<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
COMMISSION FILE NUMBER: 000-21319
LIGHTBRIDGE, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3065140
(State or other jurisdiction (I.R.S employer
of incorporation or jurisdiction) identification number)
281 Winter Street
Waltham, Massachusetts 02154
(Address of principal executive offices, including Zip Code)
(617) 890-2000
(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:
Common stock, par value $0.01 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
----- -----
[Cover page 1 of 2 pages]
<PAGE> 2
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 21, 1997 was $48,546,673, based on a total of 6,935,239
shares held by nonaffiliates and on the closing price reported on the Nasdaq
National Market of $7.00.
The number of shares of Common Stock outstanding as of March 21, 1997 was
15,237,994.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
1996. Certain portions of such proxy statement are incorporated by reference in
Part III of this report on Form 10-K.
[Cover page 2 of 2 pages]
<PAGE> 3
LIGHTBRIDGE, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. Page
- ------- ----
ITEM 1. Business 4
ITEM 1A. Risk Factors 12
ITEM 2. Properties 20
ITEM 3. Legal Proceedings 20
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 4A. Executive Officers 21
PART II.
- --------
ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters 22
ITEM 6. Selected Financial Data 23
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 24
ITEM 8. Financial Statements and Supplementary Data 32
ITEM 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure 32
PART III.
- ---------
ITEM 10. Directors and Executive Officers of the Registrant 32
ITEM 11. Executive Compensation 33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 33
ITEM 13. Certain Relationships and Related Transactions 33
PART IV.
- --------
ITEM 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K 33
Signatures 35
</TABLE>
3
<PAGE> 4
THE DISCUSSION IN THIS FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF A NUMBER OF FACTORS, INCLUDING THE RISK FACTORS SET FORTH IN ITEM 1A.
PART I
ITEM 1. BUSINESS
Lightbridge, Inc. ("Lightbridge" or the "Company") develops, markets and
supports a suite of integrated products and services that enable wireless
telecommunications carriers to improve their customer acquisition and retention
processes. The Company's comprehensive software-based solutions are delivered
primarily on an outsourcing and service bureau basis, which allows wireless
carriers to focus internal resources on their core business activities.
Lightbridge's solutions combine the advantages of distributed access and
workflow management, centrally managed client-specified business policies, and
links to carrier and third-party systems. The open architecture underlying the
Company's software applications supports the development of flexible, integrated
solutions, regardless of the type of wireless service provided by a client and
independent of the client's computing environment.
The Company offers on-line, real-time transaction processing and call
center support solutions to aid carriers in qualifying and activating
applicants for wireless service, as well as software-based sales support
services for traditional distribution channels, such as dealers, agents and
direct mobile sales forces, and emerging distribution channels, such as mass
market retail stores, home shopping and stand-alone kiosks. The Company
develops and implements interfaces that fully integrate its acquisition system
with carrier and third-party systems, such as those for billing, point-of-sale,
activation and order fulfillment. The Company recently introduced
software-based decision support tools and services that enable carriers to
reduce subscriber churn and to make more informed business decisions about
their subscribers, markets and distribution channels.
Lightbridge (formerly Credit Technologies, Inc.) was incorporated in June
1989 under the laws of the state of Delaware. Effective November 1, 1994, the
Company changed its name and reincorporated as Lightbridge, Inc. During 1995,
the Board of Directors passed a resolution to change the fiscal year end to
December 31. In September 1996, the Company organized a wholly owned subsidiary,
Lightbridge Security Corporation, as a Massachusetts securities corporation for
tax purposes, to buy, hold and sell securities.
PROFILE and SAMSPEN are registered trademarks of the Company, and ALLEGRO,
CAS_COMM, CHANNEL WIZARD, CHURN PROPHET, CREDIT DECISION SYSTEM, CUSTOMER
ACQUISITION SYSTEM, 800-FOR-CREDIT, FRAUD SENTINEL, INSIGHT, IRIS,
LIGHTBRIDGE, POPS, POSTALPRO, SAMS and WIRELESS INTELLIGENCE are trademarks of
the Company. Other trademarks or trade names referred to in this Form 10-K are
the property of their respective owners.
Products and Services
Lightbridge's suite of software-based products and services permits a
wireless carrier to select applications and functions to create an integrated,
customized solution addressing its particular needs. Lightbridge's products and
services are provided by five solutions groups:
Group Functions
----- ---------
Customer Acquisition Services On-line, real-time transaction
processing services to aid wireless
carriers in qualifying and activating
applicants for wireless service,
including proprietary databases and
processing modules to evaluate
4
<PAGE> 5
existing subscribers and detect
potential subscription fraud.
Teleservices Call center support services to assist
wireless carriers in acquiring and
activating applicants for wireless
service, including qualification and
activation, analyst reviews,
telemarketing to existing and new
subscribers, back-up and disaster
recovery for acquisition and activation
services, and customer care.
Channel Solutions Software products and services and
consulting services to support a variety
of distribution channels, including
software applications for in-store use,
laptop applications for mobile sales
professionals and an interactive
multimedia kiosk.
Wireless Intelligence Software-based decision support tools
and related consulting services to allow
wireless carriers to access data and
analyze the marketplace in order to make
more informed business decisions about
their customers, markets and
distribution channels.
Business Integration Consulting services, software and tools
to link wireless carrier legacy systems
and third-party systems to the Company's
systems, as well as other consulting
services to help wireless carriers
improve business processes.
Customer Acquisition System
The Company's Customer Acquisition System ("CAS") includes on-line,
real-time transaction processing services for the qualification and activation
of applicants for wireless service.
CAS accepts applicant information on-line from a variety of carrier
distribution points, such as retail stores. Upon receipt of information, the
system begins a series of steps required to determine the applicant's
qualification for the carrier's service through inquiry into Company proprietary
databases, such as ProFile, and external sources, such as credit bureaus. The
complete applicant file is evaluated by the system and a determination regarding
the applicant's creditworthiness is made based on centrally managed
client-specified business policies. If an issue is raised regarding
qualification of an applicant, the system electronically routes the application
to a Company or carrier credit analyst for review and action. The point-of-sale
is then notified when a determination is made. If service is to be activated at
that time, the system receives, verifies and translates the information
necessary to establish the billing account and activate service, transmitting
data to the carrier's billing and activation systems. Throughout the process,
Lightbridge's client/server system manages the routing of the application and
the flow of information, both within the system and, as necessary, to
appropriate individuals for their involvement, all in a secure, controlled
environment.
Introduced in 1989 and enhanced over time, CAS typically enables carriers
to qualify applicants and activate service in five to ten minutes while
screening for subscriber fraud, thereby assisting the carriers to close sales at
the time when the customer is ready to purchase. Although CAS typically requires
no human intervention beyond the initial data entry, it permits a carrier to
implement policies requiring analyst intervention in carrier-specified
situations. When intervention is required, CAS facilitates the on-line handling
of exceptions by, among other things, queuing exceptions to manage workflow. CAS
includes the following modules, all of which are fully integrated:
o Credit Decision System ("CDS") is an integrated qualification system
for carriers to acquire qualified applicants rapidly. Using redundant,
high-speed data lines to five major credit bureaus, CDS typically
provides consumer and business credit decisions in under 20 seconds,
based on automated analysis of credit information using a credit
policy specified by the carrier. CDS can be integrated with a
carrier's existing customer acquisition and billing systems and can be
modified quickly to reflect changes in a carrier's credit policies.
5
<PAGE> 6
o Fraud Sentinel is a suite of fraud management tools, available
separately or together. The Company believes that Fraud Sentinel is
the only pre-screening tool for detection and prevention of
subscription fraud available in the wireless industry today. The
components of Fraud Sentinel are:
ProFile, a proprietary intercarrier database of accounts
receivable write-offs and service shut-offs, provides on-line
pre-screening of applicants, on-going screening of existing
subscribers, and notification if an application is processed for
a subscriber whose account has been previously written off by a
carrier.
Fraud Detect, a multifaceted fraud detection tool provided under
agreement with Trans Union Corporation, analyzes data such as an
applicant's Social Security Number, date of birth, address,
telephone number and driver's license information and identifies
any discrepancies. Fraud Detect became commercially available
through Lightbridge in the second quarter of 1996.
Postalpro, a tool to validate addresses, enables a carrier to
detect false addresses, incorrect ZIP codes and contradictions
between addresses and ZIP codes before a potential subscriber's
service is activated. Postalpro became commercially available
during the first quarter of 1997.
InSight is a proprietary database containing information about
existing accounts and previous applicants. InSight also evaluates
existing subscribers who apply for additional services on the basis of
their payment histories. InSight can decrease costs for carriers by
reducing the number of credit bureau inquiries and the number of
applications requiring manual review.
Workstation offerings present data electronically to the appropriate
person for decision or action and then automatically route data to the
next step in the process. Workstation offerings are:
Credit workstation allows a carrier's credit analyst to enter
information or to evaluate applications that were entered at a
remote location.
Activation workstation allows the user to review, correct or
reprocess activation requests returned from the billing system
due to an error.
Fulfillment workstation provides the information necessary to
fulfill orders for wireless handsets and accessories at a remote
or third-party fulfillment operation.
Pricing of CAS is on a per qualification or activation basis and varies
substantially with the term of the contract under which services are provided,
the volume of transactions, and the other products and services selected and
integrated with the services.
Teleservices
The Company's Teleservices Group provides a range of call center support
solutions for the subscriber acquisition and activation process. The Company
first offered a Teleservices call center solution to the wireless marketplace in
1990 with its 800-FOR-CREDIT service. Since that time, the Company's
Teleservices offerings have expanded to include not only credit decisions and
activations, but also analyst reviews, telemarketing to existing and new
subscribers, back-up and disaster recovery for acquisition and activation
services, and customer care. Teleservices solutions can be provided using CAS or
a carrier's own customer acquisition system. The Company's clients typically
utilize Teleservices solutions as part of an overall sales and distribution
strategy to expand or engage in special projects without incurring the overhead
associated with building and maintaining a call center. Pricing of Teleservices
solutions is on a per transaction or per minute basis and varies with the term
of the contract under which services are provided, the volume of transactions
processed and the other products and services selected and integrated with the
services.
6
<PAGE> 7
Channel Solutions
The Company's Channel Solutions consist of products and services that
support a growing range of distribution channels. The components of Channel
Solutions include:
o POPS, a Windows-based application typically used in carrier-owned or
dealer/agent store locations, features a graphical user interface that
allows even inexperienced sales staff to conduct qualification and
activation transactions quickly via a dial-up or network connection to
CAS. POPS is being marketed both as a new solution and as a
replacement to the Company's DOS-based application.
o SAMS, a laptop application, provides a "virtual office" for carriers'
mobile sales professionals. The SAMS suite contains a number of tools
needed by sales staff, such as coverage maps and product catalogs, as
well as the ability to handle qualification and activation
transactions via landline, cellular or wireless data connection to
CAS. Third-party modules can be integrated into SAMS to provide
additional functionality.
o Iris, an interactive multimedia kiosk, uses touch screen technology to
provide potential subscribers with educational information ranging
from the basic operation of a cellular telephone to the form of
monthly bills, display the carrier's coverage area and provide
information about available services and telephone models. Iris
incorporates a credit card reader for payments and allows a customer
to purchase a telephone and complete an application for service, which
can then be processed automatically. Iris can dispense a telephone
itself or can provide for delivery or in-store pick-up.
POPS, SAMS and Iris are licensed to clients and require customization and
integration with other products and systems to varying degrees. Pricing of POPS,
SAMS and Iris varies with the configurations selected, the number of locations
licensed and the degree of customization required.
Wireless Intelligence
The Company's Wireless Intelligence Group provides software-based decision
support tools to help carriers analyze their marketplace to improve business
operations. As carriers encounter increasing competition and a growing and
changing market, the Company believes that the ability to gather, analyze and
interpret business data and then take appropriate actions will be essential to
their success. Wireless Intelligence is currently comprised of the following two
modules:
o Channel Wizard allows a carrier to analyze its distribution channel
performance by market, subscriber type or other factors, to assist the
carrier in making decisions designed to reduce customer acquisition
costs and improve channel performance. Channel Wizard is designed to
provide up-to-date information in a format that is easy for users
without statistical training to operate. Channel Wizard became
commercially available in the second quarter of 1996.
o Churn Prophet is an analytical tool designed to help carriers reduce
churn and increase customer retention. Churn Prophet uses predictive
modeling technology to identify characteristics of subscribers who
have canceled service in the past and to develop predictions as to
which subscribers are likely to cancel service in the future. Customer
retention efforts can then be targeted more cost effectively to the
subscribers most likely to cancel service. Churn Prophet became
commercially available in the fourth quarter of 1996.
Channel Wizard and Churn Prophet are licensed to clients and require
customization and integration with other products and systems to varying
degrees. Pricing of Channel Wizard and Churn Prophet varies with the number of
users and the degree of customization required.
The Wireless Intelligence Group also provides a range of consulting
services, including churn analysis and data warehouse design.
7
<PAGE> 8
Business Integration
The Company's Business Integration Group provides consulting, software and
tools to link carrier and third-party systems to the Company's systems to enable
those carriers to process qualification and activation transactions through the
Company's systems. To facilitate the development of these interfaces,
Lightbridge developed CAS_COMM, a library of software functions for the remote
host that enables third-party systems to connect to CAS. CAS_COMM is an
application layer protocol that gives CAS the appearance of a local process to
the third-party system. CAS_COMM runs on DEC VMS, Microsoft Windows NT and
certain Unix platforms and supports both TCP/IP and DECnet.
The Business Integration Group also provides a range of other consulting
services to wireless carriers, employing the Company's expertise and experience
in the wireless telecommunications industry. For example, the Business
Integration Group helps carriers develop solutions for work flow optimization,
management of bad debt, distribution channel analysis and sales automation. The
Company generally charges for consulting services on a per diem basis, but
occasionally undertakes smaller consulting projects on a fixed-fee basis.
Technology
The Company's development efforts have created a proprietary multi-layered
software architecture that facilitates the development of application products.
This design conforms to the three standard tiers of (1) presentation
(front-ends), (2) business logic and (3) database services, each independent of
the others. The architecture supports the development of Lightbridge's core
products and provides a discrete platform that enables the rapid creation of
client-specific requirements. In addition, the architecture is open in terms of
its ability to interface with third-party systems, as well as with the Company's
Windows-based products. Lightbridge can therefore offer its clients the ability
to use and enhance legacy systems and third-party systems (such as billing
systems) while implementing the market-oriented products offered by the Company.
At the most fundamental layer of its architecture, Lightbridge has written
a common, independent library of code that provides a foundation for reusability
and, equally importantly, independence from hardware platforms and operating
systems. The common library currently supports Unix and OpenVMS. The Lightbridge
products are portable and able to run on the most suitable hardware platform for
the computing needs.
A critical element of the Company's development has been the creation and
enhancement of Allegro, a proprietary peer-to-peer, client/server, transaction
management system. Allegro encapsulates a sequence of independent, application
servers into a complete transaction, customized for the client's customer
acquisition requirements. The solutions may include front-end data capture,
customer qualification, fulfillment of physical distribution and connectivity to
back office systems such as billing. To an individual user, however, Lightbridge
products offer the front-end appearance of a "single virtual machine." Allegro
features include data validation, exception handling, process queues, manual
review queues and transaction monitors.
Lightbridge servers each perform only a single function, without knowledge
of the other steps in the transaction processes or their computing environment.
Third-party software products are encapsulated so that they are integrated
seamlessly into the Allegro system. As a result, the Allegro network is scalable
and includes software redundancy.
The wireless marketplace continues to grow rapidly and requires quick
reaction to evolving market conditions. To meet this requirement, the Company
has incorporated a set of software and tools with which its trained staff can
provide the rapid customization of front-ends, business rules, system interfaces
and reporting. The customization is independent of the core products, so that
Lightbridge can provide client-specific enhancements while continuing to develop
regular releases of major product enhancements.
8
<PAGE> 9
Clients
Revenues attributable to the Company's 10 largest clients accounted for
approximately 90%, 90% and 81% of the Company's revenues in the years ended
September 30, 1994 and 1995 and December 31, 1996, respectively. Four clients
each accounted for greater than 10% of the Company's total revenues in the
years ended September 30, 1994 and 1995, and two clients each, for the year
ended December 31, 1996. AT&T Wireless Services, Inc. ("AT&T Wireless")
accounted for 29% and GTE Mobile Communications Service Corporation ("GTE
Mobile") accounted for 15% of the Company's revenues for the year ended
December 31, 1996. During 1996, GTE Mobile changed the way it accesses the
Company's Customer Acquisition System from using the call center support
solutions provided by the Teleservices Group to using on-line access. As a
result, the Company expects 1997 revenues from GTE Mobile to decrease
significantly from 1996 revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview" and Notes to Financial
Statements.
The Company's agreements with its clients set forth the terms on which the
Company will provide products and services for the client, but do not typically
require the clients to purchase any particular type or quantity of the Company's
products or services or to pay any minimum amount for products or services. The
Company's agreement with GTE Mobile and certain of its subsidiaries provides
that the contract may be terminated by GTE Mobile as of June 30 of any year upon
60 days' prior notice. In addition, if the Company fails to meet certain
performance criteria, GTE Mobile may, among other things, terminate the
agreement upon 30 days' prior written notice. The Company has an agreement with
AT&T Wireless for the provision of credit decision services. The agreement will
expire on December 31, 1999 unless it is terminated earlier, upon not less than
60 days' prior written notice. AT&T Wireless has the right to extend the term of
the agreement an additional two years. Neither of the foregoing agreements
requires that the client purchase any particular type or quantity of the
Company's products or services, although the agreement with AT&T Wireless
contains minimum payment amounts.
Sales and Marketing
The Company's sales strategy is to establish, maintain and foster long-term
relationships with its clients. The Company's sales and client services
activities are led by "relationship teams," each of which includes a senior
management team sponsor. The Company employs a team approach to selling in order
to develop a consultative relationship with existing and prospective clients.
Directors of solutions groups and product managers, as well as other executive,
technical, operational and consulting personnel, are frequently involved in the
business development and sales process. The teams conduct needs assessments and,
working with the client, develop a customized solution to meet the client's
particular needs. The sales cycle for the Company's products and services is
typically 6 to 12 months although the period may be substantially longer in some
cases.
The Company expanded its sales and marketing group during 1996 by hiring
additional staff experienced in the wireless telecommunications industry.
The Company's marketing activities include public relations, advertising,
participation in industry trade shows and panels, substantive articles in trade
journals and targeted direct mail.
Engineering, Research and Development
Lightbridge considers its on-going efforts in engineering, research and
development to be a key component of its strategy. The Company believes that its
future success will depend in part on its ability to continue to enhance its
existing product and service offerings and to develop new products and services
to allow carriers to respond to changing market requirements. The Company's
research and development activities consist of both long-term efforts to develop
and enhance products and services and short-term projects to make modifications
to respond to immediate client needs.
9
<PAGE> 10
In addition to internal research and development efforts, the Company
intends to continue its strategy of gaining access to new technology through
strategic relationships and acquisitions where appropriate.
The Company spent approximately $2.3 million, $3.9 million and $4.4 million
on engineering, research and development in the years ended September 30, 1994,
1995 and December 31, 1996, respectively.
Competition
The market for services to wireless carriers is highly competitive and
subject to rapid change. The market is fragmented, and a number of companies
currently offer one or more services competitive with those offered by the
Company. In addition, many wireless carriers are providing or can provide,
internally, products and services competitive with those the Company offers.
Trends in the wireless telecommunications industry, including greater
consolidation and technological or other developments that make it simpler or
more cost-effective for wireless carriers to provide certain services
themselves, could affect demand for the Company's services and could make it
more difficult for the Company to offer a cost-effective alternative to a
wireless carrier's own capabilities. In addition, the Company anticipates
continued growth in the wireless carrier services industry and, consequently,
the entrance of new competitors in the future.
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
subscriber needs, quality and breadth of service offerings, price and technical
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability to
hire and retain employees, the development by others of products and services
that are competitive with the Company's products and services, the price at
which others offer comparable products and services and the extent of its
competitors' responsiveness to subscriber needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources than the
Company. As a result, the Company's competitors may be able to adapt more
quickly to new or emerging technologies and changes in subscriber requirements
or may be able to devote greater resources to the promotion and sale of their
products and services. There can be no assurance that the Company will be able
to compete successfully with its existing competitors or with new competitors.
In addition, competition could increase if new companies enter the market or if
existing competitors expand their service offerings. An increase in competition
could result in price reductions or the loss of market share by the Company and
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow.
To remain competitive in the wireless carrier services industry, the
Company will need to continue to invest in engineering, research and
development, and sales and marketing. There can be no assurance that the Company
will have sufficient resources to make such investments or that the Company will
be able to make the technological advances necessary to remain competitive. In
addition, current and potential competitors have established or may in the
future establish collaborative relationships among themselves or with third
parties, including third parties with whom the Company has a relationship, to
increase the visibility and utility of their products and services. Accordingly,
it is possible that new competitors or alliances may emerge and rapidly acquire
a significant market share. If this were to occur, the Company's business,
financial condition, results of operations and cash flow could be materially and
adversely affected.
Government Regulation
The FCC, under the terms of the Communications Act of 1934, as amended,
regulates interstate communications and use of the radio spectrum. Although the
Company is not required to and does not hold any licenses or other
authorizations issued by the FCC, the wireless carriers that constitute the
Company's clients are regulated at both the federal and state levels. Federal
and state regulation may decrease the growth of the wireless telecommunications
industry, affect the development of the PCS or other wireless markets, limit the
number of
10
<PAGE> 11
potential clients for the Company's services, impede the Company's ability to
offer competitive services to the wireless telecommunications market, or
otherwise have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. The Telecommunications Act of
1996, which in large measure deregulated the telecommunications industry, has
caused, and is likely to continue to cause, significant changes in the industry,
including the entrance of new competitors, consolidation of industry
participants and the introduction of bundled wireless and wireline services.
Those changes could in turn subject the Company to increased pricing pressures,
decrease the demand for the Company's products and services, increase the
Company's cost of doing business or otherwise have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flow.
As a result of offering its ProFile product, the Company is subject to the
requirements of the Fair Credit Reporting Act as well as various state laws and
regulations. Although the Company's business activities are not otherwise
within the scope of federal or state regulations applicable to credit bureaus
and financial institutions, the Company must take into account such regulations
in order to provide products and services that help its clients comply with
such regulations. The Company monitors regulatory changes and implements
changes to its products and services as appropriate. Although the Company
attempts to protect itself by written agreements with its clients, failure to
reflect the provisions of such regulations in a timely or accurate manner could
possibly subject the Company to liabilities that could have a material adverse
effect on the Company's business, financial condition, results of operations
and cash flow.
Proprietary Rights
The Company's success is dependent upon proprietary technology. The Company
relies on a combination of copyrights, the law of trademarks, trade secrets and
employee and third-party non-disclosure agreements to establish and protect its
rights in its software products and proprietary technology. The Company protects
the source code versions of its products as trade secrets and as unpublished
copyrighted works, and has internal policies and systems designed to limit
access to and require the confidential treatment of its trade secrets. The
Company generally operates its Credit Decision System software on an outsourcing
basis for its clients. In the case of its Channel Solutions and Wireless
Intelligence products, the Company provides the software under license
agreements which grant clients the right to use, but contain various provisions
intended to protect the Company's ownership of and the confidentiality of the
underlying copyrights and technology. The Company requires its employees and
other parties with access to its confidential information to execute agreements
prohibiting unauthorized use or disclosure of the Company's technology. In
addition, all of the Company's employees are required as a condition of
employment to enter into non-competition and confidentiality agreements with the
Company.
There can be no assurance that the steps taken by the Company to protect
its proprietary rights will be adequate to prevent misappropriation of its
technology or independent development by others of similar technology. It may be
possible for unauthorized parties to copy certain portions of the Company's
products or reverse engineer or obtain and use information that the Company
regards as proprietary. The Company has no patents and existing copyright and
trade secret laws offer only limited protection. The Company's non-competition
agreements with its employees may be enforceable only to a limited extent, if at
all. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The Company has been and may be required from time to time to enter into
source code escrow agreements with certain clients and distributors, providing
for release of source code in the event the Company breaches its support and
maintenance obligations, files for bankruptcy or ceases to continue doing
business.
The Company's competitive position may be affected by limitations on its
ability to protect its proprietary information. However, the Company believes
that patent, trademark, copyright, trade secret and other legal protections are
less significant to the Company's success than other factors, such as the
knowledge, ability and experience of the Company's personnel, new product and
service development, frequent product enhancements, customer service and ongoing
product support.
11
<PAGE> 12
The Company's agreement with Trans Union Corporation provides Lightbridge
with an exclusive right to market the Fraud Detect product to named accounts.
The Company's agreement with Pilot Software, Inc. provides a non-exclusive
license to use certain software and documentation. Certain other technologies
used in the Company's products and services are licensed from third parties. The
Company generally pays license fees on these technologies and believes that if
the license for any such third-party technology were terminated, it would be
able to develop such technology internally or license equivalent technology from
another vendor, although no assurance can be given that such development or
licensing can be effected without significant delay or expense.
Although the Company believes that its products and technology do not
infringe on any existing proprietary rights of others, there can be no assurance
that third parties will not assert such claims against the Company in the future
or that such future claims will not be successful. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights, which could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flow. Furthermore, parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or other
equitable relief, which could effectively block the Company's ability to make,
use, sell, distribute or market its products and services in the United States
or abroad. Such a judgment could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. In the event
a claim relating to proprietary technology or information is asserted against
the Company, the Company may seek licenses to such intellectual property. There
can be no assurance, however, that such a license could be obtained on
commercially reasonable terms, if at all, or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain the necessary
licenses or other rights could preclude the sale, manufacture or distribution of
the Company's products and, therefore, could have a material adverse effect on
the Company's business, financial condition, results of operations or cash flow.
The cost of responding to any such claim may be material, whether or not the
assertion of such claim is valid.
Employees
As of February 28, 1997, the Company had a total of 295 employees, of which
275 were full-time and 20 were part-time. The number of personnel employed by
the Company varies seasonally. None of the Company's employees is represented by
a labor union, and the Company believes that its employee relations are good.
The future success of the Company will depend in large part upon its
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense, particularly for sales and marketing
personnel, software developers and service consultants.
ITEM 1A. RISK FACTORS
Dependence on limited number of clients
A limited number of clients historically have accounted for a substantial
portion of the Company's revenues in each fiscal year. Revenues attributable to
the Company's 10 largest clients accounted for approximately 90%, 90% and 81% of
the Company's total revenues in the years ended September 30, 1994 and 1995 and
December 31, 1996, respectively. Four clients each in the years ended September
30, 1994 and 1995 and two for the year ended December 31, 1996 accounted for
greater than 10% of the Company's total revenues. During 1996, GTE Mobile, which
accounted for 15% of the Company's revenues for the year ended December 31,
1996, changed the way it accesses the Company's Customer Acquisition System,
from using the call center support solutions provided by the Teleservices Group
to using on-line access. As a result, the Company's revenues from this client
decreased significantly during 1996 and are expected to further decrease
significantly in 1997. The concentration of the Company's revenues can cause the
Company's revenues and earnings to fluctuate significantly from quarter to
quarter, based on the volume of qualification and activation transactions
generated through its significant clients. Moreover, recent consolidation among
established participants in the wireless telecommunications industry may result
in further concentration of the
12
<PAGE> 13
Company's revenues from a limited number of clients. The Company expects that
revenues attributable to a relatively small number of clients will continue to
represent a significant percentage of its total revenues for the foreseeable
future. The Company's contracts with its clients generally extend for terms of
one or more years and do not typically require the clients to purchase any
particular type or quantity of the Company's products or services or to pay any
minimum amount for products or services. Therefore, there can be no assurance
that any of the Company's clients, including its significant clients, will
continue to utilize the Company's services at levels similar to previous years
or at all. The loss of, or a significant curtailment of purchases by, one or
more of the Company's significant clients, including a loss or curtailment due
to factors outside of the Company's control, could have a material adverse
effect on the Company's business, financial condition, results of operations and
cash flow. In addition, delays in collection or uncollectability of accounts
receivable from any of the Company's significant clients could have a material
adverse effect on the Company's liquidity and working capital position. See
"Item 1. Business--Clients" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Fluctuations in quarterly performance may adversely affect market price of
common stock
The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or acceptance of new
products and services offered by the Company or its competitors, changes in the
mix of products and services provided by the Company, the nature and timing of
changes in the Company's clients or their use of the Company's products and
services, consolidation among participants and other changes in the wireless
telecommunications industry, changes in the client markets served by the
Company, changes in regulations affecting the wireless industry, changes in the
Company's operating expenses, changes in personnel and changes in general
economic conditions. Historically, the Company's quarterly revenues have been
highest in the fourth quarter of each calendar year and have been particularly
concentrated in the holiday shopping season between Thanksgiving and Christmas.
The Company's transaction revenues, which historically have represented the
majority of the Company's total revenues, are affected by the volume of use of
the Company's services, which is influenced by seasonal and retail trends, the
success of the carriers utilizing the Company's services in attracting
subscribers and the markets served by the Company for its clients. Software and
other revenues, which include software license revenues and related consulting
revenues, have recently represented an increasing proportion of the Company's
total revenues. Software license revenues are principally recognized at the time
of delivery of the licensed products and therefore may result in further
fluctuations in the Company's quarterly operating results. Consulting revenues
may be influenced by the requirements of one or more of the Company's
significant clients, including engagement of the Company for implementing or
assisting in implementing special projects of limited duration. During the nine
months ended December 31, 1996, the Company's revenues from customized software
integration services resulted primarily from projects undertaken for one client,
which projects the Company currently expects will continue at least through
December 1997. There can be no assurance that the Company will be able to
achieve or maintain profitability in the future or that its levels of
profitability will not vary significantly among quarterly periods. Fluctuations
in operating results may result in volatility in the price of the Company's
Common Stock.
Although the Company's existing clients typically provide forecasts of
future activity levels, these forecasts have not always proved accurate. In
addition, the sales cycles for the Company's services are typically lengthy and
subject to a number of significant risks over which the Company has little or no
control, including clients' budget constraints and internal authorization
reviews. As a result, the Company may not be able to make accurate estimates of
future sales levels. A significant portion of the Company's expenses are fixed
and difficult to reduce in the event revenues do not meet the Company's
expectations, thus magnifying the adverse effect of any revenue shortfall.
Furthermore, announcements by the Company or its competitors of new products,
services or technologies could cause clients to defer or cancel purchases of the
Company's products and services; any such deferral or cancellation could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flow. Accordingly, revenue shortfalls can cause
significant variations in operating results from quarter to quarter and could
have a material adverse effect on the Company's results of operations. If demand
for the Company's services significantly exceeds the Company's estimates at a
time when its systems are used at or near capacity, however, the Company may be
unable to meet contractually required service levels. The Company's failure to
meet such service
13
<PAGE> 14
levels could permit clients to terminate their agreements with the Company or
give rise to liability for damages or penalties, either of which could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flow. In addition, the Company has hired a significant
number of employees since January 1995 and this significant increase in its
workforce may negatively impact the Company's operating margins in the future,
particularly if the Company's commercial introduction of new products and
services is not as successful as planned.
Due to all of the foregoing factors, it is possible that in some future
quarter the Company's results of operations will be below prior results or the
expectations of market analysts and investors. In such an event, the price of
the Company's Common Stock would likely be materially adversely affected.
History of losses; capital requirements
The Company was founded in 1989 and has incurred net losses in each of its
fiscal years other than the years ended September 30, 1994 and December 31,
1996. As of December 31, 1996, the Company had an accumulated deficit of
approximately $1.9 million. No assurance can be given that the Company will be
profitable on either a quarterly or annual basis in the future or that the
Company will not need to raise additional funds through public or private
financings. Expansion of the Company's business, including the acquisition of
additional computer and network equipment and the expansion of its teleservices
call center capacity, will require the Company to make significant capital
expenditures. The Company believes that the net proceeds of its initial public
offering received in October 1996, together with existing cash balances and
funds available under existing lines of credit, will be sufficient to finance
the Company's operations and capital expenditures through at least 1997. In the
event that the Company's plans change or available cash resources otherwise
prove to be insufficient (due to unanticipated expenses or otherwise), the
Company may be required to seek additional financing or curtail its expansion
activities. The Company may determine, depending upon the opportunities
available to it, to seek additional debt or equity financing to fund the cost of
continuing expansion. To the extent that the Company obtains equity financing or
finances an acquisition with equity securities, any such issuance of equity
securities could result in dilution to the interests of the Company's
stockholders. There can be no assurance that additional financing will be
available to the Company on acceptable terms, or at all. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Rapid industry change requires ongoing product development efforts
The wireless telecommunications industry has been changing rapidly as a
result of increasing competition, technological advances and evolving industry
practices and standards, and the Company expects these changes to continue.
Carriers in the wireless market have also been changing quickly, as the result
of consolidation among established carriers and the rapid entrance of new
carriers into the market. The Company's future success will depend on the
continued use of its existing products and services, market acceptance of its
new products and services and the Company's ability to develop and market new
offerings or adapt existing offerings to keep pace with changes in the wireless
telecommunications industry. A rapid shift away from the use of cellular in
favor of other telecommunications services could affect demand for the Company's
product and service offerings, since different business practices might evolve
with respect to the offering and sale of new telecommunications services and
could require the Company to develop modified or alternate offerings addressing
the particular needs of providers of the new telecommunications services. In
addition, as the cost of wireless communication services declines and the number
of subscribers increases, carriers may elect to forego credit verification of
new customers, and it is unclear what means of customer screening, if any,
carriers will employ if they do not use credit verification.
Due to rapid changes in the wireless telecommunications industry, the
Company intends to continue to devote substantial financial, managerial and
personnel resources to product development efforts for the foreseeable future.
The development of the Company's product and service offerings is based on a
complex process requiring high levels of innovation and the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will be successful in developing or marketing its existing or future
product and service offerings in a timely manner, or at all. If the Company is
unable, due to resource, technical or other constraints to anticipate or respond
adequately to changing market, client or technological requirements, the
Company's business, financial condition,
14
<PAGE> 15
results of operations and cash flow will be materially adversely affected. There
can be no assurance that products or services developed by others will not
render the Company's products or services non-competitive or obsolete. See "Item
1. Business--"Competition."
Risks associated with managing a changing business
The Company has expanded its operations rapidly, and this expansion has
created significant demands on the Company's executive, operational, development
and financial personnel and other resources. Additional expansion by the
Company, including geographic expansion, may further strain the Company's
management, financial and other resources. There can be no assurance that the
Company's systems, procedures, controls and existing space will be adequate to
support expansion of the Company's operations. The Company's future operating
results will depend on the ability of its officers and key employees to manage
changing business conditions and to continue to improve its operational and
financial control and reporting systems. If the Company's management is unable
to manage growth effectively, its business, financial condition, results of
operations and cash flow could be materially and adversely affected. See "Item
1. Business--Employees", "Item 4A. Executive Officers" and "Item 10. Directors
and Executive Officers of the Registrant."
The success of the Company's business depends in part upon the Company's
ability to attract, train and retain a sufficient number of qualified personnel
to meet its needs. The Company's teleservices call center is labor intensive;
consequently, an increase in the turnover rate among the Company's teleservices
employees would increase the Company's recruiting and training costs, and if the
Company were unable to recruit and retain a sufficient number of these
employees, it could be forced to limit its growth or possibly curtail its
operations. There can be no assurance that the Company will be successful in
attracting, training and retaining the required number of employees to support
the Company's business in the future. See "Item 1. Business--Products and
Services."
Dependence on key personnel
The Company's success to date has depended to a significant extent on
Pamela D.A. Reeve, its President and Chief Executive Officer, and a number of
other key personnel. With the exception of Ms. Reeve, none of the Company's
personnel is a party to an employment agreement with the Company. The loss of
the services of Ms. Reeve or any of the Company's other key personnel could have
a material adverse effect on the Company's business, financial condition,
results of operations and cash flow. The Company believes that its future
success will depend in large part on its ability to attract and retain highly
qualified management, engineering, research and development, sales and
operational personnel. In particular, the Company will need to hire additional
software developers in order to support and increase its software licensing
activities. Competition for all of these personnel is intense and there can be
no assurance that the Company will be successful in attracting and retaining key
personnel. The failure of the Company to hire and retain qualified personnel
could have a material adverse effect upon the Company's business, financial
condition, results of operations and cash flow. The Company does not maintain
key person life insurance policies on any of its employees other than Ms. Reeve.
