-----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, Jz/nUrtJklkTeusZARtbjDxcQcnySvdYyOvSLjO2p3B4yQWjqYVgF1foIVxG4o+m qHXa6m9FSFbRsyv03Aw1ng== 0000912057-97-010310.txt : 19970328 0000912057-97-010310.hdr.sgml : 19970328 ACCESSION NUMBER: 0000912057-97-010310 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRITE VOICE SYSTEMS INC CENTRAL INDEX KEY: 0000852637 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 480986248 STATE OF INCORPORATION: KS FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17920 FILM NUMBER: 97564263 BUSINESS ADDRESS: STREET 1: 7309 E 21ST ST N CITY: WICHITA STATE: KS ZIP: 67206 BUSINESS PHONE: 3166526500 10-K405 1 10-K405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-17920 BRITE VOICE SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) KANSAS 48-0986248 (STATE OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION) NO.)
7309 E. 21ST STREET NORTH WICHITA, KANSAS 67206 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (316) 652-6500 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO PAR VALUE (TITLE OF CLASS) ------------------------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K: [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of February 25, 1997, was $110,196,000, based upon the last reported sales price on such date. For purposes of this disclosure, shares of common stock beneficially owned by executive officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination is not necessarily conclusive. On February 25, 1997, there were 11,830,095 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on May 13, 1997 are incorporated by reference into Part III of this report. The Proxy Statement is expected to be filed with the Commission not later than April 4, 1997. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- BRITE VOICE SYSTEMS, INC. 1996 FORM 10-K TABLE OF CONTENTS Item 1. Business.................................................................... 1 Item 2. Properties.................................................................. 13 Item 3. Legal Proceedings........................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders......................... 14 Item 5. Market for the Company's Common Equity and Related Stockholder Matters...... 14 Item 6. Selected Financial Data..................................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 16 Item 8. Financial Statements and Supplementary Data................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................. 37 Item 10. Directors and Executive Officers of the Registrant.......................... 37 Item 11. Executive Compensation...................................................... 37 Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 37 Item 13. Certain Relationships and Related Transactions.............................. 38 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 38
i PART I ITEM 1. BUSINESS GENERAL Brite Voice Systems, Inc. (the "Company" or "Brite") designs, integrates, assembles, markets and supports voice processing systems and services which incorporate voice response, voice recognition, voice/ facsimile messaging, audiotex and interactive computer applications into customized market solutions. The Company also offers a broad array of telecommunications management services. Voice processing systems allow callers to use a telephone to leave or retrieve messages, obtain information stored in a computer database, or input and retrieve information from a host computer. A caller who accesses a voice processing system is typically greeted by a message identifying the owner or principal sponsor of the system, and is then requested to select options from a menu of choices. Most callers using touch-tone telephones input responses by pushing the keys on their telephone key pad. Many of the Company's systems, such as voice activated dialers, allow input of information using spoken commands. The Company's products can be divided into two categories: those that increase its customers' revenues through increased subscription or user fees, and those that reduce customers' costs or improve the efficiency of services provided to end user customers. Examples of revenue enhancing products include the Company's Voice Directories-Registered Trademark- and CityLine-Registered Trademark- products, sold to publishers of Yellow Pages directories and newspapers, who generate revenue through the sale of sponsorships to categories of information of interest to callers, such as sports scores, weather, stock quotes, business news or similar information. In addition, the Company provides systems to wireless network operators who provide voice activated dialing and debit billing services to their subscriber base, thus increasing network usage and revenues. Typical applications that reduce customers' costs or improve efficiency allow callers to access personalized account balances for bank, credit card or mutual fund accounts, order products or product literature for delivery by mail or by facsimile, pay bills, enroll for college courses, apply for credit cards and receive stock quotes or other personalized information. The use of the Company's systems to respond to routine requests for information reduces customers' direct labor costs, allowing live agents to handle more complex questions and problems, thereby improving customer service. The Company also provides a wide range of services to support its customers' voice response activities. In addition to traditional maintenance services, the Company employs a staff of writers and broadcasters who record information for playback on customers' systems, and a staff of telephone operators who process callers' requests for information, provide back office support such as advertiser and system management for Yellow Pages publishers, and assist customers in modifying voice response content for use in Internet or other on-line applications. Incorporated in Kansas in 1984, the Company initially concentrated its efforts on the provision of audiotex systems, primarily to newspaper publishers which used the systems to establish themselves as leading information providers in their respective markets. In May 1991, the Company, through its newly-formed subsidiary, Brite Voice Systems Group, Limited ("BVSGL"), acquired substantially all of the assets of the Voice Systems Group of Ferranti Business Communications, Ltd. BVSGL manufactures and markets voice processing systems which are sold both as customer premise equipment and as public telephone network equipment. BVSGL is responsible for the Company's European business and maintains design and production facilities in Manchester, England and sales and support offices in Cambridge, England; Germany; Switzerland; and Italy. In July 1993, the Company merged with one of its leading competitors, Perception Technology Corporation ("Perception"). Perception's experience as a provider of interactive voice response systems 1 significantly broadened the Company's participation in the voice response industry. In addition, the Company believes that the combined audiotex experience of the two companies established the Company as the leading provider of audiotex systems and information services to the newspaper and Yellow Pages publishing industries. In March 1995, the Company acquired Touch-Talk, Incorporated ("Touch-Talk"), based in Dallas, Texas. Prior to the merger, Touch-Talk had been the largest provider of customized application software solutions used by the Company in providing interactive voice response applications. In addition, the Company had licensed from Touch-Talk certain application software development tools for sublicense to customers. The acquisition of Touch-Talk broadened the Company's capabilities in providing turnkey voice response applications to customers seeking a single vendor for all of their voice response requirements. In August 1995, the Company acquired Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., and TSL Management Group, Inc., (collectively the "TSL Companies" or "TSL"), which were affiliated by common ownership. As a result of this acquisition (hereinafter the "TSL Merger"), the Company now offers a broad array of services and products which assist clients in managing various aspects of their telecommunications functions, including controlling and reducing expenses, developing management reports and applications, selecting service and equipment vendors, designing and implementing telecommunications systems and managing day-to-day operations. The Company expects to continue to evaluate prospects for future acquisitions or other corporate development activities to supplement its internal technology and product development activities. In addition, the Company regularly evaluates all of its product and services offerings for profitability and growth potential, and redesigns, redirects or eliminates those products or services which fail to demonstrate profitability or significant growth potential. THE COMPANY'S PRODUCTS PLATFORMS The Company's voice processing products are designed around a variety of platforms. Each platform has two main components, the "client," which interfaces to the network and provides the caller interface, and the "server," which runs the application and links into other systems. The client houses a high-capacity hard disk drive, random access memory for vocabulary and speech storage, and telecommunications modules. The server can share the same processor as the client, be housed in a separate PC or be part of a larger computer system. The Company's platforms use various operating systems (primarily QNX-TM-, UNIX-TM-, Windows NT-TM-, OS/2-TM- and proprietary systems), and a library of software programs that form the basis of the Company's voice processing products. Regardless of the platform on which a customer application resides, each of the Company's products is designed to accept incoming telephone calls, interpret touch-tone inputs or voice commands from callers, and respond to the callers' requests. The Company's platforms can be used as stand-alone voice processing systems, be integrated into existing network systems, or be utilized as a server to a host computer. Company platforms support a number of telephony interfaces, including CAS, ISDN and CCITT SS7 signaling. Optional RAID disk architectures are available for high-capacity, fault-tolerant message storage. Platforms are being installed around the world and have been integrated with many types of switches including open-programmable switches such as those manufactured by Summa Four and Excel. The Company also provides switch control software routing which integrates the Company's software applications with the switching platform. 2 This has enabled single systems to be simultaneously connected to different types of networks (cellular, PCS and wireline). Principal platforms currently supported are as follows:
VOICE TECHNOLOGY PLATFORM NAME USES - ------------------------ ----------------- -------------------------------------------------------------------- Dialogic Based VoiceSelect Network based enhanced applications Brite Enabler Network media server VSD systems Network based messaging and enhanced applications BriteLink International IVR systems VoicePrint Electronic publishing and managed services Proprietary Hardware BT series Domestic VPU server VOCOM series Domestic IVR systems NMS Based VM series Small voice mail systems
APPLICATION PROGRAMS Application programs currently in use by many of the Company's customers are as follows: VOICE ACTIVATED DIALING. VoiceSelect-Registered Trademark- allows wireless carriers to provide a cellular telephone user access to telephone numbers using spoken commands rather than the keys on the cellular telephone, thereby enabling drivers to keep their hands on the wheel and eyes on the road, promoting safety and convenience of use. VoiceSelect is marketed to cellular providers around the world. DEBIT/PREPAID CALLING. BriteDEBIT-TM- allows carriers to provide cellular telephone service to customers who have not established creditworthiness with the carrier. Customers purchase a telephone and associated airtime and all calls are routed through the Company's system, which keeps track of airtime used and notifies the user shortly prior to expiration of prepaid airtime. The customer may then purchase additional airtime through a variety of methods. Benefits to the customer include access to a cellular phone without a long-term commitment to the cellular provider, and the ability to manage the cost of a cellular phone while paying only for the usage desired. Advantages to the carrier include low cost customer acquisition and increased market penetration without increasing the risk of uncollectible accounts. VOICE MESSAGING. Voice messaging (or voice mail) allows users to store, send and receive information over the telephone or Internet. In addition to voice mail, call answering, call routing, paging, short message delivery, dictation and automated attendant features are all available. The Company's range of voice messaging features can be combined with other applications to offer a wide range of value-added services in sizes up to five million mailboxes in a single integrated system. AUDIOTEX AND MANAGED SERVICES APPLICATIONS. The Company has written application programs to create turnkey solutions for specific industries. For example, CityLine, sold to daily newspapers, consists of a wide variety of information, including stock quotes, sports scores, business news, weather and public opinion polling, all of which is provided without charge to the caller. Newspapers offering CityLine generate revenues by selling advertising sponsorships on their systems. Voice Directories, sometimes called "Talking Yellow Pages", is a similar product designed for Yellow Pages publishers and telephone companies. IVR APPLICATION PROGRAMS. Designed for use with IVR systems, IVR application programs are often customized and can be written by the Company, by the customer, or written in cooperation with a series of independent software vendors ("ISVs"). ISVs typically have specialized skills which allow the Company to economically obtain specialized, industry-specific programming. IVR application programs can be designed to operate on a stand-alone basis or to provide customer applications requiring remote data entry/data access to a mainframe host computer. They can also perform statistical logging and archiving and include dial-up modems for remote diagnostic and maintenance support. Many application software 3 packages can be used to create products targeted for specific vertical markets. Examples include applications for: higher education, which enable university and college students to register for courses 24 hours a day via touch-tone phones; the financial services market, which allow callers to perform a wide range of banking transactions by phone 24 hours a day; and utility companies, which provide automated customer service functions such as power outage reporting, billing inquiries and meter reading. APPLICATION PROGRAM DEVELOPMENT Write-1-Registered Trademark- is a language developed by Brite for writing media applications and performing host connectivity that runs under a range of UNIX operating systems. It also contains a library of interfaces to third party development tools such as databases, host connections and Dialogic's CT Connect product. The Company has created an application software development environment by enhancing Write-1 with a Graphical User Interface ("GUI") running under Windows NT. This package is designed to meet a wide variety of programming needs, from creating simple menu-based call flows to development of complex network-based applications. It also isolates the programmer from the operating system and hardware platform, thus making applications more portable and expandable. The Company has adopted a strategy of developing all new applications using a set of common components. The goal is to provide applications that can be combined as a series of building blocks integrated with platforms in a range of sizes and architectures. This strategy has increased the commonality between platforms and enables customers to upgrade their platforms while continuing to offer existing applications. Systems based on a VAX-TM-, a PC compatible machine, and an RS6000-TM-, all run the same programming environment and applications under their respective UNIX operating systems. The Company's Write-1 language contains a range of features which enable customers to produce state of the art applications. Examples of customer-developed applications include a benefits information line which links callers to part of the IRS database, child support help lines and a large call center help desk which includes automated display of pertinent caller information on the computer screen of a customer service representative. The Company believes that as the voice processing industry evolves, application programs will continue to increase in importance relative to hardware platforms. As a result, the Company's development policy is based on the use of industry standard interfaces and systems which enable the Company's products to be used in conjunction with other companies' products. This allows the Company to take advantage of new technologies as they become available, and also protects customers' investments in existing technology by providing efficient, effective upgrade paths. Standards included in the new common platform components include the Dialogic SC bus architecture and Dialogic's open standard Antares system. Operation, administration and maintenance interfaces are provided through an open interface standard. In the future, the application programming interface between components will adopt much of the work being done by the ECTF by using standard interfaces. SERVICES The Company offers a wide range of services in conjunction with its voice processing systems. These services are typically available on either an annual or quarterly basis and generally complement or support the Company's voice processing systems. The Company also provides a variety of telecommunications management services. MANAGED SERVICES As a complement to its system sales, the Company provides certain voice processing services on a managed service basis. In a typical managed service relationship, the Company provides all necessary equipment and personnel, allowing the customer to avoid both the front-end cost of purchasing equipment and the continuing cost of having operational personnel on staff. Charges for these services may be based 4 on fixed rates per month, per call or per minute, or may consist of a share of the revenue or profits generated by the service. The Company provides both inbound and outbound telemarketing functions for customers in conjunction with these services. The Company generally provides managed services in niche markets where the customer does not have the expertise on staff, has a desire to outsource the voice processing function, or where the Company can provide significant added value to the customer. The Company's TeleRent-Registered Trademark- service provides readers of apartment rental guides access to information concerning rental properties in the local area. Callers to the system may receive more detailed information about an apartment or complex than can be conveyed in a printed ad. Callers can direct connect to the leasing agent, leave messages or receive a fax of a floor plan or contract. The Company receives a monthly fee for each listing sold in the rental guide. In conjunction with audiotex systems placed in a Yellow Pages publisher's market, the Company writes, produces and manages information scripts (Consumer Tips-TM-) included as the opening position in the Yellow Pages top 200 advertising categories. Consumer Tips typically include four to five topics of interest to shoppers who call these advertising categories. The Yellow Pages publisher sells sponsorships to the Consumer Tips, and the Company produces the information and maintains contact with the advertisers throughout the year to provide feedback on the success of the sponsorship and helps update the advertisers' messages for seasonal specials and other changes that cannot be made to printed advertisements. Current customers include Ameritech, Bell South, NYNEX, Rochester Telephone, SNET, Southwestern Bell, U.S. West and a number of independent directory publishers. During 1996, the Company began offering advertising sales services as an additional turnkey service to its Consumer Tips customers. The sales staff of a Yellow Pages publisher is generally trained only to sell print advertising. The Company believes that sales of audio products in the Yellow Pages market requires specialized skills, and provides a trained sales force to the Yellow Pages publisher to increase the penetration of audio sponsorships. The Company believes this service complements the creation of information content and advertiser management currently offered to these publishers. The Company also provides Internet services to its media customers. These services include application hosting, application and home page development, software order processing, help desk services and information content for local web site applications. Because Brite is currently an information provider via audio and facsimile to newspaper, rental guide and Yellow Pages publishers, the conversion to an on-line format is relatively simple, and the Company believes its existing relationships provide a competitive advantage over other companies offering similar services to these customers. TELECOMMUNICATIONS MANAGEMENT SERVICES Through its August 1995 acquisition of the TSL Companies, the Company provides a broad range of telecommunications management services. BILLING VERIFICATION SERVICES. The Company's billing verification service consists of auditing telephone rates, tariffs, taxes, surcharges and other charges billed by telecommunications carriers and vendors. The Company (i) verifies that the client pays only for the services, circuits and equipment it actually uses and for which it has contracted; (ii) ensures that the proper rates, tariffs, taxes and surcharges, primarily for services and equipment, and also usage, are applied; (iii) corrects billing discrepancies; and (iv) prepares claims and negotiates and collects refunds. Billing verification services generate refunds of historical overcharges and reduce costs, generally producing ongoing savings to the Company's clients. The Company also provides optimization services to clients, whereby recommendations are made to reduce ongoing expenses, for which the Company receives a percentage of future savings. MANAGEMENT SOFTWARE APPLICATIONS AND SERVICES. The Company has developed software which enables its clients to better understand, control and allocate their telecommunications expenses. Telecommunications expense management software products and services are provided either on a service bureau basis through the Company's New Jersey data center, or on a licensed basis with ongoing services aimed at 5 tracking, processing and allocating the expenses associated with a client's daily calls. These products and services include: (i) call accounting services for telecommunications expense management; (ii) Fraud-Chek-Registered Trademark- a service which curtails unauthorized employee phone calls and abuses, which are detected automatically once predetermined thresholds are reached, triggering an alarm call to the Company's 24 hour toll fraud line; (iii) EZ-TRAK-TM-, a reporting product which enables a client to view its call record details, search for and sort data in order to manage call efficiencies and costs, and produce management reports; and (iv) Telecommunications On-Line Management Systems, a PC-based, on-line operations management system, which aids clients in more effectively managing facilities, including equipment inventories and circuits, work orders and phone and data systems expenses. OPERATIONS MANAGEMENT. Operations management services have developed as an outgrowth of the Company's other telecommunications management products and services, and consist of on-site and off-site continuing support to clients wishing to outsource certain telecommunications-related functions, such as technology invoice processing, telephone moves and installations, telephone circuit installations and moves for data service providers, trouble reporting and resolution, and internal telephone billing. These services are typically delivered pursuant to oral agreements, and often create an opportunity to provide additional software services to clients. TECHNICAL CONSULTING. Technical consulting consists of designing, engineering, procuring and implementing telecommunications services, networks, systems and equipment. The Company provides clients with both technical and engineering expertise, drawing upon the experience of the Company's consultants, engineers and management to complete large projects. Projects include strategic planning related to telecommunications systems, such as a corporate relocation, data communications network design, voice communications system design, disaster recovery planning, the relocation or creation of financial institution trading floor systems, and other technical advice regarding available systems and services. SERVICE CONTRACT AND REPAIR The Company's systems are generally sold with limited warranties which range from 90 days to one year. All systems contain built-in modems, allowing Company personnel to perform diagnostic procedures and many software upgrades and enhancements remotely. Customers may contract for extended warranty coverage under any of several plans. The Company maintains a customer service department consisting of a help desk function, a field service organization and a training department. The help desk function is staffed by professionals with specialized skills in hardware diagnostics, software support and applications programming, who respond to customer questions regarding software warranty claims and assist customers in developing and debugging application programs. A geographically dispersed field service staff is responsible for system installation and on-site hardware maintenance, including warranty claims. To date, warranty claims have not been significant. The training department provides beginning and advanced training sessions for both customers and employees on topics such as product orientation, system operation and programming and advanced software and technical development. ELECTRONIC INFORMATION SERVICES The Company creates, produces and broadcasts electronic information services, which it provides to purchasers of its audiotex systems, primarily newspapers, Yellow Pages publishers and telephone companies. These services provide pre-packaged content for the Company's systems and relieve the purchaser of the responsibility for creating and loading information on the system. The Company's staff of writers, editors and broadcasters produces audio information under many broad categories, such as news, weather and sports, and under many specialized categories such as gardening tips, horoscopes and soap opera updates. The Company produces over 5,000 categories of information, of which over 1,800 are updated on 6 a daily basis. Subscribers to the Company's information services receive category updates by satellite transmission, some of which occur as often as every 15 minutes. Newspapers or Yellow Pages publishers which subscribe to the service are licensed to receive the network on an annual basis. The publisher generally provides the information to callers without charge, and generates revenue by selling advertising sponsorships to the various categories. Much of the information available in audio form is also available by facsimile, or in an on-line format. In addition to its audio networks, the Company writes and produces "library programs" in both audio and facsimile formats which are installed on systems sold to hospitals, real estate brokerage firms and other customers for specific applications. These library programs are updated periodically and billed on an annual basis. SALES AND MARKETING MARKETS SERVED The Company's hardware systems are sold to two principal markets, the business systems or commercial market, and the network operator market. The business systems market is broadly defined to include organizations which would use either the Company's audiotex or IVR products to service large volumes of telephone callers on a regular basis. The market for audiotex systems includes organizations which distribute the same information to numerous callers simultaneously. The Company's audiotex system customers are primarily in the publishing and health care industries. The market for IVR and voice messaging systems includes organizations seeking to streamline internal and external communications, reduce interruptions and provide enhanced customer service. The Company has historically sold these products to the financial services, education, health care, telecommunications, government and utility markets. The network operator market is comprised of wireless operators, including companies deploying cellular and personal communications services, Regional Bell Operating Companies, Post Telephone and Telegraph organizations, international network operators and interexchange carriers. Network operators purchase and install the Company's systems in or near their central switching offices. The enhanced services made available to the operator's subscribers include voice messaging, voice activated dialing, prepaid calling and other revenue producing services. The markets for the Company's telecommunications management and managed services include almost any public or private entity which is a substantial user of telecommunications services. DOMESTIC SALES Revenues within North America were $71,320,000, $69,938,000 and $60,283,000 in 1996, 1995 and 1994, respectively. The Company sells its systems and services domestically primarily through a direct sales force, with individual personnel being responsible for either a specific industry, territory or product line. There are 41 direct sales personnel located throughout the United States, including the Company's offices in Wichita, Kansas; Canton, Massachusetts; Dallas, Texas; New York City; Parsippany, New Jersey; and San Francisco, California. The Company also markets its systems through companies offering integrated systems or services for sale to end users using the Company's hardware platforms. These companies include Alltel, Amarex Technology, Inc., Digital Data Voice Systems, Intecom, Quotient Software, Inc., Southwestern Bell Telecom, and United States Advanced Networks. INTERNATIONAL SALES International revenues were $39,089,000, $27,140,000 and $19,657,000, in 1996, 1995 and 1994, respectively, and amounted to 35%, 28% and 25% of revenues for such periods. 