manner conforming in quality and design with the Premises existing
as of the Lease Commencement Date, shall not diminish the value of the Building
or the Premises and shall at once become a part of the realty and shall be
surrendered with the Premises (unless otherwise required by Landlord as set
forth in Section 14.5 below).
14.4. Repairs. Tenant shall be responsible for making any and
-------
all repairs and replacements to the Alterations during the Term of this Lease
(as same may be extended) and maintaining the same in good order and condition.
Notwithstanding anything to the contrary contained in this Lease, should there
be a fire or other casualty to the Premises, it is agreed by the parties that
Landlord shall not be responsible to restore any Alterations made by Tenant
regardless of whether such Alterations were approved by Landlord and Tenant
shall be responsible to restore the same at its sole cost and expense.
14.5. Expiration/Termination of Lease. Upon the expiration or
-------------------------------
sooner termination of the Term hereof, Tenant shall, upon written demand by
Landlord, at Tenant's sole expense, with due diligence, remove any alterations,
additions, or improvements made by Tenant, designated by Landlord to be removed,
and repair any damage to the Premises caused by such removal. Tenant shall
remove all of Tenant's moveable property and trade fixtures which can be removed
without damage to the Premises at the termination of this Lease, either by
expiration of the Term or other cause, and shall pay Landlord any damages for
injury to the Premises or Building resulting from such removal. If Tenant shall
fail to remove any of its property of any nature whatsoever from the Premises or
Building at the termination of this Lease or when Landlord has the right of
reentry, such property shall be deemed to have been abandoned by Tenant and
Landlord may, in accordance with the provisions of applicable statutes governing
commercial landlord and tenant matters, without liability for the loss thereof
or damage thereto, either remove and store such property, such storage to be for
the account and at the expense of Tenant, or otherwise dispose of such property
in Landlord's sole and absolute discretion, all at the expense of Tenant. If
Landlord elects to store such property and Tenant fails to pay the cost of
storing any such property within thirty (30) days of demand therefor, Landlord
may sell any or all such property at public or private sale, without notice to
Tenant, and shall apply the proceeds of such sale to the following costs in the
following order: (i) the cost and expense of such sale, including reasonable
attorneys' fees, (ii) the payment of the costs or charges for storing any such
property, and (iii) the payment of any other sums which may then be or
thereafter become due Landlord from Tenant under any of the terms of this Lease.
The balance, if any, shall be paid to Tenant.
<PAGE>
15. ACCEPTANCE OF PREMISES. In establishing the Lease Commencement
----------------------
Date, the Premises shall be deemed delivered to Tenant upon the substantial
completion of the Landlord's Work which shall have occurred when all of the
following conditions have been met:
a. The Landlord's Work with respect to the Premises has been
substantially completed, notwithstanding the fact that minor or insubstantial
details of construction, mechanical adjustment or decoration remain to be
performed, the non-completion of which would not materially affect Tenant's use
or the appearance of the Premises;
b. A Certificate of Occupancy has been obtained permitting the
occupancy of the Premises and if such Certificate of Occupancy is a temporary
certificate, Landlord will not allow the temporary Certificate of Occupancy to
lapse and shall procure a final or permanent certificate of occupancy as
promptly as practicable; and
c. Tenant has the full use in and for the Premises of the
service facilities and systems of the Building, including, without limitation,
air conditioning, elevator service, heating, lighting, water supply and sewage
system.
Landlord shall use reasonable efforts to complete any punchlist items
on the list of items submitted by Tenant to Landlord, on or prior to the
applicable Lease Commencement Date, within thirty (30) days following such Lease
Commencement Date or such additional period as Landlord and Tenant may agree
upon. The existence of such punchlist items shall not postpone the Lease
Commencement Date of this Lease nor the obligation of Tenant to pay Rent or any
other charges due under this Lease.
<PAGE>
16. TENANT IMPROVEMENTS. If landlord has agreed to make any improvement
-------------------
to the premises the provisions governing the planning, construction, scope of
work and terms of payment shall be set forth in EXHIBIT C, which, if attached
---------
hereto, is incorporated herein by this reference.
17. ACCESS. Tenant shall permit landlord and its agents to enter the
------
premises at all reasonable times to inspect the same; to show the premises to
prospective tenants (within twelve (12) months of the expiration of the Term of
this Lease), or interested parties such as prospective lenders and purchasers;
to exercise its rights under this lease; to clean, repair, alter or improve the
Premises or the building; to discharge tenant's obligations when Tenant has
failed to do so within the time required under this lease or within a reasonable
time after written notice from Landlord, whichever is earlier; to post notices
of nonresponsibility and similar notices and "For Sale" signs at any time and to
place "For Lease" signs upon or adjacent to the building or the premises at any
time within twelve (12) months of the expiration of the term of this lease.
Tenant shall permit landlord and its agents to enter the Premises at any time in
the event of an emergency. When reasonably necessary, landlord may temporarily
close entrances, doors, corridors, elevators or other facilities without
liability to Tenant by reason of such closure.
18. WAIVER OF SUBROGATION.
---------------------
18.1. Tenant's Waiver. Whether due to the negligence of Landlord or
---------------
Landlord's agents or employees, or any other cause, Tenant hereby releases
Landlord and Landlord's agents and employees from responsibility for and waives
its entire claim of recovery for (i) any loss or damage to the personal property
of Tenant located in the Building, including the Building itself, arising out of
any of the perils which are (or could have been) covered by Tenant's property
insurance policy, with extended coverage endorsements, or (ii) loss resulting
from business interruption or loss of rental income, at the Premises, arising
out of any of the perils which are (or could have been) covered by the business
interruption or by the loss of rental income insurance policy held by Tenant.
Tenant shall cause its insurance carrier(s) to consent to such waiver of all
rights of subrogation against Landlord.
18.2. Landlord's Waiver. Whether due to the negligence of Tenant or
-----------------
Tenant's agents or employees, or any other cause, Landlord hereby releases
Tenant and Tenant's agents and employees from responsibility for and waives its
entire claim of recovery for (i) any loss or damage to the personal property of
Landlord located in the Building, including the Building itself, arising out of
any of the perils which are (or could have been) covered by Landlord's property
insurance policy, with extended coverage endorsements, or (ii) loss resulting
from business interruption or loss of rental income, at the Premises, arising
out of any of the perils which are (or could have been) covered by the business
interruption or by the loss of rental income insurance policy held by Landlord.
Landlord shall cause its insurance carrier(s) to consent to such waiver of all
rights of subrogation against Tenant.
19. INDEMNIFICATION. Tenant shall defend, indemnify and hold harmless
---------------
Landlord, its agents, employees, officers, directors, partners and shareholders
from and against any and all liabilities, judgments, demands, causes of action,
claims, losses, damages, costs and
<PAGE>
expenses, including reasonable attorneys' fees and costs, arising out of the
use, occupancy, conduct, operation, or management of the Premises by, or the
willful misconduct or negligence of, Tenant, its officers, contractors,
licensees, agents, servants and employees, in or about the building or premises
or arising from any breach or default under this lease by Tenant. This
indemnification shall survive termination of this lease. This provision shall
not be construed to make tenant responsible for loss, damage, liability or
expense resulting from injuries to third parties caused by the negligence or
willful misconduct of Landlord, or its officers, contractors, licensees, agents,
employees, or invitees.
20. ASSIGNMENT AND SUBLETTING.
-------------------------
20.1. Landlord's Consent. Tenant shall not assign this Lease, or
------------------
sublease all or any part of the Premises, or permit the use of the Premises by
any party other than Tenant, without the prior written consent of Landlord;
provided, however, that Tenant shall have the right, without the consent of
Landlord, to sublet the Premises or any portion thereof to, or to permit
occupancy of any portion of the Premises by, any Affiliate (as hereinafter
defined). The term Affiliate shall mean any corporation or other entity
controlled by, under common control with or which controls Tenant or in which
Tenant, directly or indirectly, has a twenty-five percent (25%) or greater
voting or ownership interest. The foregoing sentence shall not, however,
prohibit the assignment of this Lease, without Landlord's consent, to any
corporation that acquires substantially all of the assets of Tenant, any
corporation into which Tenant is merged and any corporation resulting from a
consolidation of Tenant with another corporation. When Tenant requests
Landlord's consent to such assignment or sublease, it shall notify Landlord in
writing of (i) the name and address of the proposed assignee or subtenant; (ii)
the nature and character of the business of the proposed assignee or subtenant;
(iii) financial information including financial statements of the proposed
assignee or subtenant; and (iv) a copy of the proposed sublet or assignment
agreement. Tenant shall thereafter immediately provide to Landlord any and all
other information and documents reasonably requested by Landlord in order to
assist Landlord with its consideration of Tenant's request hereunder. Landlord
shall have the option (to be exercised within thirty (30) days from the
submission of Tenant's request and receipt of all other information requested
hereunder) to cancel this Lease as it affects the portion of the Premises to be
subleased or assigned as of the commencement date stated in the proposed
sublease or assignment. If Landlord shall not exercise its option within the
time set forth above, Landlord's consent to any proposed assignment or sublease
shall not be unreasonably withheld, conditioned or delayed.
20.2. Approved Subleases and Assignments. If Landlord approves an
----------------------------------
assignment or sublease of greater than fifty percent (50%) of the Premises as
herein provided, Tenant shall pay to Landlord, as Additional Rent due under this
Lease, as applicable (i) in the case of a sublease, an overage amount equal to
fifty percent (50%) of the difference, if any, between the Rent allocable to
that part of the Premises affected by such sublease pursuant to this Lease, and
the rent paid by the subtenant to Tenant, less any reasonable and customary
expenses incurred by Tenant in connection with the sublease which are approved
by Landlord in its sole and absolute discretion, and (ii) in the case of an
assignment, an overage amount equal to fifty
<PAGE>
21. ADVERTISING. Except as otherwise provided in EXHIBIT B, tenant shall
----------- ---------
not display any sign, graphics, notice, picture, or poster, or any advertising
matter whatsoever, anywhere in or about the Premises or the building at places
visible from anywhere outside or at the entrance to the Premises without first
obtaining Landlord's written consent thereto, such consent to be at landlord's
reasonable discretion. Tenant shall be responsible to maintain any permitted
signs and remove the same at Lease termination. If Tenant shall fail to do so,
landlord may do so at Tenant's expense and Tenant's reimbursement to Landlord
for such amount shall be deemed Additional Rent and shall be due within ten (10)
days of landlord's demand therefor. Tenant shall be responsible to landlord for
any damage caused by the installation, use, maintenance or removal of any such
signs.
22. LIENS. Tenant shall keep the premises and the building free from any
-----
liens, including but not limited to liens filed against the Premises by any
governmental agency, authority or organization, arising out of any work
performed, materials ordered or obligations incurred by or on behalf of Tenant,
and Tenant hereby agrees to indemnify and hold Landlord, its agents, employees,
independent contractors, officers, directors, partners, and shareholders
harmless from any liability, cost or expense for such liens. Tenant shall cause
any such lien imposed to be released of record by payment or posting of the
proper bond acceptable to Landlord within thirty (30) days after the earlier of
imposition of the lien or written request by landlord. Tenant shall give
landlord written notice of tenant's intention to perform work on the premises
which might result in any claim of lien, at least thirty (30) days prior to the
commencement of such work to enable landlord to post and record a notice of
nonresponsibility or other notice deemed proper before commencement of any such
work. If tenant fails to remove any lien within the prescribed thirty (30) day
period, then Landlord may do so at Tenant's expense and Tenant's reimbursement
to Landlord for such amount, including attorneys' fees and costs, shall be
deemed Additional Rent. Tenant shall have no power to do any act or make any
contract which may create or be the foundation for any lien, mortgage or other
encumbrance upon the reversion or other estate of Landlord, or of any interest
of landlord in the Premises.
