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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0-27890
MINDSPRING ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 58-2113290
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
1430 WEST PEACHTREE, SUITE 400 30309
ATLANTA, GEORGIA (Zip Code)
(principal executive offices)
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(404) 815-0770
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
(NOT APPLICABLE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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]
Based upon the closing price of the registrant's common stock as of March 25,
1999 the aggregate market value of the common stock held by non-affiliates of
the registrant is $1,914,463,972.*
The number of shares of common stock outstanding as of March 25, 1999 was
28,914,414.
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* Solely for purposes of this calculation, all executive officers and
directors of the registrant and all shareholders reporting beneficial
ownership of more than 5% of the registrant's common stock are considered
to be affiliates.
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TABLE OF CONTENTS
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PART I Item 1. Business........................................... 1
Item 2. Properties......................................... 24
Item 3. Legal Proceedings.................................. 25
Item 4. Submission of Matters to a Vote of Security Holders 25
PART II Item 5. Market for Registrant's Common Stock and
Related Stockholder Matters........................ 26
Item 6. Selected Financial Data............................ 27
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 29
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.................................. 41
Item 8. Financial Statements and Supplementary Data........ 41
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................ 41
PART III Item 10. Directors and Executive Officers of the Registrant. 42
Item 11. Executive Compensation............................. 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 47
Item 13. Certain Relationships and Related Transactions..... 49
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K........................................ 50
SIGNATURES...................................................................... 53
INDEX TO FINANCIAL STATEMENTS................................................... F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES....................... S-1
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This Form 10-K includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act
of 1934. We intend the forward-looking statements to be covered by the safe
harbor provisions for forward-looking statements in these sections. All
statements regarding our expected financial position and operating results, our
business strategy and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," or "intend." Known and
unknown risks, uncertainties and other factors could cause the actual results to
differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions.
Although we believe that our expectations that are expressed in these
forward-looking statements are reasonable, we cannot promise that our
expectations will turn out to be correct. Our actual results could be
materially different from our expectations. Important risks and factors that
could cause our actual results to be materially different from our expectations
include (1) that we will not retain or grow our subscriber base, (2) that we
will not be able to successfully integrate new subscribers and/or assets
obtained through acquisitions, (3) that we will fail to be competitive with
existing and new competitors, (4) that we will not be able to sustain our
current growth, (5) that we will not adequately respond to technological
developments impacting the Internet, and (6) that financing will not be
available to us if and as needed. This list is intended to identify some of the
principal factors that could cause actual results to differ materially from
those described in the forward-looking statements included elsewhere in this
report. These factors are not intended to represent a complete list of all
risks and uncertainties inherent in MindSpring's business, and should be read
in conjunction with the more detailed cautionary statements included in this
Form 10-K under the caption "Business -- Risk Factors."
PART I
ITEM 1. BUSINESS
MindSpring is a leading national Internet service provider, or ISP. We
focus on serving individuals and small businesses. Our primary service offerings
are dial-up Internet access and business services, which we offer in various
price and usage plans designed to meet the needs of our subscribers. Our
business services include Web hosting, which entails maintaining a customer's
Internet Web site; high-speed, dedicated Internet access; Web page design;
domain name registration and customer Web server co-location. Web hosting, our
principal business service, complements our Internet access business and is one
of the fastest growing segments of the Internet marketplace.
MindSpring offers subscribers complete Internet access and Web hosting
solutions, placing an emphasis on user-friendly and easy to install software,
network reliability, highly responsive customer service and superior technical
support. Through our nationwide network of MindSpring-owned and third-party
provider-owned points of presence, or POPs, our subscribers are able to access
the Internet in the 48 contiguous U.S. states and the District of Columbia via a
local telephone call.
Over the past three years, we have rapidly increased our subscriber
base and revenues by:
- providing superior customer service and technical support;
- expanding our marketing and distribution activities;
- making strategic acquisitions; and
- creating additional revenue streams by offering value-added
services such as Web hosting that build on our basic operating
capabilities and services.
Our subscriber base has grown from approximately 12,000 subscribers at
December 31, 1995, to over 693,000 subscribers at December 31, 1998, including
over 21,000 Web hosting subscribers. In February 1999, we completed the
acquisition of substantially all of NETCOM On-Line Communication Services,
Inc.'s subscriber
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accounts in the U.S., which increased our subscriber base to approximately 1.1
million subscribers, including approximately 45,000 Web hosting subscribers. As
a result, MindSpring is currently the fourth largest ISP in the U.S. in terms of
the number of subscribers.
By providing superior service and support to our subscribers, making
good build-versus-buy network decisions and achieving significant market
penetration in a number of our target markets, we have achieved profitability
ahead of many other national ISPs. For the year ended December 31, 1998, we had
revenues of approximately $115 million, EBITDA of approximately $23 million, net
income of approximately $8.8 million and earnings per share of $0.35, in each
case excluding a one-time tax benefit of approximately $1.7 million. Including
the one-time tax benefit, our net income for 1998 was approximately $10.5
million and our earnings per share were $0.41.
RECENT ACQUISITIONS
In October 1998, we purchased substantially all of Spry, Inc.'s
subscriber base of individual dial-up Internet access customers in the United
States and Canada, including approximately 130,000 individual access accounts.
We also acquired various assets used in serving those customers, including a
leased customer support facility and a leased network operations facility in
Seattle, Washington and all rights to the "Sprynet" name. Spry was a
wholly-owned subsidiary of America Online, Inc. The purchase price for these
assets was approximately $32 million.
In February 1999, we purchased substantially all of NETCOM On-Line
Communication Services, Inc.'s subscriber accounts in the U.S., including
approximately 371,000 individual access accounts, approximately 3,000 dedicated
Internet access accounts and approximately 22,000 Web hosting accounts. NETCOM,
now known as ICG PST, Inc., is a wholly owned subsidiary of ICG Communications,
Inc. MindSpring also acquired assets used in serving those customers, including
leased operations facilities in San Jose, California and Dallas, Texas and ICG
PST's rights to the "NETCOM" name (except in Canada, the United Kingdom and
Brazil). ICG PST retained all of its assets used in connection with its network
operations. Under a separate network services agreement with ICG PST, we
purchase access to ICG PST's network. We paid $245 million for the NETCOM
assets, consisting of $215 million in cash and $30 million in MindSpring common
stock. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
MINDSPRING SERVICES
Our services include dial-up Internet access and business services,
which consist of Web hosting and other services such as high-speed dedicated
Internet access for small to medium-sized businesses, Web page design and
Web-server co-location. MindSpring's primary service offerings, dial-up Internet
access and Web hosting, are offered in various price and usage plans designed to
meet the needs of our customers. We continuously evaluate the need to add
additional product offerings and modify our service features based upon market
demands.
INTERNET ACCESS
Dial-Up Internet Access. MindSpring's primary service offering is
dial-up Internet access. As of December 31, 1998, approximately 84% of our total
revenues were attributable to dial-up Internet access. The basic equipment
requirements for an individual dial-up subscriber are a Windows 3.1 or later
operating system or Macintosh computer with at least 8MB of RAM and a modem of
14.4 Kbps speed or faster. The subscriber's MindSpring connection is a direct,
point-to-point protocol, or "PPP," connection to the Internet. A direct PPP
connection enables a subscriber to use any standard Internet capable software
that will run on the subscriber's computer.
MindSpring currently offers the following five price plans for dial-up
subscription, taking account of demand for both heavy and light Internet usage.
Each plan requires a start-up fee of up to $25 (except for the Commercial plan,
which has a start-up fee of $50), which is waived in certain instances depending
upon the promotional method by which the subscriber is acquired.
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The Works. For $26.95 per month, individual subscribers receive
unlimited usage (not intended to be a full-time connection) as well as 10MB of
Web space, a personal Web page editor that permits subscribers to create and
upload their own Web pages, and two additional mailboxes.
Unlimited Access. Individual subscribers pay $19.95 per month for
unlimited usage and 5MB of Web space. As with the Works Plan, the subscriber
must disconnect when not actively accessing the Internet. The subscriber is not
permitted, for example, to maintain a full-time computer connection as a World
Wide Web server.
Standard. Subscribers pay $14.95 per month for 20 hours of use and $1
per hour for each additional hour. Subscribers also receive 5MB of Web space.
Light. Subscribers pay $6.95 per month for 5 hours of use and $2 per
hour for each additional hour. Subscribers also receive 5MB of Web space.
Commercial. Designed for small businesses, subscribers pay a $50
start-up fee and $99 per month thereafter in exchange for 160 hours of usage and
$.75 for each additional hour. Subscribers receive 10 mailboxes and are not
charged for simultaneous usage, which would permit several employees to be
on-line at once without paying additional fees.
Subscribers to each plan can also purchase additional features such as
extra mailboxes for specified fees.
Substantially all of our subscribers are on month-to-month
subscriptions. MindSpring offers a 30-day money-back satisfaction guarantee for
new subscribers. Billing is monthly, with payments made by the majority of
subscribers by a monthly charge to the subscriber's credit card. Payment is made
at the beginning of each billing cycle, although some subscribers are invoiced
(for an extra charge). Subscribers, as well as MindSpring, may cancel an account
at any time, with the cancellation taking effect as of the first day of the
following billing month.
A subscriber who is within local dialing range of one of the MindSpring
POPs or a designated third-party provider POP can access the Internet with a
local telephone call. MindSpring also offers access to its services through an
"800" number for an additional charge. All dial-up subscribers can connect to
the MindSpring network (including the third-party provider POPs) via modem at
speeds up to 33.6 Kbps and over 90% of MindSpring's subscribers can connect at
speeds up to 56 Kbps. In a majority of the cities that MindSpring serves,
individual subscribers, except subscribers to the Unlimited Access and
Commercial plans, can also choose to connect via ISDN at 64 Kbps or 128 Kbps.
There is a one-time extra start-up fee of $25 for ISDN users who subscribe to
the Standard and Light plans; otherwise, 64K ISDN pricing is the same as for
modem subscribers, and 128K users pay a small surcharge. All dial-up subscribers
also have the option of using MindSpring servers to publish information on the
Internet through the World Wide Web or FTP. MindSpring subscribers may use the
space made available on MindSpring's servers to make World Wide Web pages or
computer data files available to the Internet.
MindSpring recently introduced high-speed cable modem Internet access
on a very limited basis in the Montgomery, Alabama area. We provide this service
through an agreement with KNOLOGY Holdings, Inc., an affiliate of ITC Holding
Company, Inc., one of our principal stockholders. Our ability to expand our
geographic offering of this service will depend on KNOLOGY's enhancement and
expansion of its network infrastructure and our access to other third-party
cable and broadband networks. See "-- Competition -- Broadband Technologies" and
"-- Risk Factors -- The Internet access and Web hosting markets are very
competitive -- Broadband Technologies."
BUSINESS SERVICES
MindSpring business services consist of:
- Web hosting, the business of maintaining a customer's
Internet Web site,
- high-speed, dedicated Internet access,
- Web page design,
- domain name registration,
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- customer Web server co-locations, and
- e-commerce services.
As of December 31, 1998, business services revenues, which were derived
almost entirely from Web hosting services, accounted for approximately 13% of
our total revenues.
Web Hosting. MindSpring offers Web hosting accounts for companies and
other organizations that wish to create their own World Wide Web sites without
maintaining their own Web servers and high-speed Internet connections. Web
hosting subscribers can use their own domain names in their World Wide Web
addresses. This type of Web hosting is called "virtual hosting." Web hosting
subscribers create their Web sites themselves and then upload the pages to a
MindSpring Web server. MindSpring's Web hosting service features
state-of-the-art Web servers for high speed and reliability, a high-quality
connection to the Internet, specialized customer support, advanced services
features, such as secure transactions and VRML, or Virtual Reality Markup
Language, a feature used to make Web pages seem three-dimensional, and reporting
on site usage. MindSpring currently offers three price plans for Web hosting
subscribers ranging from $19.95 to $99.95 per month. MindSpring has
approximately 45,000 Web hosting subscribers, including approximately 22,000 Web
hosting accounts acquired from NETCOM in February 1999.
Web Page Design. Our Web page design services consist of four standard
design packages from which a subscriber can choose or the subscriber can create
a custom Web package from scratch. The subscriber provides the text for the Web
site, and custom design work is available from MindSpring, including logo
design, additional HTML pages, and database integration.
E-commerce. We recently introduced our e-commerce hosting service,
which enables even unsophisticated subscribers to set up an Internet storefront
in virtually minutes. We offer merchants a complete suite of commercial hosting
options including:
- Web hosting,
- Web site or Web page design,
- domain name registration,
- store front and back office applications,
- customer-to-merchant e-mail services,
- search engine registration,
- encryption security certificates to assure confidentiality
of transactions, and
- credit card and on-line payment processing services.
Dedicated Access, Domain Registration and Web Server Co-location.
MindSpring offers domain registration services and, in some markets, high-speed
dedicated access connections to the Internet, including for the approximately
3,000 dedicated access accounts we purchased in the NETCOM acquisition. We also
offer Web-server co-location services at our Atlanta headquarters and at our
Dallas call center for subscribers who want to maintain their own Web servers in
MindSpring's state-of-the-art telephony environment and receive a high-speed,
full-time connection to the Internet. MindSpring's co-location services include
(1) 24-hour security monitoring, (2) an uninterrupted power supply, (3) climate
control, (4) remote access for the subscriber, (5) tape swap, and (6) secure
tape storage.
CUSTOMER SERVICE AND TECHNICAL SUPPORT
MindSpring believes that excellent customer services and technical
support is critical to our success in retaining and attracting new subscribers.
We currently provide customer service and technical support through our call
centers located in Atlanta, Georgia; Harrisburg, Pennsylvania; Phoenix, Arizona;
Seattle, Washington; San Jose,
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California; and Dallas, Texas. In February 1999, we acquired approximately 3,000
dedicated access accounts and related support personnel from NETCOM. These
subscribers are generally small to medium-sized businesses that require
full-time, dedicated connections to the Internet. We are in the process of
integrating these subscribers into MindSpring's operations. Dedicated access
subscribers generally require technical and customer support relating to the
quality of and interruptions in the full-time Internet connection, which in turn
will require MindSpring staff to interact and coordinate with the telephone
company or other dedicated line providers. We believe that our ability to
successfully integrate and support these acquired customers profitably will
determine the extent to which we will seek to expand this line of business.
MindSpring's customer service staff handles all questions regarding a
subscriber's account and are available from 9 a.m. to 9 p.m. eastern time seven
days a week, except for major holidays. As of February 28, 1999, we had
approximately 200 customer service employees.
Our technical support staff handles questions related to the provision
of our services such as questions regarding installation of MindSpring's
service, connection to our network and use of various software applications.
MindSpring's technical support staff is available 24 hours a day, seven days a
week, except for major holidays. As of February 28, 1999, we had over 820
technical support employees. In the NETCOM acquisition, we assumed a third-party
technical support service contract through which NETCOM had provided technical
support to the subscribers we acquired. We plan to continue to provide technical
support to the acquired NETCOM subscribers under this contract until
approximately the last quarter of 1999, when we expect that substantially all of
these subscribers will have transitioned to the MindSpring software.
Subscribers can call any of our call center facilities for customer
service and technical support through a local telephone number, for those cities
local to a call center, or a toll-free "800" number. Subscribers can also e-mail
their questions directly to a customer service and technical support address at
MindSpring. In addition, we maintain MindSpring-specific newsgroups on the
Internet where subscribers can post requests for help and other subscribers, as
well as MindSpring support personnel, can respond.
SALES AND MARKETING
MindSpring believes that the market for individual Internet access is
heavily influenced by person-to-person referrals. Accordingly, our marketing
efforts have been geared, among other things, toward generating positive
referrals and stimulating subscriber growth and retention by providing
exceptionally high-quality service to our existing subscribers. We also offer a
$10 credit to existing subscribers each time a new subscriber names the existing
subscriber as the referral source. A significant number of MindSpring's new
subscribers indicate that an existing subscriber referred them.
We also engage in targeted marketing and distribution efforts in
markets where there is the opportunity for substantial market penetration. We
believe that high geographic concentrations of subscribers improve network
economics and reduce subscriber acquisition costs, thereby resulting in higher
margins. While continuing to encourage referrals from existing subscribers, we
plan to increase our print publication, radio, television and direct mail
advertising in certain targeted major metropolitan areas throughout the United
States in order to achieve greater density in our subscriber base.
In addition, we have pursued nationwide strategic alliances available
to MindSpring as a result of our nationwide access and reputation for
reliability and high quality. Such nationwide marketing opportunities may
include, among others, entering into large-scale bundling arrangements with
complementary products, such as computers, software products, multimedia books,
and CD-ROM merchandise, and seeking strategic alliances available with
complementary businesses operating in our service areas, such as
Internet-oriented training organizations and consulting firms, World Wide Web
content developers, computer networking firms, media companies,
telecommunications companies, local area network and World Wide Web consulting
companies, and other Internet access companies that specialize in providing
dedicated connections. The nature and terms of these alliances vary.
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We intend to continue to expand our marketing and distribution efforts.
We will continue to closely monitor the results of our marketing techniques as
part of an ongoing effort to increase the cost-effectiveness of our marketing
efforts.
We have attempted to maintain a high degree of personal contact with
the communities that we serve, and we have a staff of territory managers who are
responsible for generating interest in MindSpring in these communities.
MindSpring marketing personnel spend considerable time meeting with and making
presentations to groups representing potential subscribers, such as computer
user associations, high-technology business associations, and educational
institutions. We plan to continue these efforts in the southeastern United
States, New York, California, Phoenix, Arizona and Chicago, Illinois and to
selectively expand them to include key metropolitan areas in other regions of
the country.
Sales are consummated by MindSpring's telephone sales force, which
responds to incoming subscription inquiries, as well as through an on-line
sign-up procedure. The on-line registration module, which is available in
MindSpring's retail software package, through MindSpring's Web site and through
various Original Equipment Manufacturer, or OEM, arrangements, enables a user to
become a MindSpring subscriber by selecting service plans and billing methods
on-line, without the need to speak to a MindSpring employee.
NETWORK INFRASTRUCTURE
Geographic Coverage. Through our nationwide network of MindSpring-owned
and third-party provider-owned points of presence, or POPs, our subscribers are
able to access the Internet in the 48 contiguous U.S. states and the District of
Columbia via a local telephone call. We purchase access to third-party provider
POPs through network services agreements with PSINet, Worldcom Advanced Networks
(formerly Gridnet International, L.L.C.), GTE Internetworking Incorporated
(formerly BBN Planet Corporation) and ICG PST.
We believe that using a combination of MindSpring-owned POPs and POPs
owned by third-party network providers enables us to provide Internet access
services on a nationwide basis while managing the timing and magnitude of our
capital expenditures. We employ a strategy of leasing POPs from third-party
providers in locations where it is more economical to do so. These are typically
geographic areas where MindSpring has lower market penetration than areas we
serve through MindSpring POPs. We periodically reevaluate the economics of this
strategy and, if warranted, we may install a MindSpring POP to replace or
overlap with a leased POP.
MindSpring POPs. Each MindSpring POP typically consists of data
communications equipment such as 3Com(R) Total Control modem chassis, 3Com(R) or
Bay Networks switches and Cisco Systems routers, the majority of which are
currently co-located with a local telecommunications or media company. The
3Com(R) modem chassis employed by MindSpring support both ISDN and analog
terminations. MindSpring has upgraded all modem chassis to support the new
international 56Kb modem standard, V.90.
Each MindSpring POP is connected to MindSpring's Atlanta Network Data
Center. These connections consist of either a private line point-to-point
Internet Protocol, or "IP" connection, or a frame relay connection. In addition,
we use private peering points to more efficiently manage our network traffic. A
private peering point is a point where our network connects to the network of
one of our third-party network providers. This enables us to route network
traffic along the shortest path feasible.
We refer to some of our POPs as "super-POPs." A super-POP is a POP
where MindSpring co-locates its equipment with a competitive local exchange
carrier, or "CLEC". By co-locating with a CLEC, we are able to aggregate
Internet traffic from multiple local calling areas into a single modem pool via
local telephone numbers. This creates, in effect, a "super-POP," enabling
MindSpring to offer local dial-up access out of a single POP to areas that would
otherwise require co-location sites in each local dial-up area -- that is,
multiple POPs -- to accomplish the same task. As part of our strategy, we intend
to open additional super-POPs where demand and other economic factors warrant.
Atlanta Network Hub. MindSpring's Atlanta Network Data Center is
connected to Internet backbone providers such as GTE Internetworking via large
leased telecommunications lines called DS-3s. MindSpring's Atlanta Network Data
Center is supported by dual SONET rings provided by BellSouth Corporation and
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MediaOne. The Data Center has a back-up generator for emergency use in the event
of a prolonged loss of electric power. In addition to dial-up subscribers, most
of MindSpring's Web hosting and Web-server co-location customers are served from
this location.
Network Operations Center. MindSpring maintains a Network Operations
Center at our Atlanta headquarters through which our technical staff monitors
network traffic, service quality, and security, as well as equipment at
individual POPs, to ensure reliable Internet access. The Network Operations
Center is staffed 24 hours a day, 7 days a week. We also monitor network
operations through our facilities in Seattle, Washington and Dallas, Texas. In
the future, we may use our other call center facilities to supplement or add
redundancy to this network monitoring capability. In addition, we continue to
invest in improved network monitoring software and hardware systems.
MINDSPRING SOFTWARE
An important component of our service offering for dial-up subscribers
is the MindSpring starter kit. The starter kit includes the MindSpring
installation program, front-end software and documentation, an on-line
registration module (retail version only), network software that enables a
subscriber to connect to the Internet, and application programs. See "--
Subscriber Applications." Our subscribers acquired from Spry and NETCOM connect
to the Internet using software that we acquired in those acquisitions. Those
subscribers may switch to MindSpring software at their option at any time.
Our objectives in developing and providing the MindSpring starter kit
are to:
Simplify Installation. MindSpring's software package automatically
configures all the individual Internet access programs after one-time entry
by the user of a few required fields of information (name, user name,
password, etc.).
Provide a Convenient and Intuitive Starting Place for Subscribers.
MindSpring's front-end software allows subscribers to connect and
disconnect, see any current messages from MindSpring, check their monthly
usage, see if they have any e-mail, and launch any of their Internet
application programs, all from one screen. "Help" files and the accompanying
documentation contain information on troubleshooting and things to do on the
Internet. Links to the most popular content sites are also provided.
Enhance Efficiency of MindSpring's Support Services. High-quality
software with which our technical support representatives are familiar makes
it easier for MindSpring to provide fast and efficient customer service and
technical support. Software that is reliable and easy to install and use
also tends to reduce subscriber need for extensive customer service and
technical support services.
Provide State-of-the-Art Applications. MindSpring uses existing
applications developed by third parties in its software package. We believe
that this approach will enable us to include state-of-the-art software in
our package and to keep pace with technology developments by replacing
applications with newer or better programs as they become available without
diverting resources by attempting to develop new applications programs.
SUBSCRIBER APPLICATIONS
MindSpring subscribers use their accounts for, among other things,
communicating, retrieving information, and publishing information on the
Internet. In our surveys of our subscribers, a substantial number of
MindSpring's individual subscribers report that they use their MindSpring
accounts for personal as well as business purposes. The subscriber's MindSpring
connection is a direct PPP connection, enabling subscribers to use any standard
Internet-capable software that will run on their computers. A complete set of
the most popular Internet applications are part of the MindSpring starter kit
software package, including:
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Electronic Mail. E-mail allows subscribers to exchange electronic
messages with anyone else who has an Internet e-mail address. These messages are
usually text only but can also include other kinds of computer files (such as
images, computer programs, or word processing documents), which are sent as
attachments. MindSpring's software package includes the Eudora Light(R) E-mail
application.
The World Wide Web. The World Wide Web allows a multimedia presentation
of material (i.e., text, graphic, sound, and video). Users can move from one
World Wide Web site to another by clicking on hypertext links and can interact
with the World Wide Web information providers through typed input. The software
programs that allow users to explore the World Wide Web are known as "browsers."
The browser applications currently included in MindSpring's software package are
Microsoft's Internet Explorer(R) and Netscape Navigator(R).
Network News. Network News provides Internet-wide, subject-specific
forums on thousands of different subjects, where users can post information and
review posted information from other users.
FTP. File transfer protocol, or FTP, is a standard Internet tool that
allows users to send and retrieve computer files. FTP is often used for
retrieving software from various archive sites on the Internet.
Internet Relay Chat. Internet Relay Chat allows users to participate in
chat sessions, in which typed comments from all participants appear on the
screen, allowing simultaneous multiperson real-time conversations.
MindSpring has obtained permission and, in certain cases, licenses from
each manufacturer of the software that we bundle in MindSpring's front-end
software product for Windows and Macintosh subscribers. See " --Proprietary
Rights."
BILLING AND MANAGEMENT INFORMATION SYSTEMS
A majority of our individual subscribers pay their MindSpring fees
automatically by credit card each month. MindSpring generally sends monthly
invoices to commercial accounts with multiple users. Billing calculations and
payment transactions are managed on our automated billing system. We expect to
continue to modify and upgrade our billing system as needed in order to maintain
our ability to bill and collect amounts due and to be responsive to changes in
the market.
PROPRIETARY RIGHTS
General. Although we believe that our success is more a function of our
technical expertise and customer service than our proprietary rights,
MindSpring's success and ability to compete depends in part upon our technology.
We rely on a combination of copyright, trademark and trade secret laws, and
contractual restrictions to establish and protect our technology. It is our
policy to require employees and consultants and, when possible, suppliers to
execute confidentiality agreements upon the commencement of their relationships
with MindSpring. These agreements provide that confidential information
developed or made known during the course of a relationship with MindSpring must
be kept confidential and not disclosed to third parties except in specific
circumstances. We cannot provide any assurances that the steps we have taken
will be adequate to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
Licenses. We have obtained authorization to use the products of each
manufacturer of software that we bundle in MindSpring's front-end software
product for Windows and Macintosh subscribers. The particular applications
included in the MindSpring starter-kit have, in some cases, been licensed.
MindSpring currently intends to maintain or negotiate renewals of, as the case
may be, all existing software licenses and authorizations as necessary.
MindSpring may also want or need to license other applications in the future.
License fees charged to MindSpring upon enrollment of additional subscribers are
included in the cost of subscriber start-up fees. Other applications included in
the MindSpring starter kit are shareware that MindSpring has obtained permission
to distribute or that are from the public domain and are freely distributable.
MindSpring developed the front-end software programs in MindSpring's starter kit
for Windows 3.1, Windows 95, and Macintosh. We have acquired some software,
trademarks and other proprietary technology from Spry and NETCOM which we may
continue to use for acquired subscribers. See "-- Risk Factors."
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COMPETITION
The markets for the provision of Internet access and business
services to individuals and small businesses are extremely competitive and
highly fragmented. There are no substantial barriers to entry, and we expect
that competition will continue to intensify. We may not be able to compete
successfully against current or future competitors, many of whom may have
financial resources greater than ours. Increased competition could cause us to
increase our selling and marketing expenses and related subscriber acquisition
costs and could also result in increased subscriber attrition. We may not be
able to offset the effects of these increased costs through an increase in the
number of our subscribers or higher revenue from enhanced services, and we may
not have the resources to continue to compete successfully. These developments
could adversely affect our business, financial condition and results of
operations.
Competitive Factors. We believe that the primary competitive factors
determining success in the Internet access and business services markets are a
reputation for reliability and service, effective customer support, pricing,
easy-to-use software, and geographic coverage. Other important factors include
the timing of introductions of new products and services and industry and
general economic trends. Our current and prospective competitors include many
large companies that have substantially greater market presence and financial,
technical, marketing, and other resources. In addition, every local market that
we have entered or intend to enter is served by multiple local ISPs.
Our Competitors. We currently compete or expect to compete with the
following types of companies:
- established on-line commercial information service providers,
such as AOL;
- national long-distance carriers, such as AT&T Corp. and MCI
WorldCom, Inc.;
- national commercial ISPs, such as EarthLink Network, Inc.;
- computer hardware and software and other technology companies,
such as IBM Corp. and Microsoft Corporation;
- numerous regional and local commercial ISPs which vary widely in
quality, service offerings, and pricing;
- national and regional Web hosting companies that focus primarily
on providing Web hosting services;
- cable operators and on-line cable services;
- local telephone companies and regional Bell operating companies;
and
- nonprofit or educational ISPs.
We believe that new competitors, including large computer hardware and
software, media, and telecommunications companies, will continue to enter the
Internet access and business services markets. As consumer awareness of the
Internet grows, existing competitors are likely to further increase their
emphasis on their Internet access and business services, resulting in even
greater competition for us. In addition, telecommunications companies may be
able to offer customers reduced communications costs in connection with these
services, reducing the overall cost of their Internet access and business
services solutions and significantly increasing pricing pressures on us. The
ability of our competitors to acquire other ISPs, to enter into strategic
alliances or joint ventures or to bundle other services and products with
Internet access or Web hosting could also put us at a significant competitive
disadvantage.
Broadband Technologies. We also face competition from companies that
provide broadband connections to consumers' homes, including local and
long-distance telephone companies, cable television companies, electric utility
companies, and wireless communications companies. These companies may include
Internet access or business services such as Web hosting using broadband
technologies in their basic bundle of services or may offer Internet access or
business services for a nominal additional charge. Broadband technologies
enable consumers to transmit and receive print, video, voice and data in
digital form at significantly faster access speeds than existing dial-up
modems.
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The companies that own these broadband networks could prevent us from
delivering Internet access through the wire and cable connections that they own.
Cable television companies are not currently required to allow ISPs to access
their broadband facilities and the availability and terms of ISP access to
broadband local telephone company networks are under regulatory review. Our
ability to compete with telephone and cable television companies that are able
to support broadband transmission, and to provide better Internet services and
products may depend on future regulation to guarantee open access to the
broadband networks. However, in January 1999, the Federal Communications
Commission, or FCC, declined to take any action to mandate or otherwise regulate
access by ISPs to broadband cable facilities at this time. It is unclear whether
and to what extent local and state regulatory agencies will take any initiatives
to implement this type of regulation, and whether they will be successful in
establishing their authority to do so. Similarly, the FCC is considering
proposals that could limit the right of ISPs to connect with their customers
over broadband local telephone lines. In addition to competing directly in the
ISP market, both cable and telephone facilities operators are also aligning
themselves with certain ISPs who would receive preferential or exclusive use of
broadband local connections to end users. If high-speed, broadband facilities
increasingly become the preferred mode by which customers access the Internet
and we are unable to gain access to these facilities on reasonable terms, our
business, financial condition and results of operations could be materially
adversely affected.
No International Operations. We do not currently compete
internationally, except we have a small number of Canadian subscribers obtained
in the Spry acquisition. If the ability to provide Internet access
internationally becomes a competitive advantage in the Internet access industry,
we may be at a competitive disadvantage relative to our competitors.
GOVERNMENT REGULATION
As an Internet service provider, we are not currently directly
regulated by the FCC or any other agency, other than regulations applicable to
businesses generally. In a report to Congress adopted on April 10, 1998, the FCC
reaffirmed that Internet service providers should be classified as unregulated
"information service providers" rather than regulated "telecommunications
providers" under the terms of the Telecommunications Act of 1996.
This finding is important because it means that regulations that apply
to telephone companies and similar carriers do not apply to us. We also are not
required to contribute a percentage of our gross revenues to support "universal
service" subsidies for local telephone services and other public policy
objectives, such as enhanced communications systems for schools, libraries, and
some health care providers. The FCC action is also likely to discourage states
from regulating Internet service providers as telecommunications carriers or
imposing similar subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. We cannot predict whether in the future the FCC
will modify its current policies against regulation of ISPs.
MindSpring also could be affected by any change in the ability of
customers to reach our network through a dial-up telephone call without any
additional charges. This practice has allowed ISPs to offer flat-rate, non-usage
sensitive pricing, and has been an important reason for the growth in Internet
use. Recently, the FCC ruled that connections linking end users to their ISPs
are jurisdictionally interstate rather than local, but the FCC did not subject
such calling to the access charges that apply to traditional telecommunications
companies. Local telephone companies assess access charges to long distance
companies for the use of the local telephone network to originate and terminate
long distance calls, generally on a per-minute basis. MindSpring could be
adversely affected by any regulatory change that would result in application of
access charges to Internet service because this would substantially increase the
cost of using the Internet. However, the FCC Chairman has stated that he opposes
Internet-related access charges, and we believe that this development is
unlikely, with one possible exception that is not currently relevant to our
business. Specifically, there is substantial debate as to whether carrier access
charges, or the universal support obligations discussed above, should apply to
Internet-based telephone services that substitute for conventional telephony. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments were they
to occur.
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The law relating to the liability of Internet service providers and
on-line services companies for information carried on, stored on, or
disseminated through their network is unsettled, even with the recent enactment
of the Digital Millennium Copyright Act. While no one has ever filed a claim
against us relating to information carried on, stored on, or disseminated
through our network, someone may file a claim of that type in the future and may
be successful in imposing liability on us. If that happens, we may have to spend
significant amounts of money to defend ourselves against these claims and, if we
are not successful in our defense, the amount of damages that we will have to
pay may be significant. Any costs that we incur as a result of defending these
claims or the amount of liability that we may suffer if our defense is not
successful could materially adversely affect our business, financial condition
and results of operations.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take actions to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering some of our products or services.
Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to some types of
content by minors, pricing, bulk e-mail or "spam," encryption standards,
consumer protection, electronic commerce, taxation, copyright infringement, and
other intellectual property issues. We cannot predict the impact, if any, that
any future regulatory changes or developments may have on our business,
financial condition, and results of operations. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly or indirectly affect telecommunication costs or increase
the likelihood or scope of competition from regional telephone companies or
others, could have a material adverse effect on our business, financial
condition and results of operations.
RISK FACTORS
Our business is subject to certain risks, including the following:
WE HAVE A LIMITED OPERATING HISTORY DURING WHICH WE HAVE INCURRED
SIGNIFICANT ANNUAL OPERATING LOSSES.
We started our business on February 24, 1994 and began offering
Internet access in June 1994. Our limited historical operating data and rapid
growth may make it more difficult for you to evaluate our performance. Before
1998, we had incurred annual operating losses in each year since we started our
business. Our annual net losses since 1995 and our accumulated deficit as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Annual Accumulated Deficit
Net Loss as of December 31, 1998
-------- -----------------------
<S> <C> <C>
1995 $1,959,000
1996 $7,612,000
1997 $4,083,000
1998 N/A $3,185,000
</TABLE>
Our ability to maintain profitability and positive cash flow depends
upon a number of factors, including our ability to increase revenue while
maintaining or reducing per subscriber costs. We may not succeed in increasing
revenue while maintaining or reducing per subscriber costs or achieving or
sustaining positive cash flow in the future, and our failure to do so could have
a material adverse effect on our business, financial condition and results of
operations.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITIONS OF SUBSCRIBER
ACCOUNTS, INCLUDING THE SPRY AND NETCOM ACQUISITIONS.
As part of our business strategy, we have acquired subscriber accounts
and related assets from other companies. In October 1998, we acquired
approximately 130,000 subscribers and related assets of Spry, Inc. from America
Online, Inc. In February 1999, we completed the acquisition of approximately
400,000 subscribers from NETCOM On-Line Communication Services, Inc., now known
as ICG PST, Inc., a wholly owned subsidiary of
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<PAGE> 14
ICG Communications, Inc. We will continue to evaluate strategic acquisitions of
businesses and subscriber accounts principally relating to our current
operations. These transactions commonly involve risks. These risks include,
among others, that:
- we may experience difficulty in assimilating the acquired
operations and personnel;
- the acquisition may disrupt our ongoing business;
- the acquisition may divert management's attention from our
ongoing business;
- we may not be able to successfully incorporate acquired assets
and technology into our service offerings;
- we may not be able to maintain uniform standards, controls,
procedures, and policies;
- we may lack the necessary experience to enter new markets and add
new services; and
- an acquisition may impair our relationships with employees and
subscribers as a result of changes in management.
We may not be successful in overcoming these risks or any other
problems encountered in connection with the Spry and NETCOM acquisitions or any
future transactions. In addition, these transactions and any future transaction
could require us to (1) issue additional equity securities, which would dilute
our stockholders, (2) incur additional debt, or (3) amortize acquisition or
debt-related expenses for goodwill and other intangible assets. We were required
to take each of these actions to complete the NETCOM acquisition. Any of these
actions could have a material adverse effect on our business, operating results
and financial condition.
WE CANNOT ASSURE YOU THAT WE WILL EFFECTIVELY MANAGE OUR GROWTH.
We may not be successful in effectively managing our growth. Our rapid
growth has in the past placed, and may in the future place, a significant strain
on our business and financial resources. The rapid expansion of our subscriber
base, including through the Spry and NETCOM acquisitions, has placed increasing
demands on our customer service and technical support resources. Failure to
manage our recent and anticipated growth could have a material adverse effect on
our business, results of operations and financial condition.
For us to effectively (1) manage our rapidly growing operations, (2)
successfully integrate newly acquired assets, including those acquired in the
Spry and NETCOM acquisitions, and (3) continue to implement a nationwide
strategy and network, we must:
- continue to implement and improve our operational, financial, and
management information systems;
- closely monitor service quality, particularly through third-party
points-of-presence, or "POPs";
- integrate leased physical sites;
- acquire and install necessary equipment and telecommunications
facilities;
- implement marketing efforts in new and existing markets, which
may involve expanding our marketing strategy to include
telemarketing and other methods;
- add new services and provide related customer and technical
support;
- employ qualified personnel to provide technical and marketing
support for new sites;
- identify, attract, train, integrate, and retain other qualified
personnel, including new management personnel;
- develop additional expertise; and
- continue to expand our operational and financial resources.
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<PAGE> 15
WE HAVE SIGNIFICANT DEBT AND WE MAY BE UNABLE TO SERVICE THAT DEBT.
On February 17, 1999, we entered into a credit agreement with First
Union National Bank and other lenders establishing a $100 million secured
revolving credit facility. Also on February 17, 1999, we borrowed approximately
$80 million under the credit facility to finance the NETCOM acquisition. At
December 31, 1998, giving effect to the Spry acquisition, the NETCOM acquisition
and the borrowings under the credit facility as if they had occurred on January
1, 1998:
- we would have had $85.1 million of indebtedness;
- stockholders' equity would have been $237.1 million; and
- our earnings would have been insufficient to cover our fixed
charges for the year ended December 31, 1998 by $96.2 million.
Even if we repay all amounts outstanding under our credit facility, we
will have significant additional debt upon completion of our recently announced
offering of $130,000,000 principal amount of convertible subordinated notes. We
cannot assure you that we will be able to improve our earnings before fixed
charges or that we will be able to meet our debt service obligations under our
credit facility or the convertible subordinated notes. We will be in default
under the terms of our credit facility if (1) we are unable to generate
sufficient cash flow or otherwise obtain funds necessary to make required
payments, or (2) we otherwise fail to comply with the various covenants in our
debt obligations. A default would permit the holders of the indebtedness to
accelerate its maturity. This, in turn, would have a material adverse effect on
our business, financial condition and results of operations. In addition, we are
required under the terms of the credit facility to obtain, by May 19, 1999,
landlord consents under some of our operating leases. If we do not obtain these
consents by the required date, the lenders' commitment under the credit facility
could be reduced to $20 million, which could have a material adverse effect on
our business, financial condition and results of operations. For a more detailed
description of our secured credit facility, see our Current Report on Form 8-K
filed with the Securities and Exchange Commission on February 25, 1999.
Even if we are able to meet our debt service obligations, the amount of
debt we have could adversely affect us in a number of ways, including by:
- limiting our ability to obtain any necessary financing in the
future for working capital, capital expenditures, debt service
requirements or other purposes;
- limiting our flexibility in planning for, or reacting to, changes
in our business;
- placing us at a competitive disadvantage to those of our
competitors having lower levels of debt;
- making us more vulnerable to a downturn in our business or the
economy generally; and
- requiring us to use a substantial portion of our cash flow from
operations to pay principal and interest on our debt, instead of
contributing those funds to other purposes, such as working
capital and capital expenditures.
To be able to meet our obligations under our credit facility, we must
successfully implement our business strategy, which includes:
- expanding our network;
- attracting or acquiring and retaining a significant number of
subscribers; and
- achieving significant and sustained growth in our cash flow.
We cannot assure you that we will successfully implement our business
strategy or that we will be able to generate sufficient cash flow from operating
activities to meet our debt service obligations and working capital
requirements. Our ability to meet our obligations will be dependent upon our
future performance, which will in turn depend upon prevailing economic
conditions and financial, business and other factors.
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If the implementation of our business strategy is delayed or
unsuccessful, or if we do not generate sufficient cash flow to meet our debt
service and working capital requirements, we may need to seek additional
financing. If we are unable to obtain necessary financing on terms that are
acceptable to us, we could be forced to dispose of assets to make up for any
shortfall in the payments due on our indebtedness under circumstances that might
not be favorable to realizing the highest price for those assets. A substantial
portion of our assets consist of intangible assets, the value of which will
depend upon a variety of factors, including the success of our business. As a
result, we cannot assure you that our assets could be sold quickly enough, or
for amounts sufficient, to meet our obligations.
VARIOUS FACTORS OUTSIDE OF OUR CONTROL MAY AFFECT OUR OPERATING RESULTS
AND CAUSE POTENTIAL FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Our future success depends on a number of factors, many of which are
beyond our control. In particular, our revenue depends on our ability to attract
and keep subscribers. We normally offer our new subscribers a 30-day money-back
satisfaction guarantee. In addition, our subscribers, including the recently
acquired Spry and NETCOM subscribers, may discontinue their service at the end
of any month for any reason. We incur some expenses based on our expectations of
future revenue. If revenue is less than we expect, we may not be able to reduce
expenses proportionately. If we do not do so, our operating results, cash flows,
and liquidity will likely be adversely affected.
Our operating results, cash flows and liquidity may also fluctuate
significantly in the future due to other factors beyond our control which
include:
- how quickly we are able to acquire new subscribers;
- how expensive it will be to acquire new subscribers;
- the impact of increased depreciation and amortization from
acquisitions;
- how much money we have to spend to improve our business and
expand our operations;
- how quickly we are able to develop new products and services that
our subscribers require;
- how our prices compare to those of our competitors;
- whether customers accept our new and enhanced products and
services;
- how much our operating expenses increase;
- the nature of changes in our strategy;
- whether we lose key employees;
- whether we experience business disruptions resulting from third
parties encountering "Year 2000" computer problems;
- whether and how quickly alternative technologies introduced by
our competitors gain market
acceptance;
- whether our arrangements with third-party network providers under
various services agreements prove to be viable;
- changes in laws and regulations which affect our business;
- the extent to which we experience increased competition in our
markets; and
- other general economic factors.
Due to all of the foregoing factors, it is likely that in some future
periods, our operating results and/or our growth rate will be below what public
market analysts and investors expect. If that happens, the market price of our
common stock could decline materially.
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Technology and industry standards relating to our business are
constantly evolving and our success depends on our ability to keep pace with
these developments.
The market for Internet access and Web hosting is characterized by
rapidly changing technology, evolving industry standards, changes in subscriber
needs, and frequent new service and product introductions. Our future success
will depend, in part, on our ability to use leading technologies effectively, to
continue to develop our technical expertise, and to enhance our existing
services and develop new services to meet changing subscriber needs on a timely
and cost-effective basis. We may not be successful in achieving these goals.
We believe that our ability to compete successfully will also depend
upon the continued compatibility and interoperability of our services with
products and architectures offered by various vendors. Although we intend to
support emerging standards in the market for Internet access, industry standards
may not be established or, if they are established, we may not be able to
conform to these new standards in a timely fashion and maintain a competitive
position in the market. In addition, others may develop services or technologies
that will render our services or technology noncompetitive or obsolete.
We are also at risk to fundamental changes in the way customers access
the Internet. Currently, customers access Internet services primarily through
computers connected by telephone lines. Several companies, however, have
developed cable television modems that transmit data at substantially faster
speeds than the modems that we and most of our subscribers currently use. As the
Internet becomes accessible through these cable television modems and by
screen-based telephones, wireless products, televisions, and other consumer
electronic devices, or as subscriber requirements change the way Internet access
is provided, we must develop new technology or modify our existing technology to
accommodate these developments.
We will have to continue to modify and expand the means by which we
deliver our services. As discussed below, our ability to offer cable wire access
to our subscribers may depend on our ability to negotiate agreements with cable
companies and, therefore, may be very limited. Our pursuit of technological
advances, such as a new technology called Digital Subscriber Lines, or "DSL,"
that uses telephone lines for high-speed data transfers, may require substantial
time and expense. We may not succeed in adapting our Internet access business to
alternate access devices and conduits.
WE MAY NEED ADDITIONAL CAPITAL TO FINANCE OUR GROWTH AND CAPITAL
REQUIREMENTS.
We must continue to enhance and develop our network to maintain our
competitive position and continue to meet the increasing demands for service
quality, availability, and competitive pricing. Despite the availability of
additional network capacity from third-party network providers, we intend to
maintain the flexibility to expand or open MindSpring POPs or make other capital
investments as dictated by subscriber demand or strategic considerations. To
open new MindSpring POPs, we must spend significant amounts of money for new
equipment as well as for leased telecommunications facilities and advertising.
In addition, to further expand our subscriber base nationwide, we will probably
have to spend significant amounts of money on additional equipment to maintain
the high speed and reliability of our Internet access services. We may also need
to spend significant amounts of cash to:
- fund growth, operating losses and increases in expenses;
- take advantage of unanticipated opportunities, such as major
strategic alliances or other special marketing opportunities,
acquisitions of complementary businesses or assets, or the
development of new products; or
- otherwise respond to unanticipated developments or competitive
pressures.
If we do not have enough cash on hand, cash generated from our
operations, or cash available under our credit facility to meet these cash
requirements, we will need to seek alternative sources of financing to carry out
our growth and operating plans. We may not be able to raise needed cash on terms
acceptable to us or at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders. If alternative sources of financing
are required, but are insufficient or unavailable, we will be required to modify
our growth and operating plans to the extent of available funding and attempt to
attain profitability in our existing operations.
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<PAGE> 18
OUR BUSINESS DEPENDS ON OUR NETWORK INFRASTRUCTURE, INCLUDING OUR
ABILITY TO OBTAIN SUFFICIENT NETWORK CAPACITY.
The future success of our business will depend on the capacity,
reliability, and security of our network infrastructure, including the
third-party POPs. We will need to use substantial financial, operational, and
management resources to expand and adapt our network infrastructure to meet the
needs of an increasing number of subscribers and to accommodate the expanding
amount and type of information they wish to transfer. We may not be able to
expand or adapt our network infrastructure to meet additional demand or changing
subscriber requirements on a timely basis and at a commercially reasonable cost,
or at all.
In the past we have experienced shortages in bandwidth capacity, both
at the level of particular POPs, which affects only subscribers attempting to
use the particular POP, and in connection with system-wide services, such as
e-mail and news group services. If we do not maintain sufficient bandwidth
capacity in our network connections, subscribers will perceive a general
slowdown of all services on the Internet. We will sometimes temporarily delay
adding new subscribers in cities experiencing significant capacity constraints
until the capacity constraints can be alleviated. This is done to protect the
service levels for current subscribers. Similar problems can occur if we are
unable to expand the capacity of our information servers for e-mail, news, and
the World Wide Web fast enough to keep up with demand from our rapidly expanding
subscriber base. If the capacity of our servers is exceeded, subscribers will
experience delays when trying to use a particular service. While our objective
is to maintain excess capacity, our failure to expand or enhance our network
infrastructure on a timely basis or to adapt it to an expanding subscriber base,
changing subscriber requirements, or evolving industry standards could
materially adversely affect our business, financial condition, and results of
operations.
WE ARE DEPENDENT ON THIRD-PARTY NETWORK PROVIDERS.
In a significant number of markets, we provide Internet access
exclusively through third-party POPs. Our ability to provide Internet access to
our subscribers will be limited if (1) third-parties are unable or unwilling to
provide POP access to our subscribers, (2) we are unable to secure alternative
POP arrangements upon partial or complete termination of third-party network
provider agreements or (3) there is a loss of access to third-party POPs for
other reasons. These events could also limit our ability to further expand
nationally, which could, in turn, have a material adverse effect on our
business. If we lose access to third-party POPs under our current arrangements,
we may not be able to make alternative arrangements on terms acceptable to us,
or at all. We do not currently have any plans or commitments with respect to
alternative POP arrangements, although there are some geographic overlaps among
our current arrangements. Moreover, while our contracts with the third-party
providers require them to provide commercially reliable service to MindSpring's
subscribers with a significant assurance of accessibility to the Internet, the
performance of third-party providers may not meet our requirements, which could
materially adversely affect our business, financial condition and results of
operations.
In connection with the NETCOM acquisition, we entered into a network
services agreement with NETCOM, which has changed its name to ICG PST, Inc. We
expect to provide service to the majority of subscribers we acquired from NETCOM
under this agreement which at least for the first year of the agreement, will be
at favorable rates. However, ICG PST is just beginning to offer network services
as a third-party provider for companies like MindSpring. We cannot be sure that
this network agreement will be adequate to provide the level of service we
require for our subscribers, and there may be operating inefficiencies, network
reliability issues or technical support difficulties that are outside of our
control.
OUR OPERATIONS AND SERVICES ARE VULNERABLE TO NATURAL DISASTERS.
Our operations and services depend on the extent to which our computer
equipment and the computer equipment of our third-party network providers is
protected against damage from fire, earthquakes, power loss, telecommunications
failures, and similar events. A significant portion of our computer equipment,
including critical equipment dedicated to our Internet access services, is
located at a single facility in Atlanta, Georgia. Despite precautions taken by
us and our third-party network providers, over which we have no control, a
natural disaster or other unanticipated problems at our headquarters, network
hub, or a MindSpring or third-party network provider POP could cause
interruptions in the services that we provide. If disruptions occur, we may have
no means of replacing these network elements on a timely basis or at all. We do
not currently maintain fully redundant or back-
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up Internet services or backbone facilities or other fully redundant computing
and telecommunications facilities. Any accident, incident, system failure, or
discontinuance of operations involving our network or a third-party network that
causes interruptions in our operations could have a material adverse effect on
our ability to provide Internet services to our subscribers and, in turn, on our
business, financial condition, and results of operations.
WE ARE DEPENDENT ON TELECOMMUNICATIONS CARRIERS AND OTHER SUPPLIERS.
We rely on local telephone companies and other companies to provide
data communications capacity via local telecommunications lines and leased
long-distance lines. We may experience disruptions or capacity constraints in
these telecommunications services. If disruptions or capacity constraints occur,
we may have no means of replacing these services, on a timely basis or at all.
In addition, local phone service is sometimes available only from the local
monopoly telephone company in each of the markets we serve. We believe that the
federal Telecommunications Act of 1996 generally will lead to increased
competition in the provision of local telephone service, but we cannot predict
when or to what extent this will occur or the effect of increased competition on
pricing or supply.
We depend on a few third-party suppliers of hardware components.
Currently, we acquire some components we use to provide our networking services
from only one source, including modems and terminal servers manufactured by
3Com(R) Corporation and high-performance routers manufactured by Cisco Systems,
Inc. The expansion of our network infrastructure and the expansion of Internet
services in general is placing, and will continue to place, a significant demand
on our suppliers, some of which have limited resources and production capacity.
From time to time, we have experienced delayed delivery from suppliers of new
telephone lines, modems, terminal servers, and other equipment. If delays of
this nature are severe, all incoming modem lines may become full during peak
times, resulting in busy signals for subscribers who are trying to connect to
MindSpring. If our suppliers cannot adjust to meet increasing demand, the higher
demand levels may prevent them from continuing to supply components and products
in the quantities, at the quality levels and at the times we require, or at all.
If we are unable to develop alternative sources of supply, if required, we could
experience delays and increased costs in expanding our network infrastructure.
Our suppliers and telecommunications carriers also sell or lease
products and services to our competitors and may be, or in the future may
become, competitors themselves. Our suppliers and telecommunications carriers
may enter into exclusive arrangements with our competitors or stop selling or
leasing their products or services to us at commercially reasonable prices, or
at all.
OUR NETWORK IS VULNERABLE TO SECURITY BREACHES AND INAPPROPRIATE USE BY
INTERNET USERS WHICH COULD DISRUPT OUR SERVICE.
The future success of our business will depend on the security of our
network and, in part, on the security of the network infrastructures of our
third-party providers, over which we have no control. Despite the implementation
of security measures, our infrastructure and the infrastructures of our network
providers are vulnerable to computer viruses or similar disruptive problems
caused by our or their subscribers or other Internet users. Computer viruses or
problems caused by third parties, such as the sending of excessive volumes of
unsolicited bulk e-mail or "spam," could lead to interruptions, delays, or
cessation in service to our subscribers. Third parties could also potentially
jeopardize the security of confidential information stored in our computer
systems or our subscribers' computer systems by their inappropriate use of the
Internet, which could cause losses to us or our subscribers or deter persons
from subscribing to our services. Inappropriate use of the Internet includes
attempting to gain unauthorized access to information or systems, commonly known
as "cracking" or "hacking." Although we intend to continue to implement security
measures to prevent this, "hackers" have circumvented security measures in the
past, and others may be able to circumvent our security measures or the security
measures of our third-party network providers in the future.
To alleviate problems caused by computer viruses or other inappropriate
uses or security breaches, we may have to interrupt, delay, or cease service to
our subscribers, which could have a material adverse effect on our business,
financial condition, and results of operations. In addition, we expect that our
subscribers will increasingly use the Internet for commercial transactions in
the future. Any network malfunction or security breach could cause these
transactions to be delayed, not completed at all, or completed with compromised
security. Subscribers or
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others may assert claims of liability against us as a result of any failure by
us to prevent these network malfunctions and security breaches. Until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential subscribers may inhibit the growth of the
Internet service industry in general and our subscriber base and revenue in
particular.
THE INTERNET ACCESS AND WEB HOSTING MARKETS ARE VERY COMPETITIVE.
The markets for the provision of Internet access and Web hosting
services to individuals and small businesses are extremely competitive and
highly fragmented. There are no substantial barriers to entry, and we expect
that competition will continue to intensify. We may not be able to compete
successfully against current or future competitors, many of whom may have
financial resources greater than ours. Increased competition could cause us to
increase our selling and marketing expenses and related subscriber acquisition
costs and could also result in increased subscriber attrition. We may not be
able to offset the effects of these increased costs through an increase in the
number of our subscribers or higher revenue from enhanced services and we may
not have the resources to continue to compete successfully. These developments
could adversely affect our business, financial condition and results of
operations.
Competitive Factors. We believe that the primary competitive factors
determining success in the Internet access and Web hosting markets are a
reputation for reliability and service, effective customer support, pricing,
easy-to-use software, and geographic coverage. Other important factors include
the timing of introductions of new products and services and industry and
general economic trends. Our current and prospective competitors include many
large companies that have substantially greater market presence and financial,
technical, marketing, and other resources. In addition, every local market that
we have entered or intend to enter is served by multiple local ISPs.
Our Competitors. We currently compete or expect to compete with the
following types of companies:
- established on-line commercial information service providers,
such as AOL;
- national long-distance carriers, such as AT&T Corp. and MCI
WorldCom, Inc.;
- national commercial ISPs, such as EarthLink Network, Inc.;
- computer hardware and software and other technology companies,
such as IBM Corp. and Microsoft Corporation;
- numerous regional and local commercial ISPs which vary widely in
quality, service offerings, and pricing;
- national and regional Web hosting companies that focus primarily
on providing Web hosting services;
- cable operators and on-line cable services;
- local telephone companies and regional Bell operating companies;
and
- nonprofit or educational ISPs.
We believe that new competitors, including large computer hardware and
software, media, and telecommunications companies, will continue to enter the
Internet access and Web hosting markets. As consumer awareness of the Internet
grows, existing competitors are likely to further increase their emphasis on
their Internet access and Web hosting services, resulting in even greater
competition for us. In addition, telecommunications companies may be able to
offer customers reduced communications costs in connection with these services,
reducing the overall cost of their Internet access and Web hosting solutions and
significantly increasing pricing pressures on us. The ability of our competitors
to acquire other ISPs, to enter into strategic alliances or joint ventures or to
bundle other services and products with Internet access or Web hosting could
also put us at a significant competitive disadvantage.
Broadband Technologies. We also face competition from companies that
provide broadband connections to consumers' homes, including local and
long-distance telephone companies, cable television companies, electric utility
companies, and wireless communications companies. These companies may use
broadband technologies to include Internet access or Web hosting in their basic
bundle of services or may offer Internet access or Web hosting
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<PAGE> 21
services for a nominal additional charge. Broadband technologies enable
consumers to transmit and receive print, video, voice and data in digital form
at significantly faster access speeds than existing dial-up modems.
The companies that own these broadband networks could prevent us from
delivering Internet access through the wire and cable connections that they own.
Cable television companies are not currently required to allow ISPs to access
their broadband facilities and the availability and terms of ISP access to
broadband local telephone company networks are under regulatory review. Our
ability to compete with telephone and cable television companies that are able
to support broadband transmission, and to provide better Internet services and
products may depend on future regulation to guarantee open access to the
broadband networks. However, in January 1999, the FCC declined to take any
action to mandate or otherwise regulate access by ISPs to broadband cable
facilities at this time. It is unclear whether and to what extent local and
state regulatory agencies will take any initiatives to implement this type of
regulation, and whether they will be successful in establishing their authority
to do so. Similarly, the FCC is considering proposals that could limit the right
of ISPs to connect with their customers over broadband local telephone lines. In
addition to competing directly in the ISP market, both cable and telephone
facilities operators are also aligning themselves with certain ISPs who would
receive preferential or exclusive use of broadband local connections to end
users. If high-speed, broadband facilities increasingly became the preferred
mode by which customers access the Internet and we are unable to gain access to
these facilities on reasonable terms, our business, financial condition and
results of operations could be materially adversely affected.
No International Operations. We do not currently compete
internationally, except that we have a small number of Canadian subscribers
obtained in the Spry acquisition. If the ability to provide Internet access
internationally becomes a competitive advantage in the Internet access industry,
we may be at a competitive disadvantage relative to our competitors.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS OR
AVOIDING CLAIMS THAT WE INFRINGE THE PROPRIETARY RIGHTS OF OTHERS.
Our success depends in part upon our software and related
documentation. We principally rely upon copyright, trade secret, and contract
laws to protect our proprietary technology. We cannot be certain that we have
taken adequate steps to prevent misappropriation of our technology or that our
competitors will not independently develop technologies that are substantially
equivalent or superior to our technology.
We have permission and, in some cases, licenses from each manufacturer
of the software that we bundle in MindSpring's front-end software product for
subscribers. Although we do not believe that the software or the trademarks we
use or any of the other elements of our business infringe on the proprietary
rights of any third parties, third parties may assert claims against us for
infringement of their proprietary rights and these claims may be successful. We
might also face third party claims as a result of our acquisition of software,
trademarks and other proprietary technology from Spry and NETCOM.
We could incur substantial costs and diversion of management resources
in the defense of any claims relating to proprietary rights, which could
materially adversely affect our business, financial condition, and results of
operations. Parties making these claims could secure a judgment awarding
substantial damages as well as injunctive or other equitable relief that could
effectively block our ability to license our products in the United States or
abroad. Such a judgment could have a material adverse effect on our business,
financial condition and results of operations. If a third party asserts a claim
relating to proprietary technology or information against us, we may seek
licenses to the intellectual property from the third party. We cannot be
certain, however, that third parties will extend licenses to us on commercially
reasonable terms, or at all. If we fail to obtain the necessary licenses or
other rights, it could materially adversely affect our business, financial
condition and results of operations.
OUR SUCCESS DEPENDS UPON OUR ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL.
Our success depends upon the continued efforts of our senior management
team and our technical, marketing, and sales personnel. These employees may
voluntarily terminate their employment with us at any time. Our success also
depends on our ability to attract and retain additional highly qualified
management, technical, marketing, and sales personnel. The process of hiring
employees with the combination of skills and attributes required to carry out
our strategy can be extremely competitive and time-consuming. We may not be able
to
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successfully retain or integrate existing personnel or identify and hire
additional personnel. If we lose the services of key personnel or are unable to
attract additional qualified personnel, our business, financial condition and
results of operations could be materially and adversely affected.
ITC HOLDING COMPANY, INC., ONE OF OUR PRINCIPAL STOCKHOLDERS, AND OUR
MANAGEMENT CAN EXERCISE SIGNIFICANT INFLUENCE OVER MINDSPRING.
ITC Holding Company, Inc. indirectly owns approximately 18.5% of our
common stock as of February 28, 1999. MindSpring's executive officers and
directors own an aggregate of approximately 9.6% of our common stock as of the
same date. As a result, if ITC Holding and management act together, they would
be able to exercise significant influence over most matters requiring
stockholder approval, including the election of directors and the approval of
significant corporate matters, such as some types of change-of-control
transactions. The common stock of MindSpring owned by ITC Holding is pledged to
ITC Holding's lenders in connection with a credit facility. If ITC Holding's
subsidiaries default under the credit facility, ITC Holding could lose ownership
of all of its stock in MindSpring and someone unknown to us would become a
significant stockholder of MindSpring.
SOME OF OUR DIRECTORS HAVE CONFLICTS OF INTEREST INVOLVING ITC HOLDING.
ITC Holding, as a significant stockholder of MindSpring, and Campbell
B. Lanier, III, William H. Scott, III, and O. Gene Gabbard, who are directors of
MindSpring and directors, stockholders, and, in the case of Messrs. Lanier and
Scott, officers of ITC Holding, are in positions involving the possibility of
conflicts of interest with respect to transactions concerning MindSpring. Some
decisions concerning our operations or financial structure may present conflicts
of interest between us and ITC Holding and/or its affiliates. For example, if we
are required to raise additional capital from public or private sources to
finance our anticipated growth and contemplated capital expenditures, our
interests might conflict with those of ITC Holding and/or its affiliates with
respect to the particular type of financing sought. In addition, we may have an
interest in pursuing acquisitions, divestitures, financings, or other
transactions that, in our judgment, could be beneficial to us, even though the
transactions might conflict with the interests of ITC Holding and/or its
affiliates. If these conflicts do occur, ITC Holding and its affiliates may
exercise their influence in their own best interests.
We currently engage and expect in the future to engage in transactions
with ITC Holding and/or its affiliates. In addition, we provide Internet access
to various companies controlled by ITC Holding, although the revenue we derive
from these sources is not substantial. We have a policy that requires any
material transaction with our officers, directors, or principal stockholders, or
their affiliates, to be on terms no less favorable to MindSpring than we
reasonably could have obtained in arm's-length transactions with independent
third parties. We believe that each current transaction in which we are engaged
with an affiliate complies with this policy.
THE ABILITY OF OUR STOCKHOLDERS TO EFFECT CHANGES IN CONTROL OF
MINDSPRING IS LIMITED.
There are provisions in our Amended and Restated Certificate of
Incorporation, as amended, our Amended and Restated Bylaws, and the Delaware
General Corporation Law that could delay or impede the removal of incumbent
directors and could make more difficult a merger, tender offer, or proxy contest
involving MindSpring or could discourage a third-party from attempting to
acquire control of MindSpring, even if these events would be beneficial to the
interests of the stockholders. In particular, our board of directors could delay
a change in control of MindSpring. In addition, our Amended and Restated
Certificate of Incorporation authorizes the board of directors to provide for
the issuance of shares of preferred stock of MindSpring, in one or more series,
which the board of directors could issue without further stockholder approval
and with terms and conditions and rights, privileges, and preferences determined
by the board of directors. We have no current plans to issue any shares of
preferred stock. We are also governed by Section 203 of the Delaware Corporation
Law. In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless specified conditions are met. These
factors could have the effect of delaying, deferring, or preventing a change of
control of MindSpring.
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WE MAY BECOME REGULATED BY THE FEDERAL COMMUNICATIONS COMMISSION OR
OTHER GOVERNMENT AGENCIES.
As an Internet service provider, we are not currently directly
regulated by the Federal Communications Commission or any other agency, other
than regulations applicable to businesses generally. In a report to Congress
adopted on April 10, 1998, the FCC reaffirmed that Internet service providers
should be classified as unregulated "information service providers" rather than
regulated "telecommunications providers" under the terms of the
Telecommunications Act of 1996.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. We cannot predict whether in the future the FCC
will modify its current policies against regulation of ISPs.
MindSpring also could be affected by any change in the ability of
customers to reach our network through a dial-up telephone call without any
additional charges. This practice has allowed ISPs to offer flat-rate, non-usage
sensitive pricing, and has been an important reason for the growth in Internet
use. Recently, the FCC ruled that connections linking end users to their ISPs
are jurisdictionally interstate rather than local, but the FCC did not subject
such calling to the access charges that apply to traditional telecommunications
companies. Local telephone companies assess access charges to long distance
companies for the use of the local telephone network to originate and terminate
long distance calls, generally on a per-minute basis. MindSpring could be
adversely affected by any regulatory change that would result in application of
access charges to Internet service because this would substantially increase the
cost of using the Internet. However, the FCC Chairman has stated that he opposes
Internet-related access charges, and we believe that this development is
unlikely, with one possible exception that is not currently relevant to our
business. Specifically, there is substantial debate as to whether carrier access
charges, or the universal support obligation discussed above, should apply to
Internet-based telephone services that substitute for conventional telephony. We
have no current plans to install gateway equipment and other telephony, and so
we do not believe we would be directly affected by these developments were they
to occur.
