<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WORLDGATE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4841 23-2866697
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code No.) Identification
incorporation or organization) No. 23-2866697)
</TABLE>
3220 TILLMAN DRIVE, SUITE 300
BENSALEM, PENNSYLVANIA 19020
(215) 633-5100
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
RANDALL J. GORT, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
WORLDGATE COMMUNICATIONS, INC.
3220 TILLMAN DRIVE, SUITE 300
BENSALEM, PENNSYLVANIA 19020
(215) 633-5100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
WALTER J. MOSTEK, JR., ESQ. JEFFREY A. STEIN, ESQ.
DRINKER BIDDLE & REATH LLP HALE AND DORR LLP
1000 WESTLAKES DRIVE, SUITE 300 60 STATE STREET
BERWYN, PENNSYLVANIA 19312-2409 BOSTON, MASSACHUSETTS 02109
(610) 993-2200 (617) 526-6000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ______________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under The Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM AMOUNT OF
AGGREGATE OFFERING REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) FEE
<S> <C> <C>
common stock, par value $.01 per share............................................ $64,400,000 $17,904
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(g) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
WORLDGATE COMMUNICATIONS, INC.
COMMON STOCK
------------------
This is an initial public offering of shares of common stock of WorldGate
Communications, Inc. No public market currently exists for our common stock. We
estimate that the initial public offering price will be between $ and
$ per share.
PROPOSED TRADING SYMBOL:
NASDAQ NATIONAL MARKET SYMBOL--WGAT
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 8.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- ---------
<S> <C> <C>
Public Offering Price.................................................... $ $
Underwriting Discounts and Commissions................................... $ $
Proceeds to WorldGate.................................................... $ $
</TABLE>
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to additional shares to
cover over-allotments of shares. If this option is exercised in full, the Total
Public Offering Price, Underwriting Discounts and Commissions and Proceeds to
WorldGate will be $ , $ and $ ,
respectively.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
GERARD KLAUER MATTISON & CO., INC. JEFFERIES & COMPANY, INC.
Prospectus dated , 1999
<PAGE>
Unless the context otherwise indicates, as used in this prospectus "Company"
and "WorldGate" mean WorldGate Communications, Inc. and its predecessor,
WorldGate Communications, L.L.C.
This prospectus includes statistical data regarding our company, the
Internet and the industries in which we compete. This data is based on our
records or is taken or derived from information published or prepared by various
sources, including International Data Corporation ("IDC"), Paul Kagan
Associates, Inc. ("Kagan"), Cahners Business Information--publishers of
Cablevision Blue Book ("Cablevision Blue Book") and Jupiter Communications
("Jupiter Communications"), providers of market and strategic information for
the information technology industry. Paul Kagan is a stockholder of WorldGate.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY WHERE IT
IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE ON THE DATE OF THIS PROSPECTUS.
DEALER PROSPECTUS DELIVERY OBLIGATION
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK BEING SOLD IN THIS
OFFERING AND OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN
THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES (1) THE UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION, (2) AN
OFFERING PRICE OF $ PER SHARE, (3) THE CONVERSION OF ALL OUTSTANDING SHARES OF
SERIES A, SERIES B AND SERIES C PREFERRED STOCK AND ALL OUTSTANDING SHARES OF
CLASS B COMMON STOCK INTO COMMON STOCK, AND (4) A 2-FOR-3 STOCK SPLIT TO BE
EFFECTED IMMEDIATELY BEFORE THE OFFERING.
THE COMPANY
We provide a new television-based Internet service, the WORLDGATE(SM)
Service, that delivers the Internet through cable television systems. The
WORLDGATE Service provides:
- high speed, easy to use, low cost Internet access without a personal
computer, modem or special purpose set-top appliance,
- full-featured Internet functionality and content that can be accessed
within seconds, and
- a television-based portal enabling viewers to dynamically link from
television programming and advertising to related Web sites.
We believe this combination of television and the Internet will transform
advertising, electronic commerce and information delivery for the consumer mass
market.
BENEFITS TO CABLE TELEVISION SUBSCRIBERS
Cable television subscribers using the WORLDGATE Service can access the
Internet by using only their television, a digital or advanced analog cable
television set-top box that is WORLDGATE enabled and a remote control or
wireless keyboard. No additional set-top appliance, personal computer or modem
is required. With the press of a button, subscribers can:
- connect within seconds to the Internet where they can, among other
activities, browse the World Wide Web, send and receive e-mail,
participate in chat sessions and shop on-line, and
- dynamically link from television programming and advertising to related
Internet content through our CHANNEL HYPERLINKING(SM) technology, without
entering or even knowing the appropriate Internet address.
BENEFITS TO CABLE OPERATORS
The WORLDGATE platform is designed to operate with current and upgraded
cable systems using current and future generation digital and advanced analog
cable television set-top boxes. We believe that we are the only company
providing a television-based Internet service for both advanced analog and
digital cable boxes. We believe this is particularly important for cable
operators who deploy both types of cable boxes. The WORLDGATE Service does not
typically require use of the limited channel capacity associated with the
advanced analog cable box. We believe our service enables cable operators to:
- earn additional subscription, advertising and e-commerce revenues,
- attract new customers not presently subscribing to cable programming, and
- easily expand capacity to accommodate additional subscribers to the
WORLDGATE Service and new WORLDGATE Service features.
BENEFITS TO TELEVISION PROGRAMMERS AND ADVERTISERS
Our CHANNEL HYPERLINKING technology integrates the dynamics of the Internet
with television's proven advertiser-sponsored
3
<PAGE>
entertainment model. This technology will enable a viewer watching a television
program or advertisement to link within seconds to a related interactive Web
site, with the push of a button. We believe this combination will be desirable
to consumers and thus valuable to advertisers that support the providers of
television programming and Internet content.
A 1998 report by Jupiter Communications predicted that Web advertising in
the United States alone will increase from approximately $1.7 billion in 1998 to
over $7.7 billion in 2002. We are working with over 70 television programmers,
advertisers, advertising agencies and e-commerce merchants to establish and
maintain a centrally administered database that provides viewers with CHANNEL
HYPERLINKING capability. We have also established a committee with
representatives of these organizations to work with us to develop standards and
policies for our CHANNEL HYPERLINKING technology as well as to assist in its
promotion. These committee members include representatives of:
- Showtime Networks
- CNN
- The Weather Channel
- QVC Networks, Inc.
- E! Entertainment
- Citicorp
- Excite, Inc.
- Ogilvy & Mather Worldwide, Inc.
- Modem Media . Poppe Tyson, Inc.
- General Motors Corporation
OUR BUSINESS MODEL
We anticipate that in the near term substantially all of our revenues will
be derived from cable operators. Cable operators purchase our systems and
wireless keyboards for use with the WORLDGATE Service and pay a monthly license
fee for each of their subscribers using the WORLDGATE Service. As the number of
WORLDGATE Service subscribers grows, we anticipate that a significant portion of
our revenues may also be derived from:
- advertisers who: (1) purchase banner or sponsorship advertisements, (2)
pay a fee based on the number of clicks on the advertisements, or (3) pay
a fee based on viewers' use of our CHANNEL HYPERLINKING feature, and
- merchants who share a portion of their revenues derived from customers
who: (1) use our CHANNEL HYPERLINKING feature or (2) click through from
the WORLDGATE Service.
CABLE INDUSTRY
We believe that the cable industry provides a large and pervasive market
opportunity for the WORLDGATE Service. According to a 1997 report, Kagan
projected that at the end of 1999 there would be more than 230 million cable
subscribers worldwide. General Instrument Corporation and Scientific-Atlanta,
Inc., the two largest manufacturers of cable boxes, have advised us that as of
December 31, 1998, they had shipped approximately 4.3 million digital and
advanced analog cable boxes that can be WORLDGATE enabled through a centrally
administered software download and that another approximately 4 million of such
boxes will be shipped during 1999.
In addition, General Instrument and Scientific-Atlanta have advised us that
as of December 31, 1998 they had received orders from cable operators for an
aggregate of approximately 70,000 advanced analog cable boxes that will be
WORLDGATE enabled at the factory. Both General Instrument and Scientific-Atlanta
have licensed the WORLDGATE technology for inclusion in their advanced analog
cable boxes and are also working with us on their digital platforms.
GROWTH OF INTERNET AND E-COMMERCE
We believe that Internet usage has experienced, and will continue to
experience, rapid growth. IDC estimates that the number of Internet users
worldwide exceeded 97 million in 1998 and will grow to over 319 million by the
end of 2002. A 1998 report by Jupiter Communications predicted that online
shopping in the United States alone will grow from approximately $5 billion in
1998 to over $29 billion by 2002.
4
<PAGE>
TELEVISION-BASED INTERNET ACCESS
In 1998, according to IDC, only 45% of U.S. households owned a personal
computer, whereas, according to Cablevision Blue Book, 97% had a television. IDC
forecasts that the cumulative shipments of television-based Internet access
devices in the United States will grow from 1 million at the end of 1998 to
almost 24 million by the end of 2002. IDC further forecasts that this market
will achieve a penetration rate in excess of 22% of all U.S. homes by 2002. We
believe that the opportunity for television-based Internet access outside the
United States may eventually be even larger.
AGREEMENTS WITH CABLE OPERATORS
We have entered into multi-year agreements with U.S. and international cable
operators that together with their affiliates have approximately 2.7 million
subscribers. These cable operators include:
- Charter Communications, Inc., which was recently acquired by Vulcan
Ventures Incorporated, which also owns Marcus Cable Company, L.P.,
- Click!Network, a service of City of Tacoma, Washington, Tacoma Public
Utilities,
- Massillon CableTV, Inc.,
- Prestige Cable, Inc., and
- TVCable S.A. (Quito, Ecuador).
Generally, these agreements provide that the cable operators will offer the
WORLDGATE Service in their major cities of operation. These cable operators are
in various stages of planning for and commercially offering our service. Charter
and Click!Network have begun to offer the WORLDGATE Service to their
subscribers. We believe that the three other cable operators will commence
deployment within the next several months. Our service is also in various stages
of testing by cable operators whose cable systems serve approximately 29 million
subscribers.
BACKGROUND
Hal M. Krisbergh and other former senior managers of General Instrument
founded WorldGate in 1995. To date, we have raised approximately $49 million
from equity investors including General Instrument, Scientific-Atlanta, Charter,
Alan Gerry (former chairman of Cablevision Industries Corporation), Showtime
Networks, Citicorp, AMP Incorporated, Motorola, Inc., Needham & Company, Advent
International Corporation and XL Capital LLC.
We were incorporated in Delaware in November 1996 to succeed to the business
of our predecessor, WorldGate Communications, L.L.C., which commenced operations
in March 1995. Our executive offices are located at 3220 Tillman Drive, Suite
300, Bensalem, Pennsylvania 19020. Our telephone number is (215) 633-5100. Our
World Wide Web site is www.wgate.com. The information in our Web site is not
incorporated by reference into this prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......... shares
Common stock to be
outstanding immediately
after this offering........ shares
Use of proceeds.............. We will use the net proceeds of this offering for general
corporate purposes, including working capital and research
and development
Proposed Nasdaq National
Market symbol for our
common stock............... WGAT
</TABLE>
The number of shares of our common stock offered and common stock
outstanding immediately after this offering listed above is based on shares of
our common stock outstanding as of , 1999, excluding shares of
our common stock subject to outstanding options and warrants and shares of
our common stock available for future grants under our stock option plan. If the
underwriters exercise in full the over-allotment option, there will be
shares outstanding.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(In thousands, except share and per share data)
The following table summarizes our financial data. The data presented in
this table is derived from the "Selected Financial Information" and the
financial statements and notes which are included elsewhere in this prospectus.
You should read those sections for a further explanation of the financial data
summarized here. The pro forma balance sheet data gives effect to the sale of
the Series C Preferred Stock in January and February 1999 for aggregate gross
proceeds of approximately $7.6 million and the conversion of all preferred stock
into common stock as if it occurred at December 31, 1998. The pro forma as
adjusted balance sheet data also gives effect to this offering and the
application of the estimated net proceeds of approximately $ million.
The pro forma net loss per common share data gives effect to the conversion of
all preferred stock outstanding as of December 31, 1998 into common stock.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- ---------- -------------
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................... $ 141 $ 1,022
Costs and expenses:
Product costs, engineering and development.............................. $ 1,408 8,511 19,603
Sales and marketing..................................................... 428 3,623 5,157
General and administrative.............................................. 1,093 2,432 3,486
Depreciation and amortization........................................... -- 22 119
--------- ---------- -------------
Total costs and expenses............................................ 2,929 14,588 28,365
Loss from operations........................................................ (2,929) (14,447) (27,343)
Other income, net........................................................... 8 423 423
Interest expense............................................................ (2) (17) (101)
--------- ---------- -------------
Net loss.................................................................... (2,923) (14,041) (27,021)
Accretion on preferred stock................................................ (75) (2,436) (6,145)
--------- ---------- -------------
Net loss available to common shareholders................................... $ (2,998) $ (16,477) $ (33,165)
--------- ---------- -------------
--------- ---------- -------------
Historical net loss per common share........................................ $ (0.33) $ (1.81) $ (3.64)
Historical weighted average common shares outstanding....................... 9,100,801 9,100,801 9,100,801
Pro forma net loss per common share......................................... $ (2.24)
-------------
-------------
Pro forma weighted average common shares outstanding........................ 14,785,714
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- ---------------
BALANCE SHEET DATA:
Cash and cash equivalents.................................................... $ 368 $ 7,968
Total assets................................................................. 5,621 13,221
Total indebtedness........................................................... 1,127 1,127
Total mandatory redeemable preferred stock................................... 49,276 --
Total stockholders' equity (deficit)......................................... (52,240) 5,516
OTHER DATA:
Common shares outstanding.................................................... 9,100,801 15,658,690
</TABLE>
7
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are not historical
facts, but rather are based on our current expectations, estimates and
projections about WorldGate's industry and our beliefs and assumptions. Words
such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements. These statements are not guarantees of future performance and are
subject to some risks, uncertainties and other factors, some of which are beyond
our control, are difficult to predict and could cause actual results to differ
materially from those expressed or forecasted in the forward- looking
statements. These risks and uncertainties are described in "Risk Factors" and
elsewhere in this prospectus. We caution you not to place undue reliance on
these forward-looking statements, which reflect our management's view only as of
the date of this prospectus. We are not obligated to update these statements or
publicly release the result of any revisions to them to reflect events or
circumstances after the date of this prospectus or to reflect the occurrence of
unanticipated events.
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER INFORMATION
IN THIS PROSPECTUS, BEFORE INVESTING IN OUR COMMON STOCK.
WE HAVE A SHORT OPERATING HISTORY
We began operations in March 1995 and our service was first made
commercially available in the third quarter of 1998. As a result, we have only a
limited operating history upon which you can base an evaluation of our business
and prospects. Our prospects are subject to the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets, such as
Internet access and e-commerce. If we are not successful in implementing our
marketing and business plans on a timely basis, our operating results and
financial condition will be materially and adversely affected.
CONSUMERS MAY NOT EMBRACE THE WORLDGATE SERVICE
Because the market for television-based Internet access is new and evolving,
we cannot guarantee that a market for the WORLDGATE Service will develop or that
demand for the WORLDGATE Service will be sustainable. If the market does not
develop, develops more slowly than expected or becomes saturated with
competitors, or if the WORLDGATE Service does not achieve or sustain market
acceptance, our business, operating results, and financial condition will be
materially and adversely affected.
WE HAVE A HISTORY OF NET LOSSES SINCE INCEPTION AND ANTICIPATE CONTINUING LOSSES
For us to make a profit, we need to increase our revenues and gross profit
margins sufficiently to cover the costs necessary for the continued deployment,
development and enhancement of the WORLDGATE Service. If we are not able to do
so, our losses may extend beyond the foreseeable future and we may never achieve
profitability. We have experienced losses and had negative cash flow in each
quarter and year since inception. Our aggregate revenues from inception to
December 31, 1998 were approximately $1.2 million, and our aggregate accumulated
deficit at December 31, 1998 was approximately $51.9 million. In addition, we
currently intend to increase our operating expenses and capital expenditures in
order to continue the commercial deployment, development and enhancement of the
WORLDGATE Service. As a result, we expect to experience substantial additional
operating losses and a negative cash flow for the foreseeable future.
WE DEPEND ON CABLE OPERATORS
Our growth and future success depends substantially upon our ability to
convince cable operators to offer the WORLDGATE Service to their subscribers. As
of the date of this prospectus, we have only entered into a limited number of
agreements with cable operators providing for
8
<PAGE>
the commercial launch of the WORLDGATE Service. None of these cable operators
who are deploying, or who have agreed to deploy, the WORLDGATE Service are
obligated to exclusively provide the WORLDGATE Service to their subscribers. In
addition, no cable operator currently testing the WORLDGATE Service is obligated
to provide the WORLDGATE Service to its cable subscribers. If our service is not
viable as a business proposition or if cable operators otherwise determine that
the service does not meet their business or operational expectations or
strategies, the WORLDGATE Service will not be offered to their subscribers. We
cannot assure you that our current and planned trials or that our commercial
deployment of the WORLDGATE Service will be successful. If we fail to
successfully complete our trials and commercial deployment in any cable
operator's systems, we will be unable to generate any cash flow from such
systems and other prospective cable operators may be reluctant to enter into
commitments with us due to concerns about the viability of the WORLDGATE
Service.
As a result of our dependence on cable operators to provide the WORLDGATE
Service to their subscribers, we have no control over a number of important
factors, including:
- the cable operators' advertising or marketing strategy, if any, regarding
their offering of the WORLDGATE Service to their subscribers, and
- the monthly fees cable operators may charge to their subscribers for the
WORLDGATE Service.
WE ARE DEPENDENT UPON CONTINUED INVESTMENT BY CABLE OPERATORS TO UPGRADE THEIR
INFRASTRUCTURE
The adoption of the WORLDGATE Service is dependent upon continued investment
by cable operators to upgrade their infrastructures to support two-way data
transmissions. It is uncertain whether cable operators will upgrade to two-way
cable plant in the near term, or at all. The failure of cable operators to
complete these upgrades or implement new services in a timely and satisfactory
manner, or at all, would adversely affect the market for the WORLDGATE Service.
Cable plants, which are the network used to distribute cable programming to
subscribers, encompass three general levels of performance:
- "one-way plant" that is only capable of downstream transmission of
programming to subscribers,
- "standard two-way plant" that is capable of downstream transmission plus
upstream transmission from the subscriber to the cable operator as
provided by a standard pay-per-view radio frequency return path, but that
has more than a nominal level of ambient noise, and
- "cable modem ready two-way plant" that is capable of downstream and
upstream transmissions with only a nominal level of ambient noise.
Although the WORLDGATE Service can operate over one-way cable plant, it can
do so only in conjunction with a telephone connection. As such, it is less
convenient and efficient for a subscriber to use the WORLDGATE Service over
one-way cable plant and to date, all of the cable operators who have agreed to
deploy the WORLDGATE Service have done so only over two-way cable plant.
According to Kagan, in 1998 at least 60% of homes were passed by one-way cable
plant. Although we believe that many cable operators have begun upgrading their
cable infrastructures to two-way cable plant primarily to offer digitally
compressed information transmission with increased channel capacity and speed,
many cable operators have in the past delayed their planned upgrades. Some cable
operators may have limited experience with these upgrades, and these investments
may place a significant strain on the financial, managerial, operational and
other resources of the cable operators, most of which are already highly
leveraged and face intense competition from wireline and wireless
telecommunications and broadcast satellite service providers. Cable operators
may not have the capital or resources required to upgrade their infrastructures
or to offer new services.
9
<PAGE>
WE DEPEND ON CABLE BOX MANUFACTURERS TO INCORPORATE OUR TECHNOLOGY INTO THEIR
CABLE BOXES
In order to access the WORLDGATE Service, a consumer needs a WORLDGATE
enabled digital or advanced analog cable box. We have worked closely with
General Instrument and Scientific-Atlanta in developing the technology that will
enable the WORLDGATE Service to operate on their digital or advanced analog
cable boxes. Although we believe that we have developed strong relationships
with General Instrument and Scientific-Atlanta, neither company is required to
install our WORLDGATE technology in its current or next generation cable boxes.
Similarly, neither company is prohibited from establishing relationships with
any of our competitors and incorporating our competitors' technologies in their
current or next generation cable boxes.
We have entered into agreements with General Instrument and
Scientific-Atlanta providing for the testing and certification of WORLDGATE
technology within their products as well as the joint marketing of the
technology with their products. Although we have obtained certification for
General Instrument's and some models of Scientific Atlanta's current generation
advanced analog cable boxes, additional certifications will likely be required
for other Scientific Atlanta advanced analog cable boxes and future generation
cable boxes. The length of time required to complete such certifications cannot
be accurately predicted and has in the past resulted in unexpected delays. Any
failure or delay in the testing, certification or availability of these cable
boxes could impact the timing and effectiveness of the deployment of the
WORLDGATE Service which could, in turn, have a material adverse effect on our
business, financial condition and results of operations.
Our WORLDGATE technology is currently incorporated into an additional
feature expansion module that must be installed within General Instrument's and
some models of Scientific-Atlanta's current advanced analog cable boxes to
enable the WORLDGATE Service. We currently bear the manufacturing responsibility
for and pay the manufacturing expenses for, and the costs of, these modules. The
incremental cost per cable box of this module is currently approximately $60,
but we expect this cost to decrease with further cost reduction activities and
volume production. Once the incremental cost to cable box manufacturers for
incorporating our WORLDGATE technology into their cable boxes becomes nominal,
however, we believe that General Instrument and Scientific-Atlanta may assume
the manufacturing responsibility and cost. We cannot assure you that the cost
reductions will be achieved in a timely manner, if at all, or that General
Instrument or Scientific-Atlanta will assume the manufacturing responsibility
and cost.
Additionally, because General Instrument and Scientific-Atlanta are the two
largest suppliers of cable boxes, their decision not to install our WORLDGATE
technology in their cable boxes or to develop similar technology with our
competitors could have a material adverse effect on our future success. Both
General Instrument and Scientific-Atlanta have joined us in promoting the
WORLDGATE Service in the press, at trade shows and conferences and through joint
sales and marketing presentations worldwide, which we believe is particularly
important in gaining market acceptance for the WORLDGATE Service outside the
United States. If either cable box manufacturer severed this relationship with
us, we would lose a valuable sales and marketing resource.
WE DEPEND ON ADVERTISERS AND TELEVISION PROGRAMMERS
Our future growth and long-term success depends substantially on our ability
to convince advertisers and television programmers to use our CHANNEL
HYPERLINKING technology with their advertisements and television programs.
Although we have tested our CHANNEL HYPERLINKING technology with programmers
such as The Weather Channel, no advertiser or programmer had, as of January 31,
1999, paid us to use our CHANNEL HYPERLINKING technology, or is obligated to use
our CHANNEL HYPERLINKING technology in their advertisements or programs. If we
cannot demonstrate the business viability of our CHANNEL HYPERLINKING technology
or if advertisers and programmers otherwise determine that such service does not
meet their business or operational expectations or
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strategies, our CHANNEL HYPERLINKING technology will not be incorporated into
their advertisements or programs. In addition, cable operators will need to
achieve significant penetration rates of the WORLDGATE Service to provide an
attractive target audience for advertisers and programmers. We cannot assure you
that we will achieve a significant number of WORLDGATE Service subscribers or
that advertisers and programmers will otherwise embrace our CHANNEL HYPERLINKING
technology. If we fail to incorporate our CHANNEL HYPERLINKING technology in a
substantial number of advertisements and programs, our business, operating
results and financial condition could be materially adversely affected.
INTELLECTUAL PROPERTY CLAIMS AGAINST US CAN BE COSTLY AND RESULT IN THE LOSS OF
SIGNIFICANT RIGHTS
We are subject to patent litigation which claims that we are infringing
other parties' intellectual property rights.
- On May 11, 1998, Interactive Channel Technologies, Inc. and SMI Holdings,
Inc., subsidiaries of Source Media, filed a complaint against us in the
U.S. District Court for the District of Delaware, alleging that we
infringed some patents issued to Source. The complaint seeks injunctive
relief, as well as monetary damages and attorneys' fees. If the plaintiffs
win this lawsuit and they are able to obtain an injunction against us, we
could be precluded from offering the WORLDGATE Service.
- On October 6, 1998, Advanced Interactive, Inc. ("AII") filed a complaint
in the U.S. District Court for the Northern District of Illinois, Eastern
Division, against us and several other defendants, alleging that each of
the defendants infringed a patent issued to AII. The complaint seeks
monetary damages and attorneys' fees.
Many parties are also actively developing or have developed technologies
related to Internet access and the establishment of links between the Internet
and television. We believe that such parties will continue to take measures to
protect these technologies, including seeking patent protection. We are aware
that a number of patents have been issued in this area and we anticipate that
additional third-party patents will be issued in the future. We cannot assure
you that additional infringement or invalidity claims, or claims for
indemnification resulting from infringement claims, will not be asserted or
prosecuted against us or that any assertion or prosecution will not materially
adversely affect our business, financial condition and results of operations.
This may be the case even if patents are issued to us. Irrespective of the
validity or the successful assertion of such claims, they would result in
significant costs and diversion of management time and resources. This would
have a material adverse effect on our business, financial condition and results
of operations. If any claim or action were to be asserted against us, we may
seek to obtain licenses for other parties' intellectual property rights. We
cannot assure you that under such circumstances licenses would be available to
us on commercially reasonable terms, or at all.
CABLE OPERATORS MAY BE CONTRACTUALLY LIMITED IN OFFERING THE WORLDGATE SERVICE
We are aware that some cable operators, such as Cablevision, Comcast
Corporation, Cox Enterprises, Inc. and Tele-Communications, Inc., whose cable
systems serve more than 26 million U.S. homes, have entered into a distribution
agreement with At Home Corporation. The distribution agreement with At Home
contains exclusivity provisions prohibiting these cable operators from
conducting or participating in any business in the United States that involves
the provision of some residential Internet services over their cable plants at
data transmission speeds greater than 128 Kbps. This distribution agreement
could be interpreted to preclude or hinder these cable operators from offering
the WORLDGATE Service to their subscribers at speeds in excess of 128 Kbps. If
cable operators are unwilling or unable to offer the WORLDGATE Service to
subscribers in these cable systems, our business, financial condition and
results of operations would be materially adversely affected.
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CABLE OPERATORS/CABLE BOX MANUFACTURERS MAY HAVE POTENTIAL CONFLICTS OF INTEREST
IN PROVIDING THE WORLDGATE SERVICE
Some cable operators and cable box manufacturers may be stockholders of
other companies that provide Internet services. For example, TCI, Comcast, Cox
and Cablevision are stockholders of At Home, and MediaOne Group, Inc. and Time
Warner, the second largest cable company in the United States, have established
their own cable-based Internet service, called Road Runner, with proprietary
content featuring various Time Warner publications and services. Time Warner
markets the Road Runner service to its subscribers as well as to other cable
operators. Also, some companies that provide Internet services may be
stockholders of cable operators or cable box manufacturers. For example, in 1997
Microsoft Corporation, which also owns WebTV Networks, Inc., invested $1 billion
in Comcast. We cannot assure you that other companies will not invest in cable
operators and/or cable box manufacturers. As a result, these cable operators may
be reluctant to provide any service, including the WORLDGATE Service, that
provides other Internet services.
OUR MARKETS ARE HIGHLY COMPETITIVE
We experience intense competition. There are many companies providing
Internet access and we anticipate that many more companies will provide Internet
products and services, including companies that provide access to the Internet:
- on televisions through cable infrastructure without a personal computer,
such as Source Media, Inc.'s Interactive Channel and ICTV, Inc.,
- on personal computers through telephone modems and telephone lines, such
as America Online, Inc., Microsoft Network, Earthlink Network, Inc.,
MindSpring Enterprises, Inc., AT&T Corp., MCI WorldCom, Inc., Sprint
Corporation and regional Bell operating companies,
- on personal computers with cable modems through the cable television
infrastructure, such as At Home and Road Runner,
- on televisions through telephone lines, such as WebTV and a product
offering recently announced by America Online, and
- by broadcast satellite.
There are also many companies providing Internet content and other Internet
services, such as companies that provide, over the Internet and on proprietary
on-line services, content and applications ranging from news, sports and
community features to e-mail and consumer video conferencing, such as America
Online, Infoseek Corporation, Microsoft Network LLC, Prodigy Communications
Corporation, Netscape Communications Corporation and WebTV.
In addition, companies such as Wink Communications, Inc. and Intel
Corporation broadcast supplementary text and/or graphics information as an
enhancement to television programming. This information may be displayed on the
television screen in addition to the standard broadcast television programming.
Many of the above companies have significantly greater financial, technical,
marketing, distribution, customer support, other resources, name recognition,
compelling content and access to consumers, and more established relationships
with advertisers and content and application providers than we have.
We cannot assure you that we will be able to achieve our objectives, that we
will be able to compete successfully against current or future competitors or
that competitive pressures faced by us will not have a material adverse effect
on our business, financial condition and results of operations.
WE ARE SUBJECT TO CAPACITY CONSTRAINTS AND SYSTEM FAILURES
Due to the limited deployment of the WORLDGATE Service, the ability of our
service to accommodate a substantial number of users concurrently performing
tasks requiring intensive processing is not yet known. Although the
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WORLDGATE Service has been designed to be easily expandable, we cannot assure
you that we will be able to maintain quality of performance and high transaction
speeds as the number of subscribers grows or their usage increases. In addition,
as subscriber penetration grows it may be necessary for cable operators to
purchase additional equipment, and we cannot assure you that they will do so.
The performance of the WORLDGATE Service is also subject to degradation and
interruption from human errors, telecommunication failures, computer viruses and
similar events. Any of these problems in our systems or those of cable operators
could result in reduced subscriber demand. We have experienced service
degradations and interruptions in the past and we expect that these problems
will continue. Our failure to provide uninterrupted service at a level of
performance acceptable to subscribers would have a material adverse effect on
our business, financial condition and results of operations.
WE MAY NOT BE SUCCESSFUL IN PROTECTING OUR PROPRIETARY RIGHTS
We regard our copyrights, trademarks, trade dress, trade secrets and similar
intellectual property as critical to our success. To protect these rights, we
rely on a combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect our proprietary rights in our
products, services, know-how and information. We have filed patent applications
in the United States and internationally covering aspects of the WORLDGATE
Service and our CHANNEL HYPERLINKING technology. We cannot assure you that any
patent will issue from these applications or that, if issued, the claims covered
by the patents will not be substantially reduced from the claims covered by our
current patent applications. Moreover, any patent that may be issued might be
held invalid or unenforceable by a court. Failure of any patent to provide
protection to our technology may make it easier for our competitors to offer
technology equivalent or superior to our technology. Even if the patents are
upheld or are not challenged, third parties might be able to develop alternative
technologies or products without infringing any such patent. We generally enter
into confidentiality agreements with our employees and consultants, and, when
possible, customers, partners and others to control and limit access to and
disclosure of our proprietary information. We cannot assure you that these
contractual arrangements or other steps taken by us to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology or
deter independent third party development of similar technologies. Enforcement
of our intellectual property rights may be costly. Additionally, the laws of
foreign countries may not protect our products or intellectual property rights
to the same extent as U.S. laws.
WE DEPEND ON THIRD PARTY SUPPLIERS FOR TECHNOLOGY AND OTHER COMPONENTS NECESSARY
TO PROVIDE THE WORLDGATE SERVICE
We depend, and will continue to depend, on third parties to provide us with
technology and other components necessary to provide the WORLDGATE Service.
Further, we do not manufacture, nor do we have the capability to manufacture,
any of the equipment used in providing the WORLDGATE Service. Any termination of
the license for such technology or any reduction or interruption in the supply
of equipment or other components or in product manufacturing by third party
contractors could adversely affect our ability to deliver the WORLDGATE Service,
thereby having a material adverse effect on our business, financial condition
and results of operations.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH OUR FOREIGN OPERATIONS
We cannot assure you that we will be successful in deploying the WORLDGATE
Service in any foreign market. To date, we have only limited experience in
developing, marketing and operating the WORLDGATE Service internationally. In
particular, international markets may be slower in adopting cable or the
Internet as an advertising and commerce medium and may not have a
technologically advanced cable or Internet infrastructure. We may experience
difficulty in managing international operations as a result of distance as well
as language and
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cultural differences. In international jurisdictions, some governmental entities
own and operate the communication authorities which they regulate. The
governmentally owned and operated authorities may be given preferences or
otherwise be treated more favorably by such governments. A government may also
own and operate an Internet service. As such, the government may prohibit any
similar or other Internet service provider from offering their services in their
territory.
In addition to the above, other risks inherent in doing business
internationally include:
- loss of revenue, property and equipment from social, political and
economic instability,
- potentially adverse tax consequences,
- changes in both foreign and U.S. laws and regulations,
- U.S. export restrictions relating to encryption technology,
- foreign laws and regulations relating to the Internet as a communications
medium, as well as laws and regulations with respect to privacy, morality
and/or other social or political standards which impact the information
which may be made available on such medium,
- difficulties in staffing and managing foreign operations,
- problems in collecting accounts receivable,
- difficulties in translating and localizing content,
- fluctuations in currency exchange rates, and
- local economic crises, such as the current Asian economic crisis.
We cannot assure you that one or more such factors will not have a material
adverse effect on our future international operations and consequently on our
business, financial condition and results of operations.
WE MAY NOT BE ABLE TO EFFECTIVELY MANAGE OUR ANTICIPATED GROWTH
If we are unable to manage our growth effectively, our business, financial
condition and results of operations could be materially adversely affected. Our
current business plan forecasts a period of rapid growth following the
commencement of commercial deployment of the WORLDGATE Service. This growth, if
it occurs, will place a significant strain on our financial, managerial and
other resources. Our ability to manage our growth effectively, should it occur,
will require us to continue to improve our operating, financial and management
information systems and to attract, train, motivate, manage and retain key
employees, including additional technical, marketing and sales personnel. In
addition, our plan to widely deploy the WORLDGATE Service in multiple locations
imposes challenges in finding additional qualified personnel as well as managing
the required logistics for operating in various locations and monitoring cable
headend systems in multiple locations.
WE RELY ON KEY EXECUTIVES AND PERSONNEL
The loss of the services of our Chairman and Chief Executive Officer, Hal M.
Krisbergh, or one or more of our other key employees or our failure to attract
additional qualified personnel, could have a material adverse effect on our
business, financial condition and results of operations. Our success depends in
significant part upon the continued service of our key technical, sales and
senior management personnel, particularly Mr. Krisbergh. Because no officer or
employee of WorldGate is bound by an employment agreement, any officer or
employee of WorldGate could terminate his or her relationship with us at any
time. Our future success will also depend on our ability to attract, train,
retain and motivate highly qualified senior management, technical, marketing and
sales personnel. Because competition for these personnel is intense, we cannot
assure you that we will be able to do so.
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OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF CUSTOMERS
We have in the past derived, and will in the future derive, a significant
portion of our revenues from a limited number of customers. In 1997, three cable
operators accounted for approximately 100% of our revenues and in 1998, ten
cable operators accounted for approximately 98% of our revenues. Moreover, in
1998, Charter and Click!Network accounted for 44% and 10%, respectively, of our
revenues. We cannot assure you that any of these customers will continue to
offer the WORLDGATE Service to their cable subscribers. The loss of any of these
cable operators as customers would have a material adverse effect on us and our
financial results.
WE ARE SUBJECT TO BURDENSOME GOVERNMENT REGULATION
We are subject to varying degrees of federal, state, local and foreign
regulation as well as laws enacted by the U.S. Congress and other governments.
The Federal Communications Commission has established regulations that, among
other things, set installation and equipment standards for communications
systems.
In addition, due to the increasing popularity and use of the Internet, it is
possible that laws and regulations may be adopted covering issues such as user
privacy, defamation, network access, pricing, taxation, content regulation,
quality of products and services, and intellectual property ownership and
infringement. Such legislation could expose us to substantial liability, could
materially increase our cost of providing the WORLDGATE Service and could
decrease the growth and acceptance of the Internet.
Due to the global nature of the Internet, it is possible that governments of
other state and foreign countries might attempt to regulate our transmissions,
confiscate our property or prosecute us for violations of their laws. We might
unintentionally violate such laws. We cannot assure you that future regulations
adopted by the Federal Communications Commission or other regulatory,
legislative or judicial initiatives will not have a material adverse effect on
us.
WE MAY HAVE LIABILITY FOR DEFAMATORY OR INDECENT CONTENT
The law relating to liability of Internet service providers for information
carried on or disseminated through their networks is currently unsettled. A
number of lawsuits have sought to impose such liability for defamatory speech
and indecent materials. In addition, the Children's Online Protection Act and
the Children's Online Privacy Act may restrict the distribution of some
materials deemed harmful to children and may impose additional restrictions on
the ability of on-line services to collect user information from minors. We
cannot assure you that such legislation will not impose significant additional
costs on our business or subject us to additional liabilities and to
expenditures of substantial resources or the discontinuation of some of our
product or service offerings. In addition, the imposition of liability for
information carried by us would have a material adverse effect on our business,
operating results and financial condition.
WE MAY HAVE LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED ON THE INTERNET
Claims for negligence, copyright or trademark infringement or other legal
theories could be made against us because information will be downloaded and
redistributed by users of the WORLDGATE Service. Copyright and trademark laws
are evolving both domestically and internationally and we are uncertain as to
their applicability to the WORLDGATE Service. The imposition of liability for
information carried by us would have a material adverse effect on our business,
operating results and financial condition.
WE MAY HAVE LIABILITY FOR E-COMMERCE TRANSACTIONS
As part of our business, we are seeking to enter into agreements with
content providers, advertisers and e-commerce merchants under which we will
receive a share of revenue from the purchase of goods and services by users of
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the WORLDGATE Service. Such arrangements may expose us to additional legal risks
and uncertainties, including potential liabilities to consumers of such products
and services. Our insurance may not cover potential claims of this type or may
not be adequate to indemnify us for all liability that may be imposed.
OUR CHAIRMAN AND CHIEF EXECUTIVE OFFICER CAN EXERCISE SIGNIFICANT INFLUENCE OVER
WORLDGATE
After the completion of this offering, Hal M. Krisbergh will beneficially
own approximately % of the outstanding common stock. Mr. Krisbergh will have
the voting power to exercise substantial control over the election of our entire
Board of Directors and all votes on matters requiring stockholder approval. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of WorldGate.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
We have funded operations primarily through private sales of equity
securities. Our capital requirements depend on numerous factors, including:
- the rate of acceptance by cable operators, cable subscribers, advertisers,
e-commerce companies and Internet content providers of the WORLDGATE
Service,
- our ability to maintain and expand the number of subscribers, and
- the rate of commercialization of the WORLDGATE Service.
We cannot accurately predict the timing and amount of our capital
requirements. Any additional equity financing, if available, may be dilutive to
our stockholders, and debt financing, if available, may involve restrictions on
our financing and operating activities. If we are unable to obtain additional
financing on terms acceptable to us as needed, our business, operating results
and financial condition would be materially and adversely affected.
YEAR 2000 RISKS MAY ADVERSELY AFFECT WORLDGATE
Year 2000 problems experienced by us or any third parties could materially
adversely affect our business. Additionally, the Internet could face serious
disruptions arising from the Year 2000 problem. We are evaluating our internal
information technology and non-information technology systems to determine our
exposure to Year 2000 problems. In addition, we have begun to contact our
information technology suppliers to ascertain their Year 2000 status. However,
we cannot guarantee that our own systems will be Year 2000 compliant in a timely
manner, that any of our participating sellers, such as cable operators, or other
Web site vendors will be Year 2000 compliant in a timely manner, or that there
will not be problems with technology systems working together. We also cannot
guarantee that consumers will be able to use the WORLDGATE Service without
serious disruptions arising from the Year 2000 problem. Given the pervasive
nature of the Year 2000 problem, we cannot guarantee that disruptions in other
industries and market segments will not adversely affect our business. Moreover,
the costs related to Year 2000 compliance could be significant.
WE ARE SUBJECT TO SECURITY RISKS
The secure transmission of confidential information over the Internet is a
significant aspect of maintaining consumer and supplier confidence in the
WORLDGATE Service. We rely on encryption and authentication technology as well
as other network technology to effect secure transmission of confidential
information within our service. We are also dependent upon the infrastructure
provided by the cable operators for the distribution of our service. It is
possible that advances in computer capabilities, new discoveries or other
developments could result in a compromise or breach of the technology used by us
to protect customer data transmission.
A party that is able to circumvent our security systems could steal
proprietary information or cause interruptions in our operations. Security
breaches also could damage our reputation and expose us to a risk of loss or
litigation and possible liability. Our insurance policies carry coverage limits,
which may not be adequate to reimburse us for losses caused by security
breaches. We cannot guarantee that our security measures will prevent security
breaches.
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We also face risks associated with security breaches affecting third parties
conducting business over the Internet. Consumers generally are concerned with
security and privacy on the Internet and any publicized security problems could
inhibit the growth of the Internet and, therefore, the WORLDGATE Service as a
means of conducting commercial transactions.
OUR STOCK PRICE MAY BE VOLATILE
Prior to this offering, you could not buy or sell our common stock publicly.
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price of our common stock was
determined solely by negotiations between us and the underwriters and does not
necessarily reflect the price at which shares of our common stock may be sold in
the public market during or after this offering. The market price of our common
stock is likely to be highly volatile and could be subject to wide fluctuations
in response to various factors and events such as the following, some of which
are beyond our control:
- quarterly variations in our operating results,
- operating results that vary from the expectations of securities analysts
and investors,
- changes in expectations as to our future financial performance, including
financial estimates by securities analysts and investors,
- changes in market valuations of other Internet or technology companies,
- announcements of technological innovations or new services by us or our
suppliers, customers or competitors,
- announcements by us or our suppliers, customers or competitors of
significant contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments,
- additions or departures of key personnel, and
- regulatory action in the cable or Internet industry.
Domestic and international stock markets often experience extreme price and
volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations, could adversely affect the market price of our common stock.
The market prices for stocks of Internet-related and technology companies,
particularly following an initial public offering, frequently reach levels that
bear no relationship to the operating performance of such companies. Such market
prices generally are not sustainable and are subject to wide variations. If our
common stock trades to such levels following this offering, it likely will
thereafter experience a material decline.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS
We are subject to Delaware laws that could have the effect of delaying,
deterring or preventing a change in control of WorldGate. One of these laws
prohibits us from engaging in a business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder, unless some conditions are met. In addition, provisions
of our Certificate of Incorporation and By-laws, and the significant amount of
common stock held by our executive officers, directors and affiliates, could
have the effect of discouraging potential takeover attempts or making it more
difficult for stockholders to change management. One such provision is the
ability of the Board of Directors to authorize the issuance of preferred stock
without stockholder approval. The rights of the holders of our common stock will
be subject to, and would be adversely affected by, the rights of the holders of
any preferred stock that may be issued in the future.
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SUBSTANTIAL SALES OF OUR COMMON STOCK MAY AFFECT OUR STOCK PRICE
The market price for our common stock could drop as a result of sales of a
large number of shares of our common stock in the market after this offering, or
the perception that such sales could occur. These factors also could make it
more difficult for us to raise funds through future offerings of our common
stock. Following the expiration of or earlier release from the 180-day lockup
agreements, approximately 14.1 million shares will become eligible for sale,
subject to compliance with Rule 144 and to contractual restrictions in our Stock
Option Plan. The approximately remaining million shares held by existing
stockholders will become eligible for sale in accordance with Rule 144. In
addition, we intend to register on Form S-8 a total of 291,990 shares of our
common stock reserved for issuance and 641,343 shares subject to outstanding
options granted under our Stock Option Plan. The holders of approximately 13.8
million shares of our common stock, assuming the exercise of all outstanding
warrants, will also be entitled to some rights with respect to registration of
such shares of our common stock for offer or sale to the public.
Upon consummation of this offering, there will be outstanding shares
of our common stock. The shares of our common stock sold in this offering will
be freely tradable without restriction, except for any shares acquired by our
"affiliates" which can be sold under Rule 144, subject to volume and other
limitations.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $
million, approximately $ million if the underwriters fully exercise
their over-allotment option, from the sale of our common stock offered by us in
this offering based on an assumed offering price of $ per share. This
estimate is after deducting underwriting discounts and commissions and other
fees and expenses payable by us.
We intend to use the net proceeds from this offering for working capital,
general corporate purposes and capital expenditures. We may use a portion of the
net proceeds to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. The amounts and the timing
of any such use may vary significantly depending upon a number of factors,
including our revenue growth, asset growth, cash flow and acquisition
activities. Pending such uses, the net proceeds of this offering will be
invested in short-term, investment-grade, interest-bearing securities. We
currently anticipate that the net proceeds received by us from this offering,
together with cash generated from operations and existing cash balances will be
sufficient to satisfy our operating cash needs for at least 18 months from
receipt of the proceeds. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
We have never paid nor declared any cash dividends. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we do
not anticipate paying or declaring any cash dividends in the foreseeable future.
The payment of future dividends, if any, will depend among other things, on our
results of operations, cash flows and financial condition and on such other
factors as the Board of Directors may, in its discretion, consider relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998,
(1) on a historical basis, (2) on a pro forma basis to reflect the sale of
697,437 additional shares of Series C Preferred Stock in January and February
1999 for aggregate gross proceeds of approximately $7.6 million, and the
conversion of Series A, B and C Preferred Stock and of Class B Common Stock into
Class A Common Stock and (3) on a pro forma basis as adjusted to give effect to
such sales and this offering and the application of the estimated net proceeds
of approximately $ million therefrom, assuming a public offering price
of $ per share. This table should be read in conjunction with the financial
statements and related notes thereto and other financial information included
elsewhere in this prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)
---------- ------------- ----------------
<S> <C> <C> <C>
(IN THOUSANDS)
Notes payable........................................................ $ 1,111 $ 1,111 $ 1,111
Capital leases....................................................... 16 16 16
Series A Convertible Mandatory Redeemable Preferred Stock, 2,752,111
shares authorized, issued and outstanding; no shares outstanding
pro forma and pro forma as adjusted................................ 16,578
Series B Convertible Mandatory Redeemable Preferred Stock, 3,270,760
shares authorized, 2,803,031 shares outstanding; no shares
outstanding pro forma and pro forma as adjusted.................... 23,569
Series C Convertible Mandatory Redeemable Preferred Stock, 3,181,819
shares authorized, 832,277 shares outstanding; no shares
outstanding pro forma and pro forma as adjusted.................... 9,129
Warrant for Series B Convertible Mandatory Redeemable Preferred
Stock.............................................................. 881
Stockholders' equity (deficit):
Class A Common Stock, $.01 par value, 50,000,000 shares authorized,
no shares issued and outstanding; 15,658,690 shares outstanding
pro forma; shares outstanding pro forma as adjusted(3)..... 157
Class B Common Stock, $.01 par value, 27,608,000 authorized,
9,100,801 shares outstanding; no shares outstanding pro forma and
pro forma as adjusted(3)(4)...................................... 91
Additional paid in capital......................................... 56,809
Warrant for common stock........................................... 881 881
Accumulated deficit................................................ (51,876) (51,876) (51,876)
Deferred compensation.............................................. (455) (455) (455)
---------- ------------- --------
Total stockholders' equity (deficit)............................. (52,240) 5,516
---------- ------------- --------
Total capitalization................................................. $ (956) $ 6,643 $
---------- ------------- --------
---------- ------------- --------
</TABLE>
- ------------------------
(1) See note 2 of the notes to financial statements for a description of pro
forma presentation.
(2) Adjusted to reflect the sale of million shares of our common stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(3) Adjusted to reflect the conversion of Class B Common Stock into Class A
Common Stock upon the consummation of this offering.
(4) Excludes (a) 641,343 shares of common stock issuable upon exercise of all
outstanding stock options as of December 31, 1998, at exercise prices
between $.75 per share and $4.50 per share and (b) 311,819 shares of common
stock issuable upon exercise of all outstanding warrants.
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DILUTION
The pro forma net tangible book value of the Company's Class A Common Stock
as of December 31, 1998 was approximately $( ), or $( ) per share. "Pro
forma net tangible book value per share" represents the amount of pro forma
total tangible assets of the Company less pro forma total liabilities divided by
the number of shares of common stock outstanding after giving effect to the
conversion of Series A, Series B and Series C Preferred Stock and the Class B
Common Stock, the sales of the Series C Preferred Stock in January and February
1999 and the stock split. After giving effect to the sale by the Company of
shares of common stock in this offering and after deducting the
underwriting discount and estimated offering expenses payable by the Company,
the pro forma net tangible book value of the Company as of December 31, 1998
would have been approximately $ or $ per share to new
investors purchasing our common stock in this offering. "Dilution per share"
represents the difference between the initial public offering price per share of
our common stock and the pro forma net tangible book value per share of the
Company as of December 31, 1998 after giving effect to this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share...................................... $
Pro forma net tangible book value per share as of December 31, 1998........
Increase per share attributable to new investors...........................
---------
Pro forma (as adjusted) net tangible book value per share after this
offering...................................................................
---------
Dilution per share to new investors.......................................... $
---------
---------
</TABLE>
The following table summarizes, as of December 31, 1998, on the pro forma
basis described above, the difference between the total consideration paid and
the average price per share paid by our existing stockholders and the new
investors purchasing shares of common stock in this offering (before deducting
underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------------- ---------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........................ 15,658,690 $ 48,752,075
New Stockholders.............................
------------ --- ------------- ---
Total.................................... 100% $ 100%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
The foregoing tables exclude all outstanding options and warrants. As of
December 31, 1998, there were outstanding warrants to purchase an aggregate of
311,819 shares of common stock and options to purchase an aggregate of 641,343
shares of Common Stock (108,750 of which were exercisable at December 31, 1998)
at a weighted average exercise price of $3.00 per share, and the Company had an
additional 291,990 shares of common stock available for future grants and other
issuances under its Stock Option Plan. See "Management" and note 7 of the notes
to financial statements appearing elsewhere in this prospectus. The exercise of
outstanding options and warrants having an exercise price less than the offering
price would increase the dilutive effect to new investors.
21
<PAGE>
SELECTED FINANCIAL INFORMATION
The following selected financial information as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998 are
derived from our financial statements included in this prospectus, which have
been audited by PricewaterhouseCoopers LLP, independent accountants. You should
read the following information in conjunction with the Company's financial
statements and notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The data as of December 31, 1995 and 1996 and for the period ended
December 31, 1995 are derived from financial data not included in this
prospectus.
<TABLE>
<CAPTION>
MARCH 21,
1995
(INCEPTION)
THROUGH YEAR ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------
1995 1996 1997 1998
------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................ $ 141 $ 1,022
Costs and expenses:
Product costs, engineering and development............ $ 149 $ 1,408 8,511 19,603
Sales and marketing................................... 428 3,623 5,157
General and administrative............................ 1,093 2,432 3,486
Depreciation and amortization......................... 22 119
------ ------------ ------------ -------------
Total costs and expenses.......................... 149 2,929 14,588 28,365
Loss from operations.................................... (149) (2,929) (14,447) (27,343)
Other income, net....................................... 8 423 423
Interest expense........................................ (2) (17) (101)
------ ------------ ------------ -------------
Net loss................................................ (149) (2,923) (14,041) (27,021)
Accretion on preferred stock............................ (75) (2,436) (6,145)
------ ------------ ------------ -------------
Net loss available to common shareholders............... $ (149) $ (2,998) $ (16,477) $ (33,165)
------ ------------ ------------ -------------
------ ------------ ------------ -------------
Historical net loss per common share.................... $ (0.33) $ (1.81) $ (3.64)
Historical weighted average common shares outstanding... 9,100,801 9,100,801 9,100,801
Pro forma net loss per common share(1).................. $ (2.24)
-------------
-------------
Pro forma weighted average common shares
outstanding(1)........................................ 14,785,714
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, PRO FORMA DECEMBER
--------------------------------------------------- DECEMBER 31, 1998, AS
1995 1996 1997 1998 31, 1998(1) ADJUSTED(1)(2)
--------- ------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short term
investments........................... $ 32 $ 7,574 $ 17,318 $ 368 $ 7,968
Total assets............................ 32 7,583 18,412 5,621 13,221
Total indebtedness...................... 591 1,127 1,127
Total mandatory redeemable preferred
stock................................. 8,571 34,366 49,276
Total stockholders' equity (deficit).... 32 (1,451) (19,177) (52,240) 5,516
OTHER DATA:
Common shares outstanding............... -- 9,100,801 9,100,801 9,100,801 15,658,690
</TABLE>
- ------------------------
(1) See note 2 to notes to financial statements for a description of pro forma
presentation.
(2) Adjusted to reflect the sale of million shares of our common stock by us
at an assumed price to the public of $ per share, less expenses. See
"Use of Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
We commenced operations on March 21, 1995. Since inception, all of our
activities have involved developing the WORLDGATE Service and conducting tests
and trials of our service with cable operators throughout the world. We are
engaged in joint engineering and sales and marketing activities with General
Instrument and Scientific-Atlanta. These relationships began in 1996 with
product development for some hardware components of our WORLDGATE platform.
We first announced the WORLDGATE Service at the National Cable Television
Association Show in May 1996 and first demonstrated an operational system at the
Western Cable Show in December 1996. Tests at corporate locations of major cable
operators began in the third quarter of 1997 and consumer field trials began in
September 1997. We have entered into multi-year agreements with cable operators
that collectively have approximately 2.7 million system subscribers including:
- Charter,
- Click!Network,
- Massillon Cable,
- Prestige Cable, and
- TVCable.
Generally, these agreements provide that these cable operators will offer
the WORLDGATE Service in their major cities of operation. These cable operators
are in various stages of planning for and commercially offering our service.
Only Charter and Click!Network have begun to offer the WORLDGATE Service to
their subscribers. The WORLDGATE Service is also in various stages of testing by
cable operators whose cable systems serve approximately 29 million subscribers.
See "Business--WORLDGATE Trials," and "Risk Factors--We depend on cable box
manufacturers to incorporate our technology into their cable boxes."
We have minimal revenues to date and have incurred operating losses, net
losses and negative operating cash flow each month since our inception. At
December 31, 1998, we had an accumulated deficit of approximately $51.9 million.
We have funded our operations since inception through private placements of
preferred stock, capital contributions from stockholders and a line of credit.
See "--Liquidity and Capital Resources." We currently intend to increase our
operating expenses and capital expenditures in order to continue the development
and enhancement of the WORLDGATE Service and to expand the commercial deployment
of the WORLDGATE Service.
REVENUES
SYSTEM SALES. In the near term we anticipate that a majority of our
revenues will be derived from cable operators who purchase our headend
computers. We derive revenues from the sale to cable operators of cable headend
equipment, including computer systems, proprietary vertical blanking interval
encoders and demodulators and other equipment manufactured by third parties. The
price of the cable headend systems, including installation and training, is
expected to depend on the number of subscribers supported. We also sell to cable
operators wireless keyboards, designed specifically for the WORLDGATE Service,
for consumers who want the convenience of a keyboard for e-mail and other
applications. When we provide cable headend and other equipment to cable
operators that are testing the WORLDGATE Service, we do not recognize any
revenue so long as payment for the equipment has not been made and there is a
substantial risk of return of such equipment.
SUBSCRIPTION AND OTHER SERVICES. We earn monthly fees from cable operators
based upon the number of WORLDGATE Service subscribers. We offer the WORLDGATE
Service to cable operators for monthly subscriber fees payable to us based upon
a metered standard, which includes a flat monthly
23
<PAGE>
fee and additional access charges for use after a threshold, E.G. two hours, of
service time, or an unlimited standard, which provides for a fixed charge not
dependent on usage time. We cannot accurately predict the level of the
subscription fees that we will actually receive from cable operators that offer
the WORLDGATE Service because contracts with only a limited number of cable
operators are currently in place.
OTHER REVENUES. In the future, as the number of WORLDGATE subscribers
grows, we also expect to generate other revenues that we will share on a basis
to be negotiated with cable operators. These include revenues from:
- advertisers who: (1) purchase banner or sponsorship advertisements, (2)
pay a fee based on the number of clicks on the advertisements or (3) pay a
fee based on viewers' use of our CHANNEL HYPERLINKING feature, and
- merchants who share a portion of their revenues derived from customers
who: (1) use our CHANNEL HYPERLINKING feature or (2) click through from
the WORLDGATE Service.
COST OF REVENUES
To date, we have included in our cost of revenues expenses associated with
product costs, engineering and development. At such time as we generate
significant revenues, we expect to separately identify cost of revenues on our
financial statements. Cost of revenues includes the cost of (1) system hardware,
wireless keyboards and the other components of the WORLDGATE Service which are
manufactured by third parties, (2) assembly, installation and testing of the
system, (3) training of cable operator personnel and (4) documentation, customer
support and other production costs. We expect that cost of revenues will also
include the costs of operating our CHANNEL HYPERLINKING technology.
In 1997 and in 1998, we incurred product costs for systems being installed
as trial systems. We expect to continue to incur costs for trial systems
throughout the remainder of 1999. We do not recognize revenue from the sale of
headend and other equipment used in trial systems so long as there is a
substantial risk of return of such equipment. As a result, the cost of such
equipment is held in inventory until revenue is realized from the sale thereof.
We currently bear the manufacturing responsibility for, and the cost of,
feature expansion modules installed within some of General Instrument's and
Scientific-Atlanta's current advanced analog cable boxes. Once installed, these
modules enable the WORLDGATE Service on such cable boxes. The incremental cost
per cable box of this module is currently approximately $60, but we expect this
cost to decrease with further cost reduction activities and volume production.
We expect to bear the manufacturing responsibility for and the cost of
incorporating our WORLDGATE technology into these cable boxes. Once the
incremental cost to cable box manufacturers for incorporating our WORLDGATE
technology into their cable boxes becomes nominal, however, we believe that
General Instrument and Scientific-Atlanta may assume the manufacturing
responsibility and cost. See "Risk Factors--We depend on cable box manufacturers
to incorporate our technology into their cable boxes."
The WORLDGATE Service can also operate on current models of General
Instrument's and Scientific-Atlanta's digital cable boxes and some models of
Scientific-Atlanta's advanced analog cable boxes that can be activated through a
centrally-administered software download; therefore, we do not expect to incur
any manufacturing cost for these boxes.
ENGINEERING AND DEVELOPMENT EXPENSES
Engineering and development expenses consist principally of personnel costs,
including salaries, benefits and bonuses, travel and other personnel-related
expenses of employees and consultants engaged in ongoing development projects,
and, to a lesser extent, prototype expenses related to the design, development,
testing and enhancement of the WORLDGATE Service. We believe that continued
24
<PAGE>
investment in engineering and development is critical to attaining our strategic
product initiatives and cost reduction objectives. As a result, we expect that
these expenses will increase significantly in the future.
SALES AND MARKETING EXPENSES
Our sales and marketing expenses consist principally of the costs of
marketing the WORLDGATE Service, including our CHANNEL HYPERLINKING technology,
to cable operators, television programmers and advertisers. These will include
salaries, travel expenses, trade show fees, consulting fees and costs to promote
the WORLDGATE Service to them. These may include the costs of materials for
direct mailings, brochures, targeted advertising and promotional campaigns. We
expect that the actual costs of delivering these marketing materials and
advertisements to consumers will be paid by the cable operators. We expect that
sales and marketing expenses will continue to increase as commercial deployment
of the WORLDGATE Service expands.
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses consist primarily of personnel costs
including salaries, benefits, bonuses and related costs for management, finance
and accounting, legal and other professional services. We expect general and
administrative expenses to increase as we add personnel and incur additional
costs related to the growth of our business and operations and to reflect the
costs of operating as a public company.
RESULTS OF OPERATIONS
Since inception, we have engaged principally in the development of the
WORLDGATE Service. Accordingly, our historical results of operations are not
indicative of and should not be relied upon as an indicator of our future
performance.
1998 VERSUS 1997
Our revenues increased to $1.0 million in 1998, as compared to $141,000 in
1997. The increase in our revenues reflects an increase in the number of system
sales and wireless keyboard sales in connection with the initial commercial
deployment of the WORLDGATE Service. The WORLDGATE Service was first made
available to cable subscribers in 1998. As of December 31, 1998, there were
approximately 1,200 WORLDGATE Service subscribers as compared to 0 as of
December 31, 1997.
Our product costs, engineering and development expenses increased to $19.6
million in 1998, as compared to $8.5 million in 1997. The increase in these
costs is primarily due to an increase in the number of trial and deployed
systems installed. Because of the initial commercial deployment of the WORLDGATE
Service, the increase in the number of trials and the on-going product
development, testing and enhancement to the WORLDGATE Service, we increased the
number of engineering and development personnel in 1998.
Our sales and marketing expenses increased to $5.2 million in 1998, as
compared to $3.6 million in 1997. These expenses represent the cost of
introducing the WORLDGATE Service to the cable television industry, and for the
marketing expenditures incurred as a result of the expansion of our initial
commercial deployment and the increased number of initial trials with cable
operators. These expenses include expenditures for advertising, trade shows,
promotional materials, consultants and general sales and marketing overhead.
Our general and administrative expenses increased to $3.5 million in 1998,
as compared to $2.4 million in 1997. The increase is attributable primarily to
additional personnel and related overhead
25
<PAGE>
costs to support our growth, including the initial commercial deployment and the
increased number of trials.
We have not provided for or paid any federal or state income taxes. As of
December 31, 1998, we had net operating loss carry forwards of approximately
$38.3 million available to offset future income subject to income taxes. The
Company believes that its ability to utilize its net operating loss
carryforwards will be subject to annual limitations as a result of this public
offering.
1997 VERSUS 1996
Our revenues for 1997 were $141,000 which consisted entirely of the sale of
headend systems shipped during the year. We had no revenues in 1996.
Our product costs, engineering and development expenses increased to $8.5
million in 1997, as compared to $1.4 million in 1996. The increase in these
costs is primarily due to the hiring of additional engineering and development
personnel in connection with our ongoing development and enhancement of the
WORLDGATE Service.
Our sales and marketing expenses increased to $3.6 million in 1997, as
compared to $428,000 in 1996. The primary items contributing to the increase in
sales and marketing expense were the hiring of additional personnel and
promotional expenditures and trade show expenses related to the introduction of
the WORLDGATE Service to the cable television industry.
Our general and administrative expenses increased to $2.4 million in 1997,
as compared to $1.1 million in 1996, primarily as a result of the hiring of
additional personnel and increased facilities costs, legal expenses and other
consulting costs necessary to support our engineering and development and sales
and marketing efforts.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have derived substantially all of our operating capital
from private placements of preferred stock, a $1.1 million capital contribution
from our Chief Executive Officer and a $2.0 million line of credit. At December
31, 1998, the amount of our accumulated deficit was $51.9 million and cash and
cash equivalents were $368,000. At December 31, 1997 and 1996, we had an
accumulated deficit of $19.2 million and $3.1 million respectively, and cash and
cash equivalents of $17.3 million and $7.6 million, respectively.
Our operating activities utilized cash in the amount of approximately $25.7
million, $12.6 million and $1.7 million for the years ended December 31, 1998,
1997 and 1996, respectively. The net cash used for operations during these
periods was primarily for funding engineering and development. Capital
expenditures for the acquisition of office equipment, computer systems and
equipment for engineering and manufacturing operations were $533,000, $249,000
and $0, for the years ended December 31, 1998, 1997 and 1996, respectively.
Net cash provided by financing activities was approximately $9.3 million,
$22.6 million and $9.2 million for the years ended December 31, 1998, 1997 and
1996, respectively, which related primarily to the issuance of preferred stock
of $9.3 million, $23.4 million and $8.5 million in 1998, 1997 and 1996,
respectively. Additionally, there was established a $1.0 million line of credit
in 1997, which was increased to $2.0 million in June 1998. As of December 31,
1998, approximately $1.6 million of this line had been utilized, $500,000 had
been repaid and an additional $400,000 was available for borrowing. At December
31, 1998, the weighted average interest rate of the borrowings was 8.89% per
annum. These borrowings mature on various dates through 2001.
In January and February 1999, the Company raised approximately $7.6 million
from the sale of 697,437 additional shares of Series C Preferred Stock.
26
<PAGE>
We plan to continue to invest in sales and marketing and engineering and
development for the WORLDGATE Service as well as to support our infrastructure.
Additionally, we expect to use a portion of our cash for capital expenditures
and other general corporate purposes. We believe the net proceeds from this
offering, together with our existing capital resources and anticipated funds
from operations, will satisfy our projected product development, working capital
and capital expenditure requirements for at least the next 18 months.
LIMITED NUMBER OF CUSTOMERS
We have in the past derived, and will in the future derive, a significant
portion of our revenues from a limited number of customers. In 1997, three cable
operators accounted for approximately 100% of our revenues and in 1998, ten
cable operators accounted for approximately 98% of our revenues. Moreover, in
1998, Charter and Click!Network accounted for 44% and 10%, respectively, of our
revenues. We cannot assure you that any of these customers will continue to
offer the WORLDGATE Service to their cable subscribers or that they will
continue to be a significant source of revenues, if at all, for us. The loss of
any of these cable operators as customers would have a material adverse effect
on us and our financial results.
YEAR 2000 RISK MAY ADVERSELY AFFECT US
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We utilize software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year 2000
phenomenon. We are also dependent on cable operators to maintain network
reliability.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services. Based upon the
results of this assessment, we will develop and implement, if necessary, a
remediation plan with respect to any third-party software, computer technology
and services which may fail to be year 2000 compliant. We have assessed our
proprietary software and internal systems and believe them to be year 2000
compliant. We anticipate that our systems, including components thereof provided
by third-party vendors, will be year 2000 compliant by the end of 1999. At this
time, the expenses associated with this assessment and potential remediation
plan cannot be determined. The failure of our software and computing systems and
our third-party vendors to be year 2000 compliant could have a material adverse
effect on us.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, we have adopted the provisions of Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for the reporting and
display of comprehensive income, requiring its components to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The adoption of SFAS No. 130 had no impact on our results
of operations, financial condition or cash flows.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1
provides, among other things, guidance for determining whether computer software
is for internal use and when the cost related to such software should be
expensed as incurred or capitalized and amortized. SOP 98-1 is required to be
applied prospectively and adopted no later than January 1, 1999. The Company
does not expect the adoption of SOP 98-1 to have a material effect on its
results of operations and financial condition.
27
<PAGE>
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 generally requires costs of start-up activities
to be expensed instead of being capitalized and amortized and is required to be
adopted no later than January 1, 1999. The Company does not expect the adoption
of SOP 98-5 to have a material effect on its results of operations and financial
condition.
28
<PAGE>
BUSINESS
OVERVIEW
WorldGate provides a new television-based Internet service, the WORLDGATE
Service, that delivers the Internet through cable television systems. The
WORLDGATE Service provides:
- high speed, easy to use Internet access without the use of a personal
computer, modem or special purpose set-top appliance,
- low cost for the subscriber, currently being offered by cable operators to
existing subscribers for $7 to $16 per month for unlimited service,
- full featured Internet functionality and content that can be accessed
within seconds, and
- a television-based portal for enabling viewers to dynamically link from
television programming and advertising to related Web sites.
We believe this combination of television and the Internet will transform
advertising, e-commerce and information delivery for the consumer mass market.
WORLDGATE MARKET OPPORTUNITY
The Internet is growing rapidly and is emerging as a significant interactive
medium used by millions of people for entertainment, communications, research,
education and e-commerce. IDC estimates that the number of Internet users
worldwide exceeded 97 million in 1998 and will grow to over 319 million by the
end of 2002. A 1998 report by Jupiter Communications predicted that online
shopping in the United States alone will grow from approximately $5 billion in
1998 to over $29 billion by 2002.
Although Internet access has historically required a personal computer, IDC
surveys indicate that U.S. consumers, by a two-to-one margin, would prefer to
receive emerging electronic information and entertainment services through their
television sets, rather than their personal computers. When surveyed by IDC
about their reasons for not purchasing a personal computer, many respondents
indicated that they do not have a need for a personal computer, that they cannot
afford a personal computer and that personal computers are too difficult or
complicated to use. According to an IDC survey of consumers, personal computer
users spend 30% of their usage time on maintenance and other problem fixing
activities.
The Company believes that a television-based approach to Internet services
is a superior alternative for many consumers. In 1998, according to IDC, only
45% of U.S. households owned a personal computer, whereas, according to
Cablevision Blue Book, 98% had televisions. The Company believes that a
television-based approach offers the following advantages:
- televisions are widely accepted and used by consumers,
- televisions are well suited for sharing information and entertainment,
- the advertiser-sponsored television entertainment model is well accepted,
and
- television programming provides a unique portal opportunity.
IDC forecasts that the cumulative shipments in the United States of Internet
television access devices, including dedicated Internet access set-top boxes and
cable television set-top boxes, will grow from 1 million at the end of 1998 to
almost 24 million by the end of 2002, representing 22% penetration. The IDC
report indicates that based upon the expense, complexity and obsolescence issues
associated with a personal computer, there is an opportunity for
television-based devices to supplement and potentially replace personal
computers as the preferred devices for accessing the Internet.
29
<PAGE>
Set-top appliances, such as those provided by WebTV, have been introduced to
provide Internet access through telephone lines to a television without
requiring a personal computer. Although such access solutions do not require a
personal computer or personal computer expertise, the Company believes that this
mode of Internet access may be limited by:
- the need to purchase a dedicated or "single-purpose" set-top appliance
which typically costs approximately $100-$240 and exposes the consumer to
risks of equipment obsolescence,
- monthly subscription fees that may be up to $25 per month in addition to
any telephone access charges,
- the telephone bandwidth and usage constraints of using dial-up modems with
peak data transmission speeds of 56 Kbps that may result in significant
dial-up connection times, busy signals and delays, and
- functional limitations such as the inability to support CD-quality audio
and Java-based applications, including instant messaging and chat rooms.
As a result of the shortcomings of telephone-based access, there is an
opportunity to provide Internet television access through a set-top box
connected to a cable television service. The Company believes that the cable
infrastructure provides a superior medium for Internet access that eliminates
the major obstacles of telephone access. The Company believes that the benefits
of cable-based Internet access include:
- lower cost than telephone-based methods,
- high transmission speed, with a maximum downstream data transmission speed
of 27 Mbps, which is almost 500 times faster than a standard 56.6 Kbps
dial up modem, and
- "always-on" availability providing access within seconds.
A 1997 Kagan report predicted that there would be approximately 230 million
worldwide cable subscribers in 1998 and approximately 285 million worldwide
cable subscribers by the year 2001. In the United States, cable is widely
available, with approximately 96% of homes passed by cable infrastructure in
1998 and approximately 69% of such homes being cable subscribers, according to
Cablevision Blue Book. IDC forecasts that, of all the Internet television access
devices considered by it, cable television set-top boxes are expected to achieve
the highest growth rate through at least 2002.
The Company believes that to successfully take advantage of the demand for
cable television-based Internet services in the mass consumer market, the
service should:
- be a relatively low-cost solution for cable operators that can be offered
to consumers over existing cable systems, I.E. one-way and two-way cable
plants, and current and future generation digital and advanced analog
cable boxes, with minimal or no use of dedicated video channel capacity,
- provide low-cost, easy to use, high speed Internet access to consumers,
- require no additional investment in equipment or hardware by the consumer,
and
- be flexible enough to efficiently accommodate ongoing advances in Internet
capabilities, such as CD-quality audio and Java-based applications,
including instant messaging and chat rooms.
The Company believes that current Internet access offerings have not
addressed the mass market opportunity due to a failure to satisfy one or more of
these criteria.
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<PAGE>
WORLDGATE SOLUTION
The Company believes that the WORLDGATE Service addresses this mass consumer
market opportunity because it is a low cost, high speed, easy to use Internet
service. This service is currently being offered by cable operators to existing
subscribers at prices ranging from $7 to $16 per month for unlimited service. In
the subscriber home, the WORLDGATE Service employs only a television, a remote
control or WorldGate wireless keyboard, and a WORLDGATE capable digital or
advanced analog cable box - both of which are currently being deployed by cable
operators for business reasons largely unrelated to Internet access. The
WORLDGATE Service enables users, among other activities, to browse the Web, send
and receive e-mail, participate in chat sessions and shop online. With features
such as the Company's CHANNEL HYPERLINKING technology, the WORLDGATE Service can
integrate the interactivity of the Internet with the television viewing
experience. By enabling low cost Internet access, integrated Internet/television
advertising and e-commerce, the Company believes it is pioneering a new mass
market.
WORLDGATE BUSINESS MODEL
WorldGate expects to derive revenues from cable operators, e-commerce
merchants and advertisers. WorldGate expects to enhance these revenue
opportunities by implementing the strategies described below.
REVENUE DERIVED FROM CABLE OPERATORS. The Company intends to sell its
headend server equipment and wireless keyboards to cable operators and to
license the software for the WORLDGATE Service to cable operators for a monthly
subscriber fee based upon either a metered standard, which includes a flat
monthly rate plus additional access charges for use after a threshold (e.g. two
hours) of service time, or an unlimited standard, which provides service for a
fixed charge not dependent on usage time. The Company believes that cable
operators will either offer the WORLDGATE Service to their subscribers as a
premium service, requiring subscribers to pay a separate monthly fee for the
service, or as a part of a package of services in which the subscriber pays a
monthly fee for the entire package. In either case, the Company expects to
receive monthly fees from the cable operators based on the total number of
subscribers to the WORLDGATE Service.
REVENUE DERIVED FROM E-COMMERCE MERCHANTS. Forecasts by Jupiter
Communications predict that online shopping in the United States will grow from
approximately $5 billion in 1998 to over $29 billion by 2002. The Company is in
the process of negotiating with companies in the business of selling products
and services online. The Company believes that it is common for these companies
to pay for the opportunity to promote their businesses through portals by
sharing a fraction of the revenues they are paid or by paying a fixed fee per
transaction. We intend to make the process of online shopping both simple and
convenient for our subscribers so that we can participate in the rapid growth
forecasted for e-commerce. We expect to share the revenues derived from
e-commerce merchants with cable operators.
REVENUE DERIVED FROM ADVERTISERS. A 1998 report by Jupiter Communications
predicted that Web advertising in the United States alone will increase from
approximately $1.7 billion in 1998 to over $7.7 billion in 2002. The Company has
space on its various menu pages that is available for banner advertising and
other promotions. When subscribers click on these banners, they can be linked
quickly to another Web page that gives more detailed information about the
subject of the banner ad. Advertisers typically pay portals based on the number
of times that their ad is displayed on a page viewed by a subscriber, so as the
number of WorldGate subscribers grows, we expect our opportunities to derive
advertising revenues will also grow. We intend to rely at least in part on third
party firms such as DoubleClick, Inc. that are in the business of providing
advertisements to portals. In some cases, we may ourselves directly contract
with advertisers to display their ads, either on a per view basis or based on a
fixed fee to cover the right to display their ad for a period of time.
Information derived from the
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cable system will permit us to know the general geographic area in which each of
our subscribers lives, and in many cases we will know zip codes and perhaps more
extensive demographic information regarding our subscribers if they wish to
share that information with us. Having location and other data regarding our
subscribers is expected to be valuable because advertisers typically are willing
to pay higher advertising fees if they can target their ads based on such
information. We expect to share the revenues derived from Web advertising with
cable operators.