7 Sales outside the United States are made through a number of sources. Sales into Europe are made by the Company's subsidiaries: BVSGL (Manchester and Cambridge, England), Brite Voice Systems Group, GmbH (Wiesbaden, Germany), Brite Voice Systems S.p.A. (Rome, Italy) and Brite Voice Systems A.G. (Zurich, Switzerland). Sales into Canada and South America are made by the Company's U.S.-based sales force, and sales into other areas of the world are made through a combination of the Company's U.S.-based sales force, distributors and local agents. The Company has employees based in Dubai, United Arab Emirates; Johannesburg, South Africa; and Singapore, who are responsible for sales and support to the Middle East, Africa and Asia. The Company's European subsidiaries market systems to two distinct sectors of the voice processing market throughout Europe. A dedicated sales staff targets corporate users for the sale of voice messaging, audiotex and interactive voice response systems. The Company concentrates its efforts on five different vertical markets: telecommunications, home shopping, travel and transport, finance and utilities. The Company also relies on indirect distribution of its systems through prominent PBX manufacturers such as Philips, Ericsson, Telenorma and S.E.L. The Company also maintains a dedicated sales staff responsible for the sale of systems to network operators throughout Europe, the Middle East and Africa. The principal products sold to these markets are voice messaging, voice activated dialing and debit billing. During 1996, the Company significantly expanded the installed base of its Voice Services Director system ("VSD"), a multi-application voice processing platform for sale to wireless operators, primarily for the provision of enhanced telecommunications services, establishing 13 new customers in 12 new countries. Nevertheless, during 1996, 78% of the sales by the Company's European subsidiaries were concentrated in ten customers. In addition, one customer, Cellnet, represented 10% of the Company's consolidated revenues. The loss of any of these customers could have a material impact on the Company's revenues and results of operations. The Company believes that the European market is behind the United States in terms of market penetration of audiotex and IVR systems and that significant future growth is possible. During 1996, much of the Company's effort was focused on shifting the emphasis in this marketplace from the small, PBX-based voice messaging systems to audiotex and IVR applications. The Company believes that this effort has been successful, as sales of IVR products in Europe increased 95% from the prior year. The Company intends to continue this focus into 1997. The Company sells its audiotex, IVR and voice dialing systems throughout the rest of the world through its direct sales force, independent sales agents and value-added resellers ("VARs"). Where possible, the Company uses the services of agents and VARs in foreign markets because of their familiarity with local markets and their knowledge of, and abilities to work within, local governmental regulations. VARs typically purchase the Company's hardware and license the operating software. In some instances, VARs provide additional software programming or information packages to complete the systems. Agents used by the Company typically receive a commission on sales made into their territories. The Company faces a number of risks in conducting its international business that do not affect its domestic business, including greater concentration of business with fewer customers, longer payment cycles, greater difficulty in accounts receivable collection, and difficulty in staffing and managing foreign subsidiary operations. Installation of the Company's products outside the United States requires that the Company conform to local telephone and electrical regulations. The Company has traditionally relied on its suppliers to obtain the necessary registrations in order for the Company to install products within specific countries. There can be no assurance that these factors will not have an adverse impact on the Company's future international sales or operating results. See Note 12 to the Consolidated Financial Statements contained herein for additional information with respect to foreign and domestic sales and assets. 8 RESEARCH AND ENGINEERING The voice processing industry is subject to rapid technological change, including continuing improvements in hardware and software performance. In order to maintain its competitive position, the Company must continually release new products and develop enhancements and new features for its existing products on a timely basis. There can be no assurance that the Company will be successful in developing and marketing, on a timely basis, product modifications or enhancements or new products that respond to technological advances by others, or that such new or enhanced products or features will adequately and competitively address the needs of the marketplace. Because of the increasing complexity of the Company's products, these efforts can be expected to continue to increase in technical difficulty. Moreover, the Company must manage product transitions successfully, since announcements or introductions, or the perception that such events are likely to occur, by either the Company or its competitors, could adversely affect sales of existing Company products. Research and product engineering activities are conducted in Wichita, Kansas; Canton, Massachusetts; Dallas, Texas; Parsippany, New Jersey; and Manchester, England. During 1996, 1995 and 1994, the Company spent approximately $11,241,000, $8,520,000 and $6,436,000, respectively, on research and engineering. As a percentage of revenues, these amounts represent 10.2%, 8.8% and 8.1%, respectively. The Company believes that it must continue to increase spending on research and engineering activities in absolute terms in order to remain competitive in the voice response market. Although it is not the Company's intent, such expenses could also increase as a percentage of revenues. MANUFACTURING The Company's manufacturing operations consist primarily of assembly of components, burn-in, testing, and quality assurance functions, which are performed at both its Canton, Massachusetts and Manchester, England facilities. Limited assembly work is performed at the Company's office in Wiesbaden, Germany. During 1996, the Company relocated its manufacturing facilities in Manchester to larger facilities in order to accommodate anticipated increases in sales. The new facility contains approximately 4,500 square feet of manufacturing space and is expected to be adequate for the Company's European manufacturing requirements for the foreseeable future. Manufacturing in Canton is performed on only one shift, and the Company devotes less than 25% of its Canton facilities to manufacturing; therefore, the Company believes its production facilities are adequate for U.S. operations for the foreseeable future. For product standardization, quality control and volume purchasing efficiencies, the Company has elected to purchase certain components from sole suppliers. Although the Company historically has been able to obtain supplies of these components in a timely manner, the interruption in supply of any of these components could have an adverse impact on the Company's revenues and operating results. While the Company believes that other suppliers could provide required components in the event of an interruption in supply, a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. BACKLOG The Company maintains an inventory of component parts which generally enables it to assemble, test and ship complete systems within two weeks of receipt of an order. The short lead time prior to shipment of systems generally results in a minimal backlog of systems orders. As of December 31, 1996, the Company and its subsidiaries had a systems backlog of $17,900,000, compared to $11,578,000 as of December 31, 1995, and $8,087,000 as of December 31, 1994. All of the backlog at December 31, 1996 is scheduled to be shipped in 1997. There can be no assurance that any such orders will not be canceled or re- 9 scheduled. Because of the possibility of customer changes in delivery schedules or cancellations of orders, the Company's backlog as of any particular date may not be indicative of actual revenues for any future period. Because of the short duration of its contracts for maintenance and information services, and the contingencies related to valuation of its billing verification contracts, the Company has not historically valued its backlog of service revenues. COMPETITION The market for voice processing systems is highly competitive and includes numerous suppliers of hardware and software of varying specifications. The Company's competition in general purpose voice response systems includes Edify, Intervoice, Periphonics, Syntellect and other voice processing system manufacturers. In addition, the Company competes with larger companies, such as IBM, Lucent Technologies and Digital, for whom voice response is a small portion of their overall business. The Company also faces competition for its audiotex and European voice messaging systems from voice mail providers such as Boston Technology, Comverse Technology and Octel. Because there are no significant technological barriers to entry into these markets, many small companies also offer competing products. In addition, as the Company's markets continue to grow, increasing numbers of applications will be introduced by existing and new competition. The Company believes that the principal factors affecting competition in the market for voice processing systems are ease of use, flexibility, reliability, overall technical performance, price and customer service, and that the Company competes favorably as to these factors. The market for telecommunications management services such as those provided by the Company is extremely fragmented, and competitors range from small start-up companies who compete on a local basis, to large, nationally-known firms such as AT&T, Electronic Data Systems and IBM. The Company competes with the small local companies on the basis of its well recognized client base, general reputation, credibility with telecommunications vendors and proven methodology. The Company believes these factors enable it to compete effectively against these competitors. Large firms such as AT&T, Electronic Data Systems and IBM often attempt to capture an organization's entire telecommunications-related activities. The Company, on the other hand, limits its products and services to those in which it has particular expertise, and believes that its software resources and the abilities of its personnel enable it to compete favorably with these companies. The Company expects that additional competition will develop, and such competition may include large companies with substantially greater financial, marketing and technical resources than those available to the Company. Such competition could adversely affect the revenues and operating results of the Company. SOFTWARE PROTECTION, SERVICE MARKS AND PATENTS The Company regards its software as proprietary and has implemented measures of both a legal and practical nature to ensure that the software retains that status. The Company derives considerable practical protection for its software by licensing only the object code to customers and keeping the source code confidential. In addition, by licensing the software rather than transferring title, the Company in most cases has been able to incorporate restrictions in licensing agreements which impose limitations on disclosure and transferability of the software. No determination has yet been made, however, as to the legal or practical enforceability of these restrictions or the extent of customer liability for violations. 10 Like many other companies in the industry, the Company does not have patent protection for its software. However, protection against unauthorized copying of the source and object code portions of the software is sought through reliance upon copyright laws. Despite these protections, competitors may be able to copy aspects of the Company's products or to obtain information which the Company regards as trade secret. In addition, the Company may be subjected to claims by third parties asserting rights on certain of the Company's products and product features. (See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Certain Trends and Uncertainties.) The Company has registered with the United States Patent and Trademark Office trademarks on CityLine, TeleCare, Cellular Information Network, Voice Directories, Real Estate Hotline, TeleRent, TeleSchool, BriteFax, Perception, Fraud-Chek, Write-1, VoiceSelect, Giving Voice to Information, Brite Mail, Value Added Classifieds and Brite & Design. EXECUTIVE OFFICERS The executive officers of the Company, their ages and the period during which each has served in his present office are as follows: Stanley G. Brannan (47) is the Company's founder and Chairman of the Board of Directors. Prior to December 1996, Mr. Brannan also served as President and Chief Executive Officer since the Company's inception. Prior to founding the Company, Mr. Brannan founded Mycro-Tek, Inc., a company specializing in the manufacture of microprocessor-based products used in electronic newsroom systems and television character generators. When Mycro-Tek, Inc. was acquired by Allied Corporation in 1980, Mr. Brannan was employed by Allied and eventually became president of the company's Merganthaler USA Division. David S. Gergacz (47) joined the Company in December 1996 as President and Chief Executive Officer. Prior to joining the Company, Mr. Gergacz served as president and CEO for Cincinnati Bell Telephone, from September 1995 to October 1996. From April 1993 to August 1995 he was president and CEO for Rogers Cantel Communications, Canada's leading provider of wireless communications, cable television, long distance, publishing and television and radio. From 1991 to 1993 he served as president and CEO of Boston Technology. He has also held many management positions with companies in the telecommunications industry, including Sprint, Bell Laboratories, AT&T and NYNEX. Mr. Gergacz has been a member of Brite's board of directors since 1994. Gerald V. Butler (56) has served as Executive Vice President of Engineering and Worldwide Operations since May 1996. He joined the Company in November 1994 as Senior Vice President at the Company's Canton facility. From 1992 until joining the Company, Mr. Butler operated Business Basics, a project and data management consulting service. From 1988 to 1992, Mr. Butler served as president of the systems integration business unit of Prime/Computervision, president and CEO of Culler Scientific from 1984 to 1988, and as vice president-computer special systems at Digital Equipment Corp. from 1979 to 1984. Glenn A. Etherington (42) has served as Chief Financial Officer of the Company since August 1988. He was Treasurer from August 1988 until August 1993, and has been Secretary since August 1993. From April 1984 until joining the Company, he served in various capacities including vice president of finance, controller and treasurer of American City Business Journals, Inc., a publisher of weekly business newspapers. Mr. Etherington is a certified public accountant. Victoria C. Farris (40) has served as Vice President of Finance since September 1995 and Treasurer since May 1996. From 1988 until 1995, she was general manager of Sun Publications in Overland Park, Kansas, a publisher of community newspapers. From 1985 until 1988, she was controller of American City Business Journals, a publisher of weekly business newspapers. Ms. Farris is a certified public accountant. 11 Stuart Hallam (50) joined the Company as Chief Executive for European Operations in February 1995. Prior to joining the Company, Mr. Hallam served as managing director of the Large Systems Division of Alcatel Business Systems Group in the United Kingdom from 1993 to 1995. Prior to his employment at Alcatel, Mr. Hallam held senior positions with GPT of Siemens/GEC company (formerly Plessey) from 1980 to 1986 and Phillips Business Communications, where he was managing director from 1986 to 1993. David F. Hemmings (50) was appointed Executive Vice President of Brite in September 1993. Mr. Hemmings served as senior vice president of Boston Technology, Inc., a worldwide voice mail systems supplier, from 1991 until joining the Company in 1993, and prior to that was president of International Systems Integration, Inc. from 1985 to 1991. International Systems Integration was a business consulting firm responsible for, among other things, assisting Sprint in winning the Federal Telecommunications Systems contract from the federal government. Alan C. Maltz (46) became Executive Vice President and a Director of the Company in August 1995, immediately following the acquisition of the TSL Companies. Mr. Maltz served as vice president and a director of TSL (West) and as president and a director of each of the other TSL Companies since their incorporation at various times between July 1986 and December 1992. Prior to the founding of the TSL Companies, Mr. Maltz was vice president of telecommunications systems at Bankers Trust Company, where he managed the engineering, design and operation of all global telecommunications systems since 1974. Prior to his employment by Bankers Trust Company, Mr. Maltz was employed as a project engineer by Western Union and New York Telephone Company. Scott A. Maltz (40) was appointed Executive Vice President of Strategy and Business Development in June 1996, having served as Vice President and a Director of the Company since August 1995, immediately following the Company's acquisition of the TSL Companies. Mr. Maltz was president of TSL (West) since its formation in 1989. Prior to joining TSL, Mr. Maltz was employed by Bain & Company, a management consulting firm where he consulted with clients in the telecommunications, financial services and personal computer industries. Donald R. Walsh (60) joined the Company as Executive Vice President in August 1990. From 1987 to August 1990, he served as president of the Information Services subsidiary of Philadelphia Suburban Corporation. Prior to 1987, he was employed by IBM, where he held several management positions, primarily relating to sales and marketing. The Company's executive officers are elected by, and serve at the discretion of, the Board of Directors. EMPLOYEES As of December 31, 1996, the Company and its subsidiaries had 751 employees, of which 708 were full-time employees. Of the full-time employees, 505 are located in the United States, and 203 are located in either Europe, the Middle East, Africa or Singapore. The Company believes that future growth is dependent in large part on its ability to attract and retain key management, technical and sales personnel. The Company has never had a work stoppage, no employees are represented by a labor organization and the Company considers its employee relations to be good. 12 ITEM 2. PROPERTIES The Company owns its headquarters building in Wichita, Kansas, which contains 40,480 square feet and houses its principal corporate offices, research and engineering and information services facilities. The Company also maintains principal facilities in Canton, Massachusetts; Carrollton, Texas; New York, New York; Parsippany, New Jersey; and San Francisco, California. These and other facilities are leased by either the Company or, in foreign countries, certain of its subsidiaries, as follows:
LOCATION SQUARE FEET USE LEASE EXPIRES - ---------------------------- ----------- ---------------------------------------------- ---------------------- Wichita, Kansas 31,250 administrative, sales and call center June 1997, with option activities to renew for two additional one-year terms Canton, Massachusetts 42,600 administrative, research and engineering, and March 1998 manufacturing facilities Carrollton, Texas 17,340 administrative, sales, engineering and product September 1997 development facilities New York, New York 10,000 office space which serves as primary base of August 2006 operations for East Coast telecommunications management services Parsippany, New Jersey 8,500 certain data processing operations November 2002 San Francisco, California 4,000 office space for the Company's West Coast December 1999 telecommunications management services Manchester, England 27,000 administrative, engineering and manufacturing December 2002 facilities, and the sales and marketing departments of BVSGL Cambridge, England 10,200 administrative offices September 2001 Wiesbaden, Germany 5,500 office space for administrative and sales September 2001 staff Rome, Italy 700 office space for administrative and sales March 2001 staff Glattbrugg, Switzerland 2,500 office space for administrative and sales September 1999 staff Singapore 1,350 office space for administrative and sales January 1999 staff
The Company also maintains regional sales and support offices in North Olmsted, Ohio; Orange, Connecticut; Pittsburgh, Pennsylvania; Orlando, Florida; Annapolis, Maryland; Rancho Cordova, California; Balboa, California; Allendale, Michigan; Temecula, California; and Woodstock, Georgia. These facilities are generally subject to short-term leases of one year or less. ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and litigation from time to time arising in the normal operation of its business. Management believes that the ultimate resolution of any pending claim will not result in any material loss to the Company. 13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No information is required in response to this Item, as no matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is traded on the Nasdaq Stock Market under the symbol BVSI. Prices per share reflected in the following table represent the range of high and low sales prices reported by the Nasdaq Stock Market for the quarters indicated.
HIGH LOW --------- --------- 1996 March 31............................................................................. $ 19.00 $ 10.50 June 30.............................................................................. 27.38 17.38 September 30......................................................................... 22.50 10.63 December 31.......................................................................... 16.38 10.88 1995 March 31............................................................................. $ 21.88 $ 15.25 June 30.............................................................................. 21.00 15.88 September 30......................................................................... 24.50 18.25 December 31.......................................................................... 18.50 12.00
Since becoming a public company in 1989, the Company has not paid cash dividends on its common stock. The Company is not bound by any contractual terms that prohibit or restrict the payment of dividends; however, the Company presently intends to retain its earnings to finance future growth of its business and does not plan to pay cash dividends to its stockholders in the near future. As of February 25, 1997, the Company had 473 stockholders of record, excluding individual participants in security position listings. 14 ITEM 6. SELECTED FINANCIAL DATA The following table contains certain selected financial data which should be read in conjunction with the Company's financial statements and notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data as of and for the years ended December 31, 1996, 1995, 1994 and 1993 have been derived from the financial statements of the Company audited by Arthur Andersen LLP, independent public accountants, except for the balance sheet and statement of operations data as of and for the years ended December 31, 1994 and 1993. The balance sheet and statement of operations data as of and for the years ended December 31, 1994 and 1993 have been restated by the Company to reflect the TSL Merger, and are derived from the financial statements of the Company audited by Arthur Andersen LLP and the financial statements of the TSL Companies as of and for the years ended December 31, 1994 and 1993, audited by Ernst & Young LLP, independent accountants. The selected financial data as of and for the year ended December 31, 1992 have been restated by the Company to reflect the TSL Merger, and are derived from the financial statements of the Company audited by Baird, Kurtz & Dobson, independent certified public accountants, and the financial statements of the TSL Companies. The balance sheet as of December 31, 1992 of the TSL Companies from which the selected financial data is derived are unaudited.