The law relating to the liability of Internet service providers and
on-line services companies for information carried on, stored on, or
disseminated through their network is unsettled, even with the recent enactment
of the Digital Millennium Copyright Act. While no one has ever filed a claim
against us relating to information carried on, stored on, or disseminated
through our network, someone may file a claim of that type in the future and may
be successful in imposing liability on us. If that happens, we may have to spend
significant amounts of money to defend ourselves against these claims and, if we
are not successful in our defense, the amount of damages that we will have to
pay may be significant. Any costs that we incur as a result of defending these
claims or the amount of liability that we may suffer if our defense is not
successful could materially adversely affect our business, financial condition
and results of operations.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide take
actions to reduce our exposure to this type of liability. This may require us to
spend significant amounts of money for new equipment and may also require us to
discontinue offering some of our products or services.
Due to the increasing popularity and use of the Internet, it is
possible that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to some types of
content by minors, pricing, bulk e-mail or "spam," encryption standards,
consumer protection, electronic commerce, taxation, copyright infringement, and
other intellectual property issues. We cannot predict the impact, if any, that
any future regulatory changes or developments may have on our business,
financial condition, and results of operations. Changes in the regulatory
environment relating to the Internet access industry, including regulatory
changes that directly or indirectly affect telecommunication costs or increase
the likelihood or scope of competition from regional telephone companies or
others, could have a material adverse effect on our business, financial
condition and results of operations.
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FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON
MINDSPRING.
Most of the world's computer hardware and software have historically
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the 21st century from dates in the
20th century. As a result, various problems may arise from the improper
processing of dates and date-sensitive calculations by computers and other
machinery as the Year 2000 is approached and reached.
Our failure, or the failure of third parties on which we rely, to
adequately address Year 2000 readiness issues could result in an interruption,
or a failure, of some normal business activities or operations. Presently, we
believe that the primary risks that we face with regard to the Year 2000 are
those arising from third party services or products.
In particular, MindSpring depends heavily on a significant number of
third party vendors to provide both network services and equipment. A
significant Year 2000-related disruption of these network services or equipment
could cause our customers to consider seeking alternate providers or cause an
unmanageable burden on customer service and technical support. This in turn
could materially and adversely affect MindSpring's results of operations,
liquidity and financial condition.
Furthermore, our business depends on the continued operation of, and
widespread access to, the Internet. To the extent that the normal operation of
the Internet is disrupted by the Year 2000 issue, or if a large portion of our
customers are unable to access the Internet due to Year-2000 related issues in
connection with their own systems, MindSpring's results of operations, liquidity
and financial condition could be materially and adversely affected.
We also face Year 2000 risks related to the acquisitions we make. If we
fail to identify and address Year 2000 issues in connection with our
acquisitions, our results of operations, liquidity and financial condition could
be materially and adversely affected.
We have established a Year 2000 readiness program to coordinate
appropriate activity to be taken to address the Year 2000 issue. As of December
31, 1998, we had incurred approximately $75,000 in connection with the
implementation of the program. We expect to incur an additional $250,000 to
$300,000 of expenses to implement the remainder of the Year 2000 readiness
program. These estimates do not include additional costs which may be incurred
in connection with expanding the program to include the systems and products
acquired in the Spry and NETCOM transactions. These are our best estimates, and
we do not believe that the total costs will have a material affect on our
business. However, if the actual costs resulting from implementation of the Year
2000 readiness program significantly exceed our estimates, they may have a
material adverse effect on our results of operations, liquidity and financial
condition.
OUR CREDIT FACILITY CONTAINS RESTRICTIVE COVENANTS.
Our credit facility contains restrictions on MindSpring and any of our
future subsidiaries that affect, and in some cases prohibit or significantly
limit, our ability and the ability of our future subsidiaries, if any, to:
- incur additional indebtedness;
- create liens;
- make investments;
- declare and pay cash dividends;
- issue some types of convertible and redeemable stock; and
- sell assets.
Our credit facility also requires us to maintain specified financial
ratios and satisfy financial condition tests. Our ability to meet those
financial ratios and tests can be affected by events beyond our control. We can
offer no assurance that we will meet those tests. In addition, these restrictive
covenants may adversely affect our ability to
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finance our future operations or capital needs, or to engage in other business
activities that may be in our interest. A breach of any of these covenants could
result in a default under the credit facility. Upon the occurrence of an event
of default under the credit facility, our lenders could elect to declare all
amounts outstanding under the credit facility, together with any accrued
interest, to be immediately due and payable. If we were unable to repay those
amounts, our lenders could proceed against the collateral granted to them to
secure that indebtedness. Substantially all of our assets are pledged as
collateral under the credit facility. If the credit facility were to be
accelerated, we can offer no assurance that our assets would be sufficient to
repay in full that indebtedness. An event of default or acceleration of the
credit facility could have a material adverse effect on our business, financial
condition and results of operations.
OUR STOCK PRICE WILL FLUCTUATE, AND COULD FLUCTUATE SIGNIFICANTLY.
Since our common stock has been publicly traded, the market price of
our common stock has fluctuated over a wide range and may continue to do so in
the future. Significant fluctuations in the market price of our common stock may
occur in response to various factors and events, including, among other things:
- the depth and liquidity of the trading market for our common
stock;
- quarterly variations in actual or anticipated operating results;
- growth rates;
- changes in estimates by analysts;
- market conditions in the industry, including demand for Internet
access;
- announcements by competitors;
- regulatory actions; and
- general economic conditions.
In addition, the stock market has from time to time experienced
significant price and volume fluctuations, which have particularly affected the
market prices of the stocks of high-technology companies and which may be
unrelated to the operating performance of particular companies. Furthermore, our
operating results and prospects from time to time may be below the expectations
of public market analysts and investors. The occurrence of any of these events
could result in a material decline in the price of our common stock.
WE DO NOT ANTICIPATE THAT WE WILL PAY CASH DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock
and do not anticipate paying cash dividends in the foreseeable future. In
addition, our credit facility contains limits on our ability to declare and pay
cash dividends.
EMPLOYEES
As of February 28, 1999, MindSpring had approximately 1,600 employees,
of which approximately 300 were added in the NETCOM acquisition. None of
MindSpring's current employees is represented by a labor organization, and we
consider our relations with our employees to be good.
NON-DIRECTOR EXECUTIVE OFFICERS OF MINDSPRING
The following is a list of the executive officers of MindSpring who are not
also directors of MindSpring, together with biographical summaries of their
experience. Executive officers serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. The ages of the persons set forth below are as of March 1, 1999.
Juliet M. Reising, age 48, has served as Executive Vice President,
Chief Financial Officer and Treasurer of MindSpring since February 1999. From
September 1998 to February 1999, Ms. Reising served as Chief Financial
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Officer with AvData Systems, Inc. ("AvData"), a provider of network management
services. From September 1997 to January 1998, Ms. Reising served as Vice
President and Chief Financial Officer of Composit Communications International,
a start-up call center software developer. From August 1995 to August 1997, she
served as Vice President and Chief Financial Officer of InterServ Services
Corp., a marketing services provider. From September 1994 to August 1995, she
served as Senior Vice President and Chief Financial Officer of Media Marketing
Services, a promotional travel incentive company. From July 1993 to September
1994, she was a financial consultant and from June 1992 to June 1993, she served
as Executive Vice President and Chief Financial Officer of Coin, Inc., a
computer systems developer. Ms. Reising started her career as a CPA with Ernst &
Young and received a BBA in Accounting from the University of Georgia.
Samuel R. DeSimone, Jr., age 39, has served as the Executive Vice
President, General Counsel and Secretary of MindSpring since November 1998. From
September 1995 to August 1998, Mr. DeSimone served as Vice President of
Corporate Development with Merix Corporation of Forest Grove, Oregon, a printed
circuit board manufacturer. From June 1990 to August 1995, he was an associate
attorney and partner with Lane Powell Spears Lubersky of Portland, Oregon. Mr.
DeSimone received a BA from, and was a Phi Beta Kappa graduate of, Amherst
College and received a JD from New York University School of Law.
Lance Weatherby, age 39, has served as MindSpring's Executive Vice
President of Sales and Marketing since April 1998. Mr. Weatherby served as
MindSpring's Vice President of Business Development from September 1996 to April
1998, MindSpring's Acting Vice President of Business Development from August
1996 to September 1996, and a Market Development Manager from September 1995 to
August 1996. Mr. Weatherby held a variety of sales, sales management and
marketing positions with Mobil from October 1990 to September 1995, including
District Sales Manager from December 1992 to September 1995. Mr. Weatherby
received a BBA in Marketing from Eastern Kentucky University and an MBA from
Indiana University.
Gregory J. Stromberg, age 46, has served as MindSpring's Executive Vice
President and has managed the NETCOM customer integration into MindSpring since
January 1999. Mr. Stromberg served as MindSpring's Executive Vice President of
Technology from August 1998 until January 1999, Executive Vice President of Call
Centers from March 1998 until August 1998, Vice President of Call Centers from
June 1996 to March 1998, and Vice President of Technical Support from October
1995 until June 1996. From June 1993 to September 1994, Mr. Stromberg worked as
a Regional Manager for Digital Financial Services, a subsidiary of GE Capital.
Mr. Stromberg worked in various sales, product management, operations and
management positions with Digital Equipment Corporation from June 1983 to June
1993. Mr. Stromberg received a BS in Business Management and an MBA from the
University of Utah.
ITEM 2. PROPERTIES
Our corporate headquarters are located in Atlanta, Georgia. The leases
for this space expire on March 31, 2001 and July 14, 2002. We also lease
additional office space in the vicinity of our Atlanta headquarters in order to
meet MindSpring's existing and anticipated space requirements. The lease for
this additional office space expires on March 31, 2002. We believe that these
facilities will provide sufficient capacity for MindSpring's operations for the
foreseeable future. Equipment for POPs other than the Atlanta POP site is
generally co-located with and in space leased from other companies operating in
the area of the particular POP.
We also maintain call center and/or network operations facilities in
the following locations:
- Harrisburg, Pennsylvania -- The lease for this facility
expires on December 15, 1999. We have the option to extend
this lease for one additional year.
- Phoenix, Arizona -- The lease for this facility expires on
October 31, 2004. We have the option to extend this lease for
two successive five-year terms.
- Seattle, Washington -- The lease for this facility expires on
February 29, 2000. We have the option to extend this lease for
one additional year.
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- Bellevue, Washington -- The lease for this facility expires
on December 31, 2000. We have the option to extend this lease
for one five-year term.
- Dallas, Texas -- The lease for this facility expires on April
30, 2003. We have the option to extend this lease for two
successive three-year terms.
- San Jose, California -- The lease for this facility expires
on October 31, 1999. We have the option to extend this lease
for two successive three-year terms.
ITEM 3. LEGAL PROCEEDINGS
We are not currently involved in any pending legal proceedings that are
likely to have a material impact on MindSpring.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock is traded on the Nasdaq National Market under the
symbol "MSPG." The following table shows for the periods indicated the high and
low sales prices per share of the common stock as reported by the Nasdaq
National Market (as adjusted for out 3-for-1 stock split effected on July 24,
1998).
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 High Low
---- ---
<S> <C> <C>
First Quarter $23.00 $9.20
Second Quarter 34.75 16.17
Third Quarter 52.38 25.31
Fourth Quarter 79.00 23.13
<CAPTION>
Fiscal Year Ended December 31, 1997 High Low
---- ---
<S> <C> <C>
First Quarter $3.42 $1.92
Second Quarter 3.79 2.21
Third Quarter 8.21 3.54
Fourth Quarter 11.54 6.08
</TABLE>
On March 25, 1999, the last reported sale price of the common stock on
the Nasdaq National Market was $92.00 per share. At March 25, 1999, there were
741 holders of record of the common stock.
We have never declared or paid any cash dividends on our capital stock
and do not anticipate paying cash dividends on our common stock in the
foreseeable future. The current policy of our board of directors is to retain
earnings to finance the expansion of the our operations. Our board of directors
will determine future declaration and payment of dividends, if any, in light of
the then-current conditions, including our earnings, operations, capital
requirements, financial condition, restrictions in financing agreements, and
other factors they deem relevant. In addition, our ability to pay dividends is
limited by the terms of our credit facility.
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ITEM 6. SELECTED FINANCIAL DATA
The following table contains selected financial and operating data for
MindSpring. The selected historical statements of operations data for the period
from February 24, 1994, MindSpring's inception, to December 31, 1994 and the
years ended December 31, 1995, 1996, 1997 and 1998 and the selected historical
balance sheet data as of December 31, 1994, 1995, 1996, 1997 and 1998 have been
derived from financial statements of MindSpring, which have been audited by
Arthur Andersen LLP, independent public accountants, whose report with respect
to these financial statements is included elsewhere in this Form 10-K. The
inception period referred to in the table below is the period from February 24,
1994, MindSpring's inception, to December 31, 1994.
The information presented in the table excludes the effects of the NETCOM
acquisition and borrowings under our secured credit facility, which occurred on
February 17, 1999. See note 10 to MindSpring's audited Financial Statements for
the fiscal year ended December 31, 1998 included in this Form 10-K for certain
pro forma and other information concerning these and other events. Also see our
Current Report on Form 8-K filed with the Securities and Exchange Commission on
February 25, 1999 for more detailed pro forma information.
You should read the following selected historical financial and operating
data with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations," MindSpring's financial
statements and notes thereto and other financial and operating data included
elsewhere in this Form 10-K.
The total debt information included in the balance sheet data presented
below contains the current portion of related indebtedness and the stockholders'
equity information included in the balance sheet data presented below excludes
approximately 2,123,000 shares of common stock reserved for issuance upon
exercise of stock options granted as of December 31, 1998.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------------
INCEPTION
PERIOD 1995 1996 1997 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Access.................................. $ 70 $ 1,455 $ 13,420 $ 40,925 $ 95,852
Business services....................... -- 260 2,286 7,711 14,735
Subscribers start-up fees............... 33 512 2,426 3,920 4,086
------ -------- --------- --------- ---------
Total revenues...................... 103 2,227 18,132 52,556 114,673
Cost and expenses:
Cost of revenues -- recurring........... 37 627 6,332 15,203 31,724
Cost of subscriber start-up fees........ 15 339 1,876 1,619 2,612
Selling, general and administrative..... 121 2,230 14,161 30,784 57,324
Depreciation and amortization........... 5 265 3,285 8,695 15,227
------ -------- --------- --------- ---------
Total operating expenses............ 178 3,461 25,654 56,301 106,887
------ -------- --------- --------- ---------
Operating gain (loss)....................... (75) (1,234) (7,522) (3,745) 7,786
Interest income (expense), net.............. -- (725) (90) (338) 1,214
------ -------- --------- --------- ---------
Income (loss) before taxes.................. (75) (1,959) (7,612) (4,083) 9,000
Income tax provision........................ -- -- -- -- 1,544
------ -------- --------- --------- ---------
Net income (loss)........................... $ (75) $ (1,959) $ (7,612) $ (4,083) $ 10,544
====== ======== ========= ========= =========
PER SHARE DATA:
Basic earnings (loss) per share............. $ (0.23) $ (0.48) $ (0.18) $ 0.43
Diluted earnings (loss) per share........... $ (0.20) $ (0.48) $ (0.18) $ 0.41
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic....................................... 8,664 15,758 22,542 24,611
Diluted..................................... 9,930 15,758 22,542 25,431
OTHER OPERATING DATA:
Approximate number of subscribers at end of
period.................................... 1,000 12,000 122,000 278,000 693,000
Approximate number of employees at end of
period.................................... 8 95 321 502 977
EBITDA (1).................................. $ (70) $ (969) $ (4,237) $ 4,950 $ 23,013
EBITDA margin (1)........................... (68)% (44)% (23)% 9% 20%
CASH FLOW DATA:
Operations.................................. (33) (70) (2,005) 11,354 35,501
Investing................................... (127) (3,724) (21,336) (9,002) (47,647)
Financing................................... 745 3,634 32,569 (2,619) 170,503
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
INCEPTION
PERIOD 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 585 $ 425 $ 9,653 $ 9,386 $167,743
Working capital.............................. 547 (3,100) 5,027 (5,352) 137,106
Total assets................................. 722 4,845 35,232 44,286 247,599
Total debt, including current maturities..... -- 2,500 4,005 9,740 5,119
Total stockholders' equity................... 670 482 25,407 21,413 207,081
</TABLE>
- ------------------------
(1) EBITDA represents operating gain (loss) plus depreciation and amortization.
EBITDA is provided because it is a measure commonly used by investors to
analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for
operating income, net income or cash flows from operating activities for
purposes of analyzing MindSpring's operating performance, financial position
and cash flows. EBITDA is not necessarily comparable with similarly titled
measures for other companies.
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<PAGE> 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
All common stock numbers and per share amounts in this report give
effect to a 3-for-1 stock split effected by MindSpring in June 1998.
OVERVIEW
MindSpring is a leading national Internet service provider, or ISP. We
focus on serving individuals and small businesses. Our subscribers use their
MindSpring accounts to, among other things, communicate, retrieve information,
and publish information on the Internet. Our primary service offerings are
dial-up Internet access and business services, which we offer in various price
and usage plans designed to meet the needs of our subscribers. Our business
services include Web hosting, which entails maintaining a customer's Web site;
high-speed, dedicated Internet access; Web page design; domain name registration
and customer Web server co-location. Web hosting, our principal business
service, complements our Internet access business and is one of the fastest
growing segments of the Internet marketplace.
We offer our subscribers:
- user-friendly and easy to install software, containing a complete
set of the most popular Internet applications including electronic
mail, World Wide Web access, Network News, File Transfer Protocol
and Internet Relay Chat;
- highly responsive customer service, and technical support which is
available 24 hours a day, seven days a week; and
- a reliable nationwide network that enables subscribers in the 48
contiguous United States and the District of Columbia to access the
Internet via a local telephone call.
Our nationwide network consists of MindSpring-owned points of presence
"POPs" and POPs that are owned by other companies with which we have service
agreements. Through these service agreements, we have the flexibility to offer
Internet access in a particular market through a MindSpring-owned POP, a
third-party network provider's POP or a combination of the two. As part of our
efforts to control quality and cost, we typically seek to increase the number of
MindSpring-owned POPs in markets where we have higher numbers of subscribers.
MindSpring has grown rapidly by:
- providing superior customer service and technical support;
- expanding marketing and distribution activities;
- making strategic acquisitions; and
- creating additional revenue streams by offering value-added
services such as Web hosting that build on our basic operating
capabilities and services.
We have increased our subscriber base from approximately 12,000
subscribers at December 31, 1995 to approximately 693,000 subscribers at
December 31, 1998, including over 21,000 Web hosting customers. In February
1999, we completed the NETCOM acquisition, which increased our subscriber base
to approximately 1.1 million subscribers, including approximately 45,000 Web
hosting subscribers. This acquisition is described below.
In addition, we have rapidly increased revenues and have achieved
profitability ahead of other national ISPs. We believe that providing superior
service and support to our subscribers has contributed to our achieving
significant market penetration in a number of our target markets. We also
believe that high geographic
29
<PAGE> 32
concentrations of satisfied subscribers in a particular market reduces the costs
of adding new subscribers in that market relative to revenues. This tends to
result in higher margins and greater profitability in these markets.
From our inception in February 1994 through 1997, we experienced annual
net operating losses as a result of efforts to build our network infrastructure
and internal staffing, develop our systems, and expand into new markets. During
1997, we generated positive cash flows from operations, with EBITDA of
approximately $5 million. We had our first year of profitability in 1998. For
the year ended December 31, 1998, we had revenues of approximately $115 million,
EBITDA of approximately $23 million, net income of approximately $8.8 million
and earnings per share of $0.35, in each case excluding a one-time tax benefit
of approximately $1.7 million. Including the one-time tax benefit, our net
income for 1998 was approximately $10.5 million and our earnings per share were
$0.41.
We expect to continue to focus on increasing our subscriber base.
Increases in our subscriber base will cause our revenues to increase, but will
also cause our costs of revenue, selling, general and administrative expenses,
capital expenditures, and depreciation and amortization to increase. Our
purchases of subscriber bases such as the Spry and NETCOM acquisitions cause an
immediate increase in our amortization expense. We generally amortize subscriber
acquisitions over a three-year period in approximately equal amounts each year.
As more fully described below, we anticipate that, while we will continue to
generate positive cash flows from operations and EBITDA during 1999 and 2000, we
expect to incur net losses into 2000, principally as a result of amortization
expenses related to the Spry and NETCOM acquisitions. If our assumptions are
incorrect, our business plans change and/or we undertake additional acquisitions
of subscriber bases in the near future, we could continue to incur net losses
for a longer period of time. We do not currently have any agreements to do
additional acquisitions. There can be no assurance that we will be able to
sustain growth in our subscriber base, revenues, cash flows or EBITDA. Also,
there can be no assurance that we will be able to achieve or sustain net income
in the future.
Spry Acquisition. On September 10, 1998, we entered into an Asset
Purchase Agreement with AOL and Spry, a wholly owned subsidiary of AOL, to
purchase assets used in connection with the consumer dial-up Internet access
business operated by Spry. In that transaction, we acquired Spry's subscriber
base of approximately 130,000 individual Internet access customers in the United
States and Canada as well as various assets used in serving those customers.
These assets included a leased support facility and a leased network operations
facility in Seattle, Washington. MindSpring also acquired all rights held by
Spry to the "Sprynet" name. On October 15, 1998, we completed the Spry
acquisition and made an initial cash payment to AOL of $25 million. In March
1999, we made an additional and final payment to AOL of approximately $7
million. The total purchase price of approximately $32 million for the Spry
subscribers and assets was primarily a function of the number of acquired
subscribers who remained active with MindSpring as continuing users in good
standing after two billing cycles, measured as of December 31, 1998.
NETCOM Acquisition. On January 5, 1999, we entered into an Asset
Purchase Agreement with NETCOM, which has changed its name to ICG PST, Inc., a
wholly owned subsidiary of ICG Communications, Inc., to purchase assets used in
connection with the United States Internet access and Web hosting business
operated by NETCOM. In that transaction, we acquired NETCOM's subscriber base of
approximately 371,000 individual Internet access accounts, 22,000 Web hosting
accounts, and 3,000 dedicated Internet access accounts in the United States. The
acquisition closed on February 17, 1999. We paid NETCOM approximately $245
million, consisting of $215 million in cash and $30 million in MindSpring common
stock (376,116 shares, at a price per share of $79.76). In addition to the
NETCOM subscriber base, MindSpring also acquired various assets used in serving
those subscribers, including leased operations facilities in San Jose,
California and Dallas, Texas and all of NETCOM's rights to the "NETCOM" name
(except in Canada, the United Kingdom and Brazil). ICG PST has retained the
network assets used to serve those subscribers. We purchase access to that
network under a network services agreement with ICG PST at rates that are
generally comparable to the costs of using MindSpring POPs. This network
agreement has a term of one year with an option for a second year on potentially
different terms to be agreed upon by the parties. During the first year under
this network agreement, we are obligated to pay at least $27 million for network
services, as long as the services provided meet specified performance levels.
Credit Facility. On February 17, 1999, we entered into a credit
agreement with First Union National Bank and several other lenders. The credit
agreement provides for a $100 million revolving credit facility that may be
increased at our option to $200 million with the approval of First Union and the
other lenders under the credit
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<PAGE> 33
agreement. The credit facility will mature on February 17, 2002. The credit
facility is to be used to fund working capital and for general corporate
purposes, including permitted acquisitions. On February 17, 1999, we borrowed
approximately $80 million under the credit facility to finance the NETCOM
acquisition. Our obligations under the credit facility are secured by
substantially all of MindSpring's assets. We intend to repay all amounts
outstanding under the credit facility with a portion of the net proceeds from
our recently announced offering of 2,000,000 shares of common stock that we have
undertaken concurrently with an offering of $130,000,000 principal amount of
convertible subordinated notes. These offerings are described below. If we do
not complete this common stock offering, we intend to use a portion of the
proceeds from the notes offering to repay all amounts outstanding under the
credit facility. If we are unable to negotiate amendments to the credit
facility, the credit facility will effectively terminate when we complete the
notes offering. For a more detailed description of our secured credit facility,
see our Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 25, 1999.
Anticipated Effects of the Spry and NETCOM Acquisitions. The Spry and
NETCOM acquisitions represent significant growth opportunities and challenges
for MindSpring. Both acquisitions were of large customer bases and related
assets which, as previously operated stand-alone entities, were historically
unprofitable. We expect to incur net losses into 2000, primarily as a result of
the amortization expense associated with the Spry and NETCOM acquisitions. We
expect that annual amortization expense attributable to these transactions will
be between approximately $85 million and $90 million per year for the next three
years. In addition, we face the significant challenge of integrating the
acquired customers and assets into MindSpring's operations. The integration
process is most time and resource intensive during the sixty- to ninety-day
period immediately after completion of an acquisition, and involves, among other
things:
- communication with and increased technical and customer support
to acquired subscribers;
- network supervision, provisioning and maintenance, including of
third-party networks;
- increased management time and resources related to hiring and
integration of new employees to support acquired subscribers;
- integration of acquired subscribers into MindSpring's billing
systems; and
- attempting to bring the cost structures associated with the
acquired subscribers and assets into alignment with MindSpring's
historical cost structure.
The Spry subscribers and assets were substantially integrated into
MindSpring's operations as of December 31, 1998. Net income for the fourth
quarter of 1998 was $1.9 million, excluding a one-time tax benefit of $1.8
million, compared to approximately $4.0 million for the third quarter of 1998.
This decrease resulted primarily from $2.3 million in amortization costs during
the fourth quarter attributable to the Spry acquisition.
The NETCOM acquisition has significantly increased MindSpring's
customer base from approximately 693,000 to approximately 1,100,000. Principally
as a result of the NETCOM acquisition, we expect that we will incur net losses
into 2000. Even though we expect to incur net losses, we expect to continue to
generate increased revenues and EBITDA as we continue to increase our subscriber
base. We believe that reducing the historical costs associated with the acquired
NETCOM subscribers to levels that approximate MindSpring's historical costs of
providing Internet access to its subscribers will contribute to our ability to
reduce net losses in the future. We expect that these cost reductions will be
achieved in part as a function of:
- the ICG PST network agreement, through which MindSpring expects
initially to provide service to the majority of the acquired NETCOM
subscribers and which MindSpring expects will be at a lower cost
than that reported by NETCOM; and
- economies of scale in selling, general and administrative costs,
particularly in the areas of numbers of employees and salaries,
operating leases, and marketing expenses.
By "economies of scale" we mean that, as the number of subscribers we
serve increases, the costs and expenses per subscriber decrease. There can be no
assurance that we will achieve these anticipated cost reductions in a timely
manner or at all. If the cost reductions are lower than anticipated, other costs
increase, and/or revenues
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<PAGE> 34
decline, our EBITDA and net income would also decline, which would have a
material adverse effect on our business, results of operations and financial
condition, including our liquidity and capital resources.
Recently Announced Offerings. We recently filed a universal shelf
registration statement with the Securities and Exchange Commission for the
public offering from time to time of up to $800 million of debt and equity
securities. This registration statement has not yet been declared effective. We
have also filed prospectus supplements under the universal shelf registration
statement for offerings of up to 2,000,000 shares of common stock (plus an
additional 300,000 shares to cover over-allotments, if any) and up to
$130,000,000 aggregate principal amount of convertible subordinated notes (plus
an additional $19,500,000 aggregate principal amount to cover over-allotments,
if any), all of which will be issued by MindSpring. These offerings of common
stock and convertible subordinated notes are currently expected to be completed
in April 1999. There can be no assurance, however, that these offerings will be
completed at that time or at all. The specific terms of other securities that
may be issued under the universal shelf registration statement will be
determined at the time of each issuance.
Revenues. MindSpring derives revenue primarily from monthly
subscriptions from individuals for dial-up access to the Internet. Monthly
subscription fees vary by billing plan. Under MindSpring's current pricing
plans, customers have a choice of two "flat rate" plans (The Works and Unlimited
Access) and two "usage-sensitive" plans (Standard and Light). MindSpring also
has a prepayment plan available to all dial-up subscribers which allows
subscribers to prepay their access fees for either one or two years at a
discounted rate. For the years ended December 31, 1998 and 1997, the average
monthly recurring revenue per dial-up subscriber was approximately $20. Average
monthly recurring revenue is calculated by dividing monthly recurring revenue
plus usage charges for non-"flat rate" subscribers by the total number of
subscribers. Start-up fees for new subscribers vary depending upon the
promotional method by which the subscriber is acquired, ranging from $0 up to a
maximum of $25. Aggregate subscriber start-up fees are sufficient to cover the
aggregate costs of direct materials, mailing expenses, and licensing fees
associated with new subscribers. A majority of MindSpring's individual
subscribers pay their MindSpring fees automatically by pre-authorized monthly
charges to the subscriber's credit card.
In addition, MindSpring earns revenue by providing Web-hosting,
full-time dedicated access connections to the Internet, other value-added
services such as Web page design, domain name registration and Web-server
co-location. MindSpring's Web-hosting services allow a business or individual to
post information on the World Wide Web so that the information is available to
anyone who has access to the Internet. MindSpring currently offers three price
plans for Web hosting subscribers ranging from $19.95 to $99.95 per month.
MindSpring had approximately 21,000 Web-hosting subscribers as of December 31,
1998, not including approximately 22,000 Web-hosting subscribers acquired from
NETCOM. Through our domain registration services, MindSpring offers subscribers
the ability to personalize electronic mail addresses and URLs (Uniform Resource
Locators). The services described in this paragraph have been classified as
business services in MindSpring's statements of operations and in the "Results
of Operations" table shown below.
Costs. MindSpring's costs include (1) costs of revenue that are
primarily related to the number of subscribers; (2) selling, general and
administrative expenses that are associated more generally with operations; and
(3) depreciation and amortization, which are related to the number of
MindSpring-owned POPs and servers, and the deferred costs associated with
acquired customer bases.
Costs of revenue that are primarily related to the number of
subscribers include both recurring costs and subscriber start-up expenses.
Recurring costs of revenue consist primarily of the costs of telecommunications
facilities necessary to provide service to subscribers. Telecommunications
facilities costs include (1) the costs of providing local telephone lines into
each MindSpring-owned POP; (2) costs related to the use of third-party networks;
and (3) costs associated with leased lines connecting each MindSpring-owned POP
and third-party network to MindSpring's hub and connecting MindSpring's hub to
the Internet backbone. Start-up expenses for each subscriber include primarily
the cost of diskettes and other product media, manuals, and packaging and
delivery costs associated with the materials provided to new subscribers.
MindSpring does not defer any subscriber start-up expenses.
Selling, general and administrative costs are incurred in the areas of
sales and marketing, customer service and support, network operations and
maintenance, engineering, accounting and administration. Selling, general and
administrative costs will increase over time as MindSpring's scope of operations
increases. We may determine to
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<PAGE> 35
significantly increase the level of marketing activity to increase the rate of
subscription growth. A significant increase in marketing activity would have a
short-term negative impact on net income. We believe that these increased costs
would be more than offset by anticipated increases in revenue attributable to
overall subscriber growth. However, there can be no assurance that we will be
able build, increase or maintain our subscriber base in a given market to the
extent necessary to generate sufficient revenues to offset these marketing
expenses. MindSpring does not defer any sales or marketing expenses.
As MindSpring expands into new markets, both costs of revenue and
selling, general and administrative expenses will increase. To the extent
MindSpring opens MindSpring POPs in new markets, these costs and expenses may
also increase as a percentage of revenue in the short-term for the period
immediately after a new MindSpring POP is opened. Many of the fixed costs of
providing service in a new market through a new MindSpring POP are incurred
before significant revenue can be expected from that market. However, to the
extent that we expand into new markets by using third-party POPs instead of
opening our own POPs, MindSpring's incremental monthly recurring costs will
consist primarily of the fees to be paid to third parties under network services
agreements. In general, the margins on those subscribers will initially be
higher than if we had opened our own POP in new markets. When a market matures,
if the market is served through purchased, third-party network services rather
than MindSpring-owned POPs, costs of revenue as a percentage of revenue will
tend to be higher, and therefore, margins on subscribers will tend to be lower.
This is because the full costs of using third-party networks is included in
costs of revenue, as compared to the costs of using MindSpring-owned POPs, a
portion of which is included in depreciation and amortization. In addition, in
more mature markets, where we have greater concentrations of subscribers, we
generally can provide services at a lower cost per subscriber through
MindSpring-owned POPs after the initial period when related expenses are higher.
This depends in part on how much we must pay for local area telecommunications
charges.
For the first year of the network services agreement with ICG PST, we
will pay for use of ICG PST's POPs at rates that are generally comparable to the
costs of using MindSpring POPs. We have an option for a second year under that
agreement, but on potentially different terms to be negotiated and agreed upon
by both parties. The ICG PST network services agreement should also contribute
to our ability to reduce future net losses. However, the cost advantages of
providing services to MindSpring subscribers through the ICG PST network
services agreement may be offset if there are operating inefficiencies, network
reliability issues or technical support difficulties due to the fact that ICG
PST is just beginning to offer network services as a third-party provider for
companies such as MindSpring.
We have added, and may in the future continue to add, MindSpring
subscribers by purchasing customer bases from other ISPs. MindSpring amortizes
such purchased customer bases using the straight-line method over a period of
three years, commencing when the purchase is completed. This amortization has a
negative effect on net income. Therefore, to the extent we continue to expand
our subscriber base through acquisitions such as the Spry and NETCOM
acquisitions, we will continue to experience increased amortization expense.
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RESULTS OF OPERATIONS
The following table shows financial data for the years ended December
31, 1998, 1997, and 1996. Operating results shown for 1998 do not reflect the
NETCOM acquisition. Operating results for any period are not necessarily
indicative of results for any future period. Dollar amounts (except per share
data) are shown in thousands.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
% OF % OF % OF
(000's) REVENUE (000's) REVENUE (000's) REVENUE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Dial-up access to Internet.................... $ 95,852 84 $ 40,925 78 $ 13,420 74
Business services............................. 14,735 13 7,711 15 2,286 13
Start-up fees................................. 4,086 3 3,920 7 2,426 13
----------- ----- ----------- ----- ----------- ----
Total revenue............................. $ 114,673 100 $ 52,556 100 $ 18,132 100
Cost and expenses:
Cost of revenues-recurring.................... $ 31,724 28 $ 15,202 29 $ 6,332 35
Cost of revenues-start-up fees................ 2,612 2 1,620 3 1,876 10
Selling, general, and administrative.......... 57,324 50 30,784 59 14,161 78
----------- ----- ----------- ----- ----------- ----
Customer base amortization.................... $ 7,048 6 $ 4,210 8 $ 1,521 8
Depreciation.................................. 8,179 7 4,485 9 1,764 10
----------- ----- ----------- ----- ----------- ----
Operating income (loss).......................... 7,786 7 (3,745) (7) (7,522) (42)
Interest income (expense), net............... 1,214 1 (338) (1) (90) (1)
----------- ----- ----------- ----- ----------- ----
Pre tax income (loss)............................ 9,000 8 (4,083) (8) (7,612) (42)
Provision for income taxes.................... 1,544 1 - - - -
----------- ----- ----------- ----- ----------- ----
Net income (loss)................................ $ 10,544 9 $ (4,083) (8) $ (7,612) (42)
=========== ===== =========== ===== =========== ====
PER SHARE DATA:
Diluted net income (loss) per share.............. $ 0.41 $ (0.18) $ (0.48)
Weighted average common shares
outstanding...................................... 25,431 22,542 15,758
OPERATING DATA:
Approximate number of
subscribers at end of year.................... 693,000 278,300 121,794
Number of MindSpring
employees at end of year..................... 977 502 321
EBITDA (1)....................................... $ 23,013 20 $ 4,950 9 $ (4,237) (23)
----------- ----- ----------- ----- ----------- ----
CASH FLOW DATA:
Cash Flow (used in) from operations.............. $ 35,501 $ 11,354 $ (2,005)
Cash flow (used in) from investing activities.... $ (47,647) $ (9,002) $ (21,336)
Cash flow (used in) from financing activities.... $ 170,503 $ (2,619) $ 32,569
</TABLE>
(1) EBITDA represents operating income (loss) plus depreciation and
amortization. EBITDA is provided because it is a measure commonly used by
investors to analyze and compare companies on the basis of operating
performance. EBITDA is not a measurement of financial performance under
generally accepted accounting principles and should not be construed as a
substitute for operating income, net income or cash flows from operating
activities for purposes of analyzing MindSpring's operating performance,
financial position and cash flows. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
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YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Revenue for the year ended December 31, 1998 totaled
approximately $114.7 million, as compared to approximately $52.6 million for the
year ended December 31, 1997. This approximately 118% increase in period
revenues resulted primarily from an approximately 150% increase in subscribers.
The greater proportional increase in subscribers was principally due to the
acquisition of Spry subscribers from AOL during the fourth quarter of 1998.
Revenues from dial-up access to the Internet for the year ended December 31,
1998 represented approximately 84% of the revenue, compared to approximately 78%
for the year ended December 31, 1997. Business services revenue decreased as a
percentage of revenue to approximately 13% for the year ended December 31, 1998,
compared to approximately 15% for the year ended December 31, 1997. This
decrease is primarily attributable to the large amount of dial-up customers
added through acquisitions in 1998. Subscriber start-up fees accounted for 3% of
revenue for the year ended December 31, 1998, as compared to approximately 7%
for the year ended December 31, 1997. MindSpring anticipates that as its
customer base continues to expand, subscriber start-up fees will progressively
represent a smaller percentage of revenue.
Cost of revenues-recurring. For the year ended December 31, 1998, cost
of revenues-recurring decreased to approximately 28% of total revenue, compared
to approximately 29% of total revenue for the year ended December 31, 1997. Cost
of revenues-recurring also decreased as a percentage of dial-up access revenue
to approximately 33% for the year ended December 31, 1998 from approximately 37%
for the year ended December 31, 1997. Not taking into account approximately $2
million in discounts we received in 1998 under our network services agreement
with PSINet, Inc., cost of revenues-recurring would have been approximately 35%
of total dial-up access revenue. Not taking into account approximately $2.1
million in discounts we received in 1997 under the network services agreement
with PSINet, Inc., cost of revenues-recurring would have been approximately 42%
of total dial-up access revenue. The discounts earned under the network services
agreement with PSINet ended in October 1998. This decrease of cost of
revenues-recurring as a percentage of total revenue and as a percentage of
dial-up access revenue resulted primarily from increased efficiency and reduced
network costs associated with MindSpring-owned POPs.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were approximately 50% of revenue for the year ended
December 31, 1998, compared to approximately 59% of revenue for the year ended
December 31, 1997. The decrease in selling, general, and administrative expenses
as a percentage of revenue resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and from cost control efforts implemented by MindSpring's management.
EBITDA margin. EBITDA margin refers to EBITDA as a percentage of
revenues. EBITDA margin increased to approximately 20% for the year ended
December 31, 1998, compared to 9% for the year ended December 31, 1997. The
increase is attributable to the significant revenue growth outpacing the related
cost increases principally as a result of economies of scale related to selling,
general, and administrative expenses as well as efficiencies and economies of
scale associated with MindSpring-owned POPs.
Depreciation and amortization. Depreciation and amortization expenses
decreased to approximately 13% of revenues for the year ended December 31, 1998,
compared to approximately 17% of revenues for the year ended December 31, 1997.
Amortization expense declined slightly to 6% of total revenues for the year
ended December 31, 1998, compared to approximately 8% for the year ended
December 31, 1997. Amortization expense resulted solely from acquired subscriber
bases, which are being amortized over three years. Depreciation expense was
approximately 7% of total revenues for the year ended December 31, 1998,
compared to approximately 9% for the year ended December 31, 1997. The decrease
in depreciation expense as a percentage of total revenues resulted from adding
capacity through increased use of network services purchased from third-party
providers, as opposed to increasing capacity by building additional
MindSpring-owned POPs, and from reductions in the cost of new equipment and
improved operating efficiencies within MindSpring's network. MindSpring
anticipates amortization expense to increase as a percentage of revenues as a
result of the Spry and NETCOM acquisitions.
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<PAGE> 38
Interest income (expense). The following table details the increase in
interest income in 1998 compared to 1997:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Interest on capital leases.................... $ (754,000) $ (473,000)
Interest on PSINet notes...................... (136,000) (276,000)
Interest income - other....................... 2,104,000 411,000
------------- -------------
Interest income (expense) net................. $ 1,214,000 $ (338,000)
============= =============
</TABLE>
Interest on capital leases increased for the year ended December 31,
1998, compared to the year ended December 31, 1997, because MindSpring entered
into several new capital leases for equipment at the end of 1997. Interest
income increased in 1998 due to the increase in outstanding cash balances
available for investment as a result of positive operating cash flows and two
public equity offerings completed during the year. See "-- Liquidity and Capital
Resources".
Income tax provision. For the year ended December 31, 1998 MindSpring
recorded a benefit for income taxes due to a one time benefit taken in the
fourth quarter of the year as a result of the removal of the valuation allowance
associated with MindSpring's deferred tax assets. MindSpring is continually
assessing its income tax situation and management believes that it is "more
likely than not" that the deferred tax assets will be realized in the future. In
the future, MindSpring expects to report taxable earnings, even though we expect
to be incurring net losses at the same time. This is principally due to the
requirement that, for tax purposes, subscriber acquisition costs must be
amortized over 15 years, compared to the three-year period applied for
accounting purposes. For the year ended December 31, 1997, no income tax benefit
was recognized as MindSpring had a net taxable loss for the year.
Net income (loss) and income (loss) per share. As a result of the
factors discussed above, MindSpring's net income for the year ended December 31,
1998 was $10.5 million, or $0.41 income per diluted share, compared to a net
loss of $4.1 million, or $0.18 basic and diluted loss per share, for the year
ended December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. Revenues for the year ended December 31, 1997 totaled
approximately $52.6 million, as compared to approximately $18.1 million for the
year ended December 31, 1996. The approximately 190% increase in revenues
resulted primarily from an approximately 129% increase in subscribers. Revenues
increased in a greater proportion than subscribers due to the subscribers
acquired from PSINet Inc. during the fourth quarter of 1996. Revenues from
dial-up access to the Internet for the year ended December 31, 1997 represented
approximately 78% of the revenue, compared to approximately 74% for the year
ended December 31, 1996. Business services revenue increased slightly to
approximately 15% of revenues for the year ended December 31, 1997, compared to
approximately 13% for the year ended December 31, 1996. This increase is
primarily attributable to the increase in the number of MindSpring's Web hosting
customers. Subscriber start-up fees accounted for 7% of revenues for the year
ended December 31, 1997, as compared to approximately 13% for the year ended
December 31, 1996. MindSpring anticipates that as its customer base continues to
expand, subscriber start-up fees will progressively represent a smaller
percentage of revenues.
Cost of revenues-recurring. For the year ended December 31, 1997, cost
of revenues-recurring decreased to approximately 29% of total revenues, compared
to approximately 35% of total revenues for the year ended December 31, 1996.
Cost of revenues-recurring also decreased as a percentage of dial-up access
revenue from approximately 47% for the year ended December 31, 1996 to
approximately 37% for the year ended December 31, 1997. Not taking into account
approximately $2.1 million in discounts we received in 1997 under the PSINet
Services Agreement, cost of revenues-recurring would have been approximately 42%
of total dial-up revenue for the year ended December 31, 1997, compared to
approximately 47% for the year ended December 31, 1996. This decrease in cost of
revenues-recurring as a percentage of total revenues and as a percentage of
dial-up access revenues resulted primarily from increased efficiency and reduced
network costs associated with MindSpring-owned POPs.
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<PAGE> 39
Selling, general, and administrative expenses. Selling, general, and
administrative expenses were approximately 59% of revenues for the year ended
December 31, 1997, compared to approximately 78% of revenues for the year ended
December 31, 1996. The decrease in selling, general, and administrative expenses
as a percentage of revenues resulted from economies of scale with respect to
costs such as payroll that do not increase in direct proportion to increases in
revenue and to cost control efforts implemented by MindSpring's management.
EBITDA margin. EBITDA margin increased to approximately 9% for the year
ended December 31, 1997, compared to (23)% for the year ended December 31, 1996.
The increase is attributable to the significant revenue growth outpacing the
related cost increases principally as a result of economies of scale related to
selling, general, and administrative expenses, as well as efficiencies and
economies of scale associated with MindSpring-owned POPs.
Depreciation and amortization. Depreciation and amortization expenses
decreased to approximately 16% of revenues for the year ended December 31, 1997,
compared to approximately 18% of revenues for the year ended December 31, 1996.
Amortization expense remained steady at approximately 8% of revenue for both the
years ended December 31, 1997 and December 31, 1996. Amortization expense
resulted primarily from acquired customer bases which are being amortized over
three years. Depreciation expense was approximately 8% of total revenues for the
year ended December 31, 1997, compared to approximately 10% for the year ended
December 31, 1996. The decrease in depreciation expense as a percentage of total
revenues resulted from adding capacity through increased use of network services
purchased from third-party providers, as opposed to increasing capacity by
building additional MindSpring-owned POPs, and from reductions in cost of new
equipment and improved operating efficiencies within MindSpring's network.
Interest income (expense). The following table details the increase in
interest expense in 1997 compared to 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Interest on capital leases.................... $ (473,000) $ 91,000)
Interest on PSINet notes...................... (276,000) (324,000)
Interest income - other....................... 411,000 325,000
---------------- -------------
Interest expense, net......................... $ (338,000) $ (90,000)
================ =============
</TABLE>
Interest on capital leases increased for the year ended December 31, 1997,
compared to the year ended December 31, 1996, because MindSpring entered into
several new capital leases for equipment. Interest income increased in 1997 due
to the increase in outstanding cash balances available for investment as a
result of positive operating cash flows.
Income tax provision. For the years ended December 31, 1997 and 1996,
no income tax benefit was recognized because MindSpring had a net taxable loss
for the year.
Net income (loss) and income (loss) per share. As a result of the
factors discussed above, MindSpring's net loss for the year ended December 31,
1997 was $4.1 million, or $(0.18) basic and diluted loss per share, compared to
a net loss of $7.6 million, or $(0.48) basic and diluted loss per share, for the
year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, MindSpring generated net cash
from operations of approximately $35.5 million, compared to $11.4 million for
the year ended December 31, 1997, an increase of approximately 212.7%. During
1998, we used approximately $27.3 million from cash flows from operations to
fund purchases of subscriber bases. $25 million of this amount was paid to AOL
on October 15, 1998 in partial payment for the Spry acquisition with the balance
of $7 million paid in March 1999. During 1998, we spent a total of approximately
$20.2 million related to purchases of telecommunications equipment necessary for
the provision of service to
37
<PAGE> 40
subscribers. We did not enter into any capital lease agreements in 1998,
compared to approximately $8.4 million incurred in 1997 under capital leases for
equipment acquisition. At December 31, 1998, MindSpring's capital lease
obligations and minimum rental commitments under non-cancelable operating leases
with initial or remaining terms of more than one year amounted to approximately
$5.7 million for capital leases, and approximately $10 million for
non-cancelable operating leases.
During 1998, MindSpring generated approximately $170.5 million from
financing activities, consisting primarily of two public equity offerings. In
June 1998, MindSpring sold 3,000,000 shares of common stock at a public offering
price of $17.67 per share. Proceeds from the June offering, net of underwriting
discounts and offering expenses, were approximately $49.8 million. In December
1998, MindSpring sold 2,300,000 shares of common stock at a public offering
price of $57 per share. Proceeds from the December offering, net of underwriting
discounts and offering expenses, were approximately $124.8 million. Cash used
for financing activities consisted of approximately $4.6 million for capital
lease obligations and the final payment to PSINet Inc. due under a promissory
note issued in connection with MindSpring's 1996 purchase from PSINet of
subscribers and other assets and rights related to PSINet's U.S. consumer
dial-up Internet access business. The final payment to PSINet was made in
December 1998. During 1997, cash used for financing activities consisted
primarily of approximately $2.6 million in payments for capital lease
obligations and repayments of promissory notes to PSINet.
As of December 31, 1998, MindSpring had cash on hand of approximately
$167.7 million. On February 17, 1999, we paid $215 million in cash in connection
with the closing of the NETCOM acquisition, approximately $80 million of which
we borrowed under our $100 million secured revolving credit facility. After
paying the amounts indicated for the NETCOM acquisition on February 17, 1999, we
had remaining cash on hand of approximately $35 million, of which we paid
approximately $7 million to AOL in March 1999 for the balance of the purchase
price for the Spry acquisition.
MindSpring's future capital requirements depend on various factors
including, without limitation:
- our ability to integrate successfully the subscribers and assets
acquired from Spry and NETCOM, which requires us to reduce the
costs previously associated with those subscribers and assets to
approximate MindSpring's historical cost structure;
- the rate of market acceptance of MindSpring's services;
- our ability to maintain and expand our subscriber base;
- the rate of expansion of MindSpring's network infrastructure;
- the resources required to expand our marketing and sales efforts,
and
- the availability of hardware and software provided by third-party
vendors.
We currently estimate that our cash and financing needs for 1999,
assuming reasonable internal growth, can be met by cash on hand, amounts
available under the credit facility, additional capital financing arrangements,
and cash flow from operations. We expect to repay all amounts outstanding under
the credit facility with a portion of the net proceeds from our recently
announced offering of common stock or, if necessary, a portion of the proceeds
from our recently announced convertible subordinated notes offering. However,
whether or not we repay those amounts, if we are unable to negotiate amendments
to the credit facility that are acceptable to us, the credit facility will
effectively terminate when we complete the notes offering. We are in discussions
with First Union National Bank regarding amending the credit facility, but we
cannot assure you that we will be successful in negotiating acceptable
amendments on a timely basis or at all.
If our credit facility is unavailable and if our expectations change
regarding our capital needs due to market conditions, strategic opportunities or
otherwise, then our capital requirements may vary materially from those
currently anticipated. Other than our recently announced offerings of common
stock and convertible subordinated notes, we do not currently have any plans or
commitments for any additional financing, and there can be no assurance that if
and when we need additional capital it will be available on terms that are
acceptable to us, if at all. If additional capital financing arrangements,
including public or private sales of debt or equity securities, or additional
borrowings from commercial banks are insufficient or unavailable, or if we
experience shortfalls in anticipated revenues or increases in anticipated
expenses, we will be required to modify our growth and operating
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<PAGE> 41
plans to match available funding. Any additional equity financing may be on
terms that are dilutive or potentially dilutive to MindSpring's stockholders.
Debt financing, if available, may involve restrictive covenants with respect to
dividends, raising future capital and other financial and operational matters
and incurring additional debt may further limit MindSpring's ability to raise
additional capital. In addition, our credit facility contains restrictions on
our ability to incur additional debt and to issue some types of convertible or
redeemable capital stock.
MindSpring frequently engages in discussions involving potential
business acquisitions. Depending on the circumstances, MindSpring may not
disclose material acquisitions until completion of a definitive agreement.
MindSpring may determine to raise additional debt or equity capital to finance
potential acquisitions and/or to fund accelerated growth. Any significant
acquisitions or increases in MindSpring's growth rate could materially affect
MindSpring's operating and financial expectations and results, liquidity and
capital resources.
Market Risks. We believe our exposure to market rate fluctuations on
our investments is nominal due to the short-term nature of those investments. We
have no material future earnings or cash flow exposures with respect to our
outstanding capital leases, which are all at fixed rates. To the extent
MindSpring has borrowings outstanding under the credit facility, we would have
market risk relating to those amounts because the interest rates under the
credit facility are variable. At present, we have no plans to enter into any
hedging arrangements with respect to those borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the provisions of Statement of Financial Accounting Standards
No. 130 ("SFAS 130"), "Reporting Comprehensive Income" and Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information" applied to MindSpring. Neither
statement had any impact on MindSpring's financial statements as MindSpring does
not have any "comprehensive income" type earnings (losses) and its financial
statements reflect how the "key operating decisions maker" views the business.
MindSpring will continue to review these statements over time, in particular,
SFAS 131, to determine if any additional disclosures are necessary based on
evolving circumstances.
YEAR 2000
Introduction. The term "Year 2000 issue" is a general term used to
describe the various problems that may result from the improper processing of
dates and date-sensitive calculations by computers and other machinery as the
year 2000 is approached and reached. These problems generally arise from the
fact that most of the world's computer hardware and software have historically
used only two digits to identify the year in a date, often meaning that the
computer will fail to distinguish dates in the "2000's" from dates in the
"1900's." These problems may also arise from other sources as well, such as the
use of special codes and conventions in software that make use of the date
field.
State of Readiness. MindSpring has established a Year 2000 Program
Office to coordinate appropriate activity and report to the Board of Directors
on a continuing basis with regard to the Year 2000 issue. MindSpring's Year 2000
Program Office has developed and is currently implementing a comprehensive plan
(the "Year 2000 Program") for MindSpring to become Year 2000 ready. The Year
2000 Program consists of six phases: (1) project planning and inventory of all
of MindSpring's assets, (2) assessment, (3) renovation (whether by upgrade or
replacement), (4) testing and validation, (5) implementation and (6) creation of
contingency plans in the event of year 2000 failures.
The Year 2000 Program covers: (1) software products which are supplied
by MindSpring to its customers, (2) MindSpring's information technology and
operating systems ("IT Systems"), and (3) MindSpring's non-information
technology systems, including embedded technology ("Non-IT Systems"). In
addition, the Program calls for MindSpring to identify and assess the systems
and services of MindSpring's major vendors, third party network service
providers and other material service providers ("Third Party Systems"), and take
appropriate remedial actions and develop contingency plans where appropriate in
connection with such Third Party Systems.
MindSpring supplies its customers with a software package which, among
other things, allows its customers to access MindSpring's services. The software
package consists of internally developed software (e.g.,
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<PAGE> 42
the MindSpring Internet Desktop interface) which is bundled with third party
software (collectively, the "Access Product"). MindSpring believes that the
current shipping version of its software package (including the MindSpring
Internet Desktop) is Year 2000 ready.
MindSpring has substantially completed the inventory phase of the Year
2000 Program for both its IT Systems and Non-IT Systems and has completed a
majority of the assessment phase of the Year 2000 Program for the IT Systems and
Non-IT Systems. MindSpring anticipates that it will complete the first two
phases for those systems during the second quarter of 1999. The Year 2000
Program calls for the completion of all six phases for both IT and Non-IT
Systems by the end of the second quarter of 1999.
MindSpring has performed a technical review of many of the more
critical Third Party Systems and has surveyed the publicly available statements
issued by the vendors of those systems. Additionally, MindSpring has recently
sent inquiry letters to its significant providers of Third Party Systems
requesting information regarding their vulnerability to Year 2000 issues and
whether the products and services purchased from those entities are Year 2000
compliant. MindSpring intends to pursue appropriate responses to those inquiries
and will evaluate the responses it receives.
MindSpring recently completed the Spry and NETCOM acquisitions.
MindSpring is developing appropriate plans to identify and address Year 2000
related concerns with Spry and NETCOM as part of the natural integration of the
Spry and NETCOM operations into MindSpring. Management believes that the Spry
and NETCOM operations will not present any significant Year 2000 issues to
MindSpring.
MindSpring also recently acquired customers and assets of NETCOM, and
intends to develop plans to identify and address Year 2000 related concerns with
NETCOM as part of the natural integration of the NETCOM operation into
MindSpring.
MindSpring has not deferred any specific IT project due to the Year
2000 Program. MindSpring has engaged a consulting firm to assist it in
completing the inventory and assessment phases of its Year 2000 Program, and to
assist it in its Year 2000 Program management.
Costs. As of December 31, 1998, MindSpring has incurred expenses of
approximately $75,000 in connection with the implementation of the Year 2000
Program Office and Year 2000 Program. MindSpring estimates that an additional
$250,000 to $300,000 in expenses will be incurred by MindSpring through the
remainder of the Year 2000 Program. These costs will be expensed as incurred.
The costs and estimates provided include MindSpring's estimate of the cost of
internal resources directly attributable to MindSpring's Year 2000 Program, but
do not yet include additional costs which may be incurred in connection with
expanding the Year 2000 Program to include the systems and products acquired in
the Spry and NETCOM transactions. MindSpring has funded, and anticipates that it
will continue funding, the costs of the Year 2000 Program from cash flows. The
estimates for the costs of the Year 2000 Program are based upon management's
best estimates and may be updated or revised as additional information becomes
available. MindSpring currently believes these costs will not have a material
effect on MindSpring's financial condition, liquidity or results of operations.
MindSpring's estimates of Year 2000-related costs may change, however, depending
on MindSpring's Year 2000 evaluation of the assets acquired from NETCOM.
Risks. The failure by MindSpring to correct a material Year 2000
problem could result in an interruption in, or a failure of, normal business
activities or operations. Presently, however, MindSpring perceives that its most
reasonably likely worst case scenario related to the Year 2000 is associated
with potential concerns with third party services or products.
Specifically, MindSpring is heavily dependent on a significant number
of third party vendors to provide both network services and equipment. A
significant Year 2000-related disruption of the network services or equipment
provided to MindSpring by third party vendors could cause customers to consider
seeking alternate providers or cause an unmanageable burden on customer service
and technical support, which in turn could materially and adversely affect
MindSpring's results of operations, liquidity and financial condition.
MindSpring is not presently aware of any vendor related Year 2000 issue that is
likely to result in this type of disruption.
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<PAGE> 43
Furthermore, MindSpring's business depends on the continued operation
of, and widespread access to, the Internet. To the extent that the normal
operation of the Internet is disrupted by the Year 2000 issue, MindSpring's
results of operations, liquidity and financial condition could be materially and
adversely affected.
Although there is inherent uncertainty in the Year 2000 issue,
MindSpring expects that as it progresses in its Year 2000 Program the level of
uncertainty about the impact of the Year 2000 issue on MindSpring will be
reduced significantly and MindSpring should be better positioned to identify the
nature and extent of material risk to MindSpring as a result of any Year 2000
disruptions.
Contingency Plans. The Year 2000 Program calls for the development of
contingency plans for at-risk functions. MindSpring has established a
Contingency Plan Committee to monitor and address the development of contingency
plans. Due to the current phase in which MindSpring is in of its Year 2000
Program, MindSpring is currently unable at this time to fully assess its risks
and determine what contingency plans, if any, need to be implemented by
MindSpring. As MindSpring progresses in its Year 2000 Program and identifies
specific risk areas, MindSpring intends to timely implement appropriate remedial
actions and contingency plans.
The estimates and conclusions included in this discussion contain
forward-looking statements and are based on management's best estimates of
future events. MindSpring's expectations about risks, future costs and the
timely completion of its Year 2000 modifications may turn out to be incorrect
and any variance from these expectations could cause actual results to differ
materially from what has been discussed above. Factors that could influence
risks, amount of future costs and the effective timing of remediation efforts
include MindSpring's success in identifying and correcting potential Year 2000
issues and the ability of third parties to appropriately address their Year 2000
issues. The foregoing Year 2000 discussion and the information contained herein
is provided as a "Year 2000 Readiness Disclosure" as defined in the Year 2000
Information and Readiness Disclosure Act of 1998 (Public Law 105-271, 112 Stat.
2386) enacted on October 19, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We believe our exposure to market rate fluctuations on our investments
is nominal due to the short-term nature of those investments. We have no
material future earnings or cash flow exposures with respect to our outstanding
capital leases, which are all at fixed rates. To the extent we have borrowings
outstanding under our credit facility, we would have market risk relating to
those amounts because the interest rates under the credit facility are variable.
At present, we have no plans to enter into any hedging arrangements with respect
to those borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Financial Statements of MindSpring, including MindSpring's Balance
Sheets as of December 31, 1998 and 1997, Statements of Operations for the years
ended December 31, 1998, 1997 and 1996, Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996, Statements of Cash Flows for
the years ended December 31, 1998, 1997 and 1996, and Notes to Financial
Statements, together with a report thereon of Arthur Andersen LLP, dated
February 17, 1999, are attached hereto as pages F-1 through F-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF MINDSPRING
Directors of MindSpring are elected at the annual meeting of stockholders.
Directors and officers serve until they resign or are removed, or are otherwise
disqualified to serve, or until their successors are elected and qualified. The
ages of the persons set forth below are as of March 1, 1999.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITION(S) WITH MINDSPRING EXPIRES
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Charles M. Brewer.............. 40 Chairman, Chief Executive Officer and Director 2001
Michael S. McQuary............. 39 President, Chief Operating Officer and Director 2000
O. Gene Gabbard(1)(2).......... 58 Director 1999
Campbell B. Lanier, III(1)(2).. 48 Director 2001
William H. Scott, III (1)(2)... 51 Director 2000
</TABLE>
- -------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Charles M. Brewer founded MindSpring and has served as Chief Executive
Officer and Director of MindSpring since its inception in February 1994 and as
Chairman since March 1996. He also served as the President of MindSpring from
its inception until March 1996 and as the Secretary and Treasurer of MindSpring
from its inception until January 1995. From May 1993 to January 1994, Mr. Brewer
developed the concept for MindSpring and evaluated its prospects. Prior to
starting MindSpring, he served as Chief Executive Officer of AudioFax, Inc., a
software company providing fax server software, from May 1992 to April 1993 and
was the Chief Financial Officer of AudioFax from May 1989 to April 1992. Mr.
Brewer received a BA in Economics from, and was a Phi Beta Kappa graduate of,
Amherst College and received an MBA from Stanford University.
Michael S. McQuary has been the President of MindSpring since March
1996, the Chief Operating Officer of MindSpring since September 1995, and a
Director of MindSpring since December 1995. He also served as MindSpring's
Executive Vice President from October 1995 to March 1996 and MindSpring's
Executive Vice President of Sales and Marketing from July 1995 to September
1995. Prior to joining MindSpring, Mr. McQuary served in a variety of management
positions with Mobil Chemical Co., a petrochemical company, from August 1984 to
June 1995, including Regional Sales Manager from April 1991 to February 1994 and
Manager of Operations (Reengineering) from February 1994 to June 1995. Mr.
McQuary received a BA in Psychology from the University of Virginia and an MBA
from Pepperdine University.
O. Gene Gabbard has been a Director of MindSpring since December 1995.
He has worked independently as an entrepreneur and consultant since February
1993. Mr. Gabbard currently serves as a director of ITC Holding and several of
its subsidiaries, as well as ITC/\DeltaCom, Inc. ("ITC/\DeltaCom"), a carriers'
carrier and retail telecommunications company, and Powertel, Inc. ("Powertel"),
a wireless telecommunications company formerly known as InterCel, Inc., and as a
director and Chairman of ClearSource, Inc., a provider of broadband
telecommunications services. From August 1990 through January 1993, he served as
Executive Vice President and Chief Financial Officer of MCI Communications
Corporation ("MCI"), a telecommunications company. Mr. Gabbard has served as a
Managing Director of South Atlantic Private Equity Fund IV, Limited Partnership
since 1997.
Campbell B. Lanier, III has served as a Director of MindSpring since
November 1994. Mr. Lanier has served as Chairman of the Board and Chief
Executive Officer of ITC Holding (or its predecessors) since its inception in
1985. In addition, Mr. Lanier is an officer and director of several ITC Holding
subsidiaries. He is also the Chairman of ITC/\DeltaCom and is a director of
ITC/\DeltaCom, KNOLOGY Holdings, Inc. ("KNOLOGY"), a
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broadband telecommunications services company formerly known as CyberNet
Holding, Inc., Vista Eyecare, Inc., a full service optical retailer, K&G Men's
Centers, a discount retailer of men's clothing, Innotrac Corporation
("Innotrac"), which provides customized, technology-based marketing support
services, and is Vice Chairman of the Board of AvData and Chairman of the Board
of Powertel. Mr. Lanier has served as a Managing Director of South Atlantic
Private Equity Fund IV, Limited Partnership since 1997.
William H. Scott, III has been a Director of MindSpring since November
1994. Mr. Scott has served as President of ITC Holding (or its predecessors)
since December 1991 and has been a director of ITC Holding (or its predecessors)
since May 1989. He is also an officer and director of several ITC Holding
subsidiaries. Mr. Scott is a director of ITC/\DeltaCom, KNOLOGY, Powertel,
Innotrac and AvData.
For a list of the executive officers of MindSpring who are not also
directors of MindSpring, together with biographical summaries of their
experience, see "Item 1. Business-Non-Director Executive Officers of
MindSpring."
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE.
The following table sets forth the compensation paid during the periods
indicated to the Chief Executive Officer of the Company and to each of the four
other most highly compensated executive officers of the Company during the
fiscal year ended December 31, 1998 (the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
----------------------
ANNUAL SECURITIES UNDERLYING
COMPENSATION OPTIONS (1)
--------------------------------- ---------------------
NAME AND PRINCIPAL POSITIONS YEAR SALARY BONUS (1)
------------------------------------- ------ ------------------ --------------
<S> <C> <C> <C> <C>
Charles M. Brewer (2) 1998 $163,750 $107,032 17,841
Chairman and Chief Executive 1997 150,000 65,550 7,314
Officer 1996 84,000 20,000 --
Michael S. McQuary (3) 1998 $136,458 $ 71,355 17,367
President and Chief Operating 1997 125,000 43,700 7,314
Officer 1996 84,000 36,035 116,238
Michael G. Misikoff (4) 1998 $114,625 $ 37,461 --
Executive Vice President, Chief 1997 105,000 22,943 3,072
Financial Officer, Secretary 1996 84,000 6,300 --
and Treasurer
James T. Markle (5) 1998 $104,800 $ 41,100 2,500
Executive Vice President 1997 96,000 20,976 2,808
1996 96,000 6,030 --
Gregory J. Stromberg (6) 1998 $ 91,700 $ 35,963 13,348
Executive Vice President 1997 82,250 18,354 2,460
1996 62,500 6,150 6,000
</TABLE>
(1) A portion of the bonuses paid to Named Executive Officers of the Company may
be paid or awarded in the first quarter of the fiscal year following the
year in which the bonus was earned.