23. DEFAULT.
-------
23.1. Tenant's Default. A default under this Lease by Tenant shall
----------------
exist if any of the following occurs:
23.1.1. If Tenant fails to pay Rent or any other sum required
to be paid hereunder after five (5) days after written notice by Landlord to
Tenant, except as provided in Section 23.1.5 of this Lease; or
23.1.2. If Tenant fails to perform any term, covenant or
condition of this Lease except those requiring the payment of money, and Tenant
fails to cure such breach within thirty (30) days after written notice from
Landlord where such breach could reasonably be cured within such thirty (30) day
period, provided, however, that where such failure could not reasonably be cured
within the thirty (30) day period, that Tenant shall not be in default if it
commences such performance within the thirty (30) day period and diligently
thereafter
<PAGE>
prosecutes the same to completion, or if Tenant shall fail to perform or observe
any of the provisions required to be performed or observed by Tenant under any
other agreement relating to the Premises; or
23.1.3. If, to the extent permitted by applicable law, there
shall be filed by or against Tenant, in any court pursuant to any statute either
of the United States or any state, a petition in bankruptcy or insolvency or for
the reorganization of or for the appointment of a receiver, trustee or
liquidator for all or any portion of the assets of Tenant, and, within thirty
(30) days thereafter, Tenant fails to secure a discharge thereof, or if Tenant
makes an assignment for the benefit of creditors, or if Tenant admits in writing
its or their inability to pay its or their debts; or
23.1.4. If tenant shall fail to take possession of and/or
occupy the Premises within the thirty (30) days following the Lease Commencement
Date or if Tenant shall vacate, desert or abandon substantially all of the
Premises for a period of forty-five (45) days at any time following the Lease
Commencement Date except during the last twelve (12) months prior to either the
end of the Term (as the same may have been extended or renewed pursuant to the
terms of this Lease) or any of the Cancellation Dates; or
23.1.5. The chronic delinquency by Tenant in the payment of
monthly Rent, or any other periodic payments required to be paid by Tenant under
this Lease, shall constitute a default. "Chronic delinquency" shall mean failure
by Tenant to pay Rent, or any other periodic payments required to be paid by
Tenant under this Lease within five (5) days after written notice thereof for
any three (3) months (consecutive or nonconsecutive) during any twelve (12)
month period. In the event of a chronic delinquency, at Landlord's option,
Landlord shall have the additional right to require that Rent be paid by Tenant
quarter-annually, in advance.
23.2. REMEDIES. Upon a default, Landlord shall have the following
--------
remedies, in addition to all other rights and remedies provided by law or
otherwise provided in this lease:
23.2.1. Landlord may continue this Lease in full force and
effect, and this Lease shall continue in full force and effect as long as
Landlord does not terminate this lease, and Landlord shall have the right to
collect Rent and other charges when due.
23.2.2. Landlord may terminate Tenant's right to possession of
the Premises at any time by giving written notice to that effect, and relet the
Premises or any part thereof. Landlord shall use commercially reasonable efforts
to relet the Premises on Tenant's behalf. On the giving of the notice, all of
the Tenant's rights in the Premises, shall terminate. Upon such termination,
Tenant shall surrender and vacate the Premises in the condition required by
Article 25, and Landlord may re-enter and take possession of the Premises and
all the remaining improvements or property and eject Tenant or any of the
Tenant's subtenants, assignees or other person or persons claiming any right
under or through Tenant or eject some and not others or eject none. This Lease
may also be terminated by a judgment specifically providing for termination. Any
termination under this Section shall not release Tenant from the
<PAGE>
payment of any sum then due Landlord or from any claim for damages or Rent or
other sum previously accrued or then accruing against Tenant. Upon such
termination Tenant shall be liable immediately to Landlord for all costs
Landlord incurs in reletting the Premises or any part thereof, including,
without limitation, broker's commissions, expenses of cleaning and redecorating
the Premises required by the reletting and like costs. Reletting may be for a
period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving written notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of Tenant's right to possession. On
termination, Landlord has the right, at Tenant's cost and without liability for
the loss thereof or damage thereto, to remove all Tenant's personal property,
which shall be deemed to have been abandoned by Tenant, and either store same or
otherwise dispose of same in Landlord's sole and absolute discretion. Landlord
and Tenant hereby acknowledge that in the event of such a termination, actual
damages to Landlord may be difficult to ascertain, and accordingly, hereby agree
that in such event, the net present value of the Base Rent due from the date of
such termination to the Lease Expiration Date, discounted at ten percent (10%)
per annum, less the fair rental value of the Premises as determined by Landlord,
which determination shall be deemed conclusive, from the date of such
termination until the Lease Expiration Date, discounted at ten percent (10%) per
annum, shall thereupon be immediately due and payable to Landlord to compensate
Landlord for Tenant's default and such termination. The payment of such amount
by tenant shall be in lieu of the payment of Base Rent owed by Tenant for the
remaining Term. Tenant waives redemption or relief from forfeiture under any
other present or future law, in the event Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder.
23.2.3. Landlord, may except as may otherwise have been agreed
to between the parties pursuant to landlord lien waivers, with or without
terminating the Lease, re-enter the Premises and remove all persons and property
from the Premises; such property shall be deemed to have been abandoned by
Tenant and may either be removed and stored in a public warehouse or elsewhere
or otherwise disposed of in Landlord's sole and absolute discretion, all at the
cost of Tenant. The parties hereby agree that Landlord shall not be liable for
the loss of such property or any damages thereto. No re-entry or taking
possession of the Premises by Landlord pursuant to this Section shall be
construed as an election to terminate this Lease unless a written notice of such
intention is given to Tenant.
23.2.4. Landlord's rights pursuant to this Article, including
without limitation, Landlord's rights to collect Base Rent, Additional Rent and
other charges due under this Lease, shall survive any termination of the Lease,
whether such termination is effected pursuant to this Article or otherwise.
Landlord shall use reasonable efforts to relet the Premises in order to mitigate
Tenant's damages. Any payment by Tenant of a sum of money less than the entire
amount due Landlord at the time of such payment shall be applied to the
obligations of Tenant then furthest in arrears. No endorsement or statement on
any check or accompanying any payment shall be deemed an accord and satisfaction
and any payment accepted by Landlord shall be without prejudice to Landlord's
right to obtain the balance due or pursue any other remedy available to Landlord
both in law and in equity.
<PAGE>
percent (50%) of the consideration, if any, received by Tenant for such
assignment. Such overage amounts shall be due and payable by Tenant to Landlord
within five (5) days of Tenant's receipt of payment from the subtenant or
assignee. Overage amounts in the case of a sublease shall be calculated and
adjusted (if necessary) on a Lease Year (or partial Lease Year) basis, and there
shall be no cumulative adjustment for the Term. No consent to any assignment or
sublease shall constitute a further waiver of the provisions of this Section,
and all subsequent assignments or subleases may be made only with the prior
written consent of Landlord. An assignee of Tenant, at the option of Landlord,
shall become directly liable to Landlord for all obligations of Tenant hereunder
and shall assume all such obligations in writing in a form satisfactory to
Landlord in its sole and absolute discretion, but no sublease or assignment by
Tenant shall relieve Tenant of any liability hereunder. Any assignment or
sublease without Landlord's consent shall be void, and shall, at the option of
Landlord, constitute a default under this Lease.
<PAGE>
24. SUBORDINATION AND ATTORNMENT. Upon request of Landlord, Tenant will,
----------------------------
in writing, subordinate its rights hereunder to the lien of any mortgage, deed
of trust, ground lease or underlying lease now or hereafter in force against the
Premises, and to all advances made or hereafter to be made upon the security
thereof subject, however, to the holder of such mortgage, deed or trust, or
ground lease agreeing not to disturb this lease or Tenant's rights hereunder so
long as Tenant is not in default. Tenant shall execute and return to Landlord
any such subordination documents within ten (10) days of Landlord's written
request. If Tenant does not provide Landlord with such subordination documents
within ten (10) days of Landlord's written request, then Tenant hereby
authorizes Landlord to execute such subordination documents acting as duly
authorized agent for Tenant. In the event any proceedings are brought for
foreclosure, or in the event of the exercise of the power of sale under any
mortgage or deed of trust made by Landlord covering the premises, Tenant shall
attorn to the purchaser at any such foreclosure, or to the grantee of a deed in
lieu of foreclosure, and recognize such purchaser or grantee as Landlord under
this Lease. The provisions of this article to the contrary notwithstanding, and
so long as Tenant is not in default hereunder, this Lease shall remain in full
force and effect for the full term hereunder.
25. SURRENDER OF POSSESSION. Upon expiration of the Term of this Lease or
-----------------------
as otherwise provided hereunder, Tenant shall promptly and peacefully surrender
the premises to Landlord in as good condition as when received by Tenant from
Landlord or as thereafter improved, reasonable use and wear and tear and damage
by storm, fire, lightning, earthquake or other casualty excepted, all to the
reasonable satisfaction of Landlord. If the premises are not surrendered in
accordance with the terms of this Lease, tenant shall indemnify landlord and its
agents, employees, independent contractors, officers, directors, partners, and
shareholders against any loss or liability including reasonable attorneys' fees
and costs, and including liability to succeeding tenants, resulting from delay
by Tenant in so surrendering the premises. This indemnification shall survive
termination of this Lease.
26. NON-WAIVER. Waiver by Landlord of any breach of any term, covenant,
----------
or condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition(s); or any subsequent breach of the same or any other
term, covenant or condition of this lease, other than the failure of Tenant to
pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent. No provision of
this Lease shall be deemed to have been waived or modified by Landlord or Tenant
unless such waiver or modification shall be in writing and signed by the party
against whom such waiver or modification is sought to be enforced.
27. HOLDOVER. If Tenant shall, without the written consent of Landlord,
--------
hold over after the expiration of the Term of this lease such tenancy shall be
deemed a month-to-month tenancy, which tenancy may be terminated by either party
upon thirty (30) days written notice to the other party. During such tenancy,
Tenant agrees to pay to Landlord, each month, the greater of the fair market
rental value for the premises or one hundred twenty-five percent (125%) of the
rent payable by tenant for the last month of the term of this lease.
<PAGE>
28. CONDEMNATION. If fifty percent (50%) or more of the Premises or of
------------
such portions of the building as may be required for the reasonable use of the
premises, are taken by eminent domain or sale under threat of condemnation by
eminent domain, this lease shall automatically terminate as of the date title
vests in the condemning authority, and all rent and other payments shall be paid
to that date. Landlord reserves all rights to damages to the premises for any
partial or entire taking by eminent domain, and tenant hereby assigns to
Landlord any right tenant may have to such damages or award, and Tenant shall
make no claim against landlord or the condemning authority for damages for
termination of the leasehold interest or interference with tenant's business.