YEARS ENDED DECEMBER 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues................................................ $ 110,409 $ 97,078 $ 79,940 $ 56,412 $ 42,265 Operating income (loss)................................. 11,699 5,708 6,005 (1,606) (3,951) Net income (loss)....................................... 8,555 3,950 4,425 (1,303) (2,423) Net income (loss) per share............................. .71 .33 .38 (.12) (.22) Weighted average shares used in computation............. 12,127 11,922 11,526 11,068 10,865 BALANCE SHEET DATA: Working capital......................................... $ 37,558 $ 26,934 $ 23,772 $ 20,918 $ 22,522 Total assets............................................ 74,882 58,832 51,888 41,328 39,745 Long term debt.......................................... -- -- -- 1,040 1,055 Stockholders' equity.................................... 54,181 40,446 35,547 29,655 30,669
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS From time to time, information provided by the Company, statements made by its employees or information included in its filings with the Securities and Exchange Commission, including this Form 10-K, may contain certain "forward-looking" information, as that term is defined by the Private Securities Litigation Reform Act of 1995 (the "Act"). The words "expects," "anticipates," "believes" and similar words generally signify a "forward-looking" statement. These forward-looking statements are made pursuant to the safe harbor provisions of the Act. The reader is cautioned that all forward-looking statements are necessarily speculative and that there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward-looking statements. Such risks and uncertainties include those inherent generally in the voice processing and telecommunications consulting industries, such as product demand, pricing, market acceptance, reliance on significant customers, intellectual property rights, risks in product and technology developments, and other risk factors detailed in the section entitled "Certain Trends and Uncertainties" below and other risks detailed throughout this Form 10-K and in the Company's other Securities and Exchange Commission filings. The Company undertakes no obligation to publicly revise any forward-looking statement due to changes in circumstances after the date of this report, or to reflect the occurrence of unanticipated events. BASIS OF PRESENTATION Effective August 9, 1995, the TSL Companies were merged into the Company in a transaction accounted for as a pooling of interests (see Note 2 to the Consolidated Financial Statements). The acquisition resulted in the issuance of 3,331,000 shares of the Company's common stock in exchange for all of the outstanding common stock of the TSL Companies. The financial information presented herein has been restated to include the accounts and operations of the TSL Companies for all periods. RESULTS OF OPERATIONS The Company derives revenue from the sale of voice processing systems to domestic and international customers and the provision of services related to the operation of these systems. The Company's products can be divided into two categories: those that increase its customers' revenues through increased subscription or user fees, and those that reduce customers' costs or improve the efficiency of services provided to end user customers. Total revenues increased $13,331,000, or 13.7%, for the year ended December 31, 1996 and $17,138,000, or 21.4%, for the year ended December 31, 1995. These increases are due primarily to a larger volume of system sales to both new and existing domestic and international customers, and to increased penetration of the Company's customer base for the sale of services. There were no significant changes in the prices of the Company's products between periods. International sales increased $9,071,000, or 37.4%, in 1996 and $9,791,000, or 67.7%, in 1995. Introduced in 1994, the VSD was sold to two large wireless carriers in Europe, and the increases in revenue during 1995 and 1996 generally reflect the continuing penetration of these accounts. In addition, the Company expanded its customer base in the Pacific Rim, Middle East and Latin America during 1996, through installation of both VSD systems and voice activated dialing systems. The Company believes that international markets are behind the United States in terms of market penetration of voice processing systems and that significant growth potential exists within these markets. Domestic system sales increased $2,212,000, or 7.8%, in 1996 and decreased $220,000, or 0.8%, in 1995. The increase in 1996 is due primarily to system expansions by existing customers and new system 16 sales of general purpose voice response systems. The slight decline in 1995 was due primarily to a decrease in the demand for the Company's electronic publishing systems. General purpose voice response system sales increased $2,238,000, or 9.3%, in 1996 and $3,001,000, or 14.3%, in 1995, due primarily to continued expansion of the voice response market as these types of systems become a more accepted means of disseminating information to callers. These increases are the result of system expansion and software upgrades by existing customers and the addition of new customers who are installing systems for the first time, or replacing first generation voice response equipment of other vendors. Electronic publishing system sales decreased $26,000, or 0.6%, in 1996 and decreased $3,221,000, or 42.0%, in 1995. The Company attributes these decreases to the continued saturation of the market for audiotex systems sold to newspapers and Yellow Pages publishers. The Company believes that it is the market share leader in these types of systems, and that many newspapers and Yellow Pages publishers have begun focusing their efforts and capital expenditures on Internet-based applications. Future growth in this area will be dependent upon identifying new applications for use by both new and current customers. System sales are dependent upon continued orders by existing customers, orders from new customers and development of new products. Orders by existing customers are dependent, in part, upon factors beyond the Company's control. There can be no assurance that the Company will be able to increase or maintain its market share in the future or to sustain recent growth rates. Services revenues are derived from sales of managed services, telecommunications management services, contracts for repair and maintenance of the Company's voice processing systems, and the broadcast of electronic information services to purchasers of electronic publishing systems. Services revenues increased $2,048,000, or 4.6%, in 1996 and $7,567,000, or 20.6%, in 1995, principally due to expansion of the Company's customer base, offset by the elimination of certain managed services products which were not profitable. Managed services revenues decreased $1,222,000, or 10.0%, in 1996, but increased $2,943,000, or 31.5%, in 1995. The decline in 1996 was due primarily to the Company's decision to discontinue two voice personals products. The Company discontinued its "Person-to-Person" product at the end of the third quarter in 1995 and sold its "900 Voice Personals" product line in July 1996. Excluding the revenues from these two products for both 1995 and 1996, managed services revenues would have increased $3,093,000, or 60.1%, for the year ended 1996. This increase, as well as the increase from 1994 to 1995, was due primarily to an expanding customer base for the Company's Consumer Tips and TeleRent products. Telecommunications management services revenues increased $452,000, or 2.7%, in 1996, and $2,155,000, or 15.8%, in 1995. These increases were due primarily to expansion of the customer base for operations management and management software applications services. The modest increase in 1996 revenues was due to the fact that billing verification and technical consulting revenues were lower than anticipated, and declined from the previous year's results. The shortfall in billing verification was due to the absence of large claim refunds during the second half of the year, while the decline in technical consulting was the result of increased competition and fewer contracts on which the Company chose to bid. Future growth in this area is dependent upon achievement of large claims similar to those received in prior years, and the availability of technical consulting contracts which the Company wishes to pursue. The Company is unable to predict whether or not these factors will occur. Service contract and repair revenue increased $2,342,000, or 21.2%, in 1996 and increased $2,335,000, or 26.7%, in 1995, due primarily to the Company's continuing emphasis on expanding its base of customers who subscribe to quarterly or annual maintenance contracts. Information services revenue increased $476,000, or 9.1%, in 1996 and increased $134,000, or 2.6%, in 1995, due primarily to the introduction of new audio products. The Company believes that due to the decline in electronic publishing system sales, 17 continued expansion of information services revenue will be dependent upon developing new audio products and applications. Cost of system sales increased $4,920,000, or 21.6%, in 1996 and $3,651,000, or 19.1%, in 1995. As a percentage of system sales, actual costs remained constant at 43.3% for both 1996 and 1995, down from 44.4% in 1994. Actual costs increased in both years due primarily to an increase in the number of systems shipped by the Company's foreign subsidiaries and the United States-based sales force to international customers. The Company expects to experience a gradual decrease in system margins due to the highly competitive nature of the industry. Cost of sales of service increased $1,622,000, or 7.3%, in 1996 and $2,906,000, or 15%, in 1995. As a percentage of services revenues, actual costs increased to 51.4% in 1996, compared to 50.1% in 1995 and 52.5% in 1994. The increase in actual costs during 1996 was due primarily to an expansion of the infrastructure of the telecommunications management services departments. The decline in margins was due to the absence of large billing verification claim refunds in the second half of the year and, to a lesser extent, lower consulting services revenues. In 1995, these revenues typically had higher margins than other components of services revenues. Research and engineering expenses increased $2,721,000, or 31.9%, in 1996 and $2,084,000, or 32.4%, in 1995. As a percentage of revenue, these expenses increased to 10.2% of total revenue in 1996, compared to 8.8% in 1995 and 8.1% in 1994. The increase in actual costs was due to the addition of research engineers to support the Company's existing products and to continue the Company's commitment to new product development. The Company believes that it must continue to increase spending on research and engineering activities in absolute terms in order to continue to remain competitive in the voice response market. Although it is not the Company's intent, such expenses could increase as a percentage of revenue as well. Selling, general and administrative expenses increased $6,707,000, or 23.0%, in 1996 and $7,153,000, or 32.5%, in 1995. As a percentage of revenues, these expenses increased to 32.5% in 1996 compared to 30.0% in 1995 and 27.5% in 1994. The Company continues to expand its international sales and marketing efforts. Sales offices in Cambridge, England, as well as Johannesburg, South Africa and Singapore, were opened during 1995. In addition, significant staff increases continue to support new sales opportunities in both the domestic and international markets. The Company anticipates that these expenses as a percentage of revenues will begin to decline as the additional staff begins generating revenues. S corporation distributions in 1995 and 1994 represent payments made to the former TSL Companies' stockholders, which were approximately equal to the tax basis earnings of the TSL Companies. Under the terms of the merger agreement, the TSL Companies were allowed to distribute estimated tax basis income through the closing date of the TSL Merger. These payments did not occur in 1996 and will not recur in future periods. In connection with the acquisition of TSL, the Company recorded a non-recurring charge of $4,327,000 in 1995. This charge consisted of $3,509,000 for expenses incurred that are specific to the acquisition, primarily fees to financial advisors, attorneys and accountants, and costs of integrating the operations of the TSL Companies. Also included was a charge of $818,000, reflecting the write-off of prepaid royalties and certain equipment associated with the Company's Person-to-Person product. Other income decreased $292,000, or 64.6%, in 1996 and $135,000, or 23.0%, in 1995. The decrease in 1996 was due to the loss on disposal of assets of $165,000, increased interest expense of $57,000 and a slight decrease in interest income due to a lower average balance of funds invested in 1996. The decrease in 1995 was due primarily to interest income which decreased $291,000 from 1994 due to a lower average balance of funds invested. The effective income tax rate for 1996 was 27.9%, compared to 35.9% in 1995 and 32.9% in 1994. The variance from the United States statutory rate in 1996 was due primarily to the utilization of net operating 18 loss and credit carryforwards acquired through the Company's 1993 merger with Perception Technology Corporation, and a reduction in the Company's deferred tax valuation allowance. The variance from the United States statutory rate in 1995 was due primarily to the non-deductibility of a majority of the costs incurred in the acquisition of the TSL Companies, partially offset by the utilization of net operating loss and credit carryforwards acquired through the Company's 1993 merger with Perception, and a reduction in the Company's deferred tax valuation allowance. CERTAIN TRENDS AND UNCERTAINTIES The Company has historically operated with very little backlog. There are no long-term supply agreements with customers and, as a result, revenues in any quarter are dependent upon orders that are received and shipped during that quarter. Further, a large percentage of any quarter's system shipments are recorded in the last month of the quarter. Consequently, quarterly revenues and operating results will depend on the volume and timing of new orders received during a quarter, which are difficult to predict. Failure to receive adequate amounts of new orders could adversely affect revenues and operating results, and such shortfalls may not be known until very late in any quarter. The Company faces a number of risks in conducting its international business that do not affect its domestic business, including greater concentration of business with fewer customers, longer payment cycles, greater difficulty in accounts receivable collection, and difficulty in staffing and managing foreign subsidiary operations. Installation of the Company's products outside the United States requires that the Company conform to local telephone and electrical regulations. The Company has traditionally relied on its suppliers to obtain the necessary registrations in order for the Company to install products within specific countries. There can be no assurance that these factors will not have an adverse impact on the Company's future international sales or operating results. See Note 12 to the Consolidated Financial Statements contained herein for additional information with respect to foreign and domestic sales and assets. The voice processing industry is subject to rapid technological change, including continuing improvements in hardware and software performance. In order to maintain its competitive position, the Company must continually release new products and develop enhancements and new features for its existing products on a timely basis. There can be no assurance that the Company will be successful in developing and marketing, on a timely basis, product modifications or enhancements, or new products that respond to technological advances by others, or that such new or enhanced products or features will adequately and competitively address the needs of the marketplace. Because of the increasing complexity of the Company's products, these efforts can be expected to continue to increase in technical difficulty. Moreover, the Company must manage product transitions successfully, since announcements or introductions, or the perception that such events are likely to occur, by either the Company or its competitors, could adversely affect sales of existing products. For quality control, ease of development and purchasing efficiencies, the Company has elected to purchase certain components from one supplier. Although the Company has been able to obtain supplies of these components in a timely manner, the interruption in supply of any of these components could have an adverse impact on the Company's revenues and operating results. While the Company believes that other suppliers could provide required components in the event of an interruption in supply, a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would adversely affect operating results. The Company has periodically received, and may receive in the future, communications from third parties asserting patent rights or copyrights on certain of the Company's products and product features. The Company believes that its products and other proprietary rights do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against the Company in the future, or that any such claims will not require the Company to enter into 19 license arrangements or result in protracted and costly litigation, regardless of the merits of such claims. There also can be no assurance that the Company will be able to obtain licenses to disputed third party technology or that such licenses, if available, would be available on commercially reasonable terms. The market for the Company's stock is highly volatile. Any variance in operating results from analysts' expectations, or changes in estimated results by industry analysts could have an adverse affect on the trading price of the Company's common stock in a given period. Furthermore, in recent years the market prices of securities of many high technology companies have experienced extreme fluctuations, in many cases for reasons unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of the Company's common stock. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had a current ratio of 2.8 to 1, and working capital of $37,588,000, compared to a current ratio of 2.5 to 1 and working capital of $26,934,000 at December 31, 1995. Cash and cash equivalents were $8,084,000 at December 31, 1996 compared to $3,405,000 at December 31, 1995. Accounts receivable at December 31, 1996 increased by $6,377,000 compared to December 31, 1995, principally due to an increase in international sales during the year, which typically have longer payment and collection cycles. Inventory increased by $1,997,000, due primarily to the lead time required for international orders. The Company believes the increase in each of these areas to be in line with the growth experienced in system sales during 1996, and the backlog of orders at the end of the year. Increases in accounts receivable and inventory have generally been funded, in part, by increases in accounts payable and other accrued expenses. The Company maintains a $5,000,000 line of credit that is used from time to time to fund short-term cash requirements. There were no borrowings outstanding under this line as of December 31, 1996. The Company regularly invests excess funds in short-term securities, such as bankers' acceptances, government obligations and variable rate demand notes, having maturities up to one year. Management believes that restricting investments to these types of securities maximizes financial flexibility and minimizes exposure to interest rate and market risks. The Company utilizes these investments as a source of liquidity, to the extent that cash requirements exceed short-term cash receipts. The Company expects to invest approximately $8,000,000 in capital expenditures during 1997, but it has no significant capital commitments. The Company believes that working capital on hand, funds provided from future operations, and its current line of credit will be sufficient to fund the Company's capital requirements on both a short-term and long-term basis. INFLATION Inflation has not had a material impact on the Company's results of operations. Because of the competitive nature of the computer industry, the costs of parts used in the Company's products have remained relatively stable. However, should inflation rise to higher levels, the Company believes that such inflationary costs would be passed on to customers by both the Company and its competition. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE ----- Report of Independent Public Accountants................................................................... 22 Consolidated Balance Sheets as of December 31, 1996 and 1995............................................... 23 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994.......................................................................... 25 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994...................................................................................................... 26 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994............................................................................................. 27 Notes to Consolidated Financial Statements................................................................. 28 Supplemental Schedules: Schedule II--Valuation and Qualifying Accounts............................................................. 37
Note: Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is included in the Financial Statements or notes thereto. 21 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS BOARD OF DIRECTORS BRITE VOICE SYSTEMS, INC. We have audited the accompanying consolidated balance sheets of Brite Voice Systems, Inc., (a Kansas corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the TSL Companies, companies acquired during 1995 in a transaction accounted for as a pooling of interests, as discussed in Note 2. Such statements are included in the consolidated financial statements of the Company and reflect total revenues of 17 percent in 1994 of the consolidated totals. These statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to amounts included for the TSL Companies, is based solely upon the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly in all material respects, the financial position of Brite Voice Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index of financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP Kansas City, Missouri, February 7, 1997 22 BRITE VOICE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 ASSETS (IN THOUSANDS)
1996 1995 --------- --------- CURRENT ASSETS Cash and cash equivalents................................................................. $ 8,084 $ 3,405 Accounts receivable, less allowance for doubtful accounts: 1996 - $471; 1995 - $481....... 35,067 28,690 Inventories (Note 4)...................................................................... 12,507 10,510 Prepaid expenses and other................................................................ 2,601 2,715 --------- --------- Total Current Assets.................................................................... 58,259 45,320 --------- --------- PROPERTY AND EQUIPMENT Land and building......................................................................... 3,074 3,074 Furniture and equipment................................................................... 23,430 19,978 --------- --------- 26,504 23,052 Less accumulated depreciation............................................................. (12,204) (11,476) --------- --------- 14,300 11,576 --------- --------- OTHER ASSETS (Note 3)....................................................................... 2,323 1,936 --------- --------- TOTAL ASSETS.......................................................................... $ 74,882 $ 58,832 --------- --------- --------- ---------
See Notes to Financial Statements 23 BRITE VOICE SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 LIABILITIES AND STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 --------- --------- CURRENT LIABILITIES Accounts payable.......................................................................... $ 10,539 $ 9,503 Accrued salaries and wages................................................................ 1,974 1,726 Other accrued expenses.................................................................... 1,512 1,785 Deferred revenue.......................................................................... 2,063 1,364 Customer deposits......................................................................... 3,526 1,565 Advances from affiliates (Note 2)......................................................... -- 551 Income taxes payable...................................................................... 1,087 1,892 --------- --------- Total Current Liabilities............................................................... 20,701 18,386 --------- --------- COMMITMENTS AND CONTINGENCIES (Notes 6 and 10).............................................. -- -- STOCKHOLDERS' EQUITY (Note 8) Preferred stock, no par value; authorized 10,000,000 shares; none outstanding............. -- -- Common stock, no par value; authorized 30,000,000 shares; outstanding 1996 -- 11,829,595 shares; 1995 -- 11,489,325 shares....................................................... 38,417 34,377 Retained earnings......................................................................... 14,938 6,383 Cumulative foreign currency translation adjustment........................................ 826 (314) --------- --------- Total Stockholders' Equity.............................................................. 54,181 40,446 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................ $ 74,882 $ 58,832 --------- --------- --------- ---------
See Notes to Financial Statements 24 BRITE VOICE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 1994 ---------- --------- --------- REVENUES Systems....................................................................... $ 63,980 $ 52,697 $ 43,126 Services...................................................................... 46,429 44,381 36,814 ---------- --------- --------- 110,409 97,078 79,940 ---------- --------- --------- COSTS AND EXPENSES Cost of sales: Systems..................................................................... 27,729 22,809 19,158 Services.................................................................... 23,871 22,249 19,343 Research and engineering...................................................... 11,241 8,520 6,436 Selling, general and administrative........................................... 35,869 29,162 22,009 S corporation distributions (Note 2).......................................... -- 4,303 6,989 Merger and other costs (Notes 2 and 3)........................................ -- 4,327 -- ---------- --------- --------- 98,710 91,370 73,935 ---------- --------- --------- INCOME FROM OPERATIONS.......................................................... 11,699 5,708 6,005 ---------- --------- --------- OTHER INCOME (EXPENSE) Interest income............................................................... 432 265 556 Interest expense.............................................................. (80) (18) (121) Other, net.................................................................... (192) 205 152 ---------- --------- --------- 160 452 587 ---------- --------- --------- INCOME BEFORE INCOME TAXES...................................................... 11,859 6,160 6,592 INCOME TAX PROVISION (Note 7)................................................... 3,304 2,210 2,167 ---------- --------- --------- NET INCOME...................................................................... $ 8,555 $ 3,950 $ 4,425 ---------- --------- --------- ---------- --------- --------- EARNINGS PER SHARE (Note 1)..................................................... $ 0.71 $ 0.33 $ 0.38 ---------- --------- --------- ---------- --------- ---------
See Notes to Financial Statements 25 BRITE VOICE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
CUMULATIVE RETAINED FOREIGN EARNINGS CURRENCY COMMON (ACCUMULATED TRANSLATION STOCK DEFICIT) ADJUSTMENT TOTAL --------- ------------ ----------- --------- Balance, December 31, 1993...................................... $ 32,166 $ (2,067) $ (444) $ 29,655 Net income.................................................... -- 4,425 -- 4,425 Sale of common stock.......................................... 847 -- -- 847 Non-qualified stock option compensation....................... 6 -- -- 6 Tax benefit of stock option transactions...................... 385 -- -- 385 Foreign currency translation adjustment....................... -- -- 229 229 --------- ------------ ----------- --------- Balance, December 31, 1994...................................... 33,404 2,358 (215) 35,547 Net income.................................................... -- 3,950 -- 3,950 Issuance of shares for pooling transaction.................... 1 75 -- 76 Sale of common stock.......................................... 733 -- -- 733 Non-qualified stock option compensation....................... 5 -- -- 5 Tax benefit of stock option transactions...................... 234 -- -- 234 Foreign currency translation adjustment....................... -- -- (99) (99) --------- ------------ ----------- --------- Balance, December 31, 1995...................................... 34,377 6,383 (314) 40,446 Net income.................................................... -- 8,555 -- 8,555 Sale of common stock.......................................... 3,970 -- -- 3,970 Tax benefit of stock option transactions...................... 70 -- -- 70 Foreign currency translation adjustment....................... -- -- 1,140 1,140 --------- ------------ ----------- --------- Balance, December 31, 1996...................................... $ 38,417 $ 14,938 $ 826 $ 54,181 --------- ------------ ----------- --------- --------- ------------ ----------- ---------
See Notes to Financial Statements 26 BRITE VOICE SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income...................................................................... $ 8,555 $ 3,950 $ 4,425 Items not requiring (providing) cash: Depreciation and amortization................................................. 3,845 3,677 2,705 Loss (gain) on disposition of assets.......................................... 162 -- (109) Non-qualified stock option compensation....................................... -- 5 6 Changes in: Accounts receivable........................................................... (5,437) (9,006) (4,640) Inventories................................................................... (1,364) (2,231) (1,693) Accounts payable and accrued expenses......................................... 1,127 1,955 3,087 Other current assets and liabilities.......................................... 1,273 1,132 756 --------- --------- --------- Net cash provided by (used in) operating activities......................... 8,161 (518) 4,537 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment, net......................................... (6,421) (5,600) (3,886) Proceeds from maturity of temporary investments................................. -- 8,580 15,067 Purchase of temporary investments............................................... -- (3,379) (14,651) Proceeds from sale of property.................................................. 411 -- 228 Decrease (increase) in other assets............................................. (756) 29 (458) Net cash received from business acquisitions.................................... -- 44 -- --------- --------- --------- Net cash used in investing activities....................................... (6,766) (326) (3,700) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Issuance of common stock........................................................ 3,970 733 847 Proceeds from shareholder loans................................................. -- 2,267 2,712 Principal payments on debt...................................................... (551) (4,428) (2,473) --------- --------- --------- Net cash provided by (used in) financing activities......................... 3,419 (1,428) 1,086 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH........................................... (135) (99) 229 --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. 4,679 (2,371) 2,152 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR...................................... 3,405 5,776 3,624 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR............................................ $ 8,084 $ 3,405 $ 5,776 --------- --------- --------- --------- --------- ---------