(2) Mr. Brewer was granted options to purchase 17,841 shares of the Company's
common stock in January 1999 for services performed in 1998 and options to
purchase 7,314 shares of the Company's common stock in January 1998 for
services performed in 1997.
(3) Mr. McQuary was granted options to purchase 17,367 shares of the Company's
common stock in January 1999 for services performed in 1998, options to
purchase 7,314 shares of the Company's common stock in January 1998 for
services performed in 1997 and options to purchase 38,736 shares of the
Company's common stock in February 1997 for services performed in 1996.
(4) Mr. Misikoff was granted options to purchase 3,072 shares of the Company's
common stock in January 1998 for services performed in 1997. Mr. Misikoff
resigned his positions as director and executive officer of the Company
effective February 19, 1999.
(5) Mr. Markle was granted options to purchase 2,808 shares of the Company's
common stock in January 1998 for services performed in 1997. Mr. Markle
resigned his position as executive officer of the Company effective February
28, 1999.
(6) Mr. Stromberg was granted options to purchase a total of 13,348 shares of
the Company's common stock in December 1998 and February 1999 for services
performed in 1998 and options to purchase 2,460 shares of the Company's
common stock in January 1998 for services performed in 1997.
44
<PAGE> 47
STOCK OPTION GRANTS IN FISCAL YEAR 1998.
The following table sets forth information with respect to grants of
stock options to each of the Named Executive Officers during the year ended
December 31, 1998 All such grants were made under the Company's 1995 Stock
Option Plan.
<TABLE>
<CAPTION>
OPTION GRANTS DURING 1998
-------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
-------------------------------------------------------------------------------------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTIONS IN FISCAL EXERCISE EXPIRATION
NAME GRANTED (1) YEAR PRICE GRANT DATE DATE 5% 10%
- ------------------- --------------- -------------- ------------- -------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Charles M. Brewer 7,314 .85% $ 10.94 1/27/98 1/27/08 $ 50,321 $127,524
Michael S. McQuary 7,314 .85% $ 10.94 1/27/98 1/27/08 $ 50,321 $127,524
Michael G. Misikoff 3,072 .36% $ 10.94 1/27/98 1/27/08 $ 21,136 $ 53,562
James T. Markle 2,808 .33% $ 10.94 1/27/98 1/27/08 $ 19,319 $ 48,959
2,500 .29% $ 60.69 12/18/98 12/18/08 $ 95,419 $241,811
Gregory J. Stromberg 2,460 .29% $ 10.94 1/27/98 1/27/08 $ 16,925 $ 42,891
2,500 .29% $ 60.69 12/18/98 12/18/08 $ 95,419 $241,811
</TABLE>
(1) All options represent shares of common stock. These options become
exercisable as follows: (i) 50% of the options become exercisable two years
after the date of grant, (ii) an additional 25% of the options become
exercisable three years after the date of grant, and (iii) the remaining 25% of
the options become exercisable four years after the date of grant.
OPTION EXERCISES AND FISCAL YEAR-END VALUES.
The following table sets forth information with respect to the Named
Executive Officers concerning the exercise of options during the fiscal year
ended December 31, 1998, the number of securities underlying unexercised options
at 1998 year-end and the year-end value of all unexercised in-the-money options
held by such individuals.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(2)(3)
SHARES ---------------------------------- ----------------------------------
ACQUIRED ON VALUE
EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------- --------------- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Charles M. Brewer -- -- -- 7,314 -- $ 446,615
Michael S. McQuary 12,500 $ 203,913 147,456 123,537 $8,847,633 7,225,694
Michael G. Misikoff 38,737 1,323,450 -- 41,807 -- 2,511,119
James T. Markle 6,900 330,801 51,201 24,676 3,115,719 1,320,279
Gregory J. Stromberg 12,500 425,125 14,490 16,457 862,685 807,720
</TABLE>
(1) Represents the difference between the exercise price and the closing
price of the common stock on the Nasdaq National Market upon the date of
exercise.
(2) Represents the difference between the exercise price and the closing
price of the common stock on the Nasdaq National Market at December 31,
1998.
(3) Based on a per share price of $61.063 on December 31, 1998.
45
<PAGE> 48
DIRECTOR COMPENSATION
Since our inception, members of the board of directors have not
received any compensation for their service on the board of directors except
pursuant to MindSpring's Directors Stock Option Plan (the "Directors Plan").
Under the Directors Plan, 210,000 shares of common stock are authorized for
issuance to non-employee directors (in the form of grants of 30,000 options per
director) upon their initial election or appointment to the board, or, in the
case of Messrs. Lanier, Scott and Gabbard, who joined the board prior to the
creation of the Directors Plan, upon the adoption of the Directors Plan by the
board. Options are exercisable at the fair market value of the common stock (as
determined by the board) on the date of grant. The Directors Plan was amended in
1998 to provide for discretionary option grants. Upon adoption of this
amendment, each of Messrs. Lanier, Scott and Gabbard received a grant of 15,000
options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The members of the Compensation Committee for the year ended December
31, 1998 were Messrs. Gabbard, Lanier and Scott.
As of February 28, 1999, ITC Holding beneficially owned approximately
18.5% of the outstanding capital stock of the Company. Both Messrs. Lanier and
Scott serve as executive officers and directors of ITC Holding. Mr. Gabbard also
is a director of ITC Holding. As of February 28, 1998, Messrs. Lanier, Scott and
Gabbard owned approximately 19%, less than 1.0% and less than 1.0%,
respectively, of the common stock of ITC Holding. As of February 28, 1998, Mr.
Brewer owned less than 1.0% of the common stock of ITC Holding.
The Company has entered into certain business relationships with
subsidiaries of ITC Holding. The Company leases T-1 telecommunications lines for
data transport for some of its points of presence and purchases long distance
telephone services, maintenance and installation services and wide area network
transport service from ITC/\DeltaCom, which until October 20, 1997 was owned by
ITC Holding and is now owned by substantially the same stockholders as ITC
Holding. The Company pays ITC/\DeltaCom approximately $254,000 per month for
these services. Charges from ITC/\DeltaCom totaled approximately $3,672,000 for
the year ended December 31, 1998, of which the Company had paid approximately
$3,493,929 as of December 31, 1998.
The Company leases telephone lines from, and has contracts for
maintenance and installation with, Interstate Telephone Company, Inc.
("Interstate Telephone"), a wholly-owned subsidiary of ITC Holding. The Company
pays Interstate Telephone approximately $18,000 per month for these leased
telephone lines. Charges from Interstate Telephone for telephone lines and
installation charges and payments made to Interstate Telephone totaled
approximately $219,736 for the year ended December 31, 1998.
SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, officers and
persons who beneficially own more than ten percent of a registered class of the
Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Directors, officers and
greater than ten percent beneficial owners are required by the SEC's regulations
to furnish us with copies of all Section 16(a) forms they file.
Based solely on a review of copies of such forms furnished to us and
certain of the our internal records, or upon written representations that no
Forms 5 were required, we believe that during the year ended December 31, 1998,
all Section 16(a) filing requirements applicable to MindSpring's directors,
officers and greater than ten percent beneficial owners were satisfied in a
timely manner.
46
<PAGE> 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information as of February 28, 1999
concerning beneficial ownership of common stock by (1) each person or entity
known by the Company to beneficially own more than 5% of the outstanding common
stock, (2) each director and nominee for director of the Company, (3) each Named
Executive Officer, and (4) all directors and executive officers of the Company
as a group. The information as to beneficial ownership has been furnished by the
respective stockholders, directors and executive officers of the Company, and,
unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF COMMON
NAME OF BENEFICIAL OWNER OWNERSHIP (1) STOCK OUTSTANDING
----------------------------- --------------- -----------------
<S> <C> <C>
ITC Service Company, Inc. (2)(3). 5,324,067 18.5%
Charles M. Brewer (4)............. 2,320,003 8.1%
O. Gene Gabbard (5)(6)............ 12,500 *
Campbell B. Lanier, III (6)(7).... 7,500 *
James T. Markle (8)............... 71,549 *
Michael S. McQuary (9)............ 306,695 1.1%
Michael G. Misikoff (10).......... 232,857 *
William H. Scott, III (6)(11)..... 13,500 *
Gregory J. Stromberg (12)......... 25,465 *
All executive officers and directors
as a group (10 persons) (13).... 2,780,956 9.6%
</TABLE>
- ---------------------------
* Less than one percent.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner, for purposes of this table,
of any shares of common stock if such person has or shares voting power or
investment power with respect to such security, or has the right to
acquire beneficial ownership at any time within 60 days from February 28,
1999. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or direct
the disposition of shares.
(2) ITC Holding Company, Inc. indirectly owns these shares through its
indirect, wholly owned subsidiary, ITC Service Company. The address of
both ITC Holding Company, Inc. and ITC Service Company is 1239 O.G.
Skinner Drive, West Point, Georgia 31833.
(3) ITC Holding has pledged all of its stock in the Company to certain lenders
in connection with a credit agreement dated October 20, 1997.
(4) The address for Charles M. Brewer is MindSpring Enterprises, Inc., 1430
West Peachtree Street, Suite 400, Atlanta, Georgia 30309.
(5) Includes 7,500 shares of common stock that Mr. Gabbard has the right to
purchase within 60 days from February 28, 1999 pursuant to options.
(6) Mr. Lanier is Chairman of the Board, Chief Executive Officer and an owner
of approximately 19% of the common stock of ITC Holding (as of February
28, 1999). Mr. Scott is the President and a director of ITC Holding and is
an owner of less than 1.0% of its common stock (as of February 28, 1999).
Mr. Gabbard is a director of ITC Holding and an owner of less than 1.0% of
its common stock (as of February 28, 1999). Each of Messrs. Lanier, Scott
and Gabbard disclaims beneficial ownership of the shares of the Company's
common stock held by ITC Holding.
47
<PAGE> 50
(7) Includes 7,500 shares of common stock that Mr. Lanier has the right to
purchase within 60 days from February 28, 1999 pursuant to options.
(8) Includes 70,569 shares of common stock that Mr. Markle has the right to
purchase within 60 days from February 28, 1999 pursuant to options. Mr.
Markle resigned his position as executive officer of the Company effective
February 28, 1999.
(9) Includes 178,436 shares of common stock that Mr. McQuary has the right to
purchase within 60 days from February 28, 1999 pursuant to options.
(10) Mr. Misikoff resigned his positions as director and executive officer of
the Company effective February 19, 1999.
(11) Includes 7,500 shares of common stock that Mr. Scott has the right to
purchase within 60 days from February 28, 1999 pursuant to options. Mr.
Scott's beneficial ownership of MindSpring includes 1,000 shares of
common stock held in trust for Mr. Scott's minor daughter, of which Mr.
Scott's wife is trustee.
(12) Includes 14,865 shares of common stock that Mr. Stromberg has the right to
purchase within 60 days from February 28, 1999 pursuant to options.
(13) Includes 293,618 shares of common stock that such persons have the right
to purchase within 60 days from February 28, 1999 pursuant to options.
Does not include shares owned by Mr. Misikoff who resigned his position as
director and executive officer of the Company effective February 19, 1999.
48
<PAGE> 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arms'
length transactions with independent third parties.
For a summary of certain transactions and relationships among the
Company and its associated entities, and among the directors, executive officers
and stockholders of the Company and its associated entities, see "Compensation
Committee Interlocks and Insider Participation."
49
<PAGE> 52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the
registrant and report of independent auditors are included in Item 8 of this
Form 10-K:
Report of Independent Public Accountants.
Balance Sheets as of December 31, 1998 and 1997.
Statements of Operations for the years ended December 31, 1998, 1997
and 1996.
Statements of Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996.
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996.
Notes to Financial Statements.
(a)(2) Except for the following, all schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission either have been included in the Financial Statements or are not
required under the related instructions, or are inapplicable and therefore have
been omitted:
Report of Independent Public Accountant as to Schedules
Schedule II - Valuation of Qualifying Accounts
(a)(3) The following exhibits are either provided with this Report or
are incorporated herein by reference:
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
-------- ----------------------------------------------------------------------------------
<S> <C>
2.1 -- Asset Purchase Agreement dated as of September 10, 1998 by and among MindSpring
Enterprises, Inc., America Online, Inc. and Spry, Inc. (Filed as Exhibit 2.1
to Current Report on Form 8-K dated September 15, 1998, File No. 0-27890, and
incorporated herein by reference.)
2.2 -- Asset Purchase Agreement dated as of January 5, 1999 by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication Services, Inc. (Filed as
Exhibit 2.1 to Current Report on Form 8-K dated February 25, 1999, File
No. 0-27890, and incorporated herein by reference.)
2.3 -- Closing Agreement, dated February 17, 1999, by and between MindSpring Enterprises,
Inc. and NETCOM On-Line Communication Services, Inc. (Filed as Exhibit 2.2 to
Current Report on Form 8-K dated February 25, 1999, File No. 0-27890, and
incorporated herein by reference.)
3.1 -- Amended and Restated Certificate of Incorporation of MindSpring Enterprises,
Inc. (Filed as Exhibit 3.1 to Quarterly Report on Form 10-Q/A dated December 7,
1998, File No. 0-27890, and incorporated herein by reference.)
3.2 -- Certificate of Amendment to Amended and Restated Certificate of Incorporation
of MindSpring Enterprises, Inc. (Filed as Exhibit 3.2 to Quarterly Report on
Form 10-Q/A dated December 7, 1998, File No. 0-27890, and incorporated herein
by reference.)
3.3 -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as Exhibit
3(b) to Quarterly Report on Form 10-Q/A dated August 30, 1996, File No.
0-27890, and incorporated herein by reference.)
10.1 -- Support Agreement entered into as of April 1996 between Sykes Enterprises,
Incorporated and NETCOM On-Line Communication Services, Inc.
10.2 -- Lease Agreement between Park West E-3 Associates and NETCOM On-Line
Communication Services, Inc., a Delaware Corporation, dated February 23, 1996.
10.3 -- Credit Agreement dated as of February 17, 1999 by and among MindSpring
Enterprises, Inc., as Borrower, the Lenders referred to herein, First Union
Capital Markets Corp., as Arranger and First Union National Bank, as
Administrative Agent. (Filed as Exhibit 10.1 to Current Report on Form 8-K
dated February 25, 1999, File No. 0-27890, and incorporated herein by
reference.)
10.4 -- Guaranty and Collateral Agreement made by MindSpring Enterprises, Inc. and the
other Grantors party hereto in favor of First Union National Bank, as
Administrative Agent. (Filed as Exhibit 10.2 to Current Report on Form 8-K
dated February 25, 1999, File No. 0-27890, and incorporated herein by
reference.)
10.5 -- Lease Agreement commencing on November 1, 1995 between West Peachtree Point
Partners, L.P. and
</TABLE>
50
<PAGE> 53
<TABLE>
<S> <C>
MindSpring Enterprises, Inc. (Filed as Exhibit 10(j) to
Initial Form S-1, and incorporated herein by reference.)
10.6 -- First Amendment dated February 6, 1996 to Lease Agreement dated November 1,
1995 between John Marshall Law School, Inc. (assignee of West Peachtree Point
Partners, L.P.) and MindSpring Enterprises, Inc. (Filed as Exhibit 10(cc) to
Initial Form S-1, and incorporated herein by reference.)
10.7 -- MindSpring Enterprises, Inc. 1995 Stock Option Plan, as amended.
10.8 -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial Form S-1,
and incorporated herein by reference.)
10.9 -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan, as amended.
10.10 -- Form of Director Stock Option Agreement, as amended. (Filed as Exhibit 10(x) to
Initial Form S-1, and incorporated herein by reference.)
10.11 -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as Exhibit
10(dd) to Initial Form S-1, and incorporated herein by reference.)
10.12 -- Master Services Agreement dated July 15, 1996 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit
10(cc) to the October 1996 S-1, and incorporated herein by reference.)
10.13 -- Office Building Lease Agreement commencing December 15, 1997, between Pennsylvania
Dental Service Corporation, a Pennsylvania corporation d/b/a Delta Dental of
Pennsylvania, and MindSpring Enterprises, Inc.
10.14 -- Lease Agreement effective as of January 1, 1997 by and between CMS Peachtree,
L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(hh) to Annual
Report on Form 10-K dated March 26, 1997, File No. 0-27890, and incorporated
herein by reference.)
10.15 -- Amendment dated June 6, 1997 to Master Services Agreement dated July 15, 1996
between BellSouth Telecommunications, Inc. and MindSpring Enterprises, Inc.
(Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q dated August 14, 1997,
File No. 0-27890, and incorporated herein by reference).
10.16 -- Special Service Arrangement Agreement dated June 1997 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc. (a substantially
identical contract has been executed for each of Alabama, Florida, Kentucky,
North Carolina, South Carolina and Tennessee) (Filed as Exhibit 10.2 to
Quarterly Report on Form 10-Q dated August 14, 1997, File No. 0-27890, and
incorporated herein by reference).
11.1 -- Statement regarding Computation of Per Share Earnings.
23.1 -- Consent of Arthur Andersen LLP
</TABLE>
- ---------------
(b) On November 13, 1998, the Company filed a Current Report on
Form 8-K (the "Spry Form 8-K") reporting that, on October 15,
1998, the Company acquired certain assets used in connection
with the consumer dial-up Internet access business operated in
the United States by Spry, Inc., a Washington corporation
("Spry") (the "Spry Acquisition"). Financial statements of
Spry and pro forma financial information required by Item 7 to
Form 8-K were filed with the Spry Form 8-K.
On December 7, 1998, the Company filed a Current Report on
Form 8-K that contained, pursuant to Item 7 to Form 8-K,
certain updated, unaudited pro forma financial information
concerning the Spry Acquisition. The Company also filed
certain other information with respect to its business and
financial condition that was contained in the Company's
prospectus dated May 29, 1998 which formed a part of the
Company's Registration Statement on Form S-3 (SEC File No.
333-51615) and that the Company deemed of importance to its
stockholders.
On December 11, 1998, the Company filed an Amendment No. 1 to
Current Report on Form 8-K/A that contained, pursuant to Item
7 to Form 8-K, the financial statements of Spry and certain
unaudited pro forma financial information for the Company
reflecting the Spry Acquisition. This filing amended the
Company's November 13, 1998 Current Report on Form 8-K
51
<PAGE> 54
Also on December 11, 1998, the Company filed an Amendment No.
1 to Current Report on Form 8-K/A that contained, pursuant to
Item 7 to Form 8-K, unaudited pro forma financial information
for the Company reflecting the Spry Acquisition. This filing
amended the Company's December 7, 1998 Current Report on Form
8-K.
52
<PAGE> 55
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 as of the 26th day of
March, 1999.
MINDSPRING ENTERPRISES, INC.
By /s/ Charles M. Brewer
---------------------
Charles M. Brewer
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
----------------------- -------------------------- ----------------
<S> <C> <C>
/s/ Charles M. Brewer
---------------------
Charles M. Brewer Chairman, Chief Executive March 26, 1999
Officer and Director
(Principal Executive Officer)
/s/ Michael S. McQuary
----------------------
Michael S. McQuary President, Chief Operating March 26, 1999
Officer and Director
/s/ Juliet M. Reising
---------------------
Juliet M. Reising Executive Vice President, March 26, 1999
Chief Financial Officer and
Treasurer (Principal
financial officer and
principal accounting officer)
/s/ O. Gene Gabbard
-------------------
O. Gene Gabbard Director March 26, 1999
/s/ Campbell B. Lanier, III
---------------------------
Campbell B. Lanier, III Director March 26, 1999
/s/ William H. Scott, III
-------------------------
William H. Scott, III Director March 26, 1999
</TABLE>
53
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS
MINDSPRING ENTERPRISES, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants ............................................................... F-2
Balance Sheets as of December 31, 1998 and 1997......................................................... F-3
Statement of Operations for the years ended December 31, 1998, 1997
and 1996....................................................................................... F-4
Statement of Stockholders' Equity for the years ended December 31,
1998, 1997 and 1996............................................................................ F-5
Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996............................................................................ F-6
Notes to Financial Statements........................................................................... F-7
</TABLE>
F-1
<PAGE> 57
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MindSpring Enterprises, Inc.:
We have audited the accompanying balance sheets of MINDSPRING
ENTERPRISES, INC. (a Delaware corporation) as of December 31, 1998 and 1997 and
the related statements of operations, stockholders' equity, and cash flows for
the three years ended December 31, 1998, 1997 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of MindSpring
Enterprises, Inc. as of December 31, 1998 and 1997 and the results of its
operations and its cash flows for the three years ended December 31, 1998, 1997
and 1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1999
F-2
<PAGE> 58
MINDSPRING ENTERPRISES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................$ 167,743 $ 9,386
Trade receivables, net of allowance for doubtful accounts of
$1,224 and $751 at December 31, 1998 and 1997, respectively................ 3,278 2,002
Deferred income taxes (Note 8)............................................... 3,421 -
Prepaids and other current assets............................................ 758 1,042
--------------- -------------
Total current assets..................................................... 175,200 12,430
--------------- -------------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.................................... 35,580 18,050
Assets under capital lease................................................... 9,546 9,916
Other........................................................................ 4,821 1,805
--------------- -------------
49,947 29,771
Less: accumulated depreciation.............................................. (14,106) (6,133)
---------------- --------------
Property and equipment, net.............................................. 35,841 23,638
--------------- -------------
OTHER ASSETS:
Acquired customer base, net (Notes 1 and 2).................................. 34,742 7,478
Deferred income taxes (Note 8)............................................... 1,123 -
Other........................................................................ 693 740
--------------- -------------
Total other assets....................................................... 36,558 8,218
--------------- -------------
$ 247,599 $ 44,286
=============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable ......................................................$ 3,462 $ 4,306
Current portion of capital lease liability (Note 7) ......................... 2,695 2,607
Telecommunications costs payable............................................. 2,831 2,233
Deferred revenue (Note 1).................................................... 7,443 2,198
Current portion of notes payable (Note 6).................................... - 2,043
Other accrued expenses....................................................... 5,105 1,776
Due to America Online, Inc. (Note 2)......................................... 7,000 -
Accrued compensation expense................................................. 2,550 1,404
Income tax payable........................................................... 2,566 -
Network services payable .................................................... 4,442 1,216
-------------- -------------
Total current liabilities................................................ 38,094 17,783
-------------- -------------
LONG-TERM LIABILITIES:
Capital lease liability (Note 7)......................................... 2,424 5,090
-------------- -------------
Total long-term liabilities.............................................. 2,424 5,090
-------------- -------------
Total liabilities........................................................ 40,518 22,873
-------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (Note 3):
Common stock, $.01 par value; 60,000 and 45,000 shares authorized at
December 31, 1998 and 1997 and 28,284 and 22,603 issued and outstanding
at December 31, 1998 and 1997, respectively............................... 283 226
Additional paid-in capital................................................... 209,983 34,916
Accumulated deficit.......................................................... (3,185) (13,729)
--------------- --------------
Total stockholders' equity............................................... 207,081 21,413
-------------- -------------
$ 247,599 $ 44,286
============== =============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
<PAGE> 59
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- -------------
<S> <C> <C> <C>
REVENUES:
Access.................................................$ 95,852 $ 40,925 $ 13,420
Business services...................................... 14,735 7,711 2,286
Subscriber start-up fees............................... 4,086 3,920 2,426
--------------- --------------- -------------
Total revenues....................................... 114,673 52,556 18,132
--------------- --------------- -------------
COST AND EXPENSES:
Cost of revenues -- recurring.......................... 31,724 15,203 6,332
Cost of subscriber start-up fees....................... 2,612 1,619 1,876
General and administrative............................. 38,443 22,265 10,072
Selling................................................ 18,881 8,519 4,089
Depreciation and amortization.......................... 15,227 8,695 3,285
--------------- --------------- -------------
Total operating expenses............................. 106,887 56,301 25,654
--------------- --------------- -------------
OPERATING INCOME (LOSS)..................................... 7,786 (3,745) (7,522)
INTEREST INCOME (EXPENSE), NET.............................. 1,214 (338) (90)
--------------- ---------------- --------------
INCOME (LOSS) BEFORE TAXES .................................$ 9,000 $ (4,083) $ (7,612)
--------------- ---------------- --------------
INCOME TAX BENEFIT ..................................... 1,544 - -
--------------- --------------- -------------
NET INCOME (LOSS)...........................................$ 10,544 $ (4,083) $ (7,612)
=============== ================ ==============
NET INCOME (LOSS) PER SHARE:
Basic..................................................$ 0.43 $ (0.18) $ (0.48)
=============== ================ ==============
Diluted................................................$ 0.41 $ (0.18) $ (0.48)
=============== ================ ==============
SHARES USED FOR COMPUTING NET
INCOME (LOSS) PER SHARE:
Basic ................................................. 24,611 22,542 15,758
=============== =============== =============
Diluted................................................ 25,431 22,542 15,758
=============== =============== =============
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-4
<PAGE> 60
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Additional Preferred Stock Total
------------------------------ Paid-in ----------------------------- Accumulated Stockholders'
Shares Amount Capital Shares Amount Deficit Equity
----------- --------- ---------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 3,802 $ 38 $ 95 1,933 $ 2,383 $ (2,034) $ 482
Conversion of Class A
preferred stock to common 3,563 36 709 (1,188) (745) - -
Conversion of Class B
preferred stock to common 1,937 19 981 (645) (1,000) - -
Issuance of additional
common stock, net of
related offering expenses 6,075 60 14,089 - - - 14,149
Conversion of Class C
preferred stock to common 300 3 635 (100) (638) - -
Issuance of additional
common stock, net of
related offering expenses 6,750 68 18,319 - - - 18,387
Issuance of common stock
pursuant to exercise of
options .......... 4 - 1 - - - 1
Net loss............... - - - - - (7,612) (7,612)
----------- ------------ ----------- --------- --------- -------- --------
Balance, December 31, 1996.. 22,431 $ 224 $ 34,829 - $ - $ (9,646) $ 25,407
Issuance of common stock
pursuant to exercise of
options................ 172 2 87 - - - 89
Net loss............... - - - - - (4,083) (4,083)
----------- ------------ ----------- --------- --------- -------- --------
Balance, December 31, 1997.. 22,603 $ 226 $ 34,916 - $ - $(13,729) $ 21,413
Issuance of additional
common stock, net of
related offering expenses 3,000 30 49,726 - - - 49,756
Issuance of additional
common stock, net of
related offering expenses 2,300 23 124,761 - - - 124,784
Issuance of common stock
pursuant to exercise of
options................ 381 4 580 - - - 584
Net income............. - - - - - 10,544 10,544
----------- ------------ ----------- --------- --------- -------- --------
Balance, December 31, 1998.. 28,284 $ 283 $ 209,983 - $ - $ (3,185) $207,081
=========== ============ ============ ========= ========= ======== ========
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-5
<PAGE> 61
MINDSPRING ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------------ --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...............................................$ 10,544 $ (4,083) $ (7,612)
------------- ---------------- -------------
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization................................... 15,227 8,695 3,285
Deferred income taxes........................................... (4,544) - -
Changes in operating assets and liabilities:
Trade receivables........................................... (1,276) (5) (1,477)
Other current assets........................................ 284 (565) (158)
Trade accounts payable...................................... (844) 2,352 1,106
Telecommunications cost payable............................. 598 1,332 700
Deferred revenue............................................ 5,245 1,782 80
Other accrued expenses...................................... 3,329 1,166 246
Accrued compensation expense................................ 1,146 769 520
Income taxes payable........................................ 2,566 - -
Network services payable.................................... 3,226 (89) 1,305
------------- ----------------- -------------
Total adjustments......................................... 24,957 15,437 5,607
------------- ---------------- -------------
Net Cash Provided By (Used In) Operating Activities....... 35,501 11,354 (2,005)
------------- ---------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................. (20,176) (8,042) (8,298)
Purchase of customer base....................................... (27,312) (960) (12,249)
Other........................................................... (159) - (789)
-------------- ---------------- --------------
Net Cash Used In Investing Activities....................... (47,647) (9,002) (21,336)
------------- ---------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of loan from preferred stockholder..................... - - 1,000
Payments of loan from preferred stockholder..................... - - (3,500)
Proceeds from notes payable..................................... - - 11,488
Payments of notes payable....................................... (2,043) (624) (8,822)
Payments of capital lease obligations........................... (2,578) (2,084) (134)
Issuance of common stock........................................ 175,124 89 32,537
------------- ---------------- -------------
Net Cash Provided By (Used In) Financing Activities........ 170,503 (2,619) 32,569
------------- ----------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................................... 158,357 (267) 9,228
CASH AND CASH EQUIVALENTS, beginning of year......................... 9,386 9,653 425
------------- ---------------- -------------
CASH AND CASH EQUIVALENTS, end of year...............................$ 167,743 $ 9,386 $ 9,653
============= ================ =============
SUPPLEMENTAL DISCLOSURE FOR CASH FLOW
INFORMATION:
Interest paid...................................................$ 890 $ 749 $ 402
============= ================ =============
Income taxes paid...............................................$ 434 $ - $ -
============= ================ =============
SUPPLEMENTAL NONCASH DISCLOSURES:
Assets acquired under capital lease.............................$ - $ 8,443 $ 1,473
============= ================ =============
Noncash accrual for acquired subscriber base....................$ 7,000 $ - $ -
============= ================ =============
</TABLE>
The accompanying Notes to Financial Statements
are an integral part of these statements.
F-6
<PAGE> 62
MINDSPRING ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. ORGANIZATION AND NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
MindSpring Enterprises, Inc. ("MindSpring" or the "Company") is a
national provider of Internet access. The Company was incorporated in Georgia on
February 24, 1994 and began marketing its services in June 1994. The Company
reincorporated in Delaware and effected a recapitalization in December 1995.
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the period.
Actual results could differ from those estimates.
PRESENTATION
Certain amounts in the prior year financial statements have been
reclassified to conform to the current year presentation.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies,
and other companies to provide data communications capacity. Although management
feels alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on
operating results.
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an
original maturity date of three months or less to be cash equivalents. Cash and
cash equivalents are stated at cost, which approximates fair value.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to
credit risk, as collateral is generally not required. The Company's risk of loss
is limited due to advance billings to customers for services, the use of
preapproved charges to customer credit cards, and the ability to terminate
access on delinquent accounts. In addition, the concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amount of the Company's receivables approximates their fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization are provided for using the straight-line method over the estimated
useful lives of the assets, commencing when assets are installed or placed in
service. The estimated useful life for all assets is five years or, for
leasehold improvements, the life of the lease, if shorter.
EQUIPMENT UNDER CAPITAL LEASE
The Company leases certain of its data communication and other
equipment under lease agreements accounted for as capital. The assets and
liabilities under capital leases are recorded at the lesser of the present value
of aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the
F-7
<PAGE> 63
assets under lease. Assets under capital lease are depreciated over their
estimated useful lives of five years, which are longer than the terms of the
leases.
ACQUIRED CUSTOMER BASE
The Company capitalizes specific costs incurred for the purchase of
customer bases from other Internet Service Providers ("ISPs"). The customer
acquisition costs include the actual fee paid to the selling ISP, as well as
legal and other expenses specifically related to the transactions. Subscriber
acquisition costs capitalized at December 31, 1998 and 1997 were $47,521,000 and
$13,209,000, respectively. Amortization is provided using the straight-line
method over three years commencing when the customer base is received.
Amortization expense for the years ended December 31, 1998, 1997, and 1996 was
$7,048,000, $4,210,000, and $1,521,000, respectively. See Note 2 for further
discussion.
LONG-LIVED ASSETS
The Company periodically reviews the values assigned to long-lived
assets, such as property and equipment and acquired customer bases, to determine
whether any impairments are other than temporary. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
INCOME TAXES
Deferred income taxes are recorded using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." The disclosure option of Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" requires
that companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted.
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. During 1998, the Company began offering
prepaid services. Advance billings including prepaid services and collections
relating to future access services are recorded as deferred revenue and
recognized as revenue when earned.
BARTER TRANSACTIONS
The Company engages in certain exchanges of services for advertising
and promotional services. The Company records these transactions at the market
value of the services provided. Such transactions are not material for the
periods presented.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
F-8
<PAGE> 64
NET INCOME (LOSS) PER SHARE
The Company calculates net income (loss) per share as required by SFAS
No. 128, "Earnings Per Share." Basic earnings (loss) per common share ("EPS")
was computed by dividing net income (loss) by the weighted average number of
shares of common stock outstanding for the year ended. The effect of the
Company's stock options (using the treasury stock method) was included in the
computation of diluted EPS for the year ended December 31, 1998. For the years
ended December 31, 1997 and 1996, the effect of the options is excluded as their
effect is anti-dilutive. The following table summarizes the shares used in the
calculations:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
(In Thousands)
Weighted average shares
Outstanding-basic 24,611 22,542 15,758
Effect of dilutive stock options 820 - -
--------------- --------------- ---------------
Shares used for diluted earnings per share 25,431 22,542 15,758
=============== =============== ===============
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In 1998, the Company was subject to the provisions of Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." Neither
statement had any impact on the Company's financial statements as the Company
does not have any "comprehensive income" type earnings (losses) and its
financial statements reflect how the "key operating decisions maker" views the
business. The Company will continue to review these statements over time, in
particular SFAS 131, to determine if any additional disclosures are necessary
based on evolving circumstances.
2. CUSTOMER BASE ACQUISITIONS
On June 28, 1996, the Company entered into a purchase agreement (as
amended on January 27, 1997, the "Purchase Agreement") with PSINet Inc.
("PSINet"), pursuant to which the Company agreed to acquire certain of the
tangible and intangible assets and rights related to the consumer dial-up
Internet access services provided by PSINet in the United States, including (i)
certain of PSINet's individual subscriber accounts and (ii) the lease for a
customer support call center near Harrisburg, Pennsylvania (the "Harrisburg
Facility"), and all related telephone switches and other equipment (the
"Assets") for $12,929,000 (excluding accrued interest and increases in principal
amount under the First and Second PSINet Notes previously paid by the Company)
(the "Purchase Price"). In connection with fixing the aggregate amount of the
Purchase Price, the Company and PSINet amended the Second PSINet Note to, among
other things, reduce the principal amount owed thereunder to $3,078,000, an
amount equal to the remaining balance of the Purchase Price as of January 24,
1997. As amended, the Second PSINet Note no longer accrued interest, was payable
over a two-year period, and was discounted for financial statement purposes
using the same rate of interest (Prime + 3%) as the prior PSINet Notes. The
Company accreted the difference between the principal and total payable amount
of $3,078,000 over the two years of the note.
In connection with the PSINet transaction, the parties also entered
into a network services agreement (as amended, the "Services Agreement") which
enables MindSpring to offer nationwide Internet access through PSINet's network
of over 200 points of presence ("POPs"). The term of the Services Agreement is 5
years commencing on June 28, 1996 and is automatically renewable annually
thereafter unless either party notifies the other in writing not less than 12
months prior to the end of such 5-year period or any 12-month extension thereof.
Either party may terminate the Services Agreement at any time upon 60 days'
written notice without penalty. The Company and PSINet amended the Services
Agreement effective January 1, 1997 to provide for certain discounts to the
monthly service fees which otherwise would have been payable by the Company to
PSINet. The Company
F-9
<PAGE> 65
earned credits of $2,000,000 and $2,050,000 during 1998 and 1997, respectively,
and the discounts are reflected as reductions of cost of revenue. This
arrangement ended in October 1998.
On September 10, 1998, MindSpring entered into an Asset Purchase
Agreement with America Online, Inc. ("AOL") and Spry, Inc. ("Spry"), a wholly
owned subsidiary of AOL, to purchase certain assets used in connection with the
consumer dial-up Internet access business operated by Spry (the "Spry
Agreement"). Pursuant to the Spry Agreement, MindSpring acquired Spry's
subscriber base of individual Internet access customers in the United States and
Canada as well as various assets used in serving those customers, including a
customer support facility and a network operations facility in Seattle,
Washington. MindSpring also acquired all rights held by Spry to the "Spry" name.
The acquisition was closed on October 15, 1998 and in accordance with the
agreement MindSpring paid the initial payment of $25,000,000 in cash to AOL The
ultimate purchase price for these assets was based primarily upon the number of
acquired subscribers who remain active with MindSpring as continuing users in
good standing as of December 31, 1998. The Company has calculated the final
purchase price to be approximately $32,000,000 and has accordingly accrued an
additional $7,000,000 in the accompanying balance sheet. The transaction is
being accounted for as a purchase. See Note 10 for further discussion.
3. STOCKHOLDERS' EQUITY
At the annual meeting of stockholders in May 1998 the Company voted to
approve and adopt an amendment to Article 4 of the Company's Amended and
Restated Certificate of Incorporation to increase the number of authorized
shares of $.01 par value common stock from 15,000,000 to 60,000,000 and to
eliminate the Company's Class C Preferred Stock.
STOCK SPLIT
On June 24, 1998 the Company effected a three-for-one stock split of
the outstanding shares of common stock in the form of a stock dividend.
Accordingly, all data shown in the accompanying financial statements and notes
has been retroactively adjusted to reflect the stock split.
COMMON STOCK
In June 1998, the Company issued 3,000,000 shares at a public offering
price of $17.67. The total proceeds of the offering, net of underwriting
discounts and offering expenses, were approximately $49,756,000.
In December 1998, the Company issued 2,300,000 shares at a public
offering price of $57.00. The total proceeds of the offering, net of
underwriting discounts and offering expenses, were approximately $124,784,000.
4. STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan, as amended (the "Stock
Option Plan"), 3,000,000 shares of common stock are reserved and authorized for
issuance upon the exercise of options. All employees of the Company are eligible
to receive options under the Stock Option Plan. The compensation committee of
the Board of Directors administers the Stock Option Plan. Options granted under
the Stock Option Plan are intended to qualify as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended. Options generally
become exercisable as follows: (i) 50% of the options become exercisable two
years after the date of grant or, in certain cases, the commencement date of the
holder's employment; (ii) an additional 25% of the options become exercisable
three years after the date of grant or, in certain cases, the commencement date
of the holder's employment; and (iii) the remaining 25% of the options become
exercisable four years after the date of grant or, in certain cases, the
commencement date of the holder's employment. Except as noted in the next
sentence, all options were granted at an exercise price equal to the estimated
fair value of the common stock on the dates of grant as determined by the Board
of Directors based on equity transactions and other analyses. Options granted to
holders of 10% or more of the outstanding common stock were granted at an
exercise price equal to 110% of the estimated fair value of the common stock on
the dates of grant as determined by the Board of Directors based on equity
F-10
<PAGE> 66
transactions and other analyses. The options expire ten years from the date of
grant or, in certain circumstances, the commencement date of the option holder's
employment.
DIRECTORS' STOCK OPTION PLAN
Under the Company's Directors' Stock Option Plan (the "Directors'
Plan"), adopted in December 1995, 210,000 shares of common stock are authorized
for issuance to nonemployee directors (in the form of 30,000 options per
director) upon their initial election or appointment to the board or, in the
case of directors who joined the board prior to the creation of the Directors'
Plan, upon the adoption of the Directors' Plan by the Board of Directors. The
Directors' Plan, as amended by the Board of Directors on March 25, 1998 and
approved by the stockholders on May 20, 1998, provides for discretionary option
grants. Options become exercisable as follows: (i) 50% of the options become
exercisable two years after the date of grant, (ii) an additional 25% of the
options become exercisable three years after the date of grant, and (iii) the
remaining 25% of the options become exercisable four years after the date of
grant. All options were granted at an exercise price equal to the estimated fair
value of the common stock at the dates of grant as determined by the Board of
Directors based upon equity transactions and other analyses. The options expire
ten years from the date of grant.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS No.
123, which defines a fair value-based method of accounting for an employee stock
option or similar equity instrument and encourages all entities to adopt that
method of accounting for all of their employee stock-based compensation plans.
However, it also allows an entity to continue to measure compensation cost for
those plans using the method of accounting prescribed by APB No. 25. Entities
electing to remain with the accounting in APB No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share as if the fair
value-based method of accounting defined in this statement had been applied.
The Company has elected to account for its stock-based compensation
plans under APB No. 25; however, the Company has computed for pro forma
disclosure purposes the value of all options granted during 1998, 1997, and 1996
using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using
the following weighted average assumptions used for grants in 1998, 1997, and
1996:
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ------------------- ------------------
<S> <C> <C> <C>
Risk-free interest rate 5.3% 6.4% 6.4%
Expected dividend yield 0% 0% 0%
Expected lives 3.5 years 3.5 years 3.5 years
Expected volatility 95.0% 58.4% 69.3%
</TABLE>
The total value of options granted during 1998, 1997, and 1996 was
computed as approximately $38,679,000, $3,735,000 and $601,000, respectively,
which would be amortized on a pro forma basis over the four-year vesting period
of the options. If the Company had accounted for these plans in accordance with
SFAS No. 123, the Company's net income (loss) and pro forma net income (loss)
per share for the years ended December 31, 1998, 1997 and 1996 would have been
as follows:
F-11
<PAGE> 67
<TABLE>
<CAPTION>
(In Thousands Except Per Share Data) As Reported Pro Forma
----------------- ---------------
<S> <C> <C>
1996
Net loss $ (7,612) $ (7,836)
Net loss per share $ (0.48) $ (0.50)
1997
Net loss $ (4,083) $ (5,402)
Net loss per share $ (0.18) $ (0.24)
1998
Net income $ 10,544 $ 2,291
Net income per diluted share $ 0.41 $ 0.09
</TABLE>
A summary of the status of the Company's two stock options plans at
December 31, 1998, 1997 and 1996 and changes during the years then ended are
presented in the following table:
<TABLE>
<CAPTION>
Weighted
Average
Shares Price Per
(In Thousands) Share
--------------- --------------
<S> <C> <C>
December 31, 1995 1,071 $0.62
Grants 756 2.87
Exercised (3) 0.21
Forfeitures (90) 2.01
---------------
December 31, 1996 1,734 1.53
Grants 453 4.21
Exercised (171) 0.29
Forfeitures (174) 3.12
---------------
December 31, 1997 1,842 2.15
Grants 861 37.53
Exercised (382) 1.53
Forfeitures (198) 7.96
---------------
December 31, 1998 2,123 16.10
===============
Weighted average fair value of options
granted in 1998 $ 45
===============
</TABLE>
The following table summarizes the number of options outstanding by
year of grant:
<TABLE>
<CAPTION>
Weighted
Number Average
Year Of Exercise Weighted Remaining
Of Shares Price Average Contractual
Grant (In Thousands) Range Price Life
--------------- ------------------ ------------------- -------------- ----------------
<S> <C> <C> <C> <C>
1998 808 $10.94-60.69 $38.59 9.6 years
1997 341 2.33 - 9.71 4.40 8.4
1996 388 2.13-4.13 2.79 7.6
1995 586 0.21-2.13 0.67 6.5
</TABLE>
The following table summarizes the options exercisable as of December
31, 1998, 1997 and 1996:
F-12
<PAGE> 68
<TABLE>
<CAPTION>
Weighted
Number Average
of Weighted Remaining
Shares Average Contractual
As of (In Thousands) Price Life
------------------ ----------------- ------------ --------------
<S> <C> <C> <C>
Dec. 31, 1998 537 $1.16 6.8 years
Dec. 31, 1997 366 $0.73 7.5
Dec. 31, 1996 210 0.21 8.1
</TABLE>
EMPLOYEE BENEFIT PLAN
The Company has a savings plan (the "Savings Plan") that qualifies as a
deferred salary arrangement under Section 401(k) of the Internal Revenue Code.
Under the Savings Plan, participating employees may defer a portion of their
pretax earnings, up to the Internal Revenue Service annual contribution limit.
Annually, the Company determines whether to make a discretionary matching
contribution equal to a percentage, determined by the Company, of the employee's
deferred compensation contribution. The Company has not made any matching
contributions to the Savings Plan.
5. RELATED-PARTY TRANSACTIONS
The Company has entered into certain business relationships with
several subsidiaries and affiliates of ITC Holding Company, Inc. ("ITC
Holding"). Except as noted below, none of these transactions were material for
the periods presented.
The Company purchases long-distance telephone services and wide area
network transport service from ITC/\DeltaCom, Inc. ("ITC/\DeltaCom"), a related
party through relationships with ITC Holding. Long-distance charges from
ITC/\DeltaCom totaled approximately $3,672,000, $1,942,000 and $677,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
F-13
<PAGE> 69
6. DEBT
The Company's only debt obligation for the periods presented is a
promissory note issued in connection with the PSINet transaction. The final
payment on this note was made in December 1998.
<TABLE>
<CAPTION>
1998 1997
---------------- ---------------
(In Thousands)
<S> <C> <C>
PSINet Note, due October, 1998 $ - $2,043
Less current maturities - (2,043)
---------------- ---------------
Long-term obligations $ - $ -
================ ===============
</TABLE>
The carrying value of the PSINet Note approximated the market value as
of December 31, 1997.
7. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain equipment under agreements, which are
classified as capital leases. These leases have original terms of three years or
less and contain bargain purchase options at the end of the original lease
terms. The Company also has operating leases, which relate to the lease of
office and equipment space. Rental expense attributable to these operating
leases was approximately $1,953,000, $1,420,000 and $519,000 for the year ended
December 31, 1998, 1997 and 1996, respectively.
At December 31, 1998, the Company's capital lease obligations and
minimum rental commitments under non-cancelable operating leases with initial or
remaining terms of more than one year were as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------------- ----------------
(In Thousands)
<S> <C> <C>
1999 $3,103 $3,385
2000 2,595 3,392
2001 - 1,441
2002 - 829
2003 and thereafter - 963
--------------- ----------------
Total minimum lease payments 5,698 $10,010
================
Amounts representing interest (579)
---------------
Present value of net minimum
payments 5,119
Current portion (2,695)
---------------
Long-term capitalized lease
obligations $2,424
===============
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that arise in
the ordinary course of business. As of December 31, 1998, management is not
aware of any asserted or pending litigation or claims against the Company that
would have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
F-14
<PAGE> 70
8. INCOME TAXES
The provision for income taxes is attributable to:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Current $ 3,000 $ - $ -
Deferred 654 (1,574) (2,915)
Increase in (reversal of) valuation allowance (5,198) 1,574 2,915
----------------- ---------------- ---------------
Income tax provision (benefit) $ (1,544) $ - $ -
================= ================ ===============
</TABLE>
A reconciliation of the income tax provision (benefit) computed at
statutory tax rates to the income tax benefit for the year ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at statutory rate 34% (34)% (34)%
State income taxes, net of federal benefit 4 (4) (4)
Other 2 0 0
Valuation allowance (57) 38 38
-------- -------- --------
Total income tax provision (benefit) (17)% 0% 0%
======== ======== ========
</TABLE>
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ - $ 3,866
Acquired customer base 3,902 1,742
Deferred revenue 2,221 835
Allowance for doubtful accounts 465 285
Prepaid revenue 608 -
Accrued vacation 371 -
Other accrued liabilities - 126
------------ -----------------
Total deferred tax assets 7,567 6,854
------------ -----------------
Deferred tax liabilities:
Depreciation (2,779) (1,608)
Other (244) (48)
------------ -----------------
Total deferred tax liabilities (3,023) (1,656)
------------ -----------------
Net deferred tax asset 4,544 5,198
Valuation allowance for deferred tax assets - (5,198)
------------ -----------------
Net deferred taxes $ 4,544 $ -
============ =================
</TABLE>
The Company's net operating loss carryforwards will expire between 2009
and 2012 unless utilized. Due to the fact that prior to 1998 the Company
incurred losses since inception, the Company did not recognize the income tax
benefit of the net operating loss carryforwards. Management provided a 100%
valuation reserve against its net deferred tax asset, consisting primarily of
net operating loss carryforwards. Management reviewed this position based on the
net income generated in 1998 as well as the projections of future income and
determined that it was more likely than not that the deferred tax assets would
be realized. Accordingly, the Company reversed its entire valuation allowance in
1998. In addition, the Company's ability to recognize the benefit from the net
F-15
<PAGE> 71
operating loss carryforwards could be limited under Section 382 of the Internal
Revenue Code if ownership of the Company changes by more than 50%, as defined.
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results for 1998,
1997, and 1996:
(In Thousands Except Per Share Data)
<TABLE>
<CAPTION>
Operating Net Net Income
Quarter Ended Revenue Income (Loss) Income (Loss) (Loss) Per Share
---------------------- ------------- ---------------- ---------------- ---------------------
Basic Diluted
<S> <C> <C> <C> <C> <C>
December 31, 1998 $ 39,534 $ 1,299 $ 3,679 $ .14 $ .13
September 30, 1998 28,695 3,440 3,985 .15 .15
June 30, 1998 25,060 1,994 2,020 .09 .08
March 31, 1998 21,384 1,053 860 .04 .04
December 31, 1997 $ 17,209 $ 646 $ 498 $ .02 $ .02
September 30, 1997 13,967 (465) (626) (.03) (.03)
June 30, 1997 11,600 (1,421) (1,430) (.06) (.06)
March 31, 1997 9,780 (2,505) (2,525) (.11) (.11)
December 31, 1996 $ 8,524 $ (2,378) $ (2,411) $ (.11) $ (.11)
September 30, 1996 5,301 (2,601) (2,702) (.18) (.18)
June 30, 1996 2,495 (1,577) (1,460) (.10) (.10)
March 31, 1996 1,812 (966) (1,039) (.10) (.10)
</TABLE>
See Note 1 for a discussion of earnings per share.
10. SUBSEQUENT EVENT
ACQUISITION
On February 17, 1999, MindSpring acquired certain tangible and
intangible assets and rights used in connection with the Internet services
business operated in the United States by NETCOM On-Line Communication Services,
Inc. ("NETCOM"), a Delaware corporation and an indirect wholly owned subsidiary
of ICG Communications, Inc., including (i) approximately 400,000 of NETCOM's
individual Internet access accounts; (ii) approximately 3,000 dedicated Internet
access accounts; (iii) approximately 18,000 Web hosting accounts; and (iv)
various assets used in serving those subscribers, including leased operations
facilities in San Jose, California and Dallas, Texas and all of NETCOM's rights
to the "NETCOM" name (except in Brazil, Canada and the United Kingdom). The
acquisition was effected pursuant to an Asset Purchase Agreement dated January
5, 1999 between MindSpring and NETCOM. MindSpring paid NETCOM approximately
$245,000,000, including $215,000,000 in cash and $30,000,000 in MindSpring
stock.
The NETCOM operations outside the United States are not included in
this transaction. In addition, NETCOM (which will change its name in the near
future) will retain all of the assets used in connection with its network
operations. Under a separate network services agreement, NETCOM (operating under
a new corporate name) will sell MindSpring wholesale access to its network. The
agreement has an initial term of one year with an option for a second year on
potentially different terms to be negotiated and accepted by both parties.
The transaction will be accounted for as a purchase. The purchase price
will be allocated to the underlying assets purchased and liabilities assumed
based on their fair market values at the acquisition date.
F-16
<PAGE> 72
The following table summarizes the net assets purchased in connection
with the NETCOM and Spry acquisitions and the amount attributable to cost in
excess of net assets acquired in millions:
<TABLE>
<CAPTION>
NETCOM Spry
------ ----
<S> <C> <C>
Working capital $(3.0) $ -
Property and equipment 17.2 -
Other assets 0.2 -
Acquired customer base 230.6 32.0
</TABLE>
The preliminary estimate of net assets represents management's best
estimate based on currently available information; however, such estimate may be
revised up to one year from the acquisition date. Acquired subscriber bases are
amortized over 3 years.
The following unaudited pro forma condensed statements of operations
(in millions) assumes the NETCOM and Spry acquisitions occurred on January 1,
1997. In the opinion of management, all adjustments necessary to present fairly
such unaudited pro forma condensed statements of operations have been made.
<TABLE>
<CAPTION>
1998 1997
--------------- -----------
<S> <C> <C>
Revenue $ 294.9 $250.3
Net Loss (101.5) (101.0)
Net Loss per share (3.57) (3.58)
</TABLE>
CREDIT FACILITY
Subsequent to year end, the Company obtained a $100 million secured
revolving credit facility from First Union National Bank and certain other
lenders. The credit facility may be increased to $200 million with the approval
of 51% of the lenders. The credit facility has an interest rate of either the
bank rate plus 25 to 100 basis points (defined as the banks prime rate or the
overnight federal funds rate plus 50 basis points) or LIBOR plus 125-200 basis
points depending upon the ratio of total debt to EBITDA. The facility is
available for 36 months and contains certain restrictive covenants including
certain financial ratios. Additionally, borrowings are secured by all assets and
properties. To complete the NETCOM acquisition, the Company borrowed $80 million
under this facility. The proceeds from any future debt issuances and certain
sales of assets and insurance proceeds must be used to repay any outstanding
borrowings.
F-17
<PAGE> 73
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with generally accepted auditing standards, the
financial statements of MINDSPRING ENTERPRISES, INC. included in this Form 10-K
and have issued our report thereon dated February 17, 1999. 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 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits 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.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1999
S-1
<PAGE> 74
SCHEDULE II - VALUATION OF QUALIFYING ACCOUNTS
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ------------------ ------------------------------- --------------- ---------------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (a) OF PERIOD
----------- ------------------ ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT
APPLIES:
Allowance for uncollectible accounts
Receivable.......................... $751 $3,123 $0 ($2,650) $1,224
</TABLE>
(a) Represents specific accounts written-off considered to be uncollectible.
MINDSPRING ENTERPRISES, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- --------------------------------- ------------------ ------------------------------- --------------- ---------------
ADDITIONS
-------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS (a) OF PERIOD
----------- ------------------ ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
DEDUCTION IN THE BALANCE SHEET
FROM THE ASSET TO WHICH IT
APPLIES:
Allowance for uncollectible accounts
Receivable.......................... $386 $1,459 $0 ($1,094) $751
</TABLE>
(a) Represents specific accounts written-off considered to be uncollectible.
S-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT
NUMBER DESCRIPTION
-------------------------------------------------------------------------------------------------------------
<S> <C>
2.1 -- Asset Purchase Agreement dated as of September 10, 1998 by and among MindSpring
Enterprises, Inc., America Online, Inc. and Spry, Inc. (Filed as Exhibit 2.1 to Current
Report on Form 8-K dated September 15, 1998, File No. 0-27890, and incorporated herein by
reference.)
2.2 -- Asset Purchase Agreement dated as of January 5, 1999 by and between MindSpring
Enterprises, Inc. and NETCOM On-Line Communication Services, Inc. (Filed as Exhibit 2.1
to Current Report on Form 8-K dated February 25, 1999, File No. 0-27890, and incorporated
herein by reference.)
2.3 -- Closing Agreement, dated February 17, 1999, by and between MindSpring Enterprises, Inc.
and NETCOM On-Line Communication Services, Inc. (Filed as Exhibit 2.2 to Current Report
on Form 8-K dated February 25, 1999, File No. 0-27890, and incorporated herein by
reference.)
3.1 -- Amended and Restated Certificate of Incorporation of MindSpring Enterprises, Inc. (Filed
as Exhibit 3.1 to Quarterly Report on Form 10-Q/A dated December 7, 1998, File No.
0-27890, and incorporated herein by reference.)
3.2 -- Certificate of Amendment to Amended and Restated Certificate of Incorporation of
MindSpring Enterprises, Inc. (Filed as Exhibit 3.2 to Quarterly Report on Form 10-Q/A
dated December 7, 1998, File No. 0-27890, and incorporated herein by reference.)
3.3 -- Amended and Restated Bylaws of MindSpring Enterprises, Inc. (Filed as Exhibit 3(b) to
Quarterly Report on Form 10-Q/A dated August 30, 1996, File No. 0-27890, and incorporated
herein by reference.)
10.1 -- Support Agreement entered into as of April 1996 between Sykes Enterprises,
Incorporated and NETCOM On-Line Communication Services, Inc.
10.2 -- Lease Agreement between Park West E-3 Associates and NETCOM On-Line Communication
Services, Inc., a Delaware Corporation, dated February 23, 1996.
10.3 -- Credit Agreement dated as of February 17, 1999 by and among MindSpring Enterprises, Inc.,
as Borrower, the Lenders referred to herein, First Union Capital Markets Corp., as
Arranger and First Union National Bank, as Administrative Agent. (Filed as Exhibit 10.1
to Current Report on Form 8-K dated February 25, 1999, File No. 0-27890, and incorporated
herein by reference.)
10.4 -- Guaranty and Collateral Agreement made by MindSpring Enterprises, Inc. and the other
Grantors party hereto in favor of First Union National Bank, as Administrative Agent.
(Filed as Exhibit 10.2 to Current Report on Form 8-K dated February 25, 1999, File No.
0-27890, and incorporated herein by reference.)
10.5 -- Lease Agreement commencing on November 1, 1995 between West Peachtree Point Partners,
L.P. and MindSpring Enterprises, Inc. (Filed as Exhibit 10(j) to Initial Form S-1, and
incorporated herein by reference.)
10.6 -- First Amendment dated February 6, 1996 to Lease Agreement dated November 1, 1995 between
John Marshall Law School, Inc. (assignee of West Peachtree Point Partners, L.P.) and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(cc) to Initial Form S-1, and
incorporated herein by reference.)
10.7 -- MindSpring Enterprises, Inc. 1995 Stock Option Plan, as amended.
10.8 -- Form of Stock Option Agreement. (Filed as Exhibit 10(v) to Initial Form S-1, and
incorporated herein by reference.)
10.9 -- MindSpring Enterprises, Inc. 1995 Directors Stock Option Plan, as amended.
10.10 -- Form of Director Stock Option Agreement, as amended. (Filed as Exhibit 10(x) to
Initial Form S-1, and incorporated herein by reference.)
10.11 -- Form of MindSpring Director or Officer Indemnity Agreement. (Filed as Exhibit 10(dd) to
Initial Form S-1, and incorporated herein by reference.)
10.12 -- Master Services Agreement dated July 15, 1996 between BellSouth Telecommunications, Inc.
and MindSpring Enterprises, Inc. (Filed as Exhibit 10(cc) to the October 1996 S-1, and
incorporated herein by reference.)
10.13 -- Office Building Lease Agreement commencing December 15, 1997, between Pennsylvania
Dental Service Corporation, a Pennsylvania corporation d/b/a Delta Dental of
Pennsylvania, and MindSpring Enterprises, Inc.
10.14 -- Lease Agreement effective as of January 1, 1997 by and between CMS Peachtree, L.P. and
MindSpring Enterprises, Inc. (Filed as Exhibit 10(hh) to Annual Report on Form 10-K
dated March 26, 1997, File No. 0-27890, and incorporated herein by reference.)
10.15 -- Amendment dated June 6, 1997 to Master Services Agreement dated July 15, 1996 between
BellSouth Telecommunications, Inc. and MindSpring Enterprises, Inc. (Filed as Exhibit 10.1 to
</TABLE>
<PAGE> 76
<TABLE>
<S> <C>
Quarterly Report on Form 10-Q dated August 14, 1997, File No. 0-27890, and incorporated
herein by reference).
10.16 -- Special Service Arrangement Agreement dated June 1997 between BellSouth
Telecommunications, Inc. and MindSpring Enterprises, Inc. (a substantially identical
contract has been executed for each of Alabama, Florida, Kentucky, North Carolina, South
Carolina and Tennessee) (Filed as Exhibit 10.2 to Quarterly Report on Form 10-Q dated
August 14, 1997, File No. 0-27890, and incorporated herein by reference).
11.1 -- Statement regarding Computation of Per Share Earnings.
23.1 -- Consent of Arthur Andersen LLP
</TABLE>
- ---------------
<PAGE> 1
EXHIBIT 10.1
SYKES ENTERPRISES, INCORPORATED
SUPPORT AGREEMENT
THIS SUPPORT AGREEMENT is entered into as of the ____ day of April, 1996 between
SYKES ENTERPRISES, INCORPORATED, a corporation organized under the laws of the
state of North Carolina (the "Support Vendor") and NETCOM ON-LINE COMMUNICATION
SERVICES, INC., a corporation organized under the laws of the state of Delaware
(the "Client").
WHEREAS the Client has licensed certain software to its customers (the "End
Users") to whom it desires to provide support; and
WHEREAS the Support Vendor is hereby being contracted to provide such support on
the Client's behalf;
NOW, THEREFORE, the parties agree as follows:
1. SUPPORT VENDOR SERVICES: The Support Vendor agrees to provide services as set
forth in Exhibit A. Such services shall commence on the Activation Date. The
Client shall have a right to inspect the Support Vendor's facility at any time.
2. SUPPORT VENDOR LICENSE: The Client hereby licenses to the Support Vendor the
right to utilize the Applicable Products as provided in its standard End User
license and as reasonably necessary to provide the services contemplated by this
Agreement for the term of this Agreement.
3. PAYMENT: The Client agrees to pay all fees set forth in Exhibit C.
4. WARRANTY/INDEMNIFICATION: Support Vendor warrants that it will provide the
services to be provided pursuant to this Agreement in a professional manner, and
in accordance with the service standards set forth in this Agreement including,
but not limited, to the standards set forth in Support Vendor's Proposal to
Client dated February 23, 1996, attached hereto as Exhibit F. Support Vendor
does not warrant that it will be able to meet or resolve any or all errors,
questions, or requests. All services are provided "AS IS" WITH NO OTHER
WARRANTIES, EXPRESS OR IMPLIED. SUPPORT VENDOR EXPRESSLY DISCLAIMS ANY AND ALL
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. SUPPORT VENDOR SHALL NOT BE
LIABLE TO EITHER THE END-USER OR THE CLIENT FOR ANY DIRECT, INDIRECT, SPECIAL,
CONSEQUENTIAL, OR OTHER DAMAGES OR LOSS OF PROFITS RESULTING FROM OR RELATED TO
ANY SERVICES PERFORMED BY SUPPORT VENDOR, INCLUDING, BUT NOT LIMITED TO, ANY
LOSS OF DATA OR SOFTWARE, OR INABILITY OF SUPPORT VENDOR TO ADDRESS OR RESOLVE
ANY QUESTIONS, ERRORS, MALFUNCTIONS, OR DEFECTS.
5. LIABILITY LIMITATION: In the event of any Support Vendor liability arising
from this Agreement or its services, the cumulative monetary liability of
Support Vendor to any person, including any cause of action sounding in
contract, tort, or strict liability, excepting only those items specified below,
shall not exceed the total payments made by Client to Support Vendor pursuant to
this Agreement. This limitation of liability is intended to apply unless breach
of contract is proven to be willful, or to involve criminal conduct or gross
negligence.
1
<PAGE> 2
6. TERM: Subject to the provisions of Section 8 of this Agreement, this
Agreement shall exist for an initial term of one year from the Activation Date
listed in Exhibit A. After the initial one-year term, this Agreement shall
automatically continue in full force and effect until canceled by either party
as provided below.
7. DEFAULT: A default shall occur upon any of the following events: 1) except
for payment as set forth in section 3, upon a party's failure to perform any
term, condition, or obligation of this Agreement if such failure shall continue
for fifteen days after written notice of such default is received by the
defaulting party; ii) immediately upon any failure to make payment as specified
in section 3; iii) if either party is subject to a voluntary or involuntary
liquidation, dissolution, receivership, bankruptcy, insolvency, assignment for
the benefit of creditors, or other similar situation or proceedings tending to
affect that party's ability to conduct its business.
8. TERMINATION: Except for a default, either party may terminate this Agreement
upon ninety days written notice. In the event of Client's request to terminate
this Agreement twelve months or less from Activation Date, other than on account
of a default by Support Vendor, a Termination Fee as noted in Exhibit C will
apply. At or after the end of the initial one year term this Agreement may be
terminated upon thirty days written notice to the other. In the event of a
default, the non-defaulting party may terminate this agreement immediately upon
notice to the defaulting party. Upon termination of this Agreement, Support
Vendor agrees to return or destroy all Applicable Product(s) as Client may
specify.
9. NOTICES: Any notices required or permitted under this Agreement shall be
deemed given five days after the deposit with the U.S. Postal Service as
certified mail, return receipt requested, postage prepaid; or courier service
and addressed as follows (or as subsequently noticed to the other party):
Support Vendor:
Sykes Enterprises, Incorporated
Customer Support Center
1450 Sykes Avenue
Greeley, CO 80632
Attention: Gary Hampson
and
Sykes Enterprises, Incorporated
100 North Tampa Street, Suite 3900
Tampa, FL 33602
Attention: David Garner
Client:
NETCOM On-Line Communication
Services, Inc.
3031 Tisch Way
San Jose, CA 95128
Attention: Eric Goffney
10. PROPRIETARY RIGHTS: Each party acknowledges that the other exclusively owns
certain trademark, copyright, and other proprietary rights. Each party agrees
that it shall not use such rights without the written permission of the other
unless reasonably necessary for efficient performance under this Agreement.
Client agrees to indemnify, hold harmless, and defend the Support Vendor against
any claims asserted against it that any Applicable Product infringes any patent,
copyright, trade secret, or other proprietary right. Support Vendor agrees to
indemnify, hold harmless and defend Client against all claims asserted against
it that any product used by Support Vendor in providing services pursuant to
this Agreement (other than Applicable Products) infringes any patent, copyright,
trade secret, or other proprietary right. The indemnification obligations of
both Support Vendor and Client shall survive any termination of this Agreement.
11. CONFIDENTIAL INFORMATION: The Support Vendor acknowledges that certain
information entrusted to it by the Client may constitute trade secret
information. The Support Vendor agrees to hold confidential all such information
for the Client's benefit and agrees to return such information upon any
termination of this Agreement. All staff of Support Vendor shall sign
appropriate agreements to protect the confidentiality of any trade secrets of
the Client. In order to adequately inform Support Vendor and its staff what
information the Client considers
2
<PAGE> 3
confidential, the Client agrees to include on such documents the conspicuous
notation "confidential" upon any delivery. The obligations not to use the
Client's proprietary rights and to hold trade secret information confidential
shall remain in effect and shall survive any termination of this Agreement.