See "Item 1. Business--Employees," "Item 4A. Executive Officers" and "Item 10.
Directors and Executive Officers of the Registrant."
Dependence on cellular market and emerging wireless markets
The Company historically has provided its products and services
predominantly to cellular carriers. Although the cellular market has experienced
significant growth in recent years, there can be no assurance that such growth
will continue at similar rates, or at all, or that cellular carriers will
continue to use the Company's products and services. Further growth in the
Company's revenues from use of the Company's Customer Acquisition System by
cellular carriers is more likely to result from expansion into additional
geographic markets for its existing clients and from general growth of the
cellular market, if any, than from the addition of new cellular carrier clients.
Declines in demand for the Company's products and services, whether as a result
of competition, technological change, industry change, general
15
<PAGE> 16
economic conditions or other factors, could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flow.
The Company's future operating results will depend in part on the emergence
of the PCS market and other wireless telecommunications markets and the use of
the Company's products and services by PCS and other wireless carriers. The PCS
market is in its initial stages of development. If the growth of the PCS market
or other new wireless markets does not meet expectations or is significantly
delayed for any reason, or if carriers in these markets do not use the Company's
products and services, the Company's business, financial condition, results of
operations and cash flow could be materially and adversely affected. See "Item
1. Business--"Products and Services."
Highly competitive industry
The market for products and services provided to wireless carriers is
highly competitive and subject to rapid change. The market is fragmented, and a
number of companies currently offer one or more products or services competitive
with those offered by the Company. In addition, many wireless carriers are
providing or can provide, internally, products and services competitive with
those the Company offers. Trends in the wireless telecommunications industry,
including greater consolidation and technological or other developments that
make it simpler or more cost-effective for wireless carriers to provide certain
services themselves, could affect demand for the Company's services and could
make it more difficult for the Company to offer a cost-effective alternative to
a wireless carrier's own capabilities. In addition, the Company anticipates
continued growth in the wireless carrier services industry and, consequently,
the entrance of new competitors in the future.
The Company believes that the principal competitive factors in the wireless
carrier services industry include the ability to identify and respond to
subscriber needs, quality and breadth of service offerings, price and technical
expertise. The Company believes that its ability to compete also depends in part
on a number of competitive factors outside its control, including the ability to
hire and retain employees, the development by others of products and services
that are competitive with the Company's products and services, the price at
which others offer comparable products and services and the extent of its
competitors' responsiveness to customer needs.
Many of the Company's current and potential competitors have significantly
greater financial, marketing, technical and other competitive resources than the
Company. As a result, the Company's competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or
may be able to devote greater resources to the promotion and sale of their
products and services. There can be no assurance that the Company will be able
to compete successfully with its existing competitors or with new competitors.
In addition, competition could increase if new companies enter the market or if
existing competitors expand their service offerings. An increase in competition
could result in price reductions or the loss of market share by the Company and
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow.
To remain competitive in the wireless carrier services industry, the
Company will need to continue to invest in engineering, research and development
and sales and marketing. There can be no assurance that the Company will have
sufficient resources to make such investments or that the Company will be able
to make the technological advances necessary to remain competitive. In addition,
current and potential competitors have established or may in the future
establish collaborative relationships among themselves or with third parties,
including third parties with whom the Company has a relationship, to increase
the visibility and utility of their products and services. Accordingly, it is
possible that new competitors or alliances may emerge and rapidly acquire a
significant market share. If this were to occur, the Company's business,
financial condition, results of operations and cash flow could be materially and
adversely affected. See "Item 1. Business--Competition."
Risk of system failure
The Company's operations are dependent upon its ability to maintain its
computer and telecommunications equipment and systems in effective working order
and to protect its systems against damage from fire, natural disaster,
16
<PAGE> 17
power loss, telecommunications failure or similar events. All of the Company's
computer and telecommunications equipment is located at its two sites in
Waltham, Massachusetts, and, as a result, may be vulnerable to a natural
disaster. The Company has taken precautions to protect itself and its clients
from events that could interrupt delivery of the Company's services. These
precautions include physical security systems, back-up and off-site data
storage, back-up telephone lines, service arrangements with multiple
long-distance telephone carriers and on-site power generators. Notwithstanding
such precautions, there can be no assurance that a fire, natural disaster, power
loss, telecommunications failure or similar event would not result in an
interruption of the Company's services. From time to time, the Company has
experienced delays in the delivery of services to some clients as a result of
failures of certain of the Company's systems. The Company intends to relocate
its corporate headquarters to larger facilities in Burlington, Massachusetts,
and this relocation may result in delays and interruptions as the Company seeks
to build its marketing infrastructure and relationships and to develop new
products and significant new versions of its existing products. In addition,
the growth of the Company's client base, a significant increase in transaction
volume or an expansion of the Company's facilities may strain the capacity of
its computers and telecommunications systems and lead to degradations in
performance or system failure. Many of the Company's agreements with carriers
contain level of service commitments which the Company might be unable to
fulfill in the event of a natural disaster or major system failure. Any damage,
failure or delay that causes interruptions in the Company's operations could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flow. Further, any future addition or expansion
of the Company's facilities to increase capacity could increase the Company's
exposure to damage from fire, natural disaster, power loss, telecommunications
failure or similar events. There can be no assurance that the Company's
property and business interruption insurance will be adequate to compensate the
Company for any losses that may occur in the event of a system failure or that
such insurance will continue to be available to the Company at all or, if
available, that it will be available on commercially reasonable terms. See
"Item 1. Business--Products and Services."
In addition to its own systems, the Company relies on certain equipment,
systems and services from third parties that are also subject to risks,
including risks of system failure or inadequacy. For example, in providing its
credit verification service, the Company is dependent on access to various
credit information data bases. Similarly, delivery of the Company's activation
services is often dependent on the availability and performance of third-party
billing systems. If, for any reason, the Company were unable to access any such
data bases or third-party billing systems, the Company's ability to process
credit verification transactions could be impaired. In addition, the Company's
business is materially dependent on service provided by various local and long
distance telephone companies. A significant increase in the cost of telephone
services that is not recoverable through an increase in the price of the
Company's services, or any significant interruption in telephone services, could
have a material adverse effect on the Company's business, financial condition,
results of operations and cash flow.
Risk of software defects; dependence on third-party software
The software developed and utilized by the Company in providing its
products and services may contain errors. Although the Company engages in
extensive testing of its software before it is used to provide services to
clients, there can be no assurance that errors will not be found in software
after commencement of the use of such software. Any such error may result in the
Company's partial or total inability to provide services to its clients,
additional and unexpected expenses to fund further product development or to add
programming personnel to complete a development project, or loss of revenue
because of the inability of clients to use the Company's products or services or
the termination by clients of their arrangements with the Company. Any of these
results could have a material adverse effect on the Company's business,
financial condition, results of operations and cash flow.
Certain software used in the Company's software products and to support the
Company's qualification and activation services is licensed by the Company from
third parties. The Company licenses software from Pilot Software, Inc. under a
license agreement that will expire in December 2000 and licenses software from
Trans Union Corporation under a three-year agreement. There can be no assurance
that these suppliers will continue to license this software to the Company or,
if any supplier terminates its agreement with the Company, that the Company will
be able to develop or otherwise procure software from another supplier on a
timely basis or on commercially reasonable terms. Even if the Company succeeds
in developing or procuring such software in such circumstances, there can be no
assurance that the Company will be able to do so in a timely fashion. See "Item
1. Business--Proprietary Rights."
17
<PAGE> 18
Risks associated with potential acquisitions
The Company may in the future pursue acquisitions of companies,
technologies or assets that complement the Company's business. Future
acquisitions may result in the potentially dilutive issuance of equity
securities, the incurrence of additional debt, the write-off of in-process
research and development or software acquisition and development costs and the
amortization of expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. Future acquisitions would
involve numerous additional risks, including difficulties in the assimilation of
the operations, services, products and personnel of the acquired company, the
diversion of management's attention from other business concerns, entering
markets in which the Company has little or no direct prior experience and the
potential loss of key employees of the acquired company.
Government regulation and legal uncertainties
The wireless carriers that constitute the Company's clients are regulated
at both the federal and state levels. Federal and state regulation may decrease
the growth of the wireless telecommunications industry, affect the development
of the PCS or other wireless markets, limit the number of
potential clients for the Company's services, impede the Company's ability to
offer competitive services to the wireless telecommunications market, or
otherwise have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. The Telecommunications Act of
1996, which in large measure deregulated the telecommunications industry, has
caused, and is likely to continue to cause, significant changes in the industry,
including the entrance of new competitors, consolidation of industry
participants and the introduction of bundled wireless and wireline services.
Those changes could in turn subject the Company to increased pricing pressures,
decrease the demand for the Company's products and services, increase the
Company's cost of doing business or otherwise have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flow.
As the result of offering its ProFile product, the Company is subject to
the requirements of the Fair Credit Reporting Act and certain state laws.
Although the Company's business activities are not otherwise within the scope of
federal or state regulations applicable to credit bureaus and financial
institutions, the Company must take into account such regulations in order to
provide products and services that help its clients comply with such
regulations. The Company monitors regulatory changes and implements changes to
its products and services as appropriate. Although the Company attempts to
protect itself by written agreements with its clients, failure to reflect the
provisions of such regulations in a timely or accurate manner could possibly
subject the Company to liabilities that could have a material adverse effect on
the Company's business, financial condition, results of operations and cash
flow. See "Item 1. Business--Government Regulation."
Limited protection of proprietary technology; risk of third party claims
The Company's success is dependent upon proprietary technology. The Company
currently has no patents and protects its property rights in its technology
primarily through copyrights, the law of trademarks, trade secrets and employee
and third-party non-disclosure agreements. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of its technology or independent development by others
of similar technology. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to the same extent as do the laws of
the United States. There can be no assurance that these protections will be
adequate.
Although the Company believes that its products and technology do not
infringe on any existing proprietary rights of others, there can be no assurance
that third parties will not assert such claims against the Company in the future
or that such future claims will not be successful. The Company could incur
substantial costs and diversion of management resources with respect to the
defense of any claims relating to proprietary rights, which could have a
material adverse effect on the Company's business, financial condition, results
of operations and cash flow.
18
<PAGE> 19
Furthermore, parties making such claims could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief, which
could effectively block the Company's ability to make, use, sell, distribute or
market its products and services in the United States or abroad. Such a judgment
could have a material adverse effect on the Company's business, financial
condition, results of operations and cash flow. In the event a claim relating to
proprietary technology or information is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that such a license could be obtained on commercially
reasonable terms, if at all, or that the terms of any offered licenses will be
acceptable to the Company. The failure to obtain the necessary licenses or other
rights could preclude the sale, manufacture or distribution of the Company's
products and, therefore, could have a material adverse effect on the Company's
business, financial condition, results of operations and cash flow. The cost of
responding to any such claim may be material, whether or not the assertion of
such claim is valid. See "Item 1. Business--Proprietary Rights."
Risks associated with international expansion.
As part of its business strategy, the Company may seek opportunities to
expand its offerings into international markets. The Company does not currently
derive any revenues from international markets. The Company believes that such
expansion is important to the Company's ability to continue to grow and to
market its products and services. In particular, some domestic wireless carriers
expanding into international markets may seek single, global solutions from the
Company and its competitors, and as a result, the inability of the Company to
offer its products and services internationally may have an adverse effect on
the Company's ability to market its products and services to those carriers for
use in the United States. In marketing its products and services
internationally, however, the Company will face new competitors, some of whom
may have established strong relationships with carriers. There can be no
assurance that the Company will be successful in marketing or distributing its
services abroad or that, if the Company is successful, its international
revenues will be adequate to offset the expense of establishing and maintaining
international operations. To date, the Company has no experience in marketing
and distributing its services internationally. In addition to the uncertainty as
to the Company's ability to establish an international presence, there are
certain difficulties and risks inherent in doing business on an international
level, such as compliance with regulatory requirements and changes in these
requirements, export restrictions, export controls relating to technology,
tariffs and other trade barriers, difficulties in staffing and managing
international operations, longer payment cycles, problems in collecting accounts
receivable, political instability, fluctuations in currency exchange rates,
seasonal reductions in business activity during the summer months in Europe and
certain other parts of the world and potentially adverse tax consequences. There
can be no assurance that one or more of such factors will not have a material
adverse effect on any international operations established by the Company and,
consequently, on the Company's business, financial condition, results of
operations and cash flow.
Possible volatility of stock price
Factors such as announcements of technological innovations or new products
by the Company, its competitors and other third parties, as well as quarterly
variations in the Company's results of operations and market conditions in the
industry, may cause the market price of the Common Stock to fluctuate
significantly. In addition, the stock market in general has experienced
substantial price and volume fluctuations, which have particularly affected the
market prices of many technology companies and which have often been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Common Stock.
Control by existing stockholders may discourage change of control
As of March 21, 1997, the Company's executive officers, directors and 5%
stockholders owned beneficially an aggregate of 8,841,655 shares or
approximately 58% of the outstanding shares of Common Stock. As a result, these
stockholders, if acting together, would be able to control matters requiring
the approval of stockholders of the Company, including the election of
directors. This concentration of ownership by existing stockholders may also
have
19
<PAGE> 20
the effect of delaying or preventing a change in control of the Company. See
"Item 12. Security Ownership of Certain Beneficial Owners and Management."
Anti-takeover effect of charter provisions, by-laws and Delaware law
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Charter") and Amended and Restated By-Laws (the "Restated By-Laws")
contain provisions that could discourage a proxy contest or make more difficult
the acquisition of a substantial block of the Company's Common Stock. The
Restated Charter requires that any action required or permitted to be taken by
stockholders of the Company must be effected at a duly called annual or special
meeting of stockholders and may not be effected by any consent in writing. The
Restated By-Laws require specified advance notice by a stockholder of a proposal
or director nomination which such stockholder desires to present at any annual
or special meeting of stockholders. Special meetings of stockholders may be
called only by the President or a majority of the Board of Directors. The
Restated By-Laws provide for a classified Board of Directors, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of capital stock of the Company
issued and outstanding and entitled to vote. The affirmative vote of the holders
of at least 75% of the shares of capital stock of the Company issued and
outstanding and entitled to vote is required to amend or repeal these
provisions. In addition, the Board of Directors is authorized to issue shares of
Common Stock and Preferred Stock which, if issued, could dilute and adversely
affect various rights of the holders of Common Stock and, in addition, could be
used to discourage an unsolicited attempt to acquire control of the Company.
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which prohibit the Company from engaging
in a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. The application of Section 203 may limit the ability of
stockholders to approve a transaction that they deem to be in their best
interests. The foregoing and other provisions of the Restated Charter and the
Restated By-Laws and the application of Section 203 of the Delaware General
Corporation Law could have the effect of deterring certain takeovers or delaying
or preventing certain changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.
ITEM 2. PROPERTIES
The Company's headquarters are currently located in a 39,000 square foot
leased facility, and the teleservices group is located in a 27,000 square foot
leased facility, both in Waltham, Massachusetts. The leases of these facilities
expire between 1999 and 2001. The Company has determined its existing facilities
while adequate for its current needs, do not support substantial future
expansion and that suitable additional or substitute space is needed.
In March 1997 the Company entered into a seven year lease for
approximately 46,000 square feet in Burlington, Massachusetts. It is the
Company's intent to relocate its headquarters to the Burlington facility and
sublease a portion of the 39,000 square foot facility in Waltham.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently party to any legal proceedings of a material
nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Form 10-K.
20
<PAGE> 21
ITEM 4A. EXECUTIVE OFFICERS
<TABLE>
The executive officers and directors of the Company and their ages as of
March 21, 1997 are as follows:
<CAPTION>
Name AGE POSITION
-------------------------------------- -------------------------------------------------
<S> <C> <C>
Pamela D.A. Reeve 47 President, Chief Executive Officer and Director
William G. Brown 36 Chief Financial Officer, Vice President of
Finance and Administration and Treasurer
Michael A. Perfit 41 Senior Vice President of Technology
Richard H. Antell 49 Vice President of Software Development
Douglas E. Blackwell 40 Vice President of Service Delivery
Andrew I. Fillat(1) 48 Director
Torrence C. Harder(1) 53 Director
Douglas A. Kingsley(2) 34 Director
D. Quinn Mills(2) 55 Director
<FN>
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
</TABLE>
Pamela D.A. Reeve has served as the President of the Company since November
1989, as Chief Executive Officer of the Company since September 1993 and as a
director of the Company since November 1989. From November 1989 to September
1993, Ms. Reeve also served as Chief Operating Officer of the Company. Prior to
joining the Company, Ms. Reeve was employed by The Boston Consulting Group. Ms.
Reeve is President of the Massachusetts Software Council and also serves as a
director of PageMart Wireless, Inc., a provider of wireless messaging services.
William G. Brown has served as Chief Financial Officer, Vice President of
Finance and Administration and Treasurer of the Company since June 1989. Prior
to joining the Company, Mr. Brown was Manager of Financial Reporting and
Analysis for Bolt, Beranek and Newman, Inc. and was employed at Deloitte,
Haskins and Sells.
Michael A. Perfit, a founder of the Company, has served as Senior Vice
President of Technology of the Company since June 1991. From June 1989 to May
1991, Mr. Perfit served as Vice President of Engineering of the Company. Prior
to joining the Company, Mr. Perfit was Vice President of Appex, Inc. and held
engineering and technical support positions at Interactive Management Systems.
Richard H. Antell has served as Vice President of Software Development of
the Company since February 1996. From June 1991 to January 1996, Mr. Antell was
Vice President of Engineering of the Company. Prior to joining the Company, Mr.
Antell served as Vice President of Application Development of Applied Expert
Systems, Inc. and Project Leader of Index Systems, Inc.
Douglas E. Blackwell has served as Vice President of Service Delivery of
the Company since November 1995. From October 1994 to October 1995, Mr.
Blackwell served as Vice President of Operations of the Company. From February
1991 to September 1994, Mr. Blackwell was employed as Vice President of
Operations of Thomson Financial Services, Inc., an on-line financial transaction
and information services firm. Prior to February 1991, Mr. Blackwell was
employed at Nolan, Norton and Co., an affiliate of KPMG/Peat Marwick.
Andrew I. Fillat has served as a director of the Company since April 1996.
Since July 1995, Mr. Fillat has served as Senior Vice President of Advent
International Corporation, a venture capital investment firm. From April 1989 to
June 1995, Mr. Fillat served as Vice President of Advent International
Corporation.
Torrence C. Harder, a founder of the Company, has served as a director of
the Company since June 1989. Mr. Harder has been the President and a director of
Harder Management Company, a registered investment advisory
21
<PAGE> 22
firm, since its establishment in 1971. He has also been the President and a
director of Entrepreneurial Ventures, Inc. and Entrepreneurial Inc., venture
capital investment firms, since their foundings in 1987 and 1990, respectively.
Douglas A. Kingsley has served as a director of the Company since April
1996. Since January 1996, Mr. Kingsley has been Vice President of Advent
International Corporation, a venture capital investment firm. From September
1990 to December 1995, Mr. Kingsley was an investment manager at Advent
International Corporation. Mr. Kingsley is a director of LeCroy Corporation, a
manufacturer of electronic instrumentation.
D. Quinn Mills has served as a director of the Company since June 1990.
Since 1976, Dr. Mills has served as the Albert J. Weatherhead, Jr. Professor of
Economics at the Harvard Business School.
The Board of Directors is divided into three classes. One class of
directors is elected each year at the annual meeting of stockholders for a term
of office expiring after three years. Mr. Kingsley serves in the class whose
term expires in 1997; Mr. Fillat and Dr. Mills serve in the class whose term
expires in 1998; and Mr. Harder and Ms. Reeve serve in the class whose term
expires in 1999. Each director will serve until the expiration of his or her
term and thereafter until his or her successor is duly elected and qualified.
The Board of Directors has appointed a Compensation Committee, which
provides recommendations concerning salaries and incentive compensation for
employees of and consultants to the Company, and an Audit Committee, which
reviews the results and scope of the audit and other services provided by the
Company's independent auditors.
Directors of the Company serve without compensation. Under the Company's
1996 Incentive and Non-Qualified Stock Option Plan, non-employee directors of
the Company are eligible to receive automatic formula grants of nonqualified
options.
Executive officers of the Company are elected annually by the Board of
Directors and serve at its discretion or until their successors are duly elected
and qualified.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
<TABLE>
Shares of the Company's Common Stock, par value $.01 per share have been
quoted on the Nasdaq National Market System under the symbol "LTBG" since the
Company's initial public offering in September 1996. The following table sets
forth, for the calendar quarters indicated, the high and low sales prices per
share of the Common Stock on the Nasdaq National Market System, as reported in
published financial sources.
<CAPTION>
1996 High Low
---- ---
<S> <C> <C>
Third Quarter (commencing September 27, 1996)............. $12.00 $11.25
Fourth Quarter............................................ $13.00 $ 7.25
</TABLE>
As of March 21, 1997, there were 111 holders of record of Common Stock
(which number does not include the number of stockholders whose shares are held
of record by a broker or clearing agency but does include each such brokerage
house or clearing agency as one record holder).
The Company has never declared or paid any cash dividends on its common
stock. The Company currently anticipates that it will retain future earnings, if
any, to fund the development and growth of its business and therefore does not
expect to pay any cash dividends in the foreseeable future. The terms of the
Company's existing
22
<PAGE> 23
borrowing arrangements and bank lines of credit prohibit the Company from
declaring or paying cash dividends on the Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
The following selected financial data for the four years ended September 30,
1995, the three months ended December 31, 1995 and the year ended December 31,
1996 have been derived from the Company's audited historical financial
statements, certain of which are included elsewhere in this Form 10-K. Selected
financial data for the twelve months ended December 31, 1995 is unaudited. In
the opinion of management, the unaudited financial information presented
reflects all adjustments, consisting only of normal, recurring adjustments,
necessary for a fair presentation of the financial information for such period.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Item 8. Financial Statements and Supplementary
Data."
<CAPTION>
Three Twelve
Months Months Year
Years ended September 30, Ended Ended Ended
------------------------------------------ Dec. 31, Dec. 31, Dec. 31,
1992 1993 1994 1995 1995 1995(1) 1996
-------- --------- -------- -------- --------- --------- --------
(in thousands, except per share amounts) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues....................... $ 2,988 $ 6,986 $13,398 $19,350 $ 6,512 $20,347 $29,545
Cost of revenues............... 1,703 3,554 7,415 12,607 3,484 13,075 15,434
-------- ------- ------- ------- ------- ------- -------
Gross profit................... 1,285 3,432 5,983 6,743 3,028 7,272 14,111
-------- ------- ------- ------- ------- ------- -------
Operating expenses:
Development................ 790 1,164 2,317 3,864 1,145 4,159 4,380
Sales and marketing........ 241 829 815 1,902 795 2,264 4,225
General and administrative. 877 1,309 1,644 2,584 701 2,655 2,769
-------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 1,908 3,302 4,776 8,350 2,641 9,078 11,374
-------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.. (623) 130 1,207 (1,607) 387 (1,806) 2,737
Other income (expense)(2):..... (130) (255) (234) (826) (313) (965) (305)
Income (loss) before income taxes (753) (125) 973 (2,433) 74 (2,771) 2,432
Provision for income taxes..... -- -- (23) -- (2) (2) (160)
-------- ------- ------- ------- ------- -------- -------
Net income (loss).............. $ (753) $ (125) $ 950 $(2,433) $ 72 $(2,773) 2,272
======= ======= ======== =======
Accretion of preferred stock
dividends.................... (119) (151) (182)
-------- ------- -------
Net income available for common
stock........................ $ (872) $ (276) $ 768
======== ======= =======
Income per common share........ $ (0.16) $ (0.05) $ 0.10
======== ======= =======
Weighted average number of common
and common equivalent shares
outstanding.................. 5,292 5,673 7,796
======== ======= =======
Pro forma net income (loss) per
common share................... $ (0.19) $ 0.01 $ 0.16
======= ======= =======
Pro forma weighted average number
of common and common equivalent
shares outstanding(3).......... 12,662 13,162 14,434
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
-------------------------------------------- --------------------
1992 1993 1994 1995 1995 1996
-------- -------- ------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ................. $ 182 $ 192 $ 1,832 $ 539 $ 58 $ 27,901
Working capital (deficiency) .............. (1,030) (292) 1,715 (3,280) (1,967) 30,457
Total assets .............................. 2,390 3,396 9,181 10,214 11,055 41,766
Long-term obligations, less current portion 624 554 4,197 3,796 4,515 2,221
Redeemable convertible preferred stock .... 2,198 2,933 2,948 3,131 3,177 --
Stockholders' equity (deficiency) ......... (2,292) (2,132) (1,093) (3,564) (3,522) 33,599
</TABLE>
23
<PAGE> 24
(1) The Company changed its fiscal year end from September 30 to December 31,
effective with the fiscal year ending December 31, 1996.
(2) Consists principally of interest expense.
(3) Gives effect to the conversion of all previously outstanding shares of
Convertible Preferred Stock into 5,247,324 shares of Common Stock, as
effected on October 2, 1996 in connection with the Company's initial
public offering. The Company has never declared or paid any cash dividends
on its Common Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with "Item
6. Selected Financial Data" and "Item 8. Financial Statements and Supplementary
Data." The discussion in this Form 10-K contains forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Form 10-K should be read as being applicable to all related forward-looking
statements wherever they appear in this Form 10-K. The Company's actual results
could differ materially from those discussed herein. Factors that could cause
or contribute to such differences include those discussed in "Item 4A. Risk
Factors" as well as those discussed elsewhere herein.
Overview
Lightbridge develops, markets and supports a suite of integrated products
and services that enable wireless telecommunications carriers to improve their
customer acquisition and retention processes. The Company changed its fiscal
year end from September 30 to December 31, effective with the fiscal year ending
December 31, 1996. The financial statements for the period ended December 31,
1995 reflect the Company's results of operations for the three months then
ended. References to fiscal years are to years ended September 30, except that
references to fiscal 1996 are to the year ended December 31, 1996.
Lightbridge's total revenues increased by 323% from $7.0 million in fiscal
1993 to $29.6 million in fiscal 1996. This revenue increase has been driven
primarily by increases in volume of wireless customer qualification and
activation transactions processed for wireless carrier clients and in the
utilization of the Company's products and services by carriers. The Company's
revenues consist of transaction revenues and software and other revenues.
Historically, transaction revenues have accounted for substantially all of the
Company's revenues, although software and other revenues have increased during
recent periods primarily as a result of increased consulting services associated
with linking wireless carrier legacy and third-party systems to the Company's
systems and the initial licensing of certain software products. Software and
other revenues, which represented no more than 6.0% of total revenues in each of
fiscal 1993, 1994 and 1995, increased to 7.0% and 25.0% of total revenues in the
three months ended December 31, 1995 and fiscal 1996, respectively. There can be
no assurance that the Company's software products will achieve market acceptance
or that the mix of the Company's revenues will remain constant.
Lightbridge's transaction revenues are derived primarily from the
processing of applications of subscribers for wireless telecommunications
services and the activation of service for those subscribers. Over time, the
Company has expanded its offerings from credit evaluation services to include
screening for subscriber fraud, evaluating carriers' existing accounts,
interfacing with carrier and third-party systems, and providing teleservices
call center services. These services are provided pursuant to contracts with
carriers which specify the services to be utilized and the markets to be served.
Generally, the Company's clients are charged on a per transaction or, to a
lesser extent, on a per minute basis. Pricing varies depending primarily on the
volume of transactions, the type and number of other products and services
selected for integration with the services, and the term of the contract under
which services are provided. The volume of processed transactions varies
depending on seasonal and retail trends, the success of the carriers utilizing
the Company's services in attracting subscribers and the markets served by the
Company for its clients. Revenues are recognized in the period when the services
are performed.
24
<PAGE> 25
The Company's software and other revenues have been derived primarily from
developing customized software and providing Business Integration consulting
services. The Company also began licensing its Channel Solutions software with
the introduction of its POPS and Iris products in fiscal 1995 and its SAMS
software in 1996. Lightbridge's Channel Solutions products and services are
designed to assist clients in interfacing with the Company's systems and are
being marketed primarily to wireless telecommunications carriers that utilize
the Company's transaction processing services. The Company's Wireless
Intelligence products are being designed to help carriers analyze their
marketplace to improve their business operations. While its Channel Solutions
products are, and its Wireless Intelligence products are currently expected to
be, licensed as packaged software products, each of these products requires
customization and integration with other products and systems to varying
degrees. Revenues derived from consulting and other projects are recognized
throughout the performance period of the contracts. Revenues from licensing
software are recognized at the later of delivery of the licensed product or
satisfaction of acceptance criteria. Lightbridge's software and other revenues
depend primarily on the continuing need for integration of diverse systems and
acceptance of the Company's software products by the Company's existing and new
clients.
During fiscal 1994 and 1995 and the three months ended December 31, 1995,
each of the Company's four largest clients, and for fiscal 1996, each of the
Company's two largest clients, accounted for more than 10% of the Company's
total revenues, representing an aggregate of 64%, 63%, 61% and 44% of total
revenues in those periods, respectively. During fiscal 1996, GTE Mobile, which
accounted for 31% and 15% of the Company's revenues in the fiscal year ended
September 30, 1995 and the year ended December 31, 1996, respectively, changed
the way it accessed the Company's Customer Acquisition System. GTE Mobile, which
historically used the call center support solutions provided by the Company's
Teleservices Group, has changed to on-line access to the Customer Acquisition
System. As a result, the Company expects the revenues from this client to
decrease significantly in fiscal 1997. The Company currently believes that the
loss of revenues from this client will be mitigated by increased revenues from
existing clients and revenues from new clients. Further, the cost of processing
transactions through the Teleservices Group typically involves personnel costs
associated with staffing the Company's call center, which are not required for
on-line transaction processing. Thus, the Company currently expects that its
variable cost of revenues associated with processing transactions will decrease
as a result of the change in services used by the client. As a result, the
Company currently believes that the change in services used by this client will
not have a material adverse effect on its business, financial condition, results
of operations or cash flow. See "Item 1A. Risk Factors--Dependence on Limited
Number of Clients." The Company's revenues have been derived primarily from
sales of products and services in the United States.
Beginning in fiscal 1995, Lightbridge increased its sales and marketing
efforts to renew contracts with existing cellular carrier clients and to add new
wireless telecommunications carrier clients, including PCS service providers. In
addition, beginning in fiscal 1995, the Company increased its development
efforts to continue to enhance its existing software and to develop and acquire
new software products and services, including its Channel Solutions and Wireless
Intelligence software products and services. The Company currently intends to
continue to increase its development, sales and marketing efforts in pursuit of
these goals.
Prior to fiscal 1995, the Company's development activities were focused on
creating software for its outsourcing and service bureau operations. All
development costs related to these activities were expensed when incurred. In
fiscal 1995, Lightbridge began developing certain software products to be
licensed as separate products. In connection with these development efforts, the
Company acquired rights to certain pen-based technology for $400,000, which has
been incorporated in the Company's SAMS product, and certain multimedia software
technology, which has been incorporated in the Company's Iris product. The
multimedia technology was purchased for $45,000 in cash plus an obligation to
pay certain royalties. In fiscal 1995, the Company capitalized approximately
$980,000 of software costs representing the aggregate of internally developed
products and for the purchase of the aforementioned technology. Commencing with
the availability of the SAMS and Iris products for general release in fiscal
1995, capitalized software development costs are being amortized using the
straight-line method over a two-year period.
25
<PAGE> 26
Results of Operations
<TABLE>
The following table sets forth, for the periods indicated, certain
financial data as a percentage of total revenues:
<CAPTION>
Years Ended September Three Months Twelve
30, Ended Months Ended Year Ended
----------------------- December 31, December 31, December 31,
1994 1995 1995 1995 1996
---------- ---------- --------------- --------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Transaction...................... 96.3% 95.1% 93.0% 94.0% 75.0%
Software and other............... 3.7 4.9 7.0 6.0 25.0
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Cost of revenues...................... 55.3 65.2 53.5 64.3 52.2
----- ----- ----- ----- -----
Gross profit 44.7 34.8 46.5 35.7 47.8
----- ----- ----- ----- -----
Operating expenses:
Development...................... 17.3 20.0 17.6 20.4 14.8
Sales and marketing.............. 6.1 9.8 12.2 11.1 14.3
General and administrative....... 12.3 13.3 10.8 13.1 9.4
----- ----- ----- ----- -----
Total operating expenses.... 35.7 43.1 40.6 44.6 38.5
----- ----- ----- ----- -----
Income (loss) from operations......... 9.0 (8.3) 5.9 (8.9) 9.3
Other income (expense), net........... (1.7) (4.3) (4.8) (4.7) (1.1)
----- ----- ----- ----- -----
Income (loss) before income taxes..... 7.3 (12.6) 1.1 (13.6) 8.2
Provision for income taxes............ (0.2) -- -- -- (0.5)
----- ----- ----- ----- -----
Net income (loss)..................... 7.1% (12.6)% 1.1% (13.6)% 7.7%
===== ===== ===== ===== =====
</TABLE>
SUPPLEMENTAL DISCUSSION OF YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE TWELVE
MONTHS ENDED DECEMBER 31, 1995
Revenues
Total revenues increased by 45.2% to $29.5 million in the year ended
December 31, 1996 from $20.3 million in the twelve months ended December 31,
1995. Transaction revenues increased by 17.1% to $22.2 million in the year ended
December 31, 1996 from $18.9 million in the twelve months ended December 31,
1995, primarily due to increased volume of wireless customer qualification and
activation transactions processed for existing carrier clients and, to a lesser
extent, new carrier clients. Software and other revenues increased to $7.4
million in the year ended December 31, 1996 from $1.4 million in the twelve
months ended December 31, 1995. This increase was attributable to increased
consulting and customized software integration services provided to both
existing and new clients and revenues from the Company's Channel Solutions
products and services. The increase in revenues from consulting services and
customized software integration services in 1996 resulted primarily from
projects undertaken for one client, which projects the Company currently expects
will continue at least through the end of 1997.
Cost of revenues
Cost of revenues consists primarily of personnel costs, costs of
maintaining systems and networks used in processing subscriber qualification and
activation transactions (including depreciation and amortization of those
systems and networks) and amortization of capitalized software. Cost of revenues
may vary as a percentage of total revenues in the future as a result of a number
of factors, including changes in the mix of transaction revenues between
revenues from on-line transaction processing and revenues from processing
transactions through the
26
<PAGE> 27
Company's Teleservices Group and changes in the mix of total revenues between
transaction revenues and software and other revenues. Cost of revenues increased
by 18.0% to $15.4 million in the year ended December 31, 1996 from $13.1 million
in the twelve months ended December 31, 1995, while decreasing as a percentage
of total revenues to 52.2% from 64.3%. The dollar increase in costs resulted
principally from increases in transaction volume, costs attributable to
expansion of the Company's staff and systems capacity and amortization of
capitalized software. The decrease in cost of revenues as a percentage of total
revenues primarily reflected a higher percentage of transaction revenues from
on-line processing than teleservices operations, a higher percentage of revenues
from customized software integration services and software licenses and
increased utilization of the Company's operating and networking systems.
Development
Development expenses consist primarily of personnel and outside technical
services costs related to developing new products and services, enhancing
existing products and services, and implementing and maintaining new and
existing products and services. Development expenses also include software
development costs incurred prior to the establishment of technological
feasibility. Development expenses increased by 5.3% to $4.4 million in the year
ended December 31, 1996 from $4.2 million in the twelve months ended December
31, 1995, while decreasing as a percentage of total revenues to 14.8% from
20.4%. The dollar increase in costs resulted principally from the hiring of
additional personnel to support the continued enhancement of products and
services and the development of new products and services including customized
software integration services, as well as the initial two modules in the
Wireless Intelligence suite. The decrease in development expenses as a
percentage of total revenues reflected the significant growth in the Company's
total revenues. The Company did not capitalize any software development costs
during the year ended December 31, 1996 and capitalized $535,000 of internally
developed software development costs during the twelve months ended December 31,
1995.
The Company expects to increase its engineering and development efforts in
order to continue enhancing its existing products and services, including its
CAS, Wireless Intelligence, Business Integration and Channel Solutions products,
as well as to develop new products and services.