See Notes to Financial Statements 27 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AND PRINCIPLES OF CONSOLIDATION Brite Voice Systems, Inc. (the "Company") designs, integrates, assembles, markets and supports voice processing systems and services which incorporate audiotex, voice response, voice recognition, voice/ facsimile messaging and interactive computer applications into customized market solutions. The Company also offers a broad array of telecommunications consulting services. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included in these financial statements include allowances for uncollectible accounts and obsolete inventory, and warranty and other accrued liabilities. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash investments with an original maturity of three months or less. INVENTORIES Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method and includes the cost of materials, direct labor and manufacturing overhead. Provision is made for obsolete or slow moving items where appropriate. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from three to 10 years for furniture and equipment and 35 years for buildings and improvements. RESEARCH AND ENGINEERING Costs associated with internal development of new products or enhancements of existing products are expensed as incurred because the marketability of such products is not determinable until substantially all the costs are incurred. REVENUE RECOGNITION Revenues from the sale of systems generally are recognized upon shipment. Software revenue is recognized in accordance with the American Institute of Certified Public Accountants Statement 91-1, Software Revenue Recognition. Revenues from maintenance and consulting services, and audio information contracts for installed systems are recognized ratably over the service period. Revenues from service bureau operations and consulting services are recognized when the services are provided. Revenues from 28 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) billing verification services are recognized when claim proceeds are received from the telecommunication provider. CREDIT RISK The Company extends unsecured credit to customers throughout the United States and in certain foreign countries. INCOME TAXES Deferred tax liabilities and assets are recognized for the future tax consequences of events that have been recognized in the financial statements or tax returns. (See Note 7). FOREIGN CURRENCY TRANSLATION ADJUSTMENT Financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars at current and average exchange rates. Resulting translation adjustments are recorded as a separate component of stockholders' equity. Any transaction gains or losses are included in the Consolidated Statements of Income. EARNINGS PER SHARE Earnings per share amounts are computed using the weighted average number of shares outstanding of 12,127,000, 11,922,000 and 11,526,000, for the years ended December 31, 1996, 1995 and 1994, respectively. All options are considered to be common stock equivalents but are only included in the weighted average to the extent that they are dilutive. ACCOUNTING FOR STOCK OPTIONS The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation". Adoption of this standard is required in 1996. Under the new standard, the Company must either change its method of computing the compensation expense associated with the issuance of stock options and other stock-based compensation or make pro forma disclosures as if the Company had recorded the compensation expense. The Company has continued to record compensation expense in accordance with APB No. 25. The Company has adopted SFAS No. 123 by making the pro forma disclosures. (See Note 8). NOTE 2: ACQUISITIONS Effective August 9, 1995, the Company issued 3,331,000 shares of its common stock for all of the outstanding common stock of Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., and TSL Management Group, Inc. (collectively the "TSL Companies" or "TSL") and the TSL Companies were merged into the Company (the "TSL Merger"). The TSL Merger has been accounted for as a pooling of interests and, accordingly, the Company's consolidated financial statements have been restated for all periods prior to the acquisition to include the results of operations, financial position and cash flows of the TSL Companies. 29 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 2: ACQUISITIONS (CONTINUED) Prior to the TSL Merger, the TSL Companies elected to be taxed as S corporations under the Internal Revenue Code. This election eliminates federal income taxes at the corporate level, as a result of which the TSL Companies' profits were included in the income tax returns of their stockholders for all periods through the date of the TSL Merger. Accordingly, the TSL Companies distributed the majority of their taxable earnings in the form of additional compensation to officers and shareholders. Distributions in excess of the salary and bonus amounts contracted for in the employment agreements entered into between the Company and certain of the TSL stockholders were $4,303,000 and $6,989,000 for the period ended August 8, 1995 and the year ended December 31, 1994, respectively. No adjustments have been made to the provision for income taxes to reflect the impact had the TSL Companies been subject to federal income taxes as the adjustment is immaterial. Merger expenses of $3,509,000 were charged to expense during 1995. These expenses represent brokerage, legal and other professional fees associated with the consummation of the TSL Merger. Prior to the TSL Merger, the TSL Companies financed working capital needs through the use of non-interest bearing loans made by the TSL stockholders. Upon consummation of the TSL Merger, the TSL stockholders had loaned $2,267,000 to the Company. The balance due was $551,000 at December 31, 1995. Final payment was made in March 1996. NOTE 3: OTHER ASSETS Other Assets consist of the following (in thousands):
1996 1995 --------- --------- Goodwill................................................................... $ 898 $ 263 Deferred tax asset......................................................... 581 325 Prepaid licenses and other................................................. 1,289 1,884 --------- --------- 2,768 2,472 Accumulated amortization................................................... (445) (536) --------- --------- $ 2,323 $ 1,936 --------- --------- --------- ---------
In September 1992, the Company licensed certain patented technology for the provision of electronic classified services, and advanced $1,250,000 in nonrefundable royalties. The royalties were being amortized over a five year period. In September 1995, due to continued unprofitability of the product, the Company wrote off $818,000, representing the balance of the prepaid royalties and the net book value of certain equipment related to the project. This charge is included in "Merger and other costs" in the accompanying Statements of Income. Goodwill and other intangible assets are being amortized using the straight-line method over the estimated useful lives of the assets or the specific contract term, which range from three to 10 years. Amortization expense, including the amortization of prepaid royalties, was $248,000, $619,000 and $434,000 in 1996, 1995 and 1994, respectively. 30 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 4: INVENTORIES Inventories consist of the following (in thousands):
1996 1995 --------- --------- Purchased parts......................................................... $ 4,060 $ 3,044 Work in progress........................................................ 5,581 4,146 Finished goods.......................................................... 2,866 3,320 --------- --------- $ 12,507 $ 10,510 --------- --------- --------- ---------
NOTE 5: LINE OF CREDIT The Company maintains a $5,000,000 line of credit that is used from time to time to fund short-term cash requirements. There were no borrowings outstanding under this line as of December 31, 1996. NOTE 6: LEASES The Company leases office space under noncancelable agreements expiring at various times through 2002. Future minimum rental payments under these operating leases are as follows (in thousands): 1997................................................................ $ 1,818 1998................................................................ 1,254 1999................................................................ 1,069 2000................................................................ 963 2001................................................................ 903 Thereafter.......................................................... 2,846 --------- $ 8,853 --------- ---------
Rent expense under the above agreements was $1,544,000, $1,023,000 and $807,800 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 7: INCOME TAXES The income tax provision includes the following (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Taxes currently payable: Federal........................................................ $ 2,736 $ 1,804 $ 1,918 State.......................................................... 552 355 150 Foreign........................................................ 791 651 449 Deferred taxes................................................... (775) (600) (350) --------- --------- --------- $ 3,304 $ 2,210 $ 2,167 --------- --------- --------- --------- --------- ---------
31 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 7: INCOME TAXES (CONTINUED) United States income taxes have not been provided on the cumulative undistributed earnings of the Company's foreign subsidiaries of $4,881,000 at December 31, 1996. It is intended that these earnings will be permanently invested in operations outside the United States. A reconciliation of income tax expense at the statutory rate to income tax expense at the Company's effective rate, is as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- Tax expense at the statutory rate............................... $ 4,075 $ 2,095 $ 2,886 Effect of foreign tax rates..................................... 50 8 28 Losses providing no current benefit............................. -- -- 49 Increase (decrease) in taxes resulting from: Merger costs.................................................. -- 1,130 -- State income taxes, net of federal benefit.................... 390 234 197 Foreign sales corporation benefit............................. (34) (54) (112) Utilization of net operating loss carryforward................ -- (321) (456) Utilization of credit carryforwards........................... (48) (278) (276) Reduction of valuation allowance.............................. (1,049) (600) (350) Other permanent differences................................... (80) (4) 201 --------- --------- --------- $ 3,304 $ 2,210 $ 2,167 --------- --------- --------- --------- --------- ---------
Deferred taxes are determined based on the estimated future tax effect of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. Deferred taxes consist of the following (in thousands):
1996 1995 --------- --------- Current deferred taxes Gross assets.............................................................. $ 1,144 $ 662 Gross liabilities......................................................... -- -- --------- --------- $ 1,144 $ 662 --------- --------- --------- --------- Noncurrent deferred taxes Gross assets.............................................................. $ 1,036 $ 728 Gross liabilities......................................................... (455) (403) --------- --------- $ 581 $ 325 --------- --------- --------- ---------
32 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 7: INCOME TAXES (CONTINUED) The tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows (in thousands):
1996 1995 --------- --------- Federal regular tax operating loss, research and development credit, investment tax credit and alternative minimum tax credit carryforwards........................................................... $ 719 $ 1,293 Depreciation.............................................................. (455) (403) Inventory obsolescence reserve............................................ 389 362 Allowance for doubtful accounts........................................... 151 154 Accrued vacation pay...................................................... 290 276 Other, net................................................................ 631 317 --------- --------- $ 1,725 $ 1,999 Valuation allowance....................................................... -- (1,049) --------- --------- Net deferred taxes........................................................ $ 1,725 $ 950 --------- --------- --------- ---------
Prior to 1996, a valuation allowance was provided to the extent realization of the deferred tax assets were dependent on taxable income (exclusive of reversing temporary differences) in future years. The Company believes that all deferred tax assets will be realizable and accordingly, in 1996, reversed its previously established valuation allowance, which reduced current year income tax expense. At December 31, 1996, the Company has loss and credit carryforwards available for tax purposes as follows (dollars in thousands):
EXPIRATION AMOUNT DATE ----------- ------------- Federal regular tax carryforwards acquired through business combinations: Operating losses...................................................... $ 624 2008 Research and development credits...................................... 380 2008 Investment tax credits................................................ 60 2008 Federal regular tax carryforwards: Capital loss.......................................................... $ 98 2008
NOTE 8: STOCKHOLDERS' EQUITY The Company has four stock option plans: the 1984 Incentive Stock Option Plan (the "1984 Option Plan"), the 1994 Stock Option Plan (the "1994 Option Plan"), the 1990 Non-Employee Director Stock Option Plan (the "Director Stock Option Plan"), and the 1994 Employee Stock Purchase Plan (the "Stock Purchase Plan"). 33 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED) STOCK PURCHASE PLAN In 1994, the Board of Directors and Stockholders approved the Stock Purchase Plan. Under the Stock Purchase Plan, up to 200,000 shares of common stock of the Company may be sold to employees. Eligible employees may authorize payroll deductions of up to 10 percent of their compensation to purchase shares at the lower of 85 percent of the fair market value of the common stock as of the date of grant (first day of an offering period) or the last day of the six-month offering period. The semi-annual offerings commenced on July 1, 1994 and will terminate on July 1, 1999. No employee may purchase shares under the Stock Purchase Plan, in any one year, having a fair market value on the offering date of more than $25,000, nor may an employee purchase more than 500 shares in any offering period. During 1996, 51,589 shares were purchased at the weighted average fair value of $11.62. On December 31, 1996, there were 99,703 shares reserved for issuance under the Stock Purchase Plan. STOCK OPTIONS In 1994, the Board of Directors and Stockholders approved the 1994 Option Plan. A maximum of 1,000,000 shares of common stock may be issued under the 1994 Option Plan. Options are granted by the Board of Directors at prices not less than the fair market value as of the date of the grant, generally have a four-year vesting period and expire 10 years after the date of grant. At December 31, 1996, a total of 18,900 shares were available for future grants under the 1994 Option Plan. In addition, options to purchase 500,000 shares were granted at fair market value to an executive of the Company under an Employment Agreement entered into in 1996, of which 100,000 shares vested immediately, and the remaining shares vest over a three year period. All such options not previously exercised expire 10 years after the date of grant. The 1984 Option Plan terminated on December 31, 1994, except as to unexercised options remaining outstanding. The Director Stock Option Plan provides for the granting of options to purchase up to 150,000 shares of common stock. Options under this plan are to be granted at prices not less than the fair market value as of the date of the grant, and have a three year vesting period. At December 31, 1996, there were options granted to purchase 58,000 shares of common stock at prices ranging from $5.00 to $18.50 per share. At December 31, 1996, options to purchase 27,500 shares were exercisable. 34 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 8: STOCKHOLDERS' EQUITY (CONTINUED) Information regarding all outstanding stock options is as follows:
1996 1995 1994 ------------------------ ------------------------ -------------------------- SHARES WTD AVG EX SHARES WTD AVG EX SHARES WTD AVG EX (000S) PRICE (000S) PRICE (000S) PRICE ----------- ----------- ----------- ----------- ----------- ------------- Outstanding, beginning of year....... 1,249 $ 12 904 $ 9 1,070 $ 7 Granted.............................. 1,018 14 434 18 131 13 Exercised............................ (67) 7 (52) 6 (219) 3 Cancelled............................ (38) 13 (37) 11 (78) 9 ----- ----- ----- Outstanding, end of year............. 2,162 13 1,249 12 904 9 ----- ----- ----- ----- ----- ----- Exercisable, end of year............. 913 10 752 8 782 8 ----- ----- ----- ----- ----- -----
The options outstanding at December 31, 1996 have exercise prices between $1.25 and $20.00, with a weighted average remaining contractual life of 8.02 years. The Company accounts for the stock options under APB No. 25 under which no compensation expense has been recognized. Had compensation expense for these plans been determined consistent with FASB Statement No. 123, the estimated weighted average grant date fair value would have been $9.90 and $11.27 per option share for those options granted in 1996 and 1995, respectively. The Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1996 1995 ------------ ------------ Net income........................................................ $ 6,853,000 $ 3,544,000 Earnings per share................................................ $ .53 $ .29
The resulting pro forma compensation expense for 1996 and 1995 may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants.
1996 1995 --------- --------- Risk free interest rates................................................... 5.92% 6.50% Expected lives............................................................. 7.90 7.20 Expected volatility........................................................ 65% 54%
35 BRITE VOICE SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 NOTE 9: EMPLOYEE BENEFIT PLANS The Company sponsors defined contribution retirement plans which cover substantially all of its employees in the United States and the United Kingdom. Company contributions to the United Kingdom plan are based on the employee's age, while contributions to the United States plan are a percentage of employee contributions at rates determined by the Board of Directors of the Company. Company contributions to these plans were $835,000, $493,000 and $428,000 for the years ended December 31, 1996, 1995 and 1994, respectively. NOTE 10: LEGAL PROCEEDINGS The Company is subject to claims and litigation from time to time arising in the normal operation of its business. Management believes that the ultimate resolution of any pending claim will not be material to the results of operations or the financial position of the Company. NOTE 11: ADDITIONAL CASH FLOW INFORMATION
1996 1995 1994 ---------- --------- --------- (IN THOUSANDS) Interest paid............................................... $ 80 $ 316 $ 127 Income taxes paid, net...................................... 4,759 1,196 1,276
NOTE 12: FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Operations for the years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995 1994 ---------- --------- --------- (IN THOUSANDS) Sales to unaffiliated customers: United States....................................................... $ 79,675 $ 76,028 $ 67,088 Europe.............................................................. 30,734 21,050 12,852 ---------- --------- --------- Total............................................................. $ 110,409 $ 97,078 $ 79,940 ---------- --------- --------- ---------- --------- --------- Operating income: United States....................................................... $ 8,714 $ 3,465 $ 4,818 Europe.............................................................. 2,985 2,243 1,187 ---------- --------- --------- Total............................................................. $ 11,699 $ 5,708 $ 6,005 ---------- --------- --------- ---------- --------- --------- Identifiable assets: United States....................................................... $ 50,101 $ 43,866 $ 43,026 Europe.............................................................. 24,781 14,966 8,862 ---------- --------- --------- Total............................................................. $ 74,882 $ 58,832 $ 51,888 ---------- --------- --------- ---------- --------- --------- Export sales from United States....................................... $ 8,355 $ 6,090 $ 6,805 ---------- --------- --------- ---------- --------- ---------
One international customer represented 10% of total 1996 revenues. 36 BRITE VOICE SYSTEMS, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSE DEDUCTIONS PERIOD - ------------------------------------------------------------------ ----------- ------------- ------------- ----------- Allowance for doubtful accounts: Year ended December 31, 1996.................................... $ 481 $ 429 $ 439 $ 471 Year ended December 31, 1995.................................... $ 844 $ 317 $ 680 $ 481 Year ended December 31, 1994.................................... $ 453 $ 548 $ 157 $ 844
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS OF END OF DESCRIPTION OF PERIOD SALES DEDUCTIONS PERIOD - ------------------------------------------------------------------ ----------- ------------- ------------- ----------- Allowance for obsolete inventory: Year ended December 31, 1996.................................... $ 1,069 $ 625 $ 279 $ 1,415 Year ended December 31, 1995.................................... $ 666 $ 635 $ 232 $ 1,069 Year ended December 31, 1994.................................... $ 639 $ 393 $ 366 $ 666
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The information concerning Directors of the Company required by Item 401 of Regulation S-K will be contained in the Company's 1997 Proxy Statement under the heading "Election of Directors", and is incorporated herein by reference. EXECUTIVE OFFICERS The information concerning executive officers of the Company required by this Item is set forth in Item 1 hereof under the heading "Executive Officers". ITEM 11. EXECUTIVE COMPENSATION The information required by Item 402 of Regulation S-K will be contained in the Company's 1997 Proxy Statement under the headings "Compensation of Directors and Executive Officers", "Compensation Committee Interlocks and Insider Participation", "Report of Compensation Committee on Executive Compensation" and "Company Performance", and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K will be contained in the Company's 1997 Proxy Statement under the heading "Common Stock Ownership", and is incorporated herein by reference. 37 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 404 of Regulation S-K will be contained in the Company's 1997 Proxy Statement under the heading "Compensation Committee Interlocks and Insider Participation", and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Financial Statements. The financial statements, notes and independent auditors' reports described in Item 8, to which reference is hereby made. (2) Financial Statement Schedules. The financial statement schedules described in Item 8, to which reference is hereby made. (3) Exhibits. The following exhibits:
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization and Merger dated May 24, 1995 by and among Brite Voice Systems, Inc., Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., TSL Management Group, Inc. and Alan C. Maltz, Scott A. Maltz, Stephen B. Rockoff and Alan C. Maltz as custodian for Sari Maltz and Lori Maltz (incorporated by reference to Annex A to the Company's definitive proxy statement dated July 17, 1995). 3.1 Restated Articles of Incorporation of the Registrant (incorporated by reference to the Exhibit filed with Registrant's Registration Statement on Form S-1, No. 33-29750). 3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit filed with Registrant's Registration Statement on Form S-1, No. 33-29750). 10.1 Registrant's 1984 Incentive Stock Option Plan, as amended (incorporated by reference to the Exhibit filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.2 1993 Amendments to the Registrant's 1984 Incentive Stock Option Plan (incorporated by reference to the Exhibit filed with Registrant's Annual Report filed on Form 10-K for the year ended December 31, 1993). 10.3 Aircraft Lease Agreement between the Registrant and Brannan Leasing, Inc. dated November 10, 1992 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.4 Registrant's 1990 Non-Employee Director Stock Option Plan dated February 6, 1990 (incorporated by reference to the Exhibit filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.5 Registrant's Amended and Restated Non-Employee Director Stock Option Plan (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.6 Lease covering the Company's call center facility at 9229 E. 37th N., Wichita, Kansas, dated April 22, 1994 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994).
38
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------- 10.7 December 22, 1994 Amendment to Lease covering the Company's call center facility (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8 Employment Agreement between the Registrant and David F. Hemmings dated September 8, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 10.9 Non-Statutory Stock Option Agreement between the Registrant and David F. Hemmings dated September 8, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). Confidential treatment has been granted with respect to a portion of the Exhibit. 10.10 Lease covering the Company's facility at 40 Shawmut Road, Canton, Massachusetts, dated March 15, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 10.11 Registrant's 1994 Stock Option Plan (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.12 Registrant's 1994 Employee Stock Purchase Plan (incorporated by reference to the Exhibit filed with the Registrant's Registration Statement on Form S-8, No. 33-80478). 10.13 Stock Purchase Agreement between the Registrant and Perry E. Esping dated March 28, 1990 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10.14 Employment Agreement dated August 9, 1995, between the Registrant and Stephen B. Rockoff (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.15 Employment Agreement dated August 9, 1995, between the Registrant and Scott A. Maltz (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16 Employment Agreement dated August 9, 1995, between the Registrant and Alan C. Maltz (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17 Employment Agreement dated December 4, 1996, between the Registrant and David S. Gergacz. 10.18 Lease covering the Company's facility at Brook House, Park Road, Gatley, England, dated June 24, 1996. 21.1 Subsidiaries of Brite. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. 99.1 Report of Ernst & Young LLP. (b) Reports on Form 8-K. The Registrant did not file any reports on Form 8-K during the last quarter of the period covered by this report.
39 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. BRITE VOICE SYSTEMS, INC. Dated: March 21, 1997 By: /s/ DAVID S. GERGACZ ----------------------------------- David S. Gergacz Chief Executive Officer /s/ GLENN A. ETHERINGTON ----------------------------------- Glenn A. Etherington Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ STANLEY G. BRANNAN - ------------------------------ Chairman of the Board March 21, 1997 Stanley G. Brannan /s/ DAVID S. GERGACZ - ------------------------------ Chief Executive Officer, March 21, 1997 David S. Gergacz President and Director /s/ PERRY E. ESPING - ------------------------------ Director March 21, 1997 Perry E. Esping /s/ C. MACKAY GANSON, JR. - ------------------------------ Director March 21, 1997 C. MacKay Ganson, Jr. /s/ JOHN F. KELSEY, III - ------------------------------ Director March 21, 1997 John F. Kelsey, III /s/ ALAN C. MALTZ - ------------------------------ Director March 21, 1997 Alan C. Maltz /s/ SCOTT A. MALTZ - ------------------------------ Director March 21, 1997 Scott A. Maltz 40 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Reorganization and Merger dated May 24, 1995 by and among Brite Voice Systems, Inc., Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., TSL Management Group, Inc. and Alan C. Maltz, Scott A. Maltz, Stephen B. Rockoff and Alan C. Maltz as custodian for Sari Maltz and Lori Maltz (incorporated by reference to Annex A to the Company's definitive proxy statement dated July 17, 1995). 3.1 Restated Articles of Incorporation of the Registrant (incorporated by reference to the Exhibit filed with Registrant's Registration Statement on Form S-1, No. 33-29750). 3.2 Bylaws of the Registrant (incorporated by reference to the Exhibit filed with Registrant's Registration Statement on Form S-1, No. 33-29750). 10.1 Registrant's 1984 Incentive Stock Option Plan, as amended (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991). 10.2 1993 Amendments to the Registrant's 1984 Incentive Stock Option Plan (incorporated by reference to the Exhibit filed with Registrant's Annual Report filed on Form 10-K for the year ended December 31, 1993). 10.3 Aircraft Lease Agreement between the Registrant and Brannan Leasing, Inc. dated November 10, 1992 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992). 10.4 Registrant's 1990 Non-Employee Director Stock Option Plan dated February 6, 1990 (incorporated by reference to the Exhibit filed with Registrant's Annual Report on Form 10-K for the year ended December 31, 1989). 10.5 Registrant's Amended and Restated Non-Employee Director Stock Option Plan (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.6 Lease covering the Company's call center facility at 9229 E. 37th N., Wichita, Kansas, dated April 22, 1994 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7 December 22, 1994 Amendment to Lease covering the Company's call center facility (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8 Employment Agreement between the Registrant and David F. Hemmings dated September 8, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993). 10.9 Non-Statutory Stock Option Agreement between the Registrant and David F. Hemmings dated September 8, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). Confidential treatment has been granted with respect to a portion of the Exhibit. 10.10 Lease covering the Company's facility at 40 Shawmut Road, Canton, Massachusetts, dated March 15, 1993 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993).
41
EXHIBIT NO. DESCRIPTION - ----------- --------------------------------------------------------------------------------------------- 10.11 Registrant's 1994 Stock Option Plan (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994). 10.12 Registrant's 1994 Employee Stock Purchase Plan (incorporated by reference to the Exhibit filed with the Registrant's Registration Statement on Form S-8, No. 33-80478). 10.13 Stock Purchase Agreement between the Registrant and Perry E. Esping dated March 28, 1990 (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990). 10.14 Employment Agreement dated August 9, 1995, between the Registrant and Stephen B. Rockoff (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.15 Employment Agreement dated August 9, 1995, between the Registrant and Scott A. Maltz (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16 Employment Agreement dated August 9, 1995, between the Registrant and Alan C. Maltz (incorporated by reference to the Exhibit filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17 Employment Agreement dated December 4, 1996, between the Registrant and David S. Gergacz. 10.18 Lease covering the Company's facility at Brook House, Park Road, Gatley, England, dated June 24, 1996. 21.1 Subsidiaries of Brite. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. 99.1 Report of Ernst & Young LLP.
