-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HQvCbxTjXOO4Vzdp7xeMnbEAd1ro5xGdsOgoNhTh9qswEQ+kDm299+i2oLMPofpN ZoGpnawzINEYf+XOV1OcAQ== 0000950109-97-002471.txt : 19971105 0000950109-97-002471.hdr.sgml : 19971105 ACCESSION NUMBER: 0000950109-97-002471 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIERE TECHNOLOGIES INC CENTRAL INDEX KEY: 0000880804 STANDARD INDUSTRIAL CLASSIFICATION: 4899 IRS NUMBER: 593074176 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27778 FILM NUMBER: 97564339 BUSINESS ADDRESS: STREET 1: 3399 PEACHTREE ROAD NE STREET 2: LENOX BUILDING SUITE 400 CITY: ATLANTA STATE: GA ZIP: 30326 BUSINESS PHONE: 4042628400 MAIL ADDRESS: STREET 1: 3399 PEACHTREE RD NE STREET 2: STE 400 CITY: ATLANTA STATE: GA ZIP: 30326 10-K 1 FORM 10-K FOR 12/31/96 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-K _______________ [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 Commission file number: 0-27778 PREMIERE TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) Georgia 59-3074176 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3399 Peachtree Road, N.E., The Lenox Building, Suite 400, Atlanta, Georgia 30326 (address of principal executive office) (Registrant's telephone number, including area code): (404) 262-8400 Securities registered pursuant to Section 12(b) of the Act: None None (Title of each class) (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.01 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 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 ((S)229.405 of this chapter) 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. [_] The aggregate market value of voting stock held by non-affiliates of the registrant, based upon the closing sale price of common stock on March 17, 1997, as reported by The Nasdaq Stock Market's National Market, was approximately $335,008,438. As of March 17, 1997, there were 24,089,769 shares of the registrant's common stock outstanding. List hereunder the documents incorporated by reference and the part of the Form 10-K (e.g., part I. Part II, etc.) into which the document is incorporated: Portions of the registrant's Proxy Statement for its 1997 meeting of shareholders are incorporated by reference in Part III. ================================================================================ INDEX
PAGE ---- PART I Item 1. Business............................................................................... 1 Item 2. Properties............................................................................. 13 Item 3. Legal Proceedings...................................................................... 14 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.................. 15 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............................................ 33 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 59 PART III Item 10. Directors and Executive Officers of the Registrant.................................... 59 Item 11. Executive Compensation................................................................ 59 Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 59 Item 13. Certain Relationships and Related Transactions........................................ 59 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 60 Signatures...................................................................................... 67 Exhibits........................................................................................ 68
PART I ITEM 1. BUSINESS GENERAL Premiere Technologies, Inc. ("Premiere" or the "Company") is a network- based computer telephony company specializing in the integration of information and telecommunications services. The Company delivers its services through its advanced computer telephony platform, which is accessible from, and provides access to, a variety of devices, including the telephone, fax machine, pager and computer. The platform is modular and scalable, with an open-systems design which allows the Company to quickly customize its services to meet the needs of its subscribers and business partners and to easily expand system capacity. The Company's growth to date has been based primarily upon the sale of Premiere WorldLink Communications Services in both the retail and wholesale markets. WorldLink services include worldwide long distance calling, voice mail, fax mail, text-to-voice e-mail, conference calling, financial news, headline news, sports updates, weather reports, active message notification, travel and concierge services, electronic banking and bill payment and "call connect" services. These services have catered primarily to the mobile business traveler and have been marketed and offered through communications cards. The Company intends to expand its markets through the development and implementation of its new Orchestrate(SM) product and network-based call center technology. The Company's September 1996 acquisition of TeleT Communications LLC ("TeleT"), an Internet-based technology development company, made possible the development of Orchestrate(SM), which the Company believes will be the first network-based product to fully integrate the functionality of telephones and computers. Orchestrate(SM) will allow subscribers to control their communications through either a computer or telephone, according to their own preferences independent of how a communication was originally sent. As currently designed, Orchestrate(SM) functions will include messaging, conference calling, information services and a personal home page on the World Wide Web (the "Web"), which subscribers will be able to utilize without the purchase of any special software or hardware. Premiere intends to launch and implement its Orchestrate(SM) product during 1997. Premiere intends to implement its network-based call center technology in 1997, beginning with NationsBanc Services, Inc. ("NationsBanc Services"), an affiliate of NationsBank Corporation, the nation's fourth largest banking company. This technology will allow Premiere to streamline and enhance call processing and distributing for financial institutions and other large corporations. Individuals may subscribe to Premiere's WorldLink services through direct distribution channels or through one of Premiere's co-branded or licensing relationships. In addition, Premiere has formed strategic relationships with companies such as DeltaTel, Inc. ("DeltaTel"), a subsidiary of Delta Airlines, Inc., WorldCom, Inc. ("WorldCom") and CompuServe Incorporated ("CompuServe") in order to market and expand its services. Premiere has developed an advanced electronic billing and information system ("EBIS"), which enables Premiere to monitor and bill transactions based on a variety of parameters. Individual usage thresholds can be established for each subscriber and fees can be electronically charged to the subscriber's credit card or bank account. The EBIS allows Premiere to speed receipt of funds, monitor spending and fraud controls on a real-time basis and minimize the number of personnel involved in billing and collection functions. THE PREMIERE STRATEGY Premiere's goal is to be the leading network-based computer telephony company specializing in the integration of telecommunications and information services. Premiere's strategy for achieving that goal includes the following key elements: -1- Build Subscriber Base. Premiere seeks to increase the number of subscribers to its services and to retain its subscribers by capitalizing on existing and creating new strategic marketing relationships, exploiting its other distribution channels, expanding the range of services available on its platform, maintaining an attractive pricing strategy for its services and providing superior customer service. Premiere emphasizes retaining existing subscribers in order to provide Premiere with a recurring revenue base. Develop Additional Services. Premiere intends to launch and implement its Orchestrate(SM) product and call center technology in 1997 and to continue developing additional functions and features on its platform. Premiere believes that relationships with its existing and future strategic partners will assist it in developing new services. Premiere intends to make available to its general subscriber base the services it develops in connection with certain of these strategic partners. Develop Local Access Capability. Premiere believes that the launch and implementation of Orchestrate(SM) will place Premiere in a position to begin developing local access to its services, which should result in Premiere's services being used more on a daily basis by subscribers, whether they are at home, in the office or traveling. Orchestrate(SM) is designed to be a time-saving tool for controlling all of a user's daily communications. Premiere believes that offering local access at a low flat rate to its subscribers will be important in developing the market for the Orchestrate(SM) package and the individual Orchestrate(SM) service components. Enter into Strategic Relationships. Premiere believes that its relationships with strategic partners will continue to be important in building Premiere's subscriber base. Each strategic partner brings to Premiere an existing base of prospective users of Premiere's services. Premiere has sought and established strategic relationships with parties whose customers are likely to be extensive users of Premiere's services. Expand Internationally. Premiere believes that there is a large international market for its services. Premiere currently has subscribers in more than 100 countries, and its platform currently communicates with subscribers in 10 languages. In 1996, Premiere opened a data and switching center in London, England. This data center has allowed Premiere to reduce the transmission costs associated with system access from many European locations and to more effectively pursue long term strategic relationships with European partners. Premiere intends to continue its international expansion activities in 1997. Continue Investment in Computer Telephony Platform. Premiere has developed its platform to be modular and scalable, with an open systems design and readily available hardware components, thereby allowing its subscriber base and network traffic to grow without significant upgrades or changes to existing platform hardware. Continue Investment in EBIS. Premiere has designed the EBIS to automate real-time monitoring and billing of subscriber transactions. Premiere believes that the EBIS reduces overhead requirements by automating the billing process and enhances cash flow by expediting payment. Premiere also believes that the EBIS reduces exposure to credit risks, since it establishes predetermined spending limits for each subscriber, requires a valid credit card or bank account from each subscriber before commencing service and bills usage charges directly to the credit card or bank account of each subscriber. The Company plans to continue its investment in development and support of the EBIS. INFORMATION AND TELECOMMUNICATIONS SERVICES WorldLink Communications Services. Premiere's computer telephony platform provides subscribers with a single point of access for information and telecommunications services. The platform can communicate with a wide variety of communications devices. Subscribers can access the platform from virtually any telephone worldwide, and access is toll-free from telephones in the United States and approximately 60 other countries and -2- territories. In addition, following the introduction of the Company's Orchestrate(SM) product, subscribers will be able to access the platform from any PC connected to the Internet or other available data connections. After accessing the platform from a telephone, the subscriber is presented with a variety of options that can be configured in different ways depending upon how Premiere or its partners position the following services: Worldwide Long Distance. Subscribers can place worldwide long distance calls at rates that are generally significantly lower than the standard card plan rates currently charged by AT&T Corp. ("AT&T"), MCI Communications Corporation ("MCI"), Sprint Corporation ("Sprint") or in the case of United Kingdom ("U.K.") subscribers, British Telecom. Messaging. Premiere offers a universal inbox for voice, fax and e- mail messages. Subscribers are notified of new messages every time they access Premiere's platform, and subscribers can receive message notification through any pager. The messaging services are offered as part of the Premiere WorldLink Communications Services package, and also through Premiere's Message Center and E-Mail Message Center services. The messaging functionality for each of these services is very similar, but the orientation, prompts and positioning differ considerably. The individual messaging functions are described below: Voice Mail. Premiere's voice mail service provides traditional voice mail features, allowing subscribers to customize their mailbox greetings and to receive, retrieve, save and delete voice mail messages. Fax Mail. The fax mail service allows subscribers to receive and store facsimile transmissions no matter where they travel. Senders of facsimile messages may attach a voice mail message identifying the facsimile. The recipient is able to later instruct the system to forward the stored facsimiles to a specified location. E-Mail. E-mail messages can be read to the subscriber over the telephone using Premiere's advanced text-to-speech functionality. E- mail messages can also be sent to any fax machine. In addition, subscribers can respond to e-mail by choosing from a variety of standard responses. Information Services. Subscribers can access financial news, headline news, sports updates, weather reports and other information updates, provided on the system through a digital feed from a subsidiary of the Chicago Tribune. These services are frequently updated and the information is accessible by a series of menus presented to the user via voice prompts. Information is first presented in a general format, with the subscriber then being given the option to retrieve more detailed information on the topic selected. Conference Calling. Subscribers can initiate conference calls involving up to four parties. The conference calling feature is automated and the subscriber is guided through each step. Enhanced Travel and Concierge Services. Premiere offers travel and concierge services through its platform which allow subscribers to make lodging, airline, rental car, dining and golf reservations and to obtain concert, theater and sporting event tickets. In addition, Premiere's concierge services provide subscribers with access to travel assistance services, including emergency medical referrals, legal referrals, tracing and redirecting lost luggage and pre-trip destination information. A record of each use by a subscriber of the travel and concierge feature is maintained so that the subscriber is provided with increasingly efficient and personalized service. Electronic Banking and Bill Payment. In connection with its relationship with Checkfree Corporation ("Checkfree"), Premiere offers subscribers the option to pay bills electronically through its platform. -3- "Call Connect" Service. Premiere offers a service that allows inbound callers to the platform to send a message to a subscriber's pager informing the subscriber that the subscriber has an incoming call. The system prompts inbound callers to identify themselves and records this information. While the inbound caller waits on the line, the subscriber can then call the platform and be informed of the identity of the inbound caller. The subscriber then has the choice of having the platform automatically connect the two calls or route the original call to voice mail. Other. Premiere provides its subscribers with other services, including speed dialing, certain travel services, sequential calling, operator assistance, detailed transaction statements on demand and detailed voice prompts, available in 10 languages. In addition, the Company offers telecommunications services to the hospitality industry. This service, which was the first offered by the Company, consists primarily of reselling "0+" long distance services to guests of hotels and motels. Orchestrate(SM). Premiere intends to launch and implement its Orchestrate(SM) product during 1997. When accessing the platform from a PC using the new Orchestrate(SM) functionality, the subscriber will be presented with a visually rich on-screen interface for control of all communications and information functions, including: Messaging. All voice, fax and e-mail messages will be displayed individually on the subscriber's PC. As currently designed, messages in the inbox can be viewed and/or listened to (depending upon the type of message), forwarded to individuals or groups or broadcast, all with the click of the mouse. This service will include a personal contact database that will allow subscribers to send or broadcast messages just by clicking on the names of the appropriate individuals or defined groups in the database. Messages will be delivered over the Internet as appropriate to reduce transmission costs. Premiere is also developing a feature that will allow subscribers to transfer information to the Premiere platform from other contact databases such as ACT or Microsoft Outlook. Conference Calling. Subscribers will be able to establish conference calls simply by clicking on the names of individuals or groups. The subscriber will be able to control all aspects of the conference call, including adding, dropping and muting parties on the conference call, all with a click of the mouse. Information Services. Subscribers will be able to tap into a spectrum of customized information services offered in conjunction with content providers such as Cable News Network, Inc.. The types of information available would include news, sports updates, stock quotes, weather reports, airline and hotel information and reservations, banking, entertainment and other specialized information. Personal Home Page. Each subscriber will be provided with a personal home page on the Web. The page will act as a "virtual receptionist," presenting contact information and a voice greeting to any Web user. The Web user will be able to page, fax or send e-mail to the subscriber directly from this page. The page will be fully customizable and a subscriber will be able to update his personal home page from any telephone or any PC connected to the Internet. As part of the development of Orchestrate(SM), Premiere intends to greatly enhance the telephone interface to its platform, allowing a user to access the same set of functions available via the computer. Using voice and/or telephone keypad commands, a subscriber will be able to send, forward and broadcast messages to individuals or groups included in his or her personal Orchestrate(SM) contact database. The subscriber will also be able to set up conference calls in a similar manner. Upon the introduction of voice recognition and other enhancements, the platform will offer true "personal assistant" or "personal agent" functionality. Call Center Technology. Upon the implementation of its network-based call center technology during 1997, Premiere's platform will also be used to provide an outsource solution for call center management. This technology will allow Premiere to streamline and enhance call processing and call routing for financial institutions and other large corporations. In a typical financial services application, such as the one currently being developed for NationsBanc Services, Premiere's platform will be used to enhance call processing service for checking, savings and other account information available through toll-free telephone access. -4- Other Services Under Development. The following additional services are also under development: Customized On-line Information Access/Content Management. In connection with the Orchestrate(SM) product, Premiere intends to implement a feature enabling subscribers to retrieve on demand or at predetermined intervals selected information from the Internet or on-line service providers. This feature would allow each subscriber to establish "filter and forward" criteria specifying the type of information desired. A search engine would retrieve the information requested and transmit this information to the platform, notifying the subscriber by page, telephone call or other means as appropriate. The subscriber can then access the information through any PC connected to the Internet or from any telephone by utilizing the text-to-speech capabilities of the system. Enhanced "Follow Me" Services. Premiere is developing an application that would allow subscribers to provide callers access to all of their current home, business, voice mail, facsimile and mobile numbers via a single number. When a subscriber's Premiere number is called, the platform would attempt to contact each of the subscriber's other specified numbers, without the caller having to remember each number or place each call separately. For example, when a subscriber receives a call, the platform would attempt to locate the subscriber at a series of predetermined numbers and page the subscriber if the paging option is enabled. The platform would allow the caller to leave a voice mail message if the subscriber is not located. MARKETING AND DISTRIBUTION Premiere markets its services through multiple distribution channels that encompass (i) direct marketing efforts where Premiere is responsible for lead generation and sales, (ii) co-branded relationships in which Premiere offers its services to the customers of other companies, such as financial institutions, that are seeking to increase their revenue from and their goodwill with their customer base by offering value-added services, (iii) strategic relationships where Premiere may develop custom applications for its platform and market its services jointly with its strategic partners, and (iv) licensing arrangements where other companies market and sell Premiere's services under their names without significant assistance from Premiere. In all distribution channels, except licensing arrangements, Premiere enters into agreements pursuant to which it agrees to pay commissions to or share revenues with the parties who assist Premiere in marketing its services. Premiere intends to employ several different distribution strategies for Orchestrate(SM). In addition to utilizing the four distribution channels described above, Premiere plans to market Orchestrate(SM) through Internet service providers, on-line service providers, on-line content providers and direct Internet marketing companies. Premiere will generally compensate such companies through commissions or revenue sharing arrangements. Direct. Premiere markets its services directly to potential subscribers. Premiere has supported this marketing effort by implementing a feature on the system allowing automated account activation, thereby making it easier for consumers to establish service with Premiere. Premiere WorldLink. Premiere markets its services under the name "Premiere WorldLink" through a variety of traditional direct channels, including advertisements in publications primarily directed at travelers. In its marketing efforts, Premiere emphasizes the attractive pricing, the variety of features, the integrated nature and the ease of use of its service. AFCOM. Premiere markets its services under the name "AFCOM" primarily to United States military personnel. Premiere generally markets the AFCOM service through financial institutions located on military bases. These financial institutions assist Premiere in marketing its services in exchange for subscriber and usage based fees paid by the Company to the financial institutions. Co-branded Relationships. Premiere has entered into relationships with a number of other companies, including First of America Bank Corporation, First National Bank of Chicago, First USA Bank, First Union -5- National Bank, KeyBank USA and the Royal Bank of Scotland PLC, under which Premiere provides its services to customers of those companies. The other company generally offers its customers access to the Premiere platform via a co- branded communications card, and Premiere pays subscriber and usage based fees to the other company with respect to each subscriber who is issued a co-branded communications card. Premiere believes that companies which enter into co- branded relationships with Premiere are motivated by the ability to offer additional value to their customers, reinforce brand equity through custom voice prompts that their customers hear each time they access the service, communicate with their customers by broadcasting voice, fax or e-mail messages, and derive additional revenue. Communications cards are generally issued under the Premiere WorldLink name, with the other company also placing its logo on the face of the card. Strategic Partners. The Company also markets its services by establishing strategic relationships with parties whose existing customers have an anticipated need for the telecommunications and information services provided by Premiere. Strategic relationships are intended to provide the Company's strategic partners with (i) an efficient means of communicating with their customers through Premiere's voice mail, e-mail and fax mail features, (ii) increased visibility to their customers through customized greetings and a private branded communications card, (iii) the ability to provide customized services to their customers over Premiere's platform, and (iv) an additional source of revenue. These relationships provide the Company with the opportunity to develop specialized services for the strategic partner's customers which, in certain circumstances, the Company can later offer to its subscribers. In connection with these strategic relationships, communications cards are generally issued in the name of Premiere's strategic partner and bear a logo and design of the strategic partner's choosing. The reverse side of the card generally states that services are provided by Premiere. Licensing Relationships. Companies such as WorldCom, Unidial Incorporated and Touch 1 Communications, Inc. have chosen to outsource part or all of their communications card services to Premiere. Premiere licenses use of its platform to these companies, which enables them to provide enhanced services to their customers and to generate additional revenue without developing or investing in their own infrastructure. The platform's open architecture allows customization of services for the licensees. For example, licensees generally customize voice prompts and may choose to offer their users only selected services available on the platform. Premiere provides licensees with on-line access to the database containing their customer information and transaction records, thus enabling licensees to add and delete subscribers and services remotely and control fraud and credit exposure. Licensees generally provide their own transmission services and therefore remain responsible for transmitting calls to and from Premiere's platform. Licensees currently sell the enhanced services via communications cards issued in their names. Premiere formats the billing records for licensees and sends the records to licensees electronically. Licensees bill their customers for the services, and Premiere bills the licensees monthly for access to the platform based on licensee customer usage. Services to licensees are generally provided under agreements with 30 to 60 month terms which require the payment of a minimum monthly fee if specified usage minimums are not met. STRATEGIC PARTNERS AND ALLIANCES DeltaTel. Premiere and DeltaTel have entered into an agreement pursuant to which Premiere provides information and telecommunications services to DeltaTel subscribers. DeltaTel subscribers receive a communications card, known as the "DeltaTel Card," that allows them to access services on Premiere's platform. Premiere has developed certain travel related features in connection with the Company's relationship with DeltaTel. DeltaTel is marketing the DeltaTel program by distributing marketing materials to passengers on Delta's flights, sending information to Delta frequent fliers, placing advertisements in Delta's Crown Rooms and other means. CompuServe. Premiere and CompuServe have entered into an agreement for Premiere to provide information and telecommunications services to parties who subscribe to Premiere's services through CompuServe, and for CompuServe to make certain of its services available to Premiere's existing subscribers, strategic partners and licensees. In connection with the CompuServe agreement, Premiere developed a feature which allows subscribers to listen to e-mail messages over the telephone and to send e-mail messages to any fax machine. This feature is being marketed to CompuServe's subscribers on-line and through direct mailing. In addition, -6- CompuServe Interactive (United Kingdom) is marketing the combined services to its members in the U.K., which now number in excess of 400,000. Others. Premiere's other strategic partners include Checkfree, Arch Nationwide Paging, a division of Arch Communications Group, Inc. ("Arch"), MobileComm, a wholly owned subsidiary of MobileMedia Corporation ("MobileComm"), and Paging Network, Inc. ("PageNet"). WorldCom. In November 1996, Premiere entered into a 25-year strategic alliance agreement with WorldCom which enables WorldCom to couple its voice and data network with Premiere's advanced, feature-rich platform, which should lead to new incremental business opportunities for both companies. WorldCom is the fourth largest long distance carrier in the United States. This agreement positions Premiere as a preferred provider to WorldCom of network-based computer telephony technology. In addition, Premiere and WorldCom intend to jointly market a comprehensive package of services that neither could previously offer independently. CALL CENTER RELATIONSHIPS Premiere intends to market its call center technology to financial institutions and other large corporations. Premiere has been selected by NationsBanc Services as its outsource solution for its customer service centers, which currently receive in excess of 100 million calls per year. PREMIERE'S COMPUTER TELEPHONY PLATFORM Premiere designed its computer telephony platform to provide its subscribers with efficient and reliable service and to be easily expandable as network usage increases. The modular and scalable design of the platform and related software allows expansion of network capacity without requiring replacement of existing hardware or software or interrupting service. Premiere's open systems design approach enables Premiere to utilize readily available third party hardware and software in constructing its platform and facilitates the integration of services and information provided by third parties into the system. Software. The system is controlled by proprietary application and database access software that was developed by the Company. Premiere's software is designed to be versatile and adaptable and to allow the system to be configured to meet the demands of strategic partners, licensees or individual subscribers. The Company's software is written in the "C" programming language in accordance with the Company's open systems development strategy and supports the Company's modular and scalable network architecture. Applications written for custom or specific functions can be quickly developed and implemented across the network and offered to all of the Company's subscribers. Premiere maintains an internal development program in order to continually enhance its software. Communications and Information Systems Architecture. The platform consists of a digital telecommunications switch which interfaces with a high speed client/server network of personal computers. Clients on the network (called "Telnodes") are controlled by PCs utilizing the Company's proprietary software (called a "Network Manager"). Servers on the network are responsible for performing functions requested by the Telnodes and Network Managers and for storing and providing access to data. Web servers connected to the network firewall interface with the Internet and allow Premiere to offer access to its services from any PC connected to the Internet. The network architecture is designed to be modular and scalable. To increase the capacity of the network, the Company adds additional Network Managers, Telnodes and servers and, at certain points, must add additional modules to the digital switch, but is not required to replace existing Network Managers, Telnodes and servers. This modular systems approach also allows Premiere, at the request of licensees and strategic partners, to provide custom applications for subscribers. The client/server network utilizes a fault tolerant network operating system and the network configuration provides for data on each server to be mirrored on a separate server, thereby providing redundancy for improved system reliability. Premiere maintains the ability to generate power in the event of a prolonged power outage, or if its uninterruptible power supply fails. -7- Incoming calls to Premiere's platform are answered by a Telnode, which hosts an automated voice response unit operator. Resident on each Telnode is the specialized software and hardware necessary to allow the Telnode to interact with, and accept input from, users. For communications card applications, the system initially prompts subscribers for their access number and personal identification number. The Network Manager instantly verifies this information for accuracy by querying the database of subscribers and also verifies that only one subscriber is connected to the platform using this access number. Once the subscriber has been identified, the Network Manager instructs the Telnode to present the subscriber with various options, which the subscriber can access by responding to voice prompts. If the subscriber chooses one of the enhanced services, the system software processes the request by directing it to the appropriate server on the network for fulfillment. If the subscriber chooses to place an outbound telephone call, the Telnode transmits the call through the digital central office switch, which is designed to select the least expensive available routing for the call. Transmission. Incoming and outgoing communications are transmitted via fiber optic trunk lines, which are provided by interexchange long distance service providers pursuant to contractual relationships with the Company. Premiere obtains transmission service from multiple carriers, thus enhancing Premiere's ability to avoid service interruptions caused by technical problems at a single carrier. Because each carrier's trunk lines physically terminate at Premiere's facility, Premiere can readily alter the routing of its transmission traffic in the event of technical difficulties. The Company opened an additional domestic switching facility in Dallas, Texas in September 1996. This facility is designed to provide geographical redundancy and increased capacity. The Dallas center will be capable of handling 300 million transaction minutes per month, which is the same capacity as Premiere's core hub in Atlanta, Georgia. In addition, the Company established a new point-of-presence ("POP") site in London, England. The London POP allows Premiere to offer even more competitive rates to customers in the U.K. and western Europe. ELECTRONIC BILLING AND INFORMATION SYSTEM Premiere's EBIS is designed to allow instant activation of subscribers' accounts, monitor subscribers' activity in real time and, while operating in the background without interrupting subscribers' service, interface with multiple financial institutions and electronically bill subscribers' credit cards or bank accounts. The EBIS is configurable for the billing requirements of various financial institutions and currently interfaces electronically with approximately 3,000 banks and other financial institutions. Premiere believes the advantages of its billing system are that it (i) avoids the delay in payment inherent in paper invoices sent through the mail, (ii) reduces billing and collection costs, and (iii) helps reduce fraud and bad debt expense by establishing preset spending maximums for subscribers. The system architecture of Premiere's EBIS is based on the same modular and scalable design philosophy used by Premiere in implementing its platform. During a subscriber's initial session on the Premiere network, the subscriber is routed to Premiere's service activation center. The subscriber is then asked by the customer service representative or the system (if the subscriber's service is being activated by the Company's automated service activation system) to choose an authorization number (usually subscribers choose their existing business or home telephone number) and a personal identification number. The subscriber is also asked to provide a credit card number. The subscriber is then assigned a preset spending limit. When a subscriber's usage reaches the preset limit, the EBIS, operating in the background and without interrupting the subscriber's transaction, attempts to charge this amount to the subscriber's credit card. If the charge is successful, the EBIS updates the threshold to a zero balance, and the subscriber may continue the transaction uninterrupted. If the attempted charge fails, the system suspends service temporarily, and upon the subscriber's next attempt to access the system, the system directs the subscriber to customer service. Billing for AFCOM subscribers operates in a similar manner, except that Premiere establishes an initial balance, which the EBIS bills against as usage charges are incurred. Once the initial draft is substantially depleted, the EBIS electronically schedules an additional draft from the subscriber's bank account on scheduled intervals (generally coinciding with pay periods). -8- RESEARCH AND DEVELOPMENT Premiere's research and development and engineering personnel are responsible for developing and supporting Premiere's proprietary software and enhanced system features. Premiere's research and development strategy is to focus its efforts on enhancing its proprietary software and to integrate its software with readily available software and hardware when feasible. Premiere maintains an internal software development program pursuant to which the Company introduces major and minor enhancements of its software. As of December 31, 1996, Premiere employed 29 people in research and development and engineering positions. Premiere's research and development team continuously monitors the operation of the computer telephony platform and the EBIS to determine if software or hardware modifications are necessary. Premiere's research and development and engineering personnel also engage in joint development efforts with Premiere's strategic partners. CUSTOMER SERVICE AND TECHNICAL SUPPORT Premiere believes that effective customer service is essential to attracting and retaining subscribers. Premiere's customer service department is responsible for educating and assisting subscribers in using Premiere's services, for resolving billing related issues and, in consultation with Premiere's technical support personnel, for resolving technical problems subscribers may have in using Premiere's services. As of December 31, 1996, Premiere employed a staff of approximately 69 people in its customer service department, which is staffed 24 hours per day, seven days per week and is accessible by a toll-free call. Each member of Premiere's customer service department is trained in all aspects of customer service in order to enable them to respond to any service related question raised by a subscriber. Premiere's platform provides customer service representatives with detailed information regarding each subscriber and the subscriber's transaction history. This information is instantly accessible by customer service representatives from their computer terminals. The real-time monitoring capabilities of the system assure that subscribers' transaction records retrieved by customer service representatives are current, even if a subscriber completed a transaction only moments before contacting the customer service department. Premiere employs separate personnel who are responsible for technical support functions. These employees are generally responsible for consulting with Premiere's strategic partners and licensees regarding technical issues and for resolving technical issues brought to their attention by the customer service department. COMPETITION The information and telecommunications service industries are intensely competitive, rapidly evolving and subject to rapid technological change. The Company expects competition to increase in the future. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, personnel, marketing, engineering, technical and other resources than the Company. Such competition could materially adversely affect the Company's business, operating results or financial condition. The Company's competitive strategy is to seek to gain a competitive advantage by being among the first companies to offer an integrated information and telecommunications services solution, by being an innovator in the integrated information and telecommunications services market and by offering unique and innovative services to its subscribers. The Company intends to capitalize on strategic relationships with WorldCom, DeltaTel, CompuServe and others in order to build its subscriber base and to maintain and increase subscriber loyalty. The Company believes that the principal competitive factors affecting the market for telecommunications and information services are price, quality of service, reliability of service, degree of service integration, ease of use, service features and name recognition. The Company believes that it competes effectively in these areas. -9- As noted, the Company attempts to differentiate itself from its competitors in part by offering an integrated suite of information and communications services accessible from multiple devices. Other providers currently offer each of the individual services and certain combinations of such services offered by the Company. The Company's worldwide long distance services and features such as conference calling compete with services provided by companies such as AT&T, MCI and Sprint, as well as smaller interexchange long distance providers. The Company's voice mail services compete with voice mail services provided by certain regional Bell operating companies ("RBOCs") as well as by independent voice mail vendors such as Octel Communications Corporation ("Octel"). The Company's electronic mail services compete with services provided by America Online, Inc. ("America Online"), Prodigy Services Co. ("Prodigy") and numerous Internet service providers. The Company's paging services compete with paging services offered by companies such as AT&T and MCI. Although the Company is aware of several companies that are marketing enhanced calling cards, it is not aware of any major competitor that is marketing an integrated information and communications service identical to the service marketed by the Company. Many of the Company's competitors have substantial resources and technical expertise and could likely develop such a service if they chose to expend sufficient resources. The Company believes that existing competitors are likely to expand their service offerings and that new competitors are likely to enter the information and telecommunications market and to attempt to integrate information and telecommunications services, resulting in greater competition for the Company. In particular, legislation was signed into law on February 8, 1996 that will allow local exchange carriers, including the RBOCs, to provide inter-LATA long distance telephone service, which will likely significantly increase competition for long distance services. The new legislation also grants the Federal Communications Commission ("FCC") the authority to deregulate other aspects of the telecommunications industry, which in the future may, if authorized by the FCC, facilitate the offering of an integrated suite of information and telecommunications services by regulated entities, including the RBOCs, in competition with the Company. Such increased competition could have a material adverse effect on the Company's business, operating results or financial condition. Telecommunications companies compete for consumers based on price, with major long distance carriers conducting extensive advertising campaigns to capture market share. There can be no assurance that a decrease in the rates charged for communications services by the major long distance carriers or other competitors, whether caused by general competitive pressures or the entry of the RBOCs and other local exchange carriers into the long distance market, would not have a material adverse effect on the Company's business, operating results or financial condition. With respect to Orchestrate(SM), Premiere is aware of a number of companies offering "unified messaging." For example, Octel and Microsoft Corp. ("Microsoft") recently announced "Unified Messenger," which places all voice mail, e-mail and fax messages in a single mailbox accessible by phone and computer. Unlike Premiere's network-based solution, many of these companies offer a premise-based solution whereby vendors integrate equipment with local area networks and PBX equipment. In addition, over the past few years, the number of companies offering call center technology has grown dramatically, primarily in response to major outsource initiatives as well as significantly lower technology costs. Such increased competition could have a material adverse effect on the Company's business, operating results or financial condition. The Company expects that the information and telecommunications services markets will continue to attract new competitors and new technologies, possibly including alternative technologies that are more sophisticated and cost effective than the Company's technology. The Company does not have the contractual right to prevent its subscribers from changing to a competing network and the Company's subscribers may generally terminate their service with the Company at will. GOVERNMENT REGULATION The Company provides both telecommunications and information services. The terms and conditions under which the Company provides its services are potentially subject to regulation by the state and federal governments of the United States. Various international authorities may also seek to regulate the services provided or to be provided by the Company. With regard to the Company's telecommunications services, federal laws and -10- FCC regulations generally apply to interstate telecommunications, while state regulatory authorities generally have jurisdiction over telecommunications that originate and terminate within the same state. Federal. On February 8, 1996, the President signed into law the Telecommunications Act of 1996, as amended (the "1996 Act"), which will allow local exchange carriers, including the RBOCs, to provide inter-LATA long distance telephone service and which also grants the FCC the authority to deregulate other aspects of the telecommunications industry. The new legislation may result in increased competition to the Company from others, including the RBOCs, and increased transmission costs in the future. The Company is classified by the FCC as a non-dominant carrier for its common carrier telecommunications services. The FCC has jurisdiction to act upon complaints against any common carrier for failure to comply with its statutory obligations. The FCC also has the authority to impose more stringent regulatory requirements on the Company and change its regulatory classification. The Company has applied for and received all necessary authority from the FCC to provide domestic interstate and international telecommunications service. The Company has been granted authority by the FCC to provide international telecommunication services through the resale of switched services of United States facilities-based carriers. The FCC reserves the right to condition, modify or revoke such international authority for violations of the Federal Communications Act or its rules. Both domestic and international non-dominant carriers must maintain tariffs on file with the FCC. Although the tariffs of non-dominant carriers and the rates and charges they specify are subject to FCC review, they are presumed to be lawful and are seldom contested. In reliance on the FCC's past practice of allowing relaxed tariff filing requirements for non-dominant domestic carriers, the Company at one time did not maintain detailed rate schedules for domestic offerings in its tariffs. The two-year statute of limitations on claims relating to these tariffs has expired. The FCC recently decided to "forbear" from requiring that non-dominant interchange carriers file tariffs for their domestic services. The United States Court of Appeals for the District of Columbia Circuit, however, has stayed the FCC's decision pending court review. As an international non-dominant carrier, the Company has always been required to include, and has included, detailed rate schedules in its international tariffs. Resale carriers are also subject to a variety of miscellaneous regulations that, for instance, govern the documentation and verifications necessary to change a consumer's long distance carrier, limit the use of "800" numbers for pay-per-call services, require disclosure of operator services and restrict interlocking directors and management. As a result of changes made by the 1996 Act, the Company may be subject to additional regulatory requirements pertaining to its telecommunications and information services. Although the Company does not believe that these changes will have a material effect on its business, no assurance can be given at this time regarding the extent or impact of such changes. Most importantly, as a non-dominant carrier, the Company will be deemed to be a "telecommunications carrier" for FCC purposes. As a telecommunications carrier, the Company will likely be required to contribute to universal service funds established by the FCC, the states or both. The FCC and the states are in the process of determining what universal service contribution requirements to adopt. Further, telecommunications carriers are subject to some minimal interconnection and network access requirements under the 1996 Act. These requirements generally require telecommunications carriers to interconnect their facilities directly or indirectly with the facilities and equipment of other telecommunications carriers upon request and prohibit them from installing network features, functions or capabilities that are not accessible to and usable by persons with disabilities, unless access for persons with disabilities is not readily achievable. Moreover, information service providers traditionally have been treated by the FCC as providing an "enhanced" computer processing service, rather than a "basic" telecommunications transmission service and, as a result, were thought to be beyond the FCC's regulatory authority. Most of the Company's business involves such unregulated enhanced services. Although the 1996 Act continues to distinguish between unregulated information or enhanced and regulated telecommunication or basic services, the changes made by the 1996 Act may have important implications for the providers of unregulated enhanced services. -11- The 1996 Act did not directly address the FCC's "access charge" system, which governs the fees paid by long distance carriers to local telephone companies to terminate calls over the local telephone network. However, it is widely agreed that this system must be revised as part of the overall effort to create competition in the local telephone market, as envisioned by the 1996 Act. The FCC, therefore, has underway a comprehensive review of its access charge system. Although the FCC tentatively has concluded not to require enhanced service providers to pay access charges, this conclusion is somewhat controversial and the FCC has indicated that it will reconsider it in the future. Current proposals to change the universal service support system do not entail the imposition of universal service fees on enhanced service providers. However, there can be no guarantee that such fees will not be assessed in the future. Similarly, individual states may determine that enhanced services providers should be required to contribute to state universal service funding mechanisms. State. The intrastate long distance telecommunications operations of Premiere are subject to various state laws and regulations, including prior certification, notification and registration requirements. In certain states, prior regulatory approval may be required for changes in control of telecommunications operations. The Company is currently subject to varying levels of regulation in the states in which it provides "0+" service and "1+" and card services (which are both generally considered "1+" services by the states). The vast majority of states require Premiere to apply for certification to provide telecommunications services, or at least to register or to be found exempt from regulation, before commencing intrastate service. The vast majority of the states require Premiere to file and maintain detailed tariffs listing rates for intrastate service. Many states also impose various reporting requirements and/or require prior approval for transfers of control of certified carriers, assignments of carrier assets, including customer bases, carrier stock offerings and incurrence by carriers of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations and policies of the state regulatory authorities. Fines and other penalties, including the return of all monies received for intrastate traffic from residents of a state, may be imposed for such violations. Premiere has made the filings and taken the actions it believes are necessary to become certified or tariffed to provide intrastate card services to customers throughout the United States, except in two states. The Company has received authorization to provide intrastate card services in 44 states and has applications to provide intrastate card service pending in 4 states. With the exception of one state in which the Company's application to provide "0+" service is pending, the Company has received authorization to provide "0+" service in each state where the Company provides such service. There can be no assurance that the Company's provision of services in states where it is not licensed or tariffed to provide such services will not have a material adverse effect on the Company's business, operating results or financial condition. Miscellaneous. In conducting its business, the Company is subject to various laws and regulations relating to commercial transactions, such as the Uniform Commercial Code and is also subject to the electronic funds transfer rules embodied in Regulation E promulgated by the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Because of growth in the electronic commerce market, it is possible that Congress or individual states could enact laws regulating the electronic commerce market, or that the Federal Reserve might revise Regulation E or adopt new rules regarding electronic funds transfer. It is impossible to predict what effect such new or revised laws, rules and regulations would have on the Company's business, operating results or financial condition. The Company's proposed international activities also will be subject to regulation by various international authorities and the inherent risk of unexpected changes in such regulation. PROPRIETARY RIGHTS The Company's ability to compete is dependent in part upon its proprietary technology. The Company relies on confidentiality agreements with its employees and copyright and trade secret laws to protect its technology. Despite these actions, there can be no assurance that others will not be able to copy or otherwise obtain and use the Company's proprietary technology without authorization, or independently develop technologies that are similar or superior to the Company's technology. However, the Company believes that, due to the rapid -12- pace of technological change in the information and telecommunications service industry, factors such as the technological and creative skills of its personnel, new product developments, frequent product enhancements and the timeliness and quality of support services are more important to establishing and maintaining a competitive advantage in the industry. The Company has one patent application pending and 13 trademark or copyright registrations pending. However, the Company currently has no registered trademarks or copyrights. The Company is aware of other companies that use the terms "WorldLink" or "Premiere" in describing their products and services, including telecommunications products and services. Certain of those companies hold registered trademarks which incorporate the names "WorldLink" or "Premiere." The Company has received correspondence from a provider of prepaid calling cards which claims that the Company's use of the term "WorldLink" infringes upon its trademark rights. In addition, the Company has received correspondence from a major bank, which is among the holders of registered trademarks incorporating the term "WorldLink," inquiring as to the nature of the Company's use of the term "WorldLink" as part of its mark "Premiere WorldLink." Based on, among other things, the types of businesses in which the other companies are engaged and the low likelihood of confusion, the Company believes these claims to be without merit. No assurance can be given that actions or claims alleging trademark, patent or copyright infringement will not be brought against the Company with respect to current or future products or services, or that, if such actions are brought, the Company will ultimately prevail. Any such claiming parties may have significantly greater resources than the Company to pursue litigation of such claims. Any such claims, whether with or without merit, could be time consuming, result in costly litigation, cause delays in introducing new or improved services, require the Company to enter into royalty or licensing agreements, or cause the Company to discontinue use of the challenged tradename or technology at potential significant expense to the Company associated with the marketing of a new name or the development or purchase of replacement technology, all of which could have a material adverse effect on the Company. See the discussion of the AudioFAX litigation under ITEM 3 - LEGAL PROCEEDINGS. EMPLOYEES As of December 31, 1996, the Company employed 170 persons on a full-time basis and two persons on a part-time basis. None of the Company's employees are members of a labor union or are covered by a collective bargaining agreement. ITEM 2. PROPERTIES Premiere leases approximately 30,750 square feet of office space in Atlanta, Georgia under a lease expiring August 30, 1997. The Company leases an additional 7,300 square feet of space in Atlanta, Georgia, for the facility that serves as the Company's primary data and communications center. This lease expires on December 31, 1998. The Company also leases approximately 7,000 square feet of space in Dallas, Texas for an additional data and communications center. This lease expires July 31, 2001. In addition, the Company maintains a single person sales office in Tulsa, Oklahoma and space in London, England for an additional data and communications center. -13- ITEM 3. LEGAL PROCEEDINGS On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery Systems, Inc. ("CRS") filed a complaint against the Company's wholly-owned subsidiary, Premiere Communications, Inc. ("PCI" or "Premiere Communications") and the Company's President, Boland T. Jones, in the Superior Court of Fulton County, Georgia. In the complaint, the plaintiffs allege that: (i) Mr. Bott, a former Company employee, is entitled to options to purchase 10,000 shares of common stock of PCI at $5.00 per share; (ii) Mr. Bott is entitled to a commission equal to 10% of all revenues that have been and in the future are collected as a result of the Company's licensing arrangement with one of its customers; (iii) Mr. Bott is entitled to $7,000 for consulting work allegedly performed for the Company; (iv) Mr. Bott is entitled to unspecified damages resulting from his sale in June 1995 of 750 shares of common stock of PCI to an unrelated third party for an unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr. Elliott, is entitled to options to purchase 5,000 or 10,000 shares of common stock of PCI at an unspecified exercise price arising out of work allegedly performed by CRS for the Company; and (vi) CRS is owed an unspecified amount of commissions from the Company relating to sales of the Company's telecommunications services by CRS. Subsequent to the filing of the complaint, the plaintiffs dismissed without prejudice count (iv) above. The plaintiffs also seek attorneys' fees and unspecified amounts of punitive damages. The Company filed an answer and counterclaim denying all allegations of the complaint and asserting various affirmative defenses. Assuming that the allegations concerning stock options and stock sales relate to the common stock of Premiere Technologies, Inc., rather than PCI, as alleged, the Company believes that the share numbers and exercise prices have not been adjusted for the 24-to-1 stock split effected in December 1995. In this regard, the plaintiffs filed a motion to add the Company as a defendant and to amend their complaint to assert their claims against the Company. Adjusting the share numbers and exercise prices of these options to reflect the 24-to-1 stock split, the plaintiffs' claims relate to options to purchase up to a total of 480,000 shares of common stock and the alleged exercise price of $5.00 per share with regard to a portion of such options becomes approximately $0.21 per share. The plaintiffs' motion was denied on December 17, 1996, and the plaintiffs dismissed the case without prejudice on January 13, 1997. The plaintiffs filed a new complaint against the Company on January 21, 1997 setting forth the same allegations as described above. The Company has filed an answer and counterclaim denying all allegations of the complaint and asserting various affirmative defenses and a motion to dismiss with respect to all counts of the complaint. The Company believes it has meritorious defenses to the plaintiffs' allegations, but due to the inherent uncertainties of the judicial system, the Company is unable to predict the outcome of this litigation. If the outcome of this litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against the Company and PCI in the United States District Court for the Northern District of Georgia. In the complaint, AudioFAX alleged that the Company manufactures, uses, sells and/or distributes certain enhanced facsimile products which infringe three United States patents and one Canadian patent allegedly held by AudioFAX. In the third quarter of 1996, the Company took a one-time charge for the estimated legal fees and other costs that the Company expected to incur to resolve this matter. On February 11, 1997, the Company entered into a long term, non-exclusive license agreement with AudioFAX settling the litigation. On August 6, 1996, Communication Network Corporation ("CNC"), a licensing customer of the Company, was placed into bankruptcy under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit brought by a CNC creditor in the United States District Court for the Southern District of New York against certain guarantors of CNC's obligations and to file a third party action against numerous entities, including such CNC creditor and PCI for alleged negligent misrepresentations of fact in connection with an alleged fraudulent scheme designed to damage CNC. The court has not ruled on CNC's request. Based upon the bankruptcy examiner's findings, the bankruptcy trustee, who has been substituted for CNC in this action, is investigating the merits of any potential actions directed at PCI. No actions or suits have been filed by the trustee against PCI, but the trustee has notified PCI that as one of the potential claims he is investigating, he intends to assert an avoidable preference claim under the Bankruptcy Code of an amount up to approximately $800,000. Due to the inherent uncertainties of the judicial system, the Company is unable to predict with certainty the outcome of the trustee's investigation and the potential -14- litigation. If the outcome of any such litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against the Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in the United States District Court for the Eastern District of Illinois. In the complaint, Lucina alleges, among other things, that: (i) in November 1995 he sold 1,563 shares of the Company common stock to Gasgarth, a former director of the Company, for $31,260; (ii) Jones offered to "facilitate" the sale; (iii) in December 1995 the Company filed a registration statement relating to the initial public offering of its common stock; (iv) prior to his sale of stock to Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for the 24-to-1 stock split subsequently effected, was worth $675,216 based on the Company's initial public offering at $18 per share in March, 1996. In his complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive Business Practices Act and common law fraud. Lucina seeks the return of 37,512 shares of common stock of the Company, or in the alternative, compensatory damages in the amount of $975,312 with interest thereon, punitive damages in the amount of $1 million and costs of the suit, including reasonable attorneys' fees and other associated costs. The Company has filed an answer to the complaint denying allegations of the complaint and asserting various defenses. Discovery is in its initial stages, and no trial date has been set. The Company believes that it has meritorious defenses to the Lucina complaint; however, due to the inherent uncertainties of the judicial system, the Company is unable to predict the outcome of this litigation. If the outcome of this litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has traded on the Nasdaq National Market under the symbol "PTEK" since its initial public offering on March 5, 1996. The following table sets forth the high and low sales prices of the common stock as reported on the Nasdaq National Market for the periods indicated:
1996 HIGH LOW ---- ---- --- First Quarter (from March 5, 1996)......................... $27.750 $18.000 Second Quarter............................................. 50.000 23.625 Third Quarter.............................................. 35.750 16.000 Fourth Quarter............................................. 31.250 14.500
As of March 17, 1997, there were approximately 148 record holders of the Company's common stock. The Company has never paid cash dividends on its common stock, and the current policy of the Company's Board of Directors is to retain any available earnings for use in the operation and expansion of the Company's business. Therefore, the payment of cash dividends on the common stock is unlikely in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will depend upon the Company's earnings, capital requirements, financial condition and any other factors deemed relevant by the Board of Directors. -15- On September 18, 1996, the Company issued 498,187 shares of common stock in connection with the acquisition by the Company of TeleT. 75,000 of such shares were placed in escrow to secure certain indemnification obligations of the members of TeleT. The issuance of such shares was exempt from registration pursuant to Section 4(2) and Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). On November 13, 1996, the Company issued 2,050,000 shares of common stock to WorldCom in connection with the Company's entering into of a strategic alliance agreement with WorldCom. This agreement provides for, among other things, a long term relationship between the parties under which the Company became a preferred platform services provider for WorldCom and its subsidiaries with respect to enhanced calling programs. The issuance of such shares was exempt from registration pursuant to Section 4(2) and Regulation D of the Securities Act. During the year ended December 31, 1996, certain current and former employees, directors and investors exercised options and warrants to purchase an aggregate of 1,246,818 shares of common stock at prices ranging from $0.00042 to $1.61 per share in transactions exempt from registration pursuant to Section 4(2) and Rule 701 of the Securities Act. -16- ITEM 6. SELECTED FINANCIAL DATA
NINE MONTHS YEAR ENDED ENDED YEAR ENDED --------------------- ------------- ------------------------------------------ MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1994 1994(1) 1994(2) 1995 1996 ---------- ---------- ------------- ------------ ------------ ------------ (UNAUDITED) STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Subscriber services....................... $ 844 $ 3,812 $ 5,391 $ 6,592 $ 15,085 $ 36,557 License fees.............................. 0 314 1,748 1,935 5,935 13,777 Other revenues............................ 1,093 1,296 1,181 1,468 1,306 1,745 --------- ---------- --------- --------- ----------- ---------- Total revenues......................... 1,937 5,422 8,320 9,995 22,326 52,079 Cost of Services.............................. 676 2,261 2,796 3,516 7,603 16,711 --------- ---------- --------- --------- ----------- ---------- Gross Margin.................................. 1,261 3,161 5,524 6,479 14,723 35,368 --------- ---------- --------- --------- ----------- ---------- Operating Expenses: Selling and marketing..................... 1,232 2,116 3,022 3,750 7,267 16,985 General and administrative................ 944 1,486 1,818 2,342 4,460 8,781 Depreciation and amortization............. 91 319 246 420 697 2,255 Charge for purchased research and development......................... 0 0 0 0 0 11,030 Accrued litigation costs.................. 0 0 0 0 0 1,250 --------- ---------- --------- --------- ----------- ---------- Total operating expenses............... 2,267 3,921 5,086 6,512 12,424 40,301 Operating Income (Loss)....................... (1,006) (760) 438 (33) 2,299 (4,933) --------- ---------- --------- --------- ----------- ---------- Other Income (Expense): Interest income........................... 16 27 127 149 283 2,529 Interest expense.......................... (166) (250) (242) (291) (366) (188) Other, net................................ 0 0 43 43 32 68 --------- ---------- --------- --------- ----------- ---------- Total other income (expense)........... (150) (223) (72) (99) (51) 2,409 --------- ---------- --------- --------- ----------- ---------- Net Income (Loss) Before Income Taxes and Extraordinary Loss....................... (1,156) (983) 366 (132) 2,248 Provision For (Benefit From) Income Taxes..... 0 0 48 48 330 (1,627) --------- ---------- --------- --------- ----------- ---------- Net Income (Loss) Before Extraordinary Loss...... (1,156) (983) 318 (180) 1,918 (897) Extraordinary Loss on Early Extinguishment of Debt, Net of Tax Effect of $37,880......... 0 0 0 0 0 59 --------- ---------- --------- --------- ----------- ---------- Net Income (Loss)............................. (1,156) (983) 318 (180) 1,918 (956) Preferred Stock Dividends..................... 0 64 256 320 309 29 --------- ---------- --------- --------- ----------- ---------- Net Income (Loss) Attributable to Common Shareholders.................................. $ (1,156) $ (1,047) $ 62 $ (500) $ 1,609 $ (985) ========= ========== ========= ========= =========== ========== Pro Forma Income (Loss) Attributable to Common Shareholders For Primary Earnings Per Share(3)......................... $ (1,156) $ (1,047) $ 226 $ (500) $ 1,807 $ (985) ========= ========== ========= ========= =========== ========== Pro Forma Income (Loss) Per Common and Common Equivalent Shares(4) Primary....................................... $ (0.16) $ (0.13) $ 0.01 $ (0.05) $ 0.10 $ (0.05) ========= ========== ========= ========= =========== ========== Shares Used In Computing Earnings Per Common and Common Equivalent Shares(4) (in thousands): Primary............ 7,293 8,164 19,147 10,804 17,529 20,170 ========= ========== ========= ========= =========== ========== BALANCE SHEET DATA (AT PERIOD END): Working capital............................... $ 482 $ 4,469 $ 4,275 $ 4,275 $ 5,535 $ 69,551 Total assets.................................. 1,574 6,573 7,623 7,623 16,988 140,051 Long term liabilities......................... 1,623 2,112 2,448 2,448 2,513 584 Shareholders' equity (deficit)................ (435) 3,502 3,603 3,603 8,193 124,158
________________ (1) Effective December 31, 1994, the Company changed its fiscal year end from March 31 to December 31. (2) Year ended December 31, 1994 data was derived from the nine months ended December 31, 1994 data and the unaudited interim data for the three months ended March 31, 1994. The data is presented for comparative purposes and additional analysis. (3) Supplementary pro forma earnings per share assuming the conversion of Series A Preferred Stock and the retirement of notes payable for the year ended December 31, 1995 are not presented because the effect of the pro forma adjustments is immaterial. (4) Pro forma net income (loss) per share is computed using the weighted average number of shares of common stock and dilutive common stock equivalents from convertible preferred stock (using the if-converted method) and from stock options (using the modified treasury stock method). In addition, common stock and common stock equivalents issued at prices below the initial public offering price of $18.00 per share within one year prior to this offering have been included in the calculation (using the treasury stock method) as if they were outstanding for all periods prior to this offering, regardless of whether they are dilutive. See Note 2 of Notes to Consolidated Financial Statements. Fully diluted data is not presented as the effect is anti-dilutive or immaterial for all periods presented. -17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in connection with the Company's consolidated financial statements and the related notes thereto included elsewhere herein. Effective December 31, 1994, the Company changed its fiscal year end from March 31 to December 31. OVERVIEW Premiere is a network-based computer telephony company specializing in the integration of information and telecommunications services. The Company delivers its services through its advanced computer telephony platform, which is accessible from, and provides access to, a variety of devices including the telephone, fax machine, pager and computer. The platform is modular and scalable, with an open-systems design which allows the Company to quickly customize its services to meet the needs of its subscribers and business partners and to easily expand system capacity. Premiere's revenues consist of: (i) subscriber services from information and telecommunications services; (ii) license fees from use of its computer telephony platform by customers of companies that have licensing relationships with Premiere; and, to a lesser extent, (iii) other revenues, primarily long distance charges from hospitality services. Subscriber services revenues from information and telecommunications services, including Premiere WorldLink, AFCOM and co-branded services, are based primarily on a per minute charge. License fees are contracted on a long term basis and are generally based on a per minute charge and, in certain circumstances, a per usage charge. Other revenue charges are based on long distance rates established by the Company depending upon the originating location of the call, and other various methods. Cost of services consists primarily of transmission costs. Licensees generally arrange for, and directly bear the cost of, transmission. Consequently, while the per minute fees for licensee platform usage are lower than those for the subscriber services, the gross margin from license arrangements is considerably higher than for subscriber services. Selling and marketing expenses include commissions to co-branded partners, strategic partners, financial institutions that promote the Company's AFCOM services and businesses participating in the hospitality program, the cost of print advertisements, direct sales force salaries and commissions, travel and entertainment expenses, bad debt expense and other operating costs related to the selling and marketing functions. General and administrative expenses include salaries and benefits (except for selling and marketing salaries), rent and facility expense, accounting and audit fees, legal fees, property taxes and other administrative expenses. Depreciation and amortization includes depreciation of computer and network operations equipment and amortization of intangible assets. The Company provides for depreciation using the straight-line method of depreciation over the estimated useful lives of the assets, which range from five to ten years, with the exception of leasehold improvements which are depreciated on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the assets. Amortization of intangible assets includes deferred software development costs and the WorldCom strategic alliance contract intangible, which are amortized over five years and 25 years, respectively. Premiere electronically bills most subscriber services revenue directly to the subscriber's credit card or bank account using the EBIS. The Company bills subscribers at least monthly and in certain instances more frequently if a particular subscriber exceeds pre-set spending limits. Because substantially all of the Company's subscriber services are billed electronically through the EBIS, the Company believes it has shortened the collection -18- cycle compared to a traditional 30-day non-electronic billing arrangement. License fees are generally billed and invoiced on a 30-day basis. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. The Company periodically reviews the values assigned to long-lived assets, such as property and equipment and software costs, to determine if any impairments are other than temporary. Management believes that the long-lived assets in the accompanying balance sheets are appropriately valued. RESULTS OF OPERATIONS The following table presents, for the periods indicated, the percentage relationship of certain statements of operations items to total revenues.