12. FORCE MAJEURE: Either party shall be excused from delays in performing or
from its failure to perform hereunder to the extent that such delays or failures
result from causes beyond the reasonable control of such party, including, but
not limited to, fire, flood, interruption in utility service, strikes, acts of
God or public enemy.
13. NO PARTNERSHIP: The Support Vendor acknowledges that, in furnishing services
to Client, it is acting as an independent contractor. In no way shall Support
Vendor be construed or hold itself out as an agent of or in partnership with the
Client.
14. NO ASSIGNMENT: Neither this Agreement nor any terms hereunder shall be
assignable by either party without the other party's written consent, except
that Client shall be entitled to assign this Agreement to anyone who purchases
all or substantially all of Client's business.
15. APPLICABLE LAW: This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado or federal law to the extent
applicable; all parties hereby submit to jurisdiction and venue in Colorado or
in federal court in Colorado if mandated.
16. ARBITRATION: Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by binding arbitration
pursuant to the then current rules of the American Arbitration Association or as
otherwise provided by a decision of a majority of the arbitrators, and both
parties hereby submit to such arbitration in Colorado. In the event either party
institutes litigation or arbitration involving this Agreement, the prevailing
party shall be entitled to recover its reasonable attorney fees and costs
incurred.
17. SEVERABILITY: In the event any provision of this Agreement is found to be
unenforceable, void, invalid, or to be unreasonable in scope, such provision
shall be modified to the extent necessary to make it enforceable, and as so
modified, this Agreement shall remain in full force and effect. Failure to
exercise any rights contained in this Agreement shall not be construed a waiver
of such rights or of any default hereunder.
18. ENTIRE AGREEMENT: This Agreement and the exhibits annexed hereto constitute
the entire Agreement between the parties, and there are no understandings or
terms relative to this Agreement other than those which are expressed herein. No
modification, waiver, addition, or change of this Agreement shall be valid
unless in writing signed by both parties.
3
<PAGE> 4
ENTERED INTO as of the day referenced above.
CLIENT SUPPORT VENDOR
NETCOM ON-LINE COMMUNICATION SERVICES, INC. SYKES ENTERPRISES, INCORPORATED
Signature: /s/ [signature illegible]
------------------------------ -------------------------------
Name:
------------------------------ -------------------------------
Title:
------------------------------ -------------------------------
Date:
------------------------------ -------------------------------
Attest:
------------------------------ -------------------------------
4
<PAGE> 5
EXHIBIT A
SUPPORT AND STANDARDS
GENERAL STANDARDS:
All support shall be provided through direct End User dialed telephone access to
and/or calls transferred from Client's telephone system to Support Vendor's
telephone system answered either in person by a member of the Support Vendor's
staff or (if elected by Client) electronically with voice messaging. End User
demographic information will be collected as required. "Installation" refers to
the capability to assist End Users in the initial installation in order to allow
the Applicable Product to be run by the End User. "Setup" refers to the
capability to configure the Applicable Product for convenient use on or with
particular hardware by telephone consultation. Due to the varied nature of
problems possible, it is understood that the term "Answer Time" does not
guarantee a solution within such times; the Support Vendor shall, however,
provide highest priority to outstanding questions on a first-come, first-served
basis.
ACTIVATION DATE
April 3, 1996
TECHNICAL EXPERTISE
Support Vendor shall have baseline skills in Windows, Internet, UNIX, and modem
trouble-shooting. Client will provide Support Vendor with a training plan and
subsequent training documents to establish the knowledge and competency
requirements for technical support calls for the Applicable Products.
TIME AND DAYS OF AVAILABILITY
Weekdays and weekends (except designated Holidays) from 8 a.m. to 8 p.m. PST or
PDT as in effect. This schedule may be changed upon mutual agreement of both
parties.
HOLIDAYS
Support shall not be required on the following days unless Client gives Support
Vendor 14 days written notice:
New Year's Day
President's Day
Memorial Day
Independence Day
Labor Day
Thanksgiving Day
Christmas Day
5
<PAGE> 6
APPLICABLE PRODUCTS; OTHER PRODUCTS SUPPORTED
Unless otherwise specified, all support is to be provided in both the Windows
3.x and Windows 95 environments.
Applicable Products:
Netcruiser - all versions
Other Support (as indicated):
Netscape Personal Edition 2.x - all aspects
[Note: without Client's prior written consent, Support Vendor may
not contact, and may not refer any End User directly to, Netscape
for problem resolution.]
Microsoft Windows 95 Dialer - assist End Users with configuration
necessary to enable access and connectivity to a NETCOM POP.
Shiva Dialer - assist End Users with configuration necessary to
enable access and connectivity to a NETCOM POP.
Modem Configuration Strings (any modem which supports the Hayes
command set) - assist End Users with modem configuration necessary
to enable access and connectivity to a NETCOM POP.
Quarterdeck Internet Suite - assist End Users in the following
areas:
Installation
Setup
Registration
Third Party Winsock Applications - limited assistance to End Users
using third party Winsock applications, such as e-mail and news
clients, by providing the NETCOM addressed information necessary for
the applications to contact and interact with the NETCOM mail and
news servers.
And any other client product an/or service as mutually agreed upon by the
parties.
SUPPORT VENDOR CONFIGURATION REQUIRED
Support Vendor will provide a basic configuration for each support
representative workstation. Each work area will have a computer (PC), configured
to accommodate the call tracking system and support requirements for each
Applicable Product. MS Windows 3.1 or Windows 95, MS Windows X-Windows Emulator
(such as Hummingbird Exceed), Telnet Session Software, Unique IP Address,
individual 28.8 kbs modem on every PC, and 486DX2 66 MHz minimum with 512 MB
Hard-drive and 16K RAM for each support team member's workstation. Additionally,
a lab will be set up to allow support representative access to a variety of
modems for troubleshooting.
6
<PAGE> 7
FACILITIES
Support Vendor will provide the necessary facilities to provide work areas for
each support representative, offices for management, and team leaders for this
program, and training and conference areas.
FURNITURE, SUPPLIES, MISCELLANEOUS
Support Vendor will provide all the necessary furniture and supplies to this
program. Support Vendor will provide the telephones, headsets, wiring, and
installation for this program.
CALL DISTRIBUTION
Support Vendor will provide an AT&T Definity System ACD, VRU, and call
management software to route calls intelligently to the appropriate Client
team/representative. The system will also provide call metrics information as
defined in Exhibit D, Project Reporting. Support Vendor will pay for integrated
CSU's and DS1 cards at Support Vendor's site to connect voice T1 lines to
Support Vendor's PBX.
STAFFING
If hourly fee per support representative is to be charged as noted in Exhibit C,
Support Vendor and Client to agree on staffing requirements to meet forecast
call volumes and service level requirements. In the event of per minute or per
call pricing, Support Vendor to determine appropriate staffing model to meet
Client's service level requirements.
Changes in staffing not to exceed ten percent (10%) on a weekly basis, unless
Support Vendor has sufficient lead time to add, train, or transition staff (if
call volumes decline).
CALL TRACKING/DATABASE MAINTENANCE
If requested, Support Vendor will work with Client to allow Client-designated
support personnel access to Client-developed call tracking application and
Client database. Support Vendor will develop, maintain, and revise such
application at the rates noted in Exhibit C. Maintenance is estimated at 25 to
30 hours per month. Support Vendor will provide diagnostics, systems
troubleshooting, and data communications tasks as required for Client at the
rates noted in Exhibit C.
Support Vendor will absorb the cost of additional server equipment at Support
Vendor's site for the call tracking application and End User database. Client's
access and usage of Support Vendor's call tracking application will be licensed
under Support Vendor's current site license for Sybase usage. Both parties agree
to negotiate new fees and responsibilities if any of the following occurs: 1) if
the number of Client representatives remotely accessing this application exceeds
Support Vendor's site license agreement, 2) additional servers, routers and
related hardware to support Client at Support Vendor site are required in order
to support
7
<PAGE> 8
more than 50 concurrent users, 3) the need for this application is greater than
one-year, or 4) this Agreement is terminated but the Client continues usage of
Support Vendor's call tracking application.
TAXES AND INSURANCE
Support Vendor will be responsible for providing and paying all appropriate
business taxes and providing necessary insurance for the business. Such
insurance coverage includes Worker's Compensation, General Liability,
Professional Liability errors and omissions, and Automobile Liability.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
8
<PAGE> 9
EXHIBIT B
TRAINING
PRODUCT/SERVICES
Technical support calls on Applicable Products.
NUMBER OF SUPPORT VENDOR PERSONNEL TO BE TRAINED
To be determined by Support Vendor.
PLACE OF TRAINING
Greeley, CO
DATES OF TRAINING
March 18 - March 29, 1996
TOPICS TO BE COVERED
Refer to the Client training plan, attached hereto as Exhibit G. Support Vendor
will provide general call handling, systems and process training to its staff.
Support Vendor will work with Client to develop the implementation training
program and ongoing training for the period of this Agreement.
Client will provide initial training to Support Vendor at no cost for the
Applicable Product training. Support Vendor will assign a support representative
for the duration of the initial training to be a trainer for subsequent classes.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
9
<PAGE> 10
EXHIBIT C
FEE SCHEDULE
EXPENSES TO BE INVOICED
For any support representative training at Client location, Client will
reimburse Support Vendor personnel for reasonable travel costs, to include
airfare, hotel, meals/per diem, and car rental.
TRAINING FEES
If initial training period for a support representative exceeds 80 hours, Client
will be billed $20.00 per hour per support representative in excess of 80 hours.
TELECOMMUNICATION CHARGES
Client will be rebilled actual cost of Support Vendor's long distance charges to
call back End Users. Call back procedure will be reviewed by Support Vendor and
Client 15 days after Activation Date.
Client will be rebilled analog line installation fees, monthly service charges,
and actual cost of Support Vendor's long distance charges on analog modem lines
used by support representatives to trouble-shoot End-User problems.
TRANSACTION FEES
A transaction is defined as the End User request, which may include incoming
telephone call, facsimile, letter, and/or electronic support message. These fees
will be calculated on a per minute or hourly basis as noted below:
<TABLE>
<CAPTION>
Fee Method Standard Fee Extended Hours Fee Holiday Fee
Elected by Client 8 a.m. - 8 p.m. 8 p.m. - 8 a.m.
Monday - Friday Monday - Friday,
all day Saturday and
Sunday
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Method I $.74 per call minute $.81 per call minute $1.11 per call minute
- ----------------------------------------------------------------------------------------------------------
Method II $23.50 per hour $25.85 per hour $35.25 per hour
per representative per representative per representative
- ----------------------------------------------------------------------------------------------------------
</TABLE>
For the first ninety days after the Activation Date, Client shall pay for
support services per Method I above. Thereafter, Client may continue to pay in
accordance with Method I, or Client may elect to switch to Method II. If Client
elects to switch to Method II, such election shall be irrevocable for the term
of this Agreement, unless Client and Support Vendor shall otherwise agree.
10
<PAGE> 11
SYSTEM FEES
Call tracking development, database implementation, and knowledgebase conversion
will have no charge for up to 120 hours of development and implementation tasks.
If additional hours beyond 120 hours are required, then the rate of $80.00 per
hour will be charged.
If Client elects to utilize Support Vendor developed call tracking application,
then the rate of $40.00 per hours, ($60.00 for holidays), will be charged for
Client database maintenance, diagnostics, systems trouble-shooting, and data
communication maintenance tasks.
TERMINATION FEE
In the event of termination of this Agreement, other than on account of a
default by Support Vendor, prior to completion of the initial 12 month term,
Support Vendor will charge Client a $50,000.00 fee to recover implementation
costs such as management overhead, systems and telecommunications equipment
costs.
CLIENT BILLING CONTACT
Diane Szabo
BILLING POLICY
All fees will be based upon Support Vendor reports and documentation which will
be sent to Client Billing Contact monthly or as needed to verify billing
charges. The Client agrees to pay all fees for its services monthly upon
invoicing by the thirtieth (30th) day following invoicing. Any amounts not paid
by the date due shall bear interest at the rate of one and one-half percent
(1.5%) per month, eighteen percent (18%) per year from the due date. The Client
understands that the prompt payment of amounts due is a material term of this
Agreement, thus the Client agrees that the Support Vendor may, without breach,
suspend immediately any provision of services in the event timely payment is not
made, provided that the Client does not, in good faith, dispute the amount of
fees stated by the Support Vendor to be due and payable. The Client agrees to be
responsible for and to reimburse the Support Vendor upon invoicing for any
federal, state, county, or local sales or use or other such taxes levied as a
result of the services rendered.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
11
<PAGE> 12
EXHIBIT D
PERFORMANCE MEASUREMENTS AND PROJECT REPORTING
TARGET PERFORMANCE MEASURES
Performance metrics will be reviewed weekly and reported to Client as noted
below. Metrics will be re-evaluated by Client at 90 days for reasonableness.
<TABLE>
<S> <C>
SERVICE LEVELS
- --------------------------------------------------------------------------------
PERFORMANCE MEASURE TARGET METRIC
- --------------------------------------------------------------------------------
AVERAGE DAILY TALK TIME 10 minutes
- --------------------------------------------------------------------------------
AVERAGE ABANDONMENT RATE less than 10%
- --------------------------------------------------------------------------------
FIRST CALL RESOLUTION TBD
- --------------------------------------------------------------------------------
PERCENT ESCALATED(1) less than 10%
- --------------------------------------------------------------------------------
AVERAGE WAIT (ANSWER) TIME 85% within four minutes
- --------------------------------------------------------------------------------
END USER SATISFACTION(2) 4.0/5.0 survey average
- --------------------------------------------------------------------------------
</TABLE>
(1)ESCALATION
The Support Vendor will escalate calls to Client based upon procedures to be
provided by Client to Support Vendor and agreed upon by Support Vendor. Calls
that exceed a twenty (20) minute talk time will be escalated to Client.
(2)END USER SATISFACTION
Support Vendor will perform call monitoring and other quality assurance
procedures to ensure End User satisfaction. In addition, the same quality
assurance process in use by the Client will be used by the Support Vendor.
Client will provide quality assurance procedures. Client and Support Vendor will
agree upon a survey to be used to measure End User satisfaction.
ADDITIONAL SERVICE METRICS
Forty-five (45) days after handling the first End User call, Support Vendor will
achieve the End User satisfaction level of 4.0.
If Support Vendor is charging Client an hourly fee, then the initial standard of
a minimum of 25 calls handled per day per support representative (team average)
will apply for all full-time Support Vendor representatives scheduled on
Client's account. This minimum will increase to 30 calls per day average per
representative after a 90 day support period.
REPORTING/MIS
Support Vendor will provide basic call tracking information and call history to
Client, including End User data, problem/resolution, and call codes. Such data
will be supplied electronically on a weekly basis, and summarized monthly, to be
included in the billing. Support Vendor and Client will electronically exchange
data from their respective systems nightly.
12
<PAGE> 13
PROJECT REPORTING
The following data will be reported to Client:
Call statistics:
Average speed of answer
Average hold time
Calls offered
Calls answered
First contact resolution percentage
Average call duration Average
number of representatives staffed
Abandonment rate
Call tracking data:
End User information (if required)
Call problem and resolution
Call types
And other data and measurements as required by Client.
MANAGEMENT REPORTING
Support Vendor's designated manager for this program is Steve Argo. A Project
Leader will be assigned as a daily contact. Support Vendor will establish (as
requested by Client) regular written reports, telephone conference calls,
in-person meetings, and formal reviews for the purposes of discussing
performance, End User satisfaction, and other information necessary for Support
Vendor to meet the requirements of this Agreement. At a minimum, a monthly
meeting will be held throughout the period of this Agreement. Each party is
responsible for its own travel expenses for any in-person meetings.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
13
<PAGE> 14
EXHIBIT E
CLIENT RESPONSIBILITIES
FORECAST OF CALL VOLUME
Client and Support Vendor will agree upon a forecast of anticipated call volume
for the first fifteen days from the Activation Date. Thereafter, Client agrees
to provide Support Vendor, on a weekly basis, with a forecast of half hour call
distribution by week; such forecast shall be provided not less than two weeks in
advance of the forecast period. If call volumes stabilize, the frequency of
forecasting this data can be changed upon agreement of Support Vendor and
Client. In the event of Client's inability to forecast this detailed call volume
and daily distribution, the parties will determine a mutually acceptable call
volume forecast.
TARGETED CALL VOLUME
Beginning fifteen days after the Activation Date, Client will endeavor to send
an average of five hundred fifty (550) calls per day to Support Vendor between
the hours of 8:00 a.m. and 8:00 p.m. It is anticipated that the average talk
times will be 10 minutes per call.
TELECOMMUNICATIONS AND DATA COMMUNICATIONS
Client will pay for telecommunications costs to transfer calls to Support
Vendor. Such costs include redirected calls, line (T1) installation fees, and/or
monthly fees for the period of this Agreement, and hardware costs to connect
line at Client site.
Client will reimburse Support Vendor for the cost of analog to digital circuit
pack cards for Support Vendor's PBX to support individual modem lines at the
support representative's work stations. Such cards are unique Client
requirements for this project. Initial purchase cost of these cards to support
the 550 daily call volume is estimated at $15,000.00.
Client will pay for line costs, data communications hardware and software (i.e.
emulation software, routers, DSU's) to allow Client support personnel to remote
access Support Vendor's call tracking application and database.
Client will provide access for Support Vendor representatives to NETCOM service
at no cost to Support Vendor. Client to pay costs of toll calls (if any) from
Support Vendor site to NETCOM Point of Presence.
SOFTWARE
Client will provide Support Vendor Netcruiser software (Applicable Product) to
support this program.
14
<PAGE> 15
TECHNICAL REQUIREMENTS
Client will provide Support Vendor with formal reporting, customer service,
and transmission requirements for Support Vendor's call tracking application.
Such requirements will be provided no later than two weeks prior to Activation
Date.
KNOWLEDGEBASE
Client will supply Support Vendor with access to and/or replication of Client's
technical support knowledgebase.
MANAGEMENT REPORTING
Client's designated manager for this support program is Julianne Tjan. Client
agrees to communicate to Support Vendor on a regular basis necessary support
information such as support policy changes. Client may provide initial project
management to assist Support Vendor's operation during the startup of this
program.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
15
<PAGE> 16
EXHIBIT F
PROPOSAL
ATTACHED.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
16
<PAGE> 17
EXHIBIT G
CLIENT TRAINING PLAN
ATTACHED.
Acceptance/Modification by the Parties
Client Support Vendor
Signature: /s/ [signature illegible]
----------------------------- --------------------------
Title:
----------------------------- --------------------------
Date:
----------------------------- --------------------------
17
<PAGE> 1
EXHIBIT 10.2
* * * * * * * * * * * * * * * * * * * * * * * *
LEASE AGREEMENT
BETWEEN
Park West E-3 Associates,
a Texas joint venture
(Landlord)
AND
NETCOM On-Line Communications Services, Inc.,
a Delaware corporation
(Tenant)
Park West E-3
1607 LBJ Freeway
Dallas, Texas
Dated: February ___,1996
* * * * * * * * * * * * * * * * * * * * * * * *
<PAGE> 2
TABLE OF CONTENTS - LEASE AGREEMENT
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1 BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS............................................1
ARTICLE 2 PREMISES AND QUIET ENJOYMENT...............................................................4
ARTICLE 3 TERM; COMMENCEMENT DATE DELIVERY AND ACCEPTANCE OF PREMISES................................6
ARTICLE 4 RENT.......................................................................................9
ARTICLE 5 OPERATING COSTS............................................................................10
ARTICLE 6 PARKING....................................................................................18
ARTICLE 7 SERVICES OF LANDLORD.......................................................................19
ARTICLE 8 ASSIGNMENT AND SUBLETTING..................................................................23
ARTICLE 9 REPAIRS....................................................................................26
ARTICLE 10 ALTERATIONS...............................................................................30
ARTICLE 11 LIENS.....................................................................................32
ARTICLE 12 USE AND COMPLIANCE WITH LAWS..............................................................33
ARTICLE 13 DEFAULT AND REMEDIES......................................................................34
ARTICLE 14 INSURANCE.................................................................................36
ARTICLE 15 DAMAGE BY FIRE OR OTHER CAUSE.............................................................39
ARTICLE 16 CONDEMNATION..............................................................................40
ARTICLE 17 INDEMNIFICATION...........................................................................42
ARTICLE 18 SUBORDINATION AND ESTOPPEL CERTIFICATES...................................................44
ARTICLE 19 SURRENDER OF THE PREMISES.................................................................47
ARTICLE 20 LANDLORD'S RIGHT TO INSPECT...............................................................48
ARTICLE 21 SECURITY DEPOSIT [INTENTIONALLY DELETED]..................................................49
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 22 BROKERAGE.................................................................................49
ARTICLE 23 OBSERVANCE OF RULES AND REGULATIONS.......................................................50
ARTICLE 24 NOTICES...................................................................................50
ARTICLE 25 MISCELLANEOUS.............................................................................51
ARTICLE 26 SUBSTITUTION SPACE [ARTICLE 26 INTENTIONALLY DELETED].....................................55
ARTICLE 26 INTENTIONALLY DELETED.....................................................................55
ARTICLE 27 OTHER DEFINITIONS.........................................................................55
ARTICLE 28 BUILDING NAME AND TENANT SIGNAGE..........................................................57
ARTICLE 29 NON-COMPETITION...........................................................................58
ARTICLE 30 ANTENNA AND HVAC SYSTEMS..................................................................59
ARTICLE 31 RIGHT TO TERMINATE FOR FAILURE TO PROVIDE SERVICES OR DUE TO HAZARDOUS SUBSTANCES.........60
</TABLE>
- ii -
<PAGE> 4
EXHIBITS AND RIDERS
The following Exhibits and Riders are attached hereto and by this
reference made a part of this Lease:
EXHIBIT A - FLOOR PLAN OF THE PREMISES
EXHIBIT B - THE LAND
EXHIBIT C - LEASEHOLD IMPROVEMENTS
EXHIBIT D - FORM OF COMMENCEMENT NOTICE
RIDER NO. 1 - RULES AND REGULATIONS
RIDER NO. 2 - EXTENSION OPINION
RIDER NO. 3 - MUST TAKE EXPANSION
RIDER NO. 4 - RIGHT TO TERMINATE LEASE
RIDER NO. 5 - GENERAL ARBITRATION
- iii -
<PAGE> 5
INDEX OF DEFINED TERMS
Definitions of certain terms used in this Lease are found in
the following sections:
<TABLE>
<CAPTION>
TERM LOCATION OF DEFINITION
<S> <C>
Additional Rent Section 1.01 N
Bankruptcy Code Section 8.06
Base Building Condition Exhibit C
Base Rent Section 1.02M
Basic Lease Information and Certain Definitions Article 1
Branch Exhibit C
Broker Section 1.01W
Building Section 1 01B
Building Standard Exhibit C
Business Days Article 27
Central Exhibit C
Commencement Date Section 1.01F
Common Areas Article 27
days Article 27
Events of Default Section 13.01
Expiration Date Section 1.01G
herein, hereof, hereby, hereunder and words
of similar import Article 27
include and including Article 27
Interest Rate Section 4.02
Land Section 1.01C
Landlord Preamble
Landlord's Address for Notice Section I 01T
Landlord's Address for Payment Section 1 01 U
Landlord's Operating Costs Estimate Section 5011
Landlord's Work Exhibit C
Leasehold Improvements Exhibit C
Net Rentable Area Article 27
Net Rentable Area of the Building Section 1.011
Net Rentable Area of the Premises Section 1.011
Non-Building Standard Exhibit C
Parking Facility Section 1.01 D
Parking Permits Section 1.01P
Permit Fees Section 1.01 P
Project Section l.01E
Premises Section 1.01A
Reference to Landlord as having "no liability
</TABLE>
- iv -
<PAGE> 6
<TABLE>
<S> <C>
to Tenant or being" without liability to
Tenant" or words of like import Article 27
Rent Section 1.01L
repair Article 27
Security Deposit Section 1.01 R
Successor Landlord Section 18.02
Taxes Section 5.02
Tenant Preamble & Article 27
Tenant Delay Exhibit C
Tenant's Address for Notice Section 1 01 V
Tenant's Allowance Exhibit C
Tenant's Permitted Uses Section 1.01Q
Tenant's Property Section 14.01A(a)
Tenant's Share Section 1.01K
Tenant's Work Exhibit C
Term
termination of this Lease and words of like import Article 27
terms of this Lease Article 27
this Lease Preamble
Usable Area of Premises Exhibit C
year
</TABLE>
- v -
<PAGE> 7
LEASE AGREEMENT
THIS LEASE AGREEMENT ("this Lease") is made and entered into
by and between Park West E-3 Associates, a Texas joint venture ("Landlord") and
NETCOM On-Line Communications Services, Inc., a Delaware corporation ("Tenant"),
upon all the terms set forth in this Lease and in all Exhibits and Riders
hereto, to each and all of which terms Landlord and Tenant hereby mutually
agree, and in consideration of One Dollar ($1.00) and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, and
of the rents, agreements and benefits flowing between the parties hereto, as
follows:
ARTICLE 1
BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS
Section 1.01. Each reference in this Lease to information and
definitions contained in the Basic Lease Information and Certain Definitions and
each use of the terms capitalized and defined in this Section 1.01 shall be
deemed to refer to, and shall have the respective meaning set forth in, this
Section 1.01.
A. Premises: The entire first floor of the Building,
presently known as Suite No. 100, as said
space is identified by diagonal lines or
shaded area on the floor plans attached
hereto as Exhibit A and made a part
hereof.
B. Building: The building constructed by Landlord on
that opinion of the Land generally
located at 1607 LBJ Freeway, Dallas,
Texas and being known as Building 11,
Phase 1, Park West Office Community.
C. Land: Those certain parcels of land described
under the caption "Land" in Exhibit B
hereof.
D. Parking Facility: The multi-level parking garage which is
adjacent to the Building, including the
parking area adjacent to the Building.
E. Project: The Land and all improvements thereon,
including the Building, the Parking
Facility, and all Common Areas,
excluding, therefrom the buildings
located at 1601, 1603 and 1605 LBJ
Freeway, Dallas, Texas.
F. Commencement Date: That certain date on which the Term shall
commence. As determined pursuant to the
provisions of Article 3 hereof.
G. Expiration Date: April 30, 2003.
- 1 -
<PAGE> 8
H. Term: Approximately seven (7) years, beginning
on the Commencement Date and ending at
11:59 p.m. on the Expiration Date, unless
this Lease is sooner terminated as
provided herein.
I. Net Rentable Area of the 50,771 square feet, it being agreed and
Premises ("NRSF"): understood that Tenant will pay Base Rent
based on 50.771 NRSF until the Must Take
Date Expansion Space Commencement Date
and thereafter on the basis of 60,827
NRSF.
J Net Rentable Area of the 60.827 square feet, subject to the
Building: provisions of Section 3.03 hereof.
K. Tenant's Share: 83.47%, representing a fraction, the
numerator of which is the Net Rentable
Area of the Premises and the denominator
and which is the Net Rentable Area of the
Building (subject to the provisions of
Section 3.03 hereof), subject to future
adjustment.
L. Rent: The Base Rent and the Additional Rent.
M. Base Rent: The Base Rent, which includes Base Year
Operating Costs, shall be $292,655.00 per
annum (approximately 55.764 per annum per
NRSF), for the period beginning thirty
(30) days after the Commencement Date
through the date prior to the first
anniversary of the Commencement Date
based upon 50,771 NRSF: $505,103.00 per
annum (approximately $8.304 per annum per
NRSF), from the first anniversary of the
Commencement Date through the day prior
to the third anniversary of the
Commencement Date based upon 60,827 NRSF:
$677.327.00 per annum (approximately
$11.135 per annum per NRSF of the
Premises), from the third anniversary of
the Commencement Date through the day
prior to the fifth anniversary of the
Commencement Date based upon 60.827 NRSF:
and $812,467.00 per annum ($13.357 per
annum per NRSF of the Premises), from the
fifth anniversary of the Commencement
Date through April 30, 2003 based upon
60.827 NRSF.
N. Additional Rent: The Additional Rent shall be all other
sums due and payable by Tenant under the
Lease.
- 2 -
<PAGE> 9
O. Base Year Operating Costs: The actual grossed up Operating Costs for
calendar year 1996 for the Project, as
determined on a per NRSF basis.
P. Parking Permits and Tenant shall be entitled to two hundred
Permit Fee: twenty (220) Parking Permits for two
hundred twenty (220) unassigned parking
spaces (calculated at the rate of 5
parking spaces per 1,000 NRSF of the
initial Premises), with six (6) parking
permits to be for assigned visitor
parking spaces in the part of the Parking
Facility immediately outside of the
Premises. All parking permits shall be
taken at no charge during the Initial
Term, and shall be used in common with
other persons in the Parking Facility,
with the Parking Permits to increase by
thirty-two (32) Parking Permits upon
Tenant's occupancy of the Must Take
Expansion Space (as defined in Rider No.
3 hereon).
Q. Tenant's Permitted Uses: Tenant may use the Premises for executive
and administrative offices for the
conduct of Tenant's business, research
and development, data room, computer and
telecommunications facilities, sales and
marketing, customer service and for any
other lawful purpose incidental thereto,
and for no other use or purpose.
R. Security Deposit: None.
S. Broker: CB Commercial Real Estate Group, Inc.,
who shall be paid by Tenant in accordance
with Article 22 hereof.
T. Landlord's Address Park West E-3 Associates
for Notice: c/o Prentiss Properties Limited, Inc.
1717 Main Street,
Suite 5000
Dallas, Texas 75201
Attention: Michael V. Prentiss
With a copy to:
Prentiss Properties Limited, Inc.
1509 LBJ Freeway
Dallas, Texas 75234
Attention: Property Management
- 3 -
<PAGE> 10
U. Landlord's Address Park West E-3 Associates
for Payment. c/o Prentiss Properties Limited, Inc.
1717 Main Street, Suite 5000
Dallas, Texas 75201
V. Tenant's Address for Notice: NETCOM On-Line Communications
Services, Inc.
1607 LBJ Freeway, Suite 100
Dallas, Texas 75234
with a copy to:
NETCOM On-Line Communications
Services, Inc.
3031 Tisch Way, 2nd Floor
San Jose, CA 95134
Attention: Anita Alston,
Director of Corporate Real Estate
and
Pillsbury Madison & Sutro
2700 Sand Hill Road
Menlo Park, CA 94025
Attention: Michael Sullivan, Esq.
ARTICLE 2
PREMISES AND QUIET ENJOYMENT
Section 2.01. Landlord hereby leases the Premises to Tenant,
and Tenant hereby rents and hires the Premises from Landlord, for the Term.
During the Term, Tenant shall have the right to use, in common with others and
in accordance with the Rules and Regulations, the Common Areas. Landlord and
Tenant each acknowledge that the Building is being developed by Landlord as a
part of a larger complex of office buildings known as the Park West Office
Community (the "Office Park"). Tenant shall have the right to use the common
areas of the Office Park as more particularly set forth in and subject to the
terms and conditions of the Declaration of Covenants, Conditions and
Restrictions (the "Declaration") filed of record in the Deed Records of Dallas,
County, Texas and the Articles of Incorporation and Bylaws of Park West One
Association, Inc., including any existing amendments to any of the foregoing
documents. Landlord hereby acknowledges that nothing contained in the
Declaration shall be contrary to the terms and conditions contained in the
Lease.
Section 2.02. Provided that Tenant fully and timely performs
all the terms of this Lease on Tenant's part to be performed, including payment
by
- 4 -
<PAGE> 11
Tenant of all Rent, Tenant shall have, hold and enjoy the Premises during the
Term without hindrance or disturbance from or by Landlord: subject however, to
all of the terms, conditions and provisions of any and all ground leases, deeds
to secure debt, mortgages, restrictive covenants, easements, and other
encumbrances now affecting the Premises, the Project or the Office Park.
Section 2.03. Landlord hereby warrants to Tenant that (i) the
Building and (ii) that portion of the Premises to be constructed by Landlord or
Landlord's contractor, will be constructed and operated in a first-class manner,
free of all asbestos containing materials ("ACM") and in full compliance with
all governmental regulations, ordinances, and laws existing at the later of the
time of construction or the execution of this Lease, including, but not limited
to, laws pertaining to disabled access, including the Americans with
Disabilities Act ("ADA"), and laws pertaining to hazardous substances
("Applicable Laws"), in order to make the Premises, the Building and the Land
suitable for business offices. In the case of hazardous substances, the term
"Applicable Laws" will he deemed to include any standards, guidances or other
recommendations issued by nationally recognized authoritative governmental units
or other bodies such as the United States Environmental Protection Agency, the
United States or any relevant state, the Occupational Safety and Health
Administration, the National Institutes of Health or the American Congress of
Industrial Hygienist, Landlord will be fully responsible for making all
alterations and repairs to the Premises and the Building at its cost, which
shall not be included as Operating Costs, resulting from or necessitated by the
failure by Landlord and/or Landlord's Contractor to comply with the Applicable
Laws, or from Landlord's and/or Landlord's Contractor's utilization of hazardous
substances (as deemed by Applicable Laws) at the time the Lease is executed in
violation of Applicable Laws. Landlord's obligation to perform such work in
accordance with Applicable Laws will be deemed to exist on the Commencement Date
and shall be deemed to continue with respect to such Applicable Laws and any
obligation created by such Applicable Laws if the obligation was generally known
on the Commencement Date (and Landlord's obligation shall exist and continue
even though the time for performance under such Applicable Laws was contingent
on (a) the passage of time, (b) the expenditure of money, or (c) the performance
of other work which would trigger such compliance). Landlord shall, subject to
Tenant's repair obligations set forth in the Lease, maintain and operate the
Building in a first class manner, keep the Building Structure (as hereinafter
defined in Section 9.01 ) and the Building Systems (as hereinafter defined in
Section 9.01 ) in first class condition and repair, maintain a safe and
healthful environment in the Building, and operate, maintain, and provide
services and security to, the Building be a first-class manner comparable to
other first-class office buildings in the North Dallas, Texas suburban area
("Comparable Building"), the cost of which (except for capital improvements and
capital repairs, as more specifically hereinafter set forth in Section 5.02)
shall be included in Operating Costs, or paid for directly by Tenant (for
maintenance and repair of the Premises only to the extent required by the Lease)
if not normally included in
- 5 -
<PAGE> 12
Operating Costs. To Landlord's knowledge, the Building contains no friable ACM
and the Building and the restrooms in the Building do not comply with the ADA.
In the event there is discovered friable ACM in the Building and/or the Premises
and such friable ACM shall be required by Applicable Laws to be removed,
Landlord shall, at its sole cost and expense and in accordance with Applicable
Laws, remove the ACM as soon as reasonably practical.
ARTICLE 3
TERM; COMMENCEMENT DATE DELIVERY AND ACCEPTANCE OF PREMISES
Section 3.01. A. The Commencement Date shall be the earlier of
(a) the first (1st) business day of the week following the date Landlord
delivers to Tenant a written notice stating that the Leasehold Improvements to
Premises are Substantially Complete and that the Premises are deemed available
for occupancy pursuant to Section 3.02 hereof, or (b) the date Tenant, or anyone
claiming by, through or under Tenant, occupies any substantial portion of the
Premises for the purpose of the conduct of Tenant's (or such other persons)
business therein. The Commencement Date shall be extended by one (1) day for
each day of delay in the design of, or Tenant's move into, the Premises that is
caused by any Force Majeure (as defined in Section 25.06 hereof) or Landlord
Delay. The terms "Leasehold Improvements," "Substantially Complete," and
"Landlord Delays" are defined in Exhibit "C", attached hereto and made a part
hereof for all purposes.
B. Notwithstanding the provisions of Section 3.01A
hereinabove, Landlord shall cause Landlord's Contractor to complete the
Leasehold Improvements to the Premises within six (6) weeks of commencement of
construction, subject to Force Majeure and Tenant Delay. If the Leasehold
Improvements are not completed subject to the aforementioned delays within eight
(8) weeks of commencement of construction. Tenant shall receive two (2) days of
abated Rent for each day of delay in Substantial Completion of construction. If
the Premises are not Substantially Complete within four (4) months of
commencement of construction, subject to Tenant Delay but regardless of Force
Majeure, Tenant may terminate this Lease if Tenant provides written notice
providing Landlord ten (10) additional days to Substantially Complete the
Premises and Landlord fails to Substantially Complete the Premises within such
ten ( 10) day period.
Section 3.02. A. The Premises shall be deemed available for
occupancy as soon as the following conditions have been met: (a) the Leasehold
Improvements (as defined in Exhibit C to the Lease) have been Substantially
Completed (as more particularly defined in Exhibit "C") (b) either a certificate
or certificates of occupancy (temporary or final) or other certificate
permitting the lawful occupancy of the Premises has been issued for the
Premises, by the
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appropriate governmental authority; and (c) at least three (3) Business Days'
notice of the anticipated occurrence of the conditions in clauses (a) and (b)
above has been given to Tenant.
B. Notwithstanding anything to the contrary
contained herein, if there is a delay in the availability for occupancy of the
Premises, due to Tenant Delay (as defined in Exhibit C to the Lease) then the
Premises, shall be deemed available for occupancy on the date on which the
Premises, would have been available for occupancy but for such Tenant Delay,
even though a certificate of occupancy or other certificate, permitting the
lawful occupancy of the Premises has not been issued or the Leasehold
Improvements have not been commenced or completed.
Section 3.03 The Net Rentable Area of the Premises and the
Building are approximately as stated in Sections 1.011 and J, respectively, and
shall be specifically calculated by the Landlord's architect or space planner
using base building plans in accordance with the definition set forth in Article
27 hereof when the Leasehold Improvements for the Premises are Substantially
Complete. Tenant shall have the right, exercisable within thirty (30) days after
the later of the date Landlord gives Tenant written notice of the final field
measurements of the Premises and the Building or the date Tenant commences
business operations from the Premises (or, when appropriate, any additional
space leased by Tenant pursuant to the Lease), to remeasure the Premises and
Building within such thirty (30) day period. In the event that subsequent
remeasurement of the Premises and/or the Building by Tenant, within the time
period specified above, indicates that the square footage measurement prepared
by Landlord produces a square footage number in excess of or lower than the
square footage number which would have resulted had the measurement been
properly utilized, any payments due to Landlord, from Tenant based upon the
amount of square feet contained in the Premises shall be proportionally,
retroactively and prospectively reduced or increased, as appropriate, to reflect
the actual number of square feet, as properly remeasured. If Landlord disagrees
with Tenant's remeasurement and if a dispute occurs regarding the final accuracy
of such measurements, such dispute will be resolved pursuant to binding
arbitration pursuant to Rider No. 5 ("General Arbitration") hereof. By written
instrument substantially in the form of Exhibit D attached hereto Landlord shall
notify Tenant of the Commencement Date, the Net Rentable Area of the Premises
and all other matters stated therein. The Commencement Notice shall be
conclusive and binding on Landlord and Tenant as to all matters set forth
therein, unless within fifteen (15) days following delivery of such Commencement
Notice. Tenant contests any of the matters contained therein by notifying
Landlord in writing of Tenant's objections. The foregoing notwithstanding,
Landlord's failure to deliver any Commencement Notice to Tenant shall not affect
Landlord's determination of the Commencement Date.
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Section 3.04. Tenant may not enter or occupy the Premises
prior to the Commencement Date without Landlord's express written consent
(except as otherwise set forth herein) and any entry by Tenant shall be subject
to all of the terms of this Lease; provided however, that no such early entry
shall change the Commencement Date or the Expiration Date. Tenant may enter the
Premises upon receipt of Landlord's consent for the purpose of installing
furniture, special flooring or carpeting, trade fixtures, telephones, computers,
photocopy equipment and other business equipment ("Early Entry Work"). Such
early entry shall not advance the Commencement Date, provided Tenant does not
commence business operations from any part of the Premises. In connection with
such Early Entry Work Landlord shall not be responsible for, and Tenant is
required to obtain insurance covering any loss caused by Tenant or those
entering the Premises on behalf of Tenant to perform such Early Entry Work,
including theft, damage or destruction to any work or material installed or
stored by Tenant or any contractor or individual involved in the construction of
the Leasehold Improvements, or for any injury to Tenant or Tenant's employees,
agents, contractors, licensees, directors, officers, partners, trustees,
visitors or invitees (collectively "Tenant's Employees.") or to any other person
and provided further that such Early Entry Work shall be coordinated with the
activities of the general contractor who is installing the Leasehold
Improvements in the Premises. The Premises will be delivered by Landlord to
Tenant when the Leasehold Improvements are Substantially Complete and the
Premises are ready for occupancy.
Section 3.05. Occupancy of the Premises or any portion thereof
by Tenant or .anyone claiming through or under Tenant for the conduct of
Tenant's, or such other person's business therein shall be conclusive evidence
that Tenant and all panics claiming through or under Tenant (a) have accepted
the Premises for the purposes for which the Premises are leased hereunder, (b)
have accepted the Common Areas as being in a good and satisfactory condition and
(c) have waived any defects in the Premises and the Project; provided however,
that, if any Leasehold Improvements have been constructed and installed to
prepare the Premises for Tenant's occupancy. Tenant's acceptance of the
Premises, and waiver of any defect therein, shall occur upon Landlord's
substantial completion of the Leasehold Improvement, in the Premises, or such
portion thereof, in accordance with the terms of Exhibit C hereof, subject only
to Landlord's completion of items on Landlord's punchlists (as determined in
accordance with Exhibit C hereof), latent defects discovered by Tenant and
reported in writing to Landlord within twelve (12) months of the Commencement
Date, and latent defects covered by any contractual warranty, or construction
warranty period provided by Landlord by Landlord's contractor (as defined in
Exhibit C to the Lease).
Section 3.06. Tenant's rights and obligations with respect to
extending the Term of this Lease are set forth in Rider No. 2 ("Extension
Option"), attached hereto and made a part of this Lease for all purposes.
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Section 3.07. Tenant's rights and obligations with respect to
the Must Take Expansion are set forth in Rider No. 3 ("Must Take Expansion"),
attached and made a pan of this Lease for all purposes.
Section 3.08. Tenant's right to terminate the Lease prior to
the Expiration Date are set forth in Rider No. 4 ("Right to Terminate Lease"),
attached hereto and made a part of this Lease for all purposes.
ARTICLE 4
RENT
Section 4.01. Tenant shall pay to Landlord, without notice,
demand, offset or deduction (except as otherwise provided in the Lease), in
lawful money of the United States of America, at Landlord's Address for Payment,
or at such other place as Landlord shall designate in writing from time to time:
(a) the Base Rent in equal monthly installments, in advance, on the first day of
each calendar month during the Term, and (b) the Additional Rent, at the
respective times required hereunder. The first monthly installment of Base Rent
payable under Article 5 hereof shall be paid on the Commencement Date: provided,
however, that, if either the Commencement Date or the Expiration Date falls on a
date other than the first day of a calendar month, the Rent due for such
fractional month shall be prorated on a per diem basis between Landlord and
Tenant so as to charge Tenant only for the portion of such fractional month
falling within the Term. Notwithstanding the foregoing provisions, Base Rent
shall not commence until thirty (30) days after the Commencement Date ("Rent
Commencement Date"). All installments of Base Rent due for the period from the
Commencement Date through the day prior to the Rent Commencement Date are waived
and abated by Landlord. Any Landlord Delay and/or Force Majeure shall extend the
Rent Commencement by the number of days of such delay.
Section 4.02. All past due installments of Rent shall bear
interest until paid at a rate per annum (the "Interest Rate") equal to two
percent (2%) above the prime rate of interest from time to time publicly
announced by The First National Bank of Chicago, a national banking association,
or any successor thereof; provided, however, that, if at the time such interest
is sought to be imposed the rate of interest exceeds the maximum rate permitted
under federal law or under the Laws of the State of Texas, the rate of interest
on such past due installments of Rent shall be the maximum rate of interest then
permitted by applicable law.
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ARTICLE 5
OPERATING COSTS
Section 5.01. Tenant shall pay to Landlord, as Additional
Rent, for each year or fractional year during the Term, following calendar year
1996, an amount ("Tenant's Operating Costs Payment") of money equal to Tenant's
Share of excess Operating Costs, for such year over Base Year Operating Costs,
such amount to be calculated on a per square foot of NRSF of the Premises basis,
such amount to be calculated and paid as follows:
A. On the first day of January of each year during the Term
(or, with respect to the year in which the Commencement Date occurs, prior to
the Commencement Date), or as soon thereafter as is practicable (but at least
within one hundred twenty (120) days after the beginning of each year), Landlord
shall furnish Tenant with a statement setting forth Landlord's reasonable
estimate of Operating Costs, itemized on a line item by line item basis
("Landlord's Operating Costs Estimate") and Tenant's Operating Costs Payment for
the forthcoming year (or the fractional year in which the Commencement Date
occurs, as the case may be). In the event Landlord's Operating Costs Estimate
shall increase in excess of eight percent (8%) over the actual Operating Costs
for the prior year, Landlord shall also furnish Tenant with such backup
information and documentation to substantiate such increase. On the first day of
each calendar month during such year, Tenant shall pay to Landlord one-twelfth
(1/12th) of Tenant's Operating Costs Payment as estimated on Landlord's
Operating Costs Estimate. If for any reason Landlord has not provided Tenant
with Landlord's Operating Costs Estimate on the first day of January of any year
during the Term (or by the Commencement Date, as the case may be), then (a)
until the first day of the calendar month following the month in which Tenant
is given Landlord's Operating Costs Estimate. Tenant shall continue to pay to
Landlord on the first day of each calendar month the sum, if any, payable by
Tenant under this Section 5.01 for the month of December of the preceding year
and, (b) promptly after Landlords' Operating Costs; Estimate is furnished to
Tenant. Landlord shall give notice to Tenant stating whether the installments of
Tenant's Operating Costs Payments previously made for such year were greater or
less than the installments of Tenant's Operating Costs Payments to be made for
such year in accordance with Landlord's Operating Costs Estimate and, and (i) if
there shall be a deficiency, Tenant shall pay the amount thereof to Landlord
within thirty (30) days after the delivery of Landlord's Operating Costs
Estimate, with additional supporting documentation as shall be reasonably
requested by Tenant, or (ii) if there shall have been an overpayment, Landlord
shall apply such overpayment as a credit against the next accruing payments of
Rent due from Tenant under this Lease until fully credited to Tenant, and (iii)
on the first day of the calendar month following the month in which Landlord's
Operating Costs Estimate is given to Tenant and on the first day of each
calendar month throughout the remainder of such year, Tenant shall pay to
Landlord an amount equal to
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one-twelfth (1/12th) of Tenant's Operating Costs Payment as shown on Landlord's
Operating Costs Estimate. The foregoing notwithstanding, Landlord shall have the
right from time to time during any year (but not more often than once in any
twelve ( 12) month period) to notify Tenant in writing of any change in
Landlord's Operating Costs Estimate, in which event such Tenant's Operating
Costs Payment, as previously estimated, shall be adjusted to reflect the amount
shown in such notice and shall be effective, and due from Tenant, on the first
day of the month following Landlord's giving of such notice.
(b) Notwithstanding anything to the contrary
contained in Section 5.01A or elsewhere in the Lease, Landlord and Tenant hereby
acknowledge that Tenant shall not be obligated to pay Tenant's Operating Costs
Payment for 50,771 NRSF of the Premises until calendar year 1997.
B. On the first day of March of each year during the Term
(beginning on the first day of March of the year following the year in which the
Commencement Date occurs), or as soon thereafter as is practicable, (but at
least within one hundred eighty (180) day after the end of each year) Landlord
shall furnish Tenant with a Statement itemized on a line item by line item basis
showing (i) the amount of the actual Operating Costs for such calendar year and
for the preceding calendar year, (ii) any amount paid by Tenant toward Tenant's
Operating Costs Payments, during such calendar year on an estimated basis and
(iii) any revised estimate of Tenant's obligations for Tenant's Operating Costs
Payment for the current calendar year ("Landlord's Statement"). Within thirty
(30) days after Landlord's giving of such statement, Tenant shall make a lump
sum payment to Landlord in the amount, if any, by which Tenants' Operating Costs
Payment for such preceding year as shown on such Landlord's Statement, exceeds
the aggregate of the monthly installments of Tenant's Operating Costs Payments
paid during such preceding year. If Tenant's Operating Costs Payment, as shown
on such Landlord's Statement, is less than the aggregate of the monthly
installments of Tenant's Operating Costs Payment actually paid by Tenant during
such preceding year, then Landlord shall apply such amount to the next accruing
Rent due from Tenant under this Section 5.01 until fully credited to Tenant. If
the Term shall have expired and no further Rent shall be due, Tenant shall
receive a refund of such difference within thirty (30) days after Landlord sends
the statement of actual Operating Costs. Landlord's failure to provide
Landlord's Statement within twelve ( 12) months of December 31st of any calendar
year shall be deemed a waiver of any right to adjust Tenant's Operating Costs
Payment for such calendar year.
C. If the Commencement Date occurs on a date other than the
first day of January, or if the Term ends on a date other than the last day of
December, the actual Operating Costs for the year in which the Commencement Date
or the Expiration Date occurs, as the case may be, shall be prorated to that
Tenant shall pay that portion of Tenant's Share of Operating Costs for such year
represented by a fraction, the numerator of which shall be the number of days
during such
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fractional year falling within the Term, and the denominator of which is 365 (or
366, in the case of a leap year). The provisions of this Section 5.01 shall
survive the Expiration Date or any sooner termination provided for in this
Lease.
Section 5.02. A. For purposes of this Lease, the term
"Operating Costs" shall mean, subject to the exclusions and the amortization
requirements hereinafter set forth, any and all expenses, costs and
disbursements of every kind which Landlord pays, incurs or becomes obligated to
pay in connection with the operation, management, repair and maintenance of all
portions of the Project. All Operating Costs shall be determined according to
generally accepted accounting principles which shall be consistently applied,
subject to the exclusions and the amortization requirements hereinafter set
forth. Operating Costs include the following: (a) Wages, salaries, and fees
(including all reasonable education, travel and professional fees) of all
personnel or entities at the level of Building manager and below (exclusive of
Landlord's executive personnel) engaged in the operation, repair, maintenance,
or security of the Project, including taxes, insurance, and benefits relating
thereto and the costs of all supplies and materials (including work clothes and
uniforms) used in the operation, repair, maintenance and security of the Project
(provided, however, that if any such employees of Landlord provide services for
more than one building, then a prorated portion of their wages, benefits and
taxes shall be included in Operating Costs based on the portion of their working
time devoted to the Building); (b) Cost of performance by Landlords personnel
of, or of all service agreements for, maintenance, janitorial services, access
control, alarm service, window cleaning, elevator maintenance and landscaping
for the Project. Such cost shall include the rental of personal property used by
Landlord's personnel in the maintenance and repair of the Project; (c) Cost of
utilities for the Project, including water, sewer, power, electricity (including
only electricity and water attributable to the Common Areas of the Building),
gas, fuel, lighting and air-conditioning, heating and ventilating costs
attributable only to the Common Areas of the Building; (d) Cost of all
insurance, including casualty and liability insurance applicable to the Project
and to Landlord's equipment, fixtures and personal property used in connection
therewith, business interruption or rent insurance against such perils as are
commonly insured against by prudent landlords, such other insurance as may be
required by any lessor or mortgagee of Landlord, and such other insurance which
Landlord considers reasonably necessary in the operation of the Project, but in
on event in excess of the types and amount of insurance maintained by comparable
landlords of Comparable Buildings, together with all appraisal and consultants'
fees in connection with such insurance; (e) All Taxes. For purposes hereof, the
term Taxes" shall mean, all taxes, assessments, and other governmental charges,
applicable to or assessed against the project or any portion thereof, or
applicable to or assessed against Landlord's personal property used in
connection therewith, whether federal, state, county, or municipal and whether
assessed by taxing districts or authorities presently taxing the Project or the
operation thereof or by other taxing authorities subsequently created, or
otherwise, and any other taxes and assessments attributable to or assessed
against
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all or any part of the Project or its operation; including any reasonable
expenses, including fees and disbursements of attorneys, tax consultants,
arbitrators, appraisers, experts and other witnesses, incurred by Landlord in
contesting any taxes or the assessed valuation of all or any part of the
Project. If at any time during the Term there shall be levied, assessed, or
imposed on Landlord or all or any part of the Project by any governmental entity
any general or special ad valorem or other charge or tax directly upon rents
received under leases, or if any fee, tax, assessment, or other charge is
imposed which is measured by or based, in whole or in part, upon such rents, or
if any charge or tax is made based directly or indirectly upon the transactions
represented by leases or the occupancy or use of the Project or any portion
thereof, such taxes, fees, assessments or other charges shall be deemed to be
Taxes; provided, however, that any (a) franchise, corporation, income or net
profits tax, unless substituted for real estate taxes or imposed as additional
charges in connection with the ownership of the Project, which may be assessed
against Landlord or the Project or both, (b) transfer taxes assessed against
Landlord or the Project or both, (c) penalties or interest on any late payments
of Landlord and, (d) personal property taxes of Tenant or other tenants in the
Project shall be excluded from Taxes. If any or all of the Taxes paid hereunder
are by law permitted to be paid in installments, notwithstanding how Landlord
pays the same, then, for purposes of calculating Operating Costs, such Taxes
shall be deemed to have been divided and paid in the maximum number of
installments permitted by law, and there shall he included in Operating Costs
for each year only such installments as are required by law to be paid within
such year, together with interest thereon and on future such installments as
provided by law; (f) Legal and accounting costs incurred by Landlord or paid by
Landlord to third parties (exclusive of legal fees with respect to disputes with
individual tenants, negotiations of tenant leases, or with respect to the
ownership rather than the operation of the Project), appraisal fees, consulting
fees, all other professional fees and disbursements and all association dues;
(g) Cost of non-capitalized repairs and general maintenance for the Project
(excluding repairs and general maintenance paid by proceeds of insurance or by
Tenant, other tenants of the Project or other third parties); (h) Amortization
of the cost of improvements or equipment which are capital in nature and which
(i) are for the purpose of reducing Operating Costs for the Project, up to the
amount saved as a result of the installation thereof, as reasonably estimated by
Landlord and such savings do not redound primarily to the benefit of any
particular tenant; (ii) are minor capital improvements, tools or expenditures to
the extent each such improvement or acquisition costs less than $5,000 in any
twelve (12) month period; or (iii) are required by any governmental authority
by any new and/or changes in laws, rules, regulations which are enacted after
the Commencement Date. All such costs, including interest thereon, shall be
amortized on a straight-line basis over the useful life of the capital
investment items, as reasonably determined by Landlord; (i) the Project
management office rent or rental value with such management office rent to be
prorated on a per Square foot basis among all buildings managed by the
Building's property manager in Phase I of the Park West Office Community; (j) a
management fee (whether or
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not Landlord engages a manager for the Project) and all items reimbursable to
the Project manager, if any, pursuant to any management contract for the
Project. The management fee shall be three percent (3%) of the gross receipts
from the operation of the Project; and (k) amounts payable to Park West One
Association Inc., pursuant to the Declaration, as amended from time to time. It
is understood that Operating Costs shall be reduced by all cash discounts. trade
discounts, or quantity discounts received by Landlord or Landlord's manager in
the purchase of any goods, utilities, or services in connection with the
operation of the Building. Any repair or maintenance costs which are covered by
a warranty or service contract in the base year shall be imputed into the Base
Year Operating Costs. In the event any facilities, services or utilities used in
connection with the Project are provided from another building, the costs
incurred by Landlord in connection therewith shall be allocated to Operating
Costs by Landlord on a reasonably equitable basis. Any operating Costs which are
prorated or allocated between any other buildings in Phase I of the Park West
Office Community, including Operating Costs payable to Park West One
Association, Inc. pursuant to Section 5.02A(C) hereof ("Shared Operating Costs")
shall be prorated based upon the NRSF of such buildings, with the Building's pro
rata portion of such Shared Operating Costs to be no greater than 9.634% of the
total Shared Operating Costs, except for Taxes which, if not separately
determined or allocated by the taxing authority, shall be reasonably determined
by Landlord's independent tax consultant.
B. "Operating Costs" shall not include (a) specific costs for
any capital repairs, replacements or improvements, except as provided above; (b)
expenses for which Landlord is reimbursed or indemnified (either by an insurer,
contractor, tenant, warrantor or otherwise) to the extent of funds received by
Landlord; (c) expenses incurred in leasing or procuring tenants (including lease
commissions, advertising expenses and expenses of renovating space for tenants);
(d) payments for rented equipment, the cost of which would constitute a capital
expenditure not permitted pursuant to the foregoing if the equipment were
purchased, except for (i) expenses in connection with making minor repairs on or
keeping Building Systems in operation while minor repairs are being made and
(ii) costs of equipment not affixed to the Project which is used in providing
janitorial or similar services; (e) interest, principal, points and fees on
debts or amortization payments on any mortgages or any other debt instrument;
(f) net basic rents under ground leases; (g) costs representing an amount paid
to an affiliate of Landlord which is in excess of the amount which would have
been paid in the absence of such relationship; (h) costs specially billed to and
paid by specific tenants, (i) costs incurred by Landlord for the repair of
damage to the Project, to the extent that Landlord is reimbursed by insurance
proceeds, and costs of all capital repairs, regardless of whether such repairs
are covered by insurance; (j) costs, including permit, license and inspection
costs, incurred with respect to the installation of tenant or other occupants'
improvements in the Project or incurred in renovating or otherwise improving,
decorating, painting or redecorating vacant space for tenants or other occupants
of the Project; (k) depreciation, amortization and interest
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payments, except as provided herein and except on materials, tools, supplies and
vendor-type equipment purchased by Landlord to enable Landlord to supply
services Landlord might otherwise contract for with a third party where such
depreciation, amortization and interest payments would otherwise have been
included in the charge for such third party's services, all as determined in
accordance with generally accepted accounting principles, consistently applied,
and when depreciation or amortization is permitted or required, the item shall
be amortized over its reasonably anticipated useful life; (1) in addition to the
costs set forth in Section 5.02B(c) above, marketing costs, including without
limitation, leasing commissions, attorneys' fees in connection with the
negotiation and preparation of letters, deal memos, letters of intent, leases,
subleases and/or assignments, space planning costs, and other costs and expenses
incurred in connection with lease, sublease and/or assignment negotiations and
transactions with present or prospective tenants or other occupants of the
Project; (m) expenses in connection with services or other benefits which are
not offered to Tenant or for which Tenant is charged for directly but which are
provided to another tenant or occupant of the Project; (n) costs incurred by
Landlord due to the violation by Landlord or any tenant of the terms and
conditions of any lease of space in the Project; (o) Landlord's general
corporate overhead and general and administrative expenses; (p) any compensation
paid to clerks, attendants or other persons in commercial concessions operated
by Landlord or in the Parking Facility of the Project or wherever Tenant is
granted its parking privileges and/or all fees paid to any Parking Facility
operator; (q) advertising and promotional expenditures, and costs of signs in or
on the Project identifying the owner of the Project or other tenants' signs; (r)
services and utilities provided, taxes attributable to, and costs incurred in
connection with the operation of the retail and restaurant operations in the
Project, except to the extent the square footage of such operations are included
in the rentable square feet of the Project and do not exceed the services,
utility and tax costs that would have been incurred had the retail and/or
restaurant space been used for general office purposes; (s) costs incurred in
connection with upgrading the Project to comply with life, fire and safety
codes, ordinances, statutes or other laws in effect prior to the Commencement
Date, (excluding costs to cause the Premises to comply with the Americans with
Disabilities Act ("ADA") which shall be solely borne by Tenant), including,
without limitation, the ADA, (but solely as to the Common Areas of the Project),
including penalties or damages incurred due to such non-compliance; (t) tax
penalties incurred as a result of Landlord's negligence, inability or
unwillingness to make payments and/or to file any tax or informational returns
when due and any other late charges, penalties or fees paid by Landlord to any
entity, as well as any premium or overtime charges which were unnecessary or
which could have been avoided if Landlord had acted in a timely manner; (u)
costs for which Landlord has been compensated by a management fee; (v) costs
arising from the negligence or fault of other tenants or Landlord or its agents,
or any vendors, contractors, or providers of materials or services selected,
hired or engaged by Landlord or its agents including, without limitation, the
selection of Project materials; (w) notwithstanding any contrary provision of
the Lease, including,
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without limitation, any provision relating to capital expenditures, any and all
costs arising from the presence of hazardous materials or substances (as defined
by Applicable Laws in effect on the date this Lease is executed) in or about the
Premises, the Project or the Land including, without limitation. hazardous
substances in the ground water or soil, not placed in the Premises, the Project
or the Land by Tenant; (x) costs arising from Landlord's charitable or political
contributions; (y) costs arising from latent defects in the base, shell or core
of the Project or improvements installed by Landlord or repair thereof, which
are reported to Landlord in writing within twelve (12) months of the
Commencement Date; (z) costs arising from any mandatory or voluntary special
assessment on the Project or the Land by any transit district authority or any
other governmental entity having the authority to impose such assessment; (aa)
costs for sculpture, paintings or other objects of art; (bb) costs (including in
connection therewith all attorneys' fees and costs of settlement judgments and
payments in lieu thereof) arising from claims, disputes or potential disputes in
connection with potential or actual claims litigation or arbitrations pertaining
to Landlord and/or the Project and/or the Land; (cc) costs associated with the
operation of the business of the partnership or entity which constitutes
Landlord as the same are distinguished from the costs of operation of the
Project, including partnership accounting and legal matters, costs of defending
any lawsuits with any mortgagee (except as the actions of Tenant may be in
issue), costs of selling, syndicating, financing, mortgaging or hypothecating
any of Landlord's interest in the Project, costs of any disputes between
Landlord and its employees (if any) not engaged in Project operation, disputes
of Landlord with Project management, or outside fees paid in connection with
disputes with other tenants; (dd) costs of any "tap fees" or any sewer or water
connection fees for the benefit of any particular tenant (as opposed to all of
the tenants) in the Project; (ee) costs incurred in connection with any
environmental clean-up, response action, or remediation on, in, under or about
the Premises or the Project, including but not limited to, costs and expenses
associated with the defense, administration, settlement, monitoring or
management thereof; (ff) any expenses incurred by Landlord for use of any
portions of the Project to accommodate events including, but not limited to
shows, promotions, kiosks, displays, filming, photography, private events or
parties, ceremonies, and advertising beyond the normal expenses otherwise
attributable to providing Project services, such as lighting and HVAC to such
public portions of the Project in normal Project operations during standard
Project hours of operation; (gg) any "validated" parking for any entity; and
(hh) any "above-standard" cleaning, including, but not limited to construction
cleanup or special cleanings associated with parties/events and specific tenant
requirements in excess of service provided to Tenant, including related trash
collection, removal, hauling and dumping. There shall be no duplication of costs
or reimbursements.
C. Notwithstanding anything to the contrary contained in this
Section 5.02 or elsewhere in the Lease, for purposes of calculating Tenant's
Operating Costs Payment for the period beginning January 1, 1997, and for each
year thereafter for the remainder of the initial Term, the components of
Operating
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Costs set forth in Sections 5.02A (a), (b), (f), (g), (h), (i), and (j)
(collectively "Controllable Operating Costs") shall not he annually increased by
more than eight percent (8%) for the remaining years of initial Term over the
actual 1996 "grossed up" Controllable Operating Costs, as determined in the
aggregate, on a compounded basis.
Section 5.03. If the Building is not fully occupied (meaning
ninety-five percent (95%) of the Net Rentable Area of the Building) during any
full or fractional year of the Term (including the Base Year), the actual
Operating Costs for such period shall be deemed to be equal to the total of the
Operating Costs which would have been incurred by Landlord if 95% of the Net
Rentable Area of the Building had been occupied for the entirety of such period.
Notwithstanding the foregoing, Landlord shall not recover as Operating Costs
more than one hundred percent (100%) of the Operating Costs actually paid by
Landlord. Operating Costs shall be computed according to accrual basis of
accounting. in accordance with standard and reasonable accounting principles
employed by Landlord.
Section 5.04. If during the Term any change occurs in either
the number of square feet of the Net Rentable Area of the Premises or of the Net
Rentable Area of the Building, Tenant's Share of Operating Costs shall be
adjusted, effective as of the date of any such change. Landlord shall promptly
notify Tenant in writing of such change and the reason therefor. Any changes
made pursuant to this Section 5.04 shall not alter the computation of Operating
Costs as provided in this Article 5, but, on and after the date of any such
change, Tenant's Operating Costs Payment pursuant to Section 5.01A shall be
computed upon Tenant's Share thereof, as adjusted. If such estimated payments of
Tenant's Share are so adjusted during a year, a reconciliation payment for
Tenant's Share of Operating Costs pursuant to this Article 5 for the calendar
year in which such change occurs shall be computed pursuant to the method set
forth in Section 5.01 B.
Section 5.05. Tenant shall, at Tenant's sole cost and expense,
have the right, at anytime with reasonable cause, upon reasonable written
notice, during the business hours of Landlord and in a manner so as to not
unreasonably interfere with Landlord's business, to have a certified public
accountant, audit Landlord's books related to the computation of Operating
Costs. Such audit may cover a period of time up to three (3) years prior to the
date of such audit. If Landlord and Tenant mutually agree upon any
misapplication of miscalculation of Operating Costs, or if Tenant finds a credit
owed by Landlord, then Landlord shall adjust its Operating Costs computation and
pay Tenant for such adjustment within thirty (30) days of Landlord agreeing to
the adjustment. If the audit reveals an overpayment of Operating Costs by Tenant
in excess of five percent (5%), and if Landlord agrees with such audit, then
Landlord shall additionally reimburse Tenant for the reasonable costs of such
audit. If Landlord disagrees with such audit, Landlord shall advise Tenant in
writing within thirty (30) days of Landlord's receipt of such audit and Tenant
shall have the right to submit the audit dispute to
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arbitration pursuant to Rider No. 5 ("General Arbitration") within five (5) days
of receipt of the results of Landlord s written notice disputing such audit.