Our CHANNEL HYPERLINKING technology will provide one button linking from
television and advertising content to a related fully interactive Web site. This
sort of advertising is "self-targeted" in the sense that subscribers themselves
decide whether they want to get more information. This is in sharp contrast to
traditional advertising that typically includes sending messages to large
numbers of viewers on an unsolicited basis. In addition to the value achieved by
self-targeting, the value of our CHANNEL HYPERLINKING technology is enhanced by
both the availability of demographic information and interactivity. By
delivering an interactive experience, we are able to give the subscribers the
opportunity to follow a variety of paths to gain extensive information about the
subject of interest. Perhaps most importantly, the interactivity also allows the
subscribers in many cases to purchase a product or service online. With the
average cable household being exposed to tens of thousands of television
advertisements annually, we believe there is the potential to have many
opportunities for use of our CHANNEL HYPERLINKING technology.
Our CHANNEL HYPERLINKING technology business model is based on a revenue
split with our cable operator partners. Revenues to WorldGate are expected to
come from advertisers seeking to engage the WORLDGATE Service subscribers in
some form of interactivity while using our CHANNEL HYPERLINKING technology. The
business model assumes that interactions will be on a pay-for-performance basis
such that advertisers and others will pay us based on the number of "clicks"
that occur. Consumers in an early deployment of the WORLDGATE Service have
averaged fifteen clicks per month related to television networks. This result
was achieved without providing any special promotion of our CHANNEL HYPERLINKING
capabilities. Clicks related to television advertisements are expected to begin
in the second half of 1999 when CHANNEL HYPERLINKING technology for
advertisements is deployed although no meaningful revenue is expected to be
derived from this service in 1999.
BUSINESS STRATEGY
The Company's objective is to transform advertising, commerce and
information delivery for the consumer mass market through its combination of
television with the Internet. The principal elements of the Company's business
strategy are the following:
PROVIDE COMPELLING VALUE FOR END-USERS. While many companies are focused
primarily on increasing the speed of Internet access, WORLDGATE is focused on
significantly expanding the availability of the Internet to a broader set of
consumers and providing these consumers with an enriched Internet experience, in
addition to offering high speed access. The Company designed the WORLDGATE
Service to operate on the widely available existing cable television systems, to
be an inexpensive alternative to other forms of Internet television access and
to be easy for the consumers to use. In contrast to other television-based
services, such as those offered by WebTV, which currently requires the purchase
of a dedicated set-top appliance, the WORLDGATE Service does not require
consumers to purchase or install any in-home equipment. To use the WORLDGATE
Service, a consumer needs only her existing television, a WORLDGATE enabled
digital or advanced analog cable box and a wireless remote or keyboard, with all
but the television typically being supplied by her cable operator. In addition,
the Company's CHANNEL HYPERLINKING technology has been designed to offer
consumers easy, fast and interactive access to content which is associated with
a television program or advertisement they are viewing.
PROVIDE COMPELLING VALUE FOR CABLE OPERATORS. The Company believes that
cable operators assess the viability of an investment in a new service by
considering the cost of initial investment in
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equipment, service reliability, overall operating and maintenance expenses and
the incremental revenue that can be generated by such service. The WORLDGATE
Service can be offered to cable subscribers through the cable operators'
existing one-way or two-way infrastructure. Furthermore, the WORLDGATE Service
has been designed to be deployed with relatively low capital costs of $45,000 to
$75,000 for a system covering up to 1,400 WorldGate subscribers. These systems
are also designed to be efficiently upgraded as the operator's infrastructure is
improved (whether through the deployment of new generation cable boxes or cable
modem ready plant) and easily expanded as subscriber penetration grows. There is
no need for any costly upgrades for cable modem ready two-way plant.
Accordingly, the WORLDGATE Service can provide cable operators with the
opportunity for immediate incremental revenue streams from subscriber fees and
sharing of advertising and online transaction fees. Additionally, the WORLDGATE
Service for the advanced analog cable box typically does not require the use of
channel bandwidth. As a result of the advantages offered by its solution, the
Company believes that it will be able to successfully market the WORLDGATE
Service to cable operators.
PROVIDE COMPELLING VALUE FOR PROGRAMMERS, ADVERTISERS, ADVERTISING AGENCIES
AND E-COMMERCE MERCHANTS. Through our CHANNEL HYPERLINKING technology,
programmers and advertisers may enhance their television content with related
Internet materials by providing their viewers with the ability to interact in
real-time with their television programming or advertising. With a push of a
single button on their remote controls, television viewers can be connected to
an Internet site that has been linked to the television program or
advertisement. For example, a television viewer watching a commercial could link
immediately to that advertiser's Web site to find more information about the
product or to place an order. By giving viewers this ability, the Company
believes that the value of the program or advertisement to the television
programmers or advertisers is increased, and that as a result, programmers and
advertisers will be able to increase their revenues.
The Company has established relationships with many providers of content for
the WORLDGATE Service including programmers such as CNN, C-SPAN, The Weather
Channel, Showtime, E! Entertainment Network, Lifetime, Arts & Entertainment,
HGTV and CourtTV. Similarly, the Company has established relationships with
Internet and other information content or service providers such as Citicorp,
Excite and Zip2. The WORLDGATE Service provides them with an opportunity to
broaden their offerings by taking advantage of the dynamic capabilities of the
Internet linked with cable television's broad subscriber base. The
television-based nature of the WORLDGATE Service provides a natural portal for
interaction between the consumer and programming and other content providers.
The Company is also working with advertisers and advertising agencies such
as General Motors, Poppe Tyson, Ogilvy & Mather, Grey Advertising Inc. and True
North Communications Inc. The Company is working with these advertisers and
advertising agencies to allow for interactive links by television consumers with
the products and/or services being advertised on the television. The Company has
also established a committee (the North American CHANNEL HYPERLINKING
Organization or "NACHO") which includes representatives from many of these
content providers, advertisers and advertising agencies as well as advertising
service providers such as Nielsen Media Research Inc. and Match Logic, Inc., an
operating unit of Excite. The NACHO advisory board is developing standards and
policies for the Company's CHANNEL HYPERLINKING technology as well as assisting
in its promotion. The Company believes that its CHANNEL HYPERLINKING technology,
along with the participation of its CHANNEL HYPERLINKING providers and the NACHO
advisory board, will facilitate an enriched interactive experience for users of
the WORLDGATE Service, and will also provide a basis for potential additional
advertising and online transaction revenue to the Company and cable operators
offering the WORLDGATE Service. Initial field tests of the CHANNEL HYPERLINKING
technology in advertisements is currently scheduled for the second half of 1999.
The Company also intends to provide additional value added services to
advertisers, programmers and cable operators by collecting consumer activity
data. This activity data will be collected and tabulated to statistically
reflect consumer responses to interactive advertisements and programming,
television viewing habits and Internet "surfing" habits. The Company
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intends to ensure a WORLDGATE Service subscriber's privacy by not providing
personally identifiable data unless authorized by the subscriber.
AGGRESSIVELY PENETRATE GLOBAL MARKETS. The Company believes that the market
for the WORLDGATE Service is global and is seeking to deploy its systems with
additional cable operators in the United States, Canada, China, Europe, Latin
America and Southeast Asia. The WORLDGATE Service is currently being tested by
cable operators on four continents. The Company is working with third parties to
provide local content directories and user interfaces in multiple languages for
the WORLDGATE Service as the demand arises.
CREATE BRAND EQUITY. The Company intends to create an identity for its
INTERNET TV OVER CABLE-SM- service under the "WORLDGATE" brand. In this regard
WORLDGATE is already a registered service mark in the United States and
applications have been filed in many other countries. The Company believes that
the creation of a brand identity among cable subscribers is important to its
strategy to become the preferred provider of cable Internet television services
to the cable television industry, advertisers, programmers and e-commerce
companies. By creating consumer awareness of the WORLDGATE Service, the Company
believes it will drive penetration in its geographic markets worldwide and
increase the pace at which cable operators, advertisers, programmers and
e-commerce companies recognize the economic and service benefits of the
WORLDGATE Service.
MAINTAIN AND LEVERAGE TECHNOLOGY POSITION. The Company believes that it has
established a competitive advantage through its technology position. Development
of the WORLDGATE Service has required in excess of three years of intensive
engineering and development efforts and the combination of significant expertise
in two historically separate industries, cable and the Internet. The Company's
engineering personnel, who came from established industry participants such as
General Instrument and Hitachi, Ltd., have been able to solve challenges
involved in delivering real-time Internet access over existing cable
infrastructure. WORLDGATE believes that it is currently the only company to have
developed, and commercially deployed, the capability to offer both real-time
upstream communications from the cable box and downstream transmissions from the
cable headend without requiring the use of cable channel capacity. The Company
intends to maintain its technology leadership by continuing to enhance the
performance and functionality of the WORLDGATE Service, and by aggressively
seeking to protect its intellectual property.
LEVERAGE EXISTING RELATIONSHIPS WITH GENERAL INSTRUMENT AND
SCIENTIFIC-ATLANTA. The Company has strategic relationships with General
Instrument and Scientific-Atlanta, the world's two largest suppliers of cable
boxes. Both companies have participated in the joint development, including
testing and implementation, of the Company's technology. The Company's
technology has been incorporated into versions of their advanced analog cable
boxes and is being tested on their digital cable boxes. In addition, both
General Instrument and Scientific-Atlanta are stockholders of the Company and
have joined the Company in promoting the WORLDGATE Service in the press, at
trade shows and conferences and through joint sales and marketing presentations
worldwide.
THE WORLDGATE SERVICE
OVERVIEW OF THE WORLDGATE SERVICE. WorldGate is the developer of the
WORLDGATE Service, an Internet television service that enables:
- cable operators to offer subscribers low cost, easy to use, high speed
Internet access, and
- television programmers and advertisers to link their programs and
advertisements with a fully interactive Web site.
Upon accessing the WORLDGATE Service, the user is provided with a main menu
screen offering several options, including Web browsing and e-mail. The main
menu screen also provides options for
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viewing informative content such as an electronic television program guide,
news, weather, sports and community activities. These options can be selected
with a single keystroke on a standard cable remote control or optional keyboard
provided by the cable operator. Depending on the option selected, the consumer
is connected to the desired content or a secondary menu screen providing
additional options. WORLDGATE has designed both its navigational menu screens
and e-mail service to be simple and user-friendly.
The WORLDGATE Service does not require an additional set-top appliance,
personal computer or modem. Furthermore, the WORLDGATE Service can co-exist with
alternative methods of Internet access, which may share the same cable operator
network and application infrastructure it employs.
The advanced e-mail service option provides additional features, such as
e-mail address list management, multiple folders for archiving received and sent
e-mail, support for multi-part mime attachments (of which ones that can e
displayed are identified and presented in such a fashion that the user can view
them), support for forwarding and carbon copying additional mail recipients, and
allowing a subscriber to establish and manage multiple mail box addresses for
each member of the subscriber's household. The "My Town" icon on the Company's
main menu screen provides local directories and community guides. This feature
offers users a directory of local school activities, restaurants, government
resources and related community information. Zip2 currently provides this
information on behalf of the Company. Also, from the WORLDGATE home page
subscribers receive the current local weather that is updated every hour. The
Weather Channel currently provides this weather information. With a few key
strokes the subscriber can receive a five day forecast, or even check the
weather for any other location in the United States.
From the Web section, subscribers can access our "Web Directories" that
provide subscribers with national references to advertisers and links that are
organized by category such as travel, sports, finance and shopping. WorldGate
can update this information to reflect the changing dynamics of the Web.
"Networks on the Web" allows subscribers to view our CHANNEL HYPERLINKING
technology partners and any currently available information that is provided by
television programmers. "Bookmarks" allows subscribers to save their favorite
sites for easier access. Subscribers can also review and edit their list of
favorite sites.
Subscribers can easily go to any site or search the Web by simply entering a
phrase or Web address into the WORLDGATE Service. The WORLDGATE technology
determines if the user has entered a valid Web address or a search phrase and
then links to the appropriate Web site. The search engine is provided by Excite
and the search results are presented in a television friendly fashion.
The WORLDGATE Service allows subscribers to administer their household
accounts online. The household administrator can add new accounts, change the
parental control (content filtering), change passwords and change the first and
last names of the individual users on the service. Up to six users are allowed
for each household. The WORLDGATE Service provides the ability to filter the
sites being viewed by the subscriber on a subscriber and household basis.
WorldGate currently uses Spyglass, Inc.'s SurfWatch filtering technology to
offer subscribers the ability to restrict viewing of Web content in categories
ranging from sexually explicit, violent and gambling to drugs and alcohol. In
addition we offer a filtering system that uses a special list in order to ensure
more restrictive content filtering suitable for children using the service.
CHANNEL HYPERLINKING TECHNOLOGY. WorldGate's innovative CHANNEL
HYPERLINKING technology is designed to allow a user to dynamically link directly
from a television program or advertisement being viewed to related Internet
sites with the push of a button on a standard remote control or optional
wireless keyboard. The WORLDGATE subscriber does not have to enter or even know
the associated Internet address. For example, while watching The Weather
Channel, a subscriber can directly access a Web page providing local weather
forecasts. Advertising, promotion, transaction and information services are
examples of the types of related programming links that may be enabled through
the
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CHANNEL HYPERLINKING technology. The real-time nature of our CHANNEL
HYPERLINKING technology is designed to enable applications such as simulcast
information on the sports program being viewed.
There have been several instances where programmers have referred television
viewers to related Internet sites. For example, Showtime, ESPN and NBC, among
others, have encouraged viewers to use their personal computers to access Web
sites related to the content of their sporting event programs, including the
Olympics. The Company believes that easier and quicker access to the Internet
through the capabilities provided by CHANNEL HYPERLINKING technology will
promote a new category of cross-programming opportunities.
The Company's CHANNEL HYPERLINKING technology can also be used to enhance
the functionality of information sources such as electronic program guides.
Although program guides currently offer limited television program and
advertising information, such information and their utility can be significantly
improved through the use of Web-based content and the ability to perform
transactions online. Because such guides are considered by many to be essential
when hundreds of channels are available, such as is the case with digital
platforms, and because the guides will likely be accessed multiple times per
day, the Company believes that CHANNEL HYPERLINKING enhancements to program
guides may represent a significant source of revenue.
To realize the economic benefits of CHANNEL HYPERLINKING, the Company,
programmers, advertisers and advertising agencies have begun to coordinate
implementation of the WORLDGATE Service. In addition, cable operators will need
to achieve significant penetration rates of the WORLDGATE Service to provide an
attractive target audience for programmers and advertisers to focus on
developing the CHANNEL HYPERLINKING service. The Company believes that CHANNEL
HYPERLINKING may enhance the value of television programming and advertising,
increase related on-line transactions and potentially lead to related revenue
generating opportunities associated with advertising and on-line transactions
revenue generating opportunities.
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WORLDGATE COMMERCIAL LAUNCHES
The Company has entered into multi-year agreements with five operators of
cable television systems, Charter, Click!Network, Massillon Cable, Prestige
Cable and TVCable, which collectively with their affiliates have approximately
2.7 million subscribers. Charter and Marcus Cable, which are owned by Paul
Allen's Vulcan Ventures, together constitute the seventh largest U.S. cable
operator, with over 2.4 million subscribers in the United States. Set forth
below is a table summarizing the current status of these commercial launches:
<TABLE>
<CAPTION>
COMMERCIALLY
TOTAL SYSTEM LAUNCHED
CABLE OPERATOR SUBSCRIBERS(1) LOCATION PLANNED LAUNCH LOCATIONS
- ------------------ ------------- ------------------ ----------------------------------------------------------
<S> <C> <C> <C>
Charter 2,414,800 St. Louis, MO; Lanett, AL; Alhambra, CA; Burbank, CA; Glendale, CA; Long
Newtown, CT Beach, CA; Riverside, CA; San Luis Obispo, CA; LaGrange,
GA; Noonan, GA; Maryville, IL; Hickory, NC; Ft. Worth, TX;
Logan, UT
Click!Network 3,000 Tacoma, WA
Massillon Cable 43,800 Massillon, OH
Prestige Cable 152,500 Cartersville, GA; Westminster, MD; Mooresville, NC;
Fredericksburg, VA
TVCable 100,000 Quito, Ecuador
</TABLE>
- ------------------------
(1) Represents the total number of subscribers served by the cable operator and
its affiliates across all of their systems, as estimated by Cable Television
Developments (Spring 1998 NCTA publication), except for TVCable, which is a
Company estimate.
WORLDGATE TRIALS
The WORLDGATE Service is in various stages of trials on four continents with
a number of cable operators including Comcast, Time Warner and MediaOne, which
are three of the four largest U.S. cable operators. Trials typically start with
cable boxes connected to a headend server system installed at a cable operator's
corporate office location for technical evaluation. Trials are of varying
duration and complexity.
The total subscriber base of cable operators currently in trials with the
Company is approximately 29 million. There can be no assurance that the current
or planned trials will be successful or will lead
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to commercial deployment of the WORLDGATE Service by these cable operators. Set
forth below is a table summarizing the current trials and planned trials of the
WORLDGATE Service as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
TOTAL SYSTEM TRIAL WORLDGATE SYSTEM
CABLE OPERATOR SUBSCRIBERS(1) LOCATION BOXES TYPE
- --------------------------------------------------------- ------------- ---------------- ----------- ---------
<S> <C> <C> <C> <C>
UNITED STATES TRIALS:
Ameritech Corporation.................................. 210,000 Chicago, IL(2) 2 Analog
Comcast................................................ 4,366,000 Lower 65 Analog
Merion, PA
Philadelphia,
PA
Torresdale, 4 Digital
PA(2)
MediaOne............................................... 4,910,000 Boulder, CO(2) 4 Analog
SNET Personal Vision, Inc.............................. 22,000 Hartford, CT 37 Analog
Time Warner............................................ 12,500,000 Orlando, FL 50 Analog
INTERNATIONAL TRIALS:
Image TV............................................... 24,000 Brazil Planned Analog
Shaw................................................... 1,500,000 Calgary, 1 Digital
Canada(2)
Singapore CableVision.................................. 800,000 Singapore(2) 5 Analog
Skycable............................................... 24,000 Philippines Planned Analog
SuperCable............................................. 52,000 Caracas, 12 Analog
Venezuela(2)
United International Holdings.......................... 5,253,070 Vienna, 10 Analog
Austria(2),
Santiago, 20 Analog
Chile(2)
</TABLE>
- ------------------------
(1) Represents the total number of subscribers served by the cable operator
across all of its systems, as estimated by Cable Television Developments
(Spring 1998 NCTA publication), except for the international operators,
which are Company estimates.
(2) Corporate office trial.
TECHNOLOGY
The WORLDGATE platform is based on a "thin client architecture," which
allows substantially all client-related processing to be performed at the cable
headend. The WORLDGATE platform is comprised of three components:
- Unix-based servers located at the cable headend,
- a WORLDGATE enabled digital or advanced analog cable box, and
- a remote control and/or optional wireless infrared keyboard.
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CABLE HEADEND; CHANNEL HYPERLINKING. There are two Unix-based servers located
at the cable headend. One server manages all information traveling to and from
this server to the Internet. This server also manages individual Internet
sessions, processes data for presentation on the television screen and manages
the Web browsing client. The second server manages real-time communications from
the cable headend to a subscriber's cable box. This server acts as a
bi-directional router for data on a cable network. These servers:
- are based on a multi-processor architecture,
- can be accessed remotely by WorldGate for performance monitoring and
software upgrades, and
- are configured so that typical full screen refresh time on: (1) an analog
platform is five seconds or less and (2) a digital platform is as low as
1/30(th) of a second.
General Web surfing is provided by our browser technology using high
performance server headend systems. The WORLDGATE Service browser currently
supports HTML Version 3.2, HTTP Version 1.0 and 1.1, HTML Frames, Image formats
such as GIF Animations, JPEG and XBM formats. To the Company's knowledge,
WorldGate is the only company that supports a full Java implementation offering
on a set-top platform. Java is used for such applications as chat and instant
messaging. The WORLDGATE platform supports JavaScript that is compatible with
Microsoft and Netscape browsers. We also support network protocols such as HTTP
1.0 & 1.1, security layers such as SSL 2.0 and authentication requests such as
Basic Authentication and Digest Authentication.
One feature of the WORLDGATE Service is our CHANNEL HYPERLINKING technology.
When a cable television subscriber makes a CHANNEL HYPERLINKING request, the
subscriber's cable box sends a signal to the cable headend indicating the
channel and program information of the program the subscriber is viewing. This
information is then matched with the corresponding Web address for the program
which has been stored at a cable headend database. Afterwards, the subscriber is
linked to the corresponding Web site for full Internet interactivity. This
entire process occurs within seconds.
[figure depicting five horizontal boxes. The first box is labeled
Advertisers and Ad Agencies and contains two smaller boxes including the
following text: "Advertising ID codes are added to master video tapes before
distribution," and "the matching URL is associated with the Advertising ID in
WorldGate's SALSA software and sent to the NACHO Center." The first box has a
one-way arrow to the second box that is labeled "Broadcast and Cable TV Network
Uplink Centers." The second box contains two smaller boxes including the
following text: "Advertising ID codes travel in realtime with the broadcast
advertisement" and "Television programming schedules are sent to the NACHO
Center in advance of broadcast." The third box is labeled WorldGate's NACHO
Center and has a smaller box with "Advertising ID cones are aggregated from all
networks and sent to local Cable TV Headends" and a cylinder with "Master
Database for all Channel HyperLinking" included. The fourth box is labeled
"Cable TV Headend" and has a smaller box with "Local cable affiliates receive
data from NACHO Center in realtime. Incoming realtime data supercedes scheduled
data" and a cylinder with "Local Database for National and Local Channel
HyperLinks" included. The fourth box is linked with a one-way arrow and text
reading "broadband cable to the home" and "return path" to the fifth box. The
fifth box is labeled "Analog or Digital Cable Subscriber's Home" and contains
two smaller boxes with the following text: "An on-screen prompt will be
displayed for any advertisements or programs that have interactive content" and
"When the consumer clicks to go interactive, the headend computer system will
retrieve the appropriate Web page to be displayed." The second box is connected
to the third box and the third box is connected to the fourth box by pictures of
satellite dishes and satellites.]
CABLE BOX. We believe that we are the only company providing a
television-based Internet service for both advanced analog and digital cable
boxes. This is particularly important for cable operators deploying both types
of cable boxes. The Company has developed technology that allows WORLDGATE
enabled advanced analog cable boxes to display the graphics and to provide
real-time communications
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necessary for the WORLDGATE Service. The WORLDGATE technology is currently
incorporated in an additional feature expansion module that must be installed
within General Instrument's and some models of Scientific-Atlanta's existing
advanced analog cable boxes. The WORLDGATE Service currently operates on
modified versions of the General Instrument CFT 2200 and the Scientific-Atlanta
8600 advanced analog cable boxes. Existing models of General Instrument's and
Scientific-Atlanta's digital cable boxes, as well as Scientific-Atlanta's 8600X
advanced analog cable box, can be used to provide the WORLDGATE Service with a
software download. The software download can be done remotely.
The advanced analog WORLDGATE platform makes use of the vertical blanking
interval to transmit its data in conjunction with regular television signals.
The vertical blanking interval is part of a television signal that is not used
for the television program. By using the vertical blanking interval, WorldGate
does not interfere with the television signal and does not require additional
bandwidth to provide the WORLDGATE Service. To provide the WORLDGATE Service,
the Company typically uses less than five of the typically 80 to 100 lines of
vertical blanking intervals available. More capacity for the WORLDGATE Service
can be provided by use of the vertical blanking interval in these additional
lines.
With the advanced analog platform, WorldGate supports data transmission
rates of up to 128 Kbps downstream and 14 Kbps or 20 Kbps upstream. Because only
keystrokes are being sent upstream, the Company believes that the upstream data
transmission rate is adequate to transmit such data. The WORLDGATE advanced
analog platform supports: (1) up to 65,000 colors on modified versions of
General Instrument's CFT 2200 and Scientific-Atlanta's 8610 advanced analog
boxes and (2) 16 colors on the Scientific-Atlanta 8600X advanced analog cable
boxes. The Company believes that there are currently over 2.3 million of
advanced analog cable boxes already shipped which can be WorldGate enabled with
a software download and an additional 1 million of such boxes which can also be
WorldGate enabled with a software download and installation of additional memory
in the boxes.
The WORLDGATE digital platform uses MPEG2 technology to provide transmission
speeds of up to 27 Mbps downstream and 256 Kbps upstream. As with the advanced
analog cable box, the Company believes that the relatively slower upstream speed
does not decrease performance of the WORLDGATE Service. Unlike high bandwidth
requirements for the downstream path for large data transfers such as Web pages,
the upstream path generally is used for small data transfers, such as
keystrokes, and does not require large bandwidth capacity. The Company's digital
platform provides up to 16 million colors and will operate on the following
models of digital boxes: GI DCT1000, 1200 and 2000 and the Company expects to
operate on the GI DCT5000 and Scientific-Atlanta's Explorer 2000. The WORLDGATE
Service over the digital platform is currently being tested by the Company and
certain cable operators. According to Cablevision Blue Book, over two million
current generation digital boxes have been shipped through December 31, 1998.
All of these boxes can potentially be upgraded to support the WORLDGATE Service
through a centrally-administered software download.
Due to its thin client/server architecture, the Company believes that the
WORLDGATE Service can be deployed on future generation digital boxes with
minimal development by WorldGate and minimal transition cost to cable operators
offering the WORLDGATE Service on the current-generation digital platform.
In addition to operating on two-way cable systems, the WORLDGATE platform is
capable of operating over one-way cable systems via a telephone return. It is
estimated that at least 60% of cable homes are currently connected to one-way
cable systems. On a one-way cable system, it is possible to transmit data from
the cable headend to the subscriber using the one-way cable system but there is
no available return path. WorldGate uses the telephone system for the return
path. The response time of the WORLDGATE Service over two-way and one-way cable
plant is similar for most functions except for slower responses during login and
use of our CHANNEL HYPERLINKING technology. The Company also believes that as
with two-way cable plant, the slower speed for the telephone system return path
is sufficient because of the generally low bandwidth requirements for the return
path.
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WIRELESS CABLE REMOTE CONTROL AND OPTIONAL KEYBOARD. To access and input
data on the WORLDGATE Service, cable television subscribers can use either a
standard remote control provided with their advanced analog or digital cable
boxes or a infrared wireless keyboard. The Company has designed a custom
wireless keyboard which provides a full size keypad, pointing device and
function keys customized for our WORLDGATE Service, such as a CHANNEL
HYPERLINKING key. The Company expects cable operators to buy keyboards from the
Company directly and then to resell or lease them to subscribers.
[figure depicting four boxes labeled "billing," "subscriber data base,"
"cache engine" and "SNMP" each connecting to a larger box labeled "Application
Servers" with the following smaller boxes included: "E-mail," "Community
Intranet," "EPG," "Billing Inquiries" and "Channel HyperLinking." That larger
box is connected to a second large box labeled "Multi-User Client" with the
following smaller boxes included: "Communications Library," "Browser" and
"Display Manager." The second larger box is connected to a third large box
labeled "Converter Communications Manager" with the following smaller boxes
included: "Controller" and "Command Interpreter." The third large box has
smaller boxes connected to it that are labeled "Data Demodulator" and "VBI
Inserter."]
SECURITY
The WORLDGATE Service uses the Secured Sockets Layer protocol, a standard
encryption protocol, to encrypt data transmitted between the cable box and the
cable headend. When a WorldGate session is initiated, the WORLDGATE enabled
cable box sends a log-in request to the WorldGate headend server. The server
then creates a unique master key. The master key is comprised of two keys: one
key is known as the public key, which is used only for encryption, and the
second key is known as the private key, which is used only for decryption. Only
the public key is transmitted back to the cable box. The cable box then chooses
two random 128 bit numbers, the session keys, and encrypts them with the public
portion of the master key before sending the encrypted session keys back to the
server. The server receives the encrypted session keys and decrypts them with
the private portion of its master key. As a result, both the server and the
cable box have available a pair of unique session keys which may be used to
encrypt and decrypt messages and thereby communicate securely for that
particular session.
ENGINEERING AND DEVELOPMENT
To date, engineering and development have been a significant focus of the
Company. Development of the WORLDGATE Service has required combining technical
experience and knowledge from two historically separate industries, the Internet
and cable, as well as three years of intensive efforts. The principal elements
of the Company's engineering and development activities are as follows:
CHANNEL HYPERLINKING. The Company has been developing and will continue to
develop the systems and hardware necessary to establish a centralized CHANNEL
HYPERLINKING control facility to enable advertisers to provide data necessary to
implement CHANNEL HYPERLINKING on a large scale. The CHANNEL HYPERLINKING
technology is currently available to enable television programmers to link
programs with related Web sites.
FEATURE ENHANCEMENTS. The Company intends to continue to expand features of
the system to integrate newly developed Web features, accessories and tools. The
Company also intends to support picture-in-picture capability to allow Web pages
and television programs to be viewed at the same time. The Company is working to
develop system enhancements that will enable consumers to listen to CD-quality
audio while browsing the Web. The Company is also currently working to allow
attachment of a printer to the WORLDGATE Service.
To implement its engineering and development strategy, the Company has
assembled an engineering team from established industry players, such as General
Instrument and Hitachi, with strong backgrounds in real-time data communications
hardware and software, digital video, client-server software, Unix operating
systems, computer networking, circuit design and cable headend design.
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SALES AND MARKETING
SALES. The Company utilizes its direct sales force and senior management,
including its Chief Executive Officer, to market the WORLDGATE Service. These
individuals work closely with the General Instrument and Scientific-Atlanta
sales forces to promote the WORLDGATE Service in the press, at trade shows and
conferences and through joint sales and marketing presentations worldwide.
Because the roll-out of the Company's service will in many cases be tied to the
introduction of new cable box deployments, it will remain important and
advantageous to the Company to have an integrated sales effort with the major
cable box manufacturers. The Company believes that its relationship with these
large industry sales forces will continue to provide efficient leads for high
volume sales. Currently, nine employees are dedicated to the sales efforts,
including its Vice President and General Manager, and the Vice President,
Affiliate Sales and Marketing.
MARKETING. The Company's marketing strategy is directed at four primary
constituencies: consumers, cable operators, programming content providers and
advertisers. To reach consumers, the Company intends to provide cable operators
with promotional content for the WORLDGATE Service including local cable
television commercial spots and insertions for monthly cable billings, in
addition to utilizing the cable operators' extensive sales networks. Because the
Company will market itself as a family service, the Company intends to develop a
series of television commercials aimed at various demographic market segments,
which will be customized for specific cable companies. In addition, the Company
plans to develop a training tape for customer service representatives to teach
them how to sell the WORLDGATE Service and how to answer commonly asked
questions. The Company also plans to create longer form commercials to sell the
WORLDGATE Service over cable television and ten-minute tutorial tapes to teach
consumers how to use the WORLDGATE Service. Standard print media for consumers
may include user guides, point-of-purchase displays, low-cost bill stuffers and
a monthly WorldGate news magazine tailored to the subscriber base. To enhance
the potential penetration of the WORLDGATE Service, the Company plans to
establish WorldGate as a known trade and consumer brand.
To reach cable operators, the Company has focused its marketing efforts
mainly on trade advertising and promotions, which includes demonstrations at
industry conferences and print advertising in major weekly industry news
publications such as MultiChannel News and Cable World. The Company has made
substantial investments in trade show booths for cable shows such as the NCTA
Cable Show, and also plans to continue to share booths with General Instrument
and Scientific-Atlanta at various upcoming trade shows.
To reach programming content providers the Company has developed an
aggressive program to establish distribution arrangements with various content
providers to develop content particularly suited to the WORLDGATE Service.
Through WorldGate's distribution of such content packages as part of the
WORLDGATE Service, these providers are offered access to a pervasive medium in
which television programming can be enriched by Internet materials, and in which
consumers can experience real-time, interaction with the programming. The
television-based nature of the WORLDGATE Service provides a natural portal for
interaction between the consumer and the programming offered by these content
providers.
WorldGate has established a team to market the WORLDGATE Service, including
the opportunities created by a television-based portal to the Internet, to
television programmers, advertisers and other content providers. WorldGate's
marketing efforts to television networks have focused primarily on cable
television networks and secondarily on the broadcast networks. We believe that
national cable television networks may have some complexities over broadcast
networks in providing CHANNEL HYPERLINKING for their programming because they do
not have to contend with programming provided by numerous affiliated local
stations. Rather, just a few network feeds cover the entire nation. We believe
that our CHANNEL HYPERLINKING technology can turn the cable television network
of national programming into targeted, personalized interactive content with
very little effort on the part of television networks.
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WorldGate sees value in partnering with television networks because the Company
believes that consumers will see value in interacting with their favorite
television programming.
The Company has developed a strategy to establish partnerships with
television programming content partners through distribution agreements. These
distribution agreements generally provide that our partner will provide link
information and Internet-based content particularly suited to the WORLDGATE
Service and our CHANNEL HYPERLINKING technology.
The Company believes that Internet and other information or service content
providers such as Citicorp, Excite and Zip2 can broaden their customer base by
taking advantage of our television-based WORLDGATE Service. The television-based
nature of the WORLDGATE Service provides a natural portal for interaction
between the consumer and the programming and other content offered by these
content providers.
WorldGate's marketing team also works with advertisers and advertising
agencies. We believe that interactive television advertising will grow
significantly in the future. WorldGate promotes the WORLDGATE Service for
television advertising directly to blue-chip advertisers and top national and
global advertising agencies. In addition, WorldGate promotes the WORLDGATE
Service through the American Association of Advertising Agencies, whose members
are composed of the leading advertising agencies in the United States, and the
Association of National Advertisers, whose members are composed of blue-chip
advertisers. WorldGate expects to provide value to advertisers and advertising
agencies by providing interactivity between broadcast television advertising and
related Internet content. Our CHANNEL HYPERLINKING technology provides a
combination of broad viewership of broadcast advertising with the accuracy of
direct, target marketing. During 1999, WorldGate expects to work with Nielsen
Media, MatchLogic, cable operators, television networks, advertisers and their
advertising agencies to complete a marketing study which will measure the
effectiveness and value of our CHANNEL HYPERLINKING technology for both
interactive programming and interactive advertising.
CUSTOMER SERVICE AND SUPPORT
The Company has developed and maintains a sales support and customer service
network infrastructure to enable it to respond to cable operator and consumer
issues. The Company believes that most sales support and customer service
requests can be handled by Company personnel via the telephone or the Internet.
Accordingly, the Company has set up a 24-hour, toll free telephone help-line and
Web site to assist cable operators having technical problems with the Company's
software or hardware. The Company also plans to monitor each cable headend
system utilizing the WORLDGATE Service in an effort to detect system problems
before they become apparent to consumers, and to remotely download software
updates as needed from its principal offices in Bensalem, Pennsylvania. To
assist domestic consumers subscribing to the WORLDGATE Service, electronic
on-line help is available 24 hours a day from any of the WORLDGATE Service
screens. Additionally, the Company intends to provide consumers with access to a
telephonic help-line offering pre-recorded answers to frequently asked questions
for a nominal charge.
SYSTEM INTEGRATION
The Company utilizes contract manufacturing for substantially all of the
major hardware components and licenses technology necessary to provide the
WORLDGATE Service, thereby allowing the Company to focus resources on sales and
marketing and engineering and development related to the WORLDGATE Service. The
Company does not manufacture, nor does it have the capability to manufacture,
any of the components of the equipment used in providing the WORLDGATE Service.
Rather, the Company's internal manufacturing operations consist primarily of
assembly of prototypes, test engineering, materials purchasing, integration of
equipment components and inspection and quality control, all of which are
performed at its facilities in Bensalem, Pennsylvania. Although the Company
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has not experienced any material difficulties in obtaining supplies or
manufactured products, any termination of the license of such technology or any
reduction or interruption in supply or manufacturing from these third-party
contractors would adversely affect its ability to deliver its products.
INTELLECTUAL PROPERTY
We regard our technology as proprietary, and we rely on a combination of
patents, copyrights, trademarks, trade secret laws, contractual restrictions,
restrictions on disclosure and other methods to establish and protect our
technology and proprietary rights and information. We have filed patent
applications in the United States and internationally covering aspects of our
real-time, asymmetric, hybrid, two-way interactive systems, including our
CHANNEL HYPERLINKING technology. We cannot assure you that any patent will issue
from these applications or that, if issued, any claims allowed will be
sufficiently broad to protect our technology. In addition, we cannot assure you
that any patents that may be issued will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide us with
proprietary protection. The failure of any patents to protect our technology may
make it easier for our competitors to offer technology equivalent or superior to
our technology. We also generally enter into confidentiality agreements with our
employees and consultants, and when possible, customers, partners and others to
control access to and distribution of our documentation and other proprietary
information. Despite these precautions, a third party may copy or otherwise
obtain and use the our products, services or technology without authorization,
or to develop similar technology independently. In addition, effective patent,
copyright, trademark and trade secret protection depends on the various forms of
liability for infringement. Legislators both domestically and internationally
are grappling with these issues, and the case law in this area is not fully
developed. Moreover, protection may be unavailable or limited particularly in
some foreign countries, and the global nature of the Internet makes it virtually
impossible to control the ultimate destination of the our content offerings.
Policing unauthorized use of our content offerings is difficult. There can be no
assurance that the steps taken by us will prevent misappropriation or
infringement of our technology. In addition, litigation may be necessary in the
future to enforce our intellectual property rights, to protect the our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our business, financial
condition and results of operations. See "--Legal Proceedings." We are subject
to litigation brought by others claiming that we infringe their intellectual
property. See "--Litigation."
COMPETITION
The market for consumer Internet services is extremely competitive, and the
Company expects that competition will intensify in the future. Access to the
Internet is currently available through several methods including:
- - telephone access through a personal computer,
- - telephone access through a television,
- - cable access through a personal computer, and
- - cable access through a television.
While these various methods of Internet access and types of services offered may
be construed as competitive, they may also be complementary. Household members
may prefer to use different methods of Internet service/access based on
availability and their intended business or leisure use. The Company is working
with some of the companies described below to find ways to combine their product
and service offerings with those of the Company.
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TELEPHONE ACCESS THROUGH A PERSONAL COMPUTER. Currently, the majority of
Internet users utilize a personal computer and a modem to access the Internet
over a telephone line through a connection to an Internet service provider
("ISP") such as America Online, Earthlink or MindSpring. The Company believes
that this mode of Internet access may be limited by:
- the complexity, maintenance and obsolescence issues usually associated
with a personal computer,
- bandwidth constraints of using dial-up modems with peak data transmission
speeds of 56 Kbps that may result in significant dial-up connection times
and delays,
- expenses including: (1) investment that may be required for a personal
computer and a modem, (2) ISP's monthly fees, which the Company believes
range from $10-22 per month, and (3) possible telephone access charges,
and
- the total number of users that may be simultaneously connected to an ISP.
Recent advancements within telephone systems may mitigate some of the above
factors. Integrated Services Digital Network ("ISDN") technology enables a peak
data transmission speed of 128 Kbps between the user and the ISP over specially
conditioned telephone lines. Although ISDN technology has been available for
several years, the Company believes that it has not been widely deployed due
primarily to its relatively high costs. Asymmetric Digital Subscriber Line
("ADSL") technology is currently the most common implementation of Digital
Subscriber Line ("xDSL") technology. ADSL enables peak data transmission speeds
of 8.4 Mbps downstream from the ISP to the user and 640 Kbps upstream from the
user to the ISP. The Company believes that these new technologies are expected
to have associated monthly fees in the range of $90-170.
In addition to telephone based access, satellite based access may be an
alternative. Satellite-delivered approaches such as direct broadcast satellite
("DBS") currently provide a peak data transmission speed of approximately 400
Kbps downstream and rely on dial-up modems and the telephone network for
upstream transmission ("telephone return"). In addition to the telephone
limitations discussed above, these approaches have limitations on the ability to
expand their services due to the necessity of dividing a finite amount of
satellite bandwidth among subscribers in a broad geographic area. Other wireless
offerings rely on ground-based radios instead of satellites. Such offerings
include multichannel multipoint distribution service ("MMDS") and local
multipoint distribution service ("LMDS"), which are one-way and two-way
high-bandwidth wireless digital broadcasting systems, respectively. MMDS and
LMDS are not yet widely available, require unobstructed "line-of-sight"
transmission paths and may require additional radio frequency spectrum
allocations, an entirely new distribution infrastructure and new equipment,
including specialized radio modems.
TELEPHONE ACCESS THROUGH A TELEVISION. Set-top appliances, such as those
provided by WebTV, have been introduced to provide Internet access through
telephone lines to a television without requiring a personal computer.
Additional offerings for this type of service have recently been announced by
Net Channel, the assets of which have been acquired by America Online, as well
as other set-top appliance manufacturers such as American Interactive Media, The
Thomson Corporation, Teknema and Mitsubishi Electronics America, Inc. Although
such access solutions do not require a personal computer or personal computer
expertise, the Company believes that this mode of Internet access may be limited
by:
- - the need to purchase a dedicated or "single-purpose" set-top appliance which
typically costs approximately $100-$240 and exposes the consumer to risks of
equipment obsolescence,
- - the telephone bandwidth constraints discussed above,
- - monthly subscription fees that may be up to $25 per month in addition to any
telephone access charges, and
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- - functional limitations such as the inability to support CD-quality audio and
Java-based applications, including instant messaging and chat rooms.
In addition, satellite television providers have recently initiated Internet
access products that broadcast Internet information from the satellite to the
in-home satellite converter but which still use the telephone infrastructure for
the upstream path. Although the satellite converter is not a dedicated set-top
appliance, like the other products in this category, its use of the telephone
infrastructure imposes the bandwidth constraints inherent with the telephone
infrastructure.
CABLE ACCESS THROUGH A PERSONAL COMPUTER. In order to leverage the
broadband infrastructure of cable television systems, several services have
recently been launched to provide high-speed Internet access and content to
cable subscribers with personal computers. Companies in this segment include At
Home and Road Runner. The Company believes that subscribers to these services
require a separate high-speed cable modem with an installation cost of
approximately $40-$100 and that additional costs are also incurred for monthly
subscription fees and cable access charges in the range of $30-$40. Such
high-speed cable modems, while generally providing higher speed Internet access
than dial-up access, typically require extensive and costly cable network
upgrades.
CABLE ACCESS THROUGH A TELEVISION. Various companies are attempting to
provide Internet access to cable television consumers through a set-top
appliance connected to a television. In some instances this appliance may be a
dedicated unit, such as is currently utilized by ICTV and the Interactive
Channel, or an advanced analog or digital cable box, such as that utilized by
the WORLDGATE Service. Generally, these solutions are cable-based and do not use
the telephone infrastructure. Accordingly, these solutions generally overcome
the bandwidth constraints typically associated with the telephone
infrastructure. The use, however, of a dedicated unit adds incremental costs
which are not present when the service is offered directly over a cable box.
Furthermore, analog-based services such as that currently offered by ICTV
require the use of one dedicated full video channel for the downstream path for
each user, which is less attractive to cable operators since such channel(s) can
no longer be used for television programming or other revenue generating
services. The WORLDGATE Service's analog platform, however, does not require a
dedicated video channel as a result of the use of the vertical blanking interval
for the downstream path. See "--Technology." Cable operators offering the
WORLDGATE Service on a digital platform will need to provide a dedicated video
channel, but it will alone support the expected usage of hundreds of WORLDGATE
Service subscribers.
Companies such as Wink and Intel broadcast supplementary text and/or
graphics information which is displayed on televisions to enhance the television
viewing experience. Typically, these systems are one-way unless a telephone and
modem is available for the return path. It is also possible for these systems to
use the pay per view polling mechanism to retrieve limited data from the
subscriber.
The Company believes that there are many factors which can affect success
within this market. Key factors include:
- - transmission speed,
- - ease-of-use,
- - price,
- - reliability of service,
- - ease of access,
- - obsolescence,
- - content quality,
- - quality of presentation,
- - timeliness of content,
- - customer support,
- - brand recognition,
- - operating experience,
- - revenue sharing, and
- - with respect to advertisers, the number of users, duration and frequency of
visits and user demographics.
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LEGAL PROCEEDINGS
On May 11, 1998, Interactive Channel Technologies, Inc. and SMI Holdings,
Inc., subsidiaries of Source Media, Inc. ("Source"), filed a complaint against
the Company in the United States District Court for the District of Delaware,
alleging that the WORLDGATE Service infringes patents issued to Source. The
complaint seeks injunctive relief, as well as monetary damages and attorney
fees. In our answer filed on June 22, 1998, we have denied these allegations and
further asserted that the patents in suit were invalid. In addition we have
filed multiple counterclaims against Source asserting that Source
misappropriated our confidential information and trade secrets, and
intentionally and tortiously interfered with our existing and prospective
business relationships, which counterclaims Source has subsequently moved to
dismiss. Discovery and further action with respect to the alleged infringement
has been stayed pending oral argument on the merits of our counterclaims, which
has not yet been scheduled. If the plaintiffs win the lawsuit and they are able
to obtain an injunction against us, we could be precluded from offering the
WORLDGATE Service.
On October 6, 1998, Advanced Interactive, Inc. ("AII") filed a complaint in
the United States District Court for the Northern District of Illinois, Eastern
Division, against Matsushita Electric Corporation, Matsushita Electric
Industrial Co. Ltd., Sharp Electronics, Corp., Sharp Corp., Interactive Channel
Technologies, Thomson Consumer Electronics, Toshiba Consumer Products, Inc,
Toshiba America, Inc., Toshiba Corporation, General Instrument Corporation,
Scientific-Atlanta, Inc., ATI Technologies, Inc., ADS Technologies Inc., Gateway
2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks,
Inc. and us, alleging that each of the above companies infringed a patent issued
to AII. The complaint seeks monetary damages and attorney fees. In our answer
filed on December 2, 1998, we have denied these allegations and further asserted
that the patent in suit was invalid.
We intend to vigorously defend these matters, but, as with any patent
litigation, there can be no assurance that the plaintiffs will not prevail and
obtain damages and, in the event that the plaintiffs would not accept an ongoing
royalty, an injunction. From time to time, others may assert infringement claims
against us in the future.
Except as stated above, we are not currently involved in any material legal
proceedings.
EMPLOYEES
As of December 31, 1998, we employed 131 full-time employees and had 15
independent contractors. All of our employees and independent contractors are
located in Bensalem, Pennsylvania, except for an aggregate of four sales people
located in Colorado, Florida and Georgia. None of our employees is represented
by a labor union, and we have no collective bargaining agreement. We believe
that our relations with our employees are good.
FACILITIES
Our corporate headquarters is currently located in Bensalem, Pennsylvania
with facilities consisting of approximately 30,000 square feet. In the third
quarter of 1999, we intend to relocate our headquarters to Trevose, Pennsylvania
in a leased facility with approximately 72,000 square feet. The lease for this
space will expire in June 2009, with an option to extend for an additional 10
years.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Hal M. Krisbergh(1).................................. 51 Chairman and Chief Executive Officer
Joseph E. Augenbraun................................. 34 Vice President, Engineering
Scott B. Campbell.................................... 52 Vice President, Business Development
David A. Dill........................................ 47 Chief Financial Officer
Randall J. Gort...................................... 49 Vice President, General Counsel and Secretary
Gerard K. Kunkel..................................... 40 Vice President, Strategic Programs
Jae Hea Edward Lee................................... 35 Vice President, Operations
Peter C. Mondics..................................... 45 Vice President, Affiliate Sales and Marketing
David E. Wachob...................................... 44 Director, Vice President and General Manager
Thomas G. Baxter..................................... 52 Director
Alan Gerry(1)........................................ 70 Director
Marcia J. Hooper(1).................................. 44 Director
Graham Pattison...................................... 48 Director
Ronald A. Walter..................................... 56 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
HAL M. KRISBERGH has been with the Company since its inception in March
1995. From September 1981 to September 1994, Mr. Krisbergh was an executive
officer of General Instrument. Mr. Krisbergh served as President of General
Instrument's Communications Division and, for the past 15 years, has been a
well-known figure in the cable industry. He is a recognized leader in the
development of addressable cable boxes, impulse pay-per-view, optoelectronics
and digital audio technologies. Mr. Krisbergh is also a director of AM
Communications, Inc., a provider of network monitoring systems, and Ortel
Corporation, a provider of linear fiberoptic technology. In 1991, Mr. Krisbergh
received cable television's prestigious Vanguard award. Prior to joining General
Instrument, Mr. Krisbergh was employed by W. R. Grace & Co., Deloitte & Touche
and Raytheon Company.
JOSEPH E. AUGENBRAUN joined the Company in August 1995. Mr. Augenbraun is
responsible for the management of the hardware and software teams developing the
WORLDGATE platform. From August 1992 to August 1995, Mr. Augenbraun was a
researcher for Hitachi's HDTV Advanced Television and Systems Laboratory. From
November 1987 to August 1992, Mr. Augenbraun was on the engineering staff at
Commodore-Amiga Inc, where he served in various capacities including Project
Manager on the Amiga 1500 Computer System and lead designer in ASIC development.
SCOTT B. CAMPBELL joined the Company in February 1997. Mr. Campbell was
President of Genesis International Group, a consulting firm to the cable
industry, from November 1993 to February 1997. At Home Shopping Network, Mr.
Campbell served in various management and sales positions, including: from March
1992 to February 1993 as Executive Vice President/Diversified Marketing and
Media Services, from July 1989 to March 1992 as Senior Vice President/Affiliate
Relations, and from July 1986 to July 1989 as Senior Vice President/Marketing
and Sales.
DAVID A. DILL joined the Company in April 1996. From July 1994 to October
1995, Mr. Dill was the Vice President, Finance of General Instrument's
Communications Division. From August 1991 through March 1994, Mr. Dill held
executive positions with International Business Machines Corporation, including
Financial Analysis Director (IBM U.S. Company), Controller (Personal Systems
Business), and Assistant General Manager, Finance and Planning (RISC System/6000
Division). Prior to joining
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IBM, Mr. Dill was Vice President and Controller for the Rolm Company. From
February 1975 to August 1989, Mr. Dill held several other executive positions
with IBM, culminating in his role as Director of Finance, Communications Systems
Group.
RANDALL J. GORT joined the Company in August 1997. From July 1995 to August
1997, Mr. Gort was General Counsel, Secretary, and Director of Legal and
Corporate Affairs for Integrated Circuit Systems, Inc. Mr. Gort was in private
practice from August 1994 through June 1995. Prior to that time, he acted as
Associate General Counsel for Commodore International Ltd. from May 1987 through
July 1994. Mr. Gort was with Schlumberger Ltd. from October 1982 through early
1987, originally as Senior Attorney and then as General Counsel, FACTRON
Division. From April 1979 through October 1982, Mr. Gort was Counsel for various
divisions of the 3M Company, including Medical and Surgical Products Divisions,
Orthopedic Products Division, Electro-Mechanical Resources Division and 3M's
four Tape divisions.
GERARD K. KUNKEL joined the Company in February 1997. Mr. Kunkel is
responsible for the development and deployment of the Company's CHANNEL
HYPERLINKING business and technology. From May 1995 to February 1997, Mr. Kunkel
was President of Broadband Applications Development Company. From March 1993 to
April 1995, he served as Vice President, Product Development of StarNet, Inc.
From June 1991 to March 1993, Mr. Kunkel was President of The Kunkel Group. From
May 1984 to June 1991, Mr. Kunkel was Director of Design and Electronic
Publishing for PC MAGAZINE. For the period 1977 through 1984, Mr. Kunkel was an
award winning art director for various New York City based magazines.
JAE HEA EDWARD LEE has been with the Company since its inception in March
1995. Mr. Lee is responsible for all manufacturing, quality assurance and field
service activities. From October 1991 through January 1995, Mr. Lee was General
Manager and then President of RGB Industries, Inc., a manufacturing and
import/export business. From September 1987 to October 1991, Mr. Lee was a
Design Engineer for General Instrument's Jerrold Division, where he was System
Manager for the engineering group's development workstation local area network.
PETER C. MONDICS has been with the Company since March 1996. From January
1994 through February 1996, Mr. Mondics was a principal with New Ventures
Business Planning, a corporation formed to conceptualize, model, create and
distribute new business models for clients seeking entry into the cable
operator, phone and wireless distributed service businesses. From February 1991
to December 1993, Mr. Mondics was President of NuStar, Inc. and Executive
Vice-President of StarNet, NuStar's parent entity. From February 1987 to January
1991, Mr. Mondics was Vice-President of NuStar's Network Sales. Mr. Mondics was
Eastern Regional Vice-President of Financial News Network from June 1984 to
January 1987 and Marketing Manager for Home Box Office from May 1981 to May
1984.
DAVID E. WACHOB has been with the Company since its inception in March 1995.
Between 1991 and 1995, Mr. Wachob was President of Network Resources
Incorporated, an independent consulting company for the cable, cellular,
telecommunications and consumer electronics industries. From June 1988 to
September 1991, Mr. Wachob was Director of Advanced Technologies for General
Instrument where he managed strategic planning, market research, technical
assessment and business development of advanced technologies for the cable
television industry. Mr. Wachob's other positions with General Instrument
included, from July 1986 to June 1988, Manager of Product Support Engineering,
and from November 1984 to July 1986, Radio Frequency Systems Engineer.
ALAN GERRY has been a member of the Company's Board of Directors since April
1997. Mr. Gerry founded Granite Associates, L.P., a private investment company,
and presently serves as its Chairman and Chief Executive Officer. Mr. Gerry was
the founder, and for at least the last 3 years prior to 1996, he was the
Chairman and Chief Executive Officer of Cablevision Industries Corporation, the
eighth largest multiple system operator in the United States, with over 1.3
million subscribers at the time of its
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merger with Time Warner Inc. in 1996. Mr. Gerry has been the recipient of
numerous awards and citations including the cable television industry's
prestigious Vanguard Award for Distinguished Leadership, which he received in
1995. Mr. Gerry is a veteran of the U.S. Marine Corps.
MARCIA J. HOOPER has been a member of the Company's Board of Directors since
April 1997. Ms. Hooper has been a partner with the Information Technology Group
of Advent International Corporation since May 1986. Ms. Hooper is also a
director of Interleaf, Inc., Signal Internet Technologies, Inc., LionBridge
Technology, Inc., PolyMedica Industries, Inc. and Wang Laboratories, Inc.. In
July 1994 Ms. Hooper co-founded Viking Capital Group, Inc., a venture firm
focused on early stage investments. From May 1979 to July 1994, Ms. Hooper was
employed as a general partner with Paine Webber/Ampersand Ventures.
RONALD A. WALTER has been a member of the Company's Board of Directors since
April 1998. Mr. Walter has been a Vice President of Citicorp and Citibank, N.A.
since May 1979. He serves as Director of Investments for Citicorp's proprietary
long-term equity investment program and manages the investment program for the
assets supporting Citigroup's employee benefit programs. He is also a partner
with Citicorp's internal Mergers and Acquisition team and its Corporate
Technology Office. His previous experience with Citicorp includes serving as
Secretary of Citicorp's Finance Committee, Head of Strategic Analysis and Chief
Financial Officer for the company's equipment finance and leasing business. Mr.
Walter was a member of the Urban Planning faculty at MIT and was part of the
management team responsible for ending the financial crisis in the City of New
York.
THOMAS G. BAXTER has been a member of the Company's Board of Directors since
July 1998. Mr. Baxter has been an operating partner in the investment banking
firm of Evercore Partners since June 1998. Mr. Baxter is also a director of
C-Span and Dycom Industries, Inc. Prior to his current position Mr. Baxter
served as President of Comcast's cable subsidiary, Comcast Cable Communications,
Inc., the nation's fifth largest cable television operation, from January 1990
to January 1998. Mr. Baxter was also responsible for the operations of Comcast's
telephone and cable systems in the United Kingdom. Prior to joining Comcast Mr.
Baxter held executive positions with Cablevision Systems Corporation and Time
Warner Entertainment Company, Inc.
GRAHAM PATTISON has been a member of the Company's Board of Directors since
August 1998. Mr. Pattison has held executive positions with Motorola for over
ten years and is currently the Vice President and General Manager of the Network
Systems Division of Motorola, which position he has held since April 1995. In
his current capacity Mr. Pattison has worldwide responsibility for the design,
manufacture and marketing of networking data communication devices. Mr. Pattison
has also served as General Manager for the Europe, Middle East and Africa region
of Motorola's Information Systems Group.
BOARD OF DIRECTORS AND COMMITTEES
Each director is elected to hold office until the next annual meeting of
stockholders and until his or her respective successor is elected and qualified.
Mr. Baxter and Ms. Hooper are reimbursed for travel and other expenses related
to their service on the Board of Directors. In addition, the Company pays to Mr.
Baxter a stipend of $1,000 for each Board meeting he attends in person and the
Company has granted to him an option to purchase 6,666 shares of the common
stock at an option price of $4.50 per share. This option became effective on Mr.
Baxter's appointment to the Board and will vest in four equal annual
installments on the anniversary of such date.
The Board of Directors has a Compensation and Stock Option Committee (the
"Compensation Committee") which makes recommendations to the Board concerning
the compensation and benefits programs for its directors, officers and
employees, including all stock options granted under the Company's 1996 Stock
Option Plan. Currently, the Compensation Committee is composed of
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Messrs. Krisbergh and Gerry and Ms. Hooper. The Board intends to create an Audit
Committee upon completion of this offering.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With the exception of Mr. Krisbergh, no member of the Compensation Committee
is an officer or employee of the Company. Mr. Krisbergh does not, however,
participate in the determination of his own compensation. No executive officer
of the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving on the
Compensation Committee.
EMPLOYMENT AGREEMENTS
No employee of the Company has entered into an employment agreement with the
Company.
BONUS PLAN
The Company has established a bonus plan which provides for the payment of
bonuses to executive officers and other employees based upon the performance of
the Company, the performance of the business division of which such officer or
employee is a member and the performance of such officer or employee. Under this
plan, the Company generally assesses the prior year's performance and makes
bonus payments during the first calendar quarter of each year.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation paid in
fiscal year 1998 with respect to the Company's Chief Executive Officer and its
four other most highly compensated executive officers (collectively, the "Named
Officers"):
SUMMARY COMPENSATION TABLE
FISCAL YEAR 1998
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
-----------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS(1) OPTIONS COMPENSATION
- ----------------------------------------------------------- ---------- ---------- ----------------- -------------
<S> <C> <C> <C> <C>
Hal M. Krisbergh........................................... $ 320,250 $ 144,113 -- $ --
Chairman and Chief Executive Officer
David A. Dill.............................................. 193,218 67,626 -- --
Chief Financial Officer
Scott B. Campbell.......................................... 160,000 48,000 -- --
Vice President, Business Development
Peter C. Mondics........................................... 159,375 47,813 -- --
Vice President, Affiliate Sales and Marketing
David E. Wachob............................................ 149,450 44,835 -- --
Director, Vice President and General Manager
</TABLE>
No options were granted to any Named Officer in 1998.
- ------------------------
(1) While the cost of the above bonuses has been accrued and reflected in the
1998 results, none of the bonuses have been paid as of February 8, 1999.
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The following table sets forth information concerning options exercised
during 1998 and the number and the hypothetical value of unexercised options of
the Company held by the Named Officers as of December 31, 1998. This table is
presented solely for purposes of complying with the Commission rules and does
not necessarily reflect the amounts the optionees will actually receive upon any
sale of the shares acquired upon exercise of the options.
AGGREGATE OPTION EXERCISES AND
LAST FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-
OPTIONS AT DECEMBER 31, MONEY OPTIONS AT
SHARES 1998 DECEMBER 31, 1998(1)
ACQUIRED VALUE -------------------------- --------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott B. Campbell................. 15,000 45,000
Peter C. Mondics.................. 16,666 50,000
</TABLE>
- ------------------------
(1) Assuming, for presentation purposes only, a per share fair market value of
$ .
KEY MAN INSURANCE
The Company maintains key man insurance policies in the amounts of $3.0
million on Hal Krisbergh and $1.0 million on David Wachob.
STOCK OPTION PLAN
The Company has one stock option plan, the 1996 Stock Option Plan, as
amended (the "Stock Option Plan"), under which, as of January 31, 1999, options
for 680,410 shares of common stock were outstanding and options for an
additional 252,923 shares were available for further grant. Outstanding options
are exercisable at prices ranging from $.75 to $4.50 per share. The maximum
number of shares of Common Stock reserved for the grant or settlement of awards
under the Stock Option Plan is 933,333 subject to adjustment as provided
therein. The total number of shares authorized, as well as shares subject to
outstanding options, will be adjusted in the event of changes to the Company's
capital structure, such as stock dividends, stock splits or other
recapitalizations. Generally, outstanding options vest in equal installments
over a four-year period, but in no event may an option be exercised more than 10
years following the date of its grant, subject to acceleration in the event of
some changes of control of the Company.
The Stock Option Plan is intended to promote the long term financial
interests and growth of the Company by providing employees, officers, directors
and consultants of the Company with appropriate incentives and rewards to enter
into and continue in the employ of, or their relationship with, the Company. The
Stock Option Plan gives recipients the opportunity to acquire a proprietary
interest in the long-term success of the Company and rewards the performance of
individual officers, other employees, consultants and directors in fulfilling
their responsibilities for long-range achievements.
The Stock Option Plan provides for the granting of awards to such officers,
other employees, consultants and directors of the Company and its affiliates as
the Compensation Committee, which is the committee of the Board appointed to
administer the Stock Option Plan, may select from time to time. If any shares
subject to an award are forfeited, canceled, exchanged or surrendered or if an
award otherwise terminates or expires without a distribution of shares to the
holder of such award, the shares of Common Stock with respect to such award
will, to the extent of any such forfeiture, cancellation, exchange, surrender,
termination or expiration, again be available for awards under the Stock Option
Plan.
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The Compensation Committee has the authority to administer the Stock Option
Plan and to exercise all the powers and authorities either specifically granted
to it under, or necessary or advisable in the administration of, the Stock
Option Plan, including, without limitation, the authority to grant awards; to
determine the persons to whom and the time or times at which awards shall be
granted; to determine the type and number of awards to be granted, the number of
shares of Common Stock to which an award may relate and the terms, conditions,
restrictions and performance goals relating to any award; to determine whether,
to what extent, and under what circumstances an award may be settled, canceled,
forfeited, exchanged, or surrendered; to make adjustments in the performance
goals in recognition of unusual or non-recurring events affecting the Company or
the financial statements of the Company (to the extent not inconsistent with
Section 162(m) of the Code, if applicable), or in response to changes in
applicable laws, regulations, or accounting principles; to construe and
interpret the Stock Option Plan and any award; to prescribe, amend and rescind
rules and regulations relating to the Stock Option Plan; to determine the terms
and provisions of agreements evidencing awards; and to make all other
determinations deemed necessary or advisable for the administration of the Stock
Option Plan.
The purchase price per share payable upon the exercise of an option (the
"option exercise price") will be established by the Compensation Committee,
provided, however, that Incentive Stock Options may not have an option exercise
price less than the fair market value of a share of common stock on the date of
grant. The option exercise price is payable by any one of the following methods
or a combination thereof, to the extent permitted by the Compensation Committee:
(1) in cash or by personal check, certified check, bank cashier's check or wire
transfer, (2) subject to the approval of the Committee, in common stock owned by
the participant for at least six months prior to the date of exercise and valued
at their fair market value on the effective date of such exercise, or (3)
subject to the approval of the Compensation Committee, by such other provision
as the Compensation Committee may from time to time authorize.
The Board of Directors or the Compensation Committee may suspend, revise,
terminate or amend the Stock Option Plan at any time, provided, however, that
(1) stockholder approval will be obtained if and to the extent required under
Rule 16b-3 promulgated under the Exchange Act or if and to the extent the Board
determines that such approval is required for purposes of satisfying Section
162(m) or Section 422 of the Code and (2) no such suspension, revision,
termination or amendment may, without the consent of a participant, reduce the
participant's rights under any outstanding award.
CERTAIN TRANSACTIONS
RESTRUCTURING. We were organized in March 1995 as a Pennsylvania limited
liability company (the "LLC"). In December 1996, the LLC was merged with and
into the Company as a result of which all assets and liabilities of the LLC were
transferred to us. Pursuant to the merger, Hal M. Krisbergh and David E. Wachob,
as the founding members of the LLC, and some other executive officers, key
employees and consultants (collectively, the "Management Stockholders") who had
been granted profit interests in the LLC, received an aggregate of 9,100,801
shares of our common stock in exchange for the cancellation of their membership
interests in the LLC. Of the total shares allocated to the Management
Stockholders, 808,733 shares of our common stock were issued subject to vesting
over a defined period as described further in the "Management Shareholders'
Agreement" discussed below.
MANAGEMENT SHAREHOLDERS AGREEMENT. Each of the Management Stockholders who
received shares of our common stock in the merger entered into a Management
Shareholders' Agreement with us (the "Management Agreement") providing for some
voting agreements, restrictions on transfer of our common stock, rights of first
refusal and vesting arrangements.
Pursuant to the Management Agreement, each Management Stockholder and his
transferees are obligated to vote for Mr. Krisbergh's designees to the Board. No
Management Stockholder may transfer his shares, except for (1) transfers to
family members and (2) transfers of up to five percent of
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his total shares, PROVIDED that such transferees agree to be bound by the
Management Agreement. Any Management Stockholder who wishes to sell in excess of
five percent of his shares must first offer to sell such shares to the other
Management Stockholders on a pro rata basis. The Management Agreement also sets
forth the vesting arrangements for some of the Management Stockholder's shares,
and provides that any shares that remain unvested at the time of termination of
a Management Stockholder's employment (other than by reason of death) shall be
distributed pro rata to the remaining Management Stockholders and will fully
vest upon such distribution. Unvested shares will be transferred to a Management
Stockholder's estate or heirs in the event of his death.
The Management Agreement automatically terminates upon the consummation of
this offering.
PREFERRED STOCK FINANCINGS. We have financed our operations to date largely
through contributions from stockholders and a series of private placements of
our Series A, Series B and Series C Preferred Stock. Each share of our Series A
Preferred Stock was initially convertible into two shares of our common stock,
each share of our Series B Preferred Stock was initially convertible into one
share of our common stock and each share of our Series C Preferred Stock was
initially convertible to one share of our common stock, subject to some
anti-dilution protections. As a result of the stock split, each share of our
Series A Preferred Stock will convert into one and one-third shares of our
common stock, each share of our Series B Preferred Stock will convert into
two-thirds of a share of our common stock and each share of our Series C
Preferred Stock will convert into two-thirds of a share of our common stock
From March 1996 through July 1997, we sold an aggregate of 2,752,111 shares
of our Series A Preferred Stock at a purchase price of $4.395 per share to the
various investors, including Citicorp, AMP Incorporated, Alan Gerry, Motorola,
funds affiliated with Advent International Corporation, Needham & Company, Paul
Kagan, Scientific-Atlanta and General Instrument (collectively, the "Series A
Investors").
From November 1997 through January 1998, we sold an aggregate of 2,803,031
shares of our Series B Preferred Stock at a purchase price of $7.10 per share to
various investors, including Citicorp, Needham & Company, H.F. Lenfest, Charter
and Paul Kagan (collectively, the "Series B Investors").
From September 1998 through February 1999, we sold an aggregate of 1,529,714
shares of our Series C Preferred Stock at a purchase price of $11.00 per share
to various investors, including Citicorp, Needham & Company, General Instrument,
Scientific-Atlanta, Charter, Showtime and XL Capital L.L.C. (collectively, the
"Series C Investors").
STOCKHOLDERS' AGREEMENT. The Series A Investors, the Series B Investors,
Series C Investors, Messrs. Krisbergh and Wachob, some other management
personnel of the Company, the Company and other stockholders are parties to a
Stockholders' Agreement (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement, (1) Hal M. Krisbergh designated David E. Wachob, Alan
Gerry and Thomas G. Baxter, (2) Motorola designated Graham Pattison, (3) the
Series A Investors, other than Motorola, designated Marcia J. Hooper, and (4)
the Series B Investors designated Ronald A. Walter to our Board of Directors.
The material provisions of the Stockholders' Agreement will terminate upon the
consummation of this offering, except for the registration rights provided for
therein. See "Shares Eligible for Future Sale-Registration Rights."
OFFICER LOANS. During the fall of 1996, we borrowed approximately $350,000
from Hal M. Krisbergh in exchange for a seven percent demand note which was
repaid in full out of the proceeds of the initial Series A Preferred Stock
financing.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of February 8, 1999 regarding
beneficial ownership of the common stock and as adjusted to reflect the sale of
the shares offered hereby (1) by each person who is known to us to own
beneficially more than 5% of the outstanding shares of common stock, (2) by each
director of the Company, (3) by each Named Officer and (4) by all directors and
executive officers of the Company as a group. Unless otherwise indicated below,
to our knowledge, all persons listed below have sole voting and investment power
with respect to their shares of common stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO THE OFFERING(1) AFTER THE OFFERING(1)
------------------------- -------------------------
<S> <C> <C> <C> <C>
NUMBER OF NUMBER OF
NAME AND ADDRESS(2) SHARES PERCENTAGE SHARES PERCENTAGE
- -------------------------------------------- ---------- ------------- ---------- -------------
Citicorp.................................... 1,124,442 7.2
153 East 53(rd) Street
New York, NY 10043
Hal M. Krisbergh(3)......................... 6,515,686 41.6
Scott B. Campbell........................... 15,000 *
David A. Dill(4)............................ 369,988 2.4
Peter C. Mondics(5)......................... 35,859 *
David E. Wachob............................. 557,897 3.6
Alan Gerry.................................. 606,666 3.9
Marcia J. Hooper(6)......................... -- *
Ronald A. Walter(7)......................... -- *
Thomas G. Baxter............................ -- *
Graham Pattison(8).......................... -- *
All current directors and executive officers
as a group (14 persons)(9)................ 9,003,972 57.3
</TABLE>
- ------------------------
* Less than 1% of the outstanding Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the SEC,
based on factors including voting and investment power with respect to
shares, subject to applicable community property laws. Shares of common
stock subject to options or warrants exercisable within 60 days of February
8, 1999 are deemed outstanding for the purpose of computing the percentage
ownership of the person holding such options or warrants, but are not deemed
outstanding for computing the percentage ownership of any other person. The
amounts indicated assumes that the outstanding shares of Series A, Series B
and Series C Preferred Stock have been converted into shares of common stock
without adjustment for anti-dilution protections to which they may be
entitled. See "Certain Transactions--Preferred Stock Financings."
(2) Unless otherwise indicated, the mailing address of such beneficial owners is
3220 Tillman Drive, Suite 300, Bensalem, Pennsylvania 19020.
(3) Includes (a) 15,237 shares of common stock held by Mr. Krisbergh as
custodian for his minor child and (b) 15,237 shares of common stock held by
Mr. Krisbergh's wife as custodian for their minor child.
(4) Includes 26,666 shares of common stock held by Mr. Dill as custodian for his
two minor children.
(5) Includes 2,666 shares of common stock held by Mr. Mondics' minor child,
6,666 shares of common stock held jointly with his wife and options to
purchase 16,666 shares of common stock.
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<PAGE>
(6) Does not include 379,218 shares of common stock held by funds that are
affiliated with Advent International Corporation as follows: Adtec Limited
Partnership (60,674 shares), Advent Crown Fund, C.V. (60,068 shares),
Digital Media & Communications, L.P. (240,880 shares), and Advent Partners
Limited Partnership (17,596 shares). Ms. Hooper is a partner and an officer
of Advent International Corporation and an officer of several of the Advent
funds, and was originally elected to the Company's Board of Directors as a
representative of the holders of the Series A Preferred Stock. Ms. Hooper
disclaims beneficial ownership of the shares held of record by the Advent
funds.
(7) Does not include 1,124,442 shares of common stock held by Citicorp. Mr.
Walter is a vice president of Citicorp and Citibank, NA.
(8) Does not include 454,666 shares of common stock held by Motorola, Inc. Mr.
Pattison is a vice president of Motorola, Inc.
(9) Includes (a) options to purchase 56,666 shares of common stock and (b)
87,034 shares of common stock owned by family members or affiliates of some
members of the group.
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DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
common stock, par value $.01 per share, and 13,500,000 shares of preferred
stock, par value $.01 per share. The following summary is qualified in its
entirety by reference to our Amended and Restated Certificate of Incorporation,
as amended (the "Certificate of Incorporation"), a form of which is filed as an
exhibit to this registration statement of which this prospectus is a part.
COMMON STOCK
As of February 8, 1999, there were 15,658,690 shares of common stock
outstanding. After giving effect to the issuance of shares of common
stock offered by the Company hereby, there will be shares of common stock
outstanding. The outstanding shares of common stock are, and the shares offered
by the Company in this offering will be, when issued and paid for, fully paid
and nonassessable. The rights, preferences and privileges of holders of common
stock are subject to, and may be adversely affected by, the rights of holders of
shares of any series of preferred stock which the Company may designate and
issue in the future. See "--Preferred Stock."
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of holders of common stock. The holders of common stock do
not have cumulative voting rights. The election of directors is determined by a
plurality of votes cast, and, except as otherwise required by law, the Company's
Certificate of Incorporation or By-Laws, all other matters are determined by a
majority of the votes cast. See "Risk Factors--Our Chairman and Chief Executive
Officer Can Exercise Significant Influence Over WorldGate." The common stock has
no preemptive rights and is not convertible, redeemable or assessable. The
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board out of legally available funds, subject to any
preferential dividend rights of outstanding preferred stock. Upon any
liquidation, dissolution or winding up of the Company, after payment of all
debts and liabilities of the Company and after payment of any liquidation
preferences of then outstanding preferred stock, the holders of common stock
will be entitled to receive a portion of all remaining assets that are legally
available for distribution.
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any further
vote or action by the stockholders, has the authority, subject to certain
limitations prescribed by law, to issue from time to time up to an aggregate of
13,500,000 shares of preferred stock in one or more classes or series and to
determine the designation and the number of shares of any class or series as
well as the voting rights, preferences, limitations and special rights, if any,
of the shares of any such class or series, including dividend rights, dividend
rates, conversion rights and terms, redemption rights and terms, and liquidation
preferences. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change of control of the Company. Upon the closing of
this offering, there will be no shares of preferred stock outstanding, and the
Company has no plans to issue any shares of preferred stock.
LIMITATION ON LIABILITY
The Company's Certificate of Incorporation limits or eliminates the
liability of the Company's directors or officers to the Company or its
stockholders for monetary damages to the fullest extent permitted by the
Delaware General Corporation Law, as amended (the "DGCL"). The DGCL provides
that a director of the Company shall not be personally liable to the Company or
its stockholders for monetary damages for a breach of fiduciary duty as a
director, except for liability: (1) for any breach of such person's duty of
loyalty, (2) for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law, (3) for the payment of unlawful
dividends and some other
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actions prohibited by Delaware corporate law, and (4) for any transaction
resulting in receipt by such person of an improper personal benefit.
The Certificate of Incorporation also provides that the directors shall be
entitled to the benefits of all limitations on the liability of directors
generally that now or hereafter become available under the DGCL. The Certificate
of Incorporation also contains provisions indemnifying the Company's directors,
officers and employees to the fullest extent permitted by the DGCL.
The Company maintains directors' and officers' liability insurance to
provide its directors and officers with insurance coverage for losses arising
from claims based on breaches of duty, negligence, error and other wrongful
acts. See "Business--Legal Proceedings" for a discussion of pending litigation.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Company's Board under the Company's Certificate of
Incorporation to establish the rights of, and to cause the Company to issue,
substantial amounts of preferred stock without the need for stockholder
approval, upon such terms and conditions, and having such rights, privileges and
preferences, as the Company's Board may determine from time to time in the
exercise of its business judgment, may, among other things, be used to create
voting impediments with respect to changes in control of the Company or to
dilute the stock ownership of holders of common stock seeking to obtain control
of the Company. The rights of the holders of common stock will be subject to,
and may be adversely affected by, any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing desirable flexibility
in connection with possible acquisitions, financings and other corporate
transactions, may have the effect of discouraging, delaying or preventing a
change in control of the Company. The Company has no present plans to issue any
shares of preferred stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the DGCL prohibits some "business combinations" between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliates or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding voting
shares of a Delaware corporation. For purposes of Section 203, business
combinations are defined broadly to include mergers, consolidations, sales or
other dispositions of assets having an aggregate value in excess of 10% of the
consolidated assets of the corporation and some transactions that would increase
the interested stockholder's proportionate share ownership in the corporation.