NINE MONTHS ENDED YEAR ENDED --------------- ----------------------------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1994(1) 1995 1996 --------------- --------------- ------------- --------------- (UNAUDITED) REVENUES: Subscriber services.................. 64.8% 66.0% 67.6% 70.2% License fees......................... 21.0 19.4 26.6 26.5 Other revenues....................... 14.2 14.6 5.8 3.3 ----- ----- ----- ----- Total revenues.................... 100.0 100.0 100.0 100.0 COST OF SERVICES......................... 33.6 35.2 34.1 32.1 ----- ----- ----- ----- GROSS MARGIN............................. 66.4 64.8 65.9 67.9 ----- ----- ----- ----- OPERATING EXPENSES: Selling and marketing................ 36.3 37.5 32.5 32.6 General and administrative........... 21.9 23.4 20.0 16.9 Depreciation and amortization........ 3.0 4.2 3.1 4.3 Charge for purchased research and development................... 0.0 0.0 0.0 21.2 Accrued litigation costs............. 0.0 0.0 0.0 2.4 ----- ----- ----- ----- Total operating expenses.......... 61.2 65.1 55.6 77.4 OPERATING INCOME (LOSS).................. 5.2 (0.3) 10.3 (9.5) ----- ----- ----- ----- OTHER INCOME (EXPENSE): Interest income...................... 1.5 1.5 1.3 4.9 Interest expense..................... (2.9) (2.9) (1.6) (0.4) Other, net........................... 0.5 0.4 0.1 0.2 ----- ----- ----- ----- Total other income (expense)...... (0.9) (1.0) (0.2) 4.7 ----- ----- ----- ----- NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS............... 4.3 (1.3) 10.1 (4.8) PROVISION FOR (BENEFIT FROM) INCOME TAXES............................... 0.6 0.5 1.5 (3.1) ----- ----- ----- ----- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS......................... 3.7 (1.8) 8.6 (1.7) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF TAX EFFECT OF $37,880...................... 0.0 0.0 0.0 0.1 ----- ----- ----- ----- NET INCOME (LOSS)........................... 3.7% (1.8)% 8.6% (1.8)% ===== ===== ===== =====
_____________ (1) Year ended December 31, 1994 data was derived from the nine months ended December 31, 1994 data and the unaudited interim data for the three months ended March 31, 1994. The data is presented for comparative purposes and additional analysis. -19- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. Total revenues increased 133.6% from $22.3 million in the year ended December 31, 1995 to $52.1 million in the year ended December 31, 1996. Subscriber services revenues increased 142.4% from $15.1 million in the year ended December 31, 1995 to $36.6 million in the year ended December 31, 1996, due primarily to increased revenues from Premiere WorldLink subscriber services. Revenues from Premiere WorldLink subscriber services increased principally as a result of response to the Company's print advertising campaign, which was substantially expanded starting in January 1996, as well as the Company's entering into additional co-branded relationships. Revenues from AFCOM subscriber services decreased 11.5% from $8.7 million in the year ended December 31, 1995 to $7.7 million in the year ended December 31, 1996, primarily due to certain branches of the military modifying their payroll practices to require direct deposit upon entering active duty. This requirement has resulted in a reduction in the level of banking activity at certain military financial institutions with which the Company has marketing arrangements. The Company has revised its AFCOM marketing strategy to attempt to address this situation. License fees increased 133.9% from $5.9 million in the year ended December 31, 1995 to $13.8 million in the year ended December 31, 1996, due to both the establishment of additional licensing relationships and increased revenues from existing licensees. Other revenues increased 30.8% from $1.3 million for the year ended December 31, 1995 to $1.7 million for the year ended December 31, 1996. This increase was attributable primarily to non-recurring system design and development revenues. On August 6, 1996, CNC, a licensing customer of the Company, was placed into bankruptcy under Chapter 11 of the Bankruptcy Code. CNC accounted for 19.6% and 5.2% the Company's licensing revenues and total revenues, respectively, during the year ended December 31, 1996. CNC owed the Company approximately $627,000 as of December 31, 1996. However, CNC's transmission provider, WorldCom Network Services, Inc. d/b/a/ WilTel ("WilTel"), is also obligated to pay this amount to the Company. The Company believes that through a combination of new licensing agreements, the strategic alliance agreement with WorldCom and increased revenues from existing licensees, the Company has replaced all of the anticipated CNC revenue. Cost of Services. Cost of services increased 119.7% from $7.6 million in the year ended December 31, 1995 to $16.7 million in the year ended December 31, 1996, but decreased as a percentage of revenues from 34.1% in the year ended December 31, 1995 to 32.1% for the same period of 1996. The decrease in cost of services as a percentage of revenues reflects higher margins resulting from relatively lower per minute transmission costs and the relative increase in contribution from license fees, which have a lower cost of services because the licensees bear the cost of call transmission. Selling and Marketing Expenses. Selling and marketing expenses increased 132.9% from $7.3 million in the year ended December 31, 1995 to $17.0 million in the year ended December 31, 1996, and decreased as a percentage of revenues from 32.7% to 32.6%. The increase in selling and marketing expenses was due primarily to greater expenditures on print advertising and other selling and marketing costs related to the increase in subscribers and revenues, and an increase in bad debt expense during the fourth quarter of 1996. Despite the increase in bad debt expense, the Company was still able to maintain selling and marketing costs as a percentage of revenues consistent with the prior year. General and Administrative Expenses. General and administrative expenses increased 95.6% from $4.5 million in the year ended December 31, 1995 to $8.8 million in the year ended December 31, 1996, due primarily to an increased number of employees and related expenses to support the Company's growth. These expenses decreased as a percentage of revenues from 20.2% in the year ended December 31, 1995 to 16.9% for the same period in 1996. This decrease was attributable primarily to increased operating leverage resulting from higher revenues. Depreciation and Amortization Expense. Depreciation and amortization expense increased 230.0% from $697,000 in the year ended December 31, 1995 to $2.3 million in the year ended December 31, 1996. This increase -20- was due to depreciation of additional equipment acquired during the period and the amortization of the strategic alliance contract intangible. Charge for Purchased Research and Development. This is a one-time charge in an amount equal to the estimated value of in-process research and development projects acquired in the acquisition of TeleT. See Note 3 of Notes to Consolidated Financial Statements. Accrued Litigation Costs. This is a one-time charge for the estimated legal fees and other costs that the Company expected to incur to resolve the patent infringement suit filed by AudioFAX. On February 11, 1997, the Company entered into a long term, non-exclusive license agreement with AudioFAX settling the litigation. The one-time charge was adequate to cover the actual costs of litigation and the cost of the license agreement is not expected to have a material effect on the Company's earnings. See Note 11 of Notes to Consolidated Financial Statements. Income Taxes. Income taxes decreased from a provision of $330,000 in the year ended December 31, 1995 to a benefit of $1.6 million in the year ended December 31, 1996. In the year ended December 31, 1995, the Company's effective income tax rate was less than the statutory rate due to the use of net operating loss carryforwards. At December 31, 1996, the Company had a total deferred tax asset of $11.1 million, principally due to net operating losses for tax purposes generated upon the exercise by employees of non-qualified stock options which generated compensation expense for tax purposes in excess of compensation expense as recorded by the Company in accordance with GAAP. In accordance with GAAP, the related tax benefit of this deduction was credited to additional paid- in-capital and accordingly, did not reduce operating tax expense recognized by the Company. Net Income (Loss). The Company recognized net income of $1.9 million in the year ended December 31, 1995 and a net loss of $956,000 in the year ended December 31, 1996. Excluding the one-time charges for in-process research and development and accrued litigation costs and the related tax effect, net income would have increased 242.1% from $1.9 million in the year ended December 31, 1995 to $6.5 million in the year ended December 31, 1996. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 General. Year ended December 31, 1994 data was derived from the nine months ended December 31, 1994 data and the unaudited interim data for the three months ended March 31, 1994. Revenues. Total revenues increased 123.0% from $10.0 million in the year ended December 31, 1994 to $22.3 million in the year ended December 31, 1995. Subscriber services revenues increased 128.8% from $6.6 million in the year ended December 31, 1994 to $15.1 million in the year ended December 31, 1995, due primarily to increased revenues from both Premiere WorldLink and AFCOM subscriber services. Revenues from Premiere WorldLink subscriber services increased principally as a result of response to the Company's print advertising campaign and additional co-branded relationships. Revenues from AFCOM subscriber services increased principally due to additional AFCOM marketing relationships and response to the Company's AFCOM direct mail advertising campaign. License fees increased 210.5% from $1.9 million in the year ended December 31, 1994 to $5.9 million in the year ended December 31, 1995, due to both the establishment of additional licensing relationships and increased revenues from existing licensees. A marked portion of this increase was due to the Company's relationship with CNC which accounted for approximately $1.5 million of the increase in license fees from the year ended December 31, 1995 compared to year ended December 31, 1994. Other revenues decreased 13.3% from $1.5 million for the year ended December 31, 1994 to $1.3 million for the year ended December 31, 1995. Cost of Services. Cost of services increased 117.1% from $3.5 million in the year ended December 31, 1994 to $7.6 million in the year ended December 31, 1995, but decreased as a percentage of revenues from 35.0% in the year ended December 31, 1994 to 34.1% for the same period of 1995. The decrease in cost of services as a percentage of revenues reflects higher margins resulting from relatively lower per minute transmission costs and -21- the relative increase in contribution from license fees, which have a lower cost of services because the licensees bear the cost of call transmission. Selling and Marketing Expenses. Selling and marketing expenses increased 92.1% from $3.8 million in the year ended December 31, 1994 to $7.3 million in the year ended December 31, 1995, and decreased as a percentage of revenues from 38.0% to 32.7%. The increase in selling and marketing expenses was due primarily to greater expenditures on print advertising and other selling and marketing costs related to the increase in subscribers and revenues. General and Administrative Expenses. General and administrative expenses increased 95.7% from $2.3 million in the year ended December 31, 1994 to $4.5 million in the year ended December 31, 1995 due primarily to an increased number of employees and related expenses to support the Company's growth. These expenses decreased as a percentage of revenues from 23.0% in the year ended December 31, 1994 to 20.2% for the same period in 1995. This decrease was attributable primarily to increased operating leverage resulting from higher revenues. Depreciation and Amortization Expense. Depreciation and amortization expense increased 66.0% from $420,000 in the year ended December 31, 1994 to $697,000 in the year ended December 31, 1995. This increase was due to depreciation of additional equipment acquired during the period. Income Taxes. Income taxes increased from $48,000 in the year ended December 31, 1994 to $330,000 in the year ended December 31, 1995, reflecting income taxes payable on the Company's net income in the year ended December 31, 1995, as compared to the Company's net loss in the year ended December 31, 1994. The Company's effective income tax rate was less than the statutory rate due to the use of net operating loss carry forwards. At December 31, 1995, the Company had a deferred tax asset of $2.5 million, principally due to net operating losses for tax purposes generated upon the exercise by employees of non- qualified stock options which generated compensation expense for tax purposes in excess of compensation expense as recorded by the Company in accordance with GAAP. In accordance with GAAP, the related tax benefit of this deduction was credited to additional paid-in-capital and accordingly, did not reduce operating tax expense recognized by the Company. Net Income (Loss). The Company recognized a net loss of $180,000 in the year ended December 31, 1994 and net income of $1.9 million in the year ended December 31, 1995. This increase reflects higher revenues achieved in the year ended December 31, 1995 for all of the Company's services and the increased gross margin contribution of license fees compared to the year ended December 31, 1994. YEAR ENDED DECEMBER 31, 1995 COMPARED TO NINE MONTHS ENDED DECEMBER 31, 1994 General. Each of these variations reflect only nine months of operations in the period ended December 31, 1994, compared to the twelve months ended December 31, 1995. Revenues. Total revenues increased 168.7% from $8.3 million in the nine months ended December 31, 1994, to $22.3 million in the twelve months ended December 31, 1995. Subscriber services revenues increased 179.6% from $5.4 million in the nine months ended December 31, 1994 to $15.1 million in the twelve months ended December 31, 1995, primarily as a result of increased revenues from both Premiere WorldLink and AFCOM subscriber services. Revenues from Premiere WorldLink subscriber services increased principally as a result of response to the Company's print advertising campaign and additional co-branded relationships. Revenues from AFCOM subscriber services increased principally due to additional AFCOM marketing relationships and response to the Company's AFCOM direct mail advertising campaign. License fees increased 247.1% from $1.7 million in the nine months ended December 31, 1994 to $5.9 million in the twelve months ended December 31, 1995 due to both the establishment of additional licensing relationships and increased revenues from existing licensees. Other services revenues increased 8.3% from $1.2 million in the nine months ended December 31, 1994 to $1.3 million in the twelve months ended December 31, 1995. -22- Cost of Services. Cost of services increased 171.4% from $2.8 million in the nine months ended December 31, 1994 to $7.6 million in the twelve months ended December 31, 1995. As a percentage of revenues, these costs were 33.7% in the nine months ended December 31, 1994 and 34.1% in the twelve months ended December 31, 1995. Cost of services remained stable as a percentage of revenues. Selling and Marketing Expenses. Selling and marketing expenses increased 143.3% from $3.0 million in the nine months ended December 31, 1994 to $7.3 million in the twelve months ended December 31, 1995, due primarily to additional expenditures on print advertising. As a percentage of revenues, selling and marketing expenses were 36.1% in the nine months ended December 31, 1994 and 32.7% in the twelve months ended December 31, 1995. General and Administrative Expenses. General and administrative expenses increased 150.0% from $1.8 million in the nine months ended December 31, 1994 to $4.5 million in the twelve months ended December 31, 1995. As a percentage of revenues, these expenses were 21.7% in the nine months ended December 30, 1994, and 20.2% in the twelve months ended December 31, 1995 as a result of increased operating leverage due to higher revenues. Depreciation and Amortization Expense. Depreciation and amortization expense increased 183.3% from $246,000 in the nine months ended December 31, 1994 to $697,000 in the twelve months ended December 31, 1995. The increase in depreciation and amortization expense reflects the shorter period in the nine months ended December 31, 1994, compared to the twelve months ended December 31, 1995. As a percentage of revenues, depreciation and amortization expense increased from 3.0% in the nine months ended December 31, 1994 to 3.1% in the twelve months ended December 31, 1995. Income Taxes. Income taxes increased 587.5% from $48,000 in the nine months ended December 31, 1994 to $330,000 in the twelve months ended December 31, 1995, reflecting state income taxes payable on the Company's income in the nine months ended December 31, 1994. The company's net income for the nine months ended December 31, 1994 was entirely offset by the Company's net operating loss carry forward. The Company had an unused net operating loss carry forward at December 31, 1994 of $1.4 million. Net Income (Loss). Net income increased 497.5% from $318,000 for the nine months ended December 31, 1994 to $1.9 million for the twelve months ended December 31, 1995. This $1.6 million increase in net income reflects the combination of the Company's increased subscriber services revenues and license fees, stable gross margins and increased leverage from selling and marketing and general and administrative expenses. LIQUIDITY AND CAPITAL RESOURCES The Company's operating activities provided cash of $919,000 in the nine months ended December 31, 1994, provided cash of $730,000 in the year ended December 31, 1994, $3.1 million in the year ended December 31, 1995 and $12.4 million in the year ended December 31, 1996. Cash provided by operating activities for the nine months ended December 31, 1994 and the year ended December 31, 1994, reflects the Company's attainment of a level of operating revenues sufficient to cover its operating costs due to increased subscribers to the Company's AFCOM and Premiere WorldLink services and increased revenues from license fees. The increase in cash provided by operating activities in the year ended December 31, 1995, as compared to earlier periods, reflects the acceleration of the growth of the Company's subscriber base during that period and the relatively greater contribution from license fees with their associated higher gross margin. The increase in cash provided by operating activities in the year ended December 31, 1996 reflects the acceleration of the growth of the Company's subscriber base during the period and increased income from the investment of the net proceeds from the Company's initial public offering. The Company's investing activities used cash of $4.3 million in the nine months ended December 31, 1994, $4.4 million for the year ended December 31, 1994, $2.9 million for the year ended December 31, 1995 and $84.6 million for the year ended December 31, 1996. The Company's investing activities for the nine months ended December 31, 1994 and the year ended December 31, 1994 consisted primarily of the investment of $3.5 -23- million of the proceeds of the Company's sale of Series 1994 Preferred Stock (which was converted into Series A Preferred Stock in December 1995) and $819,000 in purchases of property and equipment. Cash used in investing activities for the year ended December 31, 1995, consisted primarily of purchases of property and equipment. The Company's investing activities for the year ended December 31, 1996 consisted primarily of purchases of investments in the amount of $63.8 million. Additionally, the Company purchased property and equipment of $13.7 million. The Company also used cash to partially fund certain acquisitions and strategic alliances during the year ended December 31, 1996. See Notes 2 and 3 of Notes to Consolidated Financial Statements. The Company's financing activities used $12,000 in cash in the nine months ended December 31, 1994, and provided cash of $3.9 million in the year ended December 31, 1994, $223,000 for the year ended December 31, 1995 and $77.0 million for the year ended December 31, 1996. Cash used in financing activities for the nine months ended December 31, 1994 reflects principal payments under capital leases offset by proceeds from subscriptions for common stock. Cash provided by financing activities for the year ended December 31, 1995 reflects proceeds from exercises of stock options. Cash provided in the year ended December 31, 1996 was primarily from the net proceeds of the Company's initial public offering in March 1996. Additionally, proceeds from the repayment of the above mentioned subscriptions for common stock also provided cash of $2.4 million in 1996. These sources of cash were partially offset in 1996 by the repayment of notes payable outstanding at December 31, 1995 as well as payment of dividends on Preferred Stock. See Notes 2, 4 and 6 of Notes to Consolidated Financial Statements. The Company has financed its cash requirements through a combination of equity and debt financing and, beginning in the nine months ended December 31, 1994, through cash flows from operating activities. In May 1992, the Company borrowed $1.0 million (the "First Sirrom Note") from Sirrom Capital Corporation ("Sirrom"), an independent lender unaffiliated with the Company, which was used to fund the Company's operations and for capital expenditures. In December 1993, the Company borrowed an additional $1.0 million from Sirrom (the "Second Sirrom Note") (the First Sirrom Note and Second Sirrom Note are referred to as the "Notes"). In connection with entering into the Notes, the Company granted Sirrom warrants to purchase an aggregate of 568,392 shares of common stock at $0.042 per share, the terms of which do not require the cancellation or exercise of the warrants upon repayment of the Notes. The Company used $2.0 million of the net proceeds of its initial public offering to retire the Notes in March 1996. In January 1994, the Company issued 8% cumulative Series A Preferred Stock to NationsBanc Capital Corporation ("NationsBanc"), from which it realized net proceeds of $3.9 million. In connection with the issuance of the Company's Series A Preferred Stock, all of the Company's outstanding 1993 Preferred Stock and Debentures were converted into common stock. A portion of the net proceeds of the Second Sirrom Note and the issuance of the Series A Preferred Stock was used to fund operations. The Company invested the remainder of the proceeds of the Second Sirrom Note and the Series A Preferred Stock, amounting to $3.5 million, in short-term interest-bearing securities. On January 19, 1996, the Company exercised its right to redeem the Series A Preferred Stock from NationsBanc. On February 1, 1996, NationsBanc elected to convert all of the Series A Preferred Stock into common stock. Thus, effective February 1, 1996, all outstanding shares of Series A Preferred Stock were converted into 3,095,592 shares of common stock. In connection with the conversion, the Company paid NationsBanc $677,000 in accrued but unpaid dividends and interest on the Series A Preferred Stock during the year ended December 31, 1996. In connection with the Company's initial public offering, the Company issued 4,570,000 shares of its $0.01 par value common stock in March 1996. The Company received net proceeds of $74.6 million after the underwriting discount and expenses of the offering. At December 31, 1996, the Company had working capital of $69.6 million. At December 31, 1995, the Company had working capital of $5.5 million. In October 1996, the Company established a $5 million line-of-credit with NationsBank, N.A. to facilitate interim capital equipment financing needs. As of March 17, 1997, the Company had total borrowings of $4.1 million under the line-of-credit. The Company's principal commitments consist of an obligation under a capital lease for switching equipment, which amounted to $524,000 at December 31, 1996 and $528,000 at December 31, 1995, and the line-of-credit, which had a balance of $4.1 million as of March 17, 1997. The Company believes that its current cash balances, other working capital and cash flows from operations will be sufficient to meet its capital requirements for at least the next 12 months and for the currently foreseeable future. -24- FORWARD-LOOKING STATEMENTS The Company may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission (the "Commission") and its reports to shareholders. Statements made in this Annual Report, other than those concerning historical information, should be considered forward-looking and subject to various risks and uncertainties. Such forward-looking statements are made based on management's belief as well as assumptions made by, and information currently available to, management pursuant to "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company's actual results may differ materially from the results anticipated in these forward-looking statements due to, among other things: Factors Affecting Operating Results; Seasonality; Potential Fluctuations in Quarterly Results. The Company's operating results have varied significantly in the past and may vary significantly in the future. Special factors that may cause the Company's future operating results to vary include the unique nature of strategic relationships into which the Company may enter in the future, changes in operating expenses resulting from such strategic relationships and other factors, the continued acceptance of the Company's licensing program, the financial performance of the Company's licensees, the timing of new service announcements, market acceptance of new and enhanced versions of the Company's services, potential acquisitions, changes in legislation and regulation that may affect the competitive environment for the Company's communications services and general economic and seasonal factors. In the future, revenues from the Company's strategic relationships may become an increasingly significant portion of the Company's total revenues. Due to the unique nature of each strategic relationship, these relationships may change the Company's mix of expenses relative to revenues. Quarterly revenues are difficult to forecast because the market for the Company's information and telecommunications services is rapidly evolving. The Company's expense levels are based, in part, on its expectations as to future revenues. If revenue levels are below expectations, the Company may be unable or unwilling to reduce expenses proportionately and operating results would likely be adversely affected. As a result, the Company believes that period-to- period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. Due to all of the foregoing factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such event, the market price of the Company's common stock will likely be adversely affected. Intense Competition. The information and telecommunications services industries are intensely competitive, rapidly evolving and subject to rapid technological change. The Company expects competition to increase in the future. Many of the Company's current and potential competitors have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, personnel, marketing, engineering, technical and other resources than the Company. Such competition could materially adversely affect the Company's business, operating results or financial condition. The Company attempts to differentiate itself from its competitors by offering an integrated suite of information and telecommunications services. Other providers currently offer each of the individual services and certain combinations of the services offered by the Company. The Company's worldwide long distance services and features such as conference calling compete with services provided by companies such as AT&T, MCI and Sprint, as well as smaller interexchange long distance providers. The Company's voice mail services compete with voice mail services provided by certain RBOCs as well as by independent voice mail vendors such as Octel. The Company's enhanced travel services, concierge services, news services and electronic mail services are competing with services provided by America Online, Prodigy and numerous Internet service providers. When implemented, the Company's Orchestrate(SM) product will compete with companies such as Octel, Microsoft, Novell, Inc. and Lucent Technologies Inc. ("Lucent"). The Company's call center technology will compete with companies such as AT&T, MCI and Lucent. The Company expects that other parties will develop and implement information and -25- telecommunications service platforms similar to its platform, thereby increasing competition for the Company's services. In addition, on February 8, 1996, the President signed into law the 1996 Act that will allow local exchange carriers, including the RBOCs, to provide inter-LATA long distance telephone service, which will likely significantly increase competition for long distance services. The new legislation also grants the FCC the authority to deregulate other aspects of the telecommunications industry, which in the future may, if authorized by the FCC, facilitate the offering of an integrated suite of information and telecommunications services by regulated entities, including the RBOCs, in competition with the Company. Such increased competition could have a material adverse effect on the Company's business, operating results or financial condition. Telecommunication companies compete for consumers based on price, with major long distance carriers conducting extensive advertising campaigns to capture market share. There can be no assurance that a decrease in the rates charged for communications services by the major long distance carriers or other competitors, whether caused by general competitive pressures or the entry of the RBOCs and other local exchange carriers into the long distance market, would not have a material adverse effect on the Company's business, operating results or financial condition. The Company expects that the information and telecommunications services markets will continue to attract new competitors and new technologies, possibly including alternative technologies that are more sophisticated and cost effective than the Company's technology. The Company does not have the contractual right to prevent its subscribers from changing to a competing network, and the Company's subscribers may generally terminate their service with the Company at will. Ability to Manage Growth; Acquisition Risks. The Company has experienced substantial growth in recent years. This growth has placed significant demands on all aspects of the Company's business, including its administrative, technical and financial personnel and systems. Additional expansion by the Company may further strain the Company's management, financial and other resources. There can be no assurance that the Company's systems, procedures, controls and existing space will be adequate to support expansion of the Company's operations. The Company's future operating results will substantially depend on the ability of its officers and key employees to manage changing business conditions and to implement and improve its technical, administrative, financial control and reporting systems. If the Company is unable to respond to and manage changing business conditions, then the quality of the Company's services, its ability to retain key personnel and its results of operations could be materially adversely affected. At certain stages of growth in network usage, the Company is required to add capacity to its computer telephony platform and its digital central office switch, thus requiring the Company continuously to attempt to predict growth in its network usage and add capacity to its switch accordingly. Difficulties in managing continued growth, including difficulties in predicting the growth in network usage, could have a material adverse effect on the Company. The Company has grown, and intends to grow, in substantial part through acquisitions of complementary services, products, technologies or businesses. The Company acquired substantially all of the assets and business operations of TeleT in September 1996. There can be no assurance that the Company will be able to successfully integrate TeleT's products, technologies, operations, personnel or business, or that once integrated TeleT's operations will achieve comparable levels of revenue, profitability or productivity as the Company's operations existing at the time of the acquisition or otherwise perform as expected. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of additional debt, the write-off of software development costs and the amortization of expenses related to goodwill and other intangible assets, all of which could have a material adverse effect on the Company's business, operating results or financial condition. Future acquisitions also involve numerous additional risks, including difficulties in the assimilation of the operations, services, products and personnel of the acquired company, the diversion of management's attention from other business concerns, entering markets in which the Company has little or no direct prior experience and the potential loss of key employees of the acquired company. The Company is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. -26- Technological Change; Dependence on New Services. The computer telephony market is characterized by rapid technological change, frequent new product introductions and evolving industry standards. The Company's future success will depend in significant part on its ability to anticipate industry standards, continue to apply advances in technologies, enhance its current services, develop and introduce new services on a timely basis, enhance its software and its computer telephony platform and successfully compete with products and services based on evolving or new technology. The Company expects new products and services, and enhancements to existing products and services, to be developed and introduced which will compete with the services offered by the Company. Among the new and evolving technologies that the Company expects to compete for the services offered by the Company are notebook computers equipped with sound cards, fax modems and cellular modems, portable Internet appliances which would allow connection to the Internet over wireless networks and personal digital assistants with enhanced communications features. The Company is also aware that products currently exist which allow text-to-voice e-mail conversion and provide "meet me" services, and that several communications companies are developing or have developed services that would compete with the Company's proposed "follow me" service by allowing users to have a single telephone number for all of their communications devices. The Company currently intends to introduce and market new and enhanced services in 1997, including Orchestrate(SM) and network-based call center technology. Development of these services will require the implementation of new technologies and the integration of these technologies into the Company's platform. There can be no assurance that the Company will be successful in developing and marketing service enhancements or new services that respond to these or other technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of its services, or that its new services and the enhancements thereto, will adequately meet the requirements of the marketplace and achieve market acceptance. Delays in the introduction of new services, the inability of the Company to develop such new services or the failure of such services to achieve market acceptance could have a material adverse effect on the Company's business, operating results or financial condition. Uncertainty of Strategic Relationships. A principal element of the Company's strategy is the creation and maintenance of strategic relationships that will enable the Company to offer its services to a larger customer base than the Company could otherwise reach through its direct marketing efforts. The Company has experienced growth in its existing strategic relationships during 1996, and has entered into or initiated new strategic relationships with several companies, including WorldCom, CompuServe Interactive (United Kingdom), MobileComm and PageNet. Although the Company intends to continue to expand its direct marketing channels, the Company believes that strategic partner relationships may offer a potentially more effective and efficient marketing channel. Consequently, the Company's success depends in part on the ultimate success of these relationships and on the ability of these strategic partners to effectively market the Company's services. Failure of one or more of the Company's strategic partners to successfully develop and sustain a market for the Company's services, or the termination of one or more of the Company's relationships with a strategic partner, could have a material adverse effect on the Company's overall performance due to the possibility of more costly direct marketing expenditures by the Company and other factors. In November 1996 the Company entered into a strategic alliance agreement with WorldCom, the fourth largest long-distance carrier in the United States, in which WorldCom is required, among other things, to provide the Company with the right of first opportunity to provide enhanced computer telephony services for a period of at least 25 years. In connection with this agreement, the Company issued to WorldCom 2,050,000 shares of common stock valued at approximately $25.2 million (based on an independent appraisal) and paid WorldCom $4.7 million in cash. The Company recorded the value of this agreement as an intangible asset. While the Company believes that the intangible asset will be recovered over the life of the agreement, this recoverability is dependent upon the success of the strategic relationship. The Company will continually evaluate the realizability of the intangible asset recorded. Although the Company views its strategic relationships as a key factor in its overall business strategy and in the development and commercialization of its services, there can be no assurance that its strategic partners view their relationships with the Company as significant for their own businesses or that they will not reassess their commitment to the Company in the future. The Company's arrangements with its strategic partners do not always establish minimum performance requirements for the Company's strategic partners, but instead rely on the -27- voluntary efforts of these partners in pursuing joint goals. Certain of these arrangements prevent the Company from entering into strategic relationships with other companies in the same industry as the Company's strategic partners, either for specified periods of time or while the arrangements remain in force. In addition, even when the Company is without contractual restriction, it may be restrained by business considerations from pursuing alternative arrangements. The ability of the Company's strategic partners to incorporate the Company's services into successful commercial ventures will require the Company, among other things, to continue to successfully enhance its existing services and develop new services. The Company's inability to meet the requirements of its strategic partners or to comply with the terms of its strategic partner arrangements could result in its strategic partners failing to market the Company's services, seeking alternative providers of communication and information services or canceling their contracts with the Company, any of which could have a material adverse impact on the Company. Dependence on Licensing and Strategic Relationships. The Company has licensing relationships with companies that have chosen to outsource part or all of their communications card services to Premiere. License fees accounted for approximately 26.5% of Premiere's 1996 revenues. One licensee, CNC, accounted for approximately 19.6% of Premiere's 1996 license fees and approximately 5.2% of the Company's total 1996 revenues. On August 6, 1996, CNC was placed into bankruptcy under Chapter 11 of the Bankruptcy Code. CNC owed the Company approximately $627,000 as of December 31, 1996. However, CNC's transmission provider, WilTel, is also obligated to pay this amount to the Company. In addition, WorldCom accounted for approximately 43.5% of Premiere's 1996 license fees and approximately 11.5% of Premiere's total 1996 revenues. The Company believes that through a combination of new licensing agreements, the strategic alliance agreement with WorldCom and increased revenues from existing licensees, the Company has replaced all of the anticipated CNC revenue. The Company intends to increase its number of licensees and its licensee transaction volume in the future. The Company's success depends in part upon the ultimate success or failure of its licensees. The telecommunications industry is intensely competitive and rapidly consolidating. The majority of companies that have chosen to outsource communications card services to Premiere are small or medium-sized telecommunications companies that may be unable to withstand the intense competition in the telecommunications industry. During the past 12 months, one licensee, in addition to CNC, ceased doing business with the Company primarily due to financial difficulties. Licensees that ceased doing business with Premiere due to financial difficulties contributed in the aggregate approximately $2.9 million of Premiere's 1996 revenues. Although the Company was able to add new licensees in 1996, there can be no assurance that the failure of one or more of the Company's licensees to develop and sustain a market for the Company's services, or termination of one or more of the Company's licensing relationships, will not have a material adverse effect on the Company's business, operating results or financial condition. Potential Adverse Impact of Pending Litigation. The Company has several litigation matters pending, which the Company is defending vigorously. See Note 11 of Notes to Consolidated Financial Statements. Due to the inherent uncertainties of the judicial system, the Company is unable to predict the outcome of such litigation matters. If the outcome of one or more of such matters is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. Dependence on Key Management and Personnel. The Company's success is largely dependent upon its executive officers and other key personnel, the loss of one or more of whom could have a material adverse effect on the Company. The Company believes that its continued success will depend to a significant extent upon the efforts and abilities of Boland T. Jones, Chairman and President, D. Gregory Smith, Executive Vice President, Gregg S. Freishtat, Senior Vice President, and Leonard A. DeNittis, Vice President of Engineering and Operations, and certain other key executives. The loss of services of any of these individuals could have a material adverse effect upon the Company. Messrs. Jones, Smith and DeNittis have entered into employment agreements with the Company which expire in December 1999, and the Company maintains key man life insurance on each of these persons in the amounts of $3.0 million, $2.0 million and $2.0 million, respectively. The Company also believes that to be successful it must hire and retain highly qualified engineering and product development personnel. Competition in the recruitment of highly qualified personnel in the information -28- and telecommunications services industry is intense. The inability of the Company to locate, hire and retain such personnel may have a material adverse effect on the Company. No assurance can be given that the Company will be able to retain its key employees or that it will be able to attract qualified personnel in the future. Dependence on Switching Facilities and Computer Telephony Platforms; Damage, Failure and Downtime. The Company currently maintains switching facilities and computer telephony platforms in Atlanta, Georgia and Dallas, Texas, and a POP site in London, England. The Company's network service operations are dependent upon its ability to protect the equipment and data at its switching facilities against damage that may be caused by fire, power loss, technical failures, unauthorized intrusion, natural disasters, sabotage and other similar events. The Company has taken precautions to protect itself and its subscribers from events that could interrupt delivery of the Company's services. These precautions include physical security systems, uninterruptible power supplies, on-site power generators designed to be sufficient to continue operation of the Company's network in the event of a power outage for approximately four days, upgraded backup hardware and chemical fire protection systems. The Company's network is further designed such that the data on each network server is duplicated on a separate network server. Notwithstanding such precautions, there can be no assurance that a fire, act of sabotage, technical failure, natural disaster or a similar event would not cause the failure of a network server and its backup server, other portions of the Company's network or one of the facilities as a whole, thereby resulting in an outage of the Company's services. Such an outage could have a material adverse effect on the Company. While the Company has not experienced any downtime of its network due to natural disasters or similar events, on occasion the Company has experienced downtime due to various technical failures. When such failures have occurred, the Company has worked to remedy the failure as soon as possible. The Company believes that these technical failures have been infrequent. Although the Company maintains business interruption insurance providing for aggregate coverage of approximately $10.8 million per policy year, there can be no assurance that the Company will be able to maintain its business interruption insurance, that such insurance would continue to be available at reasonable prices, that such insurance would cover all such losses or that such insurance would be sufficient to compensate the Company for losses it experiences due to the Company's inability to provide services to its subscribers. Limited Protection of Proprietary Technology; Risks of Infringement. The Company relies primarily on a combination of copyright and trade secret laws and contractual confidentiality provisions to protect its proprietary rights. These laws and contractual provisions provide only limited protection of the Company's proprietary rights. The Company has one patent application pending and 13 trademark or copyright registrations pending. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's software or services or to obtain and use information that the Company regards as proprietary. Although the Company is not aware of any current or previous infringement on its proprietary rights, there can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as the laws of the United States. The Company is aware of other companies that use the terms "WorldLink" or "Premiere" in describing their products and services, including telecommunications products and services. Certain of those companies hold registered trademarks which incorporate the names "WorldLink" or "Premiere." The Company has received correspondence from a provider of prepaid calling cards which claims that the Company's use of the term "Premiere WorldLink" infringes upon its trademark rights. In addition, the Company has received correspondence from a major bank, which is among the holders of registered trademarks incorporating the term "WorldLink," inquiring as to the nature of the Company's use of the term "WorldLink" as a part of its mark "Premiere WorldLink." Based on, among other things, the types of businesses in which the other companies are engaged and the low likelihood of confusion, the Company believes these claims to be without merit. No assurance can be given that actions or claims alleging trademark, patent or copyright infringement will not be brought against the Company with respect to current or future products or services, or that, if such actions are brought, the Company will ultimately prevail. Any such claiming parties may have significantly greater resources than the Company to pursue litigation of such claims. Any such claims, whether with or without merit, could be time consuming, result in costly litigation, cause delays in introducing new or improved services, require the Company to enter into royalty or licensing agreements or cause the Company to discontinue use of the challenged tradename, service mark or technology at potential significant expense to the Company associated with the marketing of a new name -29- or the development or purchase of replacement technology, all of which could have a material adverse effect on the Company. On June 28, 1996, AudioFAX filed a complaint against the Company and PCI in the United States District Court for the Northern District of Georgia. In the complaint, AudioFAX alleged that the Company manufactures, uses, sells and/or distributes certain enhanced facsimile products which infringe three United States patents and one Canadian patent allegedly held by AudioFAX. In the third quarter of 1996 the Company took a one-time charge for the estimated legal fees and other costs that the Company expected to incur to resolve this matter. On February 11, 1997, the Company entered into a long term, non-exclusive license agreement with AudioFAX settling the litigation. Dependence Upon Software. The software developed and utilized by the Company in providing its services may contain undetected errors. Although the Company engages in extensive testing of its software prior to introducing the software onto its network, there can be no assurance that errors will not be found in software after commencement of use of such software. Any such error may result in partial or total failure of the Company's network, additional and unexpected expenses to fund further product development or to add programming personnel to complete a development project, and loss of revenue because of the inability of subscribers to use Premiere's network or the cancellation by subscribers of their service with Premiere, any of which could have a material adverse effect on the Company. The Company maintains technology errors and omissions insurance coverage of $10.0 million per policy aggregate. Dependence Upon Telecommunication Providers; No Guaranteed Supply. The Company does not own a transmission network and, accordingly, depends on WilTel, Corporate Telemanagement, Inc. ("CTG"), Cherry Communications, Incorporated ("Cherry"), Sprint and other facilities-based and non-facilities based carriers for transmission of its subscribers' long distance calls. For the year ended December 31, 1996, WilTel, CTG, Cherry and MCI were responsible for carrying traffic representing approximately 38%, 29%, 13% and 2%, respectively, of the minutes of long distance transmissions billed to the Company. Further, the Company is dependent upon local exchange carriers for call origination and termination. In October 1995, a carrier utilized by the Company to originate calls experienced a regional network outage due to Hurricane Opal. The Company's losses due to this outage were approximately $37,000, all of which, less a $5,000 deductible, was reimbursed by the Company's insurance carrier. In September 1995, a provider utilized by the Company to originate calls experienced a regional network outage due to a technical malfunction caused by a third party vendor performing software maintenance on the provider's network. The Company estimated its losses at approximately $17,000 due to this outage. This loss was not covered by the Company's insurance. Although the Company's originating providers are generally able to reroute the Company's inbound calls within several hours of an outage, rerouting was not possible in these instances due to the widespread nature of the outages. If there is an outage affecting one of the Company's terminating carriers, the Company's platform automatically switches calls to another terminating carrier if capacity is available. The Company has not experienced significant losses in the past because of interruptions of service at terminating carriers, but no assurance can be made in this regard with respect to the future. The Company's ability to maintain and expand its business depends, in part, on its ability to continue to obtain telecommunication services on favorable terms from long distance carriers and the cooperation of both interexchange and local exchange carriers in originating and terminating service for its subscribers in a timely manner. A partial or total failure of the Company's ability to receive or terminate calls would result in a loss of revenues by the Company and could lead to a loss of subscribers, which could have a material adverse effect on the Company. Regulation. Various regulatory factors may have an impact on the Company's ability to compete and on its financial performance. The Company is subject to regulation by the FCC and by various state public service and public utility commissions. Federal and state regulations and regulatory trends have had, and may have in the future, both positive and negative effects on the Company and on the information and telecommunications service industries as a whole. FCC policy currently requires interexchange carriers to provide resale of the use of their transmission facilities. The FCC also requires local exchange carriers to provide all interexchange carriers with equal access to the origination and termination of calls. If either or both of these requirements were removed, the Company could be adversely affected. These carriers may experience disruptions in service due to factors outside the Company's control, which may cause the Company to lose the ability to complete its subscribers' long distance -30- calls. The Company has made all filings with the FCC necessary to allow the Company to provide interstate and international long distance service. In order to provide intrastate long distance service, the Company is generally required to obtain certification to provide telecommunications services from the public service or public utility commissions of each state, or to register or be found exempt from registration by such commissions. Premiere has made the filings and taken the actions it believes are necessary to become certified or tariffed to provide intrastate card services to customers throughout the United States, except in two states, Alaska and Hawaii, which have historically had restrictions making the cost prohibitive in light of the immaterial amount of intrastate traffic the Company handles in those states. This, however, has recently changed and the Company anticipates authorization to occur in 1997. To date, the Company has not been denied any licenses or tariffs. The Company has received authorization to provide intrastate card services in 44 states, and its applications to provide intrastate card services are pending in 4 states. With the exception of one state, New Mexico, in which the Company's application to provide "0+" service is pending, the Company has received authorization to provide "0+" service in each state where the Company provides such service. The Company's platform does not prevent subscribers from using the platform to make intrastate long distance calls in any state, including states in which the Company has not received approval to provide intrastate long distance services. There can be no assurance that the Company's provision of intrastate card services and "0+" service in states where it is not certified or tariffed to provide such services will not have a material adverse effect on the Company's business, operating results or financial condition. On February 8, 1996, the President signed into law the 1996 Act which will allow local exchange carriers, including the RBOCs, to provide inter-LATA long distance telephone service and which also grants the FCC authority to deregulate other aspects of the telecommunications industry. The new legislation may result in increased competition to the Company from others, including the RBOCs and increased transmission costs in the future. In addition, the Company may be subject to additional regulatory requirements and fees as a result of changes made by the 1996 Act. In conducting various aspects of its business, the Company is subject to various laws and regulations relating to commercial transactions generally, such as the Uniform Commercial Code and is also subject to the electronic funds transfer rules embodied in Regulation E promulgated by the Board of Governors of the Federal Reserve. Given the expansion of the electronic commerce market, the Federal Reserve might revise Regulation E or adopt new rules for electronic funds transfer affecting users other than consumers. Congress has held hearings on whether to regulate providers of services and transactions in the electronic commerce market, and it is possible that Congress or individual states could enact laws regulating the electronic commerce market. If enacted, such laws, rules and regulations could be imposed on the Company's business and industry and could have a material adverse effect on the Company's business, operating results or financial condition. Risks Associated with International Expansion. A key component of the Company's strategy is its planned expansion into international markets. In 1996, the Company opened a POP site in London, England and the Company intends to pursue long term strategic relationships with European partners. The Company also intends to establish Telnodes and Network Managers in New Zealand, Canada and potentially other countries in 1997. If international revenues are not adequate to offset the expense of establishing and maintaining these international operations, the Company's business, operating results or financial condition could be materially adversely affected. To date, the Company has only limited experience in marketing and distributing its services internationally. There can be no assurance that the Company will be able to successfully establish the proposed international Telnodes and Network Managers, or to market, sell and deliver its services in these markets. In addition to the uncertainty as to the Company's ability to expand its international presence, there are certain difficulties and risks inherent in doing business on an international level, such as burdensome regulatory requirements and unexpected changes in these requirements, export restrictions, export controls relating to technology, tariffs and other trade barriers, difficulties in staffing and managing international operations, longer payment cycles, problems in collecting accounts receivable, political instability, fluctuations in currency exchange rates, seasonal reductions in business activity during the summer months in Europe and certain other parts of the world and potentially adverse tax consequences, which could have a material adverse effect on the performance of the Company's international operations. There can be no assurance that one or more of such factors will not have a material adverse effect on the Company's future international operations and, consequently, on the Company's business, operating results or financial condition. -31- Risk of Loss From Returned Transactions; Fraud; Bad Debt; Theft of Services. The Company utilizes two principal financial payment clearance systems: the Federal Reserve's Automated Clearing House ("ACH") for electronic fund transfers and the national credit card systems for electronic credit card settlement. In its use of these established payment clearance systems, the Company generally bears credit risks similar to that normally assumed by other users of these systems arising from returned transactions caused by insufficient funds, stop payment orders, closed accounts, frozen accounts, unauthorized use, disputes, theft or fraud. From time to time, persons have gained unauthorized access to the Company's network and obtained services without rendering payment to the Company by unlawfully utilizing the access numbers and PINs of authorized users. No assurance can be given that future losses due to unauthorized use of access numbers and PINs will not be material. The Company attempts to manage these risks through its internal controls and proprietary billing system. The Company's computer telephony platform prohibits a single access number and PIN from establishing multiple simultaneous connections to the platform, and the Company establishes preset spending limits for each subscriber. Past experience in estimating and establishing reserves, and the Company's historical losses are not necessarily accurate indications of the Company's future losses or the adequacy of the reserves established by the Company in the future. Although the Company believes that its risk management and bad debt reserve practices are adequate, there can be no assurance that the Company's risk management practices or reserves will be sufficient to protect the Company from unauthorized or returned transactions or thefts of services which could have a material adverse effect on the Company's business, operating results or financial condition. Volatility of Stock Price. There may be significant volatility in the market price for the common stock. The Company believes factors such as actual or anticipated quarterly fluctuations in financial results, changes in earnings estimates by securities analysts and announcements of material events by the Company, its major strategic partners or licensees or its competitors may cause the market price for the common stock to fluctuate, perhaps substantially. These fluctuations, as well as general economic conditions, may have a material adverse effect on the market price of the common stock. In addition, in recent years the stock market in general, and technology-related stocks in particular, have experienced price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. The Company cautions that such factors are not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by, or on behalf of, the Company. -32- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................................. 34 Consolidated Balance Sheets as of December 31, 1995 and 1996.......................................... 35 Consolidated Statements of Operations for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996.................................................. 36 Consolidated Statements of Shareholders' Equity for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996................................ 37 Consolidated Statements of Cash Flows for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996.................................................. 38 Notes to Consolidated Financial Statements............................................................ 39
-33- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Premiere Technologies, Inc.: We have audited the accompanying consolidated balance sheets of PREMIERE TECHNOLOGIES, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 31, 1995 and 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Premiere Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996 and the results of their operations and their cash flows for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Atlanta, Georgia February 11, 1997 -34- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996
ASSETS 1995 1996 ------------- -------------- CURRENT ASSETS: Cash and cash equivalents........................................................... $ 1,981,144 $ 6,800,057 Investments......................................................................... 3,515,782 67,333,688 Accounts receivable (less allowance for doubtful accounts of $107,613 and $609,769, respectively)......................................... 3,013,185 4,743,304 Due from related parties............................................................ 276,477 127,444 Prepaid expenses and other.......................................................... 497,746 2,283,944 Deferred tax asset.................................................................. 2,533,403 3,571,938 ------------- -------------- Total current assets.......................................................... 11,817,737 84,860,375 ------------- -------------- PROPERTY AND EQUIPMENT................................................................. 5,734,992 19,775,141 Less: accumulated depreciation..................................................... (980,943) (3,001,941) ------------- -------------- Net property and equipment.................................................... 4,754,049 16,773,200 ------------- -------------- OTHER ASSETS: Deferred software development costs, net............................................ 78,105 507,221 Due from related parties............................................................ 100,672 189,618 Deferred tax asset.................................................................. 0 7,566,401 Strategic alliance contract intangible, net (Note 2)................................ 0 29,814,143 Other............................................................................... 237,099 340,151 ------------- -------------- $16,987,662 $140,051,109 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable.................................................................... $ 849,584 $ 4,172,542 Accrued payroll..................................................................... 357,345 1,036,866 Accrued transmission................................................................ 1,325,094 496,210 Accrued sales taxes................................................................. 780,661 993,829 Accrued bonuses..................................................................... 15,000 138,671 Accrued construction costs.......................................................... 883,850 1,445,517 Other accrued expenses.............................................................. 887,726 3,725,470 Unearned revenue.................................................................... 352,541 452,618 Current portion of capital lease obligation......................................... 172,422 286,642 Dividends payable on preferred stock................................................ 647,644 0 Notes payable....................................................................... 10,500 2,560,500 ------------- -------------- Total current liabilities..................................................... 6,282,367 15,308,865 ------------- -------------- LONG TERM LIABILITIES: Notes payable....................................................................... 1,915,192 11,543 Obligation under capital lease...................................................... 355,160 237,692 Deferred tax liability.............................................................. 242,216 334,520 ------------- -------------- Total long term liabilities................................................... 2,512,568 583,755 ------------- -------------- COMMITMENTS AND CONTINGENCIES (Note 11) SHAREHOLDERS' EQUITY: Series A convertible, redeemable 8% cumulative preferred stock, $0.01 par value; 5,000,000 shares authorized, 128,983 and 0 shares issued and outstanding, respectively, converted to common stock......................................... 3,906,500 0 Common stock, $0.01 par value; 150,000,000 shares authorized, 12,367,920 and 24,011,777 shares issued and outstanding, respectively........................ 123,679 240,118 Additional paid-in-capital.......................................................... 7,237,795 125,785,798 Subscriptions receivable............................................................ (2,436,703) 0 Stock warrants outstanding.......................................................... 243,760 0 Accumulated deficit................................................................. (882,304) (1,867,427) ------------- -------------- Total shareholders' equity.................................................... 8,192,727 124,158,489 ------------- -------------- $16,987,662 $140,051,109 ============= ==============
The accompanying notes are an integral part of these consolidated balance sheets. -35- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1994 1995 1996 ------------- ------------- ------------- REVENUES: Subscriber services............................. $5,391,184 $15,084,985 $36,556,688 License fees.................................... 1,747,942 5,934,587 13,777,335 Other revenues.................................. 1,181,014 1,306,366 1,745,315 ------------- ------------- ------------- Total revenues............................... 8,320,140 22,325,938 52,079,338 COST OF SERVICES.................................... 2,796,332 7,602,511 16,710,820 ------------- ------------- ------------- GROSS MARGIN........................................ 5,523,808 14,723,427 35,368,518 ------------- ------------- ------------- OPERATING EXPENSES: Selling and marketing........................... 3,022,203 7,266,998 16,985,235 General and administrative...................... 1,817,708 4,460,561 8,780,604 Depreciation and amortization................... 245,687 696,898 2,255,253 Charge for purchased research and development... 0 0 11,030,000 Accrued litigation costs........................ 0 0 1,250,000 ------------- ------------- ------------- Total operating expenses..................... 5,085,598 12,424,457 40,301,092 OPERATING INCOME (LOSS)............................. 438,210 2,298,970 (4,932,574) ------------- ------------- ------------- OTHER INCOME (EXPENSE): Interest income................................. 127,177 283,082 2,529,197 Interest expense................................ (242,561) (366,034) (188,340) Other, net...................................... 42,750 32,062 68,641 ------------- ------------- ------------- Total other income (expense)................. (72,634) (50,890) 2,409,498 ------------- ------------- ------------- NET INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY LOSS.................... 365,576 2,248,080 (2,523,076) PROVISION FOR (BENEFIT FROM) INCOME TAXES........................................... 47,529 330,486 (1,626,541) ------------- ------------- ------------- NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS............................................ 318,047 1,917,594 (896,535) EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, NET OF TAX EFFECT OF $37,880.................... 0 0 59,251 ------------- ------------- ------------- NET INCOME (LOSS)................................... 318,047 1,917,594 (955,786) PREFERRED STOCK DIVIDENDS........................... 256,000 308,419 29,337 ------------- ------------- ------------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS............................. $ 62,047 $ 1,609,175 $ (985,123) ============= ============= ============= PRO FORMA INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS FOR PRIMARY EARNINGS PER SHARE...................... $ 225,614 $ 1,807,382 $ (985,123) ============= ============= ============= PRO FORMA INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARES: Primary......................................... $0.01 $0.10 $(0.05) ============= ============= ============= SHARES USED IN COMPUTING EARNINGS PER COMMON AND COMMON EQUIVALENT SHARES (in thousands): Primary................. 19,147 17,529 20,170 ============= ============= =============
The accompanying notes are an integral part of these consolidated statements. -36- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
SERIES A (FORMERLY SERIES STOCK TOTAL 1994) ADDITIONAL SUBSCRIP- WARRANTS ACCUMU- SHARE- PREFERRED COMMON PAID-IN TIONS OUT- LATED HOLDERS' STOCK STOCK CAPITAL RECEIVABLE STANDING DEFICIT EQUITY ------------ --------- ------------- ------------ ------------ ------------ ------------- BALANCE, March 31, 1994........... $ 3,906,500 $ 59,678 $ 1,959,717 $ (114,110) $ 243,760 $(2,553,526) $ 3,502,019 Subscriptions receivable payments received............... 0 0 0 39,359 0 0 39,359 Dividends on preferred stock...... 0 0 0 0 0 (256,000) (256,000) Net income........................ 0 0 0 0 0 318,047 318,047 ------------ --------- ------------- ------------ ------------ ------------ ------------- BALANCE, December 31, 1994........ 3,906,500 59,678 1,959,717 (74,751) 243,760 (2,491,479) 3,603,425 Subscriptions receivable on loans to shareholders........ 0 55,523 2,306,429 (2,361,952) 0 0 0 Issuance of common stock.......... 0 8,478 349,976 0 0 0 358,454 Income tax benefit from exercise of stock options....... 0 0 2,621,673 0 0 0 2,621,673 Dividends on preferred stock...... 0 0 0 0 0 (308,419) (308,419) Net income........................ 0 0 0 0 0 1,917,594 1,917,594 ------------ --------- ------------- ------------ ------------ ------------ ------------- BALANCE, December 31, 1995........ 3,906,500 123,679 7,237,795 (2,436,703) 243,760 (882,304) 8,192,727 Conversion of Series A Preferred Stock to common stock........................... (3,906,500) 30,956 3,875,544 0 0 0 0 Conversion of stock warrants to common stock................. 0 6,265 237,520 0 (243,760) 0 25 Subscriptions receivable on loans to shareholders........... 0 0 0 2,436,703 0 0 2,436,703 Issuance of common stock: Initial public offering......... 0 45,700 74,571,348 0 0 0 74,617,048 TeleT Communications LLC........ 0 4,982 7,495,018 0 0 0 7,500,000 Strategic alliance contract intangible...................... 0 20,500 25,174,000 0 0 0 25,194,500 Income tax benefit from exercise of stock options....... 0 0 6,886,091 0 0 0 6,886,091 Exercise of stock options......... 0 8,036 308,482 0 0 0 316,518 Dividends on preferred stock...... 0 0 0 0 0 (29,337) (29,337) Net loss.......................... 0 0 0 0 0 (955,786) (955,786) ------------ --------- ------------- ------------ ------------ ------------ ------------- BALANCE, December 31, 1996........ $ 0 $240,118 $125,785,798 $ 0 $ 0 $(1,867,427) $124,158,489 ============ ========= ============= ============ ============ ============ =============
The accompanying notes are an integral part of these consolidated statements. -37- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1994 1995 1996 -------------- ------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)....................................................... $ 318,047 $ 1,917,594 $ (955,786) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................... 245,687 696,898 2,255,253 Amortization of note discount.................................... 30,779 47,369 8,677 Non-recurring charges............................................ 0 0 12,280,000 (Loss) gain on sale of assets.................................... (47,729) 6,180 17,672 Provision for (benefit from) income taxes........................ 0 330,486 (1,626,541) Loss on early extinguishment of debt............................. 0 0 97,131 Changes in assets and liabilities: Accounts receivable, net..................................... (233,738) (2,387,451) (1,730,119) Prepaid expenses and other................................... 5,917 (597,513) (1,981,554) Accounts payable............................................. (378,893) 653,940 3,222,958 Accrued expenses............................................. 976,234 2,320,441 680,299 Unearned revenue............................................. 2,879 123,381 100,077 -------------- ------------- --------------- Total adjustments........................................ 601,136 1,193,731 13,323,853 -------------- ------------- --------------- Net cash provided by operating activities................ 919,183 3,111,325 12,368,067 -------------- ------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of investments, net............................................ (3,510,963) (14,819) (63,817,906) Purchase of property and equipment, net................................. (819,207) (3,503,771) (13,705,386) Acquisition of TeleT Communications LLC................................. 0 0 (2,870,000) Strategic alliance contract intangible.................................. 0 0 (4,777,303) Increase in accrued construction costs.................................. 0 883,850 561,667 Due from related parties, net........................................... (58,597) (231,647) 60,087 Software development costs.............................................. (7,431) 0 0 Proceeds from sale of equity securities................................. 97,729 0 0 -------------- ------------- --------------- Net cash used in investing activities.................... (4,298,469) (2,866,387) (84,548,841) -------------- ------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock, net............................. 0 0 74,617,048 Proceeds from payments of subscriptions receivable...................... 39,359 0 2,436,703 Proceeds from exercises of stock options................................ 0 358,454 316,542 Payment of dividends on preferred stock................................. 0 0 (676,981) Principal payments under capital lease obligation....................... (51,608) (135,776) (234,168) Principal payments on notes payable..................................... 0 0 (9,457) Proceeds from issuance of line-of-credit................................ 0 0 2,550,000 Early extinguishment of debt............................................ 0 0 (2,000,000) -------------- ------------- --------------- Net cash (used in) provided by financing activities...... (12,249) 222,678 76,999,687 -------------- ------------- --------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................................................... (3,391,535) 467,616 4,818,913 CASH AND CASH EQUIVALENTS, beginning of period............................. 4,905,063 1,513,528 1,981,144 -------------- ------------- --------------- CASH AND CASH EQUIVALENTS, end of period................................... $ 1,513,528 $ 1,981,144 $ 6,800,057 ============== ============= =============== SUPPLEMENTAL CASH FLOW DISCLOSURES: Cash paid for interest.................................................. $ 211,782 $ 299,465 $ 178,463 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Property purchased under a capitalized lease............................ $ 132,512 $ 299,586 $ 230,920 Stock issued for subscriptions receivable............................... $ 0 $ 2,361,952 $ 0 Equity issued for TeleT Communications LLC.............................. $ 0 $ 0 $ 7,500,000 Equity issued for strategic alliance contract intangible................ $ 0 $ 0 $ 25,194,500 NON-CASH TRANSACTIONS: Assets acquired with TeleT Communications LLC acquisition............... $ 0 $ 0 $ 627,225 Liabilities assumed with TeleT Communications LLC acquisition........... $ 0 $ 0 $ 100,000
The accompanying notes are an integral part of these consolidated statements. -38- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DECEMBER 31, 1994, 1995 AND 1996 1. ORGANIZATION AND NATURE OF BUSINESS Premiere Technologies, Inc. (the "Company" or "Premiere") was incorporated in Florida in July 1991. On December 18, 1995, Premiere merged into a wholly owned Georgia subsidiary in order to effect a reincorporation from Florida to Georgia (the "Reincorporation Merger"). The Company's principal business operations are carried out through its wholly owned subsidiary, Premiere Communications, Inc. ("PCI" or "Premiere Communications"), which was organized in October 1991 and began operations in January 1992. Through Premiere Communications, the Company provides a comprehensive, integrated suite of information and telecommunications services to a wide range of users. The Company delivers its services through its computer telephony platform, which provides users with a single, user-friendly point of access to the Company's services. The platform is accessible from virtually any telephone in the world and is also designed to communicate with PCs, facsimile machines and pagers. The Company's proprietary software, together with the modular and scalable architecture and open-systems design of the platform, enables the Company to customize its services at the individual subscriber level and to easily expand system capacity. The Company acquired substantially all of the assets and business operations of TeleT Communications LLC ("TeleT") on September 18, 1996 through its wholly owned subsidiary, PTEK Acquisition Corporation (the "Sub"), which was formed in 1996. The Sub was subsequently merged into Premiere Communications on December 31, 1996. Additionally, on November 13, 1996 the Company acquired all of the outstanding shares of EBIS Communications, Inc. that it did not already own. See Note 3 - Acquisitions. The Company issued 4,570,000 shares of its $0.01 par value common stock in an initial public offering in March 1996. Proceeds to the Company, net of the underwriting discount and expenses of the offering, were $74,617,048. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRESENTATION Certain prior years' data presented in the consolidated financial statements have been reclassified to conform with the current year presentation. The Company declared a 24-to-1 stock split through the declaration of a stock dividend for each share of common stock outstanding on December 18, 1995. All references to the number of common shares and per share amounts have been restated to reflect the effect of the split. In connection with the Reincorporation Merger, the designation of the Series 1994 preferred stock was changed to Series A preferred stock. -39- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) PRINCIPLES OF CONSOLIDATION The financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS For financial reporting purposes, cash and cash equivalents includes cash on hand and highly liquid money market investments. INVESTMENTS The Company follows the Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 mandates that a determination be made of the appropriate classification for debt and equity securities at the time of purchase and a reevaluation of such designation as of each balance sheet date. At December 31, 1995 and 1996, investments consisted of commercial paper, United States Treasury bills with maturities within 90 days, municipal bonds, coupon municipals, auction rate preferred investments with various maturities and other equity instruments. Management considers all debt instruments as "held to maturity" and all equity instruments as "available for sale." Debt instruments are carried at cost and equity instruments are carried at the lower of cost or market. As cost approximates market, there were no unrealized gains or losses at December 31, 1995 or 1996. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciation is provided for using the straight-line method over the estimated useful lives of the assets, commencing when the assets are placed in service. The estimated useful lives are ten years for furniture and fixtures, seven years for office equipment and five years for computer equipment. The cost of installed equipment includes expenditures for installation. Assets recorded under capital leases and leasehold improvements are depreciated over the shorter of their useful lives or the term of the related lease. Accrued construction costs consist of payables and accruals related to property, equipment and leasehold improvements under construction. DEFERRED CHARGES The Company has capitalized costs related to the development of proprietary software which is licensed to other long-distance carriers and which is used internally for processing communications card calls. All costs in the software development process that are classified as research and development are expensed as incurred until technological feasibility has been established. Once technological feasibility has been established, such costs are considered for capitalization. The Company's policy is to amortize capitalized software costs by the greater of (a) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or (b) the straight-line method over the remaining estimated life of the product, including the period being reported on. It is reasonably possible that those estimates of anticipated future gross revenues, the remaining economic life of the product or both will be reduced significantly in the near term due to competitive pressures. Additionally, as part of the TeleT acquisition, the Company recorded software development costs for technologically feasible in- process research and development. The valuation of this acquired developed software was $500,000 as of the date of the acquisition, based on an independent appraisal. The total accumulated amortization for all capitalized software development was $109,652 and $180,536 at December 31, 1995 and 1996, respectively. -40- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) LONG-LIVED ASSETS In 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The effect of adopting SFAS No. 121 was not material. The Company periodically reviews the values assigned to long-lived assets, such as property and equipment, software costs and intangibles, to determine whether any impairments are other than temporary. Management believes that the long-lived assets in the accompanying balance sheets are appropriately valued. In November 1996 the Company entered into a strategic alliance agreement with WorldCom, the fourth largest long-distance carrier in the United States, in which WorldCom is required, among other things, to provide the Company with the right of first opportunity to provide enhanced computer telephony services for a period of at least 25 years. In connection with this agreement, the Company issued to WorldCom 2,050,000 shares of common stock valued at approximately $25.2 million (based on an independent appraisal), and paid WorldCom $4.7 million in cash. As required by SFAS No. 121, this intangible has been reviewed for possible impairment based on events or changes in circumstances that indicate the carrying value may not be recoverable. Based on such review, management believes that this intangible asset is appropriately valued. This intangible will be reviewed periodically, and there can be no assurance that future reviews will not require a write down of this asset. STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB" No. 25"). Effective in 1995, the Company adopted the disclosure option of SFAS No. 123, "Accounting for Stock-based Compensation." SFAS No. 123 requires that companies which do not choose to account for stock- based compensation as prescribed by the statement, shall disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. See Note 9 - Stock Options, Warrants and Benefit Plans. REVENUE RECOGNITION The Company recognizes revenues when services are provided. Subscriber services revenues consist of services related to the Company's communications cards, including Premiere WorldLink, AFCOM and co-branded cards. Subscriber services revenues are based primarily on per minute charges. License fees represent charges to companies which have license relationships with the Company for the use of the Company's computer telephony platform. License fees are contracted on a long term basis with each licensee and are generally based on a per minute charge and, in certain circumstances, a per service charge. INCOME TAXES The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." In accordance with this statement, deferred income taxes are recorded using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income taxes are provided for items when there is a temporary difference in recording such items for financial reporting and income tax reporting. See Note 12 - Income Taxes. -41- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) PRO FORMA NET INCOME (LOSS) PER SHARE Primary net income (loss) per share is computed under the modified treasury stock method using the weighted average number of shares of common stock and dilutive common stock equivalent shares ("CSEs") from stock options outstanding during the period, at the weighted average market value of stock prices during the period. For periods prior to the Company's initial public offering, earnings per share was calculated pursuant to Securities and Exchange Commission Staff Accounting Bulletins. Under the modified treasury stock method, proceeds from the exercise of CSEs consist of the exercise price of the CSEs, as well as the related income tax benefit to the Company. CSE proceeds are assumed to be applied first to repurchase up to 20% of the Company's common stock and then to repay outstanding long term indebtedness. Any remaining CSE proceeds are assumed to be invested in United States government securities. In determining the Company's primary net income (loss) per share under the modified treasury stock method, net income (loss) per share applicable to common shareholders has been adjusted on a pro forma basis to reflect the decrease in interest expense related to a capitalized lease obligation and to notes payable outstanding during the period. To the extent that excess proceeds from the assumed exercise of outstanding options and tax benefits from the assumed exercise were in excess of the capitalized lease obligation and the notes payable, an increase in interest income related to the investment of such excess proceeds in United States government securities is reflected in adjusted net income per share applicable to common shareholders. The pro forma net interest adjustment to primary net income (loss) per share under the modified treasury stock method was $198,207 for the year ended December 31, 1995. For the year ended December 31, 1996, earnings per share was not calculated under the modified treasury stock method as the results were anti-dilutive. Fully diluted net income per common and common equivalent shares is computed by including convertible instruments which are not CSEs in the weighted average per share calculation (using the modified treasury stock method) at period-end market value of stock prices. To the extent that the convertible securities are anti-dilutive, they are not included in the fully diluted net income (loss) per common and common equivalent shares. To the extent that period-end market value of stock prices is less than the average market value for the period, then the average market value is used for fully diluted net income (loss) per common and common equivalent shares. For all periods presented, the inclusion of convertible securities in the fully diluted calculation are anti-dilutive. Accordingly, fully diluted earnings per share data is not presented. REGULATION The Company is subject to regulation by the FCC and by various state public service and public utility commissions. As an international presence is established, the Company will be subject to regulation by various other regulatory agencies. SOURCE OF SUPPLIES The Company does not own a transmission network and, accordingly, relies on both facilities-based and non-facilities based long distance carriers and other companies to provide transmission of its subscribers' long-distance calls. Although management feels that alternative telecommunications facilities could be found in a timely manner, disruption of these services for more than a brief period would have an adverse effect on operating results. During 1995 and 1996, certain carriers utilized by the Company experience regional network outages. The effect of these outages on the Company was not material. -42- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DEPENDENCE ON LICENSING RELATIONSHIPS The Company has licensing relationships with companies that have chosen to outsource part or all of their communications card services to Premiere. License fees accounted for approximately 26.6% and 26.5% of Premiere's 1995 and 1996 revenues, respectively. One licensee, Communications Network Corporation ("CNC"), accounted for approximately 25.3% of Premiere's year ended 1995 license fees and approximately 6.7% of the Company's total 1995 revenues. CNC accounted for approximately 19.6% of Premiere's 1996 license fees and approximately 5.2% of the Company's total 1996 revenues. On August 6, 1996, CNC was placed into bankruptcy under Chapter 11 of the Bankruptcy Code. CNC owed the Company approximately $627,000 as of December 31, 1996. However, CNC's transmission provider, WorldCom Network Services, d/b/a WilTel ("WilTel"), is also obligated to pay this amount to the Company. In addition, WorldCom accounted for approximately 43.5% of the Company's 1996 license fees and approximately 11.5% of the Company's total 1996 revenues. The Company intends to increase its number of licensees and its licensee transaction volume in the future. The Company's success depends in part upon the ultimate success or failure of its licensees. The telecommunications industry is intensely competitive and rapidly consolidating. The majority of companies that have chosen to outsource communications card services to Premiere are small or medium-sized telecommunications companies that may be unable to withstand the intense competition in the telecommunications industry. During the past 12 months, one licensee, in addition to CNC, ceased doing business with the Company primarily due to financial difficulties. Licensees that ceased doing business with the Company due to financial difficulties contributed in the aggregate approximately $2.9 million of Premiere's 1996 revenues. Although the Company was able to add new licensees in 1996 there can be no assurance that the failure of one or more of the Company's licensees to develop and sustain a market for the Company's services, or termination of one or more of the Company's licensing relationships, will not have a material adverse effect on the Company's business, operating results or financial condition. DEPENDENCE ON SWITCHING FACILITIES AND COMPUTER TELEPHONY PLATFORMS; DAMAGE, FAILURE AND DOWNTIME The Company currently maintains switching facilities and computer telephony platforms in Atlanta, Georgia and Dallas, Texas, and a point-of-presence ("POP") site in London, England. The Company's network service operations are dependent upon its ability to protect the equipment and data at its switching facilities against damage that may be caused by fire, power loss, technical failures, unauthorized intrusion, natural disasters, sabotage and other similar events. The Company has taken precautions to protect itself and its subscribers from events that could interrupt delivery of the Company's services. These precautions include physical security systems, uninterruptible power supplies, on-site power generators sufficient to continue operation of the Company's network in the event of a power outage for four days, upgraded backup hardware and chemical fire protection systems. The Company's network is further designed such that the data on each network server is duplicated on a separate network server. Notwithstanding such precautions, there can be no assurance that a fire, act of sabotage, technical failure, natural disaster or a similar event would not cause the failure of a network server and its backup server, other portions of the Company's network, or the facilities as a whole, thereby resulting in an outage of the Company's services and having a material adverse effect on the Company. FACTORS IMPACTING FUTURE SUCCESS The future success of the Company is dependent upon a number of factors, including the effect of rapid technological changes affecting the markets for Premiere's products and services and management's ability to effectively respond to those changes, including the development, implementation, marketing and support of new or improved products and services to respond to the changing environment; the success of Premiere's marketing arrangements, including its strategic and licensing relationships with various parties including WorldCom; the effects of intense competition in information and telecommunications services markets, including, among other things, the consequent effects on the prices that Premiere may charge for its products and services; the outcome of -43- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) pending litigation; the risks of potential claims of trademark, patent or copyright infringement from competitors and other parties, including the expense of defending claims that Premiere may consider unmeritorious; management's ability to integrate the operations of TeleT, which was acquired in September 1996, or the operations of any other entity that Premiere may acquire in the future without, among other things, incurring unexpected obligations or experiencing unexpected management distractions; the effects in connection with any potential acquisition of the write-off of acquisition expenses, the write- off of software development costs and the amortization of expenses related to goodwill and other intangible assets; Premiere's ability to expand successfully internationally; the effect of regulatory changes in the telecommunications industry; and the risk of dependence on key managerial personnel. In addition, the market price of Premiere's stock may from time to time be significantly volatile as a result of, among other things: Premiere's operating results; the operating results of other information and telecommunications companies; future issuances by Premiere of securities, including options to purchase its stock; and changes in the performance of the stock market in general. 3. ACQUISITIONS On September 18, 1996, the Company, through the Sub, acquired substantially all of the assets and business operations of TeleT for: (i) 498,187 shares of the Company's $0.01 par value common stock (the "Shares"), for which $4,982 was recorded to common stock and $7,495,018 was recorded to additional paid-in- capital, (ii) $2,870,000 in cash and (iii) the assumption of approximately $100,000 in liabilities (the "Acquisition"). TeleT is an Internet-based technology development company focused on applications that create an interchange between telephone and computer resources. The Acquisition was made pursuant to an Asset Purchase Agreement dated as of September 18, 1996 by and among the Company, the Sub, TeleT and the Members of TeleT. The Company financed the cash portion of the purchase price from working capital. An aggregate of 75,000 of the Shares were placed in escrow pursuant to an Escrow Agreement among the Company and the Members of TeleT to secure certain indemnification obligations of those Members. All Shares issued are subject to Lock-up Agreements prohibiting the sale of such Shares for a weighted average period of one year following the closing of the Acquisition. Pursuant to the Acquisition, the Company granted registration rights to the holder of 320,833 of the Shares. The registration rights are subordinate to the lock-up restrictions applicable to such Shares. Also pursuant to the Acquisition, Premiere entered into Employment Agreements with the two senior executives of TeleT. In connection with the Acquisition, the Company allocated $11.0 million of the purchase price to incomplete research and development projects. Accordingly, this cost was expensed as of the Acquisition date. This allocation represents the estimated value related to the incomplete projects determined by an independent appraisal. The development of these projects had not yet reached technological feasibility and the technology had no alternative future use. The technology acquired in the acquisition of TeleT required substantial additional development by the Company. This Acquisition has been accounted for under the purchase method of accounting and the results of TeleT's operations since the Acquisition date have been included with those of the Company. The table below reflects the historical results of the Company and the historical results of the Company and TeleT, as adjusted for pro forma purchase accounting adjustments to reflect additional depreciation and amortization of acquired software, and the related pro forma income tax effects of the adjustments. The charge for purchased research and development has been excluded from the pro forma results of operations since it has no continuing effect on operations. Pro forma results for fiscal year 1995 are not presented as the pro forma results do not differ materially from the historical results of the Company. These pro forma amounts are provided for informational purposes only and are not necessarily indicative of what actually would have occurred if the -44- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) acquisition had occurred at the beginning of the period presented. In addition, they are not intended to be projections of future results and do not reflect any synergies that might be achieved from combined operations.