42 EX-10.17 2 EXHIBIT 10.17 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), is made and entered into December 2, 1996, by and between DAVID S. GERGACZ ("Executive") and BRITE VOICE SYSTEMS, INC. ("Brite"). WHEREAS, Brite desires to engage Executive to perform services for Brite and Executive desires to perform such services on the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in consideration of the covenants and obligations herein contained, the parties hereto agree as follows: 1. EMPLOYMENT AND DUTIES. From and after December 2, 1996 ("Commencement Date"), Brite shall employ Executive as Chief Executive Officer. Executive shall perform such acts and duties as the Board of Directors of Brite ("Board") shall from time to time direct and shall report directly to the Board. Executive shall use his best efforts on a full time basis (at least forty (40) hours per week) to Brite's business. Notwithstanding the foregoing, it is understood that Executive may serve as an outside director of up to two companies other than Brite, and such additional company or companies as may be approved by the Board. 2. COMPENSATION AND BENEFITS. 2.1 SALARY. Executive's annual salary ("Base Salary") shall be at least $350,000, payable pursuant to Brite's customary payroll policies in force at the time of payment. For the period from the Commencement Date through December 31, 1997, Executive's Base Salary shall be $350,000. 2.2 BONUS. a. COMMENCEMENT DATE THROUGH DECEMBER 31, 1997. During the period from the Commencement Date through December, 1997, Executive will be entitled to a bonus in the amount of $189,500, payable in equal installments at the same time as Executive's Base Salary pursuant to Brite's customary payroll policies in force at the time of payment. b. 1998 AND THEREAFTER. For each year of employment after 1997, Executive will be entitled to participate in an incentive compensation program which shall provide for an annual bonus of at least 50% of his Base Salary upon attainment of reasonable performance goals established by the Board. Payments of any such bonus shall be made at the times and in the amounts determined by the Board. 2.3 ANNUAL REVIEW. Commencing with calendar year 1998, the Board shall conduct an annual performance review of the Executive as a part of which increases in Executive's Base Salary and incentive will be considered. 2.4 BENEFITS. Executive shall be entitled to participate in Brite's standard benefits provided to other employees having similar responsibility with Brite, as established and/or modified by Brite from time to time, including, but not limited to, life insurance, health insurance, and dental insurance. 2.5 VACATION. Executive shall be entitled to a reasonable amount of vacation to be scheduled by Executive, taking into consideration Executive's responsibilities and the scheduled vacations of other executive officers of Brite. 2.6 BUSINESS EXPENSES. Pursuant to Brite's customary policies in force at the time of payment, Executive shall be promptly reimbursed, against presentation of vouchers or receipts, for all authorized expenses properly incurred by him in the performance of his duties hereunder. 2.7 MOVING, TEMPORARY LODGING AND RELOCATION COSTS. Brite will reimburse Executive for all reasonable and necessary costs of moving Executive's furniture, personal items and vehicles to the Wichita, Kansas area, as well as reasonable and necessary closing costs, excluding prepaid items, relating to the purchase of Executive's new home and the commission payable with respect to the sale of his present home. Until such time as Executive relocates his residence to the Wichita, Kansas area, which shall be not later than six months from the date hereof, Executive will be entitled to reimbursement for the cost of a furnished apartment and for telephone service and utilities at such apartment. Brite shall reimburse Executive for all expenses and costs provided for in this Section 2.7, and the tax liability incurred by Executive with respect to the reimbursement, against presentation of documentation detailing the same, up to the amount of $235,000. All expenses and costs incurred in excess of this amount are the responsibility of Executive. 3. STOCK OPTIONS 3.1 OPTION GRANT. Brite hereby grants Executive options ("Options") to purchase 500,000 shares of its no par value common stock (the "Stock") at the option exercise price of $14.875 per share. 3.2 VESTING OF OPTIONS. Subject to such further limitations and qualifications as are provided herein, the Options shall be exercisable as follows: a. 100,000 shares on the date hereof; b. 100,000 shares on December 2, 1997; c. 150,000 shares on December 2, 1998; and d. 150,000 shares on December 2, 1999. Upon termination of Executive's employment, Executive shall have the right to exercise the Options at any time within ninety days after such termination of employment, to the extent his right to exercise such Options had accrued pursuant to -2- Section 3.2 and had not previously been exercised at the date of such termination. Upon a Change in Control, all previously unexercised Options shall become immediately exercisable and shall be canceled ninety (90) days thereafter. 3.3 METHOD OF EXERCISE. Each option shall be exercised by written notice, directed to the Chief Financial Officer of Brite at Brite's principal place of business and accompanied by a check in payment of the exercise price for the number of shares of Stock being purchased. Brite shall make immediate delivery of the Stock to be acquired upon such exercise, provided that, if any law or regulation requires Brite to take any action with respect to the Stock specified in such notice or for the issuance thereof, the date of delivery of such Stock shall be extended for the period necessary to take such action. 3.4 TERMINATION OF OPTION. Except as herein otherwise stated, each Option, to the extent not previously exercised, shall terminate on December 2, 2006. 3.5 RECAPITALIZATION. a. Subject to any required action by the stockholders, the number of shares of Stock covered by each outstanding Option, and the price per share of each such Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock of Brite resulting from a subdivision or consolidation of shares or the payment of a stock dividend (but only on the Stock) or any increase or decrease in the number of such shares effected without receipt of consideration by Brite. b. Subject to any required action by the stockholders, if Brite shall be the surviving corporation in any merger or consolidation, each outstanding Option shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled. c. In the event of a change in the Stock as presently constituted, which is limited to a change of all if its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Stock. d. To the extent that the foregoing adjustments relate to stock or securities of Brite, such adjustments shall be made by the Board, whose determination in such respect shall be final, binding and conclusive. e. Except as hereinbefore expressly provided, Executive shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger of consolidation or spin-off of assets or stock of another corporation, and any issue by Brite of shares of stock of any class, or securities convertible into -3- shares of stock of any class, shall not effect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock subject to an Option. 3.6 RIGHTS PRIOR TO EXERCISE OF OPTION. The Options are nontransferable by Executive, and during his lifetime are exercisable only by him; provided, however, in the event of the death of Executive, the Options may pass to his executor or administrator or any person who shall acquire the Options directly from Executive or his estate by bequest or inheritance. Executive shall not have any rights as a stockholder with respect to any shares covered by the Options until the date of the issuance of a stock certificate to him for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 3.5 hereof. 3.7 INVESTMENT PURPOSE. The Options are granted on the condition that any purchase of Stock thereunder shall be for investment purposes, and not with a view to resale or distribution, except that in the event the Stock subject to the Options is registered under the Securities Act of 1933, as amended, or in the event a resale of such Stock without such registration would otherwise be permissible, such condition shall be inoperative if, in the opinion of counsel for Brite, such condition is not required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. 3.8 ADDITIONAL OPTION GRANTS. During January in each year beginning in 2000, the Board shall grant Executive additional non-statutory stock options to purchase at least 20,000 shares of Stock, with the exercise price being the fair market value of the Stock as of the date of grant. All other terms and conditions of such options shall be determined by the Board. 4. TERMINATION. 4.1 TERMINATION FOR CAUSE. Executive shall be entitled to payment of his Base Salary, accrued bonus (if any) and benefits existing at the time of termination of his employment if such termination is a Termination for Cause. Termination for Cause means one or more of: (i) voluntary termination of employment by Executive for any reason; (ii) the death of Executive; (iii) Executive having been unable to render services required of him hereunder for a consecutive period of six months or for any period in the aggregate of six months in any twelve month period because of a serious and continuing health impairment, which impairment will most likely result in Executive's continued inability to render the services required of him hereunder; (iv) Executive's misappropriation of corporate funds; (v) Executive's conviction of a felony; (vi) Executive's conviction of any crime involving theft, dishonesty, or moral turpitude; (vii) Executive's failure to devote substantially his full business time to Brite as provided in Section 1 hereof; (viii) Executive's willful violation of directions of the Board Brite -4- which are consistent with Executive's duties as Chief Executive Officer; (ix) falsification of any material representation made by Executive to Brite; or, (x) the commission by Executive of a material breach of the terms of this Agreement. 4.2 TERMINATION OTHER THAN FOR CAUSE. If Executive's employment with Brite is terminated and such termination is not a Termination for Cause, Executive will be entitled to payment of his Base Salary, bonus and other benefits existing at the time of such termination, for a period of one year thereafter with all such payments to be made periodically pursuant to Brite's policies in force at the time of payment; provided, however, that Brite shall not be obligated to continue any benefit if the plan or policy under which such benefit is provided limits the provision of the benefit to full-time employees of Brite, or if the validity of the plan or policy would be adversely impacted by the continuation of the benefit. 4.3 CHANGE IN CONTROL. If, upon a Change in Control, Executive is either terminated or elects to resign, such termination shall be treated as a termination under Section 4.2, except that the time period for payment of the Base Salary, bonus and benefits shall be extended from one year to two years after the date of termination. "Change of Control" shall mean (i) a dissolution or liquidation of Brite; (ii) a merger or consolidation in which Brite is not the surviving corporation; or (iii) the acquisition of more than 50% of the outstanding Stock by any person, or group of related persons acting in concert, in a single transaction or series of related transactions. 5. CONFIDENTIAL INFORMATION. 5.1 DEFINITION OF CONFIDENTIAL INFORMATION. For purposes of this Agreement, the term "Confidential Information" means: That secret, proprietary information of Brite not otherwise publicly disclosed (whether or not discovered or developed by Executive) and known by Executive as a consequence of Executive's employment with Brite or as a consequence of Executive's position as a director of Brite. Without limiting the generality of the foregoing, such proprietary information shall include: information not generally known in the industry or related industries which concerns (i) customer lists; (ii) computer programs and facilities; (iii) the identity of specialized consultants and contractors and confidential information developed by them for Brite; (iv) operating and other cost data, including information regarding salaries and benefits of employees; (v) cost and pricing data; (vi) acquisition, expansion, marketing, financial and other business plans; (vii) Brite manuals, files, records, memoranda, plans, drawings and designs, specifications and computer programs and records; and (viii) all -5- information which is a "trade secret" as defined in the Uniform Trade Secrets Act as adopted in Kansas at K.S.A. 60-3320. 5.2 CONFIDENTIAL INFORMATION. During Executive's employment with Brite, Executive will have access to and become familiar with Confidential Information of Brite. Executive acknowledges that such Confidential Information is owned and shall continue to be owned solely by Brite. During the term of Executive's employment with Brite and after termination of such employment, Executive shall not use or divulge Confidential Information to any person or entity other than Brite, or persons to whom Brite has given its written consent, unless such information has become common knowledge and is no longer Confidential Information. 5.3 RETURN OF DOCUMENTS. Upon termination of Executive's employment with Brite, all procedural manuals, guides, specifications, plans, drawings, designs, records, lists, notebooks, software, diskettes, customer lists, pricing documentation and other property which is or contains Confidential Information, including all copies thereof, in the possession or control of Executive, whether prepared by Executive or others, shall be forthwith delivered by Executive to Brite. 6. COVENANTS NOT TO COMPETE. 6.1 RESTRICTIVE COVENANT. Executive covenants and agrees that during Executive's employment with Brite and for a period of one year following the date of termination of Executive's employment with Brite, Executive shall not in any manner: a. accept employment with the following companies or any business venture in which they hold any investment or management interest: Perphonics, Intervoice Precision Systems, Syntellect, Octel, Boston Technology, Edify, Microlog, Premier Technology, Talx, Brooktrout, or Comverse Technology. b. start or join any business which after the date of this Agreement enters into a line of business that is a line of business conducted by Brite during the term of Executive's employment with Brite. This Section shall prevent Executive, directly or indirectly, on Executive's own behalf or as an executive, officer, agent, director, partner, consultant, lender, or advisor, during the period covered by this Section, from forming, owning, joining, controlling, financing, or otherwise participating in the ownership or management of or being otherwise affiliated with any person or entity engaged in the type of business prohibited by this Section. During the period covered by this Section, Executive shall not permit any person or entity (other than Brite) of which Executive is a shareholder, partner or director or in which Executive has an ownership interest, to engage in any type of business prohibited by this Section. Notwithstanding any other provision herein, the parties agree that Executive may, during the period covered by this Agreement, invest Executive's personal, private assets as a passive investor in not more than one percent (1%) of the total outstanding shares of any publicly traded company engaged in a -6- competing business, so long as Executive does not participate in the management or operations of the affairs of such company. 6.2 SOLICITATION OF EMPLOYEES. During the one-year period following Executive's termination of employment with Brite, Executive shall not, without the prior written approval of the Chairman of the Board of Directors of Brite, directly or indirectly solicit, raid, entice, or induce any person who is, or was at any time within six months prior to such termination, an employee of Brite, to become employed by any other person, firm, or corporation in any business which is in any manner in competition with Brite. Furthermore, Executive shall inform Brite in writing if any other person employed by Brite contacts Executive for the purpose of seeking employment during such one year period. 6.3 NEW DEVELOPMENTS. Executive agrees that, with respect to its work for Brite, any developments made by Executive or under Executive's direction in connection with the work of Brite shall be the sole and complete property of Brite and that any and all copyrights, patent rights and other proprietary rights therein shall belong to Brite. Executive shall cooperate with Brite and execute any documents prepared by Brite to secure or protect any such rights. 7. REPRESENTATIONS OF EXECUTIVE. Executive hereby represents and warrants that he has the unrestricted right to accept employment with Brite on the terms and conditions set forth herein and to execute and perform this Agreement without being in conflict with any other agreement, obligation or understanding with any such third party. Executive represents that he is not bound by any agreement or by any other existing or previous business relationship which conflicts with, or may conflict with, the performance of his obligations hereunder, or prevent the full performance of his duties and obligations hereunder. 8. NOTICES. Any notice permitted or required to be given under this Agreement shall be sufficient if in writing and delivered personally or by registered mail return receipt requested, if to Executive, to Mr. David S. Gergacz at his residence address as reflected in Brite's records, and if to Brite, to the attention of Mr. Stanley G. Brannan, Chairman, Brite Voice Systems, Inc., 7309 East 21st Street North, Wichita, Kansas 67206. A party may change its address for receipt of notices by complying with this Section. 9. ENTIRE AGREEMENT. This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter. 10. AMENDMENT; WAIVER. This Agreement may not be amended, supplemented, canceled or discharged except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision. -7- 11. BINDING EFFECT; ASSIGNMENT. The rights an obligations of this Agreement shall bind and inure to the benefit of any successor of Brite by reorganization, merger or consolidation or any assignee of all or substantially all of Brite's business and properties. Executive's rights or obligations under this Agreement may not be assigned by Executive, except that upon Executive's death, all right to compensation hereunder shall pass to Executive's executor or administrator. 12. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 13. GOVERNING LAW; INTERPRETATION. This Agreement shall be construed in accordance with, and governed for all purposes by, the laws and public policy of the State of Kansas applicable to contracts executed and to be wholly performed within such State. 14. FURTHER ASSURANCES. Each of the parties agrees to execute, acknowledge, deliver and perform, and/or cause to be executed, acknowledged, delivered and performed, at any time and/or from time to time, as the case may be, all such further acts, documents, transfers, conveyances, and/or assurances as may be necessary and/or proper to carry out the provisions and/or intent of this Agreement. 15. SEVERABILITY. If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. IN WITNESS WHEREOF, the parties hereto have entered this Agreement effective the date first above written. BRITE VOICE SYSTEMS, INC. By: /s/ Stanley Brannan ----------------------- /s/ David S. Gergacz ----------------------------- DAVID S. GERGACZ -8- EX-10.18 3 EXHIBIT 10.18 LEASE Dated 24th June 1996 Landlord: CAPITAL & COUNTIES PLC Tenant: BRITE VOICE SYSTEMS GROUP LIMITED Brook House Gatley New General Purpose Lease Debenham & Co. LSEGPN.D 20 Hans Road Author of Standard: FS Knightsbridge Last Revised: 30th April 1996 London SW3 1RT @ Debenham & Co 1995 CONTENTS - ------------------------------------------------------------------------------- CLAUSE PAGE CLAUSE 1 PARTICULARS.................................................. 1 CLAUSE 2 DEFINITIONS.................................................. 4 CLAUSE 3 INTERPRETATION............................................... 9 3.1 Rights of the Landlord....................................... 9 3.2 Act or default of the Tenant................................. 9 3.3 Approvals of any superior landlord and mortgagee............. 9 3.4 Consent of the Landlord, approval, etc....................... 9 3.5 English law.................................................. 9 3.6 Gender and number............................................ 9 3.7 General and particular words................................. 9 3.8 Headings..................................................... 9 3.9 Joint and separate obligations............................... 10 3.10 Last year and end of the Tenancy............................. 10 3.11 Perpetuity period............................................ 10 3.12 Person and party............................................. 10 3.13 Rights and obligations....................................... 10 3.14 Statute...................................................... 10 3.15 Superior landlord............................................ 11 3.16 Tenant not to allow act...................................... 11 CLAUSE 4 LETTING...................................................... 12 4.1 Letting...................................................... 12 4.2 Rights and reservations...................................... 12 CLAUSE 5 TENANT'S RIGHTS.............................................. 13 CLAUSE 6 LANDLORD'S RIGHTS............................................ 14 6.1 Conducting Media............................................. 14 6.2 Light, support, etc.......................................... 14 6.3 Entry by Landlord............................................ 14 6.4 Landlord's right to carry out works on other premises........ 15 6.5 Letting board, etc........................................... 15 6.6 Goods left on the Property................................... 15 6.7 Variation on implied rights.................................. 15 CLAUSE 7 TENANT'S COVENANTS........................................... 16 7.1 Rent......................................................... 16 7.2 Outgoings.................................................... 16 7.3 Interest..................................................... 16 7.4 Repair and decoration........................................ 17 7.5 Maintenance.................................................. 17 7.6 Contribution to repair of party walls etc.................... 18 7.7 Repair on notice............................................. 18 7.8 Compliance with statutory requirements, etc.................. 18 7.9 Restrictions on dealings..................................... 19 CLAUSE PAGE 7.10 Registration of assignments, etc............................. 22 7.11 Information.................................................. 22 7.12 Alterations.................................................. 23 7.13 Signs and Notices............................................ 23 7.14 Cost of removal by Landlord of unauthorised signs, etc....... 23 7.15 Service installations........................................ 23 7.16 Nuisance..................................................... 24 7.17 Use.......................................................... 24 7.18 Overloading.................................................. 24 7.19 Notices...................................................... 24 7.20 Planning..................................................... 24 7.21 Encroachments................................................ 24 7.22 Maintenance agreements....................................... 25 7.23 Defective premises........................................... 25 7.24 Landlord's rights............................................ 25 7.25 Landlord's Regulations....................................... 25 7.26 The CDM Regulations.......................................... 25 7.27 Landlord's costs............................................. 26 7.28 Indemnities.................................................. 27 7.29 Yield up..................................................... 27 7.30 VAT.......................................................... 27 CLAUSE 8 LANDLORD'S COVENANTS......................................... 28 Quiet enjoyment.............................................. 28 CLAUSE 9 INSURANCE.................................................... 29 9.1 Landlord to insure Property.................................. 29 9.2 Additional Landlord's fixtures............................... 29 9.3 Landlord to inform Tenant of insurance cover................. 29 9.4 Damage to Property........................................... 29 9.5 Option to terminate following damage by an Insured Risk...... 30 9.6 Option to terminate following damage by an Excluded Risk..... 30 9.7 Application by Tenant for new lease following termination.... 31 9.8 Tenant's obligations in respect of Landlord's insurances..... 31 9.9 Tenant's insurance........................................... 32 CLAUSE 10 SUSPENSION OF RENT........................................... 33 10.1 Application.................................................. 33 10.2 Suspension................................................... 33 10.3 Disputes..................................................... 33 CLAUSE 11 FORFEITURE................................................... 34 CLAUSE 12 DECLARATIONS, WARRANTIES AND MISCELLANEOUS................... 35 12.1 Representations and exclusion of use warranty................ 35 12.2 Accidents.................................................... 35 12.3 Payments recoverable as rent................................. 35 12.4 Release of the Landlord...................................... 35 12.5 Service of notices........................................... 35 12.6 Jurisdiction of the English courts........................... 35 12.7 Tenant's option to terminate................................. 36 CLAUSE PAGE CLAUSE 13 ARBITRATION OR DETERMINATION BY EXPERT....................... 37 13.1 Contrary Provision........................................... 37 13.2 Arbitration.................................................. 37 13.3 Determination by an expert................................... 37 13.4 Expert's terms of appointment................................ 37 13.5 Experience of arbitrator or expert........................... 38 13.6 Non-payment of costs of arbitrator or expert................. 38 CLAUSE 14 RENT REVIEW.................................................. 39 14.1 Definitions.................................................. 39 14.2 New Rent..................................................... 41 14.3 Memorandum................................................... 41 14.4 Delay........................................................ 41 CLAUSE 15 GUARANTEE.................................................... 42 15.1 Definition................................................... 42 15.2 Guarantee.................................................... 42 15.3 New lease on disclaimer, etc................................. 42 15.4 Waiver by Guarantor of rights................................ 43 15.5 Guarantor's liability not to be prejudiced................... 44 15.6 Surrender of part by Original Tenant......................... 44 15.7 Benefit of guarantee......................................... 44 15.8 Change of address............................................ 