Sales and marketing
Sales and marketing expenses consist primarily of salaries, commissions and
travel expenses of direct sales and marketing personnel, as well as costs
associated with advertising, trade shows and conferences. Sales and marketing
expenses increased by 86.7% to $4.2 million in the year ended December 31, 1996
from $2.3 million in the twelve months ended December 31, 1995, and increased as
a percentage of total revenues to 14.3% from 11.1%. The increase in costs was
due to the addition of direct sales personnel, increased commissions resulting
from the higher level of revenues, the addition of marketing personnel and
increased use of marketing programs, including trade shows. The Company
continues to invest in sales and marketing efforts in order to increase
penetration of existing accounts and to add new clients and markets.
General and administrative
General and administrative expenses consist principally of salaries of
administrative, executive, finance and human resources personnel, as well as
outside professional fees. General and administrative expenses increased by 4.3%
to $2.8 million in the year ended December 31, 1996 from $2.7 million in the
twelve months ended December 31, 1995, and decreased as a percentage of total
revenues to 9.4% from 13.1%. The dollar increase in general and administrative
expenses resulted from the addition of general and administrative headcount and
other outside services, offset in part by a decrease in legal costs associated
with certain litigation settled in 1996.
27
<PAGE> 28
Other income (expense) net
Other expense consists of interest expense, commitment fees and other
similar fees payable with respect to the Company's bank line of credit,
subordinated notes and capital leases. Other expense (net) decreased 68.4% to
$305,000 in the year ended December 31, 1996 from $965,000 in the twelve months
ended December 31, 1995. Interest expense increased to $754,000 in the year
ended December 31, 1996 from $307,000 in the twelve months ended December 31,
1995. Interest income, which historically had not been significant, increased to
$422,000 in the year ended December 31, 1996 from $2,000 in the twelve months
ended December 31, 1995 as a result of the investment of proceeds received from
the issuance of Series D Convertible Preferred Stock in April 1996 and the
Company's initial public offering in September 1996.
Provision for income taxes
The income tax provision was $160,000 for the year ended December 31, 1996.
The Company had an effective tax rate of 6.6% for the year ended December 31,
1996, principally due to the application of net operating loss carryforwards
from previous years. The Company incurred a net loss for the twelve months ended
December 31, 1995 and did not record a benefit for income tax for the period. At
December 31, 1996, the Company had no remaining net operating loss carryforwards
for federal income tax purposes.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER 30, 1995
Revenues
Total revenues increased by 52.7% to $29.5 million in the year ended
December 31, 1996 from $19.4 million in the year ended September 30, 1995.
Transaction revenues increased by 20.4% to $22.2 million in the year ended
December 31, 1996 from $18.4 million in the year ended September 30, 1995,
primarily due to increased volume of wireless customer qualification and
activation transactions processed for existing carrier clients and, to a lesser
extent, new carrier clients. Software and other revenues increased to $7.4
million in the year ended December 31, 1996 from $0.9 million in the year ended
September 30, 1995. This increase was attributable to increased consulting and
customized software integration services provided to both existing and new
clients and revenues from the Company's Channel Solutions products and services.
The increase in revenues from customized software integration services in 1996
resulted primarily from projects undertaken for one client, which projects the
Company currently expects will continue at least through the end of 1997.
Cost of revenues
Cost of revenues increased by 22.4% to $15.4 million in the year ended
December 31, 1996 from $12.6 million in the year ended September 30, 1995, while
decreasing as a percentage of total revenues to 52.2% from 65.2%. The dollar
increase in costs resulted principally from increases in transaction volume,
costs attributable to expansion of the Company's staff and systems capacity and
amortization of capitalized software. The decrease in cost of revenues as a
percentage of total revenues primarily reflected a higher percentage of
transaction revenues from on-line processing than teleservices operations, a
higher percentage of revenues from customized software integration services and
software licenses and increased utilization of the Company's operating and
networking systems.
Development
Development expenses increased by 13.4% to $4.4 million in the year ended
December 31, 1996 from $3.9 million in the year ended September 30, 1995, while
decreasing as a percentage of total revenues to 14.8% from 20.0%. The increase
in dollar costs resulted principally from the hiring of additional personnel to
support the
28
<PAGE> 29
continued enhancement of products and services and the development of new
products and services including customized software integration services, as
well as the initial two modules in the Wireless Intelligence suite. The decrease
in development expenses as a percentage of total revenues reflected the
significant growth in the Company's total revenues. The Company did not
capitalize any software development costs during the year ended December 31,
1996 and capitalized $597,000 of internally developed software development costs
during the year ended September 30, 1995.
Sales and marketing
Sales and marketing expenses increased by 122.1% to $4.2 million in the
year ended December 31, 1996 from $1.9 million in the year ended September 30,
1995, and increased as a percentage of total revenues to 14.3% from 9.8%. The
increase in costs was due to the addition of direct sales personnel, increased
commissions resulting from the higher level of revenues, the addition of
marketing personnel and increased use of marketing programs, including trade
shows.
General and administrative
General and administrative expenses increased by 7.2% to $2.8 million in
the year ended December 31, 1996 from $2.6 million in the year ended September
30, 1995, and decreased as a percentage of total revenues to 9.4% from 13.4%.
The dollar increase in general and administrative expenses resulted from the
addition of general and administrative personnel and other outside services,
offset in part by a decrease in legal costs associated with certain litigation
which was settled in 1996.
Other income (expense) net
Other expense consists of interest expense, commitment fees and other
similar fees payable with respect to the Company's bank line of credit,
subordinated notes and capital leases. Other expense (net) decreased 63.1% to
$305,000 in the year ended December 31, 1996 from $826,000 in the year ended
September 30, 1995. Interest expense decreased by 12.7% to $754,000 in the year
ended December 31, 1996 from $864,000 in the year ended September 30, 1995.
Interest income, which historically had not been significant, increased to
$422,000 in the year ended December 31, 1996 from $38,000 in the year ended
September 30, 1995 as a result of the investment of proceeds received from the
issuance of Series D Convertible Preferred Stock in April 1996 and the Company's
initial public offering in September 1996.
Provision for income taxes
The income tax provision was $160,000 for the year ended December 31, 1996.
The Company had an effective tax rate of 6.6% for the year ended December 31,
1996, principally due to the application of net operating loss carryforwards
from previous years. The Company incurred a net loss for the year ended
September 30, 1995 and did not record a benefit for income tax for the period.
FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1994
Revenues
Total revenues increased by 44.4% to $19.4 million in fiscal 1995 from
$13.4 million in fiscal 1994. Transaction revenues increased by 42.6% to $18.4
million in fiscal 1995 from $12.9 million in fiscal 1994, principally from
increased volume of wireless customer qualification and activation transactions
processed for existing carrier
29
<PAGE> 30
clients. Software and other revenues increased by 92% to $948,000 in fiscal 1995
from $495,000 in fiscal 1994, primarily due to an increase in customized
software development for existing clients.
Cost of revenues
Cost of revenues increased by 70% to $12.6 million in fiscal 1995 from $7.4
million in fiscal 1994, and increased as a percentage of total revenues to 65.2%
from 55.3%. The increase in costs resulted primarily from increases in
transaction volume and increases in personnel costs attributable to the
Company's Teleservices Group and other business operations. In fiscal 1995, the
Company relocated its TeleServices Group to a larger facility, resulting in
increased facilities costs. The Company made significant investments in fiscal
1995 in its computing platform, as well as in increased networking and systems
capacity. The increase in cost of revenues as a percentage of total revenues
reflected continued investment in the Company's service delivery
infrastructure.
Development
Development expenses increased by 66.8% to $3.9 million in fiscal 1995 from
$2.3 million in fiscal 1994, and increased as a percentage of total revenues to
20% from 17.3%. The increase in costs was principally attributable to the hiring
of additional personnel to support the continued enhancement of the Company's
existing products and services and the development of new products and services,
including Channel Solutions and Wireless Intelligence products and services.
This increase was offset in part by the capitalization of $980,000 of software
development costs for internally developed products and for certain purchased
technology. The Company did not capitalize any software development costs in
fiscal 1994.
Sales and marketing
Sales and marketing expenses increased by 133.4% to $1.9 million in fiscal
1995 from $0.8 million in fiscal 1994, and increased as a percentage of total
revenues to 9.8% from 6.1%. The increase in costs was due principally to
increased commissions resulting from the higher level of transaction revenues,
an increase in sales and marketing personnel and an increase in recruiting,
training and other expenses related to the expansion of the Company's sales and
marketing organization. The increase was also attributable to the Company's
increased participation in trade shows and conferences and additional
advertising in trade publications.
General and administrative
General and administrative expenses increased by 57.2% to $2.6 million in
fiscal 1995 from $1.6 million in fiscal 1994, and increased as a percentage of
total revenues to 13.3% from 12.3%. The increase in costs was principally due to
hiring of additional personnel to support the Company's growth and, to a lesser
extent, legal costs associated with certain litigation settled in 1996.
Other income (expense), net
Interest expense increased by 252% to $864,000 in fiscal 1995 from $246,000
in fiscal 1994. This increase principally consisted of interest attributable to
the issuance of subordinated notes in August 1995, as well as a higher level of
borrowings for working capital purposes under the Company's bank line of credit.
In addition, interest on capital leases increased as the result of significant
investments in the Company's infrastructure, which were financed primarily
through the leasing of equipment accounted for as capital leases.
30
<PAGE> 31
Provision for income taxes
The Company recorded a net loss in fiscal 1995 and did not record a
provision for or benefit from income taxes. As a result of the Company's net
operating loss carryforwards from previous years, the provision for income taxes
in fiscal 1994 consisted of alternative minimum taxes.
Liquidity and Capital Resources
Prior to the initial public offering, the Company funded its operations
primarily through private placements of equity and debt securities, cash
generated from operations, bank borrowings and equipment financings.
In September 1996, the Company consummated an initial public offering in
which 4,370,000 shares of the Company's Common Stock ($.01 par value) were sold
at an initial public offering price of $10.00 per share. The total shares
consisted of 3,021,868 shares sold by the Company, and 1,348,132 shares sold by
selling shareholders. Proceeds to the Company, net of underwriters' discount and
associated costs, were approximately $27.1 million. These proceeds were used to
repay certain debt obligations of the Company, to repurchase certain shares of
the common stock of the Company and to fund working capital and other general
corporate purposes.
Prior to its initial public offering, the Company financed its operations
in part with the proceeds of four offerings of convertible preferred stock and
two offerings of subordinated debt. The Company sold shares of its Series A
Redeemable Convertible Preferred Stock in February 1991 for an aggregate
purchase price of $1.0 million, shares of its Series B Redeemable Convertible
Preferred Stock in December 1991 for an aggregate purchase price of $1.1 million
and shares of its Series C Redeemable Convertible Preferred Stock in June, July
and August of 1993 for an aggregate purchase price of $0.6 million. In August
1994, the Company sold $2.1 million in principal amount of its 8% subordinated
notes, together with warrants exercisable to purchase up to 525,000 shares of
Common Stock. In August 1995, the Company sold $1.2 million in principal amount
of its 16% subordinated notes, together with warrants exercisable to purchase up
to 287,750 shares of Common Stock. The Company sold shares of its Series D
Preferred Stock in April 1996 for an aggregate purchase price of $6.0 million. A
portion of the proceeds of the Series D Preferred Stock was applied to repay the
16% subordinated notes.
The Company's capital expenditures in the years ended September 30, 1994
and 1995, the three months ended December 31, 1995 and the year ended December
31, 1996 aggregated $3.6 million, $3.7 million, $0.3 million and $2.5 million,
respectively. The capital expenditures consisted of purchases of fixed assets,
principally for the Company's services delivery infrastructure, and teleservices
call center and computer equipment for development activities. The Company
leases its facilities and certain equipment under non-cancelable capital and
operating lease agreements that expire at various dates through December 2000.
The Company has a $4.0 million working capital line of credit and a $2.0
million equipment line of credit with Silicon Valley Bank (the "Bank"). The
working capital line of credit is secured by a pledge of the Company's accounts
receivable, equipment and intangible assets, and borrowing availability is based
on the amount of qualifying accounts receivable. Advances under the working
capital line of credit bear interest at the Bank's prime rate plus .25% (8.50%
at December 31, 1996) and advances under the equipment line of credit bear
interest at the Bank's prime rate plus .75% (9.0% at December 31, 1996). At
December 31, 1996, there were no borrowings outstanding under the working
capital line of credit and borrowings of $763,000 were outstanding under the
equipment line of credit. The agreements contain covenants that, among other
things, prohibit the declaration or payment of dividends and require the Company
to maintain certain financial ratios which the Company believes are not
restrictive to the business operations. The working capital line of credit
expires in June 1997, and the equipment line of credit expires in June 1999.
On March 5, 1997 the Company entered into an amended credit agreement to
provide for the issuance of letters of credit. Outstanding letters of credit
reduce the amount the Company may borrow under the current credit agreement and
are limited to $1,250,000 in the aggregate.
31
<PAGE> 32
As of December 31, 1996, the Company had cash and cash equivalents of $27.9
million and working capital of $30.5 million. The Company believes that the
current cash balances and funds available under existing lines of credit, will
be sufficient to finance the Company's operations and capital expenditures for
at least the next twelve months.
In the normal course of business, the Company evaluates acquisitions or
investments in companies, technologies or assets that complement the Company's
business. The Company is not currently involved in negotiations with respect to,
and has no agreement or understanding regarding, any such acquisition or
investment.
Inflation
Although certain of the Company's expenses increase with general inflation
in the economy, inflation has not had a material impact on the Company's
financial results to date.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128), which will be effective for fiscal 1997. SFAS No. 128 will require
the Company to restate amounts previously reported as earnings per share to
comply with the requirements of SFAS No. 128; while the Company is in the
process of evaluating the impact of SFAS No. 128, it does not expect that
adoption will have a dilutive effect on previously reported earnings per share.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are listed in the index included in
Item 14(a)(1) of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information called for by this Item is not applicable.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors
Certain of the information concerning the Directors of the Company required
under this item is contained in "Item 4A. Executive Officers," and the remainder
of such information is incorporated herein by reference to the information under
the heading "Election of Directors" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997.
Executive Officers
Certain of the information concerning the executive officers of the Company
required under this item is contained in "Item 4A. Executive Officers," and the
remainder of such information is incorporated herein by reference to the
information under the heading "Election of Directors" in the Company's Proxy
Statement for the
32
<PAGE> 33
1997 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 30, 1997.
ITEM 11. EXECUTIVE COMPENSATION
Information under the heading "Election of Directors" and "Executive
Compensation" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 30, 1997 is incorporated by reference herein. Such incorporation by
reference shall not be deemed to specifically incorporate by reference the
information referred to in Item 402(a)(8) of Regulation S-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information under the heading "Share Ownership of Principal Stockholders
and Management" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 30, 1997 is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information under the heading "Certain Relationships and Other
Transactions" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission on or
before April 30, 1997 is incorporated by reference herein.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) Documents filed as part of this report
(1) Financial Statements
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended
September 30, 1994 and 1995, the three months ended December
31, 1995, and the year ended December 31, 1996
Consolidated Statements of Stockholders' Equity (Deficiency) for
the years ended September 30, 1994 and 1995, the three
months ended December 31, 1995, and the year ended December
31, 1996
Consolidated Statements of Cash Flows for the years ended
September 30, 1994 and 1995, the three months ended December
31, 1995, and the year ended December 31, 1996
Notes to Consolidated Financial Statements
(2) Consolidated financial statement schedules of Lightbridge, Inc.
All schedules have been omitted because the required information
either is not applicable or is shown in the financial statements
or notes thereto.
33
<PAGE> 34
(3) Exhibits
Exhibit No. Description
----------- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen certificate for the Common Stock of the Company
10.1* 1991 Registration Rights Agreement dated February 11,
1991, as amended, between the Company and the persons
named herein
10.2* Subordinated Note and Warrant Purchase Agreement dated as
of August 29, 1994 between the Company and the Purchasers
named therein, including form of Subordinated 14%
Promissory Notes and form of Common Stock Purchase
Warrants
10.3* Form of Common Stock Purchase Warrants issued August 1995
10.4* Amended and Restated Credit Agreement dated as of
June 18, 1996, between the Company and Silicon Valley
Bank
10.5* Settlement Agreement dated February 2, 1996 between the
Company, BEB, Inc., BEB Limited Partnership I, BEB
Limited Partnership II, BEB Limited Partnership III, BEB
Limited Partnership IV, certain related parties and Brian
Boyle
10.6* 1990 Incentive and Nonqualified Stock Option Plan
10.7* 1996 Incentive and Non-Qualified Stock Option Plan
10.8* 1996 Employee Stock Purchase Plan
10.9* Office Lease dated September 21, 1993, as amended,
between the Company and L&E Investment of Massachusetts
One, Inc.
10.10* Office Lease dated September 30, 1994, as amended,
between the Company and Hobbs Brook Office Park
10.11* Employment Agreement dated August 16, 1996 between the
Company and Pamela D.A. Reeve
10.12* Office Lease dated August 5, 1994, as amended, between
the Company and L&E Investment of Massachusetts One, Inc.
10.13* Letter Agreement, dated August 26, 1996, between the
Company and Brian E. Boyle, including form of Common
Stock Purchase Warrant and Registration Rights Agreement
10.14 Office Lease dated March 15, 1997, between the Company
and Sumitomo Life Realty (N.Y.), Inc.
11.1 Statement re computation of per share earnings
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule for fiscal year ended
December 31, 1996
Each exhibit marked by an (*) is incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-6589) in the form in which it
was declared effective by the Securities and Exchange Commission on September
27, 1996.
(b) Reports on Form 8-K filed in the fourth quarter of 1996
None.
34
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 25th day of
March, 1997.
LIGHTBRIDGE, INC.
By: ________________________
Pamela D. A. Reeve
President, Chief Executive
Officer and Director
Each person whose signature appears below hereby appoints Pamela D.A.
Reeve, William G. Brown and John D. Patterson, Jr. and each of them severally,
acting alone and without the other, his/her true and lawful attorney-in-fact
with the authority to execute in the name of each such person, and to file with
the Securities and Exchange Commission, together with any exhibits thereto and
other documents therewith, any and all amendments to this Annual Report on Form
10-K necessary or advisable to enable the Registrant to comply with the rules,
regulations, and requirements of the Securities Act of 1934, as amended, in
respect thereof, which amendments may make such other changes in the Annual
Report as the aforesaid attorney-in-fact executing the same deems appropriate.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated on the 25th day of March, 1997.
/s/ Pamela D. A. Reeve
- --------------------------- President, Chief Executive Officer and Director
Pamela D. A. Reeve (Principal Executive Officer)
/s/ William G. Brown
- --------------------------- Chief Financial Officer, Vice President of Finance
William G. Brown and Administration and Treasurer (Principal
Financial and Accounting Officer)
/s/ Andrew I. Fillat
- --------------------------- Director
Andrew I. Fillat
/s/ Torrence C. Harder
- --------------------------- Director
Torrence C. Harder
/s/ Douglas A. Kingsley
- --------------------------- Director
Douglas A. Kingsley
/s/ D. Quinn Mills
- --------------------------- Director
D. Quinn Mills
35
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Lightbridge, Inc.
Waltham, Massachusetts
We have audited the accompanying consolidated balance sheets of
Lightbridge, Inc. and subsidiary as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity
(deficiency), and cash flows for the years ended September 30, 1994 and 1995,
the three months ended December 31, 1995, and the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Companies at December 31,
1995 and 1996, and the results of their operations and their cash flows for the
years ended September 30, 1994 and 1995, the three months ended December 31,
1995, and the year ended December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 4, 1997 (Except for Note 2 "Recent Accounting Pronouncement," and
Note 4, as to which the dates are March 5, 1997)
F-1
<PAGE> 37
LIGHTBRIDGE, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1996
---- ----
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................................... $ 58,064 $27,900,802
Accounts receivable-net............................................ 4,578,143 7,249,106
Accounts receivable from related parties........................... 149,894 281,703
Other current assets............................................... 144,294 970,735
----------- -----------
Total current assets..................................... 4,930,395 36,402,346
Property and equipment-net............................................ 4,881,655 4,271,880
Capitalized software development costs-net............................ 762,084 355,838
Deposits............................................................... 225,807 150,731
Note receivable from related party..................................... -- 55,210
Other assets........................................................... 254,625 529,650
----------- -----------
Total assets............................................. $11,054,566 $41,765,655
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
-------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses.............................. $ 3,025,038 $ 3,216,968
Short-term borrowings and current portion of subordinated notes
payable........................................................ 1,500,000 555,205
Current portion of obligations under capital leases................ 2,073,895 1,533,899
Deferred revenues.................................................. 74,800 422,875
Dividends payable on redeemable convertible preferred stock........ 166,876 166,876
Related parties:
Interest payable................................................ 44,096 37,453
Current portion of subordinated notes payable................... -- 12,500
----------- -----------
Total current liabilities................................ 6,884,705 5,945,776
Obligations under capital leases....................................... 1,502,128 100,301
Subordinated notes payable:
Unaffiliated parties............................................... 2,848,837 2,041,515
Related parties.................................................... 164,298 79,420
----------- -----------
Total liabilities........................................ 11,399,968 8,167,012
----------- -----------
Commitments and contingencies (Note 5)
Redeemable convertible preferred stock at redemption value
(liquidation preference of $3,343,494 at December 31, 1995)........ 3,176,618 --
----------- -----------
Stockholders' equity (deficiency):
Preferred stock; $.01 par value, 0 and 500,000 shares authorized, no
shares issued or outstanding at December 31, 1995 and 1996,
respectively................................................... -- --
Common stock, $.01 par value; 60,000,000 shares authorized;
6,575,098 and 15,369,697 shares issued; 6,573,950 and
14,568,549 shares outstanding at December 31, 1995 and 1996,
respectively................................................... 65,751 153,698
Additional paid-in capital......................................... -- 36,296,969
Warrants........................................................... 406,375 605,125
Accumulated deficit................................................ (3,993,572) (1,921,075)
----------- -----------
Total.................................................... (3,521,446) 35,134,717
Less treasury stock, at cost....................................... (574) (1,536,074)
----------- -----------
Total stockholders' equity (deficiency).................. (3,522,020) 33,598,643
----------- -----------
Total liabilities and stockholders' equity (deficiency).. $11,054,566 $41,765,655
=========== ===========
</TABLE>
See notes to consolidated financial statements
F-2
<PAGE> 38
LIGHTBRIDGE, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
---------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Transaction revenues (Includes
sales to a related party of
$104,278, $59,017, $10,644
and $3,125, respectively).... $12,902,142 $18,403,464 $6,053,688 $22,158,773
Software and other revenues.... 495,721 947,003 458,362 7,386,079
----------- ----------- ---------- -----------
Total revenues................. 13,397,863 19,350,467 6,512,050 29,544,852
Cost of revenues............... 7,415,356 12,607,879 3,484,175 15,433,548
----------- ----------- ---------- -----------
Gross profit................... 5,982,507 6,742,588 3,027,875 14,111,304
----------- ----------- ---------- -----------
Operating Expenses:
Development................ 2,317,454 3,864,000 1,144,973 4,380,293
Sales and marketing........ 814,891 1,901,716 794,687 4,225,302
General and administrative. 1,643,496 2,583,912 700,640 2,768,424
----------- ----------- ---------- -----------
Total operating expenses....... 4,775,841 8,349,628 2,640,300 11,374,019
----------- ----------- ---------- -----------
Income (loss) from operations.. 1,206,666 (1,607,040) 387,575 2,737,285
Other income (expense):
Interest income:
Related parties......... 12,604 8,688 1,551 4,807
Other................... 9,384 29,006 510 416,801
Interest expense:
Related parties......... (20,753) (39,276) (11,657) (89,142)
Other................... (224,927) (824,292) (295,454) (664,481)
Other nonoperating income
(expense)................ (9,802) -- (7,920) 26,727
----------- ----------- ---------- -----------
Income (loss) before provision
for income taxes............. 973,172 (2,432,914) 74,605 2,431,997
Provision for income taxes..... 22,900 -- 2,400 159,500
----------- ----------- ---------- -----------
Net income (loss).............. $ 950,272 $(2,432,914) $ 72,205 $ 2,272,497
=========== ========== ===========
Accretion of preferred stock (182,544)
dividends.................... -----------
Net income available for common
stock........................ $ 767,728
===========
Net income per common share.... $ 0.10
===========
Weighted average number of common
and common equivalent shares
outstanding.................. 7,796,000
===========
Pro forma net income (loss) per
common share................. $ (0.19) $ 0.01 $ 0.16
=========== ========== ===========
Pro forma weighted average number
of common and common equivalent
shares outstanding........... 12,661,576 13,161,680 14,433,722
=========== ========== ==========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE> 39
LIGHTBRIDGE, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<CAPTION>
TOTAL
ADDITIONAL STOCKHOLDERS'
COMMON STOCK TREASURY STOCK PAID-IN ACCUMULATED EQUITY
------------------------------------------- CAPITAL WARRANTS DEFICIT (DEFICIENCY)
SHARES AMOUNT SHARES AMOUNT --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, October 1, 1993....... 6,412,132 $ 64,121 -- $ -- $ 274,284 $ -- $(2,457,177) $(2,118,772)
Issuance of common stock
for cash...................... 86,100 861 -- -- 8,263 -- -- 9,124
Issuance of stock purchase
warrants...................... -- -- -- -- -- 262,500 -- 262,500
Dividends on redeemable
convertible preferred
stock........................ -- -- -- -- (182,544) -- -- (182,544)
Net income..................... -- -- -- -- -- -- 950,272 950,272
---------- -------- -------- ----------- ----------- -------- ----------- -----------
Balance, September 30, 1994.... 6,498,232 64,982 -- -- 100,003 262,500 (1,506,905) (1,079,420)
Issuance of common stock
for cash...................... 2,516 25 -- -- 142 -- -- 167
Issuance of stock purchase
warrants...................... -- -- -- -- -- 143,875 -- 143,875
Dividends on redeemable
convertible preferred
stock....................... -- -- -- -- (100,145) -- (82,399) (182,544)
Repurchase of common stock for
cash........................ -- -- 1,148 (574) -- -- -- (574)
Net loss....................... -- -- -- -- -- -- (2,432,914) (2,432,914)
---------- -------- -------- ----------- ----------- -------- ----------- -----------
Balance, September 30, 1995.... 6,500,748 65,007 1,148 (574) -- 406,375 (4,022,218) (3,551,410)
Issuance of common stock
for cash...................... 74,350 744 -- -- 2,076 -- -- 2,820
Dividends on redeemable
convertible preferred
stock....................... -- -- -- -- (2,076) -- (43,559) (45,635)
Net income..................... -- -- -- -- -- -- 72,205 72,205
---------- -------- -------- ----------- ----------- -------- ----------- -----------
Balance, December 31, 1995..... 6,575,098 65,751 1,148 (574) -- 406,375 (3,993,572) (3,522,020)
Issuance of common stock
for cash...................... 115,120 1,152 -- -- 156,420 -- -- 157,572
Exercise of common stock
warrants...................... 410,287 4,103 -- -- 27,147 (31,250) -- --
Repurchase of common stock for
cash.......................... -- -- 800,000 (1,535,500) -- -- -- (1,535,500)
Dividends on redeemable
convertible preferred
stock....................... -- -- -- -- (136,905) -- -- (136,905)
Expenses paid on behalf of
stockholder................. -- -- -- -- -- -- (200,000) (200,000)
Issuance of common stock, net of
issuance costs.............. 3,021,868 30,219 -- -- 27,030,857 -- -- 27,061,076
Conversion of preferred stock to
common stock................ 5,247,324 52,473 -- -- 9,219,450 -- -- 9,271,923
Compensation cost of issuance of
warrant..................... -- -- -- -- -- 230,000 -- 230,000
Net income..................... -- -- -- -- -- -- 2,272,497 2,272,497
---------- -------- -------- ----------- ----------- -------- ----------- -----------
Balance, December 31, 1996..... 15,369,697 $153,698 801,148 $(1,536,074) $36,296,969 $605,125 $(1,921,075) $33,598,643
========== ======== ======== =========== =========== ======== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 40
LIGHTBRIDGE, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
--------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ -------------- ------------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) .................... $ 950,272 $(2,432,914) $ 72,205 $ 2,272,497
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........ 1,000,057 2,567,767 864,192 3,557,699
Amortization of discount on notes .... 4,219 76,500 87,853 63,975
Compensation expense related to
warrant grant ...................... -- -- -- 230,000
Changes in assets and liabilities:
Accounts receivable ................ (1,278,988) (77,307) (1,840,094) (2,802,772)
Other assets ....................... (269,299) (173,594) (30,014) (731,600)
Accounts payable and accrued
liabilities ...................... 341,878 935,172 725,504 185,287
Deferred revenues .................. (254,721) 167,536 (153,850) 348,075
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities ............. 493,418 1,063,160 (274,204) 3,123,161
----------- ----------- ----------- -----------
Cash flows used in investing activities:
Purchases of property and equipment (339,223) (1,391,679) (184,186) (2,339,797)
Capitalization of software costs ... -- (980,453) -- --
Other assets ....................... -- -- -- (350,000)
----------- ----------- ----------- -----------
Net cash used in investing
activities...................... (339,223) (2,372,132) (184,186) (2,689,797)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable and
warrants.......................... 2,350,000 1,901,000 500,000 --
Proceeds from equipment line
borrowings........................ -- -- -- 763,013
Payments on notes payable .......... (50,000) -- -- (2,651,000)
Payments under capital lease
obligations....................... (823,085) (1,884,512) (525,391) (2,144,187)
Proceeds from initial public
offering ......................... -- -- -- 27,061,076
Proceeds from issuance of common
stock............................. 9,124 167 2,820 157,572
Payments toward the purchase of
treasury stock ................... -- (574) -- (1,535,500)
Expenses paid on behalf of
stockholder ...................... -- -- -- (200,000)
Proceeds from issuance of mandatory
redeemable convertible preferred
stock, net ....................... -- -- -- 5,958,400
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities ........... 1,486,039 16,081 (22,571) 27,409,374
----------- ----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents .................... 1,640,234 (1,292,891) (480,961) 27,842,738
Cash and cash equivalents, beginning
of period .......................... 191,682 1,831,916 539,025 58,064
----------- ----------- ----------- -----------
Cash and cash equivalents, end of
period ................................. $ 1,831,916 $ 539,025 $ 58,064 $27,900,802
=========== =========== =========== ===========
Cash paid for interest ................. $ 283,272 $ 904,605 $ 176,271 $ 836,869
=========== =========== =========== ===========
Cash paid for income taxes ............. $ 5,300 $ 25,000 $ 15,700 $ 87,413
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 41
LIGHTBRIDGE, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND TECHNOLOGY ACQUISITIONS
Business--Lightbridge, Inc. (formerly Credit Technologies, Inc.) (the
"Company") was incorporated in June 1989 under the laws of the state of
Delaware. Effective November 1, 1994, the Company changed its name and
reincorporated as Lightbridge, Inc. During 1995, the Board of Directors passed a
resolution to change the Company's fiscal year end to December 31. The Company
develops and markets customer acquisition solutions for the wireless
telecommunications industry. In September 1996, the Company organized a wholly
owned subsidiary, Lightbridge Security Corporation, as a Massachusetts
securities corporation for tax purposes, to buy, hold and sell securities.
In September 1996, the Company completed an initial public offering (the
"IPO") whereby 3,021,868 shares of its Common Stock ($.01 par value) were sold
by the Company, 778,132 shares by selling shareholders and 570,000 additional
shares sold by selling shareholders pursuant to the exercise of the
over-allotment option by the underwriters at $10.00 per share. The net proceeds
of the IPO, after deducting underwriters' commissions and fees and offering
costs, were approximately $27.1 million. These proceeds were used to repay
certain debt obligations of the Company, to repurchase certain shares of the
common stock of the Company and to fund working capital and other general
corporate purposes.
Technology Acquisitions--During the year ended September 30, 1995, the
Company completed the following technology acquisitions:
o In November 1994, the Company purchased the technology for a pen-based
software product for $400,000.
o In February 1995, the Company purchased the software technology for a
multimedia kiosk for $45,000. The Company is also obligated to make
royalty payments to the former owners based on future sales of the
product.
The costs associated with these acquisitions were recorded as capitalized
software costs, since such products had reached technological feasibility at the
date of acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation--These consolidated
financial statements include the accounts of the Company and its subsidiary. All
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents--Cash and cash equivalents include short-term,
highly liquid instruments, which consist primarily of money market accounts,
purchased with remaining maturities of three months or less.
Property and Equipment--Property and equipment is recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the respective assets ranging from three to seven years.
Leasehold improvements are amortized over the term of the lease or the lives of
the assets, whichever is shorter.
Revenue Recognition and Concentration of Credit Risk--Revenues from
processing of qualification and activation transactions for wireless
telecommunications carriers are recognized in the period when services are
performed. Revenues derived from software implementation projects are recognized
throughout the performance period of the contracts. Revenues arising from the
prepayment of fees or from licensing agreements where the Company has continuing
vendor obligations are deferred.
F-6
<PAGE> 42
Substantially all of the Company's customers are providers of wireless
telephone service and are generally granted credit without collateral. The
Company's revenues vary throughout the year with the period of highest revenue
generally occurring during the period October 1 through December 31. The
allowance for doubtful accounts at September 30, 1994 and 1995 and at December
31, 1995 and 1996 was $25,000, $9,000, $22,200 and $18,000, respectively. The
Company recorded bad debt expense of $25,000, $0, $13,200 and $0 and had
write-offs, net of recoveries associated with accounts receivable of $0,
$16,000, $0 and $4,200 for the years ended September 30, 1994, 1995, the three
months ended December 31, 1995 and the year ended December 31, 1996.
<TABLE>
Customers exceeding 10% of the Company's revenues during the years ended
September 30, 1994 and 1995, the three months ended December 31, 1995, and the
year ended December 31, 1996 are as follows:
<CAPTION>
PERCENT OF REVENUES
-----------------------------------------------------------
YEARS ENDED THREE MONTHS
SEPTEMBER 30, ENDED YEAR ENDED
-------------------- DECEMBER 31, DECEMBER 31,
CUSTOMER 1994 1995 1995 1996
- -------- ------- -------- ---------------- ---------------
<S> <C> <C> <C> <C>
A...................... 32% 31% 22% 15%
B...................... 12 11 18 29
C...................... 10 * * *
D...................... 10 11 10 *
E...................... * 10 11 *
------- -------- ---------------- ---------------
64% 63% 61% 44%
======= ======== ================ ===============
<FN>
* For periods in which a customer represented less than 10% of revenues,
such customer's percent of revenue for that period is not presented.
</TABLE>
Income Taxes--The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of existing assets and
liabilities. Deferred income tax assets are principally the result of net
operating loss carryforwards and differences in depreciation and amortization
for financial statement purposes and income tax purposes, and are recognized to
the extent realization of such benefits is more likely than not.
Software Development Costs--Software development costs are capitalized
after establishment of technological feasibility as provided for under SFAS No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed."
During the year ended September 30, 1995, the Company capitalized
approximately $980,400 of software development costs associated with the
development of two new products, including the costs of purchasing certain
technology (see Note 1). Capitalized software development costs are being
amortized to cost of revenues using the straight-line method over 24 months
which results in the highest levels of amortization. Accumulated amortization
was approximately $218,000 and $625,000 at December 31, 1995 and 1996,
respectively.
Development Costs--Development costs, which consist of research into and
development of new products and services, are expensed as incurred, except costs
which may be subject to capitalization under the provisions of SFAS No. 86.
<TABLE>
Supplemental Cash Flow Information--The Company entered into the following
noncash transactions:
<CAPTION>
YEARS ENDED THREE MONTHS
SEPTEMBER 30, ENDED YEAR ENDED
----------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Capital lease obligations
incurred For the acquisition
of equipment..................... $3,256,900 $2,268,605 $118,057 $202,364
========== ========== ======== ========
</TABLE>
In both April and September of 1996, the Company reacquired 200,000 shares
of its common stock from a former director. These repurchases were partially
financed through the issuance of two separate 8% notes payable in the amount of
$226,667 and $260,000. Such notes were repaid during 1996.
F-7
<PAGE> 43
Pro Forma Income (Loss) Per Common Share--Pro forma income (loss) per
common share is based on the weighted average number of common and dilutive
common equivalent shares (common stock options and warrants) outstanding and
assumes that all series of redeemable convertible preferred stock had been
converted to common stock for all pro forma periods presented. Common equivalent
shares are not included in the per share calculations where the effect of their
inclusion would be anti-dilutive, except in accordance with the requirements of
Securities and Exchange Commission Staff Accounting Bulletin No. 83. That
Bulletin requires all common shares issued and options or warrants to purchase
common stock granted by the Company during the twelve-month period prior to the
filing of a proposed initial public offering be included in the calculation as
if they were outstanding for all periods. For purposes of applying the Bulletin,
the Company has used the initial public offering price of $10 per share.