For the Year Ended December 31, 1996 -------------------------------------- Historical As Adjusted ---------- ----------- Revenues $ 52,079 $ 2,330 Net income (loss) $ (956) $ 5,277 Earnings (loss) per share $ (0.05) $ 0.24
4. SUBSCRIPTIONS RECEIVABLE The founders of the Company purchased their shares of common stock by giving the Company a total of $150,000 in non-recourse, non-interest-bearing notes, of which $50,000 were short term and $100,000 were due no later than June 30, 1999 (The "Founders Notes"). In addition, in November 1995, certain officers gave to the Company full-recourse notes to finance the exercise of stock options (the "1995 Notes"). See Note 11 - Commitments and Contingencies. These notes were paid in full subsequent to the initial public offering in March 1996. The outstanding principal and accrued interest balance of $2,436,703 of the Founders Notes and the 1995 Notes was reflected as a reduction to shareholders' equity at December 31, 1995. 5. PROPERTY AND EQUIPMENT Balances of major classes of property and equipment and the related accumulated depreciation at December 31, 1995 and 1996 were as follows:
1995 1996 --------------- ---------------- Computer equipment $3,263,658 $ 8,046,543 Furniture and fixtures 247,283 1,053,036 Office equipment 147,778 1,057,785 Leasehold improvements 455,862 4,287,253 Construction in progress 883,850 1,450,329 --------------- ---------------- 4,998,431 15,894,946 Less accumulated depreciation (725,603) (2,437,763) --------------- ---------------- Property and equipment, net $4,272,828 $13,457,183 =============== ================
The assets under capital leases included in property and equipment in the balance sheets at December 31, 1995 and 1996 were as follows:
1995 1996 --------------- ---------------- Telecommunications equipment $ 736,561 $3,880,195 Less accumulated depreciation (255,340) (564,178) --------------- ---------------- Property and equipment, net $ 481,221 $3,316,017 =============== ================
-45- PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. NOTES PAYABLE Pursuant to a loan agreement dated May 26, 1992, the Company borrowed $1,000,000 from a small business investment company ("SBIC"). The loan was scheduled to mature in May 1997, with interest accruing at 12.5%. On December 23, 1993, the Company borrowed an additional $1,000,000 from the same SBIC. The additional loan was scheduled to mature in December 1998, with interest accruing at 12%. The loans were secured by accounts receivable, contract rights, chattel paper and general intangibles. In connection with the original loan, the Company issued to the SBIC 424,392 stock warrants at $0.042 per share. The fair value of the stock at the date of the transaction was estimated by the Board of Directors to be $0.042 per share. Accordingly, the Company discounted the note by $159,147 resulting in an effective interest rate of 17.3%, In December 1993, the Company issued to the SBIC 144,000 stock warrants at $0.042 per share in conjunction with the additional loan. The fair value of the stock at the date of the transaction was estimated by the Board of Directors to be $0.54 per share. The loan was discounted by $72,000 resulting in an effective interest rate of 13.0%. Stock warrants of $231,147 are included in stock warrants outstanding in the accompanying balance sheets at December 31, 1995. Both of these loans were repaid subsequent to the Company's initial public offering. The previously mentioned stock warrants were exercised during the year ended December 31, 1996, thus the balance of the loans and the stock warrants at December 31, 1996 was $0. In October 1996, the Company established a $5 million unsecured revolving line-of-credit (the "Facility") with NationsBank, N.A. to facilitate interim long term capital equipment financing needs. The interest rate, at the option of the Company, is prime, adjusted daily, or LIBOR plus 1.75%, adjusted every 30, 60 or 90 days. The Company elected the LIBOR option, for which the rate was 6.625% at December 31, 1996. Interest is payable monthly and principal at maturity, which is September 30, 1997. Fees associated with the Facility were $3,000. There is an additional commitment fee of 0.125% on the unused availability of the Facility, which is payable quarterly. As of March 17, 1997, the Company had total borrowings of $4.1 million under the Facility. 7. FINANCIAL INSTRUMENTS In 1995, the Company adopted SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. The carrying amount of cash and investments approximates fair value because their maturity is generally less than one year in duration. The fair value of notes payable and capital lease obligations was determined using valuation techniques that considered cash flows discounted at current rates. The fair value of notes payable as of December 31, 1995 was $1,933,187, as compared to the recorded value of $1,915,192. This note was paid in full during 1996 thus the carrying value was $0 at December 31, 1996. During the year ended December 31, 1996, a line-of-credit was established and the fair value was $2,550,000 at the end of the year. The fair value of the line-of- credit approximates its carrying value as of December 31, 1996. The fair value of the capital lease obligation approximates its carrying value at December 31, 1995 and 1996. 8. SHAREHOLDERS' EQUITY In connection with the Reincorporation Merger, each outstanding share of common stock was converted into one share of $0.01 par value common stock of the Georgia corporation, and each outstanding share of the Series 1994 Preferred Stock was converted into one share of Series A Preferred Stock. Premiere thereafter declared -46- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) a 24-to-1 stock split through the declaration of a 23 share common stock dividend for each share of common stock outstanding on December 18, 1995. On January 18, 1996, the Company notified the holder of the Series A Preferred Stock of the Company's intention to redeem the preferred stock and the holder elected to convert all of the shares of the Series A Preferred Stock into 3,095,592 shares of $0.01 par value common stock at $93 per share (pre-split). The Series A Preferred Stock was fully cumulative, and the holders of the shares were entitled to receive dividends at a rate of 8%. The Company accrued $308,419 and $29,337 of dividends payable, plus accrued interest, if applicable, during the year ended December 31, 1995 and 1996, respectively. The dividends were payable annually on March 31, commencing on March 31, 1995. All accrued but unpaid dividends accrue interest after each annual dividend date at a rate of 8%. No dividends were paid during the year ended December 31, 1995 and $676,981 in dividends were paid during the year ended December 31, 1996. During 1995 and 1996, stock options were exercised under the Company's stock option plans. None of the options exercised qualified as incentive stock options, as defined in Section 422 of the Internal Revenue Code (the "Code"). Accordingly, common stock and additional paid-in-capital increased from the proceeds of the exercises totaling $64,001 and $2,656,405, respectively, for the year ended December 31, 1995, and $8,035 and $308,481, respectively, for the year ended December 31, 1996. Additionally, $2,621,673 and $6,886,091 were recorded as an increase in additional paid-in-capital due to the tax benefit to be realized by the Company as a result of the exercise of such options during the years ended December 31, 1995 and 1996, respectively. 9. STOCK OPTIONS, WARRANTS AND BENEFIT PLANS 1994 STOCK OPTION PLAN In March 1994, the Board of Directors adopted a stock option plan under which 960,000 shares of common stock were available to be granted (the "1994 Stock Option Plan") to employees, consultants, and others rendering services to the Company. Options for all of such shares had been granted as of December 31, 1995. Options granted under the 1994 Stock Option Plan are not incentive stock options ("ISOs") as defined in Section 422 of the Code. The 1994 Stock Option Plan is administered by a stock option plan committee (the "1994 Stock Option Plan Committee") consisting of the president of the Company and two members of the Board of Directors selected by the president. The stock option agreements governing options granted under the 1994 Stock Option Plan provide for an exercise price equal to the fair market value at the date of the option grant as determined by the 1994 Stock Option Plan Committee and generally vest ratably over the three years following the grant date. Generally, the options are nontransferable. The Company has granted nonqualified options and warrants to purchase common stock to officers, directors and key employees of the Company as well as to other individual third parties rendering services to the Company. The exercise price of the options granted to date has been at the market value of the shares on the date of grant, which prior to a public trading market for the Company's common stock was determined by the Board of Directors based upon arm's-length trade information and other analysis. Generally, the options vest over three years and expire eight years from the date of grant. 1995 STOCK PLAN The Board of Directors has adopted, and the Company's shareholders have approved, the Premiere Technologies, Inc. 1995 Stock Plan (the "1995 Stock Plan"), the primary focus of which is to provide an incentive to key employees who are in a position to make significant contributions to the Company. Under the 1995 Stock -47- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Plan, the stock plan committee of the Board (the "1995 Stock Plan Committee") has discretion to award stock options, Stock Appreciation Rights ("SARs") and restricted stock to employees. A total of 1,500,000 shares of common stock has been reserved for issuance pursuant to the exercise of options or the grant of restricted stock awards. Options may be either ISOs, which permits the deferral of taxable income related to the exercise of such options, or nonqualified options not entitled to such deferral. The 1995 Stock Plan is administered by the 1995 Stock Plan Committee. Subject to the provisions of the 1995 Stock Plan, this committee, at its discretion, selects the recipients of awards and the number of shares or options granted thereunder and determines other matters such as (i) vesting schedules, (ii) the exercise price of options (which cannot be less than 100% of the fair market value of the common stock on the date of grant for ISOs), (iii) the duration of awards (which cannot exceed ten years), and (iv) the price of SARs. DIRECTORS' COMPENSATION Directors are reimbursed for reasonable expenses incurred by them in connection with their attendance at Board meetings. Directors are also eligible to receive options, SARs, and restricted stock grants under the 1995 Stock Plan. Additionally, in December 1991, the Company's Board of Directors authorized the issuance of warrants to acquire up to 419,328 shares of common stock for $0.42 per share, the fair value at the date of grant, to each of the Company's nonmanagement directors. The warrants issued in 1991 vested over a three-year period provided that the individual was serving on the Board of Directors on such dates. Pursuant to this action of the Board of Directors, George W. Baker, a current member of the Company's Board of Directors, was granted warrants to acquire 86,832 shares of common stock and former members of the Board of Directors were granted warrants to acquire 332,496 shares of common stock. In May 1993, the Board of Directors issued warrants to acquire 72,000 shares of common stock at a price of $0.52 per share, the fair value at the date of grant, to Buford H. Ortale who was at that time a member of the Company's Board of Directors and is now a holder of approximately 3% of the Company's outstanding common stock in consideration of his election to the Board of Directors and his investment in the Company. In December 1993, the Board of Directors granted options to acquire 240,000 and 84,000 shares of common stock at an exercise price of $0.52 per share, the fair value at the date of grant, to Buford H. Ortale and George L. MacKay, respectively, who were at the time members of the Company's Board of Directors. In July 1995, the Board of Directors granted each director warrants to acquire 24,000 shares of common stock for $0.71 per share, the fair value at the date of grant, which vested in 1995, provided that the director was a member of the Board of Directors on that date. In addition, Eduard Mayer was granted warrants to acquire 86,400 shares of common stock at $0.71 per share, the fair value at the date of grant, in recognition of his exemplary service on the Board of Directors. In July 1996, the Board of Directors granted each nonemployee director warrants to acquire 10,000 shares of common stock for $18.50 per share, the fair value at the date of grant, which vested at December 31, 1996, provided that the director was a member of the Board of Directors on that date. -48- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) OPTION AND WARRANT ACTIVITY In November 1995, Boland T. Jones, D. Gregory Smith, and Leonard A. DeNittis exercised options to acquire 2,277,864, 2,277,864 and 996,552 shares of common stock, respectively. Pursuant to the terms of each of their employment agreements, the Company loaned such officers $825,000, $825,000 and $688,000, respectively, to fund the exercise of these options. The loans were evidenced by recourse promissory notes bearing interest at 6.55%, which were secured by a pledge of the common stock acquired upon the exercise of the options. These loans and accrued interest were repaid in full in 1996. Additionally, loans were made as part of the exercise of these options to assist the officers in paying the associated taxes. The loans to such officers for taxes totaled $73,086, $73,086, and $22,048, respectively, and were also repaid in full in 1996. In July 1995, the Board of Directors authorized the sale of warrants to acquire 24,000 shares of common stock at $0.71 per share for $1,000 to an individual who became the Company's Senior Vice President of Finance and Legal in November 1995. The Company accounts for its stock-based compensation plans under APB No. 25, under which no compensation expense has been recognized, as all options have been granted with an exercise price equal to the fair value of the Company's common stock on the date of grant. The Company adopted SFAS No. 123 for disclosure purposes in January 1995. For SFAS No. 123 purposes, the fair value of each option grant has been estimated as of the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions: risk-free interest rate of 6.26 percent, expected life of 2.34 years, dividend rate of zero percent, and expected volatility of 42 percent. Using these assumptions, the fair value of the stock options granted in 1996 is $8,402,324, which would be amortized as compensation expense over the vesting period of the options. Options generally vest over three or four years. Had compensation cost been determined consistent with SFAS No. 123, utilizing the assumptions detailed above, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1995 1996 ------------ ------------ Net Income (loss): As Reported................................ $1,917,594 $ (955,786) Pro forma.................................. $1,766,900 $(2,314,412) Primary EPS: As Reported................................ $0.10 $(0.05) Pro forma.................................. $0.09 $(0.13)
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that expected in future years. A summary of the status of the Company's stock options plans at December 31, 1994, 1995 and 1996 and for the years then ended is presented in the table and narrative below: -49- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) UNDER APB NO. 25:
OPTION PRICE SHARES PER SHARE ----------- ------------- Options outstanding, March 31, 1994................... 8,578,464 $0.13 - 0.52 Granted............................................ 54,000 0.54 - 0.71 Exercised.......................................... 0 0 Forfeited.......................................... (240,000) 0.52 ----------- Options outstanding, December 31, 1994................ 8,392,464 $0.13 - 0.71 ===========
In November 1995, the Company granted a total of 4,256,400 options to employees at $1.61 per share, the fair market value on the grant dates. The fair market value for the options granted in November 1995 was supported by an independent appraisal. The remaining 1,009,200 options granted in 1995 were granted at various dates throughout the year prior to November 1995. UNDER SFAS NO. 123:
WEIGHTED AVERAGE FIXED OPTIONS SHARES EXERCISE PRICE - - ----------------------------------------------------------- ----------------- ------------------- Options outstanding at December 31, 1994................... 8,392,464 $ 0.39 Granted................................................. 5,265,600 1.44 Exercised............................................... (5,831,688) 0.43 Forfeited............................................... (367,992) 0.45 ----------------- ------------------- Options outstanding at December 31, 1995................... 7,458,384 1.07 Granted................................................. 1,299,799 18.89 Exercised............................................... (1,371,938) 0.51 Forfeited............................................... (44,800) 18.03 ----------------- ------------------- Options outstanding at December 31, 1996................... 7,341,445 $ 4.27 ================= =================== Exercisable at end of year................................. 1,741,543 $ 1.51 ================= =================== Weighted average fair value of options granted in 1996..... $ 6.46 ===================
Of the 7,341,445 employee and director options outstanding at December 31, 1996, (i) 146,016 options have an exercise price of $0.13, with a remaining contractual life of 2.5 years, of which all are exercisable, (ii) 1,197,730 options have exercise prices between $0.42 and $0.52, with a weighted average exercise price of $0.50 and a weighted average remaining contractual life of 4.5 years, of which all are exercisable, (iii) 750,320 options have an exercise price of $0.71, with a weighted average remaining contractual life of 6.2 years, of which 64,880 are exercisable, (iv) 3,987,580 options have an exercise price of $1.61, with a weighted average remaining contractual life of 6.8 years, of which 1,223,504 are exercisable, (v) 495,350 options have exercise prices between $15.125 and $19.375, with a weighted average exercise price of $16.61 and a weighted average remaining contractual life of 8.1 years, of which 30,000 are exercisable, (vi) 764,449 options have exercise prices between $20.00 and $25.25, with a weighted average exercise price of $20.31 and a weighted average remaining contractual life of 6.7 years, of which 39,400 are exercisable. In the year ended March 31, 1994, the Company entered into an agreement with a hotel management company. The agreement, which expired June 30, 1995, represented a variable stock option plan (with a measurement date upon vesting) whereby the Company granted stock options to the hotel management company based on the level of call traffic handled at certain properties. The options were exercisable at $0.00042 per share and vested over three years. A total of 59,981 options were earned under the agreement. During the nine months -50- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) ended December 31, 1994 and the year ended December 31, 1995, 19,752 and 16,925 options vested, respectively. All of the vested options under this agreement were exercised in 1996. EMPLOYEE BENEFITS In 1995, the Company adopted a tax-qualified profit sharing plan for eligible employees that also includes a 401(k) component (the "Profit Sharing Plan"). All full-time employees are eligible to participate in the Profit Sharing Plan upon the attainment of age 21 and completion of three months of service. Under the Profit Sharing Plan, an employee may elect to defer up to 15% of his compensation and direct the Company to contribute such deferred amounts to the Profit Sharing Plan. Each year the Company determines whether to make a discretionary matching contribution equal to a percentage, determined by the Company, of the employee's deferred compensation contribution. The Company has not made any matching contributions to the Profit Sharing Plan. Accordingly, no compensation expense related to the Profit Sharing Plan has been recognized in the accompanying financial statements. All contributions to the Profit Sharing Plan by or on behalf of employees are subject to annual limits prescribed by the Code. In July 1994, the Company began offering a medical and dental health plan to its employees. The Company was self-insured for certain health and dental benefits up to a maximum amount per month of approximately $10,000 based on claims history and current employment levels through January 1996. The Company accrued for estimated losses occurring from both asserted and unasserted claims. The estimate of the liability for unasserted claims arising from unreported incidents was based on an analysis of historical claims data. The cost of such claims was approximately $35,000 and $135,000 for the periods December 31, 1994 and 1995, respectively. In February 1996, the Company changed its medical and dental plan insurance provider and is no longer self-insured. 10. RELATED-PARTY TRANSACTIONS The Company has in the past entered into agreements and arrangements with certain officers, directors and principal shareholders of the Company involving loans of funds, grants of options and warrants and the acquisition of a business. Certain of these transactions may be on terms more favorable to officers, directors and principal shareholders than they could acquire in a transaction with an unaffiliated party. The Company adopted a policy requiring that, in the future, all material transactions between the Company and its officers, directors or other affiliates must (i) be approved by a majority of the disinterested members of the Board of Directors of the Company, and (ii) be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. In September 1993, the Company loaned a total of $65,000 to the three principal officers of the Company to purchase 219,984 shares of stock and 175,992 stock purchase warrants exercisable at $0.125 per share from one of the Company's Board members. The loans, which were interest free, were repaid during 1996. In prior years, the Company advanced $25,000 to certain officers and shareholders of the Company to purchase the common stock and debentures of another shareholder, and $5,000 was repaid during the year ended March 31, 1994. The Board of Directors forgave $10,000 during the nine months ended December 31, 1994. The advances were repaid during 1996. During the year ended March 31, 1994 and the nine months ended December 31, 1994, management made salary advances of $25,000 and $35,849, respectively, to certain officers of the Company. During the year ended December 31, 1995, $50,000 of these amounts were repaid. The balance was repaid during 1996. -51- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In November 1995, the Company loaned a certain officer $90,000 in connection with the officer's transition from his previous employer to the Company. This unsecured loan is evidenced by a promissory note bearing interest at 6.11%, the interest on which is payable beginning in November 1997 and continuing each year until November 1999. Principal is to be repaid in five equal annual installments, with accrued interest, commencing in November 2000; however, pursuant to the officer's employment agreement, the officer may be required to make earlier payments from certain bonus compensation paid to the officer under such employment agreement. In November 1995, the Company loaned three officers a total of $2,338,000, to fund the exercise of stock warrants and options which were repaid in full in 1996. These loans were evidenced by recourse promissory notes bearing interest at 6.55%, which were secured by a pledge of the common stock acquired upon the exercise of the warrants and options. All principal and accrued interest were to be paid in November 2005; however, if any of the common stock securing the promissory notes was sold, the net proceeds of such sale were to be applied to the outstanding principal and interest due under that promissory note. Additionally, the Company loaned such officers an additional total amount of $168,220, to assist the officers in paying the federal and state income taxes associated with the exercise of the warrants and options which were repaid in full in 1996. In September 1996, the Company loaned a certain officer $75,000 in connection with the officer's transition from his previous employer to the Company. This unsecured loan is evidenced by a promissory note bearing interest at 6.64%, the interest on which is payable beginning in September 1998 and continuing each year until September 2000. Principal is to be repaid in five equal annual installments, with accrued interest, commencing in September 2001; however, pursuant to the officer's employment agreement, the officer may be required to make earlier payments from certain bonus compensation paid to the officer under such employment agreement. In October 1996, the Company loaned a certain officer $10,000. This unsecured loan is evidenced by a promissory note bearing interest at 6.5%. Principal and interest are to be repaid in one payment in October 1998. -52- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases central office switching equipment, office space and other equipment under non-cancelable lease agreements. The leases generally provide that the Company pay the taxes, insurance and maintenance expenses related to the leased assets. Future minimum operating and capital lease payments as of December 31, 1996 are as follows:
OPERATING CAPITAL LEASES LEASE --------------- --------------- 1997...................................................... $ 667,610 $ 352,326 1998...................................................... 326,283 264,244 1999...................................................... 179,810 0 2000...................................................... 179,810 0 2001...................................................... 104,890 0 Thereafter................................................ 0 0 --------------- --------------- $1,458,403 616,570 =============== Less amount representing taxes............................ (34,900) --------------- Net minimum lease payments................................ 581,670 Less amount representing interest......................... (57,336) --------------- Present value of net minimum lease payments............... 524,334 Less current portion...................................... (286,642) --------------- Obligation under capital lease, net of current portion.... $ 237,692 ===============
Rental expense under operating leases amounted to $206,563, $339,329 and $734,321 for the nine months ended December 31, 1994, and the years ended December 31, 1995 and 1996, respectively. During 1994, 1995 and 1996, additions to the Company's switching equipment resulted in an increase to the capital lease obligation of $132,512, $299,586 and $230,920, respectively. SUPPLY AGREEMENTS The Company obtains long distance telecommunications services pursuant to supply agreements with suppliers of long distance telecommunications transmission services. Although these contracts generally provide fixed transmission prices for terms of three to five years, they are subject to earlier termination in certain events. No assurance can be given that the Company will be able to obtain long distance services in the future at favorable prices or at all, and the unavailability of long distance service, or a material increase in the price at which the Company is able to obtain long distance service, would have a material adverse effect on the Company's business, financial condition and results of operations. Certain of these agreements provide for minimum purchase requirements. The Company is currently a party to four long distance telecommunications services contracts that require the Company to purchase a minimum amount of services each month. The first such agreement which is with Company A, requires the Company to utilize 100,000 transmission minutes each month per transmission circuit and to incur a minimum of $75,000 in charges. In the event of a shortfall in minute usage, the Company would be required to pay Company A an amount equal to $0.015 multiplied by the difference between 100,000 minutes and the number of minutes actually utilized by the Company on each transmission circuit. In the event the Company uses less than $75,000 in services, the Company would be required to pay the difference between $75,000 and the actual charges incurred. The second such agreement which is with Company B, requires the Company to use 75,000 transmission minutes each month per transmission circuit from Company B. The Company is required to use 100,000 minutes per month per transmission circuit in order to receive discounts under this agreement. If the Company fails to utilize 75,000 minutes, Company B may cancel the contract. The third such agreement requires the Company to use 100,000 minutes per transmission circuit from Company C. In the -53- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) event of a shortfall, the Company would be required to pay an amount equal to $0.03 multiplied by the difference between 100,000 minutes and the actual minutes used. This agreement also requires the Company, from the period of November 1, 1997 through October 31, 1998, to maintain at least the level of monthly charges incurred by the Company in the October 1997 billing period and grants Company C a right of first refusal to provide all telecommunications service to the Company. The final agreement which is with Company D provides for a minimum of 300,000 billable minutes per month beginning January 1996. Subject to certain exceptions, if the Company does not meet the minimum commitment, the Company will be required to pay $0.02 per billed minute below the minimum. The minimum requirement is terminable by the Company after it pays $576,000 to Company D under the agreement. The agreement provides Company D with the right to be the exclusive service provider of terminating traffic in a defined region. The Company has not failed to fulfill the minimum usage requirement under any of these contracts in the past. The Company monitors its transmission usage in an attempt to avoid any such shortfall. In the future the Company may determine that it is desirable to enter into additional agreements containing minimum purchase requirements. No assurance can be given that demand for services in the areas covered by the Company's transmission suppliers will exceed these minimum purchase requirements in the future. RISK OF INFRINGEMENT The Company is aware of other companies that utilize the term "WorldLink" or "Premiere" in describing their products and services, including telecommunications products and services. Certain of those companies hold registered trademarks which incorporate the name "WorldLink" or "Premiere." The Company has received correspondence from a provider of prepaid calling cards which claims that the Company's use of the term "Premiere WorldLink" infringes upon its trademark rights. In addition, the Company has received correspondence from a major bank, which is among the holders of registered trademarks incorporating the term "WorldLink," inquiring as to the nature of the Company's use of the term "WorldLink" as a part of its mark "Premiere WorldLink." Based on, among other things, the types of businesses in which the other companies are engaged and the low likelihood of confusion, the Company believes these claims to be without merit. No actions other than the AudioFAX litigation have been filed with respect to either the patent or trademark claims. See Litigation below. However, no assurance can be given that actions or claims alleging trademark, patent, or copyright infringement will not be brought by these or other parties against the Company with respect to current or future products or services or that, if such actions are brought, the Company will ultimately prevail. Any such claiming parties may have significantly greater resources than the Company to pursue litigation of such claims. Any such claims, whether with or without merit, could be time-consuming, result in costly litigation, cause delays in introducing new or improved services, require the Company to enter into royalty or licensing agreements, or cause the Company to discontinue use of the challenged trademark, service mark or technology at potential significant expense to the Company associated with the marketing of a new name or the development or purchase of replacement technology, all of which could have a material adverse effect on the Company. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements (the "Employment Agreements") with Boland T. Jones, Chairman of the Board of Directors and President; D. Gregory Smith, Executive Vice President, Assistant Secretary, and Director; and Leonard A. DeNittis, Vice President of Engineering and Operations (the "Executives"). Each Employment Agreement provides for an employment term expiring December 31, 1999. Under their respective Employment Agreements, Boland T. Jones and D. Gregory Smith were each paid base salaries of $200,000 for the year ended December 31, 1996 and are each to be paid a base salary of $210,000 beginning in 1997. Leonard A. DeNittis was paid a base annual salary of $175,000 and is to be paid a base annual salary of $183,750 beginning in 1997. Patrick G. Jones, who joined the Company in November 1995 as the Senior Vice President of Finance and Legal and Secretary, has entered into a similar agreement. Mr. Jones was paid a base salary of $150,000 and is to be paid a base annual salary of $157,500 beginning in 1997. Gregg S. Freishtat, who joined the Company as Senior Vice President in September 1996 from TeleT, has entered into a similar -54- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) agreement. Mr. Freishtat's base salary is $150,000 through 1997. Each of the base salaries will increase 5% each year, with additional increases, if any, as set by the Board of Directors. Under the Employment Agreements, each of the Executives is eligible to receive bonus compensation based on the financial performance of the Company. The amount of bonus compensation is calculated based on operating revenues and the Company's adjusted net income before interest and taxes as determined in accordance with the Employment Agreements ("Adjusted EBIT"). Boland T. Jones and D. Gregory Smith received as a bonus (i) 0.25% of the Company's operating revenues and (ii) 2.5% of the Company's Adjusted EBIT for the year ended December 31, 1995 which amounted to a bonus of $126,128 for both Mr. Jones and Mr. Smith. Beginning in 1996, Boland T. Jones and D. Gregory Smith will receive as a bonus 1.5% of the Company's Adjusted EBIT. Leonard A. DeNittis received a bonus of 1.5% of the Company's Adjusted EBIT for the year ended December 31, 1995 which amounted to $42,217, and his bonus beginning in 1996 will be 0.5% of the Adjusted EBIT. The changes in arrangement for Boland T. Jones, D. Gregory Smith, Leonard A. DeNittis were affected in amendments to their Employment Agreements entered into in November 1995. In conjunction with these amendments, Boland T. Jones, D. Gregory Smith, Leonard A. DeNittis were granted options to acquire 1,440,000, 1,400,000 and 720,000 shares of common stock respectively at an exercise price of $1.61 per share, the fair value of the common stock at the date of grant as determined by an independent appraisal. Beginning in 1996, Patrick G. Jones was entitled to receive a bonus of 0.45% of the Company's Adjusted EBIT, and beginning in 1997, Gregg S. Freishtat will be entitled to receive a bonus of 0.45% of the Company's adjusted EBIT. Bonuses payable to the Executives will be deferred if the net effect of the payment of the bonuses to the Executives would cause the Company to recognize a net loss for the year. The amount of any deferred bonus will be paid in the next succeeding year in which the payment of the deferred bonus and the bonus for such year would not cause the Company to recognize a net loss. To date no bonus amounts have been deferred. In July 1996, Messrs. Boland Jones, Smith, DeNittis and Patrick Jones each agreed to waive any rights to bonuses otherwise due under the Employment Agreements for 1996. In connection with such waiver, Messrs. Boland Jones, Smith, DeNittis and Patrick Jones were granted options to acquire an aggregate of 50,000, 50,000, 20,000 and 15,000 shares of common stock, respectively, at an exercise price of $18.50 per share, which was the fair market value of the common stock on the date of grant as determined by the Board of Directors. The options granted will vest on March 31, 1997. LITIGATION On January 30, 1996, Eric Bott, E.B. Elliott and Cost Recovery Systems, Inc. ("CRS") filed a complaint against the Company's wholly-owned subsidiary, Premiere Communications, Inc. ("PCI" or "Premiere Communications") and the Company's President, Boland T. Jones, in the Superior Court of Fulton County, Georgia. In the complaint, the plaintiffs allege that: (i) Mr. Bott, a former Company employee, is entitled to options to purchase 10,000 shares of common stock of PCI at $5.00 per share; (ii) Mr. Bott is entitled to a commission equal to 10% of all revenues that have been and in the future are collected as a result of the Company's licensing arrangement with one of its customers; (iii) Mr. Bott is entitled to $7,000 for consulting work allegedly performed for the Company; (iv) Mr. Bott is entitled to unspecified damages resulting from his sale in June 1995 of 750 shares of common stock of PCI to an unrelated third party for an unspecified amount; (v) Mr. Elliott or CRS, an affiliate of Mr. Elliott, is entitled to options to purchase 5,000 or 10,000 shares of common stock of PCI at an unspecified exercise price arising out of work allegedly performed by CRS for the Company; and (vi) CRS is owed an unspecified amount of commissions from the Company relating to sales of the Company's telecommunications services by CRS. Subsequent to the filing of the complaint, the plaintiffs dismissed without prejudice count (iv) above. The plaintiffs also seek attorneys' fees and unspecified amounts of punitive damages. The Company filed an answer and counterclaim denying all allegations of the complaint and asserting various affirmative defenses. Assuming that the allegations concerning stock options and stock sales relate to the common stock of Premiere Technologies, Inc., rather than PCI, as alleged, the Company believes that the share numbers and exercise prices have not been adjusted for the 24-to-1 stock split effected in December 1995. In this regard, the plaintiffs filed a motion to add the Company as a defendant and to amend their complaint to assert their claims against the -55- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Company. Adjusting the share numbers and exercise prices of these options to reflect the 24-to-1 stock split, the plaintiffs' claims relate to options to purchase up to a total of 480,000 shares of common stock and the alleged exercise price of $5.00 per share with regard to a portion of such options becomes approximately $0.21 per share. The plaintiffs' motion was denied on December 17, 1996, and the plaintiffs dismissed the case without prejudice on January 13, 1997. The plaintiffs filed a new complaint against the Company on January 21, 1997 setting forth the same allegations as described above. The Company has filed an answer and counterclaim denying all allegations of the complaint and asserting various affirmative defenses and a motion to dismiss with respect to all counts of the complaint. The Company believes it has meritorious defenses to the plaintiffs' allegations, but due to the inherent uncertainties of the judicial system, the Company is unable to predict the outcome of this litigation. If the outcome of this litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. On June 28, 1996, AudioFAX IP LLC ("AudioFAX") filed a complaint against the Company and PCI in the United States District Court for the Northern District of Georgia. In the complaint, AudioFAX alleged that the Company manufactures, uses, sells and/or distributes certain enhanced facsimile products which infringe three United States patents and one Canadian patent allegedly held by AudioFAX. In the third quarter of 1996, the Company took a one-time charge for the estimated legal fees and other costs that the Company expected to incur to resolve this matter. On February 11, 1997, the Company entered into a long term, non-exclusive license agreement with AudioFAX settling the litigation. The one-time charge was adequate to cover the actual costs of litigation, and the cost of the license agreement is not expected to have a material effect on the Company's earnings. See Note 13 - Subsequent Events. On August 6, 1996, CNC, a licensing customer of the Company, was placed into bankruptcy under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). On August 23, 1996, CNC filed a motion to intervene in a separate lawsuit brought by a CNC creditor in the United States District Court for the Southern District of New York against certain guarantors of CNC's obligations and to file a third party action against numerous entities, including such CNC creditor and PCI for alleged negligent misrepresentations of fact in connection with an alleged fraudulent scheme designed to damage CNC. The court has not ruled on CNC's request. Based upon the bankruptcy examiner's findings, the bankruptcy trustee, who has been substituted for CNC in this action, is investigating the merits of any potential actions directed at PCI. No actions or suits have been filed by the trustee against PCI, but the trustee has notified PCI that as one of the potential claims he is investigating, he intends to assert an avoidable preference claim under the Bankruptcy Code of an amount up to approximately $800,000. Due to the inherent uncertainties of the judicial system, the Company is unable to predict with certainty the outcome of the trustee's investigation and the potential litigation. If the outcome of any such litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. On September 20, 1996, Peter Lucina ("Lucina") filed a complaint against the Company, Donald B. Gasgarth ("Gasgarth") and Patrick G. Jones ("Jones") in the United States District Court for the Eastern District of Illinois. In the complaint, Lucina alleges, among other things, that: (i) in November 1995 he sold 1,563 shares of the Company common stock to Gasgarth, a former director of the Company, for $31,260; (ii) Jones offered to "facilitate" the sale; (iii) in December 1995 the Company filed a registration statement relating to the initial public offering of its common stock; (iv) prior to his sale of stock to Gasgarth, neither Gasgarth nor Jones told Lucina that the Company planned an initial public offering; and (v) the 1,563 shares sold to Gasgarth, adjusted for the 24-to-1 stock split subsequently effected, was worth $675,216 based on the Company's initial public offering at $18 per share in March, 1996. In his complaint, Lucina asserts violations of the Securities Exchange Act of 1934 and the rules promulgated thereunder, the Illinois Consumer Fraud and Deceptive Business Practices Act and common law fraud. Lucina seeks the return of 37,512 shares of common stock of the Company, or in the alternative, compensatory damages in the amount of $975,312 with interest thereon, punitive damages in the amount of $1 million and costs of the suit, including reasonable attorneys' fees and other associated costs. The Company has filed an answer to the complaint denying allegations of the complaint and asserting various defenses. Discovery is -56- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) in its initial stages, and no trial date has been set. The Company believes that it has meritorious defenses to the Lucina complaint; however, due to the inherent uncertainties of the judicial system, the Company is unable to predict the outcome of this litigation. If the outcome of any such litigation is adverse to the Company, it could have a material adverse effect on the Company's business, operating results or financial condition. 12. INCOME TAXES The difference between the statutory federal income tax rate and the Company's effective income tax rate applied to income before income taxes and extraordinary loss was as follows for the nine months ended December 31, 1994 and for the years ended December 31, 1995 and 1996:
1994 1995 1996 ------------- ------------- ------------- Income taxes at federal statutory rate $124,296 $ 844,401 $ (857,846) State tax provision, net of federal benefit 14,623 124,176 (126,154) Utilization of net operating loss (93,959) 0 0 Change in valuation allowance 0 (693,208) 0 Non-taxable investment income 0 0 (722,970) Non-deductible expenses 2,569 55,117 80,429 ------------- ------------- ------------- Income taxes at the Company's effective rate $ 47,529 $ 330,486 $(1,626,541) ============= ============= =============
1994 1995 1996 ------------- ------------- ------------- Current: Federal $ 0 $ 0 $ 2,733,717 Other 47,529 0 402,016 Deferred: Federal 0 288,116 (4,151,726) Other 0 42,370 (610,548)
During the year ended December 31, 1995, the Company reduced its valuation reserve to zero based upon management's conclusion that it is more likely than not that future taxable income will be sufficient to realize all net operating loss carryforwards. At December 31, 1996, the remaining $5,959,202 of net operating loss carryforwards relate primarily to non-qualified stock compensation expense for tax purposes in excess of stock compensation for book purposes, the benefit of which was credited directly to additional paid-in- capital in accordance with APB No. 25 and SFAS No. 109. -57- PREMIERE TECHNOLOGIES, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The sources of differences between the financial accounting and tax bases of assets and liabilities which give rise to the deferred tax assets and liabilities are as follows at December 31, 1995 and 1996:
1995 1996 ------------ ------------ Deferred tax asset: Net operating loss $2,208,844 $ 5,959,202 In-process research and development 0 4,218,056 Unearned revenue 135,297 174,327 Accounts receivable reserve 41,969 237,810 Accrued expenses 147,293 548,944 ------------ ------------ 2,533,403 11,138,339 Deferred tax liability: Depreciation (242,216) (334,520) ------------ ------------ Net deferred tax asset $2,291,187 $10,803,819 ============ ============
The Company and its subsidiaries file a consolidated income tax return. The Company has not paid income taxes for any of the years presented in the accompanying financial statements. At December 31, 1996, the Company had net operating loss carryforwards of approximately $15,280,004 expiring $439,587 in 2008, $955,846 in 2009 and $4,268,270 in 2010 and $9,616,301 in 2011. 13. SUBSEQUENT EVENTS On February 11, 1997, the Company entered into a long term, non-exclusive license agreement with AudioFAX settling the litigation. The one-time charge was adequate to cover the actual costs of litigation, and the cost of the license agreement is not expected to have a material effect on the Company's earnings. See Note 11 - Commitments and Contingencies. -58- ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements with or change in the registrant's independent accountant since the Company's inception. PART III Certain information required by Part III is omitted from this report in that the Registrant will file a Definitive Proxy Statement pursuant to Regulation 14A ("Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the Company's Proxy Statement. -59- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements The financial statements listed in the index set forth in Item 8 of this report are filed as part of this report. 2. Financial Statement Schedules Financial statement schedules required to be included in this report are either shown in the financial statements and notes thereto, included in Item 8 of this report or have been omitted because they are not applicable. 3. Exhibits 2.1 Agreement and Plan of Merger between Premiere Technologies, Inc. and Premiere Technologies Reincorporation, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 2.2 Asset Purchase Agreement, together with exhibits, dated September 18, 1996 by and among the Registrant, PTEK Acquisition Corporation, TeleT Communications LLC and the Members of TeleT Communications LLC (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 18, 1996). 3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of the holders of common stock of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S- 1 (No. 33-80547) . 4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 9.1 Form of Voting Trust Agreement to be entered into under the Registrant's 1994 Stock Option Plan (incorporated by reference to Exhibit 9.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.1 Loan Agreement dated May 26, 1992 between the Registrant and Sirrom Capital, L.P. n/k/a Sirrom Capital Corporation ("Sirrom") (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.2 Secured Promissory Note dated May 26, 1992 made by the Registrant in favor of Sirrom (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). -60- 10.3 Pledge and Security Agreement dated May 26, 1992 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.4 Guaranty Agreement dated May 26, 1992 between Premiere Communications, Inc. and Sirrom (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.5 Security Agreement dated May 26, 1992 between Premiere Communications, Inc. and Sirrom (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.6 Stock Purchase Warrant dated May 26, 1992 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.7 First Amendment to Loan Agreement and Loan Documents dated as of December 23, 1993 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S- 1 (No. 33-80547). 10.8 Secured Promissory Note dated December 23, 1993 made by the Registrant in favor of Sirrom (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.9 Stock Purchase Warrant dated December 23, 1993 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.10 Letter Agreement dated February 9, 1994 between the Registrant and Sirrom regarding the date of certain loan document and the exercise price of the Stock Purchase Warrant dated December 23, 1993 (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.11 Stock Purchase Agreement dated January 18, 1994 between the Registrant and NationsBanc Capital Corporation (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.12 Shareholder Agreement dated as of January 18, 1994 among the Registrant, NationsBanc Capital Corporation, Boland T. Jones, D. Gregory Smith, Leonard A. DeNittis and Andrea L. Jones (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.13 Amended and Restated Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and Leonard A. DeNittis (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.14 Amended and Restated Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and Leonard A. DeNittis (incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). -61- 10.15 Amended and Restated Executive Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and David Gregory Smith (incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.16 Amended and Restated Executive Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and David Gregory Smith (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.17 Amended and Restated Executive Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and Boland T. Jones (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.18 Amended and Restated Executive Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and Boland T. Jones (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.19 Executive Employment and Incentive Option Agreement dated November 1, 1995 between the Registrant and Patrick G. Jones (incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.20 Executive Employment Agreement dated November 1, 1995 between Premiere Communications, Inc. and Patrick G. Jones (incorporated by reference to Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.21 Promissory Note dated November 6, 1995 in favor of the Registrant made by Leonard A. DeNittis (incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.22 Stock Pledge Agreement dated November 6, 1995 between the Registrant and Leonard A. DeNittis (incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.23 Promissory Note dated November 6, 1995 in favor of the Registrant made by D. Gregory Smith (incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.24 Stock Pledge Agreement dated November 6, 1995 between the Registrant and D. Gregory Smith (incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.25 Promissory Note dated November 6, 1995 in favor of the Registrant made by Boland T. Jones (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.26 Stock Pledge Agreement dated November 6, 1995 between the Registrant and Boland T. Jones (incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). -62- 10.27 Promissory Note dated November 17, 1995 payable to the Registrant made by Patrick G. Jones (incorporated by reference to Exhibit 10.27 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.28 Stock Option Plan dated March 18, 1994 (incorporated by reference to Exhibit 10.28 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.29 Intentionally omitted. 10.30 Premiere Communications, Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.30 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.31 Form of Director Indemnification Agreement between the Registrant and Non-employee Directors (incorporated by reference to Exhibit 10.31 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.32 Lease Agreement dated April 5, 1993 between Premiere Communications, Inc. and Telecommunications Finance Group, as amended (incorporated by reference to Exhibit 10.32 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.33 Sublease Agreement dated August 22, 1994 between Premiere Communications, Inc. and Sales Technologies, Inc., as amended by the First Amendment dated September 28, 1995 and the Second Amendment dated October 31, 1995 (incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.34 55 Park Place Office Lease dated May 31, 1993 between Premiere Communications, Inc. and Mara-Met Venture, as amended by First Amendment dated December 15, 1995 (incorporated by reference to Exhibit 10.34 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.35 Office Lease Agreement dated April 7, 1995 between Premiere Communications, Inc. and Boston Avenue Management Company (incorporated by reference to Exhibit 10.35 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.36 Form of Officer Indemnification Agreement between the Registrant and each of the executive officers (incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.37 Carrier Agreement dated January 1, 1996 between Premiere Communications, Inc. and Communications Network Corporation (incorporated by reference to Exhibit 10.37 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.38 Carrier Service Agreement dated August 4, 1995 between Premiere Communications, Inc. and Cherry Communications Incorporated, as amended (incorporated by reference to Exhibit 10.38 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* -63- 10.39 Carrier Services Agreement Dated July 12, 1995 between Premiere Communications, Inc. and Corporate Telemanagement Group, Inc., as amended (incorporated by reference to Exhibit 10.39 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.40 Telecommunications Services Agreement dated December 1, 1995 between Premiere Communications, Inc. and WorldCom Network Services, Inc. d/b/a WilTel (incorporated by reference to Exhibit 10.40 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.41 First Amendment to Stock Purchase Warrant dated December 14, 1995 between Registrant and Sirrom amending Stock Purchase Warrant dated May 26, 1992 (incorporated by reference to Exhibit 10.41 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.42 First Amendment to Stock Purchase Warrant dated December 14, 1995 between Registrant and Sirrom amendment Stock Purchase Warrants dated December 23, 1993 (incorporated by reference to Exhibit 10.42 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.43 Strategic Alliance Agreement dated November 13, 1996 by and between the Registrant and WorldCom, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November 13, 1996).* 10.44 Investment Agreement dated November 13, 1996 by and between the Registrant and WorldCom, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated November 13, 1996.) 10.45 Form of Stock Purchase Warrant Agreement (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (No. 333-11281)). 10.46 Form of Warrant Transaction Statement (incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (No. 333-11281)). 10.47 Form of Director Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (No. 333-17593)). 10.48 Second Amended and Restated 1995 Stock Plan (incorporated by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-8 (No. 333-17593)). 10.49 Second and Third Amendment to 55 Park Place Office Lease dated November 5, 1996 between Premiere Communications, Inc. and Mara-Met Venture. 10.50 Office Lease Agreement dated May 12, 1996 between Premiere Communications, Inc. and Beverly Hills Center LLC, as amended by the First Amendment dated August 1, 1996. 10.51 Promissory Note dated October 18, 1996 between Premiere Communications, Inc. and NationsBank, N.A. (South). 10.52 Continuing and Unconditional Guaranty Agreement dated October 18, 1996, between Premiere Communications and NationsBank, N.A. (South). -64- 11.1 Statement re: Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 23.1 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule. ________________ * Confidential treatment has been granted. The copy on file as an exhibit omits the information subject to the confidentiality request. Such omitted information has been filed separately with the Commission. (b) Reports on Form 8-K The Registrant has filed the following reports on Form 8-K during the fourth quarter of 1996: Current Report on Form 8-K dated September 18, 1996, filed on October 1, 1996 pursuant to Item 2 of Form 8-K, reporting the acquisition of TeleT Communications LLC. Amended Current Report on Form 8-K/A dated September 18, 1996, filed on December 2, 1996 pursuant to Item 7 of Form 8-K, reporting the following financial statements of business acquired and pro-forma financial information. (1) Balance Sheet of Connect, Inc. (a predecessor of TeleT Communications LLC) as of December 31, 1995 (2) Statement of Operations of Connect, Inc. for the period from inception (March 3, 1995) to December 31, 1995 (3) Statement of Shareholders' Deficit of Connect, Inc. for the period from inception (March 3, 1995) to December 31, 1995 (4) Statement of Cash Flows of Connect, Inc. for the period from inception (March 3, 1995) to December 31, 1995 (5) Unaudited Pro Forma Consolidated Statements of Income of Premiere Technologies, Inc. for the year ended December 31, 1995 to reflect the acquisition of TeleT Communications LLC (6) Unaudited Pro Forma Consolidated Statements of Income of Premiere Technologies, Inc. for the nine months ended September 30, 1996 to reflect the acquisition of TeleT Communications LLC Current Report on Form 8-K dated November 13, 1996, filed on November 22, 1996 pursuant to Item 5 of Form 8-K, reporting the entering into of a Strategic Alliance Agreement with WorldCom, Inc. Amended Current Report on Form 8-K/A dated November 13, 1996, filed on February 25, 1997 pursuant to Item 7 of Form 8-K, amending an exhibit. -65- (c) Exhibits See Item 14(a) above. (d) Financial Statement Schedule See Item 14(a) above. -66- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIERE TECHNOLOGIES, INC. BY: /s/Boland T. Jones -------------------- Boland T. Jones Chairman of the Board of Directors and President Date: March 26, 1997 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Boland T. Jones Chairman of the Board and President March 26, 1997 - - ---------------------------- (principal executive officer) Boland T. Jones /s/ D. Gregory Smith Executive Vice President and Director March 26, 1997 - - ---------------------------- D. Gregory Smith /s/ Patrick G. Jones Senior Vice President of Finance and March 26, 1997 - - ---------------------------- Legal and Secretary (principal Patrick G. Jones financial and accounting officer) /s/ George W. Baker, Sr. Director March 26, 1997 - - ---------------------------- George W. Baker, Sr. /s/ Eduard J. Mayer Director March 26, 1997 - - ---------------------------- Eduard J. Mayer /s/ Robert A. Jetmudsen Director March 26, 1997 - - ---------------------------- Robert A. Jetmudsen