Section 203 prohibits any such business combination for a period of three years
commencing on the date the interested stockholder becomes an interested
stockholder, unless (1) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
becomes an interested stockholder, (2) the interested stockholder acquired at
least 85% of the voting stock of the corporation (other than stock held by
directors who are also officers or by some employee stock plans) in the
transaction in which it becomes an interested stockholder or (3) the business
combination is approved by a majority of the board of directors and by the
affirmative vote of two-thirds of the outstanding voting stock that is not owned
by the interested stockholder. See "Risk Factors--Certain Anti-takeover
Provisions."
The DGCL contains provisions enabling a corporation to avoid Section 203's
restrictions if stockholders holding a majority of the corporation's voting
stock approve an amendment to the corporation's Certificate of Incorporation or
By-Laws to avoid the restrictions. The Company has not and does not currently
intend to "elect out" of the application of Section 203 of the DGCL.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of our common stock (including shares issued upon exercise of outstanding
options and warrants) in the public market after this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through the sale of our equity securities.
Upon completion of this offering, shares of our common stock will be
outstanding (based on shares outstanding on February 8, 1999, and assuming no
exercise of options or warrants). Of these shares, shares will be
freely tradable without restriction, including shares registered and sold
in this offering, except that shares purchased by our "affiliates," as that term
is defined in Rule 144 under the Securities Act, may generally be sold only in
compliance with the limitations of Rule 144. The remaining approximately 15.7
million shares of our common stock (the "Restricted Shares") were issued and
sold by us in private transactions in reliance upon exemptions from the
registration requirements of the Securities Act and are therefore deemed
"restricted securities" as defined in Rule 144 and may not be sold in the
absence of registration under the Securities Act unless an exemption is
available, including an exemption afforded by Rule 144 or Rule 701. See "Risk
Factors--Substantial Sales of Our Common Stock May Affect Our Stock Price."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted shares" (as
defined in Rule 144) for at least one year (including the holding period of any
prior owner, except an affiliate) is entitled to sell, within any three month
period, a number of shares that does not exceed the greater of (1) one percent
of the number of shares of common stock then outstanding or (2) the average
weekly trading volume of the common stock on the Nasdaq National Market during
the four calendar weeks preceding the required filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to some manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have been
an affiliate at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume and other limitation or notice provisions of Rule 144.
Rule 144A under the Securities Act provides a non-exclusive safe harbor
exemption from the registration requirements of the Securities Act for specified
resales of restricted securities to some institutional investors. In general,
Rule 144A allows unregistered resales of restricted securities to a "qualified
institutional buyer," which generally includes an entity, acting for its own
account or for the account of other qualified institutional buyers, that in the
aggregate owns or invests on a discretionary basis at least $100 million in
securities of issuers that are not affiliated with the entity, as long as these
securities when issued were not of the same class as securities listed on a
national securities exchange or quoted on Nasdaq. The shares of our common stock
outstanding as of the date of this prospectus would be eligible for resale under
Rule 144A because such shares, when issued, were not of the same class as any
listed or quoted securities.
STOCK OPTIONS AND WARRANTS
As of December 31, 1998, there were outstanding options to purchase an
aggregate of 641,343 shares of our common stock (108,750 of which were
exercisable at December 31, 1998) at a weighted average exercise price of $3.00
per share, and we had an additional 291,990 shares of our common stock available
for future grant under the Stock Option Plan. The holders of options which are
presently exercisable to purchase a total of 108,750 shares are subject to
lock-up agreements, which
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<PAGE>
restrict the holders' ability to sell or otherwise dispose of our common stock
acquired upon the exercise of such options. See "Management--Stock Option Plan."
Following closing of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act covering shares of our common
stock subject to outstanding options under the Stock Option Plan and 291,990
shares of our common stock reserved for issuance under the Stock Option Plan.
Based on the number of shares subject to outstanding options at December 31,
1998 and currently reserved for issuance under such plan, such registration
statement would cover approximately 933,333 shares issuable on exercise of the
options of which 108,750 options have vested as of such date. Such registration
statement will automatically become effective upon filing.
As of December 31, 1998, there were outstanding warrants to purchase an
aggregate of 311,819 shares of our common stock (all of which are currently
exercisable) at an exercise price of $10.65 per share. The holders of all of
these warrants are subject to lock-up agreements that restrict the holders'
ability to sell or otherwise dispose of our common stock acquired upon the
exercise of such warrants for 180 days from the date of this prospectus.
LOCK-UP AGREEMENTS
Holders of approximately 14.1 million shares of our common stock (including
all of our directors, Named Officers and holders of stock options) have entered
into lock-up agreements under which, without the prior written consent of Gerard
Klauer Mattison & Co., Inc. on behalf of the underwriters and some other
permitted transfers, they have agreed not to offer, sell or otherwise dispose of
any such shares of our common stock, any options or warrants to acquire shares
of our common stock or any securities convertible into shares of our common
stock (or any shares of our common stock issuable upon exercise or conversion of
such securities) owned by them for a period of 180 days after the date of this
prospectus. Beginning 180 days after the date of this prospectus, approximately
14.9 million shares will be eligible for sale in the public market, subject to
some timing, manner of sale and volume limitations pursuant to Rule 144. Gerard
Klauer Mattison & Co., Inc. may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to such lock-up
agreements. Gerard Klauer Mattison & Co., Inc. currently has no plans to release
any portion of the securities subject to such lock-up agreements. The Company
has agreed that it will not, directly or indirectly, without the prior written
consent of Gerard Klauer Mattison & Co., Inc., contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any
option right or warrant to purchase, or otherwise transfer or dispose of any
shares of common stock, or any securities convertible into or exchangeable for
common stock, for a period of 180 days from the date of this prospectus, except
that the Company may grant additional options under the Stock Option Plan or
issue shares of common stock under outstanding options, warrants and convertible
securities.
REGISTRATION RIGHTS
Some holders of shares of common stock outstanding prior to the closing of
our initial public offering (including shares held by Messrs. Krisbergh and
Wachob), as well as some holders of warrants, are parties to registration rights
agreements with us. These registration rights agreements, which relate to
approximately 13.8 million shares of common stock (assuming the exercise of all
warrants and conversion of all preferred stock), provide for "piggyback" and
demand registration rights. Some holders of common stock are entitled to
unlimited piggyback registration rights in most registrations by the Company of
its securities, provided that the number of shares of common stock being
registered may be cut back by the Company's underwriters in such offerings.
These holders have waived their piggyback registration rights with respect to
this offering. Additionally, holders of at least 30% of the common stock
entitled to registration rights may request, on not more that two occasions,
that the Company use its best efforts to file a registration statement covering
at least 20% of such common stock, provided that no demand right may be
exercised during any period beginning on the date the
60
<PAGE>
Company files a registration statement and ending on the earlier of 120 days
after such registration statement is declared effective or 180 days after the
filing date of such registration statement. The Company will have the right to
delay such demand registrations under some circumstances for up to 120 days.
Finally, subject to some limitations, some holders of common stock have two
demand registration rights on Form S-3 at any time the Company is eligible to
use Form S-3. These piggyback and demand registration rights may be assigned to
any transferee who acquires at least 20% of the common stock of some holders. By
exercising these registration rights, such holders could cause a significant
number of shares to be registered and sold in the public market. Such sales may
have an adverse effect on the market price for the common stock and could impair
the Company's ability to raise capital through an offering of its equity
securities.
61
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date of this prospectus (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Gerard Klauer Mattison &
Co., Inc. and Jefferies & Company, Inc. are acting as representatives (the
"Representatives"), have severally, but not jointly, agreed to purchase from us
the following respective number of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc..........................................
Jefferies & Company, Inc...................................................
-----------------
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to some conditions precedent, and that the Underwriters will be
obligated to purchase all of the shares of common stock offered hereby (other
than those shares covered by the over-allotment option described below) if any
are taken. The Underwriting Agreement provides that in the event of a default by
an Underwriter, in some circumstances the purchase commitments of non-defaulting
Underwriters may be increased.
The Underwriters propose to offer the shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and to some dealers at a price that represents a concession not in
excess of $ per share. After the initial offering of the shares of common
stock, the offering price and concession and discount to dealers may be changed
by the Representatives.
The Company has granted to the Underwriters an option exercisable by the
Representatives, expiring at the close of business on the 30(th) day after the
date of this prospectus, to purchase up to additional shares of
common stock at the offering price, less underwriting discounts, all as set
forth on the cover page of this prospectus. Such option may be exercised only to
cover over-allotments in the sale of the shares of common stock. To the extent
that the option is exercised, each Underwriter will become obligated, subject to
some conditions, to purchase a number of additional shares of the common stock
proportionate to such Underwriter's initial amount reflected in the foregoing
table.
The Underwriters have informed the Company that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of common stock offered hereby for sale at the initial public
offering price to some employees of the Company and to some other persons. The
number of shares available for sale to the general public will be reduced to the
extent that such persons purchase such reserved shares. The Underwriters will
offer any reserved share not so purchased to the general public on the same
basis as the other shares of common stock offered hereby.
The following table summarizes the compensation to be paid to the
Underwriters by the Company and the expenses payable by the Company.
<TABLE>
<CAPTION>
TOTAL
------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts paid by the Company.............................
Expenses payable by the Company........................................
</TABLE>
62
<PAGE>
Each of the Company and some of its directors, officers and stockholders
have agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, or,
in the case of the Company file with the SEC a registration statement under the
Securities Act relating to any additional shares of the common stock or
securities convertible into or exchangeable or exercisable for any shares of the
common stock, without the prior written consent of the Representatives for a
period of 180 days after the date of this prospectus.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making in accordance with Regulation M under
the Securities Exchange Act of 1934. Over-allotment involves syndicate sales in
excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the shares of common stock in the open market
after the distribution has been completed in order to cover syndicate short
positions. Penalty bids permit the Representatives to reclaim a selling
concession from a syndicate member when the shares of common stock originally
sold by such syndicate member are purchased in a syndicate covering transaction
to cover syndicate short positions. In "passive" market making, market makers in
the securities offered hereby who are Underwriters or prospective Underwriters
may, subject to some limitations, make bids for or purchases of such securities
until the time, if any, at which a stabilizing bid is made. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the common stock to be higher than it would otherwise be in the absence
of such transactions. These transactions may be effected on the Nasdaq National
Market or otherwise and, if commenced, may be discontinued at any time.
The Company has agreed to indemnify the Underwriters against some
liabilities, including civil liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between the Company and the Representatives. Among the factors to be considered
in determining the initial public offering price will be the future prospects of
the Company and its industry in general, sales, losses and some other financial
and operating information of the Company in recent periods, and the price-sales
ratios, market prices of securities and some financial and operating information
of companies engaged in activities similar to those of the Company. The
estimated initial public offering price set forth on the cover page of this
prospectus is subject to change as a result of market conditions and other
factors.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for the Company by Drinker Biddle & Reath LLP, Philadelphia,
Pennsylvania. Certain legal matters in connection with this offering are being
passed upon for the underwriters by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The balance sheets as of December 31, 1997 and 1998 and the statements of
operations, stockholders' deficit and redeemable preferred stock and cash flows
for each of the years ended December 31, 1996, 1997 and 1998 included in this
prospectus and the registration statement of which this prospectus is part, have
been included herein in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
63
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act with respect to the shares of common stock offered
hereby. As permitted by the rules and regulations of the SEC, this prospectus,
which is a part of the registration statement, omits some information contained
in the registration statement. For further information with respect to the
Company and the common stock offered hereby, please reference the registration
statement, including its exhibits and schedules. Statements contained in this
prospectus regarding the contents of any agreement or other document filed with
the SEC as an exhibit to the registration statement are not necessarily
complete, and in each instance reference is made to the copy of such agreement
filed as an exhibit to the registration statement, each such statement being
qualified in all respects by such reference. A copy of the registration
statement, including the exhibits and schedules thereto, may be inspected
without charge at the public reference facilities maintained by the SEC at 450
Fifth Street, N.W., Washington, DC 20549, and copies of all or any part thereof
may be obtained from such office upon payment of the prescribed fees. In
addition, the Commission maintains a Web site at http://www.sec.gov that
contains reports, proxy statements, information statements and other information
regarding the Company.
64
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Report of Independent Accountants..................................................................... F-2
Balance Sheets as of December 31, 1997 and 1998....................................................... F-3
Statements of Operations for the years ended December 31, 1996, 1997 and 1998......................... F-4
Statements of Stockholders' Deficit and Redeemable Preferred Stock for the years ended December 31,
1996, 1997 and 1998................................................................................. F-5
Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998......................... F-6
Notes to Financial Statements......................................................................... F-7-F-20
</TABLE>
F-1
<PAGE>
[THIS IS THE REPORT WHICH WILL BE ISSUED UPON THE EFFECTIVENESS OF THE STOCK
SPLIT AS DESCRIBED IN NOTE 10.]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
WorldGate Communications, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, stockholders' deficit and redeemable preferred stock and of cash
flows present fairly, in all material respects, the financial position of
WorldGate Communications, Inc. at December 31, 1997 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 8, 1999, except as to the
information in Note 10, for which the date
is , 1999
F-2
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
PRO FORMA
1997 1998 1998
---------- ----------- -----------
ASSETS
Current assets:
Cash and cash equivalents................................................... $4,879,560 $ 127,587 $ 7,727,587
Restricted cash............................................................. 240,000 240,000
Short-term investments...................................................... 12,438,365
Accounts receivable, trade.................................................. 105,865 572,120 572,120
Inventory................................................................... 619,905 2,736,512 2,736,512
Prepaid and other assets.................................................... 75,968 171,624 171,624
---------- ----------- -----------
Total current assets.................................................... 18,119,663 3,847,843 11,447,843
---------- ----------- -----------
Property and equipment, at cost............................................... 270,862 780,257 780,257
Less: accumulated depreciation and amortization............................. (22,296) (136,866) (136,866)
---------- ----------- -----------
Property and equipment, net............................................. 248,566 643,391 643,391
Deposits and other............................................................ 43,862 1,129,461 1,129,461
---------- ----------- -----------
Total assets............................................................ $18,412,091 $ 5,620,695 $13,220,695
---------- ----------- -----------
---------- ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion, notes payable.............................................. $ 182,445 $ 515,798 $ 515,798
Current portion, capital lease.............................................. 3,788 4,210 4,210
Accounts payable............................................................ 647,795 5,166,141 5,166,141
Accrued expenses............................................................ 459,484 128,466 128,466
Accrued compensation and benefits........................................... 644,216 1,282,456 1,282,456
---------- ----------- -----------
Total current liabilities............................................... 1,937,728 7,097,071 7,097,071
Notes payable............................................................... 387,806 595,559 595,559
Capital leases.............................................................. 16,526 11,735 11,735
---------- ----------- -----------
Total liabilities....................................................... 2,342,060 7,704,365 7,704,365
---------- ----------- -----------
Commitments and contingent liabilities
Series A Convertible Mandatory Redeemable Preferred Stock, $.01 par value,
2,752,111 shares authorized and outstanding................................. 14,315,448 16,578,165
Series B Convertible Mandatory Redeemable Preferred Stock, $.01 par value,
4,041,641 and 3,270,760 shares authorized, 2,783,031 and 2,803,031
outstanding at December 31, 1997 and 1998................................... 20,050,950 23,568,947
Series C Convertible Mandatory Redeemable Preferred Stock, $.01 par value,
3,181,819 shares authorized, 832,277 outstanding at December 31, 1998....... 9,128,995
Warrant for Series B Convertible Mandatory Redeemable Preferred Stock......... 880,582 880,582
Stockholders' equity (deficit):
Class A common stock, $0.01 par value; 50,000,000 shares authorized, no
shares issued at December 31 1997 and 1998. (15,658,690 shares issued Pro
Forma at December 31, 1998)............................................... 156,587
Class B common stock, $0.01 par value; 27,608,000 shares authorized,
9,100,801 shares issued and outstanding at December 31, 1997 and 1998 (no
shares issued Pro Forma at December 31, 1998)............................. 91,008 91,008
Additional paid-in capital.................................................. 56,810,528
Warrant for Class A Common Stock............................................ 880,582
Accumulated deficit......................................................... (19,165,931) (51,876,639) (51,876,639)
Unearned stock-based compensation........................................... (102,026) (454,728) (454,728)
---------- ----------- -----------
Total stockholders' equity (deficit).................................... (19,176,949) (52,240,359) 5,516,330
---------- ----------- -----------
Total liabilities and stockholders' equity (deficit).................... $18,412,091 $ 5,620,695 $13,220,695
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Revenues.......................................................... $ 140,865 $ 1,022,162
------------- -------------- --------------
Costs and expenses:
Product costs, engineering and development...................... $ 1,408,441 8,510,597 19,603,365
Sales and marketing............................................. 427,631 3,622,590 5,156,717
General and administrative...................................... 1,092,502 2,432,363 3,485,442
Depreciation and amortization................................... -- 22,296 119,144
------------- -------------- --------------
Total costs and expenses.................................... 2,928,574 14,587,846 28,364,668
------------- -------------- --------------
Loss from operations.............................................. (2,928,574) (14,446,981) (27,342,506)
Interest and other income, net.................................... 8,154 422,743 422,807
Interest expense.................................................. (2,081) (17,110) (100,562)
------------- -------------- --------------
Net loss.................................................... (2,922,501) (14,041,348) (27,020,261)
Accretion on preferred stock...................................... (75,880) (2,435,470) (6,145,105)
------------- -------------- --------------
Net loss available to common stockholders................... $ (2,998,381) $ (16,476,818) $ (33,165,366)
------------- -------------- --------------
------------- -------------- --------------
Pro forma net loss per common share............................... $ (2.24)
--------------
--------------
Pro forma weighted average common shares outstanding.............. 14,785,714
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT AND REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
REDEEMABLE PREFERRED STOCK
--------------------------------------------------------------------------
SERIES A SERIES B SERIES C
------------------------ ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995.......................
Cash capital contributions.........................
Capital contributed for services...................
Merger of WorldGate Communications, Inc............
Sale of Preferred Stock, net of expenses........... 1,933,000 $ 8,495,535
Accretion on Preferred Stock....................... 75,880
Net loss for the year..............................
---------- ------------ ---------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1996....................... 1,933,000 8,571,415
Warrants issued for services provided..............
Deferred compensation..............................
Amortization of deferred compensation..............
Non-employee stock option compensation expense.....
Sale of Preferred Stock, net of expenses........... 819,111 3,599,993 2,783,031 $ 19,759,520
Accretion on Preferred Stock....................... 2,144,040 291,430
Net loss for the year..............................
---------- ------------ ---------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1997....................... 2,752,111 14,315,448 2,783,031 20,050,950
Deferred compensation..............................
Amortization of deferred compensation..............
Sale of Preferred Stock, net of expenses........... 20,000 142,000 832,277 $ 8,622,604
Accretion on Preferred Stock....................... 2,262,717 3,375,997 506,391
Net loss for the year..............................
---------- ------------ ---------- ------------ --------- -----------
BALANCE AT DECEMBER 31, 1998....................... 2,752,111 $ 16,578,165 2,803,031 $ 23,568,947 832,277 $ 9,128,995
---------- ------------ ---------- ------------ --------- -----------
---------- ------------ ---------- ------------ --------- -----------
<CAPTION>
STOCKHOLDERS' DEFICIT
-----------------------------------------------------------------
WARRANT CLASS B COMMON STOCK
FOR ------------------------------------
REDEEMABLE WORLDGATE, ADDITIONAL
PREFERRED LLC CAPITAL PAID-IN ACCUMULATED
STOCK CONTRIBUTED SHARES AMOUNT CAPITAL DEFICIT
----------- ------------ ----------- --------- ------------ -------------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1995....................... $ 180,950 $ (149,325)
Cash capital contributions......................... 873,498
Capital contributed for services................... 816,230
Merger of WorldGate Communications, Inc............ (1,870,678) 9,100,801 $ 91,008 $ 1,779,670
Sale of Preferred Stock, net of expenses........... (174,169)
Accretion on Preferred Stock....................... (75,880)
Net loss for the year.............................. (2,922,501)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1996....................... 9,100,801 91,008 1,529,621 (3,071,826)
Warrants issued for services provided.............. $ 880,582
Deferred compensation.............................. 108,875
Amortization of deferred compensation..............
Non-employee stock option compensation expense..... 63,000
Sale of Preferred Stock, net of expenses........... (1,318,783)
Accretion on Preferred Stock....................... (382,713) (2,052,757)
Net loss for the year.............................. (14,041,348)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1997....................... 880,582 9,100,801 91,008 (19,165,931)
Deferred compensation.............................. 454,658
Amortization of deferred compensation..............
Sale of Preferred Stock, net of expenses...........
Accretion on Preferred Stock....................... (454,658) (5,690,447)
Net loss for the year.............................. (27,020,261)
----------- ------------ ----------- --------- ------------ -------------
BALANCE AT DECEMBER 31, 1998....................... $ 880,582 9,100,801 $ 91,008 $ (51,876,639)
----------- ------------ ----------- --------- ------------ -------------
----------- ------------ ----------- --------- ------------ -------------
<CAPTION>
UNEARNED TOTAL
STOCK-BASED STOCKHOLDERS
COMPENSATION DEFICIT
------------- -------------
BALANCE AT DECEMBER 31, 1995....................... $ 31,625
Cash capital contributions......................... 873,498
Capital contributed for services................... 816,230
Merger of WorldGate Communications, Inc............
Sale of Preferred Stock, net of expenses........... (174,169)
Accretion on Preferred Stock....................... (75,880)
Net loss for the year.............................. (2,922,501)
------------- -------------
BALANCE AT DECEMBER 31, 1996....................... (1,451,197)
Warrants issued for services provided..............
Deferred compensation.............................. $ (108,875)
Amortization of deferred compensation.............. 6,849 6,849
Non-employee stock option compensation expense..... 63,000
Sale of Preferred Stock, net of expenses........... (1,318,783)
Accretion on Preferred Stock....................... (2,435,470)
Net loss for the year.............................. (14,041,348)
------------- -------------
BALANCE AT DECEMBER 31, 1997....................... (102,026) (19,176,949)
Deferred compensation.............................. (454,658)
Amortization of deferred compensation.............. 101,956 101,956
Sale of Preferred Stock, net of expenses...........
Accretion on Preferred Stock....................... (6,145,105)
Net loss for the year.............................. (27,020,261)
------------- -------------
BALANCE AT DECEMBER 31, 1998....................... $ (454,728) $ (52,240,359)
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................ $ (2,922,501) $ (14,041,348) $ (27,020,261)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................... -- 22,296 119,144
Amortization of deferred compensation....................... -- 6,849 101,956
Non-employee stock option compensation expense.............. -- 63,000 --
Stock and warrants issued for services provided............. 816,230 880,582 --
Loss on sale of equipment................................... -- -- 15,425
Changes in operating assets and liabilities:
Accounts receivable....................................... -- (105,865) (466,255)
Inventories............................................... -- (619,905) (2,116,607)
Prepaid and other assets.................................. (9,496) (110,334) (1,181,255)
Accounts payable.......................................... 333,112 314,683 4,518,346
Accrued expenses.......................................... 129,805 329,679 (331,018)
Accrued compensation and benefits......................... -- 644,216 638,240
------------- -------------- --------------
Net cash used in operating activities................... (1,652,850) (12,616,147) (25,722,285)
------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ -- (248,817) (533,394)
Purchases of short-term investments............................. (5,881,025) (16,443,761) (1,947,716)
Proceeds from maturities of short-term investments.............. -- 9,900,000 14,386,081
Proceeds from sale of equipment................................. -- -- 4,000
Restricted cash................................................. -- -- (240,000)
------------- -------------- --------------
Net cash (used in) provided by investing activities..... (5,881,025) (6,792,578) 11,668,971
------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock....................... 8,495,535 23,359,513 9,297,027
Stock issuance costs............................................ (174,169) (1,318,783) (532,423)
Capital contributions........................................... 873,498 -- --
Proceeds from notes payable--shareholder........................ 350,000 -- --
Repayment of notes payable--shareholder......................... (350,000) -- --
Proceeds from notes payable..................................... -- 621,161 937,790
Repayments of capital leases and notes payable.................. -- (66,220) (401,053)
------------- -------------- --------------
Net cash provided by financing activities............... 9,194,864 22,595,671 9,301,341
------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.... 1,660,989 3,186,946 (4,751,973)
Cash and cash equivalents, beginning of period.................... 31,625 1,692,614 4,879,560
------------- -------------- --------------
Cash and cash equivalents, end of period.......................... $ 1,692,614 $ 4,879,560 $ 127,587
------------- -------------- --------------
------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................................... $ 2,081 $ 16,351 $ 96,062
------------- -------------- --------------
------------- -------------- --------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Accretion on preferred stock.................................... $ 75,880 $ 2,435,470 $ 6,145,105
Issuance of warrant for services provided....................... -- 880,582 --
Issuance of stock for services provided......................... 816,230 -- --
Acquisition of property under capital lease..................... -- 22,045 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
WorldGate Communications, Inc. ("WorldGate" or the "Company") provides a new
television based Internet service that delivers the Internet through cable
television systems. The Company was originally organized as a Limited Liability
Company (the "LLC") on March 21, 1995. On December 6, 1996, pursuant to a plan
of merger between WorldGate and the LLC, all assets and liabilities of the LLC
were transferred to the Company at book value. From inception through July 1,
1998, the Company was a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." The Company operates in a single segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares its financial statements on the accrual basis of
accounting. The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. As shown in the financial statements during the year ended December
31, 1998, the Company incurred a loss of $27,020,261 and has an accumulated
deficit of $51,876,639 and cash balance of $367,587. The Company has raised
approximately $7.6 million in preferred stock since December 31, 1998, is
actively pursuing additional debt or equity financing and has received
non-binding commitments from current and new investors and its chairman to
provide additional funding if and when necessary. If appropriate financing is
not obtained, either privately or through this public offering, the Company has
a plan to modify its operations to continue its existence through 1999.
UNAUDITED PRO FORMA BALANCE SHEET
In January and February 1999, the Company sold 697,437 shares of Series C
Convertible Preferred Stock ("Series C Preferred") (464,958 shares of Class A
Common Stock post-split) (see Note 10) for approximately $7.6 million. The board
of directors has authorized the Company to file a Registration Statement with
the Securities and Exchange Commission permitting the Company to sell shares of
Common Stock in an initial public offering ("IPO"). If the IPO is consummated as
presently anticipated, all shares of the Series C Preferred and Series B
Convertible Preferred will automatically convert into an equal number of Class A
Common Stock and Class B Common Shares, respectively, and all shares of Series A
Convertible Preferred Stock will automatically convert into two shares of Class
B Common Stock. All of the outstanding Class B Common Stock will then convert
into Class A Common Stock. The unaudited pro forma balance sheet reflects the
sale of the Series C Preferred shares in 1999 and the subsequent conversion of
Series A, Series B and Series C Preferred shares into Class A Common Stock as if
such sale and conversion had occurred as of December 31, 1998.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-7
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
The Company pledged $240,000 as collateral for its corporate credit card
obligations. The amount has been classified as restricted cash on the balance
sheet as of December 31, 1998.
SHORT-TERM INVESTMENTS
The Company considers all investments to be short-term in nature and intends
to hold such investments until maturity. Investments are stated at cost, which
approximates fair market value.
INVENTORIES
Inventories are stated at the lower of cost or market on an average cost
basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is recorded on the
straight-line method over the estimated useful lives of the related assets. The
Company depreciates furniture and fixtures over seven years; office equipment
over five years; and computer equipment over three years. Leasehold improvements
are capitalized and amortized on the straight-line basis over the shorter of
their useful life or the term of the lease. Maintenance and repairs are expensed
as incurred. When the property or equipment is retired or otherwise disposed of,
related costs and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in operations.
The Company reviews assets for impairment whenever events or changes in
circumstances indicate the carrying value of the asset may not be recoverable. A
determination of impairment (if any) is made based on estimates of undiscounted
future cash flows. For the years ended December 31, 1997 and 1998, there have
been no asset impairments.
REVENUE RECOGNITION
The Company derives its revenue principally from the sale of headend units
and other equipment to cable operators. Revenue is recognized by the Company
when products are shipped and accepted by the customer.
PRODUCT, ENGINEERING AND DEVELOPMENT COSTS
Product, engineering and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs, included in sales and marketing expense, are expensed in
the period incurred. Advertising expenses were $0, $274,040 and $392,513 for the
years ended December 31, 1996, 1997 and 1998, respectively.
INCOME TAXES
From inception through December 5, 1996, the Company was an LLC under the
Internal Revenue Code, whereby taxes are the responsibility of the individual
members. Accordingly, there was no
F-8
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provision for income taxes in the Company's statement of operations. Accumulated
losses through December 5, 1996 totaled approximately $2,180,000. The Company
began operations as a C Corporation on December 6, 1996. The Company has
incurred losses from operations in the period from December 6, 1996 through
December 31, 1996 and for the years ended December 31, 1997 and 1998; therefore,
there is no provision for income taxes in the Company's statement of operations.
Provision for income taxes is determined based on the asset and liability
method. The asset and liability method provides that deferred tax balances are
recorded based on the difference between the tax bases of assets and liabilities
and their carrying amounts for financial reporting purposes. Deferred tax
liabilities or assets at the end of each period are determined using the tax
rate enacted under the current tax law. The measurement of net deferred tax
assets is reduced by the amount of any tax benefits that, based on available
evidence, are not expected to be realized, and a corresponding valuation
allowance is established.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash and cash equivalents
and short-term investments. The Company has its cash and cash equivalents placed
with high quality, creditworthy financial institutions. The balances at such
institutions at December 31, 1998 and periodically throughout the year are in
excess of federally insured limits. As part of its cash management process, the
Company performs periodic evaluation of the relative credit standing of these
institutions. At December 31, 1997, short-term investments were composed of
mortgage-backed securities issued by U.S. government agencies.
Accounts receivable, trade consists of receivables from cable operators. The
Company performs ongoing credit evaluations of its customers' financial
condition and generally requires no collateral.
Accounts receivable from major customers as a percentage of total accounts
receivable were as follows:
<TABLE>
<CAPTION>
CUSTOMER 1997 1998
- ------------------------------------------------------------------------------- ----- -----
<S> <C> <C>
A.......................................................................... -- 31%
B.......................................................................... -- 17%
C.......................................................................... -- 12%
D.......................................................................... 10% 10%
E.......................................................................... -- 10%
F.......................................................................... -- 10%
G.......................................................................... 47% --
H.......................................................................... 43% 8%
--
---
100% 98%
--
--
---
---
</TABLE>
F-9
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Sales to major customers, as a percentage of revenues, were as follows for
each of the years ended December 31:
<TABLE>
<CAPTION>
CUSTOMER 1996 1997 1998
- ---------------------------------------------------------------------- ----- ----- -----
<S> <C> <C> <C>
A................................................................. -- 32% 44%
B................................................................. -- -- 10%
C................................................................. -- 34% --
D................................................................. -- 34% --
-- --
---
100% 54%
-- --
-- --
---
---
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
debt, capital lease obligations and preferred stock. The book value of cash and
cash equivalents, accounts receivable, and accounts payable is considered to be
representative of their fair value because of their short maturities. The
carrying value of short-term investments approximates their fair value.
Management believes that determining a fair value for the Company's convertible
mandatory redeemable preferred stock is impractical due to the closely-held
nature of these instruments.
VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
The Company's growth and future success is substantially dependent upon its
ability to convince cable operators to offer the WORLDGATE Service to their
subscribers. Although a number of large cable operators have begun testing the
WORLDGATE Service, only a limited number have entered into written agreements
with the Company obligating them to offer the service to their subscribers.
The Company is highly reliant on two suppliers of cable boxes. At present
the agreements with these manufacturers do not require them to install the
WORLDGATE technology in their current or next generation cable boxes or prohibit
them from establishing relationships with the Company's competitors. The Company
is working with both manufacturers to develop an integrated product. These
manufacturers have agreed to cooperate with the Company to certify and market
such products.
The Company continues to seek additional capital resources to further the
development of its service, to expand and improve its product line and to fund
its operations.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-10
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees", and related interpretations. Accordingly, compensation
expense for stock options is measured as the excess, if any, of the fair value
of the Company's stock at the date of grant over the amount an individual must
pay to acquire the stock and amortized over the vesting period. All
transactions, with other than employees, in which goods and services are the
consideration received for the issuance of equity instruments, such as stock
options, are expensed based on the fair value of the consideration received or
the fair value of the equity instruments issued, whichever is more reliably
measured. The Company has adopted the disclosure only provisions of Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensations" (SFAS
123) (see Note 7).
PRO FORMA NET LOSS PER COMMON SHARE
Pro forma net loss per common share for the year ended December 31, 1998 is
computed using the weighted average number of shares of Class B Common Stock
outstanding during the period and gives effect to the subsequent conversion of
Series A, Series B, and Series C Preferred shares into common stock upon
effectiveness of the IPO as if such conversion occurred on January 1, 1998 or at
the date of original issuance, if later. The resulting pro forma adjustment
includes an increase in the weighted average shares of 5,684,913 used to compute
basic and diluted net loss per common share for the year ended December 31,
1998. The calculation of diluted net loss per common share excludes potential
common shares as the effect would be antidilutive. Potential common shares are
composed of shares of common stock issuable upon the exercise of stock options
and warrants.
HISTORICAL NET LOSS PER SHARE
The Company computes net loss per common share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per
common share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
common share excludes potential common shares if the effect is antidilutive.
Potential common shares are composed of shares of common stock issuable upon the
exercise of stock options and warrants and upon conversion of Series A, Series
B, and Series C Preferred Stock. Net loss per common share on a historical basis
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
<S> <C> <C> <C>
1996 1997 1998
------------- -------------- --------------
Net loss available to common stockholders..... $ (2,998,381) $ (16,476,818) $ (33,165,366)
Basic and diluted net loss per common share... $ (0.33) $ (1.81) $ (3.64)
------------- -------------- --------------
------------- -------------- --------------
Weighted average shares outstanding-- basic
and diluted................................. 9,100,801 9,100,801 9,100,801
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
F-11
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position No. 98-5 (SOP 98-5), "Reporting on the
Costs of Start-Up Activities." SOP 98-5 generally requires costs of start-up
activities to be expensed instead of being capitalized and amortized and is
required to be adopted no later than Janaury 1, 1999. The Company does not
expect the adoption of SOP 98-5 to have a material effect on its results of
operations and financial condition.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1 provides,
among other things, guidance for determining whether computer software is for
internal use and when the cost related to such software should be expensed as
incurred or capitalized and amortized. SOP 98-1 is required to be applied
prospectively and adopted no later than January 1, 1999. The Company does not
expect the adoption of SOP 98-1 to have a material effect on its results of
operations, financial position or cash flows.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS 130), which is effective for years
beginning after December 15, 1997. This statement establishes standards for the
reporting and display of comprehensive income and its components. Comprehensive
income is defined to include all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
adopted SFAS 130 in 1998; however, as of December 31, 1998, there were no
components of comprehensive income for disclosure.
RECLASSIFICATIONS
Certain amounts have been reclassified from previous years to conform with
the 1998 presentation.
3. INVENTORIES
Inventories as of December 31, 1997 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Raw material........................................................ $ 148,629 $ 991,670
Work-in-progress.................................................... 179,205 16,461
Finished goods...................................................... 292,071 1,728,381
---------- ------------
$ 619,905 $ 2,736,512
---------- ------------
---------- ------------
</TABLE>
F-12
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and
1998:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Computer equipment.................................................... $ 50,893 $ 184,502
Office equipment...................................................... 11,299 203,646
Furniture and fixtures................................................ 165,315 323,095
Leasehold improvements................................................ 21,310 46,969
Capital leases:
Equipment........................................................... 22,045 22,045
---------- ----------
270,862 780,257
Less accumulated depreciation and amortization:
Property and equipment.............................................. (18,626) (128,787)
Capital leases...................................................... (3,670) (8,079)
---------- ----------
Property and equipment, net........................................... $ 248,566 $ 643,391
---------- ----------
---------- ----------
</TABLE>
5. FINANCING AGREEMENT
During 1997, the Company entered into a $1,000,000 equipment facility of
which $429,749 remained available at December 31, 1997. During 1998, the amount
of the equipment facility was increased to $2,000,000, of which $419,044
remained available at December 31, 1998. The weighted average interest rate on
the outstanding notes payable borrowings at December 31, 1997 and 1998 was
8.89%.
Notes payable are summarized as follows:
<TABLE>
<CAPTION>
1997 1998
---------- ------------
<S> <C> <C>
Notes payable....................................................... $ 570,251 $ 1,111,357
Less: current maturities............................................ 182,445 515,798
---------- ------------
Total long-term debt............................................ $ 387,806 $ 595,559
---------- ------------
---------- ------------
</TABLE>
At December 31, 1998, the installments of the notes payable maturing in each
of the following years were: 1999--$515,798, 2000--$490,521 and 2001--$105,038.
The notes payable are collateralized by certain equipment, furniture and
fixtures.
F-13
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The significant components of deferred tax assets at December 31, 1997 and
1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------ -------------
<S> <C> <C>
Federal tax loss carryforward.................................... $ 4,136,503 $ 12,678,426
State tax loss carryforward...................................... 999,000 999,000
Property and equipment........................................... 838,625 1,107,971
Research and experimentation credit.............................. 99,327 173,174
Section 263(A) adjustment........................................ -- 33,819
Officers' compensation........................................... -- 26,891
Compensation on non-qualified stock options...................... -- 58,689
Warrant issuance................................................. 357,428 --
------------ -------------
6,430,883 15,077,970
Less: valuation allowance........................................ (6,430,883) (15,077,970)
------------ -------------
$ -- $ --
------------ -------------
------------ -------------
</TABLE>
A valuation allowance was established against the Company's net deferred tax
asset due to the Company's lack of earnings history and, accordingly, the
uncertainty as to the realizability of the asset.
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $38,288,000 for federal tax purposes, with $735,000 expiring in
2011, $12,008,000 expiring in 2012 and $25,545,000 expiring in 2018 if not
utilized. The net operating loss carryforward for state tax purposes is
approximately $10,000,000, which will expire in 2009. These carryforwards may be
applied as a reduction to future taxable income of the Company, if any. The
state net operating loss carryforwards are limited by state tax law to a maximum
utilization of $1,000,000 per year. The Company also has research and
experimentation credit carryforwards of approximately $173,000, with $11,500
expiring in 2011, $87,500 expiring in 2012 and $74,000 expiring in 2013. The
Company's ability to utilize its net operating loss carryforwards and credit
carryforwards may be subject to annual limitations as a result of prior or
future changes in ownership and state tax law. The IPO as presently contemplated
will cause such a change.
7. STOCKHOLDERS' DEFICIT
COMMON STOCK
On December 6, 1996, the date of the merger of WorldGate and the LLC, the
Company allocated 9,100,801 shares of common stock to the shareholders in the
LLC and certain key employees, who had been granted profit interests. As a
result of the conversion of such profit interests to equity, the Company
recognized $816,230 in compensation expense.
On April 27, 1998, the board of directors authorized an amendment to the
Company's Articles of Incorporation creating Class A and Class B Common Stock,
each having 27,608,000 shares authorized. Each outstanding share of common stock
was reclassified as one share of Class B Common Stock. Class A and B Common
Stock have one and five votes per share, respectively.
On July 13, 1998, the board of directors further amended the Articles of
Incorporation to increase the number of authorized shares of Class A Common
Stock to 50,000,000 shares and the number of authorized shares of preferred
stock to 13,500,000 shares.
F-14
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
CONVERTIBLE MANDATORY REDEEMABLE PREFERRED STOCK
The Company has authorized 13,500,000 shares of $0.01 par value preferred
stock of which 2,752,111, 3,270,760 and 3,181,819 shares have been designated as
Series A Convertible Preferred Stock ("Series A Preferred"), Series B
Convertible Preferred Stock ("Series B Preferred") and Series C Convertible
Preferred Stock ("Series C Preferred"), respectively (collectively the
"Preferred Stocks").
In December 1996 the Company sold 1,933,000 shares of Series A Preferred
(2,577,333 shares of Class B Common Stock, post-split) for $4.395 per share for
$8,321,366, net of $174,169 of offering expenses. In 1997, the Company completed
its Series A Preferred sale in which it issued an additional 819,111 shares
(1,092,148 shares of Class B Common Stock, post-split) for $3,400,733, net of
$199,260 of offering expenses.
In December 1997, the Company sold 2,783,031 shares of Series B Preferred
(1,855,354 shares of Class B Common Stock, post-split) at $7.10 per share for
$18,640,017, net of $1,119,503 of offering expenses.
In September through December 1998, the Company sold 832,277 shares of
Series C Preferred (554,851 shares of Class A Common Stock, post-split) for
$11.00 per share for $8,622,604, net of $532,423 of offering expenses. The
Series B and C Preferred provides certain anti-dilutive provisions that may be
triggered by an initial public offering.
All holders of outstanding shares of the Preferred Stocks have the right to
convert their shares into common stock at any time. Each share of Series A
Preferred is initially convertible into two shares of Class B Common Stock and
each share of Series B Preferred and Series C Preferred is initially convertible
into one share of Class B Common Stock and Class A Common Stock, respectively.
Each share of the Preferred Stocks will be automatically converted into shares
of common stock at the then applicable conversion rate and price, upon the
earlier of (1) completion by the Company of a qualified (as defined)
underwritten public offering of common stock or (2) the conversion date selected
by the holders of a majority of the outstanding shares of each Series A, Series
B and Series C Preferred Stock.
The redemption price of the shares corresponds to the original purchase
price of each share plus any declared and unpaid dividends, or if the Company
fails to meet certain financial performance goals, the original purchase price
of each share plus interest at 15% per annum. The Preferred shareholders are
permitted to redeem their shares commencing December 2000 provided that the
Company shall not be required to redeem more than 50% of each of the Preferred
Stocks during the twelve-month period commencing December 2000. The Company is
accreting the mandatory redemption amount, at the rate of 15% compounded per
annum, such that the carrying value of the preferred stock will equate to the
redemption amount at the time of redemption. The difference between the
redemption amount and the fair value of the preferred stock at the date of issue
is being amortized from the date of issuance assuming the preferred stockholders
redeem 50% of their shares in December 2000 and the balance in December 2001.
For the year ended December 31, 2000, the Company may be required to redeem up
to 1,376,056 Series A Preferred shares for $11,618,988, up to 1,401,516 Series B
Preferred shares for $16,757,459 and up to 416,139 Series C Preferred shares for
$7,662,786. At December 31, 2001, the Company may be required to redeem all the
Series A, Series B and Series C Preferred shares for $23,237,976, $33,514,917
and $15,325,572, respectively.
F-15
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
The holders of the Preferred Stocks have voting rights on a converted basis
equivalent to those of common stockholders on most matters. However, the
approval of a majority of the Series A, Series B and Series C Preferred
stockholders is required for certain transactions. The Series A, Series B and
Series C Preferred stockholders fully participate in any dividends declared by
the board of directors of the Company at the rate of $0.35, $0.57 and $0.88,
respectively, per share per annum. These dividends are non-cumulative. No
dividends have been declared through December 31, 1998.
Upon any liquidation, dissolution, or winding up of the Company, liquidation
proceeds will be distributed: (1) first, on a PARI PASSU basis, to the holders
of Series C Preferred at $11.00 per share plus any unpaid dividends, Series B
Preferred at $7.10 per share plus any unpaid dividends and to the holders of
Series A Preferred at $4.395 per share plus any unpaid dividends, (2) second to
the holders of common stock in an amount equal to $2 million and (3) equally
thereafter. The liquidation value of each of the Preferred Stocks at December
31, 1997 and 1998 is equal to the respective carrying amounts on the balance
sheet.
The agreements with the holders of the Preferred Stocks contain certain
provisions which, among other things, restrict borrowings and changes in capital
structure and ownership. Events of noncompliance under these provisions entitle
the holders of these shares to the right of an immediate voluntary redemption.
In January and February 1999, the Series A, Series B and Series C Preferred
stockholders agreed to waive certain rights under their respective stock
agreements.
WARRANTS
In November 1997, the Company issued a warrant to purchase 394,880 shares of
Series B Preferred (263,253 shares of Class B Common Stock, post-split) at $7.10
per share which expires June 30, 2002 to a strategic investor under the terms of
a master affiliation agreement. As a result of the issuance of the warrant, the
Company recorded approximately $881,000 as marketing expense which was the
estimated fair market value of the warrant at that time.
Also, in connection with the Series B Preferred private placement, the
underwriter received warrants to purchase 60,474 and 12,375 shares of Series B
Preferred (40,316 and 8,250 shares of Class B Common Stock, post-split) at $7.10
per share which expire in November and December 2002, respectively.
STOCK OPTION PLAN
In December 1996, the Company adopted the 1996 Stock Option Plan ("1996
Plan"), as amended. This plan provides for the granting of stock options to
officers, directors, employees and consultants. Grants under this plan may
consist of options intended to qualify as incentive stock options ("ISOs"), or
nonqualified stock options that are not intended to so qualify ("NQSOs"). The
option price of any ISO will not be less than the fair market value on the date
the option is granted (110% of fair value in certain instances). The option
price of a NQSO may be greater than, equal to, or less than the fair market
value on the date the option is granted. The 1996 Plan authorizes a maximum of
933,333 shares of common stock.
The Plan is administered by a committee of the board of directors. The
committee determines the term of each option, provided, however, that the
exercise period may not exceed ten years from the
F-16
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
date of grant, and for ISOs, in certain instances, may not exceed five years.
The options granted under this plan vest ratably over a four-year period from
the date of grant.
Compensation expense of approximately $109,000 and $455,000 is being
recognized, over the four-year vesting period for certain options which were
granted to employees in 1997 and 1998, respectively, at below the estimated fair
market value at the time of grant, to acquire 87,667 and 213,343 shares of
common stock, respectively. Compensation expense of approximately $7,000 and
$102,000 was recognized in 1997 and 1998, respectively. Also, compensation
expense of approximately $63,000 was recognized in 1997 for stock options
granted to non-employees in connection with consulting services provided.
If compensation expense had been determined based on the fair value of the
options at the grant dates for those options for which no compensation expense
has been recognized, consistent with the method of SFAS 123, the Company's net
loss and loss per share would have been:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C> <C>
Net loss available to
common stockholders: As reported................... $ (16,476,818) $ (33,165,366)
Pro forma..................... $ (16,493,691) $ (33,241,555)
Net loss per common share:
basic and diluted: As reported................... $ (1.81) $ (3.64)
Pro forma..................... $ (1.81) $ (3.65)
</TABLE>
Such pro forma disclosures may not be representative of future compensation
expense because options vest over several years and additional grants are made
each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes minimum value option valuation model. The following
weighted-average assumptions were used for grants in 1997 and 1998,
respectively: expected volatility of 0% and 0%; risk-free interest rates of 6.2%
and 5.4%; dividend yield of 0% and 0%; and expected lives of 5 and 5.91 years.
The weighted-average fair value of the options granted during the year was
$0.615 and $3.36 per option at December 31, 1997 and 1998, respectively.
F-17
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' DEFICIT (CONTINUED)
A summary of the Company's stock plan is presented below:
<TABLE>
<CAPTION>
STOCK WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
--------- -----------------
<S> <C> <C>
Outstanding, December 31, 1996................................... -- --
Granted.......................................................... 435,000 $ 2.26
Exercised........................................................ -- --
Cancelled/forfeited.............................................. -- --
---------
Outstanding, December 31, 1997................................... 435,000 2.26
Granted.......................................................... 219,643 4.50
Exercised........................................................ -- --
Cancelled/forfeited.............................................. (13,300) 3.54
---------
Outstanding, December 31, 1998................................... 641,343 $ 3.00
---------
---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
STOCK OPTIONS
STOCK OPTIONS OUTSTANDING
--------------------------------------- EXERCISABLE
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------------------------------------------------ --------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$0.75--$1.50.......................................... 87,333 7.5 $ 1.245 21,833 $ 1.245
$1.51--$2.25.......................................... 297,000 7.8 2.22 75,667 2.22
$2.26--$4.50.......................................... 257,010 8.9 4.50 11,250 4.50
--------- ----------- ---------- -----------
641,343 8.1 $ 3.00 108,750 $ 2.25
--------- ----------
--------- ----------
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In November 1997, the Company approved and adopted an Employee Stock
Purchase Plan (the "ESPP") to provide employees, directors, officers,
consultants or advisors of the Company the ability to purchase Series B
Preferred at $7.10 per share. During 1998, 20,000 shares of Series B Preferred
(13,333 shares of Class B Common Stock, post-split) were sold for $142,000.
8. COMMITMENTS AND CONTINGENCIES
SIGNIFICANT AGREEMENTS
The Company has entered into various agreements in which the Company has
obtained the right to use and distribute licensed software and certain
proprietary technology as incorporated into the WORLDGATE Service until
September 2002 for total minimum subscription fees of $550,000. For the years
ended December 31, 1997 and 1998, approximately $110,000 and $208,000 has been
expensed, respectively. In addition, in one of the agreements, the Company will
be required to pay an annual maintenance service fee of $0.02 per subscriber
over two million subscribers.
F-18
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEGAL
The Company is a party to various pending legal actions. The Company does
not expect that the ultimate resolution of pending legal matters in future
periods will have a material effect on its financial position or cash flows, but
it could have a material effect on its results of operations.
LEASES
The Company has entered into operating leases for its office facilities and
certain equipment.
The future minimum rental commitments under capital leases and operating
leases for each fiscal year ended December 31 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
FISCAL YEAR LEASES LEASES
- --------------------------------------------------------------------- --------- ------------
<S> <C> <C>
1999............................................................... $ 5,699 $ 757,000
2000............................................................... 5,699 1,046,000
2001............................................................... 5,699 921,000
2002............................................................... 2,354 891,000
2003............................................................... -- 909,000
Thereafter......................................................... -- 5,301,000
--------- ------------
Total minimum lease payments....................................... 19,451 $ 9,825,000
------------
------------
Less amounts representing interest................................. (3,506)
---------
Present value of net minimum lease payments (including $4,210
currently payable)............................................... $ 15,945
---------
---------
</TABLE>
Total rent expense for operating leases for the years ended December 31,
1997 and 1998 amounted to approximately $299,497 and $554,510, respectively.
9. RELATED PARTY TRANSACTIONS
In 1997, the Company entered into an agreement with a cable operator who is
an investor. Revenues recognized from this investor were approximately $0,
$46,000 and $451,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Accounts receivable amounted to approximately $11,000 and $176,000
at December 31, 1997 and 1998, respectively.
In 1997 and 1998, the Company entered into agreements with investors to
provide engineering and development support. As a result of these agreements,
the Company has expensed approximately $14,000, $1,033,000 and $3,072,000 for
the years ended December 31, 1996, 1997 and 1998, respectively. An additional
$1,000,000 of work remains to be funded and performed under these contracts.
Accounts payable amounted to approximately $93,000 and $18,000 as of December
31, 1997 and 1998, respectively. Revenues recognized from these investors for
the year ended December 31, 1998 amounted to approximately $99,000.
In 1998, the Company entered into a leasing arrangement for a building with
an entity formed by non-employee investors. Included in Deposits and other is
$1,000,000 related to this lease.
During 1996, the Company borrowed approximately $350,000 from its Chairman.
The note bore interest at 7% and was repaid in December 1996.
F-19
<PAGE>
WORLDGATE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
In January and February 1999, the Company sold 697,437 shares of Series C
Preferred (464,958 shares of Class A Common Stock, post-split) for $11.00 per
share for approximately $7,600,000. Upon completion of the IPO as presently
anticipated, these shares will convert into shares of Class A Common Stock.
In January 1999, the board of directors approved a 2-for-3 reverse stock
split effective immediately prior the IPO. All common stock share data have been
retroactively adjusted to reflect this change.
F-20
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Cautionary Note Regarding Forward-Looking
Statements................................... 8
Risk Factors................................... 8
Use of Proceeds................................ 19
Dividend Policy................................ 19
Capitalization................................. 20
Dilution....................................... 21
Selected Financial Information................. 22
Management's Discussion and Analysis
of Financial Condition and
Results of Operations........................ 23
Business....................................... 29
Management..................................... 48
Certain Transactions........................... 53
Principal Stockholders......................... 55
Description of Capital Stock................... 57
Shares Eligible for Future Sale................ 59
Underwriting................................... 62
Legal Matters.................................. 63
Experts........................................ 63
Additional Information......................... 64
Index to Financial Statements.................. F-1
</TABLE>
[LOGO]
GERARD KLAUER MATTISON & CO., INC.
JEFFERIES & COMPANY, INC.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (other
than underwriting discounts and commissions and underwriters' non-accountable
expense allowance):
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 17,904
NASD filing fee................................................... 6,940
Nasdaq filing fee................................................. 95,000
Printing and engraving expenses................................... 175,000
Legal fees and expenses........................................... 200,000
Accounting fees and expenses...................................... 150,000
Blue Sky fees and expenses (including legal fees)................. 10,000
Transfer agent and registrar fees and expenses.................... 4,000
Miscellaneous..................................................... 41,156
---------
Total............................................................. $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The registrant's Certificate of Incorporation, as amended, currently states
that a director of the registrant shall have no personal liability to the
registrant or its stockholders for monetary damages for breach of fiduciary duty
as a director except to the extent that Section 102(b)(7) (or any successor
provision) of the Delaware General Corporation Law, as amended from time to
time, expressly provides that the liability of a director may not be eliminated
or limited. No amendment or repeal of this provision shall apply to or have any
effect on the liability or alleged liability of any director of the registrant
for or with respect to any acts or omissions of such director occurring prior to
such amendment or repeal.
The registrant's Bylaws require the registrant to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director or
officer of the registrant, or is or was serving while a director or officer of
the registrant at its request as a director, officer, employee, agent, fiduciary
or other representative of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines, excise taxes and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding to the full extent permissible under Delaware law. Any person
claiming indemnification as provided in the Bylaws shall be entitled to advances
from the registrant for payment of the expenses of defending actions against
such person in the manner and to the full extent permissible under Delaware law.
On the request of any person requesting indemnification under such provisions,
the Board of Directors of the registrant or a committee thereof shall determine
whether such indemnification is permissible or such determination shall be made
by independent legal counsel if the Board or committee so directs or if the
Board or committee is not empowered by statute to make such determination. The
indemnification and advancement of expenses provided by the Bylaws shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any insurance or other agreement,
vote of shareholders or disinterested directors or otherwise,
II-1
<PAGE>
both as to actions in their official capacity and as to actions in another
capacity while holding an office, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such person. The registrant shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the registrant or is or was serving at
its request as a director, officer, employee, agent, fiduciary or other
representative of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the registrant would have the power to indemnify
him against such liability under the provisions of the Bylaws. The duties of the
registrant to indemnify and to advance expenses to a director or officer
provided in the Bylaws shall be in the nature of a contract between the
registrant and each such director or officer, and no amendment or repeal of any
such provision of the Bylaws shall alter, to the detriment of such director or
officer, the right of such person to the advancement of expenses or
indemnification related to a claim based on an act or failure to act which took
place prior to such amendment, repeal or termination. Delaware law also permits
indemnification in connection with a proceeding brought by or in the right of
the registrant to procure a judgment in its favor. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the registrant pursuant to the foregoing
provisions, the registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in that Securities Act and is therefore unenforceable. The
registrant has directors and officers liability insurance.
The Underwriting Agreement provides that the underwriters are obligated,
under some circumstances, to indemnify directors, officers and controlling
persons of the registrant against some liabilities, including liabilities under
the Act. Reference is made to Section of the form of Underwriting Agreement
which will be filed by amendment as Exhibit 1.1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, the
registrant has issued the following securities that were not registered under
the Act:
Since its inception, the Company has sold to employees and various
institutional and other accredited investors: (1) an aggregate of 9,100,801
shares of Class B Common Stock, (2) an aggregate of 2,752,111 shares of Series A
Preferred Stock at a price of $4.395 per share, (3) an aggregate of 2,803,031
shares of Series B Preferred Stock at a price of $7.10 per share, (4) warrants
to purchase an aggregate of 467,729 shares of Series B Preferred Stock at an
exercise price of $7.10 per share, and (5) an aggregate of 1,529,714 shares of
Series C Preferred Stock at a price of $11 per share. All of such sales were
made under the exemption from registration provided under Section 4(2) of the
Act.
Pursuant to the Company's Stock Option Plan, as amended, the Company has
granted options to purchase a total of 680,410 shares of Class B Common Stock to
its employees and some other persons during the past three fiscal years at a
weighted average exercise price of $3.00 per share. For a more detailed
description of the Company's Stock Option Plan, see "Management--Stock Option
Plan" in this registration statement. In granting the options and selling the
underlying securities upon exercise of the options, the Company is relying upon
exemptions from registration set forth in Rule 701 and Section 4(2) of the Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.#
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.#
3.2 Form of Amended and Restated By-laws of the Company.#
5.1 Opinion of Drinker Biddle & Reath LLP.#
10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as amended by
First Amendment to Lease Agreement dated December 7, 1998 between WorldGate and Balanced Capital
LLC, as further amended by Second Amendment to Lease Agreement dated December 17, 1998 between
WorldGate and Balanced Capital LLC.*
10.2 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and WorldGate, as
amended by First Amendment to Agreement of Lease dated October 24, 1997 between Glenview
Corporate Center and WorldGate.*
10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and WorldGate.*
10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta, Inc.#+
10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General Instrument
Corporation.#+
10.6 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing
Incorporated and WorldGate, as amended by Amendment No. 1 to Senior Loan and Security Agreement
No. 0098 dated June 18, 1998 between Phoenix Leasing Incorporated and WorldGate.*
10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc. ("Charter") and
WorldGate.#+
10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.*
10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.#+
10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable, Inc.#+
10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV, Inc.#+
10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.#+
10.13 Affiliation Agreement (undated), between WorldGate and City of Tacoma, Tacoma Public Utilities,
d/b/a Click!Network.#+
10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to 1996 Stock
Option Plan dated June 12, 1998.*
10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.*
10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among WorldGate and
the stockholders identified therein.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1).#
24.1 Power of Attorney (included on signature page).*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
# To be filed by amendment.
+ Confidential Treatment Requested. The entire agreement will be filed
separately with the Securities and Exchange Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All information for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission is either included in the
financial statements or is not required under the related instructions or is
inapplicable, and therefore has been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) It will provide to the underwriters at the closing specified in the
underwriting agreements certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Bensalem, Pennsylvania on February 8,
1999.
WORLDGATE COMMUNICATIONS, INC.
BY: /S/ HAL M. KRISBERGH
-----------------------------------------
Hal M. Krisbergh
CHIEF EXECUTIVE OFFICER
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hal M. Krisbergh, Randall J. Gort and David A.
Dill or each of them acting alone, his or her true and lawful attorney-in-fact
and agent, with full power of substitution and revocation, for him or her and in
his or her name, place and stead, in any and all capacities, to sign (i) any and
all amendments (including post-effective amendments) to this registration
statement and to file the same with all exhibits thereto, and other documents in
connection therewith and (ii) any registration statement and any and all
amendments thereto, relating to the offer covered hereby filed pursuant to Rule
462(b) under the Securities Act of 1933, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done as fully to all intents and purposes as he or she might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or his or their substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLES DATE
- ------------------------------ --------------------------- -------------------
Chairman and Chief
/s/ HAL M. KRISBERGH Executive Officer,
- ------------------------------ Director (Principal February 8, 1999
Hal M. Krisbergh Executive Officer)
/s/ DAVID A. DILL Chief Financial Officer
- ------------------------------ (Principal Financial and February 8, 1999
David A. Dill Accounting Officer)
/s/ DAVID E. WACHOB Vice President and General
- ------------------------------ Manager, Director February 8, 1999
David E. Wachob
/s/ ALAN GERRY Director
- ------------------------------ February 5, 1999
Alan Gerry
/s/ MARCIA J. HOOPER Director
- ------------------------------ February 5, 1999
Marcia J. Hooper
/s/ RONALD A. WALTER Director
- ------------------------------ February 3, 1999
Ronald A. Walter
/s/ THOMAS G. BAXTER Director
- ------------------------------ February 8, 1999
Thomas G. Baxter
/s/ GRAHAM PATTISON Director
- ------------------------------ February 8, 1999
Graham Pattison
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- ----------------- --------------------------------------------------------------------------------------- -----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.#
3.1 Form of Amended and Restated Certificate of Incorporation of the Company.#
3.2 Form of Amended and Restated By-laws of the Company.#
5.1 Opinion of Drinker Biddle & Reath LLP.#
10.1 Lease Agreement dated October 7, 1998 between WorldGate and Balanced Capital LLC, as
amended by First Amendment to Lease Agreement dated December 7, 1998 between WorldGate
and Balanced Capital LLC, as further amended by Second Amendment to Lease Agreement
dated December 17, 1998 between WorldGate and Balanced Capital LLC.*
10.2 Agreement of Lease dated January 14, 1997 between Glenview Corporate Center and
WorldGate, as amended by First Amendment to Agreement of Lease dated October 24, 1997
between Glenview Corporate Center and WorldGate.*
10.3 Agreement of Lease dated November 26, 1997 between Glenview Corporate Center and
WorldGate*
10.4 Development Agreement dated October 15, 1998 between WorldGate and Scientific-Atlanta,
Inc.#+
10.5 Memorandum of Understanding dated September 2, 1998 between WorldGate and General
Instrument Corporation.#+
10.6 Senior Loan and Security Agreement No. 0098 dated July 15, 1997 between Phoenix Leasing
Incorporated and WorldGate, as amended by Amendment No. 1 to Senior Loan and Security
Agreement No. 0098 dated June 18, 1998 between Phoenix Leasing Incorporated and
WorldGate.*
10.7 Master Agreement dated November 7, 1997 between Charter Communications, Inc.
("Charter") and WorldGate.#+
10.8 Warrant Agreement dated November 7, 1997 between Charter and WorldGate.*
10.9 Affiliation Agreement dated November 7, 1997 between Charter and WorldGate.#+
10.10 Affiliation Agreement dated December 8, 1998 between WorldGate and Prestige Cable,
Inc.#+
10.11 Affiliation Agreement dated October 19, 1998 between WorldGate and Massillon CableTV,
Inc.#+
10.12 Affiliation Agreement dated September 25, 1998 between WorldGate and TVCable, S.A.#+
10.13 Affiliation Agreement (undated), between WorldGate and City of Tacoma, Tacoma Public
Utilities, d/b/a Click!Network.#+
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION PAGE NO.
- ----------------- --------------------------------------------------------------------------------------- -----------
<C> <S> <C>
10.14 Amended and Restated 1996 Stock Option Plan, as further amended by First Amendment to
1996 Stock Option Plan dated June 12, 1998.*
10.15 Agreement dated June 15, 1998 between WorldGate and Thomas R. Baxter.*
10.16 First Amended and Restated Stockholders' Agreement dated September 2, 1998 among
WorldGate and the stockholders identified therein.*
23.1 Consent of PricewaterhouseCoopers LLP.*
23.2 Consent of Drinker Biddle & Reath LLP (to be included in Exhibit 5.1).#
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.*
</TABLE>
- ------------------------
* Filed herewith.
# To be filed by amendment.
+ Confidential Treatment Requested. The entire agreement will be filed
separately with the Securities and Exchange Commission.
II-7
<PAGE>
Exhibit 10.1
AGREEMENT OF LEASE
BETWEEN
BALANCED CAPITAL LLC
Landlord
AND
WORLDGATE COMMUNICATIONS, INC.
Tenant
<PAGE>
TABLE OF CONTENTS
LEASE
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. REFERENCE DATA 1
2. DEMISE 4
3. TERM 4
4. OPTION TO RENEW - HOLDING OVER 5
5. RENT 6
6. OPERATING EXPENSE 6
7. AS IS 13
8. ALTERATIONS OR IMPROVEMENTS BY TENANT 13
9. PERMITTED USES 13
10. BUILDING OPERATION AND SERVICES; ELECTRICITY 14
11. INTERRUPTION OF SERVICES 15
12. REPAIRS 15
13. INTENTIONALLY OMITTED 16
14. QUIET ENJOYMENT 16
15. LANDLORD'S RIGHT OF ENTRY 16
16. SURRENDER OF LEASED PREMISES 17
17. MISCELLANEOUS COVENANTS 17
18. RULES AND REGULATIONS 18
19. PERFORMANCE OF COVENANTS 19
20. EMINENT DOMAIN 19
21. CASUALTY DAMAGE 20
22. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION 22
23. MORTGAGEE AND OTHER AGREEMENTS 23
24. SUBORDINATION AND ATTORNMENT 23
25. ASSIGNMENT AND SUBLETTING 24
26. DEFAULT 25
27. LANDLORD'S REMEDIES 26
28. LEGAL FEES AND OTHER COSTS 29
29. LATE CHARGE 30
30. SUCCESSORS AND ASSIGNS 30
31. WAIVERS 30
32. WAIVER OF TRIAL BY JURY 30
33. SEVERABILITY 30
34. NOTICES; PAYMENT OF RENTS 30
35. AMENDMENT AND MODIFICATIONS 32
36. SECURITY DEPOSIT; OPTION TO USE LETTER OF CREDIT 32
</TABLE>
<PAGE>
<TABLE>
<S> <C>
37. ENVIRONMENTAL MATTERS 33
38. BROKERS 36
39. FINANCIAL STATEMENTS 36
40. PARKING 36
41. OPTION TO PURCHASE. 36
42. HEADINGS AND TERMS 40
43. GOVERNING LAW 40
44. PRESENT LEASE 40
45. SIGNS 40
46. MEMORANDUM OF LEASE 41
47. ANTENNA(S) INSTALLATION 41
48. LANDLORD'S WAIVER 42
49. MOVING COSTS 42
50. LANDLORD'S CONDITION 42
</TABLE>
EXHIBITS
- --------
Exhibit "A" Rules and Regulations
Exhibit "B" Tenant Estoppel Letter
Exhibit "C" Janitorial Specifications
Exhibit "D" Form of Landlord's Waiver
Exhibit "E" Representations from Seller in Sale Agreement
<PAGE>
Lease Dated: October 7, 1998
1. REFERENCE DATA
Any reference in this Lease to the following subjects shall
incorporate therein the data stated for the subject(s) in this Section:
LANDLORD: Balanced Capital LLC
LANDLORD'S ADDRESS: 580 Virginia Drive, Suite 202
Fort Washington, Pennsylvania 19034
TENANT: WorldGate Communications, Inc.
TENANT'S ADDRESS: Glenview Corporate Center
3220 Tillman Drive, Suite 300
Bensalem, Pennsylvania 19020
LEASED PREMISES: Building known as 3190 Tremont Avenue in Bensalem,
Bucks County, PA, provided that until possession of
entire Building has been delivered to Tenant, the
term "Leased Premises" shall refer only to that
portion of the Building which has been delivered.
RENTABLE AREA OF LEASED PREMISES:72,000 Rentable Square Feet, anticipated to be
delivered in two phases as described below. Within 15 days after execution of
this Lease, the Building is to be measured according to BOMA standards and
methodology; if the actual rentable square feet varies by 1,000 feet or more,
Rent and other charges shall be revised to reflect actual rentable square
footage, and references in this Lease to 72,000 shall be deemed amended to refer
to the actual square footage of the Building.
LEASE TERM: Ten (10) years plus the partial year ("Commencement Partial Year")
beginning when the first space is delivered and ending on the last day of the
calendar month in which the Last Delivery Date occurs (or if the Last Delivery
Date is the first day of a calendar month, then the Commencement Partial Year
shall end on the last day of the calendar month preceding Last Delivery Date).
COMMENCEMENT DATE: February 15, 1999 as to at least 40,000 rentable square feet,
and July 1, 1999 as to the remainder of the Building.
LAST DELIVERY DATE: July 1, 1999 or such other date as the parties may agree.
<PAGE>
ANNUAL FIXED RENT: From the Commencement Date through the last day of the
Commencement Partial Year, Annual Fixed Rent shall be $12.00 per square foot of
space delivered. For the balance of the Lease Term, Annual Fixed Rent shall be
as follows:
<TABLE>
<CAPTION>
Annual Monthly
<S> <C> <C>
Lease Year 1 (7/1/1999 through 6/30/2000) 864,000. 72,000
Lease Year 2 (7/1/2000 through 6/30/2001) 882,000. 73,500
Lease Year 3 (7/1/2001 through 6/30/2002) 882,000. 73,500
Lease Year 4 (7/1/2002 through 6/30/2003) 900,000. 75,000
Lease Year 5 (7/1/2003 through 6/30/2004) 918,000. 76,500
Lease Year 6 (7/1/2004 through 6/30/2005) 936,000. 78,000
Lease Year 7 (7/1/2005 through 6/30/2006) 954,000. 79,500
Lease Year 8 (7/1/2006 through 6/30/2007) 972,000. 81,000
Lease Year 9 (7/1/2007 through 6/30/2008) 990,000. 82,500
Lease Year 10 (7/1/2008 through 6/30/2009) 990,000. 82,500
</TABLE>
The dates used for each Lease Year assume that the balance of the Building is
delivered in June 1999 or on July 1, 1999. If delivery of the balance of the
Building is not in June 1999 or on July 1, 1999, then the rent change dates
listed above shall be adjusted to reflect actual Lease Years.
If Tenant exercises the applicable renewal options pursuant to Section 4(a),
Annual Fixed Rent for the Lease Years of the option periods shall be as follows:
<TABLE>
<CAPTION>
Annual Monthly
<S> <C> <C>
Lease Year 11 990,000. 82,500
Lease Year 12 999,900. 83,325
Lease Year 13 1,009,899. 84,158
Lease Year 14 1,019,998. 85,000
Lease Year 15 1,030,198. 85,850
Lease Year 16 1,040,500. 86,708
Lease Year 17 1,050,905. 87,575
Lease Year 18 1,061,413. 88,451
Lease Year 19 1,072,027. 89,336
Lease Year 20 1,082,748. 90,229
</TABLE>
OPERATING EXPENSE ESTIMATE: $324,000 per year ($4.50 per square foot), subject
to adjustment as provided in Section 6 below.
LEASE YEAR: "Lease Year" shall mean the 12 month period beginning on the Last
Delivery Date if the Last Delivery Date is the first day of a calendar month, or
beginning on the first day of the next succeeding calendar month if the Last
Delivery Date is not the first day of a month ("Lease Year 1"), and each
succeeding 12 month period, provided however that the Commencement Partial Year
shall be part of Lease Year 1.
2
<PAGE>
TENANT'S PROPORTIONATE SHARE: 100.00% following delivery of entire Building;
until delivery of entire Building, calculated by dividing rentable square feet
delivered by 72,000
PERMITTED USES: general office, together with associated incidental uses
including miscellaneous assembly and testing of electronic parts, Channel
HyperLinking and WorldGate Service Operations.
SECURITY DEPOSIT: $1,026,000 until the last day of the sixth month of Lease Year
2, then reducing as follows:
990,000 until the last day of the sixth month of Lease Year 3;
864,000 until the last day of the sixth month of Lease Year 4;
750,000 until the last day of the sixth month of Lease Year 7
(i.e., for 3 years);
612,000 until the last day of the sixth month of Lease Year 8;
432,000 until the last day of the sixth month of Lease Year 9;
288,000 until the last day of the sixth month of Lease Year 10
ADVANCE RENTAL PAYMENT: $-0-
BROKER: Kelley & Associates, Inc.
LANDLORD:
BALANCED CAPITAL LLC
By: /s/ Steven D. Brand By: /s/ Frank Seidman
----------------------------- -----------------------------
Steven D. Brand, Manager Frank Seidman, Manager
TENANT:
WORLDGATE COMMUNICATIONS, INC.
/s/ Kevin Flannery By: /s/ Randall J. Gort
- -------------------------------- ----------------------------
Attest Name:
Title:
3
<PAGE>
2. DEMISE. Landlord hereby demises and lets to Tenant and Tenant takes
and hires from Landlord, for the term and subject to the provisions hereof, the
existing building (hereafter referred to as the "Building" or the "Leased
Premises") containing approximately 72,000 rentable square feet located on the
parcel of land (the "Lot") commonly known as 3190 Tremont Avenue in Bensalem
Township, Bucks County, Pennsylvania, together with the use of all existing
parking spaces on the Lot for itself and its employees and invitees, such use of
parking to be subject to common use and occupancy by Landlord's agents and
invitees in the exercise of Landlord's rights and responsibilities under this
Lease. The Building and Lot are sometimes collectively called the "Property".
3. TERM.
(a) This demise shall be for the term (hereinafter referred to
as "the Term") beginning on the date when possession of any portion of the
Building is delivered to Tenant (the "Commencement Date") and ending, without
the necessity of notice from either party to the other, on the last day of the
calendar month in which occurs the tenth (10th) anniversary of the Last Delivery
Date (unless the Last Delivery Date is the first day of the month, in which
event the Term shall end on the last day of the calendar month preceding such
tenth anniversary), subject to the renewal options set forth in paragraph 4
below. Upon delivery of any part of the Building, the parties shall sign a
letter confirming the Commencement Date; upon delivery of the balance of the
Building, they shall sign a letter confirming the expiration date.
(b) Landlord shall use all reasonable efforts to deliver not
less than 40,000 square feet of the Premises by February 15, 1999, and the
balance of the Building no later than July 1, 1999 (the respective "Delivery
Deadlines"). The parties acknowledge that the Building is occupied and that the
current occupant is required by the governing documentation to vacate prior to
the Delivery Deadlines. Landlord shall use prompt, diligent efforts to enforce
the timely surrender of the Building. However, if Landlord fails to meet a
Delivery Deadline for any reason not within Landlord's control, Landlord shall
not be subject to any liability to Tenant, and failure to deliver the Premises
to Tenant by the respective Delivery Deadline or any other date shall not in any
respect affect the validity or continuance of this Lease or any obligation of
Tenant hereunder.
(c) Tenant shall have the right to terminate this Lease as of
the end of Lease Year 1 or the last day of any calendar month thereafter, in any
such case upon 12 full calendar months' prior written notice (the date
designated in said written notice as the termination date being referred to
herein as the Early Termination Date), provided that Tenant pays an early
termination fee (the "Early Termination Fee") that is to be calculated as
follows, and further provided that Tenant pays such Early Termination Fee no
later than the dates set forth in clause (c)(iv) below.
(i) If the Tenant elects to terminate as of the last
day of Lease Year 1, the Early Termination Fee will be $2,052,000. Thereafter,
if Tenant elects to terminate as of the last day of the sixth month of any
subsequent Lease Year, the Early Termination Fee will the amount set forth
below:
4
<PAGE>
<TABLE>
<CAPTION>
EARLY TERMINATION DATE EARLY TERMINATION FEE
- ----------------------- ---------------------
<S> <C>
Last Day of sixth month of Lease Year 2 1,980,000.
Last Day of sixth month of Lease Year 3 1,728,000.
Last Day of sixth month of Lease Year 4 1,476,000.
Last Day of sixth month of Lease Year 5 1,188,000.
Last Day of sixth month of Lease Year 6 864,000.
Last Day of sixth month of Lease Year 7 612,000.