44 LEASE PARTICULARS - ------------------------------------------------------------------------------- CLAUSE 1 - ------------------------------------------------------------------------------- 1.1 DATE 24TH JUNE 1996 - ------------------------------------------------------------------------------- 1.2 HEADLEASE/UNDERLEASE This lease is a headlease. - ------------------------------------------------------------------------------- 1.3 PARTIES 1.3:1 Landlord CAPITAL & COUNTIES PLC Registered office: 40 Broadway London SW1H 0BU (Company registration number: 280739). ---------------------------------------------- 1.3:2 Tenant BRITE VOICE SYSTEMS GROUP LIMITED Registered office: Dennis House Marsden Street Manchester M2 1JD (Company registration number: 2601740) - ------------------------------------------------------------------------------- 1.4 PROPERTY BROOK HOUSE (formerly Bridge House) Stonepail Close Gatley Stockport Sk8 4HZ being the whole of the land and buildings comprised in the Landlord's freehold title number GM681354 - ------------------------------------------------------------------------------- 1.5 CONTRACTUAL TERM TEN YEARS from and including the 24th June 1996. - ------------------------------------------------------------------------------- 1 1.6 RENT 1.6:1 Amount To and including the 24th December 1996 TWENTY THOUSAND FIVE HUNDRED AND FOURTEEN POUNDS (L20,514) a year; from and including 25th December 1996 to and including the 23rd June 1997 ONE HUNDRED AND SEVENTY SEVEN THOUSAND SEVEN HUNDRED AND EIGHTY EIGHT POUNDS (L177,788) a year; from and including 24th June 1997 to and including 23rd June 1998 TWO HUNDRED AND THIRTY-TWO THOUSAND FOUR HUNDRED AND NINETY-TWO POUNDS (L232,492) a year; from and including 24th June 1998 to and including the 23rd June 1999 TWO HUNDRED AND NINETY FOUR THOUSAND AND THIRTY FOUR POUNDS (L294,034) a year; from and including 24th June 1999 to and including the 23rd June 2001 THREE HUNDRED AND TWENTY ONE THOUSAND THREE HUNDRED AND EIGHTY SIX POUNDS (L321,386) a year and thereafter THREE HUNDRED THOUSAND EIGHT HUNDRED AND SEVENTY TWO POUNDS (L300,872) a year as varied from time to time under the provisions of this Lease (including in particular the provisions for review in clause 14). ---------------------------------------------- 1.6:2 Rent 24th June 1996 Commencement Date ---------------------------------------------- 1.6:3 First Rent Payment 24th June 1996 Date ---------------------------------------------- 1.6:4 Review Dates 24th June 2001 only. - ------------------------------------------------------------------------------- 1.7 INSURANCE RENT COMMENCEMENT DATE 24th June 1996 - ------------------------------------------------------------------------------- 2 1.8 PERMITTED USE Offices within Class B1 of the Town and Country Planning (Use Classes) Order 1987 and ancillary purposes 1.9 LANDLORD AND TENANT (COVENANTS) ACT 1995 This Lease is a new tenancy under section 1 of the Landlord and Tenant (Covenants) Act 1995 - ------------------------------------------------------------------------------- 3 DEFINITIONS CLAUSE 2 In this Lease the following definitions apply: "ARBITRATION" arbitration under clause 13.2. "AUTHORISED GUARANTEE has the meaning given to "authorised guarantee AGREEMENT" agreement" in section 28 of the Landlord and Tenant (Covenants) Act 1995. "BASE RATE" the base rate from time to time of Barclays Bank PLC or, if that is not available, the most closely comparable rate of interest, to be determined (if not agreed) by Arbitration. "CONDUCTING MEDIA" all conducting media, including (but not limited to) pipes, flues, ducts, wires, cables, drains, sewers, gutters, gullies and channels and their ancillary plan and equipment. "CONTRACTUAL TERM" the term specified in clause 1.5. "EXCLUDED REVIEW (see clause 14.1) MATTERS" "EXCLUDED RISK" any risk which would have fallen within the definition of "Insured Risks" but for the Landlord exercising its discretion to exclude the risk from that definition. "FAIR PROPORTION" the fair proportion reasonably determined from time to time by the Landlord's Surveyor. "first rent payment date" the date specified in clause 1.6:3. "group company" a company which is a member of the same group as the Landlord or the Tenant (as the case may be). For the purpose of this definition: (a) a company is a "subsidiary" of another company if that other company: (i) holds a majority of the voting rights in it, or (ii) is a member of it and has the right to appoint or remove a majority of its board of directors, or (iii) is a member of it and controls alone, under an agreement with other shareholders or members, a majority of the voting rights in it. 4 (b) two companies shall be taken to be members of the same group if, and only if: (i) one is a subsidiary of the other, or (ii) both are subsidiaries of a third, or (iii) one is a subsidiary of a company which itself is a subsidiary of the other. "GUARANTOR" the person (if any) so named in clause 1.3:3. "INSURANCE RENT" a sum equal to the cost of the insurances described in clause 9.1 (including the cost of any insurance valuations). "INSURANCE RENT the date specified in clause 1.7. COMMENCEMENT DATE" "INSURED RISKS" (a) fire, explosion and lightning. (b) impact, (c) earthquake, (d) aircraft (other than hostile aircraft) and things dropped from aircraft, (e) flood, storm and tempest, (f) bursting or overflowing of water tanks, apparatus, pipes, boilers, or heating equipment, (g) riot and civil commotion, and (h) malicious damage, (i) accidental damage to all plate glass in the Property and any other risks which the Landlord or any superior landlord may from time to time reasonably insure, and an "Insured Risk" means one of the risks. Except that a risk will not be an "Insured Risk" to the extent that, in the reasonable opinion of the Landlord's Surveyor, insurance cover is not available in the normal market at a reasonable premium and the Landlord elects not to take out such insurance cover for the Property and gives reasonable prior written notice to the Tenant of such election. "LANDLORD" the person named in clause 1.3:1 or any other person who, at the relevant time, is entitled to the immediate reversion on this Lease. 5 "LANDLORD'S SURVEYOR" the person from time to time appointed by the Landlord to act as its surveyor for any purpose under this Lease, who shall be a professionally qualified surveyor, and may be an employee of the Landlord. "THIS LEASE" this lease, as varied and supplemented by any document. "NON-REINSTATEMENT (see clause 9.6:1). NOTICE" "OPEN MARKET RENT" (see clause 14.1). "ORIGINAL LANDLORD" the person named in clause 1.3:1. "ORIGINAL TENANT" the person named in clause 1.3:2. "PLANNING ACTS" the Local Government Planning and Land Act 1980, the Town and Country Planning Act 1990, the Planning (Listed Buildings and Conversation Areas) Act 1990, the Planning (Hazardous Substances) Act 1990 the Planning (Consequential Provisions) Act 1990 and the Planning and Compensation Act 1991 and any later similar legislation. "PLANNING CONTROL" has the meaning given to it by the Town and Country Planning Act 1990. "PRESIDENT OF THE RICS" the President for the time being of The Royal Institution of Chartered Surveyors, or the person for the time being authorised to act on his behalf. "PROPERTY" the premises described in clause 1.4, including: (a) any vaults below or adjoining the premises, (b) any pavement lights serving the premises, (c) Conducting Media within the premises which do not belong to suppliers, (d) Conducting Media outside the premises which exclusively serve the premises and do not belong to suppliers, (e) landlord's fixtures in or forming part of the premises, (including any toilets and sanitary ware), (f) any additions to the premises, and (g) any grounds and approaches belonging to the premises, but excluding (h) tenant's fixtures. 6 [SAME AS FOLIO 6] 7 "RENT" the amount (subject to variation and review) specific in clause 1.6:1. "RENT COMMENCEMENT the date specified in clause 1.6:2. DATE" "REVIEW ASSUMPTIONS" (see clause 14.1). "REVIEW DATE" (see clause 14.1). "SIGNS AND NOTICES" signs, notices, placards, posters, stickers, advertisements, flags, logos, lettering and numerals. "TENANCY" the contractual tenancy created by this Lease and any further tenancy of the Property during any period of holding over or extension or continuation of the contractual tenancy by statute or under common law. "TENANT" the Original Tenant and its successors in title as tenant under this Lease. "TENANT COVENANT" means a "tenant covenant" (as defined by section 28 of the Landlord and Tenant (Covenants) Act 1995) which relates to the tenancy created by this lease. "TERMINATION EVENT" (see clause 15.1). "TERMINATION NOTICE" (see clause 9.6:2.2.) "VAT" value added tax and any similar tax. 8 INTERPRETATION - ------------------------------------------------------------------------------- CLAUSE 3 This clause contains directions for interpretation, which apply unless a contrary intention is clear from the wording elsewhere in this Lease. 3.1 RIGHTS OF THE LANDLORD References to the rights of the Landlord are deemed to include the same rights for any superior landlord, and anyone authorised by the Landlord or a superior landlord. 3.2 ACT OR DEFAULT OF THE TENANT References to the act or default or fault of the Tenant, and words to similar effect shall include any act, default or fault of anyone at the Property with the Tenant's authority and under the Tenant's control. 3.3 APPROVALS OF ANY SUPERIOR LANDLORD AND MORTGAGEE Any provision in this Lease requiring the consent or approval of the Landlord is to be construed as also requiring any necessary consent or approval of: 3.3:1 any superior landlord, and 3.3:2 any mortgagee of the Landlord's or any superior landlord's interest in the Property, where such consent or approval shall be required. 3.4 CONSENT OF THE LANDLORD, APPROVAL, ETC. References to consent of the Landlord, and words to similar effect, mean a prior consent in writing signed by or for the Landlord. References to approved and authorised and words to similar effect, mean previously approved or authorised in writing. 3.5 ENGLISH LAW This Lease shall be governed by and interpreted in accordance with English law. 3.6 GENDER AND NUMBER Words of one gender include all other genders. Singular words include the plural and vice versa. 3.7 GENERAL AND PARTICULAR WORDS General words are not limited because they are preceded or followed by particular words in the same category or covering the same topic. 3.8 HEADINGS Any footnotes, headings, index, marginal notes, table of contents and underlinings are for guidance only, not interpretation. 9 3.9 JOINT AND SEPARATE OBLIGATIONS If an obligation is owed to or by more than one person, that obligation is owed to or by those persons separately, jointly or in any combination. 3.10 LAST YEAR AND END OF THE TENANCY References to the last year of the Tenancy, or other period related to the end of the Tenancy, and words to similar effect include the last year of the Tenancy or such other period (as the case may be), even if it ends before the end of the Contractual Term. References to the end of the Tenancy and words to similar effect are to be similarly interpreted. 3.11 PERPETUITY PERIOD The perpetuity period applicable to this Lease is eighty (8O) years from the start of the Contractual Term. Whenever in this Lease any party is granted a future interest that interest must vest within such perpetuity period and if it has not it will be void for remoteness. 3.12 PERSON AND PARTY 3.12:1 Any reference to a person includes a company, corporation or other legal entity. 3.12:2 Any reference to "parties" or "party" means the Landlord and the Tenant or either of them but, in the absence of a specific reference to the contrary, does not include any Guarantor. 3.13 RIGHTS AND OBLIGATIONS 3.13:1 The Tenant or any undertenant or occupier of the Property shall not after the date of this Lease and during the Tenancy acquire any implied or prescriptive right or easement from or over or affecting any neighbouring premises in which the Landlord from time to time has a freehold or leasehold interest. 3.13:2 Rights granted are not exclusive to the Tenant. 3.13:3 Rights and obligations are cumulative. 3.14 STATUTE Any reference to a specific statute includes: 3.14:1 any statutory extension, variation or re-enactment of the statute whether before or after the date of this Lease. 3.14:2 derivative orders, regulations and permissions, and 3.14:3 directives and regulations adopted by the European Union relating to VAT. Any general reference to "statute" or "statutes" includes those enacted after the date of this Lease and includes all derivative orders, regulations and permissions. 10 3.15 SUPERIOR LANDLORD 3.15:1 Any reference to a superior landlord includes the Landlord's immediate reversioner and any superior landlord. 3.15:2 Any reference to a superior iease includes the lease under which the Landlord holds the Property and any lease superior to that. 3.15:3 When a superior landlord performs a landlord's obligation it shall be deemed to have been performed by the Landlord. 3.16 TENANT NOT TO ALLOW ACT An obligation by the Tenant not to do an act includes an obligation not to knowingly allow that act to be done by another person. 11 LETTING - ------------------------------------------------------------------------------- CLAUSE 4 4.1 LETTING The Landlord lets the Property to the Tenant for the Contractual Term, the Tenant paying during the Tenancy the following (all of which are reserved as rent): 4.1:1 from and including the Rent Commencement Date the Rent by equal quarterly payments in advance on the usual quarter days; the first payment for the period from the Rent Commencement Date, being due on the First Rent Payment Date, 4.1:2 from and including the Insurance Rent Commencement Date the Insurance Rent within twenty one (21) days after a written demand, 4.1:3 any VAT payable on the above amounts. 4.2 RIGHTS AND RESERVATIONS The letting includes the rights (if any) granted by clause 5 but is subject to the exceptions and reservations set out in clause 6. 12 TENANT'S RIGHTS - ------------------------------------------------------------------------------- CLAUSE 5 None 13 LANDLORD'S RIGHTS - ------------------------------------------------------------------------------- CLAUSE 6 The following rights are excepted and reserved to the Landlord: 6.1 CONDUCTING MEDIA The right to use, repair, alter, replace, add to and make connections to the Conducting Media forming part of the Property which serve or are capable of serving other premises. 6.2 LIGHT, SUPPORT, ETC. The right of light, air, support and protection and all other easements and rights now or after the date of this Lease, belonging to or enjoyed by any other premises. 6.3 ENTRY BY LANDLORD 6.3:1 The right at reasonable times and on reasonable prior written notice, but in case of emergency at any time without notice, to enter the Property with necessary materials and appliances, and: 6.3:1.1 view and record the condition of the Property, 6.3:1.2 repair, maintain, alter or clean other premises, where such work would not otherwise be reasonably practicable 6.3:1.3 inspect Conducting Media, 6.3:1.4 comply with obligations or exercise any rights under this Lease or a superior lease, 6.3:1.5 make good any failure by the Tenant to repair, maintain or decorate the Property in compliance with clause 7.7:1, 6.3:1.6 remove anything which has been fixed, placed, displayed or left on the Property in breach of clause 7.12 or clause 7.13, 6.3:1.7 make good any other breach of covenant by the Tenant, 6.3:1.8 show prospective tenants and purchasers over the Property, or 6.3:2 In exercising these rights the Landlord shall: 6.3:2.1 cause as little inconvenience to the Tenant as is reasonably practicable, 6.3:2.2 as soon as reasonably practicable make good any damage to the Property, and 6.3:2.3 indemnify the Tenant against any loss or damage to the tenant's fixtures and the contents of the Property. 14 6.4 LANDLORD'S RIGHT TO CARRY OUT WORKS ON OTHER PREMISES 6.4:1 The right to alter, add to and carry out works on adjoining or nearby premises, Provided that the same shall not materially obstruct affect or interfere with the amenity of or access to the Property or the passage of light and air to the Property. 6.4:2 In carrying out any works under this clause 6.4 the Landlord shall: 6.4:2.1 be entitled, if reasonably necessary, to erect scaffolding which can be attached to the Property, Provided that there shall not be erected any scaffolding or other structures in front of or to the rear or sides (if applicable) of the Property in such a position so as to obscure the windows of the Property or so as to prevent or interfere with access to the Property by persons entering the Property or in connection with the servicing thereof 6.4:2.2 cause as little inconvenience as reasonably practicable to the Tenant and, as soon as reasonably practicable, make good any damage caused to the Property, and 6.4:2.3 ensure that after completion of the works the use of the Property for any purpose permitted by this Lease has not been materially adversely affected. 6.5 LETTING BOARD, ETC. The right, during the last six (6) months of the Tenancy, on prior written notice to display a letting board on the Property and at any time to display a sale board on the Property, but not so that any board unreasonably obstructs the light or air to the Property, or interferes with the Tenant's or any undertenant's business being carried on at the Property. 6.6 GOODS LEFT ON THE PROPERTY 6.6:1 The right to sell, as agent for the Tenant, any belongings of the Tenant left in the Property for more than fourteen (14) days after being requested in writing by the Landlord to do so after the end of the Tenancy, unless the Tenant remains in occupation of the Property under a new tenancy. The Tenant shall indemnify the Landlord against any liability incurred by the Landlord to anyone whose belongings are sold by the Landlord in the mistaken belief, held in good faith (which shall be presumed unless the contrary is proved), that such belongings were owned by the Tenant. 6.6:2 In the event of a sale the Landlord shall account to the Tenant for the proceeds of sale, less the reasonable and proper costs of removal, storage and sale, if the Tenant shall claim the proceeds of sale within six (6) months after the date on which the Tenant has quit the Property. If no such claim is made by the Tenant the proceeds of sale shall belong to the Landlord. 6.7 VARIATION OF IMPLIED RIGHTS The right to terminate or vary any implied right, from time to time enjoyed by the Property, provided that such termination or variation does not materially adversely affect the use of the Property for any purpose permitted by this Lease. 15 TENANT'S COVENANTS - ------------------------------------------------------------------------------- CLAUSE 7 The Tenant covenants with the Landlord: 7.1 RENT 7.1:1 To pay the Rent and other amounts in the manner specified in clause 4.1. 7.1:2 Not to claim or exercise any right to set-off or to withhold payment of any amounts due to the Landlord. 7.1:3 If required by the Landlord, to make payments to the Landlord by banker's order or credit transfer to a bank and account in the United Kingdom, nominated by the Landlord. 7.2 OUTGOINGS 7.2:1 To pay, and to indemnify the Landlord against, all existing and future rates, taxes, assessments, impositions and outgoings assessed or imposed on, or in respect of, the Property (including those assessed or imposed on the Landlord and any superior landlord), except any taxes assessed or imposed on the Landlord or a superior landlord in respect of: 7.2:1.1 the rents, 7.2:1.2 the grant of this Lease, or 7.2:1.3 any dealing or deemed dealing by the Landlord or a superior landlord with its interest in the Property. 7.2:2 If such an assessment or imposition is: 7.2:2.1 made on premises which include the Property, and 7.2:2.2 paid by the Landlord, to pay a Fair Proportion of it to the Landlord within twenty one (21) days after a written demand. 7.2:3 To indemnify the Landlord against any loss of rating relief on the Property after the end of the Tenancy, caused by the Property being left empty during the Tenancy. 7.3 INTEREST 7.3:1 if required by the Landlord, to pay interest at a yearly rate of three per cent (3%) above Base Rate, on any sum payable under this Lease by the Tenant to the Landlord (whether or not formally demanded) that is not paid within seven (7) days of its due date. To pay this interest from the due date to the date of payment, both before and after any court judgment, calculated on a daily basis and compounded with rests on the usual quarter days. 16 7.3:2 If, while a breach of any tenant's covenant continues, the Landlord refuses to accept payment of any sum in order not to waive the breach, the Tenant shall be deemed for the purposes of this clause 7.3 to have failed to pay such sum. 7.3:3 This clause 7.3 is not to prejudice any other right or remedy of the Landlord. 7.4 REPAIR AND DECORATION 7.4:1 To repair and maintain the Property and to keep it clean and in good repair 7.4:2 To repair, maintain and keep clean and, when necessary, renew the fixtures (including carpets) in the Property, 7.4:3 To prepare and paint all external paintwork of the Property in the fourth (4th) and every subsequent third (3rd) year and in the last three (3) months of the Tenancy, and at the same time to prepare and polish any outside polished surfaces, and to restore and make good the brickwork and stonework where necessary (but not to paint any brickwork or stonework which has not previously been painted). 7.4:4 To redecorate the interior of the Property in every fifth (Sth) year and in the last three (3) months of the Tenancy, preparing and painting, papering or polishing as appropriate having regard to earlier treatment. 7.4:5 As often as necessary to clean and treat in an appropriate manner all other external and internal materials, surfaces and finishes of the Property. 7.4:6 In relation to the work referred to in this clause 7.4: 7.4:6.1 to carry out the work with appropriate materials of good quality, in a good and workmanlike manner and to the reasonable satisfaction of the Landlord's Surveyor, 7.4:6.2 to carry out all external painting, whenever carried out, and the internal painting, papering and treatment in the last three (3) months of the Tenancy in a colour or colours approved in writing by the Landlord such approval not to be unreasonably withheld or delayed. 7.4:7 Damage by an Insured Risk is excepted from the Tenant's liability under this clause 7.4 except to the extent that the insurance money is irrecoverable because of an act or default of the Tenant. 7.4:8 Damage by an Excluded Risk is (subject to clause 9.7) excepted from the Tenant's liability under this clause 7.4 if the Landlord serves a Non Reinstatement Notice as a result of such damage. 7.5 MAINTENANCE 7.5:1 To keep the Conducting Media which form part of the Property clear and unobstructed. Not to do anything which causes an obstruction or damage to any other Conducting Media serving the Property. 7.5:2 Not to discharge any fluid of a poisonous or noxious nature into the Conducting Media in or serving the Property. 17 7.5:3 To take all reasonably necessary precautions against: 7.5:3.1 frost damage to any pipe, tank or water apparatus in the Property, and 7.5:3.2 the bursting or overflowing of any pipe, tank or water apparatus in the Property. 7.5:4 To sweep any chimneys and clean any ducts and flues of the Property as often as reasonably necessary. 7.5:5 To clean the windows and other lights of the Property as often as reasonably necessary. 7.5:6 To keep any yards, paths and areas of the Property clean, unobstructed and tidy, and any gardens of the Property in good order, properly cultivated and free from weeds and rubbish. 7.6 CONTRIBUTION TO REPAIR OF PARTY WALLS ETC. To pay, within twenty one (21 ) days after a written demand, a Fair Proportion of the expense of repairing, maintaining, renewing and cleaning all mutual or party walls, roads, yards, fences, Conducting Media and structures used or enjoyed by the Property in common with other premises. 7.7 REPAIR ON NOTICE 7.7:1 To make good with all practicable speed any failure to repair, maintain or decorate the Property for which the Tenant is liable and of which the Landlord has given reasonable prior notice in writing. To start the necessary work within two (2) months after the Landlord's notice, or sooner if reasonably necessary, and then diligently to continue and complete the work. 7.7:2 If the Tenant does not comply with clause 7.7:1, to pay, within twenty one (21 ) days after a written demand, the reasonable and proper costs incurred by the Landlord in carrying out the necessary work, including reasonable and proper fees and expenses. 7.8 COMPLIANCE WITH STATUTORY REQUIREMENTS, ETC. 7.8:1 Subject to clause 7.8:2 and except where such compliance is within the ambit of the Landlord's obligations contained in this Lease, to carry out all works and provide and maintain all arrangements in respect of the Property and the use to which the Property is being put that are necessary in order to comply with the requirements of: 7.8:1.1 the offices Shops and Railway Premises Act 1963, the Fire Precautions Act 1971, the Defective Premises Act 1972 and the Health and Safety at Work etc. Act 1974, 7.8:1.2 any other statute, 7.8:1.3 any government department, local authority or other public or competent authorify, 7.8:1.4 any court of competent jurisdiction, and 18 7.8:1.5 any regulation of the European Communities, which applies in the United Kingdom. 7.8:2 Not to carry out any works which the Landlord elects to carry out by serving prior written notice on the Tenant. 7.8:3 To pay, within twenty-one (21) days after receiving a written demand, the Landlord's reasonable and proper expenditure (including reasonable and proper fees and expenses) on any works which the Landlord has elected to carry out under this clause 7.8. 7.8:4 To comply with any other obligations imposed by law relating to the Property or its use, except where such compliance is within the ambit of the Landlord's obligations contained in this Lease. 7.8:5 Not to do anything in respect of the Property which imposes on the Landlord a liability under any statute to pay any penalty, damages, compensation or costs. 7.9 RESTRICTIONS ON DEALINGS 7.9:1 Not to underlet the whole or part of the Property without first obtaining the prior consent of the Landlord (which must not be unreasonably withheld or delayed (and procuring (as a condition precedent to the giving of such 7.9:1.1 that the proposed underlessee enters into a direct covenant with the Landlord to perform and observe the covenants (save for the covenant to pay rent) on the part of the Tenant and conditions contained in this Lease, 7.9:1.2 that any underlease will be granted without any fine or premium at a rent not less than the yearly open market rent at which the Property (or (in the case of an underlease of part) the part underlet) might reasonably be expected to be let without taking a fine or premium and will contain provisions approved by the Landlord: (a) for the review of the rent reserved by such Underlease on the same basis and on the same dates on which the rent is to be reviewed under this Lease including provisions whereby such review may at the option of the Landlord be consolidated with any review of the rent payable under this Lease upon terms equivalent to those contained in Clause 14, (b) prohibiting the undertenant from doing or allowing any act or thing in relation to the underlet premises which is inconsistent with or in breach of the provisions of this Lease, (c) imposing an absolute prohibition against all dispositions or other dealings whatever with the underlet premises other than an assignment, underletting or charge of the whole, (d) prohibiting the Undertenant from permitting any other person to occupy the whole or any part of the underlet premises, (e) for re-entry on breach of any covenant by the undertenant. 