Landlord hereby acknowledges that nothing in this Section 5.05 shall prohibit
Tenant from auditing Landlord's books related to the computation of Operating
Costs utilizing Tenant's internal staff. The arbitration shall be final and
binding upon Landlord and Tenant. Tenant agrees to pay the cost of such audit,
provided that, if the arbitration determines that Landlord's determination of
Tenant's Operating Costs Payment as set forth in any statement sent to Tenant
was in error in Landlord's favor by more than five percent (5%). Landlord shall
pay the cost of such audit. Landlord shall be required to maintain records of
all Operating Costs and other Rent adjustments for the entirety of the
three-year period ("Review Period") following Landlord's delivery to Tenant of
each statement setting forth Tenant's Operating Costs Payment. The payment by
Tenant of any amounts pursuant to this Article 5 shall not preclude Tenant from
questioning the correctness of any statement provided by Landlord at any time
during the Review Period, but the failure of Tenant to object thereto prior to
the expiration of the Review Period shall be conclusively deemed Tenant's
approval of the statement.
ARTICLE 6
PARKING
Section 6.01. Landlord shall maintain and operate, or cause to
be maintained and operated, an area for automobile parking in the Parking
Facility. Landlord hereby grants to Tenant the right to use in common with
tenants in the buildings in Phase I of the Park West Office Community and with
the public the Parking Facility and shall issue Parking Permits for such use.
Each such Parking Permit shall entitle Tenant to one (1) unassigned parking
space in the Parking Facility. The number of Parking Permits to be issued to
Tenant is set forth in Section 1.01P. At any time and from time to time during
the Term of this Lease, Tenant may decrease or increase the number of Parking
Permits up to the maximum permitted in Section 1.01(P) by giving thirty (30)
days' written notice to Landlord. Landlord shall not be obligated to provide
Tenant with any additional Parking Permits. Tenant shall at all times observe
Landlord's reasonable Rules and Regulations with respect to the Parking
Facility; provided, however, that Tenant shall always have the right to use the
Parking Facility twenty-four (24) hours a day, seven ( 7) days a week, every day
of the year.
Section 6.02 If all or any portion of the Parking Facilities
shall be damaged or rendered unusable by fire or other casualty or any taking
pursuant to eminent domain proceeding (or deed in lieu thereof), and as a result
thereof Landlord or the garage operator is unable to make available to Tenant
the parking provided for herein, then in any such instance, Landlord shall use
all reasonable efforts to provide adequate substitute parking reasonably
satisfactory to Tenant,
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which parking area may be surface parking, located in the general vicinity of
the Building. If Landlord is unable to provide suitable substitute parking
located in the general vicinity of the Building within forty-five (45) days of
such condemnation or casualty, Tenant may, at any time thereafter, up to thirty
(30) days written notice to Landlord, terminate the Lease.
Section 6.03. Visitor parking shall be at no charge and in
common with other parkers in the Parking Facility.
ARTICLE 7
SERVICES OF LANDLORD
Section 7.01. A. During the Term, Landlord shall furnish
Tenant with the following services: (a) hot and cold water in Building Standard
bathrooms and chilled water in Building Standard drinking fountains; (b)
electrical power sufficient for lighting the Premises and for the operation
therein of typewriters, voicewriters, calculating machines, word processing
equipment, photographic reproduction equipment, copying machines, personal
computers, and similar items of business equipment which consume, in the
aggregate, less than seven (7) watts per square foot of Net Rentable Area of the
Premises and require a voltage of one hundred twenty/two hundred seventy seven
(120/277) volts. Landlord hereby advises Tenant that Landlord can provide
electric capacity (not including base Building central HVAC) of at least six (6)
watts per square foot of Net Rentable Area within the Premises, however, Tenant,
at its sole cost and expense, shall be obligated for any cost associated with
providing excess capacity over five (5) watts per square foot of Net Rentable
Area (it being understood. however, that Tenant shall only be responsible for
the cost of electrical distribution devices and distribution on the particular
floor of the Premises where such additional electrical capacity shall be
required) (c) heating, ventilating or air-conditioning, twenty-four (24) hours
per day. seven (7) days per week, at such temperatures and in such amounts as
customarily and seasonally provided to tenants occupying comparable space in
first-class office buildings in the North Dallas suburban area for general
office purposes, but with respect to Tenant's equipment room, Tenant will
provide, at its sole cost and expense, any supplemental HVAC unit required to
provide air-conditioning to such equipment room on a 24 hour basis; (d) electric
lighting for the Common Areas of the Project; (e) passenger elevator service, in
common with others, for access to and from the Premises twenty-four (24) hours
per day, seven (7) day per week; provided, however, that Landlord shall have the
right to limit the number of (but not cease to operate all) elevators to be
operated after Business Hours and on Saturdays, Sundays and Holidays; (f)
janitorial cleaning services as reasonably determined by Landlord but which is
at least comparable to such services as provided in Comparable Buildings, and;
(g) facilities for Tenant's loading, unloading, delivery and pick-up activities,
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including access thereto during Business Hours, subject to the Rules and
Regulations, the type of facilities, and other limitations of such loading
facilities; (h) replacement, as necessary, of all Building Standard lamps and
ballasts in Building Standard light fixtures within the Premises; and (i)
security at least comparable to the security being provided in Comparable
Buildings. Tenant shall be entitled, at Tenant's sole cost, to install its own
security system for the Premises, which shall be located within the Premises and
shall not interfere with the Building Systems, subject to Landlord's reasonable
approval, which approval may be conditioned upon Tenant agreeing to remove the
security system to repair the damage caused by such removal, and to return the
portion of the Premises affected by such removal to Landlord in the condition
such portion of the Premises was delivered to Tenant. All services referred to
in this Section 7.01 A shall be provided by Landlord and paid for by Tenant as
part of Tenant's Operating Costs Payment; provided, however, that the cost for
Tenant's use of electric power shall be paid by Tenant directly to the utility
company providing such electric power, if allowed by such utility company, and
shall not be included in Operating Costs.
B. Tenant shall have the right to control, without Landlord's
consent, the after hours HVAC serving the Premises through thermostats or
similar controls located within the Premises. The cost of after hour, HVAC
services shall be equal to the actual charges of the utility company providing
such electric power, without mark-up and without a fee to Landlord's Manager. If
Tenant requires other services (other than electricity and HVAC), including
cleaning services, routinely supplied by Landlord for hours or days in addition
to the hours and days specified in Section 7.01A, Landlord shall, to the extent
same can be provided by the Building Systems, provide such additional service
after prior request therefor of no less than five (5) business hours advance
notice to Landlord's Building management from an authorized representative of
Tenant, and Tenant shall reimburse Landlord for the actual, reasonable and
documented out-of-pocket incremental extra cost to Landlord to provide which
additional services, without markup for profit or overhead, but including
depreciation costs, if any, and a three percent (3%) fee to Landlord's manager,
if Landlord's manager renders any services in connection with providing such
additional HVAC services ("Actual Cost") within thirty (30) days following
receipt by Tenant of invoice therefor and reasonable additional supporting
documentation requested by Tenant; provided however, that, if any other tenants
in the Building served by the equipment providing such additional service to the
Premises request that Landlord concurrently provide such service to such other
tenants, the cost of Landlord's providing such additional and concurrent service
shall be prorated among all of the tenants requesting such service. If any
machinery or equipment which generates abnormal heat or otherwise creates
unusual demands on the air-conditioning or heating system serving the Premises
is used in the Premises and if Tenant has not, within five (5) days after demand
from Landlord, taken such steps, at Tenant's expense, as shall be necessary to
cease such adverse affect on the air-conditioning or heating system, Landlord
shall have the right to install supplemental air-conditioning or heating
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units in the Premises, and the full cost of such supplemental units (including
the cost of acquisition, installation, operation, use and maintenance thereof)
shall be paid by Tenant to Landlord within thirty (30) of receipt by Tenant of
written invoice therefor and supporting documentation requested by Tenant.
Landlord agrees to advise Tenant whether any equipment and machinery
contemplated by Tenant to be used herein will not generate abnormal heat or
create unusual demands on the HVAC system serving the Premises, provided that
Tenant provides Landlord a listing of which proposed equipment prior to Tenant's
Occupancy of the Premises. During the Term, Tenant may replace and add similar
types of equipment which require similar wiring for installation, with similar
electrical consumption, without Landlord's consent and any such similar
equipment shall not he deemed to generate abnormal heat or create unusual HVAC
demands.
C. The degree of electrical and water consumption by Tenant
shall be determined by a separate meter in the Premises to be installed and
maintained by Landlord, all at Tenant's sole cost and expense. Landlord
acknowledges that the Premises are currently separately metered, but Tenant
shall bear all costs for any additional meters, if any. Tenant shall not install
any electrical equipment requiring special wiring unless reasonably approved in
advance by Landlord. At no time shall use of electricity in the Premises exceed
the capacity of existing feeders and risers to or wiring in the Premises. Any
risers or wiring to meet Tenant's excess electrical requirements shall, upon
Tenant's written request and at Tenant's option, be installed by Landlord, at
Tenant's sole cost, if, in Landlord's reasonable judgment, the same are
necessary and shall not (i) cause permanent damage or injury to the Project, the
Building or the Premises, (ii) cause or create a dangerous or hazardous
condition, or (iii) entail excessive or unreasonable alterations, repairs or
expenses.
Section 7.02. Landlord's obligation to furnish electrical and
other utility services shall be subject to the rules and regulations of the
supplier of such electricity of other utility services and the rules and
regulations of any municipal or other governmental authority regulating the
business of providing electricity .and other utility services. Landlord shall
make all necessary arrangements with the public utility supplying electric or
other utility service directly to the Building to cause the electric or other
utility service provider to bill Tenant directly for such utility services,
unless prohibited by law or regulations of such public utility. Tenant shall,
however, be responsible for contracting promptly and directly with such public
utility supplying such service and for paying all deposits for, and all costs
relating to, such service.
Section 7.03. Except as otherwise set forth herein, failure to
furnish, or any stoppage of, the services referred to in this Article 7
resulting from any cause shall make Landlord liable in any respect for damages
to any person, property or business, or be construed as an eviction of Tenant,
or entitle Tenant to any abatement of Rent or other relief from any of Tenant's
obligations under this
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<PAGE> 28
Lease. Should any malfunction of any systems or facilities occur within the
Project or should maintenance or alterations of such systems or facilities
become necessary, Landlord shall repair the same promptly and with reasonable
diligence, and Tenant shall have no claim for rebate, abatement of Rent, or
damages because of malfunctions or any such interruptions in service. In the
event that Tenant is prevented from using, and does not use, the Premises, or
any portion thereof, for three (3) consecutive business days or ten (10)
business days in any twelve (12) month period (the "Eligibility Period") as a
result of (i) any damage or destruction to the Premises, the Parking Facility
and/or the Building, (ii) any repair, maintenance or alteration performed by
Landlord after the Commencement Date and required by the Lease, which materially
and adversely interferes with Tenant's use of the Premises, the Parking Facility
and/or the Building, (iii) any failure by Landlord to provide Tenant with
services or access to the Premises, the Parking Facility and/or the Building,
(iv) because of an eminent domain proceeding or (v) because of the presence of
hazardous substances in, on or around the Premises, the Building or the Land
which could pose a health risk to occupants of the Premises, then Tenant's Rent
shall be equitably abated after expiration of the Eligibility Period for such
time that Tenant continues to be so prevented from using, and does not use, the
Premises or a portion thereof, in the proportion that the Net Rentable Area of
the portion of the Premises that Tenant is prevented from using, and does not
use, bears to the total Net Rentable Area of the Premises. However, in the event
that Tenant is prevented from conducting, and does not conduct, its business in
any portion of the Premises for a period of time in excess of the Eligibility
Period, and the remaining portion of the Premises is not sufficient to allow
Tenant to effectively conduct its business therein, and if Tenant does not
conduct its business from such remaining portion, then for such time after
expiration of the Eligibility Period during which Tenant is so prevented from
effectively conducting its business therein, and Tenant does not conduct
Tenant's business from such remaining portion of the Premises, the Rent for the
entire Premises shall be duly abated; provided, however, if Tenant reoccupies
and conducts its business from any portion of the Premises during such period,
the Rent allocable to such reoccupied portion, based on the proportion that the
Net Rentable Area of such reoccupied portion of the Premises bears to the total
Net Rentable Area of the Premises, shall be payable by Tenant from the date such
business operations commence. If Tenant's right to abatement occurs because of
an eminent domain taking and/or because of damage or destruction to the
Premises, the Parking Facility, and/or the Building, Tenant's abatement period
shall continue until Tenant has been given sufficient time, and sufficient
access to the Premises, the Parking Facility and/or the Building, to rebuild
such portion it is required to rebuild, including insufficient time to install
Tenant's Property (as defined in Section 14.01 hereof) to the extent the same
shall have been removed as a result of such damage or destruction and to move in
over a weekend. To the extent Tenant is entitled to abatement without regard to
the Eligibility Period, because of an event covered by Articles 15 and 16 of the
Lease, then the Eligibility Period shall not be applicable.
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ARTICLE 8
ASSIGNMENT AND SUBLETTING
Section 8.01. Except as otherwise provided in this Article 8,
neither Tenant nor its legal representatives or successors in interest shall, by
operation of law or otherwise, assign, mortgage, pledge, encumber or otherwise
transfer this Lease or any part hereof, or the interest of Tenant under this
Lease, or in any sublease or the rent thereunder. The Premises or any part
thereof shall not be sublet, occupied or used for any purpose by anyone other
than Tenant, without Tenant's obtaining in each instance the prior written
consent of Landlord, which consent shall not be unreasonably withheld or
delayed. Tenant shall not modify, extend, or amend a sublease previously
consented to by Landlord without obtaining Landlord's prior written consent
thereto, which consent shall not be unreasonably withheld or delayed.
Section 8.02. Notwithstanding anything to the contrary in
Section 8.01, Tenant shall have the right, without the necessity of obtaining
Landlord's prior approval thereof, but upon ten (10) days' prior written notice
to Landlord, to (a) assign this Lease or sublet all or part of the Premises to
any related corporation or other entity which controls, directly or indirectly,
Tenant, is controlled, directly or indirectly, by Tenant or is under common
control with Tenant; or (b) assign this Lease or subleases the Premises to a
successor corporation into which or with which Tenant is merged or consolidated
or which acquired substantially all of Tenant's assets and property or which is
acquired, in whole or in part, by Tenant; provided that (i) such successor
corporation assumes substantially all of the obligations and liabilities of
Tenant and shall have assets, capitalization and net worth at least equal to the
assets, capitalization and net worth of Tenant and the assignee or sublessee as
of the date of this Lease as determined by generally accepted accounting
principles, and (ii) Tenant shall provide in its notice to Landlord the
information required in Section 8.03. For the purpose hereof "control" shall
mean ownership of not less than 50% of all the voting stock or legal and
equitable interest in such corporation or entity.
Section 8.03. If Tenant should desire to assign this Lease or
sublet the Premises (or any part thereof), Tenant shall give Landlord written
notice no later than the time required for notice under Section 8.02 in the case
of an assignment or subletting, or thirty (30) days in advance of the proposed
effective date of any other proposed assignment or sublease, specifying (a) the
name, current address, and business of the proposed assignee or sublessee, (b)
the amount and location of the space within the Premises proposed to be so
subleased, (c) the proposed effective date and duration of the assignment or
subletting, and (d) the proposed rent or consideration to be paid to Tenant by
such assignee or sublessee. Tenant shall promptly supply Landlord with financial
statements and other information as Landlord may reasonably request to evaluate
the proposed
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assignment or sublease. For assignments and sublettings other than those
permitted by Section 8.02, Landlord shall have fifteen (15) days following
receipt of such notice and other information requested by Landlord within which
to notify Tenant in writing that Landlord elects: (i) to permit Tenant to assign
or sublet such space; provided, however, that Tenant shall pay Landlord, as
Additional Rent, fifty percent (50%) of any Profits (as defined below) actually
received by Tenant pursuant to such approved assignment or sublease. Whenever
Landlord is entitled to share in any excess income resulting from an assignment
or sublease of the Premises, the following shall constitute the definition of
"Profits": the gross revenue received from the assignee or sublessee during the
sublease term or during the assignment, with respect to the space covered by the
sublease or the assignment ("Transferred Space") less: (a) the gross revenue
paid to Landlord by Tenant during the period of the sublease term or during the
assignment with respect to the Transferred Space; (b) any improvement allowance
or other economic concession (planning allowance, moving expenses, etc.), paid
by Tenant to sublessee or assignee; (c) brokers' commissions; (d) attorneys'
fees; (e) lease takeover payments; (f) costs of advertising the space for
sublease or assignment; (g) unamortized cost of initial and subsequent
improvements to the Premises by Tenant; and (h) any other costs actually paid in
assigning or subletting the Transferred Space; provided, however, under no
circumstance shall Landlord be paid any Profits until Tenant has recovered all
the items set forth in subparts (a) through (h) for such Transferred Space, it
being understood that if in any year the gross revenues, less the deductions set
forth in subparts (a) through (h) above (the "Net Revenues"), are less than any
and all costs actually paid in assigning or subletting the affected space
(collectively "Transaction Costs"), the amount of the excess Transaction Costs
shall be carried over to the next year and then deducted from Net Revenues with
the procedure repeated until a Profit is achieved; or (ii) to refuse, in
Landlord's reasonable discretion, to consent to Tenant's assignment or
subleasing of such space and to continue this Lease in full force and effect as
to the entire Premises. The parties agree that Landlord may, subject to the
remainder of the sentence, reasonably refuse to consent to an assignment or
subletting if the proposed assignee or subtenant is not financially creditworthy
to undertake the obligations imposed by the assignment or sublease, is a
governmental authority or agency, an organization or person enjoying sovereign
or diplomatic immunity, a medical or dental practice or a user that will attract
a volume, frequency or type of visitor or employee to the Building which is not
consistent with the standards of a high quality office building or that will
impose an excessive demand on or use of the facilities or services of the
Building, but that it shall be unreasonable for Landlord to refuse its consent
to an assignment or sublease to any assignee or sublessee that is comparable in
quality to other tenants in the Building or Comparable Buildings and that will
use the Premises in a manner generally comparable to the use of comparable space
in the Building or Comparable Buildings or, if there is common ownership between
the owner of the building located at 1605 LBJ Freeway, Dallas, Texas and the
Building, disapproving any use or type of tenant that leases space in the 1605
LBJ Freeway, Dallas, Texas building. It shall also be reasonable for Landlord to
refuse to consent
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to any assignment or subletting if (i) an Event of Default has occurred under
this Lease with any applicable cure period having expired, or (ii) such
assignment of subletting would cause a default by Landlord under another lease
in the Building or under any ground lease, deed of trust, mortgage, restrictive
covenant, easement or other encumbrance affecting the Project. If Landlord
should fail to notify Tenant in writing of such election within the aforesaid
fifteen (15) day period, Landlord shall be deemed to have elected option (ii)
above, but if Tenant advises Landlord in writing of such failure to respond and
Landlord does not respond within an additional five (5) business day period
after Landlord's receipt of such notice, then Landlord shall be deemed to have
elected option (i) above. Tenant agrees to reimburse Landlord for legal fees and
any other reasonable costs incurred by Landlord in connection with any permitted
assignment or subletting the aggregate of which shall in no event exceed $500.00
per requested assignment or sublease, and such payment shall not be deducted
from the Additional Rent owed to Landlord pursuant to subsection (i) above.
Tenant shall deliver to Landlord copies of all documents executed in connection
with any permitted assignment or subletting, which documents shall be in form
and substance reasonably satisfactory to Landlord and which shall require any
assignee to assume performance of all terms of this Lease to be performed by
Tenant or any subtenant to comply with all the terms of this Lease to be
performed by Tenant with respect to the sublease Premises. No acceptance by
Landlord of any Rent or any other sum of money from any assignee, sublessee or
other category of transferee shall be deemed to constitute Landlord's consent to
any assignment, sublease, or transfer.
Section 8.04. Any attempted assignment or sublease by Tenant
in violation of the terms and provisions of this Article 8 shall be void and
shall, if not cured within the applicable notice and cure period, constitute a
material breach of this Lease. In no event shall any assignment, subletting or
transfer, whether or not with Landlord's consent, relieve Tenant of its primary
liability under this Lease for the entire Term, and Tenant shall in no way be
released from the full and complete performance of all the terms hereof. If
Landlord takes possession of the Premises before the expiration of the Term of
this Lease pursuant to an Event of Default by Tenant and the failure of Tenant
to cure such Event of Default within the applicable cure period, Landlord shall
have the right, at its option, to terminate all subleases (subject to the
provisions of this Section 8.07), or to take over any sublease of the Premises
or any portion thereof and such subtenant shall attorn to Landlord, as its
landlord, under all the terms and obligations of such sublease occurring from
and after such date, but excluding previous acts, omissions, negligence or
defaults of Tenant and any repair or obligation in excess of available net
insurance proceeds or condemnation award.
Section 8.05. The term "Landlord", as used in this Lease, so
far as covenants or obligations on the part of Landlord are concerned, shall be
limited to and include only the owner or owners, at the time in question, of the
fee title to, or a lessee's interest in a ground lease of, the Land or the
Building. In the event of any
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transfer, assignment or other conveyance or transfers of any such title or
interest, Landlord herein named (and in case of any subsequent transfers of any
such title or interest, Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall, upon written notice to Tenant
advising Tenant of such transfer, be automatically freed and relieved from and
after the date of such transfer, assignment or conveyance of all liability as
respects the performance of any covenants or obligations on the part of Landlord
contained in this Lease thereafter to be performed and, without further
agreement, the transferee of such title or interest shall be deemed to have
assumed and agreed to observe and perform any and all obligations of Landlord
hereunder, during its ownership of the Project. Landlord may transfer its
interest in the Project without the consent of Tenant and such transfer or
subsequent transfer shall not be deemed a violation on Landlord's part of any of
the terms of this Lease.
Section 8.06. Tenant may allow any person or company which is
a client or customer of Tenant or which is providing service to Tenant or one of
Tenant's clients to occupy certain portions of the Premises without such
occupancy being deemed an assignment or subleasing as long as no new demising
walls are constructed to accomplish such occupancy and as long as such
relationship was not created as a subterfuge to avoid the obligations set forth
in this Article 8.
Section 8.07. To the extent that Tenant enters into an
assignment of the Lease or enters into a sublease for all or any portion of the
Premises equal to or in excess of one ( 1 ) floor of the Building, Landlord, if
it grants its consent to such assignment or sublease, which consent shall not be
unreasonably withheld, conditioned or delayed, shall also simultaneously
reasonably consider executing and delivering a recognition agreement pursuant to
which Landlord shall agree that in the event Tenant defaults under the Lease,
the assignment or the sublease shall be recognized as a direct lease between
Landlord and the assignee or the subtenant on the terms and conditions of the
assignment or sublease, with Landlord's consideration to take into account,
amongst other things, the rent being paid by any sublessee, the creditworthiness
of any sublessee or assignee, and the term of the sublease or assignment.
ARTICLE 9
REPAIRS
Section 9.01. Landlord agrees that at all times it will
maintain the structural portions of the Building, including the foundation,
floor/ceiling slabs, roof, curtain wall, exterior glass and mullions, columns,
beams, shafts (including elevator shafts), stairs, Parking Facility,
stairwells, escalators, elevator cabs, plazas, art work, sculptures, washrooms,
mechanical, electrical and telephone closets, and all Common Areas and public
areas (collectively, "Building Structure.)
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and the mechanical, electrical, life safety, plumbing, sprinkler systems
(connected to the core) and HVAC systems (-Building Systems-) in good condition
and repair. Notwithstanding anything in this Lease to the contrary, Tenant shall
not be required to make any repair to, modification of, or addition to the
Building Structure and/or the Building Systems except and to the extent required
because of Tenant's use of the Premises for other than normal and customary
business office operations. Except for ordinary wear and tear and casualty,
except as otherwise provided in Section 9.02, and except for cosmetic and other
nominal repairs of $5,000.00 or less which do not affect the Building Systems or
Building Structure ("Minor Repairs"), which Minor Repairs Tenant may elect to
complete, Landlord shall perform any maintenance and make all repairs and
replacements to the Premises (including the Leasehold improvements). Except to
the extent already included in Operating Costs, Tenant shall pay to Landlord the
Actual Cost for (a) all maintenance, repairs and replacements within the
Premises (including the Leasehold Improvements,) other than (i) repairs and
replacements necessitated by the willful misconduct or negligence of Landlord or
its agents, employees, contractors, invitees or licensees to the extent the cost
thereof is not covered and corrected under Tenant's insurance, or, if Tenant is
not carrying all of the insurance described in Section 14.01A, to the extent
such cost would not be covered by the insurance described in Section 14.01A, if
the same were in effect, and (ii) maintenance, repairs and replacements of the
Building Structure or Building Systems; (b) all repairs and replacements
necessitated by damage to the Project (including the Building Structure and the
Building Systems within the Premises) caused by the negligence or willful
misconduct of Tenant or its agents, contractors, invitees and licensees but only
to the extent the cost thereof is not covered and collected under Landlord's
insurance, or, if Landlord is not carrying all of the insurance described in
Section 14.02, to the extent that such cost would not be covered by the
insurance described in Section 14.02 if the same were in effect. Amounts payable
by Tenant pursuant to this Section 9.01 shall be payable within thirty (30) days
after receipt of an invoice therefor from Landlord and additional supporting
documentation reasonably requested by Tenant. Landlord has no obligation and has
made no promise to maintain, alter, remodel, improve, repair, decorate, or paint
the Premises or any part thereof, except as specifically set forth in this
Lease. In no event shall Landlord have any obligation to maintain, repair or
replace any furniture, furnishings, fixtures or personal property of Tenant,
except as may be due to the negligence or willful misconduct of Landlord or
agents, contractors, and licensees and to the extent not covered and collected
under Tenant's insurance.
Section 9.02. Tenant shall keep the non-structural portion of
the Premises (including the Leasehold Improvements) in good order and in a safe,
neat and clean condition. No representations respecting the condition of the
Premises or the Building or the other portions of the Project have been made by
Landlord to Tenant except as specifically set forth in this Lease. Except as
provided in Section 9.01 and Section 10.01 or specifically consented to by
Landlord, Tenant shall not
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perform any maintenance or repair work or make any replacement in or to the
Premises (including the Leasehold Improvements) but rather shall promptly notify
Landlord of the need for such maintenance, repair or replacement so that
Landlord may proceed to perform the same pursuant to the provisions of Section
9.01. In the event Landlord specifically consents to the performance of any
maintenance or the making of any repairs or replacements by Tenant and Tenant
fails to promptly commence and diligently pursue the performance of such
maintenance or the making of such repairs or replacements which are the
responsibility of Tenant, then Landlord, at its option pursuant to written
notice hereof to Tenant and failure of Tenant within thirty (30) days of receipt
of such notice to commence such maintenance or repair, may perform such
maintenance or make such repairs and Tenant shall reimburse Landlord, within
thirty (30) days after Tenant receives an invoice therefor, the Actual Cost
thereof.
Section 9.03. All repairs made by Tenant pursuant to Section
9.02 shall be performed in a good and workmanlike manner by contractors or other
repair personnel selected by Tenant from an approved list of contractors and
repair personnel maintained by Landlord in the management office or repair
personnel otherwise reasonably approved by Landlord: provided. however, that
neither Tenant nor its contractors or repair personnel shall be permitted to do
any work affecting the Building Structure or the Building Systems (except as
otherwise set forth in Section 9.05). In no event shall such work be done for
Landlord's account or in a manner which allows any liens to be filed in
violation of Article 11, To the extent any repairs involve the making of
alterations to the Premises, Tenant shall comply with the provisions of Article
10.
Section 9.04. Subject to the other provisions of this Lease
imposing obligations regarding repair upon Tenant, Landlord shall repair all
machinery and equipment necessary to provide the services of Landlord described
in Article 7 (provided that Tenant shall pay the Actual Costs of any repair to
such systems or any part thereof damaged by Tenant and Tenant's employees,
customers, clients, agents, licensees and invitees, but only to the extent the
cost thereof is not covered and collected under Landlord's insurance or, if
Landlord is not carrying all of the insurance described in Section 14.02, to the
extent that such costs would not be covered by the insurance described in
Section 14.02 if the same were in effect), and for repair of all portions of the
project which do not comprise a part of the Premises and are not leased to
others.
Section 9.05. A. Tenant shall give Landlord written notice of
any default by Landlord in the observance or performance of any repair and/or
maintenance obligation required to be performed by Landlord under this Lease. If
any mortgagee of the Building has given Tenant its address for notice and
specifically requests to receive such written notice, Tenant agrees to give a
copy of the written notice required herein to such mortgagee at the same time
Tenant gives
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the same to Landlord and to accept curative action. if any. undertaken by such
mortgagee as if such curative account had been taken by Landlord.
B. If Landlord defaults in the
observance or performance of any repair and/or maintenance obligation required
to be performed by it under this Lease, and any such default shall continue for
more than thirty (30) days after written notice thereof from Tenant or if such
failure cannot be corrected within such thirty (30) day period and Landlord does
not commence to correct the default and thereafter diligently prosecute the
correction of same to completion, Tenant may, except to the extent such default
is related to the Building Structure or Building Systems of the Building, but
shall not be obligated to, remedy such default and in connection therewith may
pay reasonable expenses. Notwithstanding the foregoing sentence or anything else
to the contrary in this Lease (i) in the event the Landlord's failure to
commence, or complete, a repair and/or maintenance obligation related to the
Building Structure or Building Systems has rendered the premises, or a portion
thereof, unusable, and Tenant is not using the Premises, or portion thereof, for
a period in excess of five (5) days after written notice to Landlord, Tenant
may, at Tenant's option, elect to remedy such failure or repair the Building
Structure or Building Systems so as to render the Premises usable, and (ii) in
the event of an emergency situation threatening immediate damage to property,
interruption to business, or injury to persons, Tenant shall use reasonable
efforts to provide Landlord oral notice, and if Landlord has not commenced the
repair and/or maintenance obligation within four (4) Business Hours thereafter,
Tenant may commence such repair and/or maintenance obligation. After such
emergency repairs, Tenant shall confirm such repairs by written notice. In the
event that (a) Landlord acknowledges that a default by Landlord in the
observance or performance of any term or covenant required to be performed under
this Lease, (b) Landlord does not dispute Tenant's claim of an alleged default
by Landlord, or (c) Landlord fails to reasonably and in good faith dispute such
Landlord default within thirty (30) days following delivery of written notice
from Tenant, then, in any such event, all reasonable and actual Tenant and/or
third party sums expended and reasonably incurred by Tenant in connection with
the cure of Landlord's default shall be due and owing within thirty (30) days
following written demand thereof to Landlord (the "Due Date"), accompanied by
invoices or other supporting documentation and evidence of such costs
substantiating such claim. In the event such sums are not paid within such time
period, Tenant shall have the right to offset its reasonable and actual Tenant
and/or third party expenses against Base Rent and Additional Rent, then, or
thereafter, due and owing, until Tenant has been fully reimbursed for such
costs.
C. Notwithstanding the foregoing
provision. Landlord may reasonably and in good faith dispute the Tenant's
declaration of a Landlord repair and/or maintenance default, including disputing
liability for payment of Tenant's costs of curing a purported Landlord repair
and/or maintenance default, and submit such matter to arbitration in accordance
with
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Rider No. 5 ("General Arbitration") hereof. In the event that Landlord has
been determined through arbitration to be in default of a repair and/or
maintenance obligation, the sums demanded by Tenant shall bear interest from the
Due Date at the Interest Rate set forth in Section 4.02 hereof until paid in
full or offset. In the event that Landlord does not pay Tenant for its
reasonable and actual Tenant and/or third party expenses, plus interest at the
Interest Rate, incurred in effecting a cure of Landlord's default of a repair
and/or maintenance obligation within thirty (30) days of the determination in
arbitration. Tenant shall have the right to offset its reasonable and actual
Tenant and/or third party expenses, plus interest at the Interest Rate against
Base Rent and Additional Rent, then, or thereafter, due and owing, until Tenant
has been fully reimbursed for such costs. Landlord's right to dispute as set
forth above shall in no way be construed to limit or delay Tenant's right to
self-help as stated in this Section 9.05.
D. The payment of any Rent due
hereunder by Tenant shall in no manner constitute a waiver or release of any
claim which Tenant may have or be able to assert against Landlord, hereunder.
Notwithstanding anything to the contrary in this Section 9.05, Tenant shall be
not entitled to exercise its rights hereunder (except for the right of Tenant to
make repairs in the event of an emergency situation as more particularly set
forth in Section 9.05B above) until Tenant has provided Landlord's mortgagees of
whom Landlord has provided Tenant identities and addresses, written notice of
Landlord default of a repair and/or maintenance obligation.
ARTICLE 10
ALTERATIONS
Section 10.01. Tenant shall not at any time during the Term
make any alterations, additions or improvements to (collectively "Alterations")
to the Premises without first obtaining Landlord's written consent thereto,
which consent Landlord shall not unreasonably withhold or delay; provided,
however, that Landlord shall not withhold its consent unless such Alterations
(a) are visible from the exterior of the Building or the Project, (b) adversely
affect the Building Structure or Building Systems, (c) do not comply with
Applicable Laws, (d) unreasonably interfere with the normal and customary
business operations of the other tenants in the Building, or (e) are prohibited
by any underlying ground lease or mortgage (collectively "Design Problem").
Should Tenant desire to make any Alterations to the Premises, Tenant shall
submit all plans and specifications for such proposed Alterations to Landlord
for Landlord's review before Tenant allows any such work to commence and
Landlord shall within ten (10) days of receipt by Landlord of Tenant's plan and
specifications, unless additional review time is reasonably required, approve or
disapprove such plans and specifications for
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any of the reasons set forth in this Section 10.01 or for any other reason
reasonably deemed sufficient by Landlord. Tenant shall select and use only
contractors, subcontractors or other repair personnel from those listed on
Landlord's approved list maintained by Landlord in the management office, or
contractors, subcontractors, or repair personnel reasonably approved by
Landlord. Upon Tenant's receipt of written approval from Landlord and any
required approval of any mortgagee or lessor of Landlord, and upon Tenant's
payment to Landlord of (a) any third party actual costs incurred by Landlord in
reviewing and approving such plans and specifications and (b) the fees, if any,
charged by any mortgagee or lessor of Landlord for such review and approval
Tenant shall have the right to proceed with the construction of all approved
Alterations, but only so long as such Alterations are in strict compliance with
the plans and specifications so approved by Landlord and with the provisions of
this Article 10. All Alterations shall he made at Tenant's sole cost and
expense, either by Tenant's contractors or, at Tenant's option, by Landlord on
terms reasonably satisfactory to Tenant, including a fee of eight percent (8%)
of the actual costs of such work to cover a fee for Landlord's agent or manager
in supervising and coordinating such work. In no event, however, shall anyone
other than Landlord or Landlord's employees or representatives perform work to
be done which affects the Building Structure or Building Systems. Landlord may,
as a condition to the installation thereof and if such request is made
concurrently with the approval of the plans and specifications therefor,
reasonably require Tenant to remove any such alterations, additions or
improvements at its sole cost and expense upon expiration or earlier termination
of the Term. Notwithstanding anything to the contrary set forth herein, Tenant
shall not be required to obtain Landlord's prior consent with respect to any
strictly cosmetic work performed within the Premises by Tenant, such as the
installation of wall coverings or floor coverings.
Section 10.02. All construction, Alterations and repair work
done by or for Tenant shall (a) be performed in such a manner as to maintain
harmonious labor relations; (b) not adversely affect the safety of the Project,
the Building or the Premises or the systems thereof and not adversely affect the
Building Structure or Building Systems; (c) comply with all building, safety,
fire, plumbing, electrical, and other codes and governmental and insurance
requirements; (d) not result in any usage in excess of Building Standard of
water, electricity, gas or other utilities or of heating ventilating or
air-conditioning (either during or after such work) unless prior written
arrangements satisfactory to Landlord are made with respect thereto; (e) be
completed promptly and in a good and workmanlike manner and in compliance with,
and subject to all of the provisions of Article 2 of Exhibit C hereof; and (f)
not unreasonably disturb Landlord or other tenants in the Building. After
completion of any Alterations to the Premises, Tenant will deliver to Landlord a
copy of "as built" plans and specifications depicting and describing such
alterations.
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Section 10.03. All Leasehold Improvements, Alterations and
other physical additions made to or installed by or for Tenant in the Premises
shall be and remain Landlord's property (except for Tenant's furniture, personal
property and movable trade fixtures) and shall not be removed without Landlord's
written consent. Tenant agrees to remove, at its sole cost and expense, all of
Tenant's furniture, personal property and movable trade fixtures, and, if
directed to do so by Landlord in writing at the time Tenant requests Landlord's
consent to such Alterations or Leasehold Improvements for which Landlord's prior
reasonable consent is required all, or any part of the Leasehold Improvements.
Alterations and other physical additions made by Tenant to the Premises. which
Landlord, as a reasonable condition to the approval of same has required Tenant
to remove, on or before the Expiration Date or any earlier date of termination
of this Lease. Tenant shall repair or promptly reimburse Landlord for the cost
of repairing, all damage done to the Premises or the Building by such removal.
Any Leasehold Improvements, Alterations or physical additions made by Tenant
which Landlord does not direct or permit Tenant to remove at any time during or
at the end of the Term shall become the property of Landlord at the end of the
Term without any payment to Tenant. If Tenant fails to remove any of Tenant's
furniture, personal property or movable trade fixtures by the Expiration Date or
any sooner date of termination of the Lease or, if Tenant fails to remove any
Leasehold Improvements, Alterations and other physical additions made by Tenant
to the premises which Landlord has in writing directed Tenant to remove,
Landlord shall have the right, on the fifth (5th) day after Landlord's delivery
of written notice to Tenant to deem such property abandoned by Tenant and to
remove, store, sell, discard or otherwise deal with or dispose of such abandoned
property in a commercially reasonable manner. Tenant shall be liable for all
costs of such disposition of Tenant's abandoned property and Landlord shall have
no liability to Tenant in any respect regarding such property of Tenant. The
provisions of this Section 10.03 shall survive the expiration or any earlier
termination of this Lease.
ARTICLE 11
LIENS
Section 11.01. Tenant shall keep the Project, the Building and
the Premises and Landlord's interest therein, free from any liens arising from
any work performed, materials furnished. or obligations incurred by or on behalf
of Tenant (other than by Landlord pursuant to Exhibit C). Notice is hereby given
that neither Landlord nor any mortgagee or lessor of Landlord shall be liable
for any labor or materials furnished to Tenant except as furnished to Tenant by
Landlord pursuant to Exhibit C. If any lien is filed for such work or materials
such lien shall encumber only Tenant's interest in Leasehold Improvements on the
Premises. Within ten (10) days after Tenant learns of the filing of any such
lien, Tenant shall notify Landlord of such lien and shall either discharge and
cancel such lien of record or post a bond
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sufficient under the laws of the State of Texas to cover the amount of the lien
claim plus any penalties, interest, attorneys' fees, court costs, and other
legal expenses in connection with such lien. If Tenant fails to so discharge or
bond such lien within thirty (30) calendar days after written demand from
Landlord, Landlord shall have the right at Landlord's option, to pay the full
amount of such lien without inquiry into the validity thereof, and Landlord
shall be promptly reimbursed by Tenant, as Additional Rent, for all amounts so
paid by Landlord, including expenses, interest, and attorneys' fees.
ARTICLE 12
USE AND COMPLIANCE WITH LAWS
Section 12.01. The Premises shall be used only for the uses
specifically set forth in Section 1.01Q and for no other purposes whatsoever.
Tenant shall use and maintain the Premises in a clean, careful, safe and lawful
manner and shall not cause or knowingly permit within the Premises, any
offensive noise, order, conduct or private or public nuisance or cause or
knowingly permit Tenant's employees, agents, licensees or invitees to create a
public or private nuisance or act in a disorderly manner within the Building or
in the Project. Any statement as to the particular nature of the business to be
conducted by Tenant in the Premises and uses to be made thereof by Tenant as set
forth in Section 1.01Q hereof shall constitute a representation or warranty by
Landlord that such business or uses are lawful and permissible under any
certificate or occupancy for the Premises or the Building and are otherwise
permitted by law. Landlord also represents that any certificate of occupancy
issued with respect to the Premises shall allow use for executive and
administrative offices.
Section 12.02. Tenant shall, at Tenant's sole expense (a)
comply with all laws, orders, ordinances, and regulations of federal, state,
county, and municipal authorities having jurisdiction over the Premises, (b)
comply with any directive, order or citation made pursuant to law by any public
officer requiring abatement of any nuisance or which imposes upon Landlord or
Tenant any duty or obligation arising from Tenant's occupancy or use of the
Premises or from conditions which have been created by or at the request or
insistence of Tenant, or required by reason of a breach of any of Tenant's
obligations hereunder or by or through other fault of Tenant, (c) comply with
all insurance requirements applicable to the Premises and (d) except as may be
due to the negligence or willful misconduct of Landlord or Landlord's agents,
contractors, employees or licensees, indemnify and hold Landlord harmless from
any loss, cost, claim or expense which Landlord incurs or suffers by reason of
Tenant's failure to comply with its obligations under clauses (a), (b) or (c)
above. If Tenant receives notice of any such directive, order citation or of any
violation of any law, order, ordinance, regulation or any insurance requirement,
Tenant shall promptly notify Landlord in writing of such alleged
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violation and furnish Landlord with a copy of such notice. Notwithstanding the
foregoing, costs of any such compliance which is necessitated by Tenant's
particular use and occupancy of the Premises shall be paid by Tenant; all other
costs of any such compliance shall be paid by Landlord and, to the extent
expressly provided for in this Lease, included in Operating Costs, and Tenant
shall, except to the extent expressly provided otherwise in this Lease, bear and
pay Tenant's Share thereof as provided in Article 5. Notwithstanding the
foregoing, costs of any such compliance which is necessitated by Tenant's
particular use and occupancy of the Premises shall be paid by Tenant, all other
costs of any such compliance shall be paid by Landlord and, to the extent
expressly provided for in this Lease, bear and pay Tenant's Share thereof as
modified in Article 5. Landlord shall use commercially reasonable efforts at
least comparable to those that would be used by other landlords of Comparable
Buildings, to secure the compliance by third parties with all use restrictions
affecting the Building; provided however, that Landlord shall not, so long as
Landlord is using commercially reasonable efforts; be liable to Tenant for any
third parties' failure to conduct itself in accordance with the provisions of
this Article 12, and Tenant shall not be released or excused from the
performance of any of its obligations under the lease solely because of such
failure.
ARTICLE 13
DEFAULT AND REMEDIES
Section 13.01. The occurrence of any one or more of the
following events shall constitute an Event of Default (herein so called) of
Tenant under this Lease: (a) if Tenant fails to pay any Rent hereunder as and
when such Rent becomes due and such failure shall continue for more than seven
(7) days after Landlord gives Tenant notice of past due Rent; (b) if Tenant
fails to pay Rent on time more than four (4) times after delivery of notice in
any period of twelve (12) months, notwithstanding that such payments have been
made within the applicable cure period; (c) if Tenant permits to be done
anything which creates a lien upon the Premises and fails to discharge or bond
such lien or post such security with Landlord as is required by Article 11; (d)
if Tenant fails to maintain in force all policies of insurance required by this
Lease and such failure shall continue for more than thirty (30) days after
Landlord gives Tenant notice of such failure; (e) if any petition is filed by or
against Tenant or any guarantor of this Lease under any present or future
section or chapter of the Bankruptcy Code, or under any similar law or statute
of the United States or any state thereof (which, in the case of an involuntary
proceeding, is not permanently discharged, dismissed, stayed, or vacated, as the
case may be, within sixty (60) days of commencement), or if any order for relief
shall be entered against Tenant or any guarantor of this Lease in any such
proceedings; (f) if Tenant or any guarantor of this Lease becomes insolvent or
makes a transfer in fraud of creditors or makes an assignment for the benefit of
creditors; (g) if a receiver, custodian, or trustee is appointed for the
Premises or for
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all or substantially all of the assets of Tenant or of any guarantor of this
Lease, which appointment is not vacated within sixty (60) days following the
date of such appointment; (h) if Tenant fails to perform or observe any other
terms of this Lease and such failure shall continue for more than thirty (30)
days after Landlord gives Tenant notice of such failure, or, if such failure
cannot be corrected within such thirty (30) day period. If Tenant does not
commence to correct such default within such thirty (30) day period and
thereafter diligently prosecute the correction of same to completion within a
reasonable time.
Section 13.02. Upon the occurrence of any Event of Default,
Landlord shall have the right, at Landlord's option, to elect to do any one or
more of the following without further notice or demand to Tenant: (a) terminate
this Lease, in which event Tenant shall immediately surrender the Premises to
Landlord, and, if Tenant fails to so surrender, Landlord shall have the right,
without notice, to enter upon and take possession of the Premises and to expel
or remove Tenant and its effects without being liable for prosecution or any
claim for damages therefor; and Tenant shall, and hereby agrees to, indemnify
Landlord for all loss and damage which Landlord suffers by reason of such
termination, including damages in an amount equal to the total of (1) the costs
of recovering the Premises and all other expenses incurred by Landlord in
connection with Tenant's default; (2) the unpaid Rent earned as of the date of
termination, plus interest at the Interest Rate; (3) the total Rent which
Landlord would have received under this Lease for the remainder of the Term, but
discounted to the then present value at a rate of eight percent (8%) per annum,
over the fair market rental value on a net basis of the balance of the Term as
of the time of such default, discounted to the then present value at a rate of
eight percent (8%) per annum; and (4) all other sums of money and damages owing
by Tenant to Landlord; or (b) enter upon and take possession of the Premises
without terminating this Lease and without being liable to prosecution or any
claim for damages therefor, and, if Landlord elects, relet the Premises on such
terms as Landlord deems advisable, in which event Tenant shall pay to Landlord
on demand the cost of repossession, renovating, repairing and altering the
Premises for a new tenant or tenants and any deficiency between the Rent payable
hereunder and the rent paid under such reletting; provided, however, that Tenant
shall not be entitled to any excess payments received by Landlord from such
reletting. Landlord's failure to relet the Premises shall not release or affect
Tenant's liability for Rent or for damages; or (c) enter the Premises without
terminating this Lease and without being liable for prosecution or any claim for
damages therefor and maintain the Premises and repair or replace any damage
thereto or do anything for which Tenant is responsible hereunder. Tenant shall
reimburse Landlord immediately upon demand for any expenses which Landlord
incurs in thus effecting Tenant's compliance under this Lease, and Landlord
shall not be liable to Tenant for any damages with respect thereto.
Notwithstanding the foregoing, in no event shall Tenant be responsible to
Landlord for consequential damages.
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Section 13.03. No agreement to accept a surrender of the
Premises and no act or omission by Landlord or Landlord's agents during the Term
shall constitute an acceptance or surrender of the Premises unless made in
writing and signed by Landlord. No re-entry or taking possession of the Premises
by Landlord shall constitute an election by Landlord to terminate this Lease
unless a written notice of such intention is given to Tenant. No provision of
this Lease shall be construed as an obligation upon Landlord to mitigate
Landlord's damages under the Lease.
Section 13.04. No provision of this Lease shall be deemed to
have been waived by Landlord or Tenant, as the case may be, unless such waiver
is in writing and signed by the waiving party. Landlord's acceptance of Rent
following an Event of Default hereunder shall not be construed as a waiver of
such Event of Default. No custom or practice which may grow up between the
parties in connection with the terms of this Lease shall be construed to waive
or lessen either Tenant's or Landlord's right to insist upon strict performance
of the terms of this Lease, without a written notice thereof from the waiving
party to the other party.
Section 13.05. The rights granted to Landlord and Tenant in
this Article 13 shall be cumulative of every other right or remedy provided in
this Lease or which Landlord and Tenant may otherwise have at law or in equity
or by statute, and the exercise of one or more rights or remedies shall not
prejudice or impair the concurrent or subsequent exercise of other rights or
remedies or constitute a forfeiture or waiver of Rent or damages accruing to
Landlord or Tenant by reason of any Event of Default or default under this
Lease. Each party ("Payor") agrees to pay to the other party ("Payee") all costs
and expenses incurred by the Payee in the enforcement of this Lease, including
all attorneys' fees incurred in connection with the collection of any sums due
hereunder or the enforcement of any right or remedy of Landlord.
Section 13.06. Landlord shall be in default in the performance
of any obligation required to be performed by Landlord under this Lease if
Landlord has failed to perform such obligation within thirty (30) days after the
receipt of notice from Tenant specifying in detail Landlord's failure to
perform; provided, however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for its performance, Landlord shall
not be deemed in default if it shall commence such performance within thirty
(30) days and thereafter diligently pursues the same to completion.
ARTICLE 14
INSURANCE
Section 14.01. A. Tenant, at its sole expense, shall obtain
and keep in force during the Term the following insurance: (a) "All Risk"
insurance
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insuring the Leasehold Improvements, Tenant's interest in the Premises and all
property located in the Premises, including furniture, equipment, fittings,
installations, fixtures, supplies and any other personal property, leasehold
improvements and alterations ("Tenant's Property"), in an amount equal to the
full replacement value, it being understood that no lack or inadequacy of
insurance by Tenant shall in any event make Landlord subject to any claim by
virtue of any theft of or loss or damage to any uninsured or inadequately
insured property; (b) Business Interruption insurance in an amount that will
reimburse Tenant for direct loss of earnings attributable to all perils insured
against under Section 14.01(a) or attributable to the prevention of access to
the Premises by civil authority; and sufficient to reimburse Tenant for Rent in
the event of a casualty to, or temporary taking of, the Building or the
Premises; (c) Commercial general liability insurance including personal injury,
bodily injury, broad form property damage, operations hazard, owner's protective
coverage, contractual liability, with a cross liability clause and a
severability of interests clause to cover Tenant's indemnities set forth herein,
and products and completed operations liability, in limits not less than
$1,000,000.00 inclusive per occurrence; (d) Worker's Compensation and Employer's
Liability insurance, in form and amount as required by applicable law; and (e)
In the event Tenant performs any repairs or alterations in the Premises,
Builder's Risk insurance on an "All Risk" basis (including collapse) on a
completed value (non-reporting) form for full replacement value covering all
work incorporated in the Building and all materials and equipment in or about
the Premises; (f) tenant's "All Risk" Legal Liability insurance for the
replacement cost value of the Premises; and (g) any other form or forms of
insurance or any changes or endorsements to the insurance required herein as any
mortgagee or lessor of Landlord may reasonably require, from time to time, in
form or in amount, provided comparable landlords in Comparable Buildings are
requiring such insurance.
B. Tenant shall have the right to include the insurance
required by Section 14.01A under Tenant's policies of "blanket insurance,"
provided that no other loss which may also be insured by such blanket insurance
shall affect the insurance coverages required hereby and further provided that
Tenant delivers to Landlord a certificate specifically stating that such
coverages apply to Landlord, the Premises and the Project. All such policies of
insurance or certificates thereof shall name Tenant as named insured thereunder
and shall name Landlord and all mortgagees and lessors of Landlord, of which
Tenant has been notified, additional insureds, all as their respective interest
may appear. All such certificates shall be issued by insurers acceptable to
Landlord and in form satisfactory to Landlord. Tenant shall deliver to Landlord
certificates by the Commencement Date and, with respect to renewals of such
policies, not later than thirty (30) days prior to the end of the expiring term
of coverage. All policies of insurance shall be primary and Tenant shall not
carry any separate or additional insurance concurrent in form or contributing in
the event of any loss or damage with any insurance required to be maintained by
Tenant under this Lease. All such policies and certificates shall contain an
agreement by the insurers that the policies will not be invalidated as
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they affect the interests of Landlord and Landlord's mortgagees by reason of any
breach or violation of warranties, representations, declaration or conditions
contained in the policies and that the insurers shall notify Landlord and any
mortgagee or lessor or Landlord in writing, by U.S. mail, not less than
forty-five (45) days before any material change, reduction in coverage,
cancellation, including cancellation for nonpayment of premium, or other
termination thereof or change therein.
Section 14.02. Landlord shall insure the Building against
damage with (a) property insurance for All Risks, including flood and ordinance
or law coverage endorsement and demolition costs and increased cost of
construction endorsement, and (b) and commercial general liability insurance, at
minimum limits of $2,000,000.00 general aggregate, $1,000,000.00 each
occurrence, and $1,000,000.00 personal and advertising injury, with such
deductibles as Landlord reasonably deems appropriate, but in all events at least
equal to insurance maintained by comparable landlords in Comparable Buildings.
Notwithstanding any contribution by Tenant to the cost of insurance premiums, as
provided hereinabove, Landlord shall not be required to carry insurance of any
kind on Tenant's Property, and Tenant hereby agrees that Tenant shall have no
right to receive any proceeds from any insurance policies carried by Landlord.
Section 14 03. Tenant shall not knowingly conduct or permit to
be conducted in the Premises any activity, or place any equipment in or about
the Premises or the Building, which will invalidate the insurance coverage in
effect or increase the rate of fire insurance or other insurance on the Premises
or the Building, and Tenant shall comply with all requirements and regulations
of Landlord's casualty and liability insurer. If any invalidation of coverage or
increase in the rate of fire insurance or other insurance occurs or is
threatened by any insurance company due to any act or omission by Tenant, or its
agents, employees, representatives, or contractors, such statement or threat
shall be conclusive evidence that the increase in such rate is due to such act
of Tenant or the contents or equipment in or about the Premises, and, as a
result thereof, Tenant shall be liable for such increase and shall be considered
Additional Rent payable with the next monthly installment of Base Rent due under
this Lease. In no event shall Tenant introduce or permit to be kept on the
Premises or brought into the Building any dangerous, noxious, radioactive or
explosive substance.
Section 14.04. Landlord and Tenant each hereby waive any right
of subrogation and right of recovery or cause of action for injury or loss to
the extent that such injury or loss is covered by fire, extended coverage, "All
Risk" or similar policies covering real property or personal property (or which
would have been covered if Tenant or Landlord, as the case may be, was carrying
the insurance required by this Lease). Said waivers shall be in addition to, and
not in limitation or derogation or, any other waiver or release contained in
this Lease. Written notice of the terms of the above mutual waivers shall be
given to the insurance
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carriers of Landlord and Tenant and the parties' insurance policies shall be
properly endorsed, if necessary, to prevent the invalidation of said policies by
reason of such waivers.
ARTICLE 15
DAMAGE BY FIRE OR OTHER CAUSE
Section 15.01. If the Building, or any portion thereof, which
does not affect Tenant's Premises as set forth in Section 15.02 hereinbelow, is
damaged or destroyed by any casualty to the extent that, in the reasonable
judgment of Landlord (a) repair of such damage or destruction would not be
economically feasible, or (b) the damage or destruction to the Building cannot
be repaired within three hundred sixty (360) days after the date of such damage
or destruction, or (c) the proceeds from insurance remaining after any required
payment to any mortgagee or lessor of Landlord are insufficient to repair such
damage or destruction, Landlord shall have the right, at Landlord's option, to
terminate this Lease by giving Tenant written notice of such termination, within
thirty (30) days after the date of such damage or destruction.
Section 15.02. If the Premises, or any portion thereof, is
damaged or destroyed by any casualty, or casualty to the Building, or any
portion thereof, renders the Premises totally and partially inaccessible or
unusable by Tenant for the ordinary conduct of Tenant's business, in the
reasonable judgment of Landlord, (a) the Premises cannot be rebuilt or made fit
for Tenant's purposes, or the Building repaired so as to render the Premises
accessible and usable by Tenant for the ordinary conduct of Tenant's business,
within ninety (90) days after the date of such damage or destruction, or (b) if
the proceeds from the insurance Tenant is required to maintain pursuant to
Article 14 hereof (or the amount of proceeds which would have been available if
Tenant was carrying such insurance) are insufficient to repair such damage or
destruction, then Tenant shall have the right to terminate this Lease by giving
Landlord written notice, within thirty (30) days after Landlord advises Tenant,
in writing, of the period of time required to make such repairs, which Landlord
notice shall be given to Tenant within thirty (30) days of such damage or
destruction.
Section 15.03. In the event of partial destruction or damage
to the Building or the Premises which is not subject to Section 15.01 or 15.02,
but which renders the Premises partially but not wholly unusable, this Lease
shall not terminate and Rent shall be abated in proportion to the area of the
Premises which, in Tenant's reasonable opinion, cannot be used or occupied by
Tenant as a result of such casualty. Landlord shall in such event, within a
reasonable time after the date of such destruction or damage, subject to force
majeure (as defined in Section 25.06) or to delays caused by Tenant and to the
extent and availability of insurance
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proceeds, restore the Premises to as near the same condition as existed prior to
such partial damage or destruction.
Section 15.04. If the Building or the Premises or any portion
thereof is destroyed by fire or other causes at any time during the last year of
the Term, or, if an applicable renewal option has been exercised, during the
last year of any renewal term, so that Tenant shall be prevented from using the
Premises for thirty (30) consecutive days due to such damage or destruction,
then either Landlord or Tenant shall have the right. at the option of either
party, to terminate this Lease by giving written notice to the other within
thirty (30) days after the date of such destruction.
Section 15.05. Landlord shall have no liability to Tenant for
inconvenience, loss of business, or annoyance arising from any repair of any
portion of the Premises or the Building. If Landlord is required by this Lease
or by my mortgagee or lessor of Landlord to repair. Tenant shall pay to Landlord
that amount of Tenant's insurance proceeds, if any. (or the amount which would
have been received by Tenant if Tenant was carrying the insurance required by
this Lease) which insures such damage as a contribution towards such repair, and
Landlord shall use reasonable efforts to have such repairs made promptly and in
a manner which will not unnecessarily interfere with Tenant's occupancy.
Section 15.06. In the event of termination of this Lease
pursuant to Sections 15.01, 15.02. or 15.04, then all Rent shall be apportioned
and paid to the date on which possession is relinquished or the date of such
damage, whichever last occurs. and Tenant shall immediately vacate the Premises
according to such notice of termination, provided, however, that those
provisions of this Lease which are designated to cover matters of termination
and the period thereafter shall survive the termination hereof.
ARTICLE 16
CONDEMNATION
Section 16.01. In the event the whole or substantially the
whole of the Building or the Premises, or any portion of the Premises as to
render the balance unusable for Tenant's business purposes. are taken or
condemned by eminent domain or by any conveyance in lieu thereof (such taking,
condemnation or conveyance in lieu thereof being hereinafter referred to as
"condemnation"), the Term shall cease and this Lease shall terminate on the
earlier of the date the condemning authority takes possession or the date title
vests in the condemning authority.
Section 16.02. In the event any portion of the Building shall
be taken by condemnation (whether or not such taking includes any portion of the
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Premises), which taking, in Landlord's judgment, is such that the Building
cannot be restored in an economically feasible manner for use substantially as
originally designed, then Landlord shall have the right, at Landlord's option,
to terminate this Lease, effective as of the date specified by Landlord in a
written notice of termination from Landlord to Tenant.
Section 16.03. In the event any portion of the Parking
Facilities shall be taken by condemnation, which taking in Landlord's judgment
is such that the Parking Facilities cannot be restored in an economically
feasible manner for use substantially as originally designed, including in such
consideration the possible use of additional parking facilities in the vicinity
of the Building, then Landlord shall have the right, at Landlord's option, to
terminate this Lease, effective as of the date specified by Landlord in a
written notice of termination from Landlord to Tenant.
Section 16.04. In the event that a portion, but less than
substantially the whole, of the Premises shall be taken by condemnation, then
this Lease shall be terminated as of the date of such condemnation as to the
portion of the Premises so taken, and unless Landlord exercises its option to
terminate this Lease pursuant to Section 16.02, this Lease shall remain in full
force and effect as to the remainder of the Premises and Landlord shall restore
the Premises to the extent of available condemnation proceeds.
Section 16.05. In the event of termination of this Lease, as
to the whole or any portion of the Premises, pursuant to the provisions of
Section 16.01, 16.02, 16.03, or 16.04, the Rent shall be proportionally reduced
as of such date of termination: provided, however, that those provisions of this
Lease which are designated to cover matters of termination and the period
thereafter shall survive the termination hereof. Upon termination of the Lease
pursuant to this Article 16, Tenant and Landlord hereby agree to release each
other from any and all obligations and liabilities with respect to the Lease
except such obligations and liabilities which arise or accrue prior to such
termination. Notwithstanding the foregoing, Landlord and Tenant shall equally
share nay recovery from the condemning authority of the so-called "Bonus Value"
of the leasehold estate which shall be equal to the difference between the
rental rate payable under the Lease and the rate established by the condemning
authority as an award for compensation purposes.
Section 16.06. All compensation awarded or paid upon a
condemnation of any portion of the Project shall belong to and be the property
of Landlord without participation by Tenant. Nothing herein shall be construed,
however, to give Landlord any interest in, require Tenant to assign to Landlord,
or preclude Tenant from prosecuting any claim directly against the condemning
authority for loss of business, loss of goodwill, moving expenses, damage to,
and cost of removed of, trade fixtures, furniture and other personal property
belonging
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to Tenant; provided, however, that Tenant shall make no claim which shall
diminish or adversely affect any award claimed or received by Landlord.
Section 16.07. If any portion of the Project other than the
Building is taken by condemnation or if the temporary use or occupancy of all or
any part of the Premises shall be taken by condemnation during the Term, this
Lease shall be and remain unaffected by such condemnation, and Tenant shall
continue to pay in full the Rent payable hereunder. In the event of any such
temporary taking for use or occupancy of all or any part of the Premises, Tenant
shall be entitled to appear, claim, prove and receive the portion of the award
for such taking that represents compensation for use or occupancy of the
Premises during the Term and Landlord shall be entitled to appear, claim, prove
and receive the portion of the award that represents the cost of restoration of
the Premises and the use or occupancy of the Premises after the end of the Term
hereof. In the event of any such condemnation of any portion of the Project
other than the Building, Landlord shall be entitled to appear, claim, prove and
receive all of that award.
ARTICLE 17
INDEMNIFICATION
Section 17.01. Tenant hereby waives all claims against
Landlord for damage to any property or injury to, or death of, any person in,
upon, or about the Project, including the Premises, arising at any time and from
any cause other than by reason of the acts, omissions, negligence or willful
misconduct of Landlord, its agents, employees, representatives, or contractors.
Tenant shall, and hereby agrees to, indemnify and hold Landlord harmless from
any damage to any property or injury to, or death of, any person arising from
the use or occupancy of the Common Areas and the Premises by Tenant, its agents,
employees, representatives, contractors, successors, assigns, licensees, or
invitees, unless such damage is caused by the acts, omissions, negligence or
willful misconduct of Landlord, its agents, employees, representatives, or
contractors. Landlord shall not be liable for any such damage caused by other
tenants or persons in the Building or by occupants of adjacent property thereto,
or by the public, or caused by construction (unless caused by the gross
negligence or willful misconduct of Landlord) or by any private, public or
quasi-public work. Tenant's foregoing indemnity shall include attorneys' fees,
investigation costs, and all other reasonable costs and expenses incurred by
Landlord in any connection therewith. The provisions of this Article 17 shall
survive the expiration or termination of this Lease with respect to any damage,
injury, or death occurring before such expiration or termination.
Section 17.02. Landlord hereby waives all claims against
Tenant for damage to any property or injury to, or death of, any person in,
upon, or about the Project, including the Premises, arising at any time and
from any cause other
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than by reason of the acts, omission, negligence or willful misconduct of
Tenant, its agents, employees, representatives, or contractors. Landlord shall,
and hereby agrees to, indemnify and hold Tenant harmless from any damage to any
property or injury to, or death of, any person arising from the use or occupancy
of the Common Areas and the Premises by Landlord, its agents, employees,
representatives, contractors, successors, assigns, licensees, or invitees,
unless such damage is caused by the acts, omissions, negligence or willful
misconduct of Tenant, its agents, employees, representatives, or contractors.
Tenant shall not be liable for any such damage caused by Landlord, its agents,
employees, representatives, or contractors, or persons in the Building or by
occupants of adjacent property thereto, or by the public, or caused by
construction (unless caused by the gross negligence or willful misconduct of
Tenant) or by any private, public or quasi-public work. Landlord's foregoing
indemnity shall include attorneys' fees, investigation costs, and all other
reasonable costs and expenses incurred by Tenant in any connection therewith.
The provisions of this Article 17 shall survive the expiration or termination of
this Lease with respect to any damage, injury, or death occurring before such
expiration or termination.
Section 17.03. Tenant's and Landlord's agreements to indemnify
and hold the other party harmless pursuant to Article 17 are not intended to and
shall not relieve any insurance carrier of its obligations under policies
required to be carried by Landlord or Tenant, respectively, pursuant to the
Lease to the extent that such policies cover the results of such acts,
omissions, negligence, or willful misconduct. If Landlord or Tenant has been or
at any time hereafter is granted the right to self insure or if either party
breaches this agreement by its failure to carry required insurance, such failure
shall automatically be deemed to be a covenant and agreement by Landlord or
Tenant, respectively, to self-insure to the full extent of such required
coverage, with full waiver of subrogation. All of the provisions set forth
herein are subject to the provisions of Section 17.04.