-67- EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION PAGE - - ------- ----------- ---- 2.1 Agreement and Plan of Merger between Premiere Technologies, Inc. and Premiere Technologies Reincorporation, Inc. (incorporated by reference to Exhibit 2.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 2.2 Asset Purchase Agreement, together with exhibits, dated September 18, 1996 by and among the Registrant, PTEK Acquisition Corporation, TeleT Communications LLC and the Members of TeleT Communications LLC (incorporated by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated September 18, 1996). 3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 4.1 See Exhibits 3.1 and 3.2 for provisions of the Articles of Incorporation and Bylaws defining the rights of the holders of common stock of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 4.2 Specimen Stock Certificate (incorporated by reference to Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 9.1 Form of Voting Trust Agreement to be entered into under the Registrant's 1994 Stock Option Plan (incorporated by reference to Exhibit 9.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.1 Loan Agreement dated May 26, 1992 between the Registrant and Sirrom Capital, L.P. n/k/a Sirrom Capital Corporation ("Sirrom") (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.2 Secured Promissory Note dated May 26, 1992 made by the Registrant in favor of Sirrom (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (No. 33- 80547). 10.3 Pledge and Security Agreement dated May 26, 1992 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (No. 33- 80547). 10.4 Guaranty Agreement dated May 26, 1992 between Premiere Communications, Inc. and Sirrom (incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.5 Security Agreement dated May 26, 1992 between Premiere Communications, Inc. and Sirrom (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.6 Stock Purchase Warrant dated May 26, 1992 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.6 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.7 First Amendment to Loan Agreement and Loan Documents dated as of December 23, 1993 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.8 Secured Promissory Note dated December 23, 1993 made by the Registrant in favor of Sirrom (incorporated by reference to Exhibit 10.8 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.9 Stock Purchase Warrant dated December 23, 1993 between the Registrant and Sirrom (incorporated by reference to Exhibit 10.9 to the Registrant's Registration Statement on Form S-1 (No. 33- 80547). 10.10 Letter Agreement dated February 9, 1994 between the Registrant and Sirrom regarding the date of certain loan document and the exercise price of the Stock Purchase Warrant dated December 23, 1993 (incorporated by reference to Exhibit 10.10 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.11 Stock Purchase Agreement dated January 18, 1994 between the Registrant and NationsBanc Capital Corporation (incorporated by reference to Exhibit 10.11 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.12 Shareholder Agreement dated as of January 18, 1994 among the Registrant, NationsBanc Capital Corporation, Boland T. Jones, D. Gregory Smith, Leonard A. DeNittis and Andrea L. Jones (incorporated by reference to Exhibit 10.12 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.13 Amended and Restated Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and Leonard A. DeNittis (incorporated by reference to Exhibit 10.13 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.14 Amended and Restated Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and Leonard A. DeNittis (incorporated by reference to Exhibit 10.14 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.15 Amended and Restated Executive Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and David Gregory Smith (incorporated by reference to Exhibit 10.15 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.16 Amended and Restated Executive Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and David Gregory Smith (incorporated by reference to Exhibit 10.16 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.17 Amended and Restated Executive Employment and Incentive Option Agreement dated November 6, 1995 between the Registrant and Boland T. Jones (incorporated by reference to Exhibit 10.17 to the Registrant's Registration Statement on Form S-1 (No. 33- 80547). 10.18 Amended and Restated Executive Employment Agreement dated November 6, 1995 between Premiere Communications, Inc. and Boland T. Jones (incorporated by reference to Exhibit 10.18 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.19 Executive Employment and Incentive Option Agreement dated November 1, 1995 between the Registrant and Patrick G. Jones (incorporated by reference to Exhibit 10.19 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.20 Executive Employment Agreement dated November 1, 1995 between Premiere Communications, Inc. and Patrick G. Jones (incorporated by reference to Exhibit 10.20 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.21 Promissory Note dated November 6, 1995 in favor of the Registrant made by Leonard A. DeNittis (incorporated by reference to Exhibit 10.21 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.22 Stock Pledge Agreement dated November 6, 1995 between the Registrant and Leonard A. DeNittis (incorporated by reference to Exhibit 10.22 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.23 Promissory Note dated November 6, 1995 in favor of the Registrant made by D. Gregory Smith (incorporated by reference to Exhibit 10.23 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.24 Stock Pledge Agreement dated November 6, 1995 between the Registrant and D. Gregory Smith (incorporated by reference to Exhibit 10.24 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.25 Promissory Note dated November 6, 1995 in favor of the Registrant made by Boland T. Jones (incorporated by reference to Exhibit 10.25 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.26 Stock Pledge Agreement dated November 6, 1995 between the Registrant and Boland T. Jones (incorporated by reference to Exhibit 10.26 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.27 Promissory Note dated November 17, 1995 payable to the Registrant made by Patrick G. Jones (incorporated by reference to Exhibit 10.27 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.28 Stock Option Plan dated March 18, 1994 (incorporated by reference to Exhibit 10.28 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.29 Intentionally omitted. 10.30 Premiere Communications, Inc. 401(k) Profit Sharing Plan (incorporated by reference to Exhibit 10.30 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.31 Form of Director Indemnification Agreement between the Registrant and Non-employee Directors (incorporated by reference to Exhibit 10.31 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.32 Lease Agreement dated April 5, 1993 between Premiere Communications, Inc. and Telecommunications Finance Group, as amended (incorporated by reference to Exhibit 10.32 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.33 Sublease Agreement dated August 22, 1994 between Premiere Communications, Inc. and Sales Technologies, Inc., as amended by the First Amendment dated September 28, 1995 and the Second Amendment dated October 31, 1995 (incorporated by reference to Exhibit 10.33 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.34 55 Park Place Office Lease dated May 31, 1993 between Premiere Communications, Inc. and Mara-Met Venture, as amended by First Amendment dated December 15, 1995 (incorporated by reference to Exhibit 10.34 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.35 Office Lease Agreement dated April 7, 1995 between Premiere Communications, Inc. and Boston Avenue Management Company (incorporated by reference to Exhibit 10.35 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.36 Form of Officer Indemnification Agreement between the Registrant and each of the executive officers (incorporated by reference to Exhibit 10.36 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.37 Carrier Agreement dated January 1, 1996 between Premiere Communications, Inc. and Communications Network Corporation (incorporated by reference to Exhibit 10.37 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.38 Carrier Service Agreement dated August 4, 1995 between Premiere Communications, Inc. and Cherry Communications Incorporated, as amended (incorporated by reference to Exhibit 10.38 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.39 Carrier Services Agreement Dated July 12, 1995 between Premiere Communications, Inc. and Corporate Telemanagement Group, Inc., as amended (incorporated by reference to Exhibit 10.39 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.40 Telecommunications Services Agreement dated December 1, 1995 between Premiere Communications, Inc. and WorldCom Network Services, Inc. d/b/a WilTel (incorporated by reference to Exhibit 10.40 to the Registrant's Registration Statement on Form S-1 (No. 33-80547).* 10.41 First Amendment to Stock Purchase Warrant dated December 14, 1995 between Registrant and Sirrom amending Stock Purchase Warrant dated May 26, 1992 (incorporated by reference to Exhibit 10.41 to the Registrant's Registration Statement on Form S-1 (No. 33- 80547). 10.42 First Amendment to Stock Purchase Warrant dated December 14, 1995 between Registrant and Sirrom amendment Stock Purchase Warrants dated December 23, 1993 (incorporated by reference to Exhibit 10.42 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 10.43 Strategic Alliance Agreement dated November 13, 1996 by and between the Registrant and WorldCom, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated November 13, 1996).* 10.44 Investment Agreement dated November 13, 1996 by and between the Registrant and WorldCom, Inc. (incorporated by reference to Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated November 13, 1996.) 10.45 Form of Stock Purchase Warrant Agreement (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (No. 333-11281)). 10.46 Form of Warrant Transaction Statement (incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (No. 333-11281)). 10.47 Form of Director Stock Purchase Warrant (incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 (No. 333-17593)). 10.48 Second Amended and Restated 1995 Stock Plan (incorporated by reference to Exhibit 4.8 to the Registrant's Registration Statement on Form S-8 (No. 333-17593)). 10.49 Second and Third Amendment to 55 Park Place Office Lease dated November 5, 1996 between Premiere Communications, Inc. and Mara-Met Venture. 10.50 Office Lease Agreement dated May 12, 1996 between Premiere Communications, Inc. and Beverly Hills Center LLC, as amended by the First Amendment dated August 1, 1996. 10.51 Promissory Note dated October 18, 1996 between Premiere Communications, Inc. and NationsBank, N.A. (South). 10.52 Continuing and Unconditional Guaranty Agreement dated October 18, 1996, between Premiere Communications, Inc. and NationsBank, N.A. (South). 11.1 Statement re: Computation of Per Share Earnings. 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the Registrant's Registration Statement on Form S-1 (No. 33-80547). 23.1 Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule. _________________ * Confidential treatment has been granted. The copy on file as an exhibit omits the information subject to the confidentiality request. Such omitted information has been filed separately with the Commission. EX-10.49 2 SECOND AND THIRD AMENDMENT TO 55 PARK PLACE OFFICE LEASE EXHIBIT 10.49 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (this "Amendment") is entered into as of this the 5th day of November, 1996, by and between PREMIERE COMMUNICATIONS, INC., a Florida corporation ("Tenant") and 55 PARK PLACE, L.P., a Delaware limited partnership ("Landlord"), WITNESSETH: ----------- WHEREAS, Mara-Met Venture and Tenant entered into that certain Lease dated May 31, 1993; as amended by that certain First Lease Amendment dated December 15, 1993 (collectively, the "Lease"); and WHEREAS, at the request of Tenant, and for the benefit of Tenant and certain other tenants within the Building (as defined in the Lease), Landlord has agreed to arrange for the installation of a shared generator system, including a shared 750KW generator, 2,000 gallon diesel fuel tank to replace the existing tank located within the Building, the output panel and feeders, battery charger, remote annunciator, all rigging and all terminations (such system being hereinafter referred to as the "Diesel Generator System"), which Diesel Generator System will be located in that certain space or premises containing approximately three hundred (300) square feet of floor area as more particularly identified on Exhibit "A" attached hereto and made a part hereof (the "Generator ----------- Space"), and WHEREAS, Tenant has agreed to pay for a portion of the Diesel Generator System and, during the remainder of the Term of the Lease, to pay Tenant's proportionate share of the costs for maintaining and repairing the Diesel Generator System, including without limitation, the costs of maintaining a full service maintenance and repair agreement for the Diesel Generator System as hereinafter provided; and WHEREAS, Tenant has agreed to pay its proportionate share of the Base Rent for the Generator Space as more particularly hereinafter provided; and WHEREAS, Landlord and Tenant desire to amend the Lease as provided herein in order to provide for the installation, maintenance and payment of the Diesel Generator System and the payment of Base Rent attributable to the Generator Space. NOW, THEREFORE, for and in consideration of the sum of Ten and No/100 Dollars ($10.00), the mutual covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Landlord and Tenant hereby acknowledge and agree that Allison-Smith Company (the "Contractor") shall be the general contractor for the installation of the Diesel Generator System, pursuant to that certain letter from Contractor to Tenant dated July 10, 1996 (the "Letter"), a copy of which is attached hereto as Exhibit "B" and made a part hereof. ----------- 2. As provided in the Letter, Tenant's total estimated cost for the installation of the Diesel Generator System is Eighty Nine Thousand Six Hundred Eighty-Seven Dollars and No/100 Dollars (89,687.000), which cost is calculated as follows: (a) One-third (1/3) of the total cost for the base generator and cooling tower systems ($208,430.00 divided by 3) $69,477.00 (b) Feeders, circuit breaker and terminators to tie Tenant's space to the generator distribution panel $20,210.00 ---------- TOTAL $89,687.00 ========== 3. Tenant shall pay the total cost due from Tenant for the Diesel Generator System (as provided in Paragraph 2 above) directly to Contractor within thirty (30) days following receipt of written notice from Contractor that it has completed the installation of the Diesel Generator System. In the event that Tenant shall fail to pay such amount within the said thirty (30) day period, such failure shall be deemed a default of Tenant under the Lease and Landlord shall have the right to exercise any available remedies under the Lease. 4. In addition to the payment for the cost of the Diesel Generator System as provided above, following the completion of the installation of the Diesel Generator System and continuing throughout the remainder of the Term of the Lease, Tenant shall pay to Landlord its "proportionate share" (as hereinafter defined) of all costs and expenses incurred by Landlord in connection with the maintenance and repairs of the Diesel Generator System, including without limitation, the costs incurred in connection with the maintenance/service agreement to be maintained for the Diesel Generator System. Tenant shall pay its proportionate share of such maintenance and repair costs to -2- Landlord as Additional Rent within thirty (30) days following receipt of invoice thereof. In the event that Tenant shall fail to pay such amount within said thirty (30) day period, such failure shall be deemed a default of Tenant under the Lease and Landlord shall have the right to exercise any available remedies under the Lease. As used herein, Tenant's proportionate share shall be based on the total number of users utilizing the Diesel Generator System during the period in which the costs reflected in the invoice accrued [for example, if there were four (4) users of the Diesel Generator System during the period in question, Tenant's proportionate share would be twenty-five percent (25%)]. 5. In addition to the costs to be paid by Tenant pursuant to paragraphs 2, 3 and 4 above, Tenant shall pay its proportionate share (as defined in paragraph 4 above) of the Base Rent due for the Generator Space. The Base Rent for the Generator Space shall be at the rate of Twenty and No/100 Dollars ($20.00) per square foot of floor area, multiplied by Tenant's proportionate share, and shall be due and payable as Base Rent in accordance with the terms of the Lease. 6. In consideration of Tenant's payment of the costs and expenses for the construction, installation, maintenance and repair of the Diesel Generator System, Tenant shall be entitled to use 135 KW of the Diesel Generator System. 7. Tenant hereby acknowledges and agrees that Tenant and the other users of the Diesel Generator System shall be responsible for the periodic testing and running of the Diesel Generator System in order that it does not remain dormat for an extended period of time beyond the manufacturer's recommendations. 8. Tenant further acknowledges and agrees that in assisting Tenant to provide for the installation and maintenance of the Diesel Generator System for Tenant and certain other tenants of the Building, Landlord shall incur no liability for injury or damage to persons or property in connection with the Diesel Generator System. In addition to, and not in lieu of, any indemnifications provided for in the Lease, Tenant hereby agrees to indemnify, defend and hold Landlord harmless from and against any loss, liability, costs, claims, demands, damages, actions, causes of action, and suits arising out of or in any manner related to the installation, maintenance, repair or replacement of the Diesel Generator System. 9. Except as set forth in this Agreement, all provisions of the Lease shall remain unchanged and in full force and effect and are hereby reaffirmed by the parties hereto. -3- IN WITNESS WHEREOF, Landlord and Tenant have cause this Amendment to be executed, under seal, as of the day and year first written above. LANDLORD: 55 PARK PLACE, L.P., a Delaware Limited Partnership By: 55 Park Place, Inc. It's General Partner By: /s/ S. Johnson ----------------------------- Name: Skip Johnson --------------------------- Title: -------------------------- Attest: /s/ Raymond G. Gardner ------------------------------ TENANT: PREMIERE COMMUNICATIONS, INC. a Florida corporation By: /s/ Patrick G. Jones ------------------------------ Name: Patrick G. Jones ---------------------------- Title: Sr. V.P. --------------------------- Attest: /s/ Julianne J. Vaio ------------------------------ -4- THIRD AMENDMENT TO LEASE ------------------------ THIS THIRD AMENDMENT TO LEASE (this "Amendment") is made this 5th day of November, 1996 by and between 55 PARK PLACE, L.P., a Delaware limited partnership successor in interest to MARA-MET VENTURE (hereinafter referred to as "Landlord"), and PREMIERE COMMUNICATIONS, INC., a Florida corporation (hereinafter referred to as "Tenant"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, Landlord and Tenant entered into that certain 55 Park Place Office Lease, dated as of May 31, 1993, as amended, for the lease of certain premises located on the Third Floor of the office building located at 55 Park Place, NE, Atlanta, Georgia (said 55 Park Place Office Lease, as so amended, is hereinafter referred to as the "Lease"); and WHEREAS, Tenant desires to lease from Landlord additional space in the Building upon the terms and conditions set forth herein; and WHEREAS, Landlord and Tenant desire to amend and modify the Lease in order to add certain space in the Building to the Premises. NOW, THEREFORE, for and in consideration of the premises, the keeping and performance of the covenants and agreements hereinafter contained, and TEN AND NO/100 Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Landlord and Tenant, it is hereby agreed as follows: 1. DEFINITION OF TERMS. Terms used hereinafter and indicated by their ---------- -- ----- initial capitalization shall have the meanings ascribed to them in the Lease unless otherwise defined herein. 2. ADDITIONAL SPACE. From and after November 1, 1996 (the "Effective ---------- ----- Date"), Landlord hereby leases and rents to Tenant and Tenant hereby leases from Landlord upon the terms and conditions set forth in the Lease, that certain space containing approximately 1,238 Square Feet situated on the Third Floor of the Building as outlined on the floor plan attached hereto as EXHIBIT "A" and by ----------- this reference made a part hereof (the "Additional Space"). From and after the Effective Date, the term "Premises" as used in the Lease, as amended hereby, shall include not only the space heretofore leased by Tenant under the terms of the Lease, but also the Additional Space, and the terms and conditions contained in the Lease shall apply to the Additional Space. Accordingly, commencing on the Effective Date, "Square Feet in the Premises" shall mean Seven Thousand Three Hundred and Nine (7,309) rentable Square Feet, including Tenant's pro rata share of Building common areas, subject to adjustment in accordance with Paragraph 32 of the Lease. 3. BASE RENT. From and after the Effective Date, Tenant shall pay Base ---- ---- Rent and its pro rata share of Operating Expenses based on the Square Feet in the Premises as provided in Paragraph 2 above. 4. NO BROKERS. Landlord and Tenant each warrant and represent to the -- ------- other that such party has not employed or dealt with a real estate broker or agent in connection with the transaction contemplated hereby. Landlord and Tenant covenant and agree, each to the other, to indemnify the other against any loss, liability, costs, claims, demands, damages, actions, causes of action, and suits arising out of or in any manner related to the alleged employment or use by the indemnifying party of any real estate broker or agent in connection with this transaction. 5. APPLICABILITY OF TERMS AND CONDITIONS. Except as otherwise expressly ------------- -- ----- --- ---------- provided herein to the contrary, all of the terms, conditions and provisions contained in the Lease, as amended hereby, shall apply to and govern Tenant's use and occupancy of the Additional space, as if the Additional Space were originally part of the Premises. 6. MISCELLANEOUS. This Third Amendment shall be governed by and ------------- construed in accordance with the laws of the State of Georgia, and shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, successors, representative and permitted assigns. The terms of this Third Amendment shall be deemed incorporated into and made a part of the Lease. In the event of any inconsistency or conflict between this Third Amendment and of the Lease, the terms of this Third Amendment shall control. Time is of the essence of all of the terms of the terms of the Third Amendment. Except as expressly modified or amended hereby or added to herein, the Lease shall remain and is in full force and effect between Landlord and Tenant, and nothing contained herein shall diminish or shall be deemed to diminish, or otherwise alter the terms and conditions of the Lease. Landlord and Tenant hereby ratify and confirm the terms of the Lease, as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their duly authorized representative, under seal, of the day and year first above written. LANDLORD: --------- 55 PARK PLACE, L.P., a Delaware limited partnership By: 55 PARK PLACE, INC., a Nevada corporation By: /s/ Raymond G. Gardner --------------------------- Its: [TITLE] --------------------------- [CORPORATE SEAL] [SIGNATURES CONTINUED ON NEXT PAGE] -2- TENANT: ------- PREMIERE COMMUNICATIONS, INC., a Florida corporation By: /s/ Patrick G. Jones -------------------------------- Its: Sr. V.P. -------------------------------- [CORPORATE SEAL] -3- EX-10.50 3 OFFICE LEASE AGREEMENT DATED MAY 12, 1996 EXHIBIT 10.50 - - -------------------------------------------------------------------------------- ALLIANZ FINANCIAL CENTRE - - -------------------------------------------------------------------------------- OFFICE LEASE AGREEMENT Between BEVERLY HILLS CENTER LLC as Landlord and PREMIERE COMMUNICATIONS, INC. as Tenant Dated May 12, 1996 TABLE OF CONTENTS
Page Paragraph 1. DEFINITION AND BASIC PROVISIONS.............................. 1 Paragraph 2. GRANTING CLAUSE.............................................. 2 Paragraph 3. EARLY OCCUPANCY.............................................. 2 Paragraph 4. RENTAL....................................................... 2 Paragraph 5. USE.......................................................... 2 Paragraph 6. SERVICES TO BE PROVIDED BY LANDLORD.......................... 2 Paragraph 7. REPAIR AND MAINTENANCE....................................... 4 Paragraph 8. FIRE OR OTHER CASUALTY....................................... 4 Paragraph 9. COMPLIANCE WITH LAWS AND USAGE............................... 5 Paragraph 10. LIABILITY AND INDEMNITY...................................... 5 Paragraph 11. ADDITIONS AND FIXTURES....................................... 6 Paragraph 12. ASSIGNMENT AND SUBLETTING.................................... 6 Paragraph 13. SUBORDINATION................................................ 7 Paragraph 14. OPERATING EXPENSES........................................... 8 Paragraph 15. EMINENT DOMAIN............................................... 10 Paragraph 16. ACCESS BY LANDLORD........................................... 10 Paragraph 17. LANDLORD'S LIEN.............................................. 10 Paragraph 18. DEFAULTS..................................................... 10 Paragraph 19. NONWAIVER.................................................... 12 Paragraph 20. HOLDING OVER................................................. 12 Paragraph 21. COMMON AREA.................................................. 12 Paragraph 22. RULES AND REGULATIONS........................................ 12 Paragraph 23. TAXES........................................................ 12 Paragraph 24. INSURANCE.................................................... 12 Paragraph 25. PARKING...................................................... 13 Paragraph 26. PERSONAL LIABILITY........................................... 13 Paragraph 27. NOTICE....................................................... 13 Paragraph 28. LANDLORD'S MORTGAGE.......................................... 13 Paragraph 29. BROKERAGE.................................................... 13 Paragraph 30. PREPAID RENTAL............................................... 13 Paragraph 31. SPRINKLERS................................................... 13 Paragraph 32. LICENSE FOR MICROWAVE DISH ANTENNA........................... 13 Paragraph 33. INTERCONNECTION RIGHTS....................................... 14 Paragraph 34. EMERGENCY GENERATOR.......................................... 15 Paragraph 35. SUPPLEMENTAL HVAC............................................ 15 Paragraph 36. TENANT FINISH................................................ 16 Paragraph 37. RIGHT OF FIRST REFUSAL....................................... 17 Paragraph 38. RENEWAL OPTION............................................... 18 Paragraph 39. MISCELLANEOUS................................................ 19 Paragraph 40. ENTIRE AGREEMENT AND BINDING EFFECT.......................... 21
EXHIBIT A LEASED PREMISES AND ROFR AREA EXHIBIT B LAND EXHIBIT C RULES AND REGULATIONS EXHIBIT D EMERGENCY GENERATOR AND HVAC LOCATIONS EXHIBIT E NON-DISTURBANCE AND ATTORNMENT AGREEMENT OFFICE LEASE AGREEMENT 1. DEFINITIONS AND BASIC PROVISIONS. -------------------------------- A. Date of Lease: _____________, 1996. B. "Landlord": Beverly Hills Center LLC C. Address of Landlord: 2323 Bryan Street, Suite 2020 Lock Box 120 Dallas, Texas 75201 D. "Tenant": Premiere Communications, Inc. E. Address of Tenant: 3399 Peachtree Road -------------------------- Suite 400 -------------------------- Atlanta, 6A 30326 -------------------------- F. "Building": The structure commonly known as the allianz Financial Centre and which is located on the 0.8437 acre tract of land (the "Land") described by metes and bounds on Exhibit B attached hereto and made a part --------- hereof all purposes. G. "Leased Premises": Approximately 6,952 square feet of rentable area on the eighth (8th) floor of the Building, as outlined and hatched on the floor plan attached hereto as Exhibit A and made a part hereof for all purposes. --------- Tenant acknowledges that Tenant has had the opportunity to measure the Leased Premises and that there has been applied to the usable square footage of the Leased Premises a common area factor to arrive at the rentable square footage of the Leased Premises. Therefore, Landlord and Tenant hereby stipulate that notwithstanding anything herein to the contrary, the Leased Premises shall be deemed to consist of 6,952 rentable square feet, and that no shortage or overage in the rentable square feet of the Leased Premises purported by either party shall be the basis for changing the number of rentable square feet herein stipulated. H. "Project": The Building, the parking facilities, parking garage, the Skybridge and other structures, improvements, landscaping, fixtures, appurtenances and other common areas now or hereafter, constructed or erected on the Land. I. "Rentable area in the Building" shall be 464,542 square feet of rentable area, unless modified as provided herein. J. "Commencement Date": August 1, 1996, or Tenant's Cutover Date (as hereinafter defined), whichever shall first occur. As used herein, the term "Tenant's Cutover Date" shall mean the date on which the telephone switch is installed in the Leased Premises and substantially performing according to all material specifications as verified by the manufacturer's standard testing procedures. Upon request of either party hereto, Landlord and Tenant agree to execute and deliver a written declaration in recordable form expressing the Commencement Date hereof. K. "Term": Commencing on the Commencement Date and ending five (5) years after the Commencement Date, plus any partial calendar month following the Commencement Date, unless sooner terminated as provided herein. L. "Base Rental" $118,184.00 per year for the first five (5) years of the Term of this Lease, payable in equal monthly installments of $9,848.67 each; each such monthly installment shall be due and payable on the first day of each calendar month, monthly in advance without demand and without setoff or deduction whatsoever. Subject to the terms of Paragraph 33, Tenant may install two (2) 4-inch and one (1) 3-inch conduits or equivalent cable runs in the riser facilities of the Building and Tenant's rental obligations with respect thereto shall be abated during the first five (5) years of the Term. In the event at Tenant's request Landlord permits Tenant to install additional conduits or equivalent cable runs, Tenant shall pay an additional Riser Fee with respect to such additional installations in an amount equal to the then prevailing market riser fee rate. M. "Prepaid Rental": $9,848.67, to be applied to the first accruing monthly installments of rental. N. "Security Deposit": $ -0-. O. "Permitted Use": The Leased Premises shall be used only for office purposes and for a telecommunications facility. P. "Common Area": That part of the Project designated by Landlord from time to time for the common use of all tenants, including among other facilities, the Skybridge, sidewalks, service corridors, curbs, truckways, loading areas, private streets and alleys, lighting facilities, mechanical and electrical rooms, janitors' closets, halls, lobbies, delivery passages, elevators, drinking fountains, meeting rooms, public toilets, parking areas and garages, decks and other parking facilities, landscaping and other common rooms and common facilities. Q. "Prime Rate": The rate announced as such from time to time by Chase Manhattan Bank, N.A., or its successors, at its principal office. R. "Broker": Trammell Crow Company/COMPASS Management and Leasing, Inc. S. "Parking": Four (4) parking spaces, subject, however, to the payment of prevailing market rental established from time to time for similar parking spaces and further subject to the other terms, covenants and conditions specified in Paragraph 25 hereof. Notwithstanding the foregoing or anything in Paragraph 25 to the contrary, Tenant's rental obligations during the first five (5) years of the Term of the Lease with respect to such four (4) parking spaces shall be $120.00 (plus applicable taxes) per month per parking space used for the parking of vehicles and $250.00 (plus applicable taxes) per month per parking space used for the placement of equipment. T. "Base Operating Expenses Rate": The Actual Operating Expenses Rate for the 1996 calendar year. -1- U. "Skybridge": The aerial walkway connecting the Building with the Plaza of the Americas, together with any alterations, improvements and/or replacements thereof. Each of the foregoing definitions and basic provisions shall be construed in conjunction with the references thereto contained in the other provisions of this Lease and shall be limited by such other provisions. Each reference in this Lease to any of the foregoing definitions and basic provisions shall be construed to incorporate each term set forth above under such definition or provision. 2. GRANTING CLAUSE. Landlord, in consideration of the covenants and --------------- agreements to be performed by Tenant and upon the terms and conditions hereinafter stated, does hereby lease, demise and let unto Tenant, and Tenant does hereby lease from Landlord, the Leased Premises specified in Paragraph 1.G. hereof to have and to hold for the Term of this Lease, as specified in Paragraph 1.K. hereof. 3. EARLY OCCUPANCY. Any occupancy of the Leased Premises by Tenant prior --------------- to the Commencement Date shall be subject to all of the terms and provisions of this Lease excepting only those requiring the payment of rental and other charges. If this Lease is executed before the Leased Premises becomes vacant, or if any present tenant or occupant of the Leased Premises holds over and Landlord cannot acquire possession thereof prior to the Commencement Date, then Landlord shall not be deemed in default hereunder, and Tenant agrees to accept possession of the Leased Premises at such time as Landlord is able to tender the same and, in such event, the date of such tender by Landlord shall be deemed to be the Commencement Date, and Landlord hereby waives the payment of rental and other charges covering any period prior to the date of such tender. 4. RENTAL. As rental for the Lease and use of the Leased Premises, Tenant ------ will pay Landlord or Landlord's assigns, at the address of Landlord specified in Paragraph 1.C. hereof, without demand and without deduction, abatement or setoff (except as otherwise expressly provided for herein in Paragraph 8 hereof and Paragraph 15 hereof), the Base Rental in the manner specified in Paragraph 1.L. hereof, in lawful money of the United States. If the Term of this Lease does not commence on the first day of a calendar month, Tenant shall pay to Landlord in advance a pro rata part of such sum as rental for such first partial month. Tenant shall not pay any installment of rental more than one (1) month in advance. All past due installments of rental or other payment specified herein shall bear interest at the highest lawful rate per annum from the date due until paid. If Tenant fails to timely pay two (2) consecutive installments of Base Rental, or other payment specified herein, or any combination thereof after ten (10) days notice to Tenant of such failure, in each case, and Tenant fails to make the required payment within such ten (10) day period, Landlord may require Tenant to pay (in addition to any interest) Base Rental and other payments specified herein (as estimated by Landlord, if necessary) quarterly in advance, and, in such event, all future payments shall be made on or before the due date in cash or by cashier's check or money order, and the delivery of Tenant's personal or corporate check shall no longer constitute payment thereof. Any acceptance of Tenant's personal or corporate check thereafter by Landlord shall not be construed as a waiver of the requirement that such payments be made in cash or by cashier's check or money order. Any amount so estimated by Landlord and paid by Tenant shall be adjusted promptly after actual figures become available and paid or credited to Landlord or Tenant, as the case may be. 5. USE. Tenant shall use the Leased Premises solely for the Permitted Use --- specified in Paragraph 1.0 hereof and for no other business or purpose without the prior written consent of Landlord. 6. SERVICES TO BE PROVIDED BY LANDLORD. ----------------------------------- A. Subject to the rules and regulations hereinafter referred to, Landlord shall furnish Tenant, at Landlord's expense, while Tenant is occupying the Leased Premises and is not in default hereunder, the following services during the Term of this Lease: (1) Air conditioning and heating in season, at such times as Landlord normally furnishes such services to other tenants in the Building, and at such temperatures and in such amounts as are considered by Landlord to be standard, but such service on Saturday afternoons, Sundays and holidays to be furnished only upon the request of Tenant, who shall bear the cost thereof. Tenant acknowledges that such service and temperature may be subject to change by local, county, state or federal regulation. Whenever machines or equipment that generate abnormal heat are used in the Leased Premises which affect the temperature otherwise maintained by the air conditioning system, Landlord shall have the right to install supplemental air conditioning in the Leased Premises, and the cost thereof, including the cost of installation, operation, use and maintenance, shall be paid by Tenant to Landlord as additional rental upon demand. (2) Water at those points of supply provided for general use. (3) Janitor service in and about the Building, and the Leased Premises, as may in the reasonable judgment of Landlord be required for Tenant's use of the Leased Premises; however, Tenant shall pay the additional costs attributable to the cleaning of improvements within the Leased Premises other than building standard improvements. (4) Elevators for ingress to and egress from the Building as may in the judgment of Landlord be reasonably required. Landlord may reasonably limit the number of elevators in operation after usual and customary business hours and on Saturday afternoons, Sundays and legal holidays. (5) Replacement of fluorescent lamps in the building standard ceiling mounted fixtures installed by Landlord and incandescent bulb replacement in all public areas. 8. Landlord shall provide or cause to be provided to the Leased Premises all electrical current required by Tenant in the normal use and occupancy of the Leased Premises. Without Landlord's prior written consent, Tenant shall not install any equipment which would result in Tenant's connected load exceeding 3.0 watts per square foot of rentable area within the Leased Premises or which would generate sufficient heat to affect the temperature otherwise maintained in the Leased Premises by the normal operation of the Building air conditioning equipment serving the -2- Leased Premises. The obligation of Landlord to provide or cause to be provided electrical service shall be subject to the rules and regulations of the supplier of such electricity and of any municipal or other governmental authority regulating the business of providing electrical utility service. Landlord shall not be liable or responsible to Tenant for any loss, damage or expense which Tenant may sustain or incur if either the quantity or character of the electric service is changed or is no longer available or no longer suitable for Tenant's requirements. At any time when Landlord is furnishing electric current to the Leased Premises pursuant to this Paragraph 6.B., Landlord may, at its option, upon not less than thirty (30) days prior written notice to Tenant, discontinue the furnishing of such electric current. If Landlord gives such notice of discontinuance, Landlord shall make all reasonably necessary arrangements with the public utilities supplying the electric current to the Project with respect to connecting electric current to the Leased Premises, but Tenant shall contract directly with such public utility with respect to supplying such service. Landlord shall have the right to measure electrical usage in the Leased Premises (1) by installing a submeter, (2) by periodic determinations by Landlord's engineers or other competent consultants selected by Landlord, or (3) by any combination of such methods. The cost of purchase and installation of a submeter in the Leased Premises shall be borne by Tenant. C. Tenant shall be obligated to pay to Landlord, as additional rental, (1) Tenant's proportionate share of all electrical service to the Common Area (collectively, "Common Area Electrical Service") and (2) the cost of electrical service to the Leased Premises. Tenant's proportionate share of the cost of Common Area Electrical Service shall be equal to the cost of such service times a fraction in which the numerator is the rentable area of the Leased Premises and the denominator is the rentable area of the Building. In the event the electrical service to the Leased Premises is submetered or otherwise measured in accordance with the provisions of Paragraph 6.B., Tenant shall pay to Landlord the cost of such electrical service based upon rates determined by Landlord from time to time (which shall not exceed the amount Tenant would have been charged for such service by the local utility company furnishing such service). In the event electrical service to the Leased Premises is not measured by a submeter or periodic determination by Landlord's engineers or other competent consultants selected by Landlord (or a combination of such methods), then, Tenant shall pay to Landlord Tenant's proportionate share of the cost of all electrical service to tenants in the Building which does not exceed Building standard consumption as established from time to time by Landlord. Such proportionate share shall be based upon the statements therefor received by Landlord from the electrical utility company providing such service, adjusted as Landlord determines appropriate to eliminate over-standard consumption, and shall be determined by multiplying the cost of such service times a fraction (the "Leased Premises Electrical Expense Percentage") the numerator of which is the rentable area of the Leased Premises and the denominator of which is the rentable area of the Building. In the event that other tenants of the Building pay directly either to Landlord or third parties for electricity supplied to their respective premises (e.g. separately metered electricity), then Landlord may, at its sole option, adjust the Leased Premises Electrical Expenses Percentage by excluding from the denominator thereof the rentable area of all tenants making such payments. The cost of electrical service shall include without limitation all fuel adjustment charges, demand charges and taxes. If, during any period of time, the Building is not fully leased, then, for purposes of this Paragraph 6.C., the area of the Building shall be deemed to mean and include that portion of the Building which is occupied (calculated on the basis of rentable area). D. Prior to the Commencement Date, Landlord shall deliver to Tenant a statement which sets forth the Estimated Monthly charge (as hereinafter defined) due and payable by Tenant under the terms of Paragraph 6.C. hereof for electrical service each month during the Term. Tenant shall pay to Landlord on the first day of each calendar month during the Term, commencing with the Commencement Date, as additional rental, the Estimated Monthly Charge. In the event the Commencement Date occurs on a day other than the first day of a calendar month, the Estimated Monthly Charge payable in respect of the month in which the Commencement Date falls shall be prorated and the Estimated Monthly charge, as so prorated, shall be due and payable on or before the Commencement Date. Thereafter, as the actual amounts owed by Tenant for Tenant's proportionate share of Common Area Electrical Service and electrical service to the Leased Premises are determined, Landlord shall deliver to Tenant a statement setting forth the electrical service utilized during the period in question and the actual amount owed by Tenant under the terms of Paragraph 6.C. hereof in respect of such electrical service. If the Estimated Monthly Charge previously paid by Tenant is less than the amount owed by Tenant based upon Landlord's actual utility bills (for the period covered in such bills), Tenant shall pay to Landlord the amount of the deficiency for such period within ten (10) days after receipt of Landlord's statement. In the event the Estimated Monthly Charge exceeds Tenant's proportionate share of such costs, the excess payment shall be credited against subsequent amounts due from Tenant for electrical service. From time to time Landlord shall review the Estimated Monthly Charge and make such adjustments as may appear to be appropriate in the discretion of Landlord. Landlord shall have the right to revise the Estimated Monthly Charge at any time and from time to time in the exercise of Landlord's reasonable judgment upon at least ten (10) days prior written notice to Tenant. All payments due under this paragraph 6.D. after the expiration of such ten (10) day period shall be increased or decreased as may be required to make such payments consistent with such revised Estimated Monthly Charge. As used in this Paragraph 6.D., the term "Estimated Monthly Charge" shall mean Landlord's estimate of the amount due and payable by Tenant each month during the Term with respect to Tenant's proportionate share of Common Area Electrical Service and electrical service to be provided to the Leased Premises. E. If Tenant's connected load for electrical design exceeds 3.0 watts per square foot, Tenant shall pay as a surcharge a proportionate part of all electrical service costs which are attributable to the aggregate over- standard electrical consumption by all tenants in the Building. Such proportion shall be equal to the product of the aggregate cost of all over-standard electrical consumption in the Building (as determined by Landlord) times a fraction in which the numerator is Tenant's electrical design load in excess of 3.0 watts per square foot and the denominator is the aggregate of the total electrical design load of all tenants in the Building in excess of 3.0 watts per square foot. Tenant's proportionate share of such sums shall be due within ten (10) days after the date of receipt of a statement therefor from Landlord setting forth the amount of the charges involved and calculating Tenant's proportionate share thereof. F. No interruption or malfunction of any of such services shall constitute an eviction or disturbance of Tenant's use and possession of the Leased Premises or the Building or a breach by Landlord of any of Landlord's obligations hereunder to render Landlord liable for damages or entitle Tenant to be relieved from any of Tenant's obligations hereunder (including the obligation to pay rental) or grant Tenant any right of setoff or recoupment. In the event of any such interruption, however, Landlord shall use reasonable diligence during normal business hours to restore such service or cause same to be restored in any circumstances in which such restoration -3- is within the reasonable control of Landlord and the interruption was not caused in whole or in part by Tenant's fault. Notwithstanding the foregoing, in the event that an interruption of any of those services to be provided by Landlord under this Paragraph 6 shall render the Leased Premises untenantable, such interruption was not caused by any act or omission of Tenant or Tenant's employees, agents or contractors and such interruption shall continue for a period in excess of fifteen (15) consecutive days, then Tenant's Base Rental obligations under the Lease shall abate for such period which exceeds fifteen (15) consecutive days; provided, however, that such rental abatement shall be on a pro rata basis to reflect only that portion of the Leased Premises affected by the interruption of services. The abatement of rent provided for in this paragraph shall not be applicable in the case of any interruption of malfunction resulting from a reduction or elimination of electrical service to the Building from the electrical utility company or governmental agency providing such electrical service or change in quality of such service, nor shall such abatement be applicable in the event of any interruption or malfunction of services due to regulations of any government or governmental authority or any utility company providing electrical service provided such interruption or malfunction is not due to the failure of Landlord to make payment for such service or the failure to comply or perform its contractual obligations or Landlord's failure to comply with existing applicable rules or regulations. G. Should Tenant desire any additional services beyond those described in this Paragraph 6 hereof or rendition of any of such services outside the normal times of Landlord for providing such service, Landlord may (at Landlord's option), upon reasonable advance notice from Tenant to Landlord, furnished such service, and Tenant agrees to pay Landlord such charges as may be agreed on between Landlord and Tenant, but in no event at a charge less than Landlord's actual cost plus overhead for the additional services provided. H. Notwithstanding anything in this Paragraph 6 to the contrary, Landlord shall provide 400 amp electrical service to the Leased Premises. Any additional electrical requirements of Tenant shall be provided at Tenant's sole cost and expense. In addition, notwithstanding anything in this Paragraph 6 to the contrary, Tenant's electrical service in the Leased Premises shall be measured by a separate meter, installed at Tenant's sole cost and expense. Tenant may use any unused Finish Allowance to pay for such meter. 7. REPAIR AND MAINTENANCE. ---------------------- A. Landlord shall, at Landlord's own cost and expense, except as may be provided elsewhere herein, make necessary repairs of damage to the Building corridors, lobby, structural members of the Building and equipment used to provide the services referred to in Paragraph 6 hereof, unless any such damage is caused in whole or in part by acts of omission or Tenant, or Tenant's agents, employees or invitees, in which event Tenant shall bear the cost of such repairs. Tenant shall promptly give Landlord notice of any damage in the Leased Premises requiring repair by Landlord, as aforesaid. B. Tenant shall not in any manner deface or injure the Leased Premises or the Building but shall maintain the Leased Premises, including, without limitation, all fixtures installed by Tenant and all plate glass, walls, carpeting and other floor covering placed or found therein, in a clean, attractive, first-class condition and in good repair, except as to damage required to be repaired by Landlord, as provided in Paragraph 7.A. hereof. Upon the expiration of the Term of this Lease, Tenant shall surrender and deliver up the Leased Premises with all improvements located thereon (except as provided in Paragraph 11.B. hereof) to Landlord broom-clean and in the same condition in which they existed at the commencement of the Lease, excepting only ordinary wear and tear and damage arising from any cause not required to be repaired by Tenant, failing which Landlord may restore the Leased Premises to such condition, and Tenant shall pay the cost thereof. C. This Paragraph 7 shall not apply in the case of damage or destruction by fire or other casualty which is covered by insurance maintained by Landlord on the Building (as to which Paragraph 8 hereof shall apply), or damage resulting from an eminent domain taking (as to which Paragraph 15 hereof shall apply). 8. FIRE AND OTHER CASUALTY. ----------------------- A. If at any time during the Term of this Lease, the Leased Premises or any portion of the Building shall be damaged or destroyed by fire or other casualty, then Landlord shall have the election to terminate this Lease or to repair and reconstruct the Leased Premises and the Building to substantially the same condition in which they existed immediately prior to such damage or destruction, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures and other improvements which may have been installed by Tenant or other tenants within the Building. In the event that the Leased Premises are damaged or destroyed by fire or other casualty, or a portion of the Building is damaged or destroyed by fire or other casualty so as to materially impair the use and occupancy by Tenant of the Leased Premises, then Landlord shall be obligated to provide written notice (the "Restoration Notice") to Tenant within sixty (60) days of such event of casualty stating a good faith estimate, certified by an independent architect, of the period of time (the "Stated Restoration Period") which shall be required for the repair and restoration of the Leased Premises and/or the Building. Tenant shall have the right, at its election, to terminate the Lease if either (i) the Stated Restoration Period shall be in excess of ninety (90) days following the event of casualty and Tenant terminates this Lease with written notice thereof to Landlord within ten (10) days following delivery of the Restoration Notice, or (ii) Landlord shall fail to substantially complete the repair and restoration of the Leased Premises or the Building within the Stated Restoration Period (subject to extension as provided in Paragraph 39.T of this Lease) and Tenant delivers written notice of such termination to Landlord within ten (10) days following the expiration of the restoration deadline. B. In any of the aforesaid circumstances, rental shall abate proportionately during the period and to the extent that the Leased Premises are unfit for use by Tenant in the ordinary conduct of Tenant's business. If Tenant does not elect, or does not have the right to elect, to terminate the Lease, and Landlord has elected to repair and restore the Leased Premises, this Lease shall continue in full force and effect and such repairs shall be made within a reasonable time thereafter, subject to delays arising from shortages of labor or material, acts of God, war or other conditions beyond Landlord's reasonable control. In the event that this Lease is terminated as herein permitted, Landlord shall refund to Tenant the prepaid rental (unaccrued as of the date of damage or destruction) less any sum then owing Landlord by Tenant. If Tenant does not elect, or does not have the right to elect, to terminate the Lease, and Landlord has elected to repair and reconstruct the Leased Premises, then the Term of this Lease shall be extended by a period of time equal to the period of such repair and reconstruction. Any insurance which may be carried by Landlord or Tenant against loss or damage to the Building or to the Leased Premises -4- shall be for the sole benefit of the party carrying such insurance under its control, and it is understood that Landlord shall in no event be obligated to carry insurance on Tenant's contents. 9. COMPLIANCE WITH LAWS AND USAGE. Tenant, at Tenant's own expense, (a) ------------------------------ shall comply with all federal, state, municipal fire underwriting and other laws, ordinances, orders, rules and regulations applicable to the Leased Premises and the business conducted therein by Tenant, (b) shall not engage in any activity which would cause Landlord's fire and extended coverage insurance to be cancelled or the rate therefor to be increased (or, at Landlord's option, Tenant shall pay any such increase to Landlord immediately upon demand as additional rental in the event of such rate increase by reason of such activity), (c) shall not commit, and shall cause Tenant's agents, employees and invitees not to commit, any act which is a nuisance or annoyance to Landlord or to other tenants, or which might, in the exclusive judgment of Landlord, damage Landlord's goodwill or reputation, or tend to injure or depreciate the Building, (d) shall not commit or permit waste in the Leased Premises or the Building, (e) shall comply with rules and regulations from time to time promulgated by Landlord applicable to the Leased Premises and/or the Building, (f) shall not paint, erect or display any sign, advertisement, placard or lettering which is visible in the corridors or lobby of the Building or from the exterior of the Building without Landlord's prior written approval, and (g) shall not occupy or use, or permit any portion of the Leased Premises to be occupied or used, for any business or purpose other than the Permitted Use specified in Paragraph 1.0. hereof. If a controversy arises concerning Tenant's compliance with any federal state, municipal or other laws, ordinances, orders, rules or regulations applicable to the Leased Premises and the business conducted therein by Tenant, Landlord may retain consultants of recognized standing to investigate Tenant's compliance. If it is determined that Tenant has not complied as required, Tenant shall reimburse Landlord on demand for all consulting and other costs incurred by Landlord in such investigation. Landlord shall comply with all federal, state, municipal, fire underwriting and other laws, ordinances, orders, rules and regulations applicable to the Common Area of the Building and the business conducted therein by Tenant. Landlord and Tenant acknowledge that, in accordance with the provisions of the Americans with Disabilities Act and the Texas Elimination of Architectural Barriers Act, each as amended from time to time, and all regulations and guidelines issued by authorized agencies with respect thereto (collectively, the "ADA" and the "EAB", respectively), responsibility for compliance with the terms and conditions of Title III of the ADA and the EAB may be allocated as between Landlord and Tenant. Notwithstanding anything to the contrary contained in the Lease, Landlord and Tenant agree that the responsibility for compliance with the ADA and the EAB shall be allocated as follows: (i) Tenant shall be responsible for compliance with the provisions of Title III of the ADA and the EAB with respect to the Leased Premises, including restrooms within the Leased Premises, and (ii) Landlord shall be responsible for compliance with the provisions of Title III of the ADA and with the EAB with respect to the exterior of the Building, parking areas, sidewalks and walkways, and any and all areas appurtenant thereto, together with all common areas of the Building not included within the Leased Premises. The allocation of responsibility for ADA and EAB compliance between Landlord and Tenant, and the obligations of Landlord and Tenant established by such allocations, shall supersede any other provisions of the Lease that may contradict or otherwise differ from the requirements of this paragraph. In the event Tenant delivers to Landlord on or before May 10, 1996 written evidence from Tenant's architect ("Architect's Evidence") that such architect has determined in good faith that the cost to cause the leasehold improvements (which exist in the Leased Premises as of the date of this lease and which will remain in the Leased Premises after the Tenant Finish Work (as defined in Paragraph 36) has been performed) to comply with the ADA and/or the EAB will exceed $30,000.00, Tenant may terminate this Lease by delivering written notice ("Tenant's ADA Termination Notice") thereof to Landlord simultaneously with Tenant's delivery of the Architect's Evidence to Landlord. Tenant's failure to timely deliver the Architect's Evidence and/or Tenant's ADA Termination Notice shall automatically extinguish Tenant's foregoing right to terminate this Lease. Until the foregoing termination right is extinguished or waived in writing by Tenant, Landlord shall not be obligated to pay to Tenant any portion of the Finish Allowance. In the event Tenant exercises the foregoing termination right, notwithstanding anything in this Lease to the contrary, Landlord shall not be obligated to pay the Finish Allowance to Tenant, and Tenant shall, at its sole cost and expense, promptly surrender the Leased Premises to Landlord in the same condition as they existed upon Landlord's tendering of possession thereof to Tenant. 