Tenant shall have the right to claim and recover from the condemning authority
compensation for any loss which tenant may incur for tenant's moving expenses,
business interruption or taking of tenant's personal property (not including
Tenant's leasehold interest) or any other claim so long as such claim does not
diminish or impair Landlord's claim and award.
29. NOTICES. All notices and demands which may be required or permitted
-------
to be given to either party hereunder shall be in writing, and shall be sent by
overnight courier or United States mail, postage prepaid, certified or
registered with return receipt requested, to the addresses set forth below, or
to such other person or place as each party may from time to time designate in a
notice to the other. Notice shall be deemed received upon delivery, if sent by
overnight courier, or upon the earlier of, if sent by mail, actual receipt or
the third day after deposit in the united states mail, postage prepaid. Notices
shall be addressed as follows:
If to Landlord: If to Tenant (before lease commencement):
Aetna Life Insurance Company CMC DataComm, Inc.
c/o Trammell Crow Company 1953 Gallows Road
1115 30th Street, N.W. Vienna, Virginia 22182
Washington, D.C. 20007
(after lease commencement):
Suite 300
1861 Wiehle Avenue
Reston, Virginia 22090
with a copy to:
Canadian Marconi Company
600 Dr. Frederick-Philips Blvd
------------------------------
Saint-Laurent, Quebec
------------------------------
H4M 2S9 Canada
-----------------------------
30. MORTGAGEE PROTECTION. Tenant agrees to give any mortgagee(s) and/or
--------------------
trust deed holder(s), by overnight courier or certified or registered mail,
return receipt requested, a copy of any notice of default served upon Landlord,
provided that prior to such
<PAGE>
notice Tenant has been notified in writing (by way of notice of assignment of
rents and leases, or otherwise) of the addresses of such mortgagee(s) and/or
trust deed holders(s). Tenant further agrees that if Landlord shall have failed
to cure such default within the time provided for in this lease, then the
mortgagee(s) and/or trust deed holder(s) shall have an additional thirty (30)
days within which to cure such default or if such default cannot be cured within
that time, then such additional time as may be necessary if within such thirty
(30) days any mortgagee and/or trust deed holder(s) has commenced and is
diligently pursuing the remedies necessary to cure such default (including but
not limited to commencement of foreclosure proceedings, if necessary to effect
such cure), in which event this lease shall not be terminated while such
remedies are being so diligently pursued.
31. COSTS AND ATTORNEYS' FEES. If Tenant or Landlord shall employ an
attorney with regard to any act, omission or activity of the other with regard
to this Lease, including any suit by Landlord for the recovery of rent or other
payments due hereunder or possession of the Premises, the losing party shall pay
the prevailing party a reasonable sum for attorneys' fees and costs, including
without limitation those incurred in connection with any litigation, at trial
and on appeal, and such attorneys' fees and costs shall be deemed to have
accrued on the commencement of such action.
32. BROKERS. Tenant and landlord each represent and warrant to the other
that neither it nor its officers or agents nor anyone acting on its behalf has
dealt with any real estate broker other than the manager who represented
Landlord and the fred ezra company who represented tenant in the negotiating or
making of this Lease, and Tenant and Landlord each agree to indemnify and hold
each other, its agents, employees, partners, directors, shareholders and
independent contractors harmless from all liabilities, costs, demands,
judgments, settlements, claims, and losses, including reasonable attorneys' fees
and costs, incurred by landlord or tenant in conjunction with any such claim or
claims of any other broker or brokers claiming to have interested tenant in the
building or premises or claiming to have caused tenant to enter into this lease.
33. LANDLORD'S LIABILTY.
-------------------
33.1. Anything in this Lease to the contrary notwithstanding,
covenants, undertakings and agreements herein made on the part of Landlord are
made and intended not for the purpose of binding Landlord personally or the
assets of Landlord but are made and intended to bind only Landlord's interest in
the Premises and Building, as the same may, from time to time, be encumbered and
no personal liability shall at any time be asserted or enforceable against
Landlord or its stockholders, officers or partners of their respective heirs,
legal representatives, successors and assigns on account of the Lease or on
account of any covenant, undertaking or agreement of Landlord in this Lease.
33.2. Except for damages or injuries caused by the negligence or
willful misconduct of Landlord, Landlord shall not be liable for any damage or
injury which may be sustained by Tenant or any other person from water by reason
of the breakage, leakage or obstruction of the roof, roof drains, sprinkler
systems, water or soil pipes or any other leakage in
<PAGE>
or about the Premises, or resulting from the negligence or willful misconduct on
the part of any of the Landlord's other tenants, their agents or employees.
Landlord shall not be liable for any loss of property from any cause whatsoever,
including not by way of limitation, theft, vandalism or burglary from the
Premises, and Tenant covenants and agrees to make no claim for any such loss at
any time.
34. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, within ten
---------------------
(10) business days of Landlord's written request, execute, acknowledge and
deliver to Landlord or its designee a written statement stating: the date the
Lease was executed and the date it expires; the date Tenant entered occupancy of
the premises; the amount of base rent, additional rent and other charges due
hereunder and the date to which such amounts have been paid; that this lease is
in full force and effect has not been assigned, modified, supplemented or
amended in any way (or specifying the date and terms of any agreement so
affecting this Lease); that this lease represents the entire agreement between
the parties as to this leasing; that all conditions under this lease to be
performed by landlord have been satisfied (or specifying any such conditions
that have not been satisfied); that all required contributions by Landlord to
Tenant on account of Tenant's improvements have been received (or specified);
that on the date of such statement there are no existing defenses or offset
which Tenant has against the enforcement of this Lease by Landlord (or if so,
specifying the same); that no rent has been paid more than one (1) month in
advance; that no security has been deposited with Landlord (or, if so, the
amount thereof); or any other matters evidencing the status of the lease, as may
be required either by a lender making a loan to landlord to be secured by a deed
of trust or mortgage against the building, or a purchaser of the building. It is
intended that any such statement delivered pursuant to this article may be
relied upon by a prospective purchaser of landlord's interest or a mortgagee of
landlord's interest or assignee of any mortgage upon landlord's interest in the
building. If Tenant fails to respond within ten business (10) days of receipt by
Tenant of a written request by Landlord as herein provided, Tenant shall be
deemed to have given such certificate as above provided without modification and
shall be deemed to have admitted the accuracy of any factual information
supplied by Landlord to a prospective purchaser or mortgagee.
35. FINANCIAL STATEMENTS. Within ten (10) days after Landlord's request,
--------------------
Tenant shall deliver to Landlord the most recent available financial statements
of Tenant, and financial statements of each of the two (2) years prior to the
current financial statements year, with an opinion of a certified public
accountant, including a balance sheet and profit and loss statement for the most
recent prior year, all prepared in accordance with generally accepted accounting
principles consistently applied. Landlord hereby agrees that it shall not
request such financial statements more often than one (1) times per calendar
year. Tenant also agrees, within five (5) days of Landlord's request, to provide
such further financial information (such as quarterly statements) as Landlord
may request.
36. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer(s) of
-------------------------------
Landlord's interest in the Premises or the Building, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of landlord accruing from and
after the date of such transfer so long as the transferee
<PAGE>
assumes landlord's obligations and liabilities hereunder, and tenant agrees to
attorn to the transferee.
37. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money, other
----------------
than rent, required to be paid by it hereunder, or if Tenant shall fail to
perform any other act on its part to be performed hereunder, which such failure
shall continue for thirty (30) days, then, in addition to a default if provided
by section 23.1, Landlord may, but shall not be obligated so to do, and without
waiving or releasing Tenant from any obligations of Tenant, make any such
payment or perform any such other act on tenant's part to be made or performed
as provided in this Lease. Notwithstanding the foregoing, in the event of an
emergency, if Tenant shall fail to pay any sum of money, other than rent,
required to be paid by it hereunder or shall fail to perform any other act on
its part to be performed hereunder, Landlord may, but shall not be obligated so
to do, and without waiving or releasing Tenant from any obligations of Tenant,
immediately make any such payment or perform any such other act on Tenant's part
to be made or performed as provided in this Lease. Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of the nonpayment of sums due under this Article as in the case of
default by Tenant in the payment of rent. All sums paid by Landlord and all
penalties, interest and costs in connection therewith, shall be due and payable
by Tenant as Additional Rent on the next day after such payment by Landlord,
together with interest thereon at the maximum rate of interest permitted by law
from such date to the date of payment.
38. SALES AND AUCTIONS. No retail sales may be conducted at, upon or in
------------------
the premises. Except with respect to the basement space, Tenant may not use the
exterior walls and doorways of the premises for storage. Tenant agrees not to
install any exterior lighting, amplifiers or similar devices in or about the
Premises. Tenant shall not conduct or permit to be conducted any sale by auction
in, upon or from the Premises whether said auction be voluntary, involuntary,
pursuant to any assignment for the payment of creditors or pursuant to any
bankruptcy or other insolvency proceeding.
39. ROOFTOP EQUIPMENT. Tenant may install, at its sole cost,
-----------------
telecommunications equipment (the "Rooftop Equipment") on the roof of the
Building, subject to Landlord's prior written approval, not to be unreasonably
withheld, of plans and specifications for the Rooftop Equipment and the type and
placement of all cabling and wiring ancillary thereto. Tenant shall be
responsible for paying all reasonable out-of-pocket, third party costs
associated with landlord's review of such plans and specifications for the
Rooftop Equipment (if any). Landlord shall not charge tenant additional rent for
the use of space on the roof for the Rooftop Equipment. Tenant shall be
responsible for obtaining and maintaining all approvals, permits and licenses
required by fairfax county, reston or any federal, state or local government for
installation and operation of the rooftop equipment and shall pay all fees
attendant thereto. If the Rooftop Equipment is installed, tenant shall have sole
responsibility for the maintenance, repair and replacement thereof and of all
cabling and wiring ancillary thereto and Tenant will be responsible for bearing
the costs to repair any damage cause to the roof or building by the installation
of the Rooftop Equipment. At the expiration or earlier termination of this
Lease, Tenant shall remove the rooftop equipment and all cabling and wiring
ancillary thereto and
<PAGE>
shall be responsible to repair any damage caused to the roof or building in
connection with such removal.
Additionally, Tenant covenants and agrees that:
(a) The Rooftop Equipment shall not unreasonably interfere with the
standard use of the Building by other tenants;
(b) Pursuant to Section 5.1, Tenant shall pay any increase in
Landlord's insurance rates occasioned by the installation or
operation of the Rooftop Equipment;
(c) Tenant shall fully insure against damage occasioned by the
installation and/or operation of the Rooftop Equipment;
(d) Landlord shall retain the right to designate the placement of the
Rooftop Equipment and to require such reasonable "screening" type
improvements to the Building, as may be required to maintain its
cosmetic appearance;
(e) If Tenant accesses the roof without a designated representative
of Landlord, the burden of proof for any damages subsequent to
such access shall be upon Tenant;
(f) Tenant agrees to indemnify Landlord (and its agents, employees,
officers, representatives and shareholders) and hold Landlord
(and its agents, employees, officers, representatives and
shareholders) harmless from all loss, cost, damage and expense,
including reasonable attorneys fees, incurred by Landlord (and
its agents, employees, officers, representatives and
shareholders) as a result of the installation, maintenance,
presence, use or removal of any Rooftop Equipment;
(g) Tenant's rights to install, operate and maintain the Rooftop
Equipment as contained in this provision shall not be
transferable or assignable to an assignee or subtenant (except to
a permitted assignee or subtenant under Section 20.1 or an
assignee or subtenant that was approved by Landlord in writing)
without the express written consent of Landlord which can be
granted or withheld in Landlord's sole discretion; and
(h) There shall be no change or alteration in the Rooftop Equipment
without the prior written approval of Landlord, which approval
may be granted or withheld in Landlord's sole discretion.