Section 17.04. Allocation of Insured Risks/Subrogation.
Landlord and Tenant release each other from any claims and demands of whatever
nature for damage, loss or injury to the Premises and/or the Building, or to the
other's property in, on or about the Premises and the Building, that are caused
by or result from risks or perils insured against under any property insurance
policies required by the Lease to be carried by Landlord and/or Tenant. Landlord
and Tenant shall cause each insurance policy obtained by them or either of them
to provide that the insurance company waives all right of recovery by way of
subrogation against either Landlord or Tenant in connection with any damage
covered by any such policy or policies. Neither Landlord nor Tenant shall be
liable to the other for any damage caused by fire or any of the risks insured
against under any insurance policy required by the Lease. If an insurance policy
cannot be obtained with a waiver of subrogation, or is obtainable only by the
payment of an additional premium charge above that charged by insurance
companies issuing policies without waiver of subrogation, the party undertaking
to obtain the insurance shall notify the other
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party of this fact. The other party shall have a period of ten (10) days after
receiving the notice either to place the insurance with a company that is
reasonably satisfactory to the other party and that will carry the insurance
with a waiver of subrogation at no additional cost, or to agree to pay the
additional premium if such a policy is obtainable at additional cost. If the
insurance cannot be obtained or the party in whose favor a waiver of subrogation
is desired refuses to pay the additional premium charged, the other party is
relieved of the obligation to obtain a waiver of subrogation with respect to the
particular insurance involved.
ARTICLE 18
SUBORDINATION AND ESTOPPEL CERTIFICATES
Section 18.01. This Lease and all rights of Tenant hereunder
are subject and subordinate to all underlying leases now in existence, and to
any supplements, amendments modifications, and extensions of such leases
heretofore or hereafter made and to any deeds to secure debt, mortgages, or
other security instruments which now cover all or any portion of the Project or
any interest of Landlord therein, and to any advances made on the security
thereof, and to any increases, renewals, modifications, consolidations,
replacements, and extensions of any of such mortgages. This provision is
declared by Landlord and Tenant to be self-operative and no further instrument
shall be required to effect such subordination of this Lease. Upon thirty (30)
days' notice, however, Tenant shall execute, acknowledge, and deliver to
Landlord any further instruments and certificates evidencing such subordination
as Landlord, and any mortgagee or lessor of Landlord shall reasonably require.
Tenant shall not unreasonably withhold, delay, or defer its written consent to
reasonable modifications in this Lease which are a condition of any
construction, interim or permanent financing for the Project or any reciprocal
easement agreement with facilities in the vicinity of the Building, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially and adversely affect Tenant's use and employment of the Premises.
This Lease is further subject and subordinate to: (a) all applicable ordinances
of any government authority having jurisdiction over the Project, relating to
easements, franchises, and other interests or rights upon, across, or
appurtenant to the Project; and (b) all utility easements and agreements, now or
hereafter created for the benefit of the Project.
Section 18.02. Notwithstanding the generality of the foregoing
provisions of Section 18.01, any mortgagee or lessor of Landlord shall have the
right at any time to subordinate any such mortgage or underlying lease to this
Lease, or to any of the provisions hereof, on such terms and subject to such
conditions as such mortgagee or lessor of Landlord may consider appropriate in
its discretion. At any time, before or after the institution of any proceedings
for the foreclosure of any such mortgage, or the sale of the Building under any
such mortgage, or the
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termination of any underlying lease, Tenant shall, upon request of such
mortgagee or any person or entities succeeding to the interest of such mortgagee
or the purchaser at any foreclosure sale ("Successor Landlord"), automatically
become the Tenant of the Successor Landlord, without change in the terms or
other provisions of this Lease; provided, however, that the Successor Landlord
shall not be (i) bound by any payment made by Tenant of Rent or Additional Rent
for more than one (1) month in advance, except for a Security Deposit previously
paid to Landlord, (ii) liable for any damages or subject to any offset or
defense by Tenant to the payment of Rent by reason of any act or omission of any
prior landlord (including Landlord), unless such Successor or Landlord has been
advised by Tenant, in writing, of such damage, offset right, defense, or claim
prior to Successor Landlord acquiring the Project; or, (iii) personally or
corporately liable, in any event, beyond the limitations on landlord liability
set forth in Section 25.05 of this Lease. This agreement of Tenant to attorn to
a Successor Landlord shall survive any such foreclosure sale, trustee's sale
conveyance in lieu thereof or termination of any underlying lease. Tenant shall
upon thirty (30) days' notice at any time, before or after any such foreclosure
or termination execute, acknowledge, and deliver to the Successor Landlord any
reasonable written instruments and certificates evidencing such attornment as
such Successor Landlord may reasonably require; provided, however, that Landlord
shall require that such agreement provide that upon such attornment as long as
Tenant is not in default hereunder, with any applicable cure period having
expired. Tenant's possession of the Premises under this Lease shall not be
disturbed.
Section 18.03. Tenant shall, from time to time, within fifteen
(15) days after request from Landlord, or from any mortgagee or lessor of
Landlord, execute, acknowledge and deliver in recordable form a certificate
certifying, to the extent true, that this Lease is in full force and effect and
unmodified (or, if there have been modifications, that the same is in full force
and effect as modified and stating the modifications); that the Term has
commenced and the full amount of the Rent then accruing hereunder; the dates to
which the Rent has been paid; that Tenant has accepted possession of the
Premises and that any improvements required by the terms of this Lease to be
made by Landlord have been completed to the satisfaction of Tenant (or if not
completed by Landlord, a list of the remaining items to be completed by
Landlord); the amount, if any, that Tenant has paid to Landlord as a Security
Deposit; that no Rent under this Lease has been paid more than thirty (30) days
in advance of its due date; that the address for notices to be sent to Tenant is
as set forth in this Lease (or has been changed by notice duly given and is as
set forth in the certificate); that Tenant, as of the date of such certificate,
has no charge, lien, or claim of offset under this Lease or otherwise against
Rent or other charges due or to become due hereunder (or if Tenant shall have a
charge, lien, or claim of offset under this Lease or against Rent, such items);
that, to the knowledge of Tenant, Landlord is not then in default under this
Lease; and such other matters as may be reasonably requested by Landlord or any
mortgagee or lessor of Landlord. Any such certificate may be relied upon by
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Landlord, any Successor Landlord, or any mortgagee or lessor of Landlord.
Landlord agrees periodically to furnish, when reasonably requested in writing by
Tenant, certificates signed by Landlord containing information similar to the
foregoing information. Landlord hereby agrees to provide to Tenant an estoppel
certificate signed by Landlord, containing substantially the same types of
information and within the same periods of time as are set forth in Section
18.03, except such charges as are reasonably necessary to reflect that the
estoppel certificate is being granted and signed by Landlord to Tenant or
Tenant's lender, assignee or sublessee, rather than from Tenant to Landlord or
to a lender or purchaser.
Section 18.04. Landlord agrees that within thirty (30) days
after the date of full execution of the Lease, it will provide Tenant with
non-disturbance, subordination and attornment agreements ("non-disturbance
agreement") in favor of Tenant from any ground lessors, mortgage holders or lien
holders (each, a "Superior Mortgage") then in existence, if such recording is
permitted by such Superior Mortgage. Said non-disturbance agreements shall be in
recordable form and may be recorded, if such recording is permitted by such
Superior Mortgagee, at Tenant's election and expense. In the event Landlord
fails to provide such commercially reasonable non-disturbance agreements within
the time frame set forth in this Section 18.04, Tenant shall have the right,
exercisable at any time thereafter, to give five (5) business days' written
notice to Landlord terminating the Lease. In the event Landlord does not provide
Tenant with the applicable non-disturbance agreements within such five (5) day
period, the Lease shall terminated. Landlord agrees to provide Tenant with
non-disturbance agreement(s) in favor of Tenant from any Superior Mortgagee(s)
of Landlord who later come(s) into existence, in a form mutually agreed upon by
Tenant and such Superior Mortgagee at any time prior to the expiration of the
Term of the Lease, as it may be extended, in consideration of, and as a
condition precedent to, Tenant's agreement to be bound by Lease Article 18. Said
non-disturbance agreements shall be in recordable form and may be recorded, in a
form mutually agreed upon by Tenant and such Superior Mortgagee at Tenant's
election and expense.
Section 18.05. No act or failure to act on the part of
Landlord which would entitle Tenant under the terms of this Lease, or by law, to
be relieved of Tenant's obligations hereunder or to terminate this Lease, shall
result in a release of such obligations upon a termination of this Lease unless
(a) Tenant has given notice by registered or certified mail to any mortgagee or
lessor of Landlord whose address shall have been furnished to Tenant, and (b)
Tenant offers such mortgagee or lessor of Landlord a reasonable opportunity to
cure the default, including time to obtain possession of the Premises by power
of sale or judicial foreclosure, if such should prove necessary to effect a
cure.
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ARTICLE 19
SURRENDER OF THE PREMISES
Section 19.01. Upon the Expiration Date or earlier termination of this
Lease, or upon any reentry of the Premises by Landlord without terminating this
Lease pursuant to Section 13.02(b). Tenant, at Tenant's sole cost and expense,
shall peacefully vacate and surrender the Premises to Landlord in good order,
broom clean and in the same condition as at the beginning of the Term or as the
Premises may thereafter have been improved by Landlord or Tenant (provided that
Tenant's improvements were made with Landlord's consent, if such consent shall
have been required), reasonable use and wear thereof, and casualty and repairs
which are Landlord's obligations under Articles 9, 15 and 16 only excepted, and
Tenant shall remove all Tenant's Property and turn over all keys for the
Premises to Landlord. Should Tenant continue to hold the Premises after the
expiration or earlier termination of this Lease, such holding over, unless
otherwise agreed to by Landlord in writing, shall constitute and be construed as
a tenancy at sufferance at monthly installments of Rent equal to one hundred
fifty percent (150%) of the monthly portion of Base Rent in effect as of the
date of expiration or earlier termination, and subject to all of the other
terms, charges and expenses set forth herein except any right to renew this
Lease or to expand the Premises. Subject to the provisions of Section 19.02
hereinbelow, Tenant shall also be liable to Landlord for all damage which
Landlord shall actually suffer because of any holding over by Tenant, and Tenant
shall indemnify Landlord against all claims made by any other tenant or
prospective tenant against Landlord resulting from delay by Landlord in
delivering possession of the Premises to such other tenant or prospective
tenant. The provisions of this Article 19 shall survive the expiration or
earlier termination of this Lease.
Section 19.02. Notwithstanding anything to the contrary set forth
hereinbelow, Tenant shall have the right, upon the expiration of the original
Term of this Lease, or any extension thereof, to hold over in the Premises for
either a period of three (3) months, or six (6) months at Tenant's sole
election, upon the same terms and conditions that were applicable to the
Premises during the last month of the Term of the Lease, with Base Rent to be
based upon the amount Tenant was paying at the expiration of the Term for the
initial three (3) months holdover, but with Base Rent to be 125% of the then
current Base Rent for the additional three (3) month holdover by giving written
notice of such election to Landlord not less than six (6) months prior to the
scheduled Expiration Date, as it may be extended.
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ARTICLE 20
LANDLORD'S RIGHT TO INSPECT
Section 20.01. Landlord shall retain duplicate keys to all doors of the
Premises. Tenant shall provide Landlord with new keys should Tenant receive
Landlord's consent to change the locks. After providing Tenant reasonable notice
of at least 24 hours (the "Access Notice"), Landlord shall have the right to
enter the Premises at reasonable hours, or in the event of cleaning the
Premises, after business hours, without notice, (or, in the event of an
emergency, at any hour, without notice) (a) to exhibit the same to present to
prospective mortgagees, lessors or purchasers during the Term and to prospective
tenants during the last year of the Term, (b) to inspect the Premises, (c) to
confirm that Tenant is complying with all of Tenant's covenants and obligations
under this Lease, (d) to clean or make repairs required of landlord under the
terms of this Lease, (e) to make repairs to areas adjoining the Premises, and
(f) to repair and service utility lines or other components of the Building;
provided, however, Landlord shall use reasonable efforts to minimize
interference with Tenant's business. Landlord shall not be liable to Tenant for
the exercise of Landlord's rights under this Article 20 and Tenant hereby waives
any claims for damages for any injury, inconvenience or interference with
Tenant's business, any loss of occupancy or quiet enjoyment of the Premises, and
any other loss occasioned thereby, except for bodily injury or property damage
resulting from the negligence or willful misconduct of Landlord or its agents,
contractors, employees, or licensees.
Section 20.02. Landlord hereby acknowledges that the existence and
success of Tenant's business operations in the Premises require that Tenant be
allowed to employ strict security measures in connection with limiting access to
the Premises. Accordingly, Landlord agrees to comply with the Security Measures
(as defined below) in consideration for and as a condition precedent to Tenant
granting landlord the right to enter the Premises in accordance with this
Article 20. Tenant may designate certain portions of its Premises as "Limited
Access Areas" as Tenant deems necessary for the purpose of safeguarding Tenant's
confidential information and business operations and related equipment. Such
Limited Access Areas may include, but are not limited to, computer rooms, rooms
containing telecommunications and/or photocopy equipment, data rooms, libraries,
file rooms and areas containing conduits and/or ducting for Tenant's data lines.
Tenant has the right to keep the Limited Access Areas locked at all times. In
the event that Landlord needs to enter all or any portion of the Limited Access
Areas, Landlord shall provide Tenant with the Access Notice, in which Landlord
shall specify the name of the designated individual(s) (individually and
collectively, "Landlord's Designee") who Landlord proposes shall enter the
Limited Access Areas (or, in the case of an emergency, Landlord shall orally
communicate this information to Tenant), and Tenant shall, within twenty-four
(24) hours, either (a) approve of Landlord's Designee, or (b) reject Landlord's
Designee, in which case Landlord shall
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designate a different individual as Landlord's Designee. Tenant hereby approves
of Christine Teagle as Landlord's Designee. As a condition to being granted
access to the Limited Access Areas, Landlord's Designee must comply with any
reasonable security measures required by Tenant ("Security Measures"), which
Security Measures may include, but are not limited to, being accompanied by an
authorized representative of Tenant, showing identification, signing in, and
wearing a security badge. Notwithstanding anything to the contrary set forth
above. Tenant may designate certain areas of the Premises as "Secured Areas"
should Tenant require such areas for the purpose of securing certain valuable
property or confidential information. Landlord may not enter such Secured Areas
except in the case of emergency or in the event of a Landlord inspection, in
which case landlord shall provide Tenant with five (5) days' prior written
notice of the specific date and time of such Landlord inspection. Tenant shall e
granted access to the Building, Parking Facility, Premises and the services and
utilities provided the Building 24 hours per day, 7 days per week.
ARTICLE 21
SECURITY DEPOSIT
INTENTIONALLY DELETED
ARTICLE 22
BROKERAGE
Section 22.01. Tenant and Landlord each represent and warrant to the
other that it has not entered into any agreement with, or otherwise had any
dealings with, any broker or agent in connection with the negotiation or
execution of this Lease which could form the basis of any claim by any such
broker or agent for a brokerage fee or commission, finder's fee, or any other
compensation of any king or nature in connection herewith, other than with
Broker and Prentiss Properties Limited, Inc., and each party shall, and hereby
agrees to, indemnify and hold the other harmless form all costs (including court
costs, investigation costs, and attorneys' fees), expenses, or liability for
commissions or other compensation claimed by any broker or agent with respect to
his Lease which arise out of any agreement or dealings, or alleged agreement or
dealings, between the indemnifying party and any such agent or broker, other
than with Broker. This provision shall survive the expiration or earlier
termination of this Lease. Tenant hereby agrees that Tenant shall pay broker a
brokerage commission pursuant to the terms of a separate agreement between
Broker and Tenant. Landlord hereby agrees that
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Landlord shall pay Prentiss Properties Limited, Inc. a brokerage commission
pursuant to the terms of a separate agreement between Prentiss Properties
Limited, Inc. and Landlord.
ARTICLE 23
OBSERVANCE OF RULES AND REGULATIONS
Section 23.01. Tenant and Tenant's servants, employees, agents,
visitors, and licensees shall observe faithfully and comply strictly with all
Rules and Regulations (herein so called) attached to this Lease as such Rules
and Regulations may reasonably changed from time to time. Landlord shall at all
times have the right to make reasonable changes in and additions to such Rules
and Regulations; provided Landlord gives Tenant prior notice of such changes and
provided such new rules and regulations or changes in existing rules and
regulations did not conflict with this Lease, and do not materially interfere
with the lawful conduct of Tenant's business in the Premises. Any failure by
landlord to enforce any of the Rules and Regulations now or hereafter in effect,
either against Tenant or any other tenant in the Building, shall not constitute
a waiver of any such Rules and Regulations. Landlord shall not enforce the Rules
and Regulations in an unreasonable manner or in a manner which shall
unreasonably interfere with the normal and customary use of the Premises by
Tenant for normal and customary business office operations. Landlord shall not
be liable to Tenant for the failure or refusal by any other tenant guest,
invitee, visitor, or occupant of the Building to comply with any of the rules
and Regulations, but Landlord shall use commercially reasonable efforts to
enforce, and shall uniformly enforce, the Rules and Regulations.
ARTICLE 24
NOTICES
Section 24.01. All notices, consent, demands, requests,
documents, or other communications (other than payment of Rent) required or
permitted hereunder (collectively, "notices") shall be deemed given, whether
actually received or not, when dispatched for hand delivery or delivery by air
express courier (with signed receipts) to the other party, or on the second
Business Day after deposit in the United States mail, postage prepaid,
certified, return receipt requested, except for notice of change of address
which shall be deemed given only upon actual receipt. The addresses of the
parties for notices are set forth in Article 1, or any such other addresses
subsequent specified by each party in notices given pursuant to this Section
24.01.
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ARTICLE 25
MISCELLANEOUS
Section 25.01. Professional Fees. In any action or proceeding
by either party against the other under this Lease, the prevailing party shall
be entitled to recover from the other party its professional fees for attorneys,
appraisers and accountants, its investigation costs, and any other legal
expenses and court costs incurred by the prevailing party in such action or
proceeding.
Section 25.02. Reimbursements. Except as otherwise set forth
in Articles 7, 9, and 10 of the Lease, wherever the Lease requires Tenant to
reimburse Landlord for the cost of any item which Tenant has elected to obtain
from Landlord, such costs will be the reasonable and customary charge
periodically established by Landlord for such item. Landlord shall keep in its
on-site manager's office a schedule of such charges (which Landlord may
periodically change) for Tenant's examination. The schedule of charges may
include, at the discretion of Landlord, a reasonable allocation of overhead,
administrative, and related costs and a reasonable fee, not to exceed five
percent (5%) of the cost of providing such services, for Landlord's agent or
manger who performs such services or arranges for performance of such services.
All such charges shall be payable within thirty (30) days after invoicing for
such costs as Additional Rent.
Section 25.03. Severability. Every agreement contained in this
Lease is, and shall be construed as, a separate independent agreement. If any
term of this Lease or the application thereof to any person or circumstances
shall be invalid or unenforceable, the remaining agreements contained in this
Lease shall not be affected.
Section 25.04. Non-Merger. There shall be no merger of this
Lease with any ground leasehold interest or the fee estate in the Project or any
part thereof by reason of the fact that the same person may acquire or hold,
directly or indirectly, this Lease or any interest in this Lease as well as any
ground leasehold interest or fee estate in the Project or any interest in such
fee estate.
Section 25.05. Landlord's Liability. Anything contained in
this Lease to the contrary notwithstanding, Tenant agrees that Tenant shall look
solely to the estate and property of Landlord in the Project for the collection
of any judgment or other judicial process requiring the payment of money by
Landlord for any default or breach by Landlord under this Lease, subject,
however, to prior rights of any mortgagee or lessor of the Project. No other
assets of Landlord or any partners, shareholders, or other principals of
Landlord shall be subject to levy, execution or other judicial process for the
satisfaction of Tenant's claim.
Section 25.06. Force Majeure. Whenever the period of time is
herein prescribed for action to be taken by Landlord or Tenant, or Tenant shall
not
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be liable or responsible for, and there shall be excluded from the computation
of any such period of time, any delays due to force majeure, which term shall
include strikes, lockouts, or other labor or industrial disturbances, civil
disturbances, or riots, blockades, embargoes, sabotage, acts of God, shortages
of labor or materials, war, governmental approvals, laws, or changes in laws,
regulations, or restrictions, weather related delays, or any other cause of any
kind whatsoever which is beyond the reasonable control of Landlord or Tenant.
Force Majeure shall not excuse or delay Tenant's obligation to Rent or any other
amount due under this Lease.
Section 25.07. Headings. The article headings contained in
this Lease are the convenience only and shall enlarge or limit the scope or
meaning of the various and several articles hereof. Words in the singular number
shall be held to include the plural, unless the context otherwise requires. All
agreements and covenants herein contained shall be binding upon the respective
heirs, personal representatives, and successors and assigns of the parties
thereto.
Section 25.08. Successors and Assigns. All agreements and
covenants herein contained shall be binding upon the respective heirs, personal
representatives, successors and assigns or the parties hereto. If there be more
than one Tenant, the obligations hereunder imposed upon Tenant shall be joint
and several. If there is a guarantor of Tenant's obligations hereunder. Tenant's
obligations shall be joint and several obligations of Tenant and such guarantor,
and Landlord need not first proceed against Tenant hereunder before proceeding
against such guarantor, and any such guarantor shall not be released from its
guarantee for any reason, including any amendment of this Lease, any forbearance
by Landlord or waiver of any of Landlord's rights, the failure to give Tenant or
such guarantor any notices, or the release of any party liable for the payment
or performance of Tenant's obligations hereunder. Notwithstanding the foregoing,
nothing contained in this Section 25.08 shall be deemed to override Article 8.
Section 25.09. Landlord's Representations. Neither Landlord
nor Landlord's agents or brokers have made any representations or promises with
respect to the Premises, the Building, the Parking Facilities, the Land, or any
other portions of the Project except as herein expressly set forth and all
reliance with respect to any representations or promises is based solely on
those contained herein. No rights, easements, or licenses are acquired by Tenant
under this Lease by implication or otherwise except as, and unless, expressly
set forth in this Lease.
Section 25.10. Entire Agreement; Amendments. This Lease and
the Exhibits and Riders attached hereto set forth the entire agreement the
parties and cancel all prior negotiations, arrangements, brochures, agreements,
and understandings, if any, between Landlord and Tenant regarding the subject
matter of this Lease. No amendment or modification of this Lease shall be
binding or valid unless expressed in writing executed by both parties hereto.
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Section 25.11. Tenant's Authority. If either Landlord or
Tenant (the "signing party") signs as a corporation, execution hereof shall
constitute a representation and warranty by the signing party that the singing
party is duly organized and existing corporation, that the signing party has
been and is qualified to do business in the State of Texas and in good standing
with the State of Texas, that the corporation has full right and authority to
enter in this Lease, and that all persons singing on behalf of the corporation
were authorized to do so by appropriate corporate action. If the signing party
signs as a partnership, trust, or other legal entity, execution hereof shall
constitute a representation and warranty by the signing party that the signing
party has complied with all applicable laws, rules and governmental regulations
relative to the signing party's right to do business in the State of Texas, that
such entity has the full right and authority to enter into this Lease, and that
all persons signing on behalf of the signing party were authorized to do so by
and all necessary or appropriate partnership, trust, or other actions.
Section 25.12. Governing Law. This Lease shall be governed by
and construed under the laws of the State of Texas. Any action brought to
enforce or interpret this Lease shall be brought in the court of appropriate
jurisdiction in Dallas County, Texas. Should any provision of this Lease require
judicial interpretation. Landlord and Tenant hereby agree and stipulate that the
court interpreting or considering same shall not apply the presumption that the
terms hereof shall be more strictly construed against a party by reason of any
rule or conclusion that a document should be construed more strictly against the
party who itself or through its agents prepared the same, it being agreed that
all parties hereto have participated in the preparation of this Lease and that
each party had full opportunity to consult legal counsel of its choice before
the execution of this Lease.
Section 25.13. Tenant's Use of Name of the Building. Tenant
shall not, without the prior written consent of Landlord, use the name of the
Building for any purpose other than as the address of the business to be
conducted by Tenant in the Premises, and Tenant shall not do or permit the doing
of anything in connection with Tenant's business or advertising (including
brokers' flyers promoting sublease space) which in the reasonable judgment of
Landlord may affect unfavorably on Landlord or the Building or confuse or
mislead the public as to any apparent connection or relationship between Tenant
and Landlord, the Building or the Land.
Section 25.14. Ancient Lights. Any elimination or shutting of
light, air, or view by any structure which may be erected on lands adjacent to
the Building shall in no way affect this Lease and Landlord shall have no
liability to Tenant with respect thereto.
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Section 25.15. Changes to Project by Landlord. Landlord shall
have the unrestricted right to make changes to all portions of the Project in
Landlord's reasonable discretion for the purpose of improving access or security
to the Project or the flow of pedestrian and vehicular traffic therein. Landlord
shall have the right at any time, without the same constituting any actual or
constructive eviction and without incurring any liability to Tenant therefor, to
change the arrangement or location of entrances or passageways, doors and
doorways, corridors, elevators, stairs, bathrooms, or any other Common Areas so
long as reasonable access to the Premises remains available and Tenant's use and
quiet enjoyment of the Premises may not be materially and adversely affected.
Landlord shall also have the right to (a) rearrange, change, expand or contract
portions of the Project constituting Common Areas (b) to use Common Areas while
engaged in making improvements, repairs or alterations to the Project or any
portion thereof, and (c) to do and perform such other acts and make such other
changes in to or with respect to the Project, or any portion thereof, as
Landlord may, in the exercise of sound business judgment, deem to be
appropriate. Landlord shall be entitled to change the name or address of the
Building or the Project. Landlord shall have the right to close, from time to
time, the Common Areas and other portions of the Project for such temporary
periods as Landlord deems legally sufficient to evidence Landlord's ownership
and control thereof and to prevent any claim of adverse possession by, or any
implied or actual dedication to, the public or any other party other than
Landlord. The rights of Landlord's set forth herein shall be subject to Tenant's
access to the Premises remaining reasonably available and to Tenant's use and
quiet enjoyment of the Premises not being materially and adversely affected.
Section 25.16. Time of Essence. Time is of the essence of
this Lease.
Section 25.17. Landlord's Acceptance of Lease. The submission
of this Lease to Tenant shall not be construed as an offer and Tenant shall not
have any rights with respect thereto unless said Lease is consented to by
mortgagee, and any lessor of Landlord, to the extent such consent is required,
and Landlord executes a copy of this Lease and delivers the same to Tenant.
Section 25.18. Performance by Tenant. All covenants and
agreements to be performed by Tenant under any of the terms of this Lease shall
be performed by Tenant, at Tenant's sole cost and expense, and without any
abatement of Rent, except as set forth in Sections 3.01, 7.03, and 19.05 and
Articles 15 and 16 and Exhibit C herein. If Tenant shall fail to pay any Rent,
other than Base Rent, required to be paid by it hereunder or shall fail to
perform any other act on its part to be performed hereunder, and such failure
shall continue for longer than the period of cure, if any, permitted in Section
13.01, and Tenant shall not otherwise have the right to not pay any Rent or
perform any action on Tenant's part to be performed hereunder. Landlord may, at
its option, without waiving or releasing Tenant from obligations of Tenant, make
any such payment or perform
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any such other act on behalf of Tenant. All sums so paid by Landlord and all
necessary incidental costs, together with interest thereon at the Interest Rate,
from the date of such payment by Landlord, shall be payable to Landlord on
demand. Tenant covenants to pay any such sums, and Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of the non-payment thereof by Tenant as in the case of default by
Tenant in the payment of Rent.
Section 25.19. Financial Statements. At any time during the
term of this Lease, Tenant shall, upon ten (10) days prior written notice from
Landlord, provide Landlord with an annual report and an annual report of the two
(2) years prior to the current year.
Section 25.20. Late Payments. Except with respect to the late
payment of Rent (which shall be governed by the provisions of Section 4.02),
whenever one party is obligated pursuant to this Lease to make a payment to the
other party, if such payment is not paid when due, then the party who does not
make such payment when due shall pay interest at the Interest Rate (as such term
is defined in Section 4.02) to the party on the unpaid amount from the date such
amount was due until the date such amount is paid.
Section 25.21. Time for Payments. Whenever in this Lease a
payment is required to be made by one party to the other, but a specific date
for payment is not set forth or a specific number of days within which payment
is to be made is not set forth, or the words "immediately", "promptly" and/or
"on demand", or the equivalent, are used to specify when such payment is due,
then such payment shall be due thirty (30) days after the party which is
entitled to such payment sends written notice to the other party demanding
payment.
ARTICLE 26
SUBSTITUTION SPACE
INTENTIONALLY DELETED
ARTICLE 27
OTHER DEFINITIONS
When used in this Lease, the terms set forth hereinbelow shall
have the following meanings: (a) "Business Days" shall mean Monday thorough
Friday (except for Holidays); "Business Hours" shall mean 8:00 a.m. to 6:00 p.m.
on
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Monday through Friday and 9:00 a.m. to 1:00 p.m. on Saturdays (except for
Holidays); and "Holidays" shall mean those holidays designated by Landlord,
which holidays shall be consistent with those holidays designated by landlords
of other first-class office buildings in the North Dallas suburban area. (b)
"Common Areas" shall mean those certain areas and facilities of the Building and
the Parking Facilities and those certain improvements to the Land which are from
time to time provided by Landlord for the use of tenants of the Building and
their employees, clients, customers, licensees and invitees or for use by the
public, which facilities and improvements include any and all corridors,
elevator foyers, vending areas, bathrooms, electrical and telephone rooms,
mechanical rooms, janitorial areas and other similar facilities of the Building
and of the Parking Facilities and any and all grounds, parks, landscaped areas,
outside sitting areas, sidewalks, walkways, tunnels, pedestrianways, skybridges,
and generally all other improvements located on the Land, or which connect the
Land to other buildings. (c) The words "day" or "days" shall refer to calendar
days, except where "Business Days" are specified. (d) The words "herein",
"hereof", "hereby", "hereunder" and words of similar import shall be construed
to refer to this Lease as a whole and not to any particular Article or Section
thereof unless expressly so stated. (e) The words "include" and "including"
shall be construed as if followed by the phrase "without being limited to." (f)
"Net Rentable Area" shall mean (1) in the case of a single tenancy floor, all
floor area measured from the inside surface of the outer glass of the Building,
excluding only the areas ("Service Areas") within the outside wall used for the
Building's stairs, fire towers, elevator shafts, vertical penetrations of the
Building's central atrium, flues, vents, stacks, pipe shafts, and vertical ducts
(which areas shall be measured from the mid-point of walls enclosing such areas,
except for the Building's central atrium, which shall be measured from the
inside surface (with respect to the Premises) of the glass enclosing such
atrium) but including any Service Areas which for the specific use of the
particular tenant, such as special stairs or elevators, plus an allocation of
the square footage of the Building's central areas for providing telephone,
electrical, mechanical, janitorial, security and mail services, as well as, the
central entry lobby, ground level elevator lobby and service elevator lobby,
central fire exit corridors, service exit corridor and central loading dock (the
"Central Areas"), and (2) in the case of a floor to be occupied by more than one
tenant, all floor areas within the inside surface (with respect to the Premises)
of the glass enclosing vertical penetrations of the Building's central atrium,
and to the midpoint of the walls separating areas leased by or held for lease to
other tenants or from the Common Areas, but including a proportionate part of
the Common Areas located on such floor based upon the ratio which Tenant's Net
Rentable Area (excluding Common Areas) on such floor bears to the aggregate Net
Rentable Area (excluding Common Areas) on such floor, plus an allocation of the
square footage of the Building's Central Areas. In the case of both single and
multiple tenant floors, telephone, electrical, mechanical, maintenance,
janitorial or security rooms no included in the Building's Central Areas but
which service more than one floor shall be considered Common Areas and shall be
allocated among all tenants whose premises are served thereby, regardless of
whether such premises are located on the
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same floor as the rooms in question. Such allocation shall be made in accordance
with the proportion of the Net Rentable Area so served. No deductions from Net
Rentable Area shall be made for columns or projections necessary to the
Building. Net Rentable Area of the Building shall include office and retail
space; it being understood, however, that the foregoing formula to be used in
the calculation of the Net Rentable Area of office space shall not necessarily
be the formula used by Landlord to calculate the Net Rentable Area of any retail
space in the Building, (g) Reference to Landlord as having "no liability to
Tenant" or being "without liability to Tenant" or words of like import shall
mean that Tenant is not entitled to terminate this Lease, or to claim actual or
constructive eviction, partial or total, or to receive any abatement or
diminution of rent, or to be relieved in any manner of any of Tenant's other
obligations hereunder, or to be compensated for loss or injury suffered or to
enforce any other right or kind of liability whatsoever against Landlord under
or with respect to this Lease or with respect to Tenant's use or occupancy of
the Premises. (h) A "repair" shall be deemed to include such rebuilding,
replacement and restoration as may be necessary to achieve and maintain good
working order and condition. (i) The "termination of this Lease" and words of
like import includes the expiration of the Term or the cancellation of this
Lease pursuant to any of the provisions of this Lease or to law. Upon the
termination of this Lease, the term shall end at 11:59 p.m. on the date of
termination as if such date were the Expiration Date, and neither party shall
have any further obligation or liability to the other after such termination
except (i) as shall be expressly provided for in this Lease and (ii) for such
obligations as by their nature or under the circumstances can only be, or by the
provisions of this Lease, may be, performed after such termination and, in any
event, unless expressly otherwise provided in this Lease, any liability for a
payment (which shall be apportioned as of the date of such termination) which
shall have accrued to or with respect to any period ending at the time of
termination shall survive the termination of this Lease. (j) the "terms of this
Lease" shall be deemed to include all terms, covenants, conditions, provisions,
obligations, limitations, restrictions, reservations and agreements contained in
this Lease. (k) "Tenant" shall be deemed to include Tenant's successors and
assigns (to the extent permitted by Landlord) and any and all occupants of the
Premises permitted by Landlord and claiming by, through or under Tenant. (l) A
"year" shall mean a calendar year.
ARTICLE 28
BUILDING NAME AND TENANT SIGNAGE
Section 28.01. Landlord reserves the right, subject to the
provisions of this Section 28.01, at any time to change the name, insignia,
logotype, or street address of the Building without in any manner being liable
to Tenant; provided, however, that Landlord shall promptly reimburse Tenant for
up to $10,000.00 for any reasonable costs incurred by Tenant as a result of any
such
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change (including, without limitation, costs incurred in replacing stationery
and business cards and advertising materials) except to the extent that any such
change was mandated by a governmental entity; and also provided, however,
Landlord shall not change the name of the Building to the name of a company
whose primary business shall be an internet access provider.
Section 28.02. (a) Tenant, at Tenant's sole cost and expense,
shall be entitled to install appropriate signage, which signage, at Tenant's
option, may be illuminated but shall not be neon signage, including Tenant's
corporate name and logo, on and in the Building, including (i) exterior Building
signage identifying Tenant on the top spandrel of the Building, (ii) at the
entry to the Building, and (iii) on the directory board located in the main
entrance to the Building. All such signage shall be subject to Landlord's
reasonable approval as to size, configuration, design, materials, and location.
(b) Landlord shall, using Landlord's reasonable
efforts, cooperate with Tenant in obtaining the proper governmental approvals
and permits for the requested signage. All signage shall comply with building
codes or ordinances of the City of Farmers Branch, Texas. Any such signage
installed by Tenant need not be consistent or compatible with the Building's
design, signage and graphics program, but such inconsistent signage shall be
subject to Landlord's reasonable approval. Tenant shall be solely responsible
for the removal of its signs, and the cost of repairing any resulting damage to
the Building and/or Premises, upon the termination or assignment of the Lease.
To Landlord's knowledge, Landlord knows of no signage restrictions imposed by
governmental authorities which would prohibit Tenant from installing signage
similar to the signage located on the 1601 and 1603 LBJ Freeway, Dallas, Texas
buildings.
ARTICLE 29
NON-COMPETITION
Section 29.01. Landlord warrants and agrees that: (a) Landlord
will not provide any signage on, in or around the Building (excluding standard
lobby directory board listings) to any Competitor of Tenant (as hereinafter
defined) throughout the entire Term of the Lease and any extension thereof; (b)
no other tenant or occupant of the Building shall have, or be provided with,
better signage than what is provided to Tenant; (c) Landlord shall not name the
Building after any Competitor of Tenant; and (d) no other identification or name
of any other tenant or occupant of the Building shall be located above Tenant's
identification on such Building signage or be in larger or more prominent
letters. In the event that Landlord violates any of its agreements set forth in
(a), (b), (c) and (d) of the preceding sentence, Tenant shall have, in addition
to all other rights and remedies
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which it may have under this Lease or at law, the right to injunctive relief
against Landlord for such breach.
Section 29.02. Landlord agreements that it will not, during
the Term of the Lease (as it may be extended) lease any space in the Building to
any other tenant, or consent to a sublease or an assignment, to any other person
or entity whose primary business is predominantly based in the computer/internet
service provider industry ("Competitor"). In the event that Landlord violates
its agreement set forth in this Section, Tenant shall have, in addition to all
other remedies which it may have under this Lease or at law, the right to
injunctive relief against Landlord for such breach.
ARTICLE 30
ANTENNA AND HVAC SYSTEMS
Section 30.01. During the Term of the Lease (as it may be
extended). Tenant shall have the right to install and maintain, on the roof of
the Building, satellite dishes, television antennas, related receiving
equipment, related cable connections and any and all other related equipment
(collectively, "Satellite Dish") required in connection with Tenant's
communications and data transmission network, subject to Landlord's reasonable
approval and the design constraints of the Building. Tenant shall have the right
to use "risers" in the Building (and to install additional risers if necessary)
to the extent of availability of space in such risers, as long as there is no
adverse affect on the building Structure or Building System. In addition to the
foregoing, Tenant shall at its option exercisable by a thirty (30) days' notice
to Landlord, have the right to use additional space on the roof of the Building
for Tenant's additional HVAC equipment and any and all related equipment to
accommodate Tenant's excess HVAC requirements (collectively, "HVAC Unit"),
subject to Landlord's reasonable approval and the design constraints of the
Building. The proposed construction and installation and general appearance of
the Satellite Dish shall be mutually agreed upon by Landlord and Tenant.
Furthermore, the exact location of any such Satellite Dish or HVAC Unit shall be
mutually acceptable to Landlord and Tenant and Tenant shall have secured the
approval of all governmental authorities and all permits required by
governmental authorities having jurisdiction over such approvals and permits for
the Satellite Dish and the HVAC Unit, and shall provide copies of such approvals
and permits to Landlord, prior to commencing any work with respect to such
Satellite Dish and the HVAC Unit. Tenant shall pay for any and all costs and
expenses in connection with the installation, maintenance, use and removal of
the Satellite Dish and the HVAC Unit, but in no event shall Tenant be obligated
to pay Landlord any rental for that portion of the roof of the Satellite Dish
and the HVAC Unit shall be located. Furthermore, Tenant shall, at its sole and
absolute discretion when it deems it as necessary or appropriate to do so,
repair and maintain the
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Satellite Dish and the HVAC Unit, but Tenant may not enter upon the roof of the
Building for such repair without providing at least one (1) business days'
notice to Landlord (except in the case of an emergency where no advance notice
shall be required. Upon the expiration of the Term of the Lease. Tenant shall
remove the Satellite Dish and the HVAC Unit and repair any damage to the roof
resulting therefrom.
ARTICLE 31
RIGHT TO TERMINATE FOR FAILURE TO PROVIDE SERVICES OR
DUE TO HAZARDOUS SUBSTANCES
Section 31.01. Notwithstanding anything to the contrary, and
except as expressly set forth in Section 30.02 below, in the event that tenant
is notified or becomes aware of the fact that as a result of:
(a) the inability of Landlord to provide
services to the Premises, or a substantial portion of the Premises, the Parking
Facility and/or the Building so as to render the Premises, the Parking Facility
and/or the Building unusable, such that Tenant does not use the Premises for the
Non-Use Period (hereinafter defined); or
(b) any discovery of hazardous substances in, or
around the Premises, the Building and/or the Land not placed in, in or around
the Premises, the Building and/or the Land by Tenant, that may, considering the
nature and amount of the substances involved, render the Premises unusable by
Tenant, such that Tenant does not use the Premises for the Non-Use Period;
which present a health risk to any occupants of the Premises) (each of the items
set forth in this Section 31.01(a) and (b) being referred to herein as a
"Trigger Event").
Tenant cannot, within six (6) months ("Non-Use
Period") of the occurrence of the Trigger Event, be given reasonable use of, and
access to, a fully repaired, restored. safe and healthful Premises, Parking
Facility and Building (except for minor "punch-list" items which will be
repaired promptly thereafter), and the utilities and services pertaining to the
Premises, the Parking Facility and the Building, all suitable for the efficient
conduct of Tenant's business therefrom, then Tenant may elect to exercise an
on-going right to terminate the Lease upon thirty (30) days' written notice sent
to Landlord at any time following the expiration of the Non-Use Period.
Section 31.02. In the event of any Trigger Event occurring
during the last year of the Term or, if an applicable renewal option has been
exercised, during the last year of any renewal term, should the Non-Use Period
continue for ninety (90) days. Tenant may elect to exercise an on-going right to
terminate the
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Lease upon thirty (30) days' written notice sent to Landlord at any time
following the expiration of the Non-Use Period.
[SIGNATURE PAGE TO FOLLOW]
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IN WITNESS WHEREOF, Landlord and Tenant have set their hands
and seals hereto and have caused this Lease to be executed by duly authorized
officials thereof, as of the day and year set forth on the cover page hereof.
LANDLORD:
Park West E-3 Associates.
a Texas joint venture
By: The Prentiss/Copley Investment Group.
a Delaware joint venture
By: Prentiss Property Investments, L.P.,
a Delaware limited partnership
By: Prentiss Property Investments. Inc..
a Delaware corporation
By: /s/ DENNIS J. DUBOIS
---------------------------------------
Name: Dennis J. Dubois
-------------------------------------
Title: Principal
------------------------------------
By: /s/ J. KEVAN DILBECK
---------------------------------------
Name: J. Kevan Dilbeck
-------------------------------------
Title: Vice President
------------------------------------
TENANT
NETCOM On-Line Communications Services, Inc.,
a Delaware Corporation
By: /s/ C. THOM WEATHERFORD
---------------------------------------
Name: C. Thom Weatherford
-------------------------------------
Title: Chief Financial Officer
------------------------------------
By: /s/ ANITA ALSTON
---------------------------------------
Name: Anita Alston
-------------------------------------
Title: Director of Corporate Real Estate
---------------------------------------
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EXHIBIT A
FLOOR PLAN OF THE PREMISES
(DRAWING)
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EXHIBIT B
THE LAND
Lot 5. Block 1. of Park West Phase II,. according to the Plat
thereof recorded in the real property records of Dallas County, Texas, as such
property may he replatted from time to time.
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EXHIBIT C
LEASEHOLD IMPROVEMENTS
ARTICLE I
DEFINITIONS
The terms defined in Article I of this Exhibit C, for all purposes of
this Exhibit C, shall have the meanings herein specified, and in addition to the
terms defined herein, the definitions in Section 1.01 of the Lease and otherwise
in this Lease shall also apply to this Exhibit C.
1.01. "Base Building Condition" shall mean the "as is" condition of the
Premises completed with the following improvements, all of which improvements
have been previously completed in the Premises; (a) outside walls, core walls,
columns, and ground elevator lobby areas completed to Building Standard
condition for public areas; (b) broom clean, unfinished concrete floors
throughout the Premises; (c) Building Standard ceiling grid system installed
throughout, with ceiling tile stacked on floor; (d) Building Standard 110 Volt
20 amp. power supplied to the Building core, at panels in the electrical closet;
(e) men's and ladies' restroom facilities with Building Standard finishes
located on each floor on which the Premises are located; (f) main heating,
ventilating, and air-conditioning ducts completed to the mixing boxes, and
standard thermostats, connected in ceiling; (g) sprinkler risers and main loop
on each floor; and (h) Building Standard smoke detectors in accordance with
applicable building codes and based on an open office floor plan.
1.02. "Building Standard" means the quality of materials, finishes, and
workmanship from time to time specified by Landlord for the Building.
1.03. "Non-Building Standard" means all materials, finishes, and
workmanship used in connection with the construction and installation of
Leasehold Improvements which deviate from Building Standard in terms of quality.
1.04. "Tenant's Work" means the work which is supplied, installed, and
finished by Landlord's Contractor, at Tenant's cost, to complete any leasehold
improvements to the Premises.
1.05. "Leasehold Improvements" shall mean the leasehold improvements,
both existing, if any, and to be completed, in the Premises.
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1.06. "Tenant's Space Planner" shall mean the architect or space
planner engaged by Tenant to prepare the plans and specifications for the
Leasehold Improvements as contemplated by Article 2 hereof.
1.07. "Landlord's Contractor" means the person or firm from time to
time selected by Landlord and Tenant, in accordance with the provisions of
Section 2.02 hereof, and paid by Tenant to construct and install the Leasehold
Improvements in the Premises.
1.08. "Landlord's Manager" shall be the manager of the Building, whose
responsibilities include serving as construction manager for Tenant in
connection with the construction of the Leasehold Improvements.
1.09. "Net Rentable Area of the Building" shall have the meaning
specified in Section 1.01 of the Lease.
1.10. "Net Rentable Area of the Premises" shall have the meaning
specified in Section 1.01 of the Lease.
1.11. "Substantially Complete" or Substantial Completion" shall mean
(a) all of the Building Systems are operational to the extent necessary to
service the Premises and the shell and core of the Building are complete and all
Building Systems are operational to the extent necessary to service the
Premises; (b) Landlord has sufficiently completed all the work required to be
performed by Landlord in accordance with this Lease (except punch list items
which Landlord shall thereafter promptly complete) such that Tenant can conduct
normal business operations from the Premises; (c) Landlord has obtained a
certificate of occupancy for the Building, or a temporary certificate of
occupancy for that portion of the Building that includes all of the Premises,
(d) Tenant has been provided with the number of parking spaces to which it is
entitled under the Lease; (e) Tenant has been delivered complete and
uninterrupted access to the Premises (and other required portions of the
Building and the Common Areas) sufficient to allow Tenant to install its
freestanding work stations, fixtures, furniture, equipment, and
telecommunication and computer cabling systems and to move into the Premises
over one (1) weekend; and (f) Tenant has received the Non-Disturbance Agreement
signed by Landlord and each lienholder, ground lessor, or mortgage holder of
record, as required by the Lease.
1.12. "Tenant Expenditures Authorization" means an authorization by
Tenant, prior to the commencement of any Tenant's Work for Landlord's Manager to
contract to expend funds on behalf of Tenant.
1.13. "Landlord Delay" shall mean any delay in the approval of the
design of the Leasehold Improvements or Tenant's move-in into the Premises
during the
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Move-In Period which is due to an act or omission of Landlord (wrongful,
negligent or otherwise), its agents or contractors (including acts or omissions
while acting as agent or contractor for Tenant). Landlord Delay shall include,
but shall not be limited to any; (a) delay in the giving of authorizations or
approvals by Landlord beyond prescribed review periods set forth in the Lease;
(b) delay attributable to the acts or failures to act, whether willful,
negligent or otherwise, of Landlord, its agents or contractors; (c) delay
attributable to the interference of Landlord, its agents or contractors with the
design of the Leasehold Improvements or the failure or refusal of any such party
to permit Tenant, its agent or contractors, access to and use of the Building or
any Building facilities or services, including elevators, and loading docks
which access and use are required for the orderly performance of the work
necessary for Tenant to complete its move-in into the Premises during the
Move-In Period, subject to reasonable restrictions imposed by Landlord or
Landlord's Contractor prior to Substantial Completion; (d) delay attributable to
Landlord giving Tenant incorrect or incomplete Building requirements or base
Building plans, or revisions made to such Building requirements or base Building
plans subsequent to the delivery of such items to Tenant (collectively,
"Incomplete Plans") in either case, in addition to such delay being deemed a
Landlord Delay. Landlord shall reimburse Tenant solely for the actual increased
costs incurred by Tenant as a result thereof; and (e) delay attributable to
Landlord's failure to allow Tenant sufficient access to the Building and/or the
Premises during the Move-In Period to move into the Premises over one (1)
weekend. In no event shall Tenant's remedies or entitlements for the occurrence
of a Landlord Delay be abated, deferred, diminished or rendered inoperative
because of a prior, concurrent, or subsequent delay resulting from any action or
inaction of Tenant, but any such Landlord Delay and Tenant Delay shall be offset
against each other.
1.14. "Tenant Delay" shall mean any delay that Landlord may encounter
in the performance of Landlord's obligations under this Lease because of any act
or omission of any nature by Tenant or its agents or contractors, including, but
not limited to, any (a) delay attributable to failure to approve, or changes in
or additions to, the Plans and Specifications (as defined in Section 2.01 below)
or to the Leasehold Improvements requested by Tenant; (b) delay attributable to
the postponement of any Leasehold Improvements at the request of Tenant; (c)
delay by Tenant in the submission of information or the giving of authorizations
or approvals within the time limits set forth in this Lease; (d) delay
attributable to the failure of Tenant to pay, when due, any amounts required to
be paid by Tenant pursuant to this Lease; (e) delay caused by Tenant's failure
to approve the Tenant Expenditure Authorization (as defined in Section 1.12
hereof; and (f) Tenant's request for materials, finishes or installations, which
are other than Building Standard. No Tenant Delay shall be deemed to have
occurred unless and until Landlord provides notice to Tenant specifying the
action or inaction that Landlord contends constitutes, or could constitute a
Tenant Delay. If such action or inaction is not cured within one (1) day after
receipt of such notice, than a Tenant Delay, as
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set forth in such notice, shall be deemed to have occurred, commencing as of the
date such notice is received and continuing for the number of days the
construction of the Leasehold Improvements was in fact delayed as a result of
such action or inaction.
ARTICLE 2
COMPLETION OF PREMISES
2.01. Tenant's Space Planner has prepared and completed, and Landlord
has approved, the space plan for the Premises. Tenant's Space Planner shall
complete the architectural construction plan with detailed specifications and
finish schedules and the mechanical and electrical construction plan with
detained specifications (collectively "Plans and Specifications") for the
Leasehold Improvements. Such Plans and Specifications shall be prepared by
Tenant's Space Planner and submitted, together with the Tenant Expenditure
Authorization, which has been prepared by Landlord's Manager, to Tenant for its
approval. Within ten (10) working days after Tenant's receipt of such Plans and
Specifications and the Tenant Expenditure Authorization, Tenant shall notify
Landlord's Manager in writing as to whether Tenant approves or disapproves such
Plans and Specifications and the Tenant Expenditure Authorization. Landlord
shall approve of such Plans and Specifications within ten (10) working days of
Landlord's receipt of same. Landlord's approval of the Plans and Specifications,
and any changes thereto, for Tenant's Work shall impose no responsibility or
liability on Landlord for their completeness, design sufficiency, or compliance
with all applicable laws, rules and regulations of governmental agencies or
authorities. If Tenant or Landlord fails to expressly disapprove such Plans and
Specifications and the Tenant Expenditure Authorization within this ten (10)
working day period, then Landlord's Manger shall be authorized to proceed
thereon. All costs, including professional fees, of Tenant's Space Planner which
are related to the review of Tenant's information and instructions and the
preparation of the space plan and the Plans and Specifications shall be paid by
Landlord.
2.02. Landlord's Contractor shall be the contractor selected pursuant
to a procedure whereby the Plans and Specifications and a construction contract
approved by Tenant are submitted to three (3) contractors, selected by Landlord
and approved by Tenant, who are requested to each submit a sealed fixed price
contract bid price (on such contract form as Landlord shall designate) to
construct the Leasehold Improvements designated on the Plans and Specifications,
to Landlord and Tenant, who shall jointly open and review the bids. Landlord and
Tenant after adjustments for the inconsistent assumptions to reflect an "apples
to apples" comparison, shall select the lowest price qualified bidder and such
contractor with the lowest priced qualified bid shall be Landlord's Contractor
and shall enter into a construction contract with Landlord consistent with the
terms of the bid to
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construct the Leasehold Improvements ("Construction Contract"); provided,
however, in the event the lowest priced qualified bid shall, in Tenant's
reasonable determination, be excessive in terms of costs. Tenant may, at its
option, revise the Plans and Specifications, and any delays caused by such
revisions and, if necessary, rebidding shall be a Tenant Delay. Such revised
Plans and Specifications shall then be subject to this Exhibit C. The
Construction Contract shall not, unless Tenant otherwise directs, require
Landlord's Contractor to post a completion bond or contain any provision
penalizing the Landlord's Contractor for not completing the Leasehold
Improvements within a specific period of time.
2.03. All Tenant's Work involved in the construction and installation
of the Leasehold Improvements shall be carried out by Landlord's Contractor
under the sole direction of Landlord's Manager, who shall serve as construction
manager on behalf of Tenant. Tenant shall cooperate with Landlord and Tenant's
Space Planner to promote the efficient and expeditious completion of such
Tenant's Work. Tenant agrees to pay, promptly upon being billed therefor, the
cost (labor and materials) of all Tenant's Work, together with a fee of five
percent (5%) thereon to Landlord's Manager as compensation for Landlord's
Manager's supervision of the construction, alteration, and installation of the
Leasehold Improvements. Tenant shall select a project manager to serve as
Tenant's representative throughout the construction of the Leasehold
Improvements. Tenant's project manager shall be authorized to make all decisions
on behalf of Tenant regarding the construction of the Leasehold Improvements.
Landlord's Manager shall submit monthly statements of costs incurred to Tenant,
which statements shall be promptly paid by Tenant, with such final statement to
be due on or before Tenant occupies the Premises. Tenant agrees that in the
event of default of payment thereof, Landlord (in addition to all other
remedies) shall have the same rights as in the event of default of payment of
Rent under this Lease.
2.04. In the event that Tenant requests any changes to the Plans and
Specifications, Landlord shall not unreasonably withhold its consent to any such
changes, and shall grant its reasonable consent to such changes within two (2)
business days after Landlord's receipt of same. If such changes increase the
cost of constructing the Leasehold Improvements shown on the Plans and
Specifications, Landlord shall provide Tenant with invoices documenting and
evidencing such increased costs, and Tenant shall pay for such increased costs
on a monthly basis according to the invoices for such costs provided by
Landlord's Contractor in accordance with the progress payment schedule. The
costs charged by Landlord to Tenant pursuant to this Section 2.04 shall be an
amount equal to the actual third party costs, if any, incurred by Landlord to
review the requested changes and to cause Tenant's Space Planner to revise the
Plans and Specifications.
2.05. If there are any changes in the Leasehold Improvements caused by
Tenant from the work as reflected in the final Plans and Specifications, each
such
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change must receive the prior written approval of the Landlord, and, in the
event of any such approved change in the Plans and Specifications, Tenant shall
cause Tenant's Space Planner, upon completion of the Tenant's Work, to furnish
Landlord with an accurate "as-built" plan of the Tenant's Work as constructed,
which plans shall be incorporated in to this Exhibit C by this reference for all
intents and purposes when said plans are fully completed.
2.06 Under no circumstances whatsoever will Tenant, or Tenant's
authorized representative, ever alter or modify or in any manner disturb any
Building Systems, Building Structure, or installation of the Building. Only
under Landlord's express written permission and under direct supervision of
Landlord or Landlord's authorized representative shall Tenant or Tenant's
authorized representative alter or modify or in any manner disturb any branch of
any Building System or installation of the Building which is located within the
Premises including, but not limited to, branch electrical system, branch
heating, ventilating, and air-conditioning system and branch fire protection and
alert system.
2.07. All design, construction and installation shall conform to the
requirements of applicable building, plumbing and electrical codes and the
requirements of any authority having jurisdiction over or with respect to, such
work.
2.08. Landlord's Manager shall have no obligation to cause the
commencement of the installation of any of the Leasehold Improvements in the
Premises until Tenant shall have approved the Plans and Specification and the
Tenant Expenditure Authorization as required by Section 2.01 hereof.
2.09. Tenant acknowledges that the Premises, and the existing Leasehold
Improvements, are delivered to Tenant, and accepted by Tenant, in "as is"
condition, except to the extent that Landlord causes Landlord's Contractor to
construct additional Leasehold Improvements to the Premises.
2.10. After the Leasehold Improvements to the Premises are
Substantially Completed (excepting punch list items) and prior to Tenant's
move-in into the Premises ("First Time"), and within thirty (30) days after the
expiration of the Move-In Period ("Second Time"), in each case following five
(5) business days' advance written notice from Tenant to Landlord, Landlord
shall cause Tenant's Space Planner and Landlord's Contractor to inspect the
Premises with a representative of Tenant and complete a punch list of unfinished
items of the Leasehold Improvements. Authorized representatives for Landlord and
Tenant shall execute said punch list to indicate their approval thereof.
Landlord shall cause Landlord's Contractor to use reasonable efforts to complete
such punch list within thirty (30) days after the approval of such punch list,
or as soon thereafter as reasonably practicable.
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2.11. Landlord shall cause Landlord's Contractor to clean the Premises
prior to the commencement of the Move-In Period, including removal of all
rubbish and debris. The cleaning shall leave the Premises in a manner consistent
with the commencement of business from comparable premises in Comparable
Buildings, such that Tenant may commence its business operations from the
Premises immediately after Landlord's Contractor completes such clean-up,
subject to Tenant's move into the Premises. The cost of the cleaning provided by
Landlord's Contractor shall not be included in Operating Costs for the Building
prior to Tenant's occupancy of the Premises.
2.12 Neither Tenant nor the Landlord's Contractor shall be charged for,
and Landlord shall provide, (a) parking (to the extent parking is available) for
Tenant's Space Planner and Tenant's architects, designers, contractors and
subcontractors (including those people working on the Leasehold Improvements)
and (b) utilities for the use of electricity, water, toilet facilities, HVAC,
security, or elevators, during the construction of the Leasehold Improvements or
during the Move-In Period. All such equipment, areas, elevators and utilities
shall be made reasonably available to Tenant during the Move-In Period.
2.13. In the event that Landlord requires Tenant to use specified
contractors or entities (such as mechanical, electrical, plumbing, engineering,
or other contractors, all of whom will be deemed agents of Landlord), Landlord
shall cause such contractors or entities to charge Tenant for such work an
amount not to exceed the cost such contractors or entities charge Landlord for
similar work performed by Landlord's own account.
2.14 During the period prior to the Commencement Date, Tenant shall
have the right, without the obligation to pay Rent, to use empty space in the
Building, if available, designated by Landlord for the sole purpose of storing
and staging its furniture and equipment. With respect to this free storage
space, Tenant shall be responsible for providing all insurance and for providing
any necessary protective facilities. Tenant shall hold Landlord harmless and
shall indemnify Landlord from and against any and all loss, liability or cost
arising out of or in connection with use of such storage space by Tenant. Tenant
shall be obligated to remove all of the stored materials and other facilities by
on or before the Commencement Date.
2.15. Notwithstanding anything to the contrary contained in this
Exhibit C or the Lease, if construction costs related to the ADA exceed
$44,000.00, Tenant shall receive a credit against Rent for up to $22,000.00 of
such excess costs. All AD related construction costs in excess of $66,000.00
shall be solely borne by Tenant.
ARTICLE 3
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COMMENCEMENT OF RENT
3.01. The Commencement Data and Tenant's obligation for the
payment of the Rent under this Lease for the Premises shall commence in
accordance with the terms of Article 3 and Article 4, respectively of the Lease
subject to Landlord Delay, Tenant Delay, and Force Major (as defined in Section
25.06 of the Lease).
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EXHIBIT D
FORM OF COMMENCEMENT NOTICE
This Commencement Notice is delivered this ___ day of _________, 19__,
by Park West E-3 Associates, a Texas joint venture ("Landlord") to ___________
("Tenant"), pursuant to the provisions of Section 3.03 of that certain Lease
Agreement (the "Lease") dated __________, 19__, by and between Landlord and
Tenant covering certain space in the Building known as __________. All terms
used herein with their initial letter capitalized shall have the meaning
assigned to such terms in the Lease.
W I T N E S S E T H:
1. The Building, the Premises, the Parking Facilities, and all other
improvements required to be constructed and furnished by Landlord in accordance
with the terms of the Lease have been satisfactorily completed by the Landlord
and accepted by the Tenant.
2. The premises have been delivered to, and accepted by, the Tenant,
subject to the completion of "punch list" items.
3. The Commencement Date of the lease is the 1st day of_________,
19__, and the Expiration Date is the __ day of _____________, 19__.
4. The Premises consist of ___ square feet of Net Rentable Area
on the_____floor of the Building.
5. The Base Rent is $__________________________ per annum,
payable in monthly installments of $________________ and $_________________,
respectively, subject, however, to the provisions of the Lease relating to
adjustments for Tenant's operating costs Payment.
6. Remittance of the foregoing payments shall be made on the first day
of each month in accordance with the terms and conditions of the lease at the
following address:
Park West E-3 Associates
c/o Prentiss Properties Limited, Inc.
1717 Main Street, Suite 5000
Dallas, Texas 75201
IN WITNESS WHEREOF, this instrument has been duly executed by Landlord
as of the date first written above.
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LANDLORD:
Park West E-3 Associates,
a Delaware joint venture
By: Prentiss Property Investments, Inc.,
a Delaware limited partnership
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
D
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RIDER NO. 1
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways and similar areas
shall not be obstructed by tenants or their officers, agents, servants, and
employees, or used for any purpose other than ingress and egress to and from the
Premises and for going from one part of the Building to another part of the
Building.
2. Plumbing fixtures and appliances shall be used only for the purpose
for which constructed, and no sweepings, rubbish, rags, or other unsuitable
material shall be thrown or placed therein. The cost of repairing any stoppage
or damage resulting to any such fixtures or appliances from misuse on the part
of a tenant or such tenant's officers, agents, servants, and employees shall be
paid by such tenant.
3. No signs, poster, advertisements, or notices shall be painted or
affixed on any of the windows or doors, or other part of the Building, except of
such color, size, and style, and in such places, as shall be first approved in
writing by the building manager. No nails, hooks, or screws shall be driven into
or inserted in any part of the Building, except by Building maintenance
personnel.
4. Directories will be placed by Landlord, Landlord's own expense, in
conspicuous places in the Building. No other directories shall be permitted.
5. The Premises shall not be used for conducting any barter, trade, or
exchange of goods or sale through promotional give-away gimmicks or any business
involving the sale of second-hand goods, insurance salvage stock, or fire sale
stock, and shall not be used for any auction or pawnshop business, any fire
sale, bankruptcy sale, going-out-of-business sale, moving sale, bulk sale, or
any other business which, because of the Building.
6. Tenants shall not do anything, or permit anything to be done, in or
about the Building, or bring or keep anything therein, that will in any way
increase the possibility of fire or other casualty or obstruct or interfere with
the rights of, or otherwise injure or annoy, other tenants, or do anything in
conflict with the valid pertinent laws, rules, or regulations of any
governmental authority.
7. Tenant shall not place a load upon any floor of the premises which
exceeds to floor load per square foot which such floor was designed to carry or
which is allowed by applicable building code. Landlord may prescribe the weight
and position of all safes and heavy installations which Tenant desires to place
in the premises so as properly to distribute the weight thereof. All damage done
to the Building by the improper placing of heavy items which overstress the
floor will be repaired at the sole expense of the Tenant.
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8. A tenant shall notify the building manager when safes or other heavy
equipment are to be taken into or out of the Building. moving of such items
shall be done under the supervision of the building manager, after receiving
written permission from him/her.
9. Corridor doors, when not in use, shall be kept closed.
10. All deliveries must be made via the service entrance and service
elevators during normal business hours or as otherwise directed or scheduled by
Landlord. prior approval must be obtained from Landlord for any deliveries that
must be received after normal business hours.
11. Each tenant shall cooperate with building employees in keeping the
premises neat and clean.
12. Nothing shall be swept or thrown into the corridors, halls,
elevator shafts, or stairways. No birds, animals, or reptiles, or any other
creatures, shall be brought into or kept in or about the building.
13. Should a tenant require telegraphic, telephonic, annunciator, or
any other communication service, Landlord will direct the electricians and
installers where and how the wires are to be introduced and placed, and none
shall be introduced or placed except as Landlord shall direct.
14. Tenants shall not make or permit any improper noises in the
Building, or otherwise interfere in any way with other tenants or persons having
business with them.
15. No equipment of any kind shall be operated on the premises that
could in any way annoy any other tenant in the Building without written consent
of Landlord.
16. Business machines and mechanical equipment belonging to tenant
which cause noise and/or vibration that may be transmitted to the structure of
the Building or to any leased space so as to be objectionable to Landlord or any
tenants in the Building shall be placed and maintained by Tenant, at Tenant's
expense, in setting of cork, rubber, or spring type noise and/or vibration
eliminators sufficient to eliminate vibration and/or noise.
17. tenants shall not use or keep in the Building any inflammable or
explosive fluid or substance, or any illuminating material, unless it is battery
powered, UL approved.
18. Tenant employees or agents, or anyone else who desires to enter the
Building after normal business hours, may be required to provide appropriate
identification and sign in upon entry, and sign out upon leaving, giving the
location
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<PAGE> 83
during such person's stay and such person's time of arrival and
departure, and shall otherwise comply with any reasonable access control
procedures as Landlord may from time to time institute.
19. Landlord has the right to evacuate the Building in event of
emergency or catastrophe.
