SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 033-21342 FW
TELESCAN, INC.
(exact name of Registrant as specified in its charter)
DELAWARE 72-1121748
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5959 CORPORATE DRIVE, SUITE 2000
HOUSTON, TEXAS 77036
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 588-9700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 25, 1996, based upon the average bid and asked price
of the Common Stock on NASDAQ Small-Cap Market for such date, was approximately
$37,250,000. The number of outstanding shares of the registrant's Common Stock
on March 25, 1996 was 10,263,796.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement related to its 1996 Annual
Meeting of Shareholders are incorporated by reference into Part III of this Form
10-K.
<PAGE>
TELESCAN, INC.
FORM 10-K REPORT INDEX
PAGE NO.
PART I
Item 1. Business .............................................. 2
Item 2. Properties ............................................ 14
Item 3. Legal Proceedings ...................................... 15
Item 4. Submission of Matters to a Vote of Security Holders .... 15
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ................................ 16
Item 6. Selected Financial Data ................................ 17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 18
Item 8. Financial Statements and Supplementary Data ............ 23
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure .............. 23
PART III
Item 10. Directors and Executive Officers of the Registrant ..... 24
Item 11. Executive Compensation ................................ 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...................................... 27
Item 13. Certain Relationships and Related Transactions ......... 28
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K ............................... 29
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Telescan, Inc., ("Telescan" or the "Company") provides innovative solutions for
online technology, sophisticated data retrieval tools and state-of-the-art
Internet services. The Company develops, markets, and operates major online
networks and Internet sites serving the financial, publishing, home design and
building, entertainment and technology transfer industries. The Company's
products and services, which are based upon its proprietary online operating
system and user software, allow its customers to electronically access and
analyze information through their personal computer systems.
The Company's primary product lines are the (1) Telescan system of online
financial services and products ("Telescan Financial"), which allow
sophisticated investors to obtain financial news and information, perform
fundamental and technical analyses and design personalized searches using
current and historical information on more than 350,000 global equities, indices
and currencies; (2) Computer Sports Network division ("CSN"), which offers
online computer sports games to golf and baseball enthusiasts; (3) numerous
third party online services which are developed and operated via alliances with
third parties in the publishing, entertainment, and home design and building
industries; and (4) Knowledge Express Data Systems, L.C. ("KEDS"), which is an
online database system for the commercialization and transfer of technology
which serves corporations, government agencies, universities, and research
institutions.
The Company's online service products contain proprietary software technologies,
developed or acquired by the Company, which increase the speed, power and user
friendliness of information retrieval in information applications while lowering
costs to users. The Company's proprietary technology employs a host hardware
configuration connected to an intelligent terminal, which is typically a
personal computer. The Company's software enables the user to accomplish a full
text search of databases for complex queries, without requiring the use of
Boolean logic found in traditional database search technologies. It also employs
a proprietary optimal search algorithm to accomplish quantitative analysis. In
addition, the Company has developed graphical interfaces for Windows and
Internet affiliates.
Revenue is generated in the form of online service fees, product sales and
contract revenue. The Company has experienced a significant increase in revenue
over the past three years. The higher revenue is primarily attributable to
increases in the Company's subscriber base. This subscriber growth, in turn, has
resulted from an increase in the online services market, the diversification of
the Company's offerings, and the Company's continued investment in customer
acquisition through technology development and marketing.
The Company's online revenue is generated from individual subscribers paying
annual subscription fees plus recurring monthly usage fees. Product revenue is
generated from the sale of online system software, software and service
enhancements, major product upgrades and related educational and training
products such as books and videotapes. The Company's software products generally
reflect a common base technology to which additional features can be added to
satisfy the various needs of the sophisticated user. Accordingly, product
revenue primarily consists of revenue from product enhancements or major
upgrades. The Company's contract revenue is generated from providing contract
services to other companies. These contract services include developing,
operating and maintaining online database systems as well as providing
administrative and marketing services.
2
The following table summarizes the Company's revenue by product line and type of
revenue (dollars in thousands).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1995 1994 1993
------------------------ ----------------------- ------------------------
PERCENT PERCENT PERCENT
REVENUE OF TOTAL REVENUE OF TOTAL REVENUE OF TOTAL
<S> <C> <C> <C> <C> <C> <C>
TELESCAN FINANCIAL
Online Service ...................... $ 7,878 56.2% $ 6,110 58.3% $ 4,152 59.7%
Products ............................ 2,243 16.0 1,611 15.4 1,503 21.6
THIRD PARTY
Online Service ...................... 110 0.8 34 0.3 -- --
Products ............................ 37 0.3 19 0.2 -- --
COMPUTER SPORTS NETWORK
Online Service ...................... 639 4.6 313 3.0 91 1.3
Products ............................ 91 0.6 131 1.2 10 0.1
KNOWLEDGE EXPRESS DATA SYSTEMS, L.C
Online Service ...................... 200 1.4 106 1.0 116 1.7
Products ............................ 14 0.1 19 0.2 110 1.6
Contract revenue .................... 2,114 15.3 1,518 14.5 150 2.2
CONTRACT REVENUE
Third Parties ...................... 212 1.5 38 0.4 32 0.5
Related Parties:
Brown/Friedman Partnership ..... -- -- 29 0.3 131 1.9
KEDS(1) ........................ -- -- -- -- 22 0.3
Telebuild ...................... 408 2.9 514 4.9 616 8.9
OTHER REVENUE ........................... 43 0.3 35 0.3 17 0.2
------- -------- ------- -------- ------- -----
TOTAL REVENUE ........................... $13,989 100.0% $10,477 100.0% $ 6,950 100.0%
======= ======== ======= ======== ======= ======
</TABLE>
(1) Net of elimination of intercompany sales subsequent to March 31, 1993, when
the Company began consolidating Knowledge Express Data Systems, L.C. as the
result of increasing its ownership from 50% to 55.58%
The business of the Company has been operated by the Company or its predecessors
since 1983. The Company, which is a Delaware corporation, was incorporated in
1988 under the name "Max Ret, Inc." for the purpose of acquiring or
participating in a business opportunity. In 1989 the Company issued 75% of its
outstanding common stock ("Common Stock") to acquire all of the outstanding
common stock of D.B. Technology, Inc. (dba Telescan, Inc.) ("DB"), and DB's
wholly owned subsidiary, CSN. After the acquisition of DB and CSN by the
Company, DB was merged into the Company and the Company changed its name from
Max Ret, Inc. to Telescan, Inc. In December 1991, CSN was merged into the
Company.
Since its formation, the Company has expanded its on-line service offerings
through a series of strategic acquisitions, joint ventures and partnerships. In
June 1990, the Company issued 420,000 shares of its Common Stock to T.I.C.
Software, Inc. in exchange for assets consisting of license and contract rights,
3
proprietary software, several full-text, technology-oriented databases,
computers, computer-related equipment and furniture.
In December 1990, the Company entered into a corporate joint venture (as a 50%
owner) in Technology Resource Company, for the purpose of marketing and
operating the Knowledge Express online database system. During 1991, the
corporate joint venture was dissolved and its interests were assigned to
Telescan, L.C., a Texas limited liability company, which has since been renamed
Knowledge Express Data Systems, L.C.. The Company acquired an additional 5.58%
ownership interest in March 1993. Telescan acts under contract as the exclusive
system operator of the KEDS database system and provides development,
maintenance and operation of the system including the uploading of the
databases; programming and development of the systems and end-user software;
system operations; and certain other contract services, all of which are charged
to KEDS on a "cost plus" basis.
In 1992, in exchange for 100,000 shares of Common Stock, the Company acquired
the 15% minority interest of the Screening Technologies partnership ("Screening
Tech"), and became the sole owner. Screening Tech developed the Telescan Edge,
Prosearch and Mutual Fund Search software programs. The partnership was
subsequently merged into the Company.
The Company has a 21.25% equity interest in Telebuild, L.C. ("Telebuild"), a
limited liability company formed in 1990 to develop and market online
information systems serving the building and construction industry. Telescan
provides maintenance and operation of the Telebuild information systems,
including the uploading of information; programming and development of the
systems and end-user software; system operations; and certain marketing, general
and administrative services, all of which it charges to Telebuild on a "cost
plus" basis.
INDUSTRY
Online services allow personal computer users to access outside sources of
information and interact with other users via telephone line connections
channeled through a central host computer. The online services industry includes
commercial services targeted exclusively to businesses, such as medical, legal,
financial, credit reporting, marketing, and technical databases, and
consumer-oriented databases offering a wide range of informational, educational,
consumer and entertainment services. The consumer online services market emerged
in the early 1980's when business-oriented, online services market began to
offer limited services to owners of personal computers. Since that time, both
the consumer and business online services markets have grown dramatically in
breadth of services offered and in market penetration.
Online services typically include information databases and specialized search
and retrieval software maintained by the service provider on a host computer.
Interface software, which is used on the customer's computer, permits users to
access information through the online system. The service provider usually rents
or purchases databases on a non-exclusive basis from third parties and then
further develops such databases for use within the provider's online system.
Customers typically subscribe to an online system for an initial base charge for
which they are granted a license for the interface software needed to access the
online services. Following their subscription, customers are typically charged
in one of two ways. The most common method used by consumer based services is a
periodic subscription fee for which users receive a fixed allotment of time on
the online system, after which they are charged on a per-minute basis. The
second method bills users at varying per minute rates, according to time
actually spent online on the databases. Under both of these methods there are
often additional charges for specific services used within the databases.
4
The industry's dramatic growth in recent years has resulted from a number of key
factors which are expected to contribute to continued growth throughout this
decade. Some of these key factors include the increasing market awareness of
online services and the Internet; growth in the availability, quality and
marketing of online products and services; growth in the home and personal
computer markets including mobile "laptop" computing; increased use of modems
for telecommunications; and the development of alternative access devices such
as dedicated communications terminals. The Company believes that as the market
continues to expand, important competitive factors will be system performance,
product differentiation, quality and quantity of content, user friendliness,
price, customer support and effective marketing techniques.
BUSINESS STRATEGY
The Company's mission is to be a worldwide leader in the development of
sophisticated interactive online information systems and Internet sites among
businesses, individuals, associations and government agencies through the
delivery of superior, cost effective data retrieval technology, customer user
interface programs and communications services. To achieve this mission, the
Company's business strategy is (i) to increase Telescan's customer base and
recurring revenue; (ii) to continue investing in the development of new
technology; and (iii) to increase current customer usage. There can be no
assurance that this strategy will be effective.
Management believes that the continued investment in customer acquisition and
the resulting increase in recurring revenue is crucial to the future growth of
the Company. This is achieved by creatively marketing its services and
exploiting the Company's existing proprietary software technologies in the
development of new online systems and Internet sites. Joint marketing
relationships with companies selling related products or services and having
large, preexisting customer bases are a major source of growth for the Company.
Additional growth is achieved by entering into mutually beneficial alliances
with associations, publishers and other third parties to jointly develop and
market online systems and Internet sites to service their members' or customers'
specific needs. Typically the Company is responsible for software design,
development and programming services; the partner is responsible for supplying
the data and marketing the service; and the net revenues of the project are
split.
Developing state-of-the-art technology is key to establishing the Company as a
leader in the industry and is important to the long-term growth of the Company.
The Company is continually investing its resources in the development of new
products and services which provide powerful online capabilities to
sophisticated users in a wide range of industries.
Current customers are a valuable Company asset and are a key component in the
Company's overall business strategy. With customer acquisition costs so high,
increasing current customer usage is the most cost-beneficial method of
maximizing internal growth. Increasing usage is accomplished by (i) providing
access to an increasing array of comprehensive, high-quality data coupled with
powerful and easy to use search and analytical tools; (ii) providing free
customer training and support to educate existing customers on the capabilities
of the system; and (iii) conducting reactivation campaigns to encourage inactive
subscribers to log back onto the system.
5
PRODUCTS AND SERVICES
The Company has attempted to penetrate the market for online services by
developing and marketing products that build and expand upon the Company's base
technology of proprietary operating systems and user software for database
applications. The Company's major product lines include the Telescan system of
online financial databases and software programs, CSN, the KEDS service and its
numerous third party online services.
TELESCAN FINANCIAL
TELESCAN INVESTORS PLATFORM (TIP) 1.1. Telescan Investors Platform ("TIP") is
the MS Windows version of the Company's popular financial research, screening
and analysis software. Introduced in June 1995, TIP offers numerous enhancements
over the Analyzer 3.0 software. Some of the new features are improved charting
capabilities, a unique portfolio-based control for greater flexibility and
faster data retrieval, additional database information such as current quotes
for all major international exchanges, full-text analysts' reports, a Market
Snapshot of major indexes, improved communications options including TCP/IP
access and interactive roundtables, a TOP PICKS screening feature, and expanded
automation tools. Features such as multi-tasking and graphic toolbars that are
inherent in the Windows operating environment make TIP more user-friendly and
lead to its improved data presentation options.
TELESCAN ANALYZER 3.0. This is the most recent version of the original Telescan
Analyzer product with the capability of accessing other Telescan products, such
as Prosearch and Mutual Fund Search. This DOS product features a graphical user
interface similar to the Microsoft Windows and Apple Macintosh operating
environments. The software allows the user to access the Telescan Database of
over 14,000 stocks, 5,600 mutual funds, 60,000 options, 1,000 market indexes and
more than 1,200 futures and commodities contracts. Telescan Analyzer 3.0 helps
the investor evaluate stock portfolios and mutual fund holdings. Over 80
fundamental and technical indicators such as price, volume, insider trading, key
company facts, volume indexes, trend lines, news releases, MACD and relative
strength are available for analyzing securities. Users can retrieve historical
price and volume charts of up to 23 years of data in less than 8 seconds. They
can utilize the Company's powerful relevant text searching technology to screen
the news and Securities and Exchange Commission filings databases using simple
words and sentences to retrieve desired information ranked in the order of
relevance. Additional features include multiple graphs per screen, higher
graphics resolution, 9600 baud modem support, mouse interface and pull down
menus, and enhanced system integration and visual presentation.
TELESCAN PROSEARCH. Prosearch is a powerful search program that allows the user
to develop customer screening routines to select securities that best meet the
individual's specific investment goals. The program was designed for serious
investors as a tool for identifying stocks to meet virtually any investment
objective as defined by a wide variety of fundamental and technical indicators.
ProSearch allows the user to select up to 40 parameters from a list of 207
criteria for building a search strategy. The program is shipped with several
pre-defined search strategies that can also be used for narrowing the list of
potentially profitable investments.
TELESCAN MUTUAL FUND SEARCH. This product is a mutual fund screening program
that allows an investor to sort through more than 5,600 mutual funds using the
Company's unique scoring system to pick the funds that best fit the user's
investment objectives. The selection criteria are grouped into three main
categories: purchase requirements, performance and consistency characteristics,
and portfolio composition. The investor
6
then chooses up to 30 of the 80 individual criteria contained within the
categories to produce a list of the mutual funds best suited to their needs.
TELESCAN ESEARCH. Built as a complement to the ProSearch program, Esearch adds
the ability to screen for investment candidates based on earnings estimate
information. Earnings estimates are very important to investors in that they are
often a preview of Wall Street's positive or negative perception of a particular
stock.
QUOTELINK. The Company released the QuoteLink quote and news utility during
1992. This product permits users of competing financial analysis software and
spreadsheet programs to download information from the Telescan Database into
such programs. QuoteLink is compatible with all the major competitive programs
such as AIQ, Metastock, Super Charts, Quicken, Lotus and Excel
OPTIONS SEARCH. This product is a screening program that allows an investor to
sort through more than 60,000 options using the Company's unique scoring system
to pick the options that best fit the user's investment objectives. The investor
chooses up to 30 of the 122 screening criteria to produce a list of the options
best suited to their needs.
TELESCAN GATEWAY. Telescan Gateway is an electronic library that brings
information to computer terminals. This online library includes domestic and
international magazines, newspapers, published papers, indexes, scholarly
journals, directories, statistics, and more, from over 800 databases.
WALL STREET CITY. Wall Street City is a comprehensive financial supersite on the
Internet designed to provide a central gathering place for financial service
providers, advertisers, and the individual investor. The site was launched in
February 1996 and is located at http://www.wallstreetcity.com. The site gives
Internet users access to a broad array of both free and subscription-based
services including real-time quotes, financial market information, product news
and data, plus search and analytical tools. The site features a revolutionary
"live" stock ticker which allows Internet users to customize a rolling ticker of
up to 50 stocks and continuously monitor the price movement of their portfolio.
For content providers, such as brokers, banks and public companies, Wall Street
City offers a highly targeted medium for reaching the Internet's
investment-oriented audience. To develop corporate and product awareness,
commercial sponsors of the site can maintain a virtual office or display space
in the appropriate building or district with hyper-links to their home pages.
Wall Street City graphically resembles lower Manhattan, and is configured into
more than twenty information and advertising districts including Corporate
Headquarters, the Exchange and the Research District.
TIPNET. TIPnet is one of the two financial Internet web sites created by the
Company, and was launched in October 1995. The site, located at
http://www.tipnet.com, offers Internet users the ability to access the Company's
comprehensive financial database and to analyze the data through a downloadable
graph viewer application. TIPnet is the Company's first major Internet effort
and is targeted to slightly less sophisticated investors. The site gives them
access to most of the research and analysis tools available in the Company's
proprietary software, but eliminates the upfront software price which can be a
barrier to entry for the lower level investor. TIPnet is a fee-based service and
users are charged a flat monthly rate based on the breadth of information they
want to access. The site is built on the World Wide Web platform which allows
for its graphical navigation, and is designed to appeal to the younger audience
typically found on the Internet.
TELESCAN PORTFOLIO MANAGER. Telescan Portfolio Manager is a securities portfolio
management program which was developed as a joint venture between the Company
and The Pilot Group, Inc. The program offers
7
a wide variety of report options and was designed to provide speed and power in
a user friendly manner that forgives many common user mistakes and accepts
corrections with ease.
SUNFLOWER. This software development tool, released during 1995, allows the
Company to establish proprietary online communication networks for third parties
without a substantial investment in hardware or software.
COMPUTER SPORTS NETWORK
THE LINKS TOUR. The Links Tour gaming program allows members to participate in
nationally held computer golf tournaments, which closely follow the pro tour. In
September 1992, the Company entered into a joint agreement with Access Software,
Inc. ("Access") to develop and market an online tournament play interface for
the Links 386 Pro golf game produced by Access. Links 386 Pro is one of the top
rated golf simulation games on the market and has sold in excess of 1 million
copies. The Company provides Access with the data structure and format necessary
to upload scores and statistics to the CSN Host Computer; conducts online
tournaments; and provides customer support. Access includes Links Tour
subscription information in all Links 386 Pro software sold, markets the Links
Tour to its existing customers and provides its software to CSN at a distributor
discount.
Links users, who are also CSN subscribers, can compete in CSN "sponsored" golf
tournaments on both a regional and national level using the CSN interface. CSN
members are also able to organize and/or join their own private "clubs." Access'
Links 386 Pro provides the graphic golf simulation game and CSN provides the
online national tournament format.
GENERAL MANAGER. This program enables fans of APBA major league baseball, a
simulated baseball game which has been in existence since 1951, to compete
nationally on a network of home computers. The Company's product acts as an
online interface to disk-based baseball software, published by APBA, enabling
customers to play interactively. The program includes the ability to draft a
team of major leaguers, trade players, maintain active reserve rosters, and
guide the team through a season of scheduled games.
KNOWLEDGE EXPRESS DATA SYSTEMS
KEDS service is an online database system serving the federal government,
universities, and private sector corporations. KEDS serves the needs of business
developers, licensing professionals, strategic planners, competitive
intelligence directors, research and development managers, scientists and others
by allowing access to information about collaborative research and technology
licensing opportunities. KEDS produces databases from information gathered from
government labs and agencies, universities, non-profit research centers and
private sector companies. KEDS not only hosts the databases it produces, but
other commercially available databases such as, Corptech, Bioscan, Business
News, and Federal Research in Progress. In addition to providing the industry
with greater access to information coming from universities and federal
laboratories, KEDS proprietary software and search capabilities facilitate
better matching of technology sources with industrial partners. This capability
is also used by intellectual property and technology transfer managers at
universities and federal laboratories to locate and qualify prospects for
collaborative research and technology licensing opportunities. The Company is
the system operator and joint owner of KEDS.
8
During 1993, KEDS initiated the LES Online Information Service offering database
services to the more than 7,000 individual and organization members of the
Licensing Executives Society, an association of technology transfer
professionals.
In April 1994, KEDS was awarded a one-year contract from the Department of
Energy (the "DOE Contract") under its Technology Reinvestment Program which was
subsequently renewed for an additional one year term. Under the terms of the DOE
Contract, the Company markets its services in order to obtain subscribers,
develops and maintains the required databases, and provides training and
customer service to the subscribers. In exchange, the Department of Energy
subsidizes online services for up to 1,200 subscribers. The DOE Contract expires
March 31, 1996. KEDS has been actively working to convert its subsidized
subscribers to paying customers and to expand its non-subsidized subscriber base
in order to minimize the impact of the DOE Contract expiration.
THIRD PARTY ONLINE SERVICES
The Company has continued to expand its business outside the Telescan financial
and sports online services by forming business alliances with institutions,
associations, publishers and other third parties to develop and operate online
databases which have been tailored to meet their members' or customers' needs.
The Company is responsible for the development and operation of the online
database systems and the partners are responsible for providing data and
marketing the services. Revenues are split after deducting certain costs as
defined in the individual agreements. The Company usually does not receive any
revenue from a project until after the service is launched. Costs incurred prior
to launch are charged to expense as incurred.
BILLBOARD ONLINE. Billboard OnLine, which is a joint effort of the Company and
BPI Communications, L.P. ("BPI"), is a global online network originally launched
as a non-Internet service during April 1994 and then launched on the World Wide
Web during December 1995. The site, located at http://www.billboard-online.com,
offers articles and charts from the current issue of Billboard magazine, along
with exclusive editorial features and the opportunity to download Billboard
OnLine software. The online service offers its users full access to Billboard
magazine's vast electronic library of more than 20,000 charts in all music
genres back to 1983, and full text articles dating back to 1991.
HOLLYWOOD REPORTER ONLINE. Hollywood Reporter Online, is a joint effort between
the Company and BPI, to develop and operate databases serving the entertainment
industry. It will offer users access to the current and archived issues of
Hollywood Reporter magazine. In addition, the users will have access to film
reviews and news articles relating to TV, film, and music, as well as
information on current events and industry developments. The Hollywood Reporter
Online service will be launched during 1996.
ADWEEK ONLINE. Adweek Online, which is a joint effort between the Company and
BPI, was launched during September 1995 to provide easily accessible information
to the advertising industry. It offers users access to full text news and
articles from Brandweek, Mediaweek and all six regional editions of Adweek
magazine plus instant access to other advertising industry information such as
Accounts in Review, Accounts Awarded, the Adweek Client/Brand Directory and
details on breaking campaigns. The full searchable database includes archives
dating back to January 1992, and is updated weekly.
EDITOR AND PUBLISHER'S AMPERSAND. In August 1993, the Company and The Editor and
Publisher Company ("E&P") signed a 10-year agreement for the development and
operation of databases servicing the newspaper and advertising industries. It
will offer users access to the current issue of E&P magazine, and archived
issues dating back to 1988. In addition, users will have access to proprietary
E&P databases, and
9
will be able to utilize the ProSearch technology to identify demographic
regions, and newspapers servicing those regions to facilitate the targeting of
advertising campaigns. The E&P Online service is scheduled to be launched during
1996.
ARTISTS ONLINE. Artists OnLine, which is a joint effort of the Company and
Artists OnLine, Ltd., is a global online network launched during March 1996,
linking artists and art buyers on the World Wide Web at
http://www.onlineart.com. This unique Internet service enables users to obtain
complete information on a particular artist or gallery, view their works of art,
and contact the artist. The powerful search engine allows users to quickly
search for artwork and artists based on a wide range of criteria including the
type of art, style, media, price, dimension, color and subject matter.
CONSULTANTS ONLINE. In February 1995, the Company and Consultants-On-Line, Inc.
entered into an agreement to develop and operate an online service providing
health, safety and environmental information to consultants and users of
consulting services in the environmental and occupational health and safety
industries. The service will provide users access to business news, Commerce
Business Daily, NASA Tech Briefs, and resumes of consultants. In addition, users
will be able to access databases including Corptech and Federal Research in
Progress. The service is expected to be launched during 1996.
HOME & DESIGN ONLINE. In March 1995, the Company and Home & Design OnLine
entered into an agreement to jointly develop the Home & Design Online network
which is expected to be launched during 1996. The service will provide a
nationwide information and communications platform linking consumers, realtors,
builders and all others involved in the buying, selling, building or remodeling
of a home. The service will provide access to real estate listings, fine art,
home furnishings, product suppliers and manufacturers, codes and regulations and
technical data. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
AIA ONLINE. In August 1992, The Company entered into an agreement with the
American Institute of Architects to develop and operate AIA Online, an
information and communications network using the proprietary technology of
Telebuild. AIA Online, a global electronic network launched during 1993,
provides time sensitive access to information used by architects and those
associated with the design and construction industry. The network also includes
large searchable databases, electronic communications and online ordering of
publications, products and services. In addition, architects have access to more
than 850 databases which cover a wide range of business needs. See Item 13 -
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
PUBLIC INFORMATION ONLINE. In April 1994, the Company and Public Information
Online, Inc. entered into an agreement for the development and operation of an
online database system to facilitate the distribution of news stories. The
service will allow users to deliver unedited press releases via fax, Telescan
e-mail, and Internet e-mail. The press releases will be archived in the database
and accessible using Telescan's proprietary keyword and relevance search engine.
The Public Information service will be launched during 1996.
ENTREPRENEURS ONLINE. In September 1993, the Company and Entrepreneurs OnLine,
Inc. ("EOL") entered into an arrangement to develop and operate Entrepreneurs
Online network, an online database linking entrepreneurs and providers of
services, capital and other resources. The service was launched during 1995. EOL
was acquired by the Company during 1995.
10
OTHER
In addition to its online database services, the Company also performs software
design, development, and programming under contract for third parties and for
related parties. The Company also offers video training tapes, financial books,
and monthly newsletters in conjunction with its Telescan financial products.
The Company's online services employ databases that consist of information
typically obtained from public and private third-party sources, usually on a
non-exclusive basis. Therefore, the Company's business is dependent upon its
ability to obtain and maintain, on an ongoing basis, information for inclusion
in the Company's databases. Acquisition of databases typically involves the
payment by the Company of a one-time fee and/or royalties based on some
combination of user subscriptions and actual database usage. Information
suppliers typically license access to data on a yearly renewable basis, subject
to termination by either party upon 90 to 180 days notice. Government contracts
may often be terminated or renegotiated at the option of the government
entities. The Company also obtains information pursuant to non-exclusive
licenses from private sector information compilers, some of which currently are
or in the future may be direct or indirect competitors of the Company. There can
be no assurance that the Company will be able to renew its current contracts
with data sources, maintain comparable price levels for information acquired, or
negotiate additional contracts with data sources as necessary to maintain
existing products or introduce new products. Termination of the Company's
relationship with one or more of the Company's information suppliers could have
a material adverse effect on the Company's operations if the data became
available through one of the Company's competitors and if the Company was unable
to obtain comparable data through other sources. The Company considers continued
access to databases as a critical factor in the competitiveness of its existing
products and believes that future product development will depend on the
availability of data in specific markets targeted by the Company. However, the
Company does not believe at this time that the loss of any single source of data
would be detrimental to its business.
MARKETING
The Company's online services are sold to customers for an initial licensing fee
followed by monthly charges under either a monthly fixed fee package or on a per
minute basis based upon actual online usage. To attract new subscribers for
Telescan, CSN and KEDS, the Company typically offers low cost initial trial
subscriptions, the cost of which is credited against the normal fee schedule if
the customer continues to subscribe after the trial period.
The Company's major marketing objectives for its online services are to increase
the number of subscribers, to sell additional products to existing subscribers
and to increase average monthly online use per subscriber. The channels for
increasing the number of subscribers to Telescan Financial include joint
marketing agreements, trade shows and seminars, advertising and direct sales and
word-of-mouth.
The Company's primary market has historically been the sophisticated individual
investor. The Company has significantly increased its individual investor
subscriber base through joint advertising and marketing arrangements with major
discount brokerage firms including Fidelity Investments Retail Services, Quick &
Reilly, Accutrade, and Charles Schwab & Co., Inc. These marketing arrangements
typically call for the brokerage firm to incorporate and package the Telescan
Financial software and a gateway to the Telescan database into their software
products, or to incorporate an application interface in their software products
that allows access to the Telescan database.
11
The Company and Notable Technologies, Inc. a wholly owned subsidiary of McCaw
Cellular Communications, Inc. have entered into an agreement calling for the
co-marketing of products and services to each other's customer base, the
development of an investment research product and the establishment of a
wireless network to deliver the Company's financial data to McCaw's cellular
phone and pager customers. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
Because of the breadth and cost effectiveness of the Company's financial online
systems, the Company targets users of competitors' financial analysis software
packages as a source of online revenue. During 1993, the Company released an
application interface product facilitating the downloading of information from
the Telescan Database to users of competitors' analysis software. The company
has continued to leverage the opportunity to tap the large data downloading
market through cooperative alliances with several major charting software
publishers including Metastock, Supercharts and AIQ.
MATERIAL CUSTOMERS
Revenue earned under the DOE Contract amounted to 15.1% and 13.7% of
consolidated revenue during the year ended December 31, 1995 and 1994,
respectively. The DOE Contract expires March 31, 1996. KEDS has been actively
working to convert its subsidized subscribers to paying customers and to expand
its non-subsidized subscriber base in order to minimize the impact of the
contract expiration.
PRODUCT DEVELOPMENT
The Company has developed and acquired proprietary software technologies to make
its products easy to use and to achieve efficient searching of extensive
databases using simple, non-Boolean logic search queries. Consequently, the
Company believes that using its proprietary technologies it can deliver superior
online database services. The Company intends to employ its proven software
technologies in developing additional products serving new markets and
customers.