40. SECURITY. Tenant hereby agrees to the exercise by landlord and its
--------
agents and employees, within their sole discretion, of such security measures as
it deems necessary for the Building.
<PAGE>
41. AUTHORITY OF TENANT. Tenant warrants to Landlord that Tenant, if
-------------------
other than an individual, is a validly existing legal entity under the laws of
the state of its formation, that it is duly qualified to do business in the
state in which the premises are located, that its entry into and performance of
this Lease has been duly authorized, that, if Tenant is not an individual, the
officer(s), partner(s) or trustee(s), as applicable, executing this lease on
Tenant's behalf are duly authorized to do so, and that this lease is binding
upon Tenant.
42. NO ACCORD OR SATISFACTION. No payment by Tenant or receipt by
-------------------------
Landlord of a lesser amount than the rent and other sums due hereunder shall be
deemed to be other than on account of the earliest Rent or other sums due, nor
shall any endorsement or statement on any check or accompanying any check or
payment be deemed an accord and satisfaction; and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
rent or other sum and to pursue any other remedy provided in this Lease.
43. MODIFICATIONS FOR LENDER. If in connection with obtaining financing
------------------------
for the Building or any portion thereof, Landlord's lender shall request
reasonable modifications to this Lease as a condition to such financing, Tenant
shall not unreasonably withhold, delay, or defer its consent to such
modification provided such modifications do not materially adversely affect
Tenant's rights hereunder.
44. PARKING. Tenant's occupancy of the Premises shall include the use of
one hundred ten (110) parking spaces, of which ten (10) shall be reserved to
Tenant and the remaining one hundred (100) of which shall be used in common with
other tenants, invitees and visitors of the Building. Tenant shall have the
right to park in the building parking facilities in common with other Tenants of
the Building. Tenant agrees not to overburden the parking facilities and agrees
to cooperate with landlord and other tenants in use of the parking facilities.
Landlord reserves the right in its absolute discretion to determine whether the
parking facilities are becoming overburdened and to allocate and assign parking
spaces among Tenant and other Tenants, and to reconfigure the parking area and
modify the existing ingress to and egress from the parking area as Landlord
shall deem appropriate.
45. GENERAL PROVISIONS.
------------------
45.1. Acceptance. The submission of this Lease by Landlord does not
----------
constitute an offer by Landlord or other option for, or restriction of, the
Premises, and this Lease shall only become effective and binding upon Landlord,
upon full execution hereof by Landlord and delivery of a signed copy to Tenant.
45.2. Joint Obligation. If there be more than one Tenant, the
----------------
obligations hereunder imposed shall be joint and several.
<PAGE>
45.3. Marginal Headings, Etc. The marginal headings, Table of
----------------------
Contents, lease summary sheet and titles to the articles and sections of this
Lease are not a part of the Lease and shall have no effect upon the construction
or interpretation of any part hereof.
45.4. Choice of Law. This Lease shall be governed by and construed
-------------
in accordance with the laws of the State in which the Premises are located.
45.5. Successors and Assigns. The covenants and conditions herein
----------------------
contained, subject to the provisions as to assignment, inure to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
45.6. Recordation. Neither Landlord nor Tenant shall record this
-----------
Lease, but a short-form memorandum hereof may be recorded at the request of
Landlord.
45.7. Quiet Possession. Upon Tenant's paying the Rent and other
----------------
charges due hereunder and observing and performing all of the covenants,
conditions and provisions on Tenant's part to be observed and performed
hereunder, Tenant shall have quiet possession of the Premises for the Term
hereof (including any renewal), subject to all the provisions of this Lease.
45.8. Partial Invalidity. Any provision of this Lease which shall
------------------
prove to be invalid, void, or illegal shall in no way affect, impair or
invalidate any other provision hereof and such other provisions(s) shall remain
in full force and effect.
45.9. Cumulative Remedies. No remedy or election hereunder shall be
-------------------
deemed exclusive but shall, whenever possible, be cumulative with all other
remedies at law or in equity.
45.10. Entire Agreement. This Lease contains the entire agreement of
----------------
the parties hereto and no representations, inducements, promises or agreements,
oral or otherwise, between the parties, not embodied herein, shall be of any
force or effect.
45.11. Labor Disputes. Tenant agrees that it will not at any time,
--------------
either directly or indirectly, employ or permit the employment of any
contractor, mechanic or laborer, or permit any materials in the Premises, in
connection with any services, provisions, alterations or maintenance, if the use
of such contractor, mechanic or laborer or such materials may create any
difficulty, strike or jurisdictional dispute with other contractors, mechanics
or laborers engaged by Landlord or others, or would disturb the construction,
maintenance, cleaning, janitorial services, repair, management, security or
operation of the Building or any part thereof. In the event of any interference
or conflict, Tenant, upon demand of Landlord, shall cause all contractors,
mechanics or laborers, or all materials causing such interference, difficulty or
conflict, to leave or be removed from the Building immediately.
45.12. Waiver of Counterclaim. [Intentionally deleted.]
----------------------
<PAGE>
45.13. Time Is of the Essence. Time is of the essence of this Lease.
----------------------
Unless specifically provided otherwise, all references to terms of days or
months shall be construed as references to calendar days or calendar months,
respectively.
45.14. Execution. This Lease may be executed in any number of
---------
counterparts, each of which shall be deemed an original and any of which shall
be deemed to be complete in itself and may be introduced into evidence or used
for any purpose without the production of the other counterparts.
45.15. Force Majeure. A party to this Lease shall be excused from the
-------------
performance of its duties and objections under this Lease, except obligations
for the payment of money such as Base Rent, for the period of delay, but in no
event longer than ninety (90) days, caused by labor disputes, governmental
regulations, riots, war insurrection, acts of God or other causes beyond the
control of the party whose performance is being excused (but such causes shall
not include insufficiency of funds).
45.16. No Joint Venture. This Lease does not and shall not be
----------------
construed to create a partnership, joint venture or any other relationship other
than that of landlord and tenant.
46. RULES AND REGULATIONS. Tenant agrees to comply with such reasonable
---------------------
rules and regulations as Landlord may adopt from time to time for the orderly
and proper operation of the Building and parking and other common areas. Such
rules may include but shall not be limited to the following: (i) restricting of
employee parking to a limited, designated area or areas; and (ii) regulation of
the removal, storage and disposal of Tenant's refuse and other rubbish at the
sole cost and expense of tenant. the rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the nonperformance of any of said rules and
regulations by any other tenants or occupants of the Building.
47. NO WARRANTIES OR REPRESENTATIONS BY LANDLORD. Tenant acknowledges and
--------------------------------------------
agrees that, except as expressly set forth in this Lease, neither Landlord nor
any agent or representatives of Landlord have made, and Landlord is not liable
or responsible for or bound in any manner by any express or implied
representations, warranties, covenants, agreements, obligations, guarantees,
statements, information or inducements pertaining to the Premises or any part
hereof, the title and physical condition thereof, the quantity, character,
fitness and quality thereof, merchantability, fitness for particular purpose,
the income, expenses or operation thereof, the value and profitability thereof,
the uses which can be made thereof or any other matter or thing whatsoever with
respect thereto. Tenant acknowledges, agrees, represents and warrants that it
has had the opportunity and has in fact inspected the Premises, and that it has
had access to information and data relating to all of same as Tenant has
considered necessary, prudent, appropriate or desirable for the purposes of this
transaction and, without limiting the foregoing, that Tenant and its agents and
representatives have independently inspected, examined, analyzed and appraised
all of same, including the condition, value and profitability thereof. Without
limiting the foregoing, tenant acknowledges and agrees that, except as expressly
set forth in this Lease, Landlord is not liable or responsible for or bound in
<PAGE>
any manner by (and tenant has no relief upon) any oral or written or supplied
guarantees, statements, information or inducements pertaining to the Premises or
any part hereof, such condition and such operation and any other information
respecting same furnished by or obtained from landlord or any agent or
representative of Landlord.
48. LANDLORD'S CONSENT OR APPROVAL.
------------------------------
48.1. With respect to any provision of this Lease which provides that
Tenant shall obtain Landlord's prior consent or approval, Landlord may withhold
such consent or approval for any reason at its sole discretion, unless the
provision specifically states that the consent or approval will not be
unreasonably withheld.
48.2. With respect to any provision of this Lease which provides that
Landlord shall not unreasonably withhold or unreasonably delay any consent or
any approval, Tenant, in no event, shall be entitled to make, nor shall Tenant
make, any claim for, and Tenant hereby waives any claim for money damages; nor
shall Tenant claim any money damages by way of setoff, counterclaim or defense,
based upon any claim or assertion by Tenant that Landlord has unreasonably
withheld or unreasonably delayed any consent or approval; but Tenant's sole
remedy shall be an action or proceeding to enforce any such provision, or for
specific performance, injunction or declaratory judgment.
49. SIGNAGE. Tenant shall be entitled to standard building signage which
includes directory and door signage only. Any signs over and above building
standard shall be placed by Tenant at Tenant's sole cost only with the prior
written consent of Landlord, in Landlord's sole and absolute discretion.
Pursuant to and in accordance with the terms of special stipulation no. 8 in
EXHIBIT B, Tenant shall have the right to install and maintain identification
- ---------
signage on the uppermost spandrel of the Building.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, in
triplicate, on the day and year first above written.
LANDLORD:
--------
AETNA LIFE INSURANCE COMPANY, a Connecticut
corporation
By: /s/ Thomas G. Dudeck
-----------------------------------------
Printed Name: Thomas G. Dudeck
-----------------------------
Its: Assistant Vice President
--------------------------------------
<PAGE>
TENANT:
------
CMC DATACOMM INC., a ___________ corporation
By: /s/ Marcia McKenzie
-----------------------------------------
Printed Name: Marcia McKenzie
-----------------------------
Its:
--------------------------------------
<PAGE>
EXHIBIT "A"
LOCATION AND DESCRIPTION OF PREMISES
Description of Premises pursuant to a lease dated
____________________, 1995, by and between Aetna Life Insurance Company
("Landlord") and CMC DataComm Inc. ("Tenant"): Twenty-five Thousand One Hundred
Forty-one (25,141) square feet on the third (3rd) floor and approximately Three
Thousand (3,000) square feet in the basement of 1861 Wiehle Avenue, the 73,685
square foot building located at 1861 Wiehle Avenue, Reston, Virginia 22090.
<PAGE>
EXHIBIT B
SPECIAL STIPULATIONS
--------------------
These Special Stipulations are hereby incorporated into this Lease and in the
event they conflict with any provision of this Lease, the Special Stipulations
shall control.