Last Day of sixth month of Lease Year 8 432,000.
Last Day of sixth month of Lease Year 9 288,000.
Last Day of sixth month of Lease Year 10 0
</TABLE>
(ii) The last day of the sixth month of each Lease
Year is referred to herein as the "Change Date." If the Tenant elects to
terminate as of the last day of a calendar month which is not a Change Date,
then the Early Termination Fee shall be the sum of the two following numbers:
(A) multiply the fixed early termination fee set forth above for the Change Date
preceding the Early Termination Date times a fraction, the denominator of which
is 12 and the numerator of which is the number of calendar months remaining
after the Early Termination Date until the next Change Date; and (B) multiply
the early termination fee set forth above for the Change Date next succeeding
the Early Termination Date times a fraction, the denominator of which is 12 and
the numerator of which is the number of calendar months from the last Change
Date to (and including) the Early Termination Date.
FOR EXAMPLE, if Tenant gives notice of its election to
terminate as of the last day of the fourth month of Lease Year
6, the early termination fee would be $918,000, calculated as
follows: (A) $1,188,000 [the fee for the preceding Change Date
- the last day of the sixth month of Lease Year 5] times
2/12ths [the number of months remaining after termination
until the next Change Date - the last day of the sixth month
of Lease Year 6 - divided by 12] = $198,000, plus (B) $864,000
[the fee for the next Change Date - the last day of Lease Year
6] times 10/12ths [the number of months until termination from
the last Change Date, divided by 12] = $720,000. (A) $198,000
plus (B) $720,000 = $918,000.
(iii) This subparagraph 3(c)(iii) applies only if
Landlord and Tenant (each in their sole and absolute discretion) sign and
deliver a written agreement (the "New Agreement") for Landlord to develop or
purchase a replacement facility (the "Replacement Facility") for Tenant to
occupy instead of the Leased Premises. The Early Termination Fee will not be
payable under this Lease if Tenant takes occupancy of the Replacement Facility
under the New Agreement. The Early Termination Fee will not be payable if by
agreement of the parties the New Agreement is terminated, Tenant's notice of
early termination is rescinded, and Tenant remains in the Leased Premises under
this Lease. If Tenant shall have paid the Early Termination Fee (or any portion
thereof) and it is subsequently waived, the amount paid for the Fee shall be
returned to Tenant within ten business days after Tenant takes possession of the
Replacement Facility.
(iv) The Early Termination Fee payment dates are as
follows: one fourth shall be paid concurrently with the Tenant's notice of early
termination; one fourth shall
5
<PAGE>
be paid in four equal monthly installments with Tenant's payment of Fixed Rent
on the first day of the sixth, seventh, eighth and ninth months of the 12-month
notice period (but if Tenant shall vacate the Leased Premises, that second
fourth shall be payable in one installment no later than the date Tenant vacates
the Leased Premises); the remaining one-half shall be paid no later than thirty
(30) days prior to the Early Termination Date, Upon due exercise of the early
termination right and payment of the Early Termination Fee required herein, this
Lease shall expire on the date set forth in Tenant's notice as if such date were
the scheduled expiration date of the Term.
4. OPTION TO RENEW - HOLDING OVER.
(a) Tenant is hereby granted the option(s) to renew the Term
of this Lease for two (2) additional periods of five (5) years on each such
option provided that there shall not be an uncured Event of Default hereunder
(as hereinafter defined) by Tenant either at the time Tenant exercises the
option or on the Commencement Date of the renewal term and further provided that
Tenant shall exercise such option in writing not later than nine (9) months
prior to the expiration of the initial Term or the first renewal Term, as the
case may be, said renewal term to be upon the same terms and conditions of this
Lease except that the Annual Fixed Rent during the renewal Term shall be in the
amount set forth for the respective Lease Years in Section 1 above.
(b) If Tenant retains possession of the Leased Premises or any
part thereof after the termination of this Lease by expiration of the Lease Term
or otherwise without the consent of Landlord, Tenant shall pay Landlord (a) as
rent for such holding over, an amount, calculated on a per diem basis for each
day of such unlawful retention, equal to the greater of (i) 150% of the Annual
Fixed Rent, or (ii) the established market rental for the Leased Premises, for
the time Tenant thus remains in possession, plus, in each case, all Additional
Rent and other sums payable hereunder, and (b) all other damages, costs and
expenses sustained by Landlord by reason of Tenant's holding over. Without
limiting any rights and remedies of Landlord resulting by reason of the wrongful
holding over by Tenant (such as eviction proceedings), or creating any right in
Tenant to continue in possession of the Leased Premises, all Tenant's
obligations with respect to the use, occupancy and maintenance of the Leased
Premises shall continue during such period of unlawful retention.
5. RENT. Rent is payable by Tenant beginning on the Commencement Date
in monthly installments of one-twelfth (1/12th) of the Annual Fixed Rent and
one-twelfth (1/12th) of the Operating Expense Estimate, without prior notice or
demand, and without any set-off or deduction whatsoever, in advance, on the
first day of each month at Landlord's office or at such other place as Landlord
may direct in writing.
If the Lease Term commences on a day other than the first day
of a calendar month, Annual Fixed Rent and Annual Operating Expenses for the
partial month shall be apportioned pro rata using a fraction the numerator of
which is the actual number of days in the month in which the Lease Term
commences and the denominator of which is 365.
Tenant hereby covenants and agrees to pay the Annual Fixed
Rent, Operating Expense Estimate, Additional Rent and other sums payable to
Landlord hereunder when due, and to pay interest to Landlord at the Overdue
Interest Rate (a) on all overdue installments of Fixed
6
<PAGE>
Rent and the Operating Expense Estimate from the due date thereof to the date
of payment and (b) on all payments of Additional Rent or other sums payable
to Landlord hereunder from the tenth business day after demand for payment
until the date of payment. Upon default by Tenant in the payment of such
Additional Rent or other sums payable hereunder, Landlord shall be entitled
to all rights and remedies to which it would be entitled in default of the
payment of Fixed Rent and Operating Expense Estimate. As used herein, the
term "Overdue Interest Rate" shall mean and equal three percent (3%) per
annum over the prime interest rate announced from time to time by the largest
commercial bank whose principal office is located in Philadelphia or
Montgomery County, Pennsylvania as being its "prime" or benchmark rate of
interest.
6. OPERATING EXPENSE. Tenant shall pay to Landlord as Additional Rent
an amount equal to Tenant's Proportionate Share of Operating Expense for each
Operating Year. Commencing with the first month of the Lease Term, Tenant shall
pay to Landlord, on account of the Operating Expense for such Operating Year,
monthly installments in advance equal to one-twelfth (1/12th) of the Tenant's
Operating Expense Estimate for such Operating Year. If Tenant occupies the
Leased Premises or portion thereof for less than a full Operating Year, the
Operating Expense will be allocated proportionately to the amount of time in
such Operating Year that Tenant so occupies such space.
Within one hundred twenty (120) days following the end of each
Operating Year, Landlord shall furnish Tenant an Operating Expense Statement
setting forth (i) the Operating Expense for the preceding Operating Year, (ii)
Tenant's Proportionate Share, (iii) the Operating Expense Estimate paid by
Tenant, and (iv) the amount overpaid or underpaid by Tenant on account of
Operating Expense for such Operating Year (referred to herein as the "Operating
Expense Adjustment"). Within fifteen (15) days following the receipt of such
Operating Expense Statement (the "Expense Adjustment Date") Tenant shall pay to
Landlord as Additional Rent any underpaid Operating Expense Adjustment for such
Operating Year, or Landlord shall credit any overpaid Operating Expense
Adjustment against the next installments of Annual Fixed Rent and Operating
Expense Estimates becoming due under this Lease. The Operating Expense Statement
shall also set forth a revised Operating Expense Estimate for the then current
Operating Year (which revised estimate shall be based on the actual Operating
Expense for the preceding Operating Year, adjusted by reasonable changes, such
as changes in taxes or service contracts known to Landlord as of the date of the
issuance of the Operating Expense Statement). The new Operating Expense Estimate
shall be retroactive to the first day of the then current Operating Year, and
any credits or adjustments shall be handled in the same manner as overpayments
and underpayments for the preceding Operating Year.
As used in this Section 6 and Section 1 where applicable, the
following words and terms shall be defined as hereinafter set forth:
(a) "OPERATING YEAR" shall mean each calendar year occurring
during the Lease Term.
(b) "OPERATING EXPENSE ESTIMATE" shall mean and equal the
amount set forth in Section 1 of this Lease multiplied by the rentable area of
the Leased Premises.
7
<PAGE>
(c) "OPERATING EXPENSE STATEMENT" shall mean a statement in
writing signed by Landlord, setting forth in reasonable detail (i) the Operating
Expense for the preceding Operating Year, (ii) Tenant's Proportionate Share,
(iii) the Operating Expense Estimate paid by Tenant, and (iv) the Operating
Expense Adjustment for such Operating Year, or portion thereof. If requested by
Tenant no later than December 31 of any Operating Year, the Operating Expense
for such Operating Year shall be audited and certified by Landlord's independent
certified public accountant whose report thereon shall be available for
inspection by Tenant at Landlord's office during normal business hours, provided
that the cost thereof shall be included in Operating Expenses payable by Tenant.
Tenant shall have the right, at its own cost and expense, to
audit or inspect Landlord's records (but not more than once in any calendar
year) with respect to Taxes and Operating Expenses, as well as all other
additional rent payable by Tenant hereunder. Tenant shall give Landlord not less
than 30 days prior written notice of its intention to conduct any such audit.
Landlord shall cooperate with Tenant during the course of such audit, which
shall be conducted during normal business hours in Landlord's office. Landlord
agrees to make such personnel available to Tenant as is reasonably necessary for
Tenant, or for Tenant's employees or agents to conduct such audit, but in no
event shall such audit last more than five business days in duration. If such
audit discloses that the amount paid by Tenant as Tenant's Proportionate Share
or of other additional rental payable by Tenant hereunder has been overstated by
more than four (4) percent, then, in addition to immediately repaying such
overpayment to Tenant, Landlord shall also pay the reasonable cost incurred by
Tenant in connection with such audit.
(d) "OPERATING EXPENSE" shall mean the following expenses
incurred by Landlord in connection with the operation, repair and maintenance of
the Building and the Lot which expenses shall be consistent with those incurred
by other owners and operators of first class office buildings in the same
geographical area in which the Building is located:
(i) Wages, salaries, fees and other compensation and
payments and payroll taxes and contributions to any social security,
unemployment insurance, welfare, pension or similar fund and payments for other
fringe benefits required by law or by union agreement (or, if the employees or
any of them are non-union, then payments for benefits comparable to those
generally required by union agreement in first class office buildings in the
Philadelphia suburban area, which are unionized) made to or on behalf of all
employees of Landlord performing services rendered in connection with the
operation and maintenance of the Building and the Lot, including, without
limitation: window cleaners; janitors; miscellaneous handymen; watchmen; persons
engaged in patrolling and protecting the Building and the Lot; carpenters;
engineers; mechanics; electricians; plumbers; persons engaged in the operation
and maintenance of the Building and the Lot; building superintendent and
assistants; building manager; and clerical and administrative personnel.
(ii) The uniforms of all such employees, and the
cleaning, pressing and repair thereof.
(iii) Cleaning costs for the Building and the Lot,
including the windows and sidewalks, all snow and rubbish removal (including
separate contracts therefor) and the costs of all labor, supplies, equipment and
materials incidental thereto.
8
<PAGE>
(iv) Premiums and other charges incurred by Landlord
with respect to all insurance relating to the Building and the Lot and the
operation and maintenance thereof, including, without limitation: fire and
extended coverage insurance, including windstorm, hail, explosion, riot, rioting
attending a strike, civil commotion, aircraft, vehicle and smoke insurance;
public liability; elevator; workmen's compensation; boiler and machinery; rent;
use and occupancy; and health, accident and group life insurance of all
employees.
(v) All taxes, charges, imposts and burdens and
special assessments of every kind and nature imposed by any governmental
authority on and/or with respect to the Lot or Building which Landlord shall
become obligated to pay because of or in connection with the ownership, leasing
or operation of the Lot or the Building. Notwithstanding anything to the
contrary contained in the Lease, Landlord and Tenant agree that the following
items are specifically excluded from the definition of taxes:
o Landlord's personal and corporate income taxes
(whether local, state or federal).
o Franchise taxes, gift taxes, transfer taxes and
gross receipt taxes.
(vi) The cost of water and sewer and any and all
other utility services used in connection with the operation and maintenance of
the Building and the Lot, excluding, however, electricity which shall be billed
monthly to tenants pursuant to Section 10 hereof.
(vii) Costs incurred for operation, service,
maintenance, inspection, repairs and alterations of the Building, the Lot and
the heating, air-conditioning, ventilating, plumbing, electrical, security and
elevator systems of the Building (including any separate contract therefor) and
the costs of labor, materials, supplies and equipment used in connection with
all of the aforesaid items.
(viii) Gross receipts taxes, sales taxes and excise
taxes and the like upon any of the expenses enumerated herein.
(ix) Management fees of the managing agent for the
Building not to exceed in any one (1) year four percent (4%) of the Fixed Rent
and Operating Expense Estimate payable for such year.
(x) The cost of replacements for tools and equipment
used in the operation and maintenance of the Building and the Lot.
(xi) Cost of repainting or otherwise redecorating the
common areas of the Building.
(xii) Christmas decorations for the lobby and other
public portions of the Building below the second floor.
9
<PAGE>
(xiii) The cost of telephone service, postage, office
supplies, maintenance and repair of office equipment and similar costs related
to operation of the Building Superintendent's office.
(xiv) The cost of licenses, permits and similar fees
and charges related to operation, repair and maintenance of the Building.
(xv) Auditing fees necessarily incurred in connection
with the maintenance and operation of the Building, and accounting fees incurred
in connection with the preparation and certification of a real estate tax
escalation and the operating expense escalation statements pursuant to this
Section 6.
(xvi) All costs incurred by Landlord to retrofit any
portion or all of the Building to comply with a change in existing legislation
or introduction of new legislation, whether Federal, State or Municipal;
repairs, replacements and improvements which are appropriate for the continued
operation of the Building as a first class building.
(xvii) All expenses associated with the installation
of any energy, labor or cost saving devices for the Building not to exceed the
savings realized from the installation of the energy, labor or cost saving
device.
(xviii) The pro rata share of all costs and expenses
reasonably allocated to the Building and the Lot relating to the maintenance,
operation and repair of any common atrium or other facilities connecting the
Building or any of its facilities to any other building or facilities on
adjacent lots.
(xix) Any and all other expenditures of Landlord in
connection with the operation, repair or maintenance of the Lot or the Building
which are properly expensed in accordance with generally accepted accounting
principles consistently applied with respect to the operation, repair and
maintenance of first-class office buildings in the Philadelphia suburbs.
If Landlord shall purchase any item of capital equipment or
make any capital expenditure as described in subsections (xvi) and (xvii) above,
then the costs for the same shall be included in Operating Expenses in the year
of installation and in subsequent years amortized on a straight line basis, over
an appropriate period, but not more than ten (10) years, with an interest factor
equal to the prime interest rate, as defined in Section 5 hereof. If Landlord
shall lease such item of capital equipment, then the rentals or other operating
costs paid pursuant to such leasing shall be included in Operating Expenses for
each year in which they are incurred.
Tenant shall have the right to contest or review all such
Taxes by legal proceedings or in such other manner as it may deem suitable
(which, if instituted, Tenant shall conduct promptly at its own cost and
expense, and free of any expense to Landlord, and, if necessary, in the name of
and with the cooperation of Landlord, and Landlord shall execute all documents
necessary to accomplish the foregoing). Notwithstanding the foregoing, Tenant
shall promptly pay all such Taxes prior to penalties being assessed thereon
(unless Tenant posts adequate security with Landlord), or if Landlord shall be
subject to any criminal liability arising out of the nonpayment thereof. The
legal proceedings shall include appropriate proceedings and
10
<PAGE>
appeals from orders therein and appeals from any judgments, decrees or orders.
In the event of any reduction, cancellation or discharge, Tenant shall pay the
amount finally levied or assessed against the Leased Premises or adjudicated to
be due and payable on any such contested Taxes. Landlord covenants and agrees
that if there shall be any refund or rebate on account of the Taxes paid by
Tenant under the provisions of this Lease, such refund or rebate shall belong to
Tenant. Any refunds received by Landlord shall be deemed trust funds and as such
are to be received by Landlord in trust and paid to Tenant forthwith. Landlord
will, upon the request of Tenant, sign any receipts which may be necessary to
secure the payment of any such refund or rebate, and will pay over to Tenant
such refund or rebate as received by Landlord.
Notwithstanding the foregoing, "Operating Expense" shall not
include expenditures for any of the following:
(i) The cost of any capital addition made to the
Building (other than that specified as part of Operating Expense as provided
above), including the cost to prepare space for occupancy by a new tenant.
(ii) Repairs or other work occasioned by fire,
windstorm or other insured casualty or hazard, to the extent that Landlord shall
receive proceeds of such insurance.
(iii) Repairs or rebuilding necessitated by
condemnation.
(iv) Depreciation and amortization of the Building,
other than
(a.) capital expenditures which under
generally applied real estate practice are expensed or regarded as deferred
expenses;
(b.) capital expenditures appropriate to a
first class office building or required by law as described in subsection (xvi)
above; and
(c.) capital expenditures designed to result
in savings or reductions in Operating Expenses as described in subsection (xvii)
above.
(v) Marketing costs, leasing commissions, brokerage
fees, attorney's fees, costs and disbursements and other expenses incurred in
connection with negotiations or disputes with tenants, other occupants, or
prospective tenants.
(vi) The costs of tenant improvements performed for
tenants in the Building.
(vii) Costs incurred by Landlord due to a violation
by Landlord or any tenant of the terms and conditions of any lease.
(viii) Amounts paid to any party, including a
division or affiliate of Landlord, providing materials, services, labor, or
equipment to the extent that such costs exceed the competitive costs of such
materials, services, labor or equipment when provided by an independent party in
an arms-length transaction.
11
<PAGE>
(ix) Payment of principal, interest, points and fees
on any mortgages, deeds of trust or other financing instruments relating to the
financing of the Property, or rental payments under any ground or underlying
lease.
(x) Any costs, fines or penalties imposed due to
Landlord's actions or omissions with respect to any governmental rule or
authority.
(xi) Wages, salaries, or other compensation or
benefits for any officers or employees of Landlord above the grade of Building
Manager.
(xii) Costs of installing, maintaining and operating
any specialty service, such as an athletic club.
(xiii) Any cost for which Landlord is entitled to
reimbursement from tenants, insurers, or any third party.
(xiv) The costs of any additions to the Property
after the original construction of the Building and its parking facility, except
for operating expenses attributable thereto (provided that Tenant's pro rata
share is equitably adjusted to reflect the addition).
(xv) Any costs attributable to any parking facility
(e.g., underground or decked parking) owned or operated by Landlord.
(xvi) The cost of any environmental clean-up of the
Land ordered by any applicable environmental authority or agency unless caused
by Tenant.
Operating Expense shall be "net" and, for that purpose, shall
be reduced by the amounts of any reimbursement or credit received or receivable
by Landlord with respect to an item of cost that is included in Operating
Expense (other than reimbursements to Landlord by tenants of the Building
pursuant to Operating Expense escalation provisions).
The Operating Expense for any Operating Year or portion
thereof during which less than one hundred percent (100%) of the Rentable Area
of the Building is leased to tenants shall be increased to include an imputed
cost for unoccupied portions of the Building in an amount with respect to each
such area equal to the product of (i) the Landlord's estimate of the marginal
Operating Expense saving resulting from such vacancy, times (ii) a fraction, the
numerator of which is the number of days during such Operating Year such portion
of the Building was unoccupied and the denominator of which is three hundred
sixty-five (365), times, (iii) the Rentable Area of such unoccupied space. In
the time that more than one such portion of Rentable Area shall be unoccupied on
separate dates within a relevant Operating Year, then a separate computation
shall be made with respect to each unoccupied portion, and the products of such
computations shall be added together, and the total thereof shall be the amount
of Operating Expense imputed to such unoccupied portions for such Operating
Year.
(e) "TENANT'S PROPORTIONATE SHARE" shall mean a fraction, the
numerator of which shall be the Rentable Area of Leased Premises, and the
denominator of which is 72,000 rentable square feet (subject to adjustment only
by reason of any substantial
12
<PAGE>
addition to the Building made after the date of the initial completion of
construction of the Building), and shall equal, with respect to the Leased
Premises, the percentage set forth in Section 1 of this Lease.
7. NO LEASEHOLD IMPROVEMENTS BY LANDLORD.
(a) Tenant acknowledges that Landlord has not yet acquired the
Property and is not familiar with its condition, and that the only
representations as to the condition of the Property which are in the current
drafts of the Sale Agreement (defined in subsection 7(b) below) are those set
forth on Exhibit "E" hereto. Tenant further acknowledges the intent of both
parties that the term of this Lease shall commence immediately following
surrender of the Property by the current owner [subject to Tenant's option to
defer occupancy until February 1, 1999 if for any reason the current owner
surrenders the Property before that date], and agrees that Landlord shall have
no obligation to make any leasehold improvements prior to commencement of the
Term. Tenant agrees to accept the Leased Premises on the Commencement Date in
their condition at that time, provided they are in substantially the same
condition as at the time of this Lease, subject to ordinary wear and tear and
further subject in any case to the provisions of Paragraphs 20 and 21 regarding
condemnation and damage by fire or other casualty, and subject to Landlord's
obligations under this Lease with respect to operation and maintenance of the
Building during the Term.
(b) As part of its due diligence investigations of the
Property prior to acquisition of the Property, Landlord may obtain written
reports regarding title to and physical condition of the Property, including
without limitation engineering and environmental reports (collectively,
"Landlord's Reports"). As an accommodation to Tenant, Landlord agrees to furnish
to Tenant copies of Landlord's Reports received prior to the Commencement Date,
provided, however, that (i) this does not constitute an agreement by Landlord to
obtain any reports other than those Landlord receives from the seller or chooses
to obtain itself as part of its own due diligence investigations of the
Property, and (ii) the delivery of copies of Landlord's Reports shall not be
deemed to constitute the making of any representations or warranties to Tenant
by Landlord or any of its agents or representatives (including without
limitation the person or entity generating a Report). Upon written notice to
Landlord, Tenant shall also be entitled to have its representatives inspect the
Property during the twenty-day period beginning when Landlord notifies Tenant
that an agreement for the sale and purchase of the Property has been signed with
Osiris Holding Corporation (the "Sale Agreement"), such inspections to be done
at Tenant's cost and expense, subject to the same conditions as are imposed upon
Landlord under the Sale Agreement (which conditions shall be copied to Tenant
upon notice from Tenant that it desires to undertake inspections). If any
material adverse condition is disclosed in any of Landlord's Reports or in any
written report generated pursuant to any of Tenant's inspections ("Tenant's
Reports") (and for purposes of this paragraph a material adverse condition is
defined as a condition which would lead a reasonably prudent mortgage lender to
decline to finance the Property), then Tenant, by written notice to Landlord
given no later than December 7, 1998 specifying the material adverse condition
with detailed reference to the relevant Report (and a copy of the applicable
Report if it is one of Tenant's Reports), may terminate this Lease by reason of
such material adverse condition. If Tenant issues a termination notice pursuant
to the preceding sentence, Landlord may nullify Tenant's termination notice by
giving Tenant written
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notice within ten days that Landlord will cause the cure of the material adverse
condition prior to February 1, 1998.
8. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not make during
the Lease Term any alterations or additions to the Leased Premises which
materially affect the Building's structure or mechanical, electrical, plumbing
or HVAC systems without Landlord's prior written approval, such approval not to
be unreasonably withheld or delayed. Any such alterations or additions which may
be approved by Landlord and made by Tenant shall be deemed part of the Building
(provided that Tenant shall at all times have the right to remove any equipment,
fixtures or other improvements installed by Tenant) and shall not thereafter be
removed by Tenant unless Landlord shall require removal of same either in
conjunction with its approval or by notice to Tenant given prior to the
termination of this Lease, in which case Tenant shall remove any such
alterations or additions and repair any damage to the Building or the Leased
Premises occasioned by their installation or removal (including, without
limitation, repairing and patching holes, replacing ceiling, wall and floor
surfaces and repainting), and restore the Leased Premises to substantially the
same condition as existed prior to the time which any such alterations or
additions were made, reasonable wear and tear excepted; provided, however, that
if in connection with alterations or improvements for which Landlord's consent
is required hereunder, Tenant shall at the time Landlord's consent is requested,
express its desire that same shall remain on the Premises upon the expiration of
the Term and Landlord agrees thereto in writing, then removal of such
alterations and improvements shall not be required.
All alterations and additions by Tenant and installation of
furnishings following occupancy shall be coordinated with any work being
performed by Landlord and performed in such manner as not to disrupt harmonious
labor relations and so as to not damage the Building or interfere with its
operation or with the activities of other tenants and, except for installation
of furnishings only, by contractors or workmen first approved by Landlord, which
approval will not be unreasonably withheld or delayed..
As further conditions to Landlord's approval of any proposed
alterations or additions by Tenant which are to be made after the beginning of
the Lease Term, Tenant shall: secure all necessary licenses and permits; deliver
to Landlord a waiver, executed by all general contractors who will be furnishing
labor or materials waiving the right to file any mechanic's lien against the
Building, the Lot or the estate or interest of Landlord or Tenant therein; cause
the contractor(s) and subcontractor(s) to carry Workmen's Compensation insurance
in statutory amounts and also comprehensive public liability insurance with
limits as approved by Landlord, and deliver to Landlord certificates of all such
insurance.
9. PERMITTED USES. Tenant covenants and agrees to use and occupy the
Leased Premises only in conformity with law and for the uses specified in
Section 1 hereof and not to use or permit any use of the Leased Premises which
creates any safety hazard, which would be dangerous to the Leased Premises, the
Building or the occupants of the same, which would be disturbing to other
tenants or occupants of the Building, or which would cause any increase in
premium for any insurance which Landlord may then have in effect with respect to
the Building generally.
10. BUILDING OPERATION AND SERVICES; ELECTRICITY. Landlord shall
furnish, through Landlord's employees or independent contractors, such services,
facilities and supplies equal in
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scope, quality and frequency to those being customarily provided by landlords in
high quality office buildings in the Philadelphia suburbs.
Heating, ventilating, and air conditioning shall be provided
as normal seasonal changes may require to provide reasonably comfortable space
temperature and ventilation for occupants of the Building during normal business
operation, daily from 8:00 a.m. to 6:00 p.m. (Saturdays to 1:00 p.m.), except
Sundays and holidays. Heating, ventilating and air conditioning service shall be
subject to such regulations as the Department of Energy or other governmental
agency shall adopt from time to time.
Maintenance and cleaning shall be provided Monday through
Friday (excluding holidays), after business hours, as follows: janitor service,
consisting of the removal of customary office trash, dusting of furniture, desks
and pictures, and vacuuming; maintenance and service of the toilet rooms in the
Building; and cleaning and maintenance of common areas in the Building, all as
more particularly set forth in the specifications attached hereto as Exhibit
"C".
Fully automatic elevator service shall be provided for the use
of all tenants and the general public for access to and from all floors of the
Building.
Elevator service for freight shall be supplied by a
passenger/freight elevator in common with service to other tenants at reasonable
times during business hours and at other times.
Hot and cold water for normal lavatory and drinking purposes
shall be provided.
Electricity, water, telephone, and other utilities serving the
Building shall be arranged and paid for by Tenant as a direct customer of the
applicable utility. If for any reason any required utility cannot be arranged
directly by Tenant, then Landlord shall contract for the applicable utility
service and Tenant shall pay the cost thereof within 15 days after invoicing
from Landlord. Any utility invoices issued by Landlord to Tenant shall be based
upon actual cost to Landlord and, if they cover any period or any space occupied
by another tenant, shall be appropriately apportioned between the space users
for the relevant periods.
Landlord shall not be liable in any way to Tenant for any
failure or defect in the supply or character of electric energy furnished on the
Leased Premises by reason of any requirement, act or omission of the public
utility serving the Building with electricity. Tenant's use of electric energy
in the Leased Premises shall not at any time exceed the capacity of any of the
electric conductors and equipment in or otherwise serving the Leased Premises.
In order to insure that such capacity is not exceeded and to avert possible
adverse effect upon the Building's electric service, Tenant shall not, without
Landlord's prior written consent in each instance, which consent shall not be
unreasonably withheld or delayed, connect to the Building's electric
distribution system any fixtures, appliances or equipment other than
minicomputers, terminals, duplicating machines, lamps, typewriters and similar
small office machines which operate on a voltage not in excess of 110 volts or
make any alterations or additions to the electric system of the Leased Premises.
Should Landlord grant such consent, all additional risers or other
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equipment required therefor shall be provided by Landlord and the reasonable
cost thereof shall be paid by Tenant upon Landlord's demand.
Landlord shall furnish and install at Tenant's expense all
replacement lighting tubes, lamps, bulbs, and ballasts required in the Leased
Premises.
11. INTERRUPTION OF SERVICES. In case Landlord is prevented or delayed
in furnishing any service as set forth in Section 10 herein or otherwise by
reason of any cause beyond Landlord's reasonable control, Landlord shall not be
liable to Tenant therefor nor shall Tenant be entitled to any abatement or
reduction in rent by reason thereof unless the delay is directly caused by
Landlord's negligence, willful actions or omissions and Tenant is materially
impaired in its use of the Leased Premises for more than three (3) consecutive
business days, nor shall the same give rise to a claim in Tenant's favor that
such absence of building services constitutes actual or constructive, total or
partial eviction or renders the Leased Premises untenantable.
Landlord reserves the right to stop any service or utility
system, when necessary by reason of accident or emergency, or until necessary
repairs have been completed, provided, however, that in each instance of
stoppage, Landlord shall exercise reasonable diligence to eliminate the cause
thereof. Except in case of emergency repairs, Landlord will give Tenant
reasonable advance notice of any contemplated stoppage and will use reasonable
efforts to avoid unnecessary inconvenience to Tenant by reason thereof.
12. REPAIRS. Landlord shall make, as an Operating Expense of the
Building, all repairs necessary to maintain the plumbing, heating, ventilating,
air conditioning, electric systems, external windows and floors (excluding
carpeting and floor coverings), provided, however, that Landlord shall not be
obligated to make any such repairs until the expiration of a reasonable period
of time after receipt of written notice from Tenant that such repair is needed.
Landlord shall make, at its own expense (except for repairs which are expensed
in accordance with GAAP, the cost of which shall be an Operating Expense), all
repairs necessary to maintain the structure of the Building, the roof, all
exterior walls and the building floor slabs. Landlord will repair any damage
caused by any act, omission or negligence of Tenant or its employees, agents,
invitees, licensees, subtenants, or contractors, and Tenant will reimburse
Landlord for the cost of such repair within thirty (30) days after receipt of an
invoice. If Tenant requires maintenance, servicing, repair or replacement of any
special plumbing, heating or air conditioning systems installed specifically for
Tenant's benefit in the Leased Premises, whether or not such systems are tied
into the standard Building systems, such maintenance, servicing, repair or
replacement shall be made at the sole expense of Tenant, unless the need for
such repairs is caused, in whole or in part, by the negligence or willful
misconduct of Landlord, its agents or employees.
Tenant shall maintain the Leased Premises and the fixtures and
appurtenances therein in good repair at all times, reasonable wear and tear
excepted. Except to the extent released by Landlord pursuant to the waiver of
subrogation provision in Section 22 hereof, Tenant shall reimburse Landlord for
all costs and expenses of repairing and replacing all damage or injury to the
Leased Premises and the Building and to fixtures and equipment caused by Tenant
or its employees, agents, invitees, licensees, subtenants, or contractors, or as
the result of all or any of them moving in or out of the Building or by its or
their installation or removal of
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furniture, fixtures or other property. Such costs and expenses shall be
collectible as Additional Rent and paid by Tenant within fifteen (15) days after
rendition of a bill therefor.
Landlord shall not be liable by reason of any injury to or
interference with Tenant's business arising from the making of any repairs,
alterations, additions or improvements in or to the Leased Premises or the
Building or to any appurtenances or equipment therein unless Landlord or its
agents, employees or contractors are negligent in performing such repairs, etc.
There shall be no abatement of rent because of such repairs, alterations,
additions or improvements or because of any delay by Landlord in making the same
except that Landlord shall reimburse Tenant for any actual damages (but not
consequential damages) in the event Landlord is negligent in performing such
repairs, etc..
Tenant shall give to Landlord prompt written notice of any
accidents to, or defects in plumbing, electrical, heating and air conditioning
systems and apparatus located in the Leased Premises. Landlord shall give Tenant
written notice of any repairs, alterations, additions or improvements which
Landlord intends to undertake either in the Leased Premises or the Building.
13. INTENTIONALLY OMITTED.
14. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed Rent, all
Additional Rent and all other sums and charges herein provided for and, upon
observing, keeping and performing all covenants, agreements and conditions of
this Lease on Tenant's part to be observed, kept and performed, shall quietly
have and enjoy the Leased Premises throughout the Lease Term without hindrance
or molestation by Landlord or by anyone claiming by, through or under Landlord,
subject, however, to the exceptions, reservations and conditions of this Lease.
15. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor, mortgagee
or any agent thereof, shall have the right to enter the Leased Premises at
reasonable times: to perform Landlord's covenants as set forth in this Lease,
for purposes of inspection and to insure Tenant's compliance with the provisions
of this Lease, to make any repairs, replacements or alterations to the Building
or do any work which Landlord may deem necessary, or to show the Leased Premises
to prospective purchasers of the Building, and also, during the last six (6)
months of the Lease Term, to show the Leased Premises to prospective tenants;
PROVIDED, HOWEVER, that except for emergencies, Landlord shall (a) give Tenant
at least 24 hours' prior notice of such entry, and (b) enter upon the Leased
Premises only during normal business hours. With the exception of emergency
repairs by Landlord, its agents, employees and contractors, no persons shall
enter the Leased Premises unless accompanied by a representative of Tenant.
Landlord also shall have the right to enter the Leased Premises at any
reasonable times after giving prior notice to Tenant to exhibit the Leased
Premises to any prospective purchaser, tenant and/or mortgagee thereof provided
that a representative of Tenant shall accompany any prospective purchaser,
tenant and/or mortgagee inspecting the Leased Premises and further provided that
Tenant may restrict access to certain portions of the Leased Premises in order
to safeguard the confidentiality of proprietary equipment.
In the event Tenant abandons the Leased Premises prior to the
expiration of the Lease Term, Landlord shall have the right to enter the Leased
Premises at any time thereafter to show
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the Leased Premises to prospective tenants and to retrofit all or a portion
thereof for new tenants. No such entry and construction work shall be deemed to
be an acceptance of surrender by landlord of all or a portion of the Leased
Premises until a replacement tenant actually occupies the same for its business
purposes. Acceptance of surrender shall be deemed to occur upon the occupancy by
a replacement tenant, but only as to such portion of the Leased Premises which
such replacement tenant occupies. Notwithstanding any such acceptance of
surrender, Tenant shall remain liable for the difference between the rent
reserved hereunder and the rent Landlord receives under a lease with the
replacement tenant.
16. SURRENDER OF LEASED PREMISES. Any alterations, improvements or
additions to the Leased Premises made by or at the request of Tenant shall
remain upon the Leased Premises at the expiration or earlier termination of this
Lease and shall become the property of Landlord unless Landlord shall, in
accordance with Article 8, give written notice to Tenant to remove such
alterations, improvements and additions. Tenant shall repair any damage caused
by the installation and/or removal (including, without limitation, repairing and
patching holes, replacing ceiling, floor and wall surfaces and repainting), and
restore the Leased Premises to substantially the same condition in which it
existed prior to the time that any such alterations, improvements or additions
were made, reasonable wear and tear excepted. Tenant shall have the right to
remove any of its fixtures, equipment or furnishings from the Leased Premises
provided that Tenant shall repair any damage to the Leased Premises or the
Building resulting from such removal. Should Tenant fail to remove any such
alterations, improvements or additions or to repair such damage when required or
requested by Landlord so to do pursuant to this Section 16, Landlord may do so,
and the cost and expense thereof shall be paid by Tenant to Landlord as
Additional Rent.
Any personal property which shall remain in the Leased
Premises or any part thereof after the expiration or earlier termination of this
Lease shall be deemed to have been abandoned and either may be retained by
Landlord as Landlord's property or may be disposed of in such manner as Landlord
may see fit, provided that notwithstanding the foregoing Tenant shall, upon
request of Landlord made no later then ten (10) days after the expiration or
earlier termination of this Lease, promptly remove from the Building any such
personal property at Tenant's own cost and expense. Should Tenant fail so to do,
Landlord may do so, and the cost and expense thereof shall be paid by Tenant to
Landlord as Additional Rent. If such personal property or any part thereof shall
be sold by Landlord, Landlord may receive and retain the proceeds of such
sale(s) as Landlord's property. The covenants contained in this Section 16 shall
survive the expiration or earlier termination of this Lease.
17. MISCELLANEOUS COVENANTS. In addition to those covenants and
conditions which are set forth elsewhere herein, Tenant agrees:
(a) To secure and maintain in effect any governmental
approvals, licenses and permits as may be required for Tenant's use and
occupancy of the Leased Premises.
(b) To comply with all applicable laws, codes and regulations
of governmental authorities applicable to Tenant's use and occupancy of the
Leased Premises and all rules and regulations of insurers of the Leased Premises
and the National Board of Fire Underwriters as they apply to Tenant's use and
occupancy of the Leased Premises.
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Notwithstanding anything to the contrary in this paragraph (b), if any such
laws, ordinances, regulations or orders shall require structural alterations to
be made in or to the Leased Premises (such as the installation of sprinklers),
and provided that such alterations are required generally in all office
buildings in Bensalem Township and are not required as a result of the specific
nature of Tenant's design, layout, configuration or use of the Leased Premises
or caused by Tenant or any of its employees, agents, contractors or subtenant's,
then it shall be Landlord's responsibility to make such structural alterations,
the cost of which shall be included in Operating Expenses after being amortized
over the useful life of such alterations, but in no event over a period of less
than ten (10) years.
(c) If the Leased Premises include less than an entire floor
of the Building, to not place, erect, maintain or display any sign or other
marking of any kind whatsoever on the exterior surface of the walls of the
Leased Premises or on any door which faces any common corridor or hallway,
without the prior written approval of Landlord, which approval shall not be
unreasonably withheld for a single sign, provided that the same conforms to the
sign standards as are then established by Landlord generally for the Building,
and to not install or replace any entrance door or other door facing on any
common corridor or hallway other than the standard door supplied by Landlord,
without the prior written approval of Landlord.
(d) Not to use or place any curtains, blinds, drapes,
coverings or signs over any exterior windows or upon the window surfaces as
would be visible from the outside of the Building without the prior written
approval of Landlord.
(e) Without the prior written consent of Landlord, not to
place within the Leased Premises or bring into the Building any machinery,
equipment or other personality other than customary office furnishings and small
machinery such as typewriters and other similar items of office equipment, and
customary kitchen equipment to be used exclusively by Tenant's employees, or any
machinery or other personality having a weight on the average in excess of the
floor bearing capacity of one hundred (100) pounds per square foot. Landlord in
its sole discretion, may condition any consent given pursuant to this
sub-section 17(e) upon the requirement that Tenant pay all costs of all
structural and other alterations, changes or additions reasonably required to be
made to the Leased Premises and the Building, in the sole judgment of Landlord,
for the safe support of such machinery, equipment or personality, together with
all costs of engineering or other studies required in the sole judgment of
Landlord, to determine the required structural and other alterations, changes or
additions.
18. RULES AND REGULATIONS. Tenant covenants and agrees that Tenant, its
servants, employees, agents, invitees, licensees and other visitors shall
observe faithfully, and comply strictly with, the Rules and Regulations
contained in Exhibit "A", attached hereto and made a part hereof, and such other
and further reasonable Rules and Regulations as Landlord or Landlord's agents
may, after written notice to Tenant, from time to time adopt. Nothing in this
Lease contained shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease as against any other tenant, and Landlord shall
not be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, invitees, licensees or other visitors. Landlord
agrees that the Rules and Regulations shall not be enforced so as to
discriminate against Tenant or unreasonably interfere with Tenant's use of the
Leased Premises and that the Rules and Regulations shall be
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enforced uniformly against all tenants in the Building; PROVIDED, HOWEVER, that
Landlord shall not be liable to Tenant for Landlord's failure to enforce the
Rules and Regulations against any other tenants. Tenant shall not be obligated
to comply with any Rules and Regulations or amendments thereto until Tenant has
received a written copy of such Rules and Regulations.
19. PERFORMANCE OF COVENANTS.
(a) If Tenant fails to perform any covenant or observe any
condition to be performed or observed by Tenant hereunder or acts in violation
of any covenant or condition hereof, Landlord may, but shall not be required to
on behalf of Tenant, perform such covenant and/or take such steps, including
entering upon the Leased Premises, as may be necessary or appropriate to meet
the requirements of any such covenant or condition, provided that Landlord shall
have given Tenant at least five (5) business days prior written notice of
Landlord's intention to do so, unless an emergency situation exists, in which
case Landlord shall have the right to proceed immediately after telephonic
notice to Tenant; and all costs and expenses incurred by Landlord in so doing,
including reasonable legal fees, shall be paid by Tenant to Landlord upon
demand, plus interest at the Overdue Interest Rate from the date of
expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding under the
rights reserved to Landlord under this Section shall not in any way prejudice or
waive any rights as Landlord might otherwise have against Tenant by reason of
Tenant's default.
(b) In the event of the failure by Landlord, after thirty (30)
days' prior written notice thereof, to perform any of the provisions, covenants,
agreements or conditions of this Lease on its part to be performed the
non-performance of which affect Tenant's use and occupancy of the Leased
Premises, Tenant may, in addition to any remedies available to it at law or in
equity, perform the same for and on behalf of Landlord, the cost of which
performance, upon the proper payment thereof, shall be paid to Tenant by
Landlord upon demand plus interest at the Overdue Interest Rate from the date of
demand, provided, however that nothing herein shall require Landlord to
reimburse Tenant for any cost which is payable by Tenant as an Operating Expense
pursuant to Section 6 of this Lease.
20. EMINENT DOMAIN. In the event of the exercise of the power of
eminent domain (a) whereby such portion of the Building is taken such that
access to the Leased Premises is permanently impaired thereby and reasonable
alternate access is not provided by Landlord within a time period which is
reasonable under the circumstances, (b) all or substantially all of the Leased
Premises or the Building is taken, (c) if less than substantially all of the
Building is taken but Landlord, acting in good faith, determines that it is
economically unfeasible to continue to operate the uncondemned portion as a
first-class office building, or (d) if less than substantially all of the Leased
Premises is taken, but Tenant, acting in good faith, determines that because of
such taking it is economically unfeasible to continue to conduct its business in
the uncondemned portion of the Leased Premises, then in the case of (a) or (b),
either party, and in the case of (c), Landlord, and in the case of (d), Tenant,
shall have the right to terminate this Lease as of the date when possession of
that part which was taken is required to be delivered or surrendered to the
condemning authority; and in such case all rent and other charges shall be
adjusted to the date of termination. Notwithstanding that the entire Leased
Premises are not condemned or taken for any public or quasi-public use or
purpose, Tenant shall have the right to terminate this Lease in the event that
(i) vehicular access to the parking lot servicing the Leased Premises is taken,
or (ii)
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more than ten percent of the existing parking spaces servicing the Leased
Premises are taken (unless Landlord replaces the lost parking spaces with new
parking spaces within reasonable proximity to the Leased Premises). The
foregoing right of termination shall be applicable to the taking of any estate
or interest whatsoever which, as a matter of law, would deprive Landlord or
Tenant of any right to possession (in common with others, as to common areas of
the Building) for any period in excess of sixty (60) consecutive days from the
date of taking, whether or not the taking be in fee, for a term of years or of
any other estate or interest; and a taking shall include the transfer of title
or of any interest in the Building by deed or other instrument in settlement of
or in lieu of transfer by operation of law incident to condemnation proceedings.
Tenant shall have no right to participate or share in any
condemnation claim, damage award or settlement in lieu thereof with respect to
any taking of any nature; provided, however, that Tenant shall not be precluded
from claiming or receiving payment for Tenant's relocation and moving expenses
and the unamortized cost of any improvements installed by Tenant as may be
specifically permitted under applicable law to tenants generally so long as the
amount of the same is not subtracted from the award which Landlord is entitled
to receive.
21. CASUALTY DAMAGE. In the event of damage to or destruction of the
Leased Premises caused by fire or other casualty, or of the entrances and other
common facilities necessary to provide normal access to the Leased Premises, or
to other portions of the Building or its equipment which portions and equipment
are necessary to provide services to the Leased Premises in accordance herewith,
Landlord shall undertake to make and complete repairs and restorations as
hereafter provided, unless this Lease be terminated by Landlord or Tenant or
unless any mortgagee which is entitled to receive casualty insurance proceeds
fails to make available to Landlord a sufficient amount of such proceeds to
cover the cost of such repairs and restoration.
If (a) the damage is of such nature or extent, in Landlord's
sole judgment, that more than one hundred and eighty (180) consecutive days,
after commencement of the work, would be required (with normal work crews and
hours) to repair and restore the part of the Leased Premises or the Building
which has been damaged, or (b) a substantial portion of the Leased Premises or
the Building is so damaged that, in Landlord's sole judgment, it is uneconomic
to restore or repair the Leased Premises or the Building, as the case may be, or
(c) less than two (2) years remain on the Lease Term (unless there are renewal
right(s) available to Tenant, and Tenant elects to exercise such available
renewal right), Landlord shall so advise Tenant promptly, and either party, in
the case described in clause (a) above, or Landlord, in the case described in
clauses (b) or (c) above, for a period of ten (10) days thereafter, shall have
the right to terminate this Lease by written notice to the other, as of the date
specified in such notice, which termination date shall be no later than thirty
(30) days after the date of such notice.
In the event of such fire or other casualty, if this Lease is
not terminated pursuant to the terms of this Section 21, if sufficient casualty
insurance proceeds are available for use for such restoration or repair, and if
this Lease is then in full force and effect, Landlord shall proceed diligently
to restore the Leased Premises (including the Improvements) to substantially its
condition prior to the occurrence of the damage, provided that Landlord shall
not be obligated to repair or restore any alterations, additions or fixtures
which Tenant may have installed (whether or not Tenant has the right or the
obligation to remove the same or is required to leave the same
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on the Leased Premises as of the expiration or earlier termination of this
Lease) unless Tenant, in a manner satisfactory to Landlord, assures payment in
full of all cost as may be incurred by Landlord in connection therewith.
Landlord is not required hereunder to insure any improvements or alterations
made by Tenant, to the Leased Premises, or any fixtures, equipment or other
property of Tenant. Tenant shall have the right, at its sole expense, to insure
the value of its leasehold improvements, fixtures, equipment or other property
located in the Leased Premises, for the purpose of providing funds to Landlord
to repair and restore the Leased Premises to substantially its condition prior
to the occurrence of the damage. If there be any such alteration, fixtures or
additions and Tenant does not assure or agree to assure payment of the cost of
restoration or repair as aforesaid, Landlord shall have the right to determine
the manner in which the Leased Premises shall be restored so as to be
substantially as the Leased Premises existed prior to the damage occurring, as
if such alterations, additions or fixtures had not then been made or installed.
The validity and effect of this Lease shall not be impaired in any way by the
failure of Landlord to complete repairs and restoration of the Leased Premises
or of the Building within one hundred eighty (180) consecutive days after
commencement of work, even if Landlord had in good faith notified Tenant that
the repair and restoration could be completed within such period, provided that
Landlord proceeds diligently with such repair and restoration, further provided
that in the event Landlord fails to complete the repairs and restoration within
two hundred ten (210) consecutive days after commencement of work for any reason
other than a delay caused by Tenant, Tenant shall have the right to terminate
this Lease upon thirty (30) days prior written notice to Landlord, in which
event this Lease shall terminate automatically at the end of such 30-day period
unless Landlord has completed the repairs and restorations prior to the end of
the 30-day period.
In the case of damage to the Leased Premises which is of a
nature or extent that Tenant's continued occupancy is substantially impaired as
reasonably determined by Tenant, the Annual Fixed Rent otherwise payable by
Tenant hereunder shall be equitably abated or adjusted for the duration of such
impairment. Anything to the contrary in this Lease notwithstanding, expressed or
implied, Landlord shall have no liability to Tenant for and shall have no duty
to repair, replace or restore any damage whatsoever, occurring as a result of
leakage or seepage of water or any other liquid from any source whatsoever, or
breakage of any pipes, mains or other plumbing located in or about the Building,
or snow, frost, steam, excessive heat or cold, falling plaster, sewage, gas,
odors, noise, or by air conditioning or heating apparatus. Provided, however,
Landlord shall repair, replace and restore as an Operating Expense (unless
Landlord receives insurance proceeds for the cost of such repair) of the
Building, all damage to the Building structure, systems and fixtures. Tenant
shall be responsible to insure and/or repair all of Tenant's leasehold
improvements and all equipment, fixtures and personal property located in the
Leased Premises.
22. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF
SUBROGATION.
(a) Tenant covenants and agrees to exonerate, indemnify,
defend, protect and save Landlord, owner of the Lot and Landlord's managing
agent, if any, harmless from and against any and all claims, demands, expenses,
losses, suits and damages as may be occasioned by reason of (a) any accident or
matter occurring on the Leased Premises, causing injury to persons or damage to
property (including, without limitation, the Leased Premises), unless such
accident or other matter resulted from the negligence or otherwise tortious act
of Landlord or
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Landlord's agents or employees, or (b) the negligence or otherwise tortious act
of Tenant or anyone in or about the Building on behalf or at the invitation or
right of Tenant.
(b) Tenant shall keep in force at its own expense
comprehensive general liability insurance (including a contractual liability
insurance endorsement) in companies acceptable to Landlord sufficient to cover
such indemnification and naming as additional insured Landlord, owner of the
Lot, Landlord's managing agent, if any, and Tenant against claims for personal
injury, including bodily injury, death or property damage in amounts not less
than $1,000,000 (or such higher limits as may be determined by Landlord), and
Tenant will further deposit the policy or policies of such insurance, or
certificates thereof, with Landlord. Said policy or policies of insurance or
certificates thereof shall have attached thereto an endorsement that such policy
shall not be canceled without at least ten (10) days prior written notice to
Landlord and Landlord's managing agent, if any, and that no act or omission of
Tenant shall invalidate the interest of Landlord under said insurance.
(c) Landlord covenants and agrees to exonerate, indemnify,
defend, protect and save Tenant harmless from and against any and all claims,
demands, expenses, losses, suits and damages as may be occasioned by reason of
(a) any accident or matter occurring on the Lot outside of the Leased Premises,
causing injury to persons or damage to property (including, without limitation,
the Leased Premises), unless such accident or other matter resulted from the
negligence or otherwise tortious act of Tenant or Tenant's agents or employees,
or (b) the negligence or otherwise tortious act of Landlord or anyone in or
about the Building on behalf or at the invitation or right of Landlord.
(d) Landlord shall keep in force as an Operating Expense 100%
replacement value "all-risk" property insurance and comprehensive general
liability insurance (including a contractual liability insurance endorsement)
sufficient to cover such indemnification against claims for personal injury,
including bodily injury, death or property damage in amounts not less than
$2,000,000.
(e) Landlord and Tenant hereby release the other from any and
all liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
covered by any insurance then in force, even if such fire or other casualty
shall have been caused by the fault or negligence of the other party, or anyone
for whom such party may be responsible, provided, however, that this release
shall be applicable and in force and effect only to the extent of and with
respect to any loss or damage occurring during such time as the policy or
policies of insurance covering said loss shall contain a clause or endorsement
to the effect that this release shall not adversely affect or impair said
insurance or prejudice the right of the insured to recover thereunder.
23. MORTGAGEE AND OTHER AGREEMENTS. In the event any person, firm,
corporation or other entity who is a party to any instrument to which this Lease
is subject or subordinate (including, without limitation, any mortgage now or
hereafter placed upon the Building or Lot or on any interest created therein) or
their successor(s), succeeds thereunder to the interest of Landlord hereunder in
the Building or the Lot, or acquires the right to possession of the Building or
the Lot, such person, firm, corporation or other entity shall not be (a) liable
for any act or omission of the party named above as Landlord under this Lease;
(b) liable for the performance of
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Landlord's covenants hereunder which arise and accrue prior to such person,
firm, corporation or other entity succeeding to the interest of Landlord
hereunder or acquiring such right to possession; (c) subject to any offsets or
defenses which Tenant may have at any time against Landlord; (d) bound by any
rent which Tenant may have paid previously for more than one (1) month in
advance; and (e) shall not be bound by any amendment or modification hereof
relating to the reduction of rent, shortening of term, or effecting a
cancellation or surrender hereof and made without the consent of such person,
firm, corporation or other entity.
The parties hereto agree, from time to time as may be
requested, to execute, acknowledge and deliver an estoppel letter certifying to
such party as may be designated in the request, including any mortgagee, that
this Lease is in full force and effect and has not been amended, modified or
superseded, that Landlord has satisfactorily completed all construction work
required by this Lease, that Tenant has accepted the Leased Premises and is now
in possession thereof, that Tenant has no defense, offsets or counterclaims
hereunder or otherwise against Landlord with respect to this Lease or the Leased
Premises and neither Landlord nor Tenant is in default hereunder (or if any of
the foregoing not be the case, specifying in reasonable detail the extent and
nature thereof), that Tenant has no knowledge of any pledge or assignment of
this Lease or rentals hereunder, that rent is accruing under this Lease but has
not been paid more than one (1) month in advance and the date to which rent has
been paid; and any other instrument as may be reasonably requested to be
executed by Tenant by any mortgagee of the Lot or the Building or any interest
therein, so long as the rights of Tenant as provided for by this Lease are not
materially affected by any such other instrument. Tenant's estoppel letter shall
be in the form of Exhibit "B" attached hereto and made a part hereof, or in such
other form as Landlord or its mortgagee shall hereafter proscribe.
24. SUBORDINATION AND ATTORNMENT. This Lease and the estate, interest
and rights hereby created are subordinate to any mortgage now or hereafter
placed upon the Lot, the Building or any estate or interest therein, including,
without limitation, any mortgage on any leasehold estate, and to all renewals,
modifications, consolidations, replacements and extensions of the same as well
as any substitutions therefor. Tenant agrees that in the event any person, firm,
corporation or other entity acquires the right to possession of the Lot and the
Building including any mortgagee or holder of any estate or interest having
priority over this Lease, Tenant shall, if requested by such person, firm,
corporation or other entity, attorn to and become the tenant of such person,
firm, corporation or other entity, upon the same terms and conditions as are set
forth herein for the balance of the Lease Term. Notwithstanding the foregoing,
any mortgagee may, at any time, subordinate its mortgage to this Lease, without
Tenant's consent, by notice in writing to Tenant, and thereupon this Lease shall
be deemed prior to such mortgage without regard to their respective dates of
execution and delivery, and in that event, such mortgagee shall have the same
rights with respect to this Lease as though it had been executed prior to the
execution and delivery of the mortgage.
Landlord shall, as an express condition to Tenant's agreement
to subordinate this Lease to any mortgage or other encumbrance now or hereafter
placed upon the Building, obtain a non-disturbance agreement from the holder of
such mortgage or other encumbrance now or hereafter placed upon the Building
providing that (i) the holder of such mortgage or other encumbrance shall not
disturb Tenant's possession under this Lease in the event of foreclosure,
transfer in lieu thereof, and other enforcement proceedings, provided that
tenant shall not be in
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default hereunder, (ii) the holder of such mortgage or other encumbrance agrees
that a foreclosure will not terminate or void any option to renew or purchase,
and (iii) provided Tenant leases more than 50% of the Building's rentable area
the holder of such Mortgage or other encumbrance shall permit insurance proceeds
and condemnation award to be used to restore the Leased Premises and Building.
25. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, pledge,
mortgage or otherwise transfer or encumber this Lease, nor sublet all or any
part of the Leased Premises or permit the same to be occupied or used by anyone
other than Tenant or its employees without Landlord's prior written consent,
which consent shall not be unreasonably withheld or delayed. It will not be
unreasonable for Landlord to withhold its consent if the reputation, financial
responsibility, or business of a proposed assignee or subtenant is
unsatisfactory to Landlord in the exercise of its reasonable business judgment.
Anything contained herein to the contrary notwithstanding, Tenant may assign
this Lease or sublet the Leased Premises or any portion thereof, without
Landlord's consent, to any corporation which controls, is controlled by or is
under common control with Tenant, or to any corporation resulting from a merger
or consolidation with Tenant, or to any person or entity which acquires all the
assets of Tenant's business as a going concern, provided that (i) the assignee
or sublessee assumes, in full, the obligations of Tenant under this Lease, (ii)
Tenant remains fully liable under this Lease, (iii) the use of the Leased
Premises remains unchanged, and (iv) provided that the surviving corporation or
acquirer has a "net worth" (excluding intangible assets) in excess of that of
Tenant at the time of the merger, consolidation or acquisition.
Tenant's request for consent shall be in writing and contain
the name, address, and description of the business of the proposed assignee or
subtenant, its most recent financial statement and the other evidence of
financial responsibility, its intended use of the Leased Premises, and the terms
and conditions of the proposed assignment or subletting.
Within fifteen (15) days from receipt of such request,
Landlord shall either: (a) grant or refuse consent; or (b) elect to require
Tenant (i) to execute an assignment of lease or sublease of Tenant's interest
hereunder to Landlord or its designee upon the same terms and conditions as are
contained herein, together with an assignment of Tenant's interest as sublessor
in any such proposed sublease, or (ii) if the request is for consent to a
proposed assignment of this Lease, to terminate this Lease and the term hereof
effective as of the last day of the second month following the month in which
the request was received.
Each assignee hereunder shall assume and be deemed to have
assumed this Lease and shall be and remain liable jointly and severally with
Tenant for all payments and for the due performance of all terms, covenants,
conditions and provisions herein contained on Tenant's part to be observed and
performed. No assignment shall be binding upon Landlord unless the assignee
shall deliver to Landlord an instrument in recordable form containing a covenant
of assumption by the assignee, but the failure or refusal of assignee to execute
the same shall not release assignee from its liability as set forth herein.
All the foregoing notwithstanding, Tenant shall not enter into
any lease, sublease, license, concession or other agreement for the use,
occupancy or utilization of the Leased Premises or any portion thereof, which
provides for a rental or other payment for such use,
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occupancy or utilization based in whole or in part on the income or profits
derived by any person from the property leased, used, occupied or utilized
(other than an amount based on a fixed percentage or percentages of receipts or
sales). Any such purported lease, sublease, license, concession or other
agreement shall be absolutely void and ineffective as a conveyance or any right
or interest in the possession, use or occupancy of any part of the Leased
Premises.
Any consent by Landlord hereunder shall not constitute a
waiver of strict future compliance by Tenant of the provisions of this Section
25 or a release of Tenant from the full performance by Tenant of any of the
terms, covenants, provisions, or conditions in this Lease contained.
26. DEFAULT. Any other provisions in the Lease notwithstanding, it
shall be an Event of Default under this Lease if Tenant fails to pay any
installment of Fixed Rent, Additional Rent or other sum payable by Tenant
hereunder when due and such failure continues for a period of ten (10) days
after written notice given by or on behalf of Landlord to Tenant, provided,
however, Landlord need not give any such written notice, for non-payment of rent
and Tenant shall not be entitled to any such period of grace, more than twice in
any twelve (12) month period, Tenant abandons the Leased Premises or uses or
occupies the Leased Premises otherwise than as permitted by Sections 1 and 9
hereof, or assigns or sublets, or purports to assign or sublet, the Leased
Premises or any part thereof otherwise than in the manner and upon the
conditions set forth in Section 25 hereof, Tenant fails to observe or perform
any other covenant or agreement of Tenant herein contained and such failure
continues after written notice given by or on behalf of Landlord to Tenant for
more than thirty (30) days and such additional time, if any, as is reasonably
necessary to cure such failure, provided Tenant commences to cure such failure
within such thirty (30) day period and diligently thereafter prosecutes such
cure to completion, without Landlord's prior written consent, Tenant removes or
attempts to remove or manifests an intention to remove any or all of Tenant's
property from the Leased Premises otherwise than in the ordinary and usual
course of business, Tenant makes any assignment for the benefit of creditors;
Tenant commits an act of bankruptcy or files a petition or commences any
proceeding under any bankruptcy or insolvency law; a petition is filed or any
proceeding is commenced against Tenant under any bankruptcy or insolvency law
and such petition or proceeding is not dismissed within thirty (30) days; Tenant
is adjudicated a bankrupt; Tenant by any act indicates its consent to, approval
of or acquiescence in, or a court approves, a petition filed or proceeding
commenced against Tenant under any bankruptcy or insolvency law; a receiver or
other official is appointed for Tenant or for a substantial part of Tenant's
assets or for Tenant's interests in this Lease; any attachment or execution
against a substantial part of Tenant's assets or of Tenant's interest in this
Lease remains unstayed or undismissed for a period of more than ten (10) days; a
substantial part of Tenant's assets or of Tenant's interest in this Lease is
taken by legal process in any action against Tenant, or any of the foregoing
occur as to any guarantor or surety of Tenant's performance under this Lease, or
such guarantor or surety defaults on any provision under its guaranty or
suretyship agreement.
If Landlord should be in default in the performance of any of
its obligations under this Lease, which default continues for a period of more
than thirty (30) days after receipt of written notice from Tenant specifying
such default, or if such default is of a nature to require more than thirty (30)
days for remedy and continues beyond the time reasonably necessary to cure (and
Landlord has not undertaken procedures to cure the default within such thirty
(30) day
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period and diligently pursued such efforts to complete such cure), Tenant may,
in addition to any other remedy available at law or in equity at its option,
upon written notice, incur any expense necessary to perform the obligation of
Landlord specified in such notice and Landlord shall reimburse Tenant promptly
after receipt of a statement therefor from Tenant.
27. LANDLORD'S REMEDIES.
(a) If an Event of Default hereunder shall have happened and
be continuing, Landlord may, at its option:
(i) declare due and payable and sue for and recover,
all unpaid Fixed Rent for the unexpired period of the Lease Term (and also all
Additional Rent as the amounts(s) of same can be determined or reasonably
estimated) as if by the terms of this Lease the same were payable in advance,
together with all legal fees and other expenses incurred by Landlord in
connection with the enforcement of any of Landlord's rights and remedies
hereunder, such sum to be discounted at the prevailing yield to maturity on
United States Treasury Notes having the closest maturity to the expiration date
of the Lease Term; provided, however, that the remedies set forth in this
subparagraph (i) shall only be available to Landlord in the event Tenant
defaults by failing to pay any installment of Fixed Rent or Operating Expense
Estimate or Operating Expense Adjustment in accordance with Section 26 above,
and/or
(ii) collect or bring action for such Fixed Rent and
Additional Rent as being rent in arrears, or may enter judgment therefor in an
amicable action as herein elsewhere provided for in case of rent in arrears, or
may file a Proof of Claim in any bankruptcy or insolvency proceeding for such
Fixed Rent and Additional Rent, or institute any other proceedings, whether
similar or dissimilar to the foregoing, to enforce payment thereof, and/or
(iii) terminate the Lease Term by giving written
notice thereof to Tenant and, upon the giving of such notice, the Lease Term and
the estate hereby granted shall expire and terminate with the same force and
effect as though the date of such notice was the date hereinbefore fixed for the
expiration of the Lease Term, and all rights of Tenant hereunder shall expire
and terminate, but Tenant shall remain liable as hereinafter provided, and/or
(iv) exercise any other rights and remedies available
to Landlord at law or in equity.
(b) If any Event of Default shall have happened and be
continuing, Landlord may, whether or not the Lease Term has been terminated as
herein provided, re-enter and repossess the Leased Premises or any part thereof
by summary proceedings, ejectment or otherwise and Landlord shall have the right
to remove all persons and property therefrom. Landlord shall be under no
liability for or by reason of any such entry, repossession or removal; and no
such re-entry or taking of possession of the Leased Premises by Landlord shall
be construed as an election on Landlord's part to terminate the Lease Term
unless a written notice of such intention be given to Tenant pursuant to Section
26(a)(ii) or unless the termination of this Lease be decreed by a court of
competent jurisdiction.
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(c) At any time or from time to time after the repossession of
the Leased Premises or any part thereof pursuant to Section 26(b), whether or
not the Lease Term shall have been terminated pursuant to Section 26(a)(ii),
Landlord will attempt to relet all or any part of the Leased Premises for the
account of Tenant for such term or terms (which may be greater or less than the
period which would otherwise have constituted the balance of the Lease Term) and
on such conditions (which may include concessions or free rent) and for such
uses as Landlord, in its absolute discretion, may determine, and Landlord may
collect and receive any rents payable by reason of such reletting; provided that
Landlord shall not be obligated to relet the Leased Premises so long as Landlord
has other comparable space available for lease in the Building. Landlord shall
not be required to accept any tenant offered by Tenant or observe any
instruction given by Tenant about such reletting, or do any act or exercise any
care or diligence with respect to such reletting or to the mitigation of
damages. For the purpose of such reletting, Landlord may decorate or make
repairs, changes, alterations or additions in or to the Leased Premises or any
part thereof 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 legal fees expended by Landlord.
(d) No expiration or termination of the Lease Term pursuant to
Section 26(a)(ii), by operation of law or otherwise, and no repossession of the
Leased Premises or any part thereof pursuant to Section 26(b), or otherwise, and
no reletting of the Leased Premises or any part thereof pursuant to Section
26(c) shall relieve Tenant of its liabilities and obligations hereunder, all of
which shall survive such expiration, termination, repossession or reletting.
(e) In the event of any expiration or termination of this
Lease or repossession of the Leased Premises or any part thereof by reason of an
occurrence of an Event of Default, and Landlord has not elected to accelerate
rent pursuant to Section 27(a)(i), Tenant shall pay to Landlord the Fixed Rent,
Additional Rent and other sums required to be paid by Tenant to and including
the date of such expiration, termination or repossession; and, thereafter,
Tenant shall, until the end of what would have been the expiration of the Lease
Term in the absence of such expiration, termination or repossession, and whether
or not the Leased Premises or any part thereof shall have been relet, be liable
to Landlord for, and shall pay to Landlord, as liquidated and agreed current
damages, the Fixed Rent, Additional Rent and other sums which would be payable
under this Lease by Tenant in the absence of such expiration, termination or
repossession, less the net proceeds, if any, of any reletting effected for the
account of Tenant pursuant to Section 26(c), after deducting from such proceeds
all of Landlord's reasonable expenses in connection with such reletting
(including, without limitation, all related reasonable repossession costs,
brokerage commissions, legal expenses, attorneys' fees, employees' expenses,
alteration costs and expenses of preparation for such reletting). Tenant shall
pay such current damages on the days on which the Fixed Rent would have been
payable under this Lease in the absence of such expiration, termination or
repossession, and Landlord shall be entitled to recover the same from Tenant on
each such day.
(f) At any time after such expiration or termination of this
Lease or repossession of the Leased Premises or any part thereof by reason of
the occurrence of an Event of Default, whether or not Landlord shall have
collected any current damages pursuant to Section 26(e), Landlord shall be
entitled to recover from Tenant, and Tenant shall pay to Landlord on
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demand, unless Tenant has paid the whole of accelerated rent pursuant to Section
27(a)(i), as and for liquidated and agreed final damages for Tenant's default
and in lieu of all current damages beyond the date of such demand (it being
agreed that it would be impracticable or extremely difficult to fix the actual
damages), an amount equal to the excess, if any, of Fixed Rent, Additional Rent
and other sums which would be payable under this Lease for the remainder of the
Lease Term from the date of such demand (or, if it be earlier, the date to which
Tenant shall have satisfied in full its obligations under Section 26(e) to pay
current damages) for what would have been the then unexpired term of this Lease
in the absence of such expiration, termination or repossession, discounted at
the prevailing yield to maturity on United States Treasury Notes having the
closest maturity to the expiration date of the Lease Term, over the then fair
rental value of the Leased Premises for the same period, discounted at a like
rate. If any statute or rule of law shall validly limit the amount of such
liquidated final damages to less than the amount above agreed upon, Landlord
shall be entitled to the maximum amount allowable under such statute or rule of
law.
(g) Tenant, in consideration for the execution of this Lease
by Landlord and for the covenants and agreements on the part of Landlord herein
contained, and fully comprehending the relinquishment of certain rights
including rights of pre-judgment notice and hearing, hereby expressly authorizes
any attorney of any Court of Record to accept service of process for, to appear
for, and to confess judgment against Tenant in any and all actions brought
hereunder by Landlord against Tenant to recover possession from time to time of
the Leased Premises in accordance with the terms hereof (and Tenant agrees that
upon the entry of each judgment for said possession a Writ of Possession or
other appropriate process may issue forthwith).
(h) In any action for ejectment or for distraint, 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 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 notwithstanding. The authority to confess judgment
against Tenant hereunder shall not be exhausted by one (1) exercise thereof, but
judgment may be confessed as provided herein from time to time as often as any
Event of Default occurs under this Lease, and such authority may be exercised as
well after the expiration of the Lease Term and/or during or after the
expiration of any extended or renewal term.
(i) No right or remedy herein conferred upon or reserved to
either party is intended to be exclusive of any other right or remedy herein by
law provided, but each shall be cumulative and in addition to every right or
remedy given herein or now or hereafter existing at law or in equity or by
statute.
(j) No waiver by either party of any breach by the other of
any of the other's obligations, agreements or covenants herein shall be a waiver
of any subsequent breach or of any obligation, agreement or covenant, nor shall
any forbearance by either party to seek a remedy for any breach by the other be
a waiver by either party or any rights and remedies with respect to such or any
subsequent breach.
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(k) In the event of a breach or threatened breach by either
party of any of the covenants or provisions hereof, the other shall have the
right of injunction and right to invoke any remedy allowed at law or in equity
as if re-entry summary proceedings and other remedies were not herein provided
for.
(l) Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or dispossessed for any cause, or in the event of Landlord
obtaining possession of the Leased Premises, by reason of the violation by
Tenant of any of the covenants and conditions of this Lease, or otherwise.
28. LEGAL FEES AND OTHER COSTS. The prevailing party in any enforcement
proceeding shall be entitled to reimbursement of all reasonable legal fees and
expenses by the non-prevailing party.
29. LATE CHARGE. If any installment of Fixed Rent, Additional Rent or
other sums payable by Tenant to Landlord under this Lease shall not be paid on
the due date thereof, Tenant shall pay to Landlord a "late charge" of three
percent (3%) of the amount so due for the purpose of defraying the expense
incident to handling such delinquent payment.
30. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns; provided that Landlord and each successive owner of the
Building and/or the Lot shall be liable only for obligations accruing during the
period of its ownership or interest in the Building or the Lot; and from and
after the transfer by Landlord or such successive owner of its ownership or
other interest in the Building or the Lot, Tenant shall look solely to the
successors in title for the performance of Landlord's obligations hereunder. The
liability of Landlord or any successive owner of the Building and/or the Lot
hereunder and all of its officers, employees, shareholders or joint venturers or
partners, if any, whether general or limited, shall be limited to Landlord's
estate or other title or interest in the Building and/or the Lot.
31. WAIVERS. No delay or forbearance by either party in exercising any
right or remedy hereunder or in undertaking or performing any act or matter
which is not expressly required to be undertaken by such party shall be
construed, respectively, to be a waiver of such party's rights or to represent
any agreement by such party to undertake or perform such act or matter
thereafter.
32. 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 Leased Premises and/or any claim of
injury or damage and any emergency statutory or any other statutory remedy.
33. SEVERABILITY. Each covenant and agreement in this Lease shall for
all purposes be construed to be a separate and independent covenant or
agreement. If any provision in this Lease or the application thereof shall to
any extent be invalid, illegal or otherwise unenforceable, the remainder of this
Lease, and the application of such provision other than as invalid, illegal or
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unenforceable, shall not be affected thereby; and such provisions in this Lease
shall be valid and enforceable to the fullest extent permitted by law.
34. NOTICES; PAYMENT OF RENT.
(a) Each notice, demand, request or other communication
required or permitted under the terms of this Lease shall be in writing and,
unless and until otherwise specified in a written notice by the party to receive
it, shall be sent to the parties at the following respective addresses:
if intended for Tenant:
WorldGate Communications, Inc.
3220 Tillman Drive, Suite 300
Bensalem, PA 19020
Attention: Randall J. Gort, V.P. and General Counsel
FAX NO.: (215) 633-9590
If intended for Landlord:
c/o Balanced Capital LLC
580 Virginia Drive, Suite 202
Fort Washington, PA 19034
Attention: Frank Seidman
FAX NO.: (215) 542-8824
with a copy to:
Virginia M. Duffy, Esquire
801 Old York Road, Suite 301
Jenkintown, PA 19026-1611
FAX NO.: (215) 885-7543
Notices may be given on behalf of any party by its legal counsel.
(b) Each such notice, demand, request or other communication
shall be deemed to have been properly given for all purposes if (i) hand
delivered or (ii) mailed by registered or certified mail of the United States
Postal Service, return receipt requested, postage prepaid or (iii) delivered to
a nationally recognized overnight courier service for next business day (or
sooner) delivery or (iv) delivered via telecopier or facsimile transmission to
the facsimile number listed in this Section, provided, however, that if such
communication is given via telecopier or facsimile transmission, an original
counterpart of such communication shall concurrently be sent in the manner
specified in either clause (iii) of this subsection (b) or be hand delivered by
the next business day.
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(c) Each such notice, demand, request or other communication
shall be deemed to have been received by its addressee, and to have been
effectively given, upon the earlier of (i) actual delivery, (ii) refusal of
acceptance at the proper address or (iii) three business days after deposit
thereof at any main or branch United States post office, if sent in accordance
with clause (ii) of subsection (b) of this Section and (iv) one business day
after delivery to the courier, if sent pursuant to clause (iii) of subsection
(b) of this Section; provided that in the case of delivery by telecopier or
facsimile transmission, any transmission not received by 5:00 p.m. on a business
day shall be deemed to have been given on the next business day after receipt.
(d) All payments of rent and any other charges under this
Lease shall be paid to Landlord at the address of Landlord provided in this
Section or at such other address as Landlord may specify in written notice given
pursuant hereto.
35. AMENDMENT AND MODIFICATIONS. This Lease contains the entire
agreement between the parties hereto, and shall not be amended, modified or
supplemented unless by agreement in writing signed by both Landlord and Tenant.
36. SECURITY DEPOSIT; OPTION TO USE LETTER OF CREDIT.
(a) Tenant shall deposit the sum of $1,026,000 with Landlord
as a security deposit (the "Security Deposit") to be held by Landlord as
security for Tenant's performance of all of Tenant's obligations under this
Lease. Landlord shall deposit the Security Deposit in a segregated
interest-bearing account, and all interest earned on the account shall be paid
to Tenant at such time as the Security Deposit is returned to Tenant. Landlord,
in its sole discretion, may apply the Security Deposit to cure any Event of
Default under this Lease. If any such application is made, upon notice by
Landlord to Tenant, Tenant shall promptly replace the amount so applied. Within
thirty (30) days after expiration or earlier termination of this Lease, Landlord
shall return the Security Deposit (less any portion thereof applied to reimburse
Landlord for amounts due by reason of an Event of Default) to Tenant. Tenant
will not look to any foreclosing mortgagee on the Lot or Building or any
interest therein for the return of the Security Deposit unless the mortgagee has
expressly assumed Landlord's obligations under this Lease or has actually
received the balance of the Security Deposit. In the event Landlord sells the
Lot and Building and transfers the Security Deposit to a new owner of the Lot
and Building, Tenant shall look solely to such new owner for the return of the
balance of the Security Deposit.