<TABLE>
Historical income (loss) per share, which includes the conversion of the
redeemable convertible preferred stock on the actual date of conversion, was as
follows:
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1995 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Net Income (loss) ................ $(2,432,914) $ 72,205 $ 2,272,497
Accretion of preferred dividends . (182,544) (45,635) (136,905)
----------- ----------- -----------
Net income (loss) available for
common stock .................. $(2,615,458) $ 26,570 $ 2,135,592
=========== =========== ===========
Net income (loss) per common
share.......................... $ (0.35) -- $ .23
=========== =========== ===========
Weighted average number of common
and common equivalent shares
outstanding ................... 7,414,252 7,914,356 9,185,274
=========== =========== ===========
</TABLE>
Fair Value of Financial Instruments--In the opinion of management, the
estimated fair value of the Company's financial instruments, which include cash
equivalents, accounts receivable and long-term debt, approximates their carrying
value.
Impairment of Long-Lived Assets--In March 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of." SFAS No. 121 addresses the accounting for the impairment of
long-lived assets, certain identifiable intangibles and goodwill when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The adoption of SFAS No. 121 in 1996 did not
have a material impact on the Company's results of operations, financial
position or cash flows.
Stock-Based Compensation--In November 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
financial accounting and reporting standards for stock-based compensation
plans and permits an entity to either record the effects of stock-based
employee compensation plans in its financial statements or present pro
forma disclosures in the notes to the financial statements. Compensation
expense associated with awards to non-employees is required to be measured
using a fair value method. In connection with the adoption of SFAS No. 123
during 1996, the Company elected to provide the appropriate disclosures in
the notes to the financial statements for employee compensation plans.
Since the Company does not expect to make significant equity awards to
outsiders in the future, adoption of SFAS No. 123 is not expected to
impact the Company's future consolidated results of operations, financial
position or cash flows.
Recent Accounting Pronouncement--
Earnings Per Share--In February 1997, the FASB released SFAS No. 128,
"Earnings Per Share," which will be effective for fiscal 1997. SFAS No. 128
will require the Company to restate amounts previously reported as earnings
per share to comply with the requirements of SFAS No. 128; while the
Company is in the process of evaluating the impact of SFAS No. 128, it
does not expect that adoption will have a dilutive effect on previously
reported earnings per share.
F-8
<PAGE> 44
Significant Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates. These estimates include provisions
for bad debts, certain accrued liabilities, recognition of revenue and
expenses, and recoverability of deferred tax assets. These estimates could
change; however, the Company does not expect any changes in the near term
that would have a significant impact on the financial statements.
Stock Split--On June 14, 1996, the Board of Directors authorized a two
for one stock split effective on July 15, 1996. All shares and per share
information included in the financial statements has been restated to
reflect this stock split. In addition, during 1996, the number of shares of
authorized common stock was increased to 60,000,000.
Reclassifications--Certain reclassifications have been made to the
1994 and 1995 financial statements to conform with the 1996 presentation.
3. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consisted of the following:
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996
------------- ------------
<S> <C> <C>
Furniture and fixtures .......... $ 117,876 $ 261,379
Leasehold improvements .......... 867,726 776,634
Computer equipment .............. 1,161,052 2,603,936
Computer equipment under capital
leases ..................... 6,972,938 5,846,954
Computer software ............... 829,436 953,602
------------ ------------
9,949,028 10,442,505
Less accumulated depreciation and
amortization ............... (5,067,373) (6,170,625)
------------ ------------
Property and equipment--net ..... $ 4,881,655 $ 4,271,880
============ ============
</TABLE>
Accumulated amortization of equipment under capital leases was $3,606,915
and $4,400,628 at December 31, 1995 and 1996, respectively.
4. NOTES PAYABLE
<TABLE>
The carrying value of notes payable consisted of the following:
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------------- -------------------------
HELD BY HELD BY HELD BY HELD BY
RELATED UNAFFILIATED RELATED UNAFFILIATED
PARTIES PARTIES PARTIES PARTIES
--------- ------------ --------- -------------
<S> <C> <C> <C> <C>
Line-of-credit/demand note
borrowings....................... $ -- $1,500,000 $ -- $ --
Equipment line borrowings........... -- -- -- 763,013
8% subordinated notes............... 90,045 1,798,549 91,920 1,833,707
16% subordinated notes.............. 74,253 1,050,288 -- --
--------- ----------- ------- ----------
Total............................... 164,298 4,348,837 91,920 2,596,720
Less current portion................ -- 1,500,000 12,500 555,205
--------- ----------- ------- ----------
Long-term portion................... $164,298 $2,848,837 $79,420 $2,041,515
======== =========== ======= ==========
</TABLE>
F-9
<PAGE> 45
Line of Credit--Prior to 1996, the Company had a line of credit agreement
with a bank (the "Bank Agreement") which permitted the Company to borrow up to
$2,000,000 ($1,000,000 during 1994) subject to certain borrowing formulae
established by the bank. Interest based on prime plus .5% was charged on any
outstanding borrowings. In December 1995, the Bank Agreement was amended to
reduce the amount of permitted borrowings to $1,500,000 and the outstanding
borrowings under the Bank Agreement, $1,500,000, were converted to a demand note
due in March 1996 (the "Demand Note Agreement"). The weighted average annual
interest rate for outstanding borrowings during the years ended September 30,
1994 and 1995 and the three months ended December 31, 1995 approximated 9.75%,
9.9% and 9.5%, respectively.
During 1996, the Company converted the existing demand note agreement (the
"Amended Bank Agreement") to a line of credit which increased the maximum
borrowing limit to $4,000,000, subject to a borrowing base formula, decreased
the interest rate to prime plus .25% and extended the agreement to June 1997.
The weighted average annual interest rate on outstanding borrowings during 1996
was 9.4%. The Amended Bank Agreement contains certain restrictions which, among
others, limits the Company's ability to pay cash dividends and requires the
Company to achieve defined levels of quarterly earnings and tangible net worth,
as well as meeting defined ratios of senior liabilities to net worth and quick
assets. Borrowings under the Amended Bank Agreement are collateralized by the
Company's accounts receivable, equipment and intangible assets.
The Amended Credit Agreement was further amended on March 5, 1997 to
provide for the issuance of letters of credit. Outstanding letters of credit
reduce the amount the Company may borrow under the Amended Credit Agreement and
are limited to $1,250,000 in the aggregate.
Line of Credit-Equipment--The Company has a $2,000,000 line of credit
available for equipment purchases (the "Equipment Line"). Borrowings under the
Equipment Line are payable in 30 monthly installments of principal and interest
commencing January, 1997 and ending June, 1999. Interest on the Equipment Line
is payable at prime plus .75%. The weighted average annual interest rate for
outstanding borrowings under the Equipment Line during the year ended December
31, 1996 approximated 8.78%.
16% Subordinated Notes--In August 1995, the Company issued $1,151,000 of
16% subordinated notes to certain holders of the Company's redeemable preferred
stock, with immediately exercisable warrants for the purchase of 287,750 shares
of the Company's common stock. Interest on the notes was accrued monthly, and
principal and accrued interest were payable on January 31, 1996. Such repayment
obligations were extended by the note holders until the Company completed the
placement of its Series D Preferred Stock on April 4, 1996 (See Note 6). The
warrants are exercisable through June 30, 2001 at a price of $2 per share and
have been appraised and recorded at an aggregate market value of $143,875. The
related discount on the subordinated note ($143,875 at time of issuance) has
been accreted over the originally scheduled term of the notes. Interest expense
for the year ended September 30, 1995, the three months ended December 31, 1995
and the year ended December 31, 1996 includes approximately $38,900, $78,500 and
$26,475 of accretion, respectively. The Company repaid principal and interest
related to these notes in full upon the sale of its Series D Preferred Stock.
The amount outstanding related to these notes was classified as long term at
December 31, 1995, reflecting the Company's refinancing of this obligation
through the issuance of Series D Preferred Stock.
8% Subordinated Notes--In August 1994, the Company issued $2,100,000 of
subordinated notes to certain holders of the Company's common and mandatory
redeemable preferred stock, with immediately exercisable warrants for the
purchase of 525,000 shares of the Company's common stock. The warrants are
exercisable through June 30, 2001 at a price of $2 per share and have been
appraised and recorded at an aggregate market value of $262,500. The related
discount on the subordinated notes ($262,500 at time of issuance) is being
accreted over the term of the notes. Interest expense for the years ended
September 30, 1994 and 1995, the three months ended December 31, 1995 and the
year ended December 31, 1996 includes accretion related to these notes of
approximately $4,200, $37,500, $9,375 and $37,500, respectively. Interest on the
notes is payable quarterly at an annual rate of 8%. Principal is payable in
quarterly installments of $131,250 beginning on September 30, 1997 through
maturity (2001). The notes are redeemable at the Company's option at par plus
declining premiums at various dates.
F-10
<PAGE> 46
5. COMMITMENTS AND CONTINGENCIES
Leases--The Company leases computer and other equipment under various
noncancelable leases which have been capitalized for financial reporting
purposes. The Company has noncancelable operating lease agreements for office
space and certain equipment.
<TABLE>
Future minimum payments under capital and operating leases consist of the
following at December 31, 1996:
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31 CAPITAL LEASES LEASES
--------------- ------------------
<S> <C> <C>
1997................................................ $ 1,621,547 $1,612,947
1998................................................ 104,695 1,441,581
1999................................................ -- 1,410,652
2000................................................ -- 1,269,630
2001................................................ -- 781,692
----------- ----------
Total minimum lease payments........................ 1,726,242 $6,516,502
==========
Less amount representing interest................... (92,042)
-----------
Present value of future minimum lease payments...... 1,634,200
Less current portion................................ (1,533,899)
-----------
Long-term portion................................... $ 100,301
===========
</TABLE>
Rent expense for operating leases was approximately $454,000, $1,503,000,
$405,000, and $1,797,000 for the years ended September 30, 1994 and 1995, for
the three months ended December 31, 1995, and for the year ended December 31,
1996, respectively.
Litigation--During 1996, the Company and certain affiliates (the
"Entrepreneurial Partnerships") (collectively, the "Plaintiffs") reached an
agreement to settle various lawsuits between the Plaintiffs and a former
director of the Company (see Note 10). In addition to settling all claims and
disputes, the former director agreed, in exchange for payments of $25,500 each,
to grant the Company and the Entrepreneurial Partnerships' various options to
purchase the Company's common stock from the former director (the "Settlement
Shares"). The Company's purchase option permitted the Company to purchase
Settlement Shares in 200,000 share allotments during each of three specified
periods of time through February 1997 at purchase prices of $1.70, $1.95 and
$2.20 per share during the first, second and final share allotments,
respectively. In the event that the Company chose not to immediately pay for the
Settlement Shares, a portion of the purchase price (66.67%) could be financed by
issuing the former director an 8% two-year note. During 1996, the Company
exercised its option to purchase 600,000 settlement shares of which a portion
were temporarily financed during the year and subsequently repaid in October
1996.
In connection with the exercise of the options by the Entrepreneurial
Partnerships, on March 28, 1996 the Company loaned an aggregate of $113,333 to
the Entrepreneurial Partnerships at an interest rate of 16%. Such amount was
repaid in May 1996. In May 1996, the Company repurchased for cash consideration
an additional 200,000 shares of its common stock from certain Entrepreneurial
Partnerships at a price of $1.70 per share and reimbursed the Entrepreneurial
Partnerships, by means of a distribution, for certain legal fees and expenses
incurred by them in connection with the litigation against the former director
in the amount of $200,000.
F-11
<PAGE> 47
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1996, the holders of the Company's Series A, B, C, and D redeemable
convertible preferred stock (collectively, the "Preferred Stock" ) converted
their holdings into shares of the Company's common stock.
<TABLE>
Activity related to the classes of redeemable convertible preferred stock
prior to conversion was as follows:
<CAPTION>
SERIES A SERIES B SERIES C SERIES D TOTAL
----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, October 1, 1993......... $ 1,130,475 $ 1,204,729 $ 597,567 $ -- $ 2,932,771
Dividends accreted................ 15,668 -- -- 15,668
----------- ----------- --------- ----------- -----------
Balances, September 30, 1994...... 1,146,143 1,204,729 597,567 -- 2,948,439
Dividends accreted................ 60,978 76,104 45,462 -- 182,544
----------- ----------- --------- ----------- -----------
Balances, September 30, 1995...... 1,207,121 1,280,833 643,029 -- 3,130,983
Dividends accreted................ 15,244 19,026 11,365 -- 45,635
----------- ----------- --------- ----------- -----------
Balances, December 31, 1995....... 1,222,365 1,299,859 654,394 -- 3,176,618
Stock issued, net of issuance
costs of $41,600 .............. -- -- -- 5,958,400 5,958,400
Dividends accreted................ 45,731 57,083 34,091 -- 136,905
Conversion to common stock........ (1,268,096) (1,356,942) (688,485) (5,958,400) (9,271,923)
----------- ----------- --------- ----------- -----------
Balances, December 31, 1996....... $ -- $ -- $ -- $ -- $ --
=========== =========== ========= =========== ===========
</TABLE>
During 1991, the Company issued 630,516 shares of redeemable convertible
preferred stock ("Series A Preferred Stock") for an aggregate purchase price of
$1,000,000, of which 315,258 shares were issued to a third-party investor and
315,258 shares were issued to certain Entrepreneurial Partnerships which are
related parties.
Also during 1991, the Company issued 620,000 shares of redeemable
convertible preferred stock ("Series B Preferred Stock") for an aggregate
purchase price of $1,085,000.
In June 1993, the Company issued 200,789 shares of redeemable convertible
preferred stock ("Series C Preferred Stock") for an aggregate purchase price of
$602,367.
In April 1996, the Company issued 1,000,000 shares of redeemable
convertible preferred stock ("Series D Preferred Stock") for an aggregate
purchase price of $6,000,000.
Conversion and Liquidation Preferences--Each share of Series A and Series D
Preferred Stock was convertible into two shares of common stock. Each share of
Series B and Series C Preferred Stock was convertible into approximately 2.42
and 2.40 shares of common stock, respectively. The Preferred Stock was
convertible upon a sale of the Company's stock or net assets for an amount in
excess of $7,500,000, with a minimum price per share of $5.25. In the event of a
liquidation, merger, consolidation, or sale of the Company's assets, the holders
of the various classes of Preferred Stock were entitled to receive a liquidation
preference equal to their aggregate purchase price plus accreted and unpaid
dividends outstanding prior to any distributions to holders of common stock of
the Company. Each share of Preferred Stock entitled the holder to the number of
votes per share equivalent to the number of common shares into which each share
of preferred stock was then convertible.
Dividends--On October 1, 1992, the Series A and Series B Preferred Stock
began accruing dividends at the rate of 8% per annum. The Series C Preferred
Stock began accruing dividends at the rate of 8% per annum beginning on October
1, 1993. Prior to the issuance of the Series D Preferred Stock, the Series A,
Series B and Series C Preferred Stock dividends were payable in cash for fiscal
years in which the Company has net income in excess of $500,000 and accruable in
all other years. Accrued dividends outstanding for any year were payable in cash
in subsequent years to the extent net income exceeded the required minimum of
$500,000 by an additional $500,000. No dividends were paid in the years ended
September 30, 1994 and 1995 or the three months ended December 31, 1995. In
connection with the issuance of the Series D Preferred Stock, the Series A,
Series B and
F-12
<PAGE> 48
Series C Preferred Stock dividends became payable in cash or by subordinated
promissory note for fiscal years in which the Company's net income was
$1,000,000 or more, to the extent of the lesser of 20% of net income in excess
of $1,000,000 or all dividends then payable. For financial reporting purposes,
the dividends were accreted ratably over the period the Preferred Stock was
expected to be outstanding to the extent not required to be paid. Dividends
payable for all periods presented consisted of $80,076 and $86,800 required to
be paid on the Series A and Series B Preferred Stock, respectively, as a result
of the Company's 1994 net income. The Company expects to pay those dividends in
1997.
Redemption--Prior to the issuance of the Series D Preferred Stock, the
Series A and Series B Preferred Stock had a mandatory redemption date of
December 31, 1997 and the Series C Preferred Stock had a mandatory redemption
date of December 31, 1999. Since the issuance of the Series D Preferred Stock,
holders of two-thirds of all shares of Series A, B and C Preferred Stock could
have, commencing on April 1, 2000 and on the same date in each following year,
required the Company to redeem 1/3 of their shares. The redemption amount
equaled the higher of the fair market value of the preferred stock as of the
fiscal year end closest to the redemption date or an amount equal to the
aggregate purchase price plus accrued dividends outstanding.
7. COMMON STOCK OPTION PLANS AND WARRANTS
1990 Incentive and Nonqualified Stock Option Plan--Under the Company's 1990
Incentive and Nonqualified Stock Option Plan, the Company could grant either
incentive or nonqualified stock options to officers, directors, employees or
consultants for the purchase of up to 2,400,000 shares of common stock. Options
were granted with an exercise price equal to the common stock's market value at
the date of grant, as determined by the Board of Directors, and would expire ten
years later. No further grants will be made under the 1990 Incentive and
Nonqualified Stock Option Plan.
1996 Employee Stock Plans--On June 14, 1996, the Board of Directors
authorized and the stockholders approved the adoption of the 1996 Incentive and
Nonqualified Stock Option Plan and the 1996 Stock Purchase Plan for the issuance
of options or sale of shares to employees. Both plans became effective
immediately after the closing of the Company's IPO:
- 1996 Incentive and Nonqualified Stock Option Plan--The 1996 Incentive
and Nonqualified Stock Option Plan provides for the issuance of up to
1,000,000 options to purchase shares of common stock. Options may be
either qualified incentive stock options or nonqualified stock options
at the discretion of the Board of Directors. Exercise prices will be
either fair market value on the date of grant, in the case of
incentive stock options, or set by the Board of Directors at the date
of grant, in the case of nonqualified options.
- 1996 Employee Stock Purchase Plan--The 1996 Stock Purchase Plan
provides for the sale of up to 100,000 shares of common stock to
employees. Employees will be allowed to purchase shares at a discount
from the lower of fair value at the beginning or end of the purchase
periods through payroll deductions.
F-13
<PAGE> 49
<TABLE>
The following table presents activity under all stock option plans:
<CAPTION>
WEIGHTED AVERAGE GRANT DATE
NUMBER OF OPTIONS EXERCISE PRICE FAIR VALUE (1)
------------------- ------------------- ----------------
<S> <C> <C> <C>
Outstanding at October 1, 1993........... 991,184 $0.06
Granted............................. 200,000 0.38 $ 76,000
Exercised........................... (86,100) 0.04
Forfeited........................... (388,984) 0.05
-------------------
Outstanding at September 30, 1994........ 716,100 0.16
Granted............................. 321,700 0.62 199,454
Exercised........................... (2,516) 0.07
Forfeited........................... (21,584) 0.12
-------------------
Outstanding at September 30, 1995........ 1,013,700 0.31
Granted............................. 233,500 0.75 175,125
Exercised........................... (74,350) 0.04
Forfeited........................... (100,150) 0.50
-------------------
Outstanding at December 31, 1995......... 1,072,700 0.40
Granted............................. 817,100 5.40 4,412,340
Exercised........................... (52,620) 0.64
Forfeited........................... (105,880) 0.84
-------------------
Outstanding at December 31, 1996......... 1,731,300 2.74
===================
<FN>
(1) Exercise prices on grant date have equaled fair market value accordingly,
no compensation expense has been recorded in the accompanying financial
statements.
</FN>
</TABLE>
<TABLE>
The number of options exercisable at the dates presented below and their
weighted average exercise price were as follows:
<CAPTION>
Weighted
Average
Options Exercisable
Exercisable Price
--------------- ----------------
<S> <C> <C>
September 30, 1994 296,565 $0.06
September 30, 1995 457,055 0.10
December 31, 1995 426,835 0.13
December 31, 1996 684,705 0.51
</TABLE>
<TABLE>
The fair value of options on their grant date was measured using the
Black/Scholes option pricing model. Key assumptions used to apply this pricing
model are as follows:
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER DECEMBER 31,
31, 1995 1996
----------------- -----------------
<S> <C> <C>
Risk-free interest rate......................................... 5.51% - 5.86% 5.36% - 6.69%
Expected life of option grants.................................. 2-6 years 1-6 years
Expected volatility of underlying stock......................... 31% 31%
Expected dividend payment rate, as a percentage of
the stock price on the date of grant......................... -- --
</TABLE>
It should be noted that the option pricing model used was designed to value
readily tradable stock options with relatively short lives. The options granted
to employees are not tradable and have contractual lives of up to ten years.
However, management believes that the assumptions used to value the options and
the model applied yield a reasonable estimate of the fair value of the grants
made under the circumstances.
F-14
<PAGE> 50
<TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996:
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
NUMBER AVERAGE REMAINING EXERCISE PRICE
NUMBER OF RANGE OF CURRENTLY EXERCISE CONTRACTUAL FOR CURRENTLY
PLAN OPTIONS EXERCISE PRICES EXERCISABLE PRICE LIFE (YEARS) EXERCISABLE
- ------------------------------------------------------------------------------------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
1990 Incentive Stock
Option Plan.......... 948,300 $0.04 - 0.75 545,985 $ 2.71 7 $0.20
391,700 2.00 116,460 2.00 9.5 2.00
200,000 8.50 -- 8.50 9.5 --
1996 Incentive Stock
Option Plan.......... 12,000 7.75 2,400 7.75 10 7.75
99,300 8.13 19,860 8.13 10 8.13
80,000 12.38 -- 12.38 10 --
</TABLE>
<TABLE>
The Company uses the intrinsic value method to measure compensation expense
associated with grants of stock options to employees. Had the Company used the
fair value method to measure compensation, reported net income and earnings per
share would have been as follows:
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
1995 1996
----------------- ----------------
<S> <C> <C>
Income before provision for income
taxes $64,188 $1,892,716
Provision for income taxes 2,200 125,000
----------------- ----------------
Net income $61,988 $1,767,716
================= ================
Net income per common share $ 0.01 $ 0.12
================= ================
</TABLE>
The pro forma effect on net income and earnings per share for the three
months ended December 31, 1995 and the year ended December 31, 1996 is not
representative of the pro forma effect in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to the three months ended December 31, 1995.
Common Stock Warrants--The Company has issued warrants to purchase
1,270,038 shares of the Company's common stock at exercise prices ranging from
$0.793 to $2.00 per share. Warrants issued prior to August 1994 were assigned
nominal value based upon management's estimate of their fair market value.
Warrants issued in connection with the Company's issuance of subordinated notes
(see Note 4) have been ascribed an aggregate value of $406,375. During 1996,
warrant holders with warrants to purchase 457,288 shares of common stock
exercised such warrants in conjunction with the IPO. The warrant holder
surrendered a portion of the warrants, valued at the IPO price of the common
stock, in lieu of payment of the cash exercise price. In addition, a director
exercised a warrant for 3,234 shares in conjunction with the IPO which was
valued at the IPO price of common stock. In June 1996, a warrant holder
exercised a warrant for 62,500 shares which had an exercise price of $2.00 per
share. In conjunction with the IPO, the Company issued warrants to a former
director to purchase 100,000 shares of common stock at the IPO price. The
compensation expense recognized for this warrant grant was $230,000 and was
determined by using the Black/Scholes pricing model. At December 31, 1996,
warrants to purchase shares of common stock aggregated 847,016 (747,016 shares
at an exercise price of $2.00 and 100,000 shares at an exercise price of
$10.00.) Such shares are subject to certain antidilutive adjustments.
Reserved Shares--The Company has reserved 3,577,016 shares of common stock
for issuance for the stock purchase plan and the exercise of stock options and
warrants.
F-15
<PAGE> 51
8. INCOME TAXES
In October 1993, the Company implemented the provisions of SFAS No. 109.
The cumulative effect of this change did not have a material effect on the
Company's results of operations, financial position or cash flows as a result of
the valuation allowance established at the time of adoption.
<TABLE>
The income tax (benefit) provision for the years ended September 30, 1994
and 1995, the three months ended December 31, 1995, and for the year ended
December 31, 1996 consisted of the following:
<CAPTION> THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
----------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------- -------------- --------------
Current:
<S> <C> <C> <C> <C>
Federal..................................... $ 299,341 $ -- $2,400 $141,400
State....................................... 89,156 -- -- 18,100
Deferred:
Federal..................................... (278,341) -- -- --
State....................................... (87,256) -- -- --
---------- ----- ------ --------
Income tax provision............................ $ 22,900 $ -- $2,400 $159,500
========== ===== ====== ========
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets are as follows:
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------------ ------------------------------
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization....... $ 161,518 $ 332,841 $ 370,598 $ 579,759
Accrued expenses and reserves....... 94,871 216,802 227,085 86,669
Tax credit and loss carryforwards... 282,962 946,098 842,847 60,189
Valuation allowance...................... (539,351) (1,495,741) (1,440,530) (726,617)
--------- ----------- ---------- ---------
Net deferred tax asset................... $ -- $ -- $ -- $ --
========= =========== =========== =========
</TABLE>
The net change in the valuation allowance for the years ended September 30,
1994 and 1995, the three month period ended December 31, 1995 and the year ended
December 31, 1996 was an increase (decrease) of $(409,258), $956,390, $(55,211)
and $(713,913), respectively. At December 31, 1996, the Company had no remaining
net operating loss carryforwards for federal income tax purposes. A valuation
allowance was established against the deferred tax assets as their realization
is not assured.
<TABLE>
The following is a reconciliation of income taxes at the federal statutory
rate to the Company's effective tax rate:
<CAPTION> YEARS ENDED THREE MONTHS
SEPTEMBER 30, ENDED YEAR ENDED
------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statutory federal income tax rate ........... 34% (34)% 34% 34%
Loss producing no tax benefit ............... -- 34 -- --
Alternative minimum tax asset, not assured of
realization .............................. 2 -- 3 2
State taxes, net of federal benefit ......... -- -- -- 1
Other, net .................................. -- -- -- 4
Net operating loss carryforwards ............ (34) -- (34) (34)
--- --- --- ---
Effective tax rate .......................... 2% -- % 3% 7%
=== === === ===
</TABLE>
F-16
<PAGE> 52
9. EMPLOYEE PROFIT SHARING PLAN
The Company has a 401(k) Employee Profit Sharing Plan (the "Plan"). Under
the Plan, the Company, at its discretion, may make contributions to match
employee contributions. All employees of the Company are eligible to
participate, subject to employment eligibility requirements. Vesting of employer
contributions occurs ratably over a five-year period. Employer contributions
amounted to approximately $27,500, $43,000, $20,000 and $91,000 for the years
ended September 30, 1994 and 1995, the three months ended December 31, 1995, and
the year ended December 31, 1996, respectively.
10. RELATED-PARTY TRANSACTIONS
Under an agreement dated February 28, 1990, the Company granted an
exclusive license to RentGrow, Inc. ("RentGrow"), a company having certain
common investors with the Company, to use the Company's Credit Decision System
in the rental real estate market. Under the terms of the agreement, the Company
was to receive $250,000, comprised of five installments in varying amounts
through August 1996. The final payment was not made in August 1996. In 1997, the
Company received from RentGrow a three year 11.25% promissory note in the
principal amount of $75,584 representing the final payment and other amounts
owed to the Company at December 31, 1996. In addition, this agreement provides
for the Company to maintain the licensed software, at RentGrow's option, at an
annual amount equal to 15% of the license amount, which the Company believes
exceeds the cost of providing such maintenance.
The Company has received advances from various Entrepreneurial Partnerships
and their general partners and has issued preferred stock to various
Entrepreneurial Partnerships. The Company leased computer equipment from various
Entrepreneurial Partnerships. The general partners of these partnerships are
also stockholders of the Company. In 1992, the Company sold and leased back
equipment from an Entrepreneurial Partnership resulting in a gain of $12,518,
which was deferred and amortized over the capital lease term. The amount
deferred was $2,781, $0, $0 and $0 as of September 30, 1994 and 1995 and
December 31, 1995 and 1996, respectively.
On August 26, 1996, the Company entered into an agreement with the former
director pursuant to which the Company paid $75,000 to the former director and
granted the former director the warrant (described in Note 7) to purchase
100,000 shares of the Company's Common Stock at the IPO price in exchange for
the execution of certain agreements related to the IPO.
F-17
<PAGE> 53
EXHIBIT INDEX
-------------
Exhibit
No. Description
--- -----------
3.1* Amended and Restated Certificate of Incorporation of the
Company
3.2* Amended and Restated By-Laws of the Company
4.1* Specimen certificate for the Common Stock of the Company
10.1* 1991 Registration Rights Agreement dated February 11, 1991,
as amended, between the Company and the persons named herein
10.2* Subordinated Note and Warrant Purchase Agreement dated as of
August 29, 1994 between the Company and the Purchasers named
therein, including form of Subordinated 14% Promissory Notes
and form of Common Stock Purchase Warrants
10.3* Form of Common Stock Purchase Warrants issued August 1995
10.4* Amended and Restated Credit Agreement dated as of June 18,
1996, between the Company and Silicon Valley Bank
10.5* Settlement Agreement dated February 2, 1996 between the
Company, BEB, Inc., BEB Limited Partnership I, BEB Limited
Partnership II, BEB Limited Partnership III, BEB Limited
Partnership IV, certain related parties and Brian Boyle
10.6* 1990 Incentive and Nonqualified Stock Option Plan
10.7* 1996 Incentive and Non-Qualified Stock Option Plan
10.8* 1996 Employee Stock Purchase Plan
10.9* Office Lease dated September 21, 1993, as amended, between
the Company and L&E Investment of Massachusetts One, Inc.
10.10* Office Lease dated September 30, 1994, as amended, between
the Company and Hobbs Brook Office Park
10.11* Employment Agreement dated August 16, 1996 between the
Company and Pamela D. A. Reeve
10.12* Office Lease dated August 5, 1994, as amended, between the
Company and L&E Investment of Massachusetts One, Inc.
10.13* Letter Agreement, dated August 26, 1996, between the Company
and Brian E. Boyle, including form of Common Stock Purchase
Warrant and Registration Rights Agreement
10.14 Office Lease dated March 15, 1997, between the Company and
Sumitomo Life Realty (N.Y.), Inc.
11.1 Statement re computation of per share earnings
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule for fiscal year ended
December 31, 1996
Each exhibit marked by an (*) is incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 333-6589) in the form in which it
was declared effective by the Securities and Exchange Commission on September
27, 1996.
<PAGE> 1
EXHIBIT 10.14
BURLINGTON BUSINESS CENTER
BURLINGTON, MASSACHUSETTS
LEASE dated as of March 5, 1997
ARTICLE I
1.1 Reference Data
Each reference in this Lease to any of the following subjects shall be construed
to incorporate the data stated for that subject in this Article:
LANDLORD: SUMITOMO LIFE REALTY (N.Y.), INC.
LANDLORD'S ORIGINAL ADDRESS: 245 Park Avenue
34th Floor
New York, New York 10167
LANDLORD'S CONSTRUCTION REPRESENTATIVE:
TENANT: Lightbridge, Inc.
a Delaware corporation
TENANT'S ORIGINAL ADDRESS: 281 Winter Street, Waltham, MA
TENANT'S CONSTRUCTION REPRESENTATIVE:
TENANT'S FINAL PLANS DATE: Not applicable
TERM COMMENCEMENT DATE: March 15, 1997
RENT COMMENCEMENT DATE: The earlier of: (x) June 1, 1997, or (y) the
date that Tenant first commences to use the
Premises for business purposes. Tenant shall
not be considered to be using the Premises
for business purposes during the time that
Tenant is making improvements to the
Premises or in moving the Tenant's furniture
and trade fixtures.
TENANT'S SPACE: An area on the first (1st) floor East Pod of the
Building, containing 21,055 rentable square feet,
substantially as shown on Lease Plan,
-1-
<PAGE> 2
Exhibit F, Sheet 1; an area on the second (2nd) floor
East Pod of the Building, containing 21,892 rentable
square feet, substantially as shown on Lease Plan,
Exhibit F, Sheet 2; and an area on the third (3rd)
floor East Pod of the Building, containing 3,411
rentable square feet, substantially as shown on Lease
Plan, Exhibit F, Sheet 3
TERMINATION DATE: Seven (7) years from the Rent Commencement Date
<TABLE>
<CAPTION>
ANNUAL FIXED RENT: Lease Year(1) Yearly Rent Monthly Payment
<S> <C> <C> <C>
1-3 $1,054,644.40 $87,887.04
4-5 $1,112,592.00 $92,716.00
6-7 $1,193,718.40 $99,476.54
</TABLE>
TENANT'S ANNUAL
ELECTRICITY CHARGE: Forty-Four Thousand Forty and 00/100 ($44,040.00)
Dollars ($.95) Cents per square foot of Rentable
Floor Area of the Premises per annum.
TENANT'S TAX BASE: The actual amount of Tax Expenses Allocable to the
Premises for fiscal/tax year 1997 (i.e., July 1, 1996
- June 30, 1997)
TENANT'S OPERATING EXPENSE BASE: The actual amount of Operating Expenses
Allocable to the Premises for calendar year
1997
RENTABLE FLOOR AREA OF THE BUILDING: 170,310 Rentable Square Feet
PERMITTED USES: General business offices. Subject to Tenant's
obligations to pay for overtime services, in
accordance with Section II of Exhibit E, and subject
to Landlord's reasonable security requirements,
Tenant shall have the right to operate its business
in the Premises twenty-four hours a day, seven days a
week throughout the term of this Lease.