1. BASE RENT FOR THE PREMISES (EXCLUDING BASEMENT SPACE).
----------------------------------------------------
The Base Rent for the Premises (excluding the Basement Space) for the First
(1st) Lease Year (as that term is defined in Section 9.1.2) of the Term
hereof shall be $14.50 per rentable square foot. During said first Lease
Year, Tenant shall pay no Additional Rent for Operating Costs and Property
Taxes under Section 9 and Section 10 of the Lease. Thereafter, Tenant shall
pay its prorata share of Operating Costs and Property Taxes in accordance
with the terms of Section 9 and Section 10 of the Lease. The Base Rent for
the Premises (excluding the Basement Space) for the second (2nd) Lease Year
shall be calculated as follows:
$14.50 - (Base Amount + Tenant's Share of Property x 1.025 =
Taxes for the Base Tax Year)
---------------------------
the rentable square footage in
the Premises (excluding the
Basement Space)
Base Rent for the Premises (excluding the Basement Space)
Thereafter, Base Rent for the Premises (excluding the Basement Space) shall
increase by two and one-half percent (2.5%) per year over the previous
Lease Year's Base Rent. For example, assuming the sum of the Base Amount
and Tenant's Share of Property Taxes for the Base Tax Year expressed in per
rentable square feet is $5.50, then Base Rent for the Premises (excluding
the Base Space) shall be as follows:
[$14.50 - 5.50] x 1.025 = $9.23
<TABLE>
<CAPTION>
Lease Base Rent Base Rent Base Rent
Year per Sq. Ft. per Annum per Month
- ---- ----------- --------- ---------
<S> <C> <C> <C>
2 $9.23 $232,051.43 $19,337.62
3 $9.46 $237,833.86 $19,819.49
4 $9.70 $243,867.70 $20,322.31
</TABLE>
<PAGE>
EXAMPLE ONLY
2. BASE RENT FOR THE BASEMENT SPACE.
--------------------------------
The Base Rent for the Basement Space shall be as follows:
<TABLE>
<S> <C> <C> <C>
1 $4.35 $13,050.00 $1,087.50
2 $4.46 $13,380.00 $1,115.00
3 $4.57 $13,710.00 $1,142.50
4 $4.68 $14,040.00 $1,170.00
5 $4.80 $14,400.00 $1,200.00
6 $4.92 $14,760.00 $1,230.00
7 $5.04 $15,120.00 $1,260.00
8 $5.17 $15,510.00 $1,292.50
9 $5.30 $15,900.00 $1,325.00
10 $5.43 $16,290.00 $1,357.50
</TABLE>
3. EXTENSION OPTION. So long as this Lease is in full force and effect and
----------------
Tenant is not in default hereunder, Tenant shall have the option (the "Extension
Option") to extend the Term for the entire Premises for one (1) additional
period of five (5) years (the "Extension Period") subject to the following terms
and conditions:
a. Tenant shall not have the right to assign the Extension Option to any
sublessee or assignee of the Premises, nor may such sublessee or assignee
exercise or enjoy the benefit of such Extension Option (except to a
permitted assignee or subtenant under Section 20.1 or an assignee or
subtenant approved by Landlord in writing).
b. Tenant shall have given Landlord written notice of its exercise of the
Extension Option on or before one hundred eighty (180) days prior to the
expiration of the Term.
c. The Extension Option shall be only applicable to the entire Premises, as it
may have expanded or contracted from time to time pursuant to the Terms of
this Lease, as it may have been amended from time to time, or by other
agreement of Landlord and Tenant; provided, however, Tenant shall have the
right to omit the Basement Space from the Premises during the Extension
Period.
<PAGE>
d. The terms and conditions of this Lease, as it may have been amended from
time to time, shall remain in full force and effect during any Extension
Period except that the term "Base Rent" shall be modified to mean ninety
five percent (95%) of the rent charged at the Prevailing Market Rate (as
hereinafter defined).
e. At least thirty (30) days before the commencement of an Extension Period,
Landlord and Tenant agree to enter into an amendment to this Lease to
evidence the exercise of the Extension Option.
f. "Prevailing Market Rate" shall mean the then prevailing market rate for
rent for leases comparable to this Lease for space comparable to the
Premises taking into account such factors offered to third party tenants
for comparable space as the base services year for pass-through expenses,
rent or other market concessions, tenant improvement allowances, lease
commissions saved or incurred, moving allowances, and the age, quality,
function, location and condition of the Building. The Prevailing Market
Rate shall be determined between Landlord and Tenant by mutual agreement.
Landlord shall advise Tenant in writing, within thirty (30) days after
Landlord's receipt of Tenant's election to exercise the Extension Option,
of its proposed Prevailing Market Rate, on a rentable square foot basis as
of the beginning of the Extension Period. Within thirty (30) days of
receipt of Landlord's notice, Tenant shall advise Landlord, in writing,
whether or not Tenant accepts or rejects the Prevailing Market Rate
proposed by Landlord. Tenant's failure to accept or reject in writing the
Prevailing Market Rate proposed by Landlord within such thirty (30) day
period, shall be deemed rejection by Tenant, and the Lease shall end on the
Lease Expiration Date. If Tenant accepts such rate in writing, then the
Base Rent rate during the Extension Period shall be said rate. If Tenant
rejects in writing the Prevailing Market Rate proposed by Landlord, Tenant
shall have the option to specify in such notice its selection of a real
estate broker, who shall act on Tenant's behalf in determining the
Prevailing Market Rate or elect to allow the then-current term of the Lease
to expire on the Lease Expiration Date. Within thirty (30) days after the
Landlord's receipt of Tenant's selection of a real estate broker, Landlord,
by written notice to Tenant shall designate a real estate broker, who shall
act on Landlord's behalf in the determination of the Prevailing Market
Rate. Within thirty (30) days of the selection of Landlord's broker, the
two brokers shall render a joint written determination of the Prevailing
Market Rate. If the two brokers are unable to agree upon a joint written
determination within said thirty (30) day period, the two brokers shall
select a third broker meeting the qualifications stated above. Each of the
parties shall bear one-half (1/2) of the cost of the appointment of the
third broker and of the third broker's fee. If the three (3) brokers are
unable to agree upon the Prevailing Market Rate within the thirty (30) days
following the appointment of the third broker, then each broker shall
separately determine the Prevailing Market Rate, they shall average the two
(2) closest figures, and within three (3) days after the expiration of such
thirty (30) day period, the appointed third broker shall notify Landlord
and Tenant of such averaged determination of the Prevailing Market Rate,
which averaged determination shall be binding upon both Landlord and
Tenant. In the event that one of the three brokers' Prevailing Market
Rates is equidistant between the
<PAGE>
highest and the lowest, then notwithstanding the foregoing sentence, there
shall be no averaging, and the equidistant Prevailing Market Rate shall be
the final arbitrated rate. In the event that the appraisal process has not
been completed prior to the commencement of the Extension Period, then upon
commencement of the Extension Period, and until the appraisal process is
completed (the "Interim Period"), Tenant shall pay Landlord monthly Base
Rent equal to the Base Rent for the immediately preceding Lease year, until
the increase in the Base Rent is determined by such process as provided
herein; provided, however, that such payments made during the Interim
Period shall be subject to adjustment based upon the results of such
process. If, as a result of such appraisal process, it is determined that
Tenant has underpaid Base Rent during the Interim Period, then such
underpaid Base Rent shall be due from Tenant to Landlord within (30) days
after expiration of the Interim Period. If, as a result of such appraisal
process, it is determined that Tenant has overpaid Base Rent during the
Interim Period, then such overpaid Base Rent shall be credited to Tenant's
next payment(s) of Base Rent falling due under this Lease. All brokers
selected in accordance with this subparagraph shall have at least five (5)
years prior experience in the metropolitan Washington, D.C. commercial
leasing market and shall be members of the Greater Washington, D.C. Board
of Realtors or similar professional organization. If either Landlord or
Tenant fails or refused to select a broker, the other broker shall alone
determine the Prevailing Market Rate. Landlord and Tenant agree that they
shall be bound by the determination of Prevailing Market Rate pursuant to
this subparagraph for the Extension Period. Landlord shall bear the fee and
expenses of its broker and Tenant shall bear the fee and expenses of its
broker.
4. Expansion Option. So long as the space is "available for lease" (as
----------------
hereinafter defined), Tenant shall have the option (the "Expansion Option")
to add any other space in the Building (the "Expansion Space") to the
Premises during the first Lease Year by providing prior written notice to
Landlord at least ninety (90) days in advance of the date Tenant wishes to
occupy the Expansion Space (the "Effective Date"). The Expansion Space
shall be "available for lease" if (i) the space is not already leased or
(ii) the space will become vacant because the existing lease has or will
expire with no renewal provision which was exercised. The Expansion Option
is also subject to and subordinate to the rights of existing tenants in the
Building. Should Tenant fail to duly and timely exercise the Expansion
Option, or elects not to exercise the Expansion Option, the expansion
Option shall become null and void and of no further force or effect.
Should Tenant duly and timely exercise the Expansion Option, the Expansion
Space shall be added to this Lease from and after the date Landlord
delivers the Expansion Space to Tenant, or such earlier date to which
Landlord and Tenant may mutually agree, through the last day of the Term,
as the same may be extended. Except as explicitly set forth herein, the
Expansion Space shall be subject to all terms and provisions of the Lease.
Tenant improvements for the Expansion Space shall be designed and installed
in accordance with the procedures and conditions set forth in EXHIBIT C to
---------
the Lease and Tenant's allowance for improvements shall be an amount equal
to the product of multiplying $21.50 (which shall be the Tenant's allowance
per square foot) times the rentable square footage of the Expansion Space
times a fraction, the numerator of which is the number of full calendar
months remaining in the Term of this Lease, and the denominator of which
<PAGE>
is the total number of months in the Term. Tenant shall not have any
right's under this paragraph if, at the time of the exercise of the
Expansion Option, Landlord does not approve Tenant's creditworthiness. In
determining Tenant's creditworthiness, Landlord may consider any financial
statements of Tenant and may compare them to financial statements submitted
by Tenant in connection with the entry into this Lease. This Expansion
Option shall not be effective or exercisable during the existence of a
default by Tenant under this Lease.