(b) As long as Tenant has not exercised its right of
termination under Section 3(c) of this Lease and there is no uncured monetary
Event of Default, the amount of the Security Deposit shall be reduced at the end
of the sixth month of each Lease Year as provided in Section 1, and any excess
Security Deposit shall be returned to Tenant within ten (10) business days after
Tenant's written request therefor. The Security Deposit shall be waived (and
returned to Tenant within ten (10) business days after Tenant's written request
therefor) if Tenant becomes a public company characterized as investment grade
by Standard & Poors, and in the latter event, the requirement of a Security
Deposit shall be waived as long as Tenant remains an Standard & Poors investment
grade company. Upon cancellation of this Lease by Tenant under Section 3(c) and
payment of the early termination payment set forth therein (to the extent not
waived as set
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forth therein), the Security Deposit shall be returned to Tenant, within ten
(10) business days after Tenant's written request therefor.
(c) In lieu of a cash Security Deposit, Tenant may replace the
Security Deposit required under Section 1 with a letter of credit (referred to
in this Agreement as the "Letter of Credit." If Tenant elects to deliver a
Letter of Credit, then the Letter of Credit, the following provisions shall
apply:
(i) The Letter of Credit shall be irrevocable, shall
be drawn on a commercial bank reasonably acceptable to Landlord, shall name the
Landlord as Beneficiary, shall have a term of at least twelve months at a time
and shall initially be in the amount of $1,026,000. No later than thirty five
(35) days prior to the then scheduled expiration date of the Letter of Credit,
Tenant shall deliver a new letter of credit or an amendment extending the
expiration date of the existing letter for at least twelve additional months. If
and when Tenant is entitled to a reduction in the amount of the Security Deposit
as provided in Section 1 and Section 36(b), Landlord will accept an amendment to
the Letter of Credit reducing the amount thereof to the reduced amount permitted
hereunder.
(ii) The Letter of Credit shall state that it may be
drawn by the Landlord upon presentation to the issuing bank of the original
letter of credit and a letter referencing this Lease by date and names of the
parties, signed by a partner, member or officer of the Landlord, certifying that
(A) "This letter of credit expires less than
thirty five (35) days from the date of this draw, and WorldGate Communications,
Inc. (Tenant) has failed to deliver to the undersigned a new letter of credit or
amendment of the existing letter of credit extending the expiration date for at
least twelve additional months" OR
(B) "An Event of Default has occurred under
the Lease which has not been cured as of the close of business on the business
day preceding presentation of this Letter of Credit."
(iii) If Landlord draws upon the Letter of Credit
under this Section 36(c), the cash proceeds of the Letter of Credit shall be
held and disposed of in accordance with the provisions of this Lease applicable
to the cash Security Deposit. Nothing in this Section shall be deemed a waiver
of any rights Tenant may have against Landlord if Landlord makes a certification
under clause (ii) which is false when made.
(iv) If Tenant elects to secure its obligations with
a Letter of Credit, (A) upon transfer of the Property by Landlord, Landlord may
require amendment of the Letter of Credit to name the new owner as Beneficiary;
and (B) upon change in the amount of the required Security Deposit under
Subsection 36(b) above, Landlord shall accept a modification reducing the amount
in accordance with Section 36(b).
(d) Tenant shall deliver the Security Deposit to Landlord no
later than December 15, 1998 (the "Security Deposit Delivery Date"), provided,
however, that if settlement on Landlord's acquisition of the Property is
scheduled for a date later than December 17, 1998,
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Landlord shall so notify Tenant and in that event, the Security Deposit Delivery
Date shall be extended by Landlord to the date which is two business days before
Landlord's scheduled settlement. If the Security Deposit is cash, Tenant shall
deliver immediately available funds by wire transfer on the Security Deposit
Delivery Date, to an account designated by Landlord. If the Security Deposit is
to be a Letter of Credit, then Tenant shall deliver a draft of the proposed
letter for Landlord's approval no later than December 5th, and shall delivery
the signed original Letter of Credit at Landlord's offices by 5:00 p.m. on the
Security Deposit Delivery Date. Tenant acknowledges that Landlord will not
acquire the Property without the Security Deposit, and accordingly that time for
delivery is strictly of the essence of this Agreement. Notwithstanding any other
provision of this Lease, there shall be no notice and cure period for failure to
deliver the Security Deposit on time. If Tenant fails to deliver the Security
Deposit on time, it shall be an immediate Event of Default entitling Landlord to
cancel this Lease at Landlord's option.
37. ENVIRONMENTAL MATTERS.
(a) Tenant shall promptly deliver to Landlord copies of any of
the following documents that Tenant receives or prepares:
(i) applications or other materials regarding the
Land, Building, or Leased Premises submitted to any governmental agency in
compliance with Environmental Statutes;
(ii) any notifications regarding the Land, Building,
or Leased Premises submitted to any person pursuant to Environmental Statutes;
(iii) any permit, license, approval, amendment or
modification thereto granted regarding the Land, Building, or Leased Premises
pursuant to Environmental Statutes;
(iv) any record or manifest required to be maintained
regarding the Land, Building, or Leased Premises pursuant to Environmental
Statutes; and
(v) any correspondence, notice of violation, summons,
order, complaint or other document received by Tenant or its lessees, sublessees
or assigns (if permitted), pertaining to the Land, Building, or Leased Premises
and to compliance with any Environmental Statutes.
"Environmental Statutes" shall mean all statutes,
ordinances, regulations, orders and requirements of common law regulating
environmental matters concerning (a) activities at the Land, Building or Leased
Premises, (b) repairs or construction of any improvements located on the Land,
(c) handling of any materials, (d) discharges to the air, soil, surface water or
ground water, and (e) storage, treatment or disposal of any waste at or
connected with any activity at the Land, Building or Leased Premises.
(b) In the event that Landlord or Landlord's mortgagee
performs or causes to perform an investigation of the Lot or Building for any of
the below matters, Tenant shall cooperate with Landlord or Landlord's mortgagee
with respect to such investigation:
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(i) compliance at the Land, Building, or Leased
Premises with Environmental Statutes;
(ii) the presence of hazardous substances or
contamination at the Land, Building, or Leased Premises;
(iii) the presence at the Land, Building, or Leased
Premises of polychlorinated biphenyls, substances containing polychlorinated
biphenyls, asbestos, materials containing asbestos, or unreaformaldehyde foam
insulation;
(iv) the presence at the Land of (A) a wetland or
other "water of the United States" for purposes of Section 404 of the federal
Clean Water Act, 33 U.S.C. Section 1344, or any similar area regulated under
any state law, (B) a flood plain or other flood hazard area as defined
pursuant to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32,
Sections 679.101 to .601 (Purdon Sup. 1989), (C) a portion of the coastal
zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C.
Sections 1451-1464, or (D) any other area development of which is
specifically restricted under applicable law by reason of its physical
characteristics or prior use;
(v) the presence at the Land, Building, or Leased
Premises of radon products; or
(vi) the presence at the Land, Building, or Leased
Premises of tanks presently or formerly used for the storage of any liquid or
gas above or below ground.
(c) Intentionally omitted.
(d) In the event any present or future Federal, State or
municipal statute, ordinance, law, rule or regulation requires Landlord or
Tenant to obtain a clearance certificate or Declaration of Non-Applicability,
similar or dissimilar to those required by the New Jersey Environmental Clean-Up
Responsibility Act, upon the expiration or earlier termination of the Lease
Term, or upon the sale of the Lot or Building by Landlord, Tenant will apply
therefor, or execute and deliver an application therefor to Landlord without
delay, and take such action as may be necessary under such applicable statute,
ordinance, law, rule or regulation to obtain such clearance certificate or
Declaration of Non-Applicability.
(e) Landlord shall defend, indemnify and hold harmless Tenant
and its directors, officers, employees, contractors, agents, parents,
subsidiaries, successors and assigns from and against any and all loss, damage,
cost, expense or liability (including attorneys' fees and actual litigation
costs) directly or indirectly arising out of or attributable to the use,
generation, manufacture, production, storage, release, threatened release,
discharge, disposal or presence of a Hazardous Substance on, under or about the
Leased Premises prior to Tenant's taking possession of the Leased Premises, or a
breach of any representation, warranty, covenant or agreement contained herein
including, without limitation, (i) all actual damages, and (ii) the costs of any
required or necessary repairs, cleanup, remediation or detoxification of the
Leased Premises.
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(f) Tenant will not engage in activities in or about the
Property which involve the generation, manufacturing, refining, transportation,
treatment, storage, emission, release, disposal or handling of hazardous
substances, hazardous wastes or hazardous materials (hereinafter collectively
called "Hazardous Substances") as such terms are defined under applicable
Environmental Statutes except that materials routinely used in office buildings
(such as toner for copiers and printers, and maintenance materials) and
materials routinely used in the manufacturing and design of circuit boards and
similar electronic hardware (such as cleaning solutions) that are or contain
Hazardous Substances may be used and stored on the Leased Premises, provided
such is incident to and reasonably necessary for the operation and maintenance
of the Leased Premises as permitted under the provisions of this Lease and is in
compliance with applicable laws, and further provided that the quantity of
Hazardous Substances is not such as would trigger reporting requirements (other
than routine requirements under OSHA and other workplace safety laws) under any
Environmental Statutes. Should any release of Hazardous Substances or solid
waste occur at the Leased Premises or elsewhere on the Property by reason of any
act or omission of Tenant, its agents, employees or invitees, the Tenant shall
immediately take all measures necessary to contain, remove and dispose off of
the Property of all materials released or contaminated by the release and remedy
and mitigate all threats to public health or the environment relating to such
release. When conducting any such measures the Tenant shall comply with
Environmental Statutes. Tenant agrees to indemnify, defend and hold Landlord
harmless of, from and against any and all expense, loss, cost or liability
incurred or suffered by reason of Tenant's breach of this Section 37(f), but
nothing herein shall be deemed to render Tenant liable for actions or omissions
of Landlord or for any contamination pre-existing at the Commencement Date. The
obligations of Tenant under this Section 37 shall survive any expiration or
termination of this Lease.
38. BROKERS. Landlord and Tenant each represent and warrant to the
other that it has not engaged any broker, finder or other person other than the
broker, if any, listed in Section 1 hereof, who would be entitled to any
commission or fees in respect of the negotiation, execution or delivery of this
Lease. Landlord and Tenant each agree to indemnify and hold harmless the other
against any loss, cost, liability or expense incurred by the other as a result
of any claim asserted by any other broker, finder or other person on the basis
of any arrangements or agreements made or alleged to have been made by or on
behalf of the other. Landlord shall be responsible for the payment of a
brokerage fee to the broker listed in Section 1 at Landlord's scheduled
commission rate or as otherwise agreed in writing between Landlord and such
broker.
39. FINANCIAL STATEMENTS. Within ninety (90) days following the end of
Tenant's fiscal year, Tenant shall deliver to Landlord a copy of Tenant's
financial statements (consisting, at a minimum, of Tenant's balance sheet and
income statement) for Tenant's fiscal year just ended, certified by an
independent certified public accountant as presenting fairly, in all material
respects, the financial position of Tenant and the results of its operations in
accordance with generally accepted accounting principles. Landlord shall keep
any information provided to Landlord in accordance with this Section 39
confidential and shall not disclose such information to any third party. In the
event at any time in the future Tenant's stock becomes publicly traded, Tenant
may satisfy the requirements of this Section 39 by providing to Landlord the
financial information which Tenant files with the Securities and Exchange
Commission.
40. INTENTIONALLY OMITTED.
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41. OPTION TO PURCHASE.
(a) GRANT; EXERCISE. Tenant shall have the option to purchase
the Property (the "Purchase Option") at any time after Landlord's acquisition of
the Property at the purchase price set forth below provided it gives Landlord at
least thirty (30) days prior written notice of its desire to exercise the
Purchase Option, provided Tenant is not in default of this Lease at the time of
such exercise, and further provided that Tenant may not exercise its Purchase
Option after the occurrence of a casualty or condemnation which would give
either party the right to terminate this Lease unless and until both sides have
elected to waive their option to terminate this Lease and any applicable
restoration has been completed:
(i) The purchase price for the Property shall be an
amount determined by capitalizing the aggregate Annual Fixed Rent payable for
the Lease Year in which settlement will occur under the Purchase Option using a
nine percent (9%) capitalization rate.
(b) SETTLEMENT. Closing shall take place at the offices of
Tenant's attorney or title company in the county in which the Leased Premises
are located and shall take place no sooner than thirty (30) days and no more
than one hundred twenty (120) days after Tenant gives notice of exercise of the
Purchase Option and no later than the date on which this Lease is then scheduled
to expire by its terms, or as otherwise agreed between the parties. The purchase
price shall be paid at closing in cash or by bank certified, treasurer's or
cashier's check or by plain check of the title insurance company insuring
Tenant's title to the Leased Premises.
(c) PROPERTY; TITLE.
(i) The Property shall include the Lot, together with
the Building and other buildings, structures and improvements thereon erected
and together with all easements, rights and privileges appurtenant thereto,
being all of the real property owned by landlord at the location of the Leased
Premises. The Property is to be conveyed subject to all easements, conditions,
covenants and restrictions of record when Landlord acquires title and otherwise
free and clear of all liens, restrictions, encumbrances, and easements of every
kind, excepting only: (1) easements and other matters of record that do not
affect the use of the Leased Premises as contemplated under this Lease, and (2)
such matters as may have been consented to be Tenant between the date of this
Lease and the date of closing on the Purchase Option; otherwise, title to the
Property shall be good and marketable and such as will be insured by a reputable
title company of Tenant's election at regular rates.
If Landlord is unable to give a good and
marketable title and such as will be so insured, as required in the preceding
paragraph, then Tenant shall have the option of (1) accepting such title as
Landlord is able to convey, with no deduction from or adjustment of the
purchase price except for deduction of the amount of the then principal,
accrued interest and penalties of any encumbrance or other lien or the amount
of any outstanding money judgment (with accrued interest and penalties, if
applicable) so encumbering the Property, or (2) declining to consummate this
purchase; and in the latter event Tenant shall be reimbursed forthwith for
all title insurance charges actually incurred in searching title to the
Property, there shall be no
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further obligation or liability on either of the parties hereunder with respect
to the Purchase Option and this Lease shall continue in accordance with its
terms.
(ii) Provided there is a closing hereunder, Tenant
will be responsible for and shall comply, at Tenant's expense, with the
requirements of any and all notices or orders served upon Landlord after the
date of this Lease and for the payment of any assessments and charges thereafter
made for any public improvements, if work in connection therewith is thereafter
begun in or about the Leased Premises or adjacent thereto.
(d) LOSS OR CASUALTY; CONDEMNATION.
(i) Loss or damage to all or any portion of the
Leased Premises caused by fire or other casualty shall not nullify, cause a
termination of or otherwise affect the Purchase Option, except as follows: If
neither party would have been entitled to cancel this Lease under Section 21 by
reason of such casualty, then the Purchase Option shall remain in effect but
closing thereunder shall be extended until the date which is 10 business days
after Landlord gives notice to Tenant that the damage has been repaired or
restored. If the casualty damage is such that either or both parties have a
right to cancel this Lease under Section 21, then the following shall apply. If
Tenant exercises a right granted in Section 21 to cancel this Lease by reason of
the casualty, then the Tenant shall be deemed to have automatically canceled its
exercise of the Purchase Option concurrently with the exercise of notice of
termination under Section 21. If Tenant has not elected to terminate this Lease
under Section 21 but Landlord exercises a right of termination of this Lease
under Section 21, then by written notice given to Landlord within 10 business
days after Tenant's receipt of Landlord's notice of election to terminate under
Section 21, Tenant shall notify Landlord as to whether or not Tenant elects to
cancel this Purchase Option. If Tenant elects not to cancel the Purchase Option,
then the parties shall proceed to closing hereunder on a date selected by Tenant
no sooner than five business days and no later than 15 business days after
Tenant's notice of election. At closing, Tenant shall pay the entire purchase
price, Landlord shall assign to Tenant all of Landlord's rights under the
property insurance policy for the Building arising out of such casualty, and
Landlord shall pay to (or credit Tenant in the amount of) insurance proceeds
theretofore received by Landlord arising out of the casualty, less any
out-of-pocket costs incurred by Landlord to collect such proceeds, to make and
to pay for repairs (including demolition, debris removal and related
restoration) completed by Landlord prior to closing, and also net of any rent
loss or business interruption proceeds applicable to rent and business losses
prior to the date of closing.
(ii) Any taking or condemnation for public or
quasi-public purpose or use by any competent authority in appropriate
proceedings or by any right of eminent domain of all or any part of the Leased
Premises between the date of Tenant's exercise of the Purchase Option and the
time of closing hereunder shall not affect the purchase option except as
follows. The property conveyed shall be net of any land taken by the condemning
authority (or subject to the notice of taking) and all of Landlord's rights with
respect thereto shall be assigned to Tenant at settlement. However, if the
extent of the taking or condemnation is such that Tenant would have the right to
cancel this Lease under Section 20 hereof, and Tenant elects to exercise such
termination right under Section 20, then the cancellation of this Lease by
Tenant under Section 20 shall be deemed to effect an automatic cancellation of
the Purchase Option.
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(e) FIXTURES, TREES, SHRUBBERY, ETC. All plumbing, heating,
air conditioning, ventilating, electrical and lighting fixtures and systems
appurtenant to and forming a part of the Leased Premises; all other fixtures of
whatever nature or description now in or located on the Leased Premises; any
remaining heating fuels stored on the Leased Premises; and all trees, shrubbery
and plants in or on the Leased Premises on the date of this Lease are included
in the sale and purchase price and shall become the property of Tenant at
closing hereunder. None of the foregoing shall be removed or permitted to be
removed by Landlord from the Leased Premises after the date of Tenant's exercise
of this Option to Purchase provided that settlement takes place.
(f) DEFAULT BY TENANT. Should Tenant violate or fail to
fulfill or perform any of the terms or conditions of this Lease insofar as they
relate to the Purchase Option and if as a result of such breach a closing
hereunder shall not occur, then Landlord, as its exclusive remedy for such
breach, shall be entitled to receive forthwith from Tenant the sum of $10,000,
which sum shall be treated as liquidated damages (and not as a penalty) for such
breach; and upon such remittance by Tenant of said sum mentioned herein,
Landlord and Tenant shall each be released from all liability or obligation
hereunder relating to the Purchase Option and the Purchase Option shall become
null and void; provided, however, all other provisions of this Lease shall
continue in full force and effect as if Tenant had never exercised the Purchase
Option.
(g) APPORTIONMENTS; EXPENSES.
(i) All rent for the month in which closing takes
place shall be apportioned at closing. Utilities, taxes and other Operating
Expenses shall not be apportioned, it being acknowledged that Tenant is
responsible for all such costs under this Lease. Landlord shall use all
reasonable efforts to make final calculations of any amounts due from Tenant or
credits owing to Tenant by reason of Operating Expenses as of the date of
closing, and preliminary credits or payments shall be made at closing based on
such numbers, subject to post settlement adjustment with respect to any items
for which Landlord is reasonably unable to obtain final numbers by closing. All
adjustments shall be completed no later than 60 days after closing.
(ii) All realty transfer taxes, if any, imposed by
any governmental authority on the conveyance of the Leased Premises by the deed
contemplated hereby shall be divided equally between Landlord and Tenant.
(iii) Each party shall pay all its own expenses
incurred in connection with the Purchase Option and the transactions
contemplated hereby.
(iv) A survey will be secured and paid for by
Landlord if (1) the title insurer shall reasonably reason require such a survey,
or (2) there has been a physical change in the metes or bounds of the Leased
Premises by subdivision, highway or road changes or improvements on or bounding
the Leased Premises which would render the existing legal description
incomplete, incorrect or inadequate to describe properly the Property to be
conveyed hereunder.
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(h) TENDER. Formal tender of an executed deed and purchase
money is hereby waived; but nothing herein shall be deemed a waiver,
concurrently with a settlement hereunder, of the obligation of Landlord to
execute, acknowledge and deliver (or cause to be executed, acknowledged and
delivered) a special warranty deed for the Property or the concurrent obligation
of Tenant to pay the purchase price.
(i) RIGHT OF FIRST OFFER. In the event Landlord receives an
expression of serious interest from a third party to purchase the Leased
Premises which Landlord is willing to accept, Landlord shall notify Tenant of
such offer and Tenant shall then have the right for a period of ten (10)
business days following receipt of Landlord's notice to decide if Tenant desires
to purchase the Leased Premises in accordance with the terms and conditions set
forth in the offer. If Tenant does not notify Landlord within ten (10) business
days after receipt of Landlord's notice of Tenant's desire to purchase the
Leased Premises, or if Tenant fails to execute an Agreement of Sale within ten
(10) days after receipt of the Agreement of Sale for any reason other than
delays caused by Landlord, then Landlord shall be free to sell the Leased
Premises to the offering party or its assignee or nominee, and this right shall
be of no further force or effect with respect to the Leased Premises unless
Landlord fails to complete the sale of the Leased Premises to the offering party
or its assignee or nominee; provided, however, that Landlord agrees not to sell
the Leased Premises upon terms materially more favorable to the purchaser than
those offered to Tenant. "Materially more favorable" shall mean changes which,
in the aggregate, effectively reduce the purchase price set forth in the offer
by more than two percent (2%). If Landlord complies with the provisions of this
Section 41(i) and the Property is sold, all of Tenant's rights under this
subparagraph (i) terminate absolutely and become void.
42. HEADINGS AND TERMS. The title, headings and table of contents of
this Lease are for convenience of reference only and shall not in any way be
utilized to construe or interpret the agreement of the parties as otherwise set
forth herein. The term "Landlord" and the term "Tenant" as used herein shall
mean, where appropriate, all persons acting by or on behalf of the respective
parties, except as to any required approvals, consents or amendments,
modifications or supplements hereunder when such terms shall only mean the
parties originally named on the first page of this Lease as Landlord and Tenant,
respectively, and their agents so authorized in writing.
43. GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
44. PRESENT LEASE. With respect to Tenant's three existing leases for
space at 3220 and 3260 Tillman Drive in Glenview Corporate Center between
Pitcairn Properties, Inc., as Landlord and Tenant as Tenant (collectively the
"Glenview Lease"), the parties agree as follows: As of the date of the beginning
of Annual Fixed Rent payments under this Lease, Landlord will contribute up to
$363,000 ("Landlord's Contribution") towards the payment of minimum and
additional rent due from Tenant under the Glenview Lease from time to time.
Payments of Landlord's Contribution shall be made on a monthly basis, by check
payable to Tenant on the first day of each month (except that if the
Commencement Date of this Lease is not the first day of the month, then the
first payment of Landlord's Contribution, apportioned for that month, shall be
made on the Commencement Date concurrently with Tenant's first payment of rent
under this Lease). The amount of each monthly installment of Landlord's
Contribution shall not
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exceed 79.25% of the applicable monthly payment due from Tenant under the
Glenview Lease for minimum rent and any additional rent that is collected in
monthly installments under the Glenview Lease. The balance of the monthly
payment due under the Glenview Lease shall be the responsibility of Tenant.
After Tenant surrenders its space under the Glenview Lease, Landlord and Tenant
shall use joint efforts to mitigate the expense under the Glenview Lease by
subleasing or negotiating a buyout of the Glenview Lease. Any savings obtained
by reason of such efforts shall be shared by Landlord and Tenant in the same
proportion (that is 79.25% to Landlord and 20.75% to Tenant).
45. SIGNS. So long as Tenant is paying Fixed and Additional Rent due
under this Lease, Tenant shall have the right to erect signage exterior to the
Building exclusive to Tenant at Tenant's own expense provided that (i) such
signage is in conformity with all governmental statutes, ordinances and
regulations, and (ii) until July 1, 1999, signage shall be subject to Landlord's
approval, which will not be withheld as long as the other tenant of the Building
does not object.
46. MEMORANDUM OF LEASE. Landlord agrees, upon Tenant's request, to
execute a short form of this Lease within thirty (30) days after the execution
and delivery of this Lease. Tenant may record such short form lease at its sole
cost and expense. The provisions of this Lease shall control, however, with
regard to any omissions from said short form, or with respect to any provisions
hereof which may be in conflict with such short form.
47. ANTENNA(S) INSTALLATION. Should Tenant wish to install an
antenna(s) and associated equipment on property belonging to Landlord, including
on the roof of the Building, Landlord agrees that said property may be used for
such purposes at no additional cost to Tenant, subject to such reasonable
approvals, rules and regulations as Landlord may adopt. Landlord grants Tenant
the right in common with Landlord and other tenants, subject to the following
provisions of this Section, to install, operate and maintain for use by Tenant
and any affiliated company (but not to transferred or assigned to a third
party), at Tenant's expense and risk, a lawfully permitted antenna(s) and
associated equipment (the "Antenna Leased Premises"):
(a) Tenant shall submit, at Tenant's expense, a full set of
engineering plans and specifications of the proposed antenna(s) installation to
Landlord for approval, such approval not to be unreasonably withheld,
conditioned or delayed;
(b) Tenant shall make all connections by conduit or cable as
required between Tenant's equipment in the Leased Premises and the Antenna
Leased Premises utilizing Building services, subject to Tenant's payment for
reasonable costs of such services, as necessary to effect the operation of the
antenna(s). Said connections shall be approved by Landlord, which approval shall
not be unreasonably withheld, conditioned or delayed;
(c) Any antenna(s) installed by Tenant shall be erected and
operated so as not to interfere with the operation of any previously erected
antenna(s). Tenant agrees to remedy at Tenant's expense any interference with
other tenants or third parties caused by the operation of Tenant's antenna(s),
and Tenant agrees to indemnify and hold harmless Landlord from all liability and
claims, including, without limitation, court costs, attorneys' fees and costs of
investigation, related to or arising from the operation and/or maintenance of
Tenant's antenna(s);
41
<PAGE>
(d) Tenant or Tenant's representatives shall, at all
reasonable times, have the unrestricted right to enter or leave the Antenna
Leased Premises where the antenna(s) and equipment are located;
(e) Landlord agrees that it will not give unauthorized persons
access to Tenant's Antenna Leased Premises or equipment;
(f) Tenant shall obtain all necessary municipal, state and
federal permits and authorizations required to install, maintain and operate an
antenna(s) and associated equipment and pay any charges levied by government
agencies annually or otherwise which are the sole result of Tenant's having an
antenna(s);
(g) Tenant agrees to maintain the Antenna Leased Premises and
associated equipment in a good state of repair, to save Landlord harmless from
any loss, costs or damages as a result of the erection, operation, maintenance,
existence or removal of said antenna(s);
(h) At the conclusion of the Term, unless Landlord permits
otherwise, Tenant shall remove the antenna(s) and surrender and restore the
Antenna Leased Premises to Landlord in as good order and same condition as when
received;
(i) The liability insurance to be carried by Tenant pursuant
to the provisions of this Lease shall include coverage for the activity of
Tenant on the Antenna Leased Premises. Tenant shall pay any increase in rates
for insurance which Landlord is required to carry under the Lease because of the
installation and use of the antenna(s) by Tenant; and
(j) Any notice or demand required or permitted to be given
hereunder shall be made in accordance with the terms of this Lease.
48. LANDLORD'S WAIVER. Landlord agrees to execute landlord's waivers in
conjunction with the financing of Tenant's fixtures, machinery, inventory and/or
equipment in form attached hereto as Exhibit "C" and made a part hereof. Tenant
shall have the right at all times to remove and/or replace any fixtures,
machinery and/or equipment owned by Tenant.
49. MOVING COSTS. Within ten days after receipt of an invoice therefor
(but not prior to Tenant taking possession of the Leased Premises), Landlord
shall pay Eighteen Thousand Dollars ($18,000) toward Tenant's costs to move its
property to the Leased Premises.
50. LANDLORD'S CONDITION. The parties acknowledge that Landlord has not
yet acquired fee title to the Property, and that it is presently contemplated
that Landlord's purchase of the Property from Osiris Holding Corporation
("Existing Owner") is anticipated to proceed to settlement on or prior to
December 31, 1998. If for any reason whatsoever [including without limitation an
election by Landlord to terminate the agreement prior to expiration of
Landlord's due diligence period], the purchase by Landlord (or its assignee or
nominee) of the Property from the Existing Owner is not consummated, this Lease
shall lapse and become void. Landlord shall respond promptly to inquiries from
Tenant as to the status of the proposed acquisition. If the Sale Agreement is
not signed by October 15, 1998, or if settlement on the sale and purchase does
42
<PAGE>
not occur by January 31, 1999, either party may cancel this Lease by written
notice to the other, provided however that Landlord may not exercise its right
of termination of this Lease unless and until negotiations and proceedings with
the Existing Owner have been terminated.
43
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the date first mentioned.
LANDLORD:
BALANCED CAPITAL LLC
By: /s/ Steven D. Brand By: /s/ Frank Seidman
----------------------------- ---------------------------
Steven D. Brand, Manager Frank Seidman, Manager
TENANT:
WORLDGATE COMMUNICATIONS, INC.
/s/ David A. Dill By: /s/ Randall J. Gort
- ------------------------------- ---------------------------
Attest Name: Randall J. Gort
Title: V.P. Corporate Affairs
Title:
44
<PAGE>
FIRST AMENDMENT TO LEASE
This First Amendment to Lease is made as of the 7th day of December
1998 by and between BALANCED CAPITAL LLC, a Pennsylvania limited liability
company ("Landlord") and WORLDGATE COMMUNICATIONS, INC., a corporation
("Tenant").
Whereas, Landlord and Tenant entered into an agreement dated October 7,
1998 (the "Lease") pursuant to which Landlord agreed to lease to Tenant, on the
terms and conditions set forth in the Lease, a building containing approximately
72,000 square feet of space located at 3190 Tremont Avenue, Bensalem, Bucks
County, Pennsylvania; and
Whereas, Landlord and Tenant desire to amend the Lease in certain
respects;
Now therefore, in consideration of the mutual promises contained in
this Amendment, and intending to be legally bound, Landlord and Tenant agree as
follows:
1. DEFINITIONS. Capitalized terms not otherwise defined in this
Amendment shall have the meaning given to such terms in the Lease.
2. CONFIRMATION OF SQUARE FOOTAGE. Landlord and Tenant confirm that
the gross square footage of the Building is approximately 72,000 square feet,
and they hereby agree, notwithstanding any measurement right or other provision
of the Lease to the contrary, to use 72,000 square feet as the size of the
Leased Premises (after delivery of the entire Building) for all purposes under
the Lease, including calculation of Rent and other charges under the Lease.
3. TREMONT AVENUE.
(a) The definition of Operating Expense set forth in subsection
6(d) of the Lease is hereby amended to include costs incurred for snow and ice
removal, maintenance, repairs and repaving of Tremont Avenue, the private street
abutting the Lot, until the date (if any) when Tremont Avenue is dedicated to
the Township of Bensalem.
(b) Section 10 of the Lease is hereby amended to add to the
following to the services to be furnished by Landlord: snow and ice removal,
maintenance, repairs and repaving of Tremont Avenue, the private street abutting
the Lot, until the date (if any) when Tremont Avenue is dedicated to the
Township of Bensalem.
4. PRESENT LEASE. Section 44 of the Lease is hereby amended and, as
amended, restated in its entirety as follows:
44. PRESENT LEASE. Landlord will contribute Three Hundred Sixty
Three Thousand Dollars ($363,000) ("Landlord's Contribution") toward
Tenant's obligations
<PAGE>
for minimum rent and additional rent under Tenant's three existing leases
for space at 3220 and 3260 Tillman Drive in Glenview Corporate Center
between Pitcairn Properties, Inc. as landlord and Tenant as tenant
(collectively the "Glenview Lease"). Landlord's Contribution shall be paid
to Tenant in its entirety by check delivered to Tenant within five days
after the date Tenant takes possession of the first 40,000 square feet of
space in the Building and begins paying Annual Fixed Rent under this Lease.
Any savings generated by the sublease, buyout or other early disposition of
Tenant's obligations under the Glenview Lease shall belong solely to Tenant.
5. RATIFICATION OF LEASE. Landlord and Tenant hereby confirm that the
Lease remains in full force and effect, unmodified except as amended in this
First Amendment.
In witness whereof, Landlord and Tenant have executed and delivered
this First Amendment as a sealed instrument as of the date first written above.
LANDLORD:
BALANCED CAPITAL LLC
By: /s/ Steven D. Brand By: /s/ Frank Seidman
-------------------------- ---------------------------
Steven D. Brand, Manager Frank Seidman, Manager
TENANT:
WORLDGATE COMMUNICATIONS, INC.
/s/ Mary Stinsman By: /s/ Randall J. Gort
- ----------------------------- ---------------------------
Attest Name: Randall J. Gort
Title: Vice President - Corporate Affairs
<PAGE>
SECOND AMENDMENT TO LEASE
This Second Amendment to Lease is made as of the 17th day of December
1998 by and between BALANCED CAPITAL LLC, a Pennsylvania limited liability
company ("Landlord") and WORLDGATE COMMUNICATIONS, INC., a corporation
("Tenant").
Whereas, Landlord and Tenant entered into an agreement dated October 7,
1998 and previously amended December 7, 1998 (collectively, the "Lease")
pursuant to which Landlord agreed to lease to Tenant, on the terms and
conditions set forth in the Lease, a building containing approximately 72,000
square feet of space located at 3190 Tremont Avenue, Bensalem, Bucks County,
Pennsylvania, and Landlord and Tenant desire to amend the Lease in certain
respects;
Now therefore, in consideration of the mutual promises contained in
this Amendment, and intending to be legally bound, Landlord and Tenant agree as
follows:
1. DEFINITIONS. Capitalized terms not otherwise defined in this
Amendment shall have the meaning given to such terms in the Lease. "GMAC
Mortgage" means the first mortgage on the Property which will be granted
concurrently with the acquisition of the Property, presently anticipated to
occur in December 1998, to secure the purchase money loan (the "GMAC Loan")
which will be used to acquire the Property. "GMAC Loan Documents" means the GMAC
Mortgage and the other documents evidencing and securing the GMAC Loan. "Lender"
means the then holder of the GMAC Mortgage and the other GMAC Loan Documents.
2. AMENDMENT OF PERMITTED USES. In Section 1 of the Lease, the
definition of Permitted Uses is hereby revised to read as follows:
PERMITTED USES: general office, engineering research and
development, assembly and testing of electronic parts, Channel
HyperLinking and WorldGate service operations.
3. SECURITY DEPOSIT. Subsection 36(c) is hereby amended to clarify
that the Tenant may at any time and from time to time replace a cash Security
Deposit with a Letter of Credit or a Letter of Credit Security Deposit with a
cash Security Deposit. In such event, Tenant shall give Landlord at least three
business days' notice that the form of Security Deposit will be changed, and in
the case of an exchange from cash to Letter of Credit, the notice shall be
accompanied by a draft of the proposed Letter of Credit for Landlord's review
for compliance with the requirements of Subsection 36(c). Landlord shall
cooperate with Tenant's efforts to arrange simultaneous exchange of the cash
Security Deposit for the approved Letter of Credit, or the
<PAGE>
simultaneous surrender the Letter of Credit in exchange for the required cash
Security Deposit, provided that Landlord shall not at any time be without one or
the other form of Security Deposit.
4. AMENDMENT OF PURCHASE OPTION. Section 41 of the Lease, captioned
"Option to Purchase," is hereby amended to add the following new subsection (j):
(j) EARLY EXERCISE OF PURCHASE OPTION. If Tenant exercises the
Purchase Option and the settlement date for the Purchase Option (the
"Option Settlement"), as determined under subsection Section 41(b),
would occur prior to THE EARLIER OF February 15, 2002 or the date when
prepayment of the GMAC Loan is permitted under the terms of the GMAC
Loan Documents, then at Landlord's request the purchaser will either
(A) defer the Option Settlement until after the date when prepayment of
the GMAC Loan is permitted under the terms of the GMAC Loan Documents,
or (B) take title to the Property subject to the GMAC Loan Documents.
If the purchaser elects to take title subject to the GMAC Loan
Documents:
(1) The transfer will be subject to the approval of
the Lender, and Tenant will furnish such information as the Lender may
reasonably require to identify the purchaser and evaluate its
creditworthiness.
(2) At least thirty (30) days prior to the Option
Settlement Landlord will deliver to the purchaser (A) copies of the
GMAC Loan Documents certified as accurate and complete by the Landlord,
and (B) an estoppel signed by the Lender confirming the then
outstanding principal balance of the GMAC Loan, the amount of any other
charges that may be due and unpaid as of the settlement date, the
amount of any escrow funds (for insurance, taxes or otherwise) then
held by the Lender or its servicing agent, and further confirming that
there are then no uncured monetary defaults under the GMAC Loan
Documents and further that the Lender has not issued any notice of a
non-monetary default under the GMAC Loan Documents which remains
uncured.
(3) At the Option Settlement the seller and the
purchaser will sign and deliver an assignment and assumption of the
GMAC Loan Documents, pursuant to which purchaser will assume the
obligation to pay the GMAC Loan, in such form as may be required by the
Lender.
(4) At the Option Settlement, seller will pay any
additional fees and costs incurred because of the fact that the
Property is being transferred subject to the GMAC Loan (including
without limitation Lender's transfer fee). Accrued and unpaid charges
then due to the Lender will be paid by the seller, the seller will
receive a credit for escrow funds then held by Lender for use in
payment of costs of the Property (such as real estate taxes) and the
purchaser will receive credits against the Purchase Price for the then
outstanding principal balance of the GMAC Loan, and for seller's share
of interest on the GMAC Loan for the calendar month in which the Option
Settlement occurs.
<PAGE>
5. RATIFICATION OF LEASE. Landlord and Tenant hereby confirm that the
Lease remains in full force and effect, unmodified except as amended in this
Second Amendment.
In witness whereof, Landlord and Tenant have executed and delivered
this Second Amendment as a sealed instrument as of the date first written above.
BALANCED CAPITAL LLC
By: /s/ Steven D. Brand By: /s/ Frank Seidman
---------------------------- ----------------------------
Steven D. Brand, Manager Frank Seidman, Manager
WORLDGATE COMMUNICATIONS, INC.
/s/ David A. Dill By: /s/ Randall J. Gort
- ------------------------------ ----------------------------
Attest Name: Randall J. Gort
Title: V.P.
<PAGE>
AGREEMENT OF
LEASE
BETWEEN
GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP,
Landlord
AND
WORLDGATE COMMUNICATIONS,
Tenant
<PAGE>
TABLE OF CONTENTS
LEASE
SECTION PAGE
1. REFERENCE DATA....................................................1
2. DEMISE............................................................3
3. TERM..............................................................3
4. HOLDING OVER......................................................3
5. RENT..............................................................3
6. OPERATING EXPENSE ESCALATION......................................4
7. COMPLETION OF IMPROVEMENTS; AS IS.................................9
8. [Intentionally Omitted]...........................................9
10. PERMITTED USES...................................................10
11. BUILDING OPERATION AND SERVICES; ELECTRICALLY....................10
12. INTERRUPTION OF SERVICES.........................................12
13. REPAIRS..........................................................13
14. INTENTIONALLY OMITTED............................................13
15. QUIET ENJOYMENT..................................................14
16. LANDLORD'S RIGHT OF ENTRY........................................14
17. SURRENDER OF PREMISES............................................14
18. MISCELLANEOUS COVENANTS..........................................15
19. RULES AND REGULATIONS............................................16
20. PERFORMANCE OF TENANT'S COVENANTS................................16
21. EMINENT DOMAIN...................................................16
22. CASUALTY DAMAGE..................................................17
23. HOLD HARMLESS: PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION.18
24. MORTGAGEE AND OTHER AGREEMENTS...................................19
25. SUBORDINATION AND ATTORNMENT.....................................20
26. ASSIGNMENT AND SUBLETTING........................................20
27. DEFAULT..........................................................22
28. LANDLORD'S REMEDIES..............................................23
29. LEGAL FEES AND OTHER COSTS.......................................26
30. LATE CHARGE......................................................26
31. SUCCESSORS AND ASSIGNS...........................................26
32. WAIVERS..........................................................27
33. WAIVER OF TRIAL BY JURY..........................................27
34. SEVERABILITY.....................................................27
35. NOTICES..........................................................27
36. AMENDMENT AND MODIFICATIONS......................................27
37. SECURITY DEPOSIT.................................................28
38. ENVIRONMENTAL MATTERS............................................28
39. BROKERS..........................................................30
40. FINANCIAL STATEMENTS.............................................30
41. TENANT'S TERMINATION RIGHTS......................................30
42. PARKING..........................................................30
<PAGE>
43. OPTIONS TO EXTEND................................................31
44. HEADINGS AND TERMS...............................................31
45. GOVERNING LAW....................................................32
EXHIBITS
A Plan of Leased Premises
B Rules and Regulations
C Tenant Estoppel Letter
<PAGE>
GLENVIEW CORPORATE CENTER Bensalem, Pennsylvania
1. REFERENCE DATA. Lease Dated: January 14, 1997
---------------
Any reference in this Lease to the following subjects shall
incorporate therein the data stated for the subject(s) in this Section:
LANDLORD: Glenview Corporate Center Limited Partnership, a
Delaware Limited Partnership
LANDLORD'S ADDRESS: c/o Pitcairn Properties Incorporated
Glenview Corporate Center, P.O. Box 863
3220 Tillman Drive, Suite 407
Bensalem, Pennsylvania 19020-2032
LANDLORD'S CONSTRUCTION REPRESENTATIVE: R. Clifford Zimmerman
TENANT: WorldGate Communications
TENANT'S ADDRESS:
TENANT'S CONSTRUCTION REPRESENTATIVE: N/A
LEASED PREMISES:
RENTABLE AREA OF LEASED PREMISES: 16,195 Rentable Square Feet
LEASE TERM: Three (3) years
SCHEDULED COMMENCEMENT DATE: March 1, 1997
COMMENCEMENT DATE: March 1, 1997
ANNUAL FIXED RENT: Year I - $263,168.75; Year 2 - $287,461.25; Year 3 -
$295,558.75
OPERATING EXPENSE ALLOWANCE: $6.00 Per Rentable Square Foot
TENANT'S PROPORTIONATE SHARE: 11. 30 %
PERMITTED USES: general office
SECURITY DEPOSIT: $21,930.73
<PAGE>
ADVANCE RENTAL PAYMENT: $-0-
BROKER: Lanard & Axilbund Colliers
CONSTRUCTION ALLOWANCE: N.A.
GLENVIEW CORPORATE CENTER LIMITED
PARTNERSHIP
By: BPPI-I Limited Partnership,
its general partner
By: PITCAIRN PROPERTIES
INCORPORATED
By: /s/ illegible
--------------------------------------
BY: BERGEN OF PHILADELPHIA, INC.
BY: /s/ illegible
--------------------------------------
TENANT:
WORLDGATE CO UNICATTONS
By: /s/ Hal Krisbergh
--------------------------------------
Name: Hal Krisbergh
Title: Chairman/CEO
Attest: /s/ David E. Wachob
---------------------------------------
Name: David E. Wachob
Title: VP/GM
<PAGE>
2. DEMISE . Landlord hereby demises and lets to Tenant and
Tenant takes and hires from Landlord that certain space (the "Leased
Premises") delineated in Exhibit "A", attached hereto and made part hereof,
in the five (5) story office building (the "Building") erected upon a parcel
of ground located at 3220 Tillman Drive, Bensalem Township, Pennsylvania (the
"Lot"), TOGETHER WITH, appurtenant to the Leased Premises, the right to use
in common with Landlord and other tenants, occupants and visitors to the
Building, the common walkways, sidewalks and parking lots of the Lot, the
common lobbies and facilities of the Building and, if the Leased Premises
include less than an entire floor of the Building, the common lobbies,
hallways and toilets and other common facilities of such floor. The
computation of the gross rentable area for the Leased Premises includes an
agreed upon loss factor representing Tenant's allocable share of common areas
and has been agreed upon and stipulated by Landlord and Tenant.
3. TERM. The Lease Term shall commence on the Commencement
Date which shall be the earlier of (a) the date on which Tenant shall take
possession of the Leased Premises, or (b) March 1, 1997.
4. HOLDING OVER. If Tenant retains possession of the Leased
Premises or any part thereof after the termination of this Lease by
expiration of the Lease Term or otherwise without the consent of Landlord,
Tenant shall pay Landlord (a) as agreed liquidated damages for such holding
over alone, an amount, calculated on a per them basis for each day of such
unlawful retention, equal to the greater of (i) twice the Annual Fixed Rent,
or (ii) the established market rental for the Leased Premises, for the time
Tenant thus remains in possession, plus, in each case, all Additional Rent
and other sums payable hereunder, and (b) all other damages, costs and
expenses sustained by Landlord by reason of Tenant's holding over. Without
limiting any rights and remedies of Landlord resulting by reason of the
wrongftil holding over by Tenant, or creating any right in Tenant to continue
in possession of the Leased Premises, all Tenant's obligations with respect
to the use, occupancy and maintenance of the Leased Premises shall continue
during such period of unlawful retention.
5. RENT. Rent is payable by Tenant beginning on the
Commencement Date in monthly installments of one-twelfth (1/12th) of the
Annual Fixed Rent, without prior notice or demand, and without any set-off or
deduction whatsoever, in advance, on the first day of each month at
Landlord's office in Bensalem, Pennsylvania or at such other place as
Landlord may direct in writing, except that the advance rent in the amount
set forth as the Advance Rental Payment in Section I hereof will be paid on
the date of the execution of this Lease and will be applied against the Fixed
Rent in the first full month of the Lease Term.
If the Lease Term commences on a day other than the
first day of a calendar month, the monthly installments of rent (including
Fixed Rent and any Additional Rent as herein provided), for the first and
last months of the Lease Term and for each Lease Month in which the rental
rate changes shall be apportioned pro rata in proportion to the number of
days in the month. As used herein, the term "Lease Month" shall mean the 28,
3
<PAGE>
29, 30 or 31 day period ending at midnight on the day preceding each monthly
anniversary of the Commencement Date.
Tenant hereby covenants and agrees to pay the
Annual Fixed Rent, Additional Rent and other sums payable to Landlord
hereunder when due, and to pay interest to Landlord at the Overdue Interest
Rate (a) on all overdue installments of Fixed Rent from the due date thereof
to the date of payment and (b) on all payments of Additional Rent or other
sums payable to Landlord hereunder from the date of demand for payment until
the date of payment. Upon default by Tenant in the payment of such Additional
Rent or other sums payable hereunder, Landlord shall be entitled to all
rights and remedies to which it would be entitled in default of the payment
of Fixed Rent. As used herein, the term "Overdue Interest Rate" shall mean
and equal three percent (3 %) per annum over the prime interest rate
announced from time to time by the largest commercial bank whose principal
office is located in Philadelphia or Montgomery County, Pennsylvania as being
its "prime" or benchmark rate of interest.
6. OPERATING EXPENSE ESCALATION. If Landlord's Operating
Expense for any Operating Year shall be greater than the Operating Expense
Allowance, Tenant shall pay to Landlord as Additional Rent an amount equal to
Tenant's Proportionate Share (as defined below) of the difference (the amount
of Tenant's Proportionate Share of such difference is hereinafter- referred
to as the "Operating Expense Adjustment"). If Tenant occupies the Leased
Premises or portion thereof for less than a full Operating Year, the
Operating Expense Adjustment will be allocated proportionately to the amount
of time in such Operating Year that Tenant so occupies such space.
Such Additional Rent shall be paid in the
following manner: within one hundred twenty (120) days following the end of
each Operating Year, Landlord shall furnish Tenant an Operating Expense
Statement setting forth (i) the Operating Expense for the preceding Operating
Year, (H) the Operating Expense Allowance and (iii) the Tenant's Operating
Expense Adjustment for such Operating Year. Within fifteen (15) days
following the receipt of such Operating Expense Statement (the "Expense
Adjustment Date") Tenant shall pay to Landlord as Additional Rent the
Operating Expense Adjustment for such Operating Year. Commencing with the
first month of the lease term, tenant shall pay to landlord, on account of
the operating expense adjustment for such Operating Year, monthly
installments in advance equal to one-twelfth (1/12TH) OF THE estimated
Operating Expense Adjustment for such Operating Year. On the next succeeding
Expense Adjustment Date, Tenant shall pay to Landlord (or Landlord shall
credit to Tenant) any deficiency (or excess) between the installments paid on
account of the preceding year's Operating Expense Adjustment and the actual
Operating Expense Adjustment for such Operating Year.
As used in this Section 6 and Section 1 where
applicable, the following words and terms shall be defined as hereinafter set
forth:
4
<PAGE>
(h) To constantly have pass keys to the Leased Premises.
(i) To grant to anyone the exclusive right to
conduct any particular business or undertaking in the Building.
0) To exhibit the Leased Premises to others and to
display "For Rent" signs on the Leased Premises.
(k) To take any and all measures, including
inspections, repairs, alterations, additions and improvements to the Leased
Premises or to the Building as may be necessary or desirable in the operation
of the Building.
Landlord may enter upon the Leased Premises and may
exercise any or all of the foregoing rights hereby reserved without being
deemed guilty of an eviction or disturbance of Tenant's use or possession and
without being liable in any manner to Tenant.
REGULATION CHANGE
Landlord shall have the right to amend these Rules and
Regulations, and to make such other and further reasonable Rules and
Regulations, as in the judgment of Landlord, may from time to time be needful
for the safety, appearance, care or cleanliness of the Building or for the
preservation of good order therein.
Landlord shall not be responsible to Tenant for the
enforcement of the Rules and Regulations or by the violation thereof by other
tenants.
5
<PAGE>
(a) "OPERATING YEAR" shall mean each calendar
year, or such other period of twelve (12) months as hereafter may be adopted
by Landlord as its fiscal year, occurring during the Lease Term.
(b) "OPERATING EXPENSE ALLOWANCE" shall mean and
equal the amount set forth in Section I of this Lease multiplied by the
rentable area of the Building.
(c) "OPERATING EXPENSE STATEMENT" shall mean a
statement in writing signed by Landlord, setting forth in reasonable detail
(i) the Operating Expense for the preceding Operating Year, (ii) the
Operating Expense Allowance and (iii) the Tenant's Operating Expense
Adjustment for such Operating Year, or portion thereof. The Operating Expense
for each Operating Year shall be audited and certified by Landlord's
independent certified public accountant whose report thereon shall be
available for inspection by Tenant at Landlord's office during normal
business hours. The Operating Expense Statement duly prepared in accordance
herewith shall constitute a final determination as between Landlord and
Tenant of the Operating Expense and the Operating Expense Adjustment for any
Operating Year.
(d) "OPERATING EXPENSE" shall mean the following
expenses incurred by Landlord in connection with the operation, repair and
maintenance of the Building and the Lot:
(i) Wages, salaries, fees and other
compensation and payments and payroll taxes and contributions to any social
security, unemployment insurance, welfare, pension or similar fund and
payments for other fringe benefits required by law or by union agreement (or,
if the employees or any of them are non-union, then payments for benefits
comparable to those generally required by union agreement in first class
office buildings *in the Philadelphia suburban area, which are unionized)
made to or on behalf of all employees of Landlord performing services
rendered in connection with the operation and maintenance of the Building and
the Lot, including, without limitation: window cleaners; janitors;
miscellaneous handymen; watchmen; persons engaged in patrolling and
protecting the building and the lot; carpenters; engineers; mechanics;
electricians; plumbers; persons engaged in the operation and maintenance of
the Building and the Lot; building superintendent and assistants; building
manager; and clerical and administrative personnel.
(ii) The uniforms of all employees, and
the cleaning, pressing and repair thereof
(iii) Cleaning costs for the Building and
the Lot, including the windows and sidewalks, all snow and rubbish removal
(including separate contracts therefor) and the costs of all labor, supplies,
equipment and materials incidental thereto.
6
<PAGE>
(iv) Premiums and other charges incurred
by Landlord with respect to all insurance relating to the Building and the
Lot and the operation and maintenance thereof, including, without limitation:
fire and extended coverage insurance, including windstorm, hail, explosion,
riot, rioting attending a strike, civil commotion, aircraft, vehicle and
smoke insurance; public liability; elevator; workmen's compensation; boiler
and machinery; rent; use and occupancy; and health, accident and group life
insurance of all employees.
(v) All taxes, charges, imposts and
burdens and special assessments of every kind and nature imposed by any
governmental authority on and/or with respect to the Lot or Building which
Landlord shall become obligated to pay because of or in connection with the
ownership, leasing or operation of the Lot or the Building.
(vi) The cost of water and sewer and any
and all other utility services used in connection with the operation and
maintenance of the Building and the Lot, excluding, however, electricity
which shall be billed monthly to tenants pursuant to Section 11 hereof.
(vii) Costs incurred for operation,
service, maintenance, inspection, repairs and alterations of the Building,
the Lot and the heating, air-conditioning, ventilating, plumbing, electrical,
security and elevator systems of the Building (including any separate
contract therefor) and the costs of labor, materials, supplies and equipment
used in connection with all of the aforesaid items.
(viii) Gross receipts taxes, sales taxes
and excise taxes and the like upon any of the expenses enumerated herein.
(ix) Management fees of the managing agent
for the Building.
(x) The cost of replacements for tools and
equipment used in the operation and maintenance of the Building and the Lot.
(xi) The cost of repainting or otherwise
redecorating any part of the Building other than premises demised to tenants
in the Building.
(xii) Christmas decorations for the lobby
and other public portions of the Building below the second floor.
(xiii) The cost of telephone service,
postage, office supplies, maintenance and repair of office equipment and
similar costs related to operation of the Building Superintendent's office.
(xiv) The cost of licenses, permits and
similar fees and charges related to operation, repair and maintenance of the
Building.
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(xv) Auditing fees necessarily incurred
in connection with the maintenance and operation of the Building, and
accounting fees incurred in connection with the preparation and certification
of a real estate tax escalation and the operating expense escalation
statements pursuant to this Section 6.
(xvi) All costs incurred by Landlord to
retrofit any portion or all of the Building to comply with a change in
existing legislation or introduction of new legislation, whether Federal,
State or Municipal; repairs, replacements and improvements which are
appropriate for the continued operation of the Building as a first class
building.
(xvii) All expenses associated with the
installation of any energy or cost saving devices.
(xviii) The pro rata share of all costs
and expenses allocated to the Building and the Lot relating to the
maintenance, operation and repair of any common atrium or other facilities
connecting the Building or any of its facilities to any other building or
facilities on adjacent lots.
(xix) All assessments against Landlord
for the Lot and the Building's share of the costs of Glenview Corporate
Center as provided in the Declaration of Protective Covenants (the
"Protective Covenants") for Glenview Corporate Center.
(xx) Any and all other expenditures of
Landlord in connection with the operation, repair or maintenance of the Lot
or the Building which are properly expensed in accordance with generally
accepted accounting principles consistently applied with respect to the
operation, repair and maintenance of first-class office buildings in the
Philadelphia suburbs.
If Landlord shall purchase any item of
capital equipment or make any capital expenditure as described in subsections
(xvii) and (xviii) above, then the costs for the same shall be included in
Operating Expenses in the year of installation and in subsequent years
amortized on a straight line basis, over an appropriate period, but not more
than ten (10) years,, with an interest factor equal to the prime interest
rate, as defined in Section 5 hereof. If Landlord shall lease such item of
capital equipment, then the rentals or other operating costs paid pursuant to
such leasing shall be included in Operating Expenses for each year in which
they are incurred.
Notwithstanding the foregoing, "Operating Expense"
shall not include expenditures for any of the following:
(A) The cost of any capital addition made
to the Building (other than-that specified as part of Operating Expense as
provided above), including the cost to prepare space for occupancy by a new
tenant.
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(B) Repairs or other work occasioned by
fire, windstorm or other insured casualty or hazard, to the extent that
Landlord shall receive proceeds of such insurance.
(C) Leasing commissions, advertising
expenses and other costs incurred in leasing or procuring new tenants.
(D) Repairs or rebuilding necessitated by
condemnation.
(E) Depreciation and amortization of the
Building, other than
(I) capital expenditures which
under generally applied real estate practice are expensed or regarded as
deferred expenses;
(II) capital expenditures
appropriate to a first class office building or required by law as described
in subsection (xvii) above; and
(III) capital expenditures
designed to result in savings or reductions in Operating Expenses as described
in subsection (xviii) above.
(F) The salaries and benefits of executive
officers of Landlord if any.
Operating Expense shall be "net" and, for that
purpose, shall be reduced by the amounts of any reimbursement or credit
received or receivable by Landlord with respect to an item of cost that is
included in Operating Expense (other than reimbursements to Landlord by
tenants of the Building pursuant to Operating Expense escalation provisions).
To the extent that any item of Operating Expense is
incur-red in common with another building or lot in the Glenview Corporate
Center, such item of expense shall be apportioned equitably among the
properties incurring such expenses.
If landlord shall eliminate the payment of any
wages or OTHER LABOR costs or otherwise reduce Operating Expense as a result
of the installation of new devices or equipment, or by any other means, then
in computing the Operating Expense the corresponding items shall be deducted
from the Operating Expense Allowance and Operating Year.
The Operating Expense for any Operating Year or
portion thereof during which less than one hundred percent (100%) of the
Rentable Area of the Building is leased to tenants shall be increased to
include an imputed cost for unoccupied portions of the Building in an amount
with respect to each such area equal to the product of (I) the Landlord's
estimate of the marginal Operating Expense saving resulting from such
vacancy, times (II) a fraction, the numerator of which is the number of days
during such Operating
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Year such portion of the Building was unoccupied and the denominator of which
is three hundred sixty-five (365), times (III) the Rentable Area of such
unoccupied space. In the time that more than one such portion of Rentable
Area shall be unoccupied on separate dates within a relevant Operating Year,
then a separate computation shall be made with respect to each unoccupied
portion, and the products of such computations shall be added together, and
the total thereof shall be the amount of Operating Expense imputed to such
unoccupied portions for such Operating Year.
(e) "TENANT'S PROPORTIONATE SHARE" shall mean a
fraction, the numerator of which shall be the Rentable Area of Leased
Premises, and the denominator of which is 142,745 rentable square feet
(subject to adjustment only by reason of any substantial addition to the
Building made after the date of the initial completion of construction of the
Building), and shall equal, with respect to the Leased Premises, the
percentage set forth in Section I of this Lease.
7. COMPLETION OF IMPROVEMENTS: AS-IS. Tenant agrees to
accept the Leased Premises in its "As-Is" condition. Landlord shall have no
obligation to complete any work in connection with Tenant's occupancy of the
Leased Premises with the exception of building standard painting of the
Leased Premises, which shall be completed promptly following the Commencement
Date. Any other work completed by Tenant shall be at Tenant's sole cost and
expense and otherwise in accordance with the terms of this Lease.
Tenant agrees that Landlord's obligation to deliver
the Leased Premise "As-Is" does not include any obligation on the part of
Landlord to remove the workstations owned by the current Tenant of the Leased
Premises.
8. [Intentionally Omitted].
9. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not
make during the Lease Term any alterations or additions to the Leased
Premises which affect the Building's structure or mechanical, electrical,
plumbing or HVAC systems without Landlord's prior written approval, such
approval not to be unreasonably withheld. Any such alterations or additions
which may be approved by landlord and made by tenant shall be deemed part of
the Building and shall not thereafter be removed by Tenant unless Landlord
shall require removal of same, either in conjunction with its approval or by
notice to Tenant given prior to the termination of this Lease, in which case
Tenant shall remove any such alterations or additions and repair any damage
to the Building or the Leased Premises occasioned by their installation or
removal (including, without limitation, repairing and patching holes,
replacing ceiling, wall and floor surfaces and repainting), and restore the
Leased Premises to substantially the same condition as existed prior to the
time which any such alterations or additions were made, reasonable wear and
tear excepted.
All alterations and additions by Tenant. and
installation of furnishings following occupancy shall be coordinated with any
work being performed by Landlord and
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performed in such manner and by such union contractor(s) as to assure
harmonious labor relations and so as to not damage the Building or interfere
with its operation or with the activities of other tenants and, except for
installation of furnishings only, by contractors or workmen first approved by
Landlord.
As further conditions to Landlord's approval of
any proposed alterations or additions by Tenant which are to be made after
the beginning of the Lease Term, Tenant shall: secure all necessary licenses
and permits; deliver to Landlord a waiver, executed by all persons or firms
who will be furnishing labor or materials waiving the right to file any
mechanic's Hen against the Building, the Lot or the estate or interest of
Landlord or Tenant therein; cause the contractor(s) and subcontractor(s) to
carry Workmen's Compensation insurance in statutory amounts and also
comprehensive public liability insurance with limits as approved by Landlord,
and deliver to Landlord certificates of all such insurance.
Failure to comply with any of the provisions of
this Section 9 (including, without limitation, any of the terms or conditions
of any consent granted hereunder) shall constitute a default under this Lease
and upon such default Landlord may pursue any or all of the remedies provided
for in Section 28 hereof, or any other remedy. available to Landlord in law
or in equity.
Tenant shall promptly pay when due the cost of all
such alterations and additions as referred to in this Section 9 and shall
cause any mechanics' liens which may be filed with respect thereto to be
immediately discharged, and shall indemnify Landlord against any loss, cost
or expense occasioned, directly or indirectly as a result of such alterations
and additions.
10. PERMITTED USES. Tenant covenants and agrees to use and
occupy the Leased Premises only in conformity with law and for the uses
specified in Section I hereof and not to use or permit any use of the Leased
Premises which creates any safety hazard, which would be dangerous to the
Leased Premises, the Building or the occupants of the same, which would be
disturbing to other tenants or occupants of the Building, or which would
cause any increase in premium for any insurance which Landlord may then have
in effect with respect to the building generally.
11. BUILDING OPERATION AND SERVICES, ELECTRICITY. Landlord
shall furnish, through Landlord's employees or independent contractors, such
services, facilities and supplies equal in scope, quality and frequency to
those being customarily provided by landlords in high quality office
buildings in the Philadelphia suburbs.
Heating, ventilating, and air conditioning shall
be provided as normal seasonal changes may require to provide reasonably
comfortable space temperature and ventilation for occupants of the Building
during normal business operation, daily from 8:00 a.m. to 6:00 p.m.
(Saturdays to 1:00 p.m.), except Sundays and holidays. Heating,
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ventilating and air conditioning service shall be subject to such regulations
as the Department of Energy or other governmental agency shall adopt from
time to time.
The air conditioning system in the Building is
designed to accommodate a population load of one (1) person per one hundred
(100) square feet and an electrical load of four (4) watts per foot. If as a
result of the layout or use of the Leased Premises, the population load
exceeds one (1) person per one hundred (100) square feet, or if as a result
of the installation of lights, equipment and appliances by Tenant in the
Leased Premises, the electrical load exceeds this design criteria of four (4)
watts per square foot, Landlord shall have the right to require Tenant to
install in the Leased Premises, at Tenant's sole cost and expense, additional
cooling systems to enable the proper cooling of the Leased Premises.
Landlord shall install a timed override switch in
the Leased Premises as a part of the initial construction thereof to permit
Tenant to activate the air-conditioning system in the Leased Premises outside
of normal office hours. Tenant can also arrange for the air conditioning
system to be activated outside of normal office hours by giving the Building
manager at least four (4) hours written notice. Tenant shall pay Landlord for
such additional air-conditioning as a part of the cost of electricity set
forth below.
Maintenance and cleaning shall be provided Monday
through Friday (excluding holidays), after business hours, as follows:
janitor service, consisting of the removal of customary office trash, dusting
of furniture, desks and pictures, and vacuuming; maintenance and service of
the toilet rooms in the Building; and cleaning and maintenance of common
areas in the Building.
Fully automatic elevator service shall be provided
for the use of all tenants and the general public for access to and from all
floors of the Building.
Elevator service for freight shall be supplied by
a passenger/freight elevator in common with service to other tenants at
reasonable times during business hours and at other times at reasonable
charges payable by Tenant to Landlord in advance.
Hot and cold water for normal lavatory purposes
shall be provided. If Tenant requires water for additional purposes, Tenant
shall pay the cost thereof as shown on a meter to be installed and maintained
at Tenant's expense to measure such additional consumption.
Landlord will install as a portion of the original
construction of each tenant space in the Building, an electric meter to
measure the consumption of electricity in such space. Landlord reserves the
right to install only i single electric meter on each floor and, in such
event, the cost of such meter and electricity will be equitably apportioned
by Landlord among the tenants on such floor. Landlord will install during the
construction of the Building an energy management system which measures the
useage of heating, ventilating and air conditioning used by each Tenant in
the Building and the common areas of the
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Building. Landlord will measure the electricity used by the heating,
ventilating and air conditioning system in the Building and will allocate
such electricity among the tenants in the Building in proportion to such
tenant's useage thereof as measured by the energy management system. Landlord
shall also determine the amount of electricity used for the common areas of
the Building and the Lot for heating, ventilating and air conditioning,
elevator service, site lighting and the like and apportion such electricity
among all tenants in the Building in accordance with such tenant's
Proportionate Share of the Building.
Landlord will bill Tenant monthly for electricity
used by or allocable to Tenant as aforesaid and Tenant shall pay for the same
as Additional Rent within fifteen (15) days after receiving Landlord's
statement. The charge to Tenant for all electricity used by or allocable to
Tenant as aforesaid shall be at the average rate per KVM that is paid by
Landlord to the utility providing the same, plus all surcharges, taxes, fuel
adjustments, transfer charges or other similar charges.
If submetering or allocation of electricity in the
Building is not permitted under future laws or regulations, the Annual Fixed
Rent will then be equitably and periodically adjusted to include an
additional payment to Landlord reflecting the cost to Landlord of furnishing
electricity to or for the benefit of Tenant.
Landlord shall not be liable in any way to Tenant
for any failure or defect in the supply or character of electric energy
furnished on the Leased Premises by reason of any requirement, act or
omission of the public utility serving the Building with electricity.
Tenant's use of electric energy in the Leased Premises shall not at any time
exceed the capacity of any of the electric conductors and equipment in or
otherwise serving the Leased Premises. In order to insure that such capacity
is not exceeded and to avert possible adverse effect upon the Building's
electric service, Tenant shall not, without Landlord's prior written consent
in each instance, connect to the Building's electric distribution system any
fixtures, appliances or equipment other than minicomputers, terminals,
duplicating machines, lamps, typewriters and similar small office machines
which operate on a voltage not in excess of 110 volts or make any
alterations or additions to the electric system of the Leased Premises.
Should Landlord grant such consent, all additional risers or other equipment
required therefor shall be provided by Landlord and the reasonable cost
thereof shall be paid by Tenant upon Landlord's demand.
Landlord shall furnish and install at Tenant's
expense all replacement lighting tubes, lamps, bulbs, and ballasts required
in the Leased Premises.
12. INTERRUPTION OF SERVICES. In case Landlord is prevented
or delayed in furnishing any service as set forth in Section 11 herein or
otherwise by reason of any cause beyond Landlord's reasonable control,
Landlord shall not be liable to Tenant therefor nor shall Tenant be entitled
to any abatement or reduction in rent by reason thereof, nor shall the same
give rise to a claim in Tenant's favor that such absence of building services
constitutes actual or constructive, total or partial eviction or renders the
Leased Premises untenantable.
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Landlord reserves the right to stop any service or
utility system, when necessary by reason of accident or emergency, or until
necessary repairs have been completed, provided, however, that in each
instance of stoppage, Landlord shall exercise reasonable diligence to
eliminate the cause thereof. Except in case of emergency repairs, Landlord
will give Tenant reasonable advance notice of any contemplated stoppage and
will use reasonable efforts to avoid unnecessary inconvenience to Tenant by
reason thereof.
13. REPAIRS. Landlord shall make, as an Operating Expense
of the Building, all repairs necessary to maintain the plumbing, heating,
ventilating, air conditioning, electric systems, external windows and floors
(excluding carpeting and floor coverings), provided, however, that Landlord
shall not be obligated to make any such repairs until the expiration of a
reasonable period of time after receipt of written notice from Tenant that
such repair is needed. In no event shall Landlord be obligated under this
Section 13 to repair any damage caused by any act, omission or negligence of
Tenant or its employees, agents, invitees, licensees, subtenants, or
contractors. If Tenant requires maintenance, servicing, repair or replacement
of any special plumbing, heating or air conditioning systems installed for
Tenant's benefit in the Leased Premises, whether or not such systems are tied
into the standard Building systems, such maintenance, servicing, repair or
replacement shall be made at the sole expense of Tenant, unless the need for
such repairs is caused, in whole or in part, by the negligence or wilful
misconduct of Landlord, its agents or employees.
Tenant shall maintain the Leased Premises and the
fixtures and appurtenances therein in good repair at all times, reasonable
wear and tear excepted. Except to the extent released by Landlord pursuant to
the waiver of subrogation provision in Section 23 hereof, Tenant shall
reimburse Landlord for all costs and expenses of repairing and replacing all
damage or injury to the Leased Premises and the Building and to fixtures and
equipment caused by Tenant or its employees, agents, invitees, licensees,
subtenants, or contractors, or as the result of all or any of them moving in
or out of the Building or by installation or removal of furniture, fixtures
or other property. Such costs and expenses shall be collectible as Additional
Rent and paid by Tenant within fifteen (15) days after rendition of a bill
therefor.
Landlord shall not be liable by reason of any
injury to or interference with Tenant's business arising from the making of
any repairs, alterations, additions or improvements in or to the Leased
Premises or the Building or to any appurtenances or equipment therein. There
shall be no abatement of rent because of such repairs, alterations, additions
or improvements or because of any delay by Landlord in making the same.
Tenant shall give to Landlord prompt written
notice of any accidents to, or defects in plumbing, electrical, heating and
air conditioning systems and apparatus located in the Leased Premises.
14. INTENTIONALLY OMITTED
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15. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed
Rent, all Additional Rent and all other sums and charges herein provided for
and, upon observing, keeping and performing all covenants, agreements and
conditions of this Lease on Tenant's part to be observed, kept and performed,
shall quietly have and enjoy the Leased Premises throughout the Lease Term
without hindrance or molestation by Landlord or by anyone claiming by,
through or under Landlord, subject, however, to the exceptions, reservations
and conditions of this Lease.
16. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor,
mortgagee or any agent thereof, shall have the right to enter the Leased
Premises at reasonable times: to perform Landlord's covenants as set forth in
this Lease, for purposes of inspection and to insure Tenant's compliance with
the provisions of this Lease, to make any repairs, replacements or
alterations to the Building or do any work which Landlord may deem necessary,
or to show the Leased Premises to prospective purchasers of the Building, and
also, during the last six (6) months of the Lease Term, to show the Leased
Premises to prospective tenants.
In the event Tenant vacates the Leased Premises
prior to the expiration of the Lease Term, Landlord shall have the right to
enter the Leased Premises at any time thereafter to show the Leased Premises
to prospective tenants and to retrofit all or a portion thereof for new
tenants. No such entry and construction work shall be deemed to be an
acceptance of surrender by landlord of all or a portion of the Leased
Premises until a replacement tenant actually occupies the same for its
business purposes. Acceptance of surrender shall be deemed to occur upon the
occupancy by a replacement tenant, but only as to such portion of the Leased
Premises which such replacement tenant occupies. Notwithstanding any such
acceptance of surrender, Tenant shall remain liable for the difference
between the rent reserved hereunder and the rent Landlord receives under a
lease with the replacement tenant.
17. SURRENDER OF PREMISES. Any alterations, improvements or
additions to the Leased Premises made by or at the request of Tenant shall
remain upon the Leased Premises at the expiration or earlier termination of
this Lease and shall become the property of Landlord unless Landlord shall,
prior to the expiration or earlier termination of this Lease, give written
notice to Tenant to remove such alterations, improvements and additions.
Tenant shall repair any damage caused by the installation and/or removal
(including, without limitation, repairing and patching holes, replacing
ceiling, floor and wall surfaces and repainting), and restore the Leased
Premises to substantially the same condition in which it existed prior to the
time that any such alterations, improvements or additions were made,
reasonable wear and tear excepted. Should Tenant fail to remove any such
alterations, improvements or additions or to repair such damage wh6n required
or requested by Landlord so to do pursuant to this Section 17, Landlord may
do so, and the cost and expense thereof shall be paid by Tenant to Landlord
as Additional Rent.
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Any personal property which shall remain in the
Leased Premises or any part thereof after the expiration or earlier
termination of this Lease shall be deemed to have been abandoned and either
may be retained by Landlord as Landlord's property or may be disposed of in
such manner as Landlord may see fit, provided that notwithstanding the
foregoing Tenant shall, upon request of Landlord made no later then ten (10)
days after the expiration or earlier termination of this Lease, promptly
remove from the Building any such personal property at Tenant's own cost and
expense. Should Tenant fail so to do, Landlord may do so, and the cost and
expense thereof shall be paid by Tenant to Landlord as Additional Rent. If
such personal property or any part thereof shall be sold by Landlord,
Landlord may receive and retain the proceeds of such sale(s) as Landlord's
property. The covenants contained in this Section 17 shall survive the
expiration or earlier termination of this Lease.
18. MISCELLANEOUS COVENANTS. Tenant shall faithfully
perform all of the covenants and conditions to be performed and observed by
Tenant hereunder and in addition to those covenants and conditions which are
set forth elsewhere herein, Tenant agrees:
(a) To secure and maintain in effect any
governmental approvals, licenses and permits as may be required for Tenant's
use and occupancy of the Leased Premises.
(b) To comply with all applicable laws, codes and
regulations of governmental authorities applicable to Tenant's use and
occupancy of the Leased Premises and all rules and regulations of insurers of
the Leased Premises and the National Board of Fire Underwriters as they apply
to Tenant's use and occupancy of the Leased Premises.
(c) If the Leased Premises include less than an
entire floor of the Building, to not place, erect, maintain or display any
sign or other marking of any kind whatsoever on the exterior surface of the
walls of the Leased Premises or on any door which faces any common corridor
or hallway, without the prior written approval of Landlord, which approval
shall not be unreasonably withheld for a single sign, provided that the same
conforms to the sign standards as are then established by Landlord generally
for the Building, and to not install or replace any entrance door or other
door facing on any common corridor or hallway other than the standard door
supplied by Landlord, without the prior written approval of Landlord.
(d) Not to use or place any curtains, blinds,
drapes,, coverings or signs over any exterior windows or upon the window
surfaces as would be visible from the outside of the Building without the
prior written approval of Landlord.
(e) Without the prior written consent of Landlord,
not to place within the Leased Premises or bring into the Building any
machinery, equipment or other personalty other than customary office
furnishings and small machinery such as typewriters and other similar items
of office equipment, or any machinery or other personalty having a weight on
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the average in excess of the floor bearing capacity of one hundred (100)
pounds per square foot. Landlord in its sole discretion, may condition any
consent given pursuant to this Section 18(e) upon the requirement that Tenant
pay all costs of all structural and other alterations, changes or additions
required to be made to the Leased Premises and the Building, in the sole
judgment of Landlord, for the safe support of such machinery, equipment or
personalty, together with all costs of engineering or other studies required
in the sole judgment of Landlord, to determine the required structural and
other alterations, changes or additions.