20. If any governmental license or permit shall be required for the
proper and lawful conduct of Tenant's business, tenant, before occupying the
Premises, shall procure and maintain such license or permit and submit it for
Landlord's inspection. tenant shall at all times comply with the terms of any
such license or permit.
21. Landlord shall have the right, exercisable without notice and
without liability to any tenant, to change the name and street address of the
Building.
22. Landlord serves the right to rescind any of these Rules and
Regulations and make such other and further rules and regulations not
inconsistent with the express terms of the lease as in the judgment of Landlord
shall form time to time be needed for the safety, protection, care, and
cleanliness of the Building, the operation thereof, the preservation of good
order therein, and the protection and comfort of its tenants, their agents,
employees, and invitees, which rules and Regulations when made and notice
thereof given to a tenant shall be binding upon him in like manner as if
originally herein prescribed. In the event of any conflict, inconsistency, or
other difference between the terms and provisions of the Rules and Regulations,
as now or hereafter in effect and the terms and provisions of any lease nor or
hereafter in effect between Landlord and any tenant in the Building, Landlord
shall have the right to rely on the term or provision in either such lease or
such Rules and Regulations which is most restrictive on such tenant and most
favorable to Landlord.
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<PAGE> 84
RIDER NO. 2
EXTENSION OPTIONS
1. Extension Options. Provided no Event of Default under the Lease
beyond any applicable notice and cure period, either at the time of the exercise
of the options set forth herein or at the time of the commencement of the
extension period hereunder. Tenant may elect to extend the Term of this Lease
("Extension Option(s)") for all or any portion of the Premises for two (2)
additional periods of three (3) years each (collectively, the "Extension
Periods"; individually, the "First Extension Period" and the "Second Extension
Period"), by delivering to Landlord not later than six (6) months before the end
of the initial Term of this Lease or the First Extension Periods"; individually,
the "First Extension Period" and the "Second Extension Period"), by delivering
to landlord not later than six (6) months before the end of the initial Term of
this Lease or the First Extension Period, as applicable, a written notice (the
"Option Notice") of such election. The First Extension Period shall commence on
the day immediately following the last day of the Term and Second Extension
Period shall commence on the day immediately following the last day of the First
Extension Period and shall be subject to all the terms and conditions of this
Lease except that (a) the Rent for the applicable Extension Period shall be
determined in accordance with Section 3 hereinbelow and (b) the Base year for
each Extension period shall be calendar year 2003 for the First Extension Period
and calendar year 2006 for the Second Extension Period.
2. Options Not Personal. The Extension Options set forth herein are not
personal to Tenant and may be exercised by any assignee of the lease permitted
under the terms of the Lease. However, no such Extension Option is assignable
separate and apart from the Lease.
3. Base Rent During Extension Periods. The Base Rent for each Extension
period shall be one hundred percent (100%) of the Fair Market Rental Rate (as
hereinafter defined) as of the commencement of the applicable Extension Period.
4. Fair Market Rental Rate. (a) For the purposes of this Rider No. 2,
the term "Fair Market Rental Rate" shall mean the annual amount per net rentable
square foot that a comparable landlord of a Comparable Building, for comparable
creditworthy tenants, for comparable space, for a comparable use for a
comparable period of time ("Comparable Transaction"). In any determination of
Comparable Transactions appropriate consideration shall be given to the annual
rental rates per net rentable square foot, the type of escalation clause (e.g.,
whether increases in additional rent are determined on a net or gross basis, and
if gross, whether such increases are determined according to a base year or a
base dollar amount expense stop), abatement provisions reflecting, free rent
and/or no rent during the period subsequent to the commencement date as to the
space in question, length of the
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<PAGE> 85
lease term, size and location of premises being leased, and building standard
work letter and/or tenant improvement or refurbishment allowances, if any. The
intent is that Tenant will obtain the same rental and other economic benefits
that landlord would otherwise give in Comparable Transactions and that Landlord
will make, and receive the same economic payments and concessions that Landlord
would otherwise make, and receive in Comparable Transactions.
Landlord shall determine the Fair Market Rental Rate by using its good
faith judgment. Landlord shall provide written notice of such amount within
thirty (30) days (but in no event later than sixty (60) days) after Tenant
provides the notice to Landlord exercising Tenant's option rights which require
a calculation of the Fair Market Rental Rate. Tenant shall have thirty (30)
days ("Tenant's Review Period") after receipt of landlord's notice of the new
rental within which to accept such rental or to reasonably object thereto in
writing. In the event Tenant objects, Landlord and Tenant shall attempt to
agree upon such Fair Market Rental Rate. If Landlord and Tenant fail to reach
agreement within thirty (30) days following Tenant's Review Period ("Outside
Agreement Date"), then each party shall place in a separate sealed envelope
their final proposal as to Fair Market Rental Rate and such determination shall
be submitted to arbitration in accordance with Section 5 hereinbelow. Failure
of Tenant to so elect in writing within Tenant's Review Period shall
conclusively be deemed its disapproval of the Fair Market Rental Rate
determined by Landlord.
(b) In the event that Landlord fails to timely generate the initial
written notice of Landlord's opinion of the Fair Market Rental Rate which
triggers the negotiation period of this Section 4, then Tenant may commence such
negotiations by providing, in its good faith judgment, the proposed new rental,
in which even Landlord shall have thirty (30) days ("Landlord's Review Period")
after receipt of Tenant's notice of the new rental within which to accept such
rental. In the event Landlord fails to accept in writing such rental proposed by
Tenant, then such proposal shall be deemed rejected, and Landlord and Tenant
shall attempt to agree upon such Fair Market Rental Rate. If Landlord and Tenant
fail to reach agreement within thirty (30) days following Landlord's Review
Period (which shall be, in such event, the "Outside Agreement Date" in lieu of
the above definition of such date), then each party shall place in separate
sealed envelope their final proposal as to Fair Market Rental Rate and such
determination shall be submitted to arbitration in accordance with Section 5
hereinbelow.
5. Arbitrator. (a) Landlord and Tenant shall meet with each other
within five (5) business days of the Outside Agreement Date and exchange the
sealed envelopes and then open such envelopes in each other's presence. If
Landlord and Tenant do not mutually agree upon the Fair Market Rental Rate
within one (1) business day of the exchange and opening of envelopes, then,
within ten (10) business days of the exchange and opening of envelopes Landlord
and Tenant shall agree upon and jointly appoint a single arbitrator who shall by
profession be a licensed real estate broker, who shall have been active over the
ten
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<PAGE> 86
(10) year period ending on the date of such appointment in the leasing of
commercial office properties and who has been involve din the leasing of at
least three (3) million square feet or commercial office properties. Neither
Landlord nor Tenant shall consult with such broker as to this or here opinion as
to Fair Market Rental Rate prior to the appointment. The determination of the
arbitrator shall be limited solely to the issue of whether Landlord's or
Tenant's submitted Fair Market Rental Rate for the Premises is the closer to the
actual Fair Market Rental Rate for the Premises as determined by the arbitrator,
taking into account the requirements of Section 4 hereinabove. Such arbitrator
may hold such hearings and require such briefs as the arbitrator, in his or her
sole discretion, determines is necessary. In addition, Landlord or Tenant may
submit to the arbitrator with a copy to the other party within five (5) business
days after the appointment of the arbitrator any market data and additional
information that such party deems relevant to the determination of Fair Market
Rental Rate ("FMRR Data") and the other party may submit a reply in writing
within five (5) business days after receipt of such FMRR Data. Any arbitration
carried out pursuant to this Rider No. 2 shall be governed by the applicable
rules of the American Arbitration Association and the Texas General Arbitration
Act; provided the right to submit testimony and other evidence with respect to
the matter in question, as well as the privilege of cross-examining any
witnesses presented by, or on behalf of the other party
(b) The arbitrator shall, within thirty (30) days of his or
her appointment, reach a decision as to whether the parties shall use Landlord's
or Tenant's submitted Fair Market Rental Rate, and shall notify Landlord and
Tenant of such determination.
(c) The decision of the arbitrator shall be binding upon
Landlord and Tenant, except as provided below.
(d) If Landlord and Tenant fail to agree upon and appoint an
arbitrator, then the appointment of the arbitrator shall be made by the
Presiding Judge of a District Court of Dallas County, Texas, or, if he or she
refuse sot act, by any judge having jurisdiction over the parties.
(e) The cost of arbitration shall be paid by Landlord and
Tenant equally.
6. Documentation. Immediately after the Base Rent for the
applicable Extension Period is determined pursuant to this Rider No. 2,,
Landlord and Tenant shall execute an amendment to the Lease stating the new Base
Rent in effect.
7. Terms. All terms used in this Rider No. 2, unless otherwise
defined in this Rider shall have the same meaning as the terms defined in the
Lease.
8. Time of the Essence. Time is of the essence in connection
with this Rider No. 2.
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<PAGE> 87
RIDER NO. 3
MUST TAKE EXPANSION
Tenant shall have the obligation to lease the additional space in the
Building designated below (the "Expansion Space"), upon and subject to the
following terms and conditions:
Expansion Space Delivery Date
10.056 square feet One (1) year from the Commence Date
of Net Rentable Area,
located on the mezzanine
level of the Building as more particularly
set forth on Attachment R-3 hereof
1. Tenant's right to lease the Expansion Space shall, at Landlord's
option, be of no force or effect if either at the time of the leasing of the
Expansion Space, an Event of Default, with any applicable cure periods having
expired, then exists under any provisions of this Lease.
2. Tenant may occupy the Expansion Space to Tenant at any time on or
before the Delivery Date, and upon such occupancy the Expansion Space shall
automatically be added to and form a part of the Premises as if originally
demised under this Lease and the terms "Premises" and "Tenant's Share" as
otherwise defined and used in this Lease shall be revise dot include the
Expansion Space. Such leasing of the Expansion Space shall be upon the same
terms and conditions of this Lease, with the Base Rent payable for the Expansion
Space to be the same Base Rent per square foot as set forth in the Lease for the
Premises. The Expansion Space shall be leased to Tenant in its "as is"
condition, except for the representations set forth in Section 2.03 of the
Lease, and Landlord shall make no representation as to such condition nor shall
Landlord have any obligation to decorate, alter, repair, improve or otherwise
prepare the Expansion Space for Tenant's occupancy. Notwithstanding the
foregoing provisions, Tenant shall only pay Operating Costs in connection with
the Expansion Space through the first anniversary of the Commencement Date.
Commencing on the day following the first anniversary of the Commencement Date,
regardless of whether Tenant has occupied the Expansion Space by such date, the
Expansion Space shall become a part of the Premise s and Tenant shall pay Base
Rent and Additional Rent, which Additional Rent shall include Tenant's Share of
Operating Costs in excess of Base Year Operating Costs, for the Expansion Space
in accordance with the lease.
3. Upon the addition of the Expansion Space to the Premises, Tenant's
Share, as set forth in Section 1.01.K, shall be increased to 100% and Tenant's
Parking Permits, as set forth in Section 1.01.P, shall be increased by
thirty-two (32) parking permits at no charge during the initial Terms.
R-3
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<PAGE> 88
4. Any termination, cancellation or surrender of this Lease shall
terminate Tenant's option for the Expansion Space.
5. Time shall be of the essence with respect to the exercise by Tenant
of its option under this Rider No. 3.
R-3
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<PAGE> 89
RIDER NO. 4
RIGHT TO TERMINATE LEASE
Notwithstanding any provisions or reference to the contrary contained
in the Lease, or any Exhibit or Rider hereto, provided no Event of Default has
occurred and is continuing, Tenant shall have the one time right, at Tenant's
sole option, to terminate this Lease effective on April 30, 2001 ("Termination
Date"), without any liability, except as set forth in this Rider No. 4, provided
that Tenant has provided Landlord written notice by on or before May 1, 2000,
and pays to Landlord, on or before the Termination Date, (a) all unamortized
costs incurred by Landlord in connection with the leasing of the Premises; plus
(b) three (3) months of the then current Base Rent plus Tenant's Operating Costs
Payment (collectively "Termination Payment"). The costs set forth in clause (a)
above shall bear interest at the rate of ten percent (10%) per annum and shall
be amortized over the original Term. Upon the termination of the Lease pursuant
to this Rider No. 4, Tenant shall vacate and return the Premises to Landlord in
"broom clean" condition and otherwise in accordance with the requirements set
forth in the Lease. All Rent under the Lease shall be prorated through the
Termination Date. After the Termination Date, Landlord and Tenant shall have no
further obligations under the Lease as it applies to the lease, except for those
matters which expressly survive the termination of the Lease.
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<PAGE> 90
RIDER NO. 5
GENERAL ARBITRATION
1. Applicability. This Rider No. 5 shall only apply with respect to the
resolution of a dispute pursuant to Section 3.03 of the Lease, Section 5.05 of
the lease, or Section 9.05 of the lease. To institute the provisions of this
Rider No. 5, Tenant shall notify Landlord and in such notice shall designate the
first arbitrator. If the first arbitrator is acceptable to Landlord, Landlord
shall so notify Tenant within ten (10) days after such notice is given and the
first arbitrator shall proceed to determine the matter or dispute within twenty
(20) days thereafter. if the first arbitrator is not acceptable to Landlord,
then within ten (10) days after the giving of Tenant's notice. Landlord shall
designate, in a written notice, the second arbitrator. If Landlord fails to
timely approve the first arbitrator or designate the second arbitrator, then the
first arbitrator shall proceed to determine the matter or dispute within twenty
(20) days after the expiration of such ten (10) day period. If a second
arbitrator is designated, the arbitrators shall meet within ten (10) days after
the designation of the second arbitrator and proceed to jointly appoint a third
arbitrator within ten (10) days after the date the first arbitrator shall be
made within twenty (20) days after his or her appointment. A decision of the
first arbitrator (if a second arbitrator is not designated pursuant to this
Rider No. 5) or the third arbitrator, as applicable, shall be binding and
conclusive on the parties hereto and shall be enforceable as a judgment by the
prevailing party against the losing party. If any arbitrator shall fail, refuse,
or become unable to act, a new arbitrator shall be appointed in his or her place
following the same method as was originally followed with respect to the
arbitrator to be replaced. Landlord and Tenant shall each pay the fees and
expenses of the arbitrator it appoints, but if only one arbitrator is used, or
if a third arbitrator is used, the fees and expenses of such sole or third
arbitrator, as the case may be, as well as the fees and expenses of their
respective counsel shall be borne equally by the parties. All other expenses of
arbitration shall be borne equally by the parties. All hearings and proceedings
held and all investigations and actions taken by the arbitrators shall take
place in Dallas, Texas.
2. Court Appointment of Arbitrator. Should it be necessary to appoint a
third arbitrator as provided for in paragraph 1 hereinabove and the initial two
(2) arbitrators are unable to agree upon a third arbitrator within ten (10)
days, then either Landlord or Tenant may apply to the appropriate District Court
of Dallas County, Texas for the appointment of the third arbitrator.
3. Procedures. Any arbitration carried out pursuant to this Agreement
shall be governed by the applicable rules of the American Arbitration
Association and the Texas General Arbitration Act; provided that regardless of
any conflict with any such rules the arbitrators shall afford the parties to
this lease a hearing and the right to submit testimony and other evidence with
respect to the matter in
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<PAGE> 91
question, as well as the privilege of cross-examining any witnesses presented
by, or on behalf of, the other party.
4. Qualifications of Arbitrators. Any arbitrator appointed by Landlord
or Tenant and any third arbitrator, shall have not less than ten (10) years
experience in connection with the matters at issue in the context of major
suburban office buildings or major mixed-use suburban projects in the Dallas,
Texas metropolitan area. Such arbitrator(s) cannot be affiliated with Landlord
or Tenant to the extent that would cause arbitrators to be a biased party in the
reasonable judgment of the parties. No arbitrator shall have been employed by
either party for the prior three (3) years. Any arbitrator designated to serve
in accordance with the provisions of this Rider No. 5 shall not be affiliated
with any party appointing such arbitrator.
5. Arbitration Not Relieve Performance. During any arbitration
proceedings pursuant to this Rider No. 5, the parties hereto shall continue to
perform and discharge all of their respective obligations under this lease.
6. Restriction on Arbitrator's authority. In determining any
controversy or dispute pursuant to Section 3.03, 5.05 and 9.05 of the lease, the
arbitrator shall apply the provisions of the Lease, without departure therefrom
in any respect. The arbitrator shall not have the power to add to, modify or
change any of the provisions of this Lease, but this provision shall not prevent
in any appropriate case the interpretation, construction and determination by
the arbitrator of the applicable provisions of this Lease to the extent
necessary in applying the same to the matters to be determined by arbitration.
The decision of the arbitration shall be accompanied by written findings of fact
as determined in accordance with applicable lease provisions.
R-5
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<PAGE> 92
COMMENCEMENT NOTICE
This Commencement Notice is delivered this 7th day of June, 1996, by
Park West E-3 Associates, a joint venture ("Landlord") to NETCOM On-Line
Communications Services, Inc. ("Tenant"), pursuant to the provisions of 3.03 of
that certain Lease Agreement (the "Lease") dated February 23, 1996, by and
between Landlord and Tenant covering space in the Building known as 1607 known
as 107 LBJ Freeway, Dallas, Texas 75234. all terms used herein with their
initial letter capitalized shall have the meaning assigned to such terms in the
Lease.
WITNESSETH:
The Building, the Premises, the Parking Facilities, and all other improvements
required to be constructed and furnished by Landlord in accordance with the
terms of the Lease have been satisfactorily completed by the Landlord and
accepted by the Tenant.
The Premises have been delivered to, and accepted by, the Tenant, subject to the
completion of "punch list" items.
The Commencement Date of the Lease is the 30th day of April, 1996, and the
expiration date is the 30th day of April, 2003.
The Premises consist of 50,771 square feet of Net Rentable Area on the 1st floor
of the Building.
The Base Rent is $292,655.00 per annum, payable in monthly installments of
$24,387.92, subject, however, to the provisions of the Lease relating to
adjustments for Tenant's Operating Costs Payment.
Remittance of the foregoing payments shall be made on the first day of each
month in accordance with the terms and conditions of the Lease at the following
address:
Park West E-3 Associates
c/o Prentiss Properties Limited, Inc.
1717 Main Street, Suite 5000
Dallas, Texas 75201
IN WITNESS WHEREOF, this instrument has been duly executed by Landlord
as of the date first written above.
LANDLORD:
Park West E-3 Associates,
a Texas joint venture
<PAGE> 93
By: The Prentiss/Copley Investment Group,
a Delaware joint venture
By: Prentiss Property Investments, L.P.
a Delaware corporation
By: Prentiss Property Investments, L.P.
a Delaware corporation
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By: /s/ J. KEVAN DILBECK
----------------------------------
Name: J. Kevan Dilbeck
--------------------------------
Title: Vice President
-------------------------------
<PAGE> 94
PACTRUST 15350 S.W. Sequoia Pkwy., Suite 300
Pacific Realty Associates, L.P. Portland, Oregon 97224
503/624-6300 Facsimile: 503/624-7755
February 9, 1999
BY FACSIMILE - 303/414-8869
AND BY U.S. MAIL
Bernard L. Zuroff
Assistant General Counsel
ICG Communications, Inc.
P.O. Box 6742
Englewood, CO 80155-6742
Dear Mr. Zuroff:
Re: Lease Agreement dated February 23, 1966 (the "LEASE"), between
NETCOM On-Line Communications Services, Inc., a Delaware
corporation ("NETCOM") and Park West E-3 Associates ("LANDLORD")
By its signature below, Landlord grants its consent to the assignment by Netcom
of its rights and obligations under the Lease defined above to Mindspring
Enterprises, Inc. ("MINDSPRING"), on the following conditions: (1) the facts
stated in your letter dated February 2, 1999, to Michael Nugent of PacTrust,
including the understanding that Netcom will not realize any "profits" as such
term is defined in Section 8.03 of the Lease from the Assignment, are true and
correct as of the date made and as of the date of the assignment; (2) Netcom and
Mindspring shall execute an assignment and assumption of the lease pursuant to
which, among other things, Mindspring will assume all obligations of Tenant
under the Lease, and Landlord shall be provided with a copy of such assignment
and assumption immediately upon execution thereof; (3) after such assignment and
assumption Mindspring shall be subject to all terms and conditions of the Lease;
and (4) Netcom shall not be released of liability under the Lease
notwithstanding such assignment and assumption.
Landlord's consent granted hereby shall be null and void if Landlord has not
received the assignment and assumption referred to above within thirty (30 days
of the date of this letter. In addition, Landlord's consent granted in this
instance shall not modify the obligation of tenant under the Lease to obtain
Landlord's consent to any future assignment of the Lease.
<PAGE> 95
Please call Mike Nugent or the undersigned if you have any questions. Please be
sure to forward the written Assignment and Assumption Agreement to the
undersigned as soon as possible.
Very truly yours,
PARK WEST E-3 ASSOCIATES,
a Texas joint venture partnership
By: PRENTISS/COPLEY INVESTMENT GROUP,
a Delaware joint venture, Managing Venturer
By: PAC/SIB L.L.C., a Washington limited
liability company, managing Partner
By: PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership, Manager Member
By: PACTRUST REALTY, INC., a Delaware
corporation, General Partner
By: /s/ NANCY B. MURRAY
-----------------------------------
Name: Nancy B. Murray
---------------------------------
Its: AVP/ Associate General Counsel
----------------------------------
<PAGE> 96
ASSIGNMENT AND ASSUMPTION OF LEASE
THIS ASSIGNMENT AND ASSUMPTION OF LEASE (the "Assignment") is made and
entered into this 8th day of March, 1999 between NETCOM On-Line Communications
Services, Inc., a Delaware corporation ("Assignor"), and Mindspring Enterprises,
Inc., a Delaware corporation ("Assignee").
In consideration of the promises by Assignee hereunder and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by Assignor, Assignor hereby assigns, transfers and conveys to
Assignee, all right, title and interest of Assignor as tenant in and to that
certain lease dated February 23, 1996, as amended, by and between Assignor and
Park West E-3 Associates (the "Lease").
Assignee hereby expressly assumes all liabilities and agrees to perform
all obligations of Assignor under the Lease to be performed from and after the
date hereof and shall indemnify and hold Assignor harmless from all obligations
on the part of the tenant arising under the Lease from and after the date hereof
and from all liabilities, costs and expenses (including, without limitation,
reasonable attorney's fees) incurred in connection therewith.
This Assignment shall bind and inure to Assignor and Assignee and their
respective successors and assigns.
NETCOM On-Line Communications Services, Inc.
a Delaware corporation, as Assignor
By: /s/ DON TEAGUE
--------------------------------------
Name: Don Teague
------------------------------------
Title: Executive Vice President
--------------------------------------
Mindspring Enterprises, Inc., a Delaware
corporation, as Assignee
By: /s/ SAM DESIMONE
--------------------------------------
Name: Sam DeSimone
------------------------------------
Title: Exec. Vice President
-----------------------------------
<PAGE> 1
EXHIBIT 10.7
AMENDED AND RESTATED
STOCK OPTION PLAN
OF
MINDSPRING ENTERPRISES, INC.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. PURPOSE................................................................1
2. ADMINISTRATION.........................................................1
2.1. The Board......................................................1
2.2. The Committee..................................................2
2.3. No Liability...................................................2
3. STOCK..................................................................2
4. ELIGIBILITY............................................................2
5. EFFECTIVE DATE AND TERM OF THE PLAN....................................3
5.1. Effective Date.................................................3
5.2. Term...........................................................3
6. GRANT OF OPTIONS.......................................................3
7. LIMITATION ON INCENTIVE STOCK OPTIONS..................................3
8. OPTION AGREEMENTS......................................................4
9. OPTION PRICE...........................................................4
10. TERM AND EXERCISE OF OPTIONS...........................................4
10.1. Term and Exercise.............................................4
10.2. Option Period and Limitations on Exercise.....................5
10.3. Method of Exercise............................................5
11. TRANSFERABILITY OF OPTIONS.............................................6
12. TERMINATION OF EMPLOYMENT..............................................6
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY.............................7
13.1. Death.........................................................7
13.2. Disability....................................................8
14. USE OF PROCEEDS........................................................8
15. SECURITIES ACT OF 1933.................................................8
16. SECURITIES EXCHANGE ACT OF 1934: RULE 16B-3............................9
16.1. General.......................................................9
16.2. Compensation Committee........................................9
16.3. Action by the Board...........................................9
16.4. Additional Restriction on Transfer of Stock...................10
16.5. Additional Requirement of Stockholders' Approval..............10
17. AMENDMENT AND TERMINATION OF THE PLAN..................................10
18. EFFECT OF CHANGES IN CAPITALIZATION....................................10
18.1. Changes in Stock..............................................10
18.2. Reorganization With Corporation Surviving.....................11
18.3. Other Reorganizations; Sale of Assets/Stock...................11
18.4. Adjustments...................................................12
18.5. No Limitations on Corporation.................................12
19. DISCLAIMER OF RIGHTS...................................................12
20. NONEXCLUSIVITY OF THE PLAN.............................................12
</TABLE>
-i-
<PAGE> 3
AMENDED AND RESTATED STOCK OPTION PLAN
Mindspring Enterprises, Inc., a Delaware corporation (the
"Corporation"), sets forth herein the terms of this Stock Option Plan (the
"Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the Corporation by
providing eligible individuals (as designated pursuant to Section 4 below) an
opportunity to acquire (or increase) a proprietary interest in the Corporation,
which thereby will create a stronger incentive to expend maximum effort for the
growth and success of the Corporation and its subsidiaries and will encourage
such eligible individuals to remain in the employ or service of the Corporation
or that of one or more of its subsidiaries. Each stock option granted under the
Plan (an "Option") is intended to be an "incentive stock option" ("Incentive
Stock Option") within the meaning of Section 422 of the Internal Revenue Code
of 1986, or the corresponding provision of any subsequently enacted tax
statute, as amended from time to time (the "Code"), except to the extent that
any such Option would exceed the limitations set forth in Section 7 below and
except for Options specifically designated at the time of grant as not being
"incentive stock options."
2. ADMINISTRATION
2.1. THE BOARD
The Plan shall be administered by the Board of Directors of the
Corporation (the "Board"), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Option granted or Option Agreement (as defined in Section 8
below) entered into hereunder and all such other actions and determinations not
inconsistent with the specific terms and provisions of the Plan deemed by the
Board to be necessary or appropriate to the administration of the Plan or any
Option granted or Option Agreement entered into hereunder. The interpretation
and construction by the Board of any provision of the Plan or of any Option
granted or Option Agreement entered into hereunder shall be final and
conclusive.
1
<PAGE> 4
2.2. THE COMMITTEE
The Board may from time to time appoint a Compensation Committee
(the "Committee"). The Board, in its sole discretion, may provide that the role
of the Committee shall be limited to making recommendations to the Board
concerning any determinations to be made and actions to be taken by the Board
pursuant to or with respect to the Plan, or the Board may delegate to the
Committee such powers and authorities related to the administration of the
Plan, as set forth in Section 2.1 above, as the Board shall determine,
consistent with the Certificate of Incorporation and By-laws of the Corporation
and applicable law. In the event that the Plan or any Option granted or Option
Agreement entered into hereunder provides for any action to be taken by or
determination to be made by the Board, such action may be taken by or such
determination may be made by the Committee if the power and authority to do so
has been delegated to the Committee by the Board as provided for in this
Section. Unless otherwise expressly determined by the Board, any such action or
determination by the Committee shall be final and conclusive.
2.3. NO LIABILITY
No member of the Board or of the Committee shall be liable for any
action or determination made, or any failure to take or make an action or
determination, in good faith with respect to the Plan or any Option granted or
Option Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options granted under the
Plan shall be shares of Common Stock and/or shares of Preferred Stock of the
Corporation (such shares of Common Stock and Preferred Stock being collectively
referred to herein as the "Stock"), which shares may be treasury shares or
authorized but unissued shares. The number of shares of Stock that may be
issued pursuant to Options granted under the Plan shall not exceed in the
aggregate 1,000,000 shares of Stock, which number of shares is subject to
adjustment as provided in Section 18 below. If any Option expires, terminates
or is terminated for any reason prior to exercise in full, the shares of Stock
that were subject to the unexercised portion of such Option shall be available
for future Options granted under the Plan.
4. ELIGIBILITY
Options may be granted under the Plan to any employee of the
Corporation or any "subsidiary corporation" thereof within the meaning of
Section 424(f) of the Code (a "Subsidiary") (including any such employee who is
an officer or director of the Corporation or any Subsidiary) as the Board shall
determine and designate from time to time prior to expiration or termination of
the
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Plan. An individual may hold more than one Option, subject to such restrictions
as are provided herein. The maximum number of shares of Stock subject to
Options that may be granted under the Plan to any employee of the Corporation
or any Subsidiary is 200,000 shares in any calendar year (subject to adjustment
pursuant to Section 18. hereof).
5. EFFECTIVE DATE AND TERM OF THE PLAN
5.1. EFFECTIVE DATE
The Plan shall become effective as of the date of adoption by the
Board, subject to stockholders' approval of the Plan within one year of such
effective date by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of
all outstanding stock is present, either in person or by proxy, and voting on
the matter, or by written consent in accordance with applicable state law and
the articles of incorporation and by-laws of the Corporation; provided,
however, that upon approval of the Plan by the stockholders of the Corporation
as set forth above, all options granted under the Plan on or after the
effective date shall be fully effective as if the stockholders of the
Corporation had approved the Plan on the effective date. If the stockholders
fail to approve the Plan within one year of such effective date, any options
granted hereunder shall be null, void and of no effect.
5.2. TERM
The Plan shall terminate on the date ten years after the effective
date.
6. GRANT OF OPTIONS
Subject to the terms and conditions of the Plan, the Board may, at
any time and from time to time prior to the date of termination of the Plan,
grant to such eligible individuals as the Board may determine ("Optionees")
Options to purchase such number of shares of the Stock on such terms and
conditions as the Board may determine, including any terms or conditions which
may be necessary to qualify such Options as "incentive stock options" under
Section 422 of the Code. The date on which the Board approves the grant of an
Option shall be considered the date on which such Option is granted.
7. LIMITATION ON INCENTIVE STOCK OPTIONS
An Option shall constitute an Incentive Stock Option only to the
extent that the aggregate fair market value (determined at the time the Option
is granted) of the Stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year (under
the Plan and all other plans of the Optionee's employer corporation and its
parent and subsidiary
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corporations within the meaning of Section 422(d) of the Code) does not exceed
$100,000.
8. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements") to be executed by the Corporation and
by the Optionee, in such form or forms as the Board shall from time to time
determine. Option Agreements covering Options granted from time to time or at
the same time need not contain similar provisions; provided, however, that all
such Option Agreements shall comply with all terms of the Plan.
9. OPTION PRICE
The purchase price of each share of the Stock subject to an Option
(the "Option Price") shall be fixed by the Board and stated in each Option
Agreement. In the case of an Option that is intended to constitute an Incentive
Stock Option, the option price shall be not less than the greater of par value
or 100 percent of the fair market value of a share of the Stock covered by the
Option on the date the Option is granted (as determined in good faith by the
Board); provided, however, that in the event the Optionee would otherwise be
ineligible to receive an Incentive Stock Option by reason of the provisions of
Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more
than ten percent), the Option Price of an Option which is intended to be an
Incentive Stock Option shall be not less than the greater of par value or 110
percent of the fair market value of a share of the Stock covered by the Option
at the time such Option is granted. In the event that the Stock is listed on an
established national or regional stock exchange, is admitted to quotation on
the National Association of Securities Dealers Automated Quotation System, or
is publicly traded in an established securities market, in determining the fair
market value of the Stock, the Board shall use the closing price of the Stock
on such exchange or System or in such market (the highest such closing price if
there is more than one such exchange or market) on the date the Option is
granted (or, if there is no such closing price, then the Board shall use the
mean between the highest bid and lowest asked prices or between the high and
low prices on such date), or, if no sale of the Stock has been made on such
day, on the next preceding day on which any such sale shall have been made. In
the case of an Option not intended to constitute an Incentive Stock Option, the
Option Price shall be not less than the par value of the Stock covered by the
Option.
10. TERM AND EXERCISE OF OPTIONS
10.1. TERM AND EXERCISE
Each Option granted under the Plan shall terminate and all rights to
purchase shares thereunder shall cease upon the expiration of ten years (ten
years
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and 30 days, in the case of an Option which is not designated as an Incentive
Stock Option) from the date such Option is granted, or on such date prior
thereto as may be fixed by the Board and stated in the Option Agreement
relating to such Option; provided, however, that in the event the Optionee
would otherwise be ineligible to receive an Incentive Stock Option by reason of
the provisions of Sections 422(b)(6) and 424(d) of the Code (relating to stock
ownership of more than ten percent), an Option granted to such Optionee which
is intended to be an Incentive Stock Option shall in no event be exercisable
after the expiration of five years from the date it is granted.
10.2. OPTION PERIOD AND LIMITATIONS ON EXERCISE
Each Option granted under the Plan shall be exercisable, in whole or
in part, at any time and from time to time over a period commencing on or after
the date of grant and ending upon the expiration or termination of the Option,
as the Board shall determine and set forth in the Option Agreement relating to
such Option. Without limiting the foregoing, the Board, subject to the terms
and conditions of the Plan, may in its sole discretion provide that an Option
may not be exercised in whole or in part for a stated period or periods of time
during which such Option is outstanding; provided, however, that any such
limitation on the exercise of an Option contained in any Option Agreement may
be rescinded, modified or waived by the Board, in its sole discretion, at any
time and from time to time after the date of grant of such Option, so as to
accelerate the time at which the Option may be exercised. Notwithstanding any
other provisions of the Plan, no Option shall be exercisable in whole or in
part prior to the date the Plan is approved by the stockholders of the
Corporation as provided above.
10.3. METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by delivery
to the Corporation on any business day, at its principal office addressed to
the attention of the President, of written notice of exercise, which notice
shall specify the number of shares with respect to which the Option is being
exercised and shall be accompanied by payment in full of the Option Price of
the shares for which the Option is being exercised. The minimum number of
shares of Stock with respect to which an Option may be exercised, in whole or
in part, at any time shall be the lesser of 100 shares or the maximum number of
shares available for purchase under the Option at the time of exercise. Payment
of the Option Price for the shares of Stock purchased pursuant to the exercise
of an Option shall be made, as determined by the Board and set forth in the
Option Agreement pertaining to an Option, either (i) in cash or by check
payable to the order of the Corporation (which check may, in the discretion of
the Corporation, be required to be certified); (ii) through the tender to the
Corporation of shares of Stock, which shares shall be valued, for purposes of
determining the extent to which the Option Price has been paid thereby, at
their fair market value (determined in the manner described in Section 9 above)
on the date of exercise; or (iii) by a combination of the methods described in
(i) and (ii);
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provided, however, that the Board may in its discretion impose and set forth in
the Option Agreement pertaining to an Option such limitations or prohibitions
on the use of shares of Stock to exercise Options as it deems appropriate.
Notwithstanding the foregoing, payment in full of the Option Price need not
accompany the written notice of exercise provided the notice directs that the
Stock certificate or certificates for the shares for which the Option is
exercised be delivered to a licensed broker acceptable to the Corporation as
the agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the
Corporation cash (or cash equivalents acceptable to the Corporation) equal to
the Option Price. An attempt to exercise any Option granted hereunder other
than as set forth above shall be invalid and of no force and effect. Promptly
after the exercise of an Option and the payment in full of the Option Price of
the shares of Stock covered thereby, the individual exercising the Option shall
be entitled to the issuance of a Stock certificate or certificates evidencing
his ownership of such shares. A separate Stock certificate or certificates
shall be issued for any shares purchased pursuant to the exercise of an Option
which is an Incentive Stock Option, which certificate or certificates shall not
include any shares which were purchased pursuant to the exercise of an Option
which is not an Incentive Stock Option. An individual holding or exercising an
Option shall have none of the rights of a stockholder until the shares of Stock
covered thereby are fully paid and issued to him, and, except as provided in
Section 18 below, no adjustment shall be made for dividends or other rights for
which the record date is prior to the date of such issuance.
11. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in the
event of legal incapacity or incompetency, the Optionee's guardian or legal
representative) may exercise the Option. No Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution.
12. TERMINATION OF EMPLOYMENT
On the 30th day following the termination of the employment of an
Optionee with the Corporation or a Subsidiary, other than by reason of the
death or "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code) of such Optionee, any Option granted to an Optionee
pursuant to the Plan shall terminate, and such Optionee shall have no further
right to purchase shares of Stock pursuant to such Option; provided, however,
that in the event that such termination of employment is by reason of the
Optionee's retirement with the consent of the Corporation or a Subsidiary in
accordance with the normal retirement policies of the Corporation or a
Subsidiary, as the case may be, then such Optionee shall have the right
(subject to the general limitations on exercise set forth in Section 10 above),
at any time within three months after such retirement
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and prior to termination of the Option pursuant to Section 10 above, to
exercise, in whole or in part, any Option held by such Optionee at the date of
such retirement, whether or not such Option was exercisable immediately prior
to such retirement; provided further, that the Board may provide, by inclusion
of appropriate language in any Option Agreement, that an Optionee may (subject
to the general limitations on exercise set forth in Section 10 above), in the
event of termination of employment of the Optionee with the Corporation or a
Subsidiary, exercise an Option, in whole or in part, at any time subsequent to
such termination of employment and prior to termination of the Option pursuant
to Section 10 above, either subject to or without regard to any installment
limitation on exercise imposed pursuant to Section 10 above, as the Board, in
its sole and absolute discretion, shall determine and set forth in the Option
Agreement. Whether a termination of employment is to be considered by reason of
retirement with the consent of the Corporation or a Subsidiary in accordance
with the normal retirement policies of the Corporation or a Subsidiary, as the
case may be, and whether a leave of absence or leave on military or government
service shall constitute a termination of employment for purposes of the Plan,
shall be determined by the Board, which determination shall be final and
conclusive. For purposes of the Plan, a termination of employment with the
Corporation or a Subsidiary shall not be deemed to occur if the Optionee is
immediately thereafter employed with the Corporation or any other Subsidiary.
13. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
13.1. DEATH
If an Optionee dies while employed by the Corporation or a
Subsidiary, the executors or administrators or legatees or distributees of such
Optionee's estate shall have the right (subject to the general limitations on
exercise set forth in Section 10 above), at any time within one year after the
date of such Optionee's death and prior to termination of the Option pursuant
to Section 10 above, to exercise any Option held by such Optionee at the date
of such Optionee's death, whether or not such Option was exercisable
immediately prior to such Optionee's death; provided, however, that the Board
may provide by inclusion of appropriate language in any Option Agreement that,
in the event of the death of an Optionee, the executors or administrators or
legatees or distributees of such Optionee's estate may exercise an Option
(subject to the general limitations on exercise set forth in Section 10 above),
in whole or in part, at any time subsequent to such Optionee's death and prior
to termination of the Option pursuant to Section 10 above, either subject to or
without regard to any installment limitation on exercise imposed pursuant to
Section 10 above, as the Board, in its sole and absolute discretion, shall
determine and set forth in the Option Agreement.
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13.2. DISABILITY
If an Optionee terminates employment with the Corporation or a
Subsidiary by reason of the "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) of such Optionee, then such Optionee
shall have the right (subject to the general limitations on exercise set forth
in Section 10 above), at any time within one year after such termination of
employment and prior to termination of the Option pursuant to Section 10 above,
to exercise, in whole or in part, any Option held by such Optionee at the date
of such termination of employment, whether or not such Option was exercisable
immediately prior to such termination of employment; provided, however, that
the Board may provide, by inclusion of appropriate language in any Option
Agreement, that an Optionee may (subject to the general limitations on exercise
set forth in Section 10 above), in the event of the termination of employment
of the Optionee with the Corporation or a Subsidiary by reason of the
"permanent and total disability" (within the meaning of Section 22(e)(3) of the
Code) of such Optionee, exercise an Option, in whole or in part, at any time
subsequent to such termination of employment and prior to termination of the
Option pursuant to Section 10 above, either subject to or without regard to any
installment limitation on exercise imposed pursuant to Section 10 above, as the
Board, in its sole and absolute discretion, shall determine and set forth in
the Option Agreement. Whether a termination of employment is to be considered
by reason of "permanent and total disability" for purposes of this Plan shall
be determined by the Board, which determination shall be final and conclusive.
14. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of Stock
pursuant to Options granted under the Plan shall constitute general funds of
the Corporation.
15. SECURITIES ACT OF 1933
The Corporation shall not be required to sell or issue any shares of
Stock under any Option if the sale or issuance of such shares would constitute
a violation by the individual exercising the Option or the Corporation of any
provisions of any law or regulation of any governmental authority, including
without limitation any federal or state securities laws or regulations.
Specifically in connection with the Securities Act of 1933, as amended (the
"Securities Act"), upon exercise of any Option, unless a registration statement
under such Act is in effect with respect to the shares of Stock covered by such
Option, the Corporation shall not be required to sell or issue such shares
unless the Corporation has received evidence satisfactory to it that the holder
of such Option may acquire such shares pursuant to an exemption from
registration under such Act. Any determination in this connection by the
Corporation shall be final, binding, and conclusive. The
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Corporation may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act. The Corporation shall not be
obligated to take any affirmative action in order to cause the exercise of an
Option or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority. As to any jurisdiction that expressly
imposes the requirement that an Option shall not be exercisable unless and
until the shares of Stock covered by such Option are registered or are subject
to an available exemption from registration, the exercise of such Option (under
circumstances in which the laws of such jurisdiction apply) shall be deemed
conditioned upon the effectiveness of such registration or the availability of
such an exemption.
16. SECURITIES EXCHANGE ACT OF 1934: RULE 16B-3
16.1. GENERAL
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
after the date on which the Corporation first registers a class of equity
security under Section 12 of the Exchange Act (the "Registration Date"). From
and after the Registration Date, any provision inconsistent with Rule 16b-3 (as
in effect on the Registration Date) shall, to the extent permitted by law and
determined to be advisable by the Committee (constituted in accordance with
Section 10) or the Board (acting pursuant to Section 10), be inoperative and
void. Moreover, in the event that the Plan does not include a provision
required by Rule 16b-3 to be stated therein, such provision (other than one
relating to eligibility requirements and the amount or timing of awards) shall
be deemed automatically to be incorporated into the Plan insofar as
participants subject to Section 16 are concerned. In addition, from and after
the Registration Date the provisions set forth in Sections 16.2 through 16.5
shall apply.
16.2. COMPENSATION COMMITTEE
From and after the Registration Date, the Committee appointed
pursuant to Section 2.2 shall consist of not fewer than two members of the
Board, neither of whom, during the twelve months prior to service on such
Committee, shall have been granted an Option under this Plan and each of whom
shall qualify (at the time of appointment to the Committee and during all
periods of service on the Committee) in all respects as a "disinterested
person" as defined in Rule l6b-3.
16.3. ACTION BY THE BOARD
From and after the Registration Date, the Board may act under the
Plan other than by, or in accordance with the recommendations of, the
Committee, constituted as set forth in Section 2.2 above, only if all members
of the Board are "disinterested persons" as defined in Rule 16b-3.
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16.4. ADDITIONAL RESTRICTION ON TRANSFER OF STOCK
From and after the Registration Date, no director, officer or other
"insider" of the Corporation subject to Section 16 of the Exchange Act shall be
permitted to sell Stock (which such "insider" had received upon exercise of an
Option) during the six months immediately following the grant of such Option.
16.5. ADDITIONAL REQUIREMENT OF STOCKHOLDERS' APPROVAL
From and after the Registration Date, no amendment by the Board
shall, without approval by a majority of the votes cast at a duly held meeting
of the stockholders of the Corporation at which a quorum representing a
majority of all outstanding stock is present, either in person or by proxy, and
voting on the amendment, or by written consent in accordance with applicable
state law and the articles of incorporation and by-laws of the Corporation,
materially increase the benefits accruing to eligible individuals under the
Plan or take any other action that would require the approval of such
stockholders pursuant to Rule 16b-3.
17. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend, suspend or
terminate the Plan as to any shares of Stock as to which Options have not been
granted; provided, however, that no amendment by the Board shall, without
approval by a majority of the votes cast at a duly held meeting of the
stockholders of the Corporation at which a quorum representing a majority of
all outstanding stock is present, either in person or by proxy, and voting on
the amendment, or by written consent in accordance with applicable state law
and the articles of incorporation and by-laws of the Corporation, materially
change the requirements as to eligibility to receive Options or increase the
maximum number of shares of Stock in the aggregate that may be sold pursuant to
Options granted under the Plan (except as permitted under Section 18 hereof).
Except as permitted under Section 18 hereof, no amendment, suspension or
termination of the Plan shall, without the consent of the holder of the Option,
alter or impair rights or obligations under any Option theretofore granted
under the Plan.
18. EFFECT OF CHANGES IN CAPITALIZATION
18.1. CHANGES IN STOCK
If the outstanding shares of Stock are increased or decreased or
changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of the conversion of the outstanding
shares of Preferred Stock to shares of Common Stock of the Corporation pursuant
to the terms of the Certificate of Incorporation of the Corporation, or by
reason of any recapitalization, reclassification, stock split-up, combination
of shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other
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increase or decrease in such shares effected without receipt of consideration
by the Corporation, occurring after the effective date of the Plan, the number
and kinds of shares for the purchase of which Options may be granted under the
Plan shall be adjusted proportionately and accordingly by the Corporation. In
addition, the number and kind of shares for which Options are outstanding shall
be adjusted proportionately and accordingly, so that the proportionate interest
of the holder of the Option immediately following such event shall, to the
extent practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate Option Price
payable with respect to shares subject to the unexercised portion of the Option
outstanding but shall include a corresponding proportionate adjustment in the
Option Price per share.
18.2. REORGANIZATION WITH CORPORATION SURVIVING
Subject to Section 18.3 hereof, if the Corporation shall be the
surviving corporation in any reorganization, merger or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding proportionate adjustment of the Option Price per share so
that the aggregate Option Price thereafter shall be the same as the aggregate
Option Price of the shares remaining subject to the Option immediately prior to
such reorganization, merger or consolidation.
18.3. OTHER REORGANIZATIONS; SALE OF ASSETS/STOCK
Upon the dissolution or liquidation of the Corporation, or upon a
merger, consolidation or reorganization of the Corporation with one or more
other corporations in which the Corporation is not the surviving corporation,
or upon a sale of substantially all of the assets of the Corporation to another
corporation, or upon any transaction (including, without limitation, a merger
or reorganization in which the Corporation is the surviving corporation)
approved by the Board which results in any person or entity owning 80 percent
or more of the combined voting power of all classes of stock of the
Corporation, the Plan and all Options outstanding hereunder shall terminate,
except to the extent provision is made in writing in connection with such
transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan and Options theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, each individual holding an Option
shall have the right (subject to the general limitations on exercise set forth
in Section 10 above), immediately prior to the occurrence of such termination
and during such period occurring prior to such termination as the Board in its
sole discretion shall
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designate, to exercise such Option in whole or in part, whether or not such
Option was otherwise exercisable at the time such termination occurs and
without regard to any installment limitation on exercise imposed pursuant to
Section 10 above, but subject to any additional limitations that the Board may,
in its sole discretion, include in any Option Agreement. The Board shall send
written notice of an event that will result in such a termination to all
individuals who hold Options not later than the time at which the Corporation
gives notice thereof to its stockholders.
18.4. ADJUSTMENTS
Adjustments under this Section related to stock or securities of the
Corporation shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. No fractional shares of Stock or units
of other securities shall be issued pursuant to any such adjustment, and any
fractions resulting from any such adjustment shall be eliminated in each case
by rounding downward to the nearest whole share or unit.
18.5. NO LIMITATIONS ON CORPORATION
The grant of an Option pursuant to the Plan shall not affect or
limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
19. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to remain in the employ of the Corporation or any
Subsidiary, or to interfere in any way with the right and authority of the
Corporation or any Subsidiary either to increase or decrease the compensation
of any individual at any time, or to terminate any employment or other
relationship between any individual and the Corporation or any Subsidiary.
20. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to
the stockholders of the Corporation for approval shall be construed as creating
any limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable
either generally to a class or classes of individuals or specifically to a
particular individual or individuals) as the Board in its discretion determines
desirable, including, without limitation, the granting of stock options
otherwise than under the Plan.
* * *
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EXHIBIT 10.9
MINDSPRING ENTERPRISES, INC.
DIRECTORS STOCK OPTION PLAN
AS AMENDED AS OF MARCH 25, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. PURPOSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1. Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2. No Liability . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. EFFECTIVE DATE AND TERM OF THE PLAN . . . . . . . . . . . . . . . . . 2
6. GRANT OF OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
6.1. Formula Grants . . . . . . . . . . . . . . . . . . . . . . . . 2
6.2. Discretionary Grants . . . . . . . . . . . . . . . . . . . . . 2
7. OPTION AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 2
8. OPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
9. TERM AND EXERCISE OF OPTIONS . . . . . . . . . . . . . . . . . . . . . 3
9.1. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
9.2. Option Period and Limitations on Exercise . . . . . . . . . . 3
9.3. Method of Exercise . . . . . . . . . . . . . . . . . . . . . . 3
10. TRANSFERABILITY OF OPTIONS . . . . . . . . . . . . . . . . . . . . . 4
11. SERVICE TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . 4
12. RIGHTS IN THE EVENT OF DEATH OR DISABILITY . . . . . . . . . . . . . 4
12.1. Death . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
12.2. Disability . . . . . . . . . . . . . . . . . . . . . . . . . 5
13. USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
14. SECURITIES ACT OF 1933 . . . . . . . . . . . . . . . . . . . . . . . 5
15. SECURITIES EXCHANGE ACT OF 1934: RULE 16B-3 . . . . . . . . . . . . . 5
15.1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
15.2. Additional Restriction on Transfer of Stock . . . . . . . . . 6
16. AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . . . . . . . 6
17. EFFECT OF CHANGES IN CAPITALIZATION . . . . . . . . . . . . . . . . . 6
17.1. Changes in Stock . . . . . . . . . . . . . . . . . . . . . . 6
17.2. Reorganization With Corporation Surviving . . . . . . . . . . 6
17.3. Other Reorganizations; Sale of Assets/Stock . . . . . . . . . 7
17.4. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . 7
17.5. No Limitations on Corporation . . . . . . . . . . . . . . . . 7
18. DISCLAIMER OF RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . 7
19. NONEXCLUSIVITY OF THE PLAN . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
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<PAGE> 3
MINDSPRING ENTERPRISES, INC.
DIRECTORS STOCK OPTION PLAN
MindSpring Enterprises, Inc., a Delaware corporation (the
"Corporation"), sets forth herein the terms of this Directors Stock Option Plan
(the "Plan") as follows:
1. PURPOSE
The Plan is intended to advance the interests of the
Corporation by providing eligible individuals (as designated pursuant to
Section 4 below) an opportunity to acquire (or increase) a proprietary interest
in the Corporation, which thereby will create a stronger incentive to expend
maximum effort for the growth and success of the Corporation and its
subsidiaries and will encourage such eligible individuals to remain in the
employ or service of the Corporation or that of one or more of its affiliates.
No stock option granted under the Plan (an "Option") is intended to be an
"incentive stock option" ("Incentive Stock Option") within the meaning of
Section 422 of the Internal Revenue Code of 1986, or the corresponding
provision of any subsequently enacted tax statute, as amended from time to time
(the "Code").
2. ADMINISTRATION
2.1. BOARD
The Plan shall be administered by the Board of Directors of
the Corporation (the "Board"), which shall have the full power and authority to
take all actions and to make all determinations required or provided for under
the Plan or any Option granted or Option Agreement (as defined in Section 7
below) entered into hereunder and all such other actions and determinations not
inconsistent with the specific terms and provisions of the Plan deemed by the
Board to be necessary or appropriate to the administration of the Plan or any
Option granted or Option Agreement entered into hereunder. The interpretation
and construction by the Board of any provision of the Plan or of any Option
granted or Option Agreement entered into hereunder shall be final and
conclusive.
2.2. NO LIABILITY
No member of the Board shall be liable for any action or
determination made, or any failure to take or make an action or determination,
in good faith with respect to the Plan or any Option granted or Option
Agreement entered into hereunder.
3. STOCK
The stock that may be issued pursuant to Options granted under
the Plan shall be shares of Common Stock of the Corporation (the "Stock"),
which shares may be treasury shares or authorized but unissued shares. The
number of shares of Stock that may be issued pursuant to Options granted under
the Plan shall not exceed in the aggregate 70,000 shares of Stock, which number
of shares is subject to adjustment as provided in Section 17.4 below. If any
Option expires, terminates or is terminated for any reason prior to exercise in
full, the shares of Stock that were subject to the unexercised portion of such
Option shall be available for future Options granted under the Plan.
<PAGE> 4
4. ELIGIBILITY
Options will be granted under the Plan to non-employee
directors of the Corporation.
5. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall be effective as of the date of adoption by the
Board (the "Effective Date"), subject to approval of the Plan within one year
of such Effective Date by the affirmative votes of the holders of a majority of
the shares present, or represented, and entitled to vote at a duly held meeting
of the stockholders of the Corporation at which a quorum is present, either in
person or by proxy, or by written consent in accordance with applicable state
law and the Certificate of Incorporation or the Bylaws of the Corporation;
provided, however, that upon approval of the Plan by the stockholders of the
Corporation as set forth above, all options granted under the Plan on or after
the Effective Date shall be fully effective as if the stockholders of the
Corporation had approved the Plan on the Effective Date. If the stockholders
fail to approve the Plan within one year of such Effective Date, any options
granted hereunder shall be null, void and of no effect. The Plan shall
terminate on the date ten years after the Effective Date.
6. GRANT OF OPTIONS
6.1. FORMULA GRANTS
On the Effective Date, each nonemployee director then serving
on the Board shall be granted Options to purchase 10,000 shares of Stock.
Thereafter, the Board shall grant to each nonemployee director of the
Corporation, upon such person's initial election or appointment to serve as
such a director, Options to purchase 10,000 shares of Stock.
6.2. DISCRETIONARY GRANTS
The Board may, at any time and from time to time prior to the
date of termination of the Plan, grant to any nonemployee director then serving
on the Board Options to purchase such number of shares of Stock on such terms
and conditions as the Board may determine. Without limiting the foregoing, the
Board may at any time, with the consent of the Optionee, amend the terms of
outstanding Options or issue new Options in exchange for the surrender and
cancellation of outstanding Options. The date on which the Board approves the
grant of an Option (or such later date as is specified by the Board) shall be
considered the date on which such Option is granted.
7. OPTION AGREEMENTS
All Options granted pursuant to the Plan shall be evidenced by
written agreements ("Option Agreements") executed by the Corporation and by the
Optionee, in such form or forms as the Board shall from time to time determine.
Option Agreements covering Options granted from time to time or at the same
time need not contain similar provisions; provided, however, that all such
Option Agreements shall comply with all terms of the Plan.
8. OPTION PRICE
The purchase price of each share of the Stock subject to an
Option granted pursuant to Section 6.1 (the "Option Price") shall be the fair
market value of the Stock (the "Market Price") as determined by the Board. The
Option Price of each share of Stock subject to an Option granted
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<PAGE> 5
pursuant to Section 6.2 shall be fixed by the Board and stated in each Option
Agreement. In the event that the Stock is listed on an established national or
regional stock exchange, is admitted to quotation on the National Association
of Securities Dealers Automated Quotation System, or is publicly traded on an
established securities market, in determining the fair market value of the
Stock, the Board shall use the closing price of the Stock on such exchange or
System or in such market (the highest such closing price if there is more that
one such exchange or market) on the trading date immediately before the Option
is granted (or, if there is no such closing price, then the Board shall use the
mean between the high and low prices on such date), or, if no sale of the Stock
had been made on such day, on the next preceding day on which any such sale
shall have been made.
9. TERM AND EXERCISE OF OPTIONS
9.1. TERM
Each Option granted pursuant to Section 6.1 shall terminate and
all rights to purchase shares thereunder shall cease upon the expiration of ten
years and 30 days from the date such Option is granted. Each Option granted
pursuant to Section 6.2 shall terminate and all rights to purchase shares
thereunder shall cease upon the date determined by the Board.
9.2. OPTION PERIOD AND LIMITATIONS ON EXERCISE
The Optionee may exercise the Option granted pursuant to Section
6.1 (subject to the limitations on exercise set forth in this Plan or in the
Option Agreement relating to such Option), in installments as follows: on the
second anniversary of the date of grant of the Option, as set forth in Section
6.1 above, the Option shall be exercisable in respect of 50 percent of the
number of shares specified in Section 6.1 above, and the Option shall be
exercisable in respect of an additional 25 percent of the number of shares
specified in Section 6.1 above on each of the third and fourth anniversaries of
the date of grant, as set forth in Section 6.1 above. The foregoing
installments, to the extent not exercised, shall accumulate and be exercisable,
in whole or in part, at any time and from time to time, after becoming
exercisable and prior to the termination of the Option; provided, that no
single exercise of the Option shall be for less than 100 shares, unless the
number of shares purchased is the total number at the time available for
purchase under this Option. The Optionee may exercise the Option granted
pursuant to Section 6.2 (subject to the limitations on exercise set forth in
this Plan or in the Option Agreement relating to such Option) in whole or in
part, at any time and from time to time, over a period commencing on or after
the date of grant and, to the extent that the Board determines and sets forth a
termination date for such Option in the Option Agreement (including any
amendment thereto), ending upon the stated expiration or termination date.
9.3. METHOD OF EXERCISE
An Option that is exercisable hereunder may be exercised by
delivery to the Corporation on any business day, at its principal office
addressed to the attention of the President, of written notice of exercise,
which notice shall specify the number of shares with respect to which the
Option is being exercised and shall be accompanied by payment in full of the
Option Price of the shares for which the Option is being exercised. The
minimum number of shares of Stock with respect to which an Option may be
exercised, in whole or in part, at any time shall be the lesser of 100 shares
or the maximum number of shares available for purchase under the Option at the
time of exercise. Payment of the Option Price for the shares of Stock
purchased pursuant to the exercise of an Option shall be made, as determined by
the Board and set forth in the Option Agreement pertaining to an Option, either
(i) in cash or by check payable to the order of the Corporation (which
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<PAGE> 6
check may, in the discretion of the Corporation, be required to be certified);
(ii) through the tender to the Corporation of shares of Stock, which shares
shall be valued, for purposes of determining the extent to which the Option
Price has been paid thereby, at their fair market value (determined by the
Board in good faith) on the date of exercise; or (iii) by a combination of the
methods described in (i) and (ii). An attempt to exercise any Option granted
hereunder other than as set forth above shall be invalid and of no force and
effect. Notwithstanding the foregoing, payment in full of the Option Price
need not accompany the written notice of exercise provided the notice directs
that the Stock certificate of certificates for the shares for which the Option
is exercised be delivered to a licensed broker acceptable to the Corporation as
the agent for the individual exercising the Option and, at the time such Stock
certificate or certificates are delivered, the broker tenders to the
Corporation cash (or cash equivalents acceptable to the Corporation).
Promptly after the exercise of an Option and the payment in
full of the Option Price of the shares of Stock covered thereby, the individual
exercising the Option shall be entitled to the issuance of a Stock certificate
or certificates evidencing his ownership of such shares. An individual holding
or exercising an Option shall have none of the rights of a stockholder until
the shares of Stock covered thereby are fully paid and issued to him, and,
except as provided in Section 17 below, no adjustment shall be made for
dividends or other rights for which the record date is prior to the date of
such issuance.
10. TRANSFERABILITY OF OPTIONS
During the lifetime of an Optionee, only such Optionee (or, in
the event of legal incapacity or incompetency, the Optionee's guardian or legal
representative) may exercise the Option. No Option shall be assignable or
transferable by the Optionee to whom it is granted, other than by will or the
laws of descent and distribution.
11. SERVICE TERMINATION
Except as otherwise provided in the Optionee's Option
Agreement, upon the termination of an Optionee's service as a director of the
Corporation or a Subsidiary, other than by reason of the death or permanent and
total disability of such Optionee, any Option granted to an Optionee pursuant
to the Plan shall terminate, and such Optionee shall have no further right to
purchase shares of Stock pursuant to such Option.
12. RIGHTS IN THE EVENT OF DEATH OR DISABILITY
12.1. DEATH
Except as otherwise provided in the Optionee's Option
Agreement, if an Optionee dies while in the service of the Corporation or an
affiliate or Subsidiary, the executors or administrators or legatees or
distributees of such Optionee's estate shall have the right (subject to the
general limitations on exercise set forth in Section 9.2 above), at any time
within one year after the date of such Optionee's death and prior to
termination of the Option pursuant to Section 9.1 above, to exercise any Option
held by such Optionee at the date of such Optionee's death, whether or not such
Option was exercisable immediately prior to such Optionee's death.
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<PAGE> 7
12.2. DISABILITY
Except as otherwise provided in the Optionee's Option
Agreement, if an Optionee's service is terminated by reason of the permanent
and total disability of the Optionee, then such Optionee shall have the right
(subject to the general limitations on exercise set forth in Section 9.2
above), at any time within one year after such termination of service and prior
to termination of the Option pursuant to Section 9.1 above, to exercise, in
whole or in part, any Option held by such Optionee at the date of such
termination, whether or not such Option was exercisable immediately prior to
such termination. Whether such termination is to be considered by reason of
permanent and total disability for purposes of this Plan shall be determined by
the Board, which determination shall be final and conclusive.
13. USE OF PROCEEDS
The proceeds received by the Corporation from the sale of
Stock pursuant to Options granted under the Plan shall constitute general funds
of the Corporation.
14. SECURITIES ACT OF 1933
The Corporation shall not be required to sell or issue any
shares of Stock under any Option if the sale or issuance of such shares would
constitute a violation by the individual exercising the Option or the
Corporation of any provisions of any law or regulation of any governmental
authority, including without limitation any federal or state securities laws or
regulations. Specifically in connection with the Securities Act of 1933, as
amended (the "Securities Act"), upon exercise of any Option, unless a
registration statement under such Act is in effect with respect to the shares
of Stock covered by such Option, the Corporation shall not be required to sell
or issue such shares unless the Corporation has received evidence satisfactory
to it that the holder of such Option may acquire such shares pursuant to an
exemption from registration under such Act. Any determination in this
connection by the Corporation shall be final, binding, and conclusive. The
Corporation may, but shall in no event be obligated to, register any securities
covered hereby pursuant to the Securities Act. The Corporation shall not be
obligated to take any affirmative action in order to cause the exercise of an
Option or the issuance of shares pursuant thereto to comply with any law or
regulation of any governmental authority. As to any jurisdiction that
expressly imposes the requirement that an Option shall not be exercisable
unless and until the shares of Stock covered by such Option are registered or
are subject to an available exemption from registration, the exercise of such
Option (under circumstances in which the laws of such jurisdiction apply) shall
be deemed conditioned upon the effectiveness of such registration or the
availability of such an exemption.
15. SECURITIES EXCHANGE ACT OF 1934: RULE 16B-3
15.1. GENERAL
The Plan is intended to comply with Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
from and after the date on which the Corporation first registers a class of
equity security under Section 12 of the Exchange Act (the "Registration Date").
From and after the Registration Date, any provision inconsistent with Rule
16b-3 (as in effect on the Registration Date) shall, to the extent permitted by
law and determined to be advisable by the Board be inoperative and void.
Moreover, in the event the Plan does not include a provision required by Rule
16b-3 to be stated therein, such provision (other than one relating to
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<PAGE> 8
eligibility requirements and the amount and timing of awards) shall be deemed
automatically to be incorporated into the Plan insofar as participant is
subject to Section 16 are concerned.
15.2. ADDITIONAL RESTRICTION ON TRANSFER OF STOCK
From and after the Registration Date, no director, officer or
other "insider" of the Corporation subject to Section 16 of the Exchange Act
shall be permitted to sell Stock (which such "insider" had received upon
exercise of an Option) during the six months immediately following the grant of
such Option.
16. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, at any time and from time to time, amend,
suspend or terminate the Plan as to any shares of Stock as to which Options
have not been granted; except that any amendment or alteration to the Plan
shall be subject to the approval of the Corporation's stockholders not later
than the annual meeting next following such Board action if such stockholder
approval is required by any federal or state law or regulation or the rules of
any stock exchange or automated quotation system on which the Stock may then be
listed or quoted, and the Board may otherwise, in its discretion, determine to
submit other such changes to the Plan to stockholders for approval. Except as
permitted under Section 17 hereof, no amendment, suspension or termination of
the Plan shall, without the consent of the holder of the Option, alter or
impair rights or obligations under any Option theretofore granted under the
Plan.
17. EFFECT OF CHANGES IN CAPITALIZATION
17.1. CHANGES IN STOCK
If the outstanding shares of Stock are increased or decreased
or changed into or exchanged for a different number or kind of shares or other
securities of the Corporation by reason of the conversion of the outstanding
shares of Preferred Stock to shares of Common Stock of the Corporation pursuant
to the terms of the Certificate of Incorporation of the Corporation, or by
reason of any recapitalization, reclassification, stock split-up, combination
of shares, exchange of shares, stock dividend or other distribution payable in
capital stock, or other increase or decrease in such shares effected without
receipt of consideration by the Corporation, occurring after the Effective Date
of the Plan, the number and kinds of shares for the purchase of which Options
may be granted under the Plan shall be adjusted proportionately and accordingly
by the Corporation. In addition, the number and kind of shares for which
Options are outstanding shall be adjusted proportionately and accordingly, so
that the proportionate interest of the holder of the Option immediately
following such event shall, to the extent practicable, be the same as
immediately prior to such event. Any such adjustment in outstanding Options
shall not change the aggregate Option Price payable with respect to shares
subject to the unexercised portion of the Option outstanding but shall include
a corresponding proportionate adjustment in the Option Price per share.