10. LIABILITY AND INDEMNITY. ----------------------- A. Tenant agrees to indemnify and save Landlord harmless from all third-party claims (including costs and expenses of defending against such claims) arising or alleged to arise from any negligent act or omission or willful misconduct of Tenant or Tenant's agents, employees, or contractors. Landlord agrees to indemnify and save Tenant harmless from all third-party claims (including costs and expenses of defending against such claims) arising or alleged to arise from any negligent act or omission or willful misconduct of Landlord or Landlord's agents, employees or contractors. B. Notwithstanding any provision in this Lease to the contrary, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action, or cause of action, against the other, its agents, officers, or employees, for any loss or damage that may occur to the Leased Premises, or any improvements thereto, or the Building of which the Leased Premises are apart, or any improvements thereto, or any personal property of such party therein, by reason of fire, the elements, or any other cause which is or would be insured against under the terms of the property insurance policies carried or required to be carried under the terms of this Lease by the respective parties hereto, regardless of cause or origin, including negligence of the other party hereto, its agents, officers, or employees, and covenants that no insurer shall hold any right of subrogation against such other party (and all such insurance policies shall be amended or endorsed to reflect such waiver of subrogation). This waiver of subrogation provision shall be effective to the full extent, but only to the extent that it does not impair the effectiveness of insurance policies of Landlord and Tenant. C. Tenant, to the extent permitted by law, waives all claims Tenant may have against Landlord, and against Landlord's agents and employees for injury to person or damage to or loss of property sustained by Tenant or by any occupant of the Leased Premises, or by any other person, resulting from any part of the Building or any equipment or appurtenances becoming out of repair, or resulting from any accident in or about the Building or resulting directly or indirectly from any act or neglect of any tenant or occupant of any part of the Building or of any other person, unless such damage is a result of the negligence of Landlord's agents or employees or Landlord's default in the performance of its obligations under this Lease. If any damage results from any act or neglect of Tenant and if the cost of repair of such damage would not be covered by a fire and extended coverage insurance policy maintained by Landlord on the Project, then Landlord may, at Landlord's option, repair such damage, and Tenant shall thereupon pay to Landlord the -5- total cost of such repair. All personal property belonging to Tenant or any occupant of the Leased Premises that is in or on any part of the Building shall be there at the risk of Tenant or of such other person only, and Landlord, Landlord's agents and employees shall not be liable for any damage thereto or for the theft or misappropriation thereof unless such damage, theft or misappropriation is a result of the negligence of Landlord or Landlord's agents or employees. 11. ADDITIONS AND FIXTURES. ---------------------- A. Tenant will make no alteration, change, improvement, repair, replacement or physical addition in or to the Leased Premises without the prior written consent of Landlord, such consent not to unreasonably withheld or delayed; provided, however, that Landlord shall be deemed to have reasonably withheld its consent if Landlord withholds its consent because any such alteration, change, improvement, repair, replacement or addition negatively impacts the structure of the Building or any system of the Building including, without limitation, the Building's floor load-bearing requirements and its mechanical, electrical, plumbing and HVAC systems. If such prior written consent of Landlord is granted, the work in such connection shall be at Tenant's expense but by workmen of Landlord or by workmen and contractors approved in advance in writing by Landlord and in a manner and upon terms and conditions and at times satisfactory to and approved in advance in writing by Landlord. In any instance where Landlord grants such consent, Landlord may grant such consent contingent and conditioned upon Tenant's contractors, laborers, materialmen and others furnishing labor or materials for Tenant's job working in harmony and not interfering with any labor utilized by Landlord, Landlord's contractors or mechanics or by any other tenant or such other tenant's contractors or mechanics; and if at any time such entry by one (1) or more persons furnishing labor or materials for Tenant's work shall cause disharmony or interference for any reason whatsoever without regard to fault, the consent granted by Landlord to Tenant may be withdrawn at any time upon written notice to Tenant. B. Tenant, if Tenant so elects, may remove Tenant's trade fixtures, office supplies and movable office furniture and equipment not attached to the Building provided (i) such removal is made prior to the expiration of the Term of this Lease, (ii) Tenant is not in default of any obligation or covenant under this Lease at the time of such removal, and (iii) Tenant promptly repairs all damage caused by such removal. All other property at the Leased Premises and any alteration or addition to the Leased Premises (including wall-to-wall carpeting, paneling or other wall covering) and any other article attached or affixed to the floor, wall or ceiling of the Leased Premises shall become the property of Landlord shall be in good condition, normal wear and tear excepted, and shall remain upon and be surrendered with the Leased Premises as part thereof at the expiration of the Term of this Lease, Tenant hereby waiving all rights to any payment or compensation therefor. If, however, Landlord so requests in writing, Tenant will, prior to the termination of this Lease, remove in a good and workmanlike manner any and all alterations, additions, fixtures, equipment and property placed or installed by Tenant in the Leased Premises and will repair any damage occasioned by such removal. 12. ASSIGNMENT AND SUBLETTING ------------------------- A. Neither Tenant nor Tenant's Legal representatives or successors in interest by operation of law or otherwise shall assign this Lease or sublease the Leased Premises or any part thereof or mortgage, pledge or hypothecate its Leasehold interest or grant any concession or license within the Leased Premises without the prior express written permission of Landlord, which permission shall not be unreasonably withheld or delayed, and any attempt to do any of the foregoing without the prior express written permission of Landlord shall be void and of no effect. In determining whether to grant permission to Tenant's request to assign this lease or sublease the Leased Premises, Landlord may consider any reasonable factor. Landlord and Tenant agree that any one of the following factors, or any other reasonable factor, will be reasonable grounds for deciding Tenant's request: (i) The business reputation of the proposed assignee or subleasee must be in accordance with generally acceptable commercial standards and consistent with B class A office building environment; (ii) The use of the Leased Premises by the proposed assignee or sublessee must be for general office use or for a telecommunications facility only; (iii) The proposed assignee or sublessee may not be a tenant or occupant in the Building; and (iv) The use of the Leased Premises by the proposed assignee or sublessee shall not violate any other agreements affecting the Leased Premises, the Building, Landlord or other tenants. Notwithstanding any provision in this Lease to the contrary, the undersigned Tenant may, without Landlord's prior written consent, assign its rights hereunder to any bona fide purchaser of substantially all of the undersigned Tenant's assets or all of the corporate stock of the undersigned Tenant, or to an entity with which the undersigned Tenant enters into a bona fide merger or consolidation (collectively, a "Permitted Assignee"); provided, however, that (i) the undersigned Tenant shall remain liable for the performance of all covenants, duties and obligations under the Lease, irrespective of any such assignment or sublease, (ii) the use of the Leased Premises by the Permitted Assignee may not violate any other agreements affecting the Leased Premises, the Building, Landlord or other tenants, and (iii) use of the Leased Premises by the Permitted Assignee shall conform with the uses permitted by this Lease. Tenant shall notify Landlord, in writing, of any such assignment or sublease within thirty (30) days of its occurrence and shall provide Landlord with all such reasonable information as Landlord may request regarding the identity and status of such assignee or sublessee. In the event Tenant requests Landlord's prior express permission as to any assignment of the Lease (other than to a Permitted Assignee), Landlord shall have the right and option, (but no obligation), to cancel and terminate this lease by giving Tenant ten (10) days' prior written notice; provided, however, that Landlord's right to counsel and terminate shall not apply if Tenant withdraws its request within such 10-day period. In the event of any attempted assignment or attempted sublease without the prior express written permission of Landlord, or should Tenant, in any other nature of transaction, permit or attempt to permit anyone to occupy the Leased Premises (or any portion thereof) without the prior express written permission of Landlord, Landlord shall thereupon have the right and option to cancel and terminate this Lease effective upon ten (10) days' notice to Tenant given by Landlord at any time thereafter either as to the entire Leased Premises or as to only the portion thereof which Tenant shall have attempted to assign or sublease or otherwise permitted some other party's occupancy without Landlord's prior express written permission, and if Landlord elects to cancel and terminate this Lease as to the aforesaid portion of the Leased Premises, then the rental and other charges payable hereunder shall thereafter be proportionately reduced. This prohibition against assignment or subletting -6- shall be construed to include a prohibition against any assignment or subletting by operation of law. B. Notwithstanding that the prior express written permission of Landlord to any of the aforesaid transactions may have been obtained, the following shall apply: (1) In the event of an assignment, contemporaneously with the granting of Landlord's aforesaid consent, Tenant shall cause the assignee to expressly assume in writing and agree to perform all of the covenants, duties and obligations of Tenant hereunder, and such assignee shall be jointly and severally liable therefor along with Tenant; Tenant shall further cause such assignee to grant Landlord and express first and prior contract lien and security interest in the manner hereinafter stated as applicable to Tenant; (2) A signed counterpart of all instruments relative thereto (executed by all parties to such transactions with the exception of Landlord) shall be submitted by Tenant to Landlord prior to or contemporaneously with the request for Landlord's prior express written permission thereto (it being understood that no such instrument shall be effective without the prior express written permission of Landlord); (3) [Intentionally Deleted.] (4) No usage of the Leased Premises different from the usage herein provided to be made by Tenant shall be permitted, and all other terms and provisions of this Lease shall continue to apply after any such transaction; (5) In any case where Landlord consents to an assignment, sublease, grant of a concession or license or mortgage, pledge or hypothecation of the Leasehold, the undersigned Tenant will nevertheless remain directly and primarily liable for the performance of all of the covenants, duties and obligations of Tenant hereunder (including, without limitation, the obligation to pay all rental and other sums herein provided to be paid), and Landlord shall be permitted to enforce the provisions of this Lease against the undersigned Tenant and/or any assignee, sublessee, concessionaire, licensee or other transferee without demand upon or proceeding in any way against any other person; and C. If Tenant is a corporation, then any transfer of this Lease from Tenant by merger, consolidation or dissolution or any change in ownership or power to vote a majority of the voting stock in Tenant outstanding at the time of execution of this Lease shall constitute an assignment for the purpose of this Lease; provided, however, that acquisition of all stock of a corporate tenant by any corporation, the stock of which is registered pursuant to the Securities Act of 1933 or the merger of a corporate tenant into such a corporation, the stock of which is so registered, shall not itself be deemed to be a violation of Paragraph 12.A. For purposes of this Paragraph 12.C., the term "voting stock" shall refer to shares of stock regularly entitled to vote for the election of directors of the corporation involved. If Tenant is a general partnership having one (1) or more corporations as partners of if Tenant is a limited partnership having one (1) or more corporations as general partners, the provisions of the preceding paragraph of this Paragraph 12.C. shall apply to each of such corporations as if such corporation alone had been the Tenant hereunder. If Tenant is a general partnership (whether or not having any corporations as partners) or if Tenant is a limited partnership (whether or not having any corporations as general partners), the transfer of the partnership interest or interests constituting a majority shall constitute an assignment for the purposes of this Lease. D. Consent by Landlord to a particular assignment or sublease or other transaction shall not be deemed a consent to any other or subsequent transaction. If this Lease is assigned, or if the Leased Premises are subleased (whether in whole or in part), or in the event of the mortgage, pledge or hypothecation of the leasehold interest or grant of any concession or license within the Leased Premises without the prior express written permission of Landlord, which permission as stated in Paragraph 12.A. above shall not be unreasonably withheld or delayed, or if the Leased Premises are occupied in whole or in part by anyone other than Tenant without the prior express written permission of Landlord, then Landlord may nevertheless collect rental and other charges from the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold interest was hypothecated, concessionaire or licensee or other occupant and apply the net amount collected to the rental and other charges payable hereunder, but no such transaction or collection of rental and other charges or application thereof by Landlord shall be deemed a waiver of these provisions or a release of Tenant from the further performance by Tenant of Tenant's covenants, duties and obligations hereunder. 13. SUBORDINATION. Tenant accepts this lease subject and subordinate to ------------- any ground lease, mortgage, deed of trust or other lien presently existing or hereafter placed upon the Leased Premises or upon the Building or any part thereof, and to any renewals, modifications, extensions and refinancings thereof, which might now or hereafter constitute a lien upon the Building or any part thereof, and to zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of the Leased Premises, but Tenant agrees that any such ground lessor, mortgagee and/or beneficiary of any deed of trust or other lien ("Landlord's Mortgagee") and/or Landlord shall have the right at any time to subordinate such ground lease, mortgage, deed of trust or other lien to this Lease on such terms and subject to such conditions as such Landlord's Mortgagee may deem appropriate in its discretion. Upon demand Tenant agrees to execute such further instruments subordinating this Lease, as Landlord may request, and such nondisturbance and attornment agreements, as any such Landlord's Mortgagee shall request, in form satisfactory to Landlord's Mortgagee. In the event that Tenant shall fail to execute any such instrument within ten (10) business days after requested, Tenant hereby irrevocably constitutes -7- Landlord as Tenant's attorney-in-fact to execute such instrument in Tenant's name, place and stead, it being stipulated by Landlord and Tenant that such agency is coupled with an interest in Landlord and is, accordingly, irrevocable. Upon foreclosure of the Building or upon acceptance of a deed in lieu of such foreclosure, Tenant hereby agrees to attorn to the new owner of such property after such foreclosure or acceptance of a deed in lieu of foreclosure, if so requested by such new owner of the Building. Notwithstanding any contrary provision contained herein, Landlord shall use reasonable efforts to obtain from the current Landlord's Mortgagee a duly executed non-disturbance and attornment agreement providing Tenant with substantially the same protection as to Tenant's use and enjoyment of Tenant's leasehold estate, use, possession, tenancy and other rights hereunder as is afforded Tenant under the form instrument attached hereto as Exhibit E. In the event that Landlord fails to obtain such --------- non-disturbance and attornment agreement from Landlord's Mortgagee within fifteen (15) business days of following the date of this Lease, then Tenant shall have the option, as Tenant's sole and exclusive right and remedy, to terminate this Lease by delivering written notice to Landlord of the exercise of such right of termination on or before twenty-five (25) business days following the date of this Lease. Tenant's failure to timely deliver such written notice shall automatically extinguish Tenant's right to terminate this Lease as set forth herein. Until the foregoing termination right is extinguished or is waived in writing by Tenant, Landlord shall not be obligated to pay any portion of the Finish Allowance to Tenant. In the event Tenant timely exercises the foregoing termination right, notwithstanding anything in this Lease to the contrary, Landlord shall not be obligated to pay any portion of the Finish Allowance to Tenant, and Tenant shall immediately surrender the Leased Premises to Landlord. In addition, notwithstanding any contrary provision contained herein, the subordination of this Lease to any mortgage, deed of trust or other lien hereafter placed upon the Leased Premises or the Building or any part thereof and Tenant's agreement to attorn to the holder of such mortgage, deed of trust or other lien as provided in this Paragraph 13 shall be conditioned upon such holder's entering into a non-disturbance and attornment agreement providing Tenant with substantially the same protection as to Tenant's use and enjoyment of Tenant's leasehold estate, use, possession, tenancy and other rights hereunder as is afforded Tenant under the form instrument attached hereto as Exhibit E. - - --------- 14. OPERATING EXPENSES. ------------------ A. For purposes of this Paragraph 14, the following definitions and calculations shall apply: (1) The term "Operating Expenses" shall mean all expenses, costs and disbursements of every kind and nature which Landlord shall pay or become obligated to pay because of or in connection with the ownership, operation, maintenance, repair, replacement, protection and security of the Project, determined on an accrual basis in accordance with generally accepted accounting principles, including, without limitation, the following: (i) Salaries and wages of all employees (at the level of property manager and below) engaged in the operation, maintenance and security of the Project, including taxes, insurance and benefits (including pension, retirement of fringe benefits) relating thereto; (ii) Cost of all supplies and materials used in the operation, maintenance and security of the Project; (iii) Cost of all water and sewage service supplied to the Project; (iv) Cost of all maintenance and service agreements for the Project and the equipment therein, including, without limitation, alarm service, parking facilities, security (both on-site and off- site), janitorial service, landscaping, fire protection, sprinklers, window cleaning and elevator maintenance; (v) Cost of all insurance relating to the Project, including the cost of casualty, rental and liability insurance applicable to the Project and Landlord's personal property used in connection therewith; (vi) All taxes, assessments and governmental charges (foreseen or unforeseen, general or special, ordinary or extraordinary) whether federal, state, county or municipal and whether levied by taxing districts or authorities presently taxing the Project or by others subsequently created or otherwise, and any other taxes and assessments attributable to the Project or its operation, and all taxes of whatsoever nature that are imposed in substitution for or in lieu of any of the taxes, assessments or other charges herein defined; provided, however, Operating Expenses shall not include taxes paid by tenants of the Project as a separate charge on the value of their leasehold improvements, death taxes, excess profits taxes, franchise taxes and state and federal income taxes; (vii) Cost of repairs and general maintenance, including, without limitation, reasonable depreciation charges applicable to all equipment used in repairing and maintaining the Project, but specifically excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or by other third parties; (viii) Cost of capital improvement items, including installation thereof, which are acquired primarily for the purpose of reducing Operating Expenses; (xi) Reasonable management fees paid by Landlord to third parties or to management companies owned by, or management divisions of, Landlord, not to exceed the then prevailing market rate for the management of high quality class A office buildings comparable to the Project; and (x) Any and all increases in ground rental and/or mortgage debt service requirements on the Project in accordance with the terms and conditions of any ground leases, mortgages or deeds of trust now or hereafter encumbering the Project; excluding, however, any and all increases in debt service caused by a refinancing which enables Landlord to net any proceeds or additional debt placed upon the Project to finance additional capital improvements, additions or alterations. Notwithstanding anything herein to the contrary, the following shall not be included in Operating Expenses: (a) Brokerage commissions, attorneys' fees, advertising costs or other related expenses incurred by Landlord in connection with the leasing of space to individual tenants in the Building; -8- (b) Legal fees and other expenses incurred in connection with disputes with tenants or other occupants of the Building or associated with the enforcement of the terms of any leases with tenants; (c) Any cost of capital improvements or other costs which are capital costs under generally accepted accounting principles, except as provided in Paragraph 14.A.(1)(viii); (d) Depreciation and amortization allowance or expense, except as otherwise provided Paragraph 14.A.(1)(vii); (e) Legal and auditing fees, other than those legal and auditing fees necessarily incurred in connection with the maintenance and operation of the Project; (f) Legal or accounting fees incurred in connection with any debt or equity financing of the Project or in connection with any reports, returns or other financial or tax reporting or accounting performed for the benefit of investors, partners or affiliates of Landlord; (g) Marketing and advertising expenses incurred in connection with the leasing of the Building; (h) Interest, fines and penalties to the extent caused by the negligence or willful misconduct of Landlord; and (i) The cost of removing asbestos or hazardous substances from the Project. To the extent that any Operating Expenses are attributable to the Project and other projects of Landlord, a fair and reasonable allocation of such Operating Expenses shall be made between the Project and such other projects. (2) The term "Operating Expenses" shall exclude the cost of electrical energy supplied to the Project and to tenants of the Building. (3) The term "Base Operating Expenses Rate" is stipulated to be the rate specified in Paragraph 1.?. hereof per square foot or rentable area in the Leased Premises. (4) The term "Actual Operating Expenses" shall mean, with respect to each calendar year during the Term of this Lease, the actual Operating Expenses for such year. The term "Actual Operating Expenses Rate" shall mean, with respect to each calendar year during the Term of this Lease, the Actual Operating Expenses attributable to each square foot of rentable area in the Building, and shall be calculated by dividing the Actual Operating Expenses by the total number of square feet of rentable area in the Building, as specified in Paragraph 1.I. hereof. The term "Tenant's Proportionate Share of Actual Operating Expenses" shall mean, with respect to each calendar year during the Term of this Lease, an amount equal to the product of (i) the positive difference (if any) obtained by substracting the Base Operating Expenses Rate from the Actual Operating Expenses Rate, multiplied by (ii) the weighted average number of square feet of rentable area in the Leased Premises in such year; provided, however, if the Actual Operating Expenses Rate is determined on the basis of a partial calendar year, then in making the foregoing calculation, the Base Operating Expenses Rate shall be multiplied by a fraction, the numerator of which is the number of days in such partial calendar year and the denominator of which is 365, and the foregoing weighted average shall be calculated only on the basis of the portion of such calendar year covered by the Term of this Lease. For example, if the Actual Operating Expenses Rate for a calendar year is $3.20 and the Base Operating Expenses Rate is $3.00, and the Leased Premises contains 19,000 square feet of rentable area during the entire calendar year, Tenant's Proportionate Share of Actual Operating Expenses is $3,800.00, calculated as follows: ($3.20 - $3.00) x 19,000 = $3,800.00. B. If the Actual Operating Expenses Rate during any calendar year is greater than the Base Operating Expenses Rate, Tenant shall be obligated to pay to Landlord as additional rental an amount equal to Tenant's Proportionate Share of Actual Operating Expenses. To implement the foregoing, Landlord shall provide to Tenant within ninety (90) days (or as soon thereafter as reasonably possible) after the end of the calendar year in which the Commencement Date occurs, a statement of the Actual Operating Expenses for such calendar year, the Actual Operating Expenses Rate for such calendar year, and Tenant's Proportionate Share of Actual Operating Expenses. If the Actual Operating Expenses Rate for such calendar year exceeds the Base Operating Expenses Rate, Tenant shall pay to Landlord, within thirty (30) days after Tenant's receipt of such statement, an amount equal to Tenant's Proportionate Share of Actual Operating Expenses for such calendar year. C. Beginning with the Commencement Date of this Lease (or as soon thereafter as reasonably possible), Landlord shall provide to Tenant a statement of the projected annual Operating Expenses per square foot of rentable area in the Project (the "Projected Operating Expenses Rate"). Tenant shall pay to Landlord on the first day of each month an amount (the "Projected Operating Expenses Installment") equal to one-twelfth (1/12) of the product of (i) the positive difference (if any) obtained by subtracting the Base Operating Expenses Rate from the Projected Operating Expenses Rate for such calendar year, multiplied by (ii) the number of square feet of rentable area in the Leased Premises on the first day of the prior month. Until Tenant has received the statement of the Projected Operating Expenses Rate from Landlord, Tenant shall continue to pay Projected Operating Expenses Installments to Landlord in the same amount (if any) as required for the last month of the prior calendar year. Upon Tenant's receipt of such statement of the Projected Operating Expenses Rate, Tenant shall pay to Landlord, or Landlord shall pay to Tenant (whichever is appropriate), the difference between the amount paid by Tenant prior to receiving such statement and the amount payable by Tenant as set forth in such statement. Landlord shall provide Tenant a statement, prepared by a certified public accountant (who may be an employee of Landlord), within ninety (90) days (or as soon thereafter as reasonably possible) after the end of each calendar year, showing the Actual Operating Expenses Rate as compared to the Projected Operating Expenses Rate for such calendar year. If Tenant's Proportionate Share of Actual Operating Expenses for such calendar year exceeds the aggregate of the Projected Operating Expenses Installments collected by Landlord from Tenant, Tenant shall pay to Landlord, within thirty (30) days following Tenant's receipt of such statement, the amount of such excess. If Tenant's Proportionate Share of Actual Operating Expenses for such calendar year is less than the aggregate of the Projected Operating Expenses Installments collected by Landlord from Tenant, Landlord shall pay to Tenant, within thirty (30) days following Tenant's receipt of -9- such statement, the amount of such excess. Landlord shall have the right from time to time during each calendar year to revise the Projected Operating Expenses Rate and provide Tenant with a revised statement thereof, and thereafter Tenant shall pay Projected Operating Expenses Installments on the basis of the revised statement. If the Commencement Date of this Lease is not the first day of a calendar year, or the expiration or termination date of this Lease is not the last day of a calendar year, then Tenant's Proportionate Share of Actual Operating Expenses shall be prorated. The foregoing adjustment provisions shall survive the expiration or termination of the Term of this Lease. D. Notwithstanding any other provision herein to the contrary, it is agreed that if the Project is not fully occupied during any calendar year an adjustment shall be made in computing the Actual Operating Expenses for such year so that the Actual Operating Expenses are computed as though the Project had been fully occupied during such year. E. Landlord agrees to keep books and records reflecting the Operating Expenses of the Project in accordance with generally accepted accounting principles. Tenant, at its expense, shall have the right, within six (6) months after receiving Landlord's statement of Actual Operating Expenses for a particular year, to audit Landlord's books and records relating to the Operating Expenses for such year if the Actual Operating Expenses Rate exceeds the Base Operating Expenses Rate; or, at Landlord's sole option, Landlord may provide such audit prepared by a certified public accountant selected by Landlord. If within such six (6) month period Tenant does not give Landlord written notice stating in reasonable detail any objection to the statement of Actual Operating Expenses, Tenant shall be deemed to have approved such statement in all respects. F. Notwithstanding any provision of the Lease to the contrary, for the purpose of calculating Tenant's Proportionate Share of Actual Operating Expenses each year during the first five (5) years of the Term of the Lease, the items of Actual Operating Expenses which are reasonably subject to the control of Landlord ("Controllable Expenses") shall be deemed not to increase more than eight percent (8%) per calendar year (determined on a cumulative compounding basis throughout the Term of the Lease) for each calendar year from and after January 1, 1997; provided, however, that no item of Actual Operating Expenses other than Controllable Expenses shall be subject to the foregoing limitation. Controllable Expenses shall not include, without limitation, (i) insurance, (ii) taxes, assessments and governmental charges, as specified in Paragraph 14.A.(1) (vi) above, and (iii) utilities. 15. EMINENT DOMAIN. If there shall be taken by exercise of the power of -------------- eminent domain during the Term of this Lease any part of the Leased Premises or the Building, Landlord may elect to terminate this Lease or to continue same in effect. If there shall be taken by exercise of the power of eminent domain any part of the Leased Premises or the Building which materially interferes with Tenant's ability to conduct its operations in the Leased Premises, then Tenant shall have the right to terminate this Lease upon thirty (30) days' written notice to Landlord following such taking. If this Lease continues, the rental shall be reduced in proportion to the area of the Leased Premises so taken, and Landlord shall repair any damage to the Leased Premises or the Building resulting from such taking. All sums awarded or agreed upon between Landlord and the condemning authority for the taking of the interest of Landlord, whether as damages or as compensation, will be the property of Landlord. Tenant shall present its own claim for damages against the condemning authority on account of the unamortized cost of leasehold improvements paid for by Tenant taken by the condemning authority and for damages to, or condemnation of, furniture, trade fixtures and equipment and such other installations as Tenant shall be unable to remove from the Leased Premises (but only to the extent that the terms and provisions of this Lease provide that such items will remain the property of Tenant upon the termination of this Lease), and the reimbursement of Tenant's cost in moving and relocating such furniture, trade fixtures and equipment and other installations to which Tenant shall be entitled and is able to remove from the Leased Premises and such other claims Tenant may have against the condemning authority, but only to the extent Tenant's claim does not diminish Landlord's claim against the condemning authority. If this Lease should be terminated under any provision of this Paragraph 15, rental shall be payable up to the date that possession is taken by the condemning authority, and Landlord will refund to Tenant any prepaid unaccrued rental less any sum then owing by Tenant to Landlord. 16. ACCESS BY LANDLORD. Landlord, Landlord's agents and employees shall ------------------ have access to and the right to enter upon any and all parts of the Leased Premises at any reasonable time after reasonable prior notice, which notice may be oral or written (except in cases of emergency, defined to be any situation in which Landlord perceives imminent danger of inquiry to person and/or damage to or loss of property, in which case Landlord may enter upon any and all parts of the Leased Premises at any time) to examine the condition thereof, to clean, to make any repairs, alterations or additions required to be made by Landlord hereunder, to show the Leased Premises to prospective purchasers or tenants or mortgage lenders (prospective or current) and for any other purpose deemed reasonable by Landlord, and Tenant shall not be entitled to any abatement or reduction of rental by reason thereof. 17. LANDLORD'S LIEN. Landlord hereby expressly waives and releases any and --------------- all contractual liens and security interests or constitutional and/or statutory liens and security interests arising by operation of law to which Landlord might now or hereafter be entitled on all the property of Tenant which Tenant now or hereafter places in or upon the Leased Premises (except for judgment liens that may arise in favor of Landlord). The waiver and release contained herein shall not waive, release or otherwise affect any unsecured claim Landlord may have against Tenant. 18. DEFAULTS. -------- A. Each of the following acts or omissions of Tenant or occurrences shall constitute an "Event of Default": (1) Failure or refusal by Tenant to pay rental or other payments hereunder upon the expiration of a period of ten (10) days following written notice to Tenant of such failure; provided, however, that Landlord shall not be required to send such written notice to Tenant more than twice in any one calendar year and after such two (2) written notices, Landlord shall have no obligation to give Tenant written notice of any subsequent default during the remainder of such calendar year and Tenant's failure or refusal to timely pay rental or other payments hereunder when due during the remainder of such calendar year shall constitute an Event of Default. (2) Failure to perform or observe any covenant or condition of this Lease by Tenant to be performed or observed upon the expiration of a period of ten (10) days following written notice to Tenant of such failure; provided, however, that in the event Tenant's failure to perform a covenant or condition of this Lease cannot reasonably be cured within ten (10) days -10- following written notice to Tenant, Tenant shall not be in default if Tenant commences to cure same within the ten (10) day period and thereafter diligently prosecutes the curing thereof, but in no event shall Tenant's cure period exceed thirty (30) days following written notice to Tenant. (3) The filing or execution or occurrence of any one of the following: (i) a petition in bankruptcy or other insolvency proceeding by or against Tenant, (ii) petition or answer seeking relief under any provision of the Bankruptcy Act, (iii) an assignment for the benefit of creditors or composition, (iv) a petition or other proceeding by or against Tenant for the appointment of a trustee, receiver or liquidator of Tenant or any of Tenant's property, or (v) a proceeding by any governmental authority for the dissolution or liquidation of Tenant. B. This Lease and the Term and estate hereby granted and the demise hereby made are subject to the limitation that if and whenever any Event of Default shall occur, Landlord may, at Landlord's option, in addition to all other rights and remedies given hereunder or by law or equity, do any one (1) or more of the following: (1) Terminate this Lease, in which event Tenant shall immediately surrender possession of the Leased Premises to Landlord. (2) Enter upon and take possession of the Leased Premises and expel or remove Tenant and any other occupant therefrom, with or without having terminated the Lease. (3) Alter locks and other security devices at the Leased Premises. C. Exercise by Landlord of any one (1) or more remedies hereunder granted or otherwise available shall not be deemed to be an acceptance of surrender of the Leased Premises by Tenant, whether by agreement or by operation of Law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. No such alteration of security devices and no removal or other exercise of dominion by Landlord over the property of Tenant or others at the Leased Premises shall be deemed unauthorized or constitute a conversion, Tenant hereby consenting, after any Event of Default, to the aforesaid exercise of dominion over Tenant's property within the Building. All claims for damages by reason of such re-entry and/or possession and/or alteration of locks or other security devices are hereby waived, as are all claims for damages by reason of any distress warrant, forcible detainer proceedings, sequestration proceedings or other legal process. Tenant agrees that any re-entry by Landlord may be pursuant to judgment obtained in forcible detainer proceedings or other legal proceedings or without the necessity for any legal proceedings, as Landlord may elect, and Landlord shall not be liable in trespass or otherwise. D. In the event that Landlord elects to terminate this Lease by reason of an Event of Default, then, notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord, at the address specified in Paragraph 1.C. hereof, the sum of all rental and other indebtedness accrued to the date of such termination, plus, as damages, an amount equal to the then present value of the rental reserved hereunder for the remaining portion of the Term of this Lease (had such Term not been terminated by Landlord prior to the expiration of the Term of this Lease), less the then present value of the fair rental value of the Leased Premises for such period. In the event that Landlord elects to terminate the Lease by reason of an Event of Default, in lieu of exercising the rights of Landlord under the preceding paragraph of this Paragraph 18.D., Landlord may instead hold Tenant liable for all rental and other indebtedness accrued to the date of such termination, plus such rental and other indebtedness as would otherwise have been required to be paid by Tenant to Landlord during the period following termination of the Term of this Lease measured from the date of such termination by Landlord until the expiration of the Term of this Lease (had Landlord not elected to terminate the Lease on account of such Event of Default) diminished by any net sums thereafter received by Landlord through reletting the Leased Premises during said period (after deducting expenses incurred by Landlord as provided in Paragraph 18.F. hereof). Actions to collect amounts due by Tenant provided for in this paragraph of this Paragraph 18.D. may be brought from time to time by Landlord during the aforesaid period, on one (1) or more occasions, without the necessity of Landlord's waiting until the expiration of such period, and in no event shall Tenant be entitled to any excess of rental (or rental plus other sums) obtained by reletting over and above the rental provided for in this Lease. E. In the event that Landlord elects to repossess the Leased Premises without terminating this Lease, then Tenant shall be liable for and shall pay to Landlord, at the address specified in Paragraph 1.C. hereof, all rental and other indebtedness accrued to the date of such repossession, plus rental required to be paid by Tenant to Landlord during the remainder of the Term of this Lease until the expiration of the Term of this Lease, diminished by any net sums thereafter received by Landlord through reletting the Leased Premises during said period (after deducting expenses incurred by Landlord as provided in Paragraph 18.F. hereof). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due by Tenant as provided in this Paragraph 18.E. may be brought from time to time, on one (1) or more occasions, without the necessity of Landlord's waiting until the expiration of the Term of this Lease. F. In case of an Event of Default, Tenant shall also be liable for and shall pay to Landlord, at the address specified in Paragraph 1.C. hereof, in addition to any sum provided to be paid above: (i) broker's fees incurred by Landlord in connection with reletting the whole or any part of the Leased Premises, (ii) the cost of removing and storing Tenant's or other occupant's property, (iii) the cost of reparing, altering, remodeling or otherwise putting the Leased Premises into condition acceptable to a new tenant or tenants, and (iv) all reasonable expenses incurred by Landlord in enforcing Landlord's remedies, including reasonable attorneys' fees. Past due rental and other past due payments shall bear interest from maturity at the highest lawful rate per annum until paid. G. In the event of termination or repossession of the Leased Premises for an Event of Default, Landlord shall not have any obligation to relet or attempt to relet the Leased Premises, or any portion thereof, or to collect rental after reletting; but Landlord shall have the option to relet or attempt to relet; and in the event of reletting, Landlord may relet the whole or any portion of the Leased Premises for any period to any tenant and for any use and purpose. H. If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby -11- waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the Leased Premises for such purpose), and thereupon Tenant shall be obligated to, and hereby agrees to, pay Landlord, upon demand, all costs, expenses and disbursements (including reasonable attorneys' fees) incurred by Landlord in taking such remedial action. I. In the event of any default by Landlord, except as expressly provided in Paragraph 6.F. of this Lease, Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting Tenant a lien upon the property of Landlord and/or upon rental due Landlord), but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon have thirty (30) days (plus such additional reasonable period as may be required in the exercise by Landlord of due diligence) in which to cure any such default. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of Landlord's possession of the Building and not thereafter. The term "Landlord" shall mean only the owner, for the time being, of the Building, and in the event of the transfer by such owner of its interest in the Building, such owner shall thereupon be released and discharged from all covenants and obligations of the Landlord thereafter accruing, but such covenants and obligations shall be binding during the Term of this Lease upon each new owner for the duration of such owner's ownership. 19. NONWAIVER. Neither acceptance of rental or other payments by Landlord --------- nor failure by Landlord to complain of any action, nonaction or default of Tenant shall constitute a waiver of any of Landlord's rights hereunder. Waiver by Landlord of any right for any default of Tenant shall not constitute a waiver of any right for either a subsequent default of the same obligation or any other default. Receipt by Landlord of Tenant's keys to the Leased Premises shall not constitute an acceptance of surrender of the Leased Premises. 20. HOLDING OVER. If Tenant should remain in possession of the Leased ------------ Premises after the expiration of the Term of this Lease, without the execution by Landlord and Tenant of a new lease or an extension of this Lease, then Tenant shall be deemed to be occupying the Leased Premises as a tenant-at-sufferance, subject to all the covenants and obligations of this Lease and at a daily rental of 150% of the per day rental provided for the last month of the Term of this Lease, computed on the basis of a thirty (30) day month. The inclusion of the preceding sentence shall not be construed as Landlord's consent for Tenant to hold over. If any property not belonging to Landlord remains at the Leased Premises after the expiration of the Term of this Lease, Tenant hereby authorizes Landlord, after ten (10) business days prior written notice to Tenant, to make such disposition of such property as Landlord may desire without liability for compensation or damages to Tenant in the event that such property is the property of Tenant; and in the event that such property is the property of someone other than Tenant, Tenant agrees to indemnify and hold Landlord harmless from all suits, actions, liability, loss, damages and expenses in connection with or incident to any removal, exercise or dominion over and/or disposition of such property by Landlord. 21. COMMON AREA. The Common Area, as defined in Paragraph 1.P. hereof, ----------- shall be subject to Landlord's sole management and control and shall be operated and maintained in such manner as Landlord in Landlord's discretion shall determine. Landlord reserves the right to change from time to time the dimensions and location of the Common Area, to construct additional stories on the Building and to place, construct or erect new structures or other improvements on any part of the Land without the consent of Tenant. Tenant, and Tenant's employees and invitees shall have the nonexclusive right to use the Common Area as constituted from time to time, such use to be in common with Landlord, other tenants of the Building and other persons entitled to use the same, and subject to such reasonable rules and regulations governing use as Landlord may from time to time prescribe. Tenant shall not solicit business or display merchandise within the Common Area, or distribute handbills therein, or take any action which would interfere with the rights of other persons to use the Common Area. Landlord may temporarily close any part of the Common Area for such periods of time as may be necessary to prevent the public from obtaining prescriptive rights or to make repairs or alterations. 22. RULES AND REGULATIONS. Tenant, and Tenant's agents, employees and --------------------- invitees shall comply fully with all requirements of the rules and regulations of the Building which are attached hereto as Exhibit C and made a part hereof. --------- Landlord shall at all times have the right to change such rules and regulations or to amend or supplement them in such manner as may be deemed advisable for the safety, care and cleanliness of the Leased Premises and the Building and for preservation of good order therein, all of which rules and regulations, changes and amendments shall be forwarded to Tenant and shall be carried out and observed by Tenant. Tenant shall further be responsible for the compliance with such rules and regulations by the employees, agents and invitees of Tenant. Such rules and regulations shall be applied uniformly to all tenants of the Building. 23. TAXES. Tenant shall be liable for the timely payment of all taxes ----- levied or assessed against personal property, furniture or fixtures or equipment placed by Tenant in the Leased Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same, or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture or fixtures or equipment placed by Tenant in the Leased Premises, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder. 24. INSURANCE. Tenant shall, at Tenant's expense, procure and maintain --------- throughout the Term of this Lease a policy or policies of comprehensive public liability insurance, contractual liability insurance and property damage insurance, issued by insurers of recognized responsibility, authorized to do business in the State in which the Building is located, insuring Tenant and Landlord against any and all liability for injury to or death of a person or persons, occasioned by or arising out of or in connection with the use or occupancy of the Leased Premises, the limits of such policy or policies to be in an amount of not less than $1,000,000 combined single limit with respect to any one (1) occurrence, and shall furnish evidence satisfactory to Landlord of the maintenance of such insurance. Tenant shall obtain a written obligation on the part of each insurer to notify Landlord at least fifteen (15) days prior to modification or cancellation of such insurance. In the event Tenant shall not have delivered to Landlord a policy or certificate evidencing such insurance at least fifteen (15) days prior to the Commencement Date and at least fifteen (15) days prior to the expiration dates of each expiring policy, Landlord may obtain such insurance as Landlord may reasonably require to protect Landlord's interest. The cost for such policies shall be paid by Tenant to Landlord as additional rental upon demand plus an administrative charge as determined by Landlord. -12- 25. PARKING. Landlord hereby leases to Tenant and Tenant hereby leases ------- from Landlord the number of parking spaces specified in Paragraph 1.S. hereof in the parking facility from time to time associated with the Building at the prevailing market rental established by Landlord from time to time for similar parking spaces in such parking facility. Tenant shall pay to Landlord the prevailing market rental from time to time established by Landlord for such number of parking spaces as additional rental monthly together with and in addition to Base Rental, whether or not such number of parking spaces are in use. Tenant may not increase or decrease such number of parking spaces without the prior written consent of Landlord. Tenant agrees to comply with such reasonable rules and regulations as may be promulgated from time to time for the use of such parking facility, including, without limitation, rules and regulations requiring the parking of vehicles in designated spaces or areas to the exclusion of other spaces or areas. Parking spaces will be unassigned, provided that Landlord may at any time assign parking spaces. Tenant shall, if requested by Landlord, furnish to Landlord a complete list of the license plate numbers of all vehicles operated by Tenant, Tenant's employees and agents. Landlord shall not be liable for any damage of any nature whatsoever to, or any theft of, vehicles, or contents therein, in or about such parking facility. During temporary periods of construction or repair, Landlord shall use Landlord's best efforts to provide suitable substitute parking facilities in reasonable proximity to the Building; provided, however, if for any reason Landlord fails or is unable to provide suitable substitute parking facilities in reasonable proximity to the Building, Landlord shall not be deemed to be in default hereunder, but Tenant's obligation to pay the prevailing market rental for any such parking spaces shall cease for so long as Tenant does not have the use of such parking spaces and such abatement shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of such failure or inability to provide such parking spaces. 26. PERSONAL LIABILITY. The liability of Landlord to Tenant for any ------------------ default by Landlord under the terms of this Lease shall be limited to the proceeds of sale on execution of the interest of Landlord in the Building and in the Land, and neither Landlord, nor any party comprising Landlord, shall be personally liable for any deficiency. This clause shall not be deemed to limit or deny any remedies which Tenant may have in the event of default by Landlord hereunder which do not involve the personal liability of Landlord. 27. NOTICE. Any notice which may or shall be given under the terms of this ------ Lease shall be in writing and shall be either delivered by hand (including commercially recognized messenger and express mail service) or sent by United States Mail, registered or certified, return receipt requested, postage prepaid, if for Landlord, to the Building office and at the address specified in Paragraph 1.C. hereof, or if for Tenant, to the Leased Premises or, if prior to the Commencement Date, at the address specified in Paragraph 1.E. hereof, or at such other addresses as either party may have theretofore specified by written notice delivered in accordance herewith. Such address may be changed from time to time by either party by giving notice as provided herein. Notice shall be deemed given when delivered (if delivered by hand) or, whether actually received or not, when postmarked (if sent by mail). If the term "Tenant" as used in this Lease refers to more than one (1) person and/or entity, and notice given as aforesaid to any one of such persons and/or entities shall be deemed to have been duly given to Tenant. 28. LANDLORD'S MORTGAGEE. If the Building and/or Leased Premises are at -------------------- any time subject to a ground lease, mortgage, deed of trust or other lien, then in any instance in which Tenant gives notice to Landlord alleging default by Landlord hereunder, Tenant will also simultaneously give a copy of such notice to each Landlord's Mortgagee (provided Landlord or Landlord's Mortgagee shall have advised Tenant of the name and address of Landlord's Mortgagee) and each Landlord's Mortgagee shall have the right (but no obligation) to cure or remedy such default during the period that is permitted to Landlord hereunder, plus an additional period of thirty (30) days, and Tenant will accept such curative or remedial action (if any) taken by Landlord's Mortgagee with the same effect as if such action had been taken by Landlord. 29. BROKERAGE. Tenant represents and warrants that it has dealt with no --------- broker, agent or other person in connection with this transaction, other than Broker specified in Paragraph 1.R. hereof, and that no broker, agent or other person brought about this transaction, other than Broker specified in Paragraph 1.R. hereof, and Tenant agrees to indemnify and hold Landlord harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. The provisions of this Paragraph 29 shall survive the termination of this Lease. 30. PREPAID RENTAL. Landlord hereby acknowledges receipt from Tenant of -------------- the sum stated in Paragraph 1.M. hereof to be applied to the first accruing monthly installments of rental. 31. SPRINKLERS. If there now is or shall be installed in the Building ---------- a sprinkler system, and such system or any of its components shall be damaged or injured or not in proper working order by reason of any act or omission of Tenant, Tenant's agents servants, employees, licensees or visitors, then Tenant shall forthwith restore the same to good working condition at Tenant's own expense; and if the Board of Fire Underwriters or any bureau, department or official of the state or local government require or recommend that any changes, modifications, alterations or additional sprinkler heads or other equipment be made or supplied by reason of Tenant's business, or the location of partitions, trade fixtures or other contents of the Leased Premises, or for any other reason, or if any such changes, modifications alterations, additional sprinkler heads or other equipment become necessary to prevent the imposition of a penalty or charge against the full allowance for a sprinkler system in the fire insurance rate as fixed by the Board of Fire Underwriters, or by any fire insurance company, Tenant shall, at Tenant's expense, promptly make and supply such changes, modifications, alterations, additional sprinkler heads or other equipment. 32. LICENSE FOR MICROWAVE DISH ANTENNA. ---------------------------------- A. Effective as of the Commencement Date, and subject to the terms, provisions, and obligations of this Lease, for so long as the Lease remains in full force and effect and there is no uncured Event of Default thereunder, Landlord grants to Tenant a non-exclusive license to install, at Tenant's sole cost and expense, a microwave dish antenna, not to exceed three (3) feet in diameter on the roof of the Building. Additionally, subject to Landlord's prior written approval of plans and specifications relating thereto, Tenant shall have the right to install such wire, conduits, cables and other materials as necessary to connect the microwave dish antenna to Tenant's allied machinery and equipment (the microwave dish antenna and connecting material being collectively referred to as the "Installation"). The specific location of the Installation shall be subject to Landlord's prior written approval, such approval not be unreasonably withheld or delayed. The Installation shall be used solely for the purpose of providing communication services. -13- B. Tenant shall construct and install the Installation, or have the Installation constructed and installed, in a first class and workmanlike manner. The Installation shall be constructed in accordance with plans and specifications prepared or caused to be prepared by Tenant, at Tenant's sole cost and expense, and approved in advance, in writing, by Landlord. The Installation shall be constructed, installed, maintained and operated in accordance with all applicable laws and ordinances and all covenants, conditions and restrictions affecting the Project. Tenant shall, at Tenant's cost and subject to reasonable security regulations of Landlord, repair and maintain the Installation. Landlord agrees that Tenant and representatives designated by Tenant and approved by Landlord shall have reasonable access to the Installation in order to install, operate, maintain, inspect and remove as required, the Installation, except when reasonable safety and security requirements of Landlord preclude such access. C. Tenant shall not commence the construction of any portion of the Installation until (i) Landlord has approved, in writing, the contractors who shall perform such work, and (ii) Tenant has delivered to Landlord releases or waivers of mechanic's and materialmen's liens for such work by all parties who shall furnish materials or services or perform labor of any kind in connection with the Installation. D. Landlord shall permit Tenant and Tenant's agents and contractors to enter, at such times as are reasonably satisfactory to Landlord, applicable portions of the Project in order that Tenant may perform, construct and install the Installation. The foregoing license to enter the applicable portions of the Project is conditioned upon Tenant's workmen and mechanics working in harmony and not materially interfering with the labor employed by Landlord, Landlord's mechanics or contractors, or with any other tenant or their contractors. Such license is further conditioned upon workers' compensation and public liability insurance and property damage insurance, all in amounts and with companies and on forms reasonably satisfactory to Landlord, being provided and at all times maintained by Tenant's contractors, and certificates of such insurance being furnished to Landlord prior to proceeding with the work. If at any time such entry shall cause material disharmony or interference to other tenants, contractors or labor for any reason whatsoever including, without limitation, strikes or other work stoppages, then this license may be immediately revoked by Landlord unless such disharmony or interference is caused by the willful misconduct or intentional acts by Landlord, Landlord's agents or contractors. Such entry shall be deemed to be under all of the terms, covenants, provisions and conditions of the Lease. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of the Installation, the same being solely at Tenant's risk. E. Tenant shall indemnify and hold Landlord harmless from and against any and all demands, liability, liens, claims, losses, costs and expenses (including reasonable attorneys' fees) relating to or arising from the design, construction, installation, operation and removal of the Installation. Notwithstanding the fact that Landlord may, from time to time, review all applicable plans and specifications and monitor the construction of the Installation, Landlord shall have no obligation or liability to Tenant relating to or arising from the workmanship or materials employed in the construction and preparation of the Installation and the related planning and design services. F. Landlord reserves the right to relocate the Installation at any time and from time to time for a reasonable purpose to Landlord's operations or utilization of the Project, and Tenant shall cause the Installation to be moved to the new route at Tenant's cost within a reasonable time after notice from Landlord containing the details of the new route, and the license granted in this paragraph shall be deemed amended to the new route effective upon the receipt of the notice. Landlord shall have the right, without liability to Tenant, to remove the Installation from the previous location if Tenant has not relocated the Installation to the new route within the permitted time period, which removal may involve cutting any or all cables or otherwise interrupting service through the Installation. In the event of such action, Tenant shall save and hold Landlord harmless from and against any and all demands, liability, liens, claims, losses, costs and expenses (including reasonable attorneys' fees) relating to or arising from the removal of the Installation and any interruption of service cause thereby. G. Upon the expiration or earlier termination of the Term of this Lease, Tenant shall remove the Installation and related improvements in a good workmanlike manner, and Tenant will repair any damage occasioned by such removal. If Tenant fails to remove the Installation within thirty (30) days after the expiration or earlier termination of the Term of this Lease, Landlord shall have the right, but not the obligation, to elect either (i) to remove the Installation at Tenant's cost and expense, and Landlord shall have no liability for the return of, or damage to, the Installation, or (ii) to treat the Installation as abandoned by Tenant. H. Landlord reserves the right to grant to other parties, as Landlord may desire, the right to install telephone lines, conduit, cable, and other telecommunications equipment and materials in, on, over, under and through all or any portion of the Project. Tenant shall have no right to install telephone lines, conduit, cable or telecommunications equipment or materials other than as expressly defined and delineated in this Lease without the prior written approval of Landlord, which approval may be withheld in Landlord's sole and absolute discretion and/or conditioned upon such terms and conditions as Landlord may, in its discretion, require. 33. INTERCONNECTION RIGHTS. ---------------------- A. Landlord acknowledges that the nature of Tenant's business may require it to interconnect with other telecommunications companies which may also be located in the Building. Landlord agrees that Tenant may, subject to Landlord's prior written approval, which approval, subject to the following provisions, shall not be unreasonably withheld: i. install, maintain and use cable, conduits, wires, cable ducts, telephone closets and ladder racks for the conduct of its business between the Leased Premises and other parts of the Building; and ii. directly connect to, interface with, or otherwise attach to, the lines and facilities of the public utilities supplying electrical or telephone services to the Building, for additional electric energy and telephone connections to the Leased Premises. B. In the event that Tenant desires to make any of the foregoing modifications or improvements, Tenant shall provide written notice to Landlord describing the type, size, location and manner of such desired modification or improvement. Landlord shall, within three (3) business days of receipt of such written notice, advise Tenant in writing of Landlord's approval or disapproval of such requested modification or improvement, or of the requirement that Tenant -14- submit detailed drawings and specifications of such modification or improvement. If Landlord notifies Tenant of the requirement that Tenant submit detailed drawings and specifications, Tenant may then elect to withdraw its request or submit detailed drawings and specifications, at Tenant's sole cost and expense, regarding such modification or improvement. In the event Tenant elects to provide detailed drawings and specifications, Landlord shall have three (3) business days from the receipt of such detailed drawings and specifications to notify Tenant of Landlord's approval or disapproval of such modification or improvement. Tenant agrees that Landlord's disapproval of any of the foregoing modifications and improvements shall be reasonable if any such modifications or improvements have a material negative impact on any Building electrical, mechanical, plumbing or other system or the structural or aesthetic integrity of the Building or if space is not available for such installation after taking into consideration the needs of Landlord and of other tenants in the Building. Subject to Landlord's prior written approval, Tenant shall have access to and use of all common areas, lines, chase ways and ways of passage in the Building and the Leased Premises necessary to effectuate the rights set forth in this paragraph, provided said access and use does not interfere with the operation of the Building, the existing equipment of other tenants or Landlord's obligations to other tenants in the Building. Any installation carried out by Tenant pursuant to this paragraph shall be at Tenant's sole cost and expense, shall be performed in accordance with the other provisions of this Lease, and shall comply with all applicable federal, state and local laws and ordinances. Tenant agrees to indemnify and hold Landlord harmless from and against any and all loss, cost, claim and liability (including all attorneys' fees) for injuries to all persons and for damage to or loss of all property arising or alleged to arise from any act or omission of Tenant or Tenant's agents, employees, or contractors relating to the installation, maintenance, operation and removal of such improvements, installations and modifications. Notwithstanding any contrary provision herein, Landlord shall have the right to relocate, at Landlord's expense, any and all of the improvements described in this Paragraph 33 to another location in the Project, as Landlord shall elect at any time and from time to time for a reasonable purpose to Landlord's operations or utilization of the Project; provided, however, that no such relocation may have any detrimental effect on Tenant's use and operation of such improvements. Tenant shall cause such improvements to be moved to the new location within a reasonable time after notice from Landlord containing the details of the new location, and the license granted in this paragraph shall be deemed amended to the new location effective upon the receipt of the notice. Landlord shall have the right, without liability to Tenant, to remove such improvements from the previous location if Tenant has not relocated such improvements to the new location within the permitted time period, which removal may involve cutting any or all cables or otherwise interrupting service through such improvements. In the event of such action, Tenant shall save and hold Landlord harmless from and against any and all demands, liability, liens, claims, losses, costs and expenses (including reasonable attorneys' fees) relating to or arising from the removal of such improvements and any interruption of service caused thereby. C. Upon the expiration or earlier termination of the Term of this Lease, Tenant shall remove any and all of the improvements described in this Paragraph 33 in a good and workmanlike manner, and Tenant will repair any damage occasioned by such removal. If Tenant fails to remove such improvements within thirty (30) days after the expiration or earlier termination of the Term of this Lease, Landlord shall have the right, but not the obligation, to elect either (i) to remove such improvements at Tenant's cost and expense, and Landlord shall have no liability for the return of, or damage to, such improvements, or (ii) to treat such improvements as abandoned by Tenant. 34. EMERGENCY GENERATOR. ------------------- A. Tenant shall have the right, subject to Landlord's weight stress, load bearing and ventilation requirements and at Tenant's sole cost and expense, to install and maintain an emergency generator at the location set forth on Exhibit D attached hereto and made a part hereof for all purposes. Tenant shall - - --------- maintain, at Tenant's sole cost and expense, a fence around such emergency generator. Additionally, subject to Landlord's prior written approval of plans and specifications relating thereto, Tenant shall have the right to install such wire, conduits, cables and other materials as necessary to connect such emergency generator to the Leased Premises (the emergency generator and connecting material, being collectively referred to as the "Generator Installation"). Tenant shall be responsible for all costs and expenses arising from and relating to the Generator Installation. The Generator Installation shall be in compliance with all applicable federal, state and local laws and ordinances and Tenant shall indemnify and hold Landlord harmless from and against any and all loss, cost, claim and liability arising from Tenant's failure to satisfy such requirement. Landlord agrees that Tenant and representatives designated by Tenant and approved by Landlord shall have reasonable access to the Generator Installation in order to install, operate, maintain, inspect and remove as required, the Generator Installation, except when reasonable safety and security requirements of Landlord preclude such access. Landlord shall not unreasonably interfere with or impair Tenant's use, operation, maintenance or repair of the Generator Installation. Subject to Landlord's obligation not to unreasonably interfere with or impair Tenant's use, operation, maintenance or repair of the Generator Installation, Landlord reserves the right to lease space in the Project to other tenants, as Landlord may desire, for any purpose, including the installation and operation of a separate emergency generator. Notwithstanding any contrary provision contained herein, Landlord shall have the right to relocate, at Landlord's sole expense, the Generator Installation to another location in the Project, as Landlord shall elect; provided, however, that no such relocation may result in any additional cost or expense to Tenant or have any detrimental effect on Tenant's use and operation of the Generator Installation. B. Tenant agrees to indemnify and hold Landlord harmless from and against any and all loss, cost, claim and liability (including all attorneys' fees) for injuries to all persons and for damage to or loss of all property arising or alleged to arise from any act or omission of Tenant or Tenant's agents, employees, or contractors relating to the installation, maintenance, operation or removal of the Generator Installation. C. Upon the expiration or earlier termination of the Term of this Lease, Tenant shall remove the Generator Installation and related improvements in a good and workmanlike manner, and Tenant will repair any damage occasioned by such removal. If Tenant fails to remove the Generator Installation within thirty (30) days after the expiration or earlier termination of the Term of this Lease, Landlord shall have the right, but not the obligation, to elect either (i) to remove the Generator Installation at Tenant's cost and expense, and Landlord shall have no liability for the return of, or damage to, the Generator Installation, or (ii) to treat the Generator Installation as abandoned by Tenant. 35. SUPPLEMENTAL HVAC. ----------------- A. Tenant shall have the right to install and maintain, at Tenant's sole cost and expense, supplemental air-conditioning equipment at the location set forth on Exhibit D attached --------- -15- hereto. Tenant shall maintain, at Tenant's sole cost and expense, a fence around such supplemental air conditioning equipment. Additionally, subject to Landlord's prior written approval of plans and specifications relating thereto, Tenant shall have the right to install such wire, conduits, cables and other materials as necessary to connect such supplemental air conditioning equipment to the Leased Premises (the supplemental air conditioning equipment and connecting material being collectively referred to as the "HVAC Installation"). Landlord agrees not to unreasonably withhold or delay its approval regarding matters involving the HVAC Installation on which Landlord's approval is required. Tenant shall be responsible for all costs and expenses arising from and relating to the HVAC Installation. The HVAC Installation shall be in compliance with all applicable federal, state and local laws and ordinances and Tenant shall indemnify and hold Landlord harmless from and against any all loss, cost, claim and liability arising from Tenant's failure to satisfy such requirement. B. Tenant agrees to indemnify and hold Landlord harmless from and against and all loss, cost, claim and liability (including all attorneys' fees) for injuries to all persons and for damage to or loss of all property arising or alleged to arise from any act or omission of Tenant or Tenant's agents, employees, or contractors relating to the installation, maintenance, operation or removal of the Installation, except to the extent such injury, damage or loss of property is caused by Landlord's negligence or willful misconduct. C. Landlord agrees that Tenant and representatives designated by Tenant and approved by Landlord shall have reasonable access to the HVAC Installation in order to install, operate, maintain, inspect and remove as required, the HVAC Installation, except when reasonable safety and security requirements of Landlord preclude such access. Landlord shall not unreasonably interfere with or impair Tenant's use, operation, maintenance or repair of the HVAC Installation. D. Subject to Landlord's obligation not to unreasonably interfere with or impair Tenant's use, operation, maintenance, or repair of the HVAC Installation, Landlord reserves the right to lease space in the Project to other tenants, as Landlord may desire, for any purpose, including the installation and operation of supplemental air conditioning equipment. E. Notwithstanding any contrary provision contained herein, Landlord shall have the right to relocate, at Landlord's sole expense, the HVAC Installation to another location in the Project, as Landlord shall elect; provided, however, that no such relocation may result in any additional cost or expense to Tenant or have any detrimental effect on Tenant's use and operation of the HVAC Installation. F. Upon the expiration or earlier termination of the Term of this Lease, Tenant shall remove the HVAC Installation and related improvements in a good workmanlike manner, and Tenant will repair any damage occasioned by such removal. If Tenant fails to remove the HVAC Installation within thirty (30) days after the expiration or earlier termination of the Term of this Lease, Landlord shall have the right, but not the obligation, to elect either (i) to remove the HVAC Installation at Tenant's costs and expense, and Landlord shall have no liability for the return of, or damage to, the HVAC Installation, or (ii) to treat the HVAC Installation as abandoned by Tenant. 36. TENANT FINISH. ------------- A. Tenant shall construct or have constructed in a first class and workmanlike manner the tenant finish improvements (the "Tenant Finish Work") to be constructed and installed in the Leased Premises. The Tenant Finish Work shall be constructed in accordance with plans and specifications (the "Plans") prepared or caused to be prepared by Tenant, at Tenant's sole cost and expense, and approved in advance, in writing, by Landlord, such approval not to be unreasonably withheld or delayed; provided, however, that Landlord shall be deemed to have reasonably withheld its consent if Landlord withholds its consent because any proposed tenant finish improvements negatively impacts any system of the Building including, without limitation, the Building's floor load-bearing requirements or its mechanical, electrical, plumbing or HVAC systems. Landlord agrees to review the Plans, to approve same or note any changes reasonably required by Landlord, and return the Plans to Tenant within fifteen (15) business days following Landlord's receipt of the Plans from Tenant ("Landlord's Review Period"). In the event Landlord does not do so within Landlord's Review Period, then the date of August 1, 1996 referenced in Paragraph 1.J. of this Lease shall be delayed by one (1) day for each day in the period commencing on the last day of Landlord's Review Period and ending on the day Landlord returns the Plans to Tenant with Landlord's approval or requested changes. In the event Landlord does not comply with the foregoing review process within thirty (30) business days following receipt of the Plans from Tenant, Tenant may, as Tenant's sole and exclusive remedy, terminate this Lease by delivering written notice of such termination to Landlord prior to the date Landlord returns the Plans to Tenant with Landlord's approval or Landlord's requested changes. The Tenant Finish Work shall be constructed in accordance with all applicable building laws and ordinances and all covenants, conditions and restrictions affecting the Project. Tenant shall obtain Landlord's written approval of Tenant's bid package prior to delivering the bid package to prospective contractors, such approval not to be unreasonably withheld or delayed. B. Tenant shall not commence the construction of any portion of the Tenant Finish Work until Landlord has approved, in writing, the contractors who shall perform the Tenant Finish Work, including, without limitation, the mechanical, electrical, and plumbing contractors, such approval not to be unreasonably withheld or delayed. C. Landlord shall permit Tenant and Tenant's agents to enter the Leased Premises as of May 1, 1996 in order that Tenant may perform the Tenant Finish Work through Tenant's own contractors. The foregoing license to enter prior to the Commencement Date is conditioned upon Tenant's workmen and mechanics working in harmony and not materially interfering with the labor employed by Landlord, Landlord's mechanics or contractors or with any other tenant or their contractors. Such license is further conditioned upon workers' compensation and public liability insurance and property damage insurance, all in amounts and with companies and on forms reasonably satisfactory to Landlord, being provided and at all times maintained by Tenant's contractors engaged in the performance of the Tenant Finish Work, and certificates of such insurance being furnished to Landlord prior to proceeding with the work. If at any time such entry shall cause material disharmony or interference to other tenants, contractors or labor for any reason whatsoever including, without limitation, strikes or other work stoppages and if Tenant has not caused such disharmony or interference to promptly cease following notice thereof to Tenant, then this license may be immediately revoked by Landlord until such disharmony or interference ceases. Such entry shall be deemed to be under all of terms, covenants, provisions and conditions of the Lease. Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of the Tenant Finish Work prior to or after the Commencement Date, the same being solely at Tenant's risk. -16- D. Tenant shall indemnify and hold Landlord harmless from and against any and all demands, liability, liens, claims, losses, costs and expenses (including reasonable attorneys' fees) relating to or arising from the design, construction and installation of the Tenant Finish Work. Such indemnity shall not apply where such demands, liability, claims, losses, costs and expenses arise in whole or in part from the negligence of Landlord. Notwithstanding the fact that Landlord may, from time to time, review all applicable plans and specifications and monitor the progress of the Tenant Finish Work, Landlord shall have no obligation or liability to Tenant relating to or arising from the workmanship or materials employed in the construction and preparation of the Tenant Finish Work and the related space planning and architectural services. E. The costs and expenses of installing and constructing the Tenant finish Work shall be borne solely by Tenant; provided, however that Landlord shall provide to Tenant an allowance (the "Finish Allowance") with respect to the construction of the Tenant Finish Work in an amount equal to the product of Five and 25/100 Dollars ($5.25) multiplied by the number of rentable square feet of area located in the Leased Premises. The Finish Allowance shall be disbursed to Tenant as follows: (i) One-half (1/2) of the Finish Allowance shall be paid to Tenant within thirty (30) days following (a) the completion of one-half (1/2) of the Tenant Finish Work, as reasonably determined by a representative of Landlord, and (b) Tenant's delivery to Landlord of the paid bills or invoices for such work and unconditional releases or waivers of mechanic's and materialmen's liens from all parties who have furnished materials or services or performed labor of any kind in connection with the Tenant Finish Work; and (ii) The remainder of the Finish Allowance shall be paid to Tenant within thirty (30) days following (a) the final completion of the Tenant Finish Work, as reasonably determined by a representative of Landlord, and (b) Tenant's delivery to Landlord of the paid bills or invoices for such work and final unconditional releases or waivers of mechanic's and materialmen's liens from all parties who have furnished materials or services or performed labor of any kind in connection with the Tenant Finish Work. Tenant shall be entitled only to that portion of the Finish Allowance which is evidenced by paid bills or invoices for Tenant Finish Work actually performed by third parties, and any unused portion of the Finish Allowance as of the Commencement Date shall be the sole and exclusive property of Landlord. 37. RIGHT OF FIRST REFUSAL. Provided this Lease is then in full force and ---------------------- effect and there is no uncured Event of Default hereunder, Tenant shall have the right of first refusal to Lease additional space in the Building (the "ROFR Area") identified as such on Exhibit A to this Lease. Such right of first ---------- refusal shall be exercisable at the following times and upon the following conditions. (a) If during the term of this Lease, Landlord receives a bona fide offer from a prospective tenant (the "Prospective Tenant") to Lease premises (the "Offered Premises") in the Building containing all or any part of the ROFR Area, and Landlord desires to accept such offer, Landlord shall notify Tenant of such fact. Tenant shall have a period of five (5) business days from the date of delivery of such notice to notify Landlord whether Tenant elects to exercise the right granted hereby to Lease the Offered Premises. If Tenant fails to give any notice to Landlord within the required five (5) business day period, Tenant shall be deemed to have refused its right to lease all or any portion of the Offered Premises. (b) If Tenant refuses its right to lease the Offered Premises, either by giving written notice thereof or by failing to give any notice, Landlord shall thereafter have the right to lease the Offered Premises to the Prospective Tenant on such terms and provisions as may be acceptable to Landlord, provided such terms and provisions are not more favorable than the terms and provisions set forth in the notice from Landlord to Tenant. If Landlord and the Prospective Tenant fail to enter into a Lease, Tenant shall have the right of first refusal described herein with respect to any subsequent bona fide offers from other prospective tenants. (c) If Tenant exercises its right to Lease the Offered Premises, Landlord and Tenant shall, within ten (10) days after Tenant delivers to Landlord notice of its election, enter into a Lease agreement with respect to the Offered Premises on the same terms, covenants, and conditions as are contained in this Lease, except as follows: (i) The rentable area of the Offered Premises shall be equal to the area offered to be leased by the Prospective Tenant. (ii) The Base Rental rate to be paid for the Offered Premises shall be equal to the base rental rate offered to be paid by the Prospective Tenant, including any offered increases from time to time in such rental rate; provided, however, that in the event the date on which the term of the lease offered to the Prospective Tenant (the "Prospective Tenant's Term") expires is a date earlier than the date on which the Term of this Lease expires, then the Base Rental rate to be paid for the Offered Premises for the period commencing on the day following the date the Prospective Tenant's Term would have expired shall be the then prevailing market base rental rate per rentable square foot per annum charged for comparable office space in comparable buildings in the central business district of Dallas, Texas. (iii) The Base Operating Expenses Rate in effect for the Offered Premises shall be equal to the base operating expenses rate offered to the Prospective Tenant, including any offered increases from time to time in such rate. (iv) The payment of monthly installments of Base Rental with respect to the Offered Premises shall commence on the effective date of the lease of the Offered Premises as offered to the Prospective Tenant, or in the event no specific effective date was so offered, on the date mutually acceptable to Landlord and Tenant, and rent for any partial month shall be prorated. (v) Possession of such portion of the Offered Premises shall be delivered to Tenant on the basis offered to the Prospective Tenant, provided, however, that in the event the date on which the Prospective Tenant's Term expires is a date later than the date on which the Term of the Lease expires, then the tenant finish allowance offered to the Prospective Tenant shall be multiplied by a fraction, the numerator of which shall be the total number of months (as of the effective date of the demise of the Offered Premises) remaining in the Lease, and the denominator of which shall be the total number of months contained in the term of the Lease. -17- offered to the Prospective Tenant, and if no specific basis was so offered, on a basis mutually acceptable to Landlord and Tenant. Landlord will use reasonable diligence to make the Offered Premises available to Tenant as soon after the effective date stated above as it can. Landlord shall not be liable for the failure to give possession of the Offered Premises on said date by reason of the holding over or retention of possession of any tenant, tenants, or occupants, nor shall such failure impair the validity of this Lease, nor extend the term hereof, but the rent for the Offered Premises shall be abated until possession is delivered to Tenant and such abatement shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of said failure to give possession of the Offered Premises to Tenant on the scheduled effective date. (vi) The term of the Lease of the Offered Premises shall commence on the date determined pursuant to subparagraph (c) (iv) above, and shall continue thereafter until the date on which the Term of the Lease terminates. (vii) In the event the date on which the Prospective Tenant's Term expires is a date later than the date on which the Term of the Lease expires, then any and all allowances and credits offered to the Prospective Tenant shall be multiplied by a fraction, the numerator of which shall be the total number of months (as of the effective date of the demise of the Offered Premises) remaining in the Term of the Lease, and the denominator of which shall be the total number of months contained in the term of the lease offered to the Prospective Tenant. (d) Notwithstanding anything herein to the contrary, Tenant's right of first refusal pursuant to this paragraph shall be subordinate to any and all rights, including without limitation, renewal rights, expansion rights, rights of first refusal and rights of first offer, under any existing lease demising premises in the Building. Landlord represents that there are no such superior rights with respect to the ROFR Area. (e) The right of refusal hereby granted Tenant shall cease on, and be ineffective after, the expiration of the first five (5) years of the Term of this Lease, whether or not any option to renew and extend this Lease is exercised by Tenant. (f) Any assignment or subletting by Tenant of this Lease, or any termination of this Lease, shall terminate the refusal right of Tenant hereby granted. 38. RENEWAL OPTION. If there is no uncured Event of Default hereunder, -------------- Tenant shall have the right to renew the term of this Lease for one (1) additional period of five (5) years upon the same terms, conditions and provisions applicable to the then current term of this Lease (unless otherwise expressly provided herein), except that the annual Base Rental for the additional term of five (5) years shall be the greater of either: (a) the product of (i) the number of rentable square feet then contained in the Leased Premises multiplied by (ii) an amount equal to the then prevailing market base rental rate per rentable square foot per annum charged for comparable office space in comparable buildings in the central business district of Dallas, Texas (taking into consideration use, location and floor level, size of space, definition of rentable area, quality, age and location of the applicable building, financial status of Tenant, rental concessions, tenant improvements and refurbishment allowances, expense stop, moving allowances, architectural allowances, parking rental concessions, brokerage commissions, other inducements, the time the particular rate under consideration became effective and all other relevant factors); or (b) the product of (i) the number of square feet of rentable area then contained in the Leased Premises multiplied by (ii) the Base Rental rate in effect with respect to the Leased Premises during the last year of the then existing term of this Lease. Tenant shall evidence its intent to exercise its right of renewal by delivering to Landlord written notice ("Tenant's Notice") of Tenant's desire to renew the Term of this Lease as aforesaid at least six (6) months (but not more than twelve (12) months) prior to the expiration of the then current Term of this Lease. Tenant's failure to timely deliver Tenant's Notice shall automatically extinguish Tenant's right to renew detailed herein. Within thirty (30) days following delivery of Tenant's Notice, Landlord shall deliver to Tenant a written notice ("Landlord's Notice") specifying the Base Rental rate per rentable square foot per annum for the additional term of five (5) years. Tenant shall have thirty (30) days following delivery of Landlord's Notice to notify Landlord in writing ("Tenant's Renewal Notice") of (i) Tenant's exercise of its right to renew the Lease at the Base Rental rate proposed by Landlord, (ii) Tenant's exercise of its right to renew the Lease but Tenant's contest of the Base Rental rate proposed by Landlord, or (iii) Tenant's election not to exercise its right to renew the Lease. Tenant's failure to timely deliver Tenant's Renewal Notice shall automatically extinguish Tenant's right to renew detailed herein. If Tenant fails to contest Landlord's designated Base Rental rate in Tenant's Renewal Notice, Tenant shall be deemed to have waived its right to so contest. Tenant's election to contest Landlord's designated Base Rental rate in Tenant's Renewal Notice shall be deemed an exercise of Tenant's right to renew the Term of the Lease with the Base Rental rate being the rate determined by the below-described appraisal process. In the event Tenant timely contests Landlord's designated Base Rental rate, Landlord and Tenant shall attempt to agree upon the market base rental rate. In the event Landlord and Tenant cannot agree upon the market base rental rate on or before three (3) months prior to the expiration of the then current Term of the Lease, Landlord and Tenant within ten (10) days thereafter, shall each appoint and employ, at its cost, a real estate appraiser (who shall be a member of the American Institute of Real Estate Appraisers (MAI) with a minimum of ten years' experience in the area of office building appraisals or leasing in Dallas County, Texas, and neither of whom shall be employees or former employees of either Landlord or Tenant or otherwise affiliated with either Landlord or Tenant) to appraise and establish the prevailing market base rental rate. The two appraisers, thus appointed, shall meet promptly and attempt to agree upon and designate a third appraiser meeting the qualifications set forth above within ten (10) days after the last of the two appraisers were appointed. If they are unable to agree on the third appraiser, either of the parties, after giving five (5) days notice to the other, may apply to the appropriate court of the county in which the Building is located for the selection of a third appraiser meeting the qualifications stated above. Each of the parties shall bear one-half of the cost of the appointment of the third appraiser and of the third appraiser's fee. Within thirty (30) days after the selection of the third appraiser, a majority of the appraisers shall agree upon the prevailing market base rental rate. If a majority of the appraisers are unable to agree within the stipulated time, then each appraiser shall render his separate appraisal within such time, and the three appraisals shall be averaged in order to establish such rate; provided, however, if the low appraisal and/or the high appraisal are more than ten percent (10%) lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be -18- disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be averaged in order to establish such rate. If both the low appraisal and the high appraisal are disregarded, the middle appraisal shall establish such rate. After the prevailing market base rental has been established, the appraisers shall immediately notify the parties in writing. The decision of the above-described appraisal process shall be binding upon the parties and enforceable by a court of competent jurisdiction. Tenant shall have no right to renew the Term of this Lease following the expiration of the renewal term of five (5) years detailed herein. 39. MISCELLANEOUS. ------------- A. Provided Tenant complies with Tenant's covenants, duties and obligations hereunder, Tenant shall quietly have, hold and enjoy the Leased Premises subject to the terms and provisions of this Lease without hinderance from Landlord or any person or entity claiming by, through or under Landlord. B. In any circumstance where Landlord is permitted to enter upon the Leased Premises during the Term of this Lease, whether for the purpose of curing any default of Tenant, repairing damage resulting from fire or other casualty or an eminent domain taking or is otherwise permitted hereunder or by law to go upon the Leased Premises, no such entry shall constitute an eviction or disturbance of Tenant's use and possession of the Leased Premises or a breach by Landlord of any of Landlord's obligations hereunder or render Landlord liable for damages for loss of business or otherwise or entitle Tenant to be relieved from any of Tenant's obligations hereunder or grant Tenant any right of setoff or recoupment or other remedy; and in connection with any such entry incident to performance of repairs, replacements, maintenance or construction, all of the aforesaid provisions shall be applicable notwithstanding that Landlord may elect to take building materials in, to or upon the Leased Premises that may be required or utilized in connection with such entry by Landlord. C. [Intentionally Deleted.] D. Landlord may restain or enjoin any breach or threatened breach of any covenant, duty or obligation of Tenant herein contained without the necessity of providing the inadequacy of any legal remedy or irreparable harm. The remedies of Landlord hereunder shall be deemed cumulative, and no remedy of landlord, whether exercised by Landlord or not, shall be deemed to be in exclusion of any other. Except as may be otherwise herein expressly provided, in all circumstances under this Lease where prior consent or permission of one (1) party ("first party") is required before the other party ("second party") is authorized to take any particular type of action, the matter of whether to grant such consent or permission shall be within the sole and exclusive judgment and discretion of the first party; and it shall not constitute any nature of breach by the first party hereunder or any defense to the performance of any covenant, duty or obligation of the second party hereunder that the first party delayed or withheld the granting of such consent or permission, whether or not the delay or withholding of such consent or permission was prudent or reasonable or based on good cause. E. In all instances where Tenant is required to pay any sum or do any act at a particular indicated time or within an indicated period, it is understood that time is of the essence. F. The obligation of Tenant to pay all rental and other sums hereunder provided to be paid by Tenant and the obligation of the Tenant to perform Tenant's other covenants and duties hereunder constitute independent, unconditional obligations to be performed at all times provided for hereunder, save and except only when an abatement thereof or reduction therein is hereinabove expressly provided for and not otherwise. Tenant waives and relinquishes all rights which Tenant might have to claim any nature of lien against or withhold, or deduct from or offset against any rental and other sums provided hereunder to be paid Landlord by Tenant. Tenant waives and relinquishes any right to assert, either as a claim or as a defense, that Landlord is bound to perform or is liable for the nonperformance of any implied covenant or implied duty of Landlord not expressly herein set forth. G. Under no circumstances whatsoever shall Landlord ever be liable hereunder for consequential damages or special damages. H. Landlord retains the exclusive right to create any additional improvements to structural and/or mechanical systems, interior and exterior walls and/or glass, which Landlord deems necessary without the prior consent of Tenant. I. All monetary obligations of Landlord and Tenant (including, without limitation, any monetary obligation of Landlord or Tenant for damages for any breach of the respective covenants, duties or obligations of Landlord or Tenant hereunder) are performable exclusively in the county in which the Building is located. J. The laws of the State in which the Building is located shall govern the interpretation, validity, performance and enforcement of this Lease. K. If any clause or provision of this Lease is or becomes illegal, invalid, or unenforceable because of present or future laws or any rule or regulation of any governmental body or entity, effective during the Term of this Lease, the intention of the parties hereto is that the remaining parts of this Lease shall not be affected thereby unless such invalidity is, in the sole determination of Landlord, essential to the rights of both parties, in which event Landlord has the right to terminate this Lease on written notice to Tenant. L. Tenant waives the benefits of all existing and future rental control legislation and statutes and similar governmental rules and regulations, whether in time of war of not, to the extent permitted by law. In the event that any law, decision, rule or regulation of any governmental body having jurisdiction shall have the effect of limiting for any period of time the amount of rental or other charges payable by Tenant to any amount less than that otherwise provided pursuant to this Lease, the following amounts shall nevertheless be payable to Tenant: (i) throughout such period of limitation, Tenant shall remain liable for the maximum amount of rental and other charges which are legally payable (without regard to any limitation to the amount thereof expressed in this Lease except that all amount payable by reason of this paragraph shall not in the aggregate exceed the total of all amounts which would otherwise be payable by Tenant pursuant to the terms of this Lease for the period of limitation), (ii) at the termination of such period of limitation, Tenant shall pay to landlord, on demand but only to the extent legally -19- collectible by Landlord, any amounts which would have been due from Tenant during the period of limitation but which were not paid because of such limiting law, decision, rule or regulation, and (iii) for the remainder of the Term of this Lease following the period of limitation, Tenant shall pay to Landlord all amounts due for such portion of the Term of this Lease in accordance with the terms hereof calculated as though there had been no intervening period of limitation. M. It is mutually agreed by and between Landlord and Tenant that the respective parties hereto shall and they hereby do waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and tenant, Tenant's use or occupancy of the Leased Premises, and any emergency statutory or any other statutory remedy. N. [Intentionally Deleted.] O. No receipt of money by Landlord from Tenant after the expiration of the Term of this Lease, or after the service of any notice, or after the commencement of any suit, or after final judgment for possession of the Leased Premises, shall reinstate, continue or extend the Term of this Lease or affect any such notice, demand or suit or imply consent for any action for which Landlord's consent is required. P. In the event of variation or discrepancy, Landlord's original copy of the Lease shall control. Q. Words of any gender used in this Lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. The headings of the Paragraphs of this Lease have been inserted for convenience only and are not to be considered in any way in the construction or interpretation of this Lease. R. Tenant agrees that Tenant shall from time to time upon request by Landlord and/or Landlord's Mortgagee execute and deliver to Landlord a statement in recordable form certifying (i) that the Lease is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as so modified), (ii) the dates to which rental and other charges payable under this Lease have been paid, and (iii) that Landlord is not in default hereunder (or, if Landlord is in default, specifying the nature of such default). Tenant further agrees that Tenant shall from time to time upon request by Landlord execute and deliver to Landlord an instrument in recordable form acknowledging Tenant's receipt of any notice of assignment of this Lease by Landlord. S. In no event shall Tenant have the right to create or permit there to be established any lien or encumbrance of any nature against the Leased Premises or the Building for any improvement or improvements by Tenant, and Tenant shall fully pay the cost of any improvement or improvements made or contracted for by Tenant. Any mechanic's lien filed against the Leased Premises or the Building for work claimed to have been done, or materials claimed to have been furnished to Tenant, shall be duly discharged by Tenant within ten (10) days after the filing of the lien. T. Whenever a period of time is herein prescribed for action to be taken by Landlord, Landlord shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, and delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions, or any other causes of any kind whatsoever which are beyond the reasonable control of Landlord. U. This Lease shall not be recorded by either party without the consent of the other. V. Nothing herein contained shall be deemed or construed by the parties hereto, nor by any third party, as creating the relationship of principal and agent, or of partnership or of joint venture between the parties hereto, it being understood and agreed that neither the method of the computation of rental, nor any other provision contained herein, nor any acts of the parties hereto, shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and tenant. W. Whenever it is provided herein that a monetary sum shall be due to Landlord or Tenant together with interest at the highest lawful rate, if at such time there shall be no highest rate prescribed by applicable law, interest shall be due at the rate of two percent (2%) in excess of Prime Rate as defined in Paragraph 1.Q. hereof. X. Tenant acknowledges that Landlord's agents and employees have made no representations or promises with respect to the Leased Premises or the Building except as herein expressly set forth, and Tenant further acknowledges that no rights, easement or licenses are acquired by Tenant by implication or otherwise, except as herein expressly set forth. Y. Tenant warrants that Tenant is, and shall remain throughout the Term of this Lease, authorized to do business and in good standing in the State in which the Building is located. Tenant agrees, upon request by Landlord, to furnish Landlord satisfactory evidence of Tenant's authority for entering into this Lease. Z. If either party brings an action to enforce the terms hereof or declare rights hereunder, the prevailing party in any such action, on trial or appeal, shall be entitled to his reasonable attorney's fees to be paid by the losing party as fixed by the court. AA. In the event Tenant requests from Landlord the written consent of Landlord to any propose assignment of the Lease or subletting of the Leased Premises, Landlord may require the payment of reasonable attorney's fees incurred by Landlord in processing such request, regardless of whether such consent is granted. Such fee shall be payable by Tenant within thirty (30) days following receipt by Tenant or a request for payment from Landlord and on invoice from Landlord's attorney setting forth in reasonable detail the services rendered. BB. Submission of this Lease for examination does not constitute an offer, right of first refusal, reservation of, or option for, the Leased Premises of any other premises in the Building. This Lease shall become effective only upon execution and delivery by both Landlord and Tenant. CC. If Tenant is composed of more that one (1) person or entity, each person and/or entity comprising Tenant shall be jointly and severally liable for the performance of the obligations of Tenant under this Lease, including specifically, without limitation, the payment of rental and all other sums payable hereunder. -20- DD. Landlord shall have the right at any time to change the name or street address of the Building and to install and maintain a sign or signs on the interior or exterior of the Building. EE. Any charges against Tenant by Landlord for services or for work done on the Leased Premises by order of Tenant, or otherwise accruing under this Lease, shall be considered as rental due and shall be included in any lien for rental. FF. If at any time during the Term of this Lease a tax or excise on rental, a sales tax or other tax however described (except any inheritance, estate, gift, income or excess profit tax imposed upon Landlord) is levied or assessed against Landlord by any taxing authority having jurisdiction on account of Landlord's interest in this Lease, or the rentals or other charges payable hereunder, as a substitute in whole or in part for, or in addition to, the taxes described elsewhere in this paragraph. Tenant shall pay to Landlord as additional rental upon demand the amount of such tax or excise. In the event that any such tax or excise is levied or assessed directly against Tenant, Tenant shall pay the same at such times and in such manner as such taxing authority shall require. GG. Tenant has no right to protest the real estate tax rate assessed against the Project and/or the appraised value of the Project determined by any appraisal review board or other taxing entity with authority to determine tax rates and/or appraised values (each a "Taxing Authority"). Tenant hereby knowingly, voluntarily and intentionally waives and releases any right, whether created by law or otherwise, to (a) file or otherwise protest before any Taxing Authority any such rate or value determination even though Landlord may elect not to file any such protest; (b) receive, or otherwise require Landlord to deliver, a copy of any reappraisal notice received by Landlord from any Taxing Authority; and (c) appeal any order of a Taxing Authority which determines any such protest. The foregoing waiver and release covers and includes any and all rights, remedies and recourse of Tenant, now or at any time hereafter, under Section 41.413 and Section 42.015 of the Texas Tax Code (as currently enacted or hereafter modified) together with any other or further laws, rules or regulations covering the subject matter thereof. Tenant acknowledges and agrees that the foregoing waiver and release was bargained for by Landlord and Landlord would not have agreed to enter into this Lease in the absence of this waiver and release. If, notwithstanding any such waiver and release, Tenant files or otherwise appeals any such protest, then Tenant will be in default under this Lease and, in addition to Landlord's other rights and remedies, Tenant must pay or otherwise reimburse Landlord for all costs, charges and expenses incurred by, or otherwise asserted against, Landlord as a result of any tax protest or appeal by Tenant, including, appraisal costs, tax consultant charges and attorneys' fees (collectively, the "Tax Protest Costs"). If, as a result of Tenant's tax protest or appeal, the appraised value for the Project is increased above that previously determined by the Taxing Authority (such increase, the "Value Increase") for the year covered by such tax protest or appeal (such year, the "Protest Year"), then Tenant must pay Landlord, in addition to all Tax Protest Costs, an amount (the "Additional Taxes") equal to the sum of the following: (1) the product of the Value Increase multiplied by the tax rate in effect for the Protest Year; plus (ii) the amount of additional taxes payable during the five (5) year period following the Protest Year, such amount to be calculated based upon the Value Increase multiplied by the tax rate estimated to be in effect for each year during such five (5) year period. Tenant must pay all Additional Taxes - even those in excess of Tenant's proportionate share and which may relate to years beyond the term of this Lease. The Additional Taxes will be conclusively determined by a tax consultant selected by Landlord, without regard to whether and to what extent Landlord may be able in years following the Protest Year to reduce or otherwise eliminate any Value Increase. All Tax Protest Costs and Additional Taxes must be paid by Tenant within five (5) days following written demand by Landlord. 40. ENTIRE AGREEMENT AND BINDING EFFECT. This Lease and any ----------------------------------- contemporaneous workletter, addenda or exhibits signed by the parties constitute the entire agreement between Landlord and Tenant; no prior written or prior contemporaneous oral promises or representations shall be binding. This Lease shall not be amended, changed or extended except by written instrument signed by both parties hereto. The provisions of this Lease shall be binding upon and inure to the benefit of the heirs, personal representatives, successors and assigns of the parties, but this provision shall in no way alter the restriction herein in connection with assignment, subletting and other transfer by Tenant. EXECUTED in multiple counterparts, each of which shall have the force and effect of an original, on the date specified in Paragraph 1.A. hereof. LANDLORD: --------- BEVERLY HILLS CENTER LLC, a California limited liability company By: /s/ Ted Akhavizadeh --------------------------- Name: Ted Akhavizadeh ------------------------- Title: Vice President ------------------------ TENANT: ------ PREMIERE COMMUNICATIONS, INC., a Florida corporation By: /s/ Patrick G. Jones --------------------------- Name: Patrick G. Jones ------------------------- Title: Senior Vice President ------------------------ -21- FIRST AMENDMENT TO LEASE AGREEMENT ---------------------------------- This FIRST AMENDMENT TO LEASE AGREEMENT (the "Amendment") is made and entered into as of (but not necessarily on) the 1st day of August, 1996, by and between BEVERLY HILLS CENTER, LLC, a California limited liability company ("Landlord") and PREMIERE COMMUNICATIONS, INC., a Florida corporation ("Tenant"); WITNESSETH: WHEREAS, Landlord and Tenant entered into that certain Lease Agreement (the "Lease"), dated May 12, 1996 covering approximately 6,952 rentable square feet on the eighth (8th) floor in the building commonly known as Allianz Financial Centre (the "Building"), in Dallas, Texas; and WHEREAS, Landlord and Tenant desire to modify the terms of the Lease in accordance with the terms and conditions herein provided. NOW, THEREFORE, for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable consideration paid by each party hereto to the other, the receipt and sufficiency of which is hereby acknowledged. Landlord and Tenant hereby agree as follows: 1. Conduits. Effective as of August 1, 1996, the Lease shall be amended to -------- reflect that Tenant shall be entitled to the following additional conduit or equivalent cable runs (the "Additional Conduit") in the risen facilities of the Building: . One four-inch conduit or equivalent cable run . One two-inch conduits or equivalent cable runs . One one and one-fourth inch conduit or equivalent cable run . Three one-inch conduits or equivalent cable runs . Four two and one-half inch conduits or equivalent cable runs 2. Base Rental. Tenant's Base Rental obligations with respect to the ----------- Additional Conduit shall commence on August 1, 1996 and shall be $26,050 per year, payable in monthly installments of $2,337,50. Tenant shall pay an additional Right Fee for any and all additional conduit or equivalent cable runs, beyond the additional conduit specifically described herein, installed on behalf of or used by Tenant, regardless of the use to which such conduit or equivalent cable run is put, including, interconnection rights, emergency generator, or supplementary HVAC. 3. Miscellaneous. ------------- (a) Tenant hereby acknowledges that Landlord is not in default under the Lease and no event or condition exists, which, with the giving of notice or the passing of time or both, would constitute a default or event of default by Landlord under the Lease, and that Tenant has no charge, lien, defense, or claim of offset under the Lease against rent or other charges due or to become due thereunder. (b) This Amendment may be executed in multiple counterparts, each of which shall constitute an original instrument, but all of which shall constitute one and the same Amendment. (c) Any capitalized term or phrase used in this Amendment shall have the same meaning as the meaning ascribed to such term or phrase in the Lease unless expressly otherwise defined in this Amendment. (d) Except as amended by this Amendment, the terms of this Lease remain in full force and effect. All obligations of Tenant under the Lease are hereby satisfied and reaffirmed. (e) In the event that the terms of the Lease conflict or are inconsistent with those of this Amendment, the terms of this Amendment shall govern. (f) This Amendment shall become effective only upon execution and delivery by both Landlord and Tenant. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written above. LANDLORD: BEVERLY HILLS CENTER, L.L.C., a California Limited Liability Company By: /s/ Ted Akhavizadeh ---------------------------- Name: Ted Akhavizadeh Title: Vice President TENANT: PREMIERE COMMUNICATIONS, INC. a Florida Corporation By: /s/ Patrick G. Jones ---------------------------- Name: Patrick G. Jones Title: Senior Vice President EX-10.51 4 PROMISSORY NOTE DATED OCTOBER 18, 1996 EXHIBIT 10.51 NATIONSBANK (R) PROMISSORY NationsBank, N.A. (South) E. Gilmer/3829 NOTE - - -------------------------------------------------------------------------------- Date October 18, 1996 Amount $5,000,000.00 For Value Received, the undersigned ("Borrower") unconditionally (and jointly and severally, if more than one) promise(s) to pay to the order of NationsBank, N.A. (South)("Bank"), Financial Strategies (Banking Center) without setoff, at its offices at 600 Peachtree St., N.E., Atlanta, Georgia, or at such other place as may be designated by Bank, the principal amount of FIVE MILLION & 00/100'S Dollars ($5,000,000.00), or so much thereof as may be advanced from time to time in immediately available funds, together with interest computed daily on the outstanding principal balance hereunder, as an annual interest rate, and in accordance with the payment schedule, indicated below. [This Note contains some provisions preceded by boxes. Mark only those boxes beside provisions which will be applicable to this transaction. A box which is not marked means that the provision beside it is not applicable to this transaction.] RATE [_]PRIME RATE. The rate shall be the Prime Rate, plus______________ percent, per annum. The "Prime Rate" is the fluctuating rate of interest established by Bank from time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index or base rate and may or may not at any time be the best or lowest rate charged by Bank on any loan. [_]FIXED RATE. The Rate shall be fixed at __________ percent per annum. [_]TREASURY SECURITIES RATE. The Rate shall be the Treasury Securities Rate, plus ______________ percent, per annum. The "Treasury Securities Rate" is a fluctuating rate of interest applied by Bank from time to time, based on the most recent monthly average of daily yields on all outstanding United States Treasury Securities adjusted to a common maturity of ___________________years, as made available by the Federal Reserve Board, rounded upwards to the nearest one-eighth of one percentage poles (0.125%). [x]Other. Interest Rate Option Provisions are described in Exhibit A, attached hereto and made a part hereof. Notwithstanding any other provisions contained in this Note, Bank does not intend to charge and Borrower shall not be required to pay any amount of interest or other fees or charges that is in excess of the maximum permitted by applicable law. Any payment in excess of such maximum shall be refunded to Borrower or credited against principal, at the expense of Bank. Accrual Method Interest at the Rate set forth above, unless otherwise indicated, will be calculated on the basis of the 365/360 method, which compares daily amount of interest for a hypothetical year of 360 days., then multiplies such amount by the actual number of days elapsed this in an as interest calculation period. If interest is not to be computed using the method, the method to be used shall be: __________________________. Rate Change Date Any Rate based on a fluctuating index or base rate will charge, unless otherwise provided, such time and as of the date that the index or base rate changes. If the Rate is to change on any other date or at any other interval describe: _______________________________________________________________________________. In the event any index is discontinued, Bank shall substitute an index determined by Bank to be comparable, in its sole discretion. Payment Schedule All payments received hereunder shall be applied first to the payment of any expense or changes payable hereunder or under any other documents executed in connection with the Note ("Loan Documents"), than to interest due and payable, with the balance being applied to principal, or in such other order as Bank shall determine at its option. [_] PRINCIPAL Principal and interest shall be paid in _____________ (_______) equal: [_] monthly, [_] quarterly or [_] PLUS installments of $_______________ each, commencing on _____________________, 19__, together with accrued interest INTEREST thereon and continuing on the same day of each successive month/quarter or other period (as applicable) thereafter, with a final payment of all unpaid principal and interest thereon on ______________, 19__. PRINCIPAL Principal and interest shall be paid in ______ (______) equal: [_] monthly, [_] quarterly or [_] ____________ AND installments of $____________________ each, commencing on _______________, 19___ and continuing on the same day of INTEREST each successive month/quarter/or other period (as applicable) therefor, with a final payment of all unpaid principal and interest thereon on _____________________ 19 ____; provided that, if accrued interest on any payment date exceeds the amounts set forth above, Borrower will pay an additional amount to such excess interest. [X] SINGLE Principal shall be paid in full in a single payment on September 30, 1997. Interest thereon shall be paid: [_] at ------------ ---- maturity, [x] monthly, [_] quarterly, or PRINCIPAL [_] _________________commencing on November 30, 1996 and ----------- ---- continuing on the same say of each successive month/quarter, or PAYMENT period (as applicable) therefor, with a final payment of all unpaid interest at the maturity of this Note. [_] Demand Notwithstanding any provisions contained herein which may be inconsistent with a demand note, including but not limited to any reference to installments, a maturity date, acceleration or events of default, Borrower acknowledges that Bank may demand payment at any time in its sole discretion. [_] OTHER ____________________________________________________________ Revolving Feature [X] Borrower may borrow, repay and reborrow hereunder at any one time, up to a maximum aggregate amount outstanding at any one time equal to the principal amount of this Note; provided, however, that Borrower is not in default under any provision of this Note, any Loan Document, or any other obligation of Borrower to Bank, and provided that the borrowings hereunder do not exceed any borrowing base or other limitations on borrowings by Borrower. Bank shall have no liability for its refusal to advance funds based upon its determination that any conditions of such further advances have not been met. Bank records of the amounts borrowed from time to time shall be conclusive proof thereof. [_] Uncommitted Facility. Borrower acknowledges and agrees that notwithstanding any provisions of this Note or the Loan Documents, Bank has no obligations to make any advances, and that all advances are at the sole discretion of Bank. Automatic Payment [_] Borrower has elected to authorize bank to affect payment of sums due under this Note by means of debiting Borrowers account number __________________________. This authorizations shall not affect the obligations of Borrower to pay such sums when due, without notice. If there are insufficient funds in such account to make such payment in full on the due date thereof, or if Bank fails to debit the account. Loan Fee [_] Upon the maturity of this Note, whether by demand, acceleration, or otherwise, as administrative fee in the amount of $____________ shall be due and payable. Borrower represents to Bank that the proceeds of this loan are to be used primarily for business, commercial or agricultural purposes. Borrower acknowledges having read and understood, and agrees to be bound by, all terms and conditions of this Note, including the Additional Terms and Conditions set forth on the reverse side of this Note, and hereby executes this Note under Seal. Borrower Corporate Borrower or Partnership: Premiere Communications, Inc. ---------------------------------- (Name of Corporation, Partnership, etc.) /s/ Patrick G. Jones, Secretary __________________________________ /s/ Julianne F. Vaio Attest (if applicable) By:_______________________________(Seal) Julianne F. Vaio, Treasurer __________________________________ __________________________________ Corporate Seal (if applicable) Print Name and Title By:_______________________________(Seal) __________________________________ Print Name and Title Additional Terms and Conditions 1. Waivers, consents and covenants. Borrower, any indorser, or guarantor hereof or any other party hereto (collectively "Obligors") and each of them jointly and severally: (a) waive presentment, demand, notice of demand, notice of intent to accelerate, and notice of acceleration of maturity, protest, notice of protest, notice of nonpayment, notice of dishonor, and any other notice required to be given under the law to any of Obligors, in connection with the delivery, acceptance, performance, default or enforcement of this Note, of any indorsement or guaranty of this Note or of any Loan Documents; (b) consent to any and all delays, extensions, renewals, or other modifications of this Note or the Loan Documents, or waivers of any term hereof or of the Loan Documents, or releases or discharge by Bank of any Obligors or release, substitution, or exchange of any security for the payment hereof, or the failure to act on the part of Bank or any indulgence shown by Bank, from time to time and in one or more instances (without notice to or further assent from any of Obligors) and agree that no such action, failure to act or failure to exercise any right or remedy on the part of Bank shall in any way affect or impair the obligations of any Obligors or be construed as a waiver by Bank of, or otherwise affect, any of Bank's rights under the Note, under any indorsement or guaranty of this Note or under any of the Loan Documents; and (c) agree to pay, on demand, all costs and expenses of collection of this Note or of any indorsement or guaranty hereof and/or the enforcement of Bank's rights with respect to, or the administration, supervision, preservation, protection of, or realizations upon, any property securing payment hereof, including, without limitation, reasonable attorney's fees, including fees related to any trial, arbitration, bankruptcy, appeal or other proceeding, in the amount 15% of the principal amount of this Note, or such greater amount as may be determined reasonable by any court. 2. Indemnification. Obligors agree to promptly pay, indemnify and hold Bank harmless from all state and federal taxes of any kind and other liabilities with respect to or resulting from advances made pursuant to this Note. If this Note has a revolving feature and is secured by a mortgage, Obligors expressly consent to the deduction of any applicable taxes from each taxable advance extended by Bank. 3. Prepayments. Prepayments may be made in whole or in part at any time on any loan for which the Rate is based on the Prime Rate. All prepayments of principal shall be applied in the inverse order of maturity, or in such other order as Bank shall determine in its sole discretion. No prepayments of any other loan shall be permitted without the prior written consent of the Bank. Notwithstanding such prohibition, if there is a prepayment of any such loan, whether by consent of Bank, or because of acceleration or otherwise, Borrower shall, within 15 days of any request of Bank, pay to Bank any loss or expense which Bank may incur or sustain as a result of such prepayment. For the purposes of calculating the amounts owed only, it shall be assumed that Bank actually funded or committed to fund the loan through the purchase of an underlying deposit in an amount and for a term comparable to the loan, and such determination by Bank shall be conclusive, absent a manifest error in computation. 4. Events of defaults. The following are events of default hereunder: (a) the failure to pay or perform any obligation, liability or indebtedness of any Obligor to Bank, or to any affiliate of Bank, whether under this Note or any other Agreement, note or instrument now or hereafter existing, as and when due (whether upon demand, at maturity or by acceleration); (b) the failure to pay or perform any other obligation, liability or indebtedness of any of Obligors whether to Bank or some other party, the security for which constitutes an encumbrance on the security for this Note; (c) death of any Obligor (if an individual), or a proceeding being filed or commenced against any Obligor for dissolution or liquidation, or any Obligor voluntarily or involuntarily terminating or dissolving or being terminated or dissolved; (d) insolvency of, business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any of the property of, or an assignment, for the benefit of creditors by, or the filing of a petition under bankruptcy, insolvency or debtors relief law or for any adjustment of indebtedness, composition or extension by or against any Obligor; (e) any lien or additional security interest being placed upon any of the property which is security for this Note; (f) acquisition at any time or from time to time of title to the whole of or any part of the property which is security for this Note by any person, partnership, corporation or other entity; (g) Bank determining that any representation or warranty made by any Obligor in any Loan Documents or otherwise to Bank is, or was, untrue or materially misleading; (h) failure of any Obligor to timely deliver such financial statements, including tax returns, and other statements of condition or other information as Bank shall request from time to time; (i) any default under any Loan Documents; (j) entry of a judgment against any Obligor which Bank deems to be of a material nature, in Bank's sole discretion; (k) the seizure or forfeiture of, or the issuance of a writ of possession, garnishment or attachment, or any turnover order for any property of any Obligor; (l) Bank reasonably deeming itself insecure for any reason; (m) the determination by Bank that a material adverse change has occurred in the financial condition of any Obligor; or, (n) the failure to comply with any law or regulation regulating the operation of Borrower's business. 5. Remedies upon default. Whenever there is a default under this Note (a) the entire balance outstanding and all other obligations of Obligor to Bank (however acquired or evidenced) shall, at the option of Bank, become immediately due and payable, and/or (b) to the extent permitted by law, the Rate of interest on the unpaid principal shall, at the option of the Bank, be increased at Bank's discretion up to the maximum rate allowed by law, or if none, 25% per annum, (the "Default Rate"): and or (c) to the extent permitted by law, a delinquency charge may be imposed in an amount not to exceed five percent (5%) of any payment in default for more than fifteen days. The provisions herein for a Default Rate or a delinquency charge shall not be deemed to exceed the time for any payment hereunder or to constitute a "grace period" giving the Obligors a right to cure any default. At Bank's option, any accrued and unpaid interest, fees or charges may, for purposes of computing and accruing interest on a daily basis after the due date of the Note or any installment thereof, be deemed to be a part of the principal balance, and interest shall accrue on a daily compounded basis after such date at the rate provided in this Note until the entire outstanding balance of principal and interest is paid in full. Bank is hereby authorized at any time to set off and charge against any deposit accounts of any Obligor, as well as any other property of such party at or under the control of Bank, without notice or demand, any and all obligations due hereunder. 6. Non-waiver. The failure at any time of Bank to exercise any of its options or any other rights hereunder shall not constitute a waiver thereof, nor shall it be a bar to the exercise of any of its options or rights at a later date. All rights and remedies of Bank shall be cumulative and may be pursued singly, successively or together, at the option of Bank. The acceptance by Bank of any partial payment shall not constitute a waiver of any default or of any of Bank's rights under this Note. No waiver of any of its rights hereunder, and no notification or amendment of this Note, shall be deemed to be made by Bank unless the name shall be in writing, duly signed on behalf of Bank; and each such waiver, if any, shall apply only with respect to the specific issuance involved, and shall in no way impair the rights of Bank or the obligations of Obligor to Bank in any other respect at any other time. 7. Applicable law. This Note is delivered in and shall be construed under the internal laws and judicial decisions of the State of Georgia, and the laws of the United States as the same may be applicable. 8. Partial invalidity. The unenforceability or invalidity of any provision of this Note shall not affect the enforceability or the validity of any other provision herein and the invalidity or unenforceability of any provision of the Note or of the Loan Document to any person or circumstances shall not affect the enforceability or validity of each provision as it may apply to other persons or circumstances. 9. Jurisdiction and venue. In any litigation in connection with or to enforce this Note or any indorsement or guaranty of this Note or any Loan Documents, Obligors, and each of them, irrevocably consent to and confer personal jurisdiction on the courts of the State of Georgia or the United States courts located within the State of Georgia, and expressly waive any objections as to venue in any such courts, and agree that service of process may be made as Obligors by mailing a copy of the summons and complaint by registered or certified mail, return receipt requested, to their respective addresses. Nothing contained herein shall, however, prevent Bank from bringing any action or exercising any rights within any other state or jurisdiction or from obtaining personal jurisdiction by any other means available by applicable law. 10. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS NOTE OR ANY RELATED NOTES OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OR JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.) AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL, JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THE NOTE MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS NOTE APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF BORROWER'S DOMICILE AT THE TIME OF THIS NOTE'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR AN ADDITIONAL 60 DAYS. (B) RESERVATION OF RIGHTS. NOTHING IN THIS NOTE SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS NOTE; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. (S) 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS NOTE. NEITHER THE EXERCISE OR SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 11. Binding effect. This note shall be binding upon and inure to the benefit of Borrower. Obligors and Bank and their respective successor, assigns, heirs and personal representatives, provided, however, that no obligators of the Borrower or the Obligor hereunder can be without prior written consent of Bank. 12. NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. EXHIBIT A --------- INTEREST RATE OPTION PROVISIONS ------------------------------- THIS EXHIBIT A is attached to and forms a part of that certain PROMISSORY NOTE (the "Note"), dated October 15 1996, executed by Premiere Communications --------------- ----------------------- Inc. a Georgia corporation ("Borrower"), and made payable to the order of - - --- ------------------- NationsBank, N.A. (South) ("Bank"). 1. Borrower's Rates. On the terms and subject to the conditions set forth ---------------- below, Borrower will be able to select, from one of the following Rate Options, an interest rate which will be applicable to a particular dollar increment of amounts outstanding, or to be disbursed, under the Note: (check the available options) [X] The Prime Rate plus 0.00 (the "Prime Rate Option"); ---- [_] The Treasury Securities Rate plus ________ (the "Treasury Securities Rate Option"); or [X] The LIBOR Funding Rate, plus 176 basis points (the "LIBOR Rate Option"); ---------------- [_] The Eurodollar Rate, plus _______ (the "Eurodollar Rate Option"); [_] The CD Rate plus ________ (the "CD Rate Option"); or [_] The Quoted Rate, plus ___________ (the "Quoted Rate Option"); or [_] The Transaction Rate of __________ (the "Transaction Rate Option"). Interest based on the Prime Rate Option is a floating rate and will change on and as of the date of a change in the Prime Rate. The period of time during which the Prime Rate shall be applicable shall be a Prime Rate Interest Period. Interest based on the Treasury Securities Rate Option will be fixed for periods of __________ year(s) (each a "Treasury Securities Interest Period"). Interest based on the LIBOR Rate Option will be fixed for periods of one, two or three ----------------- months (each a "LIBOR Interest Period"). Interest based on the Eurodollar Rate - - ------ Option will be fixed for periods of _________ (each a "Eurodollar Interest Period"). Interest based on the CD Rate Option will be fixed for periods of ___________ (each a "CD Interest Period"). Interest based on the Quoted Rate Option will be fixed for periods of ___________ (each a "Quoted Interest Period"). Interest based on the Transaction Rate Option will be fixed for periods of ____________ (each a "Transaction Interest Period"). The Treasury Securities Rate, the LIBOR Rate, the Eurodollar Rate, the CD Rate, the Quoted Rate, and the Transaction Rate each being hereafter from time to time referred to as a "Fixed Rate Option"). (See note below) 2. Selection of Applicable Interest Rate. ------------------------------------- (a) Request. Borrower may request (a "Rate Request") that a $1.00 ------- ---- increment or any amount in excess thereof (an "Increment") of the outstanding principal of, or amounts to be disbursed under, the Note bear interest at the Prime Rate Option, and Borrower may request (a "Rate Request") that a $500,000.00 increment or any amount in excess thereof (an "Increment") of the ---------- outstanding principal of, or amounts to be disbursed under, the Note bear interest at the Treasury Securities Rate Option, the LIBOR Rate Option, the Eurodollar Rate Option, the CD Rate Option, the Quoted Rate Option or the Transaction Rate Option, as applicable, by telephonic notice no later than 10:00 a.m. (Eastern time) a sufficient (in Bank's sole discretion) number of Business ------------ Days prior to the effective date of the Rate Request to permit Bank to quote the rate requested. (b) Applicable Interest Rates. Borrower's Rate Request will become ------------------------- effective, and Interest on the Increment designated will be calculated at the rate (the "Effective Rate") requested by Borrower for the applicable Interest Period, subject to the following: (i) Notwithstanding any Rate Request, interest shall be calculated on the basis of the Prime Rate Option if (a) Bank, in good faith is unable to ascertain the requested Fixed Rate Option by reason of circumstances then affecting the applicable money market or otherwise, (b) it becomes unlawful or impracticable for the Bank to maintain loans based upon the requested Fixed Rate Option, or (c) Bank, in good faith, determines that it is impracticable to maintain loans based on the requested Fixed Rate Option because of increased taxes, regulatory costs, reserve requirements, expenses or any other costs or charges that affect such interest Rate Options. Upon the occurrence of any of the above events, and increment to which a requested Fixed Rate Option applies, shall be immediately (or at the option of Bank, at the end of the current Fixed Rate Interest Period), without further action of Borrower or Bank, converted to an increment to which the Prime Rate Option applies. (ii) Borrower may have no more than a total of Two Effective Rates --- applicable to amounts outstanding under the Note at any given time. (iii) A Rate Request shall be effective as to amounts to be disbursed under the Note only if, on the effective date of the Rate Requests, such amounts are in fact disbursed to or for the account of the Borrower in accordance with the provisions of the Note and any related loan documents. (iv) Any amounts of outstanding principal for which a Rate Request has not been made, or is otherwise not effective, shall bear interest until paid in full at the Prime Rate Option. (v) Any amounts of outstanding principal bearing interest based upon a Fixed Rate Option shall bear interest at such rate until the end of the Interest Period therefor, and thereafter shall bear interest based upon the Prime Rate Option unless a new Rate Request for a Fixed Rate Option complying with the terms hereof has been made and has become effective. (vi) If Borrower shall be in default under the Note ("Default"), then Bank shall no longer be obligated to honor any Rate Requests. (vii) No Fixed Rate interest Period shall extend beyond the maturity date of the Note. (c) Repayment. Principal shall be payable on September 30, 1997 and --------- ------------------ interest shall be payable as follows: (check all that apply) [X] For any Interest Period during which the Prime Rate is applicable to any of the outstanding principal, interest thereon shall be payable [X] monthly, [ ] quarterly or [_] ________________ and continuing on the [_] same day, [X] last day of each successive month, quarter or other period (as applicable thereafter, with a final payment of all accrued and unpaid interest on the last day of such Interest Period. [_] For any Interest Period during which the Quoted Rate is applicable to any of the outstanding principal, interest thereon shall be payable [_] monthly, [_] quarterly or [_] and continuing on the [_] same day, [_] last day of each successive month, quarter or other period (as applicable) thereafter, with a final payment of all accrued and unpaid interest on the last day of such Interest Period. [_] For any Interest Period during which the Transaction Rate is applicable to any of the outstanding principal, interest thereon shall be payable [_] monthly, [_] quarterly or [_] ________________________________ and continuing on the [_] same day, [_] last day of each successive month, quarter or other period (as applicable) thereafter, with a final payment of all accrued and unpaid interest on the last day of such Interest Period. [X] For any Interest Period during which the LIBOR Funding Rate is applicable to any of the outstanding principal, all accrued and unpaid interest thereon shall be payable on the last day of each applicable Interest Period and, in the case of an Interest Period greater than three months, at three month intervals after the first day of such Interest Period. [_] For any Interest Period during which the Eurodollar Rate is applicable to any of the outstanding principal, all accrued and unpaid interest thereon shall be payable on the last day of each applicable Interest Period and, in the case of an Interest Period greater than three months, at three month intervals after the first day of such Interest Period. [_] For any Interest Period during which the CD Rate is applicable to any of the outstanding principal, all accrued and unpaid interest thereon shall be payable on the last day of each applicable Interest Period and, in the case of an Interest Period greater than 90 days, at 90 day intervals after the first day of such Interest Period. [_] For any Interest Period during which the Treasuries Securities Rate is applicable to any outstanding principal, interest thereon shall be payable [_] monthly, [_] quarterly or [_] ________________________ and continuing on the [_] same day, [_] last day of each successive month, quarter or other period (as applicable) thereafter, with a final payment of all accrued and unpaid interest on the last day of such Interest Period. 3. Defined terms. The following terms as used in this Exhibit A shall ------------- have the following meanings: "Business day" shall mean a day on which Bank is open for business and ------------ dealing in deposits in Atlanta, Georgia. "Treasury securities rate" shall mean the rate of Interest per annum ------------------------ determined by Bank, in accordance with its customary general practice from time to time, to be the weekly average yield on all United States Treasury Securities adjusted to a constant maturity for a term comparable to such Interest Period, as most recently reported by the Federal Reserve System in the weekly FEDERAL RESERVE STATISTICAL RELEASE NO. H-15(519), entitled "Selected Interest Rates" (or any succeeding publication) (the "Treasury Securities Rate") adjusted from time to time in Bank's sole discretion for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. "CD rate" shall mean the rate of interest per annum (rounded upwards, if ------- necessary, to the next higher 1/16 of 1%) determined by Bank. In accordance with its customary general practice from time to time, paid from time to time by major banks on negotiable certificates of deposit (secondary market) in amounts of $100,000.00 or more for a term comparable to such Interest Period, as most recently reported by the Federal Reserve System in the weekly FEDERAL RESERVE STATISTICAL RELEASE NO H-15(519), entitled "Selected Interest Rates" (or any succeeding publication) (the "CD Rate") adjusted from time to time in Bank's sole discretion for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. "LIBOR funding rate" shall mean the rate of interest set by Bank as the ------------------ LIBOR Funding Rate as of and at any time during the second Business Day immediately preceding the first day of such Interest Period, for a term comparable to such Interest Period, as adjusted from time to time in Bank's sole discretion for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. "Eurodollar rate" shall mean the rate of interest set by Bank as the --------------- Eurodollar Rate, as of and at any time during the second Business Day immediately preceding the first day of such Interest Period, for a term comparable to such Interest Period, as adjusted from time to time in Bank's sole discretion for then applicable reserve requirements, deposit insurance assessment rates and other regulatory costs. "Prime rate" is the fluctuating rate of interest established by Bank from ---------- time to time, at its discretion, whether or not such rate shall be otherwise published. The Prime Rate is established by Bank as an index and may or may not an any time be the best or lowest rate charged by Bank on any loan. "Quoted rate" shall mean a fixed rate of interest per annum agreed upon by ----------- the Bank and Borrower on or prior to the first day of the Interest Period for which such rate shall be in effect. "Transaction rate" shall mean the fixed rate of _____________% per annum. ---------------- 4. NOTICES; AUTHORITY TO ACT. Borrower acknowledges and agrees that the ------------------------- agreement of Bank herein to receive certain notices by telephone is solely for the convenience of Borrower. Bank shall be entitled to rely on the authority of the person purporting to be a person authorized by Borrower to give such notice, and Bank shall have no liability to Borrower on account of any action taken by Bank in reliance upon such telephonic notice. The obligation of Borrower to repay all sums owing under the Note shall not be affected in any way or to any extent by any failure by Bank to receive written confirmation of any telephonic notice or the receipt by Bank of a confirmation which is at variance with the terms understood by Bank to be contained in the telephonic notice. IN WITNESS WHEREOF, the parties hereto have executed this Exhibit A to Note as of the 18th day of October, 1996. ---- ------- ---- Borrower: Premiere Communications, Inc. ------------------------------------ By: /s/ Julianne F. Vaio ---------------------------- Its: Treasurer & Dir. of Finance ---------------------------- By: ---------------------------- Its: ---------------------------- Bank: NationsBank, N.A. (South) By: /s/ Ellen Gilmer ----------------------------- Ellen Gilmer - Sr. Vice Pres. Note: LIBOR and Eurodollar should be quoted in terms of months (i.e. one, two three or six months) and not days (i.e. 30, 60, 90 or 180 days). There is no automatic way to accrue interest on Quoted rate or Transaction Rate, calculations must be done manually. EX-10.52 5 CONTINUING AND UNCONDITIONAL GUARANTY AGREEMENT EXHIBIT 10.52 NATIONSBANK(R) NationsBank, N.A. (South) E. Gilmer/3829 CONTINUING AND UNCONDITIONAL - - --------------------------------------------------------------------------- GUARANTY - - -------- 1. GUARANTY. FOR VALUE RECEIVED, and to induce NationsBank, N.A. (South) Financial Strategies - - --------------------------- Banking Center 600 Peachtree Street, N.E. , Atlanta , GA , 30308 - - ----------------------------------- ------------- -------- ------------- Back Street Address City State Zip Code (Attn: Financial Strategies ) (herein called "Bank"), to make loans or advances -------------------- or to extend credit or other financial accommodations or benefits, with or without security, to or for the account of Premiere Communications, Inc. ------------------------------------- 3399 Peachtree Road , Atlanta , GA , 30326 - - ------------------------------ ------------------ ---- ---------------. Street Address City State Zip Code (herein called "Borrower"), the undersigned (herein called the "Guarantor"), if more than one, then each of them jointly and severally, hereby becomes a surety for and irrevocably and unconditionally guarantees to Bank the full and prompt payment when due, whether by acceleration or otherwise, of any and all Liabilities (as hereinafter defined) of Borrower to Bank, together with reasonable attorney's fees, costs and expenses incurred by Bank in enforcing any and all of such indebtedness. This Guaranty is continuing and unlimited as to the amount. Guarantor further unconditionally guarantees the faithful, prompt and complete compliance by Borrower with all terms, conditions, covenants, agreements, and undertakings of Borrower (herein collectively referred to as the "Obligations") under all notes and other documents evidencing the Liabilities, as hereinafter defined, and under all deeds to secure debt, deeds of trust, mortgages, security agreements and other documents securing payment of the Liabilities and all notes and other agreements, documents, and instruments evidencing or relating to the Liabilities and Obligations being herein collectively called the "Loan Documents"). The undertakings of Guarantor hereunder are independent of the Liabilities and Obligations of the Borrower and a separate action or actions for payment, damages or performance may be brought or prosecuted against Guarantor, whether or not an action is brought against the Borrower or to realize upon the security for the Liabilities and/or Obligations and whether or not Borrower is joined in any such action or actions, and whether or not notice is given or demand is made upon the Borrower. Bank shall not be required to proceed first against Borrower, or any other person, firm or corporation, whether primarily or secondarily liable, or against any Collateral held by it, before resorting to Guarantor for payment, and Guarantor shall not be entitled to assert as a defense to the enforceability of the Guaranty any defense of Borrower with respect to any Liabilities or Obligations. 2. PARAGRAPH HEADINGS AND GOVERNING LAW. Guarantor agrees that the paragraph headings in this Guaranty are for convenience only and that they will not limit any of the provisions of this Guaranty. Guarantor further agrees that this Guaranty shall be governed by and construed in accordance with the laws of the State of Georgia and applicable United States federal law. Guarantor further agrees that this Guaranty shall be deemed to have been made in the State of Georgia at Bank's address indicated herein, and shall be governed by, and construed in accordance with, the laws of the State of Georgia, or the United States courts located within the State of Georgia, and is performable in the State of Georgia. 3. DEFINITIONS. A. "Liability" or "Liabilities" as used herein shall include without limitation, all liabilities, overdrafts, indebtedness, and obligations of Borrower to Bank, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, now or hereafter existing, or held or to be held by the Bank for its own account or as agent for another or others, whether created directly, indirectly, or acquired by assignment or otherwise, including but not limited to all extensions or renewals thereof, and all sums payable under or by virtue thereof, including without limitation, all amounts of principal and interest, all expenses (including attorney's fees and cost of collection as specified) incurred in the collection thereof or the enforcement of rights thereunder or in enforcing this Guaranty (including without limitation, any liability arising from failure to comply with state or federal laws, rules and regulations concerning the control of hazardous wastes or substances at or with respect to any real estate securing any loan guaranteed hereby), whether arising in the ordinary courts of business or otherwise, and whether held or to be held by Bank for its own account or as agent for another or others. If Borrower is a partnership, corporation or other entity the term "Liability" or "Liabilities" as used herein shall include all Liabilities to Bank of any successor entity or entities. B. "Guarantor" as used herein shall mean Guarantor or any one or more of them. Anyone executing this Guaranty shall be bound by the terms hereof without regard to execution by anyone else. This Guaranty is binding upon Guarantor, his, their or its executors, administrators, successors or assigns, and shall inure to the benefit of Bank, its successors, endorsees or assigns. "Guarantor" as used in this instrument shall be construed as singular or plural to correspond with the number of persons executing this instrument as Guarantor. The pronouns used in this Agreement are in the masculine gender but shall be construed as female or neuter as an occasion may require. C. "Collateral" means the property subject to a security interest, and includes accounts and chattel paper which have been sold, including but not limited to all additions and accessions thereto, all replacements or substitutes therefor, and all immediate and remote proceeds of the sale or other disposition thereof. 4. WAIVERS BY GUARANTOR. Guarantor waives notice acceptance of this Guaranty, notice of any Liability or Obligations to which it may apply, and waives presentment, demand for payment, protest, notice of dishonor or nonpayment of any Liabilities, waiver of notice of intent to accelerate, waiver of notice of acceleration and notice of any suit or the taking of other action by Bank against Borrower. Guarantor or any other person and any other notice to any party liable thereon (including Guarantor) and any applicable statute of limitations. Each Guarantor also hereby waives any claim, right or remedy which such Guarantor may now have or hereafter acquire against the Borrower that arises hereunder and/or from the performance by any Guarantor hereunder including, without limitation, any claim, remedy or right of subrogation, reimbursement, exoneration, contribution, indemnification, or participation in any claim, right or remedy of the Bank against the Borrower or any security which the Bank now has or hereafter acquires, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Guarantor hereby agrees to waive the benefits of any provision of law requiring that the Bank exhaust any right or remedy, or take any action, against the Borrower, any Guarantor, any other person and/or property including but not limited to the provisions of the Official Code of Georgia (S)10-7-24 and Official Code of Georgia (S)11-3-601, as amended, or otherwise. Bank may at any time and from time to time (whether before or after revocation or termination of this Guaranty) without notice to Guarantor (except as required by law), without incurring responsibility to Guarantor, without impairing, releasing, or otherwise affecting the obligations of Guarantor, in whole or in part, and without the endorsement or execution by Guarantor of any additional consent, waiver or guaranty: (a) change the manner, place or terms of payment; (b) change or extend the time of or renew or alter, any Liability or Obligation or installment thereof, or any security therefor: (c) loan additional monies or extend additional credit to Borrower, with or without security, thereby creating new Liabilities or Obligations the payment or performance of which shall be guaranteed hereunder, and the Guaranty herein made shall apply to the Liabilities and Obligations as so changed, extended, surrendered, realized upon or otherwise altered: (d) sell exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property at any time pledged or mortgaged to secure the Liabilities or Obligations and any offset there against; (e) exercise or refrain from exercising any rights against Borrower or others (including Guarantor) or act of refrain from acting in any other manner; (f) settle or compromise any Liability or Obligation or any security therefor and subordinate the payment of all or any part thereof to the payment of any Liability or Obligation of any other parties primarily or secondarily liable on any of the Liabilities or Obligations; (g) release or compromise any liability of Guarantor hereunder of any Liability or Obligation of any other parties primarily or secondarily liable on any of the Liabilities or Obligations; or (h) apply any sums from any sources to any Liability without regard to any Liabilities remaining unpaid. 5. SUBORDINATION. Upon demand of Bank, Guarantor agrees that it will not demand, take or receive from the Borrower, by set-off or in any other manner, payment of any liabilities and/or obligations, now and at any time or times hereafter owing by the Borrower to Guarantor unless and until all the Liabilities shall have been fully paid, and any security interest, liens or encumbrances which Guarantor now has and from time to time hereafter may have upon any of the assets of the Borrower shall be made subordinate, junior and inferior and postponed in priority, operation and effect to any security interest of Bank in such assets. 6. WAIVERS BY BANK. No delay on the part of Bank in exercising any of its options, powers or rights, or any partial or single exercise thereof, shall constitute a waiver thereof. No waiver of any of its rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by Bank unless the same shall be in writing, duly signed on behalf of Bank; and each such waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of Bank of the obligations of Guarantor to Bank in any other respect at any other time. 7. TERMINATION. This Guaranty shall continue until written notice of revocation signed by each respective Guarantor or until written notice of the death of such Guarantor shall actually have been received by Bank, notwithstanding change in name, location composition or structure of, or the dissolution, termination or increase, decrease or change in personnel, owners or partners of Borrower, or any one or more of Guarantors, provided, however, that no notice of revocation or termination hereof shall affect in any manner rights arising under this Guaranty with respect to Liabilities or Obligations that shall have been created. Contracted, assumed or incurred prior to receipt of such written notice pursuant to any agreement entered into by Bank prior to receipt of such notice, and the sole effect of such notice of revocation or termination hereof shall be to exclude from this Guaranty, Liabilities or Obligations thereafter arising that are unconnected with Liabilities or Obligations theretofore arising or transactions entered into theretofore. In the event of the death of a Guarantor, the liabilities of the estates of the deceased Guarantor shall continue in full force and effect as to (i) the Liabilities existing at the date of death, and any renewals or extensions thereof and (ii) loans or advances made to or for the account of Borrower after the date of death of the deceased Guarantor pursuant to the liabilities of Bank under a commitment made to Borrower prior to the date of such death. As to all surviving Guarantors, this Guaranty shall continue in full force and effect after the death of a Guarantor, not only as to the Liabilities existing at that time, but also as to Liabilities thereafter incurred by Borrower to Bank. 8. PARTIAL INVALIDITY AND/OR ENFORCEABILITY OF GUARANTY. The unenforceability or invalidity of any provision of this Guaranty shall not affect the enforceability or validity of any other provision herein and the invalidity or unenforceability of any provision of any Loan Documents as it may apply to any person or circumstance shall not affect the enforceability or validity of such provision as it may apply to other persons or circumstances: In the event Bank is required to relinquish or return the payments, the Collateral or the proceeds thereof, in whole or in part, which had been previously applied to or retained for applications against any Liability, by reason of a proceeding arising under the Bankruptcy Code, or for any other reason, this Guaranty shall automatically continue to be effective notwithstanding any previous cancellation or release effected by the Bank. 9. OBLIGATIONS OF GUARANTOR. In the event that Borrower fails to perform any of the Obligations or pay any of the Liabilities, Guarantor shall upon demand by Bank, promptly and with due diligence pay all Liabilities and perform and satisfy for the benefit of Bank all Obligations. Guarantor will not become a party to a merger or consolidation with any other company, except where Guarantor is the surviving corporation or entity, and all covenants under this Guaranty Agreement are assumed by the surviving corporation. Further, Guarantor may not change the status of or type of entity, that Guarantor is, without the written consent of Bank and all covenants under this Guaranty Agreement are assumed by the new or surviving entity. Guarantor further agrees that this Guaranty Agreement shall be binding, legal and enforceable against Guarantor in the event Borrower changes its name, status or type of entity. 10. FINANCIAL AND OTHER INFORMATION. Guarantor agrees to furnish to Bank any and all financial information and any other information regarding Guarantor and/or Collateral requested in writing by Bank within ten (10) days of the date of the request. The Guarantor has made an independent investigation of the financial condition and affairs of the Borrower prior to entering into this Guaranty, and the Guarantor has made and will continue to make an independent appraisal of the creditworthiness of the Borrower: and in entering into this Guaranty the Guarantor has not relied upon representation of the Bank as to the financial conditions, operations or creditworthiness of the Borrower. The Guarantor further agrees that the Bank shall have no duty or responsibility now or hereafter to make any investigation or appraisal of the Borrower on behalf of the Guarantor or to provide the Guarantor with any credit or other information which may come to its alteration now or hereafter. 11. NOTICES. All notices required or permitted to be given to Bank herein shall be sent by registered or certified mail, return receipt requested to the Bank at the address shown in the preamble to this Agreement. Guarantor agrees that all notices required or permitted to be given to Guarantor shall be sent by first class mail, postage prepaid United States mail. The parties agree that the notice shall be considered received by Guarantor five (5) days after being placed in the United States mail. 12. EVENTS OF DEFAULT. The following are events of default hereunder: (a) the failure to pay or perform any Obligation. Liability or indebtedness of Borrower or Guarantor to Bank, or to any affiliate of Bank, whether under this Guaranty or any other agreement, note or instruments now or hereafter existing, as and when due (whether upon demand, at maturity or by acceleration): (b) the failure to pay or perform any other Obligation, Liability or indebtedness of Borrower or Guarantor as and when due, whether to Bank or some other party, the Collateral for which constitutes an encumbrance on the Collateral for this Guaranty;(c) death of any Borrower or Guarantor (if any individual), or a proceeding being filed or commenced against a Borrower or Guarantor for dissolution or liquidation, or any Borrower or Guarantor voluntarily or involuntarily termination or dissolving or being terminated or dissolved; (d) the insolvency of, the business failure of, the appointment of a custodian, trustee, liquidator or receiver for or for any of the property of, or an assignment for the benefit of creditors by, or the filling of a petition under any bankruptcy, insolvency or debtor's relief law or for any adjustments of indebtedness, composition or extensions by or against Borrower or Guarantor: (a) any lien or additional security interest being placed upon any of the Collateral which is security for this Guaranty; (f) acquisition at any time or from time to time of title to the whole of or any part of the Collateral which is security for this Guaranty by any person, partnership, corporation, or other entity; (g) Bank determining that any representation of warranty made by Borrower or Guarantor to Bank is, or was, untrue or materially misleading; (h) failure of Borrower or Guarantor to timely deliver such financial statements, including tax returns, and other statements of condition or other information as Bank shall request from time to time; (i) any default under any Loan Documents; (j) entry of a judgment against Borrower or Guarantor which Bank deems to be of a material nature, in Bank's sole discretion; (k) the seizure or forfeiture of, or the issuance of any wir of possession, garnishment or attachment, or any runover order for any property of Borrowers or Guarantor; (l) Bank reasonably deeming itself insecure of any reason; (m) the determination by Bank that a material adverse change has occurred in the financial condition of Borrower or Guarantor; (n) the failure to comply with any law regulating the operation of Borrower's business; (o) termination of Guaranty by Guarantor, or (p) the inability of the Borrower or Guarantor to pay debts as they mature whether owing to Bank or any other party. 13. REMEDIES. Upon the occurrence of any event of default hereunder. Bank shall have all of the remedies of a creditor and, to the extent applicable, of a secured party, under all applicable law, and without limiting the generality of the foregoing, Bank may, at its option and without notice or demand: (a) declare any Liability accelerated and due and payable at once: and (b) take possession of any Collateral wherever located, and sell, resell, assign, transfer and deliver all or any part of said Collateral of Borrower or Guarantor at any public or private sale or otherwise dispose of any or all of the Collateral in its then condition, for cash or on credit or for future delivery, and in connection therewith Bank may impose reasonable conditions upon any such sale. Bank, unless prohibited by law the provisions of which cannot be waived, may purchase all or any part of said Collateral to be sold, free from and discharged of all trusts, claims, rights or redemption and equities of the Borrower or Guarantor whatsoever: Guarantor acknowledges and agrees that the sale of any Collateral through any nationally recognized broker-dealer, investment banker or any other method common in the securities industry shall be deemed a commercially reasonable sale under the Uniform Commercial Code or any other equivalent status or federal law, and expressly waives notice thereof except as provided herein: and (c) set-off against any or liabilities of Guarantor all money owed by Bank in any capacity to Guarantor whether or not due, and also set-off against all other Liabilities of Borrower or Guarantor to Bank all money owed by Bank in any capacity to any Borrower or Guarantor, and if exercised by Bank. Bank shall be deemed to have exercised such right of set-off and to have made a charge against any such money immediately upon the occurrence of such default although made or entered on the books subsequent thereto. 14. ATTORNEY FEES, COST AND EXPENSES. Guarantor shall pay all costs of collection and attorney's fees equal to the greater of (a) fifteen percent (15%) of the first $500.00 of any liability due and ten percent (10%) on the excess of $500.00 Liability due and unpaid if Bank proceeds to collect such Liability through the services of an attorney at law, whether through the initiation of legal proceedings or otherwise, plus reasonable attorney's fees incurred in appeilate proceedings, or (b) reasonable attorney's fees, including reasonable attorney's fees, including reasonable attorney's fees in connection with any suit,mediation or arbitration proceeding, out of court payment agreement, trial, appeal, bankruptcy proceedings or otherwise, incurred or paid by Bank in enforcing the payment of any Liability or enforcing or preserving any agreement, trial, appeal bankruptcy proceedings or otherwise incurred or paid by Bank in enforcing the payment of any Liability or enforcing or preserving any right or interest of Bank hereunder, including the collection, preservation, sale or delivery of any Collateral from time to time pledged to Bank, and after deducting such fees, costs and expenses from the proceeds of sale or collection, Bank may apply any residue to pay any of the Liabilities an Guarantor shall continue to be liable for any deficiency with interest at the rate specified in any instrument evidencing the Liability or, at the Bank's option, equal to the highest lawful rate, which shall remain a liability. 15. PRESERVATION OF PROPERTY. Bank shall not be bound to take any steps necessary to preserve any rights in any of the property of Guarantor pledged to Bank to secure Guarantor's obligations against prior parties who may be liable in connection therewith, and Guarantor hereby agrees to take any such steps. Bank, nevertheless, at any time, may (a) take any action it deems appropriate for the care or preservation of such property or of any rights of Guarantor or Bank therein, (b) demand, sue for, collect or receive any money or property at any time due, payable or receivable on account of or in exchange for any property of Guarantor, (c) compromise and settle with any person liable on such property, or (d) extend the time of payment or otherwise change the terms of the Loan Documents as to any part liable on the Loan Documents, all without notice to, without incurring responsibility to, and without affecting any of the obligations or liabilities of Guarantor. 16. COLLATERAL. The Bank at all times and from time to time shall have the right to require Guarantor to deliver to Bank Collateral satisfactory to Bank to secure Guarantor's undertakings hereunder and/or the liabilities of Guarantor hereunder. Bank shall have a properly perfected security interest in all of Guarantor's funds on deposit with Bank to secure the balance of any liabilities and/or obligations that Guarantor may now or in the future owe the Bank. Bank is granted a contractual right of set-off and will not be liable for dishonoring checks or withdrawals where the exercise of Bank's contractual right of set-off or security interest results in insufficient funds in Guarantor's account. As authorized by law, Guarantor grants to Bank this contactual right of set-off and security interest in all property of Guarantor now or at anytime hereafter in the possession of Bank, including but not limited to any joint account, special account, account by the entireties, tenancy in common, and all dividends and distributions now or hereafter in the possession or control of Bank. [ ] CHECK IF APPLICABLE. In addition to the provisions stated above, Guarantor hereby pledges, assigns and grants to Bank a security interest in and title to the Collateral described in the security agreement, deed of trust, deed to secure debt, mortgage or other Collateral instrument dated ______, 19__ which Collateral, except for any margin stock (as defined in Regulation U of the Board of Governors of the Federal Reserve System), shall secure this Guaranty, whether currently existing or arising in the future. Guarantor agrees to execute such security agreements, financing statements and other documents as Bank may reasonably require or request to obtain and perfect its security interest in said Collateral. 17. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY RELATED AGREEMENTS OR INSTRUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF JUDICIAL ARBITRATION AND MEDIATION SERVICES, INC. (J.A.M.S.), AND THE "SPECIAL RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY TO THIS AGREEMENT MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION. (A) SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE CITY OF THE ------------- BORROWER'S DOMICILE AT THE TIME OF THIS AGREEMENT'S EXECUTION AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS. (B) RESERVATION OF RIGHTS. NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO --------------------- (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS AGREEMENT; OR (II) BE A WAIVER BY THE BANK OF THE PROTECTION AFFORDED TO IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE RIGHT OF THE BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSURE AGAINST ANY REAL OR PERSONAL PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT OF A RECEIVER. THE BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS AGREEMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES. 18. Execution under seal. This Guaranty is being executed under seal by the Guarantor. 19. NOTICE OF FINAL AGREEMENT. THIS WRITTEN CONTINUING AND UNCONDITIONAL GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the undersigned has caused this Guaranty to to be executed under seal on the 18th day of October 1996. ---- ------- -- Witnessed By: Guarantor: /s/ Ellen Gilmer (Seal) - - ------------------------------------ ----------------------------------- Ellen Gilmer - Senior Vice President - - ------------------------------------- _________________________________________ Print Name (And Title, If Applicable) Print Individual's Name Corporate Guarantor or Partnership: Premiere Technologies, Inc. ----------------------------------------- Name of Corporation, Partnership etc. By: /s/ Julianne F. Vaio (Seal) -------------------------------- Julianne F. Vaio - Treasurer ----------------------------------------- Print Name and Title Attest (If applicable) By: (Seal) -------------------------------- /s/ Patrick G. Jones - - ----------------------------------- ----------------------------------------- Secretary Print Name and Title [Corporate Seal] INDIVIDUAL ACKNOWLEDGEMENT State of _____________________________(S) (S) County of ____________________________(S) This instrument was acknowledged before me on _____________________, 19__ by _______________________________. Guarantor ___________________________________ Notary Public in and for the State of ___________ (Seal) _______________________________ ___________________________________ My Commission Expires Print Name of Notary CORPORATE ACKNOWLEDGMENT State of _____________________________(S) (S) County of ____________________________(S) This instrument was acknowledged before me on ____________________, 19__ by ____________________________________, ________________________, of ________________________, a __________________________ corporation, on behalf of said corporation. ___________________________________ Notary Public in and for the State of ___________ (Seal) _______________________________ ___________________________________ My Commission Expires Print Name of Notary EX-11.1 6 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 PREMIERE TECHNOLOGIES, INC. AND SUBSIDIARIES STATEMENT RE COMPUTATION OF EARNINGS PER SHARE FOR THE THREE AND TWELVE MONTHS ENDED DECEMBER 31, 1995 AND 1996 (IN THOUSANDS)
Three Months Ended Year Ended ----------------------------- --------------------- December 31, December 31, December December 1995 1996 1995 1996 -------------- ------------ ---------- --------- (Unaudited) PRIMARY (6) - - ----------- Earnings applicable to common stock: Net income (loss) $ 936 $ 2,667 $ 1,918 $ (956) Preferred dividends (1) (77) 0 (308) (29) Interest income (2) 53 91 197 0 -------------- ------------ --------- ---------- Net income (loss) applicable to common stock $ 912 $ 2,758 $ 1,807 $ (985) ============== ============ ========= ========== Weighted average shares outstanding for primary: Weighted average shares outstanding 5,968 23,936 5,968 20,170 Shares upon assumed exercise of stock options and warrants issued within one year if initial public offering (3) 4,845 0 4,845 0 Other shares upon assumed exercise of stock options and warrants (4) 6,600 2,585 6,716 0 -------------- ------------ --------- ---------- Weighted average shares 17,413 26,521 17,529 20,170 ============== ============ ========= ========== Primary net income (loss) per share $ 0.05 $ 0.10 $ 0.10 $ (0.05) ============== ============ ========== ==========
______________ (1) Dividends on cumulative convertible preferred stock are deducted to arrive at net income applicable to common stock as the preferred stock is not a common stock equivalent and is therefore not considered as if converted for primary earnings per shares. (2) Reflects adjustment to interest expense, net of related Income tax effect, on excess proceeds due to 20% limitation on assumed acquisition of shares under the modified treasury stock method. Assumed proceeds from stock options include an income tax benefit as the options are not qualified options under the Internal Revenue Code. (3) Options and warrants issued within one year of the initial filing of the accompanying registration statement are assumed to be outstanding for all periods using the modified treasury stock method at the assumed Initial public offering price, regardless of whether they are anti-dilutive. (4) Options and warrants are assumed exercised using the modified treasury stock method, except where the effect is anti-dilutive. (5) Fully diluted net income per share is anti-dilutive. Accordingly, fully diluted net income per share is not presented for all periods. EX-23.1 7 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of Registration Statement File Nos. 333-17593 and 333-11281. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia March 25, 1997 EX-27.1 8 FINANCIAL DATA SCHEDULE
5 3-MOS 12-MOS DEC-31-1996 DEC-31-1996 OCT-01-1996 JAN-01-1996 DEC-31-1996 DEC-31-1996 6,800 6,800 67,334 67,334 5,353 5,353 610 610 0 0 84,860 84,860 19,775 19,775 3,002 3,002 140,051 140,051 15,309 15,309 0 0 0 0 0 0 240 240 123,918 123,918 140,051 140,051 17,211 52,079 17,211 52,079 4,936 16,711 4,936 16,711 8,869 40,301 0 0 59 188 4,128 (2,523) 1,461 (1,627) 2,667 (897) 0 0 0 59 0 0 2,667 (956) .10 (.05) .10 (.05)
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