(1) For the purposes of this Lease, "Lease Year" shall be defined as any
twelve-(12)-month period during the term of the Lease commencing as of the Rent
Commencement Date, or as of any anniversary of the Rent Commencement Date
-2-
<PAGE> 3
PUBLIC LIABILITY INSURANCE: Bodily Injury - $5,000,000
Property Damage - $5,000,000
1.2 Exhibits. There are eleven (11) Exhibits incorporated as a part of this
Lease:
EXHIBIT A - Description of Lot
EXHIBIT B - Condition of Premises and Landlord's Contribution
EXHIBIT C - Intentionally Omitted
EXHIBIT D - Building Standard Tenant Improvements
EXHIBIT E - Landlord's Services
EXHIBIT F - Floor Plan
EXHIBIT G - Required Tenant Work General
Conditions
EXHIBIT H - Intentionally Omitted
EXHIBIT I - Form of Letter of Credit
EXHIBIT J - Approved Exterior Signage
EXHIBIT K - Present Rights of Existing Tenants to RFO Premises
1.3 Tables of Articles and Sections
ARTICLE I - Reference Data
<TABLE>
<S> <C>
1.1 Subjects Referred To.................................. 1
1.2 Exhibits.............................................. 2
1.3 Table of Articles and Sections ........................ 2
ARTICLE II - Premises, Term and Rent
2.1 The Premises.......................................... 8
</TABLE>
-3-
<PAGE> 4
<TABLE>
<S> <C>
2.2 Rights to Use Common Facilities....................... 8
2.3 Landlord's Reservations............................... 8
2.4 Commencement of Term.................................. 9
2.5 Monthly Fixed Rent Payments........................... 9
2.6 Adjustment for Operating Expenses..................... 9
2.7 Adjustment for Real Estate Taxes...................... 15
2.8 Due Date of Additional Payments; No Offsets........... 17
ARTICLE III - Alterations and Construction
3.1 Alterations and Additions by Tenant................... 17
3.2 Real Estate Taxes on Leasehold Improvements........... 19
3.3 Landlord's Right to Make Alterations.................. 20
3.4 Signage............................................... 22
ARTICLE IV - Landlord's Covenants; Interruptions and Delays
4.1 Services Furnished by Landlord........................ 23
4.2 Additional Services Available to Tenant............... 23
4.3 Additional Air Conditioning Equipment................. 23
4.4 Roof, Exterior Wall, Floor Slab and Common
Facility Repair................................... 24
4.5 Door Signs............................................ 24
4.6 Quiet Enjoyment....................................... 24
</TABLE>
-4-
<PAGE> 5
ARTICLE V - Tenant's Covenants
<TABLE>
<S> <C>
5.1 Payments.............................................. 24
5.2 Repair and Yield Up................................... 25
5.3 Use................................................... 25
5.4 Obstructions, Items Visible from Exterior;
Rules and Regulations............................. 26
5.5 Safety Appliances..................................... 26
5.6 Assignment; Sublease.................................. 26
5.7 Indemnity; Insurance.................................. 30
5.8 Personal Property at Tenant's Risk.................... 30
5.9 Right of Entry........................................ 32
5.10 Floor Load; Prevention of Vibration and Noise......... 32
5.11 Personal Property Taxes............................... 33
5.12 Payment of Litigation Expenses........................ 33
5.13 Compliance with Insurance Regulations................. 33
ARTICLE VI - Casualty and Taking
6.1 Termination or Restoration; Rent Adjustment........... 33
6.2 Eminent Domain Damages Reserved....................... 35
6.3 Temporary Taking...................................... 35
ARTICLE VII - Default
7.1 Events of Default..................................... 35
</TABLE>
-5-
<PAGE> 6
<TABLE>
<S> <C>
7.2 Damages............................................... 36
ARTICLE VIII - Miscellaneous
8.1 Computation of Rentable Floor Areas................... 38
8.2 Notice of Lease; Consent of Approval;
Notices; Bind and Inure........................... 38
8.3 Landlord's Failure to Enforce......................... 39
8.4 Acceptance of Partial Payments of Rent;
Delivery of Keys.................................. 39
8.5 Cumulative Remedies................................... 39
8.6 Partial Invalidity.................................... 40
8.7 Self-Help............................................. 40
8.8 Tenant's Estoppel Certificate......................... 40
8.9 Waiver of Subrogation................................. 41
8.10 All Agreements Contained.............................. 41
8.11 Brokerage............................................. 41
8.12 Submission Not an Option.............................. 42
8.13 Applicable Law........................................ 42
8.14 Waiver of Jury Trial.................................. 42
8.15 Holdover.............................................. 42
8.16 Arbitration........................................... 43
8.17 Requirements of Law - Fines and Penalties............. 44
8.18 Inability to Perform - Exculpatory Clause............. 44
</TABLE>
-6-
<PAGE> 7
<TABLE>
<S> <C>
8.19 Parties Bound - Seizin of Title....................... 45
ARTICLE IX - Rights of Parties Holding Prior Interests
9.1 Lease Subordinate..................................... 45
9.2 Rights of Holder of Mortgage to Notice of
Defaults by Landlords and to Cure Same............. 46
ARTICLE X - Letter of Credit
10.1 Requirements for Letter of Credit.................. 47
10.2 Landlord's Right to Draw Down Letter of Credit..... 47
10.3 Tenant's Failure to Deliver Substitute Letter of Credit .. 48
10.4 Return of Collateral............................... 48
ARTICLE XI - Tenant's Option to Extend Term of Lease
11.1 Tenant's Option to Extend Term of Lease ............ 48
ARTICLE XII - Tenant's Right of First Offer
12.1 Tenant's Right of First Offer....................... 51
ARTICLE XIII - Definition of Fair Market Rental Value
13.1 Definition of Fair Market Rental Value.............. 52
ARTICLE XIV - Condition of Landlord's Execution
14.1 Condition of Landlord's Execution .................. 54
</TABLE>
-7-
<PAGE> 8
ARTICLE II
PREMISES, TERM AND RENT
2.1 The Premises
Landlord hereby leases to Tenant and Tenant hereby hires from Landlord
Tenant's Space in the Building. The demise herein excludes exterior faces of
exterior walls, the common stairways and stairwells, elevators and elevator
shafts, fan rooms, electric and telephone closets, janitor closets, freight
elevator vestibules, and pipe, ducts, conduits, wires and appurtenant fixtures
serving exclusively or in common other parts of the Building, and if Tenant's
Space includes less than the entire rentable area of any floor, excluding the
common corridors, elevator lobbies and toilets located on such floor. Tenant's
Space with such exclusions is hereinafter referred to as "the Premises." The
term "Building" means the building erected on the Lot, and the term "Lot" means
all, and also any part of, the land described in Exhibit A in whole or in part
and subject to minor adjustments of the lot boundaries. "Property" means the
Building and Lot.
2.2 Rights to Use Common Facilities
Tenant shall have, as appurtenant to the Premises, rights to use in
common, subject to reasonable rules of general applicability to tenants of the
Building from time to time made by Landlord of which Tenant is given notice: (a)
the common lobbies, corridors, stairways, elevators, exercise room and cafeteria
(to the extent that the exercise room and cafeteria area available to the other
tenants in the Building), and loading platform of the Building, and the pipes,
ducts, conduits, wires and appurtenant meters and equipment serving the Premises
in common with others, (b) common walkways and driveways for access to the
Building, (c) if the Premises included less than the entire rentable area of any
floor, the common toilets, corridors and elevator lobbies of such floor and (d)
the common parking facilities adjacent to the Building (Tenant hereby
acknowledging that parking is available on a first-come, first-served basis
only); and no other appurtenant rights or easements.
2.3 Landlord's Reservations
Landlord reserves the right from time to time, without unreasonable
interference with Tenant's use and upon reasonable notice to Tenant when any
such activities shall directly affect the Premises (except that no notice shall
be required in emergency situations): (a) to install, use, maintain, repair,
replace and relocate for service to the Premises and other parts of the
Building, or either, pipes, ducts, conduits, wires and appurtenant fixtures,
wherever located in the Premises or Building, and (b) to alter or relocate any
other common facility, provided that substitutions are substantially equivalent
or better. Installations, replacements and relocations referred to in clause
-8-
<PAGE> 9
(a) above shall be located so far as practicable in the central core area of the
Building, above ceiling surfaces, below floor surfaces or within perimeter walls
of the Premises; provided, however, that Landlord will not substantially reduce
the usable floor area of the Premises nor will any such work materially
adversely affect the appearance of the Premises.
2.4 Commencement of Term
Tenant shall have and hold the Premises for a period commencing on the
date ("Term Commencement Date", as defined in Section 1.1, and, subject to the
provisions of this Lease, expiring as of the date ("Termination Date") seven (7)
years after the Rent Commencement Date, as defined in Section 1.1.
Notwithstanding the foregoing, if the Rent Commencement Date occurs on other
than the first day of a calendar month, then the Termination Date shall be the
last day of the calendar month in which the seventh (7th) anniversary of the
Rent Commencement Date occurs.
2.5 Monthly Fixed Rent Payments
Commencing as of the Rent Commencement Date, and continuing thereafter
throughout the term of this Lease, Tenant shall pay as of the Rent Commencement
Date, without notice or demand, monthly installments of 1/12 of (a) the Annual
Fixed Rent, and (b) a charge ("Annual Electricity Charge") equal to 95(cent) per
annum for each square foot of Rentable Floor Area of the Premises for tenant
electricity, as described in Paragraph VI (A) of Exhibit E, in advance on the
first day of each month for each full calendar month of the Term, and the
corresponding fraction of said amounts for any fraction of a calendar month at
the beginning or end of the Term. Notwithstanding the provisions hereof, Tenant
shall pay the first monthly installment of Annual Fixed Rent on the execution of
this Lease.
Rental and any other sums due hereunder not paid within ten (10) days
after the date due shall bear interest for each month or fraction thereof from
the due date until paid computed at the annual rate of two (2) percentage points
over the so-called prime rate then currently from time to time charged by The
First National Bank of Boston, or at any applicable lesser maximum legally
permissible rate for debts of this nature.
In addition, should Tenant fail to pay when due rental and any other
sums due hereunder, Tenant acknowledges that Landlord will incur additional
administrative expenses which are difficult to determine. Therefore, in such
event, Landlord may assess against Tenant, from and after the tenth business
(10th) day following the date on which any sum shall be due and payable, a late
payment fee equal to five (5%) of the sum due from Tenant to Landlord.
2.6 Adjustment for Operating Expenses
-9-
<PAGE> 10
A. Terms used herein are defined as follows:
(1) "Operating Year" shall mean any 12 month period elected by
Landlord for operating purposes. Landlord's current Operating Year commences on
January l of each year. If Landlord should elect to change said Operating Year,
Landlord shall notify Tenant thereof, and all calculations required to be made
at the end of a Operating Year shall be made and proportioned accordingly.
(2) "Operating Expenses for the Property" means the cost of
operation of the Property which shall exclude Excluded Expenses, as hereinafter
defined, but shall include, without limitation, the following: Premiums for
insurance carried with respect to the Property (including insurance against loss
in case of fire or casualty, monthly installments of Annual Fixed Rent and any
additional rent which may be due under this Lease and other leases of space in
the Building and, if there be any first mortgage of the Property, including such
insurance as may be required by the holder of such first mortgage); compensation
and all fringe benefits, Workmen's Compensation Insurance premiums and payroll
taxes paid to, for or with respect to all persons engaged in the operating,
repairing, maintaining, or cleaning of the Building or Lot (provided however,
that if any individual performs services to the Property on other than a full
time basis, the compensation, benefits, premiums and taxes payable in respect of
such individual shall be allocated between the Property and other properties for
which such individual provides services on the basis of the relative time spent
by such individual in providing services for each property); steam, water,
sewer, gas, oil and telephone charges; electricity provided to the Building and
to the Premises; cost of building and cleaning supplies and equipment; related
equipment, facilities and appurtenances, elevators, cooling and heating
equipment, provided, however, that (i) if, during the term of this Lease,
Landlord shall replace any capital items or make any capital expenditures
(collectively called "capital expenditures") the total amount of which is not
properly includible in Operating Expenses for the Operating Year in which they
were made, there shall nevertheless be included in such Operating Expenses and
in Operating Expenses for each succeeding Operating Year the amount, if any, by
which the annual charge-off (determined as hereinafter provided) of such capital
expenditure (less insurance proceeds, if any, collected by Landlord by reason of
damage to, or destruction of the capital item being replaced) exceeds the annual
charge-off of the capital expenditure for the item being replaced; and (ii) if a
new capital item is acquired which does not replace another capital item which
has worn out, has become obsolete, etc., then there shall be included in
Operating Expenses for each Operating Year in which and after such capital
expenditure is made the annual charge-off of such capital expenditure. (Annual
charge-off shall be determined by (i) dividing the original cost of the capital
expenditure by the number of years of useful life thereof [The useful life shall
be reasonably determined by Landlord in accordance with generally accepted
accounting principles and practices in effect at the time of acquisition of the
capital item]; and (ii) adding to such quotient an interest factor computed on
the unamortized balance of such capital expenditure at an annual rate of either
one percentage point over the AA Bond rate [Standard & Poor's corporate
composite or, if unavailable, its equivalent] as reported in
-10-
<PAGE> 11
the financial press at the time the capital expenditure is made or, if the
capital item is acquired through third-party financing, then the actual
[including fluctuating] rate paid by Landlord in financing the acquisition of
such capital item.) Provided, further, that if Landlord reasonably concludes on
the basis of engineering estimates that a particular capital expenditure will
effect savings in Operating Expenses for the Property, including, without
limitation, energy-related costs, and that such annual projected savings will
exceed the annual charge-off of capital expenditure computed as aforesaid, then
and in such events, the annual charge-off shall be determined by dividing the
amount of such capital expenditure by the number of years over which the
projected amount of such savings shall fully amortize the cost of such capital
item or the amount of such capital expenditure; and by adding the interest
factor, as aforesaid; cost of maintenance, cleaning and repairs, cost of snow
removal and care of landscaping; payments under service contracts with
independent contractors or subsidiaries or affiliates of Landlord; management
fees not in excess of management fees paid to manage other first class office
buildings in the greater Burlington area; and all other expenses paid, in good
faith, in connection with the operation, repair, cleaning and maintenance of the
Building and Lot.
If during all or part of any Operating Year, Landlord is not performing
or furnishing any item to any portion of the Building (the cost of which, if
performed or furnished by Landlord to such portion of the Property would
constitute a part of Operating Expenses for the Property) on account of (a) such
portion of the Building not being occupied or leased, (b) such item not being
required or desired by a tenant, (c) any tenant itself obtaining or providing
such item, or (d) any other reason, whether similar or dissimilar to the
foregoing; then, Operating Expenses for the Property shall be deemed to be
increased by an amount equal to the additional costs and expenses which would
reasonably have been incurred during such period by Landlord if it had performed
or furnished such item to 100% of the Building.
(3) Operating Expenses for the Property shall exclude the
following costs ("Excluded Expenses"):
1. Salaries of officers and executives of
Landlord not connected with the operation of
the Property;
2. The personnel costs of any employee above
the grade of building superintendent, senior
building manager or chief engineer;
3. All costs related to the preparation of the
Premises or another tenant's premises for
occupancy by a tenant or other occupant;
4. Legal fees and expenses incurred by the
Landlord in connection with negotiating
leases and occupancy agreements and in
-11-
<PAGE> 12
connection with any disputes between
Landlord and any tenant or occupant of the
Building;
5. costs of special services rendered to
tenants (including Tenant) for which a
separate charge is made,
6. Advertising and promotional expenses
associated with the marketing of vacant
space in the Building;
7. Depreciation and amortization, except to the
extent provided above;
8. Mortgage charges, and interest, except to
the extent included in the annual charge-off
for a capital item which is permitted to be
included in Operating Expenses for the
Property in accordance with this
Subparagraph (b);
9. Costs and expenses incurred by the Landlord
in connection with the repair of damage to
the Building or Property caused by fire or
other casualty, insured or required to be
insured against hereunder, to the extent
that such costs and expenses exceed the
deductible under Landlord's insurance
policy;
10. Insurance premiums to the extent any unusual
tenant activity causes the Landlord's
existing insurance premiums to increase or
requires the Landlord to purchase additional
insurance, but only to the extent such
additional cost is identified by the insurer
and attributed to another tenant;
11. The cost of installing any specialty service
such as luncheon club, retail store, sundry
shop, newsstand, concession, or athletic or
recreational club (Tenant acknowledging that
certain costs of operating the exercise room
and cafeteria are included in Operating
Expenses for the Property);
12. The cost of constructing any additions to
the Property;
13. Damages or penalties incurred due to
violation by the Landlord or any other
tenant of the Building of any lease;
-12-
<PAGE> 13
14. The cost of making any alterations to the
Building or the Property for the purpose of
complying with any laws, rules, regulations
or ordinances applicable to the Building
which are in effect as of the Execution Date
of this Lease;
15. The cost of any work performed or service
provided to the extent that the Landlord is
otherwise reimbursed, other than through
Operating Expense escalation provisions
included in the leases of the tenants of the
Building; and
16. items of expense referred to in Section 2.7
hereof.
(4) "Operating Expenses Allocable to the Premises", as may be
adjusted pursuant to Subparagraph (c) hereof, shall mean the same proportion of
the Operating Expenses for the Property as the Rentable Floor Area of Tenant's
Space bears to the Rentable Floor Area of the Building actually leased on an
average annual basis for said Operating Year.
(5) The "Statement" shall mean a statement rendered to Tenant
by Landlord within 90 days or as soon thereafter as reasonably possible after
the end of each Operating Year. The Statement shall be in reasonable detail,
certified by Landlord's representative, and show the Operating Expenses for the
Property, the Operating Expenses Allocable to the Premises, amounts already paid
by Tenant for Operating Expenses Allocable to the Premises (including Tenant's
Operating Expense Base, amounts received on account of Annual Electricity Charge
pursuant to Section 2.5 hereof, and amounts paid pursuant to part C of this
Section 2.6), and the amount of Operating Expenses Allocable to the Premises
remaining due from or overpaid by Tenant for the Operating Year or fraction
thereof covered by the Statement with appropriate prorations for fractional
years.
B. If with respect to any Operating Year of the Term, Operating
Expenses Allocable to the Premises exceed Tenant's Operating Expense Base, then
Tenant shall pay to Landlord as additional rent the amount of such excess. Such
payments shall be made at the times and in the manner hereinafter provided in
this Section 2.6. Appropriate prorations shall be made for those periods at the
beginning or end of the Term which are less than a full Operating Year (Tenant's
Operating Expense Base includes the $.95 per Rentable Square Foot charge for
Annual Electricity Charge to be paid pursuant to Section 2.5 hereof).
Within 30 days after the date of delivery of such Statement, Tenant
shall pay to Landlord or Landlord shall pay to Tenant as the case may be, the
balance of the amounts, if any, required to be paid pursuant to the above
provisions of this Section 2.6, except that Landlord may at its
-13-
<PAGE> 14
option credit any amounts due from it to Tenant against monthly installments of
Annual Fixed Rent next thereafter coming due.
C. Commencing on the first day of the first month following the
delivery to Tenant of the Statement referred to above and on the first day of
each month thereafter until delivery to Tenant of the next such Statement,
Tenant shall pay to Landlord, on account of Tenant's share of increases in
Operating Expenses Allocable to the Premises reasonably anticipated by Landlord
for the then current Operating Year, 1/12th of the difference between Operating
Expenses Allocable to the Premises calculated by Landlord on the basis of the
most recent Operating Expense data or budget available from time to time, and
Tenant's Operating Expense Base. Landlord agrees to keep proper books and
records of Operating Expenses.
D. Subject to the provisions of this paragraph, Tenant shall have the
right, at Tenant's cost and expense, to examine all documentation and
calculations prepared in the determination of Operating Expenses Allocable to
the Property:
(1) Such documentation and calculation shall be made available to
Tenant at the offices where Landlord keeps such records during normal
business hours within a reasonable time after Landlord receives a
written request from Tenant to make such examination. Tenant's review
shall be conducted in a manner so as not to unreasonably interfere with
the conduct of Landlord's business.
(2) Tenant shall have the right to make such examination no more than
once in respect of any period in which Landlord has given Tenant a
statement of the actual amount of Operating Expenses Allocable to the
Premises.
(3) Any request for examination in respect of any Operating Year may be
made no more than ninety (90) days after Landlord advises Tenant of the
actual amount of Operating Expenses Allocable to the Premises in
respect of such period.
(4) Such examination may be made only by a national recognized
independent certified public accounting firm approved by Landlord.
Without limiting Landlord's approval rights, Landlord may withhold its
approval of any examiner of Tenant who is, or has, within the last five
years prior to Tenant's request, represented any other tenant in the
Building or in other buildings owned by Landlord or an affiliate of
Landlord, or any examiner of Tenant who is being paid by Tenant on a
contingent fee basis.
(5) As a condition to performing any such examination, Tenant and its
examiners shall be required to execute and deliver to Landlord an
agreement, in form acceptable to Landlord, agreeing to keep
confidential any information which it discovers about Landlord or the
Building in connection with such examination. Without limiting the
foregoing, such
-14-
<PAGE> 15
examiners shall be required to agree that they will not represent any
other tenant in the Building or in other buildings owned by Landlord or
an affiliate of Landlord.
E. Any dispute which arises in connection with Operating Expenses
Allocable to the Property as the result of any such examination by Tenant shall
be submitted to arbitration in accordance with Section 8.16 of this Lease. If,
based upon the resolution of any such dispute (whether by agreement of the
parties, or by arbitration, as aforesaid), it is determined that Tenant has
overpaid Landlord on account of Operating Expenses Allocable to the Property,
Landlord shall, at Landlord's election, either promptly refund such overpayment
to Landlord or shall credit such overpayment against the next installments of
Annual Fixed Rent and other charges due under this Lease.
2.7 Adjustments for Real Estate Taxes
A. Terms used herein are defined as follows:
(1) "Tax Year" means the twelve-month period beginning July 1 each year
during the Term or if the appropriate governmental tax fiscal period shall begin
on any date other than July 1, such other date.
(2) In any Tax Year when the Building has an average annual occupancy
rate of less than 95% then "Tax Expenses Allocable to the Premises" means the
same proportion of the Landlord's Tax Expenses as Rentable Floor Area of
Tenant's Space bears to 95% of the Rentable Floor Area of the Building. In any
Tax Year when the Building has an average annual occupancy rate of 95% or more
"Tax Expenses Allocable to the Premises" means the same proportion of Landlord's
Tax Expenses as Rentable Floor Area of Tenant's Space bears to the Rentable
Floor Area of the Building actually leased on an average annual basis for said
Tax Year.
(3) "Landlord's Tax Expenses" with respect to any Tax Year means the
aggregate Real Estate Taxes on the Property with respect to that Tax Year,
reduced by any abatements actually received with respect to that Tax Year.
(4) "Real Estate Taxes" means all taxes, levies, betterments, and
special assessments of every kind and nature assessed by National, State,
Municipal or by any other governmental authority on the Lot or the Building or
the Property which the Landlord shall become obligated to pay because of or in
connection with the ownership, leasing, operating, use or occupancy of the Lot,
the Building, and the Property or based upon rentals derived therefrom; charges,
fees and assessments for transit, housing, police, fire or other governmental
services or purported benefits to the Building; service or user payments in lieu
of taxes; and reasonable expenses of any proceedings for abatement of taxes. The
amount of special taxes or special assessments to be included shall be limited
to the amount of the installment (plus any interest, other than penalty
-15-
<PAGE> 16
interest, payable therein) of such special tax or special assessment required to
be paid during the year in respect of which such taxes are being determined.
There shall be excluded from such taxes all income, estate, succession,
inheritance and transfer taxes; provided, however, that if at any time during
the Term the present system of ad valorem tax of real property shall be changed
so that in lieu of or in addition to the whole or any part of the ad valorem tax
on real property, there shall be assessed on Landlord a capital levy or other
tax on the gross rents received with respect to the Lot or Building or Property,
or a federal, state, county, municipal, or other local income, franchise, excise
or similar tax, assessment, levy or charge (distinct from any now in effect in
the jurisdiction in which the Property is located) measured by or based, in
whole or in part, upon any such gross rents, than any and all of such taxes
shall be included within the term "Real Estate Taxes" but only to the extent
that the same would be payable if the Lot, Building or Property were the only
property of Landlord. Landlord agrees that all assessments for real estate
betterments shall be included in Landlord's Tax Expenses as if apportioned over
the longest period permitted by law and Tenant shall only be obligated to pay
its respective share of each payment which falls due during the Term.
Notwithstanding the foregoing, to the extent that it is determinable from the
records of the assessing authority that any increase in Real Estate Taxes is
based solely upon improvements to any tenants premises which exclude the
Building Standard Tenant Improvement level, as set forth on Exhibit D, such
increase shall be excluded from Landlord's Tax Expenses. For any Tax Year in
which the assessing authority determines the assessed value of the Property is
based upon an income approach, then the immediately preceding sentence shall not
apply.
B. If with respect to any Tax Year of the Term, Tax Expenses Allocable
to the Premises exceed Tenant's Tax Base, then Tenant shall pay to Landlord as
additional rent the amount of such excess. Such payments shall be made at the
times and in the manner hereinafter provided in this Section 2.7. Appropriate
prorations shall be made for those periods at the beginning or end of the Term
which are less than a full Tax Year. Within ninety (90) days or as soon
thereafter as reasonably possible after the end of such first Tax Year or
fraction thereof at the beginning of the Term, and of each succeeding Tax Year
during the Term and within ninety (90) days or as soon thereafter as reasonably
possible after lease termination, Landlord shall render to Tenant a statement in
reasonable detail certified by a representative of Landlord showing for the
preceding Tax Year or fraction thereof, as the case may be, Landlord's Tax
Expenses for the Property, and Tax Expenses Allocable to the Premises.
C. Commencing on the first day of the first month following the
delivery to Tenant of the statement referred to above and on the first day of
each month thereafter until delivery to Tenant of the next such statement,
Tenant shall pay to Landlord, on account toward Tenant's share of increases in
Tax Expenses Allocable to the Premises anticipated for the then current Tax
Year, 1/12th of the total amount of Tax Expenses Allocable to the Premises as
shown on the most recent such statement delivered to Tenant. The statements to
be rendered to Tenant referred to above shall also show for the preceding Tax
Year amounts of Real Estate Taxes already paid by
-16-
<PAGE> 17
Tenant on account for such year and the amount of Tax Expenses Allocable to the
Premises remaining due from or overpaid by Tenant for the Tax Year or fraction
thereof covered by the statement. Within 30 days after the date of delivery of
such statement, Tenant shall pay to Landlord or Landlord shall pay to Tenant as
the case may be, the balance of the amounts, if any, required to be paid
pursuant to the above provisions of this Section 2.7, except that Landlord may
at its option credit any amounts due from it to Tenant against monthly
installments of Annual Fixed Rent next thereafter coming due.
D. To the extent that Real Estate Taxes shall be payable to the taxing
authority in installments for periods less than a Tax Year, the foregoing
statement shall be rendered and payments made on account of such installments
with respect to such periods rather than with respect to such full Tax Year.
2.8 Due Date, Additional Rent; No Offsets
Except as otherwise specifically provided herein, all sums, amounts,
items or charges payable by Tenant to Landlord under this Lease shall be
considered as additional rent, and shall be paid by Tenant to Landlord on the
first day of the month following the date on which Landlord notifies Tenant of
the amount payable or on the tenth day after the giving of such notice,
whichever shall be later. Any such notice shall specify in reasonable detail the
basis of such additional rent. Annual Fixed Rent and additional rent shall be
paid by Tenant to Landlord without offset or deduction.
ARTICLE III
TENANT ALTERATIONS AND CONSTRUCTION
3.1 Alterations and Additions by Tenant
(a) This Section 3.1 shall apply before and during the Term. Tenant
shall not make alterations and additions to Tenant's Space except in accordance
with plans and specifications and a time schedule therefor first approved by
Landlord, in writing which approval shall not be unreasonably withheld or
delayed. All alterations and additions to Tenant's Space shall equal or exceed
the specifications and quantities provided in Exhibit D. No amendments or
additions to Tenant's approved plans shall be made without the prior written
consent of Landlord. Such approval shall not be unreasonably withheld or
delayed. Landlord shall not be deemed unreasonable for withholding approval of
any alterations or additions which (a) involve or might affect any structural or
exterior element of the Building, any area or element outside of the Premises,
or any facility serving any area of the Building outside the Premises, or (b)
will delay completion of the Premises or Building or (c) will require unusual
expense to readapt the
-17-
<PAGE> 18
Premises to normal office use on Lease termination or increase the cost of
construction or of insurance or taxes on the Building or of the services called
for by Section 4.1 unless Tenant first gives assurance reasonably acceptable to
Landlord for payment of such increased cost and that such readaption will be
made prior to such termination without expense to Landlord.
(b) All alterations and additions shall be part of the Building unless
and until Landlord shall specify the same for removal pursuant to Section 5.2.
Landlord may elect to require Tenant at the expiration or sooner termination of
the term of this Lease to restore the Premises to substantially the same
condition as existed at the Term Commencement Date.
(c) All of Tenant's alterations and additions and installation of
furnishings shall be coordinated with any work being performed by Landlord in
such manner as to not damage the Property or interfere with Building
construction or operation and, except for installation of furnishings, shall be
performed by contractors or workmen first approved by Landlord. Such approval
shall not be unreasonably withheld or delayed. In the event that Tenant shall
engage its own contractors to perform such work, Tenant shall pay to Landlord
the reasonable cost of services provided by Landlord or Landlord's contractor to
Tenant and to Tenant's contractors while performing such work, which services
shall include, but not be limited to, cleaning, security, rubbish removal,
electricity, toilet facilities, and elevators. Tenant's contract with any such
contractors shall include the Required Tenant Work General Conditions attached
hereto as Exhibit G, and Landlord shall have the right to enforce such General
Conditions directly against any of Tenant's contractors. Tenant shall defend,
save harmless, exonerate and indemnify Landlord from all injury, loss or damage
to any person or property occasioned by or growing out of such work, except to
the extent that such injury, loss or damage is caused by the negligence of
Landlord or the agents and employees of Landlord. Tenant agrees that it will
not, either directly or indirectly, use any contractors and/or materials if
their use will create any difficulty, whether in the nature of a labor dispute
or otherwise, with other contractors and/or labor engaged by Tenant or Landlord
or others in the construction, maintenance and/or operation of the Building or
any part thereof. Except for work by Landlord's general contractor, Tenant,
before its work is started, shall: secure all licenses and permits necessary
therefor; deliver to Landlord a statement of the names of all its contractors
and subcontractors and the estimated cost of all labor and material to be
furnished by them; and cause each contractor to carry Workmen's Compensation
Insurance in statutory amounts covering all the contractor's and subcontractor's
employees, Automobile Liability Insurance and comprehensive public liability
insurance and property damage insurance with such limits as Landlord may
reasonably require but in no event less than, with respect to public liability
insurance, $5,000,000.00 and with respect to property damage insurance,
$5,000,000.00 (all insurance to be written in companies reasonably approved by
Landlord and insuring Landlord and Tenant as well as the contractors), and to
deliver to Landlord certificates of all such insurance. No installations or work
shall be undertaken or begun by Tenant until Tenant has made provision for the
receipt by Tenant of written waivers of liens (i.e. for work performed, or
materials supplied, through the date of requisition) from all contractors,
laborers
-18-
<PAGE> 19
and suppliers of materials for installations or work, as a condition to payment
of each requisition. If the cost of any installation or work to be performed by
Tenant in the premises exceeds One Million ($1,000,000.00) Dollars, then Tenant
shall, prior to commencing such work, obtain a payment, performance and lien
bond, which shall name Landlord as an additional obligee, on behalf of its
general contractor.
(d) In no event shall any material or equipment be incorporated in or
added to the Premises, so as to become a fixture or otherwise a part of the
Building, in connection with any such alteration, decoration, installation,
addition or improvement which is subject to any lien, charge, mortgage or other
encumbrance of any kind whatsoever or is subject to any security interest or any
form of title retention agreement. Any mechanic's lien filed against the
Premises or the Building for work claimed to have been done for, or materials
claimed to have been furnished to, Tenant shall be discharged by Tenant within
ten (10) days thereafter, at Tenant's expense, by filing the bond required by
law or otherwise. If Tenant fails so to discharge any lien, Landlord may do so
at Tenant's expense and Tenant shall reimburse Landlord for any expense or cost
incurred by Landlord in so doing within fifteen (15) days after rendition of a
bill therefor.
(e) All installations or work done by Tenant shall be at its own
expense (subject, however, to Landlord's obligation to provide Landlord's
Contribution in accordance with Exhibit B), and shall at all times comply with
(i) laws, rules, orders and regulations of governmental authorities having
jurisdiction thereof; (ii) orders, rules and regulations of any Board of Fire
Underwriters, or any other body hereafter constituted exercising similar
functions, and governing insurance rating bureaus; (iii) Rules and Regulations
of Landlord; and (iv) plans and specifications prepared by and at the expense of
Tenant theretofore submitted to and approved by Landlord. All construction work
required or permitted by this Lease shall be done in a good and workmanlike
manner. Tenant agrees to pay promptly when due the entire cost of any work done
on the Premises by Tenant, its agents, employees, or independent contractors.
3.2 Real Estate Taxes on Leasehold Improvements
If under Massachusetts law or regulations, the tax assessor is required
to include leasehold (real property) improvements in determining the assessed
value of the Building, then to the extent that Tenant makes leasehold
improvements (including Tenant's original installation and Tenant's subsequent
alterations, additions, substitutions and improvements) which are in excess of
the Building Standard Tenant Improvements set forth in Exhibit D, whether done
prior to or after the commencement of the Term of this Lease, Tenant shall pay
the real estate taxes attributable to the value of such excess leasehold
improvements throughout the Term of this Lease within thirty (30) days after
being billed therefor by Landlord.
3.3 Landlord's Right to Make Alterations
-19-
<PAGE> 20
A. Upon at least forty-eight (48) hours' advance notice to Tenant,
except in case of emergency, Landlord reserves the right, exercisable by itself
or its nominee, at any time and from time to time without the same constituting
an actual or constructive eviction and without incurring any liability to Tenant
therefor or otherwise affecting Tenant's obligations under this Lease, to make
such changes, alterations, additions, improvements, repairs or replacements in
or to the Building (including the Premises, provided however, that Landlord's
right to make improvements within the Premises shall be subject to limitations
set forth in Section 2.3) and the fixtures and equipment thereof, as well as in
or to the street entrances, halls, passages, elevators, escalators, and
stairways thereof, as it may deem necessary or desirable, and to change the
arrangement and/or location of entrances or passageways, doors and doorways, and
corridors, elevators, stairs, toilets, or other public parts of the Building,
provided, however, that: (i) there be no unreasonable obstruction of the right
to access to, or unreasonable interference with the use of the Premises by
Tenant, (ii) Landlord does not reduce the useable floor area of the Premises, or
(iii) Landlord does not diminish or materially adversely affect the current
quality of the Building. Nothing contained in this Section 3.3 shall be deemed
to relieve Tenant of any duty, obligation or liability of Tenant with respect to
making any repair, replacement or improvement or complying with any law, order
or requirement of any governmental or other authority.
B. Landlord reserves the right to adopt at any time and from time to
time to change the name or address of the Building. In the event that Landlord
makes any such change in name or address more than once during the term of this
Lease, then Landlord shall promptly reimburse Tenant for the reasonable cost
(not to exceed $2,500.00) incurred by Tenant in replacing its stationery and
business cards.
C. Neither this Lease nor any use by Tenant shall give Tenant any right
or easement for the use of any door or any passage or any concourse connecting
with any other building or to any public convenience, and the use of such doors,
passes and concourses and of such conveniences may be regulated or discontinued
at any time and from time to time by Landlord without notice to Tenant and
without affecting the obligation of Tenant hereunder or incurring any liability
to Tenant therefor, provided, however, that there be no unreasonable obstruction
of the right to access to, or unreasonable interference with the use of the
Premises by Tenant.
D. Subject to Paragraphs F and G of this Section 3.3, Landlord shall
not be liable to Tenant for any compensation or reduction of rent by reason of
inconvenience or annoyance or for loss of business arising from the necessity of
Landlord or its agents entering the Premises for any of the purposes in this
Lease authorized, or for repairing the Premises or any portion of the Building,
however the necessity may occur provided, however, that Landlord shall use
reasonable efforts not to interfere with Tenant's use of the Premises. In case
Landlord is prevented or delayed from making any repairs, alterations or
improvements, or furnishing any services or performing any other covenant or
duty to be performed on Landlord's part, by reason of any cause reasonably
beyond Landlord's control, Landlord shall not be liable to Tenant therefor, nor,
-20-
<PAGE> 21
except as expressly otherwise provided in Paragraphs F and G of this Section 3.3
and in Section 6.1, shall Tenant be entitled to any abatement or reduction of
rent by reason thereof, nor shall the same give rise to a claim in Tenant's
favor that such failure constitutes actual or constructive, total or partial,
eviction from the Premises; provided however, that Landlord shall use reasonable
efforts to make such repair, restoration or improvements or restore such service
as soon as is reasonably practicable.
E. Landlord reserves the right to stop any service or utility system,
when necessary by reason of accident or emergency, or until necessary repairs
have been completed; provided, however, that in each instance of stoppage
Landlord shall exercise reasonable diligence to eliminate the cause thereof.
Except in case of emergency repairs Landlord will give Tenant reasonable advance
notice of any contemplated stoppage and will use reasonable efforts to avoid
unnecessary inconvenience to Tenant by reason thereof.
F. Notwithstanding anything to the contrary in this Lease contained, if
due to: (i) any such repairs, alterations, replacements, or improvements made by
Landlord, (ii) to Landlord's failure to make any repairs, alterations, or
improvements required to be made by Landlord, or (iii) any interruption of
services required to be provided by Landlord to Tenant under this Lease, any
portion of the Premises becomes untenantable so that for the Premises
Untenantability Cure Period, as hereinafter defined, the continued operation in
the ordinary course of Tenant's business is materially adversely affected, then,
provided that Tenant ceases to use the affected portion of the Premises during
the entirety of the Premises Untenantability Cure Period and that such
untenantability and Landlord's inability to cure such condition is not caused by
the fault or neglect of Tenant or Tenant's agents, employees or contractors,
Annual Fixed Rent, Annual Electricity Charges, Operating Expenses Allocable to
the Premises, and Tax Expenses Allocable to the Premises shall thereafter be
abated in proportion to such untenantability until the day such condition is
completely corrected. For the purposes hereof, the "Premises Untenantability
Cure Period" shall be defined as ninety (90) consecutive days after Landlord's
receipt of written notice from Tenant of the condition causing untenantability
in the Premises.