Telescan's software development staff includes 37 staff programmers who develop
new products and provide maintenance support for existing products. During the
years ended December 31, 1995, 1994 and 1993, the Company spent approximately
$1,600,000, $1,200,000 and $900,000, respectively, for software development
activities, all of which was capitalized. All software development costs are
charged to expense until technological feasibility is established, after which
remaining software production costs are capitalized and amortized over periods
ranging from three to five years. The Company also continuously evaluates
opportunities to obtain new products through acquisition.
PROPRIETARY RIGHTS
The Company relies upon a combination of contract provisions and copyrights,
trademarks, and trade secret laws to protect its proprietary rights in its
products. The Company attempts to protect its trade secrets and other
proprietary information through software licenses, nondisclosure agreements with
product development partners, employees and consultants. Although the Company
intends to protect and defend its proprietary rights vigorously, there can be no
assurance that these measures will be successful.
12
With respect to software technologies which the Company has licensed to third
parties for use in specific applications, the Company has entered into licensing
agreements which are intended to protect the proprietary rights of the Company
in such technologies. The Company seeks to protect the source code of its
products as a trade secret and as an unpublished copyright work. The Company has
also obtained federal trademark registration of the name "Telescan" and for the
names of many of its leading services.
The Company has filed a patent application with the U.S. Patent and Trademark
Office for its new technology, code-named Sunflower and has filed patent
applications in certain foreign countries. The Company believes that its
products, trademarks and other proprietary rights do not infringe on the
proprietary rights of third parties, and the Company is not aware of any current
infringement claims from third parties. There can be no assurance that third
parties will not assert infringement claims against the Company in the future
with respect to current or future features or contents of services or that any
such assertion may not require the Company to enter into royalty arrangements or
result in litigation.
COMPUTER AND NETWORK OPERATIONS
The Company's data center computer system consists of commonly available PC
processors, disk storage devices and telecommunications equipment, operated by a
common operating system which is proprietary to the Company. The Company
typically screens and filters incoming data feeds from third parties, using
specific software routines, in order to detect errors and certain detectable
viruses.
The Company's data center is located at the Company's headquarters facility. The
data center has separate air conditioning units and the equipment room has a
raised floor. The power system includes power conditioning, backup battery, and
full "zero downtime" emergency generator support on site, which is supplied by
the facility owner. Data is regularly backed up and stored off-site, and certain
data is duplicated on separate storage devices within the data center. The
building in which the data center is located has off-hours card key access, card
key access to the Company's offices, separate card key access to the data center
and 24 hour on site security personnel. The Company believes that data center
system redundancy is afforded by the Company's ability to use commonly available
computer processors, storage devices, and communications equipment, including
the Company's non-data center computer systems, in its data center in case of
equipment failure or other emergency. The Company's telecommunications network
consists of the public packet switching networks provided by US Sprint and ADP
Autonet. Through these networks, subscribers in hundreds of cities in the U.S.
and Canada can dial a local number to connect to the Company's online services.
Although the Company believes that its computer and communications hardware
systems are adequate for existing operations, the Company has recently purchased
additional hardware required in order to accommodate any significant increases
in the customer base for the Company's existing products and services, and to
accommodate additional products or services.
The Company continually upgrades its computers and peripheral hardware to take
advantage of technological advances. Further, the Company believes that future
hardware and software advances will serve to improve the performance of the
Company's systems. While the Company does not believe that it faces a material
risk due to technological changes, there can be no assurance that the Company's
existing technology will remain viable or that the Company will be able to
achieve technological advances that may be necessary in order to remain viable.
13
COMPETITION
The Company competes with many companies, who operate proprietary and/or online
systems, many of which have significantly greater financial, technical, and
marketing resources than the Company. In addition, a substantial number of new
competitors are entering the online services market as a result of the recent
growth and the perceived future opportunities in this market. The Company
believes the principal competitive factors in the online services market include
system performance, product differentiation, quality and quantity of content,
user friendliness, price, customer support and effective marketing techniques.
The Company believes that it competes effectively in these areas. Competitive
pressures could result in reduced market share, price reductions and increased
spending on marketing and product development, which could adversely affect the
Company's financial condition and operating results. However, the Company
believes that its business strategy of building marketing relationships with
larger partners and expanding the range of its online offerings by entering into
alliances with associations, publishers and other third parties may serve to
lessen the impact of future competitive pressures on the Company.
EMPLOYEES
As of December 31, 1995, the Company had 153 full-time employees, with 29
employed in sales and marketing; 37 in customer service; 14 in computer
operations; 37 in product development and maintenance; and 36 in general
management and administration. None of the Company's employees is represented by
a labor union, and the Company has never experienced a work stoppage.
GOVERNMENTAL REGULATION
The Company is not subject to direct regulation other than regulation generally
applicable to businesses. However, changes in the regulatory environment
relating to the telecommunications and media industries could have an effect on
the Company's business, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope of
competition from regional telephone and cable television companies. See
"Competition." In addition, although the Federal government research data
available through the Company's KEDS online database is intended to be
non-confidential, the Company could be liable if data later determined to be
confidential was disseminated by the Company through its database. The Company
cannot predict the impact, if any, future regulation may have on its business.
ITEM 2. PROPERTIES
The Company's principal executive offices, as well as its principal marketing,
computer operations, and product development activities, are located in leased
facilities in Houston, Texas, consisting of a total of approximately 51,500
square feet. The Knowledge Express Data Systems, L.C. subsidiary maintains a
marketing and administrative office of approximately 7,400 square feet in
Berwyn, Pennsylvania, which is leased. The current aggregate monthly rental for
these facilities is approximately $45,000. The leases for Houston and Berwyn
facilities will expire in 2007 and 1999, respectively. The Company believes that
its facilities are adequate for its present needs and that suitable space will
be available to accommodate its anticipated future needs. The Company has a five
year option for 15,179 square feet of contiguous office space plus the right of
first refusal for an additional 20,103 square feet of contiguous office space.
14
ITEM 3. LEGAL PROCEEDINGS
In 1986, a stockholder of Telescan, Inc. (predecessor business to D.B.
Technology, Inc.) filed suit in the 269th District Court in Texas against the
Company, certain stockholders of the Company, and others. The suit sought to set
aside the 1986 merger of D.B. Technology and Telescan, Inc., money damages from
all defendants, and sums due under alleged promissory notes. The case went to
trial in October 1989 and judgment was rendered in favor of the defendants on a
directed verdict including an order for the plaintiff to pay certain court costs
and certain attorney's fees of Telescan, Inc. Subsequent to an appeal by the
stockholder in the Texas Court of Appeals 14th Judicial District, the appellate
court remanded the case to trial court. At the conclusion of presentation of
evidence, the case was submitted to the jury by means of questions in order to
determine issues of liability and damages. Based on a lack of evidence which
would impose liability upon Telescan, Inc., no questions were submitted which
asked the jury to determine whether or not the Company bears any liability to
any plaintiff. A hearing on pending matters, including entry of Judgment, was
held April 10, 1995. At the hearing the court ruled that plaintiffs take nothing
other than the payment, with interest, of $40,000 in promissory notes in favor
of plaintiff Investa, Inc. and Hoggett, which notes preceded the merger. The
defendants were awarded attorney's fees and court costs. The Judgment has been
entered; however, it is subject to appeal. Management does not believe that any
material adverse outcome is reasonably possible nor probable and thus, no
qualified disclosure as to a range of reasonable possible loss or accrual in the
financial statements of probable loss have been made.
During 1993, the Company replaced a leased telephone system prior to the
expiration of the existing rental agreement and ceased further rental payments
under such agreement. In April 1994, the lessor filed suit against the Company
in the District Court of Harris County, Texas 270th Judicial District, seeking
accelerated rental payments of approximately $106,000, together with interest,
court costs and legal fees. The Company answered the lawsuit, asserted the
defense of failure of consideration and counterclaimed for breach of contract,
fraud and Deceptive Trade Practices Act violations by the lessor. On May 26,
1995, the parties entered into an Agreement of Settlement and Mutual Release
pursuant to which the Company paid $47,500 to the lessor. The lawsuit was then
dismissed without prejudice.
From time to time the Company may be involved in certain other legal actions
arising in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1995, there were no matters submitted to a vote of
the security holders, through solicitation of proxies or otherwise.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is quoted on the NASDAQ Small-Cap Market under the
symbol "TSCN." The following table sets forth, for the periods indicated, the
high and low closing bid prices for the Common Stock as reported by the NASDAQ
Small-Cap Market. The bid prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commissions and do not necessarily represent actual
transactions.
COMMON STOCK PRICES
--------------------------
HIGH LOW
------------ ----------
1994:
Quarter ended March 31 .............. $ 8.87 $ 7.50
Quarter ended June 30 ............... 7.75 5.00
Quarter ended September 30 .......... 6.50 4.75
Quarter ended December 31 ........... 6.00 3.75
1995:
Quarter ended March 31 .............. $ 6.25 $ 4.00
Quarter ended June 30 ............... 5.87 4.37
Quarter ended September 30 .......... 7.25 5.75
Quarter ended December 31 ........... 8.75 5.75
On March 25, 1996, the last closing price of the Company's Common Stock as
reported by the NASDAQ Small-Cap Market was $7.13. As of March 25, 1996, the
Company had approximately 300 stockholders of record.
DIVIDEND POLICY
The Company has never declared a cash dividend on its Common Stock. The Board of
Directors presently intends to retain all earnings for use in the Company's
business, and therefore, does not anticipate paying any cash dividends in the
foreseeable future. The declaration of dividends, if any, in the future would be
subject to the discretion of the Board of Directors, which may consider factors
such as the Company's results of operations, financial condition, capital needs
and acquisition strategy, among others. See "Item 7 - MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below for the five-year
period ended December 31, 1995, have been derived from the audited historical
consolidated financial statements of the Company. The historical consolidated
financial data include the results of operations of acquired businesses from
their dates of acquisition. The selected data should be read in conjunction with
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and the Company's consolidated financial statements and the notes
thereto.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA: YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue ........................... $ 13,989 $ 10,477 $ 6,950 $ 4,219 $ 2,982
Cost of online services and
products........................ 6,230 5,196 2,961 1,686 1,186
Cost of contract revenue earned ... 1,539 1,293 761 503 232
Marketing, general & administrative 7,143 6,425 3,265 2,177 1,934
Interest expense, net ............. 65 42 21 21 36
Nonrecurring charges (1) .......... -- -- -- -- 92
Minority interest in (income)
loss of subsidiaries(2).......... (226) (152) 70 -- (23)
Equity in loss of joint venture (3) -- -- (43) (123) (30)
-------- -------- -------- -------- --------
Net loss per common share ......... $ (1,214) $ (2,631) $ (31) $ (291) $ (551)
======== ======== ======== ======== ========
Net loss .......................... $ (0.12) $ (0.28) $ (0.00) $ (0.05) $ (0.11)
======== ======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding.... 9,777 9,480 7,591 6,438 5,132
======== ======== ======== ======== ========
<CAPTION>
BALANCE SHEET DATA: YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital (deficit) ......... $ 2,143 $ 1,369 $ 5,174 $ 1,401 $ (183)
Total assets ...................... 10,859 8,317 10,047 4,202 1,831
Total long-term obligations ....... 488 603 312 75 126
Total stockholders' equity ........ 7,965 6,022 8,617 3,607 994
</TABLE>
(1) Nonrecurring charges for 1991 consist of approximately $16,000 in tax
penalties paid to the Internal Revenue Service, $19,000 representing the
recognition of a previously unrecorded liability, approximately $26,000
related to current period payments to a contract employee for services
rendered in prior years, and certain other expenses.
(2) Reflects minority interest in Knowledge Express Data Systems, L.C. in 1994
and 1993 and Screening Technologies partnership in 1991.
(3) Reflects recognition of losses of Knowledge Express Data Systems, L.C. of
which the Company is currently a 55.58% owner.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and related notes, and "Item 6 - SELECTED
FINANCIAL DATA" included elsewhere in this Annual Report.
RESULTS OF OPERATIONS
OVERVIEW
Telescan is an industry leader in providing innovative solutions for online
technology, sophisticated data retrieval tools and Internet services. The
Company develops, markets, and operates major online networks and Internet sites
serving the financial, publishing, home design and building, entertainment and
technology transfer industries. The Company's products and services, which are
based upon its proprietary online operating system and user software, allow its
customers to electronically access and analyze information through their
personal computer systems.
The Company's primary product lines are the (1) Telescan system of online
financial databases and software tools which allow sophisticated investors to
obtain financial news and information and to design a variety of sophisticated
searches and perform fundamental and technical analyses using current and
historical financial information on more than 350,000 global equities, indices
and currencies; (2) CSN, which offers online computer sports games to golf and
baseball enthusiasts; (3) numerous third party online services which are
developed and operated via alliances with third parties in the publishing,
entertainment, and home design and building industries; and (4) KEDS, which is
an online database system for the commercialization and transfer of technology
serving corporations, government agencies, universities, and research
institutions. The Company owns 55.58% of KEDS and acts under contract as the
exclusive system operator.
Revenue is generated in the form of online service fees, product sales and
contract revenue. The Company has experienced a significant increase in revenue
over the past three years. The higher revenue is primarily attributable to
increases in the Company's subscriber base and the DOE Contract. The subscriber
growth, is a result of the growth in the online services industry, the
diversification of the Company's offerings, and the Company's continued
investment in customer acquisition through technology development and marketing.
The Company's online revenue is generated primarily from individual subscribers
paying annual subscription fees plus recurring monthly usage fees. Until
recently, the monthly usage fees for the Company's financial online service were
based upon actual hours of prime time and non-prime time usage, with prime-time
hours charged at a premium. In December 1995, after negotiating more favorable
contracts with several of its communications providers and data vendors, the
Company implemented a new fixed rate pricing plan for the Telescan Financial
online service, whereby all customers are charged a flat monthly fee for a
specified number of hours, with no stipulations as to time of day access. Under
the terms of the plan, financial customers will now have free access to several
services which were previously available only for a surcharge. The Company will
benefit from having a predictable base of recurring monthly revenue and should
see future reductions in its incremental communications costs. The Company's
other online services should also benefit from future reductions in incremental
communication costs under the new telecommunications contract.
18
The Company's incremental online operating expenses primarily include
telecommunications costs, royalties and customer service expenses, while fixed
online operating costs include data costs, amortization of software development
and amortization of capitalized data. On a going forward basis,
telecommunications cost will become semi-variable due to new "per port"
contract. As a result of this mixed cost structure, the online gross margin rate
will typically increase as online revenue increases and will decrease as online
revenue decreases.
Product revenue is primarily generated from the sale of online access software,
software and service enhancements, major product upgrades and related
educational and training products such as books and videotapes. The Company's
software products generally reflect a common base technology to which additional
features can be added to satisfy the needs of the more sophisticated user.
Accordingly, product revenue principally represents revenue from product
enhancements or major upgrades. During 1995, the first version of Telescan
Investor's Platform for Windows ("TIP") software was released and generated a
significant increase in product revenue.
Product costs are variable in nature and include production, duplication,
royalties and distribution costs. Due to the variable nature of these costs,
increases or decreases in product revenue typically do not impact the gross
margin rate. In 1994 however, the Company made a strategic decision to lower the
price of its Analyzer software product below cost in order to increase its
online subscriber base. While this campaign resulted in an increase in customers
and an increase in recurring online revenue for future periods, it significantly
lowered the product sales gross margin rate for 1994.
The Company's contract revenue is generated from providing contract services to
other companies which include developing, operating and maintaining online
database systems as well as providing administrative and marketing services.
Contract revenue has increased primarily due to the Department of Energy ("DOE")
contract awarded to KEDS in April 1994. Under the terms of the contract, the
Company is responsible for the development, marketing and operation of an online
service enabling technology transfer among universities, federal laboratories,
and small to medium sized businesses. In exchange, DOE subsidizes online
services for up to 1,200 subscribers, pursuant to which $2,114,000 and
$1,434,000 of contract revenue and $934,000 and $659,000 of gross margin was
recognized by the Company during 1995 and 1994, respectively. The DOE Contract
expires in March 1996. To counter the impact of the expiration of the Contract,
KEDS has been actively working to expand its unsubsidized subscriber base. Since
the beginning of 1995, the number of unsubsidized subscribers has increased 270%
from 683 to 1,853. This represents an increase in monthly revenue from
unsubsidized subscribers of $13,000 per month during the first quarter of 1995
to $39,000 per month during the first quarter of 1996. Management will continue
to closely monitor the operating results of KEDS, and will make modifications,
if necessary, to optimize KEDS' operating results subsequent to the expiration
of this contract. See Item 13 - "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
19
1995 COMPARED TO 1994
Total revenue increased $3,512,000, or 34%, from $10,477,000 for the year ended
December 31, 1994, to $13,989,000 for the year ended December 31, 1995. Online
revenue, which consists primarily of recurring revenue, increased $2,263,000, or
35%, from $6,564,000 for fiscal 1994 to $8,827,000 for fiscal 1995, primarily
due to continued growth in the number of online customers. Product revenue
increased $606,000, or 34%, from $1,779,000 in 1994 to $2,385,000 in fiscal
1995, primarily due to the 1995 release of Telescan Investor's Platform for
Windows. Contract and license revenue increased $635,000, or 30%, from
$2,099,000 to $2,734,000, primarily due to the DOE Contract, which commenced
April 1, 1994, and a $200,000 license fee earned pursuant to an agreement with a
major financial services institution, whereby the Company's financial software
will be included in a new software bundle due to be released during 1996. Under
the terms of this agreement, the Company has been guaranteed a minimum of
$500,000 of online revenue within 12 months after the software bundle is
released, although the actual amounts could be higher.
For the year ended December 31, 1995, total cost of revenue increased from
$6,489,000 in fiscal 1994 to $7,769,000 in fiscal 1995, a $1,280,000, or 20%
increase. This increase is primarily attributable to the increase in revenue
discussed above. As a percentage of total revenue, cost of revenue decreased
from 62% to 56% primarily due to the higher margin TIP software released in 1995
coupled with the below cost pricing of the 1994 Analyzer sales.
For the year ended December 31, 1995, the Company earned a gross margin on its
online service revenue of $3,854,000 compared to $2,972,000 for the comparable
period of 1994. Online gross margin as a percentage of online revenue remained
relatively constant at 44% and 45% for the year ended December 31, 1995 and
1994.
For the year ended December 31, 1995, the Company earned a gross margin on its
product revenue of $1,128,000 compared to $175,000 for the comparable period of
1994. Product gross margin as a percentage of product revenue increased from 10%
to 47% primarily due to the higher margin TIP software released in 1995 coupled
with the below cost pricing of the 1994 Analyzer sales.
Marketing expenses increased 4% from $3,169,000 for the year ended December 31,
1994 to $3,284,000 for the year ended December 31, 1995 primarily as a result of
the Company's continuing commitment to customer acquisition. The increase
includes an additional $213,000 in marketing personnel salaries and $118,000 of
additional commission expense directly related to the 34% increase in product
sales discussed above. These increases were offset by a decrease in advertising
and sales promotion expenses of $342,000, which is a result of the postponement
of major 1995 advertising activities until the release of TIP at the end of the
second quarter.
General and administrative expenses increased 19% from $3,256,000 for the year
ended December 31, 1994 to $3,859,000 for the year ended December 31, 1995,
primarily due to increased salary expense of approximately $394,000 and
increased depreciation and amortization expense of approximately $168,000.
The net loss during the fourth quarter of 1995 was $939,000, or $0.09 per share
verses $873,000, or $0.09 per share during the same period of the prior year.
20
1994 COMPARED TO 1993
For the year ended December 31, 1994, total revenues of $10,477,000 were
$3,527,000, or 51%, higher than the same period 1993 total revenues of
$6,950,000, principally due to a $2,205,000, or 51%, increase in online service
revenue together with a $1,148,000, or 121%, increase in contract revenue
principally as the result of the DOE Contract acquired by KEDS in the first
quarter of 1994. The online service revenue increase was principally the result
of increased online volume primarily resulting from growth in the number of the
Company's online customers. This increase is attributable to the higher level of
advertising employed by the Company during the year ended December 31, 1994 as
compared to the same period of 1993. In conjunction with increased advertising
in 1994, the Company sharply reduced the price of its Analyzer product on
January 1, 1994, which resulted in the shipment of approximately 39,000 Analyzer
units during the year ended December 31, 1994, compared to approximately 6,400
units shipped in the same 1993 period.
For the year ended December 31, 1994, the Company's gross margin was $3,988,000,
representing an increase of $760,000 compared to the corresponding 1993 period's
gross margin of $3,228,000. The overall increase in gross margin primarily
reflects increases of $992,000 and $616,000, respectively, in the online and
contract gross margins offset by a decline of $867,000 in gross margin from the
product revenues. For the year ended December 31, 1994 and 1993, the online
service gross margins remained constant at 45% of their respective online
revenues. Product gross margins were 10% and 64% for the respective years ended
December 31, 1994 and 1993, with the margin decline primarily reflecting the
lowered price of the Analyzer product below cost, together with a lower margin
sales mix of other products. Gross margin earned on contracts for the year ended
December 31, 1994 improved to 38% from 20% for the same period of the prior
year, primarily as the result of the DOE Contract.
Marketing expense increased $1,763,000 to $3,169,000 during the year ended
December 31, 1994 from $1,406,000 in the same 1993 period, due primarily to
higher advertising expenses of approximately $1,000,000 and higher salary
expense of approximately $490,000 principally related to the hiring of
additional personnel. At December 31, 1994, the number of employees involved in
selling-related functions was 30, compared to 22 at December 31, 1993.
Prior to the third quarter of 1994, the Company capitalized direct-response
advertising costs and amortized such costs on the straight-line method over 12
months. Beginning in the third quarter of 1994, direct-response advertising
costs are expensed in the year in which they were incurred to preclude carrying
such costs over from one year to the next. Although the foregoing had no
material effect on the Company's historical 1994 results of operations for the
first three quarters of the year, advertising expense in the fourth quarter of
1994 was approximately $350,000 higher than otherwise would have been reported.
General and administrative expense increased $1,397,000 from $1,859,000 in the
year ended December 31, 1993 to $3,256,000 in the year ended December 31, 1994,
due primarily to increased legal expense, approximately $580,000 of increased
salary and related fringe benefit expenses, approximately $255,000 of increased
depreciation expense and approximately $130,000 of higher building rent expense.
At December 31, 1994 and 1993, the numbers of administrative employees totaled
72 and 50, respectively. Legal expense, which included a $28,000 settlement of a
lawsuit, increased approximately $240,000, reflecting unusually high corporate
development activity and litigation matters principally involving the Hoggett
Litigation, as discussed in Note 9 to the Company's Consolidated Financial
Statements.
21
For the year ended December 31, 1994, the Company incurred a net loss of
$2,631,000 compared to a net loss of $31,000 for the corresponding 1993 period
principally as the result of higher selling, general and administrative expenses
together with a decrease in the product revenue margin partially offset by
increased gross margins associated with online and contract revenue.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash and cash equivalents aggregating
$1,796,000, which represents an $840,000 increase over the prior year. Net cash
provided by operating activities was $551,000 for the year ended December 31,
1995 compared to cash used by operations of $1,562,000 for the year ended
December 31, 1994. This $2,113,000 increase in cash provided by operations was
primarily due to improved operating results adjusted for non-cash items,
including $1,552,000 of depreciation and amortization during 1995.
The Company's primary capital needs are for (1) the continued investment in
technology through its software development activities, (2) the purchase of
capitalized data and (3) the purchase of computers and communications equipment.
During the year ended December 31, 1995, the Company invested $1,566,000 in
software development costs and acquired property and equipment totaling
$450,000, of which $292,000 was financed. The Company estimates that it may
invest an additional $2 million in capital expenditures over the next twelve
months. The Company intends to fund these capital additions through existing
cash on hand, cash generated from operations, long-term capital leasing and
proceeds from borrowings.
In June 1995, the Company entered into a Stock Purchase Agreement with
TransTerra Company ("TransTerra"), whereby TransTerra agreed to purchase $5
million of the Company's common stock ("Common Stock") in four equal
installments over a nine month period. The number of restricted shares of Common
Stock to be issued for each installment is calculated based upon the average
market price of the Common Stock over the preceding quarter. In connection with
this agreement, the Company granted certain registration rights to TransTerra
and allowed TransTerra to appoint a representative to the Board of Directors.
Net proceeds of approximately $4,900,000 from this series of transactions are
being used by the Company for technology development, working capital and other
general corporate requirements. During 1995, pursuant to the terms of this
agreement, 427,998 shares of restricted Common Stock were issued for total
consideration of $2.5 million. An additional 173,459 shares were issued in
January 1996 in exchange for the third installment of $1,250,000.
The Company believes that the existing cash on hand, cash generated from
operations, proceeds from borrowings and the proceeds from the TransTerra Common
Stock purchase will be adequate to fund its working capital and other cash
requirements over the next twelve months.
Aggregate revenue from the Company's online financial database and related
product sales accounted for approximately 72% and 74% of the Company's total
revenue for the year ended December 31, 1995 and 1994, respectively. A downturn
in the equity markets could cause a reduction in this revenue, which could have
an adverse effect on the Company's financial position and results of operations.
However, the Company believes that the effect of such adverse market conditions
would be lessened by its fixed rate billing structure. To counter the potential
impact, if any, of such a downturn, the Company is broadening its revenue base
through its alliances with third parties to develop and operate online databases
and Internet sites outside the Company's primary market. Also, during the fourth
quarter of 1995, the Company began utilizing its new technology, code-
22
named Sunflower, which will allow the Company to efficiently establish
additional third party online communication networks without a substantial
investment in hardware or software development.
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This
statement is effective for fiscal years beginning after December 15, 1995.
Management does not believe that adoption of this pronouncement in 1996 will
have a material impact on its financial statements.
The FASB also issued SFAS No. 123, "Accounting for Stock Based Compensation",
effective for fiscal years beginning after December 15, 1995. This statement
allows companies to choose to adopt the statement's new rules for accounting for
employee stock-based compensation plans. For those companies who choose not to
adopt the new rules, the statement requires disclosures as to what earnings and
earnings per share would have been if the new rules had been adopted. Management
intends to adopt the disclosure requirements of this statement in 1996.
SEASONALITY
The Company does not believe that seasonality has a discernible effect on the
Company's aggregate results of operations, which is influenced by an array of
other diverse factors, including general economic and stock market conditions,
new product releases, and the existence or absence of significant contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are filed pursuant to Item 14 (a)1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's directors and executive officers are as follows:
NAME AGE POSITION
- ----------------------- ---------- ------------------------------------
David L. Brown 55 Director, Chairman and Chief
Executive Officer
Richard K. Carlin 40 Director, Vice Chairman and Senior
Vice President
Roger C. Wadsworth 48 Director and Senior Vice President
Karen R. Fohn 35 Chief Financial Officer
Luiz V. Alvim 65 Executive Vice President and "Acting"
Chief Operating Officer
William T. Melton 59 Vice President
Neil S. Waldman 39 Vice President
Tracy N. Curry 31 Vice President
Joseph F. Frantz II 32 Vice President
J. Joseph Ricketts 54 Director
Ronald W. Hart, Ph.D. 54 Director
Burt H. Keenan 57 Director
William D. Savoy 31 Director
Stephen C. Wood 44 Director
Each director holds office until the next annual meeting of stockholders or
until his successor has been elected and qualified. The Compensation Committee
and Audit Committee of the Board of Directors is composed of Messrs. Ricketts,
Hart, Keenan, Savoy, and Wood.
David L. Brown, Chairman of the Board and CEO, has served as a director of the
Company since 1989. Mr. Brown is co-author of CYBER-INVESTING: CRACKING WALL
STREET WITH YOUR PERSONAL COMPUTER, a book on computerized investing, published
by John Wiley & Sons, Inc. From 1978 to 1986, Mr. Brown was president and, from
1978 to 1986 and from 1992 to 1993, a director of Time Energy Systems, Inc., a
public company, which changed its name to ACR Group, Inc. He has served as
chairman of the U.S. Science and Technology Commission for the Emerging Leaders
Summit Conference series with the USSR. For the past nine years, he has served
as a director of the Alliance for Aging Research, based in Washington, D.C. He
has also served as chairman of the New Millennium Committee of the Planetary
Society, a group based in Pasadena, California, which supports space
exploration. He has served as chairman of the Advisory Board of the Southwest
Council of Public CEOs and on the boards of several banks and financial
institutions. Mr. Brown began his career in the space program at NASA, where he
headed the team of engineers who designed the landing gear for the first lunar
module. Mr. Brown holds a B.S. degree in mechanical engineering from the
University of Pittsburgh and an M.B.A. from the University of Houston.
24
Dr. Richard K. Carlin, Vice Chairman of the Board and Senior Vice President, was
one of the founders of Telescan and has served as a director of the Company
since 1989. From 1988 to April 1990, Dr. Carlin served as the director of
Technology Information Center, a subsidiary of Maxwell Communications, where he
managed the development and maintenance of a technology transfer online
database. From 1983 to 1988, he was with D.B. Technology, Inc., the predecessor
to the Company. From 1981 to 1983, Dr. Carlin was assistant professor at
Rockefeller University. Dr. Carlin holds a B.S. degree in biophysical sciences
from the University of Houston and a Ph.D. in biochemistry, also from the
University of Houston.
Roger C. Wadsworth, Senior Vice President, has served as a director since 1989.
From 1988 to 1990, Mr. Wadsworth served as President of the Company. From 1983
to 1988, Mr. Wadsworth was employed as vice-president of Information Management
Services, Inc., in Houston, Texas, where he provided management services to
investment vehicles such as limited partnerships and joint ventures. From 1979
to 1983 he served as co-owner of D. Russell Smith Associates, a restaurant and
tenant finish general contractor. Mr. Wadsworth holds a B.B.A. from the
University of Houston.
Karen R. Fohn, Chief Financial Officer, came to Telescan in September 1995 from
TransAmerican Waste Industries, Inc., where she served as Corporate Controller
since 1992. From 1990 to 1992, Ms. Fohn was employed as External Reporting
Manager for Sanifill, Inc.. From 1985 to 1990, she was an Audit Manager for
Ernst & Young. Ms. Fohn is a Certified Public Accountant and holds a B.S. in
accounting from Louisiana State University.