19. RULES AND REGULATIONS. Tenant covenants and agrees that
Tenant, its servants, employees, agents, invitees, licensees and other
visitors shall observe faithfully, and comply strictly with, the Rules and
Regulations contained in Exhibit "B", attached hereto and made a part hereof,
and such other and further reasonable Rules and Regulations as Landlord or
Landlord's agents may, after written notice to Tenant, from time to time
adopt. Nothing in this Lease contained shall be construed to impose upon
Landlord any duty or obligation to enforce the Rules and Regulations or
terms, covenants or conditions in any other lease as against any other
tenant, and Landlord shall not be liable to Tenant for violation of the same
by any other tenant, its servants, employees, agents, invitees, licensees or
other visitors.
20. PERFORMANCE OF TENANT'S COVENANTS. If Tenant fails to
perform any covenant or observe any condition to be performed or observed by
Tenant hereunder or acts in violation of any covenant or condition hereof,
Landlord, may, but shall not be required to on behalf of Tenant, perform such
covenant and/or take such steps, including entering upon the Leased Premises,
as may be necessary or appropriate to meet the requirements of any such
covenant or condition, provided that Landlord shall have given Tenant at
least three (3) days prior written notice of Landlord's intention to do so,
unless an emergency situation exists, in which case Landlord shall have the
right to proceed immediately; and all costs and expenses incurred by Landlord
in so doing, including reasonable legal fees, shall be paid by Tenant to
Landlord upon demand, plus interest at the Overdue Interest Rate from the
date of expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding
under the rights reserved to Landlord under this Section shall not in any way
prejudice or waive any rights as Landlord might otherwise have against Tenant
by reason of Tenant's default.
21. EMINENT DOMAIN. In the event of the exercise of the
power of eminent domain whereby (a) such portion of the Building is taken
that access to the Leased Premises is permanently impaired thereby and
reasonable alternate access is not provided by Landlord within a time period
which is reasonable under the circumstances, (b) all or substantially all of
the Leased Premises or the Building is taken, (c) if less than substantially
all of the Building is taken but Landlord, acting in good faith, determines
that it is economically unfeasible to continue to operate the uncondemned
portion as a first-class office building, or (d) if less than substantially
all of the Leased Premises is taken, but Tenant, acting in good faith,
determines that because of such taking it is economically unfeasible to
continue to conduct its business in the uncondemned portion of the Leased
Premises, then in the case of (a) or (b), either party, and in the case of
(c), Landlord, and in the case of (d), Tenant, shall
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<PAGE>
have the right to terminate this Lease as of the date when possession of that
part which was taken is required to be delivered or surrendered to the
condemning authority; and in such case all rent and other charges shall be
adjusted to the date of termination. The foregoing right of termination shall
be applicable to the taking of any estate or interest whatsoever which, as a
matter of law, would deprive Landlord or Tenant of any right to possession
(in common with others, as to common areas of the Building) for any period in
excess of sixty (60) consecutive days from the date of taking, whether or not
the taking be in fee, for a term of years or of any other estate or interest;
and a taking shall include the transfer of title or of any interest in the
Building by deed or other instrument in settlement of or in lieu of transfer
by operation of law incident to condemnation proceedings.
Tenant shall have no right to participate or share
in any condemnation claim, damage award or settlement in lieu thereof with
respect to any taking of any nature; provided, however, that Tenant shall not
be precluded from claiming or receiving payment for Tenant's relocation and
moving expenses as may be permitted under applicable law so long as the
amount of the same is not subtracted from the award which Landlord is
entitled to receive.
22. CASUALTY DAMAGE. In the event of damage to or
destruction of the Leased Premises caused by fire or other casualty, or of
the entrances and other common facilities necessary to provide normal access
to the Leased Premises, or to other portions of the Building or its equipment
which portions and equipment are necessary to provide services to the Leased
Premises in accordance herewith, Landlord shall undertake to make and
complete repairs and restorations as hereafter provided, unless this Lease be
terminated by Landlord or Tenant or unless any mortgagee which is entitled to
receive casualty insurance proceeds fails to make available to Landlord a
sufficient amount of such proceeds to cover the cost of such repairs and
restoration.
If (a) the damage is of such nature or extent, in
Landlord's sole judgment, that. more than one hundred and eighty (180)
consecutive days, after commencement of the work, would be required (with
normal work crews and hours) to repair and restore the part of the Leased
Premises or the Building which has been damaged, or (b) a substantial portion
of the Leased Premises or the Building is so damaged that, in Landlord's
.sole judgment, it is uneconomic to restore or repair the Leased Premises or
the Building, as the case may be, or (c) less than two (2) years remain on
the Lease Term, Landlord shall so advise Tenant promptly, and either party,
in the case described in clause (a) above, or Landlord, in the case described
in clauses (b) or (c) above, for a period of ten (10) days thereafter, shall
have the right to terminate this Lease by written notice to the other, as of
the date specified in such notice, which termination date shall be no later
than thirty (30) days after the date of such notice.
In the event of such fire or other casualty, if
this Lease is not terminated pursuant to the terms of this Section 22, if
sufficient casualty insurance proceeds are available for use for such
restoration or repair, and if this Lease is then in full force and
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effect, Landlord shall proceed diligently to restore the Leased Premises to
substantially its condition prior to the occurrence of the damage, provided
that Landlord shall not be obligated to repair or restore any alterations,
additions or fixtures which Tenant may have installed (whether or not Tenant
has the right or the obligation to remove the same or is required to leave
the same on the Leased Premises as of the expiration or earlier termination
of this Lease) unless Tenant, in a manner satisfactory to Landlord, assures
payment in full of all cost as may be incurred by Landlord in connection
therewith. Landlord is not required hereunder to insure any improvements or
alterations made by Tenant, to the Leased Premises, or any fixtures,
equipment or other property of Tenant. Tenant shall have the right, at its
sole expense, to insure the value of its leasehold improvements, fixtures,
equipment or other property located in the Leased Premises, for the purpose
of providing funds to Landlord to repair and restore the Leased Premises to
substantially its condition prior to the occurrence of the damage. If there
be any such alteration, fixtures or additions and Tenant does not assure or
agree to assure payment of the cost of restoration or repair as aforesaid,
Landlord shall have the right to determine the manner in which the Leased
Premises shall be restored so as to be substantially as the Leased Premises
existed prior to the damage occurring, as if such alterations, additions or
fixtures had not then been made or installed. The validity and effect of this
Lease shall not be impaired in any way by the failure of Landlord to complete
repairs and restoration of the Leased Premises or of the Building within one
hundred eighty (180) consecutive days after commencement of work, even if
Landlord had in good faith notified Tenant that the repair and restoration
could be completed within such period, provided that Landlord proceeds
diligently with such repair and restoration.
In the case of damage to the Leased Premises which
is of a nature or extent that Tenant's continued occupancy is substantially
impaired, the Annual Fixed Rent otherwise payable by Tenant hereunder shall
be equitably abated or adjusted for the duration of such impairment. Anything
to the contrary in this Lease notwithstanding, expressed or implied, Landlord
shall have no liability to Tenant for and shall have no duty to repair,
replace or restore any damage whatsoever, occurring as a result of leakage or
seepage of water or any other liquid from any source whatsoever, or breakage
of any pipes, mains or other plumbing located in or about the Building, or
snow, frost, steam, excessive heat or cold, falling plaster, sewage, gas,
odors, noise, or by air conditioning or heating apparatus. Provided, however,
Landlord shall repair, replace and restore as an Operating Expense of the
Building, all damage to the Building structure, systems and fixtures. Tenant
shall be responsible to insure and/or repair all of Tenant's leasehold
improvements and all equipment, fixtures and personal property located in the
Leased Premises.
23. HOLD HARMLESS: PUBLIC LIABILITY INSURANCE: WAIVER OF
SUBROGATION. Tenant covenants and agrees to exonerate, indemnify, defend,
protect and save Landlord, owner of the Lot and Landlord's managing agent, if
any, harmless from and against any and all claims, demands, expenses,.
losses, suits and damages as may be occasioned by reason of (a) any accident
or matter occurring on the Leased Premises, causing injury to persons or
damage to property (including, without limitation, the Leased Premises),
unless such accident
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or other matter resulted from the negligence or otherwise tortious act of
Landlord or Landlord's agents or employees, (b) the failure of Tenant to
fully and faithfully perform the obligations and observe the conditions of
this Lease, or (c) the negligence or otherwise tortious act of Tenant or
anyone in or about the Building on behalf or at the invitation or right of
Tenant.
Tenant shall keep in force at its own expense
comprehensive general liability insurance (including a contractual liability
insurance endorsement) in companies acceptable to Landlord sufficient to
cover such indemnification and naming as additional insured Landlord, owner
of the Lot, Landlord's managing agent, if any, and Tenant against claims for
personal injury" including bodily injury, death or property damage in amounts
not less than $1,000,000 (or such higher limits as may be determined by
Landlord), and Tenant will further deposit the policy or policies of such
insurance, or certificates thereof, with Landlord. Said policy or policies of
insurance or certificates thereof shall have attached thereto an endorsement
that such policy shall not be cancelled without at least ten (10) days prior
written notice to Landlord and Landlord's managing agent, if any, and that no
act or omission of Tenant shall invalidate the interest of Landlord under
said insurance.
Landlord and Tenant hereby release the other from
any and all liability or responsibility to the other or anyone claiming
through or under them by way of subrogation or otherwise for any loss or
damage to property covered by any insurance then in force, even if such fire
or other casualty shall have been caused by the fault or negligence of the
other party, or anyone for whom such party may be responsible, provided,
however, that this release shall be applicable and in force and effect only
to the extent of and with respect to any loss or damage occurring during such
time as the policy or policies of insurance covering said loss shall contain
a clause or endorsement to the effect that this release shall not adversely
affect or impair said insurance or prejudice the right of the insured to
recover thereunder.
-24. MORTGAGEE AND OTHER AGREEMENTS. In the event any
person, firm, corporation or other entity who is a party to any instrument to
which this Lease is subject or subordinate (including, without limitation,
any mortgage now or hereafter placed upon the building or lot or on any
interest created therein) or their successor(s), succeeds thereunder to the
interest of landlord hereunder in the building or the lot, or acquires the
right to possession of the Building or the Lot, such person, firm,
corporation or other entity shall not be (a) liable for any act or omission
of the party named above as Landlord under this Lease; (b) liable for the
performance of Landlord's covenants hereunder which arise and accrue prior to
such person, firm, corporation or other entity succeeding to the interest of
Landlord hereunder or acquiring such right to possession; (c) subject to any
offsets or defenses which Tenant may have at any time against Landlord; (d)
bound by any rent which Tenant may have paid previously for more than one (1)
month in advance; and (e) shall not be bound by any amendment or modification
hereof relating to the reduction of rent, shortening of term, or effecting a
cancellation or surrender hereof and made without the consent of such person,
firm, corporation or other entity.
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Tenant agrees, from time to time as may be
requested by Landlord, to execute, acknowledge and deliver to Landlord all or
any of the following: an estoppel letter certifying to such party as Landlord
reasonably may designate, including any mortgagee, that this Lease is in full
force and effect and has not been amended, modified or superseded, that
Landlord has satisfactorily completed all construction work required by this
Lease (subject to completion of punch-list items), that Tenant has accepted
the Leased Premises and is now in possession thereof, that Tenant has no
defense, offsets or counterclaims hereunder or otherwise against Landlord
with respect to this Lease or the Leased Premises and Landlord is not in
default hereunder (or if any of the foregoing not be the case, specifying in
reasonable detail the extent and nature thereof), that Tenant has no
knowledge of any pledge or assignment of this Lease or rentals hereunder,
that rent is accruing under this Lease but has not been paid more than one
(1) month in advance and the date to which rent has been paid; and any other
instrument as may be reasonably requested to be executed by Tenant by any
mortgagee of the Lot or the Building or any interest therein, so long as the
rights of Tenant as provided for by this Lease are not materially affected by
any such other instrument. Tenant's estoppel letter shall be in the form of
Exhibit "D" attached hereto and made a part here of, or in such other form as
Landlord or its mortgagee shall hereafter proscribe.
25. SUBORDINATION AND ATTORNMENT. This Lease and the
estate, interest and rights hereby created are subordinate to any mortgage
now or hereafter placed upon the Lot, the Building or any estate or interest
therein, including, without limitation, any mortgage on any leasehold estate,
and to all renewals, modifications, consolidations, replacements and
extensions of the same as well as any substitutions therefor. Tenant agrees
that in the event any person, firm, corporation or other entity acquires the
right to possession of the Lot and the Building including any mortgagee or
holder of any estate or interest having priority over this Lease, Tenant
shall, if requested by such person, firm, corporation or other entity, attorn
to and become the tenant of such person, firm, corporation or other entity,
upon the same terms and conditions as are set forth herein for the balance of
the Lease Term. Notwithstanding the foregoing, any mortgagee may, at any
time, subordinate its mortgage to this Lease, without Tenant's consent, by
notice in writing to Tenant, and thereupon this Lease shall be deemed prior
to such mortgage without regard to their respective dates of execution and
delivery, and in that event, such mortgagee shall have the same rights with
respect to this lease as though it had been executed prior to the execution
and delivery of the mortgage.
Tenant, if requested by Landlord, shall execute
any such instruments in recordable form as ma~ be reasonably required by
Landlord in order to confirm or effect the subordination of this Lease and
the attornment of Tenant to future landlords in accordance with the terms of
this Section.
26. ASSIGNMENT AND SUBLETTING . Tenant shall not assign,
pledge, mortgage or otherwise transfer or encumber this Lease, nor sublet all
or any part of the Leased Premises or permit the same to be occupied or used
by anyone other than Tenant or its employees without Landlord's prior written
consent, which consent shall not be unreasonably
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withheld or delayed. It will not be unreasonable for Landlord to withhold its
consent if Landlord is acting in its best interests and not with the express
intent of interfering with Tenant's proposed assignment or Sublease, and if
the reputation, financial responsibility, or business of a proposed assignee
or subtenant is unsatisfactory to Landlord, or if Landlord deems such
business to not be consonant with that of other tenants in the Building, or
if the intended use by the proposed assignee or subtenant conflicts with any
commitment made by Landlord to any other tenant in the Building, or if the
proposed rental rate is lower than the then current rate at which similar
space in the Building is being offered by Landlord, or if the proposed
subletting is to a prospective subtenant for less than fifty percent (50%) of
the Leased Premises. Notwithstanding the foregoing, Tenant may assign or
sublet the Leased Premises without Landlord's consent to a corporation which
is a parent or subsidiary of Tenant or is affiliated with Tenant in a common
group of corporations provided no such assignment or subletting shall relieve
Tenant of its obligations and liabilities hereunder.
Tenant's request for consent shall be in writing
and contain the name, address, and description of the business of the
proposed assignee or subtenant, its most recent financial statement and the
other evidence of financial responsibility, its intended use of the Leased
Premises, and the terms and conditions of the proposed assignment or
subletting.
Within thirty (30) days from receipt of such
request, Landlord shall either: (a) grant or refuse consent; or (b) elect to
require Tenant (i) to execute an assignment of lease or sublease of Tenant's
interest hereunder to Landlord or its designee upon the same terms and
conditions as are contained herein, together with an assignment of Tenant's
interest as sublessor in any such proposed sublease, or (ii) if the request is
for consent to a proposed assignment of this Lease, to terminate this Lease
and the term hereof effective as of the last day of the third month following
the month in which the request was received.
Each assignee hereunder shall assume and be deemed
to have assumed this Lease and -shall be and remain liable jointly and
severally with Tenant for all payments and for the due performance of all
terms, covenants, conditions and provisions herein contained on Tenant's part
to be observed and performed. No assignment shall be binding upon Landlord
unless the assignee shall deliver to Landlord an instrument in recordable
form containing a covenant of assumption by the assignee, but the failure or
refusal of assignee to execute the same shall not release assignee from its
Habifity as set forth herein.
All the foregoing notwithstanding, Tenant shall not
enter into any lease, sublease, license, concession or other agreement for
the use, occupancy or utilization of the Leased Premises or any portion
thereof, which provides. for a rental or other payment for such use,
occupancy or utilization based in whole or in part on the income or profits
derived by any person from the property leased, used, occupied or utilized
(other than an amount based on a fixed percentage or percentages of receipts
or sales). Any such purported lease, sublease, license, concession or other
agreement shall be absolutely void and ineffective as a
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conveyance or any right or interest in the possession, use or occupancy of
any part of the Leased Premises.
Any consent by Landlord hereunder shall not
constitute a waiver of strict future compliance by Tenant of the provisions
of this Section 26 or a release of Tenant from the full performance by Tenant
of any of the terms, covenants, provisions, or conditions in this Lease
contained.
27. DEFAULT. Any other provisions in the Lease
notwithstanding, it shall be an Event of Default under this Lease if (a)
Tenant fails to pay any installment of Fixed Rent, Additional Rent or other
sum payable by Tenant hereunder when due and such failure continues for a
period of ten (10) days after written notice given by or on behalf of
Landlord to Tenant, provided, however, Landlord need not give any such
written notice, for nonpayment of rent and Tenant shall not be entitled to
any such period of grace, more than twice in any twelve (12) month period,
(b) Tenant vacates the Leased Premises or uses or occupies the Leased
Premises otherwise than as permitted by Sections 1 and 10 hereof, or assigns
or sublets, or purports to assign to sublet, the Leased Premises or any part
thereof otherwise than in the manner and upon the conditions set forth in
Section 26 hereof, (c) Tenant fails to observe or perform any other covenant
or agreement of Tenant herein contained and such failure continues after
written notice given by or on behalf of Landlord to Tenant for more than
thirty (30) days and such additional time, if any, as is reasonably necessary
to cure such failure, provided Tenant commences to cure such failure within
such thirty (30) day period and diligently thereafter prosecutes such cure to
completion, (d) without Landlord's prior written consent, Tenant removes or
attempts to remove or manifests an intention to remove any or all of Tenant's
property from the Leased Premises otherwise than in the ordinary and usual
course of business, (e) Tenant makes any assignment for the benefit of
creditors; Tenant commits an act of bankruptcy or files a petition or
commences any proceeding under any bankruptcy or insolvency law; a petition
is filed or any proceeding is commenced against Tenant under any bankruptcy
or insolvency law and such petition or proceeding is not dismissed within
thirty (30) days; Tenant is adjudicated a bankrupt; Tenant by any act
indicates its consent to, approval of or acquiescence in, or a court
approves, a petition filed or proceeding commenced against Tenant under any
bankruptcy or insolvency law; a receiver or other official is appointed for
Tenant or for a substantial part of Tenant's assets or for Tenant's interests
in this Lease; any attachment or execution against a substantial part of
Tenant's assets or of Tenant's interest in this Lease remains unstayed or
undismissed for a period of more than ten (10) days; a substantial part of
Tenant's assets or of Tenant's interest in this Lease is taken by legal
process in any action against Tenant, or (f) any of the foregoing occur as to
any guarantor or surety of Tenant's performance under this Lease, or 'such
guarantor or surety defaults on any provision under its guaranty or
suretyship agreement.
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28. LANDLORD'S REMEDIES.
(a) If an Event of Default hereunder shall have
happened and be continuing, Landlord may, at its option:
(i) declare due and payable and sue for
and recover, all unpaid Fixed Rent for the unexpired period of the Lease Term
(and also all Additional Rent as the amount(s) of same can be determined or
reasonably estimated) as if by the terms of this Lease the same were payable
in advance, together with all legal fees and other expenses incurred by
Landlord in connection with the enforcement of any of Landlord's rights and
remedies hereunder, and/or
(ii) distrain, collect or bring action for
such Fixed Rent and Additional Rent as being rent in arrears, or may enter
judgment therefor in an amicable action as herein elsewhere provided for in
case of rent in arrears, or may file a Proof of Claim in any bankruptcy or
insolvency proceeding for such Fixed Rent and Additional Rent, or institute
any other proceedings, whether similar or dissimilar to the foregoing, to
enforce payment thereof, and/or
(iii) terminate the Lease Term by giving
written notice thereof to Tenant and, upon the giving of such notice, the
Lease Term and the estate hereby granted shall expire and terminate with the
same force and effect as though the date of such notice was the date
hereinbefore fixed for the expiration of the Lease Term, and all rights of
Tenant hereunder shall expire and terminate, but Tenant shall remain liable
as hereinafter provided, and/or
(iv) exercise any other rights and remedies
available to Landlord at law or in equity.
(b) If any Event of Default shall have happened
and be continuing, Landlord may, whether or not the Lease Term has been
terminated as herein provided, reenter and repossess the Leased Premises or
any part thereof by force, summary proceedings, ejectment or otherwise and
Landlord shall have the right to remove all persons and property therefrom.
Landlord shall be under no liability for or by reason of any such entry,
repossession or removal; and no such re-entry or taking of possession of the
Leased Premises by Landlord shall be construed as an election on Landlord's
part to terminate the Lease Term unless a written notice of such intention be
given to Tenant pursuant to Section 28(a)(iii) or unless the termination of
this Lease be decreed by a court of competent jurisdiction.
(c) At any time or from time to time after the
repossession of the Leased Premises or any part thereof pursuant to Section
28(b), whether or not the Lease Term shall have been terminated pursuant to
Section 28(a)(iii), Landlord may (but shall be under no obligation to) relet
all or any part of the Leased Premises for the account of Tenant for such
term or terms (which may be greater or less than the period which would
otherwise
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have constituted the balance of the Lease Term) and on such conditions (which
may include concessions or free rent) and for such uses as Landlord, in its
absolute discretion, may determine, and Landlord may collect and receive any
rents payable by reason of such reletting. Landlord shall not be required to
accept any tenant offered by Tenant or observe any instruction given by
Tenant about such reletting, or do any act or exercise any care or diligence
with respect to such reletting or to the mitigation of damages. For the
purpose of such reletting, Landlord may decorate or make repairs, changes,
alterations or additions in or to the Leased Premises or any part thereof 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 legal fees expended by Landlord.
(d) No expiration or termination of the Lease Term
pursuant to Section 28(a)(iii), by operation of law or otherwise, and no
repossession of the Leased Premises or any part thereof pursuant to Section
28(b), or otherwise, and no reletting of the Leased Premises or any part
thereof pursuant to Section 28(c) shall relieve Tenant of its liabilities and
obligations hereunder, all of which shall survive such expiration,
termination, repossession or reletting.
(e) In the event of any expiration or termination
of this Lease or repossession of the Leased Premises or any part thereof by
reason of an occurrence of an Event of Default, and Landlord has not elected
to accelerate rent pursuant to Section 28(a)(i), Tenant shall pay to Landlord
the Fixed Rent, Additional Rent and other sums required to be paid by Tenant
to and including the date of such expiration, termination or repossession;
and, thereafter, Tenant shall, until the end of what would have been the
expiration of the Lease Term in the absence of such expiration, termination
or repossession, and whether or not the Leased Premises or any part thereof
shall have been relet, be liable to Landlord for, and shall pay to Landlord,
as liquidated and agreed current damages, the Fixed Rent, Additional Rent and
other sums which would be payable under this Lease by Tenant in the absence
of such expiration, termination or repossession, less the net proceeds, if
any, of any reletting effected for the account of Tenant pursuant to Section
28(c), after deducting from such proceeds all of Landlord's reasonable
expenses in connection with such reletting (including, without limitation,
all related reasonable repossession costs, brokerage commissions, legal
expenses, attorneys' fees, employees' expenses, alteration costs and expenses
of preparation for such reletting). Tenant shall pay such current damages on
the days on which the Fixed Rent would have been payable under this Lease in
the absence of such expiration, termination or repossession, and Landlord
shall be entitled to recover the same from Tenant on each such day.
(f) At any time after such expiration or
termination of this Lease or repossession of the Leased Premises or any part
thereof by reason of the occurrence of an Event of Default, whether or not
Landlord shall have collected any current damages pursuant to Section 28(e),
Landlord shall be entitled to recover from Tenant, and Tenant shall pay to
Landlord on demand, unless Tenant has paid the whole of accelerated rent
pursuant to
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Section 28(a)(i), as and for liquidated and agreed final damages for Tenant's
default and in lieu of all current damages beyond the date of such demand (it
being agreed that it would be impracticable or extremely difficult to fix the
actual damages), an amount equal to the excess, if any, of (i) Fixed Rent,
Additional Rent and other sums which would be payable under this Lease for
the remainder of the Lease Term from the date of such demand (or, if it be
earlier, the date to which Tenant shall have satisfied in full its
obligations under Section 28(e) to pay current damages) for what would have
been the then unexpired term of this Lease in the absence of such expiration,
termination or repossession, discounted at the prevailing yield to maturity
on United States Treasury Notes having the closest maturity to the expiration
date of the Lease Term, over (ii) the then fair rental value of the Leased
Premises for the same period, discounted at a like rate. If any statute. or
rule of law shall validly limit the amount of such liquidated final damages
to less than the amount above agreed upon, Landlord shall be entitled to the
maximum amount allowable under such statute or rule of law.
(g) Tenant, in consideration for the execution of
this Lease by Landlord and for the covenants and agreements on the part of
Landlord herein contained, and fully comprehending the relinquishment of
certain rights including rights of pre-judgment notice and hearing, hereby
expressly authorizes any attorney of any Court of Record to accept service of
process for, to appear for, and to confess judgment against Tenant in any and
all actions brought hereunder by Landlord against Tenant to recover
possession from time to time of the Leased Premises in accordance with the
terms hereof (and Tenant agrees that upon the entry of each judgment for said
possession a Writ of Possession or other appropriate process may issue
forthwith).
(h) Tenant further hereby expressly authorizes and
empowers (which power is coupled with an interest) Landlord, upon the
occurrence of an Event of Default and so long as the same is continuing, to
enter upon the Leased Premises, distrain upon and remove therefrom all
inventory, equipment, machinery, trade fixtures, and personal property of
whatsoever kind or nature, owned by Tenant and to proceed, without judicial
decree, writ of execution or assistance of constables, to conduct a private
sale, by auction or sealed bid, of such personal property, at which sale
Landlord may bid without restriction. Tenant hereby waives the benefit of all
laws, whether now in force or hereafter enacted, exempting any personal
property on the Leased Premises from sale or levy, whether execution thereon
is had by order of ANY COURT OR THROUGH PRIVATE sale as herein authorized.
Landlord agrees, on the request of a secured party holding a valid purchasing
money security interest in personal property located at the Leased Premises,
to execute a Landlord's waiver on terms and conditions reasonably acceptable
to Landlord.
(i) In any action for ejectment or for distraint,
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 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
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to the contrary notwithstanding. The authority to confess judgment against
Tenant hereunder shall not be exhausted by one (1) exercise thereof, but
judgment may be confessed as provided herein from time to time as often as
any Event of Default occurs under this Lease, and such authority- may be
exercised as well after the expiration of the Lease Term and/or during or
after the expiration of any extended or renewal term.
(j) No right or remedy herein conferred upon or
reserved to either party is intended to be exclusive of any other right or
remedy herein by law provided, but each shall be cumulative and in addition
to every right or remedy given herein or now or hereafter existing at law or
in equity or by statute.
(k) No waiver by either party of any breach by the
other of any of the other's obligations, agreements or covenants herein shall
be a waiver of any subsequent breach or of any obligation, agreement or
covenant, nor shall any forbearance by either party to seek a remedy for any
breach by the other be a waiver by either party or any rights and remedies
with respect to such or any subsequent breach.
(l) In the event of a breach or threatened breach
by either party of any of the covenants or provisions hereof, the other shall
have the right of injunction and right to invoke any remedy allowed at law or
in equity as if re-entry summary proceedings and other remedies were not
herein provided for.
(in) Tenant hereby expressly waives any and all
rights of redemption granted by or under any present or future laws in the
event of Tenant being evicted or dispossessed for any cause, or in the event
of Landlord obtaining possession of the Leased Premises, by reason of the
violation by Tenant of any of the covenants and conditions of this Lease, or
otherwise.
29. LEGAL FEES AND OTHER COSTS. The prevailing party in any
enforcement proceeding shall be entitled to reimbursement of all reasonable
legal fees and expenses by the non-prevailing party.
30. LATE CHARGE. If any installment of fixed rent,
additional rent or other sums payable by tenant to landlord under this lease
shall not be paid on the due date thereof, Tenant shall pay to Landlord a
"late charge" of five percent (5 %) of the amount so due for the purpose of
defraying the. expense incident to handling such delinquent payment.
31. SUCCESSORS AND ASSIGNS. The obligations of this Lease
shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns; provided that Landlord and each
successive owner of the Building and/or the Lot shall be liable only for
obligations accruing during the period of its ownership or interest in the
Building or the Lot; and from and after the transfer by Landlord or such
successive owner of its ownership or other interest in the Building or the
Lot, Tenant shall look solely to the successors in title for the performance
of Landlord's obligations hereunder. The liability of
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Landlord or any successive owner of the Building and/or the Lot hereunder and
all of its officers, employees, shareholders or joint venturers or partners,
if any, whether general or limited, shall be limited to Landlord's estate or
other title or interest in the Building and/or the Lot.
32. Waivers. No delay or forbearance by Landlord in
exercising any right or remedy hereunder or in undertaking or performing any
act or matter which is not expressly required to be undertaken by Landlord
shall be construed, respectively, to be a waiver of Landlord's rights or to
represent any agreement by Landlord to undertake or perform such act or
matter thereafter.
33. 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
Leased Premises and/or any claim of injury or damage and any emergency
statutory or any other statutory remedy.
34. SEVERABILITY. Each covenant and agreement in this Lease
shall for all purposes be construed to be a separate and independent covenant
or agreement. If any provision in this Lease or the application thereof shall
to any extent be invalid, illegal or otherwise unenforceable, the remainder
of this Lease, and the application of such provision other than as invalid,
illegal or unenforceable, shall not be affected thereby; and such provisions
in this Lease shall be valid and enforceable to the fullest extent permitted
by law.
35. NOTICES. All notices or other communications required
or permitted hereby shall be effective only if the same are in writing and
are signed by the party giving the notice or by an agent or other person
authorized in writing to so act on behalf of such party. Notices.-to Tenant
shall be given by registered or certified mail, return receipt requested,
addressed to Tenant at the address set forth in Section I hereto; and notices
to Landlord shall be given by registered or certified mail, return receipt
requested to the address set forth in section I hereof. All notices shall be
deemed given unless otherwise specified herein, on the date when same are
delivered, if delivered, or on the date when the same are deposited in the
mail.
36. AMENDMENT AND MODIFICATIONS. This Lease contains the
entire agreement between the parties hereto, and shall not be amended,
modified or supplemented unless by agreement in writing signed by both
Landlord and Tenant and the same shall not be valid unless approved in
writing by all mortgagees and holders of any estate or interest in the
Building or the Lot by virtue of leases or other instruments expressly
referred to herein or which are then of record.
28
<PAGE>
37. SECURITY DEPOSIT. Upon execution of this Lease, Tenant
shall deposit the sum set forth in Section I hereof with Landlord as a
security deposit (the "Security Deposit") to be held by Landlord as security
for Tenant's performance of all of Tenant's obligations under this Lease.
Landlord may commingle the Security Deposit with its general funds and any
interest earned on the Security Deposit shall belong to Landlord. Landlord,
in its sole discretion, may apply the Security Deposit to cure any Event of
Default under this Lease. If any such application is made, upon notice by
Landlord to Tenant, Tenant shall promptly replace the amount so applied. If
there has been no Event of Default within thirty (30) days after expiration
or earlier termination of this Lease, Landlord shall return the entire
balance of the Security Deposit to Tenant. Tenant will not look to any
foreclosing mortgagee on the Lot or Building or any interest therein for the
return of the Security Deposit unless the mortgagee has expressly assumed
Landlord's obligations under this Lease or has actually received the balance
of the Security Deposit. In the event Landlord sells the Lot and Building and
transfers the Security Deposit to a new owner of the Lot and Building, Tenant
shall look solely to such new owner for the return of the balance of the
Security Deposit.
38. ENVIRONMENTAL MATTERS.
(a) Tenant shall promptly deliver to Landlord
copies of any of the following documents that Tenant receives or prepares:
(i) applications or other materials
regarding the Land, Building, or Premises submitted to any governmental
agency in compliance with Environmental Statutes;
(ii) any notifications regarding the Land,
Building, or Premises submitted to any person pursuant to Environmental
Statutes;
(iii) any permit, license, approval,
amendment or modification thereto granted regarding the Land, Building, or
Premises pursuant to Environmental Statutes;
(iv) any record or manifest required to be
maintained regarding the land, building, or premises pursuant to
environmental statutes; and
(v) any correspondence, notice of
violation, summons, order, complaint or other document received by Tenant or
its lessees, sublessees or assigns (if permitted), pertaining to the Land,
Building, or Premises and to compliance with any Environmental Statutes.
"Environmental Statutes" shall mean all
statutes, ordinances, regulations, orders and requirements of common law
regulating environmental matters concerning (A) activities at the Land,
Building or Premises, (B) repairs or construction of any improvements located
on the Land, (C) handling of any materials, (D) discharges to the
29
<PAGE>
air, soil, surface water, or ground water, and (E) storage, treatment or
disposal of any waste at the Land, Building or Premises.
(b) In the event that Landlord or Landlord's mortgagee performs
or n of the Lot or Building for any of the below matters, lord or Landlord's
mortgagee with respect to such investigation:
(i) compliance at the Land, Building, or Premises
with Environmental Statutes;
(ii) the presence of hazardous substances or
contamination at the Land, Building, or Premises;
(iii) the presence at the Land, Building, or
Premises of polychlorinated biphenyls, substances containing polychlorinated
biphenyls, asbestos, materials containing asbestos, or unreaformaldehyde foam
insulation;
(iv) the presence at the Land of (A) a wetland or
other "water of the United States" for purposes of Section 404 of the federal
Clean Water Act, 33 U.S.C. Section 1344, or any similar area regulated under
any state law, (B) a flood plain or other flood hazard area as defined
pursuant to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32,
Sections 679.101 to .601 (Purdon Sup. 1989), (C) a portion of the coastal
zone for purposes of the federal Coastal Zone Management Act, 16 U.S.C.
Sections 1451-1464, or (D) any other area development of which is
specifically restricted under applicable law by reason of its physical
characteristics or prior use;
(v) the presence at the Land, Building, or
Premises of radon products; or
(vi) the presence at the Land, Building, or
Premises of tanks presently or formerly used for the storage of any liquid or
gas above or below ground.
(C) In the event Tenant brings any hazardous or toxic
substances or waste into the Leased Premises of the nature described in
clause (b) above, Tenant shall notify Landlord thereof and Tenant shall
promptly clean up the same.
(d) In the event any present or future Federal, State or
municipal statute, ordinance, law, rule, or regulation requires Landlord or
Tenant to obtain a clearance certificate or Declaration of Non-Applicability,
similar or dissimilar to those required by the New Jersey Environmental
Clean-Up Responsibility Act, upon the expiration or earlier termination of
the Lease Term, or upon the sale of the Lot or Building by Landlord, Tenant
will apply therefore and deliver an application therefor to Landlord without
delay,
30
<PAGE>
and take such action as may be necessary under such applicable statute,
ordinance, law, rule or regulation to obtain such clearance certificate or
Declaration of Non-Applicability.
39. BROKERS. Landlord and Tenant each represent and warrant
to the other that it has not engaged any broker, finder or other person other
than the broker, if any, listed in Section I hereof, who would be entitled to
any commission or fees in respect of the negotiation, execution or delivery
of this Lease. Landlord and Tenant each agree to indemnify and hold harmless
the other against any loss, cost, liability or expense incurred by the other
as a result of any claim asserted by any other broker, finder or other person
on the basis of any arrangements or agreements made or alleged to have been
made by or on behalf of the other. Landlord shall be responsible for the
payment of a brokerage fee to the broker listed in Section I at Landlord's
scheduled commission rate or as otherwise agreed in writing between Landlord
and such broker.
40. FINANCIAL STATEMENTS. Within ninety (90) days following
the end of Tenant's fiscal year, Tenant shall deliver to Landlord a copy of
Tenant's financial statements (consisting, at a minimum, of Tenant's balance
sheet and income statement) for Tenant's fiscal year just ended, certified by
an independent certified public accountant as presenting fairly, in all
material respects, the financial position of Tenant and the results of its
operations in accordance with generally accepted accounting principles. In
addition, Tenant shall provide from time to time, on request of Landlord,
bank references necessary to verify Tenant's continued good credit.
41. TENANT'S TERMINATION RIGHTS. Tenant shall have the
right and option to terminate this Lease at the end of the twenty-fourth
(24th) Lease Month (the "Termination Date") of the initial Lease Term by
giving Landlord not less than six (6) months prior written notice thereof and
paying to Landlord at the time of the giving of such notice a termination fee
of $73,889.68 (the "Termination Fee"). If Tenant gives notice of its election
to terminate this lease under this Section 41, but fails to pay the
Termination Fee or fails to vacate the Leased Premises on or before the
Termination Date, Landlord shall have the option of treating such failure as
either (a) an Event of Default hereunder, (b) a rescission of Tenant's notice
of termination, or (c) a holdover under Section 4 hereof. In any event,
Tenant shall pay Landlord, as Additional Rent hereunder, all damages, losses,
costs and expenses (including reasonable legal fees and expenses) Landlord
may have incurred by reason of Tenant's failure to vacate, including, without
limitation, any costs or lost profits from any reletting or proposed
reletting of the Leased Premises and Landlord's efforts to regain possession
of the Leased Premises.
42. PARKING. At no additional rent to * Tenant, Landlord
shall provide on the Lot on which the Building is located parking for all
tenants (including Tenant), their guests and customers at an overall rate of
five (5) parking spaces per 1,000 square feet of office space in the
Building, which shall include two (2) spaces in the underground parking
structure.
31
<PAGE>
43. OPTIONS TO Extend. Provided no Event of Default under
this Lease has occurred and is CONTINUING, TENANT shall have the right and
option, exercisable by giving Landlord written notice at least nine (9)
months prior to the expiration of the initial Term, to to extend the Lease
Term for one (1) additional period of four (4) years (the "Extended Term")
and, upon the giving of such notice, this Lease shall automatically be
extended for such four (4) year period and no further agreement of extension
need be executed. In the even that Tenant fails to give such notice to
Landlord as herein provided, this Lease shall automatically terminate at the
end of the then current Lease Term and Tenant shall have no further right or
option to extend this Lease. The Extended Term shall be upon the same
covenants, agreements, provisions, terms and conditions as during the
original Lease Term except that the Annual Fixed Rent during the Extended
Term shall equal the Fair Market Rent for the Leased Premises, but not less
than the aggregate rent paid during the last year of the initial Term. The
"Fair Market Rent" for the Leased Premises shall mean the rent for comparable
space in a Class A mid-rise building in lower Bucks County for a new tenant
entering into a new four (4) year lease and with the Operating Expense
Allowance being adjusted to reflect the expense allowance used in calculating
the Fair Market Rent. At least nine (9) months prior to the expiration of the
then current Lease Term, Tenant may request Landlord to quote the Fair Market
Rent effective for the first day of the Extended Term. If Tenant objects
thereto, Landlord and Tenant shall negotiate for a period of thirty (30) days
to determine whether the Fair Market Rent can be agreed upon. In the event
Landlord and Tenant cannot agree on the Fair Market Rent within such thirty
(30) day period, Landlord and Tenant shall mutually select a real estate
appraiser (MAI or equal) knowledgeable of rents obtained in Class A mid-rise
office buildings in lower Bucks County, Landlord shall submit to such
appraiser the lowest Annual Fixed Rent which Landlord is willing to accept,
together with any information with respect thereto that Landlord deems
relevant and Tenant shall submit to such appraiser the highest Annual Fixed
Rent which Tenant is wining to pay, together with any information with
respect thereto that Tenant deems relevant, and the appraiser will then
select which of Landlord's or Tenant's submissions most clearly reflect the
Fair Market Rent for Class A mid-rise office buildings in lower Bucks County
for new leases for a four (4) year term as aforesaid. The appraiser's
decision shall be rendered within forty-five (45) days following his
selection and to determine the Fair market rent of the leased premises as
aforesaid. Such determination shall be final, binding and or conclusive on
Landlord and Tenant.
44. HEADINGS AND TERMS. The title, headings and table of
contents of this Lease are for convenience of reference only and shall not in
any way be utilized to construe or interpret the agreement of the parties as
otherwise set forth herein. The term "Landlord" and the term "Tenant" as used
herein shall mean, where appropriate, all persons acting by or on behalf of
the respective parties, except as to any required approvals, consents or
amendments, modifications or supplements hereunder when such terms shall only
mean the parties originally named on the first page of this Lease as Landlord
and Tenant, respectively, and their agents so authorized in writing.
32
<PAGE>
45. GOVERNING LAW. This Lease shall be governed by and
construed in accordance with the laws of the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed the date first mentioned.
LANDLORD:
GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP
By: BPPI-I, L.P.
By: Bergen of Philadelphia, Inc.
By: /s/ illegible
----------------------------------------
By: Pitcairn Properties, Inc.
By: /s/ illegible
----------------------------------------
TENANT:
WORLDGATE COMMUNICATIONS
By: /s/ Hal Krisbergh
----------------------------------------
Name: Hal Krisbergh
--------------------------------------
Title: Chairman/CEO
-------------------------------------
Attest: /s/ David E. Wachob
------------------------------------
Name: David E. Wachob
-------------------------------------
Title: VP/GM
------------------------------------
33
<PAGE>
EXECUTION
FIRST AMENDMENT TO LEASE
FIRST AMENDMENT TO LEASE dated October 24, 1997 by and between
GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP, Landlord ("Landlord"), and
WORLDGATE COMMUNICATIONS, as Tenant ("Tenant").
BACKGROUND
A. Landlord and Tenant entered into a Lease dated January 14,
1997 (the "Original Lease") pursuant to which Tenant leased approximately 16,195
rentable square feet (the "Premises") at 3220 Tillman Drive, Bensalem Township,
Pennsylvania (the "Building"). Capitalized terms not otherwise defined herein
shall have the meaning assigned to them in the Original Lease.
B. Tenant desires to Lease an additional approximately 3,130
rentable square feet on the second (2nd) floor of the Building (the "Additional
Premises"). Landlord has agreed to the lease of the Additional Promises upon the
terms and conditions hereinafter set forth.
AGREEEMENT
NOW, THEREFORE, in consideration of the foregoing, the parties
hereto, intending to be legally bound hereby, agree as follows:
1. DEFINITIONS; EFFECTIVENESS. The Original Lease as amended by
this Amendment is hereafter referred to as the Lease. The respective obligations
of Landlord and Tenant prior to the Effective Date (as defined in Section 3
below) shall be governed in all respects by the Original Lease.
2. PREMISES. Landlord hereby leases the Additional Premises to
Tenant for the Annual Rent set forth in Section 3 below and upon the terms and
conditions set forth in the Original Lease. EXHIBIT "A" to the Lease is hereby
amended to include as the Premises the area in the Building depicted on EXHIBIT
"A" attached hereto.
3. BASE RENT. Tenant shall pay to Landlord as Annual Fixed Rent
for the Additional Premises the sum of Twenty and 50/100 Dollars ($20.50) per
rentable square foot, or Sixty Four Thousand one Hundred Sixty Five ($64,165),
per annum, commencing December 1, 1997 (the "Effective Date"), payable as
provided in the Original Lease.
<PAGE>
4. CONSTRUCTION OF ADDITIONAL PREMISES. (a) Landlord will
construct the improvements in the Additional Premises in accordance with the
plans attached or described in EXHIBIT "B". Landlord will provide Tenant with a
Tenant Improvement Allowance in the amount of $29,200. To the extent that Tenant
makes any changes in finish or scope of the work described in EXHIBIT "B" Tenant
shall pay such excess monthly in proportion to the overall Cost of Construction
within fifteen (15) days of receiving Landlord's statement therefor. The "Cost
of Construction" shall mean the actual charges of Landlord's contractors,
designers and engineers and Landlord's overhead in an amount equal to ten
percent (10%) of such charges.
(b) All construction work required or permitted
by the Lease, whether by Landlord or Tenant, shall be done in a good and
workmanlike manner and in compliance with all applicable laws, ordinances,
regulations and orders of governmental authorities and with all applicable
codes of all insurers of the Building. Each party may inspect the work of the
other at reasonable times and shall promptly give notice of observed defects.
Each party hereby agrees to be bound by and authorizes the other to rely
upon, in connection with design and construction, approval and other actions
by their respective construction representative, as identified by written
notice to the other. Landlord's construction representation is R. Clifford
Zimmerman.
(c) Within five (5) days after written notice
from Landlord to Tenant of the date on which Landlord reasonably expects that
the construction of the Additional Premises will be Substantially Completed
or, in the absence of such notice, within five (5) days after Tenant
commences occupancy of the Additional Premises, or any part thereof,
Landlord's and Tenant's construction representatives shall make such
inspection of the Additional Premises as Tenant deems appropriate, and,
except as otherwise notified by Tenant in writing to Landlord within such
period, Tenant shall be deemed to have accepted the Additional Premises in
their then condition and as being in the condition in which Landlord is
obligated to deliver the Additional Premises hereunder. If as a result of
such inspection Tenant discovers deviations or variations from the plans and
specifications for the construction of the Additional Premises of a nature
commonly found on a "punch list" (as that term is used in the construction
industry), Tenant shall promptly notify Landlord of such deviations. The
existence of such punch list items shall not postpone the Effective Date of
this Lease nor the obligations of Tenant to pay rent. After the Effective
Date, Landlord, its agents and/or contractors may enter the Additional
Premises from time to time to complete unfinished details and adjustments
with reasonable dispatch, and such entry shall not constitute an eviction, in
whole or in part, entitle Tenant to any abatement or diminution of rent,
relieve Tenant of any of its obligations
<PAGE>
under the Lease, or impose any liability on Landlord to Tenant or its agents or
contractors by reason thereof.
5. COMPLETION OF IMPROVEMENTS. (a) The Additional Premises
shall be deemed to be substantially completed ("Substantially Completed" or
"Substantial Completion") when all work specified to be done in the plans
attached or described in EXHIBIT "B", attached hereto and made a part hereof,
has BEEN substantially completed, except for minor items of finishing and
construction of a nature which are not necessary to make the Additional Premises
reasonably tenantable for Tenant's use as stated herein.
(b) If TENANT MAKES any changes in such plans,
Tenant shall bear any additional construction or other expense to Landlord
caused directly or indirectly by any delay caused BY such changes and shall
pay to Landlord as Additional Rent, at the Effective Date as defined in
Section 3, an amount equal to the aggregate number of days of delay caused by
such changes, multiplied by one three hundred sixty-fifth (1/365th) of the
Annual Fixed Rent. Landlord and Tenant, understanding the difficulty in
determining or estimating the actual damages that will result from Tenant's
changes, have agreed upon the foregoing as an appropriate method of
liquidating such damages.
(c) Landlord shall have the Additional Premises
Substantially Completed by the Effective Date, except for delays due to
governmental regulation, unusual scarcity of or inability to obtain labor or
materials, labor difficulties, casualty or other causes beyond Landlord's
reasonable control, any of which shall extend the Effective Date for a period
equal to the total of the duration of each such delay. However, if the
Additional Premises is not Substantially Completed within one (1) month
following the Effective Date, as the same may be extended in accordance
herewith, Tenant, as Tenant's sole right thereby arising, may terminate the
Lease (as to the Additional Premises ONLY) by written notice to Landlord
given within fifteen (15) days thereafter, provided that the Lease Term for
the Additional Premises shall not have commenced prior to the giving of such
notice to Tenant, the Lease as to the Additional Premises to terminate in
such case upon Landlord's receipt of such notice, whereupon Landlord shall
return all rent and other monies paid by Tenant to Landlord in advance on
account of the Additional Premises, except as hereinafter stated, and all
further obligaTIONS OF the parties hereunder shall end. The termination right
provided herein is applicable to the Additional Premises only, and shall not
terminate or otherwise effect the Tenant's obligations under the Lease as to
the Leased Premises under the Original Lease.
(d) it is understood that in the event of such
termination by Tenant, Landlord shall have no responsibility to
<PAGE>
reimburse Tenant for ANY COST or expenses AS TENANT MAY have directly or
indirectly incurred toward this leasing or the occupancy of the Additional
Premises, whether with respect to arranging for or termination of arrangements
for other space.
6. TERM. The term of the Lease with respect to the Additional
Area shall commence on the Effective Date (as defined in Section 3 above) and
thereafter be coterminous with the Lease Term as provided in the Original Lease.
7. ADDITIONAL RENT. The Additional Premises shall be considered
part of the Rentable Area of the Leased Premises for the purposes of determining
Tenant's Proportionate Share under Paragraph 6 of the Original Lease. Tenant
acknowledges and agrees that from and after the Effective Date, Tenant's
Proportionate Share shall be 13.53%.
S. TENANT'S TERMINATION RIGHTS. In the event that Tenant
exercises its right and option to terminate the Lease in accordance with Section
41 of the original Lease, Tenant shall pay to Landlord, in addition to any and
all costs and charges provided in Section 41 of the Original Lease (including,
but not limited to the Termination Fee), the unamortized portion of the Tenant
Improvement Allowance provided in Section 4(a) hereof.
9. BROKERS. Landlord and Tenant each represent and warrant to
the other that it has not engaged any broker, finder or other person other than
the broker, if any, listed in Section I of the Original Lease, who would be
entitled to any commission or fees in respect of the negotiation, execution or
delivery of this Lease. Landlord and Tenant each agree to indemnify and hold
harmless the other against any loss, cost, liability or expense incurred by the
other as a result of any claim asserted by any other broker, finder or other
person on the basis of any arrangements or agreements made or alleged to have
been made by or on behalf of the other. Landlord shall be responsible for the
payment of a brokerage fee to the broker listed in Section 1 of the Original
Lease at Landlord's scheduled commission rate or as otherwise agreed in writing
between Landlord and such broker.
10. GENERAL PROVISIONS.
(a) GOVERNING LAW. This Amendment shall be governed
by and construed in accordance with the laws of the Commonwealth of
Pennsylvania.
(b) ENTIRE AGREEMENT. This Amendment
constitutes the entire agreement between the parties hereto and may not be
modified except by a written instrument executed by the parties hereto.
<PAGE>
(c) CAPTIONS. Paragraph headings are used herein
solely for reference purposes and are not to be construed as part of this
Amendment.
(d) COUNTERPARTS. This Amendment may be executed in
counterpart copies, each of which shall constitute an original but all of
which together shall constitute one and the same instrument.
(e) FULL FORCE AND EFFECT. Except as expressly
modified herein or inconsistent with the terms hereof, THE Original Lease
shall remain in full force and effect and all of the provisions thereof are
hereby ratified and confirmed.
IN WITNESS WHEREOF, the undersigned have executed this First
Amendment to Lease on and as of the date first above set forth.
Attest: LANDLORD:
GLENVIEW CORPORATE CENTER
LIMITED PARTNERSHIP
By: /s/ James M. Watson By: Pitcairn Properties Incorporated
-----------------------------
Title:
By: /s/ James M. Watson
----------------------------------
Authorized Officer
Pitcairn Properties Incorporated
executes This Lease in its
capacity as the General Partner of
PPI-LDP-I which is the general
partner of Land and Development
Partnership -I which is the
General Partner of Landlord.
Attest: TENANT:
WORLDGATE COMMUNICATIONS
By: /s/ illegible
-----------------------------
Title:
By: /s/ Randall J. Gort
------------------------------
Name: Randall J. Gort
Title: VP, General Counsel
<PAGE>
Exhibit 10.3
AGREEMENT OF
LEASE
BETWEEN
GLENVIEW CORPORATE CENTER LIMITED PARTNERSHIP,
Landlord
AND
WORLDGAGE COMMUNICATIONS,
Tenant
<PAGE>
TABLE OF CONTENTS
LEASE
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C> <C>
1. REFERENCE DATA ......................................................... 1
2. DEMISE ................................................................. 3
3. TERM ................................................................... 3
4. HOLDING OVER ........................................................... 3
5. RENT ................................................................... 3
6. ESCALATION ............................................................. 4
7. COMPLETION OF IMPROVEMENTS; AS IS ...................................... 9
8. [INTENTIONALLY DELETED] ................................................ 9
9. ALTERATIONS OR IMPROVEMENTS BY TENANT .................................. 9
10. PERMITTED USES ......................................................... 10
11. BUILDING OPERATION AND SERVICES ........................................ 10
12. INTERRUPTION OF SERVICES ............................................... 11
13. REPAIRS ................................................................ 11
14. [INTENTIONALLY DELETED] ................................................ 12
15. QUIET ENJOYMENT ........................................................ 12
16. LANDLORD'S RIGHT OF ENTRY .............................................. 12
17. SURRENDER OF PREMISES .................................................. 12
18. MISCELLANEOUS COVENANTS ................................................ 13
19. RULES AND REGULATIONS .................................................. 13
20. PERFORMANCE OF TENANT'S COVENANTS ...................................... 14
21. EMINENT DOMAIN ......................................................... 14
22. CASUALTY DAMAGE ........................................................ 15
23. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVER OF SUBROGATION ....... 16
24. MORTGAGEE AND OTHER AGREEMENTS ......................................... 17
25. SUBORDINATION AND ATTORNMENT ........................................... 18
26. ASSIGNMENT AND SUBLETTING .............................................. 18
27. DEFAULT ................................................................ 19
28. LANDLORD'S REMEDIES .................................................... 20
29. LANDLORD'S COSTS AND EXPENSES .......................................... 24
30. LATE CHARGE ............................................................ 24
31. SUCCESSORS AND ASSIGNS ................................................. 24
32. WAIVERS ................................................................ 25
33. WAIVER OF TRIAL BY JURY ................................................ 25
34. SEVERABILITY ........................................................... 25
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
35. NOTICES ................................................................ 25
36. AMENDMENT AND MODIFICATIONS ............................................ 26
37. [INTENTIONALLY OMITTED] ................................................ 26
38. ENVIRONMENTAL MATTERS .................................................. 26
39. HEADINGS AND TERMS ..................................................... 27
40. GOVERNING LAW .......................................................... 27
41. TENANT'S TERMINATION RIGHTS ............................................ 28
</TABLE>
<PAGE>
GLENVIEW CORPORATE CENTER
Bensalem, Pennsylvania Lease Dated: November 26, 1997
1. REFERENCE DATA
Any reference in this Lease to the following subjects shall incorporate
therein the data stated for the subject(s) in this Section:
LANDLORD: Glenview Corporate Center Limited Partnership, a Delaware Limited
Partnership
LANDLORD'S ADDRESS: c/o Pitcairn Properties Incorporated
One Pitcairn Place
165 Township Line Road
Jenkintown, Pennsylvania 19046
LANDLORD'S CONSTRUCTION REPRESENTATIVE: Clifford Zimmerman
TENANT: Worldgate Communications
TENANT'S ADDRESS: 3220 Tillman Drive, Bensalem, PA
TENANT'S CONSTRUCTION REPRESENTATIVE: N/A
LEASED PREMISES: A portion of 3260 Tillman Drive, Bensalem, Pennsylvania
RENTABLE AREA OF LEASED PREMISES: 6,066 Rentable Square Feet
LEASE TERM: Two (2) years, Three (3) months
SCHEDULED COMMENCEMENT DATE: December 1, 1997
COMMENCEMENT DATE: December 1, 1997
ANNUAL FIXED RENT: $97,056.00
OPERATING EXPENSE ALLOWANCE: 6.00 Per Rentable Square Foot
TENANT'S PROPORTIONATE SHARE: 6,066/29,157 20.80%
PERMITTED USES: General Office
1
<PAGE>
SECURITY DEPOSIT: -0-
CONSTRUCTION ALLOWANCE: N/A
GLENVIEW CORPORATE CENTER LIMITED
PARTNERSHIP
By: BPPI-I, L.P., its general partner
By: Bergen of Philadelphia, Inc.
general partner
By: /s/ Elizabeth A. Owens
--------------------------------------------
By: Pitcairn Properties Incorporated, general partner
By: /s/ James M. Watson
--------------------------------------------------
TENANT:
WORLDGATE COMMUNICATIONS
By: /s/ [illegible]
--------------------------------------------------
2
<PAGE>
2. DEMISE. Landlord hereby demises and lets to Tenant and Tenant takes
and hires from Landlord that certain space (the "Leased Premises") delineated
in Exhibit "A", attached hereto and made part hereof, in the one (1) story
office building (the "Building") erected upon a parcel of ground located at
3260 Tillman Drive, Bensalem Township, Pennsylvania (the "Lot") TOGETHER
WITH, appurtenant to the Leased Premises, the right to use in common with
Landlord and other tenants, occupants and visitors to the Building, the
common walkways, sidewalks and parking lots of the Lot.
3. TERM. The Lease Term shall commence on the Commencement Date which
shall be the earlier of (A) the date on which Tenant shall take possession of
the Leased Premises, or (B) December 1, 1997 and shall continue for the period
of years set forth in Section 1 hereof, unless extended or sooner terminated
as provided herein.
When the Commencement Date and, consequently, the Lease Term have
been so determined, Landlord and Tenant shall confirm the Commencement Date
accordingly by an amendment to Section 1.
4. HOLDING OVER. If Tenant retains possession of the Leased Premises
or any part thereof after the termination of this Lease by expiration of the
Lease Term or otherwise, Tenant shall pay Landlord (A) as agreed liquidated
damages for such holding over alone, an amount, calculated on a per diem
basis for each day of such unlawful retention, equal to the greater of (i)
twice the Annual Fixed Rent, or (ii) the established market rental for the
Leased Premises, for the time Tenant thus remains in possession, plus, in
each case, all Additional Rent and other sums payable hereunder, and (B) all
other damages, costs and expenses sustained by Landlord by reason of Tenant's
holding over. Without limiting any rights and remedies of Landlord resulting
by reason of the wrongful holding over by Tenant, or creating any right in
Tenant to continue in possession of the Leased Premises, all Tenant's
obligations with respect to the use, occupancy and maintenance of the Leased
Premises shall continue during such period of unlawful retention.
5. RENT. Rent is payable by Tenant beginning on the Commencement Date
in monthly installments of one-twelfth (1/12th) of the Annual Fixed Rent,
without prior notice or demand, and without any set-off or deduction
whatsoever, in advance, on the first day of each month at Landlord's office
in Bensalem, Pennsylvania or at such other place as Landlord may direct,
except that the rent for the first full month of the Lease Term will be paid
on the date of the execution of this Lease.
In addition, if the Lease Term commences on a day other than the
first day of a calendar month, Tenant shall pay to Landlord, on or before the
Commencement Date of the Lease Term, a pro rata portion of the monthly
installment of rent (including Fixed Rent and any Additional Rent as herein
provided), such pro rata portion to be based on the number of days remaining
in such partial month after the Commencement Date of the Lease Term.
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Tenant hereby covenants and agrees to pay the Annual Fixed Rent,
Additional Rent and other sums payable to Landlord hereunder when due, and to
pay interest to landlord at the Overdue Interest Rate (A) on all overdue
installments of Fixed Rent from the due date thereof to the date of payment
and (B) on all payments of Additional Rent or other sums payable to Landlord
hereunder from the date of demand for payment until the date of payment. Upon
default by Tenant in the payment of such Additional Rent or other sums
payable hereunder, Landlord shall be entitled to all rights and remedies to
which it would be entitled in default of the payment of Fixed Rent. As used
herein, the term "Overdue Interest Rate" shall mean and equal three
percent (3%) per annum over the prime interest rate announced from time to
time by the largest commercial bank whose principal office is located on
Philadelphia or Montgomery County, Pennsylvania as being its prime interest
rate charged to its most credit-worth commercial customers on ninety (90)
days unsecured loans.
6. ESCALATION.
OPERATING EXPENSE. If Landlord's Operating Expense for any
Operating Year shall be greater than the Operating Expense Allowance, Tenant
shall pay to Landlord as Additional Rent an amount equal to Tenant's
Proportionate Share (as defined below) of the difference (the amount of
Tenant's Proportionate Share of such difference is hereinafter referred to as
the "Operating Expense Adjustment"). If Tenant occupies the Leased Premises or
portion thereof for less than full Operating Year, the Operating Expense
Adjustment will be allocated proportionally to the amount of time in such
Operating Year that Tenant so occupies such space.
Such additional Rent shall be paid in the following manner: within
one hundred twenty (120) days following the end of each Operating Year,
Landlord shall furnish Tenant an Operating Expense Statement setting forth
(i) the Operating Expense for the preceding Operating Year, (ii) the
Operating Expense Allowance and (iii) the Tenant's Operating Expense
Adjustment for such Operating Year. Within fifteen (15) days following the
receipt of such Operating Expense Statement (the "Expense Adjustment Date")
Tenant shall pay to Landlord as Additional Rent the Operating Expense
Adjustment for such Operating Year. Commencing with the first month of the
Lease Term, Tenant shall pay to Landlord, on account of the Operating Expense
Adjustment for such Operating Year, monthly installments in advance equal to
one-twelfth (1/12th) o the estimated Operating Expense Adjustment for such
Operating Year. ON the next succeeding Expense Adjustment Date, Tenant shall
pay to Landlord (or Landlord shall credit to Tenant) any deficiency (or
excess) between the installments paid on account of the preceding year's
Operating Expense Adjustment and the actual Operating Expense Adjustment for
such Operating Year.
As used in this Section 6 and Section 1 where applicable, the
following words and terms shall be defined as hereinafter set forth:
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(i) "OPERATING YEAR" shall mean each calendar year, or such other
period of twelve (12) months as hereafter may be adopted by Landlord as its
fiscal year, occurring during the Lease Term.
(ii) "OPERATING EXPENSE ALLOWANCE" shall mean and equal the amount
set forth in Section 1 of this Lease multiplied by the rentable area of the
Building.
(iii) "OPERATING EXPENSE STATEMENT" shall mean a statement in
writing signed by Landlord, setting forth in reasonable detail (a) the
Operating Expense for the preceding Operating Year, (b) the Operating Expense
Allowance and (c) the Tenant's Operating Expense Adjustment for such
Operating Year, or portion thereof. The Operating Expense for each Operating
Year shall be audited and certified by Landlord's independent certified
public accountant whose report thereon shall be available for inspection by
Tenant at Landlord's office during normal business hours. The Operating
Expense Statement shall constitute a final determination as between Landlord
and Tenant of the Operating Expense and the Operating Expense Adjustment for
any Operating Year.
(iv) "OPERATING EXPENSE" shall mean the following expenses
incurred by Landlord in connection with the operation, repair and maintenance
of the Building and the Lot:
(a) Wages, salaries, fees and other compensation and payments
and payroll taxes and contributions to any social security, unemployment
insurance, welfare, pension or similar fund and payments for other fringe
benefits required by law or by union agreement (or, if the employees or any
of them are non-union, then payments for benefits comparable to those
generally required by union agreement in first class office buildings in the
Philadelphia suburban area, which are unionized) made to or on behalf of all
employees of Landlord performing services rendered in connection with the
operation and maintenance of the Building and the Lot, including, without
limitation: window cleaners; janitors; miscellaneous handymen; watchmen;
persons engaged in patrolling and protecting the Building and the Lot;
carpenters; engineers; mechanics; electricians; plumbers; persons engaged in
the operation and maintenance of the Building and the Lot; building
superintendent and assistants; building manager; an clerical and
administrative personnel.
(b) The uniforms of all employees, and the cleaning, pressing
and repair thereof.
(c) Cleaning costs for the Building and the Lot, including
the windows and sidewalks, all snow and rubbish removal (including separate
contracts therefor) and the costs of all labor, supplies, equipment, and
materials incidental thereto.
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(d) Premiums and other charges incurred by Landlord with
respect to all insurance relating to the Building and the Lot and the
operation and maintenance thereof, including, without limitation: fire and
extended coverage insurance, including windstorm, hail, explosion, riot,
rioting attending a strike, civil commotion, aircraft, vehicle and smoke
insurance; public liability; elevator; workmens' compensation; boiler and
machinery; rent; use and occupancy; and health, accident and group life
insurance of all employes.
(e) All taxes, liens, charges, imposts and burdens and
special assessments of every kind and nature imposed by any governmental
authority on and/or with respect to the Lot or Building which Landlord shall
become obligated to pay because of or in connection with the ownership,
leasing or operation of the Lot or the Building.
(f) The cost of electricity used for site lighting and the
cost of water and sewer and any and all other utility services used in
connection with the operation and maintenance of the Building and the Lot.
(g) Costs incurred for operation, service, maintenance,
inspection, repairs and alterations of the Building, the Lot and the heating,
air-conditioning, ventilating, plumbing and electrical systems of the
Building (including any separate contract therefor) and the costs of labor,
materials, supplies and equipment used in connection with all of the
aforesaid items.
(h) Gross receipts taxes, sales taxes and excise taxes and
the like upon any of the expenses enumerated herein.
(i) Management fees of the managing agent for the Building.
(j) The cost of replacements for tools and equipment used in
the operation and maintenance of the building and the Lot.
(k)
(l) The cost of telephone service, postage, office supplies,
maintenance and repair of office equipment and similar costs related to
operation of the Building Superintendent's office.
(m) The cost of licenses, permits and similar fees and
charges related to operation, repair and maintenance of the Building.
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(n) Auditing fees necessarily incurred in connection with the
maintenance and operation of the Building, and accounting fees incurred in
connection with the preparation and certification of a real estate tax
escalation and the operating expense escalation statements pursuant to this
Section 6.
(o) All costs incurred by Landlord to retrofit any portion or
all of the Building to comply with a change in existing legislation or
introduction of new legislation, whether Federal, State or Municipal;
repairs, replacements and improvements which are appropriate for the
continued operation of the Building as a first class building.
(p) All expenses associated with the installation of any
energy or cost saving devices.
(q) All assessments against Landlord's pro rata share of the
costs of Glenview Corporate Center as provided in the Declaration of
Protective Covenants for Glenview Corporate Center.
(r) Any and all other expenditures of Landlord in connection
with the operation, repair or maintenance of the Lot or the Building which
are properly expensed in accordance with generally accepted accounting
principles consistently applied with respect to the operation, repair and
maintenance of first-class office buildings in the Philadelphia suburbs.
If Landlord shall purchase any item of capital equipment or make any
capital expenditure as described in subsections (o) and (p) above, then the
costs for the same shall be included in Operating Expenses in the year of
installation and in subsequent years amortized on a straight line basis, over
an appropriate period, but not more than ten (10) years, with an interest
factor equal to the prime interest rate, as defined in Section 5 hereof. If
Landlord shall lease such item of capital equipment, then the rentals or
other operating costs paid pursuant to such leasing shall be included in
Operating Expenses for each year in which they are incurred.
Notwithstanding the foregoing, "Operating Expense" shall not include
expenditures for any of the following:
(a) The cost of any capital addition made to the Building
(other than that specified as part of Operating Expense as provided above),
including the cost to prepare space for occupancy by a new tenant.
(b) Repairs or other work occasioned by fire, windstorm or
other insured casualty or hazard, to the extent that Landlord shall receive
proceeds of such insurance.
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(c) Leasing commissions, advertising expenses and other costs
incurred in leasing or procuring new tenants.
(d) Repairs or rebuilding necessitated by condemnation.
(e) Depreciation and amortization of the Building, other than
(I) capital expenditures which under generally applied
real estate practice are expensed or regarded as deferred expenses;
(II) capital expenditures appropriate to a first class
office building or required by law as described in subsection (o) above; and
(III) capital expenditures designed to result in savings
or reductions in Operating Expenses as described in subsection (p) above.
(f) The salaries and benefits of executive officers of
Landlord, if any.
Operating Expense shall be "net" and, for that purpose, shall be
reduced by the amounts of any reimbursement or credit received or receivable
by Landlord with respect to an item of cost that is included in Operating
Expense (other than reimbursements to Landlord by tenants of the Building
pursuant to Operating Expense escalation provisions).
To the extent that any item of Operating Expense is incurred in
common with another building or lot in the Glenview Corporate Center, such
item of expense shall be apportioned equitably among the properties incurring
such expenses.
If Landlord shall eliminate the payment of any wages or other labor
costs or otherwise reduce Operating Expense as a result of the installation
of new devices or equipment, or by any other means, then in computing the
Operating Expense the corresponding items shall be deducted from the
Operating Expense Allowance and Operating Years.
The Operating Expense for any Operating Year or portion thereof
during which less than one hundred percent (100%) of the Rentable Area of the
Building is leased to tenants shall be increased to include an imputed cost
for unoccupied portions of the Building in an amount with respect to each
such area equal to the product of (a) the Landlord's estimate of the marginal
Operating Expense saving resulting from such vacancy, times (b) a fraction,
the numerator of which is the number of days during such Operating Year such
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portion of the Building was unoccupied and the denominator of which is three
hundred sixty-five (365), times (c) the Rentable Area of such unoccupied
space. In the time that more than one such portion of Rentable Area shall be
unoccupied on separate dates within a relevant Operating Year, then a
separate computation shall be made with respect to each unoccupied portion,
and the products of such computations shall be added together, and the total
thereof shall be the amount of Operating Expense imputed to such unoccupied
portions for such Operating Year.
(v) "TENANT'S PROPORTIONATE SHARE" shall mean a fraction, the
numerator of which shall be the Rentable Area of Leased Premises, and the
denominator of which is 29,157 rentable square feet (subject to adjustment
only by reason of any substantial addition to the Building made after the
date of the initial completion of construction of the Building), and shall
equal, with respect to the Leased Premises, the percentage set forth in
Section 1 of this Lease.
7. COMPLETION OF IMPROVEMENTS; AS IS. Tenant agrees to accept the
Leased Premises in its "As-Is" condition. Landlord shall have no obligation
to complete any work in connection with Tenant's occupancy of the Leased
Premises with the exception of (i) building standard painting of the Leased
Premises, (ii) replacement of tiles in bathroom, where necessary, and (iii)
shampoo carpets, when necessary, which work shall be completed prior to the
Commencement Date. Any other work completed by Tenant shall be at Tenant's
sole cost and expense and otherwise in accordance with the terms of the Lease.
8. [INTENTIONALLY DELETED].
9. ALTERATIONS OR IMPROVEMENTS BY TENANT. Tenant shall not make during
the Lease Term any alterations or additions to the Leased Premises which
(affect the Building's structure or mechanical, electrical, plumbing or HVAC
systems without the prior written approval of Landlord and then only in
accordance with plans and specifications previously approved by Landlord
which approval shall not be unreasonably withheld). Any such alterations or
additions which may be approved by Landlord and made by Tenant shall be
deemed part of the Building and shall not thereafter be removed by Tenant
unless Landlord shall require removal of same, either in conjunction with its
approval or by notice to Tenant given prior to the termination of this Lease,
in which case Tenant shall remove any such alterations or additions and
repair any damage to the Building or the Leased Premises occasioned by their
installation or removal (including, without limitation, repairing and pathing
holes, replacing ceiling, wall and floor surfaces and repainting), and
restore the Leased Premises to substantially the same condition as existed
prior to the time which any such alterations or additions were made.
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All alterations and additions by Tenant and installation of
furnishings following occupancy shall be coordinated with any work being
performed by Landlord and performed in such manner and by such union
contractor(s) as to assure harmonious labor relations and so as to not damage
the Building or interfere with its operation or with the activities of other
tenants and, except for installation of furnishings only, by contractors or
workmen first approved by Landlord.
As further conditions to Landlord's approval of any proposed
alterations or additions by Tenant which are to be made after the beginning
of the Lease Term, Tenant shall: secure all necessary licenses and permits;
deliver to Landlord a waiver, executed by all persons or firms who will be
furnishing labor or materials waiving the right to file any mechanic's lien
against the Building, the Lot or the estate or interest of Landlord or Tenant
therein; cause the contractor(s) and subcontractor(s) to carry Workmen's
Compensation insurance in statutory amounts and also comprehensive public
liability insurance with limits as approved by Landlord, and deliver to
Landlord certificates of all such insurance.
Failure to comply with any of the provisions of this Section 9
(including, without limitation, any of the terms or conditions of any consent
granted hereunder) shall constitute a default under this Lease and upon such
default Landlord may pursue any or all of the remedies provided for in
Section 28 hereof, or any other remedy available to Landlord in law or in
equity.
Tenant shall promptly pay when due the cost of all such alterations
and additions as referred to in this Section 9 and shall cause any mechanics'
liens which may be filed with respect thereto to be immediately discharged,
and shall indemnify Landlord against any loss, cost or expense occasioned,
directly or indirectly as a result of such alterations and additions.
10. PERMITTED USES. Tenant covenants and agrees to use and occupy the
Leased Premises only in conformity with law and for the uses specified in
Section 1 hereof and not to use or permit any use of the Leased Premises
which creates any safety hazard, which would be dangerous to the Leased
Premises, the Building or the occupants of the same, which would be
disturbing to other tenants or occupants of the Building, or which would
cause any increased in premium for any insurance which landlord may then have
in effect with respect to the Building generally.
11. BUILDING OPERATION AND SERVICES. Landlord shall furnish, through
Landlord's employees or independent contractors, such services, facilities
and supplies equal in scope, quality and frequency to those being customarily
provided by landlords in one story office buildings in the Philadelphia
suburbs.
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During the construction of the Leased Premises, Landlord shall install
and provide thereafter for the duration of the Term a heat pump or other HVAC
system to provide heating, ventilating and air conditioning to the Leased
Premises. Such system shall service only the Leased Premises and Tenant shall
have the right to control the hours of operation thereof. Electricity for the
operation shall be routed through Tenant's electric meter.
Maintenance and cleaning shall be provided Monday through Friday
(excluding holidays), after business hours, as follows: janitor service,
consisting of the removal of customary office trash, dusting of furniture,
desks and pictures, and vacuuming; maintenance and service of the toilet
rooms in the Leased Premises.
Hot and cold water for normal lavatory purposes shall be provided. If
Tenant requires water for additional purposes, Tenant shall pay the cost
thereof as shown on a meter to be installed and maintained at Tenant's
expense to measure such additional consumption.
During the construction of the Leased Premises, Landlord shall connect
the electrical service in the Leased Premises to the electric public utility
serving the Building and Tenant shall be responsible to pay for such
electricity directly to such electric public utility.
Landlord shall furnish and install at Tenant's expense all replacement
lighting tubes, lamps, bulbs, and ballasts required in the Leased Premises.
12. INTERRUPTION OF SERVICES. In case Landlord is prevented or delayed in
furnishing any service as set forth in Section 11 herein or otherwise by
reason of any cause beyond Landlord's reasonable control, Landlord shall not
be liable to Tenant therefor nor shall Tenant be entitled to any abatement or
reduction in rent by reason thereof, nor shall the same give rise to a claim
in Tenant's favor that such absence of building services constitutes actual
or constructive, total or partial eviction or renders the Leased Premises
untenantable.
Landlord reserves the right to stop any service or utility system, when
necessary by reason of accident or emergency, or until necessary repairs have
been completed, provided, however, that in each instance of stoppage,
Landlord shall exercise reasonable diligence to eliminate the cause thereof.
Except in cash of emergency repairs, Landlord will give Tenant reasonable
advance notice of any contemplated stoppage and will use reasonable efforts
to avoid unnecessary inconvenience to Tenant by reason thereof.
13. REPAIRS. Landlord shall make, as an Operating Expense of the
Building, all repairs necessary to maintain the plumbing, heating,
ventilating, air conditioning, electric systems, external windows and floors
(excluding carpeting and floor coverings), provided, however, that Landlord
shall not be obligated to make any such repairs until the expiration of a
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reasonable period of time after receipt of written notice from Tenant that
such repair is needed. In no event shall Landlord be obligated under this
Section 13 to repair any damage caused by any act, omission or negligence of
Tenant or its employees, agents, invitees, licensees, subtenants, or
contractors. If Tenant requires maintenance, servicing, repair or replacement
of any special plumbing, heating or air conditioning systems installed for
Tenant's benefit in the Leased Premises, such maintenance, servicing, repair
or replacement shall be made at the sole expense of Tenant, unless the need
for such repairs is caused solely by the negligence or wilful misconduct of
Landlord, its agents or employees.