G. Notwithstanding anything to the contrary herein contained, if due
to: (i) such repairs, alterations, replacements or improvements made by
Landlord, (ii) Landlord's failure to make any repairs, alterations or
improvements required to be made by Landlord, or (iii) Landlord's failure to
provide any services which Landlord is required to provide under this Lease, any
material portion of the Premises becomes untenantable for a period of eleven
(11) months after Landlord's receipt of written notice of such condition from
Tenant, then, provided that Tenant ceases to use the affected portion of the
Premises during the entire period of such untenantability, such untenantability
and Landlord's inability to cure such condition is not caused by the fault or
neglect of Tenant, or Tenant's agents, employees or contractors, then Tenant may
terminate this Lease by giving Landlord written notice as follows:
-21-
<PAGE> 22
(1) Said notice shall be given after said eleven (11) month period.
(2) Said notice shall set forth an effective date which is not earlier
than thirty (30) days after Landlord receives said notice.
(3) If said condition is remedied on or before said effective date,
said notice shall have no further force and effect.
(4) If said condition is not remedied on or before said effective date
for any reason other then Tenant's fault, as aforesaid, the Lease shall
terminate as of said effective date, and the Annual Fixed Rent,
escalations and other charges due under the Lease shall be apportioned
as of said effective date.
H. The provisions of Paragraphs F and G of this Section 3.3 shall not
apply in the event of untenantability caused by fire, other casualty, or taking
(see Article 6).
3.4 Signage
Except as provided in Section 4.5 and this Section 3.4, Tenant shall
have no right to install or maintain any signage in or about the Premises, the
Building or the Property. Notwithstanding the foregoing, provided that
Lightbridge, Inc. is occupying the entirety of the Premises initially demised to
Tenant, Tenant shall be permitted, subject to Landlord's approval to erect a
sign on the facade of the Building. Such sign shall be the same size and in the
same location ("Present Exterior Sign Location") as the existing signage of the
present tenant of the Premises. Landlord hereby approves the signage (if any)
shown on Exhibit J to be installed in the Present Exterior Sign Location. Said
sign shall be erected in accordance with the by-laws of the Town of Burlington,
Massachusetts. Tenant shall, at Tenant's sole cost and expense, maintain such
signage in good condition throughout the term of the Lease. Notwithstanding
anything to the contrary herein contained, upon the earlier of: (x) the
termination of the term of this Lease, or (y) the date that Lightbridge, Inc.,
itself, ceases to occupy the entirety of the Premises initially demised to
Tenant, Tenant shall, at Tenant's sole cost and expense, remove such signage
from the Building and shall repair any damage to the Building caused by the
installation, maintenance or removal of such signage. Landlord shall, prior to
June 15, 1997, remove or cause to be removed, the existing Tenant's sign on the
facade of the Building and shall repair or cause to be repaired any damage
caused by such removal.
-22-
<PAGE> 23
ARTICLE IV
LANDLORD'S COVENANTS; INTERRUPTIONS AND DELAYS
Landlord covenants:
4.1 Services Furnished by Landlord
To furnish services, utilities, facilities and supplies ("Landlord's
Services") set forth in Exhibit E, which Landlord's Services Landlord shall have
the right to change, from time to time, provided that Landlord's Services (i.e.
at the time that Landlord changes such services) shall be equal in quality and
quantity to those customarily provided by landlords in comparable buildings in
the Burlington area.
4.2 Additional Services Available to Tenant
To furnish, at Tenant's expense, reasonable additional Building
operation services which are usual and customary in similar office buildings in
the Burlington area upon reasonable advance request of Tenant at reasonable and
equitable rates from time to time established by Landlord. Landlord represents
that, as of the Execution Date of this Lease, the additional charge for heat is
$33.00 per hour per Pod and the additional charge for air-conditioning is $48.00
per hour per Pod. Such charges are subject to change, from time to time, based
upon the actual cost to Landlord of providing such service.
4.3 Additional Air Conditioning Equipment
In the event Tenant requires additional air conditioning for business
machines, meeting rooms or other special purposes, or because of occupancy or
excess electrical loads, any additional air conditioning units, chillers,
condensers, compressors, ducts, piping and other equipment, such additional air
conditioning equipment will be installed and maintained by Landlord at Tenant's
sole cost and expense, but only if Tenant has obtained Landlord's prior written
consent, which consent shall not be unreasonably withheld and if the same will
not cause damage or injury to the Building or create a dangerous or hazardous
condition or entail excessive or unreasonable alterations, repairs or expense or
interfere with or disturb other tenants; and Tenant shall reimburse Landlord in
such an amounts as will compensate it for the cost incurred by it in operating
such additional air conditioning equipment.
-23-
<PAGE> 24
4.4 Roof, Exterior Wall, Floor Slab, and Common Facility Repair
Except as otherwise provided in Article VI to make such repairs to the
roof, exterior walls, floor slabs, plumbing, electrical and mechanical systems
installed by Landlord and common areas and facilities as may be necessary to
keep them in good condition, the expense of which shall be charged in accordance
with Section 2.6. Landlord shall maintain the landscaping, driveways and parking
areas in a clean and neat condition and shall remove snow and ice from driveways
and parking areas as is reasonably necessary.
4.5 Door Signs
To provide and install, at Tenant's expense, letters or numerals on
doors in the Premises to identify Tenant's name and Building address; all such
letters and numerals shall be in the building standard graphics and no others
shall be used or permitted on the Premises. Landlord agrees, during the term of
this Lease, to list Tenant's name in any building directory. The initial listing
shall be at Landlord's cost and expense. Any change in any such building
directory listing shall be at Tenant's cost and expense.
4.6 Quiet Enjoyment
Landlord covenants that if, and so long as, Tenant keeps and performs
each and every covenant, agreement, term, provision and condition herein
contained on the part and on behalf of Tenant to be kept and performed, Tenant
shall quietly enjoy the Premises from and against the claims of all persons
claiming by, through or under Landlord subject, nevertheless, to the covenants,
agreements, terms, provisions and conditions of this Lease.
ARTICLE V
TENANT'S COVENANTS
Tenant covenants during the Term and such further time as Tenant
occupies any part of the Premises:
5.1 Payments
To pay when due all Annual Fixed Rent and additional rent and all
charges for utility services rendered to the Premises (except as otherwise
provided in Exhibit E) and, as further additional rent, all charges for
additional services rendered pursuant to Section 4.2;
-24-
<PAGE> 25
5.2 Repair and Yield Up
Except as otherwise provided in Article VI and Section 4.4, to keep the
Premises in as good order, repair and condition as they were on the Term
Commencement Date, reasonable wear and tear, damage caused by casualty, and
damage caused by taking only excepted, and all glass in windows (except glass in
exterior walls of the Building unless the damage thereto is attributable to
Tenant's negligence or misuse) and doors of the Premises whole and in good
condition with glass of the same quality as that injured or broken, damage by
fire only excepted; and at the expiration or termination of this Lease,
peaceably to yield up the Premises and all alterations and additions thereto in
good order, repair and condition, reasonable wear and tear, damage caused by
casualty, and damage caused by taking only excepted, first removing all goods
and effects of Tenant and, to the extent specified by Landlord by notice
("Improvement Removal Notice") to Tenant given at least ten (10) days before
such expiration or termination, all alterations and additions made by Tenant and
all partitions, and repairing any damage caused by such removal and restoring
the Premises and leaving them clean and neat. If Tenant so requests in writing
at the time that Tenant requests Landlord's approval of any alteration or
addition, Landlord shall give its Improvement Removal Notice (i.e. Landlord
shall make its election as to whether such alteration or addition is to be
removed at the end of the term of this Lease), at the time that Landlord
approves Tenant's plans for the same.
Tenant will remove any personal property from the Building and the
Premises upon or prior to the expiration or termination of this Lease and any
such property which shall remain in the Building or the Premises thereafter
shall be conclusively deemed to have been abandoned, and may either be retained
by Landlord as its property or sold or otherwise disposed of in such manner as
Landlord may see fit. If any part thereof shall be sold, then Landlord may
receive and retain the proceeds of such sale and apply the same, at its option,
against the expenses of the sale, the cost of moving and storage, any arrears of
Annual Fixed Rent, additional or other charges payable hereunder by Tenant to
Landlord and any damages to which Landlord may be entitled under Section 7.2
hereof or pursuant to law.
5.3 Use
Continuously from the commencement of the Term to use and occupy the
Premises for the Permitted Uses, and not to injure or deface the Premises,
Building or Lot, nor to permit in the Premises any auction sale, vending
machine, or inflammable fluids or chemicals, or nuisance, or the emission from
the Premises of any objectionable noise or odor, nor to use or devote the
Premises or any part thereof for any purpose other than the Permitted Uses, nor
any use thereof which is inconsistent with the maintenance of the Building as an
office building of first class quality in maintenance, use and occupancy, or
which is improper, offensive, contrary to law or ordinance or liable to
invalidate or increase the premiums for any insurance on the Building or its
contents or liable to render necessary any alteration or addition to the
Building.
-25-
<PAGE> 26
5.4 Obstructions, Items Visible from Exterior;
Rules and Regulations
Not to obstruct in any manner any portion of the Building not hereby
leased or any portion thereof or of the Lot used by Tenant in common with
others; not without prior consent of Landlord to permit the painting or placing
of any signs, curtains, blinds, shades, awnings, aerials or flagpoles, or the
like, visible from outside the Premises; and to comply with all reasonable Rules
and Regulations now or hereafter made by Landlord, or which Tenant has been
given notice, for the care and use of the Building and Lot and their facilities
and approaches. Landlord shall use reasonable efforts to enforce such Rules and
Regulations; provided however, that in no event shall Landlord be liable to
Tenant for the failure of other occupants of the Building to conform to such
Rules and Regulations or for any other act or omission of other occupants of the
Building.
5.5 Safety Appliances
To keep the Premises equipped with all safety appliances required by
law or ordinance or any other regulation of any public authority because of any
use made by Tenant other than normal office use, and to procure all licenses and
permits so required because of such use and, if requested by Landlord, to do any
work so required because of such use, it being understood that the foregoing
provisions shall be construed to broaden in any way Tenant's Permitted Uses.
5.6 Assignment; Sublease
A. Except as provided in this Section 5.6, Tenant covenants and agrees
that neither this Lease nor the term and estate hereby granted, nor any interest
herein or therein, will be assigned, mortgaged, pledged, encumbered or otherwise
transferred, voluntarily, by operation of law or otherwise, and that neither the
Premises, nor any part thereof will be encumbered in any manner by reason of any
act or omission on the part of Tenant, or used or occupied, or permitted to be
used or occupied, or utilized for desk space for mailing privileges, by anyone
other than Tenant, or for any use or purposes other than the Permitted Uses
stated in Article 1, or be sublet, or offered or advertised for subletting.
Notwithstanding the foregoing, it is hereby expressly understood and agreed,
however, if Tenant is a corporation, that the assignment or transfer of this
Lease, and the term and estate hereby granted, to any corporation into which
Tenant is merged or with which Tenant is consolidated which corporation shall
have a net worth at least equal to that of Tenant immediately prior to such
merger or consolidation (such corporation being hereinafter called "Tenant
Successor"), shall not be deemed to be prohibited hereby is, and upon the
express condition that such Tenant Successor and Tenant shall promptly execute,
acknowledge and deliver to Landlord an agreement in form and substance
satisfactory to Landlord whereby such Tenant Successor shall agree to be
independently bound by and upon all the covenants,
-26-
<PAGE> 27
agreements, terms, provisions and conditions set forth in this Lease on the part
of Tenant to be performed, and whereby such Tenant Successor shall expressly
agree that the provisions of this Section 5.6 shall, notwithstanding such
assignment or transfer, continue to be binding upon it with respect to all
future assignments and transfers.
B. Notwithstanding anything to the contrary in the Lease
contained:
1. Tenant shall, prior to offering or advertising the
Premises, or any portion thereof for sublease or
assignment give Landlord a Recapture Offer, as
hereinafter defined.
2. For the purposes hereof a "Recapture Offer" shall be
defined as a notice in writing from Tenant to
Landlord which:
(a) States that Tenant desires to sublet the
Premises, or a portion thereof, or to assign
its interest in this Lease.
(b) Identifies the affected portion of the
Premises ("Recapture Premises").
(c) Identifies the period of time ("Recapture
Period") during which Tenant proposes to
sublet the Recapture Premises or to assign
its interest in the Lease.
(d) Offers to Landlord to terminate the Lease in
respect of the Recapture Premises (in the
case of a proposed assignment of Tenant's
interest in the Lease or a subletting for
the remainder of the term of the Lease) or
to suspend the term of the Lease pro tanto
in respect of the Recapture Period (i.e. the
term of the Lease in respect of the
Recapture Premises shall be terminated
during the Recapture Period and Tenant's
rental obligations shall be reduced in
proportion to the ratio of the Total
Rentable Area of the Recapture Premises to
the Total Rentable Area of the premises then
demised to Tenant).
3. Landlord shall have forty-five (45) days to accept a
Recapture Offer. If Landlord does not timely give
written notice to Tenant accepting a Recapture Offer,
then Landlord agrees that it will not unreasonably
withhold or delay its consent to a sublease of the
Recapture Premises for the Recapture Period, or an
assignment of
-27-
<PAGE> 28
Tenant's interest in the Lease, as the case may be,
to a Qualified Transferee, as hereinafter defined.
4. For the purposes hereof, a "Qualified Transferee"
shall be defined as a person, firm or corporation
which, in Landlord's reasonable opinion:
(a) is financially responsible and of good
reputation; and
(b) is engaged in a business, the functional
aspects of which, with respect to the
Premises, are similar to the use of other
premises made by other office space tenants
in the Building; and
(c) is not a Restricted Building Occupant, as
hereinafter defined.
5. For the purposes hereof, a "Restricted Building
Occupant" shall be defined as any tenant or subtenant
of the Building who:
(a) Desires to sublease the Recapture Premises
for expansion purposes only; and
(b) Such Occupant's occupancy of the Recapture
Premises will not, either directly or
indirectly, cause a vacancy in the premises
which such occupant then occupies in the
Building; and
(c) Such Occupant's need, as to the size of
premises and length of term, cannot then
(i.e., at the time that Tenant requests
Landlord's consent to such Occupant) be
satisfied by Landlord.
6. Notwithstanding anything to the contrary in this
Paragraph B contained:
(a) If Tenant is in default (i.e. after giving
of any applicable notice and the expiration
of any applicable grace periods) of its
obligations under the Lease at the time that
it makes the aforesaid offer to Landlord,
such default shall be deemed to be a
"reasonable" reason for Landlord withholding
its consent to any proposed subletting or
assignment; and
-28-
<PAGE> 29
(b) If Tenant does not enter into a sublease
with a subtenant (or an assignment to an
assignee, as the case may be) approved by
Landlord, as aforesaid, on or before the
date which is one hundred (100) days after
the earlier of: (x) the expiration of said
forty-five (45) day period, or (y) the date
that Landlord notifies Tenant that Landlord
will not accept Tenant's offer to terminate
or suspend the Lease, then Landlord shall
have the right arbitrarily to withhold its
consent to any subletting or assignment
proposed to be entered into by Tenant after
the expiration of said one hundred (100) day
period unless Tenant again offers, in
accordance with this Paragraph B, either to
terminate or to suspend the Lease in respect
of the portion of the premises proposed to
be sublet (or in respect of the entirety of
the premises in the event of a proposed
assignment, as the case may be). If Tenant
shall make any subsequent offers to
terminate or suspend the Lease pursuant to
this Paragraph B, any such subsequent offers
shall be treated in all respects as if it is
Tenant's first offer to suspend or terminate
the Lease pursuant to this Paragraph B,
provided that the period of time Landlord
shall have in which to accept or reject such
subsequent offer shall be thirty (30) days.
7. Notwithstanding anything to the contrary herein
contained, Tenant shall have no right, under this
Paragraph B hereof, prior to the date one (1) year
after the Term Commencement Date. Without limiting
the foregoing, Tenant shall have no right to give
Landlord a Recapture Offer prior to the date one (1)
year after the Term Commencement Date.
8. No subletting or assignment shall relieve Tenant of
its primary obligation as party-Tenant hereunder, nor
shall it reduce or increase Landlord's obligations
under the Lease provided, however, that Tenant's
obligations or Tenant hereunder shall be suspended
with respect to the Recapture Space during the
Recapture Period if Landlord elects to accept a
Recapture Offer.
C. In the event of an assignment of this Lease or a sublease of the
premises or any portion thereof to anyone other than a Tenant Successor, Tenant
shall pay to Landlord fifty (50%) percent of any Net Sublease Profits (as
defined below), payable in accordance with the following.
-29-
<PAGE> 30
In the case of an assignment of this Lease, "Net Sublease Profit": (1) shall be
defined as a lump sum in the amount (if any) by which any consideration paid by
the assignee in consideration of or as an inducement to Tenant to make said
assignment exceeds the reasonable attorneys' fees, construction costs and
brokerage fees incurred by Tenant in order to effect such assignment
(collectively, "Sublease Expenses"), and (2) be payable concurrently with the
payment to be made by the assignee to Tenant. In the case of a sublease, "Net
Sublease Profit": (3) shall be defined as a monthly amount equal to the amount
by which the sublease rent and other charges payable by the subtenant to Tenant
under the sublease exceed the sum of the rent and other charges payable under
this Lease for the premises or allocable to the sublet portion thereof, plus a
monthly amount equal to the Sublease Expenses divided by the number of months in
the term of the sublease, and (4) shall be payable on a monthly basis
concurrently with the subtenant's payment of rent to Tenant under the sublease.
D. If Tenant is an individual who uses and/or occupies the Premises
with partners, or if Tenant is a partnership, then:
(i) Each present and future partner shall be personally bound
by and upon all of the covenants, agreements, terms, provisions and conditions
set forth in this Lease on the part of Tenant to be performed; and
(ii) In confirmation of the foregoing, Landlord may (but
without being required to do so) request (and Tenant shall duly comply) that
Tenant, at the time that Tenant admits any new partner to its partnership, shall
require each such new partner to execute an agreement in form and substance
satisfactory to Landlord whereby such new partner shall agree to be personally
bound by and upon all of the covenants, agreements, terms, provisions and
conditions of this Lease on the part of Tenant to be performed, without regard
to the time when such new partner is admitted to partnership or when any
obligations under any such covenants, etc., accrue.
E. The listing of any name other than that of Tenant, whether on the
doors of the Premises or on the Building directory, or otherwise, shall not
operate to vest in any such other person, firm or corporation any right or
interest in this Lease or in the Premises or be deemed to effect or evidence any
consent of Landlord, it being expressly understood that any such listing is a
privilege extended by Landlord revocable at will by written notice to Tenant.
F. If this Lease be assigned, or if the Premises or any part thereof be
sublet or occupied by anybody other than Tenant, Landlord may, at any time and
from time to time, collect rent and other charges from the assignee, subtenant
or occupant, and apply the net amount collected to the rent and other charges
herein reserved, then due and hereafter becoming due, but no assignment,
subletting, occupancy or collection shall be deemed a waiver of this covenant,
or the acceptance of the assignee, subtenant or occupant as a tenant, or a
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. Any consent
-30-
<PAGE> 31
by Landlord to a particular assignment or subletting shall not in any way
diminish the prohibition stated in the first sentence of this Section 5.6 or the
continuing liability of the Tenant named in Article 1 as the party-Tenant under
this Lease. No assignment or subletting or use of the Premises by an affiliate
of Tenant shall affect the Permitted Uses for which the Premises may be used as
stated in Article 1.
5.7 Indemnity; Insurance
To defend with counsel first reasonably approved by Landlord, save
harmless, and indemnify Landlord from any liability for injury, loss. accident
or damage to any person or property, and from any claims, actions, proceedings
and expenses and costs in connection therewith (including without limitation
reasonable counsel fees), (i) arising from (a) the omission, fault, willful act,
negligence or other misconduct of Tenant, or of Tenant's employees, agents or
contractors, or (b) from any use made or thing done or occurring on the Premises
not due to the omission, fault, willful act, negligence or other misconduct of
Landlord or of Landlord's employees, agents, or contractors, or (ii) resulting
from the failure of Tenant to perform and discharge its covenants and
obligations under this Lease; to maintain in responsible companies qualified to
do business, and in good standing, in Massachusetts public liability insurance
covering the Premises insuring Landlord as well as Tenant with limits which
shall, at the commencement of the Term, be at least equal to those stated in
Article 1 and from time to time during the Term shall be for such higher limits,
if any as are customarily carried in the Burlington area with respect to similar
properties, and Workmen's Compensation Insurance with statutory limits covering
all of Tenant's employees working in the Premises, and to deposit promptly with
Landlord certificates for such insurance, and all renewals thereof bearing the
endorsement that the policies will not be canceled until after ten (10) days'
written notice to Landlord.
5.8 Personal Property at Tenant's Risk
That all of the furnishings, fixtures, equipment, effects and property
of every kind, nature and description of Tenant, and all persons claiming by,
through or under Tenant which, during the continuance of this Lease or any
occupancy of the Premises by Tenant or anyone claiming under Tenant, may be on
the Premises or elsewhere in the Building or on the Lot, shall be at the sole
risk and hazard of Tenant, and if the whole or any part thereof shall be
destroyed or damaged by fire, water or otherwise, or by the leakage or bursting
of water pipes, steam pipes, or other pipes, by theft or from any other cause,
no part of said loss or damage is to be charged to or be borne by Landlord,
except that Landlord shall in no event be indemnified or held harmless or
exonerated from any liability to Tenant or to any person, for any injury, loss,
damage or liability to the extend such indemnity, hold harmless or exoneration
is prohibited by law.
5.9 Right of Entry
-31-
<PAGE> 32
To permit Landlord and its agents: to examine the Premises at
reasonable times and upon reasonable notice (except that no notice shall be
required during an emergency or during normal cleaning operations), if Landlord
shall so elect, to make any repairs or replacements Landlord may deem necessary;
to remove, at Tenant's expense, any alterations, additions, signs, curtains,
blinds, shades, awnings, aerials, flagpoles, or the like not consented to in
writing; and at reasonable times and upon reasonable notice to Tenant to show
the Premises to prospective tenants during the eighteen months preceding
expiration of the Term and to prospective purchasers and mortgagees at all
reasonable times. At Tenant's election, a representative of Tenant may accompany
Landlord and its agents during any such entry.
Without incurring any liability to Tenant, Landlord may permit access
to the Premises and open the same, whether or not Tenant shall be present, upon
any demand or any receiver, trustee, assignee for the benefit of creditors,
sheriff, marshall or court officer entitled to, or reasonably purporting to be
entitled to, such access for the purposes of taking possession of, or removing,
Tenant's property or for any other lawful purposes (but this provision and any
action by Landlord hereunder shall not be deemed a recognition by Landlord that
the person or official making such demand has any right or interest in or to
this Lease, or in or to the Premises), or upon demand of any representation of
the fire, police, building, sanitation or other department of the city, state or
federal governments.
5.10 Floor Load; Prevention of Vibration and Noise
Not to place a load upon the Premises exceeding an average rate of 70
pounds of live load per square foot of floor area (partitions shall be
considered as part of the live load); Landlord reserves the right to prescribe
the weight and position of all safes, files and heavy equipment which Tenant
desires to place in the Premises so as properly to distribute the weight
thereof; Tenant's business machines and mechanical equipment which cause
vibration or noise that may be transmitted to the Building structure or to any
other space in the Building shall be so installed, maintained and used by Tenant
as to eliminate such vibration or noise. Notwithstanding the foregoing, subject
to obtaining Landlord's prior written approval, which approval shall not be
unreasonably withheld, Tenant shall have the right to exceed the foregoing floor
loading limit for its data center, provided that Tenant construct such
structural support as is necessary to allow such floor loading.
-32-
<PAGE> 33
5.11 Personal Property Taxes
To pay promptly when due all taxes which may be imposed upon personal
property (including without limitation, fixtures and equipment) in the Premises
to whomever assessed.
5.12 Payment of Litigation Expenses
As additional rent, to pay all reasonable costs, counsel and other
fees incurred by Landlord in connection with the successful enforcement (in
litigation or arbitration proceedings, as the case may be) by Landlord of any
obligations of Tenant under this Lease. Landlord agrees to pay all reasonable
costs, counsel and other fees incurred by Tenant in connection with the
successful enforcement (in litigation or arbitration proceedings, as the case
may be) by Tenant of any obligation of Landlord under this Lease.
5.13 Compliance with Insurance Regulations
Not to do or permit to be done any act or thing upon the Premises
which will invalidate or be in conflict with the terms of the Massachusetts
standard form of fire, boiler, sprinkler, water damage or other insurance
policies covering the Building and the fixtures and property therein; Tenant
shall, at its own expense, comply with all rules, regulations, and requirements
of the National Board of Fire Underwriters or any state or other similar body
having jurisdiction, and shall not knowingly do or permit anything to be done in
or upon the Premises in a manner which increases the rate of fire insurance upon
the building or on any property or equipment located therein.
ARTICLE VI
CASUALTY AND TAKING
6.1 Termination or Restoration; Rent Adjustment
A. In case during the Term all or any material part of the Premises or
the Building or the Lot are damaged materially by fire or other casualty or by
action of public or other authority in consequence thereof, or are taken by
eminent domain or Landlord receives compensable damage by reason of anything
lawfully done in pursuance of public or other authority, this Lease shall
terminate at Landlord's election, which may be made notwithstanding Landlord's
entire interest may have been divested, by notice given to Tenant within three
(3) months after the casualty or taking specifying the effective date of
termination. The effective date of termination specified by Landlord shall not
be less than 15 nor more than 30 days after the date of notice of
-33-
<PAGE> 34
such termination. Unless terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect following any such damage or taking,
subject, however, to the following provisions.
B. If in any such case the Premises, Tenant's means of access thereto,
rendered unfit for use and occupation and this Lease is not so terminated,
Landlord shall use due diligence (following the expiration of the period in
which Landlord may terminate this Lease pursuant to the foregoing provisions of
this Section 6.1), subject to the then applicable statutes, building codes,
zoning ordinances, and regulations of any governmental authority and at the
expense of Landlord (but only to the extent of insurance proceeds made available
to Landlord) to put the Premises or Tenant's means of access, or in case of
taking what may remain thereof (excluding in case of both casualty and taking
any items installed or paid for by Tenant which Tenant may be required to remove
pursuant to Section 5.2), into proper condition for use and occupation and a
just proportion of the Annual Fixed Rent and additional rent according to the
nature and extent of the injury shall be abated from the date of such casualty
or taking until the Premises or the means of access, or such remainder shall
have been put by Landlord in such condition; and in case of taking which
permanently reduces the area of the Premises, a just proportion of the Annual
Fixed Rent and additional rent shall be abated for the remainder of the Term.
C. In the event that the premises or the Building are damaged by fire
or other casualty to such an extent so as to render the premises untenantable,
and if Landlord shall fail to substantially complete said repairs or restoration
within a period ("Restoration Period") which is eleven (11) months after the
date of such fire or other casualty for any reason other than Tenant's fault,
Tenant may terminate this Lease by giving Landlord written notice as follows:
(1) Said notice shall be given after said Restoration Period.
(2) Said notice shall set forth an effective date which is not
earlier than thirty (30) days after Landlord receives said
notice.
(3) If said repairs or restoration are substantially complete on
or before the date thirty (30) days (which thirty-(30)-day
period shall be extended by the length of any delays caused by
Tenant or Tenant's contractors) after Landlord receives such
notice, said notice shall have no further force and effect.
(4) If said repairs or restoration are not substantially complete
on or before the date thirty (30) days (which thirty-(30)-day
period shall be extended by the length of any delays caused by
Tenant or Tenant's contractors) after Landlord receives such
notice, the Lease shall terminate as of said effective date.
-34-
<PAGE> 35
D. If there is taking which reduces the ratio of parking spaces serving
the Building to less than 3.0 parking spaces per 1,000 square feet of occupied
rentable area in the Building ("Minimum Parking Ratio"), Tenant shall have the
right to terminate the term of this Lease by giving written notice to Landlord
within thirty (30) days of the loss of the use of parking spaces by Tenant. If
Landlord fails, within ninety (90) days of Landlord's receipt of Tenant's notice
to provide alternate parking within a reasonable distance from the Building
satisfying the Minimum Parking Ratio, then the term of this Lease shall
terminate as of the date ninety (90) days after Landlord receives such notice.
6.2 Eminent Domain
Landlord reserves to itself any and all rights to receive awards made
for damages to the Premises and Building and Lot and the leasehold hereby
created, or any one or more of them, accruing by reason of exercise of eminent
domain or by reason of anything lawfully done in pursuance of public or other
authority. Tenant hereby releases and assigns to Landlord all Tenant's rights to
such awards, and covenants to deliver such further assignments and assurances
thereof as Landlord may from to time request. Tenant hereby irrevocably
designates and appoints Landlord as its attorney-in-fact to execute and deliver
in Tenant's name and behalf all such further assignments thereof.
Notwithstanding anything to the contrary herein contained, Tenant shall be
entitled to receive any separate award for relocation expenses and for the cost
of its trade fixtures.
6.3 Temporary Taking
In the event of taking of the Premises or any part thereof for
temporary use, (i) this Lease shall be and remain unaffected thereby and rent
shall not abate, and (ii) Tenant shall be entitled to receive for itself such
portion or portions of any award made for such use with respect to the period of
the taking which is within the Term, provided that if such taking shall remain
in force at the expiration or earlier termination of this Lease, Tenant shall
then pay to Landlord a sum equal to the reasonable cost of performing Tenant's
obligations under Section 5.2 with respect to surrender of the Premises and upon
such payment shall be excused from such obligations.
ARTICLE VII
DEFAULT
7.1 Events of Default
If (a) Tenant shall neglect or fail to perform or observe any of
Tenant's covenants or agreements herein, including the obligation to pay, when
due, Annual Fixed Rent or additional rent, and such failure continues, in the
case of Annual Fixed Rent or additional rent, for more than
-35-
<PAGE> 36
ten (10) days after written notice thereof, or in any other case, for more than
thirty (30) days after written notice thereof and such additional time, if any,
as is reasonably necessary to cure the default if the default is of such a
nature that it cannot reasonably be cured in thirty (30) days, provided however,
that no such notice need be given and no such default shall be curable if on two
(2) prior occasions within the same calendar year there had been a default which
had been cured after notice thereof had been given by Landlord to Tenant as
herein provided; or if Tenant or any guarantor or any guarantor of any of
Tenant's obligations under this Lease, (b) is not paying its debts as such debts
become due, becomes insolvent, seeks relief under any chapter of the U.S.
Bankruptcy Code (or any insolvency or similar law of any jurisdiction), or (c)
proposes any dissolution, liquidation, composition, financial reorganization or
recapitalization with creditors; or (d) makes an assignment or trust mortgage
for the benefit of creditors or (e) if a receiver, trustee, custodian or similar
agent is appointed or takes possession with respect to any property or business
of Tenant or such guarantor, or (f) Tenant shall desert or abandon the Premises
or the same shall become, or appear to have become, vacant (whether or not the
key shall have been surrendered or the rent shall have been paid), or (g) any
event shall occur or any contingency shall arise whereby this Lease, or the term
and estate thereby created, would (by operation of law or otherwise) devolve
upon or pass to any person, firm or corporation other than Tenant, except as
expressly permitted under Section 5.6 hereof then, in any such case, whether or
not the Term shall have begun, Landlord may immediately, or at any time while
such default exists and without further notice, terminate this Lease by entry by
Landlord or upon the giving of notice to Tenant, and this Lease shall come to an
end as fully and completely as if such date were the date herein originally
fixed for the expiration of the Term, and Tenant shall then quit and surrender
the Premises to Landlord, but Tenant shall remain liable as hereinafter
provided.
7.2 Damages
In the event that this Lease is terminated under any of the provisions
contained in Section 7.1 or shall be otherwise terminated for breach of any
obligation of Tenant, Tenant covenants to pay forthwith to Landlord, as
compensation, the present value of the excess of the total rent reserved for the
residue of the Term over the rental value of the Premises for said residue of
the Term. In calculating the rent reserved there shall be included, in addition
to the Annual Fixed Rent and all additional rent, the value of all other
considerations agreed to be paid or performed by Tenant for said residue. Tenant
further covenants as an additional and cumulative obligation after any such
ending to pay punctually to Landlord all the sums and perform all the
obligations which Tenant covenants in this Lease to pay and to perform in the
same manner and to the same extent and at the same time as if this Lease had not
been terminated. In calculating the amounts to be paid by Tenant under the next
foregoing covenant Tenant shall be credited with any amount paid to Landlord as
compensation as in this Section 7.2 provided and also with the net proceeds of
any rent obtained by Landlord by reletting the Premises, after deducting all
Landlord's expenses incurred by Landlord in good faith in connection with such
reletting, including, without limitation, all repossession costs, brokerage
commissions, fees for legal services and expenses of
-36-
<PAGE> 37
preparing the Premises for such reletting, it being agreed by Tenant that
Landlord may (i) relet the Premises or any part or parts thereof, for a term or
terms which may at Landlord's option be equal to or less than or exceed the
period which would otherwise have constituted the balance of the Term and may
grant such concessions and free rent as Landlord in its sole judgment considers
advisable or necessary to relet the same and (ii) make such alterations, repairs
and decorations in the Premises as Landlord in its sole judgment considers
advisable or necessary to relet the same, and no action of Landlord in
accordance with the foregoing or failure to relet or to collect rent under
reletting shall operate or be construed to release or reduce Tenant's liability
as aforesaid.
In lieu of any other damages or indemnity and in lieu of full recovery
by Landlord of all sums payable under all the foregoing provisions of this
Section 7.2, and Landlord may, by written notice to Tenant, at any time after
this Lease is terminated under any of the provisions contained in Section 7.1 or
is otherwise terminated for breach of any obligation of Tenant and before such
full recovery, elect to recover, and Tenant shall thereupon pay, as liquidated
damages, an amount equal to: (i) the aggregate of the Annual Fixed Rent and
additional rent accrued under Section 2.5, 2.6 and 2.7 in the period commencing
as of the date of such termination and ending as of the earlier of: (x) the date
12 months ended next following such termination, and (y) the last day of the
then current term of the Lease, plus (ii) the amount of Annual Fixed Rent and
additional rent of any kind accrued and unpaid at the time of termination and
less the amount of any recovery by Landlord under the foregoing provisions of
this Section 7.2 up to the time of payment of such liquidated damages.
Nothing contained in this Lease shall limit or prejudice the right of
Landlord to prove for and obtain in proceedings for bankruptcy or insolvency by
reason of the termination of this Lease, an amount equal to the maximum allowed
by any statute or rule of law in effect at the time when, and governing the
proceedings in which, the damages are to be proved, whether or not the amount be
greater, equal to, or less than the amount of the loss or damages referred to
above.
-37-
<PAGE> 38
ARTICLE VIII
MISCELLANEOUS
8.1 Computation of Rentable Floor Areas
For all purposes of this Lease, (a) the rentable area for single tenant
office floors is the gross area of the floor measured from the plane of the
inside surface of the exterior glass line deducting therefrom the non rentable
areas of the floor and adding a pro-rata share of the building common area, but
allowing no deductions for columns or projections within such floor, (b) the
rentable area for multi-tenant office floors is the gross area of Tenant's Space
measured from the plane of the inside surface of the exterior glass line to the
middle of the demising walls, and adding a pro-rata share of the building common
areas and of the floor common area, but allowing no deductions for columns or
projections within such floor, (c) non-rentable areas of the floor are: public
elevator shafts and elevator machine rooms, machinery shafts and common
stairways and stairwells, (d) floor common areas are restrooms, elevator lobby,
janitor closets, common corridors, and mechanical rooms, (e) the building common
area is the first floor lobby, loading dock, mail room, electrical equipment,
mechanical room and health club.
8.2 Notice of Lease; Consent of Approval; Notices;
Bind and Inure
The titles of the Articles are for convenience only and are not to be
considered in construing this Lease. Tenant agrees not to record this Lease, but
upon request of either party both parties shall execute and deliver a notice of
this Lease in form appropriate for recording or registration, and if this Lease
is terminated before the term expires, an instrument in such form acknowledging
the date of termination. Whenever any notice, approval, consent, request or
election is given or made pursuant to this Lease it shall be in writing.
Communications and payments shall be addressed if to Landlord at Landlord's
Original Address or at such other address as may have been specified by prior
notice to Tenant, and if to Tenant, at Tenant's Original Address or at such
other place as may have been specified by prior notice to Landlord. Any
communication so addressed shall be deemed duly given when mailed by registered
or certified mail, return receipt requested. If Landlord by notice to Tenant at
any time designates some other person to receive payments or notices, all
payments or notices thereafter by Tenant shall be paid or given to the person
designated until notice to the contrary is received by Tenant from Landlord. The
obligations of this Lease shall run with the land, and this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that only the original Landlord named herein
shall be liable for obligations accruing before the beginning of the Term, and
thereafter the original Landlord named herein and each successive owner of the
Premises shall be liable only for obligations accruing during the period of
ownership.