Luiz V. Alvim was appointed Executive Vice President and "Acting" Chief
Operating Officer of Telescan in March 1996, after having served as the
Company's Director of Financial Research and Chairman of the International
Committee since 1994. From 1988 to 1994, Mr. Alvim held the position of
Executive Vice President and Chief Operating Officer of PanAtlantica SA.
William T. Melton, Vice President of the Company since January 1995, previously
held the position of Manager of Project Development. Before joining the Company
in October 1993, Mr. Melton served as a Project Manager with International
Business Machines, Inc., having previously served in other sales positions as a
30-year employee of that company. Mr. Melton holds both a B.S. in Business
Administration and an M.B.A. from the University of Arkansas.
Neil S. Waldman, Vice President of the Company since May 1995, previously held
the position of Director of Institutional Sales. Before joining the Company in
1993, Mr. Waldman was employed as Manager Business Development for IDD
Information Services, Inc. where he was instrumental in the introduction of
three new products for the investment management and brokerage communities. From
1989 to 1991 Mr. Waldman served as Vice President of Sales and Marketing for
Vista Computer, Inc. where he directed sales and marketing for the developer of
integrated software solution targeted at international commodities traders. Mr.
Waldman holds a B.S. in Business Administration from Northeastern University.
Tracy N. Curry, Vice President of the Company since February 1996, previously
held the positions of Director of Marketing and Marketing Manager. Ms. Curry
came to Telescan from Utopia Spring Water, Inc. where she was instrumental in
the successful positioning of a product which fueled significant growth. From
1989 to 1991 Ms. Curry served as a Marketing Coordinator for Blue Bell
Creameries, Inc. where she spearheaded a marketing campaign for the nation's
first dietary ice cream. Ms. Curry holds a B.B.A in Marketing from the
University of Texas at Austin.
25
Joseph F. Frantz II, Vice President of the Company since May 1995, previously
held the positions of Computer Operations Manager, End-User Software Product
Manager and Senior Programmer. Mr. Frantz joined the Company in 1987 as a
Technical Support Representative. Mr. Frantz holds a B.S. in Applied Mathematics
from the University of Houston and a M.S. in Management Computing and Systems
from Houston Baptist University.
Dr. Ronald W. Hart has been a Distinguished Scientist in Residence for the Food
and Drug Administration, Public Health Service, since 1992. From 1980 to 1992,
he was the Director for the National Center for Toxicological Research, Food and
Drug Administration, Public Health Service, Department of Health and Human
Services in Jefferson, Arkansas. From 1987 to 1993, Dr. Hart served on the Board
of Directors of First Commercial Bank Corporation of Little Rock, Arkansas. Dr.
Hart has received over 30 awards and recognition for his research and
administrative accomplishments and is an internationally recognized scientist
and science manager holding the position of distinguished professor at a number
of universities and colleges, including Cairo University, Cairo, Egypt; Gangzou
University, Gangzou, China; Moscow State University, Moscow, Russia. Dr. Hart
also serves as a professor at the University of Arkansas for Medical Sciences
and the University of Tennessee Center for Health Sciences. Dr. Hart has
published over 500 manuscripts on various topics, including research management
and administration and is a fellow of the American College of Toxicology,
American Association for the Advancement of Science, and the Gerontology Society
of America. Dr. Hart received his B.A. in 1967 from Syracuse University, an M.S.
in 1970, and a Ph.D. in 1971 at the University of Illinois, Urbana. Dr. Hart has
been a director since 1990.
J. Joseph Ricketts currently serves as Chairman and Chief Executive Officer of
TransTerra Co., a financial services holding company. TransTerra was purchased
by Mr. Ricketts in 1975, and he continues to manage the Company and is the
principal stockholder. Mr. Ricketts also serves on the Board of CSS, Inc., a
software development consortium, and is on the Advisory Committee of Roundtable
Partners, L.L.C., a securities trading firm. He is also a newly elected member
of the District Committee of the National Association of Securities Dealers,
Inc. Mr. Ricketts is a resident of Omaha, Nebraska, and is a graduate of
Creighton University with a major in economics. Mr. Ricketts has been a director
since July 1995.
Burt H. Keenan has been an associate with Chaffe & Associates, Inc., an
investment banking firm located in New Orleans, Louisiana, since 1987. Prior to
1987, Mr. Keenan was the Chairman and Chief Executive Officer of Offshore
Logistics, Inc., a publicly held oil and gas service company operating a fleet
of marine service vessels and helicopters worldwide. Mr. Keenan received his
bachelor and masters degrees in business administration from Tulane University.
Mr. Keenan has been a director since 1989.
William D. Savoy currently serves as Vice President of Vulcan Ventures
Incorporated, a venture capital fund controlled by Paul G. Allen, co-founder of
Microsoft Corporation. Vulcan is a significant stockholder of the Company. From
1987 until November 1990, Mr. Savoy was employed by Layered, Inc., a company
controlled by Mr. Allen, and became its President in 1988. Mr. Savoy has served
as President for Vulcan Northwest Inc., a company wholly-owned by Mr. Allen,
from November 1990 until the present. He also represents Mr. Allen in a wide
variety of other personal financial transactions. Mr. Savoy holds a B.S. in
Computer Science, Accounting and Finance from Atlantic Union College. Mr. Savoy
was appointed as a director of the Company in March 1993.
26
Stephen C. Wood is currently Chief Executive Officer of Notable Technologies,
Inc. based in Kirkland, Washington. Until December 1994 Mr. Wood was Vice
President of Information Broadcasting for McCaw Development Corporation, located
in Kirkland, Washington. From February 1993 to December 1993, Mr. Wood was a
consultant providing advisory services to the computer industry. Until February
1993 he was President of Starwave Corporation, a company he formed in 1992 with
Microsoft Corporation co-founder Paul G. Allen to develop and market data and
information products. Mr. Wood is a member of the Board of Directors of Raima
Corporation, a database software company in Bellevue, Washington. From 1986
through 1991, Mr. Wood served as Vice President of Marketing, Vice President of
Marketing and Development, Vice President of Marketing and Sales and Vice
President of Business Development at Asymetrix Corporation, a software
development and marketing firm. From 1980 until 1985, Mr. Wood was in charge of
building a microcomputer software development organization for Datapoint
Corporation in Austin, Texas, after serving in R & D and marketing positions.
Mr. Wood began his career in 1976 when he became the sixth employee of Microsoft
Corporation, where he was General Manager from 1977 to 1980. Mr. Wood holds a
B.S. in Computer Engineering from Case Western Reserve University, and an M.S.
in Electrical Engineering from Stanford University.
Mr. Wood was appointed as a director of the Company in August 1993 in accordance
with the agreement entered into between the Company and Vulcan. Pursuant to the
terms of the agreement, Vulcan has the right to designate one director to the
Company's Board of Directors for as long as Vulcan (or its affiliate) owns, or
has the right to acquire through the exercise of their warrants, at least
540,000 shares of Common Stock of the Company. In addition, the Company has
agreed not to take any corporate action to increase its number of directors
without the unanimous written consent of all directors for as long as Vulcan (or
its affiliate) owns, or has the right to acquire through the exercise of their
warrants, at least 540,000 shares of Common Stock of the Company.
In March 1993, upon unanimous consent of all directors and with the assent of
Vulcan, the number of directors was expanded by one to a total of eight. Vulcan
determined to change its designate as its representative to the Company's Board
of Directors from Mr. Stephen C. Wood, who continues to serve as a director of
the Company, to William D. Savoy. Mr. Savoy was elected by unanimous consent of
the directors to a seat on the Company's board
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the section entitled "Executive
Compensation" in the Company's Proxy Statement relating to the 1996 Annual
Meeting of Shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item appears in the section entitled "Security
Ownership of Certain Beneficial Owners and Management" in the Company's Proxy
Statement relating to the 1996 Annual Meeting of Shareholders, which information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the section entitled "Certain
Relationships and Related Transactions" in the Company's Proxy Statement
relating to the 1996 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
28
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(A) The following documents are filed as a part of this Annual Report:
PAGE
1. FINANCIAL STATEMENTS.
Independent Auditor's Report.................................... 35
Consolidated Balance Sheets as of December 31, 1995 and 1994.... 36
Consolidated Statements of Operations for the years ended
December 31, 1995, 1994 and 1993............................ 37
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1995, 1994 and 1993...................... 38
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993.............................. 39
Notes to Consolidated Financial Statements...................... 40
2. FINANCIAL STATEMENT SCHEDULES.
Independent Auditor's Report on Schedules....................... 51
Schedule II - Valuation and Qualifying Accounts................. 52
All other schedules have been omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or notes thereto.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
3.1** Restated Certificate of Incorporation of Registrant. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
3.2** Certificate of Amendment of Restated Certificate of Incorporation of
the Registrant. (Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).
3.3** By-laws of the Registrant. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).
4.1** See Exhibits 3.1 through 3.4 for provisions of the Certificate of
Incorporation and By-laws of the Registrant defining rights of holders
of Common Stock of the Registrant. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
29
4.2** Asset Purchase Agreement dated June 30, 1990, between TIC Software,
Inc. and the Registrant which sets forth certain registration rights of
TIC Software, Inc. (Incorporated by reference to the Company's Form S-1
dated September 14, 1993 (Registration No. 33-52182)).
4.3** Exhibits to Asset Purchase Agreement dated June 30, 1990, between TIC
Software, Inc. and the Registrant which set forth certain registration
rights of TIC Software, Inc. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.4** Assignment of Agreement between Jacob Sobotka, Marvin Deuell, Raymond
C. Wicker and the Registrant which sets forth certain registration
rights of those parties, effective as of January 1, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.5** Assignment of General Partnership interest between New World
Technologies, a Texas general partnership, and the Registrant which
sets forth certain registration rights effective as of January 1, 1992.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).
4.6** Registration Rights Agreement between Vulcan Ventures Incorporated and
the Registrant dated May 20, 1992. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.7** Form of Redeemable Warrant Certificate issued by the Registrant to
Vulcan Ventures Incorporated to purchase 600,000 shares of Common Stock
of the Registrant at $3.25 per share dated May 20, 1992. (Incorporated
by reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.8** Form of Registration Rights Agreement between Sanders Morris Mundy Inc.
and the Registrant dated May 20, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.9** Form of Warrant Certificate issued by the Registrant to Sanders Morris
Mundy Inc. to purchase 60,000 shares of Common Stock of the Registrant
at $1.75 per share dated May 20, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.10** Form of Warrant Certificate issued by Registrant to Sanders Morris
Mundy Inc. to purchase 60,000 shares of Common Stock of Registrant at
$3.25 per share dated May 20, 1992. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.11** Form of Registration Rights Agreement between the Registrant and 47
private investors dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
30
4.12** Form of Redeemable Warrant Certificate issued by the Registrant to 47
private investors to purchase, in the aggregate, 1,200,000 shares of
Common Stock of the Registrant at $3.25 per share dated August 5, 1992.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).
4.13** Form of Registration Rights Agreement between the Registrant and
Sanders Morris Mundy Inc. dated August 5, 1992. (Incorporated by
reference to the Company's Form S-1 dated September 14, 1993
(Registration No. 33-52182)).
4.14** Form of Warrant Certificate issued by the Registrant to Sanders Morris
Mundy Inc. to purchase 120,000 shares of Common Stock of the Registrant
at $1.75 per share dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.15** Form of Warrant Certificate issued by the Registrant to Sanders Morris
Mundy Inc. to purchase 120,000 shares of Common Stock of the Registrant
at $3.25 per share dated August 5, 1992. (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.16** Form of Registration Rights Agreement between the Registrant and G.
Robert Friedman dated May 24, 1990. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
4.17** Registration Rights Agreement between TransTerra Company and the
Registrant dated June 28, 1995. (Incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1995.)
10.1** Independent Contractor Agreement by and between Knowledge Express, L.C.
and the Registrant dated December 31, 1990. (Incorporated by reference
to the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
10.2** Assignment of General Partnership interest dated as of January 1, 1992
by and between the Registrant and New World Technologies, a Texas
general partnership (see Exhibit 4.5). (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
10.3** Assignment of Agreement effective as of January 1, 1992 by and among
the Registrant and Jacob C. Sobotka, Marvin J. Deuell and Raymond C.
Wicker. (see Exhibit 4.4). (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)).
10.4** Stock Purchase Agreement between the Registrant and Vulcan Ventures,
Incorporated dated May 20, 1992. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
10.5** Asset Purchase Agreement between the Registrant and TIC Software, Inc.
dated June 30, 1990 (see Exhibit 4.2). (Incorporated by reference to
the Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
31
10.6** Agreement between the Registrant and the Brown/Friedman Partnership
dated July 31, 1991. (Incorporated by reference to the Company's Form
S-1 dated September 14, 1993 (Registration No. 33-52182)).
10.7** Employee Stock Option Plan. (Incorporated by reference to the Company's
Form S-1 dated September 14, 1993 (Registration No. 33-52182)). (1)
10.8** Amended Stock Option Plan. Incorporated by reference to Exhibit 4.1 to
the Company's Post-Effective Amendment No. 1 to Form S-8 (File No.
33-63172) as filed with the Commission on February 2, 1994. (1)
10.9** Exchange Agreement among the Registrant, Resurgence Systems, Inc. and
certain persons or entities whose names appear on the signature page
thereof dated as of December 7, 1992. (Incorporated by reference to the
Company's Form S-1 dated September 14, 1993 (Registration No.
33-52182)).
10.10** Regulations of Telescan (TRC), L.C. effective January 1, 1992 by and
between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to the Company's Form S-1 dated September
14, 1993 (Registration No. 33-52182)).
10.11** First Amendment to Regulations of Knowledge Express, L.C. (formally now
Telescan (TRC), L.C.) entered into effective July 23, 1992, by and
between the Registrant and The Radnor-Houston Joint Venture.
(Incorporated by reference to Amendment No. 1 to the Company's Form S-1
dated January 8, 1993).
10.12** Regulations of Telebuild, L.C. entered into effective July 31, 1992, by
and among the Registrant, JST Technology Center, Inc. and Friedman
Interests, Inc. (Incorporated by reference to Amendment No. 2 to the
Company's Form S-1 dated February 1, 1993).
10.13** Agreement by and between Fidelity Investments Retail Services and
Telescan, Inc. dated as of March 15, 1991. (Incorporated by reference
to Amendment No. 2 to the Company's Form S-1 dated February 1, 1993).
10.14** Database License Agreement between SEC Online, Inc. and Telescan, Inc.
dated as of November 25, 1992. (Incorporated by reference to Amendment
No. 2 to the Company's Form S-1 dated February 1, 1993).
10.15** Agreement between the Registrant and Access Software, Inc. dated
January 23, 1992. (Incorporated by reference to Amendment No. 3 to the
Company's Form S-1 dated March 29, 1993).
10.16** Contribution Agreement between The Radnor-Houston Joint Venture and
Telescan, Inc. dated March 25, 1993. (Incorporated by reference to
Amendment No. 3 to the Company's Form S-1 dated March 29, 1993).
10.17** Fourth Amendment to Regulations of Knowledge Express, L.C. made and
entered into effective March 25, 1993, by and between The
Radnor-Houston Joint Venture and Telescan, Inc. (Incorporated by
reference to Amendment No. 3 to the Company's Form S-1 dated March 29,
1993).
32
10.18** Agreement by and between American Institute of Architects and
Telebuild, L.C. dated August 7, 1992. (Incorporated by reference to
Amendment No. 4 to the Company's Form S-1 dated May 5, 1993).
10.19** Employment Agreement by and between the Company and David L. Brown
dated March 10, 1994. (Incorporated by reference to Post-Effective
Amendment No. 1 to the Company's Form S-1dated August 11, 1994). (1)
10.20** Stock Purchase Agreement between the Company and TransTerra Company
dated June 28, 1995. (Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
1995.)
10.21* Office Lease Agreement between the Registrant and Chevron U.S.A., Inc.
dated November 8, 1995.
11* Statement regarding computation of per share earnings.
21* Subsidiaries of the Registrant.
23* Consent of Independent Public Accountants.
27* Financial Data Schedule.
* Indicates documents filed herewith.
** Indicated documents incorporated by reference from the prior filing
indicated.
(1) Management contracts or compensation plans or arrangements.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of fiscal
1995
33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE CITY OF HOUSTON, STATE OF
TEXAS, ON MARCH 28, 1996.
TELESCAN, INC.
BY: /S/ DAVID L. BROWN
David L. Brown, Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, THIS REPORT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/S/ DAVID L. BROWN Chairman of the Board, Chief Executive Officer and March 28, 1996
David L. Brown Director (Principal Executive Officer)
/S/ DR. RICHARD K. CARLIN Senior Vice President and Director March 28, 1996
Dr. Richard K. Carlin
/S/ KAREN R. FOHN Chief Financial Officer (Principal Financial March 28, 1996
Karen R. Fohn Officer and Principal Accounting Officer)
/S/ ROGER C. WADSWORTH Senior Vice President and Director March 28, 1996
Roger C. Wadsworth
/S/ J. JOSEPH RICKETTS Director March 28, 1996
J. Joseph Ricketts
/S/ DR. RONALD W. HART Director March 28, 1996
Dr. Ronald W. Hart
/S/ BURT H. KEENAN Director March 28, 1996
Burt H. Keenan
/S/ WILLIAM D. SAVOY Director March 28, 1996
William D. Savoy
/S/ STEPHEN C. WOOD Director March 28, 1996
Stephen C. Wood
</TABLE>
34
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Telescan Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheets of Telescan, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Telescan, Inc. and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and cash flows for each of the years in the three-year period ended
December 31, 1995, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
HOUSTON, TEXAS
FEBRUARY 13, 1996
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
-------- --------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 1,796 $ 956
Accounts receivable, net of allowance of $80 and $98, respectively .......... 1,265 997
Receivable from affiliates .................................................. 311 318
Prepaid expenses ............................................................ 416 305
Inventory ................................................................... 190 213
Other current assets ........................................................ 201 85
-------- --------
TOTAL CURRENT ASSETS ................................................... 4,179 2,874
Property and equipment, net of accumulated depreciation of
$1,682 and $1,036, respectively ........................................ 2,260 2,233
Software development costs, net ............................................. 3,173 2,111
Software technology rights, net ............................................. 76 131
Capitalized data costs, net ................................................. 826 847
Other assets ................................................................ 345 121
-------- --------
TOTAL ASSETS ........................................................... $ 10,859 $ 8,317
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 1,463 $ 1,081
Accrued liabilities ......................................................... 221 33
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................................... -- 118
Current portion of long-term debt and capital lease obligations ............. 315 230
Amounts due to stockholders and affiliates .................................. 37 42
-------- --------
TOTAL CURRENT LIABILITIES ............................................. 2,036 1,504
Long-term debt .............................................................. 175 192
Capital lease obligations ................................................... 313 411
Minority interest in subsidiary ............................................. 370 188
Commitments and contingencies (Notes 5 and 9) .................................. -- --
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued ............................................................... -- --
Common stock, $.01 par value; 15,000,000 shares authorized;
10,242,506 and 9,500,471 shares issued and outstanding in
1995 and 1994, respectively ............................................... 102 95
Additional paid-in capital ................................................. 14,457 11,307
Accumulated deficit ........................................................ (6,594) (5,380)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ............................................ 7,965 6,022
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $ 10,859 $ 8,317
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Online service ...................................... $ 8,827 $ 6,564 $ 4,359
Products ............................................ 2,385 1,779 1,623
Contract and license revenue ........................ 2,326 1,556 182
Contract revenue earned from affiliates ............. 408 543 769
Other revenue ....................................... 43 35 17
-------- -------- --------
Total revenue ................................... 13,989 10,477 6,950
-------- -------- --------
Costs and expenses:
Cost of revenue - online ............................ 4,973 3,592 2,379
Cost of revenue - products .......................... 1,257 1,604 582
Cost of revenue - other ............................. 1,539 1,293 761
Marketing expenses .................................. 3,284 3,169 1,406
General and administrative expenses ................. 3,859 3,256 1,859
Interest expense .................................... 65 42 21
-------- -------- --------
Total costs and expenses ......................... 14,977 12,956 7,008
-------- -------- --------
Loss before minority interest and equity in loss ....... (988) (2,479) (58)
of joint venture
Equity in loss of joint venture ........................ -- -- (43)
Minority interest in income of subsidiary .............. (226) (152) 70
======== ======== ========
Net loss ........................................ $ (1,214) $ (2,631) $ (31)
======== ======== ========
Net loss per common share .............................. $ (0.12) $ (0.28) $ (0.00)
======== ======== ========
Weighted average common and common
equivalent shares outstanding ...................... 9,777 9,472 7,591
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1993 ................ 7,420 $ 74 $ 6,252 $ (2,718) $ 3,608
Issuance of Common Stock for warrant
exercises ............................ 1,935 19 5,035 -- 5,054
Predecessor cost adjustment .............. -- -- (150) -- (150)
Issuances of Common Stock
under stock option plan .................. 90 1 135 -- 136
Net loss ................................. -- -- -- (31) (31)
-------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 1993 .............. 9,445 94 11,272 (2,749) 8,617
Issuances of Common Stock under
stock option plan ................... 55 1 90 -- 91
Stock issuance costs ..................... -- -- (55) -- (55)
Net loss ................................. -- -- -- (2,631) (2,631)
-------- -------- -------- -------- --------
BALANCE - DECEMBER 31, 1994 .............. 9,500 95 11,307 (5,380) 6,022
Issuances of Common Stock under
stock option plan .................. 280 3 618 -- 621
Issuance of Common Stock for
acquired business .................. 44 -- 232 -- 232
Other issuances of Common Stock .......... 428 4 2,496 -- 2,500
Stock issuance costs ..................... -- -- (141) -- (141)
Other .................................... (10) -- (55) -- (55)
Net loss ................................. -- -- -- (1,214) (1,214)
======== ======== ======== ======== ========
BALANCE - DECEMBER 31, 1995 .............. 10,242 $ 102 $ 14,457 $ (6,594) $ 7,965
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
38
<PAGE>
TELESCAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(1,214) $(2,631) $ (31)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Gain on the disposition of property and equipment ....... -- -- (14)
Loss in equity of joint venture ......................... -- -- 43
Minority interest in income of subsidiary ............... 226 152 (70)
Depreciation and amortization ........................... 1,552 1,153 774
Provision for doubtful accounts ......................... 106 67 67
Changes in assets and liabilities net of effects of
acquired businesses:
Receivables and advances ................................ (409) (469) (311)
Other current assets .................................... (162) (105) (240)
Accounts payable ........................................ 382 156 735
Billings in excess of costs and estimated earnings
on uncompleted contracts ............................. (118) 118 --
Other current liabilities ............................... (3) (285)
188
------- ------- -------
Net cash provided (used) by operating activities ... 551 (1,562) 668
------- ------- -------
CASH FLOWS INVESTING ACTIVITIES:
Net Additions to property and equipment, net ............. (450) (693) (686)
Additions to software development costs .................. (1,566) (1,245) (871)
Additions to capitalized data costs ...................... (262) (301) (261)
Other .................................................... (22) (21) (43)
------- ------- -------
Net cash used by investing activities .............. (2,300) (2,260) (1,861)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock .................. 2,925 36 5,190
Payments on notes payable and capital lease obligations .. (292) (104) (60)
Other .................................................... (44) -- (38)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES .... 2,589 (68) 5,092
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............. 840 (3,890) 3,899
CASH AND CASH EQUIVALENTS:
Beginning of year ........................................ 956 4,846 947
------- ------- -------
End of year .............................................. $ 1,796 $ 956 $ 4,846
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
financial statements.
39
TELESCAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include
the accounts of Telescan, Inc., and its majority owned subsidiaries ("Telescan"
or the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation. The Company's consolidated statement of
operations includes the results of Knowledge Express Data Systems, L.C. ("KEDS")
beginning April 1, 1993. KEDS results of operations were accounted for on the
equity method of accounting prior to the Company acquiring a majority interest
on April 1, 1993.
NATURE OF BUSINESS. The Company is an industry leader in providing
innovative solutions for on-line technology, data retrieval and Internet
services. The Company develops, markets, and operates major online networks
serving the financial, publishing, home design and building, entertainment and
technology transfer industries. The Company's products and services, which are
based upon its proprietary online operating system and user software, allow its
customers to electronically access and analyze information through their
personal computer systems.
The Company's primary products are the Telescan system of on-line
financial databases and software tools, which offer current and historical
financial news and information as well as search and analytical tools; Computer
Sports Network ("CSN"), which offers on-line computer sports games; third party
on-line services which are developed and operated via alliances with third
parties in the publishing, entertainment, and home design and building
industries; and KEDS, which is an on-line database system for the
commercialization and transfer of technology serving corporations, government
agencies, universities, and research institutions. The Company owns 55.58% of
KEDS and acts under contract as the exclusive system operator.
SIGNIFICANT RISKS AND UNCERTAINTIES. Preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosed amounts of contingent assets and
liabilities, and the reported amounts of revenues and expenses. Actual results
could differ from those estimates.
CONCENTRATION OF CREDIT RISK. The Company markets its products
to a diverse customer base, and as such does not have any significant
concentrations of credit risk. The Company maintains deposits in banks which may
exceed the amount of federal deposit insurance available. Management
periodically assesses the financial condition of the institutions and believes
that any possible deposit loss is minimal.
INVENTORIES. Inventories are carried at the lower-of-cost or
market, determined on the specific identification method.
EQUIPMENT. Equipment is recorded at cost and depreciated over
the estimated useful life of the related assets. Equipment under capital lease
is amortized over the shorter of the lease term or its estimated useful life.
Depreciation and amortization expense is determined principally on the
straight-line method. The estimated useful lives of the Company's equipment is
as follows:
Computer equipment 5 years
Furniture 7 years
Automobiles 5 years
40
SOFTWARE DEVELOPMENT COSTS. Costs incurred in the research,
design and development of software are charged to expense until technological
feasibility is established, after which remaining software production costs are
capitalized and amortized on a product-by-product basis based upon the greater
of the ratio of current gross revenues for such product to total anticipated
revenues or the straight-line basis over periods of three to five years. The
Company has interpreted "technological feasibility" as the completion of a
working model. Amortization of software development costs is included in cost of
products in the accompanying consolidated statements of operations and totaled
$505,000, $371,000, and $266,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Accumulated amortization totaled $2,121,000 and $1,617,000
at December 31, 1995 and 1994, respectively. Amortization of capitalized
software development costs begin when the related product is available for
general release to customers. The Company periodically reviews software
development costs to assess impairment. Amounts impaired are charged to expense
as identified.
SOFTWARE TECHNOLOGY RIGHTS. The Company has acquired rights to
certain core software technologies. These rights are recorded at cost and are
amortized over a period of five years. Amortization of software technology
rights is included in cost of products in the accompanying consolidated
statements of operations and totaled $55,000, $55,000 and $46,000 for the years
ended December 31, 1995, 1994 and 1993, respectively. Accumulated amortization
totaled $178,000 and $123,000 at December 31, 1995 and 1994, respectively.
CAPITALIZED DATA COSTS. Costs incurred to acquire data are
capitalized and amortized on a straight-line basis over three to five years.
Capitalized data costs include actual costs to acquire the data plus personnel
costs specifically related to loading the purchased data and performing the
required programming. Amortization of capitalized data costs is included in cost
of products in the accompanying consolidated statements of operations and
totaled $266,000, $195,000 and $152,000 for the years ended December 31, 1995,
1994 and 1993, respectively. Accumulated amortization totaled $823,000 and
$540,000 at December 31, 1995 and 1994, respectively. The Company periodically
reviews capitalized data costs to assess impairment. Amounts impaired are
charged to expense as identified.
DIRECT-RESPONSE ADVERTISING COSTS. Prior to 1994, the Company
capitalized direct-response advertising costs and amortized such costs on the
straight-line method over 12 months. Beginning in 1994, the Company changed its
policy to expense such costs in the year in which they were incurred in order to
preclude carrying such costs over from one year to the next. For purposes of
interim financial reporting, the Company has historically expensed
direct-response advertising on a campaign by campaign basis based upon the ratio
of actual revenue derived from a specific campaign compared to the expected
revenue for that fiscal year. On a going forward basis, the Company will expense
such costs in the interim period in which the costs are incurred.
GOODWILL. Goodwill, totaling $277,000 and $29,000 at December
31, 1995 and 1994, respectively, represents the cost in excess of the fair value
of the net assets of companies acquired and is being amortized on the
straight-line basis over periods ranging from five to fifteen years. Accumulated
amortization totaled $29,000 and $15,000 at December 31, 1995 and 1994,
respectively. Goodwill amortization totaled approximately $14,000 and $2,000 for
the years ended December 31, 1995 and 1994, respectively.
EQUITY INVESTMENTS. The Company accounts for its investments
in less than majority-owned entities, using the equity method of accounting. The
Company discontinues recognition of losses on corporate joint
41
ventures once the Company's investment has been reduced to zero, provided the
Company is not committed to fund the operations of the joint venture and is not
contingently liable for obligations of such joint ventures.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial
instruments consist of trade receivables and liabilities, notes receivable due
from officers, and various notes payable to banks. The Company believes the
carrying value of these financial instruments approximate their estimated fair
value.
REVENUE RECOGNITION.. The Company recognizes online revenue
when the service is provided. Software license fee revenue is recognized at the
time of shipment unless significant future obligations remain. In these
instances, revenue is not recognized until obligations have been satisfied or
are no longer significant. Product revenue is recognized when the product is
shipped. Revenue and costs related to the Company's "cost plus" contracts are
recognized as the services are performed or the expenses incurred. Revenue and
costs related to the Company's fixed price contract are recognized on the
percentage-of-completion method. At December 31, 1995 cost and profits in excess
of amounts billed on uncompleted contracts totaled $31,000 and is included in
other current assets.
INCOME TAXES. The Company accounts for income taxes on the
liability method as prescribed by Statement of Financial Accounting Standards
No. 109.
EARNINGS PER SHARE. Earnings per share is computed based on
the weighted average number of common and common equivalent shares outstanding.
For periods in which a net loss occurred, common equivalent shares are not
included in the weighted average number of common and common equivalent shares
outstanding, as their inclusion would be anti-dilutive. During the periods
presented, common equivalent shares consisted of warrants and options to acquire
common stock.