5. Tenant's First Refusal Right. Subject to the rights, as of the date of
----------------------------
this Lease, of any other tenants in the Building including, without
limitation, the rights of Telephone Business Meetings, Inc., Landlord
grants to Tenant a pre-exemptive right (the "First Refusal Right") to lease
the First Refusal Space, as hereinafter defined, at any time during the
Term, on and subject to the following terms and conditions. The First
Refusal Right is not effective or exercisable by Tenant during the
existence of a default by Tenant under this Lease.
a. The "First Refusal Space" shall mean any space which is available to
be leased in the Building.
b. Should Landlord receive from a prospective third-party tenant a
written offer to lease the First Refusal Space which Landlord is
willing to accept (the "Third-Party Offer"), Landlord agrees promptly
to so notify Tenant in writing of the Third-Party Offer. Tenant shall
have a period of seven (7) business days after the date of the notice
to Tenant within which to exercise the First Refusal Right (the
"Acceptance Period") by delivery to Landlord of written notice of its
exercise on or before the last day of the Acceptance Period. If
Tenant fails to duly and timely exercise the First Refusal Right, or
elects not to exercise the First Refusal Right, the same shall lapse
and Landlord shall be free to lease the First Refusal Space to the
third party submitting the Third-Party Offer.
c. Within ten (10) days after the effective date of Tenant's exercise of
the First Refusal Right, Landlord shall provide to Tenant an amendment
to this Lease adding the First Refusal Space to the Premises and
Landlord and Tenant shall have fifteen (15) days thenceforth to
execute such amendment, which amendment shall subject the First
Refusal Space to the terms and provisions of the Lease, except that
Base Rent with respect to the First Refusal Space shall be the then
Prevailing Market Rate as determined in accordance with the procedures
set forth in Special Stipulation No. 2(f) above and the tenant
improvement allowance (expressed in per square feet) shall also be a
prevailing market allowance and shall be determined in accordance with
Special Stipulation No. 2(f) above. Such tenant improvement allowance
shall be multiplied by the rentable square feet of the First Refusal
Space times a fraction, the numerator of which is the number of full
calendar months remaining in the Term of this Lease, as the same may
have
<PAGE>
been extended and the denominator of which is the total number of
months in the Term.
d. Should Tenant exercise its First Refusal Right and subsequently fail
to enter into the amendment within the fifteen (15) day period as set
forth in clause (c) above, Tenant's exercise of the First Refusal
Right with respect to such Third-Party Offer shall be void and of no
further force or effect.
e. The First Refusal Right shall not apply if, as of the date of
Landlord's receipt of the Third-Party Offer, there shall be less than
two (2) year(s) remaining in the Term, as the same may have been
extended.
f. If Tenant fails to or elects not to exercise the First Refusal Right
and the third party submitting the Third-Party Offer does not lease
the First Refusal Space, the First Refusal Space shall again become
subject to the First Refusal Right herein contained as to any
subsequent Third-Party Offer submitted to Landlord.
g. If Tenant elects to exercise the First Refusal Right, included with
Tenant's written acceptance shall be Tenant's current audited
financial statements. After reviewing such statements, Landlord
reserves the right to request such credit enhancements as Landlord
deems reasonable given the Rent for the First Refusal Space. Tenant
shall not have any rights under this paragraph if, at the time of the
exercise of the First Refusal Right, Landlord does not approve
Tenant's creditworthiness. In determining Tenant's creditworthiness,
Landlord may consider any financial statements of Tenant and compare
them to financial statements submitted by Tenant in connection with
the entry into this Lease.
6. Reduced Rent. So long as Tenant is not in default hereunder, all Rent
------------
(including Base Rent and Additional Rent with respect to the Basement
Space) for the first nine (9) months of the Term of this Lease shall be
reduced by fifty percent (50%). Notwithstanding any other remedy set forth
in the Lease, if Tenant fails to take possession of the Premises or
otherwise defaults at any time during the Term of this Lease such that
Landlord terminates this Lease or Tenant's possession hereunder, the
unamortized portion of foregoing rent concession shall be cancelled and all
Rent which would have otherwise been due during such nine (9) month period
shall be immediately due and payable by Tenant to Landlord.
7. Cancellation Option. Notwithstanding anything to the contrary contained in
-------------------
this Lease, provided Tenant is not in default hereunder beyond any
applicable notice and cure period or in the event that Tenant is in
default, if Tenant shall cure such default, Tenant shall have the option to
terminate this Lease, effective as of (i) the completion of the seventh
(7th) Lease Year; (ii) the completion of the eighth (8th) Lease Year; and
(iii) the completion of the ninth (9th) Lease Year (the "Cancellation
Dates") by providing Landlord with written notice of such option election
(the "Cancellation Notice"). Such Cancellation Notice shall be effective
only if it is given to Landlord at least nine (9)
<PAGE>
months prior to the Cancellation Date (the "Cancellation Notice Deadline");
accordingly, if Tenant has not given its Cancellation Notice to Landlord
prior to a Cancellation Notice Deadline, the respective Cancellation Option
shall terminate and be of no further force or effect. As a condition
precedent to any cancellation of this Lease pursuant to the provisions of
this paragraph, Tenant shall pay to Landlord, as a cancellation fee, an
amount equal to the sum of (i) $338,962.00 with respect to a cancellation
effective at the completion of the seventh (7th) Lease Year; (ii)
$237,022.00 with respect to a cancellation effective at the completion of
the eighth Lease Year; or (iii) $124,407.00 with respect to a cancellation
effective at the completion of the ninth (9th) Lease Year. Tenant shall
also pay to Landlord an amount equal to the unamortized portion of any
tenant improvement allowance, leasing commissions, free or reduced rent, if
any, and other cost associated with either the First Refusal Space or the
Expansion Space which has been added to the Premises which shall be payable
by Tenant to Landlord at least thirty (30) days prior to the Cancellation
Date. It is hereby acknowledged that any such amount required to be paid by
Tenant in connection with such early termination is not a penalty but a
reasonable pre-estimate of the loss incurred by Landlord as a result of
such early termination of this Lease (which loss is impossible to calculate
more precisely) and, in that regard, constitutes liquidated damages with
respect to such loss. Tenant shall continue to be liable for its
obligations under this Lease to and through the Cancellation Date,
including, without limitation, Additional Rent that accrues pursuant to the
terms of the Lease, with all of such obligations surviving the early
termination of the term of this Lease. The rights granted to Tenant under
this paragraph are personal to Tenant, and in the event of any assignment
of this Lease or sublease by Tenant (except to a permitted assignee under
Section 20.1 or to an assignee which is approved by Landlord in writing),
this Cancellation Option shall thenceforth be void and of no further force
or effect.
8. Signage. So long as the Lease is in full force and effect and Tenant is
not in default thereunder, Tenant shall have the right, as its sole cost
and expense, to install and maintain identification signage including its
corporate name and logo on the upper most spandrel of the side of the
Building facing Dulles Toll Road, subject to the following terms and
conditions:
a. Tenant shall have such right if and only for as long as Tenant leases
and occupies at least 20,000 square feet in the Building;
b. Tenant shall not have the right to assign this right to signage to any
sublessee, transferee or assignee of the Lease or the Premises, not
may such sublessee, transferee or assignee enjoy the use or benefit of
such right (except to a permitted assignee or subtenant under Section
20.1 or to an assignee or subtenant approved by Landlord in writing);
c. The design, construction, size and all other aspects of such signage
shall be subject to Landlord's prior written consent, which consent
shall not be unreasonably withheld; and
<PAGE>
d. The expense of installing, construction, maintaining and removing the
sign shall be the sole cost and expense of Tenant and shall be paid
directly by Tenant. Tenant shall be responsible for all costs and
expenses associated with such signage and Tenant shall promptly repair
any damage to the Building resulting from the installation,
construction, maintenance or removal of such signage. Upon the
expiration of Tenant's right to such signage as provided hereinabove
or otherwise upon the termination or expiration of the Lease, Tenant
shall promptly remove the sign at its sole cost and expense. Tenant
agrees to indemnify and hold Landlord harmless for any cost, expense,
loss (normal wear and tear excepted) or other liability associated
with the installation, construction, maintenance and removal of the
sign.
9. Renovation. Landlord shall, at its sole cost and expense, repaint the
Premises with two coats of paint and recarpet the circulation areas of the
Premises within a reasonable time after the expiration of the fifth (5th)
Lease Year.
10. Landlord's Property Insurance. Landlord shall, at its sole cost and
expense but subject to the provisions of Section 8 regarding the recovery
of Operating Costs, during the Term of this Lease maintain all risk
property insurance on the Building for one hundred percent (100%) of the
replacement cost of the Building. Additionally, Landlord shall carry
general comprehensive liability insurance in amounts deemed reasonable by
Landlord according to industry standards for office buildings of this size
and type. Upon written request of Tenant, Landlord shall provide to Tenant
written evidence of Landlord's compliance with this paragraph.
<PAGE>
EXHIBIT C
WORK LETTER
-----------
PLANS AND SPECIFICATIONS FOR THE PREMISES (EXCLUDING THE BASEMENT SPACE)
The following are the Standard Improvement Items, the Standard Allowance of each
of which Landlord shall provide at its expense as part of the improvements to be
made to the Premises (excluding the Basement Space). Additionally, Landlord
shall, at its sole cost and expense, paint and carpet the common areas on the
third (3rd) floor as an additional part of the Standard Improvement Items.
1. PARTITIONING
1.1 Standard interior partitions shall be constructed of one-half inch
(1/2") gypsum drywall on each side of three and five-eighths inch (3-5/8") steel
studs, from slab to ceiling. Such drywall shall be taped, spackeled, finished
and painted.
1.2 All corridor and demising partitions shall be sound-insulated with 3
1/2" of batt insulation, finished gypsum drywall, and shall be constructed
according to applicable building code provisions.
2. DOORS
2.1 Standard interior doors shall be solid-core, paint grade, shall be
painted to match the partitioning, and shall include building standard hardware.
2.2 Standard suite entrance doors shall be made of solid core wood, and
shall include a building standard lockset.
3. ELECTRICAL SERVICE
The Standard Allowance shall not include any special outlet, any outlet not
located on a drywall partition, or any separate circuit, all of which shall be
provided at Tenant's expense.
4. FLOOR COVERING
Landlord shall provide a dark brown or black four-inch (4") high base for
each partition covered by the Standard Allowance.
5. WINDOW COVERING
Landlord shall provide for each exterior window architectural narrow slat
venetian blinds of a standard color.
<PAGE>
6. WALL FINISHES
Landlord shall provide two (2) coats of paint on all partitions, doors and
columns covered by the Standard Allowance using such paint color as is selected
by Tenant from the selections provided by Landlord.
7. GRAPHICS
Landlord shall provide the suite number for the Premises, using Landlord's
standard type for the Building. Any additional lettering requested by Tenant
shall conform to such standard type and shall be provided at Tenant's expense.
8. CEILING
8.1 Landlord shall provide throughout the Premises an acoustical tile
ceiling comprised of two-foot (2') by four-foot (4') panels, having an exposed
grid system.
8.2 The ceiling shall have a minimum height of eight feet, two inches
(8'2").
9. HEATING, VENTILATING AND AIR-CONDITIONING SYSTEM
Tenant will be responsible for all construction costs associated with
changes to existing building heating, ventilation, air conditioning and
electrical systems due to Tenant requirements which exceed or differ from
building standards.
10. FLOOR LOAD
Floor load capabilities are designed for normal office space use. Tenant
shall notify Landlord before the preparation of working drawings for the
Premises of any concentration of floor loads which Tenant may desire, and shall
bear any additional cost incurred by Landlord in accommodating the same.
11. LANDLORD'S CONSTUCTION OF TENANT'S SPACE
Landlord and Tenant agree that Landlord shall cause the construction of the
improvements to the Premises in accordance with the plans, design and
specifications prepared by Tenant ("Tenant's Plans"), and the working drawings
prepared by Tenant (i.e., mechanical, electrical and plumbing drawings, the
"Working Drawings"). Tenant's Plans and Working Drawings shall be prepared by
Tenant and presented to Landlord for approval and review within thirty (30) days
of the full execution of the Lease.