-38-
<PAGE> 39
8.3 Landlord's Failure to Enforce
The failure of Landlord to seek redress for violation of, or to insist
upon strict performance of, any covenant or condition of this Lease, or with
respect to such failure of Landlord to enforce any of the Rules and Regulations
referred to in Section 5.4, whether heretofore or hereafter adopted by Landlord,
shall not be deemed a waiver of such violation nor prevent a subsequent act
which would have originally constituted a violation, from having all the force
and effect of an original violation, nor shall the failure of Landlord to
enforce any of said Rules and Regulations against any other tenant of the
Building be deemed a waiver of any such Rule or Regulation. Notwithstanding the
foregoing, Landlord agrees to use reasonable efforts to enforce said Rules and
Regulations against such other tenants of the Building, provided however, that
in no event shall Landlord be liable to Tenant on account of the acts or
omissions of the tenants of the Building. The receipt by Landlord of Annual
Fixed Rent or additional rent with knowledge of the breach of any covenant of
this Lease shall not be deemed a waiver of such breach. No provision of this
Lease shall be deemed to have been waived by Landlord, or by Tenant, unless such
waiver be in writing signed by the party to be charged. No consent or waiver,
express or implied, by Landlord or Tenant, to or of any breach of any agreement
or duty shall be construed as a waiver or consent to or of any other breach of
the same or any other agreement or duty.
8.4 Acceptance of Partial Payments of Rent; Delivery of Keys
No acceptance by Landlord of a lesser sum than the Annual Fixed Rent
and additional rent then due shall be deemed to be other than on account of the
earliest installment of such rent due, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent 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 installment or
pursue any other remedy in this Lease provided. The delivery of keys to any
employee of Landlord or to Landlord's agent or any employee thereof shall not
operate as a termination of this Lease or surrender of the Premises.
8.5 Cumulative Remedies
The specific remedies to which Landlord may resort under the terms of
this Lease are cumulative and are not intended to be exclusive of any other
remedies or means of redress to which it may be lawfully entitled in case of any
breach or threatened breach by Tenant of any provisions of this Lease. In
addition to other remedies provided in this Lease, Landlord shall be entitled to
the restraint by injunction of the violation or attempted or threatened
violation of any of the covenants, conditions or provisions of this Lease or to
a decree compelling specific performance of any such covenants, conditions or
provisions.
-39-
<PAGE> 40
8.6 Partial Invalidity
If any term of this Lease, or the application thereof to any person or
circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such term to persons or circumstances other
than those as to which it is invalid or unenforceable shall not be affected
thereby, and each term of this Lease shall be valid and enforceable to the
fullest extent permitted by law.
8.7 Self-Help
If Tenant shall at any time default in the performance of any
obligation under this Lease, Landlord shall have the right, but shall not be
obligated, to enter upon the Premises and to perform such obligation
notwithstanding the fact that no specific provision for such substituted
performance by Landlord is made in this Lease with respect to such default. In
performing such obligation, Landlord may make any payment of money or perform
any other act. All sums so paid by Landlord (together with interest at the rate
of 2 1/2 percentage points over the then prevailing prime rate in Boston as set
by The First National Bank in Boston) and all necessary incidental costs and
expenses in connection with the performance of any such act by Landlord, shall
be deemed to be additional rent under this Lease and shall be payable to
Landlord immediately on demand. Landlord may exercise the foregoing rights
without waiving any other of its rights or releasing Tenant from any of its
obligations under this Lease.
8.8 Tenant's Estoppel Certificate
Tenant agrees from time to time, upon not less than fifteen (15) days'
prior written request by Landlord, to execute, acknowledge and deliver to
Landlord a statement in writing certifying that this Lease is unmodified and in
full force and effect and that Tenant has no defenses, offsets or counterclaims
against its obligations to pay the Annual Fixed Rent and additional rent and to
perform its other covenants under this Lease and that, to the best of Tenant's
knowledge, there are no uncured defaults of Landlord or Tenant under this lease
(or, if there have been any modifications that the same is in full force and
effect as modified and stating the modifications and, if there are any defenses,
offsets, counterclaims, or defaults, setting them forth in reasonable detail),
and the dates to which the Annual Fixed Rent, additional rent and other charges
have been paid. Any such statement delivered pursuant to this Section 8.8 may be
relied upon by a prospective purchaser or mortgagee of the Premises or any
prospective assignee of any mortgagee of the Premises. Time is of the essence in
respect of any such requested certificate, Tenant hereby acknowledging the
importance of such certificates in mortgage financing arrangements, prospective
sale and the like. Tenant hereby appoints Landlord Tenant's attorney-in-fact in
its name and behalf to execute such statement if Tenant shall fail to execute
such statement within such fifteen-(15)-day period.
-40-
<PAGE> 41
8.9 Waiver of Subrogation
In any case in which Tenant shall be obligated to pay to Landlord any
loss, cost, damage, liability, or expense suffered or incurred by Landlord,
Landlord shall allow to Tenant as an offset against the amount thereof (i) the
net proceeds of any insurance collected by Landlord for or on account of such
loss, cost, damage, liability or expense, provided that the allowance of such
offset does not invalidate or prejudice the policy or policies under which such
proceeds were payable, and (ii) if such loss, cost, damage, liability or expense
shall have been caused by a peril against which Landlord has agreed to procure
insurance coverage under the terms of this Lease, the amount of such insurance
coverage, whether or not actually procured by Landlord.
In any case in which Landlord or Landlord's agents shall be obligated
to pay to Tenant any loss, cost, damage, liability or expense suffered or
incurred by Tenant, Tenant shall allow to Landlord and Landlord's agents as an
offset against the amount thereof (i) the net proceeds of any insurance
collected by Tenant for or on account of such loss, cost, damage, liability, or
expense, provided that the allowance of such offset does not invalidate the
policy or policies under which such proceeds were payable and (ii) the amount of
any loss, cost, damage, liability or expense caused by a peril covered by fire
insurance with the broadest form of property insurance generally available on
property in buildings of the type of the Building, whether or not actually
procured by Tenant.
The parties hereto shall each procure an appropriate clause in, or
endorsement on, any property insurance policy covering the Premises and the
Building and personal property, fixtures and equipment located thereon and
therein, pursuant to which the insurance companies waive subrogation or consent
to a waiver of right of recovery. Having obtained such clauses and/or
endorsements each party hereby agrees that it will not make any claim against or
seek to recover from the other for any loss or damage to its property or the
property of others resulting from firm or other perils covered by such property
insurance.
8.10 All Agreements Contained
This Lease contains all of the agreements of the parties with respect
to the subject matter thereof and supersedes all prior dealings between them
with respect to such subject matter.
8.11 Brokerage
Landlord and Tenant each warrant that they have had no dealings with
any broker or agent other than Fallon, Hines & O'Connor and Meredith & Grew
("Co-Brokers") in connection with the Lease and covenant to defend, hold
harmless and indemnify each other from and against any and all cost, expense or
liability for any compensation, commissions and charges claimed by
-41-
<PAGE> 42
any broker or agent claiming by or through them with respect to dealings in
connection with this Lease or the negotiation thereof. Landlord agrees to pay
Co-Brokers a commission in connection with the execution of this Lease pursuant
to separate agreements between Landlord and Co-Brokers.
8.12 Submission Not an Option
The submission of this Lease or a summary of some or all of its
provisions for examination does not constitute a reservation of or option for
the Premises or an offer to lease.
8.13 Applicable Law
This Lease, and the rights and obligations of the parties hereto,
shall be construed and enforced in accordance with the laws of the Commonwealth
of Massachusetts.
8.14 Waiver of Jury Trial
Landlord and Tenant hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other, on or in respect to any matter whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant hereunder,
Tenant's use or occupancy of the Premises, and/or claim of injury or damages.
8.15 Holdover
If Tenant or anyone claiming under Tenant shall remain in possession
of the Premises or any part thereof after the expiration or prior termination of
the term of this Lease without any agreement in writing between Landlord and
Tenant with respect thereto, then, prior to the acceptance of any payments for
rent or use and occupancy by Landlord, the person remaining in possession shall
be deemed a tenant-at-sufferance. Whereas the parties hereby acknowledge that
Landlord may need the Premises after the expiration or prior termination of the
term of the Lease for other tenants and that the damages which Landlord may
suffer as the result of Tenant's holding-over cannot be determined as of the
date of this Lease, in the event that Tenant so holds over, Tenant shall pay to
Landlord in addition to all rental and other charges due and accrued under the
Lease prior to the date of termination, charges (based upon the fair market
rental value of the Premises) for use and occupation of the Premises thereafter
and, in addition to such sums and any and all other rights and remedies which
Landlord may have at law or in equity, an additional use and occupancy charge in
the amount of fifty percent (50%) of either the Annual Fixed Rent and other
charges calculated (on a daily basis) at the highest rate payable under the
terms of this Lease, but measured from the day on which Tenant's hold-over
commenced and terminating on the day on which Tenant vacates the Premises or the
fair market rental value of the Premises for such period, whichever is greater.
Notwithstanding the foregoing, Landlord shall
-42-
<PAGE> 43
have the right to elect to recover any other damages which Landlord is permitted
to recover under this Lease in lieu of said liquidated damages by giving Tenant
written notice of such election. From and after the date on which Landlord gives
Tenant such notice, said liquidated damages shall cease to accrue and Tenant
shall be liable to Landlord for any damages recoverable under this Lease which
accrue thereafter.
8.16 Arbitration
Any disputes relating to provisions or obligations in this Lease as to
which a specific provision for a reference to arbitration is made herein shall
be submitted to arbitration in accordance with the provisions of applicable
state law, as from time to time amended. Arbitration proceedings, including the
selection of an arbitrator, shall be conducted pursuant to the rules,
regulations and procedures from time to time in effect as promulgated by the
American Arbitration Association. Prior written notice of application by either
party for arbitration shall be given to the other at least ten (10) days before
submission of the application to the said Association's office in the city
wherein the Building is situated (or the nearest other city having an
Association office). The arbitrator shall hear the parties and their evidence.
The decision of the arbitrator shall be binding and conclusive, and judgment
upon the award or decision of the arbitrator may be entered in the Superior
Court of the Commonwealth of Massachusetts. The parties consent to the
jurisdiction of the Superior Court of the Commonwealth of Massachusetts and
further agree that any process or notice of motion or other application to the
Superior Court or a Judge thereof may be served outside the Commonwealth of
Massachusetts by registered mail or by personal service, provided a reasonable
time for appearance is allowed. The costs and expenses of each arbitration
hereunder and their apportionment between the parties shall be determined by the
arbitrator in his award or decision. No arbitrable dispute shall be deemed to
have arisen under this Lease prior to (i) the expiration of the period of twenty
(20) days after the date of the giving of written notice by the party asserting
the existence of the dispute together with a description thereof sufficient for
an understanding thereof; and (ii) where a Tenant payment is in issue, the
amount billed by Landlord having been paid by Tenant.
8.17 Requirements of Law - Fines and Penalties
Tenant at its sole expense shall comply with all laws, rules, orders
and regulations, including, without limitation, all energy-related requirements,
of Federal, State, County and Municipal Authorities and with any direction of
any public officer or officers, pursuant to law, which shall impose any duty
upon Landlord or Tenant with respect to or arising out of Tenant's use or
occupancy of the Premises provided, however, that Tenant shall not be required
to make structural alterations or to replace Building systems unless such
changes are required because of Tenant's particular use of the Premises. Tenant
shall reimburse and compensate Landlord for all expenditures made by, or damages
or fines sustained or incurred by, Landlord due to nonperformance or
noncompliance with or breach or failure to observe any item, covenant, or
-43-
<PAGE> 44
condition of this Lease upon Tenant's part to be kept, observed, performed or
complied with. If Tenant receives notice of any violation of law, ordinance,
order or regulation applicable to the Premises, it shall give prompt notice
thereof to Landlord. Landlord represents that, as of the Execution Date,
Landlord has not received any notice that the Buildings are with any such laws,
rules, orders and regulations.
8.18 Inability to Perform - Exculpatory Clause
This Lease and the obligations of Tenant to pay rent hereunder and
perform all the other covenants, agreements, terms, provisions and conditions
hereunder on the part of Tenant to be performed shall in no way be affected,
impaired or excused because Landlord is unable to fulfill any of its obligations
under this Lease or is unable to supply or is delayed in supplying any service
expressly or impliedly to be supplied or is unable to make or is delayed in
making any repairs, replacement, additions, alterations, improvements or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Landlord is prevented or delayed from so doing by reason of strikes
or labor troubles or any other similar or dissimilar cause whatsoever beyond
Landlord's reasonable control, including but not limited to, governmental
preemption in connection with a national emergency or by reason of any rule,
order or regulation of any department thereof of any governmental agency or by
reason of the conditions of supply and demand which have been or are affected by
war, hostilities or other similar or dissimilar emergency. In each such instance
or inability of Landlord to perform, Landlord shall exercise reasonable
diligence to eliminate the cause of such inability to perform. This paragraph
shall not extend Tenant's abatement and termination rights as set forth in
Paragraphs F and G of Section 3.3 or Tenant's termination right as set forth in
Section 6.1.
Tenant shall neither assert nor seek to enforce any claim or breach of
this Lease against any of Landlord's assets other than Landlord's equity
interest in the Building and in the uncollected rents, issues and profits
thereof, and Tenant agrees to look solely to such interest for the satisfaction
of any liability of Landlord or Landlord's agents under this Lease or otherwise,
it being specifically agreed that in no event shall Landlord (or any of the
officers, trustees, directors, partners, beneficiaries, joint venturers,
members, stockholders or other principals, agents or representatives, and the
like, disclosed or undisclosed, thereof) ever by personally liable for any such
liability. This paragraph shall not limit any right that Tenant might otherwise
have to obtain injunctive relief against Landlord or to take any other action
which shall not involve the personal liability of Landlord to respond in
monetary damages from Landlord's assets other than the Landlord's interest in
the Building, as aforesaid. In no event shall Landlord (or any of the officers,
trustees, directors, partners, beneficiaries, joint venturers, members,
stockholders or other principals or representatives and the like, disclosed or
undisclosed, thereof) ever be liable for consequential damages. If by reason of
Landlord's failure to complete construction of the Premises, Landlord shall be
held to be in breach of this Lease, Tenant's sole and exclusive remedy shall be
a right to terminate this Lease.
-44-
<PAGE> 45
8.19 Parties Bound - Seizin of Title
The covenants, agreements, terms, provisions and conditions of this
Lease shall bind and benefit the successors and assigns of the parties hereto
with the same effect as if mentioned in each instance where a party hereto is
named or referred to, except that no violation of the provisions of Section 5.6
hereof shall operate to vest any rights in any successor or assignee of Tenant
and that the provisions of this Section 8.19 shall not be construed as modifying
the default provisions contained in Article VII hereof.
If, in connection with or as a consequence of the sale, transfer or
other disposition of Landlord's interest in the Building, any party who is
Landlord ceases to be the owner of the reversionary interest in the Premises,
Landlord shall be entirely freed and relieved from the performance and
observance thereafter of all covenants and obligations hereunder on the part of
Landlord to be performed and observed, it being understood and agreed in such
event (and it shall be deemed and construed as a covenant running with the land)
that the person succeeding to Landlord's ownership of said reversionary interest
shall thereupon and thereafter assume, and perform and observe, any and all of
such covenants and obligations of Landlord.
ARTICLE IX
RIGHTS OF PARTIES HOLDING PRIOR INTERESTS
9.1 Lease Subordinate
This Lease shall be subject and subordinate to any mortgage now or
hereafter on the Lot or Building, or both, which are separately and together
hereinafter in this Article IX referred to as "the mortgaged premises", and to
each advance made or hereafter to be made under any mortgage, and to all
renewals, modifications, consolidation, replacements and extensions thereof and
all substitutions therefor, provided that the holder thereof enters into an
agreement with Tenant by the terms of which such holder will agree to recognize
the rights of tenant under this Lease and to accept Tenant as tenant of the
Premises under the terms and conditions of this Lease in the event of
acquisition of title by such holder through foreclosure proceedings or otherwise
and Tenant will agree to recognize the holder of such mortgage as Landlord in
such event, which agreement shall be made expressly to bind and inure to the
benefit of the successors and assigns of Tenant and of the holder and upon
anyone purchasing the Premises at any foreclosure sale, provided however, that
such holder shall not: (i) be liable for any previous act or omission of
Landlord under this Lease; (ii) be subject to any offset, defense or
counterclaim which shall theretofore have accrued to Tenant against Landlord;
(iii) have any obligation with respect to any security deposit unless it shall
have been paid over or physically delivered to such successor; or
-45-
<PAGE> 46
(iv) be bound by any previous modification of this Lease or by any previous
payment of Annual Fixed Rent for a period greater than one (1) month, made
without the consent of such holder where such consent is required by the
applicable instrument. Notwithstanding the foregoing any such holder may at its
election subordinate its mortgage to this Lease without the consent or approval
of Tenant. Tenant and Landlord agree to execute and deliver any appropriate
instruments necessary to carry out the agreements contained in this Section 9.1.
Tenant acknowledges that, where applicable, any consent or approval hereafter
given by Landlord may be subject to the further consent or approval of the
holder; and the failure or refusal of such holder to give such consent or
approval shall, notwithstanding anything to the contrary in this Lease
contained, constitute reasonable justification for Landlord's withholding its
consent or approval. Tenant hereby irrevocably constitutes and appoints Landlord
or any holder, and their respective successors in interest, acting singly,
Tenant's attorney-in-fact to execute and deliver any such certificate or
instrument for, on behalf and in the name of Tenant, but only if Tenant fails to
execute, acknowledge and deliver any such certificate or instrument within ten
(10) days after Landlord or such holder has made written request therefor.
9.2 Rights of Holder of Mortgage to Notice of Defaults
by Landlord and to Cure Same
No act or failure to act on the part of Landlord which would entitle
Tenant under the terms of this Lease, or by law, to be relieved of Tenant's
obligations hereunder or to terminate this Lease, shall result in a release or
termination of such obligations or a termination of this Lease unless (i) Tenant
shall have first given written notice of Landlord's act or failure to act to
Landlord's mortgagees (if any) of which Tenant has been notified in writing,
such notice to specify the act or failure to act on the part of Landlord which
could or would give basis to Tenant's rights; and (ii) such mortgagees after
receipt of such notice, have failed or refused to correct or cure the condition
complained of within a reasonable time thereafter; but nothing contained in this
Section 9.3 shall be deemed to impose any obligation on any such mortgagees to
correct or cure any condition. "Reasonable time" as used above means and
includes a reasonable time to obtain possession of the mortgaged premises if the
mortgagee elects to do so and a reasonable time to correct or cure the condition
if such condition is determined to exist. Notwithstanding anything to the
contrary herein contained, if Landlord's failure causes Tenant to be unable to
use the Premises for their intended purposes, a reasonable time shall not exceed
ninety (90) days after the period of time which Landlord has to cure such
default, provided however, that if such mortgagee is prevented from curing such
default by reason of causes beyond its reasonable control, such ninety (90) day
period shall be extended for an additional period (which shall not exceed an
additional ninety days) equal to the length of such delays.
-46-
<PAGE> 47
ARTICLE X
LETTER OF CREDIT
10.1 Requirements for Letter of Credit
Tenant acknowledges that Landlord is unwilling to execute the Lease
unless Tenant provides Landlord with additional security for Tenant's
obligations under the Lease. Therefore, Tenant shall deliver to Landlord, on the
date that Tenant executes and delivers the Lease to Landlord, an Irrevocable
Standby Letter of Credit ("Letter of Credit") which shall be (1) in the form
attached hereto as Exhibit I, (2) issued by a bank reasonably acceptable to
Landlord which has an office in either New York or Boston at which said Letter
of Credit may presented for payment, (3) in an amount equal to One Million and
00/100 ($1,000,000.00) Dollars and (4) for a term of one (1) year, subject to
extension in accordance with the terms of the Letter of Credit. Tenant shall, on
or before the date thirty (30) days prior to the expiration of the term of such
Letter of Credit, deliver to Landlord a new Letter of Credit satisfying the
foregoing conditions ("Substitute Letter of Credit") in lieu of the Letter of
Credit then being held by Landlord. Such Letter of Credit shall be automatically
renewable in accordance with the second to last grammatical paragraph of Exhibit
6; provided that, in such event, Tenant shall be required to deliver a
Substitute Letter of Credit satisfying the conditions hereof, on or before the
date thirty (30) days prior to the expiration of the term of such Letter of
Credit, if the issuer of such Letter of Credit gives notice of its election not
to renew such Letter of Credit for any additional period pursuant thereto.
10.2 Landlord's Right to Draw Down Letter of Credit
In the event that Tenant is in default of its obligations under the
Lease, beyond any applicable period for notice and cure, then the Landlord shall
have the right, at any time after such event, without giving any further notice
to Tenant, to draw down from said Letter of Credit (Substitute Letter of Credit
or Additional Letter of Credit, as defined below, as the case may be) (a) the
amount necessary to cure such default or (b) if such default cannot reasonably
be cured by the expenditure of money, to exercise all rights and remedies
Landlord may have on account of such default, the amount which, in Landlord's
opinion, is necessary to satisfy Tenant's Liability in account thereof. In the
event of any such draw by the Landlord, Tenant shall, within fifteen (15)
business days of written demand therefor, deliver to Landlord an additional
Letter of Credit satisfying the foregoing conditions ("Additional Letter of
Credit"), except that the amount of such Additional Letter of Credit shall be
the amount of such draw. In addition, in the event of a termination based upon
the default of Tenant under the Lease, or a rejection of the Lease pursuant to
the provisions of the Federal Bankruptcy Code, Landlord shall have the right to
draw upon the Letter of Credit (from time to time, if necessary) to cover the
full amount of damages and other
-47-
<PAGE> 48
amounts due from Tenant to Landlord under the Lease. Any amounts so drawn shall,
at Landlord's election, be applied first to any unpaid rent and other charges
which were due prior to the filing of the petition for protection under the
Federal Bankruptcy Code. In no event shall the proceeds of any Letter of Credit
be deemed to be a prepayment of rent nor shall it be considered as a measure of
liquidated damages.
10.3 Tenant's Failure to Deliver Substitute Letter of Credit
In the event that Tenant fails timely to deliver to Landlord a
Substitute Letter of Credit, then the Landlord shall have the right, at any time
after such event, without giving any further notice to Tenant or to Landlord, to
draw down the Letter of Credit (or Substitute Letter of Credit and/or Additional
Letter(s) of Credit) and to hold the proceeds thereof ("Security Proceeds") in a
segregated bank account in the name of the Landlord as security for Tenant's
obligations under the Lease in accordance with the provisions of this Paragraph
1.
10.4 Return of Collateral
To the extent that Landlord has not previously drawn upon any Letter of
Credit, Substitute Letter of Credit, Additional Letter of Credit or Security
Proceeds (collectively "Collateral") held by the Landlord, and to the extent
that Tenant is not otherwise in default of its obligations under the Lease as of
the termination date of the Lease, Landlord shall return such Collateral to
Tenant on the termination of the term of the Lease.
E. In no event shall the proceeds of any Letter of Credit be deemed to
be a prepayment of rent nor shall it be considered as a measure of liquidated
damages.
ARTICLE XI
TENANT'S OPTION TO EXTEND THE TERM OF THE LEASE
11.1 Tenant's Option to Extend the Term of the Lease
A. On the conditions, which conditions Landlord may waive, at its
election, by written notice to Tenant at any time, that Tenant is not in default
of its covenants and obligations under the Lease beyond any applicable period of
notice and cure, and that Lightbridge, Inc., itself, is occupying the entirety
of the premises then demised to Tenant, both as of the time of option exercise
and as of the commencement of the hereinafter described additional term, Tenant
shall have the option to extend the term of this Lease for one (1) additional
five (5) year term, such additional term commencing as of the expiration of the
initial term of the Lease. Tenant may exercise such option to extend by giving
Landlord written notice on or before the date twelve (12) months prior to the
expiration date of the initial term of the Lease. Upon the timely giving of
-48-
<PAGE> 49
such notice, the term of this Lease shall be deemed extended upon all of the
terms and conditions of this Lease, except that Landlord shall have no
obligation to construct or renovate the premises and that the Annual Fixed Rent,
the Annual Electricity Charge, Tenant's Operating Expense Base, and Tenant's Tax
Base during such additional term shall be as hereinafter set forth. If Tenant
fails to give timely notice, as aforesaid, Tenant shall have no further right to
extend the term of this Lease, time being of the essence of this Article XI..
B. Annual Fixed Rent
The Annual Fixed Rent during the additional term shall be based upon
the Fair Market Rental Value, as defined in Article XIII herein, as of the
commencement of the additional term, of the premises then demised to Tenant,
provided however, that in no event shall the sum of Annual Fixed Rent, the
Annual Electricity Charge, Operating Expenses Allocable to the Premises and Tax
Expenses Allocable to the Premises payable by Tenant for any twelve-(12)- month
period during the additional term be less than the sum of Annual Fixed Rent,
Annual Electricity Charge, Operating Expenses Allocable to the Premises and Tax
Expenses Allocable to the Premises payable by Tenant during the seventh (7th)
Lease Year of the initial term, as defined in Section 1.1.
C. Tenant shall have no further option to extend the term of the Lease
other than the one (1) additional five (5) year term herein provided.
D. Notwithstanding the fact that upon Tenant's exercise of the herein
option to extend the term of the Lease such extension shall be self-executing,
as aforesaid, the parties shall promptly execute a lease amendment reflecting
such additional term after Tenant exercises the herein option, except that the
Annual Fixed Rent payable in respect of such additional term, the Annual
Electricity Charge payable during the initial term, Tenant's Operating Expenses
Base during such additional term, and Tenant's Tax Base during such additional
term, may not be set forth in said amendment. Subsequently, after such Annual
Fixed Rent, the Annual Electricity Charge, Tenant's Operating Expenses Base, and
Tenant's Tax Base are determined, the parties shall execute a written agreement
confirming the same. The execution of such lease amendment shall not be deemed
to waive any of the conditions to Tenant's exercise of its rights under this
Article XI, unless otherwise specifically provided in such lease amendment.
-49-
<PAGE> 50
ARTICLE XII
TENANT'S RIGHT OF FIRST OFFER
12.1 Tenant's Right of First Offer
On the conditions (which conditions Landlord may waive, at its
election, by written notice to Tenant at any time) that Tenant is not in default
of its covenants and obligations under the Lease beyond any applicable period of
notice and case and that Lightbridge, Inc., itself is occupying the entirety of
the premises then demised to Tenant, both at the time that Landlord is required
to give Landlord's Notice, as hereinafter defined, and as of the Term
Commencement Date in respect of the RFO Premises, Tenant shall have the
following right to lease the RFO Premises, as hereinafter defined, when the RFO
Premises become available for lease to Tenant, as hereinafter defined.
A. Definition of RFO Premises
"RFO Premises" shall be defined as any area on the third (3rd)
and fourth (4th) floors of Pod C in the Building, when such area becomes
available for lease to Tenant, as hereinafter defined, during the initial term
of this Lease. For the purposes of this Article XII, an RFO Premises shall be
deemed to be "available for lease to Tenant" if, during the term of this Lease,
Landlord, in its sole judgment, determines that such area will become available
for leasing to Tenant (i.e. when Landlord determines that the current tenant of
such RFO Premises will vacate such RFO Premises after its termination of its
present lease, as the same may be extended pursuant to the provisions of such
lease, the rights of all other tenants which are in effect as of the Execution
Date of this Lease to lease such RFO Premises have been waived or have lapsed
unexercised, and when Landlord intends to offer such area for lease). In no
event shall Tenant have any rights under this Article XII on or after the date
twelve (12) months prior to the expiration of the initial term of the Lease
(i.e. Landlord shall have no obligation to give Landlord's Notice, as
hereinafter defined, to Tenant on or after the date twelve (12) months prior to
the expiration of the initial term of the Lease). Landlord hereby represents
that the tenants listed on Exhibit K have pre-existing rights to the RFO
Premises.
B. Exercise of Right to Lease RFO Premises
Landlord shall give Tenant written notice ("Landlord's
Notice") at the time that Landlord determines, as aforesaid, that an RFO
Premises will become available for lease to Tenant. Landlord's Notice shall set
forth the exact location of the RFO Premises in question, Landlord's designation
of the Fair Market Rental Value (as defined in Article XIII hereof) applicable
to such RFO Premises and the Specified Commencement Date in respect of such RFO
-50-
<PAGE> 51
Premises. Tenant shall have the right, exercisable upon written notice
("Tenant's Exercise Notice") given to Landlord within ten (10) days after the
receipt of Landlord's Notice, to lease such RFO Premises. If Tenant fails timely
to give Tenant's Exercise Notice, Tenant shall have no further right to lease
such RFO Premises pursuant to this Article XII, provided however, that Tenant
shall have the right from time to time thereafter throughout the term of the
Lease until Tenant's right to lease any RFO Premises has lapsed, to give
Tenant's Request as to any other subsequently available RFO Premises. Upon the
timely giving of such notice, Landlord shall lease and demise to Tenant and
Tenant shall hire and take from Landlord, such RFO Premises, upon all of the
same terms and conditions of the Lease except as hereinafter set forth. Tenant's
rights under this Article XII shall be subject to, and subordinate to the rights
of the existing tenants in the Building.
C. Lease Provisions Applying to RFO Premises
The leasing to Tenant of such RFO Premises shall be upon all
of the same terms and conditions of the Lease, except as follows:
(1) Term Commencement Date
The Term Commencement Date in respect of such RFO Premises
shall be the later of: (x) the Specified Commencement Date in respect of such
RFO Premises as set forth in Landlord's Notice, or (y) the date that Landlord
delivers such RFO Premises to Tenant.
(2) Annual Fixed Rent
The Annual Fixed Rent rental rate in respect of such RFO
Premises shall be based upon the Fair Market Rental Value, as defined in Article
XIII hereof, of such RFO Premises as of the Term Commencement Date in respect of
such RFO Premises.
(4) Condition of RFO Premises
Tenant shall take such RFO Premises "as-is" in its then (i.e.
as of the date of premises delivery) state of construction, finish, and
decoration, without any obligation on the part of Landlord to construct or
prepare any RFO Premises for Tenant's occupancy.
D. Execution of Lease Amendments
Notwithstanding the fact that Tenant's exercise of the
above-described option to lease RFO Premises shall be self-executing, as
aforesaid, the parties hereby agree promptly to execute a lease amendment
reflecting the addition of an RFO Premises, except that the Annual Fixed Rent
payable in respect of
-51-
<PAGE> 52
such RFO Premises, Tenant's Operating Expense Base in respect of such RFO
Premises, and Tenant's Tax Base in respect of such RFO Premises may not be as
set forth in such Amendment. At the time that such Annual Fixed Rent, such
Annual Electricity Charge, Tenant's Operating Expense Base and Tenant's Tax Base
are determined, the parties shall execute a written agreement confirming the
same. The execution of such lease amendment shall not be deemed to waive any of
the conditions to Tenant's exercise of the herein option to lease the RFO
Premises, unless otherwise specifically provided in such lease amendment.
ARTICLE XIII
DEFINITION OF FAIR MARKET RENTAL VALUE
13.1 Definition of Fair Market Rental Value
A. "Fair Market Rental Value" shall be computed as of the date in
question at the then current annual rental charge (i.e., the sum of Annual
Yearly Rent plus escalation and other charges), including provisions for
subsequent increases and other adjustments for leases or agreements to lease
then currently being negotiated, or executed in comparable space located in the
Building, or if no leases or agreements to lease are then currently being
negotiated or executed in the Building, the Fair Market Rental Value shall be
determined by reference to leases or agreements to lease then currently being
negotiated or executed for comparable space located elsewhere in comparable
office buildings located in the Burlington area. In determining Fair Market
Rental Value, the following factors, among others, shall be taken into account
and given effect: size, location of premises, lease term, condition of building,
services provided by the Landlord, and economic concessions (e.g., tenant
improvements, brokerage commissions, etc.) the being granted by landlords to
tenants.
B. Notwithstanding anything to the contrary herein contained, the
parties hereby agree that upon the determination of any Fair Market Rental
Value, Landlord shall have the right, exercisable by written notice to Tenant on
or before the time that Landlord gives Tenant its initial designation of Fair
Market Rental Value:
(1) to change Tenant's Operating Expense Base as stated
in Section 1.1 from the amount stated in Section 1.1
to an amount equal to the actual amount of Operating
Expenses for the immediately preceding Operating
Year, and
(2) to change Tenant's Tax Base as stated in Section 1.1
from the amount stated in Section 1.1 to an amount
equal to the actual amount of Taxes for the
immediately preceding fiscal/tax year for which
Landlord has actual data.
-52-
<PAGE> 53
If Landlord shall exercise such right, the amount of Annual
Fixed Rent payable hereunder shall be commensurately adjusted to reflect such
change in Tenant's Operating Expense Base and in Tenant's Tax Base.
C. Dispute as to Fair Market Rental Value
Landlord shall initially designate Fair Market Rental Value
and Landlord shall furnish data in support of such designation. If Tenant
disagrees with Landlord's designation of a Fair Market Rental Value, Tenant
shall have the right, by written notice given within thirty (30) days after
Tenant has been notified of Landlord's designation, to submit such Fair Market
Rental Value to arbitration. Fair Market Rental Value shall be submitted to
arbitration as follows: Fair Market Rental Value shall be determined by
impartial arbitrators, one to be chosen by the Landlord, one to be chosen by
Tenant, and a third to be selected, if necessary, as below provided. The
unanimous written decision of the two first chosen, without selection and
participation of a third arbitrator, or otherwise, the written decision of a
majority of three arbitrators chosen and selected as aforesaid, shall be
conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each
notify the other of its chosen arbitrator within ten (10) days following the
call for arbitration and, unless such two arbitrators shall have reached a
unanimous decision within thirty (30) days after their designation, they shall
so notify the President of the Boston Bar Association (or such organization as
may succeed to said Boston Bar Association) and request him to select an
impartial third arbitrator, who shall be an office building owner, a real estate
counselor or a broker dealing with like types of properties, to determine Fair
Market Rental Value as herein defined. Such third arbitrator and the first two
chosen shall, subject to commercial arbitration rules of the American
Arbitration Association, hear the parties and their evidence and render their
decision within thirty (30) days following the conclusion of such hearing and
notify Landlord and Tenant thereof. Landlord and Tenant shall bear the expense
of the third arbitrator (if any) equally. The decision of the arbitrator shall
be binding and conclusive, and judgment upon the award or decision of the
arbitrator may be entered in the appropriate court of law; and the parties
consent to the jurisdiction of such court and further agree that any process or
notice of motion or other application to the Court or a Judge thereof may be
served outside the State wherein the Building is situated by registered mail or
by personal service, provided a reasonable time for appearance is allowed. If
the dispute between the parties as to a Fair Market Rental Value has not been
resolved before the commencement of Tenant's obligation to pay rent based upon
such Fair Market Rental Value, then Tenant shall pay Annual Fixed Rent and other
charges under the Lease in respect of the premises in question based upon the
Fair Market Rental Value designated by Landlord until either the agreement of
the parties as to the Fair Market Rental Value, or the decision of the
arbitrators, as the case may be, at which time Tenant shall pay any underpayment
of rent and other charges to Landlord, or Landlord shall refund any overpayment
of rent and other charges to Tenant.
-53-
<PAGE> 54
ARTICLE XIV - Condition of Landlord's Execution
14.1 Condition of Landlord's Execution
Reference is made to the fact that the Premises are presently leased to
Fax International, Inc. ("FAX"). Therefore, Landlord shall have the right,
exercisable upon written notice to Tenant, to render the foregoing Lease void
and without force or effect, unless both of the following events occur:
A. Tenant executes and delivers to Landlord the foregoing Lease; and
B. FAX executes and delivers to Landlord an agreement, in form and
substance acceptable to Landlord, whereby FAX agrees to terminate the term of
its lease.
EXECUTED as a sealed instrument in two or more counterparts on the day
and year first above written.
LANDLORD:
SUMITOMO LIFE REALTY (N.Y.), INC.