CONSOLIDATED STATEMENTS OF CASH FLOWS. For purposes of the
consolidated statements of cash flows, the Company considers all highly liquid
debt instruments with a remaining maturity of three months or less at the date
of purchase and mutual funds readily convertible to cash, to be cash
equivalents. The effects of non-cash transactions related to the acquisition
discussed in Note 3 and certain other non-cash transactions are excluded from
the statement of cash flows. Supplemental disclosures of cash flow information
are as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- --------- --------
Interest paid ........................... $ 66,000 $ 42,000 $ 25,000
Income taxes paid ....................... -- -- --
Property and equipment financed by debt
or long-term capital leases .......... $256,000 $545,000 $362,000
RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". This statement is effective for fiscal
years
42
beginning after December 15, 1995. Management does not believe that adoption of
this pronouncement in 1996 will have a material impact on its financial
statements.
The FASB also issued SFAS No. 123, "Accounting for Stock Based
Compensation", effective for fiscal years beginning after December 15, 1995.
This statement allows companies to choose to adopt the statement's new rules for
accounting for employee stock-based compensation plans. For those companies who
choose not to adopt the new rules, the statement requires disclosures as to what
earnings and earnings per share would have been if the new rules had been
adopted. Management intends to adopt the disclosure requirements of this
statement in 1996.
MAJOR CUSTOMERS. Revenue earned under the KEDS contract with the
Department of Energy (the "DOE Contract") amounted to 15.1% and 13.7% of
consolidated revenue during years ended December 31, 1995 and 1994,
respectively. The DOE Contract expires March 31, 1996. KEDS has been actively
working to convert its subsidized subscribers to paying customers and to expand
its non-subsidized subscriber base in order to minimize the impact of the
contract expiration.
RECLASSIFICATIONS. Amounts in prior years' consolidated
financial statements have been reclassified whenever necessary to conform with
the current year's presentation.
2. EQUIPMENT
A summary of property and equipment at December 31, 1995 and 1994
is as follows:
1995 1994
----------- -----------
Property and equipment ............... $ 3,519,000 $ 2,818,000
Furniture and fixtures ............... 370,000 345,000
Autos ................................ 53,000 106,000
----------- -----------
3,942,000 3,269,000
Accumulated depreciation ............. (1,682,000) (1,036,000)
----------- -----------
$ 2,260,000 $ 2,233,000
=========== ===========
Depreciation and amortization expense was approximately $679,000, $511,000
and $244,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
3. ACQUISITIONS
During September 1995, the Company acquired all of the
outstanding capital stock of Entrepreneurs On-line, Inc. ("EOL"), for total
consideration of $230,000, consisting of 43,774 restricted shares of the
Company's common stock ("Common Stock"). This transaction has been accounted for
under the purchase method of
43
accounting and has been treated as a non-cash transaction in the Consolidated
Statement of Cash Flows. The operating results of EOL have been included in the
Company's consolidated financial statements since the date of acquisition. Pro
Forma statements are not presented, as the impact of the 1995 EOL operating
results on the consolidated total is immaterial. EOL operates an online database
which links entrepreneurs and providers of services, capital and other
resources.
4. RELATED PARTY TRANSACTIONS
The Company has receivables from and payables to officers,
stockholders, joint ventures and affiliates. The balances are generally due on
demand and are noninterest bearing. At December 31, 1995 and 1994, the net
amounts due from officers, stockholders, joint ventures and affiliates amounted
to $315,000 and $312,000 respectively. Included in these amounts at December 31,
1995 is $44,000 in legal expenses paid by the Company on behalf of certain
officers/stockholders in connection with litigation discussed in Note 10. These
advances are expected to be repaid during 1996.
The Company has provided computer hardware, programming, systems
maintenance, data loading, telecommunications and certain administrative
services to KEDS, Telebuild, and the Brown/Friedman Partnership. The Company
owns 55.58% of KEDS and 21.25% of Telebuild. GRF Interests, Inc., a company
controlled by G. Robert Friedman ("Friedman"), a significant stockholder of the
Company, owns 30% of KEDS. Friedman Interest, Inc., also controlled by Friedman,
and JST Technology Center, Inc. ("JST"), own 38.1625% and 40.875% respectively
of Telebuild. JST is owned 93.98% by the Brown Family Partnership and 6.02% by
an unrelated party. The Brown Family Partnership is owned by David L. Brown, the
Company's Chairman and Chief Executive Officer, Scott L. Brown, the former Vice
President of Operations, and other members of the Brown family. The
Brown/Friedman Partnership is owned by David L. Brown and Friedman.
Contract service revenue earned from affiliates for the years
ended December 31, 1995, 1994 and 1993 are as follows:
1995 1994 1993
-------- -------- --------
Telebuild, L.C .......................... $408,000 $514,000 $616,000
Brown/Friedman Partnership .............. -- 29,000 131,000
Knowledge Express Data Systems, L.C ..... -- -- 22,000
-------- -------- --------
$408,000 $543,000 $769,000
======== ======== ========
5. LONG -TERM OBLIGATIONS
CAPITAL LEASES. Future minimum lease payments under capital
leases at December 31, 1995, together with the present value of the minimum
lease payments, are as follows:
YEAR ENDING DECEMBER 31
1996 ........................................... $ 206,000
1997 ........................................... 162,000
1998 ........................................... 138,000
1999 ........................................... 55,000
---------
Total minimum lease payments ............................... 561,000
Amount representing interest ............................... (85,000)
---------
Present value of minimum lease payments ................ 476,000
Current portion capital lease obligations .................. (163,000)
---------
Long-term capital lease obligations .................... $ 313,000
=========
Property and Equipment under capital lease at December 31,
1995 and 1994 totaled $765,000 and $690,000, with related accumulated
depreciation of $283,000 and $164,000, respectively.
LINE OF CREDIT. The Company has a $500,000 revolving line of
credit with a bank to fund equipment purchases. Borrowings under this line bear
interest at Wall Street Prime, are collateralized by the equipment purchased,
and are due in 36 equal monthly installments following the draw. As of December
31, 1995, $310,000 was outstanding under this equipment line. The line of credit
expired during 1996. The Company is in the process of renewing it for an
additional one year term.
EQUIPMENT NOTE. At December 31, 1995, the Company has a
$17,000 note payable to a bank The note bears interest at 7.8%, is
collateralized by equipment , and is payable in monthly installments of
principal and interest through April 1997.
Future payments under the line of credit and bank note are as
follows:
YEAR ENDING DECEMBER 31,
1996 ..................... $ 152,000
1997 ..................... 149,000
1998 ..................... 26,000
---------
327,000
Current portion of long-term debt ........ (152,000)
---------
$ 175,000
=========
45
OPERATING LEASES. The Company has commitments to lease office
space and equipment under noncancelable operating leases. During the fourth
quarter of 1995, the Company entered into a long-term lease agreement pursuant
to which the Company is leasing approximately 51,500 square feet of office space
in Houston, Texas to house its principal executive offices as well as its
marketing, computer operations and product development activities. The agreement
is for an initial term of 11 years with a one-time cancellation option at the
end of the sixth year.
Rent expense under operating leases totaled $581,000, $373,000 and $214,000
for the years ended December 31, 1995, 1994 and 1993, respectively. Future
minimum lease payments are as follows:
YEAR ENDING DECEMBER 31,
1996 $ 526,000
1997 851,000
1998 833,000
1999 797,000
2000 663,000
Thereafter 4,350,000
===========
$ 8,020,000
===========
6. STOCKHOLDERS' EQUITY
TRANSTERRA TRANSACTION. In June 1995, the Company entered into a Stock
Purchase Agreement with TransTerra Company ("TransTerra"), whereby TransTerra
agreed to purchase $5 million of restricted Common Stock in four equal
installments over a nine month period. The number of shares of Common Stock to
be issued for each installment is calculated based upon the average market price
of the Common Stock over the preceding quarter. In connection with this
agreement, the Company granted certain registration rights to TransTerra and
allowed TransTerra to appoint a representative to the Board of Directors. Net
proceeds of approximately $4,900,000 from this series of transactions are being
used by the Company for product development, working capital and other general
corporate requirements. During 1995, pursuant to the terms of this agreement,
427,998 shares of restricted Common Stock were issued for total consideration of
$2.5 million. An additional 173,459 shares were issued in January 1996 in
exchange for the third installment of $1,250,000.
46
WARRANTS. During 1993, the Company issued 1,935,000 shares of Common
Stock upon exercise of various stock purchase warrants at exercise prices
ranging from $1.75 to $3.00, per share. During 1995, the Company issued 157,500
shares of Common Stock upon the exercise of various stock purchase warrants at
exercise prices ranging from $1.75 to $3.00 per share. As of December 31, 1995,
warrants to acquire 67,500 shares of Common Stock at an exercise price of $3.00
per share were outstanding. These warrants expire in August 1997.
The predecessor cost adjustment reflected in the accompanying
Consolidated Statement of Stockholders' Equity arose in 1991 in connection with
the acquisition of software technology by KEDS from the Company. It did not
appear in the Company's financial statements prior to 1993 because the accounts
of KEDS were not consolidated with those of the Company until 1993.
The holders of any preferred stock which might be issued shall have such
rights, preferences and privileges as may be determined by the Company's Board
of Directors.
7. INCOME TAXES
At December 31, 1995, the Company had net operating loss carryforwards
for tax reporting purposes of approximately $8,600,000 which expire in years
2000 through 2010.
Deferred tax assets and liabilities as of December 31, 1995 consisted of
the following:
Deferred tax assets:
Net operating loss carryforwards ............................ $ 3,268,000
Other, net .................................................. 19,000
-----------
Total deferred tax asset ................................ 3,287,000
Less: Valuation allowance ........................................ (1,675,000)
-----------
Deferred tax asset, net .......................................... 1,612,000
-----------
Deferred tax liability - accumulated depreciation and amortization (1,612,000)
-----------
$ ---
===========
47
8. STOCK OPTION PLAN
The Company's stock option plan ( the "Plan") for officers, directors and
key employees authorizes the grant of options to purchase a maximum of 1,000,000
shares of Common Stock. The Plan provides for the issuance of incentive stock
options or nonstatutory stock options, as defined by the Internal Revenue Code.
Pursuant to the terms of the Plan, the exercise price of incentive stock options
must equal the greater of $1.50 or the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory options may be any amount
equal to or greater than $1.50 per share. The vesting period of each grant is
determined by the Compensation Committee of the Board of Directors.
No non-statutory options have been granted as of December 31, 1995.
Transactions with regard to incentive options issued pursuant to the Plan are as
follows:
SHARES AVERAGE
UNDER PRICE
OPTION PER SHARE
--------- --------
Balance - January 1, 1993 .................. 618,250 $ 1.63
Granted .................................. 99,500 $ 2.81
Canceled ................................. (24,725) $ 1.73
Exercised ................................ (89,125) $ 1.53
---------
Balance - December 31, 1993 ................ 603,900 $ 1.84
Granted .................................. 183,373 $ 7.96
Canceled ................................. (12,108) $ 6.03
Exercised ................................ (56,725) $ 1.61
---------
Balance - December 31, 1994 ................ 718,440 $ 3.35
Granted .................................. 148,395 $ 4.91
Canceled ................................. (39,148) $ 5.27
Exercised ................................ (122,763) $ 1.67
---------
Balance - December 31, 1995 ................ 704,924 $ 3.87
=========
At December 31, 1995, options to purchase a total of 353,481 shares of
Common Stock were exercisable at prices ranging from $1.50 to $8.44 per share.
Subsequent to December 31, 1995, an additional 131,035 options were granted at
an exercise price of $7.44 per share, the market price at the date of grant.
48
9. CONTINGENCIES
In 1986, a stockholder of Telescan, Inc. (predecessor business to
D.B. Technology, Inc.) filed suit in the 269th District Court in Texas against
the Company, certain stockholders of the Company, and others. The suit sought to
set aside the 1986 merger of D.B. Technology and Telescan, Inc., money damages
from all defendants, and sums due under alleged promissory notes. The case went
to trial in October 1989 and judgment was rendered in favor of the defendants on
a directed verdict including an order for the plaintiff to pay certain court
costs and certain attorney's fees of Telescan, Inc. Subsequent to an appeal by
the stockholder in the Texas Court of Appeals 14th Judicial District, the
appellate court remanded the case to trial court. At the conclusion of
presentation of evidence, the case was submitted to the jury by means of
questions in order to determine issues of liability and damages. Based on a lack
of evidence which would impose liability upon Telescan, Inc., no questions were
submitted which asked the jury to determine whether or not the Company bears any
liability to any plaintiff. A hearing on pending matters including entry of
Judgment, was held April 10, 1995. At the hearing the court ruled that
plaintiffs take nothing other than the payment, with interest, of $40,000 in
promissory notes in favor of plaintiff Investa, Inc. and Hoggett which notes
preceded the merger. The defendants were awarded attorney's fees and court
costs. The Judgment has been entered; however, it is subject to appeal.
Management does not believe that any material adverse outcome is reasonably
possible nor probable and thus, no qualified disclosure as to a range of
reasonable possible loss or accrual in the financial statements of probable loss
have been made.
From time to time the Company is involved in certain other legal
actions arising in the ordinary course of business. It is the opinion of
management that such litigation will be resolved without a material effect on
the Company's financial position or results of operations
10. JOINT VENTURES
KNOWLEDGE EXPRESS DATA SYSTEMS, L.C. At the end of the first quarter of
1993, the Company acquired an additional 5.58% ownership interest in KEDS, which
increased its total ownership to 55.58%. As a result of this additional equity
purchase, KEDS became a majority owned subsidiary of the Company, and
accordingly, beginning with the second quarter of 1993, the financial statements
of KEDS were consolidated with those of the Company. Prior to that time, KEDS
operating results were reflected on the equity method.
TELEBUILD L.C. The Company has a 21.25% equity interest in Telebuild
L.C., a limited liability company formed in 1990 to develop and market the
Telebuild on-line data base service for which the Company has served as a
contract software developer. During the years ended December 31, 1995, 1994 and
1993, the Company performed services under contract for Telebuild totaling
approximately $408,000, $514,000 and $616,000 respectively. As of December 31,
1995 and 1994, corresponding amounts due the Company totaled $307,000 and
$271,000, including costs and profits in excess of amounts billed of $40,000 and
$30,000, respectively.
49
Selected condensed balance sheet and operations data for Telebuild is
summarized as follows:
BALANCE SHEET DATA: DECEMBER 31,
----------------------------
1995 1994
--------- ---------
(unaudited)
Current assets ........................... $ 131,000 $ 36,000
Other assets, net ........................ 360,000 487,000
--------- ---------
$ 491,000 $ 523,000
========= =========
Notes and advances due owners ............ $ 865,000 $ 435,000
Other liabilities ........................ 312,000 277,000
Owners' equity (deficit) ................. (686,000) (189,000)
--------- ---------
$ 491,000 $ 523,000
========= =========
SUMMARY OPERATIONS DATA: YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
(unaudited)
Revenue ............................. $ 98,000 $ 86,000 $ 28,000
Cost of Revenue ..................... 273,000 276,000 74,000
Marketing, general and administrative 322,000 266,000 356,000
--------- --------- ---------
Net loss ............................ $(497,000) $(456,000) $(402,000)
========= ========= =========
50
INDEPENDENT AUDITOR'S REPORT ON SCHEDULES
Stockholders and Board of Directors
Telescan, Inc.
Houston, Texas
We have audited the consolidated financial statements of Telescan, Inc. and
subsidiaries as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995. Our audits for such years also
included the financial statement schedules of Telescan, Inc. and subsidiaries,
listed in Item 16(2), for each of the years in the three-year period ended
December 31, 1995. These financial statement schedules are the responsibility of
the Company's management. Our responsibility is to report on these schedules
based on our audits. In our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth herein.
HEIN + ASSOCIATES LLP
HOUSTON, TEXAS
FEBRUARY 13, 1996
51
TELESCAN, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS:
ADDITIONS ACCOUNTS
BALANCE AT CHARGED TO WRITTEN BALANCE
BEGINNING OF COSTS AND OFF AGAINST AT END
DESCRIPTION PERIOD EXPENSES ALLOWANCE OF PERIOD
------- ------- --------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993:
Allowance for Doubtful
Accounts $39,000 $67,000 $(54,000) $52,000
======= ======= ========= =======
DECEMBER 31, 1994:
Allowance for Doubtful
Accounts $52,000 $67,000 $(21,000) $98,000
======= ======= ========= =======
DECEMBER 31, 1995:
Allowance for Doubtful
Accounts $98,000 $106,000 $(124,000) $80,000
======= ======== ========== =======
</TABLE>
52
5959 CORPORATE DRIVE
HOUSTON, TEXAS
OFFICE LEASE AGREEMENT
BETWEEN
CHEVRON U.S.A. INC.
("LANDLORD")
AND
TELESCAN, INC.
("TENANT")
TABLE OF CONTENTS
FOR THE 5959 CORPORATE DRIVE LEASE TO
TELESCAN, INC.
PAGE
----
ARTICLE 1 PREMISES ......................................... 1
ARTICLE 2 TERM ............................................ 2
ARTICLE 3 LEASEHOLD IMPROVEMENTS ........................... 3
ARTICLE 4 ACCEPTANCE OF THE PREMISES
AND BUILDING BY TENANT ......................... 5
ARTICLE 5 RENT ............................................. 5
ARTICLE 6 SERVICES BY LANDLORD ............................. 13
ARTICLE 7 UTILITIES ........................................ 14
ARTICLE 8 USE .............................................. 16
ARTICLE 9 LAWS, ORDINANCES, AND REQUIREMENTS OF
PUBLIC AUTHORITIES ............................. 16
ARTICLE 10 OBSERVANCE OF RULES AND REGULATIONS .............. 17
ARTICLE 11 ALTERATIONS ...................................... 17
ARTICLE 12 LIENS ........................................... 18
ARTICLE 13 ORDINARY REPAIRS ................................. 19
ARTICLE 14 INSURANCE ........................................ 19
ARTICLE 15 DAMAGE BY FIRE OR OTHER CAUSE .................... 21
-i-
ARTICLE 16 CONDEMNATION ..................................... 23
ARTICLE 17 ASSIGNMENT AND SUBLETTING ........................ 23
ARTICLE 18 INDEMNIFICATION .................................. 24
ARTICLE 19 SURRENDER OF THE PREMISES ........................ 24
ARTICLE 20 ESTOPPEL CERTIFICATES ............................ 25
ARTICLE 21 SUBORDINATION .................................... 25
ARTICLE 22 PARKING .......................................... 26
ARTICLE 23 DEFAULT AND REMEDIES ............................. 26
ARTICLE 24 ATTORNEYS' FEES AND LEGAL EXPENSES ............... 29
ARTICLE 25 NOTICES .......................................... 29
ARTICLE 26 MISCELLANEOUS .................................... 30
ARTICLE 27 CONFLICTS OF INTEREST ............................ 32
ARTICLE 28 RENEWAL .......................................... 32
ARTICLE 29 EXPANSION ........................................ 34
ARTICLE 29A STORAGE SPACE .................................... 35
ARTICLE 30 DEFINITION OF FAIR MARKET VALUE RENTAL RATE ...... 36
ARTICLE 31 SIGNAGE ........................................ 36
ARTICLE 32 ENVIRONMENTAL .................................. 37
-ii-
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT (this "LEASE") dated as of the 8th day of
November, 1995 (the "Effective Date"), is made between CHEVRON U.S.A. INC., a
Pennsylvania corporation, acting through its agent Chevron Real Estate
Management Company, a division of Chevron U.S.A. Inc. ("Landlord"), and
TELESCAN, INC. ("Tenant").
ARTICLE 1
PREMISES
Section 1.01. Landlord hereby leases to Tenant, and Tenant hereby
leases from Landlord for the Term (as defined below) and subject to the
provisions hereof, to each of which Landlord and Tenant mutually agree, the
Premises (as defined below) comprising approximately 54,108 square feet (the
final square footage to be determined by the architect working in connection
with the Tenant. Improvements discussed in Section 3.02, subject to
verification by Landlord) of Net Rentable Area (as defined below) located on the
Second Level of the Building now known as 5959 Corporate Drive ("Building"),
located in Houston, Harris County Texas, as more particularly described in the
floor plans in Exhibit A hereto, such space constituting the "Premises,"
together with its appurtenances, including the right to use, in common with
others, the lobbies, entrances, stairs, elevators, off street loading areas
(for loading and unloading of materials and supplies), and other public
portions of the Building. The Building is situated on the real property
described in Exhibit B hereto (the "Land").
Section 1.02. The term "NET RENTABLE AREA", as used herein shall
be the unit of measurement for space in the Building leased or held for lease
to tenants for general office purposes, and shall mean (a) in the case of a
single tenancy floor, all floor area, measured from the inside surface of the
outer glass line of the Building excluding only the areas ("SERVICE AREA") used
for Building stairs, fire towers, elevator shafts, flues, vent stacks, pipe
shafts, and vertical ducts (which service areas shall be measured from the
midpoint of walls enclosing such service areas), but including any such
service areas which are for the specific use of the particular tenant such as
special stairs or special elevators, plus an allocation of the square footage
of the Building's elevator and mechanical and electrical rooms, maintenance
areas and public areas ("SUPPORT AREAS"), and (b) in the case of a floor to be
occupied by more than one tenant, all floor areaa within the inside surface of
the outer glass line enclosing the Premises and measured to the midpoint of
the walls separating areas leased by or held for lease to other tenants or
areas devoted to corridors, elevator foyers, rest rooms, mechanical rooms,
janitor closets, vending areas and other similar facilities for the use of all
tenants on the particular floor (hereinafter sometimes called "COMMON AREAS"),
but including a proportionate part of the common areas located on such floor,
plus an allocation of the support areas of the Building. No deductions from
Net Rentable Area shall be made for columns or projections necessary to the
Building. The Net Rentable Area of the Premises has been calculated on the
basis of the foregoing definition, and includes the "add-on factor" of nine
percent (9%). The "add-on factor" for any other space taken by Tenant
pursuant to this Lease shall be as follows: storage space pursuant to Article
29A - 15%; and space taken pursuant to Article 29 - 9%.
Section 1.03. This Lease shall include Tenant's non-exclusive right to
use and access the roof of the Building to install and provide up to six 24" -
48" satellite dishes in locations designated by Landlord. Tenant shall use
the roof subject to the reasonable requirements of Landlord, and any
1
installations of satellite dishes shall be treated as alterations under Article
11 below, subject to no charge by Landlord, except as provided in Article 11.
ARTICLE 2
TERM
Section 2.01. The term of this Lease (the "TERM") shall begin on
the earlier of: (i) "SUBSTANTIAL COMPLETION" as defined in Article III (1.) of
Exhibit C hereto, or (ii) February 1, 1996 (the "COMMENCEMENT DATE") and,
unless sooner terminated or renewed pursuant to the provisions hereof shall
end at midnight on January 31, 2007 (the "EXPIRATION DATE"). The period
between the Commencement Date and the Expiration Date is sometimes herein
referred to as the "ORIGINAL" Term, and that portion, if any, of the Term
resulting from the exercise of the renewal option granted in Section 28.01 is
sometimes referred to as the "RENEWAL" Term.
Section 2.02. Provided Tenant performs all of Tenant's obligations
under this Lease, including the payment of Rent (as defined below), Landlord
covenants that Tenant shall, during the Term, peaceably and quietly enjoy the
Premises without disturbance from Landlord or any other persons; subject,
however, to the terms of this Lease. This covenant and all other covenants of
Landlord in this Lease shall be binding upon Landlord and its successors only
with respect to breaches occurring during its and their respective ownership of
Landlord's interest hereunder.
Section 2.03. At the end of the sixty-sixth (66th) month of the
original Term, Tenant shall have the one-time option to either (a) cancel its
Lease for up to 30,000 square feet of Net Rentable Area in the Premises, but
Tenant's selection of the location shall be subject to Landlord's reasonable
determination that such surrendered space may be reasonably re-marketed; or (b)
cancel its Lease for space in the Premises in its entirety.
Said cancellation option must be exercised by Tenant, if at
all, by (a) providing nine (9) months prior written notice accompanied by
Tenant's check in the amount equal to the total of Landlord's unamortized
up-front costs incurred in connection with this Lease, including brokers'
commissions, plus unamortized Landlord allowance costs (if any) used by
Tenant; or (b) providing six (6) months prior written notice accompanied by
Tenant's check in an amount equal to the total of Landlord's unamortized
up-front costs incurred in connection with this Lease, including brokers'
commissions, unamortized Landlord allowance costs (if any) consumed by Tenant,
and three (3) months rental payments and escalations.
2
ARTICLE 3
LEASEHOLD IMPROVEMENTS,
Section 3.01. Leasehold Improvements from time to time designated by
Landlord as "BUILDING STANDARD" are sometimes called in this Lease "BUILDING
STANDARD LEASEHOLD IMPROVEMENTS." Leasehold Improvements not designated
as Building Standard Leasehold Improvements are sometimes called in this Lease
"NON-BUILDING STANDARD LEASEHOLD IMPROVEMENTS." Building Standard Leasehold
Improvements and Non-Building Standard Leasehold Improvements are collectively
called "LEASEHOLD IMPROVEMENTS." If the Premises already contain leasehold
improvements from a prior occupancy, Tenant may, at its option, use such
improvements in connection with the construction of Leasehold Improvements in
the Premises, to the extent provided in the final plans and specifications for
the Leasehold Improvements approved by Landlord and Tenant. From and after
the Effective Date, Tenant and Tenant's Contractor shall be permitted to enter
the Premises and shall construct or cause to be constructed certain additional
Leasehold Improvements in accordance with the Tenant Space Plan and Working
Drawings prepared by Tenant subject to and in accordance with the terms and
provisions of the Work Letter executed simultaneously with this Lease, the
form of which Work Letter is attached hereto as Exhibit C. Landlord shall
either approve or disapprove such Tenant Space Plan within seven (7) days
after Landlord's receipt thereof, which approval shall not be unreasonably
withheld, conditioned or delayed. Tenant and Tenant's Contractor may enter
the Premises for construction and demolition work, and the installation of
furniture equipment and electrical cables and Tenant shall not be required to
pay Base Rent or Additional Rent until the Commencement Date, unless Tenant
conducts business operations on the Premises. If for any reason Tenant fails
to complete construction of its additional Leasehold Improvements before the
Commencement Date, then this Lease shall not be void or voidable, and Tenant
shall not be liable for any loss or damage resulting therefrom except that
Tenant's obligation to pay Base Rent and Additional Operating Expenses shall
commence as of the Commencement Date, provided that Tenant shall not be
obligated to pay any Base Rent or Additional Operating Expenses for any days
(i.e., for the number of days) and the Commencement Date shall be postponed
for the number of days that the completion of the construction is delayed
because of Landlord Delay (as defined in the Work Letter).
Section 3.02. TENANT ALLOWANCES.
(a) Landlord shall bear no more than $25.00 per square foot of Net
Rentable Area of the Premises within the Leased Premises as an
"Improvement Allowance" only toward the cost of design and
construction of Leasehold Improvements. Such Improvement
Allowance will be paid to Tenant (or, at Tenant's option, to
Tenant's contractors or design professionals, upon Tenant's
written request showing the draw down upon the Improvement
Allowance) upon Tenant's providing Landlord with copies of
invoices or other evidence of the costs of the Leasehold
Improvements. Tenant shall bear all amounts in excess of said
Improvement Allowance. Landlord shall bear all costs of
Landlord's field observation and follow-up, and Landlord's
coordination of design and construction, with respect to the work
and improvements contemplated by this Article 3.
3
(b) The cost of design and construction of the Leasehold
Improvements shall include, without limitation, the cost of
preliminary space planning; final space planning, Construction
Documents; mechanical engineering design and documentation;
electrical design and documentation; demolition; Tenant's
construction management costs including fees; special consultants
costs (structural, acoustical vibration, etc.), direct costs of
construction; and all required permits and fees. Some of the
foregoing may be covered by the Architectural Allowance as
defined below, and Tenant may use either the Architectural
Allowance or Improvement Allowance as supplemented by unused
portions of the Relocation Allowance, as defined below, to pay
for these architectural items.
(c) At any time prior to the Lease Commencement Date, Tenant may
request from Landlord and Landlord shall provide to Tenant, an
additional allowance, hereinafter referred to as "Additional
Allowance" in an amount not to exceed $10.00 per square foot of
the Net Rentable Area of the Premises to be added to and to
be treated the same as the Improvement Allowance set forth in
paragraph (a) above. If Tenant elects to request said
Additional Allowance, Landlord shall increase the Improvement
Allowance by the amount requested. In the event the
Improvement Allowance is increased, Landlord shall increase the
Base Rent under the original Term of this lease by an amount
equal to the amount of Additional Allowance, amortized at an
interest rate over the original Term of this Lease equal to one
percent (1%) plus the prime lending rate quoted in The Wall
Street Journal on the day Tenant makes such request.
(d) Landlord shall grant Tenant an allowance for architectural
expenses in connection with Leasehold Improvements (the
"Architectural Allowance") of no more than $2.25 per square foot
of Net Rentable Area of the Premises. Such Architectural
Allowance will be paid to Tenant upon Tenant's providing Landlord
with copies of invoices or other evidence of the costs of
architectural services (or, at Tenant's option, to Tenant's
design professionals, upon Tenant's written request showing the
draw down on the Architectural Allowance). Any unused portion of
the Architectural Allowance, at Tenant's option, may be used to
supplement the Improvement Allowance, or to reduce the Base Rent
under the Original Term of this Lease by an amount equal to the
amount of the unused Architectural Allowance.
(e) Landlord shall grant to Tenant an allowance for the expenses of
or related to relocating to the Building (the "Relocation
Allowance") of no more than $3.00 per square foot of Net Rentable
Area of the Premises. Such Relocation Allowance will be
paid to Tenant upon Tenant's providing Landlord with copies of
invoices or other evidence of the costs of relocation. Any
unused portion of the Relocation Allowance, at Tenant's option,
may be used to supplement the Improvement Allowance, or to reduce
the Base Rent under the original Term of this Lease by an amount
equal to the amount of the unused Relocation Allowance.