Tenant shall maintain the Leased Premises and the fixtures and
appurtenances therein in good repair at all times. Except to the extent
released by Landlord pursuant to the waiver of subrogation provision in
Section 23 hereof, Tenant shall reimburse Landlord for all costs and expenses
of repairing and replacing all damage or injury to the Leased Premises and
the Building and to fixtures and equipment caused by Tenant or its employees,
agents, invitees, licensees, subtenants, or contractors, or as the result of
all or any of them moving in or out of the Building or by installation or
removal of furniture, fixtures or other property. Such costs and expenses
shall be collectible as Additional Rent and paid by Tenant within fifteen
(15) days after rendition of a bill therefor.
Landlord shall not be liable by reason of any injury to or interference
with Tenant's business arising from the making of any repairs, alterations,
additions or improvements in or to the Leased Premises or the Building or to
any appurtenances or equipment therein. There shall be no abatement of rent
because of such repairs, alterations, additions or improvements or because of
any delay by Landlord in making the same.
Tenant shall give to Landlord prompt written notice of any accidents to,
or defects in plumbing, electrical, heating and air conditioning systems and
apparatus located in the Leased Premises.
14. [INTENTIONALLY DELETED].
15. QUIET ENJOYMENT. Tenant, upon paying the Annual Fixed Rent, all
Additional Rent and all other sums and charges herein provided for and, upon
observing, keeping and performing all covenants, agreements and conditions of
this Lease on Tenant's part to be observed, kept and performed, shall quietly
have and enjoy the Leased Premises throughout the Lease Term without
hindrance or molestation by Landlord or by anyone claiming by, through or
under Landlord, subject, however, to the exceptions, reservations and
conditions of this Lease.
16. LANDLORD'S RIGHT OF ENTRY. Landlord, any ground lessor, mortgagee or
any agent thereof, shall have the right to enter the Leased Premises at
reasonable times: to perform Landlord's covenants as set forth in this Lease,
for purposes of inspection and to insure Tenant's
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compliance with the provisions of this Lease, to make any repairs,
replacements or alterations to the Building or do any work which Landlord may
deem necessary, or to show the Leased Premises to prospective purchasers of
the Building, and also, during the last six (6) months of the Lease Term, to
show the Leased Premises to prospective tenants.
17. SURRENDER OF PREMISES. Any alterations, improvements or additions
to the Leased Premises made by or at the request of Tenant shall remain upon
the Leased Premises at the expiration or earlier termination of this Lease
and shall become the property of Landlord unless Landlord shall, prior to the
expiration or earlier termination of this Lease, give written notice to
Tenant to remove such alterations, improvements and additions. Tenant shall
repair any damage caused by the installation and/or removal (including,
without limitation, repairing and patching holes, replacing ceiling, floor
and wall surfaces and repainting), and restore the Leased Premises to
substantially the same condition in which it existed prior to the time that
any such alterations, improvements or additions were made. Should Tenant fail
to remove any such alterations, improvements or additions or to repair such
damage when required or requested by Landlord so to do pursuant to this
Section 17, Landlord may do so, and the cost and expense thereof shall be
paid by Tenant to Landlord as Additional Rent.
Any personal property which shall remain in the Leased Premises or any
part thereof after the expiration or earlier termination of this Lease shall
be deemed to have been abandoned and either may be retained by the Landlord
as Landlord's property or may be disposed of in such manner as Landlord may
see fit, provided that notwithstanding the foregoing Tenant shall, upon
request of Landlord made no later then ten (10) days after the expiration or
earlier termination of this Lease, promptly remove from the Building any such
personal property at Tenant's own cost and expense. Should Tenant fail so to
do, Landlord may do so, and the cost and expense thereof shall be paid by
Tenant to Landlord as Additional Rent. If such personal property or any part
thereof shall be sold by Landlord, Landlord may receive and retain the
proceeds of such sale(s) as Landlord's property. The covenants contained in
this Section 17 shall survive the expiration or earlier termination of this
Lease.
18. MISCELLANEOUS COVENANTS. Tenant shall faithfully perform all of
the covenants and conditions to be performed and observed by Tenant hereunder
and in addition to those covenants and conditions which are set forth
elsewhere herein, Tenant agrees:
A. To secure and maintain in effect any governmental approvals,
licenses and permits as may be required for Tenant's use and occupancy of the
Leased Premises.
B. To comply with all applicable laws, codes and regulations of
governmental authorities applicable to Tenan's use and occupancy of the
Leased Premises and all rules and regulations of insurers of the Leased
Premises and the National Board of Fire Underwriters as they apply to
Tenant's use and occupancy of the Leased Premises.
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C. Not to use or place any curtains, blinds, drapes, coverings or
signs over any exterior windows or upon the window surfaces as would be
visible from the outside of the Building without the prior written approval
of Landlord.
19. RULES AND REGULATIONS. Tenant covenants and agrees that Tenant,
its servants, employees, agents, invitees, licensees and other visitors shall
observe faithfully, and comply strictly with, the Rules and Regulations
contained in Exhibit "B", attached hereto and made a part hereof, and such
other and further reasonable Rules and Regulations as Landlord or Landlord's
against may, after written notice to Tenant, from time to time adopt. Nothing
in this Lease contained shall be construed to impose upon Landlord any duty or
obligation to enforce the Rules and Regulations or terms, covenants or
conditions in any other lease as against any other Tenant, and Landlord shall
not be liable to Tenant for violation of the same by any other tenant, its
servants, employees, agents, invitees, licensees or other visitors.
20. PERFORMANCE OF TENANT'S COVENANTS. If Tenant fails to perform any
covenant or observe any condition to be performed or observed by Tenant
hereunder or acts in violation of any covenant or condition hereof, Landlord
may, but shall not be required to on behalf of Tenant, perform such covenant
and/or take such steps, including entering upon the Leased Premises, as may
be necessary or appropriate to meet the requirements of any such covenant or
condition, provided that the Landlord shall have given Tenant at least three
(3) days prior written notice of Landlord's intention to do so, unless an
emergency situation exists, in which case Landlord shall have the right to
proceed immediately; and all costs and expenses incurred by Landlord in so
doing, including reasonable legal fees, shall be paid by Tenant to Landlord
upon demand, plus interest at the Overdue Interest Rate from the date of
expenditure(s) by Landlord, as Additional Rent. Landlord's proceeding under
the rights reserved to Landlord under this Section shall not in any way
prejudice or waive any rights as Landlord might otherwise have against Tenant
by reason of Tenant's default.
21. EMINENT DOMAIN. In the event of the exercise of the power of
eminent domain whereby (A) such portion of the Building is taken that access
to the Leased Premises is permanently impaired thereby and reasonable
alternate access is not provided by Landlord within a time period which is
reasonable under the circumstances, (B) all or substantially all of the
Leased Premises or the Building is taken, (C) if less than substantially all
of the Building is taken but Landlord, acting in good faith, determines that
it is economically unfeasible to continue to operate the uncondemned portion
as a first-class office building, or (D) if less than substantially all of the
Leased Premises is taken, but Tenant, acting in good faith, determines that
because of such taking it is economically unfeasible to continue to conduct
its business in the uncondemned portion of the Leased Premises, then in the
case of (A) or (B), either party, and in the case of (C), Landlord, and in
the case of (D), Tenant, shall have the right to terminate this Lease as of
the date when possession of that part which was taken is required to be
delivered or surrendered to the condemning authority; and in such case all
rent and other charges shall be adjusted to the date of termination. The
foregoing right of termination shall
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be applicable to the taking of any estate or interest whatsoever which, as a
matter of law, would deprive Landlord or Tenant of any right to possession
(in common with others, as to common areas of the Building) for any period in
excess of sixty (60) consecutive days from the date of taking, whether or not
the taking be in fee, for a term of years or of any other estate or interest;
and a taking shall include the transfer of title or of any interest in the
Building by deed or other instrument in settlement of or in lieu of transfer
by operation of law incident to condemnation proceedings.
Tenant shall have no right to participate or share in any
condemnation claim, damage award or settlement in lieu thereof with respect
to any taking of any nature; provided, however, that Tenant shall not be
precluded from claiming or receiving payment for Tenant's relocation and
moving expenses as may be permitted under applicable law so long as the
amount of the same is not subtracted from the award which Landlord is
entitled to receive.
22. CASUALTY DAMAGE. In the event of damage to or destruction of the
Leased Premises caused by fire or other casualty, or of the entrances and
other common facilities necessary to provide normal access to the Leased
Premises, or to other portions of the Building or its equipment which
portions and equipment are necessary to provide services to the Leased
Premises in accordance herewith, Landlord shall undertake to make repairs and
restorations as hereafter provided, unless this Lease be terminated by
Landlord or Tenant or unless any mortgagee which is entitled to receive
casualty insurance proceeds fails to make available to Landlord a sufficient
amount of such proceeds to cover the cost of such repairs and restoration.
If (A) the damage is of such nature or extent, in Landlord's sole
judgment, that more than one hundred and eighty (180) consecutive days, after
commencement of the work, would be required (with normal work crews and
hours) to repay and restore the part of the Leased Premises or the Building
which has been damaged, or (B) a substantial portion of the Leased Premises
or the Building is so damaged that, in Landlord's sole judgment, it is
uneconomic to restore or repair the Leased Premises or the Building, as
the case may be, or (C) less than two (2) years remain on the Lease Term,
Landlord shall so advise Tenant promptly, and either party, in the case
described in clause (A) above, or Landlord, in the case described in clauses
(B) or (C) above, for a period of ten (10) days thereafter, shall have the
right to terminate this Lease by written notice to the other, as of the date
specified in such notice, which termination date shall be no later than
thirty (30) days after the date of such notice. In the event of such fire or
other casualty, if this Lease is not terminated pursuant to the terms of this
Section 22, if sufficient casualty insurance proceeds are available for use
for such restoration or repair, and if this Lease is then in full force and
effect, Landlord shall proceed diligently to restore the Leased Premises to
substantially its condition prior to the occurrence of the damage, provided
that Landlord shall not be obligated to repair or restore any alterations,
additions or fixtures which Tenant may have installed (whether or not Tenant
has the right or the obligation to remove the same or is required to
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leave the same on the Leased Premises as of the expiration or earlier
termination of this Lease) unless Tenant, in a manner satisfactory to
Landlord, assures payment in full of all cost as may be incurred by Landlord
in connection therewith. Landlord shall not insure any improvements or
alterations to the Leased Premises in excess of Building Standard tenant
improvements, or any fixtures, equipment or other property of Tenant. Tenant
shall have the right, at its sole expense, to insure the value of its
leasehold improvements, fixtures, equipment or other property located in the
Leased Premises, for the purpose of providing funds to Landlord to repair and
restore the Leased Premises to substantially its condition prior to the
occurrence of the damage. If there be any such alteration, fixtures or
additions and Tenant does not assure or agree to assure payment of the cost
of restoration or repair as aforesaid, Landlord shall have the right to
determine the manner in which the Leased Premises shall be restored so as to
be substantially as the Leased Premises existed prior to the damage
occurring, as if such alterations, additions or fixtures had not then been
made or installed. The validity and effect of this Lease shall not be
impaired in any way by the failure of Landlord to complete repairs and
restoration of the Leased Premises or of the Building within one hundred
eighty (180) consecutive days after commencement of work, even if Landlord
had in good faith notified Tenant that the repair and restoration could be
completed within such period, provided that Landlord proceeds diligently with
such repair and restoration.
In the case of damage to the Leased Premises not caused by the
negligence or other tortious acts of Tenant which is of a nature or extent
that Tenant's continued occupancy is substantially impaired, the Annual Fixed
Rent otherwise payable by Tenant hereunder shall be equitably abated or
adjusted for the duration of such impairment. Anything to the contrary in
this Lease notwithstanding, expressed or implied, Landlord shall have no
liability to Tenant for and shall have no duty to repair, replace or restore
any damage whatsoever, occurring as a result of leakage or seepage of water
or any other liquid from any source whatsoever, or breakage of any pipes,
mains or other plumbing located in or about the Building, or snow, frost,
steam, excessive heat or cold, falling plaster, sewage, gas, odors, noise, or
by air conditioning or heating apparatus. Provided, however, Landlord shall
repair, replace and restore as an Operating Expense of the Building, all
damage to the Building structure, systems and fixtures. Tenant shall be
responsible to insure and/or repair all of Tenant's leasehold improvements
and all equipment, fixtures and personal property located in the Leased
Premises.
23. HOLD HARMLESS; PUBLIC LIABILITY INSURANCE; WAIVE OF SUBROGATION.
Tenant covenants and agrees to exonerate, indemnify, defend, protect and save
Landlord, owner of the Lot and Landlord's managing agent, if any, harmless
from and against any and all claims, demands, expenses, losses, suits and
damages as may be occasioned by reason of (A) any accident or matter
occurring on the Leased Premises, causing injury to persons or damage to
property (including, without limitation, the Leased Premises), unless such
accident or other matter resulted from the negligence or otherwise tortious
act of Landlord or Landlord's agents or employees, (B) the failure of Tenant
to fully and faithfully perform the
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obligations and observe the conditions of this Lease, or (C) the negligence
or otherwise tortious act of Tenant or anyone in or about the Building on
behalf or at the invitation or right of Tenant.
Tenant shall keep in force at its own expense comprehensive general
liability insurance (including a contractual liability insurance endorsement)
in companies acceptable to Landlord sufficient to cover such indemnification
and naming as insured Landlord, owner of the Lot, Landlord's managing agent,
if any, and Tenant against claims for personal injury" including bodily
injury, death or property damage in amounts not less than $1,000,000 (or such
higher limits as may be determined by Landlord), and Tenant will further
deposit the policy or policies of such insurance, or certificates thereof,
with Landlord. Said policy or policies of insurance or certificates thereof
shall have attached thereto endorsement that such policy shall not be
cancelled without at least ten (10) days prior written notice to Landlord and
Landlord's managing agent, if any, and that no act or omission of Tenant
shall invalidate the interest of Landlord under said insurance.
Landlord and Tenant hereby release the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
covered by any insurance then in force, even if such fire or other casualty
shall have been caused by the fault or negligence of the other party, or
anyone for whom such party may be responsible, provided, however, that this
release shall be applicable and in force and effect only to the extent of and
with respect to any loss or damage occurring during such time as the policy
or policies of insurance covering said loss shall contain a clause or
endorsement to the effect that this release shall not adversely affect or
impair said insurance or prejudice the right of the insured to recover
thereunder.
24. MORTGAGEE AND OTHER AGREEMENTS. In the event any person, firm,
corporation or other entity who is a party to any instrument to which this
Lease is subject or subordinate (including, without limitation, any mortgage
now or hereafter placed upon the Building or Lot or on any interest created
therein) or their successor(s), succeeds thereunder to the interest of
Landlord hereunder in the Building or the Lot, or acquires the right to
possession of the Building or the Lot, such person, firm, corporation or
other entity shall not be (A) liable for any act or omission of the party
named above as Landlord under this Lease; (B) liable for the performance of
Landlord's covenants hereunder which arise and accrue prior to such person,
firm, corporation or other entity succeeding to the interest of Landlord
hereunder or acquiring such right to possession; (C) subject to any offsets
or defenses which Tenant may have at any time against Landlord; (D) bound by
any rent which tenant may have paid previously for more than one (1) month in
advance; and (E) shall not be bound by any amendment or modification hereof
relating to the reduction of rent, shortening of term, or effecting a
cancellation or surrender hereof and made without the consent of such person,
firm, corporation nor other entity.
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Tenant agrees, from time to time as may be requested by Landlord, to
execute, acknowledge and deliver to Landlord all or any of the following: an
estoppel letter certifying to such party as Landlord reasonably may
designate, including any mortgagee, that this Lease is in full force and
effect and has not been amended, modified or superseded, that Landlord has
satisfactorily completed all construction work required by this Lease
(subject to completion of punch-list items), that Tenant has accepted the
Leased Premises and is not in possession thereof, that Tenant has no defense,
offsets or counterclaims hereunder or otherwise against Landlord with respect
to this Lease or the Leased Premises and Landlord is not in default hereunder
(or if any of the foregoing not be the case, specifying in reasonable detail
the extent and nature thereof), that Tenant has no knowledge of any pledge or
assignment of this Lease or rentals hereunder, that rent is accruing under
this Lease but has not been paid more than one (1) month in advance and the
date to which rent has been paid; and any other instrument as may be
reasonably requested to be executed by Tenant by any mortgagee of the Lot or
the Building or any interest therein, so long as the rights of Tenant as
provided for by this Lease are not materially affected by any such other
instrument. Tenant's estoppel letter shall be in the form of Exhibit "D"
attached hereto and made a part hereof, or in such other form as Landlord or
its mortgagee shall hereafter proscribe.
25. SUBORDINATION AND ATTORNMENT. This Lease and the estate, interest and
rights hereby created are subordinate to any mortgage now or hereafter placed
upon the Lot, the Building or any estate or interest therein, including,
without limitation, any mortgage on any leasehold estate, and to all
renewals, modifications, consolidations, replacements and extensions of the
same as well as any substitutions therefor. Tenant agrees that in the event
any person, firm, corporation or other entity acquires the right to
possession of the Lot and the Building including any mortgagee or holder of
any estate or interest having priority over this Lease, Tenant shall, if
requested by such person, firm, corporation or other entity, attorn to and
become the tenant of such person, firm, corporation or other entity, upon the
same terms and conditions as are set forth herein for the balance of the
Lease Term. Notwithstanding the foregoing, any mortgagee may, at any time,
subordinate its mortgage to this Lease, without Tenant's consent, by notice
in writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution and delivery,
and in that event, such mortgagee shall have the same rights with respect to
this Lease as though it had been executed prior to the execution and delivery
of the mortgage.
Tenant, if requested by Landlord, shall execute any such instruments in
recordable form as may be reasonably required by Landlord in order to confirm
or effect the subordination of this Lease and the attornment of Tenant to
future landlords in accordance with the terms of this Section.
26. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, pledge, mortgage
or otherwise transfer or encumber this Lease, nor sublet all or any part of
the Leased Premises or permit the same to be occupied or used by anyone other
than Tenant or its employees
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without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. It will not be unreasonable for Landlord to
withhold its consent if the reputation, financial responsibility, or business
of a proposed assignee or subtenant is unsatisfactory to Landlord, or if
Landlord deems such business to not be consonant with that of other tenants
in the Building, or if the intended use by the proposed assignee or subtenant
conflicts with any commitment made by Landlord to any other tenant in the
Building, or if the proposed rental rate is lower than the then current rate
at which similar space in the Building is being offered by Landlord, or if
the proposed subletting is to a prospective subtenant for less than fifty
percent (50%) of the Leased Premises. Notwithstanding the foregoing, Tenant
may assign or sublet the Leased Premises without Landlord's consent to a
corporation which is a parent or subsidiary of Tenant or is affiliated with
Tenant in a common group of corporations provided no such assignment or
subletting shall relieve Tenant of its obligations and liabilities hereunder.
Tenant's request for consent shall be in writing and contain the name,
address, and description of the business of the proposed assignee or
subtenant, its most recent financial statement and the other evidence of
financial responsibility, its intended use of the Leased Premises, and the
terms and conditions of the proposed assignment or subletting.
Within thirty (30) days from receipt of such request, Landlord shall
either: (A) grant or refuse consent; or (B) elect to require tenant
(i) to execute an assignment of lease or sublease of Tenant's interest
hereunder to Landlord or its designee upon the same terms and conditions as
are contained herein, together with an assignment of Tenant's interest as
sublessor in any such proposed sublease, or (ii) if the request is for
consent to a proposed assignment of this Lease, to terminate this Lease and
the term hereof effective as of the last day of the third month following the
month in which the request was received.
Each assignee hereunder shall assume and be deemed to have assumed this
Lease and shall be and remain liable jointly and severally with Tenant for
all payments and for the due performance of all terms, covenants, conditions
and provisions herein contained on Tenant's part to be observed and
performed. No assignment shall be binding upon Landlord unless the assignee
shall deliver to Landlord an instrument in recordable form containing a
covenant of assumption by the assignee, but the failure or refusal of
assignee to execute the same shall not release assignee from its liability as
set forth herein.
All the foregoing notwithstanding, Tenant shall not enter into any
lease, sublease, license, concession or other agreement for the use,
occupancy or utilization of the Leased Premises or any portion thereof, which
provides for a rental or other payment for such use, occupancy or utilization
based in whole or in part on the income or profits derived by any person from
the property leased, used, occupied or utilized (other than an amount based
on a fixed percentage or percentages of receipts or sales). Any such
purported lease, sublease,
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license, concession or other agreement shall be absolutely void and
ineffective as a conveyance or any right or interest in the possession, use
or occupancy of any part of the Leased Premises.
Any consent by Landlord hereunder shall not constitute a waiver of
strict future compliance by Tenant of the provisions of this Section 26 or a
release of Tenant from the full performance by Tenant of any of the terms,
covenants, provisions, or conditions in this Lease contained.
27. DEFAULT. Any other provisions in the Lease notwithstanding, it
shall be an Event of Default under this Lease if (A) Tenant fails to pay any
installment of Fixed Rent, Additional Rent or other sum payable by Tenant
hereunder when due and such failure continues for a period of ten (10) days
after written notice given by or on behalf of Landlord to Tenant, provided,
however, Landlord need not give any such written notice, and Tenant shall not
be entitled to any such period of grace, more than twice in any twelve (12)
month period, (B) Tenant vacates the Leased Premises or uses or occupies the
Leased Premises otherwise than as permitted by Sections 1 and 10 hereof, or
assigns or sublets, or purports to assign to sublet, the Leased Premises or
any part thereof otherwise than in the manner and upon the conditions set
forth in Section 26 hereof, (C) Tenant fails to observe or perform any other
covenant or agreement of Tenant herein contained and such failure continues
after written notice given by or on behalf of Landlord to Tenant for more
than fifteen (15) days and such additional time, if any, as is reasonably
necessary to cure such failure, provided Tenant commences to cure such
failure within such fifteen (15) day period and diligently thereafter
prosecutes such cure to completion, (D) without Landlord's prior written
consent, Tenant removes or attempts to remove or manifests an intention to
remove any or all of Tenant's property from the Leased Premises otherwise
than in the ordinary and usual course of business, (E) Tenant makes any
assignment for the benefit of creditors; Tenant commits an act of bankruptcy
or files a petition or commences any proceeding under any bankruptcy or
insolvency law; a petition is filed or any proceeding is commenced against
Tenant under any bankruptcy or insolvency law and such petition or proceeding
is not dismissed within thirty (30) days; Tenant is adjudicated a bankrupt;
Tenant by any act indicates its consent to, approval of or acquiescence in,
or a court approves, a petition filed or proceeding commenced against Tenant
under any bankruptcy or insolvency law; a receiver or other official is
appointed for Tenant or for a substantial part of Tenant's assets or for
Tenant's interests in this Lease; any attachment or execution against a
substantial part of Tenant's assets or of Tenant's interest in this Lease
remains unstayed or undismissed for a period of more than ten (10) days; a
substantial part of Tenant's assets or of Tenant's interest in this Lease is
taken by legal process in any action against Tenant, or (F) any of the
foregoing occur as to any guarantor or surety of Tenant's performance under
this Lease, or such guarantor or surety defaults on any provision under its
guaranty or suretyship agreement.
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28. LANDLORD'S REMEDIES.
A. If an Event of Default hereunder shall have happened and be
continuing, Landlord may, at its option:
(i) declare due and payable and sue for and recover, all unpaid
Fixed Rent for the unexpired period of the Lease Term (and also all
Additional Rent as the amount(s) of same can be determined or reasonably
estimated) as if by the terms of this Lease the same were payable in
advance, together will all legal fees and other expenses incurred by
Landlord in connection with the enforcement of any of Landlord's rights and
remedies hereunder, and/or
(ii) distrain, collect or bring action for such Fixed Rent and
Additional Rent as being rent in arrears, or may enter judgment therefor in
an amicable action as herein elsewhere provided for in case of rent in
arrears, or may file a Proof of Claim in any bankruptcy or insolvency
proceeding for such Fixed Rent and Additional Rent, or institute any other
proceedings, whether similar or dissimilar to the foregoing, to enforce
payment thereof, and/or
(iii) terminate the Lease Term by giving written notice thereof
to Tenant and, upon the giving of such notice, the Lease Term and the estate
hereby granted shall expire and terminate with the same force and effect as
though the date of such notice was the date hereinbefore fixed for the
expiration of the Lease Term, and all rights of Tenant hereunder shall expire
and terminate, but Tenant shall remain liable as hereinafter provided, and/or
(iv) exercise any other rights and remedies available to
Landlord at law or in equity.
B. If any Event of Default shall have happened and be continuing,
Landlord may, whether or not the Lease Term has been terminated as herein
provided, re-enter and repossess the Leased Premises or any part thereof by
force, summary proceedings, ejectment or otherwise and Landlord shall have
the right to remove all persons and property therefrom. Landlord shall be
under no liability for or by reason of any such entry, repossession or
removal; and no such re-entry or taking of possession of the Leased Premises
by Landlord shall be construed as an election on Landlord's part to terminate
the Lease Term unless a written notice of such intention be given to Tenant
pursuant to Section 28(A)(iii) or unless the termination of this Lease be
decreed by a court of competent jurisdiction.
C. At any time or from time to time after the repossession of the
Leased Premises or any part thereof pursuant to Section 28(B), whether or not
the Lease Term shall have been terminated pursuant to Section 28(A)(iii),
Landlord may (but shall be under no
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obligation to) relet all or any part of the Leased Premises for the account
of Tenant for such term or terms (which may be greater or less than the
period which would otherwise have constituted the balance of the Lease Term)
and on such conditions (which may include concessions or free rent) and for
such uses as Landlord, in its absolute discretion, may determine, and
Landlord may collect and receive any rents payable by reason of such
reletting. Landlord shall not be required to accept any tenant offered by
Tenant or observe any instruction given by Tenant about such reletting, or do
any act or exercise any care or diligence with respect to such reletting or
to the mitigation of damages. For the purpose of such reletting, Landlord may
decorate or make repairs, changes, alterations or additions in or to the
Leased Premises or any part thereof 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 legal fees
expended by Landlord.
D. No expiration or termination of the Lease Term pursuant to
Section 28(A)(iii), by operation of law or otherwise, and no repossession of
the Leased Premises or any part thereof pursuant to Section 28(B), or
otherwise, and no reletting of the Leased Premises or any part thereof
pursuant to Section 28(C) shall relieve Tenant of its liabilities and
obligations hereunder, all of which shall survive such expiration,
termination, repossession or reletting.
E. In the event of any expiration or termination of this Lease or
repossession of the Leased Premises or any part thereof by reason of an
occurrence of an Event of Default, and Landlord has not elected to accelerate
rent pursuant to Section 28(A)(i), Tenant shall pay to Landlord the Fixed
Rent, Additional Rent and other sums required to be paid by Tenant to and
including the date of such expiration, termination or repossession; and,
thereafter, Tenant shall, until the end of what would have been the
expiration of the Lease Term in the absence of such expiration, termination
or repossession, and whether or not the Leased Premises or any part thereof
shall have been relet, be liable to Landlord for, and shall pay to Landlord,
as liquidated and agreed current damages, the Fixed Rent, Additional Rent and
other sums which would be payable under this Lease by Tenant in the absence
of such expiration, termination or repossesssion, less the net proceeds, if
any, of any reletting effected for the account of Tenant pursuant to Section
28(C), after deducting from such proceeds all of Landlord's reasonable
expenses in connection with such reletting (including, without limitation,
all related repossession costs, brokerage commissions, legal expenses,
attorneys' fees, employees' expenses, alteration costs and expenses of
preparation for such reletting). Tenant shall pay such current damages on the
days on which the Fixed Rent would have been payable under this Lease in the
absence of such expiration, termination or repossession, and Landlord shall
be entitled to recover the same from Tenant on each such day.
F. At any time after such expiration or termination of this Lease or
repossession of the Leased Premises or any part thereof by reason of the
occurrence of an
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Event of Default, whether or not Landlord shall have collected any current
damages pursuant to Section 28(E), Landlord shall be entitled to recover from
Tenant, and Tenant shall pay to Landlord on demand, unless Tenant has paid
the whole of accelerated rent pursuant to Section 28(A)(i), as and for
liquidated and agreed final damages for Tenant's default and in lieu of all
current damages beyond the date of such demand (it being agreed that it would
be impracticable or extremely difficult to fix the actual damages), an amount
equal to the excess, if any, of (i) Fixed Rent, Additional Rent and other
sums which would be payable under this Lease for the remainder of the Lease
Term from the date of such demand (or, if it be earlier, the date to which
Tenant shall have satisfied in full its obligations under Section 28(E) to
pay current damages) for what would have been the then unexpired term of this
Lease in the absence of such expiration, termination or repossession,
discounted at the rate of six percent (6%) per annum, over (ii) the then
fair rental value of the Leased Premises for the same period, discounted at a
like rate. If any statute or rule of law shall validly limit the amount of
such liquidated final damages to less than the amount above agreed upon,
Landlord shall be entitled to the maximum amount allowable under such
statute or rule of law.
G. Tenant, in consideration for the execution of this lease by
landlord and for the covenants and agreements on the part of landlord herein
contained, and fully comprehending the relinquishment of certain rights
including rights of pre-judgment notice and hearing, hereby expressly
authorizes any attorney of any court of record to accept service of process
for, to appear for, and to confess judgment against tenant (i) in any and all
actions brought hereunder by landlord against tenant to recover possession
from time to time of the leased premises (and tenant agrees that upon the
entry of each judgment for said possession a writ of possession or other
appropriate process may issue forthwith), and/or (ii) to enforce payment from
time to time of the sums or any part thereof owing hereunder by tenant.
H. Tenant further hereby expressly authorizes and empowers (which
power is coupled with an interest) landlord, upon the occurrence of an event
of default and so long as the same is continuing, to enter upon the leased
premises, distrain upon and remove therefrom all inventory, equipment,
machinery, trade fixtures, and personal property of whatsoever kind or
nature, whether owned by tenant or others, and to proceed, without judicial
decree, writ of execution or assistance of constables, to conduct a private
sale, by auction or sealed bid, of such personal property, at which sale
landlord may bid without restriction. Tenant hereby waives the benefit of all
laws, whether now in force or hereafter enacted, exempting any personal
property on the leased premises from sale or levy, whether execution thereon
is had by order of any court or through private sale as herein authorized.
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I. In any action for ejectment, for rent in arrears or for
distraint, 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 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
notwithstanding. The authority to confess judgment against tenant hereunder
shall not be exhausted by one (1) exercise thereof, but judgment may be
confessed as provided herein from time to time as often as any event of
default occurs under this lease, and such authority may be exercised as well
after the expiration of the lease term and/or during or after the expiration
of any extended or renewal term.
J. No right or remedy herein conferred upon or reserved to Landlord
is intended to be exclusive of any other right or remedy herein by law provided,
but each shall be cumulative and in addition to every right or remedy given
herein or now or hereafter existing at law or in equity or by statute.
K. No waiver by Landlord of any breach by Tenant of any of Tenant's
obligations, agreements or covenants herein shall be a waiver of any
subsequent breach or of any obligation, agreement or covenant, nor shall any
forbearance by Landlord to seek a remedy for any breach by Tenant be a
waiver by Landlord or any rights and remedies with respect to such or any
subsequent breach.
L. In the event of a breach or threatened breach by Tenant of any
of the covenants or provisions hereof, Landlord shall have the right of
injunction and right to invoke any remedy allowed at law or in equity as if
re-entry summary proceedings and other remedies were not herein provided for.
M. Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord obtaining
possession of the Leased Premises, by reason of the violation by Tenant of
any of the covenants and conditions of this Lease, or otherwise.
29. LEGAL FEES AND OTHER COSTS. The prevailing party in any
enforcement proceeding shall be entitled to reimbursement of all reasonable
legal fees and expenses by the non-prevailing party.
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30. LATE CHARGE. If any installment of Fixed Rent, Additional Rent or
other sums payable by Tenant to Landlord under this Lease shall not be paid
on the due date thereof, Tenant shall pay to Landlord a "late charge" of 5%
of the amount so due for the purpose of defraying the expense incident to
handling such delinquent payment.
31. SUCCESSORS AND ASSIGNS. The obligations of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their
respective successors and assigns; provided that Landlord and each successive
owner of the Building and/or the Lot shall be liable only for obligations
accruing during the period of its ownership or interest in the Building or
the Lot; and from and after the transfer by Landlord or such successive owner
of its ownership or other interest in the Building or the Lot, Tenant shall
look solely to the successors in title for the performance of Landlord's
obligations hereunder. The liability of Landlord or any successive owner of
the Building and/or the Lot hereunder and all of its officers, employees,
shareholders or joint venturers or partners, if any, whether general or
limited, shall be limited to Landlord's estate or other title or interest in
the Building and/or the Lot.
32. WAIVERS. No delay or forbearance by Landlord in exercising any
right or remedy hereunder or in undertaking or performing any act or matter
which is not expressly required to be undertaken by Landlord shall be
construed, respectively, to be a waiver of Landlord's rights or to represent
any agreement by Landlord to undertake or perform such act or matter
thereafter.
33. 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 Leased Premises
and/or any claim of injury or damage and any emergency statutory 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.
34. SEVERABILITY. Each covenant and agreement in this Lease shall for
all purposes by construed to be a separate and independent covenant or
agreement. If any provision in this Lease or the application thereof shall to
any extent be invalid, illegal or otherwise unenforceable, the remainder of
this Lease, and the application of such provision other than as invalid,
illegal or unenforceable, shall not be affected thereby; and such provisions
in this lease shall be valid and enforceable to the fullest extent permitted
by law.
35. NOTICES. All notices or other communications required or permitted
hereby shall be effective only if the same are in writing and are signed by
the party giving the
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notice or by an agent or other person authorized in writing to so act on
behalf of such party. Notices to Tenant may be given by the leaving of the
same at the Leased Premises during business hours or by registered or
certified mail, return receipt requested, addressed to Tenant at the address
set forth in Section 1 hereto; and notices to Landlord shall be given by
registered or certified mail, return receipt requested to the address set
forth in Section 1 hereof. All notices shall be deemed given unless otherwise
specified herein, on the date when same are delivered, if delivered, or on
the date when the same are deposited in the mail.
36. AMENDMENT AND MODIFICATIONS. This Lease contains the entire
agreement between the parties hereto, and shall not be amended, modified or
supplemented unless by agreement in writing signed by both Landlord and
Tenant and the same shall not be valid unless approved in writing by all
mortgagees and holders of any estate or interest in the Building or the Lot
by virtue of leases or other instruments expressly referred to herein or
which are then of record.
37. [INTENTIONALLY OMITTED].
38. ENVIRONMENTAL MATTERS.
A. Tenant shall promptly deliver to Landlord copies of any of the
following documents that Tenant receives or prepares:
(i) applications or other materials regarding the Lot,
Building, or Leased Premises submitted to any governmental agency in
compliance with Environmental Statutes;
(ii) any notifications regarding the Lot, Building, or Leased
Premises submitted to any person pursuant to Environmental Statutes;
(iii) any permit, license, approval, amendment or modification
thereto granted regarding the Lot, Building, or Leased Premises pursuant to
Environmental Statutes;
(iv) any record or manifest required to be maintained
regarding the Lot, Building, or Leased Premises pursuant to Environmental
Statutes; and
(v) any correspondence, notice of violation, summons, order,
complaint or other document received by Tenant or its lessees, sublessees or
assigns (if permitted), pertaining to the Lot, Building, or Leased Premises
and to compliance with any Environmental Statutes.
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"Environmental Statutes" shall mean all statutes, ordinances,
regulations, orders and requirements of common law regulating environmental
matters concerning (a) activities at the Lot, Building or Leased Premises,
(b) repairs or construction of any improvements located on the Lot, (c)
handling of any materials, (d) discharges to the air, soil, surface water or
ground water, and (e) storage, treatment or disposal of any waste at or
connected with any activity at the Lot, Building or Leased Premises.
B. In the event that Landlord or Landlord's mortgagee performs or
causes to perform an investigation of the Lot or Building of any of the below
described matters, Tenant shall cooperate with Landlord or Landlord's
mortgagee with respect to such investigation.
(i) compliance at the Lot, Building, or Leased Premises with
Environmental Statutes;
(ii) the presence of hazardous substances or contamination at
the Lot, Building, or Leased Premises;
(iii) the presence at the Lot, Building, or Leased Premises of
polychlorinated biphenyls, substances containing polychlorinated biphenyls,
asbestos, materials containing asbestos, or unreaformaldehyde foam insulation;
(iv) the presence at the Lot of (a) a wetland or other "water
of the United States" for the purposes of Section 404 of the federal Clean
Water Act, 33 U.S.C. Section 1344, or any similar area regulated under any
state law, (b) a flood plain or other flood hazard area as defined pursuant
to the Pennsylvania Flood Plain Management Act, Pa. Stat. tit. 32, Sections
679.101 to .601 (Purdon Sup. 1989), (c) a portion of the coastal zone for
purposes of the federal Coastal Zone Management Act, 16 U.S.C. Sections
1451-1464, or (d) any other area development of which is specifically
restricted under applicable law by reason of its physical characteristics or
prior use;
(v) the presence at the Lot, Building, or Leased Premises of
radon-products; or
(vi) the presence at the Lot, Building, or Leased Premises of
tanks presently or formerly used for the storage of any liquid or gas above
or below ground.
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39. HEADINGS AND TERMS. The title, headings and table of contents of
this Lease are for convenience of reference only and shall not in any way be
utilized to construe or interpret the agreement of the parties as otherwise
set forth herein. The term "Landlord" and the terms "Tenant" as used herein
shall means, where appropriate, all persons acting by or on behalf of the
respective parties, except as to any required approvals, consents or
amendments, modifications or supplements hereunder when such terms shall only
mean the parties originally named on the first page of this Lease as Landlord
and Tenant, respectively, and their agents so authorized in writing.
40. GOVERNING LAW. This Lease shall be governed by and construed in
accordance with the laws of the Commonwealth of Pennsylvania.
41. TENANT'S TERMINATION RIGHTS. Tenant shall have the right and
option to terminate this Lease on February 28, 1999 (the "Termination Date")
by giving Landlord not less than six (6) months prior written notice thereof
and paying to Landlord at the time of the giving of such notice a termination
fee equal to the unamortized portion of the cost of tenant improvements and
brokerage fees (the "Termination Fee"). If Tenant gives notice of its
election to terminate this Lease under this Section 41, but fails to pay the
Termination Fee or fails to vacate the Leased Premises on or before the
Termination Date, Landlord shall have the option of treating such failure as
either (a) an Event of Default hereunder, (b) a rescission of Tenant's notice
of termination, or (c) a holdover under Section 4 hereof. In any event,
Tenant shall pay Landlord, as Additional REnt hereunder, all damages, losses,
costs and expenses (including reasonable legal fees and expenses) Landlord
may have incurred by reason of Tenant's failure to vacate, including, without
limitation, any costs or lost profits from any reletting or proposed
reletting of the Leased Premises and Landlord's efforts to regain possession
of the Leased Premises.
42. PARKING. At no additional rent to Tenant, Landlord shall provide
on the Lot on which the Building is located parking for all tenants
(including Tenant), their guests and customers at an overall rate of at least
five (5) parking spaces per 1,000 square feet of office space in the Building.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed the date first mentioned.
LANDLORD:
GLENVIEW CORPORATE CENTER LIMITED
PARTNERSHIP
By: BPPI-I, L.P., its general partner
By: Bergen of Philadelphia, Inc.,
general partner
By: /s/ Elizabeth A. Owens
--------------------------------
By: Pitcairn Properties Incorporated,
general partner
By: /s/ [Illegible]
--------------------------------
TENANT:
WORLDGATE COMMUNICATIONS
By: /s/ [Illegible]
------------------------------------
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Exhibit 10.6
SENIOR LOAN AND SECURITY AGREEMENT NO. 0098
THIS SENIOR LOAN AND SECURITY AGREEMENT NO. 0098 (this "Security Agreement") is
dated as of July 15,1997 between WORLDGATE COMMUNICATIONS, INC., a Delaware
corporation ("Borrower") and PHOENIX LEASING INCORPORATED, a California
corporation ("Lender").
RECITALS
A. Borrower desires to borrow from Lender in one or more borrowings an
amount not to exceed $1,000,000 in the aggregate, and Lender desires to loan,
subject to the terms and conditions herein set forth, such amount to Borrower
(each, a "Loan" and collectively, the "Loans"). Such borrowings shall be
evidenced by one or more Senior Secured Promissory Notes (each, a "Note" and
collectively, the "Notes"), in the form attached hereto.
B. As security for Borrower's obligations to Lender under this Security
Agreement, the Notes and any other written agreement between Borrower and
Lender, Borrower will grant to Lender hereunder a first perfected security
interest in certain of its equipment, machinery, fixtures, other items and
intangibles whether now owned by Borrower or hereafter acquired, and all
substitutions and replacements of and additions, improvements, accessions and
accumulations to said equipment, machinery and fixtures and other items,
together with all rents, issues, income, profits and proceeds therefrom
(collectively, the "Collateral") which is described on the Note attached hereto
or any subsequently-executed Note entered into by Lender and Borrower and which
incorporates this Security Agreement by reference. In addition to the foregoing
Collateral, under certain circumstances Borrower's obligations to Lender may
also be secured by certain "Additional Collateral" as provided below, in which
case the term "Collateral" shall include such Additional Collateral.
NOW, THEREFORE, THE PARTIES AGREE AS FOLLOWS:
SECTION 1. TERM OF AGREEMENT. The term of this Security Agreement begins on the
date set forth above and shall continue thereafter and be in effect so long as
and at any time any Note entered into pursuant to this Security Agreement is in
effect. The Base Term and monthly payment amount payable with respect to each
item of Collateral shall be as set forth in and as stated in the respective
Note(s). The terms of each Note hereto are subject to all conditions and
provisions of Us Security Agreement as it may at any time be amended. Each Note
shall constitute a separate and independent Loan and contractual obligation of
Borrower and shall incorporate the terms and conditions of this Security
Agreement and any additional provisions contained in such Note. In the event of
a conflict between the terms and conditions of this Security Agreement and any
provisions of such Note, the provisions of such Note shall prevail with respect
to such Note only.
SECTION 2. NON-CANCELLABLE LOAN. This Security Agreement and each Note cannot be
cancelled or terminated except as expressly provided herein. Borrower agrees
that its obligations to pay all monthly payment amounts and other sums payable
hereunder (and under any Note) and the rights of Lender and any assignee in and
to such rent and other sums, are absolute and unconditional and are not subject
to any abatement, reduction, setoff, defense, counterclaim or recoupment due or
alleged to be due to, or by reason of, any past, present or future claims which
Borrower may have against Lender, any assignee, the manufacturer or seller of
the Collateral, or against any person for any reason whatsoever.
SECTION 3. LENDER COMMITMENT. (a) GENERAL TERMS. Subject to the terms and
conditions of this Security Agreement and so long as no Event of Default or
event which with the giving of notice or passage of time, or both, could become
an Event of Default has occurred or is continuing, Lender hereby agrees to make
one
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or more senior secured Loans to Borrower, subject to the following conditions:
(i) each Loan shall be evidenced by a Note; (ii) the total principal amount of
the Loans shall not exceed $1,000,000 in the aggregate (the "Commitment"); (iii)
at the time of each Loan, no Event of Default or event which with the giving of
notice or passage of time, or both, could become an Event of Default shall have
occurred and be continuing, as reasonably determined by Lender, and certified by
Borrower; (iv) the amount of each Loan shall be at least $50,000 except for a
final Loan which may be less than $50,000; (v) Lender shall not be obligated to
make any new Loan after December 3 1, 1997 provided that the funding period may
be extended to June 30, 1998 if Lender has received and approved in its sole
discretion Borrower's monthly 1998 business plan; (vi) for each Loan, Borrower
shall present to Lender a list of proposed Collateral for approval by Lender in
its sole discretion; (vii) for each Loan, Borrower shall have provided Lender
with each of the closing documents described in Exhibit A hereto (which
documents shall be in form and substance acceptable to Lender); (viii) Borrower
is performing according to its business plan referred to as "WorldGate
Communications, Inc. Confidential 1997 Operating Statements, Balance Sheets and
Cash Flow Statements" (the "Business Plan"), as may be amended from time to time
in form and substance reasonably acceptable to Lender, (ix) there shall be no
material adverse change in Borrower's condition, financial or otherwise, as
reasonably determined by Lender, and Borrower so certifies, from (yy) the date
of the most recent financial statements delivered by Borrower to Lender to (zz)
the date of the proposed Loan; (x) Borrower shall use the proceeds of all Loans
hereunder for working capital; (xi) at the time of each Loan, Borrower has
reimbursed Lender for all UCC filing and search costs and appraisal fees; (xii)
all Collateral has been marked and labeled by Lender or Lender's agent; and
(xiii) Lender has received in form and substance acceptable to Lender: (a)
Borrower's interim financial statements signed by a financial officer of
Borrower, (b) evidence of Borrower's $7,556,000 cash position as of April 30,
1997; and (c) complete copies of the Borrower's audit reports for its most
recent fiscal year, which shall include at least Borrower's balance sheet as of
the close of such year, and Borrower's statement of income and retained earnings
and of changes in financial position for such year, prepared on a consolidated
basis and certified by independent public accountants. Such certificate shall
not be qualified or limited because of restricted or limited examination by such
accountant of any material portion of the company's records. Such reports shall
be prepared in accordance with generally accepted accounting principles and
practices consistently applied.
(b) THE NOTES. Each Loan shall be evidenced by a Note. Each Note shall
bear interest and be payable and prepayable at the times and in the manner
provided therein. Following payment of the Indebtedness related to each Note,
Lender shall promptly return such Note, marked "canceled," to Borrower.
(c) SPECIFIC TERMS - TRADE SHOW BOOTH. Borrower and Lender agree that
if, upon the expiration of the Commitment Period, the amount funded allocable to
Borrower's trade show booth exceeds thirty-five percent (35%) of the Commitment
utilized as of such expiration date, then, at Lender's option, Borrower shall
pay to Lender an amount equal to such excess ("Excess Payment"). Borrower agrees
to pay the Excess Payment to Lender within thirty (30) days of Lender's invoice
The Excess Payment shall be applied in pro rata shares to each Note as advance
payments under each such Note of (i) first, Borrower's additional interest
compensation election (which for purposes of this Excess Payment shall be
assumed to be the final payment election) and (ii) next, to Borrower's last
monthly payment obligations. Such Excess Payment shall not constitute a
prepayment of interest or principal.
SECTION 4. SECURITY INTERESTS. (a) Borrower hereby grants to Lender a first
security interest in all Collateral; (b) This Security Agreement secures (i) the
payment of the principal of and interest on the Notes and all other sums due
thereunder and under this Security Agreement (the "Indebtedness") and (ii) the
performance by Borrower of all of its other covenants now or hereafter existing
under the Notes, this Security Agreement and any other obligation owed by
Borrower to Lender (the "Obligations").
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SECTION 5. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower represents and
warrants that (a) it is in good standing under the laws of the state of its
formation, duly qualified to do business and will remain duly qualified during
the term of each Loan in each state where necessary to carry on its present
business and operations, including the jurisdiction(s) where the Collateral will
be located as specified on each Exhibit A to each Note except where the failure
to so qualify or remain qualified would not have a material adverse effect upon
Borrower; (b) it has full authority to execute and deliver this Security
Agreement and the Notes and perform the terms hereof and thereof, and this
Security Agreement and the Notes have been duly authorized, executed and
delivered and constitute valid and binding obligations of Borrower enforceable
in accordance with their terms except as such enforceability may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditor's rights generally, and general principles of equity; (c) the execution
and delivery of this Security Agreement and the Notes will not contravene any
law, regulation or judgment affecting Borrower or result in any breach of any
agreement or other instrument binding on Borrower; (d) no consent of Borrower's
shareholders or holder of any indebtedness, or filing with, or approval of, any
governmental agency or commission, which has not already been obtained or
performed, as appropriate, is a condition to the performance of the terms of
this Security Agreement or the Notes; (e) there is no action or proceeding
pending or threatened against Borrower before any court or administrative agency
which might have a materially adverse effect on the business, financial
condition or operations of Borrower; (f) Borrower owns and will keep all of the
Collateral free and clear of all liens, claims and encumbrances, and, except for
this Security Agreement, there is no deed of bust, mortgage, security agreement
or other third party interest against any of the Collateral; (g) Borrower has
good and marketable title to the Collateral; (h) all Collateral has been
received, installed and is ready for use and is satisfactory in all respects for
the purposes of this Security Agreement; (i) the Collateral is, and will remain
at all times under applicable law, removable personal property, which is free
and clear of any lien or encumbrance except in favor of Lender, notwithstanding
the manner in which the Collateral may be attached to any real property; (j) all
credit and financial information submitted to Lender herewith or at any other
time is and will at the time given be true and correct; and (k) the security
interest granted to Lender hereunder is a perfected first priority security
interest.
SECTION 6. METHOD AND PLACE OF PAYMENT. Borrower shall pay to Lender, at such
address as Lender specifies in writing, all amounts payable to it under this
Security Agreement and the Notes.
SECTION 7. LOCATION; INSPECTION; LABELS. All of the Collateral shall be located
at the address (the "Collateral Location") shown on Exhibit A to each Note and
shall not be moved without Lender's prior written consent which location shall
in all events be within the United States. All of the records regarding the
Collateral shall be located at 3220 Tillman Drive, Suite 300, Bensalem, PA
19020. Lender shall have the right to inspect Collateral, including records
relating thereto, and Borrower's books and records with respect to the same at
any time (upon reasonable notification) during regular business hours, such
books and records to be maintained in accordance with generally accepted
accounting principles. Borrower shall be responsible for all labor, material and
freight charges incurred in connection with any removal or relocation of
Collateral which is requested by Borrower and consented to by Lender, as well as
for any charges due to the installation or moving of the Collateral. Payments
under the Notes and under this Security Agreement shall continue during any
period in which the Collateral is in transit during a relocation. Lender or its
agent shall mark and label Collateral, which labels (to be provided by Lender)
shall state that such Collateral is subject to a security interest of Lender,
and Borrower shall keep such labels on the Collateral as so labeled.
SECTION 8. COLLATERAL MAINTENANCE. For so long as an item of Collateral remains
subject to a security interest hereunder, then, with respect to such item of
Collateral: (a) GENERAL. Borrower will reasonably permit Lender to inspect each
item of Collateral and its maintenance records. Borrower will at its sole
expense comply with all applicable laws, rules, regulations, requirements and
orders with respect to the use, maintenance,
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<PAGE>
repair, condition, storage and operation of each item of Collateral. Except as
required herein, Borrower will not make any addition or improvement to any item
of Collateral that is not readily removable without causing material damage to
any item or impairing its original value or utility. Any addition or improvement
that is so required or cannot be so removed will immediately become Collateral
of Lender. (b) SERVICE AND Repair. Borrower will at its sole expense maintain
and service and repair any damage to each item of Collateral in a manner
consistent with prudent industry practice and Borrower's own practice so that
such item of Collateral is at all times (i) in the same condition as when
delivered to Borrower, except for ordinary wear and tear, and (ii) in good
operating order for the function intended by its manufacturer's warranties and
recommendations.
SECTION 9. LOSS OR DAMAGE. Borrower assumes the entire risk of loss to the
Collateral through use, operation or otherwise. Borrower hereby indemnifies and
holds harmless Lender from and against all claims, loss of Loan payments, costs,
damages, and expenses relating to or resulting from any loss, damage or
destruction of the Collateral, any such occurrence being hereinafter called a
"Casualty Occurrence." On the first day payment is due on each Note describing
Collateral materially affected by such Casualty Occurrence, following the
Casualty Occurrence or, if there is no such payment date, thirty (30) days after
such Casualty Occurrence Borrower shall: (a) repair the Collateral, (b) replace
the Collateral with comparable Collateral in good condition and repair taking
all steps required by Lender to perfect Lender's first priority security
interest therein and (which replacement Collateral shall be subject to the terms
of this Security Agreement), or (c) pay to Lender an amount equal to the Balance
Due (as defined below) for each lost or damaged item of Collateral. The Balance
Due for each such item is the sum of. (i) all amounts for each item which may be
then due or accrued to the payment date, plus (ii) as of such payment date, an
amount equal to the product of the fraction specified below times the sum of all
remaining payments under the respective Note, including the amount of any
mandatory or optional payment required or permitted to be paid by Borrower to
Lender at the maturity of the Note. The numerator of the fraction shall be the
Collateral Value (as set forth on the applicable Note) of the item and the
denominator shall be the aggregate Collateral Value of all items under the Note.
Upon the making of such payments, Lender shall release such item of Collateral
from its lien hereunder.
Notwithstanding the above, within thirty (30) days following a Casualty
Occurrence, Borrower may replace any item of Collateral which has suffered a
Casualty Occurrence with Collateral acceptable to Lender in its complete
discretion and, in such event the provisions of the previous paragraph shall not
apply. Borrower's tender of such Collateral shall constitute a representation
and warranty that it is free of all liens, claims and encumbrances and otherwise
qualifies as Collateral under this Security Agreement. Following such tender,
Lender shall have a first security interest in such Collateral.
SECTION 10. INSURANCE. Borrower at its expense shall keep the Collateral insured
against all risks of physical loss for at least the replacement value of the
Collateral and in no event for less than the amount payable following a Casualty
Occurrence (as provided in Section 9). Such insurance shall provide for a loss
payable endorsement to Lender and/or any assignee of Lender. Borrower shall
maintain commercial general liability insurance with respect to loss or damage
for personal injury, death or property damage in an amount not less than
$2,000,000 in the aggregate, naming Lender and/or Lender's assignee as
additional insured. Such insurance shall contain insurer's agreement to give
thirty (30) days' advance written notice to Lender before cancellation or
material change of any policy of insurance. Borrower will provide Lender and any
assignee of Lender with a certificate of insurance from the insurer evidencing
Lender's or such assignee's interest in the policy of insurance. Such insurance
shall cover any Casualty Occurrence to any unit of Collateral. Notwithstanding
anything in Section 9 or this Section 10 to the contrary, this Security
Agreement and Borrower's obligations hereunder shall remain in full force and
effect with respect to any unit of Collateral which is not subject to a Casualty
Occurrence. If Borrower fails to provide or maintain insurance as required
herein, Lender shall have the right, but shall not be obligated, to obtain such
insurance. In that event, Borrower shall pay to Lender the cost thereof.
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SECTION 11. MISCELLANEOUS AFFIRMATIVE COVENANTS. So long as any portion of the
Indebtedness is unpaid and as long as any of the Obligations are outstanding
Borrower will: (a) duly pay all governmental taxes and assessments at the time
they become due and payable; (b) comply with all applicable governmental laws,
rules and regulations relating to its business and the Collateral; (c) maintain
Lender's security interest in the corresponding Collateral as a first and prior
perfected security interest; (d) furnish Lender with its annual financial
statements within ninety (90) days following the end of Borrower's fiscal year,
quarterly financial statements within forty-five (45) days after the end of each
fiscal quarter, and within thirty (30) days of the end of each month a financial
statement for that month prepared by Borrower, and including an income statement
and balance sheet, all of which shall be certified by an officer of Borrower as
true and correct and shall be prepared in accordance with generally accepted
accounting principles consistently applied, and such other information as Lender
may reasonably request; and (e) promptly (but in no event more than five (5)
business days after the occurrence of such event) notify Lender of any material
adverse change in Borrower's condition during the commitment period and of the
occurrence of any Event of Default.
SECTION 12. INDEMNITIES. Borrower will protect, indemnify and save harmless
Lender and any assignees on an after-tax basis from and against all liabilities,
obligations, claims, damages, penalties, causes of action, costs and expenses
(including reasonable attorneys' fees and expenses), imposed upon or incurred by
or asserted against Lender or any assignee of Lender by any third party by
reason of the occurrence or existence (or alleged occurrence or existence) of
any act or event relating to or caused by any portion of the Collateral, or its
purchase, acceptance, possession, use, maintenance or transportation, including
without limitation, consequential or special damages of any kind, any failure on
the part of Borrower to perform or comply with any of the terms of this Security
Agreement or any Note, claims for latent or other defects, claims for patent,
trademark or copyright infringement and claims for personal injury, death or
property damage, including those based on Lender's negligence or strict
liability in tort and excluding only those based on Lender's gross negligence or
willful misconduct, provided, however, did in the event that any action, suit or
proceeding is brought against Lender by reason of any such occurrence, Borrower
will, at Borrower's expense, resist and defend such action, suit or proceeding
or cause the same to be resisted and defended by counsel designated by Borrower
and reasonably approved by Lender. Borrower's obligations under this Section 12
shall survive the payment in full of all the Indebtedness and the performance of
all Obligations with respect to acts or events occurring or alleged to have
occurred prior to the payment in full of all the Indebtedness and the
performance of all Obligations.
SECTION 13. TAXES. Borrower agrees to reimburse Lender (or pay directly if
instructed by Lender) and any assignee of Lender for, and to indemnify and hold
Lender and any assignee harmless from, all fees (including, but not limited to,
license, documentation, recording and registration fees), and all sales, use,
gross receipts, personal property, occupational, value added or other taxes,
levies, imposts, duties, assessments, charges, or withholdings of any nature
whatsoever, together with any penalties, fines, additions to tax, or interest
thereon (the foregoing collectively "Impositions"), except same as may be
attributable to Lender's income, arising at any time prior to or during the term
of any Notes or of this Security Agreement, or upon termination or early
termination of this Security Agreement and levied or imposed upon Lender
directly or otherwise by any Federal, state or local government in the United
States or by any foreign country or foreign or international taxing authority
upon or with respect to (a) the Collateral, (b) the exportation, importation,
registration, purchase, ownership, delivery, leasing, financing, possession,
use, operation, storage, maintenance, repair, return, sale, transfer of title,
or other disposition thereof, (c) the rentals, receipts, or earnings arising
from the Collateral, or any disposition of the rights to such rentals, receipts,
or earnings, (d) any payment pursuant to this Security Agreement or the Notes,
or (e) this Security Agreement, the Notes or any transaction or any part hereof
or thereof.
SECTION 14. RELEASE OF LIENS. Upon payment of all of the Indebtedness and
performance of all of the Obligations, Lender shall promptly execute UCC
termination statements and such other documents as Borrower shall reasonably
request to evidence the release of Lender's lien relating to the Collateral.
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SECTION 15. ASSIGNMENT. WITHOUT LENDER'S PRIOR WRITTEN CONSENT WHICH CONSENT
WILL NOT BE UNREASONABLY WITHHELD, BORROWER SHALL NOT (a) ASSIGN, TRANSFER,
PLEDGE, HYPOTHECATE OR OTHERWISE DISPOSE OF THIS SECURITY AGREEMENT, ANY NOTE,
ANY COLLATERAL, OR ANY INTEREST THEREIN, (b) LEASE OR LEND COLLATERAL OR PERMIT
IT TO BE USED BY ANYONE OTHER THAN BORROWER OR BORROWER'S EMPLOYEES AND
CONTRACTORS OR (c) MERGE INTO, CONSOLIDATE WITH OR CONVEY OR TRANSFER ITS
PROPERTIES SUBSTANTIALLY AS AN ENTIRETY TO ANY OTHER PERSON OR ENTITY EXCEPT TO
A SUCCESSOR IN INTEREST TO ALL OR SUBSTANTIALLY ALL OF THE BUSINESS OF BORROWER;
PROVIDED, HOWEVER, THAT, THE FINANCIAL CONDITION OF SUCH SUCCESSOR IS GREATER
THAN OR EQUAL TO BORROWER AS DETERMINED IN GOOD FAITH BY LENDER. LENDER MAY
ASSIGN ANY OF THE NOTES, THIS SECURITY AGREEMENT OR ITS SECURITY INTEREST IN ANY
OR ALL COLLATERAL, OR ANY OR ALL OF THE ABOVE, IN WHOLE OR IN PART TO ONE OR
MORE ASSIGNEES OR SECURED PARTIES WITHOUT NOTICE TO BORROWER. In the event
Lender declines to consent to an assignment pursuant to Section 15(c) above,
Borrower shall have the option to early terminate all Notes upon payment to
Lender of (i) all amounts under the Notes which may be then due or accrued, (ii)
the aggregate sum of all remaining payments under the Notes, including the
amount of any mandatory or optional payment required or permitted to be paid by
Borrower to Lender at the maturity of the Notes discounted to present value at a
rate of 6% per annum, and (iii) all other amounts due under this Security
Agreement and under the Notes. If Borrower is given notice of such assignment it
agrees to acknowledge receipt thereof in writing and Borrower shall execute such
additional documentation as Lender's assignee and/or secured party shall
reasonably require. Each such assignee and/or secured party shall have all of
the rights, but (except as provided in this Section 15) none of the obligations,
of Lender under this Security Agreement, which obligations will be retained by
Lender unless such assignee or secured party expressly agrees to assume such
obligations in writing. Borrower shall not assert against any assignee and/or
secured party any defense, counterclaim or offset that Borrower may have against
Lender. Notwithstanding any such assignment, and providing no Event of Default
has occurred and is continuing, Lender, or its assignees, secured parties, or
their agents or assigns, shall not interfere with Borrower's right to quietly
enjoy use of Collateral subject to the terms and conditions of this Security
Agreement. Subject to the foregoing, the Notes and this Security Agreement shall
inure to the benefit of, and are binding upon, the successors and assignees of
the parties hereto. Borrower acknowledges that any such assignment by Lender
will not change Borrower's duties or obligations under this Security Agreement
and the Notes or increase any burden or risk on Borrower.
SECTION 16. DEFAULT. (a) Events of Default. Any of the following events or
conditions shall constitute an "Event of Default" hereunder. (i) Borrower's
failure to pay any monies due to Lender hereunder or under any Note beyond the
tenth (10th) day after the same is due; (ii) Borrower's failure to comply with
its obligations under Section 10 or Section 15 if not cured within thirty (30)
days of such failure in instances when a cure can be effected; (iii) any
representation or warranty of Borrower made in this Security Agreement or the
Notes or in any other agreement, statement or certificate furnished to Lender in
connection with this Security Agreement or the Notes shall prove to have been
incorrect in any material respect when made or given; (iv) Borrower's failure to
comply with or perform any term, covenant or condition of this Security
Agreement or any Note or under any other agreement between Borrower and Lender
or under any lease or mortgage of real property covering the location of the
Equipment if such failure to comply or perform is not cured by Borrower within
thirty (30) days after Borrower knows of the noncompliance or nonperformance or
notice from Lender; (v) seizure of any of the Collateral under legal process;
(vi) the filing by or against Borrower or any guarantor under any guaranty
executed in connection with this Security Agreement ("Guarantor") of a petition
for reorganization or liquidation under the Bankruptcy Code or any amendment
thereto or under any other insolvency law providing for the relief
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of debtors; (vii) the voluntary or involuntary making of an assignment of a
substantial portion of its assets by Borrower or by any Guarantor for the
benefit of its creditors, the appointment of a receiver or trustee for Borrower
or any Guarantor or for any of Borrower's or Guarantor's assets, the institution
by or against Borrower or any Guarantor of any formal or informal proceeding for
dissolution, liquidation, settlement of claims against or winding up of the
affairs of Borrower or any Guarantor provided that in the case of all such
involuntary proceedings, same are not dismissed within sixty (60) days after
commencement; or (viii) except as permitted under Section 15, the making by
Borrower or by any Guarantor of a transfer of all or a material portion of
Borrower's or Guarantor's assets or inventory not in the ordinary course of
business.
(b) REMEDIES. If any Event of Default has occurred, Lender may in its
sole discretion exercise one or more of the following remedies with respect to
any or all of the Collateral: (i) declare due any or all of the aggregate sum of
all remaining payments under the Notes, including the amount of any mandatory or
optional payment required or permitted to be paid by Borrower to Lender at the
maturity of the Notes ("Remaining Payments"); (ii) proceed by appropriate court
action or actions either at law or in equity to enforce Borrower's performance
of the applicable covenants of the Notes and this Security Agreement or to
recover all direct damages and expenses reasonably incurred by Lender by reason
of an Event of Default; (iii) without court order or prior demand, enter upon
the premises where the Collateral is located and take immediate possession of
and remove it without liability of Lender to Borrower or any other person or
entity; (iv) terminate this Security Agreement and sell the Collateral at public
or private sale, or otherwise dispose of, hold, use or lease any or all of the
Collateral adhering to standards of commercial reasonableness; or (v) exercise
any other right or remedy available to it under applicable law. If Lender has
declared due any or all of the Remaining Payments, Borrower will pay immediately
to Lender (A) the Remaining Payments, (B) all amounts which may be then due or
accrued, and (C) all other amounts due under this Security Agreement and under
the Notes (Lender's Return, as referred to below, means the amounts described in
clauses (A), (B) and (C) above). The net proceeds of any sale or lease of such
Collateral will be credited against Lender's Return. The net proceeds of a sale
of the Collateral pursuant to this Section 15(b) is defined as the sales price
of the Collateral less reasonable selling expenses, including, without
limitation, costs of remarketing the Collateral and all refurbishing costs and
commissions paid with respect to such remarketing. The net proceeds of a lease
of the Collateral pursuant to this Section 15 (b) is defined as the amount equal
to the monthly payments due under such lease (discounted at a rate per annum
equal to the 3-year Treasury Bill yield as of the date on which Lender notifies
Borrower that this Security Agreement is terminated (the "Termination Date") (as
such yield is reported in the most recent Federal Reserve Statistical Release H.
15 (519) ("Statistical Release") (the "Discount Rate")) plus the residual value
of the Collateral at the end of the basic term of such lease, as reasonably
determined by Lender, and discounted at the Discount Rate.
Borrower agrees to pay all reasonable internal and out-of-pocket costs
of Lender incurred in enforcement of this Security Agreement, the Notes or any
instrument or agreement required under this Security Agreement, including, but
not limited to attorneys' fees and litigation expenses and fees of collection
agencies ("Remedy Expenses"). At Lender's request, Borrower shall assemble the
Collateral and make it available to Lender at such time and location as Lender
may designate.
Declaration that any or all amounts under this Security Agreement
and/or the Notes are immediately due and payable and Lender's taking possession
of any or all Equipment shall not terminate this Security Agreement or any of
the Notes unless Lender so notifies Borrower in writing. None of the above
remedies is intended to be exclusive but each is cumulative and may be enforced
separately or concurrently.
(c) APPLICATION of PROCEEDS. The proceeds of any sale of all or any
part of the Collateral and the proceeds of any remedy afforded to Lender by this
Security Agreement shall be paid to and applied as follows:
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FIRST, to the payment of reasonable costs and expenses of suit
or foreclosure, if any, and of the sale, if any, including, without limitation,
refurbishing costs, costs of remarketing and commissions related to remarketing,
all Remedy Expenses, all reasonable expenses, liabilities and advances incurred
or made pursuant to this Security Agreement or any Note by Lender in connection
with foreclosure, suit, sale or enforcement of this Security Agreement or the
Notes, and taxes, assessments or liens superior to Lender's security interest
granted by this Security Agreement;
SECOND, to the payment of all other amounts not described in
item Third below due under this Security Agreement and all Notes;
THIRD ,to pay Lender an amount equal to Lender's Return, to
the extent not previously paid by Borrower; and
Fourth, to the payment of any surplus to Borrower or to
whomever may lawfully be entitled to receive it.
(d) EFFECT OF DELAY; WAIVER; FORECLOSURE ON COLLATERAL. No delay or
omission of Lender, in exercising any right or power arising from any Event of
Default shall prevent Lender from exercising that right or power if the Event of
Default continues. No waiver of an Event of Default, whether full or partial, by
Lender or such holder shall be taken to extend to any subsequent Event of
Default, or to impair the rights of Lender in respect of any damages suffered as
a result of the Event of Default. The giving, taking or enforcement of any other
or additional security, collateral or guaranty for the payment or discharge of
the Indebtedness and performance of the Obligations shall in no way operate to
prejudice, waive or affect the security interest created by this Security
Agreement or any rights, powers or remedies exercised hereunder or thereunder.
Lender shall not be required first to foreclose on the Collateral prior to
bringing an action against Borrower for sums owed to Lender under this Security
Agreement or under any Note.
SECTION 17. LATE PAYMENTS. Borrower shall pay Lender a late charge in an amount
equal to 10% of each monthly payment and other payments, if any, owed Lender by
Borrower which are not paid when due, for every month such payment is not paid
when due, but in no event an amount greater than the highest rate permitted by
applicable law. If such amounts have not been received by Lender at Lender's
place of business or by Lender's designated agent by the date such amounts are
due under this Security Agreement or the Notes, Lender shall bill Borrower for
such charges. Borrower acknowledges that invoices for amounts due hereunder or
under the Notes are sent by Lender for Borrower's convenience only. Borrower's
non-receipt of an invoice will not relieve Borrower of its obligation to make
payments hereunder or under the Notes.
SECTION 18. PAYMENTS BY LENDER If Borrower shall fail to make any payment or
perform any act required hereunder (including, but not limited to, maintenance
of any insurance required by Section 10, then Lender may, but shall not be
required to, after such notice to Borrower as is reasonable under the
circumstances, make such payment or perform such act with the same effect as if
made or performed by Borrower. Borrower will upon demand reimburse Lender for
all sums reasonably paid and all costs and expenses reasonably incurred in
connection with the performance of any such act.
SECTION 19. FINANCING STATEMENTS. Borrower Will execute all financing statements
pursuant to the Uniform Commercial Code and all such other documents reasonably
requested by Lender to perfect Lender's security interests hereunder. Borrower
authorizes Lender to file financing statements signed only by Lender (where such
authorization is permitted by law) at all places where Lender deems necessary.
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SECTION 20. NATURE OF TRANSACTION. Lender makes no representation whatsoever,
express or implied, concerning the legal character of the transaction evidenced
hereby, for tax or any other purpose.
SECTION 21. SUSPENSION OF LENDER'S OBLIGATIONS. The obligations of Lender
hereunder will be suspended to the extent that Lender is hindered or prevented
from complying therewith because of labor disturbances, including but not
limited to strikes and lockouts, acts of God, fires, floods, storms, accidents,
industrial unrest, acts of war, insurrection, riot or civil disorder, any order,
decree, law or governmental regulations or interference, failure of the
manufacturer to deliver any item of Collateral or any cause whatsoever not
within the sole and exclusive control of Lender.
SECTION 22. LENDER'S EXPENSE. Borrower shall -pay Lender all costs and expenses
including reasonable attorneys' fees and the fees of collection agencies,
reasonably incurred by Lender (a) in enforcing any of the terms, conditions or
provisions hereof and related to the exercise of its remedies, and (b) in
connection with any bankruptcy or post-judgment proceeding, whether or not suit
is filed and, in each and every action, suit or proceeding, including any and
all appeals and petitions therefrom.
SECTION 23. ALTERATIONS; ATTACHMENTS. No alterations or attachments shall be
made to the Collateral without Lender's prior written consent, which shall not
be given for changes that will affect the reliability and utility of the
Collateral or which cannot be removed without damage to the Collateral, or which
in any way affect the value of the Collateral for purposes of resale or lease.
All attachments and improvements to the Collateral shall be deemed to be
"Collateral" for purposes of the Security Agreement, and a first priority
security interest therein shall immediately vest in Lessor.
SECTION 24. CHATTEL PAPER (a) One executed copy of the Security Agreement will
be marked "Original" and all other counterparts will be duplicates. To the
extent, if any, that this Security Agreement constitutes chattel paper (as such
term is defined in the Uniform Commercial Code as in effect in any applicable
jurisdiction) no security interest in the Security Agreement may be created in
any documents other than the "Original." (b) There shall be only one original of
each Note and it shall be marked "Original," and all other counterparts will be
duplicates. To the extent, if any, that any Notes(s) to this Security Agreement
constitutes chattel paper (or as such term is defined in the Uniform Commercial
Code as in effect in any applicable jurisdiction) no security interest in any
Note(s) may be created in any documents other than the "Original."
SECTION 25. COMMITMENT FEE. Borrower has paid to Lender a commitment fee ("Fee")
of $5,000. The Fee shall be applied by Lender first to reimburse Lender for all
out-of-pocket UCC and other search costs, inspections and labeling costs and
appraisal fees, if any, incurred by Lender, and then proportionally to the first
monthly payment for each Note hereunder in the proportion that the Collateral
Value for such Note bears to Lender's entire commitment. However, the portion of
the Fee which is not applied to such monthly payments shall be non-refundable
except if Lender defaults in its obligation to fund Loans pursuant to Section 3.
SECTION 26. NOTICES. All notices hereunder shall be in writing, by registered
mail, or reliable messenger or delivery service and shall be directed, as the
case may be, to Lender at 2401 Kerner Boulevard, San Rafael, California 94901,
Attention: Asset Management and to Borrower at 3220 Tillman Drive, Suite 300,
Bensalem, PA 19020, Attention: John Mischak, Jr.
SECTION 27. MISCELLANEOUS. (a) Borrower shall provide Lender with such corporate
resolutions, financial statements and other documents as Lender shall reasonably
request from time to time. (b) Borrower represents that the Collateral hereunder
is used solely for business purposes. (c) Time is of the essence with
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respect to this Security Agreement. (d) Borrower acknowledges that Borrower has
read this Security Agreement and the Notes, understands them and agrees to be
bound by their terms and further agrees that this Security Agreement and the
Notes constitute the entire agreement between Lender and Borrower with respect
to the subject matter hereof and supersede all previous agreements, promises, or
representations. (e) This Security Agreement and the Notes may not be changed,
altered or modified except by an instrument signed by an officer or authorized
representative of Lender and Borrower. (f) Any failure of either party to
require strict performance by the other or any waiver of any provision herein or
in a Note shall not be construed as a consent or waiver of any other breach of
the same or any other provision. (g) If any provision of this Security Agreement
or any Note is held invalid, such invalidity shall not affect any other
provisions hereof or thereof. (h) The obligations of Borrower to pay the
Indebtedness and perform the Obligations shall survive the expiration or earlier
termination of this Security Agreement and each Note until all Obligations of
Borrower to Lender have been met and all liabilities of Borrower to Lender and
any assignee have been paid in full. (i) Borrower will, at its expense, promptly
execute and deliver to Lender such documents and assurances (including financing
statements) and take such further action as Lender may reasonably request in
order to carry out the intent of this Security Agreement and Lender's rights and
remedies. (j) During the continuance of an Event of default hereunder, Borrower
hereby appoints Lender (and each of Lender's officers, employees or agents
designated by Lender), with full power of substitution by Lender, as Borrower's
attorney, with power to execute and deliver on Borrower's behalf financing
statements and other documents necessary to perfect and/or give notice of
Lender's security interest in any of the Collateral. (k) Any consents required
hereunder shall not be unreasonably withheld or delayed.
SECTION 28. JURISDICTION AND WAIVER OF JURY TRIAL. This Security Agreement and
the Notes shall be deemed to have been negotiated, entered into and performed in
the State of California and it is understood and agreed that the validity of
this Security Agreement and of any of the terms and provisions, of the Security
Agreement and Notes, as well as the rights and duties of Lender and Borrower,
shall be construed pursuant to and in accordance with the laws of the State of
California, without giving effect to conflicts of law principles. It is agreed
did exclusive jurisdiction and venue for any legal action between the parties
arising out of or relating to this Security Agreement and each Note shall be in
the Superior Court for Marin County, California, or, in cases where federal
diversity jurisdiction is available, in the United States District Court for the
Northern District of California situated in San Francisco. BORROWER, TO THE
EXTENT IT MAY LAWFULLY DO SO, HEREBY WAIVES ITS RIGHT TO TRIAL BY JURY IN ANY
ACTION BROUGHT ON OR WITH RESPECT TO THIS SECURITY AGREEMENT, ANY NOTE, ANY
SECURITY DOCUMENTS, OR ANY OTHER AGREEMENTS EXECUTED IN CONNECTION HEREWITH.