By: /s/ S. Kurematsi
---------------------------------
Hereunto Duly Authorized
TENANT:
LIGHTBRIDGE, INC.
By: /s/ William G. Brown
---------------------------------
(Name) (Title)
Hereunto Duly Authorized
-54-
<PAGE> 55
EXHIBIT A
Description
The land in Burlington, Middlesex County, Massachusetts being shown as
Lot 75 on a plan by Raymond C. Pressey, Inc. dated December 16, 1980 filed with
the Land Court Engineer's office as Plan No. 26172R and bounded and described
according to said plan as follows:
by the southwesterly line of South Bedford Street, one hundred fifty (150) feet;
SOUTHWESTERLY, SOUTHEASTERLY AND NORTHEASTERLY by Lot 74 on said plan,
thirty-five (35) feet, ninety-seven and 70/100 (97.70) feet, five hundred
seventy-one and 80/100 (571.80) feet and four hundred forty-eight (448),
respectively;
by the northwesterly line of Northern Circumferential Highway (Route 128 non
access), eight hundred seventy-nine and 81/100 (879.81) feet;
by Lot 27 as shown on said plan, five hundred eight and 19/100 (508.19) feet;
and
by Lots 73 and 68 shown on said plan, one thousand four hundred sixty-three and
37/100 (1463.37) feet.
-55-
<PAGE> 56
EXHIBIT B
CONDITION OF PREMISES
A. Notwithstanding anything to the contrary herein or in the Lease
contained, Tenant shall take the Premises "as-is", in the condition in which the
Premises are in as of the Term Commencement Date without any obligation on the
part of Landlord to prepare or construct the Premises for Tenant's occupancy and
without any representation or warranty by Landlord as to the condition of the
Premises or the Building.
B. Landlord shall, in the manner hereinafter set forth, provide to
Tenant up to Four Hundred Sixty-Three Thousand Five Hundred Eighty and 00/100
($463,580.00) Dollars ("Landlord's Contribution") towards the cost of leasehold
improvements to be installed by Tenant in the Premises, which shall include
electrical work and removal of HVAC units left by the prior tenant of the
Premises ("Tenant's Work"), to the cost of space planning, architectural
services, construction management fees, and for the cost of replacing light
bulbs in the Premises. In no event shall Landlord's Contribution be applied
towards the cost of installing cabling, wiring, or furniture, fixtures or
equipment. Tenant's Work shall be performed in accordance with Article 3.1 of
the Lease. Provided that Tenant is not in default of its obligations under the
Lease beyond any applicable period of notice and case at the time that Tenant
requests any requisition on account of Landlord's Contribution, Landlord shall
pay the cost of the work shown on each requisition (as hereinafter defined)
submitted by Tenant to Landlord within thirty (30) days of submission thereof by
Tenant to Landlord.
C. For the purposes hereof, a "requisition" shall mean written
documentation (including, without limitation, invoices from Tenant's contractor,
written lien waivers and such other documentation as Landlord may reasonably
request) showing in reasonable detail the costs of the improvements installed by
Tenant to date in the premises, accompanied by certifications from Tenant,
Tenant's architect, and Tenant's contractor that the work performed to date has
been performed in accordance with applicable laws and in accordance with
Tenant's approved plans, and that the amount of the requisition in questions
does not exceed the amount of the work covered by such requisition. Each
requisition shall be accompanied by evidence reasonably satisfactory to Landlord
that all work covered by previous requisitions has been fully paid by Tenant.
Landlord shall have the right, upon reasonable advance notice to Tenant, to
inspect Tenant's books and records relating to each requisition in order to
verify the amount thereof. Tenant shall submit requisition(s) no more often than
monthly.
D. Notwithstanding anything to the contrary herein contained:
(i) Landlord shall have no obligation to advance funds on
account of Landlord's Contribution unless and until Landlord has received the
requisition in question, together with the
-56-
<PAGE> 57
certifications required by Subparagraph B hereof, certifying that the work shown
on the requisition has been performed in accordance with applicable law and in
accordance with Tenant's plans.
(ii) Except with respect to work and/or materials previously
paid for by Tenant, as evidenced by paid invoices and written lien waivers
provided to Landlord, Landlord shall have the right to have Landlord's
Contribution paid to both Tenant and Tenant's contractor(s) and vendor(s)
jointly.
(iii) Tenant shall not be entitled to any portion of
Landlord's Contribution, and Landlord shall have no obligation to pay Landlord's
Contribution in respect of any requisition submitted after September 30, 1997.
Notwithstanding, said September 30, 1997 date shall be extended if Tenant is
unable to complete Tenant's Work by such date by reason of strikes or labor
troubles or any other similar or dissimilar cause whatsoever beyond Tenant's
reasonable control, including, but not limited to, governmental preemption in
connection with a national emergency of by reason of any rule, order or
regulation of any department thereof of any governmental agency or by reason of
the conditions of supply and demand which have been or are affected by war,
hostilities or other similar or dissimilar emergency, and if Tenant gives
Landlord written notice on or before September 30, 1997 of its inability timely
to complete its work and of the reasons therefore. In such event, said September
30, 1997 date shall be extended by the length of delays in Tenant's work arising
from causes beyond Tenant's reasonable control.
E. Landlord shall have the same rights and remedies which Landlord has
upon the nonpayment of Annual Fixed Rent and other charges due under this Lease
for nonpayment of any amounts which Tenant is required to pay to Landlord or
Landlord's contractor in connection with any construction in the Premises
performed for Tenant by Landlord, Landlord's contractor or any other person,
firm or entity.
-57-
<PAGE> 58
EXHIBIT C
INTENTIONALLY OMITTED
-58-
<PAGE> 59
EXHIBIT D
Building Standard Tenant Improvements
Attached to and made part of Lease dated as of
Between
Sumitomo Life Realty (N.Y.), Inc.
and
Lightbridge, Inc.
A. Partitions
One (1) linear foot of tenant partition shall be provided for
each 13.5 square feet of Useable Area. Partitions shall extend
six inches beyond the ceiling height and be comprised of
2 1/2" metal studs and one (1) layer of 5/8" gypsum board on
each side of the studs. All partitions shall have a vinyl base
4" high, color selections from building standard.
B. Tenant Entries
1. Where possible, Tenants will have double-leaf, full
height mahogany doors set in a wood frame with glass
sidelights on each side.
2. Alternatively, a single-leaf full-height mahogany
door set in a wood frame with a glass sidelight.
3. First Floor - all Tenant Entries visible to the first
floor lobby areas will consist of double glass doors
with butt-glazed glass on each side.
C. Interior Doors
One (1) door unit shall be provided for each 314 square feet
of Useable Area. Doors shall be (3'0" x 8'3" nominal). Solid
core with sealed or stained mahogany face, set in aluminum
frames. Hardware shall include 1 1/2 pairs of paint grade
butts, a lever handled chrome finished latchset and one floor
stop.
-59-
<PAGE> 60
D. Paint
All building standard interior partitioning shall receive two
(2) coats of eggshell latex paint, one (1) color per room.
Color selection from building standard samples.
E. Ceiling
Acoustical ceiling shall consist of 3/4", foil backed,
revealed edge, 2' x 2' U.S.G. Glacier textured ceiling tiles.
F. Flooring
J&J Industries "Echelon" 30 oz. plush nylon pile carpet. Color
to be selected from options offered by landlord.
G. Electrical Outlets
One (1) 15 amp. 120 volt duplex wall-type electrical outlet
with brushed chrome cover shall be provided for each 135
square feet of Useable Area.
H. Telephone Outlets
One (1) wall-type telephone pull string prepared to receive a
telephone outlet, installation by Tenant's telephone company,
shall be provided for each 180 square feet of Useable Area.
Telephone outlets does not include any conduit.
I. Lighting
One (1) 2' x 4' fluorescent light fixture with parabolic
reflector and (1) 18 cell cover shall be provided for each 80
square feet of Useable Area.
J. Switching
One (1) single pole light switch with brushed chrome cover
shall be provided for each 314 square feet of Useable Area.
K. Sprinklers
-60-
<PAGE> 61
One (1) recessed chrome pendant sprinkler head shall be
provided to meet all applicable code requirements up to a
maximum of one per 157 square feet of Useable Area.
L. Sun Control
All exterior windows shall receive Louver Drape Model E1 Elite
Vertical Blinds with solid vinyl traversing and rotating
louvers. Track will be finished in bronze baked enamel to
match window frames.
M. Drinking Fountain
All floors will have a drinking fountain accessible to all
Tenants on the floor.
N. Wet Stacks
Wet Stacks containing cold water, waste and vents will be
available on each floor. Tenant equipment can be connected at
the Tenant's expense.
O. Heating, Ventilating and Air Conditioning
A variable air volume (VAV) system will be employed for both
heating and air conditioning.
P. Exit Sign
One (1) exit sign shall be provided for every 1,000 square
feet of Useable Area.
Q. Emergency Light
One (1) emergency light shall be provided for every 1,000
square feet of Useable Area.
-61-
<PAGE> 62
EXHIBIT E
Landlord Services
Attached to and made part of Lease dated
Between
Sumitomo Life Realty (N.Y.), Inc.
and
Lightbridge, Inc.
I. CLEANING
A. Office Area
Daily: (Monday through Friday, inclusive. Holidays excepted.)
Empty and clean all waste receptacles and ash trays and remove
waste material from Premises; wash receptacles as necessary.
Sweep and dust mop all uncarpeted areas using a dust-treated
mop.
Vacuum all rugs and carpeted areas.
Hand dust and wipe clean with treated cloths all horizontal
surfaces including furniture, office equipment, window sills,
door ledges, chair rails, and convector tops, within normal
reach.
Wash clean all water fountains.
Remove and dust under all desk equipment and telephones and
replace same.
Wipe clean all brass and other bright work.
Hand dust all grill work within normal reach.
-62-
<PAGE> 63
Upon completion of cleaning, all lights will be turned off and
doors locked, leaving the Premises in an orderly condition.
Weekly:
Dust coat racks, and the like.
Remove all finger marks from private entrance doors, light
switches and doorways.
Quarterly:
Render high dusting not reached in daily cleaning to include:
Dusting all pictures, frames, charts, graphs, and similar wall
hangings.
Dusting all vertical surfaces, such as walls, partitions,
doors and bucks.
Dusting of all pipes, ducts and high moldings.
Dusting of all venetian blinds.
B. Lavatories
Daily: (Monday through Friday, inclusive, holidays excepted.)
Sweep and damp mop floors.
Clean all mirrors, powder shelves, dispensers and receptacles,
bright work, flushometers, piping, and toilet seat hinges.
Wash both sides of all toilet seats.
Wash all basins, bowls and urinals.
Dust and clean all powder room fixtures.
Empty and clean paper towel and sanitary disposal receptacles.
Remove waste paper and refuse.
-63-
<PAGE> 64
Refill tissue holders, soap dispensers, towel dispensers,
vending sanitary dispensers; materials to be furnished by
Landlord.
A sanitizing solution will be used in all lavatory cleaning.
Monthly:
Machine scrub lavatory floors.
Wash all partitions and tile walls in lavatories.
C. Main Lobby, Elevators, Building Exterior and Corridors
Daily: (Monday through Friday, inclusive, holidays excepted.)
Sweep and wash all floors. (Buff both main public lobby
floors.)
Wash all rubber mats.
Clean elevators, wash or vacuum floors, wipe down walls and
doors.
Spot clean any metal work inside lobby.
Spot clean any metal work surrounding Building Entrance doors.
Weekly:
All resilient tile floors in public areas to be treated
equivalent to spray buffing.
D. Window Cleaning
Windows of exterior walls will be washed semiannually.
E. Tenant requiring services in excess of those described above
shall request same through Landlord, at Tenant's expense.
II. HEATING, VENTILATING, AIR CONDITIONING
A. Landlord shall furnish space heating and cooling as normal seasonal
changes may require to provide reasonably comfortable space temperature and
ventilation for occupants of the
-64-
<PAGE> 65
Premises under normal business operation, daily from 8:00 a.m. to 6:00 p.m.
(Saturdays to 1:00 p.m.), Sundays and holidays excepted.
After hours heating, venting and air conditioning to be billed to
tenant at cost, including reasonable cost and management expense.
B. The air conditioning system is based upon an occupancy of not more
than one person per 150 square feet of floor area, and upon a combined lighting
and standard electrical load not to exceed 2.5 watts per square foot of usable
area. In the event Tenant exceeds this condition or introduces onto the Premises
equipment which overloads the system, and/or in any other way causes the system
not adequately to perform their proper functions, supplementary systems may at
Landlord's option be provided by Landlord at Tenant's expense, and Tenant shall
reimburse Landlord in such an amount as will compensate it for the cost incurred
by it in operating such supplementary systems.
III. WATER
A. Cold water at temperatures supplied by the local utility water mains
for drinking, lavatory, kitchen, restaurant and toilet purposes and hot water
for lavatory purposes only from regular building supply at prevailing
temperatures; provided however, that Landlord may, at its expense, install a
meter or meters to measure the water supplied to any kitchen (including
dishwashing) and restaurant areas in the Premises, in which case Tenant shall
upon Landlord's request reimburse Landlord for the cost of the water (including
heating thereof) consumed in such areas and the sewer use charge resulting
therefrom.
IV. ELEVATORS
A. The passenger elevator system shall be in automatic operation and
available to Tenant at all times. Use of the elevators for service purposes will
have to be scheduled with the Landlord and coordinated with the needs of the
other tenants.
V. ELECTRICAL SERVICE
A. Landlord shall provide electric power for up to 1.8 watts per square
foot of usable area for lighting plus 1.0 watts per square foot of usable area
for office machines through standard receptacles for the typical office space.
B. Landlord, at his option, may require separate metering and billing
to Tenant for the electric power required for any special equipment (such as
computers and reproduction equipment) that require either 3-phase electrical
power or any voltage other than 120. Landlord will furnish and install at
Tenant's expense all replacement lighting tubes, lamps, and ballasts
-65-
<PAGE> 66
required by Tenant. Landlord will clean lighting fixtures on a regularly
scheduled basis at Tenant's expense.
-66-
<PAGE> 67
EXHIBIT F
FLOOR PLAN
[Diagram of floor plan]
-67-
<PAGE> 68
EXHIBIT G, SHEET 1
(Required Tenant Work General Conditions)
The following General Conditions are promulgated pursuant to Section
3.1 of the Lease ("Lease").
1. DEFINITIONS
1.1 Building: Burlington Business Center
1.2 Consultant: Any architectural, engineering, or design consultant
engaged by a Tenant in connection with Tenant Work.
1.3 Contractor: Any Contractor engaged by a Tenant of the Building for
the performance of any Tenant Work, and any
Subcontractor employed by any such Contractor.
1.4 Plans: All architectural, electrical and mechanical
construction drawings and specifications required for
the proper construction of the Tenant Work.
1.5 Regular Business Monday through Friday, 9:00 a.m. through 5:00 p.m.,
Hours: holidays excluded.
1.6 Construction Such individual or organization as Landlord may
Coordinator: designate from time to time.
1.7 Senior Tenant Such individual as Landlord may designate from time to
Design time.
Coordinator:
1.8 Tenant: Any occupant of the Building.
1.9 Tenant Work: Any alterations, improvements, additions, repairs or
installations in the Building performed by or on
behalf of any Tenant.
-68-
<PAGE> 69
<TABLE>
<S> <C> <C>
1.10 Tradesperson: Any employee (including, without limitation, any mechanic,
laborer, or Tradesperson) employed by a Contractor
performing Tenant Work.
</TABLE>
2. GENERAL
2.1 All Tenant Work shall be performed in accordance with these
General Conditions and the applicable provisions of the Lease.
2.2 The provisions of these General Conditions shall be
incorporated in all agreements governing the performance of
all Tenant Work, including, without limitation, any agreements
governing services to be rendered by each Contractor and
Consultant.
3. PRECONSTRUCTION NOTIFICATION AND APPROVALS
3.1 Approval to Commence Work
a. Tenant shall submit to Construction Coordinator, for the
approval of Retail Construction Coordinator, the names of all
prospective Contractors prior to issuing any bid packages to
such Contractors.
b. No Tenant Work shall be undertaken by any Contractor or
Tradesperson unless and until all the matters set forth in
Article 3.2 below have been received for the Tenant Work in
question and unless Construction Coordinator has approved the
matters set forth in Article 3.2 below.
3.2 No Tenant Work shall be performed unless, at least three days
before any Tenant Work is to begin, all of the following has
been provided to the Construction Coordinator and approved. In
the event that Tenant proposes to change any of the following,
the Construction Coordinator shall be immediately notified of
such change and such change shall be subject to the approval
of the Construction Coordinator.
a. Schedule for the work, indicating start and
completion dates, any phasing and special working
hours, and also a list of anticipated shutdown of
building systems.
b. List of all Contractors and Subcontractors, including
addresses, telephone numbers, trades employed, and
the union affiliation of each Contractor and
Subcontractor.
-69-
<PAGE> 70
c. Names and telephone numbers of the supervisors of the
work.
d. Copies of all necessary governmental permits,
licenses and approvals.
e. Proof of current insurance, to the limits set out in
Exhibit A to these General Conditions, naming
Landlord and Construction Coordinator as an
additional insured party.
f. Notice of the involvement of any Contractor in any
ongoing or threatened labor dispute.
g. Payment, Performance and Lien Bonds from sureties
acceptable to Landlord, in form acceptable to
Landlord, naming Landlord as an additional obligee.
h. Evidence that Tenant has made provision for either
written waivers of lien from all Contractors and
suppliers of material, or other appropriate
protective measures approved by Landlord.
3.3 Reporting Incidents
All accidents, disturbances, labor disputes or threats
thereof, and other noteworthy events pertaining to the
Building or the Tenant's property shall be reported
immediately to the Construction Coordinator. A written report
must follow within 24 hours.
4. CONSTRUCTION SCHEDULE
4.1 Coordination
a. All Tenant Work shall be carried out expeditiously and with
minimum disturbance and disruption to the operation of the
Building and without causing discomfort, inconvenience, or
annoyance to any of the other tenants or occupants of the
Building or the public at large.
b. All schedules for the performance of construction,
including materials deliveries, must be coordinated
through the Construction Coordinator. The
Construction Coordinator shall have the right,
without incurring any liability to any Tenant, to
stop activities and/or to require rescheduling of
-70-
<PAGE> 71
Tenant Work based upon adverse impact on the tenants
or occupants of the Building or on the maintenance or
operation of the Building.
c. If any Tenant Work requires the shutdown of risers
and mains for electrical, mechanical, sprinklers and
plumbing work, such work shall be supervised by a
representative of Landlord. No Tenant Work will be
performed in the Building's mechanical or electrical
equipment rooms without both Landlord's prior
approval and the supervision of a representative of
Landlord, the cost of which shall be reimbursed by
the Tenant.
4.2 Time Restrictions
a. Subject to Paragraph 4.1 of these General Conditions,
general construction work will generally be permitted
during Regular Business Hours.
b. Tenant shall provide the Construction Coordinator
with at least twenty-four (24) hours notice before
proceeding with Special Work, as hereinafter defined,
and such Special Work will be permitted only at times
agreed to by the Building Manager during periods
outside of Regular Business Hours. Tenant shall pay
for all additional supervisory and other premium
costs incurred by Landlord as the result of any such
Special Work. "Special Work" shall be defined as the
following operations:
(1) All utility disruptions, shutoffs and turnovers;
(2) Activities involving high levels of noise,
including demolition, coring, drilling and
ramsetting;
(3) Activities resulting in excessive dust or odors,
including demolition and spray painting; and
(4) Any other work which Tenant proposes to perform
outside of Regular Business Hours.
c. If coordination, labor disputes or other
circumstances require, the Construction Coordinator
may change the hours during which regular
construction work can be scheduled and/or restrict or
refuse entry to and exit from the Building by any
Contractor.
5. CONTRACTOR PERSONNEL
-71-
<PAGE> 72
5.1 Work in Harmony
a. All Contractors shall be responsible for employing skilled
and competent personnel and suppliers who shall abide by the
Supplemental Conditions herein set forth as amended from time
to time by Landlord.
b. No Tenant shall at any time, either directly or indirectly,
employ, permit the employment, or continue the employment of
any Contractor if such employment or continued employment will
or does interfere or cause any labor disharmony, coordination
difficulty, delay or conflict with any other contractors
engaged in construction work in or about the Building.
Notwithstanding anything to the contrary herein or in the
Lease contained, Tenant shall not be required to employ union
labor in connection with the initial Tenant Work.
c. Should a work stoppage or other action occur anywhere in or
about the Building as a result of the presence, anywhere in
the Building, of a Contractor engaged directly or indirectly
by a Tenant, or should such Contractor be deemed by Landlord
to have violated by applicable rules or regulations, then upon
twelve hours written notice, Landlord may, without incurring
any liability to Tenant or said contractor, require any such
Contractor to vacate the premises demised by such Tenant and
the Building, and to cease all further construction work
therein.
d. Tenant agrees that all Tenant Work shall be performed by
Contractors employing Union labor only. The failure of
Landlord or the Retail Construction Coordinator to disapprove
a proposed contractor which is, in fact, a Contractor not
employing Union labor, shall not constitute a waiver by
Landlord of this provision since Landlord and the Retail
Construction Coordinator may be unable to determine readily
whether a proposed contractor employs such labor.
e. In the employment of all workmen by any Contractor, working
arrangements generally accepted and prevailing on so-called
Union jobs in the Boston area shall be complied with.
f. Tenant shall use, and Tenant shall require the Contractor
to use his best efforts to prevent work stoppages on the
Premises, or elsewhere in the Building, to the extent
attributable to work being performed on the Premises,
irrespective of the reason for any such stoppage, in
recognition of the fact that it is of the utmost importance to
Landlord and all those occupying space in the Building that
there be no interruption in the progress of the work. Tenant's
agreement to utilize one hundred percent (100%) Union labor in
Tenant's work, and its performance of
-72-
<PAGE> 73
such obligation, shall not be treated as, by the fact,
compliance with this requirement.
5.2 Conduct
a. Tradespersons shall wear clothing suitable for their work
and shall remain fully attired at all times. All Contractors
will be responsible for their Tradespersons' proper behavior
and conduct.
b. The Construction Coordinator reserves the right to remove
anyone who, or any Contractor which is causing a disturbance
to any Tenant or Occupant of the Building or any other person
using or servicing the Building; is interfering with the work
of others; or is in any other way displaying conduct or
performance not compatible with the Landlord's standards.
Tenant shall exonerate, indemnify and hold Landlord and the
Construction Coordinator harmless from any loss, cost,
damages, or liability incurred by reason of compliance with
any such demand.
5.3 Access
a. All Contractors and Tradespersons shall contact the
Construction Coordinator prior to commencing work, to confirm
work location and Building access, including elevator usage
and times of operation. Access to the Building before and
after Regular Business Hours or any other hours designated
from time to time by the Building Manager and all day on
weekends and holidays will only be provided when twenty-four
(24) hours advance notice is given to the Construction
Coordinator.
b. No Contractor or Tradesperson will be permitted to enter
any private or public space in the Building except through
entrances designated by the Construction Coordinator.
5.4 Parking
Parking is not allowed in or near truck docks, in handicapped
or fire access lanes, or any private ways in or surrounding
the property. Vehicles so parked will be towed at the expense
of the Tenant who has engaged the Contractor for whom the
Owner of such vehicle is employed.
6. BUILDING MATERIALS
6.1 Delivery
-73-
<PAGE> 74
a. All deliveries of construction materials shall be made at
the predetermined times approved by the Construction
Coordinator and shall be effected safely and expeditiously
only at the location determined by the Construction
Coordinator.
b. Tenant shall give the Construction Coordinator at least
twenty-four (24) hours notice of deliveries of any materials
in the Building.
6.2 Transportation in Building
a. Distribution of materials from delivery point to the work
area in the Building shall be accomplished with the least
disruption to the operation of the Building possible.
Elevators will be assigned for material delivery and will be
controlled by the Construction Coordinator.
b. Contractors shall provide adequate protection to all
carpets, wall surfaces, doors and trim in all public areas
through which materials are transported. Contractors shall
continuously clean all such areas. Protective measures shall
include runners over carpet, padding in elevators and any
other measures determined by the Construction Coordinator.
c. Any damage caused to the Building through the movement of
construction materials or otherwise shall be the
responsibility of Tenant who has engaged the Contractor
involved. Charges for such damage will be submitted by the
Landlord directly to the Tenant.
6.3 Storage and Placement
a. All construction materials shall be stored only in the
premises where they are to be installed. No storage of
materials will be permitted in any public areas, loading docks
or corridors leading to the premises.
b. No flammable, toxic, or otherwise hazardous materials may
be brought in or about the Building unless: (i) authorized by
the Construction Coordinator, (ii) all applicable laws,
ordinances, rules and regulations are complied with, and (iii)
all necessary permits have been obtained. All necessary
precautions shall be taken by the Contractor handling such
materials against damage or injury caused by such materials.
-74-
<PAGE> 75
c. All materials required for the construction of the premises
must conform with the plans and specifications approved by
Landlord, and must be installed in the locations shown on the
drawings approved by the Landlord.
d. All work shall be subject to reasonable supervision and
inspection by a representative of Landlord.
e. No alterations to approved plans will be made without prior
knowledge and approval of the Senior Tenant Design
Coordinator. Such changes shall be documented on the as-built
drawings required to be delivered to Landlord pursuant to
Paragraph 10 of these General Conditions. At the time that
such changes are prepared by the Tenant and approved by
Landlord, Tenant shall submit such approved changes to the
Construction Coordinator. At the time that any shop drawing is
approved by the Senior Tenant Design Coordinator, Tenant shall
submit such approved shop drawings to the Construction
Coordinator.
f. All protective devices (e.g., temporary enclosures and
partitions) and materials, as well as their placement, must be
approved by the Construction Coordinator.
g. It is the responsibility of Contractors to ensure that the
temporary placement of materials does not impose a hazard to
the Building or its occupants, either through overloading, or
interference with Building systems, access, egress or in any
other manner whatsoever.
h. All existing and/or new openings made through the floor
slab for piping, cabling, etc. must be firestopped in
accordance with applicable codes. All holes in the floor slab
at abandoned floor outlets, etc. will be filled with solid
concrete.
6.4 Salvage and Waste Removal
a. All rubbish, waste and debris shall be neatly and cleanly
removed from the Building by Contractors daily and placed in a
trash container designated by the Construction Coordinator,
unless otherwise approved by the Construction Coordinator. For
any demolition and debris, each Contractor must make
arrangements with the Construction Coordinator for the
scheduling and location of an additional dumpster to be
supplied at the cost of the Tenant engaging such Contractor.
Where, in the opinion of the Construction Coordinator, such
arrangements are not practical, such Contractors will make
alternative arrangements for removal at the cost of the
Tenants engaging such Contractors.
-75-
<PAGE> 76
b. Toxic or flammable waste is to be properly removed daily
and disposed of in full accordance with all applicable laws,
ordinances, rules and regulations.
c. Contractors shall, prior to removing any item from the
Building, notify the Construction Coordinator that it intends
to remove such item. At the election of Construction
Coordinator, Contractors shall deliver any such items to the
Construction Coordinator. Such items will be delivered,
without cost, to an area designated by the Construction
Coordinator which area shall be within the Building or the
complex in which the Building is located.
7. PAYMENT OF CONTRACTORS
Tenant shall promptly pay the cost of all Tenant Work so that Tenant's
premises and the Building shall be free of liens for labor or
materials. If any mechanic's lien is filed against the Building or any
part thereof which is claimed to be attributable to the Tenant, its
agents, employees or contractors, Tenant shall give immediate notice of
such lien to the Landlord and shall promptly discharge the same by
payment or filing any necessary bond within ten (10) days after Tenant
has first notice of such mechanic's lien.
8. CONTRACTOR'S INSURANCE
Prior to commencing any Tenant Work, and throughout the performance of
the Tenant Work, each Contractor shall obtain and maintain insurance in
accordance with Exhibit A attached hereto. Each Contractor shall, prior
to making entry into the Building, provide Landlord with certificates
that such insurance is in full force and effect.
9. SUBMISSIONS UPON COMPLETION
a. Upon completion of any Tenant Work and prior to taking occupancy,
Tenant shall submit to Landlord a permanent Certificate of Occupancy
and final approval of any other governmental agencies having
jurisdiction.
b. Tenant shall submit to the Senior Tenant Design Coordinator a final
"as-build" set of drawings showing all items of the work in full detail
as required in the Tenant Design Criteria Manual.
10. ADJUSTMENTS OF REGULATIONS
In accordance with Section 5.4 of the Lease, Landlord has the right to
cancel or amend these General Conditions.
-76-
<PAGE> 77
11. CONFLICT BETWEEN RULES AND REGULATIONS AND LEASE
In the event of any conflict between the Lease and these General
Conditions, the term of the Lease shall control.
-77-
<PAGE> 78
EXHIBIT A
TO
REQUIRED TENANT WORK GENERAL CONDITIONS
INSURANCE REQUIREMENTS FOR CONTRACTORS
When Tenant Work is to be done by Contractors in the Building, the
Tenant authorizing such work shall be responsible for including in the contract
for such work the following insurance and indemnity requirements to the extent
that they are applicable. Insurance certificates must be received prior to
construction. Landlord and the Construction Coordinator shall be name as an
additional insured party on all certificates.
INSURANCE
Each Contractor and each Subcontractor shall, until the completion of
the Tenant Work in question, procure and maintain at its expense, the following
insurance coverages with companies acceptable to Landlord in the following
minimum limits:
Worker's Compensation
(including coverage for Occupational Disease)
Limit of Liability
Worker's Compensation As required by law
Employer's Liability
Comprehensive General Liability
(including Broad Form Comprehensive Liability Endorsement, Contractual
Liability assumed by the Contractor and the Tenant under Article 15.3
of the Lease and Completed Operations coverage)
Limit of Liability
Bodily Injury & Property Damage $5,000,000 combined single limit
Comprehensive Automobile Liability
(including coverage for Hired and Non-owned Automobiles)
Limit of Liability
-78-
<PAGE> 79
Bodily Injury & Property Damage $5,000,000 per occurrence
INDEMNITY
Each Contractor shall indemnify, defend with counsel acceptable to
Landlord, and hold Landlord and Landlord's agents from and against any claims,
losses, and damages arising out of the work performed by such Contractor, unless
such claim, loss or damage arises from the negligence or willful misconduct of
Landlord or its agents.
-79-
<PAGE> 80
EXHIBIT H
INTENTIONALLY OMITTED
-80-
<PAGE> 81
EXHIBIT I
LETTER OF CREDIT
BENEFICIARY: ISSUANCE DATE:
________________, 1997
SUMITOMO LIFE REALTY (N.Y.), INC. IRREVOCABLE STANDBY
245 Park Avenue - 34th Floor LETTER OF CREDIT NO.
New York, NY 10167
ACCOUNTEE/APPLICANT: MAXIMUM/AGGREGATE
CREDIT AMOUNT: $1,000,000
LIGHTBRIDGE, INC. USD One Million and 00/100 Dollars
GENTLEMEN:
We hereby establish our irrevocable letter of credit in your favor for
account of the applicant up to an aggregate amount not to exceed One Million and
00/100 US Dollars ($1,000,000.00) available by your draft(s) drawn on ourselves
at sight accompanied by:
Your statement, signed by a purportedly authorized officer/official
certifying that the Beneficiary is entitled to draw upon this Letter of Credit
(in the amount of the draft submitted herewith) pursuant to Article X of the
Lease (the "Lease") dated March 5, 1997 by and between Sumitomo Life Realty
(N.Y.), Inc., as Landlord, and Lightbridge, Inc., as Tenant.
Draft(s) must indicate name and issuing bank and credit number and must
be presented at this office.
You shall have the right to make partial draws against this Letter of
Credit, from time to time.
Except as otherwise expressly stated herein, this Letter of Credit is
subject to the "Uniform Customs and practice for Documentary Credits,
International Chamber of Commerce, Publication No. 500 (1993 Revision)".
This Letter of Credit shall expire at our office on ________________,
199__ (the "Stated Expiration Date"). It is a condition of this Letter of Credit
that the Stated Expiration Date shall
-81-
<PAGE> 82
be deemed automatically extended without amendment for successive one (1) year
periods from such Stated Expiration Date, unless at least forty-five (45) days
prior to such Stated Expiration Date )or any anniversary thereof) we shall
notify you and the Accountee/Applicant in writing by registered mail (return
receipt) that we elect not to consider this Letter of Credit extended for any
such additional one (1) year period.
-82-
<PAGE> 1
<TABLE>
Exhibit 11 Computation of Earnings (Loss) per Common Share
<CAPTION>
THREE MONTHS
YEARS ENDED SEPTEMBER 30, ENDED YEAR ENDED
----------------------------- DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
PRO-FORMA:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock 6,508,424 6,509,214 6,521,913
Assumed Conversion of Preferred Stock 5,247,324 5,247,324 5,247,324
Common Equivalent Shares Resulting from stock
options and warrants (treasury stock method) -- 499,314 1,758,657
SAB 83 Shares (treasury stock method) 905,828 905,828 905,828
----------- ----------- -----------
Total 12,661,576 13,161,680 14,433,722
=========== =========== ===========
Net Income (Loss) Applicable to Common Stock $(2,432,914) $ 72,205 $ 2,272,497
=========== =========== ===========
Pro-Forma Income (Loss) per Common Share $ (0.19) $ 0.01 $ 0.16
=========== =========== ===========
PRIMARY:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock 6,493,091 6,508,424 6,509,214 6,520,789
Common Equivalent Shares Resulting from stock
options and warrants (treasury stock method) 397,081 -- 499,314 1,758,657
SAB 83 Shares (treasury stock method) 905,828 905,828 905,828 905,828
----------- ----------- ----------- -----------
Total 7,796,000 7,414,252 7,914,356 9,185,274
=========== =========== =========== ===========
Net Income (Loss) $ 950,272 $(2,432,914) $ 72,205 $ 2,272,497
Dividends Accreted on Preferred Stock (182,544) (182,544) (45,635) (136,905)
----------- ----------- ----------- -----------
Net Income (Loss) Applicable to Common Stock $ 767,728 $(2,615,458) $ 26,570 $ 2,135,592
=========== =========== =========== ===========
Primary Income (Loss) per Common Share $ 0.10 $ (0.35) $ 0.00 $ 0.23
=========== =========== =========== ===========
FULLY DILUTED:
Weighted Average Number of Common and
Common Equivalent Shares Outstanding:
Common Stock 6,493,091 6,508,424 6,509,214 6,520,789
Assumed Conversion of Preferred Stock 3,247,324 3,247,324 3,247,324 4,747,300
Common Equivalent Shares Resulting from stock
options and warrants (treasury stock method) 464,201 -- 499,313 1,838,155
SAB 83 Shares (treasury stock method) 905,828 905,828 905,828 905,828
----------- ----------- ----------- -----------
Total 11,110,444 10,661,576 11,161,679 14,012,072
=========== =========== =========== ===========
Net Income (Loss) Applicable to Common Stock $ 950,272 $(2,432,914) $ 72,205 $ 2,272,497
=========== =========== =========== ===========
Fully Diluted Income (Loss) per Common Share $ 0.09 $ (0.23) $ 0.01 $ 0.16
=========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-21585 of Lightbridge, Inc. on Form S-8 of our report dated February 4,
1997 (except for Note 2, "Recent Accounting Pronouncement," and Note 4, as to
which the dates are March 5, 1997), appearing in this Annual Report on Form
10-K of Lightbridge, Inc. for the year ended December 31, 1996.
Deloitte & Touche LLP
Boston, Massachusetts
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 27,900,802
<SECURITIES> 0
<RECEIVABLES> 7,530,809
<ALLOWANCES> 18,000
<INVENTORY> 0
<CURRENT-ASSETS> 36,402,346
<PP&E> 10,442,505
<DEPRECIATION> 6,170,625
<TOTAL-ASSETS> 41,765,655
<CURRENT-LIABILITIES> 5,945,776
<BONDS> 0
0
0
<COMMON> 153,698
<OTHER-SE> 33,444,945
<TOTAL-LIABILITY-AND-EQUITY> 41,765,655
<SALES> 29,544,852
<TOTAL-REVENUES> 29,544,852
<CGS> 15,433,548
<TOTAL-COSTS> 26,807,567
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 753,623
<INCOME-PRETAX> 2,431,997
<INCOME-TAX> 159,500
<INCOME-CONTINUING> 2,272,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,272,497
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.16
</TABLE>