4
Section 3.03. Landlord shall provide to Tenant, as a refurbishment
allowance (the "Refurbishment Allowance"), an amount equal to Four and No/100
Dollars ($4.00) per square foot of Net Rentable Area of the Premises under
lease to Tenant as of the fifth (5th) anniversary of Tenant's occupancy of the
Building, said allowance to be made available to Tenant (at Tenant's option)
at any time after the sixty-sixth (66th) month of the original Term of the
Lease, and will be paid to Tenant upon Tenant's presentation of invoices for
the subject refurbishment work. Tenant shall be entitled to use said amount,
subject to the requirements of 3.01. above, only for refurbishments and other
tenant improvements within the Premises, including but not limited to paint,
carpet, drywall partitioning, voiceldata cabling, and electrical work.
ARTICLE 4
ACCEPTANCE OF THE
PREMISES AND BUILDING BY TENANT
Except as may be expressly provided otherwise in this Lease, Tenant
will take possession of the Premises in "AS IS" condition. The term "AS-IS"
condition of the Premises and associated Building area shall be defined as the
existing initial condition of the Premises prior to construction of any Tenant
Improvements, with completely operational HVAC, electrical supply and plumbing
systems capable of supplying Tenant with the services identified in Article 6
of the Lease Agreement, and with all existing base building and tenant
improvements free of all building code violations including City, State,
Federal, and all other Authorities having jurisdiction at the time the
original Certificate of Occupancy was issued. Landlord agrees to provide such
"AS-IS" condition at its sole cost and expense without charge to Tenant or
offset against the Article 3 Tenant Allowances, prior to the Commencement
Date. Landlord further agrees that should any code violations relating to the
"AS-IS" condition of the Premises and associated Building areas existing prior
to construction of any Tenant Improvements, be discovered or should inspecting
authorities require improvements to same, then Landlord shall at its sole
cost, correct all such violations. The foregoing provision of this Article 4
shall not limit or qualify any of Landlord's obligations under any other
sections of this Lease, including Section 6.02, to clean, repair, maintain or
replace the Land, the Building and elements thereof, and the Premises.
ARTICLE 5
RENT
Section 5.01. BASE RENT; ADDITIONAL RENT. Subject to any other
applicable provisions of this Lease, the Rent reserved by Landlord and payable
by Tenant in consideration of and under the terms of this Lease for each year
of the Term hereof (prorated on a day basis for any period less than an entire
year) shall be and consist of
(a) an annual base rent (sometimes herein called the "BASE RENT") in
the amounts stated in Section 5.02 hereof, plus
(b) such other sums of money as shall become due and payable by
Tenant as Additional Rent (as hereinafter defined), which
Additional Rent shall be payable as hereinafter provided.
5
Section 5.02. BASE RATE. "BASE RENT" for the Premises shall be,
during the original, Term hereof, Zero and No/100 Dollars ($0.00) per square
foot of Net Rentable Area per annum during the first six (6) months of said
original Term (months 1-6) and Twelve and 25/100 Dollars ($12.25) per square
foot of Net Rentable Area per annum during months 7-66 of the original Term,
and then Zero Dollars ($0.00) per square foot of Net Rentable Area per annum
during months 67-72 of the original Term; and then Fourteen and 75/100 Dollars
($14.75) per square foot of Net Rentable Area during months 73-132 of the
original Term. Tenant covenants and agrees to pay Base Rent in equal monthly
installments, in advance on the first day of each and every calendar month
during the Term of this Lease from and after the Commencement Date. Base Rent
for any fractional calendar month (i.e., when tenancy does not cover the entire
month) shall be that proportion of the Base Rent which the number of days of
tenancy during such month bears to the total number of days in such month. The
Base Rent payable during any renewal period granted pursuant to Section 28.01
hereof shall be at the rate therein provided. It is further understood that
the rent for the first full paid calendar month has been paid in advance upon
the execution of this Lease and Landlord acknowledges receipt thereof.
Section 5.03. ADDITIONAL RENT. "ADDITIONAL RENT" means all sums,
other than Base Rent, which Tenant is or becomes obligated to pay to Landlord
under this Lease, including, but not limited to, Additional Operating Expenses
(as hereinafter defined).
Section 5.04. ADDITIONAL OPERATING EXPENSES. "ADDITIONAL OPERATING
EXPENSES" shall be computed separately for each square foot of Net Rentable
Area in the Premises for each calendar year or portion thereof which ensues
after the Commencement Date and prior to the end of the Term of this Lease and,
for each such calendar year or portion thereof, shall mean an amount (but not
less than zero) per square foot of Net Rentable Area in the Premises determined
by subtracting the amount described below in (b) from the amount described
below in (a), to wit:
(a) The arithmetic average of the Operating Expenses (as hereinafter
defined) per square foot of Net Rentable Area in the Building
incurred during such calendar year or portion thereof.
(b) The applicable Landlord's Expense Stop (as hereinafter defined)
as to such square foot of Net Rentable Area in the Premises
for such calendar year or portion thereof.
For all purposes under this Lease, the "ARITHMETIC AVERAGE" of the Operating
Expenses per square foot of Net Rentable Area in the Building for a calendar
year shall be determined by dividing the total amount of the Operating
Expenses incurred during such calendar year by the total number of square feet
of Net Rentable Area in the Building, and, likewise, the Operating Expenses
for any portion (less than all) of a calendar year for a square foot of Net
Rentable Area in the Building shall be determined by dividing the arithmetical
average of the Operating Expenses per square foot of Net Rentable Area in the
Building for such entire calendar year by the number of days in such year and
by multiplying the result obtained by the number of days in such portion of
said calendar year.
Section 5.05. LANDLORD'S EXPENSE STOP. "LANDLORD'S EXPENSE STOP" means
as follows:
(a) For any full calendar year during the Term, "LANDLORD'S EXPENSE
STOP" shall mean the quotient obtained by dividing the total
amount of Operating Expenses, grossed up in accordance with
the last paragraph of Section 5.06(a) for the Building for the
6
calendar year 1996 by the total number of square feet of Net
Rentable Area in the Building ( 541,022.43 square feet), as
shown in Landlord's statements for 1996 Operating Expenses.
Until 1996 Operating Expenses have been finally determined, Landlord's Expense
Stop shall be the figure estimated by Landlord in good faith to be Landlord's
Expense Stop.
(b) For any partial calendar year during the Term, "Landlord's
Expense Stop" means the product obtained by multiplying
the amount in Section 5.05(a) by a fraction, the denominator of
which is 365, and the numerator of which is the number of
days in such partial calendar year.
Section 5.06. OPERATING EXPENSES.
(a) Subject to the provisions of subsection (b) hereof, "OPERATING
EXPENSES" as used herein means all expenses, costs, and
disbursements of every kind which Landlord shall be required to
pay, in connection with the ownership, operation and
maintenance of the Building and the Land, including, without
limitation, the following:
(1) An amount (the "MANAGEMENT FEE ALLOCATION") equal to
three percent (3%) of the Base Rent and Additional
Operating Expenses (exclusive of the "Management
Fee Allocation") payable by Tenant.
(2) Wages, salaries, and fees of a personnel or entities
engaged in the operation, maintenance, or security of the
Building, including taxes, insurance, and benefits
relating thereto; provided, however, that if during
the Term such personnel or entities are also working on
other projects being periodically developed or operated
by Landlord, their wages, salaries, fees, and related
expenses shall be allocated by Landlord reasonably and in
good faith among all of such projects, and only that
portion of such expenses allocable to the Building shall
be included as an Operating Expense.
(3) All supplies and materials used in the operation and
maintenance of the Building.
(4) Cost of all maintenance and service agreements for the
Building, including without limitation, alarm service,
janitorial services, security services, window
cleaning, elevator maintenance, landscaping, and parking
facilities maintenance.
(5) Cost of all insurance relating to the Building,
including, without limitation, the cost of casualty and
liability insurance applicable to the Building and
Landlord's personal property used in connection
therewith, the cost of business interruption insurance
in such amounts as will reimburse Landlord for all
losses of earnings and other income attributable to
the ownership and operation of the Building, and the
7
cost of insurance against such perils and occurrences as
are commonly insured against by prudent landlords. If
Landlord elects to self-insure as provided in Section
14.02, the cost of insurance shall be Landlord's
estimated fair market cost, not to exceed the rates
charged to landlords of first-class office buildings in
the Westchase area of Houston, Texas, during the
applicable period of time or the applicable rates
published in the Insurance Service Offices (ISO) Manual
for the applicable period, whichever is less.
(6) All taxes, assessments, and other governmental charges,
whether federal, state, county, or municipal and whether
assessed by taxing districts or authorities presently
taxing the Building or the Land or by others,
subsequently created or otherwise, and any other taxes
and assessments attributable to the Building and the
Land or their operation, exclusive of any (i)
inheritance, gift, franchise, mortgage, transfer or
income taxes which may be assessed against Landlord, and
(ii) penalties, interest, or attorney's fees in
connection with late payments or late charges or
collection costs therefor.
(7) Cost of repairs and general maintenance (excluding
repairs and general maintenance paid by proceeds of
insurance by Tenant or other third parties, and
alterations attributable solely to tenants of the
Building).
(8) Amortization of the cost of capital investment items
which are installed primarily to reduce operating costs
for the benefit of all the Building's tenants, but only
to the extent that such operating costs are actually
reduced, or which may be required by any governmental
authority. All such costs, including interest cost,
shall be amortized over the reasonable life of the
capital investment items, with the reasonable life and
amortization schedule being determined by Landlord
according to generally accepted accounting principles,
but in no event to extend beyond the reasonable life of
the Building.
(9) Cost of all utilities for the Building, including the
cost of water, electricity, gas, fuel oil, heating,
lighting, air conditioning, and ventilation for the
Building.
(10) Landlord's legal costs, appraisal costs, and other
such third-party fees relating to the operation of
the Building.
If the Net Rentable Area of the Building is not fully occupied during any
Fiscal Year of the Term, an adjustment shall be made in computing the
Operating Expenses for that year so that the Operating Expenses which vary
with occupancy shall be increased for that year to the amount that, in
Landlord's reasonable good faith judgment, would have been incurred had the
total Net Rentable Area of the Building been ninety-five percent (95%)
occupied during that year. All Operating Expenses shall be computed according
to generally accepted accounting principles, consistently applied.
8
(b) The term "OPERATING EXPENSES" shall not include any of the following
expenses:
(1) Depreciation and amortization, except to the extent
provided in Section 5.06(a)(8);
(2) Costs incurred in renovating or otherwise improving
or decorating or redecorating space for tenants or other
occupants in the Building or vacant space in the
Building;
(3) Any compensation paid to clerks, attendants, or other
persons in commercial concessions operated by Landlord;
(4) Leasing commissions, attorneys' fees, architect's fees
and other costs incurred in connection with
negotiations or disputes with tenants or prospective
tenants of the Building;
(5) Costs incurred by Landlord for alterations, additions,
improvements, repairs, replacements, tools and equipment
which are considered capital expenditures under
generally accepted accounting principles, consistently
applied, except to the extent provided in Section
5.06(a)(8). (excepting costs that are incurred due to
changes in law, including but not limited to "The
Americans with Disabilities Act" and other governmental
laws, regulations and rules and, also, excepting costs
expended to cause a reduction in Operating Expenses to
the extent such Operating Expenses are actually reduced,
with the foregoing costs included in Operating
Expenses);
(6) Interest on debt or amortization payment on any
mortgage or mortgages and any rental under any
ground or underlying leases or lease (except to the
extent the same may be made to pay insurance or taxes);
(7) Advertising and promotional expenses;
(8) Repairs or other work occasioned by fire, windstorm,
or other casualty and public liability claims of the
type which would be covered by insurance policies, the
cost of which is included in Operating Expenses, and
costs incurred by Landlord in connection with or made
necessary by the actual or threatened exercise by
governmental authorities (or other entities with power
of eminent domain) of the power of eminent domain;
(9) Specific costs specially billed to Tenant or any
other specific tenants, such as (but not limited to)
above Building Standard janitor service, or electrical
usage or other services or benefits above Building
Standard.
9
(10) Landlord's general corporate overhead and general
administrative expenses;
(11) Cost to acquire, construct, equip and complete
the Building and any cost connected with the sale,
purchase, financing or refinancing at any time of the
Building or the Land;
(12) Costs associated with the violation by Landlord of
any lease for space in the Building, any contract or
restrictions relating to the Building or the Land or any
law or governmental regulation applicable to the
Building or the Land;
(13) Contributions to civic or charitable organizations;
(14) Costs paid to Landlord or to subsidiaries or
affiliates of Landlord for goods or services to the
Building to the extent that same materially exceed
the cost of such goods or services if rendered or sold
by unaffiliated third parties on a competitive basis;
(15) All costs associated with the presence in the Building
of asbestos, polychlorinated biphenyls, or any other
hazardous or toxic material;
(16) Management fees and costs in excess of the Management
Fee Allocation;
(17) Costs to correct structural defects in the construction
of the Building;
(18) Salaries and other compensation for employees above
the grade of building manager;
(19) Costs of paintings, artwork and objects d'art for the
Building;
(20) Costs covered by manufacturer or other warranties;
(21) Costs associated with the failure of the Building to
comply with existing laws, rules and regulations as of
the date of this Lease;
(22) Costs incurred in connection with removing property
or improvements of former tenants, or in restoring
their leased premises;
(23) Costs attributable to losses for uncollected rent or
charges or reserves for bad debts; and
(24) Costs arising from or connected with disputes relating
to Landlord's ownership of or title to the Building or
Land.
10
(c) The term "FISCAL YEAR" as used herein shall mean a period of
twelve consecutive calendar months, commencing on January 1,
and ending on December 31, or such other twelve-month period
as Landlord may specify from time to time.
Section 5.07. RENT. "RENT" means all amounts which Tenant is obligated
or becomes obligated to pay to Landlord under this Lease, including Base Rent
and Additional Rent.
Section 5.08. PAYMENT OF RENT. Tenant shall pay to Landlord all Rent
at Landlord's lockbox in Houston, Texas or elsewhere in the continental United
States, as Landlord may from time to time designate to Tenant in writing, in
legal tender for the payment of public and private debts, without
counterclaims, set-off, or deduction except as set forth in this Lease, in the
following manner:
(a) The Base Rent, monthly in advance (without written demand) in
equal monthly installments on the first day of each fill
calendar month during the Term and for any other period of
occupancy.
(b) The Additional Rent, within thirty (30) days after notice
thereof by Landlord's invoice or statement for the same as
elsewhere provided for and authorized herein, and at such
other times as this Lease provides for the payment of the same.
Section 5.09. FAILURE TO PAY; INTEREST. All past-due Rent shall bear
interest from and after the fifth (5th) day after it is due until paid at the
rate of interest per annum equal to the interest rate then being quoted by
Bank of America National Trust and Savings Association (or its successor) as
its "prime rate," plus two (2) percent, or the maximum rate permitted under
state or federal law, if the aforesaid rate exceeds such maximum.
Section 5. 10. ADDITIONAL OPERATING EXPENSES. As Additional Rent,
Tenant shall pay to Landlord an amount (if any) equal to the Additional
Operating Expenses for each square foot of Net Rentable Area included in the
Premises during any calendar year or portion thereof during the Term of this
Lease; provided that for any period of time which constitutes less than an
entire calendar year, the Additional Rent, if any, payable by Tenant under this
Section 5.10 for each square foot of Net Rentable Area in the Premises during
such portion of a calendar year shall be calculated on a proportionate per-day
basis as described in Sections 5.04 and 5.05 above.
11
Section 5.11. PAYMENT OF ESTIMATED ADDITIONAL RENT. At least fifteen
(15) days prior to the first day of each calendar year during the Term of this
Lease, Landlord shall notify Tenant of Landlord's reasonable, good faith
estimate of the amount, if any, of Additional Rent which will become due by
Tenant under Section 5.10 during the next calendar year or part thereof. The
amount of Additional Rent, if any, thus estimated by Landlord to become due for
any such period shall be divided into equal monthly installments during such
period (reduced proportionately for any partial month) and shall be paid by
Tenant in such equal monthly installments in advance on the first day of each
month during such period; provided that if Additional Rent is estimated to
accrue under Section 5.10 during a portion only of such period (as, for example,
a portion of a calendar year during which the Term hereof ends), the entire
amount of such estimated Additional Rent shall be payable in equal monthly
installments during the portion of such period during which it is estimated to
accrue. If Landlord fails to give notice to Tenant of Landlord's estimate of the
amount of Additional Rent to become due by Tenant during any period at least
fifteen (15) days prior to commencement of such period as required in the first
sentence of this Section 5.11, Tenant shall not be required to commence paying
monthly installments of estimated Additional Rent for such period until the
first day of the first calendar month which ensues at least fifteen (15) days
after notice of such estimate is given by Landlord to Tenant, in which event the
first monthly installment of estimated Additional Rent to be paid by Tenant
after receipt of such notice shall include all monthly installments of estimated
Additional Rent for such period which would have become due through such
installment payment date if Landlord had timely given notice of estimated
Additional Rent for such period as provided for in the first sentence of this
Section 5.11.
Section 5.12. CORRECTION OF ESTIMATED PAYMENTS. Within one hundred
fifty (150) days, after the end of each calendar year during which any estimated
Additional Rent has accrued under Section 5.11 above, Landlord shall provide to
Tenant a statement for such calendar year setting forth, in reasonable detail,
the Operating Expenses incurred during such calendar year and the amount, if
any, of Additional Rent due by Tenant under Section 5.10 for such calendar year
or any portion thereof. If the actual Additional Rent, if any, due by Tenant
under Section 5.10 for such calendar year, or portion thereof, is greater than
the estimated Additional Rent paid by Tenant under Section 5.11 during such
calendar year, or portion thereof, then within thirty (30) days after receipt of
such statement Tenant shall pay to Landlord the amount of such excess. If the
actual Additional Rent, if any, due by Tenant under Section 5.10 for such
calendar year, or portion thereof, is less than the estimated Additional Rent
paid by Tenant under Section 5.11 during such calendar year, or portion thereof,
then Landlord shall allow a credit in the amount of such overpayment plus
interest thereon from the date of delivery of said statement from Landlord until
the credit is given, at the rate of interest per annum equal to the interest
rate being quoted by Bank of America National Trust and Savings Association (or
its successor) as its "prime rate" plus two (2) percent, or the maximum rate
permitted by state or federal law if the aforesaid rate exceeds such maximum,
against the aggregate payment of Base Rent and estimated Additional Rent
otherwise becoming due under Section 5.08(a) and Section 5.11 on the next
ensuing monthly payment of Rent due dates, if any, after delivery of such
statement to Tenant; provided that if the Term of this Lease has ended or shall
end prior to utilization of such entire overpayment and any accrued interest as
a credit against Rent hereunder, Landlord shall promptly refund such overpayment
and any accrued interest (to the extent not credited against Rent otherwise
becoming due hereunder) to Tenant.
Section 5.13. TENANT'S RIGHT TO EXAMINE RECORDS. Tenant shall have
the right at all reasonable times to audit, inspect and copy or reproduce at
its own expense Landlord's books and
12
records relating to Additional Rent under this Lease for all or any part of the
immediately preceding two (2) calendar years of the Term. Tenant shall bear
the costs incurred by it in connection with such audit but Landlord agrees to
reimburse Tenant for such costs in the event such audit reveals that the annual
Additional Rent charged equaled or exceeded 110% of the annual Additional Rent
which should have been charged for the calendar year which is covered by such
audit. Landlord shall in any event promptly refund to Tenant any overcharge
(regardless of the amount) revealed by such audit.
ARTICLE 6
SERVICES BY LANDLORD
Section 6.01. While Tenant is occupying the Premises and there is no
uncured event of default under this Lease for more than ten (10) consecutive
days, Landlord shall furnish the Premises with:
(a) passenger elevator, and freight elevator service 24 hours per day in
common with other tenants for access to and from the Premises as is
customarily provided to tenants in first-class office buildings in the
Westchase area of West Houston, Texas, provided that Landlord may
reasonably limit the number of elevators to be operated before or after
Normal Business Hours (as defined in Section 26.02 hereof) and on
Sundays and holidays (as defined in Section 26.02 hereof);
(b) janitorial cleaning services as listed on Exhibit F, attached hereto;
(c) replacement, as necessary, of all Building Standard (including warm
white) lamps and ballasts in the fight fixtures within the Premises;
(d) the services provided for in Sections 7.01 and 7.02 below;
(e) the security gate house on Townpark and the Building shipping/receiving
office will be manned at all times during Normal Business Hours, but as
to the security gate house only, Landlord may substitute a security
access control system in lieu of manning such security gate house;
(f) during the original Term, a watchman in the Building every day,
twenty-four (24) hours a day;
(g) Tenant shall have twenty-four (24) hours day access to the Building;
and
(h) escalator service and loading dock access in common with other Tenants
during Normal Business Hours.
If after the Commencement Date, Tenant requests services which are not
specified herein and Landlord elects to provide such services to Tenant, Tenant
will pay to Landlord, as Additional Rent, upon demand, the cost of providing
such services, plus an additional amount equal to five percent (5%) of such
costs to cover Landlord's overhead, administrative and related costs, except
that charges for additional metered electrical power shall be at Landlord's out
of pocket cost for such power.
13
Section 6.02. Landlord shall operate the Building as a first-class
office building in the Westchase area of West Houston, and maintain, repair and
replace (as needed) the common areas of the Building and the foundation, roof,
and other structural elements of the Building, including exterior walls and
glass, and the Building systems such as HVAC and plumbing and electrical in a
manner consistent with first-class office buildings and data centers in the
Westchase area of West Houston, Texas.
ARTICLE 7
UTILITIES
Section 7.01. While Tenant is occupying the Premises and there is no
uncured event of default under this Lease for more than ten (10) consecutive
days, Landlord shall furnish Tenant with the following services:
(a) potable water at those points of supply provided in Tenant's
Premises and hot and cold water for normal lavatory use by
tenants in the Building;
(b) heating, ventilating, and/or air conditioning ("HVAC") in
season during Normal Business Hours for the Building and at
such temperatures and in such amounts which shall in all
events have adequate capacity to heat and cool the occupants
of the Leased Premises up to one person per 150 square feet of
useable area, at temperatures ranging from 74 degrees F to 76
degrees F, with a variance of -1 degree F in the summer, and
from 68 degrees F to 70 degrees F with a variance of +1 degree
F in the winter as well as electrical loads identified in
Section 7.01 and 7.02. In the event Tenant requires HVAC
services in excess of those specified herein, Tenant shall
install such systems at Tenant's expense. The utilities for
the operation of such additional systems shall be metered in
accordance with Section 7.02. Additional consumption in excess
of the power allowed in Section 7.02 shall be billed to Tenant
by Landlord at Landlord's actual out of pocket expense;
(c) electric lighting for public areas and special service areas
of the Building in the manner and to the extent customarily
provided in office buildings in the Westchase area of West
Houston, Texas;
(d) connection to Landlord's emergency power generator which
shall not exceed 50 KVA without prior Landlord approve with
any Tenant consumption to be determined by meter and to the
extent the total consumption of 120/208 volt power for the
month exceeds the amount allowed pursuant to Section 7.02,
such consumption shall be charged at Houston Lighting & Power
kilowatt hour (KWH) cost for the preceding month, and
(e) a one to one relationship of the volume of return air
entering the mechanical room above the ceiling to supply air
entering the Leased Premises, assuming a return air velocity
of no greater than 500 feet per minute through all, return air
openings; a properly sized life safety control system and
building backbone to Tenant's floor, that will receive the
Tenant's life safety devices installed in the Leased Premises.
Section 7.02. While Tenant is occupying the Premises and there is no
event of default under this Lease, Landlord will furnish electric power at 2.0
watts per square foot of Net Rentable Area for
14
lighting and 5.0 watts per square foot of Net Rentable Area for Tenant's other
power requirements. Landlord reserves the right to charge Tenant for the
kilowatts of non-lighting electrical usage in excess of .75 kilowatt hours per
square foot of Net Rentable Area of the Premises per month averaged over a
twelve month period. Additional consumption will be determined by separate
kilowatt meters for the Premises to be installed by Landlord at Tenant's
expense.
Landlord shall provide required 120/208 volt electrical transformers
and panels to supply up to 5.0 watts per square foot of Net Rentable Area, in
the four electrical closets that serve the Premises. Three of the aforementioned
four electrical closets will have a general purpose power panel and an isolated
ground panel. One UPS/isolated ground panel and one emergency generator power
panel will be located in the computer area.
To the extent Tenant elects to utilize the Landlord provided UPS power,
maintenance and repairs for the 60 KVA of UPS power will be made on a time and
materials basis, with costs shared between UPS power users on a pro rata,
percentage of total UPS used, basis. At Lease commencement, Tenant's UPS power
usage is anticipated to be 50 KVA. On the basis of an initial usage of 50 KVA of
UPS power, Tenant's initial cost for UPS maintenance and repairs will be $300.00
per month with an end of year accounting and adjustment based on actual
maintenance and repair costs.
If Tenant's requirements for electricity exceed those described above,
Landlord, at Tenant's expense, will make reasonable efforts to supply such
service through the then-existing feeders servicing the Building and will bill
Tenant monthly at Landlord's actual out of pocket cost for such additional
service, but, in any event, Landlord's feeders shall be capable of supplying 60
KVA of UPS power to Tenant. Such additional consumption shall be determined, at
Landlord's election, either (i) by a survey performed by a reputable consultant
selected by Landlord and paid for by Tenant, or (ii) by a separate meter in the
Premises to be installed, maintained, and read by Landlord at Tenant's sole
expense.
Section 7.03. The hourly charge for HVAC overtime usage shall be $20.00
per hour per Building Quadrant serviced, such rate to be increased or decreased
annually in direct proportion to any increase or decrease since 1996 in the
annual average of kilowatt rates charged Landlord, but in no event shall such
rate be less than $20.00 per hour per Building Quadrant serviced. Should Tenant
elect to use Landlord's chilled water, it shah be billed at 25 cents per ton
hour. For purposes of the foregoing, the Building shall be divided into four
quadrants (a "Building Quadrant") by two lines, one running generally
north-south and the other generally east-west, both lines intersecting at the
approximate center of the Second Level. Notwithstanding the foregoing, Landlord
hereby waives the HVAC overtime usage charge for overtime HVAC usage from
between 5:30 p.m. and 6:00 p.m. on business days (as defined in Section 26.03
hereof.
Landlord will not be liable in any way to Tenant for any failure or
defect in the supply or character of electric energy or any other utility
service furnished to the Premises because of any requirement act, or omission of
the public utility serving the Building with electricity or any other utility
service.
15
All installations of electrical fixtures, appliances, and equipment
which require modifications to the Building's electrical systems will be subject
to Landlord's prior written approval, such approval not to be unreasonably
withheld, delayed or conditioned.
Landlord's obligation to furnish electrical and other utility services
as described in this Article 7 will be subject to the rules and regulations of
the supplier of such electricity or other utility services and the rules and
regulations of any municipal or other governmental authority regulating the
business of providing electricity and other utility services.
At all times Tenant's use of electrical current will never exceed the
capacity of existing feeders to the Building or the risers or wiring
installations.
Section 7.04. Should stoppage of any of the services provided for in
Article 6 above or in this Article 7 render the Premises untenantable
(tenantability being presumed if Tenant is using Premises for its intended
purpose) for more than three (3) consecutive business days and be the result of
a cause other than Force Majeure or the failure of utilities to the Building,
Tenants rent shall abate during the period of untenantability. Should stoppage
of any of the services provided for in Article 6 or in this Article 7 render the
Premises untenantable for more than ten (10) consecutive business days for any
cause, Tenant's rent shall abate during the period of untenantability. If the
period of untenantability exceeds thirty (30) consecutive business days for any
cause, Tenant shall have the right to terminate the Lease after the thirtieth
(30th) consecutive business day by giving written notice to Landlord prior to
restoration of such services, but only if Landlord is not working diligently to
achieve such full restoration. If the period of untenantability exceeds sixty
(60) consecutive business days, for any cause, Tenant shall have the right to
terminate the Lease after the sixtieth (60th) consecutive business day by giving
written notice to Landlord prior to full restoration of such services,
regardless of Landlord's diligent efforts to achieve restoration. The cure
periods and notice requirements of Section 23.05, as well as the limitations on
Tenant's rights and remedies set forth therein, shall be inapplicable to this
Section 7.04.
ARTICLE 8
USE
Section 8.01. The Premises shall be used only for general office and
data center purposes including but not limited to, employee training, employee
lunchroom and/or kitchen facilities (including vending machines for Tenant's use
only) and any other legally permitted uses. Tenant may change its use only with
the consent of Landlord, which shall not be unreasonably withheld, and Tenant
agrees to use and maintain the Premises in a clean, careful, safe, lawful, and
proper manner.
ARTICLE 9
LAWS, ORDINANCES, AND REQUIREMENTS
OF PUBLIC AUTHORITIES
Section 9.01. Tenant shall, at its sole expense, comply with all laws,
orders, ordinances, and regulations of federal, state, county, and municipal
authorities and with any directive of any public officer or officers which
shall, with respect to the use of the Premises or to any abatement of nuisance,
impose any violation, order or duty upon Landlord or Tenant arising from
Tenant's use of the Premises or from conditions which have been created by or at
the insistence of Tenant or required by reason of a
16
breach of any of Tenant's obligations hereunder. Tenant is responsible for
compliance with Title III of the Americans with Disabilities Act "ADA") in the
Premises, as required by applicable governmental authorities having
jurisdiction; Landlord is responsible for compliance with Title III of the ADA
in the common areas of the Building.
The foregoing obligations of Tenant under this Article 9 shall not
apply to any laws, orders, ordinances, regulations, or directives that must be
complied with by Landlord generally in order for Landlord to lease space in the
Building for general office purposes.
If Tenant receives written notice of the violation of any such law,
order, ordinance, or regulation, it shall promptly notify Landlord thereof.
ARTICLE 10
OBSERVANCE OF RULES AND REGULATIONS
Section 10.01. Tenant and its servants, employees, agents, visitors,
and licensees shall observe faithfully and comply with the Rules and Regulations
attached hereto as Exhibit E, except as otherwise provided herein. In the event
of conflict between this Lease and the Rules and Regulations, then this Lease
shall control.