17.2. REORGANIZATION WITH CORPORATION SURVIVING
Subject to Section 17.3 hereof, if the Corporation shall be
the surviving corporation in any reorganization, merger or consolidation of the
Corporation with one or more other corporations, any Option theretofore granted
pursuant to the Plan shall pertain to and apply to the securities to which a
holder of the number of shares of Stock subject to such Option would have been
entitled immediately following such reorganization, merger or consolidation,
with a corresponding
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<PAGE> 9
proportionate adjustment of the Option Price per share so that the aggregate
Option Price thereafter shall be the same as the aggregate Option Price of the
shares remaining subject to the Option immediately prior to such
reorganization, merger or consolidation.
17.3. OTHER REORGANIZATIONS; SALE OF ASSETS/STOCK
Upon the dissolution or liquidation of the Corporation, or
upon a merger, consolidation or reorganization of the Corporation with one or
more other corporations in which the Corporation is not the surviving
corporation, or upon a sale of substantially all of the assets of the
Corporation to another corporation, or upon any transaction (including, without
limitation, a merger or reorganization in which the Corporation is the
surviving corporation) approved by the Board which results in any person or
entity owning 80 percent or more of the combined voting power of all classes of
stock of the Corporation, the Plan and all Options outstanding hereunder shall
terminate, except to the extent provision is made in writing in connection with
such transaction for the continuation of the Plan and/or the assumption of the
Options theretofore granted, or for the substitution for such Options of new
options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kinds of
shares and exercise prices, in which event the Plan and Options theretofore
granted shall continue in the manner and under the terms so provided. In the
event of any such termination of the Plan, each individual holding an Option
shall have the right (subject to the general limitations on exercise set forth
in Section 9.2 above), immediately prior to the occurrence of such termination
and during such period occurring prior to such termination as the Board in its
sole discretion shall designate, to exercise such Option in whole or in part,
whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on exercise
imposed pursuant to Section 9.2 above, but subject to any additional
limitations that the Board may, in its sole discretion, include in any Option
Agreement. The Board shall send written notice of an event that will result in
such a termination to all individuals who hold Options not later than the time
at which the Corporation gives notice thereof to its stockholders.
17.4. ADJUSTMENTS
Adjustments under this Section 17 related to stock or
securities of the Corporation shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. No fractional shares
of Stock or units of other securities shall be issued pursuant to any such
adjustment, and any fractions resulting from any such adjustment shall be
eliminated in each case by rounding downward to the nearest whole share or
unit.
17.5. NO LIMITATIONS ON CORPORATION
The grant of an Option pursuant to the Plan shall not affect
or limit in any way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge, consolidate, dissolve or liquidate, or to sell or
transfer all or any part of its business or assets.
18. DISCLAIMER OF RIGHTS
No provision in the Plan or in any Option granted or Option
Agreement entered into pursuant to the Plan shall be construed to confer upon
any individual the right to continue as a member of the Board or interfere in
any way with the right of the Corporation to terminate such relationship.
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<PAGE> 10
19. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the
Plan to the stockholders of the Corporation for approval shall be construed as
creating any limitations upon the right and authority of the Board to adopt
such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or
specifically to a particular individual or individuals) as the Board in its
discretion determines desirable, including, without limitation, the granting of
stock options otherwise than under the Plan.
* * * *
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<PAGE> 1
EXHIBIT 10.13
OFFICE BUILDING LEASE AGREEMENT
THIS LEASE is made between PENNSYLVANIA DENTAL SERVICE CORPORATION, a
Pennsylvania corporation d/b/a Delta Dental of Pennsylvania, having its
principal place of business at One Delta Drive, Mechanicsburg, Pennsylvania
(hereinafter "LANDLORD") and MINDSPRING ENTERPRISES, INC., a corporation, having
its principal place of business at 1430 West Peachtree Street, Suite 400,
Atlanta, Georgia, 30309 (hereinafter "TENANT").
Landlord hereby Leases unto Tenant the premises situated at 23 Old
Depot Road, Fairview Township, York County, Pennsylvania, more fully described
herein, upon the following terms and conditions:
1. Premises: The Landlord does hereby lease unto the Tenant and
the Tenant does hereby Lease from the Landlord the Premises with improvements
erected thereon, which is outlined in red on Exhibit "A", attached hereto and
made a part hereof.
2. Improvements: Tenant accepts the Premises "as-is." Upon
execution of this Agreement, Landlord agrees that it will undertake and
complete, at its sole cost and expense, all those certain Leasehold
improvements set forth in Exhibit "E" attached hereto and made a part hereof by
reference. Notwithstanding the foregoing, Landlord represents and warrants
that the Premises are not in violation of any applicable law.
3. Term and Rent: Landlord demises the above premises for a
term of two (2) years ("initial term"), commencing December 15, 1997,
terminating on
<PAGE> 2
December 15,1999, unless earlier terminated as provided herein, at the initial
annual rental of $287,280.00, for the first year, payable in equal monthly
installments in advance during the term of this Lease, in sums of $23,940.00 on
the fifteenth (15th) day of each month, rent to begin from the 15th day of
December, 1997, the first installment to be paid at the time of signing this
Lease. During the second year of the initial term of this Lease, the annual
rental shall be increased to $301,680.00, payable in equal monthly installments
of $25,140.00, as aforesaid. Tenant shall have the right, at its option, to
extend the initial term of this Lease for a third year, provided Tenant shall
give Landlord written notice of its intention to exercise the option to extend
at least ninety (90) days prior to the expiration of the initial term. During
the third year of the initial term of this Lease, if any, the annual rental
shall be increased to $313,800.00, payable in equal monthly installments of
$26,150.00.
If Landlord has not received the full amount of any monthly payment by
the end of ten (10) calendar days after the date it is due, Tenant shall pay a
late charge to Landlord in the amount of five percent (5%) of the overdue
payment.
4. Security Deposit: At the execution of this Lease, Tenant
shall have deposited with Landlord such security deposit which shall be
considered as security for the payment and performance by Tenant of all
Tenant's obligations, covenants, conditions and agreements under the Lease.
Upon the expiration of the term hereof, Landlord shall (provided that Tenant is
not in default under the terms hereof) return and pay back such security
deposit to Tenant within thirty (30) days,
2
<PAGE> 3
less such portion thereof as Landlord shall have used to make good any default
by Tenant with respect to any of Tenant's aforesaid obligations, covenants,
conditions and agreements. In the event of any default by Tenant hereunder
during the term of this Lease, Landlord shall have the right, but shall not be
obligated, to consider the security deposit as pre-paid additional rent and
apply all or any portion of the monies available to cure such default, in which
event Tenant shall be obligated promptly to deposit with the Landlord the amount
necessary to restore the security deposit to its original amount. In the event
of the sale or transfer of Landlord's interest in the Property, Landlord shall
have the right to transfer the security deposit to such purchaser or transferee,
in which event Tenant shall look only to the new Landlord for the return of the
security deposit and Landlord shall thereupon be released from all liability to
Tenant for the return of such security deposit. Landlord hereby acknowledges
that it is in receipt of the security deposit required of Tenant as referenced
in Paragraph 33 hereof.
5. Use: Tenant agrees that it will use and occupy the Demised
Premises offices as an internet access company and uses customarily incident
thereto and for no other purpose without the written consent of Landlord first
had and obtained; nor shall Tenant manufacture any commodity, nor prepare or
dispense foods or beverages therein, nor do or permit anything to be done in
the Demised Premises or in any part of the building, nor bring or keep anything
which will in any way increase the rate of fire insurance over that for such a
building used exclusively for business office purposes, or avoid or suspend
policies of fire insurance on the
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<PAGE> 4
building, or on property kept in it, or which will obstruct or interfere with
the rights of other Tenants, or in any other way injure or annoy them, or which
will conflict with the laws or police or fire department or Board of Fire
Underwriters' regulations relating to fires, or with any of the rules and
regulations of the Board of Health, nor will the Tenant allow the Demised
Premises or any part of it to be occupied by any other person than Tenant or
Tenant's employees without the written consent of Landlord endorsed on this
Agreement.
6. Inability to Give Possession: If Landlord is unable to give
Tenant possession of the Demised Premises by reason of the holding over of a
previous occupant, or by reason of any cause beyond the control of the
Landlord, the Landlord shall not be liable in damages to the Tenant, and during
the period that the Landlord is unable to give possession, all rights and
remedies of both parties hereunder shall be suspended.
7. Payment of Rent: All rents and other sums due to Landlord
shall be paid by Tenant to Landlord without demand, deduction, setoff or
counterclaim at the office of Landlord, or to such other party or at such other
address as Landlord may designate, from time to time, by written notice to
Tenant.
8. Rent Acceptance: If Landlord, at any time or times, shall
accept Rent or any other sum due to it after the same shall become due and
payable, such acceptance shall not excuse delay upon subsequent occasions, or
constitute, or be construed as, a waiver of any of Landlord's rights.
4
<PAGE> 5
9. Affirmative Covenants of Tenant: Tenant covenants and agrees
that it will perform the following without demand:
(a) Payment of Rent: Pay the rent and all other charges
on the days and times and at the place that they are made payable, without
fail. Tenant agrees that any charge or payment agreed to be treated or
collected as rent and/or any other charges or taxes, expenses, or costs to be
paid by the Tenant may be proceeded for and recovered by the Landlord by
distraint or other process in the same manner as rent due and in arrears.
(b) Care and Maintenance of Premises: Tenant
acknowledges that the premises are in good order and repair. Tenant shall, at
its own expense and at all times, maintain the premises in a clean, sanitary
and safe condition. Tenant shall be responsible for the janitorial services,
changing of light bulbs, provide all paper products, cleaning materials and the
removal of trash from the demised premises. Tenant will be responsible for
loss or damage to the premises suffered by Landlord because of the negligence
of Tenant, subject, however, to the exception of ordinary wear and tear, and
unavoidable damage by fire, elements, casualty, or other cause or happening not
due to the negligence of Tenant, its agents, employees or guests. Tenant shall
surrender the demised premises, at the termination hereof, in as good condition
as received, ordinary wear and tear excepted. Tenant shall professionally
clean the carpets. In the event that Tenant fails to comply with any of the
terms of this paragraph within ten (10) days after receipt of written request
by Landlord, then Landlord shall undertake such repairs and cleaning with
Tenant
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being liable for all costs thereof. Tenant shall comply with all requirements
of law, ordinances and regulations, including those rules and regulations
attached hereto as Exhibit "B" and including those relating to occupational
safety and health which are Tenant's obligations under this Lease.
Landlord shall, at its own expense and at all times, maintain the
roof, foundation, exterior walls, plate glass, electrical wiring, plumbing,
heating and air conditioning installations, and any other systems or equipment
that are typically referred to as fixtures on the premises, excluding the
Tenant installed phone and computer systems. Landlord at its own expense shall
also be responsible for the maintenance, snow removal and landscaping of the
exterior of the demised premises in accordance with the minimum requirements
set forth in Exhibit "C."
(c) Requirements of Public Authorities: Comply with any
requirements of any of the constituted public authorities, and with the terms
of any state or federal statute or local ordinance or regulation applicable to
Tenant or its use of the Demised Premises, and indemnify Landlord from
penalties, fines, costs or damages resulting from failure so to do.
(d) Fire: Use every reasonable precaution against fire.
(e) Rules and Regulations: Comply with rules and
regulations of Landlord promulgated as provided in this Agreement.
(f) Surrender of Possession: Peaceably deliver up and
surrender possession of the Demised Premises to the Landlord at the expiration
or sooner termination of this Lease, promptly delivering to Landlord at its
office all keys for
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the Demised Premises, subject, however, to the provisions for renewal of the
Lease terms set forth in Paragraph 45 herein.
(g) Notice of Fire, etc.: Give to Landlord prompt
written notice of any accident, fire, or damage occurring on or to the Demised
Premises.
(h) Agency on Removal: The Tenant agrees that if, with
the permission in writing of Landlord, Tenant shall vacate or decide at any
time during the term of this Lease, or any renewal, to vacate the Demised
Premises, prior to the expiration of this Lease, or any renewal, Tenant will
not cause or allow any other agent to represent Tenant in any subletting or
reletting of the Demised Premises other than an agent approved by the Landlord
and that should Tenant do so or attempt to do so, the Landlord may remove any
signs that may be placed on or about the Demised Premises by such other agent
without any liability to Tenant or to the agent, the Tenant assuming all
responsibility for such action.
10. Utilities and Services: Landlord shall furnish the Premises
with electricity, heating and air conditioning and water service, for the
normal use and occupancy of the Premises as general offices. Landlord reserves
the right, without any liability to Tenant, and without being in breach of any
covenant of this Lease, to interrupt or suspend service of any of the heating,
ventilating, air-conditioning, electric, sanitary, or other building systems
serving the Premises, or the rendition of any of the other services required by
Landlord under this Lease, whenever and for so long as may be necessary by
reason of accident, emergencies, strikes or the making of repairs or changes
which Landlord is required by this Lease or by law to
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make or in good faith deems advisable, or by reason of difficulty in securing
proper supplies of fuel, steam, water, electricity, labor or supplies, or by
reason of any other cause beyond Landlord's reasonable control, including
without limitation mechanical failure and governmental restrictions on the use
of materials or the use of any of the building systems.
In each instance, however, Landlord shall exercise reasonable
diligence to eliminate the cause of interruption and to effect restoration of
service, and shall give Tenant reasonable notice, when practicable, of the
commencement and anticipated duration of such interruption. Tenant shall not
be entitled to any diminution or abatement of rent or other compensation or
damages nor shall this Lease or any of the obligations of the Tenant be
affected or reduced by reason of the interruption, stoppage or suspension of
any of the building systems or services arising out of the causes set forth in
this paragraph. Notwithstanding the foregoing, if this interruption continues
for a period of time in excess of ten (10) business days, Tenant may terminate
this Lease upon forty-eight (48) hours written notice.
(a) The cost of separately metered electrical service and
water service shall be paid by Tenant promptly upon being billed therefor by
the utility company.
11. Negative Covenants of Tenant: Tenant covenants and agrees
that it will do none of the following things without the consent in writing of
Landlord:
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(a) Use of Premises: occupy the Demised Premises in any
manner or for any purpose other than as permitted in Paragraph 5 herein.
(b) Assignment and Subletting: Assign, mortgage or
pledge this Lease or underlet or sublease the Demised Premises, or any part of
it, or permit any other person, firm or corporation to occupy the Demised
Premises, or any part of it except as provided in paragraph 21 herein; nor
shall any assignee or sublessee assign, mortgage or pledge this Lease or such
sublease, without an additional written consent by the Landlord, and without
consent no assignment, mortgage or pledge shall be valid. If the Tenant
becomes embarrassed or insolvent, or makes an assignment for the benefit of
creditors, or if a petition in bankruptcy is filed by or against the Tenant or
a bill in equity or other proceeding for the appointment of a receiver for the
Tenant is filed, or if the real or personal property of the Tenant shall be
sold or levied upon by any sheriff, marshall or constable, the same shall be a
violation of this covenant.
(c) Signs and Exterior Attachments: Landlord agrees to
permit one outside sign per building which shall include the name of Tenant as
well as to letter the entrance to the premises with the name of the Tenant.
All signage must conform to zoning and not be mounted on the building. Tenant
shall not place or suffer to be placed on the exterior of the Premises or upon
the roof or any exterior door or wall or on the exterior or interior of any
window or common area wall, thereof any sign, awning, canopy, marquee,
advertising matter, decoration, lettering, or any other thing of any kind
(exclusive of the signs, if any, which may be
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provided for in the original construction or improvement plans and
specifications approved by the Landlord and Tenant hereunder) without the
written consent of Landlord first had and obtained. Landlord hereby reserves
the exclusive right to the use of the roof and exterior walls of the building
of which the Premises are a part, for any purpose whatsoever. Except as
otherwise herein provided, Tenant shall have the right, at its sole cost and
expense, to erect and maintain within the interior of the Premises all signs
and advertising matter customary or appropriate in the conduct of Tenant's
business. Tenant shall at all times maintain its windows and signs in a neat,
clean and orderly condition. If, as to any exterior sign, Tenant shall fail to
do so after five (5) days' written notice from Landlord, Landlord may remove,
repair, clean or maintain such exterior sign and the cost thereof shall be
payable by Tenant to Landlord upon demand as additional rent. Tenant shall
remove any sign, projection or device painted, placed or erected, if permission
has been granted and restore the walls, etc., to their former conditions, at or
prior to the expiration of this Lease. In case of the breach of this covenant
(in addition to all other remedies given to Landlord in case of the breach of
any conditions or covenants of this Lease) Landlord shall have the privilege of
removing the stand, booth, sign, showcase, projection or device, and restoring
the walls, etc., to their former condition, and Tenant, at Landlord's option,
shall be liable to Landlord for any and all expenses so incurred by Landlord.
(d) Alterations, Improvements: Make any alterations,
improvements, or additions to the Demised Premises without the prior obtained
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written consent of Landlord, which consent shall not be unreasonably withheld
or delayed. Tenant agrees to submit detailed plans and specifications for any
proposed alterations, improvements, or additions to Landlord for prior review
and approval, which approval shall not be withheld unreasonably. No such work
shall be commenced until after Landlord has notified Tenant in writing that
such plans and specifications have been approved. All such work shall be
promptly commenced and thereafter completed with due diligence. Any such plans
and specifications shall be in compliance with applicable building codes and
the standards of the Department of Labor and Industry or other governmental or
regulatory authority in accordance with Paragraph 9(c) of this Agreement. All
alterations, improvements, additions or fixtures, whether installed before or
after the execution of this Lease, shall remain upon the premises at the
expiration or sooner determination of this Lease and become the property of
Landlord, unless Landlord shall, prior to the termination of this Lease, have
given written notice to Tenant to remove such alterations, improvements and
additions and restore the premises to the same good order and condition in
which they now are. Should Tenant fail to do so, Landlord may do so,
collecting, at Landlord's option, the cost and expense from Tenant as
additional rent.
(e) Machinery: Use or operate any machinery that, in
Landlord's opinion, is harmful to the building or disturbing to other tenants
occupying other parts of it.
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(f) Weights: Place any weights in any portion of the
Demised Premises beyond the safe carrying capacity of the structure.
(9) Fire Insurance: Do or allow to be done, any act, matter or
thing objectionable to the fire insurance companies so that the fire insurance
or any other insurance now in force or thereafter to be placed on the Demised
Premises, or any part of it, or on the building of which the Demised Premises
may be a part, shall become void or suspended, or whereby the same shall be
rated as a more hazardous risk than at the date of execution of this Lease, or
employ any person or persons objectionable to the fire insurance companies or
carry or have any benzene or explosive matter of any kind in and about the
Demised Premises. In case of a breach of this covenant (in addition to all
other remedies given to Landlord in case of the breach of any of the conditions
or covenants of this Lease) Tenant agrees to pay to Landlord as additional rent
any and all increase or increases of premiums on insurance carried by Landlord
on the Demised Premises, or any part of it, or on the building of which the
Demised Premises may be a part, caused in any way by the occupancy of Tenant.
(h) Removal of Goods: Remove, attempt to remove or
manifest an intention to remove Tenant's goods or property from or out of the
Demised Premises otherwise than in the ordinary and usual course of business,
without having first paid and satisfied Landlord for all rent which may become
due during the entire term of this Lease.
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(i) Vacate Premises: Vacate or desert premises during
the term of this Lease, or permit the same to be empty and unoccupied.
(j) Hazardous Substances: In addition to, and not in
limitation of any other provisions of this Lease, Tenant agrees not to
generate, store, use, treat or dispose of, nor to allow, suffer or permit the
generation, storage, use, treatment or disposal of, any "hazardous waste" or
"hazardous substance" (as those terms are defined in the Resource Conservation
and Recovery Act, 42 U.S.C. Sections 6901, et seq., as amended ("RCRA") or the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), and any rules and
regulations now or hereafter promulgated under either of such acts) or any
pollutant or other contaminant on, in, from or about the Demised Premises,
which hazardous material is prohibited or controlled by any federal, state or
local law, ordinance, rule or regulation now or hereafter in effect. Tenant
shall and hereby does indemnify and hold Landlord harmless from and against any
and all loss, damages, expenses, fees, claims, costs and liabilities
(including, but not limited to, attorneys' fees and costs of litigation)
arising out of or in any manner related to the "release" or "threatened
release" of, and for any clean-up responsibility imposed upon Landlord under
any federal, state or local law, ordinance, rule or regulation now or hereafter
in effect, with respect to any "hazardous waste" or "hazardous substance" (as
those terms are defined in RCRA and CERCLA, and any rules and regulations now
or hereafter promulgated thereunder), or any pollutant, or other contaminant
on, in, from or about the
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Demised Premises or any portion or portions thereof, which release or
threatened release arises out of or is in any manner related to Tenant's use or
occupancy of the Demised Premises. Notwithstanding anything contained herein
to the contrary, Landlord shall remain responsible for, and shall indemnify and
save Tenant harmless from and against any and all liability, damages, losses,
claims, suits and other costs (including reasonable attorneys' fees) arising
out of, or connected with the presence on, in, or under the Building or
Premises, of any asbestos, PCBs, or any other hazardous substance or hazardous
waste existing prior to the commencement of this Lease, or resulting from any
cause other than Tenant's occupancy in, or use of, the Demised Premises.
12. Landlord's Rights: Tenant covenants and agrees that Landlord
shall have the right to do the following things and matters in and about the
Demised Premises:
(a) Inspection of Premises: At all reasonable times and
upon reasonable notice by Landlord or its duly authorized agents to go upon and
inspect the Demised Premised and every part of it, and/or at its option to make
repairs, alterations and additions to the Demised Premises or the building of
which the Demised Premises is a part.
(b) Sale or Rent Sign-Prospective Purchasers or Tenants:
To display a "For Sale" sign at any time, and also, after notice from either
party of intention to terminate this Lease, or at any time within six (6)
months prior to the expiration of this Lease, a "For Rent" sign, or both "For
Rent" and "For Sale" signs;
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and all of the signs shall be placed upon such part of the premises as Landlord
shall require. Prospective purchasers or tenants authorized by Landlord may
inspect the premises at reasonable hours at any time.
13. Responsibility of Landlord:
(a) Fire or Casualty: in case of damage to the Premises
by a risk insured against under Paragraph 17 hereof, Landlord, unless it shall
otherwise elect as hereinafter provided, shall repair or cause to be repaired
such damages with reasonable dispatch after receiving from the Tenant written
notice of the damage. If the damages are such as to render the premises
untenantable, the rent shall be abated to an extent corresponding with the
period during which and the extent to which the Premises have become
untenantable; provided, however, if such damages are caused by the carelessness
or negligence or improper conduct of Tenant or of a Subtenant, or the agents,
employees, visitors, invitees or licensees of Tenant or of a Subtenant, then
notwithstanding such damages and untenantability, Tenant shall be liable for
rent without abatement. In the event of damage to the Premises to the extent
of more than fifty (50%) percent of the value of such premises or if the
Tenant's operations cannot reasonably be conducted from the balance of the
Premises, Tenant shall give Landlord written notice of the damage (but failure
to give notice shall not be binding upon Landlord) after which either party may
determine with reasonable dispatch, that the Lease shall be terminated, in
which event all rent shall abate and the Lease terminate as of the date of the
occurrences of the event causing such damage.
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(b) Eminent Domain: The Tenant may at its option
terminate this Lease if any portion of the Premises is condemned by any
governmental body or by any other body or organization possessing the power of
condemnation provided such condemnation substantially impairs the use or
enjoyment by Tenant of the Premises. In case of the taking through eminent
domain of all, or any portion, of the premises, the Landlord shall notify the
Tenant in writing of such taking. Within sixty (60) days after receipt of such
written notice, the Tenant shall notify the Landlord, in writing, whether such
taking through eminent domain in the opinion of the Tenant substantially
impairs its use or enjoyment of the Premises. If Landlord and Tenant agree
that Tenant's use or enjoyment is substantially impaired, then Tenant shall
give written notice to Landlord of its intent to vacate the Premises, which
notice shall include the time when it desires to terminate the Lease, which
time shall not be earlier than physical work (other than surveying and staking
out) shall be instituted on the Premises by the condemning authority, nor later
than sixty (60) days after the same time. The failure of the Tenant to give
notice set forth above as required and within the time limit set forth above,
shall be conclusively construed as a decision on the Tenant's part that such
taking does not substantially impair its use or enjoyment of the Premises. On
the other hand, the giving of such notice by the Tenant does not bind the
Landlord as to the correctness of the Tenant's decision that its use or
enjoyment of the Premises is substantially impaired by the taking, and Landlord
may object to same and demand a decision be made by a proper authority. Tenant
shall not be entitled to receive any part of any
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award or awards that may be made to or received by Landlord, relating to the
fair market value of the real estate taken or severance damage to the remaining
real estate of Landlord. Tenant at its expense may take independent
proceedings against the public authority exercising the power of eminent domain
to prove and establish any damage Tenant may have sustained relating to
Tenant's business and relocation expense.
(c) Damage for Interruption of Use: Landlord shall not
be liable for any damage, compensation or claim by reason of inconvenience or
annoyance arising from the necessity of repairing any portion of the building,
the interruption in the use of the premises, or the termination of this Lease
by reason of the destruction of the premises.
(d) Representation of Condition of Premises: The
Landlord has let the Demised Premises in their present condition and without
any representations on the part of the Landlord, its employees, servants and/or
agents. It is understood and agreed that Landlord is under no duty to make
repairs or alterations at the time of letting or at any time thereafter.
(e) Zoning: It is understood and agreed that the
Landlord does not warrant or undertake that the Tenant shall be able to obtain
a permit under any zoning ordinance or regulation for such use as Tenant
intends to make of the said premises, and nothing in this Lease shall obligate
the Landlord to assist Tenant in obtaining this permit; the Tenant further
agrees that in the event a permit cannot be obtained by Tenant under any zoning
ordinance, or regulation, this Lease shall
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not terminate without Landlord's consent, and the Tenant shall use the premises
only in a manner permitted under such zoning ordinance or regulation.
14. Indemnification of Landlord:
(a) The Landlord shall not be liable to the Tenant, any
officer, employee, agent, invitee, licensee or visitor of the Tenant, or any
other person, for damage or injury to any person or property caused by any act,
omission or neglect of the Tenant, its contractor, employees or agents,
invitee, licensee, or visitor, or any happening in any manner on the Premises.
(b) Tenant covenants and agrees that it shall, without
notice or demand and at its own cost and expense, indemnify and hold harmless
Landlord against and from, any and all claims, demands, loss, damages or other
liability or any nature whatsoever, by or on behalf of any person arising in
any manner whatsoever from, out of or in connection with (a) the use,
possession and occupancy of the premises by Tenant, or any act or omission of
Tenant, its agents, servants, employees, business invitees and licensees, (b)
any failure by Tenant to perform any of the terms or conditions of this Lease
required to be performed by Tenant, and (c) any failure by Tenant to comply
with any statutes, regulations, ordinances or order of any governmental
authority, and from and against all costs, attorney fees, expenses and
liabilities incurred in or as a result of any such claim or action or
proceeding brought against Landlord by reason of any such claim. Tenant, upon
notice from Landlord, covenants to resist or defend such action or proceeding
by legal counsel reasonably satisfactory to Landlord.
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Tenant will defend, indemnify, and save Landlord harmless from and against
any and all claims, actions, lawsuits, damages, liability, and expense
(including, without limitation, attorneys' fees) arising from loss, damage, or
injury to persons or property occurring in, on, or about the Demised Premises,
arising out of the Demised Premises, or occasioned wholly or in part by any act
or omission of Tenant, Tenant's agents, contractors, customers or employees.
(c) All property kept, stored or maintained on the
Premises shall be so kept, stored or maintained at the risk of the Tenant only,
and the Landlord shall not be liable for any loss or damage to the Tenant of
its property.
15. Insurance:
(a) Tenant Insurance: Tenant covenants and agrees that
from and after the delivery of the Premises from Landlord to Tenant, Tenant
will carry and maintain, at its sole cost and expense, the following types of
insurance, the amounts specified and in the form hereinafter provided for:
(i) Public Liability and Property Damage: Public
liability and property damage insurance with
a combined single limit of One Million
Dollars ($1,000,000.00) insuring against any
and all liability of the insured with respect
to said Premises or arising out of the
maintenance, use or occupancy thereof. All
such bodily injury liability insurance and
property damage liability insurance shall
specifically insure the performance by Tenant
of the
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indemnity provisions as to liability for
injury to or death of persons and injury or,
damage to property in this Section contained.
(ii) Tenant Improvements: Tenant shall maintain
casualty insurance on all of Tenant's
leasehold improvements, trade fixtures,
merchandise and personal property. In
addition, Tenant shall maintain fire and
extended coverage insurance for Landlord's
furniture provided for Tenant's use.
Landlord has provided Tenant with a Schedule
(Exhibit "D") listing the items to be insured
which constitute Landlord's furniture
hereunder.
(b) Policy Form: All policies of insurance provided for
herein shall be issued by insurance companies with general policyholders'
rating of not less than A and a financial rating of AAA as rated in the most
current available "Best's Insurance Reports", and qualified to do business in
the Commonwealth of Pennsylvania, and shall be issued in the names of Landlord,
Tenant and such other persons or firms as Landlord specifies from time to time.
Insurance provided by Tenant pursuant to Section (a) above and covering
Landlord's furniture, as described in (a)(ii) shall name Landlord as insured.
Executed copies of such policies of insurance or certificates hereof shall be
delivered to the Landlord not later than ten (10) days before delivery of
possession of the Premises to Tenant and thereafter no less than thirty (30)
days prior to the expiration of the term of such policy. All
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public liability and property damage policies shall contain a provision that
the Landlord, although named as an insured, shall nevertheless be entitled to
recovery under said policies for any loss occasioned to it, its servants,
agents and employees by reason of the negligence of the Tenant. As often as
any such policy shall expire or terminate, renewal or additional policies shall
be procured and maintained by the Tenant in like manner and to like extent.
All policies of insurance delivered to the Landlord must contain a provision
that the company writing said policy will give to the Landlord twenty (20)
days' notice in writing in advance of any cancellation or lapse or the
effective date of any reduction in the amounts of insurance. All public
liability, property damage and other casualty policies shall be written as
primary policies, not contributing with and not in excess of coverage which the
Landlord may carry.
(c) Failure of Tenant to Obtain: In the event that
Tenant fails to procure and/or maintain any insurance required herein and for
Landlord's furniture pursuant to (a)(ii) above, or fails to carry insurance
required by law or governmental regulation, Landlord may (but without
obligation to do so) at any time or from time to time, and without notice,
procure such insurance in which event Tenant shall repay the Landlord all sums
so paid by Landlord, together with interest thereon as provided herein, and any
incidental costs or expenses incurred by Landlord in connection therewith,
within ten (10) days following Landlord's written demand to Tenant for such
payment.
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16. Waiver of Subrogation: Each party waives rights of
subrogation against the other with respect to any insured risks to the extent
such waiver does not invalidate such insurance or reduce the proceeds.
17. Fire Insurance: Landlord shall procure and maintain in full
force and effect non-assessable fire insurance policies, which insurance all
include protection against those occurrences covered by standard "extended
coverage" clause. Such policies shall name Landlord as the insured. In the
event of loss, insurance proceeds shall be held in escrow by Landlord's
mortgagee, if any, and otherwise by an escrow agent selected by Landlord
pending repair of the damages by Landlord, and upon completion the proceeds
shall be paid to Landlord or paid to Landlord's mortgagee if required by it.
In the event Landlord or Tenant elects to terminate the Lease as herein
provided, insurance proceeds shall be paid immediately to Landlord or its
mortgagee if required by it.
18. Trade Fixtures: All improvements made by Tenant to the
premises which are so attached to the premises that they cannot be removed
without material injury to the premises, shall become the property of Landlord
upon installation. Not later than the last day of the term, Tenant shall, at
Tenant's expense, remove all of Tenant's personal property and those
improvements made by Tenant which have not become the property of Landlord,
including trade fixtures, cabinetwork, movable paneling, partitions, and the
like; repair all injury done by or in connection with the installation or
removal of such property and improvements; and surrender the premises in as
good condition as they were at the beginning of
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the term, reasonable wear, and damage by fire, the elements, casualty, or other
cause not due to the misuse or neglect by Tenant or Tenant's agents, employees,
visitors, or licensees, excepted. All property of Tenant remaining on the
premises after the last day of the term of this Lease shall be conclusively
deemed abandoned and may be removed by Landlord, and Tenant shall reimburse
Landlord for the cost of such removal.
19. Abandonment: Tenant shall not, without first obtaining the
written consent of Landlord, abandon the premises, or allow the premises to
become vacant or deserted.
20. Condemnation: If the premises or the building or any material
part of either shall be condemned by any governmental body or by any other body
or organization possessing the power of condemnation for public use, then and
in that event, upon the vesting of title to the same for such public use, this
Lease shall terminate, anything herein contained to the contrary
notwithstanding, except that Tenant shall have the right to prove and collect
the value of the Tenant's Property installed by it, including moving expenses.
In the event of the taking through eminent domain of all, or any portion, of
the Premises, the Landlord shall notify the Tenant in writing of such taking.
In the event of such termination of this Lease, all rent paid in advance shall
be apportioned and refunded to Tenant as of the date of such termination.
Notwithstanding the foregoing, if only a part of the premises shall be so taken
and the part not so taken shall be sufficient for the operation of the Tenant's
business, Tenant, at its election, may retain the part not so taken and
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there shall be a proportional reduction in the rent. All compensation awarded
or paid upon such a total or partial taking of the premises shall belong to and
be the property of the Landlord without any participation by the Tenant,
provided however, that nothing contained herein shall be construed to preclude
the Tenant from prosecuting any claim directly against the condemning authority
in such condemnation proceedings for loss of business, or depreciation to,
damage to, or cost of removal of, or for the value of stock, Tenant's Property,
furniture, and other personal property belonging to the Tenant; provided,
however, that no such claim shall diminish or otherwise adversely affect the
Landlord's award or the award of any mortgagee. Except to the extent that any
obligation of either party incurred or resulting from the Lease prior to
termination hereunder remains to be fulfilled following termination hereunder,
this Lease shall terminate and all rights and responsibilities of the parties
shall cease.
21. Sublease: The Tenant shall not have the right to sell,
assign, transfer, mortgage, pledge, sublease or sublet the Premises without the
Landlord's prior written consent. In the event that the Tenant proposes to
sublease or sublet the Premises or any portion thereof, Tenant shall give to
Landlord its written notice which notice shall set forth (i) the identity,
business and financial condition of the proposed sub-tenant, (ii) the terms and
conditions of the proposed sublease, (iii) any other relevant information
requested by Landlord and (iv) an offer by Tenant and proposed sub-tenant for
the release of Tenant from this Lease and the establishment of the
Landlord-Tenant relationship between landlord and proposed
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Sub-Tenant under the terms and conditions of the proposed sublease. Landlord
shall have the right to (a) withhold consent, if reasonable, (b) to grant
consent (in which case Tenant and Landlord shall divide equally any increase in
rent net of leasing commission, build-out expenses and attorneys' fees), or (c)
to release Tenant from this Lease and accept the offer of the proposed
sub-tenant to establish the Landlord-Tenant relationship between Landlord and
proposed Sub-Tenant under the terms and conditions of the proposed sublease. In
the event that the proposed sublease is of a portion of the Premises, and
Landlord consents to the sublease, the rent in this Lease shall be prorated
between the portion proposed to be subleased and the balance of the Premises on
a square foot basis.
Tenant shall pay all of Landlord's cost and expense (including
reasonable attorneys' fees) in connection with any proposed subletting or
assignment.
22. Quiet Enjoyment: Landlord and Tenant agree to permit the
other quiet and peaceable enjoyment and possession of their respective portions
of the premises, free from interference or interruption of the other or any
person claiming under or through each of them.
23. Surrender at Lease Termination: The Tenant shall, upon the
termination of the Term of this Lease and subject to the provisions for renewal
of the lease terms set forth in Paragraph 45, surrender to the Landlord the
Premises and all building apparatus, machinery, equipment and fixtures situated
thereon, except items which may be removed hereunder. All alterations,
improvements, and other additions which may be made or installed by either
party to, in, upon, or
25
<PAGE> 26
about the Premises shall either be removed by Tenant or become the property of
the Landlord as the Landlord may elect and if Landlord elects to keep the same
they shall be surrendered to the Landlord by the Tenant without any damage,
injury or disturbance thereto, or payment therefor, and otherwise Tenant shall
repair any damage caused by removal.
24. Default: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant:
(a) The vacation or abandonment of the premises by Tenant
not caused by condemnation, fire or other casualty;
(b) A failure by Tenant to pay, when due, any installment
of rent hereunder or any such other sum herein required to be paid by Tenant
where such failure continues for ten (10) days after written notice thereof
from Landlord is received by Tenant; provided that Landlord shall not be
required to give such notice more than twice in any twelve-month period;
(c) A failure by Tenant to observe and perform any other
terms or conditions of this Lease to be observed or performed by Tenant, where
such failure continued for thirty (30) days after written notice thereof from
Landlord to Tenant, provided however, that if the nature of the default is such
that the same cannot reasonably be cured within such period, Tenant shall not
be deemed to be in default if within such period Tenant shall commence such
cure and thereafter diligently prosecute the same to completion;
26
<PAGE> 27
(d) The making by Tenant of any assignment for the
benefit of creditors; the adjudication that Tenant is bankrupt, insolvent, or
unable to pay its debts; the filing by or against Tenant of a petition to have
Tenant adjudged a bankrupt or a petition for reorganization or arrangement
under any law relating to bankruptcy (unless, in the case of a petition filed
against Tenant, the same is dismissed within sixty (60) days after the filing
thereof); the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located in the premises or of Tenant's
interest in this Lease (unless possession is restored to Tenant within thirty
(30) days after such appointment); or the attachment, execution or levy
against, or other judicial seizure of, substantially all of Tenant's assets
located in the premises or of Tenant's interest in this Lease (unless the same
is discharged within thirty (30) days after issuance thereof).
25. Remedies: Upon the occurrence of any event of default, as
defined above, Landlord shall be entitled, at its sole discretion, to pursue
all available remedies at law or equity, including but not limited to the
following:
(a) Landlord may perform for the account of Tenant any
such default of Tenant upon ten (10) days written notice and immediately
recover as additional rent any expenditures made and the amount of any
obligations incurred in connection therewith;
(b) Landlord may accelerate all rent and additional rent
due for the balance of the lease term and declare the same to be immediately
due and payable;
27
<PAGE> 28
(c) Landlord, at its option, may serve notice upon Tenant
that this Lease and the then unexpired term hereof shall cease and expire and
become absolutely void on the date specified in such notice, to be not less
than ten (10) days after the date of Tenant's receipt of such notice without
any right on the part of the Tenant to save the forfeiture by payment of any
sum due or by the performance of any term or condition broken; and, thereupon
and at the expiration of the time limit in such notice, this Lease and the term
hereof, as well as the right, title and interest of the Tenant hereunder, shall
wholly cease and expire and become void in the same manner and with the same
force and effect (except as to Tenant's liability) as if the date fixed in such
notice were the date herein granted for expiration of the term of this Lease.
Thereupon, Tenant shall immediately quit and surrender to Landlord the
premises, and Landlord may enter into and repossess the premises by summary
proceedings, detainer, ejectment or otherwise and remove all occupants thereof
and, at Landlord's option, any property thereon. No such expiration or
termination of this Lease shall relieve Tenant of its liability and obligations
under this Lease, whether or not the premises shall be relet;
(d) Landlord may, at any time after the occurrence of any
event of default, re-enter and repossess the premises and any part thereof and
attempt in its own name, as agent for Tenant if this Lease not be terminated or
in its own behalf if' this Lease be terminated, to relet all or any part of the
premises for and upon such terms and to such persons and for such period or
periods as Landlord, in its sole discretion, shall determine, including the
term beyond the termination of this
28
<PAGE> 29
Lease; and Landlord shall not be required to accept any tenant offered by
Tenant or observe any instruction given by Tenant about such reletting. For
the purpose of such reletting, Landlord may decorate or make repairs, changes,
alterations or additions in or to the premises to the extent deemed by Landlord
desirable or convenient; and the cost of such decoration, repairs, changes,
alterations or additions shall be charged to and be payable by Tenant as
additional rent hereunder, as well as any reasonable brokerage and attorneys'
fees expended by Landlord; and any sums collected by Landlord from any new
tenant obtained on account of the Tenant shall be credited against the balance
of the rent due hereunder as aforesaid. Tenant shall pay to Landlord monthly,
on the days when the rent would have been payable under this Lease, the amount
due hereunder less the amount obtained by Landlord from such new tenant;
(e) Landlord shall have the right of injunction, in the
event of a breach or threatened breach by Tenant of any of the terms and
conditions hereof, to restrain the same and the right to invoke any remedy
allowed by law or in equity, whether or not other remedies, indemnity or
reimbursements are herein provided. The rights and remedies given to Landlord
in this Lease are distinct, separate and cumulative remedies; and no one of
them, whether or not exercised by Landlord, shall be deemed to be an exclusion
of any of the others.
(f) In addition to the other rights and remedies provided
herein, in the event of any default of Tenant, any Prothonotary or attorney of
any court of record may appear for Tenant in amicable actions for rent in
arrears or treated as if
29
<PAGE> 30
in arrears and charges, whether or not payable as rent, and sign for Tenant an
agreement for entering in any competent court an amicable action or actions in
assumpsit for the recovery of arrears of rent and rent treated as if in
arrears, and the said charges, and in any suits or in said amicable actions to
confess judgment against Tenant for all arrears of rent and rent treated as if
in arrears and the said charges, and for interest and costs, together with
reasonable attorney's fees. Such authority shall not be exhausted by one
exercise thereof, but judgment may be confessed from time to time as often as
any rent in arrears or rent treated as if in arrears or charges fall due and
are not paid. Such powers may be exercised during, as well as after, the
expiration or termination of the original term and during, and at any time,
after an extension or renewal of the term. When this Lease shall be terminated
by covenant or condition broken, either during the original term or any renewal
or extension thereof, and also when and after the term hereby created or, any
renewal or extension thereof shall have expired, it shall be lawful for any
attorney of any court of record as attorney for Tenant to file an agreement for
entering in any competent court an amicable action for judgment in ejectment
against Tenant and all persons claiming under Tenant for the recovery by
Landlord of possession of the premises, for which this lease shall be its
sufficient warrant, whereupon if Landlord so desires, a writ of possession may
issue forthwith, without any prior writ or proceedings whatsoever, it shall be
cancelled or suspended and possession of the premises remains in or is restored
by Tenant, Landlord shall have the right upon any subsequent default or upon
the expiration or termination of this
30
<PAGE> 31
Lease, or any renewal or extension hereof, to bring one or more amicable
actions in ejectment as hereinbefore set forth to recover possession of the
premises. In any amicable action in ejectment, or in assumpsit for rent or
charges, Landlord shall cause to be filed in such action an affidavit setting
forth the facts necessary to authorize the entry of judgment and if a true copy
of this Lease (and of the truth of the copy such affidavit shall be sufficient
proof) be filed in such action, it shall not be necessary to file the original
as a warrant of attorney, any law, rule of court, custom or practice to the
contrary notwithstanding. Tenant expressly releases to Landlord, and to any
and all attorneys who may appear for Tenant, all errors in the said
proceedings, and all liability therefor. Tenant expressly waives the benefits
of all laws, now or hereafter in force, exempting any goods within the premises
or elsewhere from distraint, levy or sale;
(g) Any other right or remedy available to Landlord at
law or equity.
26. Ejectment: When this Lease shall be terminated by condition
broken, either during the original term of this Lease or any renewal or
extension, and also when and as soon as the term hereby created or any
extension shall have expired, it shall be lawful for any attorney as attorney
for Tenant to file an agreement for entering in a competent court an amicable
action and judgment in ejectment against Tenant and all persons claiming under
Tenant for the recovery by Landlord of possession of the Demised Premises, for
which this Lease shall be its sufficient warrant, whereupon, if Landlord so
desires, a writ of possession may issue, without
31
<PAGE> 32
any prior proceedings whatsoever, and provided that if for any reason after
such action shall have been commenced the same shall be determined and the
possession of the premises hereby demised remain in or be restored to Tenant.
Landlord shall have the right upon any subsequent default or defaults, or upon
the termination of this Lease, to bring one or more amicable action or actions
to recover possession of the said premises.
27. Affidavit of Default: In any amicable action of ejectment
and/or for rent in arrears, Landlord shall first cause to be filed in such
action an affidavit made by it or someone acting for it setting forth the facts
necessary to authorize the entry of judgment, of which facts such affidavit
shall be conclusive evidence, and if a true copy of this Lease (and of the
truth of the copy of such affidavit shall be sufficient evidence) be filed in
such action, it shall not be necessary to file the original as a warrant of
attorney, any rule of Court, custom or practice to the contrary.
28. Waivers by Tenant of Errors, Right of Appeal, Stay
Exemption, Inquisition: If proceedings shall be commenced by Landlord to
recover possession under the Acts of Assembly, either at the end of the term or
sooner termination of this Lease, or for nonpayment of rent or any other
reason, Tenant specifically waives the right to the three months' notice,
and/or the fifteen or thirty days' notice required by the Pennsylvania Landlord
and Tenant Act of 1951, as amended, and agrees that five days' notice shall be
sufficient in either or any such case.
32
<PAGE> 33
29. Right of Landlord to Cure Tenant's Default. If Tenant
defaults in the making of any payment or in the doing of any act herein
required to be made or done by Tenant, then Landlord may, but shall not be
required to, make such payment or do such act, and charge the amount of the
expense thereof, if made or done by Landlord, with interest thereon at the rate
per annum which is three percent (3%) greater than the prime rate then in
effect at Corestates Bank, in Lancaster, Pennsylvania, from the date paid by
Landlord to the date of payment thereof by Tenant; provided, however, that
nothing herein contained shall be construed or implemented in such a manner to
allow Landlord to charge or receive interest in excess of the maximum legal
rate then allowed by law. Such payment and interest shall constitute
additional rent hereunder due and payable with the next monthly installment of
rent, but the making of such payment or the taking of such action by Landlord
shall not operate to cure such default or to stop Landlord from the pursuit of
any remedy to which Landlord would otherwise be entitled.
30. Late Payments: If Tenant fails to pay any installment of rent
(in accordance with Paragraph 3) by the twenty-fifth (25th) day of the calendar
month, or ten (10) days after such installment has become due and payable,
Tenant shall pay to Landlord a late charge of five percent (5%) of the amount
of such installment if paid before the first of the next month; thereafter,
such unpaid installment shall bear interest at the rate per annum which is
three percent (3%) greater than the prime rate then in effect at Corestates
Bank, in Lancaster, Pennsylvania, from the date such installment becomes due
and payable to the date of payment thereof by
33
<PAGE> 34
Tenant; provided, however, that nothing herein contained shall be construed or
implemented in such a manner as to allow Landlord to charge or receive interest
in excess of the maximum legal rate then allowed by law. Such late charge and
interest shall constitute additional rent hereunder due and payable with the
next monthly installment of rent.
31. Remedies Cumulative: All of the remedies herein given to
Landlord and all rights and remedies given to it by law and equity shall be
cumulative and concurrent. No termination of this Lease or taking or
recovering of the premises shall deprive Landlord of any of its remedies or
actions against the Tenant for rent due at the time or which, under its terms,
would in the future become due as if there had been no termination, or for sums
due at the time or which, under its terms, would in the future become due as if
there had been no termination, nor shall the bringing of any action for rent or
breach of covenant, or the resort to any other remedy herein for the recovery
of rent be construed as waiver of the right to obtain possession of the
premises.
32. Non-Disturbance:
(a) Offset Statement: Within ten days after request
therefore by Landlord, or in the event that upon any sale, assignment or
hypothecation of the Property and/or the Land thereunder by Landlord, an offset
statement shall be required from Tenant; Tenant agrees to deliver in recordable
form a certificate to any proposed mortgagee or purchaser, or to Landlord,
certifying (if such be the case)
34
<PAGE> 35
that this Lease is in full force and effect and that there are no defenses or
offsets thereto, or stating those claimed by Tenant.
(b) Attornment: Tenant shall, at the request of any
first mortgagee or purchaser of the Premises attorn to such mortgagee or
purchaser.
(c) Subordination: Tenant's rights hereunder are
subordinate to the lien of any mortgage or mortgages, or the lien resulting
from any other method of financing or refinancing, now or hereafter in force
against the land and/or buildings hereafter placed upon the land of which the
premises are a part, and to all advances made or hereunder to be made upon the
security thereof. Regardless of the self-operating provision of this
Paragraph, if a prospective mortgagee requests the Tenant to sign a
subordination agreement, the Tenant shall do so promptly.
(d) Limited Attorney-in-Fact: In the event Tenant fails
to execute such instruments or certificates to carry out the intent of this
Paragraph within fifteen (15) days of Landlord's written request to execute
such instruments or certificates, then Tenant hereby irrevocably appoints
Landlord as Attorney-in-Fact for Tenant with full power and authority to
execute and deliver in the name of the Tenant any such instruments or
certificates.
(e) No Mortgage: Landlord represents to Tenant that as
of the date of this Lease, there is no mortgage related to premises. Although
no mortgage is planned, Landlord reserves its rights to enter a mortgage
relationship subject to the terms herein.
35
<PAGE> 36
33. Security Deposit: Landlord acknowledges that Tenant has
deposited with Landlord on the signing of this Lease the sum of $43,000.00, as
security for the performance of Tenant's obligations under this Lease,
including without limitation the surrender of possession of the premises to
Landlord as herein provided. If Landlord applies any part of the deposit to
cure any default of Tenant, Tenant shall on demand deposit with Landlord the
amount so applied so that Landlord shall have the full deposit on hand at all
times during the term of this Lease with the balance to be returned to Landlord
within thirty (30) days of complete vacancy.
34. Attorneys' Fees:
(a) Waiver of Trial by Jury: It is mutually agreed by
and between Landlord and Tenant that the respective parties hereto shall and
they hereby do waive trial by jury in any action, proceeding or counterclaim
brought by either of the parties hereto against the other on any matter
whatsoever arising out of or in any way connected with this Lease, the
relationship of Landlord and Tenant, Tenant's use of or occupancy of the
Premises and/or any claim of injury or damage and any emergency or any other
statutory remedy. It is further mutually agreed that in the event Landlord
commences any summary proceeding for non-payment of rent, Tenant will not
interpose any counterclaim of whatever nature or description in any such
proceeding.
(b) In case suit should be brought for recovery of the
premises, or for any sum due hereunder, or because of any act which may arise
out of the possession of the premises, by either party, the prevailing party
shall be entitled to
36
<PAGE> 37
all costs incurred in connection with such action, including reasonable
attorneys' fees.
35. Landlord Right of Entry: Landlord shall have the right,
during the last six (6) months of the Lease Term, to display a sign indicating
that the Premises are "Available." During said period, interested persons shall
be admitted at reasonable hours of the day to view the Premises. Landlord
shall provide reasonable advance notice except in case of emergency and be
accompanied by tenant's authorized agent.
36. Change in Ownership: Tenant agrees that in the event that the
Premises is sold, or in the event of any change of legal title or equitable
ownership, that all obligations herein undertaken by Landlord, including but
not limited to the obligation for the return of any security deposit paid
hereunder, shall be transferred to such purchaser or assignee, and in such
event all of Landlord's obligations shall terminate and Landlord shall be
released and relieved from all liability and responsibility to Tenant hereunder
arising subsequent to the transfer of title and Tenant shall look solely to
such purchaser or assignee for the performance of said obligations or for the
enforcement thereof. Each purchaser or assignee shall in turn have like
privileges of sale, assignment and release.
37. Successors and Assigns: This Lease shall inure to the benefit
of and shall bind the heirs, successors and assigns of the parties to the
extent that the parties' rights hereunder may succeed and be assigned according
to the terms hereof.
37
<PAGE> 38
38. Descriptive Headings: The descriptive headings of the several
paragraphs hereof are inserted for convenience only and shall not control or
affect the meaning or construction of any of its provisions.
39. Tenant's Estoppel: Tenant shall, from time to time, on not
less than ten (10) days' prior written request by Landlord, execute,
acknowledge, and deliver to Landlord a written statement certifying that the
Lease is unmodified and in full force and effect, or that the Lease is in full
force and effect as modified and listing the instruments of modification; the
dates to which the rents and other charges have been paid; and whether or not
to the best of Tenant's knowledge Landlord is in default hereunder and, if so,
specifying the nature of the default. It is intended that any such statement
delivered pursuant to this section may be relied upon by a prospective
purchaser of Landlord's interest or mortgagee of Landlord's interest or
assignee of any mortgage upon Landlord's interest in the building.
40. Notice: All notices required to be given by Landlord to
Tenant and by Tenant to Landlord must be given by certified mail, addressed as
follows:
TO LANDLORD:
Pennsylvania Dental Service Corporation
d/b/a Delta Dental of Pennsylvania
One Delta Drive
Mechanicsburg, PA 17055
TO TENANT:
MindSpring Enterprises, Inc.
1430 West Peachtree Street
Suite 400
Atlanta, GA 30309
38
<PAGE> 39
As against Landlord the only admissible evidence that notice has been
given by Tenant shall be a certified return receipt signed by Landlord or its
agent.
41. Complete Agreement: It is expressly understood and agreed by and
between the parties that this Lease and any riders attached to it and forming a
part of it set forth all the promises, agreements, conditions and
understandings between Landlord and Tenant relative to the Demised Premises,
and that there are no promises, agreements, conditions or understandings,
either oral or written, between them other than as are set forth herein. It is
further understood and agreed that, except as otherwise provided, no subsequent
alteration, amendment, change or addition to this Lease shall be binding upon
Landlord or Tenant unless reduced to writing and signed by them.
42. Miscellaneous:
(a) This Agreement shall be construed under and in accordance with the
laws of the Commonwealth of Pennsylvania, and all obligations of the parties
created hereunder are performable in Cumberland County, Pennsylvania.
(b) In case any one or more of the provisions contained in this Lease
shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision thereof and this Lease shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
(c) Any headings preceding the text of the paragraphs and
subparagraphs of this Agreement are inserted solely for convenience or
reference and shall not
39
<PAGE> 40
constitute a part of this Lease, nor shall they affect its meaning,
construction, or effect.
43. Tenant Right of First Refusal: If Landlord, during the Lease
Term, or any extension or renewal thereof, receives a bona fide offer to
purchase the Demised Premises from any party other than Tenant, Landlord shall
give notice in writing to Tenant and Tenant shall have the right and privilege,
at any time within thirty (30) days from receipt of such written notice, of
submitting a written purchase offer for the Demised Premises on the same terms
and conditions of such purchase offer, provided that closing shall be held
within a reasonable time, not to exceed sixty (60) days. If Tenant fails to
meet such bona fide offer within thirty (30) days after notice thereof from
Landlord, Landlord may sell the premises or a portion thereof to such third
person in accordance with the terms and conditions of the purchase offer.
Should Tenant fail or refuse to exercise the right of first refusal
above granted within thirty (30) days and for any reason whatsoever the sale to
such other party not be consummated, the right of first refusal of the Tenant
as herein agreed upon, shall continue in the same manner until November 15,
1999.
Should the premises be sold to any party other than Tenant (upon
Tenant's failure or refusal to exercise the privilege above granted), the sale
shall in no way affect this lease and shall be made subject to the terms
hereof.
44. Leasehold Furnishings: Landlord agrees that Tenant shall have
the right to use any personal property or furnishings of Landlord located on
the Leased Premises, including office furnishings, equipment and moveable
office partitions. A
40
<PAGE> 41
schedule of the Landlord-provided leasehold furnishings is attached hereto as
Exhibit "D". Tenant shall be entitled to change the configuration of the
office partitions, subject, however, to the prior approval of Landlord which
shall not be unreasonably withheld, conditioned or delayed. Tenant agrees to
reimburse Landlord for any damage or destruction of Landlord's personal
property, except for customary wear and tear. Tenant further agrees that it
shall not pledge, assign or encumber any personal property belonging to
Landlord during Tenant's occupancy of the Leased Premises.
45. Renewal of Terms: Unless either party shall give to the other
written notice for removal at least ninety (90) days prior to the expiration of
the Lease Term, the Lease shall continue, upon the terms and conditions then in
force, including the rent payable, on a month-to-month basis until terminated
by either party giving to the other at least ninety (90) days' written notice
of removal prior to the expiration of the then current term or renewed by
mutual agreement of the parties on such terms and conditions as they shall
determine.
46. Holding Over: Subject to the provisions of Paragraph 45
above, in the event that Tenant shall not immediately surrender the Premises on
the date of expiration of the term hereof, Tenant shall, by virtue of the
provisions hereof, become a tenant by the month at the monthly rent in effect
on the date of expiration, which said monthly tenancy shall commence with the
first day next after the expiration of the term of this Lease. Tenant, as a
monthly tenant, shall be subject to all of the terms, conditions, covenants and
agreements of this Lease.
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<PAGE> 42
Tenant shall give to Landlord at least ninety (90) days written notice of any
intention to quit the Premises, and Tenant shall be entitled to ninety (90)
days written notice to quit the Premises, unless Tenant is in default
hereunder, in which event Tenant shall not be entitled to any notice to quit,
the usual ninety (90) days notice to quit being hereby expressly waived. In
the event that Tenant shall hold over after the expiration of the term of this
Lease, and if Landlord shall desire to regain possession of the Premises
promptly at the expiration of the term of this Lease, then at any time prior to
landlord's acceptance of rent from Tenant as a monthly tenant hereunder,
Landlord, at its option, may forthwith re-enter and take possession of the
Premises without process, or by any legal process in force in the State of
Pennsylvania.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
undersigned Landlord and Tenant execute this Agreement on the day, month and
year first above written.
<TABLE>
<S> <C>
ATTEST: LANDLORD:
Pennsylvania Dental Service Corporation,
D/B/A Delta Dental of Pennsylvania
[signature illegible] By [signature illegible]
- -------------------------------- --------------------------------------
ATTEST: TENANT:
MindSpring Enterprises, Inc.
[signature illegible] By /s/Michael Misikoff, CFO
- -------------------------------- --------------------------------------
</TABLE>
42
<PAGE> 43
EXHIBIT A
Contiguous land for parking expansion, subject to approval of Fairview
Township.
[MAP]
<PAGE> 44
EXHIBIT B
RULES AND REGULATIONS
1. No awnings or other projections shall be attached to the outside walls
or windows of the building. No curtains, blinds, shades, or screens
shall be attached to or hung in, or used in connection with, any
window or door of the space demised to any Tenant other than those
specified or supplied by Landlord. In the event such shades or
screens are specified or supplied by Landlord, removal of same at any
time will be prohibited.
2. Tenant shall not mark, paper, paint, bore into, make any alterations
or additions to, or in any way deface any part, including equipment
and fixtures, of the leased space or the building of which it forms a
part, without the prior written consent of Landlord. Tenant
specifically agrees not to use tape or add picture hangers or nails on
the interior walls to hang items on the walls. Landlord does not
object to the Tenants using existing hardware for that purpose.
3. Neither the whole nor any part of the space demised to Tenant shall be
used for manufacturing, without prior written approval from the
landlord, or for the sale at auction of merchandise, goods, or
property.
4. No animals of any kind shall be brought into or kept about the
building by Tenant.
5. Tenant shall not permit others to tie in to the water supply on the
Premises without prior written consent of the Landlord.
<PAGE> 45
6. Tenant shall not remove, alter or replace the building standard
ceiling light diffusers in any portion of the leased space without the
prior written consent of Landlord.
7. Tenant shall immediately notify the Landlord of any serious breakage,
or fire or disorder, which comes to its attention in the Premises.
8. Tenant shall apply, at Tenants cost, such reasonable pest
extermination measures as Tenant deems reasonably necessary.
9. Tenant shall not burn any trash or garbage of any kind in or about the
demised premises.
10. Tenant will encourage its employees to respect the property and
privacy of neighbors.
2
<PAGE> 46
EXHIBIT D
DELTA DENTAL
OLD DEPOT ROAD, NEW CUMBERLAND, PA.
INVENTORY OF KNOLL EQUITY PRODUCT
<TABLE>
<CAPTION>
Product Quantity
Panels
- ------
<S> <C>
PA240 12
PA340 13
PA440 11
PA540 5
PA248 10
PA348 36
PA448 2
PA548 17
PA160 1
PA260 93
PA3060 2
PA360 72
PA460 37
PA560 7
CURVE 40" 5
Glaze-3' 2
Glaze-2' 1
Curve Glaze 6
EP60 8
PA3040 12
GLAZE 5' 1
1/2 GLAZE -4' 1
OPC2428 2
OPC3628 2
OPC2440 6
OPC3640 9
OPC4840 2
OPC6040 1
OPC2448 42
OPC3648 48
OPC4848 14
</TABLE>
Page 1 of 5
<PAGE> 47
<TABLE>
<S> <C>
OPC6048 32
OPC1260 1
OPC2460 115
OPC3060 22
OPC4860 69
OPC6060 8
OPC2460 26
OPC3660 29
OPC4860 22
OPC6060 8
DOOR . 1
CURVE 2
CURVE-GLAZED 4
EP60 34
EP48 2
Panel Connectors
- ----------------
PC40 48
PC48 63
PC60 232
PC40/60 6
PC48/60 2
PC40/48/60 1
PC40/48 2
OPC28R 4
OPC40 9
OPC48 182
OPC60 326
OPC80 6
OPC28/60 1
OPC40/60 13
OPC48/60 4
OPC60/80 2
Connector Caps
- --------------
OCSR 220
OCLR 131
OCTR 62
</TABLE>
Page 2 of 5
<PAGE> 48
<TABLE>
<S> <C>
OCX 17
PCPF 7
PCPFR 128
PCMF 15
OCA 22
Drawers
- -------
DC22 148
DD22 178
Shelves
- -------
CS36 37
CS48 12
CS60 4
Cabinets
- --------
CFMA36 61
CFMA48 59
CFMA60 7
CFMA72 3
CFMD36 3
CFMD48 2
Electric
- --------
NBI 10
NBIP 7
NTB 111
NCC24 4
NCC36 14
NCC48 13
NCC60 14
NCC72 31
NCC84 1 S
NCC96 8
NCC120 13
NCR30 2
</TABLE>
Page 3 of 5
<PAGE> 49
<TABLE>
<S> <C>
NCR36 1
OBI 14
O1M48H6 1
OlM60H6 3
OTB 120
OCC24 4
OCC36 3
OCC48 9
OCC60 11
OCC72 28
OCC84 25
OCC96 3
OCC108 3
OCF12 1
OCCC 2
OR1 91
OR2 32
OR3 21
OCR48 3
OCR60 1
OCC39 3
OCC42 1
OCC57 2
OCR30 7
Worksurfaces
- ------------
W224A 5
W320A 23
W324A 26
W420A 22
W424A 70
W524A 44
W530A 47
W624A 63
W724A 42
W824A 2
W36C24 9
W524CL 1
W524CR 1
</TABLE>
Page 4 of 5
<PAGE> 50
<TABLE>
<S> <C>
W624CL 2
W624CR 3
W724CR 1
W824CR 1
W924CL 1
W330A 1
NWR530 1
WM4CC 2
WM5CC S
WM6CC 1
SQCC 1
CURCC 3
W224C 1
</TABLE>
Page 5 of 5
<PAGE> 51
EXHIBIT C
MINIMUM LAWN CARE AND SNOW REMOVAL REQUIREMENTS
LAWN CARE:
Established turf area on all properties are to be uniformly green during
the growing season and maintained, after cutting at a height of 2-3". Prior to
cutting, the grass is to reach a height of no more than 5-6". Grass clippings
are to be removed frequently enough to maintain a thatch of no more than one
inch.
All trees and shrubs are to be neatly trimmed and shaped yearly to
present a well groomed appearance. Mulch beds are to be neatly edged, top
dressed annually with 2" of fresh mulch, and weed free.
SNOW REMOVAL:
All driveways and parking lots will be plowed if snow accumulates more
than two (2) inches. An anti-skid material such as cinders or rice stone
should be applied to icy areas and inclines to reduce the risk of accidents The
use of salt (NaCL) is strictly prohibited on concrete sidewalks, and Tenant
shall be responsible for any damage from use of same. Potassium Cloride is
suggested as an ice melting agent. Tenant shall be responsible for sidewalks.
Landlord shall be responsible for parking lots and driveways.
<PAGE> 52
EXHIBIT "E"
IMPROVEMENTS
1) Selective indoor painting
2) Replace stair nosing
3) Install exterior light near west exit
4) Clean exterior window areas and wash exterior windows
5) Paint exterior trim and select areas where needed
6) Replace second floor carpeting
<PAGE> 1
EXHIBIT 11.1
EARNINGS PER SHARE CALCULATION
(In thousands except per share data)
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998 December 31, 1997
--------------------------- --------------------------
<S> <C> <C>
Total Shares for Basic Earnings (Loss) Per Share 24,611 22,542
Effect of Dilutive Stock Options $ 820 $ 0
--------------------------- --------------------------
Total Shares for Diluted Earnings (Loss) Per Share 25,431 22,542
Net income (loss) 10,544 (4,083)
--------------------------- --------------------------
Basic Earnings (Loss) Per Share $0.43 ($0.18)
=========================== ==========================
Diluted Earnings (Loss) Per Share $0.41 ($0.18)
=========================== ==========================
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated February 17, 1999 on the financial statements of
MindSpring Enterprises, Inc., included in this Form 10-K, into MindSpring
Enterprises, Inc.'s previously filed Registration Statements No. 333-17807 and
No. 333-44411.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 29, 1999