19 7.9:1.3 Any such underlease of part of the Property will be excluded from the operation of Sections 24 to 28 of the Landlord and Tenant Act 1954 by Court order. 7.9:1.4 In relation to any permitted Underlease; (a) to enforce the performance and observance by any such undertenant of the provisions of the underlease and not at any time either expressly or by implication to waive any breach of covenant or condition on the part of the undertenant or any assignee of any underlessee, (b) not without the consent of the Landlord to vary the terms or accept a surrender of any permitted underlease, (c) to ensure that the rent is reviewed in accordance with the terms of the underlease, (d) not to agree the reviewed rent with the undertenant without the approval of the Landlord which shall not be unreasonably withheld or delayed. 7.9:2 Not to assign, charge or part with possession or occupation of part of the Property except by a permitted underletting. 7.9:3 Not to share possession or occupation of the whole or part of the Property save with a Group Company provided that no relationship of the Landlord and Tenant is thereby created. 7.9:4 Not to hold the whole or part of the Property as trustee or agent for any other person. 7.9:5 Not to part with possession or occupation of the whole or part of the Property, except by a permitted underletting of the whole or part of the Property or assignment of the whole of the Property. 7.9:6 Subject to the provisions of clauses 7.9:1, 7.9:2, 7.9:3, 7.9:4, 7.9:5, 7.9:7 and 7.9:8, not without the Landlord's consent (which shall not be unreasonably withheld or delayed) to assign or charge the Property as a whole. 7.9:7 It is agreed for the purposes of sub-section (1A) of section 19 of the Landlord and Tenant Act 1927 (as inserted by section 22 of the Landlord and Tenant (Covenants) Act 1995) that the Landlord may (in addition to the Landlord's right to withhold consent on other grounds) withhold consent to an assignment of the Property if any one or more of the following circumstances exist: 7.9:7.1 the Landlord reasonably determines that the financial standing of the proposed assignee and any proposed guarantor, offered by the proposed assignee, is not satisfactory, 7.9:7.2 the proposed assignment is to a person connected with the Tenant and the question whether a person is so connected shall be determined in accordance with the provisions of section 533 of the Income and Corporation Taxes Act 197O (as originally enacted) Provided in addition that a person shall be treated as connected with the Tenant in relation to any assignment or proposed assignment if the Landlord reasonably 20 determines that such person is dealing with the Tenant otherwise than at arm's length, 7.9:7.3 the Landlord reasonably determines that there is a material outstanding breach by the Tenant of a Tenant Covenant, 7.9:7.4 any ascertained amount due from the Tenant to the Landlord under this Lease has not been paid, 7.9:8 It is agreed for the purposes of sub-section (1A) of section 19 of the Landlord and Tenant Act 1927 (as inserted by section 22 of the Landlord and Tenant (Covenants) Act 1995) that the Landlord may (in addition to the Landlord's right to impose other conditions) give consent to an assignment of the Property subject to any one or more of the following conditions: 7.9:8.1 that: (a) the assignor and (b) anyone who has guaranteed the obligations of the assignor (except a guarantor under an Authorised Guarantee Agreement or a guarantor who has also guaranteed the obligations of the immediate predecessor in title of the assignor) enters into a guarantee with the Landlord guaranteeing the performance and observance by the assignee of the Tenant Covenants, 7.9:8.2 if reasonably required by the Landlord that (in addition to any guarantee under clause 7.9:8.1) a guarantor reasonably acceptable to the Landlord enters into a guarantee with the Landlord guaranteeing the performance and observance by the assignee of the Tenant Covenants, 7.9:8.3 that the proposed assignee shall join in the licence to assign to give a direct covenant to the Landlord to pay to the Landlord any ascertained amounts due under this Lease from the Tenant to the Landlord at the date of completion of the assignment, 7.9:8.4 (a) if the proposed assignee or, where there are joint proposed assignees, each proposed assignee is, in the case of an individual, ordinarily resident outside the United Kingdom or is, in the case of a body corporate, incorporated outside the United Kingdom, or (b) if reasonably required by the Landlord in the case of any other assignee that the proposed assignee delivers to the Landlord on completion of the proposed assignment either: (i) a rent deposit of an amount equal to the Landlord's reasonable estimate of the Rent and Service Charge (plus VAT) payable under this Lease for the six months (or such longer period as the Landlord reasonably requires) immediately following completion of the proposed assignment to be held by the Landlord for as long as the proposed assignee has any liability under this Lease together with a duly executed deposit deed in such form as the Landlord reasonably requires, or (at the discretion of the proposed assignee) 21 (ii) a guarantee from a London clearing bank in such form as the Landlord reasonably requires. 7.9:8.5 that the Landlord may revoke the consent before completion of the assignment if: (a) any event referred to in clauses 11.4:1, 11.4:2, 11.4:3 and 11.5:1 to 11.5:5 (inclusive) has occurred in relation to the proposed assignee or any proposed guarantor, offered by the proposed assignee, or (b) the assignment is not completed within sixteen (16) weeks after the date of consent. Any guarantee under this clause 7.9:8 (except a guarantee under clause 7.9:8.4(ii) shall be in the form of the guarantee contained in clause 15 but where applicable with the assignee substituted for the original Tenant and with such other amendments as the Land!ord reasonably requires and (where an assignor is giving a guarantee) any further amendments required to create an Authorised Guarantee Agreement. 7.9:9 In respect of any circumstance or condition specified in clauses 7.9:7 and 7.9:8 which is framed by reference to any matter falling to be determined by the Landlord or by any other person for the purposes of this Lease (except where the power to determine such matter is required to be exercised reasonably) the Tenant has an unrestricted right to have any determination reviewed by an independent surveyor in accordance with clause 13.3. 7.10 REGISTRATION OF ASSIGNMENTS, ETC. 7.10:1 Within one month after its date, to produce to the Landlord's solicitors every assignment, underlease, charge or other document evidencing a devolution of the whole or any part of the Property. At the same time to provide the Landlord's solicitors with a true copy of the document. 7.10:2 on production of a document under clause 7.10:1 to pay to the Landlord's solicitors a reasonable registration fee of not less than twenty-five pounds ( 25) plus VAT. 7.11 INFORMATION 7.11:1 To produce to the Landlord on request (but not more frequently than may be reasonable) all plans, documents and other evidence which the Landlord may reasonably require in order to be satisfied that the Tenant has complied with its obligations under this Lease. 7.11:2 When requested, to supply to the Landlord full details of all occupations of the Property and derivative interests in the Property, however remote. 7.11:3 As soon as reasonably practicable to notify the Landlord in writing of each change in the principal address of the Tenant (including in the case of an individual a change in the usual place of residence and in the case of a Tenant with a registered office a change in the address of the registered office). 22 7.12 ALTERATIONS 7.12:1 Not to alter, or add to, the structure or exterior of the Property. 7.12:2 Not without the Landlord's consent (which shall not be unreasonably withheld or delayed) to alter or extend: 7.12:2.1 the electrical installation (including wiring) in the Property, 7.12:2.2 any gas installation (including piping) in the Property, or 7.12:2.3 any air-conditioning system in the Property. 7.12:3 Not to make any other alterations or additions to the Property without the Landlord's consent (which shall not be unreasonably withheld or delayed). Provided that notwithstanding clause 7.12:1 the Tenant may fit out the Property to their specification as approved by the Landlord such approval not to be unreasonably withheld or delayed. 7.12:4 on any application for consent to alter, to supply the Landlord with two (2) sets of a specification and detailed drawings identifying the proposed works. 7.12:5 Not without the Landlord's consent (which shall not be unreasonably withheld or delayed) to fix, place or leave anything (for example: any aerial, satellite dish, telecommunications equipment, iighting, shade or awning) on the exterior of the Property. 7.12:6 If required by the Landlord, to reinstate the Property by the end of the Tenancy under the supervision and to the reasonable satisfaction of the Landlord's Surveyor, to the condition it was in before the carrying out of any permitted alterations or additions. 7.13 SIGNS AND NOTICES Not to place or display any Signs and Notices on the Property which can be seen from outside the Property, except that the Tenant may display external signs giving the Tenant's name and business, the size, style and position of which have been first approved by the Landlord such approval not to be unreasonably withheld or delayed. 7.14 COST OF REMOVAL BY LANDLORD OF UNAUTHORISED SIGNS, ETC If anything is fixed, placed, displayed or left on the Property in breach of clause 7.12 or clause 7.13 to pay to the Landlord, within fourteen (14) days after a written demand, the reasonable and proper cost of removal incurred by the Landlord. 7.15 SERVICE INSTALLATIONS 7.15:1 To pay to the suppliers, and to indemnify the Landlord against, all charges for electricity, gas, water, telephone and other services consumed or used at or for the Property (including meter rents). 7.15:2 To comply with the requirements and regulations of the suppliers of electricity, gas, water, telephone and other services relating to the installations in the Property. 7.15:3 Not to overload the electrical installation in the Property. To maintain the electrical installation, any gas installation and any air-conditioning system in a safe condition. 23 7.16 NUISANCE Not to do anything on the Property which causes a nuisance, damage or annoyance to the Landlord or others Provided that it is hereby agreed that the use of the property for purposes permitted under this Lease shall not of itself amount to a breach of this clause. 7.17 USE 7.17:1 Not to use the Property: 7.17:1.1 for any illegal or immoral purpose, 7.17:1.2 for any offensive, noisy or dangerous trade, business or manufacture, 7.17:1.3 as a betting office, a booking office, a theatrical agency, an employment agency or a travel agency, 7.17:1.4 as a sex establishment (as defined in the Local Government (Miscellaneous Provisions) Act 1982), or 7.17:1.5 for any diplomatic use. 7.17:2 To use the Property only for the purpose stated in clause 1.8 or for such other purpose as the Landlord shall approve, which approval shall not be unreasonably withheld or delayed. 7.18 OVERLOADING Not to overload the Property. 7.19 NOTICES 7.19:1 To supply the Landlord with a copy of any notice, order, direction or proposal of any competent authority affecting the Property as soon as reasonably possible after it has been received by the Tenant. 7.19:2 To comply with any such notice, order, direction or proposal or, at the request and cost of the Landlord, to make or join with the Landlord in making such objections or representations relating to it as the Landlord may reasonably require except where the Tenant reasonably considers that any such objections or representations are against its best interests or those of any undertenant. 7.20 PLANNING 7.20:1 Not to commit any breach of Planning Control. To comply with all provisions and requirements under the Planning Acts which affect the Property. 7.20:2 Not without the Landlord's consent (such consent not to be unreasonably withheld or delayed and which consent shall not be required in relation to applications in respect of the signage at the Property) to apply for planning permission relating to the Property or to implement any planning permission. 7.20:3 Unless the Landlord gives written notice to the contrary, to carry out before the end of the Tenancy any works required to be carried out to the Property as a condition of any planning permission obtained by or for the Tenant or anyone having an interest in the Property inferior to that of the 24 Tenant. This applies even if the planning permission does not require the works to be carried out until later. 7.21 ENCROACHMENTS 7.21:1 Not to stop up, darken or obstruct any window at the Property. 7.21:2 So far as reasonably possible, to preserve all easements and rights enjoyed by the Property and to help the Landlord prevent anyone acquiring any easement or right over the Property. 7.22 MAINTENANCE AGREEMENTS To maintain in force, throughout the Tenancy, agreements with competent contractors approved by the Landlord (such approval not to be unreasonably withheld or delayed) for the maintenance, repair and upkeep of any electrical and mechanical equipment and apparatus and other plant and machinery in and serving the Property. 7.23 DEFECTIVE PREMISES 7.23:1 Promptly to give written notice to the Landlord upon becoming aware of any defect in the Property which might result in an obligation on the Landlord to do or to stop doing anything (for example, in order to comply with the provisions of this Lease or the duty of care imposed by the Defective Premises Act 1972). 7.23:2 To display and maintain all notices relating to the condition of the Property which the Landlord shall reasonably require the Tenant to display at the Property. 7.24 LANDLORD'S RIGHTS To allow the Landlord to exercise its rights under this Lease free from interference by the Tenant. 7.25 LANDLORD'S REGULATIONS To comply with the regulations a copy of which is annexed. 7.26 THE CDM REGULATIONS Where works are carried out on or for the benefit of the Property to which the Construction (Design and Management) Regulations 1994 ("the CDM Regulations~) apply and the works are carried out by or on behalf of the Tenant or anyone having an interest in the Property inferior to this Lease: 7.26:1 to comply with the CDM Regulations and to procure that any person involved in carrying out such works complies with the CDM Regulations, 7.26:2 to act (or if the works are to be carried out by an undertenant to procure that the undertenant acts) as the only c~ient for the works and before commencing the works to make (or procure the making of) a declaration to that effect in accordance with Regulation 4 of the CDM Regulations, 7.26:3 to comply with the following obligations in respect of the health and safety file covering the works: 25 7.26:3.1 to provide the Landlord: (a) with a copy of the file on completion of the works, and (b) with copies of the whole or any part of the file at any time on request, 7.26:3.2 to make the file available for inspection by the Landlord on request, 7.26:3.3 to hand over the file to the Landlord at the end the tenancy created by this Lease and any renewals of this Lease, 7.26:4 as soon as reasonably practical after becoming aware of any relevant information concerning health and safety relating to the Property to provide such information to the Landlord, 7.26:5 to allow the Landlord and its agents to use any documents and other information (including the making of copies) supplied by the Tenant under this clause 7.26 for any purpose connected with the Property, 7.26:6 to obtain all necessary copyright licences permitting the use of the documents and other information under the provisions of clause 7.26:5. 7.27 LANDLORD'S COSTS 7.27:1 To pay, on an indemnity basis, the reasonable and proper legal charges, surveyor's fees, bailiff's charges and other costs and expenses reasonably and properly incurred by the Landlord and any superior landlord in relation to: 7.27:1.1 applications by the Tenant for the Landlord's consent (including cases where consent is reasonably refused or the application is withdrawn), unless such refusal is unlawful whether because it is unreasonable or otherwise 7.27:1.2 the preparation and service of a schedule of dilapidations during or after the expiration of the Tenancy (but if after the expiration of the Tenancy only in respect of wants of repair occurring during the Tenancy and where served within three months after the expiration of the Tenancy) or a notice or proceedings under Sections 146 or 147 of the Law of Property Act 1925 (even if forfeiture is avoided otherwise than by relief granted by the court), 7.27:1.3 the recovery of any sums due to the Landlord from the Tenant, or 7.27:1.4 enforcing or requiring the Tenant to remedy a breach of the provisions of this Lease. 7.27:2 Where the Landlord could recover the cost of advice or services under clause 7.27:1 if undertaken by a third party but the Landlord or a Group Company of the Landlord provides the advice or services, to pay to the Landlord the amount that would have been payable by the Tenant if that advice or service had been provided by a third party. 26 7.28 INDEMNITIES To keep the Landlord indemnified against all liabilities, losses and expenses, incurred by the Landlord arising out of the negligence or wrongful act of the Tenant or any breach of the tenant's covenants in this Lease. 7.29 YIELD UP At the end of the Tenancy to give up the Property: 7.29:1 repaired, carpeted, decorated and, if required by the Landlord, reinstated in accordance with: 7.29:1.1 any obligations under this clause 7, and 7.29:1.2 any consents given by the Landlord to the Tenant, 7.29:2 clear of any goods and refuse and any tenant's fixtures and with all damage caused by such removal made good, 7.29:3 with all keys and electronic passes relating to the Property, and 7.29:4 with all Signs and Notices put up by the Tenant removed and all damage caused by removal made good. 7.30 VAT 7.30:1 To pay to the Landlord, and to indemnify the Landlord against, any VAT chargeable in respect of: 7.30:1.1 the rents, payments and other consideration payable or given by the Tenant to the Landlord or to any person on the Landlord's behalf and any supply made by the Landlord to the Tenant under or in connection with this Lease, and 7.30:1.2 any payments made by, or other liability of, the Landlord or any other person where the Tenant agrees in this Lease to reimburse or indemnify the Landlord in respect of any such payment or liability, except to the extent that the Landlord is entitled to a credit for such VAT as allowable input tax. Provided that the Landlord will provide a valid VAT invoice in the Tenant's name. 7.30:2 For the avoidance of doubt: 7.30:2.1 the Landlord shall not be under any duty to exercise, or not to exercise, any option or right so as to reduce or avoid any liability to VAT in respect of the Property, and 7.30:2.2 it is confirmed that the amounts due under this Lease from the Tenant to the Landlord are exclusive of VAT. 27 LANDLORD'S COVENANTS - ------------------------------------------------------------------------------- CLAUSE 8 The Landlord covenants with the Tenant: QUIET ENJOYMENT That, as long as the Tenant pays the rents and complies with the terms of this Lease, the Tenant may enjoy the Property peaceably during the Tenancy without any interruption (except as authorised by this Lease) by the Landlord or any person lawfully claiming through, under or in trust for the Landlord. 28 INSURANCE - ------------------------------------------------------------------------------- CLAUSE 9 9.1 LANDLORD TO INSURE PROPERTY The Landlord shall insure the Property, (but not tenant's fixtures), so far as such insurance is reasonably available: 9.1:1 with a reputable insurance company or with reputable underwriters, 9.1:2 for the following sums: 9.1:2.1 the full reinstatement value of the Property (except usual voluntary excesses) including the cost of shoring up, demolition and site clearance, fees, an allowance for inflation and VAT on all such sums, 9.1:2.2 loss of the Rent reasonably estimated by the Landlord's Surveyor to be payable for three (3) years, or such longer period as the Landlord's Surveyor may reasonably consider necessary for planning and carrying out the reinstatement or rebuilding of the Property, 9.1:3 against damage or destruction by the Insured Risks, 9.1:4 on terms that the insurers waive their rights of subrogation against the Tenant in respect of the Property, and 9.1:5 on terms not imposing unreasonable conditions having regard to general market conditions at the time, but subject to such excesses, exclusions and limitations and other terms as the insurers may impose. 9.2 ADDITIONAL LANDLORD'S FIXTURES If the Tenant installs fixtures which become landlord's fixtures, the Tenant shall notify the Landiord in writing of the reinstatement value so that the Landlord can arrange adequate insurance cover. 9.3 LANDLORD TO INFORM TENANT OF INSURANCE COVER 9.3:1 on request by the Tenant (and payment by the Tenant to the Landlord of a reasonable fee), the Landlord shall produce to the Tenant reasonable evidence of the terms of the insurance policy and of payment of the current premium. 9.3:2 The Landlord shall notify the Tenant in writing of any material changes in the risks covered and material changes in the terms of the policy with which the Tenant must comply. 9.4 DAMAGE TO PROPERTY 9.4:1 If the Property or its essential accesses or services are damaged or destroyed by an Insured Risk or an Excluded Risk: 29 9.4:1.1 unless payment of any of the insurance money is refused because of an act or default of the Tenant, and 9.4:1.2 subject to the Landlord (using its best endeavours) being able to obtain any necessary consents, and 9.4:1.3 subject to the necessary labour and materials being and remaining available, the Landlord shall, subject to clause 9.5, reinstate the damaged part or rebuild the Property (but not so as to provide accommodation identical in layout if it would not be reasonably practicable to do so) as quickly as reasonably possible. 9.4:2 The Landlord shall use reasonable efforts to obtain the necessary consents (short of making appeals), labour and materials. 9.4:3 The Tenant shall, on request, vacate the Property and remove its fixtures and effects to allow the Landlord to reinstate the Property. 9.5 OPTION TO TERMINATE FOLLOWING DAMAGE BY AN INSURED RISK If the whole or a substantial part of the Property is made unfit for use by damage or destruction caused by an Insured Risk and: 9.5:1 the damage or destruction occurs during the last four (4) years of the Contractual Term, or 9.5:2 circumstances beyond the control of the Landlord prevent the reinstatement or rebuilding of the Property being started by the third (3rd) anniversary of the date of such damage or destruction, either the Landlord or the Tenant may terminate this Lease by notice in writing to the other. The notice may only be given within six (6) months after either the date of such damage or destruction under clause 9.5:1 or the third (3rd) anniversary referred to in clause 9.5:2 (as the case may be). on service of the notice this Lease shall terminate but without prejudice to any claim of the Landlord or the Tenant for an earlier breach of covenant by the other. on termination of this Lease the insurance money shall belong to the Landlord. 9.6 OPTION TO TERMINATE FOLLOWING DAMAGE BY AN EXCLUDED RISK 9.6:1 If the whole or a substantial part of the Property is made unfit for use by damage or destruction caused by an Excluded Risk the Landlord may elect not to reinstate the Property. Any such election shall be made by the Landlord serving notice in writing ("Non-Reinstatement Notice") on the Tenant within six (6) months after the date of such damage or destruction. 9.6:2 If the Landlord serves a Non-Reinstatement Notice: 9.6:2.1 the Landlord (despite any other provisions of this Lease) shall not be under any obligation to reinstate the Property, and 9.6:2.2 either the Landlord or the Tenant may terminate this Lease by notice in writing to the other. Such a notice ("Termination Notice") may only be given within six (6) months after the date of service of the Non-Reinstatement Notice. on service of a Termination Notice, this Lease shall terminate, but without prejudice to the claim of either the Landlord or the Tenant for any earlier breach of covenant by the other. on termination of this Lease the insurance money shall belong to the Landlord. 30 9.7 APPLICATION BY TENANT FOR NEW IEASE FOLLOWING TERMINATION 9.7:1 If following: 9.7:1.1 termination of this Lease under clause 9.5, or 9.7:1.2 service of a Termination Notice under clause 9.6, the Tenant makes an application for a new lease of the Property under the Landlord and Tenant Act 1954 then clause 9.7:2 shall apply. 9.7:2 Notwithstanding clauses 7.4:7, 7.4:8 and 1O, the Tenant: 9.7:2.1 shall, so far as reasonably possible, make good the destruction of, or damage to, the Property caused by an Insured Risk or an Excluded Risk which gave rise to the termination of this Lease under clause 9.5 or the service of a Termination Notice (as the case may be), and 9.7:2.2 shall continue paying the Rent and the Insurance Rent from the date of the destruction or damage referred to in clause 9.7:2.1. 9.8 TENANT'S OBLIGATIONS IN RESPECT OF LANDLORD'S INSURANCES 9.8:1 The Tenant shall not, by act or omission, do anything which: 9.8:1.1 adversely affects any Landlord's insurance reiating to the Property, or 9.8:1.2 causes any increase in the insurance premium payable for any such insurance, unless the Tenant has obtained the Landlord's approval and has agreed to pay the additional premium, or 9.8:1.3 otherwise prevents the Landlord from renewing any such insurance on terms that would have applied but for the Tenant's act or omission. 9.8:2 The Tenant shall comply with the requirements and reasonable recommendations of the insurers of the Property and the fire authority and the reasonable requirements of the Landlord in respect of the Property relating to: 9.8:2.1 explosive and specially flammable articles, substances and liquids, 9.8:2.2 the provision and maintenance of fire fighting equipment, and 9.8:2.3 fire and safety precautions. 9.8:3 The Tenant shall repay to the Landlord, within fourteen (14) days after a written demand, all increased premiums paid and all losses and damage suffered by the Landlord because of a breach by the Tenant of this clause 9.8. 9.8:4 The Tenant shall immediately upon becoming aware of the happening of any such event, inform the Landlord in writing of any circumstance in respect of the Property which might affect, or lead to a claim on, any Landlord's insurance relating to the Property. 31 9.8:5 If because of the Tenant's act or default, any insurance money under the insurance policy arranged by the Landlord or a superior landlord (other than in respect of the loss of rents) is wholly or partially irrecoverable, the Tenant shall pay to the Landlord, within fourteen (14) days after a written demand, the irrecoverable amount but not so as to require payment before the equivalent insurance money would have been payable. on payment, clause 9.4 shall apply as though the insurance money had been recoverable. 