Following the preparation and approval of Tenant's Plans and the Working
Drawings, Landlord agrees to build-out the Premises according to Tenant's Plans
and the Working Drawings. All construction for the Premises shall be awarded
following a competitive bid format, with Trammell Crow Real Estate Services,
Inc. serving as construction manager
<PAGE>
("Construction Manager"). The Construction Manager shall: (1) prepare a bid
package approved by Landlord and Tenant; (2) solicit bids from a minimum of
three qualified general contractors approved by Landlord and Tenant; (3) prepare
a bid analysis for review by Landlord and Tenant; and (4) award the bid to the
lowest qualified general contractor (as approved by Tenant). On behalf of
Landlord and Tenant, the Construction Manager shall supervise the construction
for the Premises, ensuring that: (1) all construction is performed in a
workmanlike manner; (2) all construction is in compliance with all applicable
governmental regulations; and (3) all construction materials are free of defect
(inherent or otherwise).
a. Tenant Allowance. Landlord agrees to provide to Tenant an
----------------
allowance with respect to the Premises (excluding the Basement Space) of $22.50
per square foot (the "Tenant Improvement Allowance") (i.e., a total of 25,141 sf
x $22.50 psf = $565,672.50). Such Tenant Improvement Allowance shall be solely
used for the cost of all construction documents/drawings (not to exceed $1.50
per square foot of the total Tenant Improvement Allowance), permits, cabling
(not to exceed $1.50 per square foot of the total Tenant Improvement Allowance)
actual construction costs (materials and labor), general contractor fees,
reasonable (and documented) moving related expenses (not to exceed $1.00 per
square foot of the total Tenant Improvement Allowance), and a five percent (5%)
construction management fee (such total costs hereinafter referred to as "Tenant
Improvement Costs"). To the extent that Tenant Improvement Costs exceed Tenant
Improvement Allowance (a "Shortfall"), Landlord will bill to Tenant the
Shortfall in three (3) equal installments, due as follows: the first installment
of one third (1/3) of the Shortfall to be made at the commencement of
construction, and the second installment of one third (1/3) upon fifty percent
(50%) of the construction being completed and the last installment of the one
third (1/3) upon substantial completion of construction. To the extent that
Tenant Improvement Costs are less than Tenant Improvement Allowance, Landlord
shall credit the unused portion of Tenant Improvement Allowance against he first
Base Rent payment(2) when due. In all events, ten percent (10%) of the total
cost of the job will be held back from the general contractor until all punch
list items are complete, to the reasonable satisfaction of Tenant's architect.
There shall be no Tenant Improvement Allowance with respect to the Basement
Space, provided, however, Landlord, at its sole cost and expense, shall carpet
and paint the Basement Space, remove the wall between the two storage areas and
construct a demising partition to separate the Basement Space from the remaining
basement area.
b. Delay in Preparation of Tenant's Plans. If Tenant does not
--------------------------------------
complete preparation of Tenant's Plans and Working Drawings within the time
periods specified above, and such delay causes Landlord to postpone substantial
completion of the space or delays the Lease Commencement Date, then Tenant shall
pay to Landlord on the date Rent would have commenced hereunder in the absence
of such delay, a sum of money equivalent to the Rent for the Premises for the
period during which Tenant would have been obligated to pay Rent to Landlord had
not the Lease Commencement Date been so delayed.
c. Changes to Tenant Plans. If changes are made by Tenant to
-----------------------
Tenant's Plans after Landlord's approval, and should these changes to Tenant's
Plans cause Landlord to postpone substantial completion of the space or delay
the Lease Commencement Date and such postponement or delay is not attributable
to a delay caused by Landlord, then Landlord shall have
<PAGE>
the right to refuse to permit the making of such changes unless and until Tenant
shall have committed in writing, in a manner reasonably satisfactory to
Landlord, to pay to Landlord on the date Rent would have commenced hereunder in
the absence of such delay, a sum of money equivalent to the Rent for the
Premises for the period during which Tenant would have been obligated to pay
Rent to Landlord had not the Lease Commencement Date been so delayed.
d. Notice. Tenant shall, by notice to Landlord in writing,
------
designate a single individual who Tenant agrees shall be available to meet and
consult with Landlord at the Premises as Tenant's representative respecting the
matters which are the subject of this Exhibit and who, as between Landlord and
Tenant, shall have the power to legally bind Tenant, in making requests for
changes, giving approval of plans or work, giving directions to Landlord or the
like, under this Exhibit.
Landlord shall, by notice to Tenant in writing, designate a single
individual who Landlord agrees shall be available to meet and consult with
Tenant at the Premises as Landlord's representative respecting the matters which
are the subject of this Exhibit and who, as between Landlord and Tenant, shall
have the power to legally bind Landlord, in making requests for changes, giving
approval of plans or work, giving directions to Tenant or the like, under this
Exhibit.
e. Substantial Completion. For purposes of the Lease, "substantially
----------------------
complete" means full completion, except for minor or insubstantial details of
construction, decoration or installation. Landlord shall give Tenant at least
thirty (30) days prior written notice of the date the Premises will be
substantially complete.
f. Payment. Any invoice from Landlord not paid by Tenant within 30
-------
days of receipt thereof will be subject to an interest charge at an annual rate
equal to the average prime interest rate published in The Wall Street Journal
-----------------------
during the period of any such delay in payment. Said interest and invoice
payments are to be treated by Landlord and Tenant as Rent due hereunder.
g. Permits; Compliance with Laws. The Tenant's Plans shall be in a
-----------------------------
form in which building permits can be readily obtained and shall comply with all
applicable local, state and federal laws, ordinances, codes and regulations.
The architect shall certify to Landlord and Tenant that Tenant's Plans comply
with the Americans with Disabilities Act and all other applicable local, state
and federal laws, ordinances, codes and regulations. The Certification by the
architect shall be in the form attached hereto as EXHIBIT E..
----------
h. Additional Construction. Landlord shall, at its sole cost and
-----------------------
expense, replace the Building entrance door and frames with structural glass
doors.
i. Delivery of Premises. Landlord shall make the Premises ready for
--------------------
Tenant's move-in on the Saturday and Sunday prior to the Lease Commencement
Date. There shall be no charge to Tenant for the advance occupancy or the
Building personnel or engineer for Tenant's move-in.
<PAGE>
j. Tenant's Contractor(s). Tenant shall be permitted to include up
----------------------
to two (2) of its contractors to the bid list to compete for the construction of
Tenant's space. Tenant shall be permitted to use its own contractor(s) for its
telephone, security, cabling requirements within the Premises. Landlord and
Tenant hereby agree to cause Tenant's LAN, telephone and/or security contractors
and Landlord's contractor(s) to reasonably cooperate during the period of
Tenant's fit-up.
k. Design and Construction Schedule. In order to ensure timely
--------------------------------
completion of construction and outfitting of the Premises, Landlord and Tenant
shall mutually agree to a timetable whereby each party shall be obligated to
meet certain dates in the design and construction process.
l. Early Possession for Tenant Fit-Up. Tenant shall be given access
----------------------------------
to the Premises thirty (30) days prior to the Lease Commencement Date for the
purpose of installing special equipment, furniture, telephone equipment,
computers, etc. During the last ten (10) days of this period, the Premises shall
be substantially free of Landlord's contractors. Tenant's consultant shall have
access to the Premises during construction to install cabling and wiring prior
to the partitions being enclosed and for the purpose of inspecting the work in
progress.
<PAGE>
EXHIBIT D
CLEANING SPECIFICATIONS
-----------------------
Cleaning services provided five (5) days per week unless otherwise specified.
Cleaning hours Monday through Friday between 6:00 p.m. and before 8:00 a.m. of
the following day.
On the last day of the week the work will be done after 6:00 p.m., Friday, but
before 8:00 a.m., Monday.
No cleaning on holidays.
Lavatories
- ----------
All lavatory floors to be swept and washed with disinfectant nightly.
Tile walls and dividing partitions to be washed and disinfected weekly.
Basins, bowls, urinals to be washed and disinfected daily.
Mirrors, shelves, plumbing work, bright work, and enamel surfaces cleaned
nightly.
Waste receptacles will be emptied and cleaned and wash dispensaries to be filled
with appropriate tissues, towels, soap nightly.
Main Lobby, Elevators, Building Exterior and Corridors
- ------------------------------------------------------
Wipe and wash all floors in Main Lobby nightly.
Wipe and/or vacuum elevator floors nightly.
Office Area
- -----------
Furniture and fixtures within reach will be dusted and desk tops will be wiped
clean. However, desks with loose papers on the top will not be cleaned.
Ash trays to be emptied and cleaned.
Window sills and baseboards to be dusted and washed when necessary.
Office wastepaper baskets will be emptied nightly.
Cartons or refuse in excess of that which can be placed in wastebaskets will not
be removed. Tenants are required to place such unusual refuse in trash area.
<PAGE>
Cleaner will not remove or clean tea or coffee cups or similar containers; also;
if such liquids are spilled in wastebaskets, the wastebaskets will be emptied
but not otherwise cleaned.
Hard floors will be swept daily and washed and waxed monthly.
Carpet will be vacuumed nightly.
Wipe clean all glass, brass and other bright work weekly.
Dust all pictures, charts, wall hangings monthly that are not reached in nightly
cleaning.
<PAGE>
EXHIBIT E
ARCHITECT'S CERTIFICATE
CERTIFICATE OF FINAL COMPLETION
TENANT IMPROVEMENT WORK
-----------------------
The undersigned, [ARCHITECTURAL FIRM] with a principal place of business at
[ADDRESS], [CITY], [STATE], [ZIP] does hereby certify to Aetna Life Insurance
Company ("Owner") and CMC DataComm Inc. ("Tenant") that the plans and
specifiactions it has drawn and established for the Premises located at Suite__,
1861 Wiehle Avenue, Reston, Virgina, comply with all applicable federal, state
and local laws, codes, ordinances and regulations including, without limitation,
the Americans with Disabilities Act.
The undersigned certifies that to the best of its knowledge and belief and
on true basis of the information gathered during site visits and from the
information furnished by the contractor, that construction of the improvements
including with respect to the Premises have been completed in a good and
workmanlike manner substantially in accordance with the plans and specifications
approved by Owner and Tenant.
This certificate may be relied on by Owner and Tenant. No other parties may
rely on this certificate without the undersigned's written approval.
Certification and other statements made herein and given to the best of the
undersigned's knowledge, information and belief, based upon professional
services provided in accordance with generally accepted standards of
professional practice.
_________________________________
[ARCHITECT]
By:______________________________
Its:_____________________________
Date:____________________________
<PAGE>
Exhibit F
LEASE GUARANTY
--------------
WHEREAS, AETNA LIFE INSURANCE COMPANY, a Connecticut corporation,
hereinafter referred to as "Landlord" and CMC DATACOMM INC., hereinafter
referred to as "Tenant", have simultaneously executed or are about to execute a
lease of space with respect to certain space at 1861 Wiehle Avenue, Reston,
Virginia 22090, hereinafter called the "Lease" wherein Landlord will lease the
premises to Tenant; and,
WHEREAS, Canadian Marconi Company, hereinafter referred to as "Guarantor",
has a financial interest in Tenant; and,
WHEREAS, Landlord would not enter into the Lease if Guarantor did not
execute and deliver to Landlord this Lease Guaranty,
NOW THEREFORE, for and in consideration of the execution of the foregoing
Lease by Landlord and as a material inducement to Landlord to execute said
Lease, Guarantor hereby jointly, severally, unconditionally and irrevocably
guarantees the prompt payment by Tenant of all rentals and all other sums
payable by Tenant under said Lease and the faithful and prompt performance by
Tenant of each and every one of the terms, conditions and covenants of said
Lease to be kept and performed by Tenant as such are defined in the Lease.