Landlord shall at all times have the right to make reasonable changes
in and additions to such Rules and Regulations, provided any changes in existing
rules or any new rules do not interfere with the lawful conduct of Tenant's
business in the Premises as permitted by this Lease, and apply generally to all
tenants in the Building.
Landlord shall have no responsibility or liability to Tenant and its
servants, employees, agents, visitors, and licensees with respect to any damages
or injuries to persons or property arising out of noncompliance with the Rules
and Regulations, or any of them, by any other tenant or person in the Building.
However, Landlord shall use reasonable efforts to cause other tenants to comply
with the Rules and Regulations.
ARTICLE 11
ALTERATIONS
Section 11.01. Tenant shall not, without Landlord's prior written
consent, which consent shall not be unreasonably withheld, delayed or
conditioned, make any alterations to the Premises, which either (i) affect the
Building structure or systems, or (ii) exceed $5,000.00 in cost.
Should Tenant desire to make any such alterations, Tenant agrees to
submit all plans and specifications for same to Landlord for Landlord's written
approval before such work is begun.
Upon Tenant's receipt of Landlord's written approval, Tenant may
proceed with the construction of the approved alterations, but only so long as
the alterations are constructed in substantial compliance with the approved
plans and specifications and with the provisions of this Article 11.
17
All alterations shall be made at Tenant's expense, either by Tenant's
contractors which have been approved by Landlord, or by Landlord's contractors
on terms reasonably satisfactory to Tenant, including a fee payable by Tenant to
Landlord of 2 1/2% of the actual cost of performing such work to cover
Landlord's overhead if Tenant's contractors do the work or 5% if Landlord's
contractors do the work.
All work in connection with such alterations shall:
(a) be performed in such a manner as to maintain harmonious
labor relations;
(b) not alter the exterior appearance of the Building;
(c) not adversely affect the structure or safety of
the Building;
(d) comply with all building, safety, fire, and other codes
and governmental and insurance requirements;
(e) not result in any usage in excess of Building Standard
of water, electricity, gas, heating, ventilating, or
air-conditioning (either during or after such work)
unless prior written arrangements satisfactory to
Landlord are made with respect thereto; and
(f) be completed promptly and in a good and workmanlike
manner.
Section 11.02. All Leasehold Improvements, alterations, and other
physical additions made or installed by or for Tenant in or to the Premises and
Building pursuant to Section 3.01. above shall be and remain Landlord's
property, except Tenant's furniture, furnishings, personal property, movable
equipment and trade fixtures, and roof-mounted satellite dishes, and shall not
be removed. Tenant agrees to remove, at Tenant's expense, all of its furniture,
furnishings, personal property, and movable equipment and trade fixtures by the
Expiration Date or the date of any earlier termination hereof, and shall
promptly reimburse Landlord for the cost of repairing all damage done to the
Premises or the Building by such removal normal wear and tear excepted.
ARTICLE 12
LIENS
Section 12.01. Tenant shall keep the Premises free from any liens
arising from any work performed, materials furnished, or obligations incurred by
or at the request of the Tenant. Nothing contained in this Lease shall be
construed as Landlord's consent to any contractor, subcontractor, laborer, or
materialman for the performance of any labor or the furnishing of any materials
for any specific improvement alteration, or repair of, or to, the Premises, nor
as giving Tenant any right to contract for, or permit the performance of, any
services or the furnishing of any materials that would result in any liens
against the Premises.
If any lien is filed against the Premises or Tenant's leasehold
interest therein in connection with work performed for Tenant, Tenant shall
discharge same within thirty (30) days after Tenant learns that the lien has
been filed. If Tenant fails to discharge any lien, within such period, then, in
addition to any
18
other right or remedy of Landlord, Landlord may, at its election, discharge the
lien by either paying the amount claimed to be due or obtaining the discharge by
deposit with a court or a title company or by bonding. Tenant shall pay on
demand any amount paid by Landlord for the discharge or satisfaction of any
lien, and all reasonable attorneys' fees and other legal expenses of Landlord
incurred in defending any such action or in obtaining the discharge of such
lien, together with all necessary disbursements in connection therewith.
The above described obligations of Tenant relative to release of liens
shall not apply to the extent any such lien results from the failure of Landlord
to pay any allowance to Tenant as required in Article 3 of the Lease.
Notwithstanding the foregoing, Tenant may contest the amount or
validity of any such lien, provided that Tenant obtains an indemnity bond which
meets the requirements of Section 53.171 of the Texas Property Code issued by a
corporate surety reasonably satisfactory to Landlord.
ARTICLE 13
ORDINARY REPAIRS
Section 13.01. Tenant shall, at all times during the Term hereof and at
Tenant's sole cost and expense, keep the Premises and every part thereof in good
condition and repair, subject to the provisions of Section 6.02 and Article 15.
Tenant shall, at the end of the Term hereof surrender to Landlord the
Premises and all alterations, additions, and improvements thereto as required by
Section 19.01.
If Tenant fails to make such repairs promptly, Landlord may, at its
option, make the repairs, and Tenant shall pay Landlord on demand Landlord's
actual costs in making such repairs, plus a fee of fifteen percent (15%) to
cover Landlord's overhead.
Landlord has no obligation and has made no promise to alter, remodel,
improve, repair, decorate, or paint the Premises, or any part thereof except as
specifically herein set forth. No representations respecting the condition of
the Premises or the Building have been made by Landlord to Tenant, except as
specifically herein set forth.
ARTICLE 14
INSURANCE
Section 14.01. Tenant shall, during the Term and at its sole expense,
obtain and keep in force, with Tenant, Landlord, and the mortgagees of Landlord
named as insured therein (except with respect to the Worker's Compensation
coverage) as their respective interests may appear, the following insurance:
(a) Fire insurance, including extended coverage, vandalism, and
malicious mischief upon Non-Building Standard Leasehold
Improvements and alterations, installed by Tenant, in an
amount not less than ninety percent (90%) of the full
replacement cost thereof,
19
(b) Commercial General Liability Insurance Coverage, to include
personal injury, bodily injury, broad form property damage,
operations hazard, contractual liability, and products and
completed operations liability, in limits not less than
$1,000,000, inclusive.
(c) Worker's Compensation and Employees Liability insurance, in
such form and amounts as are required by applicable law.
All policies shall be taken out with insurers that are licensed in Texas and
have a Best's Rating of B+ or better in form reasonably satisfactory from time
to time to Landlord. Tenant agrees that certificates of insurance on the
Landlord's standard form, or, if required by Landlord or the mortgagees of
Landlord, certified copies of each such insurance policy, will be delivered to
Landlord as soon as practicable after the placing of the required insurance, but
not later than ten (10) days after Tenant takes possession of all or any part of
the Premises. All policies shall contain an undertaking by the insurers to
notify Landlord and the mortgagees of Landlord in writing not less than fifteen
(15) days before any material change, reduction in coverage, cancellation, or
other termination thereof
Section 14.02. During the Term, Landlord shall insure the Building and
the existing Leasehold Improvements (excluding any property which Tenant is
obligated to insure under Section 14.01 hereof) against damage by fire and
standard extended coverage perils and maintain public liability insurance in
such amounts and with such deductibles as Landlord reasonably considers
appropriate; provided, however, that, so long as the Building is owned by
Chevron U.S.A. Inc. or an affiliated corporation, Landlord shall have the right,
at its election, to maintain all such insurance under either: a program of
self-insurance in lieu of purchasing an insurance policy or policies if it is
Landlord's normal policy to self-insure against such perils for its property;
or, the Chevron Self-Administered Claims Program. Landlord may, but shall not be
obligated to, take out and carry any other form or forms of insurance as it or
Landlord's mortgagees may reasonably determine advisable. Notwithstanding any
contribution by Tenant to the cost of insurance premiums, as provided herein,
Tenant acknowledges that such contribution, in and of itself, shall not confer
upon Tenant the right to receive any proceeds from any such insurance policies
carried by Landlord for which such contribution by Tenant has been made.
Landlord will not have to carry insurance of any kind on any Non-Building
Standard Leasehold Improvements, on Tenant's furniture or Furnishings, or on any
of Tenant's fixtures, equipment, improvements, or appurtenances under this
Lease; and Landlord shall not be obligated to repair any damage thereto or
replace the same.
Section 14.03. Tenant shall not do or permit to be done in the
Premises, nor bring or keep or permit to be brought to the Premises or kept
therein, anything which is prohibited by any insurance policy carried by
Landlord or Tenant, periodically in force covering the Building, the Leasehold
Improvements, or the Premises, or which will in any way increase the existing
premiums for any such policy. If Tenant fails to remedy the condition giving
rise to any such increase or threatened increase in premiums, or such
cancellation or reduction, or threatened cancellation or reduction of coverage,
within forty-eight (48) hours after notice thereof, the failure shall constitute
an event of default hereunder, and Landlord may do any one or more of the
following without any notice or demand:
(a) Enter upon the Premises and attempt to remedy such condition,
in which event Landlord shall not be liable for any damage or
injury caused to any property of Tenant or of others located
on the Premises resulting from such entry and Tenant shall
20
promptly pay to Landlord as Additional Rent the cost to
Landlord of remedying or attempting to remedy such condition; or
(b) In the case of an increase or threatened increase in
insurance premiums, Tenant, at Landlord's election, shall pay
any actual increase in premiums as Additional Rent within ten
(10) days after being billed therefor by Landlord. In
determining whether increased premiums are a result of Tenant's
use of the Premises, a schedule issued by the organization
computing the insurance rate on the Building or the Leasehold
Improvements showing the various components of such rate shall
be conclusive evidence of the several items and charges which
make up such rate. Tenant shall promptly comply with all
reasonable requirements of the insurance authority or any
present or future insurer relating to the Premises.
Section 14.04. All policies of fire, extended coverage or similar
casualty insurance, which Tenant is required to obtain hereunder or for which
Landlord charges Tenant as an Operating Expense for the Premises shall include a
clause or endorsement denying the insurer any rights of subrogation against the
other party to the extent rights have been waived by the insured before the
occurrence of injury or loss. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant waive any rights of recovery against the
other for injury, loss or damage to persons or property due to hazards covered
by insurance containing such a waiver of subrogation clause or endorsement to
the extent of the injury, loss or damage to persons or property covered thereby,
or which could have been covered by the type of insurance that Landlord could
have included in Operating Expenses, regardless of cause or origin, including
the negligence of the other party hereto, its agents, officers, or employees,
and no third party shall have any such rights by assignment subrogation or
otherwise.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
Section 15.01. Subject to Sections 15.02, 15.03, and 15.04 hereof, if
the Premises, the Building or the Building Standard Leasehold Improvements are
damaged by fire or other casualty against which Landlord could obtain a policy
of insurance under Section 14.02 and could have included such in Operating
Expenses, Landlord shall, except to the extent of the Non-Building Standard
Leasehold Improvements, have the damage repaired with reasonable speed at the
expense of Landlord, subject to delays that may arise by reason of adjustment of
loss under insurance policies and for other delays beyond Landlord's reasonable
control.
Section 15.02. If the Premises are damaged or destroyed by any cause
whatsoever, and if, in either Landlord's or Tenant's reasonable opinion, (a) the
Premises cannot be rebuilt or made fit for Tenant's purposes within one hundred
twenty (120) days of the damage or destruction, or (b) the proceeds from
insurance remaining after payment of any such proceeds required to be paid to
Landlord's mortgagee are insufficient to repair or restore the damage or
destruction, either Landlord or Tenant may, at its option, terminate this Lease
by giving the other notice of termination within sixty (60) days after such
damage or destruction, and thereupon, Rent and any other payments for which
Tenant is liable under this Lease shall be prorated and paid to the date of such
damage, and Tenant shall vacate as soon as reasonably possible the Premises,
provided, however, that all provisions of this Lease which are designated to
cover matters of termination and the period thereafter shall survive the
termination hereof
21
Section 15.03. If the Building is damaged or destroyed by any cause
whatsoever to the extent that, in either Landlord's or Tenant's reasonable
judgment (a) it would not be economically feasible to repair or restore such
damage or destruction, or (b) the damage or destruction to the Building cannot
be repaired or restored within one hundred twenty (120) days after such damage
or destruction, either Landlord or Tenant may, at its option, terminate this
Lease by giving the other notice of termination within sixty (60) days after
such damage or destruction, and thereupon, Rent and any other payments shall be
prorated and paid to the date on which possession is relinquished, if Tenant
continues to occupy the Premises, and Tenant shall vacate as soon as reasonably
possible the Premises according to such notice of termination.
Section 15.04. If the Building, the Premises, or Building Standard
Leasehold Improvements are substantially damaged by fire or other cause at any
time during the last two (2) years of the Term, Landlord or Tenant may terminate
this Lease upon written notice to the other party given within sixty (60) days
of the date of such damage, requiring Tenant to vacate the Premises, and
thereupon Rent and any other payments shall be prorated and paid to the date on
which possession is relinquished, if Tenant continues to occupy the Premises,
and Tenant shall vacate as soon as reasonably possible the Premises.
Section 15.05. No damages, compensation, or claim shall be payable by
Landlord for inconvenience, loss of business, or annoyance arising from any
repair or restoration of any portion of the Premises, the Building Standard
Leasehold Improvements, or the Building. Landlord shall use reasonable efforts
to have such repairs made promptly so as not unnecessarily to interfere with
Tenant's occupancy.
Section 15.06. If the Non-Building Standard Leasehold Improvements are
damaged or destroyed by fire or other casualty against which Tenant is insured
under Section 14.01, Tenant shall immediately notify Landlord, and unless either
Landlord or Tenant elects to terminate this Lease under Sections 15.02, 15.03,
or 15.04, Tenant shall, to the extent of the proceeds from Tenant's insurance
available to Tenant have the damage repaired with reasonable speed at the
expense of Tenant, subject to delays which may arise by reason of adjustment of
loss under insurance policies and for other delays beyond Tenant's reasonable
control.
Section 15.07. The provisions of this Article shall be considered an
express agreement governing any case of damage or destruction of the Building,
the Building Standard Leasehold Improvements, the Non-Building Standard
Leasehold Improvements, or the Premises by fire or other casualty.
Section 15.08. Tenant shall promptly notify Landlord if the Premises or
the Building Standard Leasehold Improvements are damaged by any cause
whatsoever. If the Building, Premises, or Building Standard Leasehold
Improvements, through no fault or neglect of Tenant, its agents, employees, or
invitees (except to the extent that Landlord could have included the cost of
business interruption insurance in Operating Expenses), shall be damaged by fire
or other casualty so as to render any portion of the Premises untenantable, the
Base Rent and Additional Operating Expenses hereunder shall abate as to that
portion of the Premises rendered untenantable by such damage from the date of
such casualty until such time as Landlord reasonably determines that such
damaged portion of the Premises has been made tenantable.
22
ARTICLE 16
CONDEMNATION
Section 16.01. If a material part of the Premises or the Building shall
be taken or condemned for any public purpose, whether such taking or
condemnation shall be temporary or permanent, either Landlord or Tenant, at its
option, may terminate this Lease, by notice to the other party hereto within
sixty (60) days after such party becomes aware that such taking or condemnation
has occurred. If all of the Premises shall be taken or condemned for any public
purpose, this Lease shall automatically terminate. All proceeds from any taking
or condemnation attributable to the Land or Building shall belong to and be paid
to Landlord.
ARTICLE 17
ASSIGNMENT AND SUBLETTING
Section 17.01. If Tenant should, desire to assign this Lease or sublet
the Premises (or any part hereof), Tenant shall give Landlord written notice at
least fifteen (15) days in advance of the date on which Tenant desires to make
such assignment or sublease. Landlord shall then have a period of fifteen (15)
days following receipt of such notice within which to notify Tenant in writing
that Landlord elects (a) to terminate this Lease as to the portion of the
Premises which Tenant desires to sublease or assign as of the date specified by
Tenant in its notice, in which event Tenant shall be relieved of all further
obligations hereunder as to such space; (b) to permit Tenant to assign or sublet
such space, subject, however, to the subsequent written approval of the proposed
assignee or subtenant by Landlord, and provided that if the rental rate agreed
upon between Tenant and its proposed subtenant or assignee is greater than the
Rent that Tenant must pay Landlord hereunder, then one-half (1/2) of such excess
rental, minus Tenant's cost of subletting shall be considered Additional Rent
owed by Tenant to Landlord, and shall be paid by Tenant to Landlord in the same
manner that Tenant pays Base Rent; or (c) to refuse to consent to Tenant's
assignment or subleasing of such space and to continue this Lease in full force
and effect as to the entire Premises. If Landlord elects option (a), then Tenant
may retract its notice of request to assign or sublease. Landlord's consent to
sublease or assignment, and to the proposed assignee or sublessee, cannot be
unreasonably withheld, conditioned or delayed. In determining reasonableness,
Landlord may only take into consideration the following factors:
(1) Any proposed assignee (but not sublessee) is a
respectable party of financial worth commensurate with its
rental obligations and Tenant shall have provided Landlord
with proof thereof;
(2) Whether the usage under the assignment or sublease would
conflict with the exclusive usage rights granted to any
tenant in the Building;
(3) Whether the proposed assignee or sublessee would use the
Premises for any use which would diminish the value or
reputation or alter the first class character of the Building;
or
(4) In the event of an assignment or sublease of only a portion
of the Premises, whether such portion of the Premises and the
balance of the Premises could be leased independently of each
other in compliance with all applicable governmental codes
and regulations.
23
If Landlord shall fail to notify Tenant in writing of such election
within such fifteen (15) day period, Landlord shall be deemed to have elected
option (b) above. No assignment or subletting by Tenant shall relieve Tenant
of Tenant's obligations under this Lease. Any attempted assignment or sublease
by Tenant in violation of the terms and provisions of this Section 17.01 shall
be void.
Section 17.02. Landlord may sell, transfer, assign, or convey, all or
any part of the Building and any and all of its rights under this Lease, and in
the event Landlord assigns its rights under this Lease, Landlord shall be
released from any obligations hereunder attributable to periods of time after
such assignment and Tenant agrees to look solely to Landlord's successor in
interest for performance of such obligations.
ARTICLE 18
INDEMNIFICATION
Section 18.01. Subject to the provisions of Section 14.04, Tenant
hereby releases and agrees to indemnify, defend, and hold Landlord harmless from
and against all claims for damage to property or injury or death to persons
arising during its tenancy and to the extent resulting from (1) the negligence
or willful misconduct of Tenant, or (2) the condition of the Premises
(excluding, however, claims arising from any breach by Landlord of its
obligations under this Lease, or to the extent arising from the negligence or
willful misconduct of Landlord). The foregoing indemnity obligation shall
include reasonable attorneys' fees and other reasonable costs of defense.
Section 18.02. Subject to the provisions of Section 14.04, Landlord
hereby releases and agrees to indemnify, defend, and hold Tenant harmless from
and against all claims for damage to property or injury or death to persons
arising during the tenancy and to the extent resulting from (1) the negligence
or willful misconduct of Landlord, or (2) the condition of the common areas of
the Building or Land (excluding, however, claims arising from any breach by
Tenant of its obligations under this Lease, or to the extent arising from the
negligence or willful misconduct of Tenant). The foregoing indemnity obligation
shall include reasonable attorneys' fees and other reasonable costs of defense.
Section 18.03. The obligations of Tenant and Landlord pursuant to this
Article 18 shall survive the expiration or any termination of this Lease, with
respect to any damage, injury or death occur-ring before such expiration or
termination.
ARTICLE 19
SURRENDER OF THE PREMISES
Section 19.01. Upon the expiration or other termination of this Lease
for any cause whatsoever, Tenant shall peacefully vacate the Premises in as good
order and condition as the same were at the beginning of the Term or may
thereafter have been improved or modified by Landlord or (subject to obtaining
any Landlord consent to such improvement or modification which may be required
hereby) by Tenant reasonable use and wear and tear thereof and repairs that are
not Tenant's obligation (including without limitation any repairs that are
Landlord's obligations under Section 6.02, and any repairs made under Articles
15 and 16) excepted. Should Tenant continue to hold the Premises after the
termination of this Lease, whether the termination occurs by lapse of time or
otherwise, such holding over shall, unless otherwise agreed to by Landlord in
writing, constitute and be construed as a tenancy at will at a daily Base Rent
equal to one-thirtieth (1/30th) of an amount equal to
24
one and one-half (1 1/2) times the monthly Base Rent hereunder, plus all
Additional Rent that would have been due hereunder for the period involved if
such period had been included in the Term, and subject to all of the other
terms set forth herein except any right to renew this Lease. Tenant shall be
liable to Landlord for all damage that Landlord suffers because of any holding
over by Tenant and Tenant shall indemnify Landlord against (i) all claims made
by any other tenant or prospective tenant against Landlord resulting from delay
by Landlord in delivering possession of the Premises to such other tenant or
prospective tenant and (ii) all other losses, costs, and expenses, including
(without limitation) attorneys' fees, incurred by reason of such holding over.
ARTICLE 20
ESTOPPEL CERTIFICATES
Section 20.01. Landlord and Tenant each agrees to furnish periodically,
when requested by the other or by the holder of any deed of trust or mortgage
covering the Building, the Land, or any interest of Landlord therein, a signed
certificate certifying to the extent applicable and true (i) that this Lease is
in full force and effect and unmodified (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications, if any); (ii) that the Term of this Lease has commenced and the
Rent is then accruing hereunder, (iii) that Tenant has accepted possession of
the Premises and that except as stated in the certificate, to the best of
Tenant's knowledge, any improvements required by the terms of this Lease to be
made by Landlord have been completed to the satisfaction of Tenant; (iv) that
except as stated in the certificate, no Rent under this Lease has been paid more
than thirty (30) days in advance of its due date; (v) that the address for
notices is as set forth in this Lease (or has been changed by notice duly given
and is as set forth in the certificate); (vi) that to the best of Tenant's
knowledge, except as stated in the certificate, Tenant, as of the date of such
certificate, has no charge, Lien, or claim of offset under this Lease or
otherwise against Rent or other charges due or to become due hereunder, (vii)
that except as stated in the certificate, to its knowledge the other is not then
in default under this Lease; and (viii) such other matters as may reasonably be
requested (which may be qualified by Tenant to the extent of its knowledge). Any
such certificate may be relied upon by any prospective purchaser, mortgagee or
any beneficiary under any deed of trust on the Building or the Land or any part
thereof
ARTICLE 21
SUBORDINATION
Section 21.01. This Lease is subject and subordinate to any deeds of
trust, mortgages, or other security instruments which may in the future cover
the Building and the Land, or any interest of Landlord therein, and to any
advances made on the security thereof and to any increases, renewals,
modifications, consolidations, replacements, and extensions of any of such deeds
of trust, mortgages, or security instruments provided, however, any such
subordination is subject to the condition that Tenant's rights under this Lease
shall not be disturbed or terminated so long as Tenant is not in default
hereunder, and Landlord shall use reasonable efforts to obtain from any such
deed of trust holder or mortgagee a non-disturbance and attornment agreement for
the benefit of Tenant (or Tenant's successors or assigns) agreeing that,
notwithstanding such subordination, so long as no event of default is occurring
under this Lease, neither this Lease nor any rights of Tenant hereunder shall be
disturbed, terminated or subjected to termination by any trustee's sale, any
action to enforce the security therefor or any proceeding or action in
foreclosure. This provision is declared by Landlord and Tenant to be
self-operative and no further instruments shall be required to effect such
subordination of this Lease.
25
Tenant shall, however, upon demand execute, acknowledge and deliver to Landlord
any further instruments and certificates evidencing such subordination as
Landlord may reasonably require. This Lease is further subject and subordinate
to all applicable ordinances of the City of Houston.
Section 21.02. Notwithstanding the provisions of Section 21.01 hereof
any such mortgagee shall have the right at any time to subordinate any such
deeds of trust, mortgages, or other security instruments to this Lease on such
terms and subject to such conditions as such mortgagee may consider appropriate
in its discretion. At any time, before or after the institution of any
proceedings for the foreclosure of any such deeds of trust, mortgages, or other
security instruments, or the sale of the Building under any such deeds of trust,
mortgages, or other security instruments, Tenant shall attorn to such purchaser
upon any sale or the grantee under any deed in lieu of such foreclosure and
recognize such purchaser or grantee as Landlord under this Lease. The agreement
of Tenant to attorn contained in the preceding sentence shall survive any such
foreclosure sale, trustee's sale, or conveyance in lieu thereof Tenant shall
upon demand at any time, before or after any such foreclosure sale, trustee's
sale, or conveyance in lieu thereof, execute, acknowledge, and deliver to
Landlord's mortgagee any written instruments and certificates evidencing such
attornment as Landlord's mortgagee may reasonably require.
ARTICLE 22
PARKING
Section 22.01. Landlord shall permit Tenant to use the parking
facilities ("Parking Facilities") in common with other tenants in the Building
during the Term to the extent, if any, so provided in Exhibit D hereto.
ARTICLE 23
DEFAULT AND REMEDIES
Section 23.01. TENANT'S DEFAULT. The occurrence and continuance of any
one or more of the following events shall constitute an "EVENT OF DEFAULT" by
Tenant under this Lease:
(a) if Tenant shall fail to pay any Rent or other sums payable by
Tenant hereunder as and when such Rent or other sums become due
and payable, and such failure shall continue for ten (10) days
after notice thereof from Landlord;
(b) if Tenant shall fail to perform or observe any other term
hereof (other than the provisions of Section 14.03) or any of
the Rules and Regulations and such failure shall continue for
more than thirty (30) days after notice thereof from Landlord
(provided however, in the event the default is of the type that
cannot reasonably be cured within such thirty (30) days, if
Tenant commences to cure such default within such thirty (30)
days and thereafter proceeds with due diligence to cure such
default, no event of default shall exist for so long as Tenant
shall continue diligent efforts to cure such default);
(c) if any petition is filed by or against Tenant or any guarantor
of Tenant's obligations under this Lease, under any section or
chapter of the present or any future federal Bankruptcy Code
or under any similar law or statute of the United States or any
state
26
thereof (and with respect to any petition filed against Tenant
or any guarantor of Tenant's obligations under this Lease, such
petition is not dismissed within thirty (30) days after the
filing thereof), or Tenant or any guarantor of Tenant's
obligations under this Lease shall be adjudged bankrupt or
insolvent in proceedings filed under any section or chapter of
the present or any future federal Bankruptcy Code or under any
similar law or statute of the United States or any state
thereof,
(d) if Tenant or any guarantor of Tenant's obligations under this
Lease becomes insolvent;
(e) if a receiver, custodial or trustee is appointed for Tenant or
for any of the assets of Tenant which appointment is not vacated
within thirty (30) days of the date of such appointment; or
(f) any events that constitute an event of default under the
terms of Section 14.03 hereof
Section 23.02. If an event of default occurs and at any time thereafter
while Tenant remains in default, Landlord may do any one or more of the
following without notice or demand, provided however, that Landlord shall comply
with the applicable provisions of the Texas Property Code, as amended from time
to time:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Premises to Landlord. If Tenant fails to do so,
Landlord may, without notice and without prejudice to any other
remedy Landlord may have, enter upon and take possession of the
Premises and expel or remove Tenant and its effects without
being liable to prosecution or any claim for damages therefor;
and Tenant shall indemnify Landlord for all loss and damage
which Landlord may suffer by reason of such termination, whether
through inability to relet the Premises or otherwise, including
any loss of Rent for the remainder of the Term.
(b) Terminate this Lease, and consider Tenant's event of default as
an anticipatory repudiation of this Lease and Tenant immediately
shall become liable for damages equal to the total of:
(1) the costs of recovering the Premises;
(2) the unpaid Rent earned as of the date of
termination, plus interest thereon at a rate
per annum from the due date equal to the
maximum rate of interest allowed by state or
federal law;
(3) the amount of the excess of (i) the total Rent
and other benefits which Landlord would have
received under the Lease for the remainder of
the Term, at the rates then in effect, over
(ii) the fair market rental value of the
balance of the Term as of the time of such
breach, each item discounted at the rate of eight
percent (8%) per annum to the then present
value; and
(4) all other sums of money and damages owing by
Tenant to Landlord;
27
(c) Enter upon and take possession of the Premises as Tenant's
agent without terminating this Lease and without being liable
to prosecution or any claim for damages therefor, and
Landlord may relet the Premises as Tenant's agent and
receive the Rent therefor; provided, however, that Landlord
shall have no duty to relet the Premises and Landlord's
failure to relet the Premises shall not release or affect
Tenant's liability for Rent or damages. Any rental received
by Landlord from reletting the Premises as Tenant's agent shall
be applied first against the cost of reletting, including
renovating, repairing and altering the Premises for such new
tenant, to Building Standard, and broker's commissions and
advertising, then against any sums due under this Lease.
Tenant shall pay to Landlord on demand any deficiency between
the sums due hereunder and that portion of any rental received
from reletting applied against such sums.
(d) Do whatever Tenant is obligated to do under this Lease and enter
the Premises without being liable to prosecution or any claim for
damages therefor, to accomplish this purpose. Tenant shall
reimburse Landlord immediately upon demand for any expenses
which Landlord incurs in thus effecting compliance with this
Lease on Tenant's behalf, and Landlord shall not be liable for
any damages suffered by Tenant from such action.
Section 23.03. No act or thing done by Landlord or its agents during
the Term shall constitute an acceptance of an attempted surrender of the
Premises, and no agreement to accept a surrender of the Premises shall be valid
unless made in writing and signed by Landlord. No reentry or taking possession
of the Premises by Landlord shall constitute an election by Landlord to
terminate this Lease, unless a written notice of such intention is given to
Tenant. Notwithstanding any such reletting, reentry or taking possession,
Landlord may at any time thereafter terminate this Lease for a previous uncured
default. Landlord's acceptance of Rent following an event of default hereunder
shall not be construed as a waiver of such event of default, unless the Rent
accepted cures such event of default. No waiver by Landlord of any breach of
this Lease shall constitute a waiver of any other violation or breach of any of
the terms hereof. Forbearance by Landlord to enforce one or more of the remedies
herein provided upon a breach hereof shall not constitute a waiver of any other
breach of the Lease.