9.9 TENANT'S INSURANCE 9.9:1 The Tenant shall maintain in force throughout the Term insurance in respect of the Property against any act or default of the Tenant which gives rise to a liability to third parties for injury to or death of any person or damage to any property 9.9:2 The Tenant shall produce to the Landlord on request the policy relating to any insurance specified in clause 9.9:1 and evidence of payment of the current premium. 9.9:3 The Tenant shall indemnify the Landlord in respect of any loss or damage against which the Tenant is obliged to insure under this clause 9.9. 9.9:4 The Tenant shall not arrange any insurance of the Property against an Insured Risk. If the Tenant has the benefit of any such insurance, the Tenant shall hold all money receivable under such insurance in trust for the Landlord. 32 SUSPENSION OF RENT - ------------------------------------------------------------------------------- CLAUSE 10 10.1 APPLICATION This clause 10 applies (subject to clause 9.7:2) if the Property or its essential accesses or services are damaged destroyed by an Insured Risk or (unless caused by the act or default of the Tenant) an Excluded Risk so that any part of the Property is unfit for use. 10.2 Suspension The whole or a Fair Proportion of the Rent, according to the extent of the damage, shall be suspended until the earlier of: 10.2:1 the date that the whole of the Property (with the necessary services) is again fit for use, and 10.2:2 the expiration of the period of three (3) years from the date of the damage or, if longer, the period of the loss of rent covered by the Landlord's insurance, except to the extent that payment of any of the insurance money in respect of the loss of rents is refused because of an act or default of the Tenant. 10.3 DISPUTES Any dispute about this clause 1O shall be settled by Arbitration. If, before an application is made for the appointment of an arbitrator, the Landlord so elects by notice in writing served on the Tenant, a dispute will instead be determined by an independent surveyor. 33 FORFEITURE - ------------------------------------------------------------------------------- CLAUSE 11 If any of the following events occur: 11.1 any rents are unpaid for twenty-one (21 ) days after becoming due (whether formally demanded or not), 11.2 there is a breach by the Tenant or the Guarantor (if any) of any covenant or other term of this Lease, 11.3 the Tenant or the Guarantor (if any) enters into an arrangement or composition for the benefit of creditors, 11.4 the Tenant or the Guarantor (if any) being an individual (or if more than one individual then any one of them): 11.4:1 becomes bankrupt, 11.4:2 makes an application to the Court for an interim order under Part Vlil of the Insolvency Act 1986, or 11.4:3 has been served with a statutory demand under the Insolvency Act 1986 which has not been satisfied. 11.5 the Tenant or the Guarantor (if any) being a body corporate (or if more than one of them is a body corporate then any one of them): 11.5:1 has a winding-up petition or a petition for an administration order presented against it, 11.5:2 is subject to a resolution by the directors or shareholders to present a petition for an administration order, 11.5:3 has an administration order made in respect of it, 11.5:4 passes a winding-up resolution or enters into liquidation (other than a winding up or liquidation for the purpose of reconstruction or amalgamation of a solvent body corporate), or 11.5:5 has a receiver or an administrative receiver or a receiver and manager appointed, or, 11.6 execution or distress is levied on the Tenant's goods in the Property, then the Landlord may, by re-entering any part of the Property, forfeit this Lease and the Tenancy shall immediately end, but without prejudice to any other rights and remedies of the Landlord or the Tenant. Provided however that in the event that this Lease is mortgaged at the time of the proposed re-entry and the Landlord has been given notice of the existence of the mortgage then prior to such re-entry or proceedings therefor the Landlord will serve a notice of such proceedings and proposed re-entry on the mortgagee at the mortgagee's last known address. 34 DECLARATIONS, WARRANTIES AND MISCELLANEOUS - ------------------------------------------------------------------------------- CLAUSE 12 12.1 REPRESENTATIONS AND EXCLUSION OF USE WARRANTY 12.1:1 The Tenant acknowledges that this Lease has not been entered into in reliance on any representation made by or on behalf of the Landlord. 12.1:2 Nothing in this Lease, or in any consent granted by the Landlord, shall imply a warranty by the Landlord that the Property may be used for any specific purpose under the Planning Acts. 12.2 ACCIDENTS The Landlord is not liable to the Tenant nor to any other person for: 12.2:1 any damage to, or loss of, any goods or property sustained in the Property, or 12.2:2 any other damage, loss, accident, happening or injury not caused or contributed to by the negligence of the Landlord or any employee of the Landlord. 12.3 PAYMENTS RECOVERABLE AS RENT Amounts payable by the Tenant and any guarantor under this Lease not expressly reserved as rent shall be recoverable as if they were rent. 12.4 RELEASE OF THE LANDLORD The obligations on the Landlord under this Lease shall not be binding on, or enforceable against, any person who has ceased to be the Landlord to the extent that the obligations relate to any time after that person has ceased to be the Landlord. 12.5 SERVICE OF NOTICES The provisions of Section 196 of the Law of Property Act 1925 (as amended by the Recorded Delivery Service Act 1962) and Section 23 of the Landlord and Tenant Act 1927 shall apply to the service of all notices under or in connection with this Lease except that Section 196 shall be deemed to be amended by the deletion of the words "and that service ... be delivered45 at the end of Section 196(4) and the substitution of the words "... and that service shall be deemed to be made on the third Working Day after the registered letter has been posted; "Working Day" meaning any day from Monday to Friday (inclusive), other than Christmas Day, Good Friday and any statutory bank or public holiday". 12.6 JURISDICTION OF THE ENGLISH COURTS The parties, including any Guarantor, submit to the exclusive jurisdiction of the English courts on all matters relating to this Lease. 35 12.7 TENANT'S OPTION TO TERMINATE The Tenant may terminate this Lease on the 31 st December 20O2 by giving to the Landlord not less than twelve (12) calendar months and three (3) days' notice in writing and on expiry of such notice: 12.7:1 this Lease shall come to an end, but without prejudice to the rights of either party against the other for any antecedent breach of covenant, 12.7:2 the Tenant shal-l give vacant possession of the whole of the Property, and 12.7:3 the Tenant shall cancel any notice, caution or land charge registered to protect this Lease and shall, if the title to this Lease is registered at H.M. Land Registry, assist the Landlord in cancelling such title. 36 ARBITRATION OR DETERMINATION BY EXPERT - ------------------------------------------------------------------------------- CLAUSE 13 13.1 CONTRARY PROVISION Any contrary provision elsewhere in this Lease shall modify the provisions of this clause 13. 13.2 ARBITRATION 13.2:1 Where this Lease provides for reference to Arbitration, a reference shall be made, in accordance with the Arbitration Acts 195O and 1979, to a single arbitrator. 13.2:2 The arbitrator may be appointed by the Landlord and the Tenant jointly. otherwise the arbitrator shall be nominated by the President of the RICS, on the application of either the Landlord or the Tenant. 13.2:3 If an appointed or nominated arbitrator dies or declines to act or it becomes clear that he will be unable to complete his duties, a replacement shall be appointed or nominated by the same process. 13.3 DETERMINATION BY AN EXPERT 13.3:1 Where this Lease provides for reference to the determination of an independent surveyor a reference shall be made on the terms of clause 13.4 to the determination of a single independent surveyor. 13.3:2 The surveyor may be appointed by the Landlord and the Tenant jointly or, in the absence of agreement on a joint appointment, shall be nominated by the President of the RICS, on the application of either the Landlord or the Tenant. 13.3:3 The surveyor shall act as an expert (not as an arbitrator) on the terms set out in clause 13.4. 13.4 EXPERT'S TERMS OF APPOINTMENT 13.4:1 The surveyor shall give to the Landlord and the Tenant notice in writing of his appointment. In that notice, the surveyor shall invite the Landlord and the Tenant to submit within a specified time period, not exceeding four (4) weeks, their respective proposals and representations. 13.4:2 The surveyor shall: 13.4:2.1 consider the proposals and representations submitted to him (but not be limited or fettered by them), 13.4:2.2 be entitled to rely on his own judgment and opinion, 13.4:2.3 state any reasons for his decision, and 37 13.4:2.4 within eight (8) weeks after his appointment, or within such extended period as the Landlord and the Tenant may agree, give to the Landlord and the Tenant written notice of his decision, and his decision shall be final and binding on the Landlord the Tenant and the Guarantor (if any). 13.4:3 If the surveyor: 13.4:3.1 does not give notice of his decision within the time and in the manner referred to in clause 13.4:2, 13.4:3.2 resigns from his appointment, or 13.4:3.3 dies, or if for any reason it becomes clear that he will be unable to complete his duties, the Landlord or the Tenant may appoint, or apply for the nomination of, a new surveyor in his place, and this procedure may be repeated as many times as necessary. 13.4:4 In the absence of a direction by the surveyor as to how his fees or charges are to be borne, the Landlord and the Tenant shall bear them equally. 13.4:5 if the provisions for an independent surveyor to determine the issue fail completely, the issue shall then be referred to Arbitration. 13.5 EXPERIENCE OF ARBITRATOR OR EXPERT The arbitrator or independent surveyor shall, if reasonably practicable, be a surveyor experienced in the valuation or letting of premises similar to the Property. 13.6 NON-PAYMENT OF COSTS OF ARBITRATOR OR EXPERT This clause 13.6 applies if the arbitrator or independent surveyor is ready to make his award but is unwilling to do so due to the failure by one party to pay its share of the costs of the award. If one party fails to pay its share of the costs within fourteen (14) days after a written request, the other party may pay that share and any amount so paid shall be a debt due immediately from the party in default to the other party. 38 RENT REVIEW - ------------------------------------------------------------------------------- CLAUSE 14 14.1 DEFINITIONS In this clause the following definitions apply: "REVIEW the following assumptions at the relevant Review Date: ASSUMPTIONS" (a) that the Property is fit for use and has been fully fitted out and equipped by, and at the cost of, the Landlord so as to be ready for immediate occupation and use for any purpose permitted under this Lease by any prospective willing tenant, (b) that no work other than work carried out in compliance with clause 7.8 has been carried out to the Property during the Tenancy or under an agreement for the grant of this Lease which has reduced its rental value. (c) that the Property is in a good state of repair and decorative condition, (d) that if the Property has been damaged or destroyed, it has been fully restored, (e) that the Property is available to let as a whole with vacant possession by a willing landlord to a willing tenant without a premium payable by the tenant, (f) that the letting is to be on the same terms as those contained in this Lease (other than the amount of the Rent) but subject to the following qualifications: (i) the term is to commence on the relevant Review Date and is to continue for ten (10) years with tenant's option to terminate after six and a half (6-1/2) years, (ii) the rent is to be subject to review on the terms of this clause 14 at five (5) yearly intervals after the commencement of the term of the letting. (iii) the permitted use is to be that originally permitted by this Lease and by any consent given by the Landlord, at the request of the Tenant, before the relevant Review Date, but taking into account any provisions entitling the Tenant to change the use with the Landlord's consent, (iii) the provisions of clauses 7.9:6 and 7.9:7 are excluded (and clause 7.9:5 consequently amended) and (iv) where this Lease has been varied, the variations are to be incorporated into the new lease, unless the variation document expressly states otherwise, 39 (g) that the covenants by the Landlord and the Tenant in this Lease have been and will continue to be fully performed and observed, (h) that no reduction is to be made to take account of any rental concession which, on a new letting with vacant possession, might be granted to the incoming tenant for a period within which its fitting out works would be carried out, (i) that the benefit of any planning or other consent or licence current at the relevant Review Date is available also for such willing tenant, (j) that the Property may lawfully be used for the use originally permitted by this Lease and permitted by any consent given by the Landlord at the request of the Tenant, before the relevant Review Date, and (k) that any VAT chargeable on the rents is fully recoverable by the Tenant as an input for VAT purposes. "EXCLUDED the following matters at the relevant Review Date: REVIEW MATTERS" (a) any effect on the rent of the fact that the Tenant, or any sub-tenant or any predecessor in title of either, is or has been in occupation of the Property, (b) any goodwill attached to the Property by reason of the carrying on there of any business of the Tenant its sub-tenants or their predecessors in title to their respective businesses, (c) any increase in rental value due to any improvements made to the Property before or after the date of this Lease by the Tenant or its sub-tenants with any consents (where required), except improvements: (i) made at the expense of, or under an obligation to, the Landlord or its predecessors in title, or (ii) completed more than twenty-one (21) years before the relevant Review Date, and for the avoidance of doubt the works specified in the attached schedule have been or will be carried out by the Tenant under an obligation to the Landlord (and so are not Excluded Matters). (d) any temporary legal restraint on making or recovering any increase in the Rent, (e) any depreciatory effect on the rent because VAT is charged or chargeable on the rents, "OPEN MARKET the yearly rent, making the Review Assumptions and disregarding RENT" the Excluded Review Matters, which would reasonable be expected to be payable for the Property on a letting in the open market on the relevant Review Date. "REVIEW DATE" each date specified in clause 1.6:4 40 14.2 NEW RENT From and including each Review Date, the Rent will be: 14.2:1 the sum agreed in writing between the Landlord and the Tenant at any time, or 14.2.2 in the absence of such agreement, the greater of: 14.2:2.1 The Rent payable as specified in clause 1.6:1, or, if payment of the whole or part of the Rent has been suspended, the Rent that would have been payable had there been no suspension, and 14.2:2.2 the Open Market Rent determined (but not earlier than the relevant Review Date) by Arbitration. If before an application is made for the appointment of an arbitrator, the Landlord so elects by prior notice in writing served on the Tenant, the determination will instead be made by an independent surveyor. Any application for the appointment of an arbitrator or an independent surveyor may be made at any time after (but not before) the date six (6) months before the relevant Review Date. 14.3 MEMORANDUM 14.3:1 Whenever a new Rent is agreed or determined under clause 14.2, the Landlord and the Tenant shall each execute a memorandum recording the agreed amount of the new Rent and the memoranda shall be exchanged. 14.3:2 The memoranda will be prepared by the landlord and the parties shall bear their own costs in this respect. 14.4 DELAY If the Rent payable from a Review Date ("the New Rent") is not known until after that Review Date: 14.4:1 the Rent payable immediately before the Review Date ("the Old Rent") shall continue to be payable until the New Rent is ascertained, and 14.4:2 when the New Rent is ascertained, the Tenant shall pay, within fourteen (14) days after the date of ascertainment: 14.4:2.1 any difference ("the Shortfall") between the Old Rent and the New Rent for the period since the Review Date, and 14.4:2.2 interest at Base Rate on the Shortfall, 14.4:3 if interest is payable on the Shortfall, it shall accrue separately on each instalment of the Shortfall from the date on which each instalment would have been payable (had the New Rent been known by the Review Date) to the date of payment of the Shortfall, or to the date fourteen (14) days after the New Rent becomes known, whichever date is the sooner. 41 GUARANTEE - ------------------------------------------------------------------------------- CLAUSE 15 15.1 DEFINITIONS In this clause "TERMINATION EVENT" means: (a) the disclaimer of this Lease, or (b) the surrender of this Lease by a liquidator, administrative receiver or trustee in bankruptcy, or (c) the forfeiture of this Lease, or (d) the Original Tenant (being a body corporate) ceasing to exist. 15.2 GUARANTEE The Guarantor covenants with and guarantees to the Landlord, as a premiinary obligation and with joint and several liability as if the Guarantor were the tenant or a co-tenant with the tenant: 15.2:1 that the Original Tenant shall comply with its obligations: 15.2:1.1 to pay the rents under this Lease, including all increases whether implemented in accordance with this Lease or otherwise agreed or settled between the Landlord and the Original Tenant, and 15.2:1.2 to perform and observe the Tenant Covenants, and 15.2:1.3 to perform and observe the provisions of any Authorised Guarantee Agreement entered into by the Original Tenant under the terms of this Lease, 15.2:2 that the Guarantor shall indeminify the Landlord against all losses, claims, demands, damages, liabilities, costs, fees and expenses suffered by the Landlord as a result, directly or indirectly, of a breach by the Original Tenant of a Tenant Covenant or the happening of a Termination Event. 15.3 NEW LEASE ON DISCLAIMER, ETC. 15.3:1 If the Landlord so requires, by notice in writing served on the Guarantor within four (4) months after a Termination Event, the Guarantor shall immediately take up a new lease of the Property. The terms of the new lease shall be such that, under the combination of this Lease and the new lease, the Landlord will be in the same postion (so far as can be achieved) as if the Termination Event had not occurred and the Guarantor had been the tenant under this Lease. Without prejudice to these general words, the new lease is to include the following provisions: 15.3:1.1 the term shall commence on (and shall include) the day after the date of the Termination Event and continue for the balance of the Contractual Term, and 42 15.3:1.2 if on the date of the Termination Event there is an outstanding rent review: (a) the second day of the term shall be a review date ("New Lease First Review Date"), (b) for the purpose of the review of the Rent on the New Lease First Review Date (but not on any subsequent Review Date) the Open Market Rent shall be assessed as at the last Review Date in this Lease falling before the New Lease First Review Date, (c) pending ascertainment of the New Rent payable from the New Lease First Review Date (in accordance with the provisions for review of the Rent) the initial Rent shall be the Rent payable under this Lease immediately before the date of the Termination Event, and (d) on ascertainment of the New Rent clause 14.4 shall apply, and 15.3:1.3 the other terms shall be the same as the terms of this Lease, with all provisions of a periodic nature, including any relating to review of the Rent, applying on the dates that would have applied if the Termination Event had not occurred. 15.3:2 The Guarantor shall pay the Landlord's reasonable and proper costs and expenses in connection with the grant of the new lease. 15.4 WAIVER BY GUARANTOR OF RIGHTS 15.4:1 The Guarantor waves any right to require the Landlord to proceed against the Original Tenant or to pursue any other remedy which may be available to the Landlord before proceeding against the Guarantor. 15.4:2 The Guarantor shall not claim in any liquidation, bankruptcy, composition or arrangement of the original Tenant in competition with the Landlord. 15.4:3 While any liabilities of the Original Tenant or the Guarantor to the Landlord remain outstanding: 15.4:3.1 the Guarantor shall pay to the Landlord the proceeds of all judgments and distributions it receives from any liquidator, trustee in bankruptcy or supervisor of the Original Tenant, 15.4:3.2 the Guarantor shall hold for the benefit of the Landlord all security and rights the Guarantor may have over assets of the Original Tenant, 15.4:3.3 the Guarantor shall not be entitled to benefit from any security held by the Landlord in respect of the Original Tenant's obligations to the Landlord under this Lease, and 15.4:3.4 the Guarantor shall not be entitled to stand in the place of the Landlord in respect of any such security. 43 15.5 GUARANTOR'S LIABILITY NOT TO BE PREJUDICED The Guarantor's liability under this clause 15 is not to be discharged or reduced by any of the following: 15.5:1 any time or indulgence granted by the Landlord to the Origianl Tenant or any neglect or tolerance by the Landlord in enforcing the Original Tenant's obligations, 15.5:2 the Landlord's refusal to accept rent tendered, when acceptance of rent might have joepardised the Landlord's right of forfeiture, 15.5:3 any change in the constitution, structure or powers of the Original Tenant, the Guarantor or the Landlord, 15.5:4 the liquidation, administration or bankruptcy of the Origianl Tenant or the Guarantor 15.5:5 any legal limitation or any immunity, disability or incapacity of the original Tenant, whether or not known to the Landlord, or any dealings with the Landlord by the original Tenant outside the powers of the original Tenant, 15.5:6 a variation of the terms of this Lease by agreement between the Landlord and the original Tenant, or 15.5:7 any other thing by which (but for this provision) the Guarantor would have been released. 15.6 SURRENDER OF PART BY ORIGINAL TENANT If the original Tenant surrenders part of the Property: 15.6:1 the liability of the Guarantor shall continue in respect of the remainder, after making any necessary apportionments under Section 14O of the Law of Property Act 1925, and 15.6:2 any new lease granted under clause 15.3 shall be of the part of the Property that has not been surrendered. 15.7 BENEFIT OF GUARANTEE Successors of the Landlord shall automatically be entitled to the benefit of this guarantee without the need for an assignment. 15.8 CHANGE OF ADDRESS The Guarantor shall forthwith notify the Landlord in writing of each change in the principal address of the Guarantor (including in the case of an individual a change in the usual place of residence and in the case of a Guarantor with a registered office a change in the address of the registered office). 44 EXECUTED BY THE PARTIES AS A DEED and delivered on, but not before, the date inserted as the date of this Lease (THE COMMON SEAL of (CAPITAL & COUNTIES plc (was affixed in the presence of:- Director Secretary 45 REGULATIONS - ------------------------------------------------------------------------------- 1. MUSIC Tenants must not play or use any musical instruments or equipment which produces sound in their premises which can be heard outside their premises. 2. ANIMALS Tenants must not keep any live animals (other than guide dogs), fish, reptiles or birds in their premises. 3. PESTS Tenants must keep their premises free from rats, mice and other pests. 4. RUBBISH Tenants must keep all rubbish and refuse in properly covered rubbish bins to the reasonable satisfaction of the Landlord and arrange for the removal of all refuse from their premises at least weekly. 5. RESIDENCE Tenants must not allow any person to reside or sleep on their premises. 6. AUCTION Tenants must not hold any sale by auction on their premises. 7. SAFES AND OTHER HEAVY OBJECTS Tenants must not bring any safe or other very heavy object on to their premises without the Landlord's consent, such consent not to be unreasonably withheld or delayed. 8. WINDOW SILLS AND BALCONIES Tenants must not place flower-pots window-boxes or other articles on externalwindow sills and balconies. 46 THE SCHEDULE - ------------------------------------------------------------------------------- Of works referred to in item (c) in the definition of Excluded Review Matters in clause 14.1 Items to be included at rent review 1. Air conditioning systems in the following areas Ground floor - Production Commissioning Area (Stonepail Close elevation) - Training Rooms and Training Equipment Room (south wing overlooking rear car park) - VSD Lab and Development Systems Areas - VM2OOO Lab - Customer Test Area First Floor - None Second Floor - Conference Room Nos 1 & 2 2. Rearrangement of car park comprising 84 spaces to provide an additional 6 spaces. 3. Unisex shower to be provided on first or second floor in existing toilet block. 4. Additional service bunking similar to existing perimeter bunking to be provided to the six internal columns on each floor. 47 EX-21.1 4 EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES State or Other Jurisdiction Name of Subsidiary of Incorporation ------------------ --------------------------- Brite Voice Systems Group, Limited United Kingdom Brite Voice Systems Group, GmbH Germany Brite Holding AG Switzerland Brite Voice Systems AG Switzerland Brite Voice Systems S.p.A. Italy Brite Leasing, Inc. Kansas Brite Voice Systems Pte Ltd. Singapore Brite Voice Systems S.A. (Pty) Ltd. South Africa EX-23.1 5 EXHIBIT 23.1 EXHIBIT 23.1 Arthur Andersen LLP Consent of Independent Public Accounts As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File Nos. 33-44609, 33-59371, 33-66812, 33-67274 and 33-80478. /s/ Arthur Andersen LLP Kansas City, Missouri March 24, 1997 EX-27 6 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 8,084 0 35,538 471 12,507 58,259 26,504 12,204 74,882 20,701 0 0 0 38,417 15,764 74,882 63,980 110,409 27,729 98,710 (240) 0 80 11,859 3,304 0 0 0 0 8,555 .71 .00
EX-99.1 7 EXHIBIT 99.1 EXHIBIT 99.1 REPORT OF INDEPENDENT AUDITORS The Board of Directors Telecom Services Limited (U.S.), Inc. Telecom Services Limited (West), Inc. TSL Software Services, Inc. TSL Management Group, Inc. We have audited the combined statements of operations and retained earnings (deficit), and cash flows of Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., and TSL Management Group, Inc. for the year ended December 31, 1994 (not presented separately herein). 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 audit 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 combined financial statements referred to above present fairly, in all material respects, the combined results of operations and cash flows of Telecom Services Limited (U.S.), Inc., Telecom Services Limited (West), Inc., TSL Software Services, Inc., and TSL Management Group, Inc. for the year ended December 31, 1994 in conformity with generally accepted accounting principles. ERNST & YOUNG LLP /s/ Ernst & Young LLP MetroPark, New Jersey April 7, 1995 -----END PRIVACY-ENHANCED MESSAGE-----