It is specifically agreed and understood that the terms of the foregoing
Lease may be altered, affected, modified or changed by agreement between
Landlord and Tenant, or by a course of conduct, and said Lease may be assigned
by Landlord or any assignee of Landlord without consent or notice to Guarantor
and that this Guaranty shall thereupon and thereafter guarantee the performance
of said Lease as so changed, modified, altered or assigned.
The Guaranty shall not be released, modified or affected by failure or
delay on the part of Landlord to enforce any of the rights or remedies of the
Landlord under the Lease, whether pursuant to the terms thereof or at law or in
equity.
Except as set forth below, no notice of default need be given to Guarantor,
it being specifically agreed and understood that the guarantee of the
undersigned is a continuing guarantee under which Landlord may proceed forthwith
and immediately against Tenant or against Guarantor following any breach or
default by Tenant (and expiration of any applicable notice and cure period) or
for the enforcement of any rights which Landlord may have as against Tenant
pursuant to or under the terms of the within Lease or at law or in equity.
Notwithstanding anything to the contrary, Landlord shall provide written notice
to Guarantor of any default by Tenant under the Lease and Guarantors shall
thereafter have, beyond Tenant's applicable cure period, five (5) days to cure
monetary defaults and fifteen (15) days to cure nonmonetary defaults. In the
event that Tenant shall fail to cure any default under the Lease which Guarantor
subsequently cures (as provided above), Guarantor shall have the right to become
Tenant's
<PAGE>
successor in interest (and Landlord agrees to recognize Guarantor as such) so
long as Guarantor expressly assumes in writing all of Tenant's obligations and
liabilities under the Lease.
Except as set forth in the preceding paragraph, Landlord shall have the
right to proceed against Guarantor hereunder following any breach or default by
Tenant without first proceeding against Tenant and without previous notice to or
demand upon either Tenant or Guarantor.
Guarantor hereby waives (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) all right to assert or plead
any statute of limitations as to or relating to this Guaranty and the Lease, (d)
any right to require the Landlord to proceed against the Tenant or any other
Guarantor or any other person or entity liable to Landlord, (e) any right to
require Landlord to apply to any default any security deposit or other security
it may hold under this Lease, (f) any right to require Landlord to proceed under
any other remedy Landlord may have before proceeding against Guarantor, (g) any
right of subrogation.
The term "Landlord" whenever hereinabove used refers to and means the
Landlord in the foregoing Lease specifically named and also any assignee of said
Landlord, whether by outright assignment or by assignment for security, and also
any successor to the interest of said Landlord or of any assignee in such Lease
or any part thereof, whether by assignment or otherwise. So long as the
Landlord's interest in or to the leased premises or the rents, issues and
profits therefrom, or in, to or under said lease, are subject to any mortgage or
deed of trust or assignment for security, no acquisition by Guarantor of the
Landlord's interest in the leased premises or under said Lease shall affect the
continuing obligation of Guarantor under this Guaranty, which shall nevertheless
continue in full force and effect for the benefit of the mortgagee, beneficiary,
trustee or assignee under such mortgage, deed of trust or assignment, of any
purchase at sale by judicial foreclosure or under private power of sale, and of
the successors and assigns of any such mortgagee, beneficiary, trustee, assignee
or purchaser.
The term "Tenant" whenever hereinabove used refers to and means the Tenant
in the foregoing Lease specifically named and also any assignee or sublessee of
said Lease and also any successor to the interests of said Tenant, assignee or
sublessee of such Lease or any part thereof, whether by assignment, sublease or
otherwise.
The obligations of the Guarantor hereunder shall include payment to
Landlord of all reasonable costs of any successful legal action by Landlord
against Guarantor, including reasonable attorneys' fees.
This Guaranty, all acts and transaction hereunder and the rights and
obligations of the parties hereto shall be governed by and construed and
enforced in accordance with the laws of the State of Virginia. As part of the
consideration for Landlord's entering into the Lease which this Guaranty is a
part, the Guarantor hereby agrees that all actions or proceedings arising
directly or indirectly hereunder may, at the option of Landlord, be litigated in
courts having situs within the State of Virginia, and the Guarantor hereby
expressly consents to the jurisdiction of any such local, state or federal
court, and consents that any service of process in such action or proceeding may
be made by personal service upon the Guarantor wherever the Guarantor may
<PAGE>
then be located, or by certified or registered mail directed to such Guarantor
at the address set forth in the Lease for the delivery of notices.
IN WITNESS WHEREOF, the Guarantor has hereunto caused these presents to be
executed under seal this ________ day of March, 1995.
CANADIAN MARCONI CORPORATION
By: ____________________________
Title: _________________________
[CORPORATE SEAL]
<PAGE>
EXHIBIT G
COMMENCEMENT DATE AGREEMENT
---------------------------
This Commencement Date Agreement (the "Agreement") is made and entered into
this ___________ day of _______________________, 199___, by and between AETNA
LIFE INSURANCE COMPANY, a Connecticut corporation ("Landlord") and CMC DATACOMM,
INC., a _____________________ corporation ("Tenant");
WHEREAS, Landlord and Tenant entered into that certain Lease (the "Lease")
dated _______________________, 199____, with respect to certain premises located
at Suite _____, 1861 Wiehle Avenue, Reston, Virginia, as such demised premises
are more particularly described in the Lease; and
WHEREAS, by virtue of Paragraph 1.3 of the Lease, this Agreement is
executed by Landlord and Tenant to confirm the Lease Commencement Date and the
Lease Expiration Date, as those terms are defined in the Lease;
NOW, THEREFORE, for and in consideration of the premises set forth above
and the mutual covenants expressed in the Lease, it is hereby agreed by Landlord
and Tenant as follows:
1. Pursuant to the terms of Section 2 of the Lease, the Premises were
substantially complete and the Base Rent and Additional Rent (as such
terms are defined in the Lease) commenced on _________________ 1995
(the "Lease Commencement Date") and will expire on
______________________ 2000, (the "Lease Expiration Date").
2. This Agreement shall not be deemed or construed to alter or amend the
Lease in any manner.
IN WITNESS WHEREOF, Landlord and Tenant have caused their duly authorized
officers or partners to execute this Agreement the day and year first above
written.
TENANT: LANDLORD:
- ------ --------
CMC DATACOMM, INC., a _____________ AETNA LIFE INSURANCE COMPANY, a
corporation Connecticut corporation
By: _______________________________ By: __________________________________
Title: ____________________________ Title: _______________________________
<PAGE>
1861 WIEHLE AVENUE, RESTON, VIRGINIA
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("this First Amendment") dated as of July
_____, 1996, by and between ROYCO, INC., a Maryland corporation ("Landlord"),
and CMC DATACOMM, INC., a _________________ corporation ("Tenant").
EXPLANATORY STATEMENT
A. Tenant and Landlord, as successor in interest to Aetna Life Insurance
Company, entered into a Lease dated March _____, 1995 for the Premises located
in the Building.
B. Landlord and Tenant desire to amend the Lease on the terms and
conditions set forth below.
NOW, THEREFORE, WITNESSETH, that for and in consideration of the foregoing
Explanatory Statement and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:
1. Defined Terms. Initially capitalized terms used in this First
-------------
Amendment shall have the meaning ascribed to them in the Lease.
2. Amendment to Section 39. Section 39 of the Lease is hereby amended
-----------------------
by adding the following at the end thereof:
The term "Rooftop Equipment" shall include the roof-mounted heating,
air conditioning, and ventilation systems serving the Premises (the
"HVAC Rooftop Equipment"). Notwithstanding any contrary provision
contained in this Lease, at the expiration or earlier termination of
this Lease, Tenant shall not remove the HVAC Rooftop Equipment unless
directed to do so by Landlord. If Landlord so directs Tenant to do
so, Tenant shall be responsible for repairing any damage caused to the
roof or the Building in connection such removal of the HVAC Rooftop
Equipment.
3. No Other Amendments. In all other respects, the Lease shall remain in
-------------------
full force and effect and binding on the parties thereto and their successors
and assigns, except as amended herein.
4. Confirmation of Subordination. Tenant confirms that the Lease and the
-----------------------------
tenancy created thereunder shall be subject and subordinate to all mortgages,
deeds of trust, or other security interests hereinbefore or hereafter made
against the Premises or the Building, or both.
<PAGE>
5. Representations. All of the parties hereto hereby represent that they
---------------
have the corporate or partnership power to execute this First Amendment and that
the execution and delivery of this First Amendment (a) has been authorized by
proper corporate action, (b) has been executed by a duly authorized officer of
such parties, and (c) constitutes the valid and binding obligation of the
parties hereto.
IN WITNESS WHEREOF, the duly authorized representatives of the parties
hereto have executed this First Addendum, with the intention that this First
Amendment constitute a sealed instrument, as of the date first above written.
WITNESS: LANDLORD: ROYCO, INC.
/s/ Joseph J. Kelly
__________________________________ By: ____________________________(SEAL)
Joseph J. Kelly
Vice President
TENANT: CMC DATACOMM, INC.
/s/ Marcia McKenzie
__________________________________ By: ____________________________(SEAL)
Name: Marcia McKenzie
Title: ___________________________
JOINDER
To induce Landlord to enter in this First Amendment with Tenant, the
undersigned Guarantor hereby joins in the execution of this First Amendment for
the purpose of evidencing its consent to the terms and conditions thereof, and
to reaffirm the continuing nature and the full force and effect of its guaranty
obligations under the Lease.
WITNESS: CANADIAN MARCONI CORPORATION
__________________________________ By: ____________________________(SEAL)
Name: ____________________________
Title: ___________________________
<PAGE>
EXHIBIT 11.1
VIALOG CORPORATION
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
BASIC EARNINGS PER SHARE
- ------------------------
Weighted average common shares outstanding 2,088,146 2,889,005
========= =========
DILUTED EARNINGS PER SHARE
- --------------------------
Weighted average common shares outstanding 2,088,146 2,889,005
Common stock equivalents -- --
--------- ---------
Total 2,088,146 2,889,005
========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,567,000
<SECURITIES> 0
<RECEIVABLES> 5,718,000
<ALLOWANCES> 32,000
<INVENTORY> 0
<CURRENT-ASSETS> 15,510,000
<PP&E> 7,817,000
<DEPRECIATION> 273,000
<TOTAL-ASSETS> 75,083,000
<CURRENT-LIABILITIES> 8,251,000
<BONDS> 71,539,000
0
0
<COMMON> 35,000
<OTHER-SE> (4,917,000)
<TOTAL-LIABILITY-AND-EQUITY> 75,083,000
<SALES> 4,816,000
<TOTAL-REVENUES> 4,816,000
<CGS> 0
<TOTAL-COSTS> 2,694,000
<OTHER-EXPENSES> 7,555,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,866,000
<INCOME-PRETAX> (15,299,000)
<INCOME-TAX> 522,000
<INCOME-CONTINUING> (15,821,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,821,000)
<EPS-PRIMARY> (5.48)
<EPS-DILUTED> (5.48)
</TABLE>