Section 23.04. No provision of this Lease shall be deemed to have been
waived by Landlord or Tenant unless such waiver is in writing and signed by
Landlord and/or Tenant. Nor shall any custom or practice which may grow up
between the parties in the administration of the terms of this Lease be
construed to waive or lessen Landlord's or Tenant's right to insist upon strict
performance of the terms of this Lease. The rights granted to Landlord or Tenant
in this Lease shall be cumulative of every other right or remedy which Landlord
or Tenant may otherwise have at law or in equity or by statute and the exercise
of one or more rights or remedies shall not prejudice or impair the concurrent
or subsequent exercise of other rights or remedies.
Section 23.05. Tenant's sole remedies for Landlord's default hereunder
shall be its remedies at law or in equity (except where this Lease affords
additional remedies to Tenant such as but not limited to those provided under
Section 7.04), which Tenant agrees it will not exercise without first providing
Landlord written notice of the default and ten (10) days' opportunity to cure;
provided, however, that if such default cannot be cured in the ten (10) day
period, Tenant shall not seek its remedies if Landlord commences to cure such
default within the ten (10) day period and diligently and
28
continuously pursues such cure, unless such default continues for more than one
hundred eighty (180) days, for whatever reason; provided further, however if
Landlord's alleged default is an unauthorized lock-out of Tenant, then Tenant
shall still provide Landlord written notice of the default but need not give
Landlord ten (10) days' opportunity to cure before Tenant seeks a remedy. The
exercise of one or more rights or remedies by Tenant shall not prejudice or
impair the concurrent or subsequent exercise of other rights or remedies. The
grace and notice provisions of this Section 23.05 shall not be applicable
to the events and matters described or referred to in Section 7.04.
ARTICLE 24
ATTORNEYS' FEES AND LEGAL EXPENSES
Section 24.01. In any action or proceeding brought by either party
against the other under this Lease, the prevailing party shall be entitled to
recover from the other party attorneys' fees, investigation costs, and other
legal expenses and court costs incurred by such party in such action or
proceeding as the court may find to be reasonable.
ARTICLE 25
NOTICES
Section 25.01. Any notice or document required to be delivered
hereunder shall be considered delivered, whether actually received or not,
forty-eight (48) hours after such notice or document is deposited in the United
States mail, postage prepaid, registered or certified mail, return receipt
requested, addressed to the parties hereto at the respective addresses specified
below:
If to Landlord -
Chevron U.S.A. Inc.
P.O. Box 4619
Houston, Texas 77210
Attention: Leasing Manager
If to Tenant -
Telescan, Inc.
5959 Corporate Drive
Houston, Texas 77036
Attention: Mr. Roger C. Wadsworth,
Senior Vice President
Either party may change its address for purposes of notice under this Article
25 to any address within the continental United States of America, and add up
to two (2) recipients of copies of such notices upon thirty (30) days advance
written notice to the other party hereto.
29
ARTICLE 26
MISCELLANEOUS
Section 26.01. Tenant represents and warrants that it has had no
dealings, with any broker or agent other than Trione & Gordon and The Staubach
Company in connection with the negotiation or execution of this Lease.
Section 26.02. As used herein the terms "BUSINESS DAYS" means Monday
through Friday (except for holidays); "NORMAL BUSINESS HOURS" means 7:00 a.m. to
5:30 p.m. on business days and 7:00 a.m. to 12:00 p.m. on Saturdays (except for
holidays); and "HOLIDAYS" means New Year's Day, Christmas, July Fourth,
Thanksgiving Day, the Friday after Thanksgiving Day, Good Friday, Memorial Day
and Labor Day.
Section 26.03. Every agreement contained in this Lease is, and shall be
construed as, a separate and independent agreement. If any term of this Lease or
the application thereof to any person or circumstances shall be invalid and
unenforceable, the remainder of this Lease, or the application of the term to
other persons or circumstances, shall not be affected.
Section 26.04. There shall be no merger of this Lease or of the
leasehold estate hereby created with the fee estate in the Premises or any part
thereof by reason of the fact that the same person may acquire or hold, directly
or indirectly, this Lease or the leasehold estate hereby created or any interest
in this Lease or in such leasehold estate as well as the fee estate in the
Premises or any interest in such fee estate. In the event of a voluntary or
other surrender of this Lease, or a mutual cancellation hereof, Landlord may, at
its option, terminate all subleases, or treat such surrender or cancellation as
an assignment of any of such subleases.
Section 26.05. Tenant agrees to look solely to Landlord's interest in
the Building and the Land for the recovery of any judgment against Landlord, it
being agreed that Landlord (and its partners and shareholders) shall never be
personally liable for any such judgment.
Section 26.06. Except as otherwise provided in Sections 7.04 and 23.05,
whenever a period of time is herein prescribed for action to be taken by either
Tenant or Landlord, either shall not be liable or responsible for, and there
shall be excluded from the computation for any such period of time, any delays
due to strikes, riots, acts of God, shortages of labor or materials, war,
governmental laws, regulations, or restrictions or any other cause of any kind
whatsoever which is beyond the reasonable control of either ("FORCE MAJEURE").
Section 26.07. The article headings contained in this Lease are for
convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words of any gender used in this Lease
shall include any other gender, and words in the singular number shall be held
to include the plural, and vice-versa, unless the context otherwise requires.
Section 26.08. If there be more than one Tenant the obligations
hereunder imposed upon Tenant shall be joint and several, and all agreements and
covenants herein contained shall be binding upon the respective estates,
successors, and, to the extent permitted, assigns of the parties hereto. If
there is a guarantor of Tenant's obligations hereunder, Tenant's obligations
shall be joint and several
30
obligations of Tenant and such guarantor, and Landlord need not first proceed
against Tenant hereunder before proceeding against such guarantor, nor shall
any such guarantor be released from its guarantee for any reason, including,
without limitation, any amendment of this Lease, any forbearance by Landlord or
waiver of any of Landlord's rights, the failure to give Tenant or such
guarantor any notices, or the release of any party liable for the payment of
Tenant's obligations hereunder.
Section 26.09. Neither Landlord nor Landlord's agents or brokers have
made any representations or promises with respect to the Premises or the
Building except as herein expressly set forth and all reliance with respect to
any representations or promises is based solely on those contained herein. No
rights, easements, or licenses are acquired by Tenant under this Lease by
implication or otherwise except as expressly set forth in this Lease.
Section 26.10. This Lease sets forth the entire agreement between the
parties and cancels all prior negotiations, arrangements, brochures, agreements
and understandings, if any, between Landlord and Tenant regarding the subject
matter of this Lease. No amendment or modification of this Lease shall be
binding or valid unless expressed in writing and executed by both parties
hereto.
Section 26.11. The submission of this Lease to Tenant shall not be
construed as an offer nor shall Tenant have any rights with respect thereto
unless Landlord executes a copy of this Lease and delivers the same to Tenant.
Section 26.12. If Tenant signs as a corporation, each of the persons
executing this Lease on behalf of Tenant represents and warrants that Tenant is
a duly organized and existing corporation that Tenant has and is qualified to do
business in Texas, that the corporation has full right and authority to enter
into this Lease, and that all persons signing on behalf of the corporation were
authorized to do so by appropriate corporate actions.
Section 26.13. This Lease shall be governed by and construed under the
laws of the State of Texas. Any action brought to enforce or interpret this
Lease shall be brought in the court of appropriate jurisdiction in Harris
County, Texas.
Section 26.14. Tenant shall not, without the prior written consent of
Landlord, use the name of the Building for any purpose other than as the address
of the business to be conducted by Tenant in the Premises, nor shall Tenant do
or permit the doing of anything in connection with Tenant's business or
advertising which in the reasonable judgment of Landlord may confuse or mislead
the public as to any apparent connection or relationship (other than the
landlord/tenant relationships between Landlord, the Building, and Tenant.
Section 26.15. Any elimination or shutting off of light, air, or view
by any structure which may be erected on lands adjacent to the Building shall in
no way affect this Lease or impose any liability on Landlord.
Section 26.16. Landlord covenants and agrees with Tenant to furnish
Tenant Thirty (30) keys to each corridor door to the Premises. Additional keys
will be furnished for a reasonable charge by Landlord on an order signed by
Tenant or Tenant's authorized representative. All such keys shall remain the
property of Landlord. No additional locks shall be allowed on any door of the
Premises without Landlord's permission, and Tenant shall not make or permit to
be made any duplicate keys,
31
except those furnished by the Landlord. Upon termination of this Lease,
Tenant shall surrender to Landlord all keys to the Premises, and give to
Landlord the explanation of the combination of all locks for safes, safe
cabinets, and vault doors, if any, in the Premises.
Section 26.17. Tenant shall not cause this Lease or any memorandum or
evidence thereof to be filed with the county clerk. Landlord shall have the
right (but not the obligation) to cause this Lease or a memorandum or evidence
thereof to be filed with the county clerk, and upon request by Landlord, Tenant
shall promptly execute, acknowledge, and deliver to Landlord such a memorandum
or other evidence of this Lease.
Section 26.18. The exhibits attached to this Lease are by this
reference incorporated fully herein. The term "THIS LEASE" shall be considered
to include all such exhibits.
Section 26.19. As used in this Lease, "including" and similar terms
shall be construed to mean "including by way of example only and without
limitation."
ARTICLE 27
CONFLICTS OF INTEREST
Section 27.01. Conflicts of interest relating to this Agreement are
strictly prohibited, and neither Landlord nor Tenant, nor any director,
employee, or agent of either, shall give to or receive from any director,
employee, or agent of the other, any gift, entertainment or other favor of
significant value, or any commission, fee, or rebate. Any authorized
representative(s) of either Landlord or Tenant may audit the records of the
other relating to this transaction, including the expense records of employees
involved in this transaction, upon reasonable notice and during regular business
office hours, for the sole purpose of determining whether there has been
compliance with this section.
ARTICLE 28
RENEWAL
Section 28.01. Tenant upon giving Landlord not less than twelve (12)
months prior written notice in each instance, shall have the right to renew the
Lease ("Lease Renewal") with respect to all or part of the space then under
lease to Tenant for two (2) additional five (5) year periods at a Base Rent
which shall be ninety-five percent (95%) of the then-current effective Fair
Market Value Rental Rate, as defined below.
At such time as Tenant notifies Landlord of its desire to
discuss, the possibility of a Lease Renewal, Landlord shall, within thirty (30)
days thereafter notify Tenant of its interpretation of the Fair Market Value
Rental Rate. Tenant may accept the rate as quoted, or elect to enter into
negotiations with Landlord for a period not to exceed ninety (90) days, during
which both parties shall be required to negotiate on a diligent, good-faith
basis to arrive at agreement concerning the Fair Market Value Rental Rate.
Should agreement not be reached by both parties during said ninety (90) days,
then Tenant may, at its option, give written notice to Landlord indicating its
desire for an independent binding determination of the Fair Market Value Rental
Rate, and Tenant shall also advise Landlord in such notice of the name of an
independent licensed real estate broker experienced in brokering office building
leases in the Houston area for ten (10) year's or longer, and a member of SIOR,
HOLBA, or some other similarly recognized professional organization (the
"Tenant's
32
Appraisee"). Landlord shall, within twenty (20) days after receipt of such
notice from Tenant appoint another independent licensed real estate broker
experienced in brokering office building leases for ten (10) years or longer
and a member of SIOR, HOLBA, or some other similarly recognized professional
organization (the "Landlord's Appraisee"). Landlord's Appraiser and Tenant's
Appraiser shall together, within twenty (20) days of the appointment of the
Landlord's Appraiser, appoint a third independent licensed real estate broker
experienced in brokering office building leases for ten (10) years or longer
and a member of SIOR, HOLBA, or some other similarly recognized professional
organization who, in the judgment of Landlord's Appraiser and Tenant's
Appraiser, is familiar with and experienced in determining the market value of
office space in Houston, Texas (the "Arbitration Appraiser"). If Landlord's
Appraiser and Tenant's Appraiser cannot agree on the appointment of the
Arbitration Appraiser within said twenty (20) days, then Landlord and Tenant
shall request that the American Arbitration Association appoint the
Arbitration Appraiser.
Additionally, any such appraiser so appointed shall not be
employed by, have represented as a broker, or have any material interest in,
either Landlord or Tenant or any affiliate of either, or in the outcome of the
appraisal or arbitration proceeding.
Landlord's Appraiser, Tenant's Appraiser and the Arbitration
Appraiser shall within twenty (20) days of the Arbitration Appraiser's
appointment collectively determine the Fair Market Value Rental Rate.
Notwithstanding anything contained in this clause to the
contrary, should the three appraisers so appointed be unable to reach agreement
concerning the Fair Market Value Rental Rate for the renewal term within the
above-noted twenty (20) day period, then the Arbitration Appraiser's
recommendation concerning the Fair Market Value Rental Rate shall be final
concerning the Fair Market Value Rental Rate for the Lease Renewal.
Both Landlord and Tenant agree that, if for any reason the
binding decision of the appraisers so appointed cannot be provided prior to
commencement of the applicable Lease Renewal, then the Base Rent at the
commencement of the applicable Lease Renewal shall be the same monthly Base Rent
plus escalations, which Tenant paid during the final month of the previous lease
term. At such time as the appraiser or appraisers present their binding decision
of the Fair Market Value Rental Rate for the Lease Renewal, then said Fair
Market Value Rental Rate shall become effective (for purposes of setting the
Base Rent at ninety-five percent (95%) of said Fair Market Value Rental Rate) as
of the Lease Renewal commencement date, and any underpayment or overpayment
shall be reimbursed to Landlord or Tenant as the case may be within thirty (30)
days of the binding decision.
It is further agreed that Landlord and Tenant shall bear their
respective costs for services of the Landlord's Appraiser and the Tenant's
Appraiser, and shall equally divide the costs of the Arbitration Appraiser.
Upon each Lease Renewal, Landlord shall, at Tenant's option,
provide as a refurbishment allowance (the "Renewal Refurbishment Allowance"),
up to Seven and No/100 Dollars ($7.00) per square foot of Net Rentable Area
(excluding the Basement Space) of the Premises. Landlord shall pay such
allowance to Tenant only for refurbishment upon Tenant's presentment of
invoices for the subject refurbishing work.
33
ARTICLE 29
EXPANSION
Section 29.01. Tenant will be granted the option to expand into
approximately 15,769 square feet (the final square footage to be determined by
the architect working in connection with the Tenant Improvements discussed in
Section 3.02, subject to verification by Landlord) of Net Rentable Area of slab
space on the south half of the second level as shown on Exhibit G hereto, and on
the approximately 7,105 square feet (the final square footage to be determined
by the architect working in connection with the Tenant Improvements discussed in
Section 3.02, subject to verification by Landlord) of Net Rentable Area of space
on the Northeast Quadrant of the second level shown on Exhibit H hereto,
contiguous to the Premises, any time, and from time to time, during the first
five (5) years of Tenant's Lease. Tenant's taking of less than all of such space
is subject to Landlord's reasonable determination that such taken space is
contiguous to the Premises, and configured so as to leave the untaken space
reasonably marketable. Any space taken by Tenant pursuant to this option shall
be for a Base Rent to be the lesser of (a) the Fair Market Value Rental Rate as
below defined, or (b) Tenant's Base Rent for the Second Level Space then in
effect under this Lease, with any Improvement Allowances adjusted to reflect
differences in the length of lease terms. (Fair Market Value Rental Rate for
purposes of this Section 29.01 shall be determined in the same manner and on the
same timetable, and using the same procedures, as are set forth in Section
28.01.)
Rent shall not commence with respect to said space until
Tenant takes occupancy thereof to conduct business therein, or until forty-five
(45) days after the date when Landlord makes available such space to Tenant
for the purposes of Tenant undertaking alterations therein, whichever shall
first occur. Such additional space shall be leased on an "AS IS" basis
(vacuumed and broomed-cleaned condition), except that Tenant shall be allowed
an improvement allowance of up to $25.00 per square foot of Net Rentable Area
only for completion of Tenant's leasehold improvements therein, it being
clearly understood between the parties that any such allowance requested by
Tenant may effect the Fair Market Value Rental Rate. Such improvement
allowance shall be paid to Tenant upon Tenant's presentment of invoices for
such improvements.
Section 29.02 Tenant shall have a right of first refusal on the
approximately 20,103 square feet of Net Rentable Area of space in the Northeast
quadrant of the Second Level of the Building shown on Exhibit I hereto (the
"Exhibit I Space" subject to the primary right of first refusal held by PCS
Primeco. If Landlord receives an offer from a third party, to lease all or part
of the Exhibit I Space and PCS Primeco, waives, or fails to timely exercise, its
right of first refusal in connection therewith, Landlord shall provide Tenant
with written notice of such offer and Tenant shall reply within seven (7) days
whether or not Tenant wishes to exercise its subordinate right of first refusal
with respect to the subject Exhibit I Space and include such within the Premises
under this Lease on the same terms and conditions as provided in the third party
offer to lease, with any allowances adjusted to reflect differences in the
lengths of lease terms, (except that the lease term for such additional space
shall be coterminous with the Term of this Lease and any renewal term for which
Tenant has exercised an option to renew; however, if fewer than twelve (12)
months remain in the Lease term and Tenant has not exercised an option to renew,
then the term for Exhibit I Space will be the same as provided in the third
party offer). If Tenant fails to so reply within the aforesaid seven (7) days,
Tenant shall waive its rights hereunder with respect to that third party offer,
however, if Landlord does not lease such additional space to the aforesaid third
party on substantially the same terms as offered to Tenant, or if
34
the let additional space shall again become available, Tenant's subordinate
right of first refusal with respect thereto shall be revised and shall be
recurring.
ARTICLE 29A
STORAGE SPACE
Section 29A.01. Tenant shall have the option at any time and from time
to time during the Term, upon prior written notice to Landlord, to use available
space adjacent to the Premises and located on the second floor of the Building
(or if such space shall be or become unavailable, or if Tenant shall otherwise
elect, such other space in the basement as may from time to time be or become
available), for storage purposes only. Tenant may commence or terminate its
rights and obligations with respect to any space at any time, upon at least
thirty (30) days' prior written notice to Landlord. In the event Landlord shall
lease any or all of such space to a third party, Landlord may terminate Tenant's
rights and obligations with respect to such space upon at least thirty (30)
days' prior written notice to Tenant. In addition, in the event Tenant's
exercise of its expansion option pursuant to Section 29.01 or 29.02 shall result
in such space becoming part of the Premises, then Tenant's rights and
obligations under this Section 29A.01 with respect to such space shall end no
later than the date upon which such space shall become part of the Premises.
Tenant shall be responsible for the demising costs of any space taken by Tenant
pursuant to this Article. Such demising shall be subject to the approval of
Landlord, but Landlord's standard shall be set at the minimum required for
demising of storage space on a temporary basis - for example, simple dry wall -
and shall not be unreasonably delayed, conditioned, or withheld. Except as
otherwise expressly provided in this Lease, the demise of such space to Tenant,
and Landlord's and Tenant's respective rights and obligations in respect thereof
shall be the same as set forth in this Lease with respect to the Premises,
except that: (a) the gross rent payable by Tenant with respect to such space
shall at all times be $5.75 per square foot of Net Rentable Area (which shall
include an "add-on factor" of fifteen percent (15%) in the space leased by
Tenant per year, as determined by Tenant's architect and approved by Landlord,
such approval not to be unreasonably conditioned, withheld or delayed; (b) no
Additional Rent whether actual or estimated, nor any pass-through of Operating
Expenses or any increases thereof, shall be payable with respect to such space,
nor shall such space be included in any calculation of Additional Rent or the
pass-through of Operating Expenses or increases thereof to Tenant; (c) Tenant
shall acquire no additional parking rights based upon its lease of such space,
and such space shall not be included in the calculation of Tenant's parking
space rights set forth in Exhibit D hereto; (d) such space shall be leased to
Tenant in 'AS IS" condition, and no allowance pursuant to Article 3 of this
Lease shall be payable with respect thereto or be calculated with reference
thereto; (e) the rules and regulations of the Building shall not be applicable
to such space to the extent same are inconsistent with the nature of such space
or Tenant's intended use thereof (f) Tenant shall use such space solely for
storage space; (g) Landlord shall not be obligated to provide heating,
ventilating, or air conditioning with respect to such space pursuant to Section
7.01; and (h) Landlord shall not be obligated to provide janitorial cleaning
services with respect to such space pursuant to Section 6.01(b).
35
ARTICLE 30
DEFINITION OF FAIR MARKET VALUE RENTAL RATE
Section 30.01. The term "Fair Market Value Rental Rate", as used in
this Lease, shall mean the rate determined as of the date notice to renew or
expand is given for space of comparable size, location and condition to that
found in the Building in comparable office buildings located in Westchase area
of West Houston, Texas which office buildings have 100,000 or more Rentable
square feet of space in an office project ("Comparable Buildings"). The Fair
Market Value Rental Rate for Comparable Buildings shall also consider the
following: (i) location, quality and age of the Comparable Building; (H) the
use, location, size and floor level(s) of the space in question; (iii) the
definition of "Rentable Area" used therein; (iv) the inclusion of amortization
for leasehold improvements (existing or to be provided); (v) abatements
(including with respect to base rental - operating expenses and real estate
taxes, and parking charges); (vi) the inclusion of parking charges in rental;
(vii) lease takeovers/assumptions; (viii) relocation/moving allowance; (ix)
space planning allowances; (x) the extent of services provided or to be
provided; (xi) distinctions between "gross" and "net" leases; (xii) base year or
amount for escalation purposes of all operating expenses, including real estate
taxes, and the method of calculation used in determining each tenant's share of
operating expenses for any given period; (xii) any adjustments (including by way
of indices) to rental during the term of such lease; (xiv) the extent, if any,
to which the credit standing and financial stature of the tenant and any
guarantors would have an impact upon the base rental charged by operators of
such comparable buildings; (xv) term or length of lease, and any termination
options included therein; (xvi) the time the particular rental rate under
consideration was agreed upon and became or is to become effective; (xvii)
whether the tenant will pay for or provide electrical and other services for the
premises; and (xviii) except as provided otherwise in the Lease to the contrary,
any other relevant term or condition in making such market rate determination.
It is the intent of the parties that any arbitrators chosen to determine the
Fair Market Value Rental Rate shall use the foregoing considerations fairly to
both parties.
ARTICLE 31
SIGNAGE
Section 31.01. Tenant will be granted building standard signage on the
Second Level of the Building. Additionally, Landlord agrees not to permit more
than a total of three tenant monument signs on the property, one of which shall
be for Tenant, and the others of which may be for one or more other tenants.
Landlord shall provide an allowance of up to $3,000.00 to Tenant for the
installation of Tenant's separate monument sign. Landlord shall maintain the
aforementioned monument in first-class condition and appearance during the
original Term and any Renewal Terms of this Lease, at Landlord's expense.
Tenant's separate monument sign shall be similar in design, size and materials
to the existing tenant monument sign, and shall be at the location shown on
Exhibit J attached hereto. Landlord agrees not to change the name of the
Building, unless Landlord so decides in its sole discretion if requested to do
so by a tenant occupying at least 150,000 square feet of Net Rentable Area.
However, Landlord agrees not to name the Building for another tenant if Tenant
occupies at least 150,000 square feet of Net Rentable Area and Landlord has not
named the Building for Tenant.
Section 31.02. No building directory will be supplied by Landlord.
Visitors will check into the lobby security position and then either wait for a
Tenant employee to escort them, or will be sent to Tenant's reception area.
Landlord will notify Tenant should Landlord change this visitor control
36
procedure, in which case Landlord will provide and install a first-class
building directory board for Tenant's use in the entrance lobby of the
Building.
Section 31.03. Landlord will not permit any signage on the Building
which identifies any tenant or any affiliate of such tenant, occupying space in
the Building.
ARTICLE 32
ENVIRONMENTAL
If during the term of this lease the Environmental Protection Agency or
any other government regulatory agency determines that an environmental
problem exists with respect to the Premises under then-existing regulations
(such as relating to asbestos), whether or not said problem is discovered as a
result of remodeling conducted by Tenant, Landlord shall be solely responsible
for all costs associated with clean-up and elimination of the environmental
problem, including abatement of rent for the time that Tenant is unable to
occupy the Premises due to the environmental hazard, and/or clean up of same.
This obligation of Landlord shall apply only to all such environmental hazards
not brought on to the Premises by Tenant, and present in the Building or
Premises at the time of the execution of this Lease or subsequently brought
into the Building or Premises by Landlord.
EXECUTED as of the date first written above.
LANDLORD TENANT
CHEVRON U.S.A INC. TELESCAN, INC.
By: By: ILLEGIBLE
------------------- ---------------------
Its: Its: Senior Vice President
------------------- ---------------------
37
procedure, in which case Landlord will provide and install a first-class
building directory board for Tenant's use in the entrance lobby of the
Building.
Section 31.03. Landlord will not Permit any signage on the Building
which identifies any tenant, or any affiliate of such tenant, occupying space in
the Building.
ARTICLE 32
ENVIRONMENTAL
If during the term of this lease the Environmental Protection Agency or
any other government regulatory agency determines that an environmental problem
exists with respect to the Premises under then-existing regulations (such as
relating to asbestos), whether or not said problem is discovered as a result of
remodeling conducted by Tenant, Landlord shall be solely responsible for all
costs associated with clean-up and elimination of the environmental problem,
including abatement of rent for the time that Tenant is unable to occupy the
Premises due to the environmental hazard, and/or clean up of same. This
obligation of Landlord shall apply only to all such environmental hazards not
brought on to the Premises by Tenant, and present in the Building or Premises at
the time of the execution of this Lease or subsequently brought into the
Building or Premises by Landlord.
EXECUTED as of the date first written above.
LANDLORD TENANT
CHEVRON U.S.A INC. TELESCAN, INC.
By: W. R. MORRISON By:
------------------- ---------------------
Its: Vice President Its:
------------------- ---------------------
37
EXHIBIT A
EXHIBIT B
LAND
A tract of land containing 21.78 acres more or less, being part of and
out of Block Three, Unrestricted Reserve "C", Replat of Beltway Subdivision,
Section One (1), as per map or plat of said Subdivision recorded in Volume 175,
Page 83 of the Map Records of Harris County, Texas, and being all of Block Eight
(8), Unrestricted Reserve "C", Beltway Subdivision, Section Two (2), as per map
or plat recorded in Volume 176, Page 80 of the Map Records of Harris County,
Texas, and being part of and out of Unrestricted Reserve "A"', Beltway
Subdivision, Section Three (3), as per map or plat of said Subdivision recorded
in Volume 226, Page 60 of the Map Records of Harris County, Texas, in the C.
McKenzie Survey, Abstract No. 561, and the Williams Lyons Survey, Abstract No.
516, Houston, Harris County, Texas, all as more particularly described on
Schedule A attached to this Exhibit B. EXHIBIT C LEASEHOLD IMPROVEMENTS
The provisions of this Exhibit C shall apply to any and all alterations
or physical additions to the Premises, except as set forth in Section 11.01
of the Lease. All alterations and physical additions to the Premises shall
be done at Tenant's sole cost and expense, and are herein called "TENANT WORK".
Capitalized terms used herein that are not defined herein shall have the same
meaning given to such terms in the Lease.
ARTICLE I. LANDLORD AND TENANT PRE-CONSTRUCTION OBLIGATIONS
1. Tenant Space Plan.
Tenant will deliver to Landlord a detailed space plan containing
the information usually required to satisfy paragraph 3.27 in AIA document
B-162 , together with other relevant
information and written instructions relating thereto (the space plan and
other information and instructions being herein called the "Tenant Space
Plan").
2. Landlord Review.
Landlord will review the Tenant Space Plan to confirm that the
Tenant Work contemplated thereby (i) conforms with or exceeds the standards of
the Building and the information usually required to satisfy paragraph 3.27 in
AIA Document B-162 , and (ii) will not
impair the structural, mechanical, electrical or plumbing integrity of the
Building. Landlord shall either approve or disapprove the Tenant Space Plan
by notice to Tenant within ten (10) days after the date Landlord receives the
Tenant Space Plan. If Landlord does not approve the Tenant Space Plan,
Landlord will inform Tenant in writing of its objections and Tenant will revise
the same and deliver a corrected version to Landlord for its approval within
ten (10) days after the date Tenant receives Landlord's disapproval notice.
The approval and revision process for the revised Tenant Space Plan shall be
the same as described in the previous two sentences. If the Landlord does not
disapprove the Tenant Space Plan by notice to Tenant within ten (10) days after
submission, it shall be deemed approved.
3. Tenant Working Drawings.
After the Tenant Space Plan has been approved by Landlord, Tenant
shall cause working drawings (the "TENANT WORKING DRAWINGS") of the Tenant Work
to be prepared and shall deliver the same to Landlord for its approval within
forty-five (45) days after the date of Landlord's approval of the Tenant Space
Plans. The Tenant Working Drawings shall consist of the complete sets of
plans and specifications, including detailed architectural, structural,
mechanical, electrical, and plumbing plans for the Tenant Work and contain
all the information described in Article IV of this Exhibit C. The Tenant
Working Drawings shall be substantially consistent with the Tenant Space Plan.
The Tenant Working Drawings shall be prepared at Tenant's expense by architects
and engineers selected by Tenant and approved by Landlord. The approval
process for the Tenant Working Drawings shall be identical to the approval
process for the Tenant Space Plan described in Paragraph 2 of Article I.
C-1
ARTICLE II. SELECTION OF A CONTRACTOR AND CONSTRUCTION OF TENANT WORK
1. Bid Letting.
Tenant shall promptly submit the approved Tenant Working Drawings
to Landlord's contractor and, if Tenant chooses, to any other reputable
contractor(s) selected by Tenant and reasonably agreed to by Landlord for
pricing.
2. Selection of Bid.
Tenant may negotiate with the contractor(s) and Landlord agrees to
assist Tenant in its negotiation with the Landlord's contractor, but in any
event Tenant shall accept one of the bids and enter into an agreement with the
selected contractor within fifteen (15) days after the date Tenant receives
the bid proposals. Tenant agrees to notify Landlord promptly of its decision.
3. Construction Coordination.
(a) The Contractor whose bid is accepted by Tenant ("TENANT
CONTRACTOR") shall (and its contract shall so provide):
(i) conduct its work in such a manner so as not to unreasonably
interfere with other tenants, Building operations, or any other
construction occurring on or in the Building or the Premises;
(ii) execute a set of and comply with the rules and regulations
attached hereto as Schedule 1 and comply with all additional rules
and regulations relating to the construction activities in or on
the Building as may be reasonably promulgated from time to time and
uniformly enforced by Landlord or its agents;
(iii) maintain such insurance in force and effect as may be
reasonably requested by Landlord or as required by applicable law;
and
(iv) be responsible for reaching an agreement with Landlord and its
agents as to the terms and conditions for all contractor items
relating to the conducting of its work, including but not limited
to, those matters relating to hoisting, systems interfacing, use of
temporary utilities, storage of materials, access to the Premises
and the Building, and the purchase and return of Building standard
materials.
(b) Landlord shall have the right to approve all subcontractors
to be used by the Tenant Contractor, which approval shall not be unreasonably
withheld conditioned or delayed as long as such subcontractors satisfy the
requirements of this Paragraph 3.
(c) As a condition precedent to Landlord permitting the Tenant
Contractor to commence the Tenant Work, Tenant and the Tenant Contractor shall
deliver to Landlord such assurances or instruments as may be reasonably
requested by Landlord, to evidence the Tenant Contractor's and its
subcontractor's compliance or agreement to comply with the provisions of this
Paragraph 3.
C-2
4. Tenant Contractor - Hold Harmless.
TENANT SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD, ITS AGENTS,
CONTRACTORS AND ANY MORTGAGEE OF LANDLORD (THE "INDEMNITIES") FROM AND
AGAINST ANY AND ALL LOSSES, DAMAGES, COSTS (INCLUDING COSTS OF SUIT AND
ATTORNEYS' FEES) , LIABILITIES, OR CAUSES OF ACTION FOR INJURY TO OR DEATH OF
ANY PERSON, FOR DAMAGE TO ANY PROPERTY, AND FOR MECHANIC'S, MATERIALMEN'S, OR
OTHER LIENS OR CLAIMS ARISING OUT OF OR IN CONNECTION WITH THE WORK DONE BY THE
TENANT CONTRACTOR (AND TENANT CONTRACTOR'S SUBCONTRACTORS AND
SUB-SUBCONTRACTORS) UNDER ITS CONTRACT WITH TENANT UNLESS CAUSED BY THE SOLE
NEGLIGENCE OF AN INDEMNITEE.
5. Tenant Contractor - Mechanic's and Materialmen's Liens.
Tenant shall notify all materialmen, contractors, artisans,
mechanics, laborers, and other parties hereafter contracting with Tenant for
the furnishing of any labor, services, materials, supplies, or equipment with
respect to any portion of the Premises in writing that they must look solely to
Tenant for payment for same and shall simultaneously send copies of all such
notifications to Landlord for its review. Should any mechanic's or other liens
be filed against any portion of the Building, including the Premises, by
reason of Tenant's or the Tenant Contractor's acts or omissions or because of a
claim against Tenant or Tenant Contractor, Tenant shall inform Landlord of such
lien immediately and cause the same to be canceled or discharged of record by
bond or otherwise within twenty (20) days after receipt of notice by Tenant,
subject to Section 12.01 of the Lease. If Tenant fails to cancel or discharge
the lien within the twenty (20) day period, Landlord may, at its sole option,
cancel or discharge the same and upon Landlord's demand, Tenant shall promptly
reimburse Landlord for all costs (including reasonable attorneys' fees)
incurred in canceling or discharging such liens. The above described
obligations of Tenant relative to release of liens shall not apply to the
extent such lien is a result of the failure of Landlord to pay any allowance to
Tenant provided for in Article 3 of the Lease.
6. Payment of Landlord.
Tenant shall pay to Landlord all amounts payable by Tenant
pursuant to this Exhibit C within thirty (30) days after billing by Landlord.
7 . Default.
The failure by Tenant to comply with the provisions of Paragraphs
4, 5, or 6 of this Article II shall constitute an event of default by Tenant
under terms of Section 23.01 (b) of the Lease except as to Paragraph 6, which
shall be under 23.01 (a) of the Lease and Landlord shall have the benefit of
all remedies provided for in the Lease.
8. Change Orders.
Tenant may authorize changes in the Tenant Work, provided that any
changes must meet the criteria set forth in Article I of this Exhibit C.
Tenant shall also be responsible for any delays or additional costs caused by
such change orders.
9. As-Built Plans.
C-3
Upon final completion of the Tenant Work, Tenant shall deliver to
Landlord a copy of the "as-built" plans and specifications for the Tenant Work
within thirty (30) days of completing the same.
ARTICLE III. COMPLETION AND DELAY
1. Substantial Completion.
"SUBSTANTIAL COMPLETION" shall mean the day on which the Tenant
Work has been completed in accordance with the Tenant Working Drawings so that
Tenant may receive the beneficial use of the Premises (i.e., when Tenant may
use the Premises for its intended purpose), subject to a punch-list of non-
material items that can be completed within thirty (30) days, all as
determined by Tenant in its reasonable judgment.
2. Tenant Delay.
"TENANT DELAY" means (i) delays caused by Tenant's failure to act or
respond in a timely manner as required by Articles I and II of this Exhibit C,
(ii) delays caused by Tenant's change orders, (iii) delays caused by Tenant
using materials, labor, installation methods, or an architectural design that
Landlord has identified in writing to Tenant on or before the date Tenant
entered into a contract with the Tenant's Contractor as having a reasonable
probability of delaying the completion of Tenant Work due to limited supplies
or suppliers, length of time to be fabricated or manufactured and delivered or
installed, existing or impending labor problems or other foreseeable
circumstances, and (iv) all other delays caused by Tenant or Tenant's agents,
consultants and contractors, including but not limited to Tenant's
construction coordinator, that delay the Tenant's Contractors completion of the
Tenant Work.
3. Landlord Delay.
"LANDLORD DELAY" means (i) delays caused by Landlord's failure to
act or respond in a timely manner as required by Articles I and II of this
Exhibit C and (ii) all other delays caused by Landlord, Landlord's contractors
or Landlord's consultants that delay the Tenant's Contractors completion of
the Tenant Work including delays caused by Landlord's obligations pursuant to
Articles 3 and 7 of the Lease.
ARTICLE IV. MINIMUM INFORMATION REQUIRED OF TENANT WORKING DRAWINGS
Tenant shall provide to Landlord Tenant Working Drawings that
contain architectural, mechanical, electrical and plumbing plans prepared and
stamped by a licensed architect or engineer, as the case may be, indicating:
1. Location and type of all partitions.
2 . Location and types of all doors - indicate hardware and provide keying
schedule.
3. Location and type of glass partitions, windows, doors and framing.
4. Location of telephone equipment room.
5. Indicate critical dimensions necessary for construction.
6. Location, circuit number and specifications of all electrical devices-
outlets, switches, telephone outlets, etc.
7. Location and type of all lighting and access control systems.
C-4
8. Location and type of equipment that will require special electrical
requirements. Provide manufacturer's specifications for use and
operation.
9. A load analysis of all electrical devices.
10. Location, weight per square foot and description of any exceptionally
heavy equipment or filing system exceeding 50 psf live load.
11. Location, type and specifications of the HVAC distribution systems and
controls.
12. Requirements for special air conditioning or ventilation.
13. Type and color of floor covering.
14. Location, type and color of wall covering.
15. Location, type and color of paint and/or finishes.
16. Location and type of plumbing, including special sprinkling
requirements.
17. Location and type of kitchen equipment.
Details Showing:
1. All Millwork with verified dimensions and dimensions of all equipment to
be built-in.
2. Corridor entrance.
3. Bracing or support of special walls, glass partitions, etc., if
necessary.
SCHEDULE 1
CONTRACTOR RULES & REGULATIONS
1. PERMITS
Permits and licenses necessary for the completion of the work shall be
secured and paid for by Contractor. A copy of all permits shall be
posted in a readily accessible area at the construction site.
2. WORK APPROVAL
All drawings, subcontractors and material must be approved by Landlord
prior to the start of construction.
3. INSURANCE
Contractor shall provide Landlord a certificate of insurance for his
company and for each of his subcontractors prior to the commencement of
work.
4. BUILDING USE
Contractor shall confine his use of the Building to any designated
construction work area so as not to disturb other tenants of the
Building.
C-5
5. COMMON AND OTHER TENANT AREAS
Contractor shall carefully protect all walls, wall coverings, carpet,
floors, furniture and fixtures, and shall repair or replace damaged
property without cost to Landlord.
6. DUSTY WORK
Contractor shall notify Landlord prior to commencement of extremely
dusty work (sheetrock cutting, sanding, extensive brooming, etc.) so
that arrangements may be made for additional filtering capacity on the
affected HVAC equipment. Contractor will absorb the costs of returning
the equipment to proper condition.
7. CLEANUP
Contractor shall at all times on a day-to-day basis keep the site free
from accumulations of waste material, debris or rubbish caused by his
employees or work. At the completion of the work, he shall remove from
the site all his tools, scaffolding, surplus materials, debris, and shall
leave the site and his work "broom clean." The Building's restroom
facilities are not to be used for the cleaning of tools or paint
materials. Upon the completion of construction it may be necessary
to replace filters and clean the air-handler coils. If required,
these costs will be charged to Tenant.
8. SANITARY FACILITIES
Sanitary facilities will be furnished to Contractor by Landlord.
Contractor shall use only those facilities specifically designated by
Landlord.
9. DISPOSITION OF MATERIALS
Any and all existing materials removed and not reused in the
construction, of the Leasehold improvements, except as directed by
Landlord shall be disposed of by the Contractor as waste or unwanted
material. Materials which may be reused should first be cleared with
Landlord prior to disposal.
10. WORKING HOURS
There are certain operations that must be performed outside of Normal
Business Hours to prevent the interruption of normal business
operations. These are:
1. Drilling or cutting of the concrete floor slab or any
concrete structural member.
2. Any work in which machine noise or vibration (such as
removal of glue down carpet or tile flooring or the laying
of carpet tack strips) may disrupt normal office procedures.
3. Demolition and trash removal.
4. Any work requiring access to the ceiling of the floor below
construction. In such case, please allow ample time to
coordinate the work with the affected tenant.
C-6
Notwithstanding anything else to the contrary, the requirements of this
Item 10 shall not apply so long as Tenant is the only Tenant of Landlord
occupying space in the Building.
11. WORKMAN CONDUCT
No abusive language or actions on the part of the workers or loud radios
will be tolerated. It will be the responsibility of the General
Contractor to enforce this regulation on a day-to-day basis.
12. WATER AND ELECTRICITY DURING CONSTRUCTION
Sources of water and electricity will be furnished to Contractor without
cost to him, in reasonable quantities for use in lighting, for portable
power tools, drinking water, water for testing and other such common
usages during construction. Contractor shall make all connections,
furnish any necessary extensions, and remove same upon completion of
work.
13. ELEVATORS
All construction materials, tools and trash are to be transferred to and
from the construction floor via the freight elevators. At no time shall
the passenger elevators be used to move materials, equipment, tools or
trash. The use of the freight elevators shall be scheduled by
Contractor with Landlord. Use during business hours will be on a first
come, first served basis. Situations may arise from time to time when
Contractor may be required to share the freight elevators with the
Building's cleaning crew, other tenants, etc.
14. SPECIAL ELEVATOR SERVICES
Any work or repair which necessitates:
1. Access to the top of an elevator cab;
2. Utilization of the cab to perform special services; or
3. Special security device,
shall be scheduled with the Landlord.
Sufficient times should be allowed for Landlord to arrange with the
elevator service contractor to provide personnel to perform the
requested service. Under no circumstance should an individual
Contractor or Tenant permit its personnel to utilize the elevator
facilities for any purpose other than transport of materials and/or
personnel.
Tenant and/or Contractor will be responsible for any extra costs
incurred in these arrangements.
15. ELECTRICAL PANEL CHANGES
All additional electrical circuits, panels and associated metering will
be appropriately marked as to the area and/or equipment serviced by the
circuits(s) in question. Noncompliance with this regulation will result
in possible barring of the Contractor from future activities in the
Building.
C-7
All electrical panels, junction boxes or pull boxes which have covers or
doors removed so as to allow the addition of new circuits or any new
electrical panels which are installed shall be fully covered, closed or
replaced, as the case may be.
16. HVAC
The mechanical contractor shall deliver to Landlord an air balance
report which will verify air flow delivery per the construction drawing
and be able to demonstrate to Landlord that all thermostats function
correctly and are properly calibrated. All flex ducts must be
externally insulated. Duct tap cut-outs not used shall be covered with
a duct plate and insulation.
17. METERING
All additional electrical panels and air conditioning units must be
metered.
18. FLOOR PENETRATIONS
All floor penetrations shall be caulked, cemented or filled with
materials which are fire-rated and match specifications of the original
floor composition.
19. WELDING/CUTTING TORCH USE
At no time is any welding or cutting torch to be used in the Building
without approval of the Landlord. If approval is granted, the
Contractor must coordinate the timing with Landlord and must have a fire
extinguisher present in the work area at all times the equipment is
being used. Additionally, the Contractor may be required to perform the
work he is seeking to do after-hours because of the fumes associated
with his welding/cutting torch equipment.
20. SPRAYING OF VARNISHES/LACQUER IN THE BUILDING
No varnishes/lacquers are to be sprayed in the Building without approval
of Landlord. Because of their combustible nature, this type of work
should be done outside the Building. Anyone found spraying these
compounds in the Building without approval of the Landlord will be
requested to cease its work.
21. DRAINING OF SPRINKLER LINE
Any work which will involve the draining of a sprinkler line or
otherwise affect the Building's sprinkler system must be approved by
Landlord. In all instances where this is done, the system will not be
left inoperable overnight.
22. FIRE ALARM SYSTEM
Should a Contractor's job include that of welding, use of a cutting
torch, sprinkler system modification or any job that would interfere
with the fire alarm system, or cause a false alarm, the Contractor
should contact Landlord prior to that work. Any cost associated with
false alarms that are caused by a Contractor or his subcontractors shall
be absorbed by the Contractor.
C-8
23. LIGHT BULBS AND BALLASTS
Contractor is responsible for insuring that all light fixtures in the
work area are working properly and are fully lit and cleaned upon job
completion. This includes replacement of tubes and ballasts as required
in light fixtures that are replaced, added or repositioned.
24. LOCKS
Only building standard locks are to be installed in the Premises.
25. DELIVERIES
All deliveries and/or pickups made by contractors or vendors must be
made through the loading dock. All delivery vehicles are governed by a
30-minute parking limitation.
26. POSTING OF RULES AND REGULATIONS
A copy of these rules and regulations, acknowledged and accepted by the
General Contractor, must be posted on the job site in a manner allowing
easy access by all workers. It is the General Contractors's
responsibility to instruct his and all subcontractor workers to
familiarize themselves with these rules.
------------------------------- ------------------
Acknowledged and Accepted Date
by Contractor
C-9
EXHIBIT D
PARKING
1. Tenant shall be entitled to five (5) covered reserved parking
spaces in the surface parking lot, and other parking spaces based upon a number
(including the aforementioned 5 spaces) based upon the formula: 5 parking
spaces per 1,000 square feet of Net Rentable Area in the Premises. Except for
the five (5) covered reserved parking spaces, Tenant's parking spaces shall be
non-exclusive and used in common with other tenants in the Building.
Additionally Tenant shall have available up to twenty-five (25) other covered
reserved parking spaces at a cost of $15.00 per space per month.
2. Except as provided herein there shall be no additional charge
or rental for any parking space. Tenant agrees to comply with all reasonable
rules and regulations now or hereafter established by Landlord (or its agent
or designee) relating to use of the surface parking lot. Tenant shall have no
further nights to any parking spaces taken at the beginning of the original
Term and thereafter released by Tenant (except to the extent to which such
spaces have not been leased to others and are therefore available) or
terminated by Landlord or its agent or designee for failure to comply with the
other terms and conditions for the leasing of such parking space imposed by
Landlord or its agent or designee (except where Tenant subsequently cures the
failure or default in question). Upon the termination of this Lease, Tenant's
rights to all parking spaces as are then being leased to Tenant hereunder shall
terminate.
3. TENANT SHALL USE THE PARKING SPACES AT ITS OWN RISK ANT RELEASES
LANDLORD FROM ANY AND ALL CLAIMS FOR PERSONAL INJURY AND PROPERTY DAMAGE, COST,
LOSS, LIABILITY, EXPENSE AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER
ARISING OUT OF OR RELATING TO TENANT'S USE OF THE PARKING SPACES.
EXHIBIT E
BUILDING RULES AND REGULATIONS
(1) The sidewalks, walks, plaza entries, corridors, concourses,
ramps, staircases, or any purpose other than in escalators, and elevators shall
not be obstructed or used for any purpose other than ingress and egress to and
from the Premises. No bicycle or motorcycle shall be brought into the
Building or kept on the Premises without the consent of the Landlord, such
consent not to be unreasonably withheld, conditioned or delayed.
(2) No freight, furniture of bulky matter of any description will
be received into the Building or carried into the elevators except in such a
manner, during such hours and using such elevators and passageways as may be
approved by Landlord (such approval not to be unreasonably withheld,
conditioned or delayed), and then only after being coordinated with Landlord
during Normal Business Hours or upon having been scheduled in advance for
other times. Any hand trucks carryalls or similar appliances used for the
delivery or receipt of merchandise or equipment shall be equipped with rubber
tires, side guards, and such other safeguards as Landlord shall reasonably
require.
(3) Landlord shall have the right to prescribe the weight,
position, and manner of installation of sales and/or other heavy equipment
which, if considered necessary by Landlord, shall be installed in a manner
which shall insure satisfactory weight distribution. All damage done to the
building by reason of a safe or any other article of Tenant's office equipment
being on the Premises shall be repaired at Tenant's expense. The time and
manner of moving safes and/ or other heavy equipment shall be subject to prior
approval by Landlord (such approval not to be unreasonably withheld,
conditioned or delayed). The persons employed to move the same in or out of
the Building must be approved by Landlord (such approval not to be
unreasonably withheld, conditioned or delayed).
(4) Tenant shall not permit its employees or agents to use portable
electric heaters in the Premises.
(5) Tenant or the employees, agents, servants, visitors, or
licensees of Tenant shall not at any time place, leave or discard any rubbish,
paper, articles or objects of any kind whatsoever outside the doors of the
Premises or in the corridors or passageways of the Building on floors on which
less than the entire Net Rentable Area is included in the Premises leased by
the Tenant. No animals or birds shall be brought or kept in or about the
Building.
(6) Landlord shall have the night to prohibit any advertising by
Tenant which, in Landlord's reasonable opinion, tends to impair the reparation
of the Building or its desirability for offices and, its upon written notice
from Landlord, Tenant will refrain from or discontinue such advertising.
(7) Canvassing, soliciting, or peddling in the Building is
prohibited and Tenant shall cooperate to prevent same.
E-1
(8) Landlord shall have the right to require that any person
entering the Building other than during customary business hours of Tenant be
subject to identification by the employees and agents of Landlord. Landlord
will provide all security services for the Building, provided that, if Tenant
desires any additional security service for the Premises, Tenant shall have the
night (with advance written consent of the Landlord, which consent will not be
unreasonably withheld) to obtain such additional service at Tenant's sole cost
and expense.
(9) Only workmen employed, designated, or approved by Landlord
(such approval not to be unreasonably withheld) may be employed for repairs,
installations, alterations, painting, material moving, and other similar work
that may be done on the Premises.
(10) Tenant shall not conduct any restaurant, luncheonette, or
cafeteria for the sale or service of food or beverages to the general public.
(11) Tenant shall not bring or permit to be brought or kept in or on
the Premises any inflammable, combustible, corrosive, caustic, poisonous or
explosive fluid, material, chemical or substance, or cause or permit any odors
to permeate in or emanate from the Premises.
(12) No boring or cutting through floors of the Building shall be
permitted without prior written consent of Landlord (which consent shall not
be unreasonably withheld, conditioned or delayed) and as Landlord may
reasonably direct.
(13) Tenant shall give immediate notice to Landlord in case of
accidents in the Premises or in the Building or of defects discovered by Tenant
therein or in any fixtures or equipment or of any known emergency in the
Building.
(14) Tenant shall not use the Premises or permit the Premises to be
used for photographic, multilithic or multigraphic reproductions except for
its own uses on the Premises and for business copy machines normally in use in
office installations.
(15) Tenant shall not use or permit any portion of the Premises to
be used as an office for a public stenographer or typist, offset printing
(except in the basement), the sale of liquor, a barber or manicure shop, an
employment bureau, a labor union office, a doctor's or dentist's office, a
dance or music studio or for any use other than those granted in these Lease.
(16) The requirements of Tenant will be attended to only upon
application at the office of the Building. Employees of Landlord shall not
perform any work or do anything outside of their regular duties, unless under
special instructions from the office of the Landlord.
(17) Tenant shall not place a load upon any floor of the Premises
which exceeds the load per square foot which such floor was designed to carry
and which is allowed by law. Business machines and mechanical equipment
belonging to the Tenant which cause noise, vibration or any other nuisance
that may be transmitted to the structure or other portions of the Building
outside the Premises to such a
E-2
degree as to be reasonably objectionable to Landlord or which unreasonably
interfere with the use or enjoyment by other tenants of their premises or the
public portions of the building shall be moved and/or maintained by Tenant, at
Tenant's expense, in settings of vibration eliminators sufficient to reduce
such noise or vibration to a non-objectionable level.
(18) No draperies, shutters, or other covering may be installed by
Tenant between the standard window covering approved by the Landlord for use in
the entire Building and the exterior windows or walls.
(19) No portion of the Premises or any part of the Building shall at
any time be occupied as sleeping or lodging quarters.
(20) Tenant shall not bring or keep or permit to be brought or kept
in or on the Premises cut natural trees, including but not limited to Christmas
trees.
(21) Tenants will use passenger elevators or escalators for
transportation within the building. Freight elevators will be limited to
service use only.
(22) Peak traffic hours are 6:00 a.m. to 8:30 a.m. and 3:30 p.m. to
5:30 p.m.
In the event of any conflict between the express terms and provisions
of the Lease and the Building Rules and Regulations, the express terms and
conditions of the Lease shall control over the conflicting terms and provisions
of the Building Rules and Regulations.
E-3
EXHIBIT F
SCHEDULE OF JANITORIAL SERVICES
AREAS: All general and private offices, entrances, lobbies, elevators,
escalators, corridors, rest rooms, plazas and garage.
I. DAILY SERVICES:
1. Empty and clean a ashtrays.
2. Empty and clean all wastebaskets.
3. Clean all cigarette urns. Screen sand and replace sand as
necessary.
4. Sweep and dust clean composition floors with treated mops.
5. Dust all desks, table, files and horizontal surfaces. Clean glass
tops nightly.
6. Dust all desk accessories (includes phones) and replace in proper
place.
7. Spot-clean all carpets and vacuum as necessary.
8. Damp-mop spillage.
9. Remove trash to designated areas.
10. Spot-clean woodwork and doors to remove fingerprints.
11. Clean drinking fountains.
12. Spot-clean interior glass doors and partition glass daily and
wipe weekly.
13, Sweep all interior private stairwells nightly. Vacuum if
carpeted.
14. Spot-clean smudges from vinyl walls and light switches.
15. Clean all kitchen areas, except for coffeepots, dishes, utensils,
etc.
II. QUARTERLY SERVICES:
1. High-dust door tops, tops of partitions, high ledges, high files,
ventilating, air
conditioning outlets and return air grills.
2. Dust blinds (where installed).
III. DAILY SERVICES -- REST ROOM AREA:
1. Empty and wipe out a wastepaper containers.
2. Polish all mirrors.
3. Clean all lavatory fixtures.
4. Sinks, toilet bowls and urinals to be kept free of scale at all
times.
5. Wash and sanitize underside and tops of toilet seats, toilet
fixtures and compartments.
6. Refill soap, paper towel and tissue containers (building stock).
7. Wipe down walls around lavatories.
8. Mop all lavatory floors.
9. Fill floor drains when installed.
10. Dust all horizontal surfaces.
F-1
11. Empty, clean and disinfect sanitary napkin disposal.
IV. MONTHLY SERVICES -- REST ROOM AREA:
1. Wash down ceramic title walls and toilet compartment partitions.
2. Perform high dusting.
3. Brush down vents.
V. STAIRWELL:
1. All stairwells will be swept and spot-mopped daily.
2. Spot-clean walls as required.
3. All stairwells will be policed regularly.
VI. ENTRANCE LOBBY AREAS:
1. All floors will be swept or vacuumed daily with proper equipment.
2. Spot-clean all carpets as required.
3. Entrance door glass and side lights will be spot-cleaned daily
and washed weekly.
4. Ashtrays and sand urns Will be emptied and cleaned daily.
5. Drinking fountains will be scrubbed and polished daily.
6. Walls will be spot-cleaned daily to remove fingerprints and
smudges.
7. Spillage will be removed daily.
8. Wipe down metal reachable surfaces nightly.
VII. FLOOR SERVICES:
1. Machine scrub and wax all composition floors once each month;
strip and relax as required.
2. Buff all floors once each month.
3. Buff halls (public areas only) once each week.
4. Buff traffic areas in Premises once each week.
5. Spot clean carpets as needed.
VIII. WINDOW CLEANING SERVICES:
1. All windows in tower will be washed inside once each year and
outside at least two times each year, or as required to
maintain Building in a first-class condition.
2. All lobby glass will be washed inside and outside as required
to maintain Building in a first-class condition.
F-2
IX. ELEVATORS AND ESCALATORS:
1. Elevator carpets will be vacuumed daily and spot-cleaned as
necessary.
2. Exterior and interior doors and trim will be cleaned nightly.
3. Cabs will be cleaned nightly.
4. Elevator lobby fabric walls will be cleaned as necessary.
5. Control and dispatch panels will be dusted and polished nightly.
6. Escalator skirts will be dusted nightly and polished monthly.
7. Thresholds will be cleaned daily.
S. Handrails will be kept cleaned and treated as required.
9. Escalator treads, hand runs and sides will be cleaned daily.
10. All lights will be washed annually.
11. Elevator pits will be cleaned as required.
X. SPECIAL:
1. Spot-clean blemishes on walls as required.
2. Wash lighting fixtures and lenses as required.
3. The following services will be furnished on an "Request only"
basis:
a. Vacuuming draperies (or twice a year).
b. Shampooing of carpet.
c. Dusting and/or washing ceiling grills as required.
d. Dusting of chairs.
4. Toilet supplies to be of quality grade and replenished at
least once daily during regular cleaning day.
5. Hours for janitorial cleaning services:
a. Between 6:00 p.m. to approximately 11:00 p.m.,
Monday through Friday, and at the option of Landlord
at such hours on Saturday afternoon and/or Sunday
during which Landlord elects to provide such services.
b. Modifications of starting time for specific locations
within lease area may coordinated with the Building
office and the cleaning crew if it does not delay
the completion of over-all Building cleaning.
6. The ground floor, mezzanine levels, all terraces, plazas,
landscaping, sidewalks, etc., will be policed and swept as
necessary to maintain the Premises and Building in a first-
class condition.
F-3
TELESCAN, INC.
OFFICE LEASE AGREEMENT
DESCRIPTION OF MAP EXHIBITS
Exhibit A: Landlord leases to tenant the premises comprising approximately
54,108 square feet (the final square footage to be determined by the architect
working in connection with the Tenant Improvements discussed in Section 3.02,
subject to verification by Landlord) of Net Rentable Area located on the Second
Level of the Building known as 5959 Corporate Drive, located in Houston, Harris
County, Texas.
EXHIBIT G
Exhibit G: Tenant will be granted the option to expand into approximately
15,769 square feet ( the final square footage to be determined by the architect
working in connection with the Tenant Improvements discussed in Section 3.02,
subject to verification by Landlord) of Net Rentable Area of slab space on the
south half of the Second Level.
EXHIBIT H
Exhibit H: Tenant will be granted the option to expand into approximately
7,105 square feet of Net Rentable Area of space on the Northeast Quadrant of the
second level contiguous to the Premises.
EXHIBIT I
Exhibit I: Tenant shall have a right of first refusal on the approximately
20,103 square feet of Net Rentable Area of space in the Northeast quadrant of
the Second Level of the Building
EXHIBIT J
Exhibit J: Tenant will be granted building standard signage on the Second
Level of the Building
EXHIBIT 11
TELESCAN, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(SHARES IN THOUSANDS)
DAYS
OUT- WEIGHTED
SHARES STANDING SHARES
QUARTER ENDED DECEMBER 31, 1995:
Balance September 30, 1995 .................. 10,107 90 10,107
Common stock issuances ...................... 135 45.9 69
------ ------- ------
Balance December 31, 1995 ................... 10,242 10,176
====== ======
TWELVE MONTHS ENDED DECEMBER 31, 1995:
Balance December 31, 1994 ................... 9,500 360 9,500
Common stock issuances ...................... 742 134.1 277
------ ------- ------
Balance December 31, 1995 ................... 10,242 9,777
====== ======
EXHIBIT 21
TELESCAN, INC.
LIST OF SUBSIDIARIES
Knowledge Express Data Systems, L. C.
Telebuild, L. C.
Entrepreneurs Online, Inc.
[INSERT CONSENT HERE]
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TELESCANS
ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1995 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-1-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,796
<SECURITIES> 0
<RECEIVABLES> 1,345
<ALLOWANCES> 80
<INVENTORY> 190
<CURRENT-ASSETS> 4,179
<PP&E> 3,942
<DEPRECIATION> 1,682
<TOTAL-ASSETS> 10,859
<CURRENT-LIABILITIES> 2,036
<BONDS> 0
0
0
<COMMON> 102
<OTHER-SE> 7,863
<TOTAL-LIABILITY-AND-EQUITY> 10,859
<SALES> 2,385
<TOTAL-REVENUES> 13,989
<CGS> 1,257
<TOTAL-COSTS> 11,053
<OTHER-EXPENSES> 3,859
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65
<INCOME-PRETAX> (1,214)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,214)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,214)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
</TABLE>