SECTION 29. ADDITIONAL INTEREST COMPENSATION: (a) GENERAL. If and as the Note
provides, Borrower shall be required to choose a final payment or Note extension
election ("Additional Interest Compensation") at the expiration of the first
Note's Base Term, then that choice shall be an election of Borrower's Additional
Interest Compensation election for all, but not less than all, of the Collateral
under all Notes under the Security Agreement.
Fair market value shall be determined for the Collateral under all Notes prior
to the first Note's expiration.
Until Borrower fulfills an Additional Interest Compensation election, all
Borrower's Obligations, including payment of the Monthly Payment Amount, shall
continue in full force and effect, on a month-to-month basis.
(b) END OF LOAN POSITION ELECTIONS.
ELECTION NO. I - FOR THE TRADE SHOW BOOTH ONLY:
Make a final payment equal to 15% of the Trade Show Booth Note's original
principal amount.
ELECTION NO. I - FOR ALL OTHER COLLATERAL
Make a final payment equal to the Collateral's fair market value, in no event
less than 10% nor more than 20% of the Note's original principal amount for
such Collateral.
ELECTION NO. 2 - FOR BOTH THE TRADE SHOW BOOTH AND OTHER COLLATERAL
Extend the Note's Base Term for an additional 6 months "Extended Term") for a
monthly rate of 3.175% of the Collateral's original purchase price.
If Borrower fails to timely make the payment required under (a) above, Borrower
shall be deemed to have elected (b).
IN WITNESS WHEREOF, Borrower and Lender have caused this Security Agreement to
be executed as of the date and year first above written.
PHOENIX LEASING INCORPORATED WORLDGATE COMMUNICATIONS, INC.
By: /s/ Ronald Demer By: /s/ Randall J. Gort
-------------------------------- -----------------------------
Name: Ronald Demer Name: Randall J. Gort
------------------------------ ---------------------------
Title: VP Title: VP, Corporate Affairs
----------------------------- --------------------------
HEADQUARTERS LOCATION:
3220 Tillman Drive, Suite 300
Bensalem, PA 19020
County of Bucks
EXHIBITS AND SCHEDULES:
Exhibit A - Closing Memorandum
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AMENDMENT NO. 1 TO SENIOR LOAN AND SECURITY AGREEMENT NO. 0098
THIS AMENDMENT NO. 1 TO SENIOR LOAN AND SECURITY AGREEMENT NO. 0098
("Amendment") is dated as of June 18, 1998, by and between WORLDGATE
COMMUNICATIONS, INC. ("Borrower") and PHOENIX LEASING INCORPORATED ("Lender").
RECITALS
WHEREAS, Borrower and Lender entered into that certain Senior Loan and
Security Agreement No. 0098, dated as of July 15, 1997 (the "Security
Agreement"), pursuant to which Borrower is financing equipment with an
aggregate purchase price of $1,000,000, (the "Initial Commitment");
WHEREAS, Borrower has requested that Lender increase the dollar limit on the
aggregate purchase price of equipment which Lender is willing to finance for
Borrower under the Security Agreement by an additional $1,000,000, (such
increase hereinafter referred to as the "Additional Commitment");
WHEREAS, Lender is willing to provide the Additional Commitment, on the terms
set forth herein and Borrower is willing to agree to such terms; and
WHEREAS, Borrower and Lender now desire to amend the Security Agreement to
provide for the Additional Commitment, and as otherwise provided in this
Agreement;
NOW, THEREFORE, IT IS AGREED THAT:
1. DEFINITIONS. Unless otherwise indicated, words and terms which are
defined in the Security Agreement shall have the same meaning where used
herein. Upon execution of this Amentment, (i) the term "Security Agreement"
shall be deemed to include this Amendment, (ii) the term "Collateral" shall
be deemed to include the "Additional Commitment Collateral," (iii) the term
"Note(s)" shall be deemed to include any "Additional Commitment Note(s)," and
(iv) the term "Loan" shall be deemed to include "Additional Commitment Loan,"
as these terms are defined herein.
2. AMENDMENTS. The Security Agreement is hereby amended as follows:
(a) Following Section 3, a new Section 3A is added as follows:
3A. LENDER ADDITIONAL COMMITMENT. (a) GENERAL TERMS. Subject to the
terms and conditions of this Security Agreement and so long as no Event of
Default or event which with the giving of notice or passage of time, or both,
could become an Event of Default has occurred or is continuing, upon full
funding of the Initial Commitment, Lender hereby agrees to make one or more
additional senior secured Loans "Additional Commitment Loans" to Borrower,
subject to the following conditions: (i) each Additional Commitment Loan
shall be evidenced by an Additional Commitment Note; (ii) the total principal
amount of the Additional Commitment Loans shall not exceed $1,000,000 in the
aggregate (the "Additional Commitment"), but in any event the Initial
Commitment together with the Additional Commitment shall not exceed
$2,000,000 ("Total Commitment"); (iii) no more than $250,000 of the
Additional Commitment may be used for the Borrower's trade show booth
upgrade; (iv) at the time of each Additional Commitment Loan, no Event of
Default or event which with the giving of notice or passage of time, or both,
could become an Event of Default shall have occurred and be continuing, as
reason-
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ably determined by Lender, and certified by Borrower, (v) the amount of each
Additional Commitment Loan shall be at least $50,000 except for a final
Additional Commitment Loan which may be less than $50,000; (vi) Lender shall
not be obligated to make any Additional Commitment Loan after March 31, 1999;
(vii) for each Additional Commitment Loan, Borrower shall present to Lender a
list of proposed Additional Commitment Collateral for approval by Lender in
its sole discretion; (viii) for each Additional Commitment Loan, Borrower
shall have provided Lender with each of the closing documents described in
Exhibit A hereto (which documents shall be in form and substance reasonably
acceptable to Lender); (ix) Borrower is performing according to its business
plan referred to as "WorldGate Communications, Inc. Projected Balance Sheets,
Statement of Cash Flows and Statement of Operations" cover dated April 27,
1998, viable only through December 31, 1999 (the "Additional Commitment
Business Plan"), as may be amended from time to time in form and substance
acceptable to Lender; (x) there shall be no material adverse change in
Borrower's condition, financial or otherwise, that would materially impair
the ability of Borrower to meet its payment and other obligations under this
Additional Commitment Loan (a "Material Adverse Effect") as reasonably
determined by Lender, and Borrower so certifies, from (yy) the date of the
most recent financial statements delivered by Borrower to Lender to (zz) the
date of the proposed Additional Commitment Loan; (xi) prior to payment in
full of all Additional Commitment Notes, Borrower shall not offer any loan
secured by any equipment, furniture or fixtures to any other person or entity
other than Lender, unless Lender declines to finance such transaction or
Borrower and Lender are unable to agree on the terms of such financing; (xii)
Borrower shall use the proceeds of all Additional Commitment Loans hereunder
to purchase or reimburse the purchase of Additional Commitment Collateral;
(xiii) at the time of each Additional Commitment Loan, Borrower has
reimbursed Lender for all UCC filing and search costs, inspection and
labeling costs, and appraisal fees, if any; (xiv) all Additional Commitment
Collateral has been marked and labeled by Lender or Lender's agent; and (xv)
Lender has received in form and substance acceptable to Lender: (a)
Borrower's interim financial statement signed by a financial officer of
Borrower, (b) prior to each funding, hardcopy evidence of Borrower's cash
position; and (d) complete copies of the Borrower's audit reports for its
most recent fiscal year, which shall include at least Borrower's balance
sheet as of the close of such year, and Borrower's statement of income and
retained earnings and of changes in financial position for such year,
prepared on a consolidated basis and certified by independent public
accountants. Such certificate shall not be qualified or limited because of
restricted or limited examination by such accountant of any material portion
of the company's records. Such reports shall be prepared in accordance with
generally accepted accounting principles and practices consistently applied.
(b) THE NOTES. Each Additional Commitment Loan shall be evidenced
by an Additional Commitment Note which may not be prepaid in whole or in
part. Each Additional Commitment Note shall bear interest and be payable at
the times and in the manner provided therein. Following payment of the
Indebtedness related to each Additional Commitment Note, Lender shall
promptly return such Additional Commitment Note, marked "canceled," to
Borrower.
(c) SPECIFIC TERMS - TRADE SHOW BOOTH ADDITIONAL COMMITMENT
COLLATERAL. Borrower and Lender agree that if, upon the expiration of the
Additional Commitment Period, the amount funded allocable to Borrower's trade
show booth, inclusive of the upgrade, exceeds thirty-five percent (35%) of
the Total Commitment utilized as of such expiration date, then, at Lender's
option, Borrower shall pay to Lender an amount equal to such excess ("Excess
Payment"). Borrower agrees to pay the Excess Payment to Lender within thirty
(30) days of Lender's invoice
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to be held and applied by Lender in accordance with the Additional Security
Section below. Such Excess Payment shall not constitute a prepayment of
interest or principal and shall be applied first to Borrower's Additional
Interest Compensation, as hereinafter defined, with any remaining funds to be
applied pro rata to the last monthly payment due under each Additional
Commitment Note.
(b) Following Section [25], a new Section [25A] is added as follows:
25A. ADDITIONAL COMMITMENT FEE. Borrower has paid to Lender a
commitment fee ("Additional Commitment Fee") of Five Thousand Dollars
($5,000) with respect to the Additional Commitment. The Additional Commitment
Fee shall be applied by Lender first to reimburse Lender for all
out-of-pocket UCC search costs, inspections and appraisal fees incurred by
Lender, and then proportionally to the first month's payment under each
Additional Commitment Note, in the proportion that the collateral value for
such Additional Commitment Note bears to the Additional Commitment. However,
the portion of the Additional Commitment Fee which is not applied to such
monthly payments shall be non-refundable except if Lender defaults in its
obligation to fund Additional Commitment Loans pursuant to Section 3A.
3. REPRESENTATIONS AND WARRANTIES: Borrower hereby reconfirms as of the
date hereof, its representations and warranties set forth in Section 5 of the
Security Agreement.
4. CONTINUED VALIDITY OF SECURITY AGREEMENT. Except as amended by this
Amendment, the Security Agreement shall continue in full force and effect as
originally constituted and is ratified and affirmed by the parties hereto.
Such Amendment shall not amend or otherwise affect any of the Notes executed
and delivered by Borrower prior to the the date hereof.
5. AUTHORIZATION. Each party represents to the other that the individual
executing this Amendment on its behalf is the duly appointed signatory of
such party to this Amendment and that such individual is authorized to
execute this Amendment by or on behalf of such party and to take all action
required by the terms of this Amendment.
6. WHEN AMENDMENT IS EFFECTIVE. This Amendment shall be binding and deemed
effective when executed by Borrower and accepted and executed by Lender. Upon
such effectiveness this Amendment shall be deemed to have amended the
Security Agreement as provided herein.
7. Captions. Section headings and numbers have been set forth herein for
convenience only. Unless the contrary is compelled by the context, everything
contained in each section applies equally to this entire Amendment.
8. NO NOVATION. This Amendment is not intended to be, and shall not be
construed to create, a novation or accord and satisfaction, and, except as
otherwise provided herein, the Security Agreement shall remain in full force
and effect.
9. SEVERABILITY. Each provision of this Amendment shall be severable from
every other provision of this Amendment for the purpose of determining the
legal enforceability of any specific provision.
10. ENTIRE AGREEMENT. The Security Agreement as amended by this Amendment
constitutes the entire agreement between Borrower and Lender with respect to
the subject matter hereof and supersedes all prior and contemporaneous
negotiations, communications, discussions and agreements concerning such
subject matter.
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Borrower acknowledges and agrees that Lender has not made any representation,
warranty or covenant in connection with this Amendment.
11. CONFLICTS. In the event of any conflict between the terms of this
Amendment and the terms of the Security Agreement, the terms of this
Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first set forth above.
LENDER: BORROWER:
PHOENIX LEASING INCORPORATED WORLDGATE COMMUNICATIONS, INC.
By: /s/ Patti Gleisten By: /s/ David A. Dill
------------------------------- ------------------------------
Name: Patti Gleisten Name: David A. Dill
------------------------------- ------------------------------
Title: Contract Administrator Title: CFO
------------------------------- ------------------------------
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Exibit 10.8
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). NEITHER THIS WARRANT NOR SUCH SECURITIES MAY BE
TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR (B) UPON RECEIPT BY THE
ISSUER OF AN OPINION OF COUNSEL, WHICH OPINION OF COUNSEL SHALL BE REASONABLY
SATISFACTORY TO THE ISSUER, TO THE EFFECT THAT SUCH TRANSFER IS EXEMPT FROM
REGISTRATION UNDER THE ACT AND SUCH STATE SECURITIES LAWS.
WARRANT AGREEMENT
FOR SERIES B CONVERTIBLE PREFERRED STOCK OF
WORLDGATE COMMUNICATIONS, INC.
WARRANT NO. I
THIS CERTIFIES that, for value received, CHARTER COMMUNICATIONS,
INC., or its permitted assigns registered on the books of the Company
(collectively, the "Holder"), is entitled to purchase from WORLDGATE
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), at any time,
and from time to time, on or before 5 p.m., New York City time, on June 30,
2002, 394,880 shares (the "Shares") of fully paid and nonassessable shares of
Series B Convertible Preferred Stock of the Company (the "Preferred Stock").
The purchase price for each Share (the "Share Price") is seven dollars and
ten cents ($7.10) per Share or if shares of Preferred Stock are sold
pursuant to the Company's Confidential Private Placement Memorandum dated
September 29, 1997 (the "Current Offering") at a lower price, the purchase
price will be adjusted to such lower price. The Company will not sell more
than $25 million of Preferred Stock in the Current Offering without the
consent of the Holder. Securities issuable upon exercise of this Warrant and
the price payable therefor are subject to adjustment from time to time as
hereinafter set forth. As used herein, the term "Warrant" shall include any
warrant or warrants hereafter issued in consequence of the exercise of this
Warrant in part.
1 . EXERCISES PAYMENT FOR OWNERSHIP INTEREST . Upon the terms and subject to
the conditions set forth herein, this Warrant may be exercised in whole or in
part by the Holder hereof at any time, or from time to time, by presentation
and surrender of this Warrant to the principal offices of the Company,
together with the Purchase Form annexed hereto, duly executed, and
accompanied by payment to the Company of an amount equal to the Share Price
multiplied by the number of Shares as to which this Warrant is then being
exercised. Moreover, any transfer of
<PAGE>
Shares obtained by Holder in exercise of this Warrant is subject to the
requirement that such securities are registered under the Securities Act of
1933, as amended (the "1933 Act"), and applicable state securities laws or
are exempt from registration under such laws. The Holder of this Warrant
shall be deemed to be a shareholder of the Shares as to which this Warrant is
exercised in accordance herewith effective immediately after the close of
business on the date on which the Holder shall have delivered to the Company
this Warrant in proper form for exercise and payment by certified or official
bank check or wire transfer of the cash purchase price for the number of
Shares as to which the exercise is being made, or by delivery to the Company
of securities of the Company having a fair market value equal to the cash
purchase price for such number of Shares determined as of the date of
delivery. If this Warrant shall be exercised in part only, the Company shall,
upon surrender of this Warrant for cancellation, execute and deliver a new
Warrant evidencing the rights of the Holder thereof to purchase the balance
of the Shares purchasable hereunder as to which the Warrant has not been
exercised. If this Warrant is exercised in part, such exercise shall be for a
whole number of Shares. Upon any exercise and surrender of this Warrant, the
Company (a) will issue and deliver to: the Holder a certificate or
certificates in the name of the Holder for the largest whole number of Shares
ID which the Holder shall be entitled and, if this Warrant is exercised in
whole, in lieu of any fractional Share to which the Holder otherwise might be
entitled, cash in an amount equal to the fair value of such fractional share
(determined in such reasonable and equitable manner as the Board of Directors
of the Company shall in good faith determine), and (b) will deliver to the
Holder such other securities, properties and cash which the Holder may be
entitled to receive upon such exercise, or the proportionate part thereof if
this Warrant is exercised in part, pursuant to the provisions of this Warrant.
2. AGREEMENT OF HOLDER. The Holder acknowledges that this Warrant is
unregistered and that it will not be transferred or sold except that Charter
Communications, Inc. may transfer this Warrant to any entity controlled by,
under common control with or that controls Charter Communications, Inc.
3. ADJUSTMENTS. -Securities ~ issuable upon exercise of this Warrant and the
Share Price shall be subject to adjustment from time to time as follows:
3.1 REORGANIZATION RECLASSIFICATION, CONSOLIDATION, MERGER OR
SALE or DISTRIBUTION,
(a) If any capital reorganization or reclassification of
the Company, or any consolidation or merger of the Company with another
person, or the sale, transfer or lease of all or substantially all of its
assets to another person shall be effected in such a way that holders of
shares of Preferred Stock or common stock of the Company (the "Common
Stock") shall be entitled to receive stock, securities or assets with respect
to or in exchange for their shares, then provision shall be made, in
accordance with this Section 3.1, whereby the Holder hereof shall thereafter
have the right to purchase and receive, upon the basis and upon the terms and
conditions specified in this Warrant Agreement and in addition to or in
exchange for, as applicable, the Shares subject to this Warrant immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby, such securities or assets as would have been issued or
2
<PAGE>
payable with respect to or in exchange for the aggregate Shares immediately
theretofore purchasable and receivable upon the exercise of the rights
represented hereby if (i) exercise of the Warrant or (ii) exercise of the
Warrant and conversion of the Shares thereby purchasable had occurred
immediately prior to such reorganization, reclassification, consolidation,
merger or sale. The Company will not effect any such consolidation, merger,
sale, transfer or lease unless prior to the consummation thereof the
successor entity (if other than the Company) resulting from such
consolidation or merger or the entity purchasing or leasing such assets shall
assume by written instrument (i) the obligation to deliver to such Holder
such securities or assets as, in accordance with the foregoing provisions,
such Holder may be entitled to purchase, and (ii) all other obligations of
the Company under this Warrant. The provisions of this Section 3.1(a) shall
similarly apply to successive consolidations, mergers, exchanges, sales,
transfers or leases. The Company shall not sell or lease any securities or
assets of the Company to any holder of securities of the Company for a
consideration of less than that believed by the Company, in good faith, to be
the fair market value of such securities or assets, or purchase or lease, any
securities or assets from any holder of securities of the Company for a
consideration of more than that believed by the Company, in good faith, to be
the fair market value of such securities or assets, provided, however, that
this restriction shall not apply to ordinary course purchases and sales of
mortgage loans, provided further that this proviso shall not be used as a
device to avoid the purpose of this Section.
(b) If, at any time or from time to time after the date of
this Warrant, the Company shall distribute to the holders of shares of
Preferred Stock or Common Stock (i) securities, (ii) property, other than
cash, or (iii) cash (other than cash distributed as a regular quarterly
dividend in an aggregate amount in any fiscal quarter not exceeding 1.25%
of the value of the Common Stock at the end of such quarterly period based on
the public market value of such Common Stock), without fair payment therefor,
then, and in each such case, the Holder, upon the exercise of this Warrant,
shall be entitled to receive such securities, property and cash (but only to
the extent, with respect to cash, such cash is paid in excess of 1.25% of
the value of the Common Stock in any fiscal quarter or is paid in a special
dividend or distribution) which the Holder would hold on the date of such
exercise if, on the date of this Warrant, the Holder had been the holder of
record of the shares of Preferred Stock or Common Stock subscribed for upon
such exercise and, during the period from the date of this Warrant to and
including the date of such exercise, had retained such shares of Preferred
Stock or Common Stock and the securities, property and cash receivable by the
Holder during such period, subject, however, to the Holder agreeing to any,
as applicable, conditions to such distribution as were required of all other
Holders of shares of Preferred Stock or Common Stock in connection with such
distribution. If the securities to be distributed by the Company involve
rights, warrants, options or any other form of convertible securities and the
right to exercise or convert such securities would expire in accordance with
its terms prior to the exercise of this Warrant, then the terms of such
securities shall provide that such exercise or convertibility right shall
remain in effect until thirty (30) days after the date the Holder of this
Warrant receives such securities pursuant to (i) the exercise hereof or (ii)
the exercise hereof and conversion of the underlying Shares.
3
<PAGE>
(c) In addition to those adjustments set forth in Sections
3.1(a) and (b), but without duplication of the adjustments to be made under
such Sections, if the Company:
(i) pays a dividend or makes a distribution on its Preferred Stock or
Common Stock in shares of its Preferred Stock or Common Stock;
(ii) subdivides its outstanding shares of Preferred Stock or Common
Stock into a greater number of shares;
(iii) combines its outstanding shares of Preferred Stock or Common
Stock into a smaller number of shares;
(iv) makes a distribution on its Preferred Stock or Common Stock in
shares of its capital stock other than Preferred Stock or Common
Stock; and/or
(v) issues, by reclassification of its Preferred Stock Common Stock,
any shares of its capital stock;
then the number and kind of Shares purchasable upon exercise of this Warrant
or issuable upon conversion of the Shares shall be adjusted so that the
Holder upon exercise hereof shall be entitled to receive the kind and number
of Shares or other securities of the Company (such other securities
thereafter enjoying the rights of Shares under this Warrant) that the Holder
would have owned or have been entitled to receive after the happening of any
of the events described above had this Warrant been exercised or exercised
and the Shares purchased thereby converted into shares of Common Stock (or
other securities, assets and cash) immediately prior to the happening of such
event or any record date with respect thereto. An adjustment made pursuant to
this Section 3.1(c) shall become effective immediately after the record
date in the case of a dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision,
combination or issuance. If, as a result of an adjustment made pursuant to
this Section 3.1(c), the Holder of this Warrant thereafter surrendered for
exercise shall become entitled to receive shares of two (2) or more classes
of capital stock, shares of Preferred Stock or Common Stock and any other
class of capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be described in a written notice
to all holders of this Warrant promptly after such adjustment) shall
determine the allocation of the adjusted Share Price between or among shares
of such classes of capital stock or shares of Preferred Stock or Common Stock
and such other class of capital stock.
The adjustment to the number of Shares purchasable upon
the exercise of this Warrant described in this Section 3.1 (c) shall be made
each time any event listed in paragraphs (i) through (v) of this Section 3.1
(c) occurs.
(d) Simultaneously with all adjustments to the number
and/or kind of securities, property and cash to be issued in connection with
the exercise of this Warrant, the Share Price will
4
<PAGE>
also be appropriately adjusted so that at all times the Holder and all
subsequent holders of this Warrant (whether in whole or in part) would not
pay more than the aggregate purchase price to exercise this Warrant in full
immediately after such adjustment as the Holder and all such subsequent
holders had to pay immediately prior to such adjustment.
3.2 OTHER ACTION AFFECTING SHARES. If the Company takes any action
affecting its shares of Preferred Stock or Common Stock after the date
hereof, that would be covered by Section 3.1 but for the manner in which
such action is taken or structured, other than an action described in any of
Section 3.1, which would in any way diminish the value of this Warrant
hereunder, then this Warrant shall be adjusted as to the Shares purchasable
hereunder and the Share Price payable hereunder in such manner as the Board
of Directors of the Company shall in good faith determine to be equitable
under the circumstances.
3.3 NOTICE OF ADJUSTMENTS. Upon each adjustment or readjustment of
the Share Price or in the nature of the securities or other property
receivable upon the exercise of this Warrant, the Company at its expense will
promptly compute such adjustment or readjustment in accordance with the terms
of this Warrant and prepare a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Company will forthwith mail, by first class mail,
postage prepaid, a copy of each such certificate addressed to the Holder of
this Warrant at the address of such Holder as, shown on the books of the
Company.
3.4 SALE OF SECURITIES BELOW SHARE PRICE. (a) If, at any time or
from time to time after the date of this Warrant, and other than pursuant to
the Current Offering, the Company shall issue or sell any shares of Preferred
Stock for a consideration per share less than the Share Price in effect
immediately prior to such issuance or sale, the Share Price shall be adjusted
as of the date of such issuance or sale so that the same shall equal the
price determined by dividing (i) the sum of (A) the number of shares of
Preferred Stock outstanding immediately prior to such issuance or sale
multiplied by the Share Price plus (B) the consideration received by the
Company upon such issuance or sale by (ii) the total number of shares of
Preferred Stock outstanding after such issuance or sale.
(b) If, at any time or from time to time after the date of
this Warrant, and other than pursuant to the Current Offering, the Company
shall issue or sell any rights, options, warrants or other securities
entitling the holders thereof to purchase Preferred Stock or to convert such
securities into Preferred Stock at a price per share (determined by dividing
(i) the total amount, if any, received or receivable by the Company in
consideration of the issuance or sale of such rights, options, warrants or
other securities plus the total amount, if any, payable to the Company upon
exercise or conversion thereof (the "Total Consideration") by (ii) the number
of additional shares of Preferred Stock issuable upon exercise or conversion
of such securities) which is less than the Share Price in effect on the date
of such issuance or sale, the Share Price shall be adjusted as of the date of
such issuance or sale so that the same shall equal the price determined by
dividing (i) the sum of (A) the number of shares of Preferred Stock
outstanding on the date of such issuance or sale multiplied by the Share
Price in effect immediately prior thereto plus (B) the
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<PAGE>
Total Consideration by (ii) the number of shares of Preferred Stock
outstanding on the date of such issuance or sale plus the maximum number of
additional shares of Preferred Stock issuable upon exercise or conversion or
such securities.
3.5 OTHER NOTICES. If at any time:
(a) the Company shall (i) offer for subscription pro rata
to the holders of shares of the Preferred Stock or Common Stock any
additional equity in the Company or other rights; (ii) pay a dividend in
additional shares of the Preferred Stock or Common Stock or distribute
securities or other property to the holders of shares of the Preferred Stock
or Common Stock (including, without limitation, evidences of indebtedness
and equity and debt securities); or (iii) issue securities convertible into,
or rights or Warrants to purchase, securities of the Company (OTHER THAN
STOCK OPTIONS IN THE ORDINARY COURSE OF BUSINESS TO EMPLOYEES PURSUANT TO
AN EMPLOYEE BENEFIT PLAN APPROVED BY THE COMPANY'S STOCKHOLDERS);
(b) there shall be any capital reorganization or
reclassification or consolidation or merger of the Company with, or sale,
transfer or lease of all or substantially all of its assets to another entity;
or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give, by first
class mail, postage prepaid, addressed to the Holder of this Warrant at the
address of such Holder as shown on the books of the Company, (a) at least
fifteen (15) days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such subscription rights,
dividend, distribution or issuance, and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least fifteen (15) days' prior written notice
of the date when the same shall take place if no stockholder vote is required
and at least fifteen (15) days' prior written notice of the record date for
stockholders entitled to vote upon such matter if a stockholder vote is
required. Such notice in accordance with the foregoing clause (a) shall also
specify, in the case of any such subscription rights, the date on which the
holders of shares of Preferred Stock or Common Stock shall be entitled to
exercise their rights with respect thereto, and such notice in accordance
with the foregoing clause (b) shall also specify the date on which the
holders of shares of Preferred Stock or Common Stock shall be entitled to
exchange their shares of Preferred Stock or Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the
case may be.
3.6 MODIFICATION OF ANTI-DILUTION PROVISION. Notwithstanding
anything to the contrary set forth herein, prior to the time all shares of
Preferred Stock shall be deemed automatically converted into shares of Common
Stock, the anti-dilution provisions contained herein relating to the adjustments
in the shares of Common Stock issuable upon conversion of the Shares, to the
extent such provisions are duplicative with the anti-dilution provisions
contained in
6
<PAGE>
the Certificate of Designations establishing the Preferred Stock and thereby
would result in a double adjustment, shall be superceded by the anti-dilution
provisions set forth in such Certificate of Designations. Once the Preferred
Stock has automatically converted into shares of Common Stock then the
anti-dilution provisions contained herein shall no longer be superceded by
the anti-dilution provisions set forth in the Certificate of Designations
establishing the Preferred Stock.
4. CALL RIGHTS. (a) Concurrently with the Company entering into an
underwriting agreement relating to the sale of shares of its Common Stock
pursuant to a registration statement that has become effective under the 1933
Act (an "IPO") the Company or its designee shall have the right (which right
may be exercised on one (1) occasion only) to repurchase all or any portion
of the Warrants or any of the Shares issued as a result of the exercise of
this Warrant. The Company may exercise the call by providing the holder of
the Warrant or the Shares with notice of the exercise thereof (such notice
being referred to as a "Call Notice"). The Company shall, no later than
thirty (30) days after the date of such Call Notice, pay to the holder (i) of
the Warrant an amount in cash for each Share which could have been purchased
pursuant, to the Warrant equal to the Warrant Purchase Price (as defined in
Subsection (b) hereof) and/or (ii) of the Shares issued upon the exercise of
the Warrant an amount in cash for each such Share equal to the Share
Repurchase Price (as defined in Subsection (c) hereof). If the IPO is not
consummated once the Company exercises its right of repurchase such
repurchase will be deemed canceled and thereafter the Company will once again
have the right to repurchase this Warrant and the Shares issuable upon the
exercise hereof. The Company's right to repurchase this Warrant and/or the
Shares issuable upon the exercise hereof may only be exercised and will only
be in effect until June 30, 1999, or such later date as the parties may
mutually agree.
(b) If the IPO Price (as defined in Subsection (d) hereof) is equal
to or less than $20.00 then the "Warrant Repurchase Price" for each Share
which could be purchased pursuant to the Warrant shall be $5.40; PROVIDED,
HOWEVER, if the IPO Price is greater than $20.00 then the "Warrant
Repurchase Price" shall be the sum of (i) $5.40 plus (ii) the product of
(x) the IPO Price minus $20.00 and (y) .27; PROVIDED FURTHER, HOWEVER, if
an event has occurred which requires an adjustment pursuant to Section 3.1
or 3.2 (an "Adjustment Event") and such adjustment would have the effect,
based on the number of Shares then outstanding or the securities, property
and cash into which the Shares are convertible, of reducing the aggregate
amount of consideration payable by the Company to repurchase the Warrant,
then the "Warrant Repurchase Price" shall be automatically adjusted so that
the aggregate consideration payable by the Company to redeem the Warrant
shall be the same immediately after such Adjustment Event as would have
been payable immediately prior to such Adjustment Event.
(c) If the IPO Price (as defined in Subsection (d) hereof) is equal
to or less than $20.00 then the "Share Repurchase Price" shall be $12.50;
PROVIDED, HOWEVER, if the IPO Price is greater than $20.00 then the "Share
Repurchase Price" shall be the sum of (i) $12.50 plus (ii) the product of (x)
the IPO Price minus $20.00 and (y) .27; PROVIDED FURTHER, HOWEVER, if an
Adjustment Event has occurred and such adjustment would have the effect,
based on the number of Shares then outstanding or the securities, property
and cash into which the Shares are convertible, of reducing the aggregate
amount of consideration payable by the Company to repurchase the Shares, then
the
7
<PAGE>
"Share Repurchase Price" shall be automatically adjusted so that the
aggregate consideration payable by the Company to redeem the Shares shall be
the same immediately after such Adjustment Event as would have been payable
immediately prior to such Adjustment Event.
(d) The "IPO Price" shall be the price per share of Common Stock at
which such Common Stock is initially offered for sale to the public in the
IPO.
5. NO VOTING RIGHTS. Except as otherwise provided herein, this Warrant shall
not be deemed to confer upon the Holder any right to vote or to consent to or
receive notice as a stockholder of the Company, as such, in respect of any
matters whatsoever, or any other rights or liabilities as a stockholder,
prior to the exercise hereof.
6. [Intentionally Omitted.]
7. WARRANTS EXCHANGEABLE: LOSS, THEFT, DESTRUCTION. ETC.. This Warrant is
exchangeable, upon surrender hereof by the Holder hereof at the principal
offices of the Company, for new Warrants of like tenor representing in the
aggregate the right to subscribe for and purchase the Shares which may be
subscribed for and purchased hereunder, each such new Warrant to represent
the right to subscribe for and purchase such Shares (not to exceed the
maximum aggregate Shares which may be purchased hereunder) as shall be
designated by such Holder hereof at the time of such surrender. Upon receipt
of evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon delivery of a bond or indemnity satisfactory to the
Company, or, in the case of any such mutilation, upon surrender or
cancellation of this Warrant, the Company will issue to the Holder hereof a
new Warrant of like tenor, in lieu of this Warrant, representing the right to
subscribe for and purchase the Shares which may be subscribed for and
purchased hereunder.
8. LEGENDS; INVESTMENT REPRESENTATIONS. Any certificate evidencing the
securities issued upon exercise of this Warrant shall bear a legend in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE TRANSFERRED EXCEPT (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS
OR (B) UPON RECEIPT BY THE ISSUER OF AN OPINION OF COUNSEL, WHICH OPINION OF
COUNSEL SHALL BEL REASONABLY SATISFACTORY TO THE ISSUER, TO THE EFFECT THAT
SUCH TRANSFER.IS EXEMPT FROM REGISTRATION UNDER THE ACT AND SUCH STATE
SECURITIES LAWS.
8
<PAGE>
9. REGISTRATION RIGHTS. The Holder shall be entitled to participate in the
registration rights, including without limitation all demand and piggy-back
registration rights and all notification rights, granted to the holders of
Preferred Stock pursuant to the Stockholders' Agreement being entered into in
connection with the Current Offering, in the form attached hereto as Exhibit
A (with no changes thereto that are adverse to the interests of the holders
of Preferred Stock from Exhibit A), on the same basis as all other holders of
Preferred Stock thereunder.
10. MISCELLANEOUS. The Company and the Holder shall each pay all of its
respective expenses and other, charges payable in connection with the
preparation, issuance and delivery of this Warrant and all substitute
Warrants other than as set forth in this Section 10. The Holder shall pay all
taxes (other than any issuance taxes, including, without limitation,
documentary stamp taxes, transfer taxes and other governmental charges, which
shall be paid by the Company) in connection with such issuance and delivery
of the Warrants and the Shares.
The Company shall maintain, at the office or agency of the
Company maintained by the Company, books for the registration and transfer of
the Warrant.
11. RESERVATION OF SHARES. The Company will at all times reserve and keep
available, free from preemptive rights, out of the aggregate of its
authorized but unissued (a) Common Stock or its authorized and issued Common
Stock held in its treasury, and (b) Preferred Stock solely for the purpose of
enabling it to satisfy any obligation to issue Shares upon exercise of this
Warrant or shares of Common Stock upon the conversion of the Shares, the
maximum number of shares of Preferred Stock and Common Stock which may then
be deliverable upon the exercise of this Warrant and/or conversion of the
Shares.
The Company or, if appointed, the transfer agent for the
Common Stock (the "Transfer Agent") and every subsequent transfer agent for
any shares of the Company's capital stock issuable upon the exercise of any
of the rights of purchase aforesaid will be irrevocably authorized and
directed at all times to reserve such number of authorized shares as shall
be required for such purpose. The Company, will keep a copy of. this Warrant
on file with the Transfer Agent and with every subsequent transfer agent for
any shares of the Company's capital stock issuable upon the exercise of the
rights of purchase represented by this Warrant. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to the Holder pursuant to Section 3.5 hereof.
The Company covenants that all Shares which may be issued
upon exercise of this Warrant and all shares of. Common Stock and other
securities issued upon conversion of the Shares will, upon issue, be fully
paid, nonassessable, free of preemptive rights and free from all taxes,
liens, charges and security interests with respect to the issue thereof.
12. OBTAINING STOCK EXCHANGE LISTINGS. The Company will, from time to time,
take all actions which may be necessary so that the Shares, immediately upon
their issuance upon the exercise of this Warrant, will be listed on the
principal securities exchanges and markets within the United
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States of America, if any, on which other shares of Preferred Stock (and in
the case of the shares of Common Stock, the Common Stock) are then listed;
provided, however, that this provision will not be construed to require
registration of such Shares or shares of Common Stock except as otherwise
provided in this Agreement and no listing will be required to the extent such
listing would violate applicable laws, regulations and exchange regulations.
13. ADJUSTMENT OF NUMBER OF SHARES ISSUABLE AND EXERCISE PRICE. The number of
Shares issuable upon the exercise of this Warrant (and the shares of Common
Stock issued upon conversion of such Shares) and the Share Price are subject
to adjustment from time to time upon the occurrence of the events enumerated
in Section 3. For purposes of this Warrant, "Preferred Stock" and "Common
Stock" means shares now or hereafter authorized of any class of preferred or
common stock, respectively, of the Company and any other stock of the
Company, however designated, that has the right (subject to any prior rights
of any class or series of preferred stock) to participate in any distribution
of the assets or earnings of the Company without limit as to per share amount.
14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The descriptive headings of the
several paragraphs of this Warrant are inserted for convenience only and do
not constitute a part of this Warrant. This Warrant shall be construed and
enforced in accordance with the laws of the State of Delaware, and the rights
of the parties shall be governed by, the law of such State.
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IN WITNESS WHEREOF, this Warrant Agreement has been executed
as of the 7th day of November, 1997.
WORLDGATE COMMUNICATIONS, INC.
By:
Its: Vice President
CHARTER COMMUNICATIONS, INC.
By:
Its: Senior Vice President
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Exhibit 10.14
Page 1 of 11
WORLDGATE COMMUNICATIONS
1996 STOCK OPTION PLAN
(AMENDED AND RESTATED AS OF JUNE 12, 1998)
The purpose of this 1996 Stock Option Plan (the "Plan") of WorldGate
Communications (the "Company") is to advance the interests of the Company by
encouraging the acquisition of an equity interest in the Company and providing
designated key employees, officers, directors, consultants and advisors to the
Company with the opportunity to receive grants of incentive stock options and
non qualified stock options. The Company believes that the Plan will serve as an
incentive for the participants to contribute materially to the growth of the
Company, thereby benefitting the Company's stockholders and will align the
economic interests of the participants with those of the stockholders.
1. ADMINISTRATION
The Plan shall be administered and interpreted by a committee (the
"Committee") appointed by the board of directors of the Company (the "Board")
consisting of not less than two persons. On and after the effective date
specified in Section 17(b), the Committee shall consist of not less than two
persons appointed by the Board, all of whom shall be "independent or
disinterested persons" as defined under Rule 16b-3 under the Securities Exchange
Act of 1934 (the "Exchange Act") and "outside directors" as defined under
section 162(m) of the Code and related Treasury regulations.
Subject to the provisions of Section 4, the Committee shall have the
sole authority to (i) determine to whom options shall be granted under the Plan
(the "Optionee" or "Optionees"), (ii) determine the type, quantity and terms of
the options to be granted to each Optionee, (iii) determine when the options
will be granted and the duration of the exercise period, including the criteria
for vesting and the acceleration of vesting (if any), (iv) select the "Valuation
Expert," as defined below and (v) make determinations with respect to any other
matters arising under the Plan. Notwithstanding the foregoing, on and after the
effective date specified in Section 17(b), the Committee shall not have the
authority to make grants to Non-Employee Directors, except pursuant to
provisions of the Plan as then in effect that satisfy the requirements for
making exempt grants in accordance with Rule 16b-3 of the Exchange Act.
The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interests in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in its
sole discretion, in the best interest of the Company and in keeping with the
objectives of the Plan and need not be uniform as to similarly situated
individuals.
<PAGE>
Page 2 of 11
Notwithstanding anything herein to the contrary, the Board may exercise
any power or authority of the Committee under the Plan and, in such case, any
reference to the Committee hereunder shall be deemed to include the Board as a
whole.
2. GRANTS
Awards under the Plan shall consist of options intended to qualify as
incentive stock options ("Incentive Stock Options") within the meaning of
section 422 of the Code or options which are not intended to so qualify ("Non
qualified Stock Options") (hereinafter collectively referred to as "Stock
Options"). All Stock Options shall be subject to the terms and conditions set
forth herein and to those other terms and conditions consistent with this Plan
as the Committee deems appropriate and as are specified in writing by the
Committee to the Optionees. Grants under a particular section of the Plan need
not be uniform as among the Optionees.
3. SHARES SUBJECT TO THE PLAN
(a) Subject to the adjustment specified below, the aggregate number of
shares of the Class B Common Stock of the Company, par value $0.01 per share
(the "Company Stock") that have been or may be issued or transferred under the
Plan is one million four hundred thousand shares. Notwithstanding anything in
the Plan to the contrary, during the term of the Plan, the maximum aggregate
number of shares of Company Stock that shall be subject to options granted under
the Plan annually to any one Optionee shall be two hundred thousand shares
(representing approximately 14.4% of the aggregate number of shares that have
been or may be issued or transferred under the Plan.) The shares may be
authorized but unissued shares of Company Stock or reacquired shares of Company
Stock, including shares purchased by the Company on the open market or
otherwise, for purposes of the Plan. If and to the extent options granted under
the Plan terminate, expire, or are canceled, forfeited, exchanged or surrendered
without having been exercised, the shares subject to such options shall again be
available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of Company
Stock outstanding by reason of a stock dividend, recapitalization, stock split,
combination or exchange of such shares, merger, reorganization or consolidation
in which the Company is the surviving corporation, reclassification or change in
par value or by reason of any other extraordinary or unusual events affecting
the outstanding Company Stock as a class without the Company's receipt of
consideration, or if the value of outstanding shares of Company Stock is
substantially reduced due to the Company's payment of an extraordinary dividend
or distribution, the maximum number of shares of Company Stock available for
Stock Options, the maximum number of shares of Company Stock for which any one
Optionee participating in the Plan may be granted over the term of the Plan, the
number of shares covered by outstanding Stock Options, and the price per share
or the applicable market value of such Stock Options, shall be proportionately
adjusted by the Committee to reflect any increase or decrease in the number or
kind of issued shares of Company Stock to preclude the enlargement or dilution
of rights and benefits under such Stock Options; provided, however, that any
fractional shares resulting from such adjustment shall be eliminated. The
adjustments determined by the Committee shall be final, binding and conclusive.
Notwithstanding the foregoing, no adjustment shall be authorized or made
pursuant to this Section to the extent that such authority or adjustment would
cause any Incentive Stock Option to fail to comply with section 422 of the Code.
4. ELIGIBILITY FOR PARTICIPATION
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All employees who hold positions of responsibility and whose
performance, in the judgment of the Committee, can have a significant effect on
the long-term success of the Company ("Employees"), all directors of the Company
who are not also employees of the Company ("Non- Employee Directors") and all
advisors and consultants ("Consultants") whose services, in the judgement of the
Committee, can have a significant effect on the long-term success of the Company
shall be eligible to participate in the Plan. Employees as used herein shall
include employees of the Company's "parent corporation" or "subsidiary
corporations" as those terms are defined in section 424(e) or 424(f) of the
Internal Revenue Code of 1986 (the "Code"), as well as directors of the Company
who are also employees of the Company. Except as provided in Section 6, the
Committee shall select the Employees, Non-Employee Directors and Consultants to
receive Stock Options and determine the number of shares of Company Stock
subject to a particular Stock Option in such manner as the Committee determines.
Nothing contained in this Plan shall be construed to limit the right of
the Company to grant options otherwise in connection with the acquisition, by
purchase, lease, merger, consolidation or otherwise, of the business or assets
of any corporation, firm or association, including options granted to employees
thereof who become Employees of the Company, or for any other proper corporate
purpose.
5. AGREEMENTS WITH OPTIONEES
Each Stock Option made under this Plan shall be evidenced by a letter
to the Optionee containing such terms and conditions as the Committee shall
approve (the "Grant Letter").
6. GRANTING OF OPTIONS
(a) NUMBER OF SHARES. The Committee, in its sole discretion, shall
determine the number of shares of Company Stock that will be subject to each
Stock Option grant.
(b) TYPE OF OPTION AND PRICE. The Committee may grant Incentive Stock
Options, Non qualified Stock Options or any combination of Incentive Stock
Options and Non qualified Stock Options, all in accordance with the terms and
conditions set forth herein; provided, however, that neither Non-Employee
Directors nor Consultants shall be eligible to receive grants of Incentive Stock
Options.
The purchase price of Company Stock subject to a Stock Option shall be
determined by the Committee and may be equal to, greater than, or less than the
fair market value of a share of such Stock on the date such Stock Option is
granted; provided, however, that the purchase price of Company Stock subject to
an Incentive Stock Option shall be equal to, or greater than, the fair market
value of a share of such Stock on the date such Stock Option is granted. Prior
to the effective date specified in Section 17(b) of the Plan, the Committee
shall inform the Optionees as to the fair market value of the Company Stock on a
periodic basis, but not less frequently than once per calendar year.
During such time that the Company Stock is not listed on an established
stock exchange or traded in the over-the-counter-market, including the NASDAQ
National Market System published in the WALL STREET JOURNAL, the "fair market
value" of Company Stock shall be determined
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by an independent firm, I.E., a firm not otherwise engaged in consulting work
for the Company, unless determined otherwise by the Committee, with expertise in
the valuation of business entities and the securities thereof, selected by the
Committee (the "Valuation Expert") or as otherwise determined by the Committee
in good faith based on the best available facts and circumstances. Such
determination of "fair market value" shall be made on a periodic basis, but no
less frequently than once a calendar year. If the Company Stock is listed on an
established stock exchange or traded in the over-the-counter market, as
determined by the Committee, "fair market value" on any date of reference shall
be the closing price of a share of Company Stock (on a consolidated basis) on
the principal exchange or such other over-the counter market on the last
previous day on which a sale is reported.
(c) EXERCISE PERIOD. The Committee shall determine the option exercise
period of each Stock Option. The exercise period shall not exceed ten years from
the date of grant.
(d) VESTING AND EXERCISABILITY OF OPTIONS. Stock Options shall become
vested and exercisable in accordance with the terms and conditions determined by
the Committee, in its sole discretion, and specified the Grant Letter. All
outstanding Stock Options shall become immediately exercisable upon a Change in
Control (as defined herein), unless the Committee, in its sole discretion,
determines otherwise in accordance with Section 9 of the Plan.
(e) MANNER OF EXERCISE. An Optionee may exercise a Stock Option which
has become exercisable by delivering a notice of exercise to the Committee with
accompanying payment of the option price in accordance with Subsection (g)
below. Should a Stock Option become exercisable on and after the effective date
specified in Section 17(b), such notice may instruct the Company to deliver
shares of Company Stock due upon the exercise of the Stock Option to any
registered broker or dealer designated by the Company ("Designated Broker") in
lieu of delivery to the Optionee. Such instructions must designate the account
into which the shares are to be deposited. The Optionee may tender this notice
of exercise, which has been properly executed by the Optionee, and the
aforementioned delivery instructions to any Designated Broker.
(f) TERMINATION OF EMPLOYMENT, DISABILITY OR DEATH.
(1) EMPLOYEES AND CONSULTANTS.
(i) In the event the Optionee during the Optionee's lifetime ceases to
be an Employee or a Consultant for any reason other than death, disability
(within the meaning of Section 22(e)(3) of the Code), retirement (as defined
below), voluntary termination without the consent of the Company, or termination
for cause by the Company (as defined below), any Stock Option which is otherwise
exercisable by the Optionee shall terminate unless exercised within ninety (90)
days of the date on which the Optionee ceases to be an Employee or Consultant
(or within such other period of time as may be specified in the Grant Letter),
but in any event no later than the date of expiration of the option exercise
period. For purposes of this Section 6(f)(1), if an Optionee ceases to be an
Employee or a Consultant for reasons other than voluntary termination without
the consent of the Company or termination for cause, but continues to serve as a
member of the Board, such Optionee's service as a member of the Board shall be
considered as continued employment or service with the Company. In addition, for
purposes of this Section 6(f), a leave of absence at the request, or with the
approval, of the Company shall not be deemed a termination of employment so long
as the period of such leave does not exceed 90 days, or, if longer, so long as
the Optionee's
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right to re-employment with the Company is guaranteed by contract. Any of the
Optionee's Stock Options which are not otherwise vested and exercisable as of
the date on which the Optionee ceases to be an Employee or Consultant shall
terminate as of such date (except as the Committee may otherwise provide in
writing).
(ii) In the event the Optionee ceases to be an Employee or a Consultant
on account of a "termination for cause" by the Company (or the applicable parent
or subsidiary corporation), as determined in accordance with the personnel
policies of the Company (or such corporation) in effect before any Change in
Control of the Company or as determined by a written contract between the
Consultant and the Company, or on account of a voluntary separation from the
Company (or the applicable parent or subsidiary corporation) without the
consent of the Company (or such corporation), any Stock Option held by the
Optionee shall terminate as of the date the Optionee ceases to be an Employee or
a Consultant (except as the Committee may otherwise provide in writing).
(iii) In the event of the death of the Optionee while an Employee or a
Consultant of the Company or within ninety (90) days after (A) termination of
employment or service due to disability (as defined above) or (B) retirement of
an Employee pursuant to a retirement plan maintained by the Company (or the
parent or subsidiary companies) on the Optionee's retirement date (or within
such other period of time as may be specified in the Grant Letter), any Stock
Option which is otherwise exercisable by the Optionee on the date on which the
Optionee ceases to be an Employee or Consultant as aforesaid, shall terminate
unless exercised by the Optionee or the Optionee's personal representative
within one year of the date on which the Optionee ceases to be an Employee or
Consultant (or within such other period of time as may be specified in the Grant
Letter), but in any event no later than the date of the expiration of the option
exercise period.
(iv) Notwithstanding the foregoing provisions, failure to exercise an
Incentive Stock Option within the periods of time prescribed under sections 421
and 422(a) of the Code shall cause the Incentive Stock Option to cease to be
treated as an "incentive stock option" for purposes of sections 421 and 422 of
the Code.
(2) NON-EMPLOYEE DIRECTORS. Upon cessation of service as a Non-
Employee Director for reasons other than retirement or death, only those options
exercisable at the date of cessation of service shall be exercisable by the
Non-Employee Director. Such options shall be exercisable until the first to
occur of: (i) the expiration of the remaining term of the option or (ii) 90 days
after cessation of service of the Non-Employee Director.
Upon the retirement or death of a Non-Employee Director, options shall
be exercisable as follows:
(i) RETIREMENT. Upon retirement as a Non-Employee Director, all options
shall continue to be exercisable during their terms as if such person had
remained a Non-Employee Director.
(ii) DEATH. In the event of the death of a Non-Employee Director while
a member of the Board, or within the period after termination of service during
which the options are exercisable by the Non-Employee Director in accordance
with this Plan, the options
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granted to him shall be exercisable until the first to occur of: (A) the
expiration of the remaining term of the option or (B) one year after the date of
the Non-Employee Director's death, but only to the extent that the Non-Employee
Director would have been entitled to exercise the options had he lived during
such period.
(g) SATISFACTION OF OPTION PRICE. The Optionee shall pay the option
price specified in the Grant Letter in (i) U.S. Dollars by cash, wire transfer
of immediately available funds or certified check payable to the order of the
Company, or (ii) with the approval of the Committee, by delivering shares of
Company Stock owned by the Optionee including Company Stock acquired in
connection with the exercise of a particular Stock Option and having a fair
market value on the date of exercise equal to the option price. The Company may
require the Optionee, in connection with the exercise of a Stock Option, to
provide such information (including, without limitation, the Optionee's address
and taxpayer identification number) as may be necessary to complete any tax
information returns and other tax returns and reports that may be required to
reflect such exercise. The Optionee shall pay the option price and the amount of
withholding tax due, if any, at the time of exercise. Except as otherwise
determined by the Committee, shares of Company Stock shall not be issued or
transferred upon exercise of a Stock Option until the option price is fully paid
and any required withholding is made.
(h) RULE 16b-3 RESTRICTIONS. Unless an Optionee could otherwise
transfer Company Stock issued pursuant to a Stock Option granted hereunder
without incurring liability under Section 16(b) of the Exchange Act, at least
six months must elapse from the date of acquisition of a Stock Option to the
date of disposition of the Company Stock issued upon exercise of such option.
(i) LIMITS ON INCENTIVE STOCK OPTIONS. Each Incentive Stock Option
shall provide that to the extent that the aggregate fair market value of the
Company Stock on the date of the grant with respect to which Incentive Stock
Options are exercisable for the first time by an Optionee during any calendar
year under the Plan or any other stock option plan of the Company or any parent
or subsidiary corporation thereof exceeds $100,000, then, if and to the extent
required by Section 422(d) of the Code or any successor or related provision,
such option as to the excess shall be treated as a Non qualified Stock Option.
An Incentive Stock Option shall not be granted to any Employee who, at the time
of grant, owns stock possessing more than 10 percent of the total combined
voting power of all classes of stock of the Company or parent of the Company,
unless the option price per share is not less than 110% of the fair market value
of Company Stock on the date of grant and the option exercise period is not more
than five years from the date of grant.
(j) OPTIONAL PURCHASE BY THE COMPANY. In the sole discretion of the
Committee, in lieu of the exercise of a Stock Option, the Optionee may be
permitted to transfer the Stock Option to the Company in exchange for a cash
payment equal to the excess of (i) the then fair market value of the shares of
Company Stock subject to the Optionee's outstanding Stock Options over (ii) the
purchase price as specified therein. Notwithstanding the foregoing, if any right
granted pursuant to this Subsection would make any corporate transaction
ineligible for pooling of interests accounting treatment under APB No. 16 that
but for this provision would otherwise be eligible for such accounting
treatment, or is determined by the Committee to be otherwise disadvantageous to
the Company, the Optionee shall not receive a cash payment in lieu of the
exercise of his or her Stock Options.
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7. TRANSFERABILITY OF OPTIONS AND RESTRICTIONS ON ISSUANCE OF COMMON STOCK UPON
EXERCISE OF OPTIONS
(a) TRANSFERABILITY OF OPTIONS. Only the Optionee or his or her
authorized legal representative may exercise rights under a Stock Option. Such
persons may not transfer those rights except by will or by the laws of descent
and distribution or, if permitted under Rule 16b-3 of the Exchange Act and if
permitted in any specific case by the Committee in its sole discretion, pursuant
to a qualified domestic relations order as defined under the Code or Title I of
ERISA or the regulations thereunder. When an Optionee dies, the personal
representative or other person entitled to succeed to the rights of the Optionee
("Successor Optionee") may exercise such rights. A Successor Optionee must
furnish proof satisfactory to the Company of his or her right to receive the
Stock Option under the Optionee's will or under the applicable laws of descent
and distribution.
Notwithstanding the foregoing, the Committee may permit an Optionee to
transfer rights under a Non qualified Stock Option to the Optionee's spouse or a
lineal descendant or to one or more trusts for the benefit of such family
members or to partnerships in which such family members are the only partners (a
"Family Transfer") provided that the Optionee receives no consideration for a
Family Transfer and that the Optionee and the transferee in the Family Transfer
agree to such conditions as the Committee my impose, including, without
limitation, (i) provisions to assure the payment of any taxes required to be
deducted, withheld and/or paid over in connection with the exercise of a Stock
Option, and (ii) acknowledgment that the Stock Options and the exercise thereof
will continue to be subject to the same terms and conditions of the Grant Letter
and this Plan, and any attempt to transfer a Stock Option other than in
accordance with the foregoing shall be void and of no force or effect.
(b) RESTRICTIONS ON ISSUANCE OF COMMON STOCK UPON EXERCISE OF STOCK
OPTIONS. Class B Common Stock of the Company may only be issued to Optionees and
other "permitted transferees," as such terms are defined in the Company's
Certificate of Incorporation, as amended. In the event Company shares are to be
issued, upon the exercise of a Stock Option, (i) to any person other than said
Optionee or other "permitted transferee," or (ii) to any person subsequent to a
Mandatory Conversion Election, such shares of the Company shall be shares of
Class A Common Stock and not shares of Class B Common Stock notwithstanding the
provision in Section 3 to the contrary.
8. CHANGE IN CONTROL OF THE COMPANY
As used herein, a "Change in Control" shall be deemed to have occurred
if:
(a) As a result of any transaction, any one stockholder other than an
existing stockholder as of the effective date specified in Section 17(a) of the
Plan (or a beneficiary or the estate thereof), becomes a beneficial owner, as
defined below, directly or indirectly, of securities of the Company representing
more than 50% of the common stock of the Company or the combined voting power of
the Company's then outstanding securities;
(b) A liquidation or dissolution of or the sale of all or substantially
all of the Company's assets occurs; or
(c) On or after the effective date specified in Section 17(b):
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(1) As a result of a tender offer, stock purchase, other stock
acquisition, merger, consolidation, recapitalization, reverse split, or sale or
transfer of assets, any person or group (as such terms are used in and under
Section 13(d) of the Exchange Act) other than an existing stockholder as of the
effective date specified in Section 17(a) of the Plan (or a beneficiary of the
estate thereof), becomes the beneficial owner (as defined in Rule 13-d under the
Exchange Act), directly or indirectly, of securities of the Company representing
more than 40% of the common stock of the Company, or the combined voting power
of the Company's then outstanding securities; or
(2) During any period of two consecutive years, individuals who at the
beginning of such period constitute the board of directors cease for any reason
to constitute at least a majority thereof unless the election, or the nomination
for election by the Company's shareholders, of each new director was approved by
a vote of at least 2/3 of the directors then still in office who were directors
at the beginning of the period.
9. CONSEQUENCES OF A CHANGE IN CONTROL
(a) NOTICE. Unless the Committee otherwise determines:
(1) If a Change of Control will occur pursuant to a transaction
approved by the stockholders of the Company or by the Board (if stockholder
action is not required), then, not later than ten (10) days after the approval
by the stockholders of the Company (or the approval by the Board, if stockholder
action is not required) of such Change of Control, the Company shall give each
Optionee with any outstanding Stock Options written notice of such proposed
Change in Control.
(2) If a Change of Control occurs without approval by the stockholders
or the Board, then, not later than ten (10) days after such Change in Control,
the Company shall give each Optionee with any outstanding Stock Options written
notice of the Change of Control.
(b) EXERCISE RIGHT. In connection with the Change in Control and
effective only upon such Change in Control, unless the Committee determines
otherwise, each Optionee shall thereupon have the right, within twenty (20) days
after such written notice is sent by the Company, (the "Election Period"), to
exercise in full any or all of such Optionee's outstanding Stock Options
(whether the right to exercise such Stock Option has then accrued or the right
to exercise such Stock Options will occur or has occurred upon the Change in
Control).
(c) TERMINATION OF STOCK OPTION. If an Optionee does not exercise the
Optionee's outstanding Stock Options in a timely manner in accordance with
Subsection (b) in connection with a Change in Control where the Company is not
the surviving corporation(or survives only as a subsidiary of another
corporation), the Optionee's Stock Options shall terminate as of the Change of
Control. Notwithstanding the foregoing, a Stock Option will not terminate if
assumed by the surviving or acquiring corporation, or its parent, upon a merger
or consolidation and, with respect to an Incentive Stock Option, the assumption
of the Stock Option occurs under circumstances which are not deemed a
modification of the option with the meaning of Sections 424(a) and 424(h)(3)(A)
of the Code.
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(d) ACCOUNTING AND TAX LIMITATIONS. Notwithstanding the foregoing, if
the termination of the Stock Options described in Subsection (c) would make the
applicable Change in Control ineligible for pooling of interest accounting
treatment under APB No. 16, and, but for such provision, the Change of Control
would otherwise qualify for such treatment, each affection Optionee shall
receive a replacement or substitute stock option issued by the surviving or
acquiring corporation.
10. AMENDMENT AND TERMINATION OF THE PLAN
(a) AMENDMENT. The Board, by written resolution, may amend or terminate
the Plan at any time; provided, however, that any amendment that increases the
aggregate number (or individual limit for any single Optionee) of shares of
Company Stock that may be issued or transferred under the Plan (other than by
operation of Section 3(b)), or modifies the requirements as to eligibility for
participation in the Plan, shall be subject to approval by the stockholders of
the Company, and provided, further, that after the effective date specified in
Section 17(b) the Board shall not amend the Plan without stockholder approval if
such approval is required by Rule 16b-3 of the Exchange Act or section 162(m) of
the Code.
(b) TERMINATION OF PLAN. The Plan shall terminate on the day before the
tenth anniversary of its effective date unless terminated earlier by the Board
or unless extended by the Board with the approval of the stockholders.
(c) TERMINATION AND AMENDMENT OF OUTSTANDING STOCK OPTIONS. A
termination or amendment of the Plan that occurs after a Stock Option is granted
shall not materially impair the rights of an Optionee unless the Optionee
consents or unless the Committee acts under Section 18(b) hereof. The
termination of the Plan shall not impair the power and authority of the
Committee with respect to an outstanding Stock Option. Whether or not the Plan
has terminated, an outstanding Stock Option may be terminated or amended under
Section 18(b) hereof or may be amended by agreement of the Company and the
Optionee consistent with the Plan.
(d) GOVERNING DOCUMENT. The Plan shall be the controlling document. No
other statements, representations, explanatory materials, or examples, oral or
written, may amend the Plan in any manner. The Plan shall be binding upon and
enforceable against the Company, its successors and assigns and the Optionees
and their assigns.
11. FUNDING OF THE PLAN
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Stock Options under this Plan. In no event
shall interest be paid or accrued on any Stock Option, including unpaid
installments of Stock Options.
12. RIGHTS OF INDIVIDUALS
Nothing in this Plan shall entitle any Employee, Non-Employee Director,
Consultant or other person to any claim or right to be granted a Stock Option
under this Plan. Neither this Plan nor any action taken hereunder shall be
construed as giving any Employee, Non-Employee Director,
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or Consultant any rights to be retained by or in the employ of the Company or
any other employment rights.
13. NO FRACTIONAL SHARES
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Stock Option. The Committee shall determine whether
cash, other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
14. WITHHOLDING OF TAXES
The Optionee or other person receiving shares of Company Stock upon the
exercise of a Stock Option shall be required to pay to the Company the amount of
any federal, state or local taxes which the Company is required to withhold with
respect to the exercise of such Stock Options and the Company shall have the
right to deduct from other wages paid to the Optionee by the Company (including
through the withholding of Company Stock purchased upon the exercise of a Stock
Option, if then authorized by the Committee and applicable law) the amount of
any tax required to be deducted, withheld or paid over with respect to such
Stock Options which is not otherwise paid. The Company's obligation to make any
delivery or transfer of any shares shall be conditioned on the Optionee's
compliance, to the Company's satisfaction, with any withholding requirements.
15. REQUIREMENTS FOR ISSUANCE OF SHARES
No Company Stock shall be issued or transferred upon the exercise of
any Stock Option hereunder unless and until all requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Stock Option made to any Optionee hereunder on such Optionee's undertaking
in writing to comply with such restrictions on his subsequent disposition of
such shares of Company Stock as the Committee shall deem necessary or advisable
as a result of any provisions of such grant or any applicable law, regulation or
official interpretation thereof, and certificates representing such shares may
be legended to reflect any such restrictions. Certificates representing shares
of Company Stock issued under the Plan will be subject to such stop-transfer
orders and other restrictions as may be applicable under such laws, regulations
and other obligations of the Company, including any requirement that a legend or
legends be placed thereon.
16. HEADINGS
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
17. EFFECTIVE DATE
(a) EFFECTIVE DATE OF THE PLAN. Subject to the approval of the
Company's stockholders, this Plan shall be effective as of December 5, 1996.
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(b) EFFECTIVENESS OF SECTION 16 AND SECTION 162(m) PROVISIONS. The
provisions of the Plan that refer to, or are applicable to persons subject to,
section 16 of the Exchange Act or section 162(m) of the Code shall be effective,
if at all, upon registration of the Company Stock under section 12(g) of the
Exchange Act, and shall remain effective thereafter for so long as such stock is
so registered.
18. MISCELLANEOUS
(a) SUBSTITUTE GRANTS. The Committee may make a grant to an employee of
another corporation who becomes an Employee by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or liquidation
involving the Company or any of its subsidiaries in substitution for a stock
option or restricted stock grant granted by such corporation ("Substituted Stock
Incentives"). The terms and conditions of the substitute grant may vary from the
terms and conditions required by the Plan and from those of the Substituted
Stock Incentives. The Committee shall prescribe the provisions of the substitute
grants.
(b) COMPLIANCE WITH LAW. The Plan, the exercise of Stock Options and
the obligations of the Company to issue or transfer shares of Company Stock
under Stock Options shall be subject to all applicable laws and to approvals by
an governmental or regulatory agency as may be required. With respect to persons
subject to section 16 of the Exchange Act, it is the intent of the Company that
the Plan and all transactions under the Plan comply with all applicable
provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee
may revoke any Stock Option if it is contrary to law or modify a Stock Option to
bring it into compliance with any valid and mandatory government regulation. The
Committee may also adopt rules regarding the withholding of taxes on payments to
Optionees. The Committee may, in its sole discretion, agree to limit its
authority under this Section.
(c) OWNERSHIP OF STOCK. An Optionee or Successor Optionee shall have no
rights as a stockholder with respect to any shares of Company Stock covered by a
Stock Option until the shares are issued or transferred to the Optionee or
Successor Optionee on the stock transfer records of the Company.
(d) GOVERNING LAW. The validity, construction, interpretation and
effect of the Plan and Grant Letters issued under the Plan shall exclusively be
governed by and determined in accordance with the law of the Commonwealth of
Pennsylvania.
(e) GENDER AND NUMBER. In this Plan (unless the context requires
otherwise), the masculine, feminine, and neuter genders and the singular and the
plural include one another.
(f) NOTICE. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given upon delivery, if delivered
in person, or on the third business day after mailing, if mailed by registered
or certified mail, return receipt requested, addressed in the case of the
Company, to the President, at the last principal address of record for the
Company; to the Optionee, at the Optionee's last address as reflected on the
books and records of the Company; or in each case, to such other address as may
be designated to the Company or the Optionee from time to time as provided
above.
<PAGE>
Exhibit 10.15
June 15, 1998
Thomas Baxter
Evercore Partners, Inc.
65 East 55th Street
New York, NY 10022
Dear Tom:
As we have discussed, I would like to invite you to join the board of directors
of WorldGate Communications, Inc., to fill a currently vacant position on the
board. Subject to confirmation by the current directors, I would propose that
your appointment as a director be effective as of our July 24, 1998, meeting.
The proposed director compensation will be as follows:
1. The grant of an option under and subject to the terms and conditions of
WorldGate's 1996 Stock Option Plan (a copy of which is attached) to purchase
10,000 shares of WorldGate's Class A common stock at a per share price
equivalent to the fair market value of a share of such stock on the date the
option is granted (i.e., the date of your appointment.) This option will vest in
four equal annual installments commencing with the first anniversary of your
appointment as a director.
2. A stipend of U.S. $1,000., plus reimbursement for reasonable travel expenses
associated therewith, for your attendance in person of a scheduled meeting of
the board of directors (committee meetings which are held on the same day as a
meeting of the full board will not be separately compensable.)
As previously indicated the next board of directors meeting will be held on July
24, 1998, beginning at 10:00 AM, and your attendance would be appreciated.
In order to submit your appointment to the board, I will need written
confirmation of your willingness to accept this appointment (for this purpose,
please sign a copy of this letter at the place indicated below), as well as a
short biography indicating your birth date as well as a summary of your
professional experience over at least the last five years. I will also need to
know the names of any public companies for which you currently or in the past
five years have served as a director.
I will look forward to your appointment and working with you as a WorldGate
director.
Sincerely,
Hal Krisbergh
CEO, WorldGate Communications, Inc.
<PAGE>
I hereby indicate my willingness to serve as a director of WorldGate
Communications, Inc.
/s/ Thomas G. Baxter 7/21/98
-------------------------------- ------------
Thomas G. Baxter Date
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WORLDGATE COMMUNICATIONS, INC.,
FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
<PAGE>
FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
THIS FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT (this
"AGREEMENT") is made and entered into as of the 2nd day of September, 1998, by
and among WorldGate Communications, Inc., a Delaware corporation (the
"COMPANY"), Hal Krisbergh ("KRISBERGH") and David Wachob ("WACHOB" and,
collectively with Krisbergh, the "FOUNDING STOCKHOLDERS"), AMP Incorporated,
Motorola, Inc. ("MOTOROLA"), Alan Gerry, Citicorp ("CITICORP"), Adtec Limited
Partnership, Advent Crown Fund, C.V., Digital Media & Communications, L.P. and
Advent Partners Limited Partnership, Needham Capital SBIC, L.P., Needham Group
Investors I, L.L.C., Paul Kagan, Scientific-Atlanta, Inc., and General
Instrument Corporation (formerly NextLevel Systems, Inc.) (collectively, the
"SERIES A STOCKHOLDERS", and together with the Founding Stockholders, the
"INITIAL STOCKHOLDERS"), the holders of Series B Preferred Stock (as hereinafter
defined) set forth on Schedule I hereto (the "Series B Stockholders"), the
persons or entities who purchase Series C Preferred Stock (as hereinafter
defined) and become signatories to this Agreement on or before the First Closing
(as hereinafter defined) to be set forth on SCHEDULE II hereto and who purchase
Series C Preferred Stock and become signatories hereto on or before Subsequent
Closings (as hereinafter defined) to be set forth on SCHEDULE III hereto
(together with any other person acquiring Series C Preferred Stock hereunder,
the "SERIES C STOCKHOLDERS"), BT Alex. Brown, those Management Stockholders (as
defined herein) identified on SCHEDULE IV hereto, those Strategic Partners (as
defined herein) receiving Strategic Partner Securities (as defined herein) set
forth on SCHEDULE V hereto, and those persons receiving shares under the
Employee Stock Purchase Plan (as defined herein) to be set forth on SCHEDULE VI
hereto. The Initial Stockholders, the Series B Stockholders, the Series C
Stockholders,, the Management Stockholders, and BT Alex. Brown are referred to
hereinafter as a "STOCKHOLDER" and collectively as the "STOCKHOLDERS." The
Series A Stockholders, the Series B Stockholders and the Series C Stockholders
are sometimes referred to hereinafter as a "PREFERRED STOCKHOLDER" and
collectively as the "PREFERRED STOCKHOLDERS."
RECITALS
WHEREAS, the parties hereto other than the Series C
Stockholders are parties to a Stockholders' Agreement, dated as of November 24,
1997 (the "Original Stockholders Agreement");
WHEREAS, certain of the Series C Stockholders and the Company
are parties to a Stock Purchase Agreement (the "STOCK PURCHASE AGREEMENT") dated
as of the date hereof, whereby the Series C Stockholders' obligation to purchase
the Series C Preferred Stock is conditioned upon the amendment and restatement
of the Original Stockholders Agreement to include Series C Stockholders as
provided herein;
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, and, intending to be legally bound, the parties
hereto agree as follows:
<PAGE>
ARTICLE I CERTAIN DEFINITIONS; TERMINATION OF AGREEMENTS;
RESTRICTIONS ON TRANSFER
SECTION 1.1 CERTAIN DEFINITIONS. In addition to those terms
defined elsewhere in this Agreement, as used in this Agreement, the following
terms shall have the respective meanings set forth below:
(a) "ALEX. BROWN" shall mean BT Alex. Brown.
(b) "ALEX. BROWN WARRANTS" shall mean the five year
noncancelable warrants to purchase up to 72,849 shares of the Series B Preferred
Stock issued to Alex. Brown by the Company.
(c) "BYLAWS" shall mean the bylaws of the Company, as amended
from time to time.
(d) "CERTIFICATE OF INCORPORATION" shall mean the Company's
Restated Certificate of Incorporation as filed with the Secretary of State of
the State of Delaware on June 12, 1998, as amended on September 2, 1998 and as
further amended from time to time.
(e) "COMMISSION" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(f) "COMMON STOCK" refers to the Company's Class A Common
Stock, par value $.01 per share, and Class B Common Stock, par value $.01 per
share.
(g) "CO-SALE SECURITIES" shall mean (i) shares of Common Stock
issued pursuant to the conversion of the Preferred Shares including the
conversion of the Series B Warrant Shares and the Strategic Partner Shares, and
(ii) any Common Stock issued as a dividend or other distribution with respect to
or in exchange for or in replacement of the shares referenced in clause (i)
above.
(h) "EMPLOYEE STOCK PURCHASE PLAN" shall have the meaning set
forth in SECTION 4.2.
(i) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(j) "FIRST CLOSING" shall mean the first closing of the sale
of shares of the Series C Preferred Stock pursuant to the Series C Offering.
(k) "HOLDERS" shall mean, collectively, the Agent, any
Strategic Partner, and any Preferred Stockholder who holds Registrable
Securities and any holder of Registrable Securities to whom the registration
rights conferred by this Agreement have been transferred in compliance with
SECTION 7.10.
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(l) "INITIAL PUBLIC OFFERING" shall mean the initial firm
commitment underwritten public offering of the Company's Common Stock pursuant
to a registration statement under the Securities Act.
(m) "MANAGEMENT STOCKHOLDER" means any person (other than the
Company) that is a party to the Management Stockholders' Agreement.
(n) "MANAGEMENT STOCKHOLDERS' AGREEMENT" means the Management
Shareholders' Agreement, dated as of December 4, 1996, by and among the Company,
the Founding Stockholders and the other Management Stockholders, as amended and
in effect on the date hereof.
(o) "ORIGINAL CONVERSION STOCK" shall mean that number of
Preferred Shares convertible into the total number of shares of Common Stock
issuable upon conversion of the Preferred Shares issued as of the final
Subsequent Closing.
(p) "ORIGINAL SERIES A PURCHASE PRICE" means $4.395 per share
of Series A Preferred Stock.
(q) "ORIGINAL SERIES B PURCHASE PRICE" means $7.10 per share
of Series B Preferred Stock.
(r) "ORIGINAL SERIES C PURCHASE PRICE" means the lowest
average cash consideration per share of Series C Preferred Stock paid to the
Company by any of the purchasers thereof upon original issuance thereof, as
adjusted from time to reflect the issuance of any additional shares of Series C
Preferred Stock for cash consideration per share less than the prevailing
Original Series C Purchase Price.
(s) "PREFERRED SHARES" shall mean the Series A Preferred
Stock, the Series B Preferred Stock and the Series C Preferred Stock..
(t) "REGISTRATION EXPENSES" shall mean all expenses incurred
by the Company in complying with ARTICLE VII (other than the underwriting
discounts and commissions), including, without limitation: (i) all registration
and filing fees (including all expenses incident to filing with the National
Association of Securities Dealers, Inc.); (ii) the fees and expenses of
complying with securities and blue sky laws; (iii) expense allowances of the
underwriters; (iv) printing expenses; (v) fees and disbursements of Company
counsel; and (vi) the fees and expenses of the Company's independent public
accountants.
(u) "REGISTRABLE SECURITIES" shall mean, on any date: (i)
shares of Common Stock issued or issuable pursuant to the conversion of the
Preferred Shares; (ii) shares of Common Stock issued or issuable pursuant to the
conversion of the Series B Warrant Shares and Strategic Partner Shares; (iii)
shares of Common Stock owned by the Management Stockholders; and (iv) any Common
Stock or other security exchangeable or convertible into Common Stock issued as
a dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in clauses (i) through (iv) above;
PROVIDED, HOWEVER, that Registrable Securities shall not include any shares of
Common Stock (x) which are then already registered, (y) which have been sold to
the public either pursuant to a registration under the Securities Act or
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Rule 144 or (z) so long as the Common Stock is listed on the New York Stock
Exchange, the American Stock Exchange or the NASDAQ National Market, which can
be sold pursuant to Rule 144 under the Securities Act without restrictions as a
result of volume limitations.
(v) The terms "REGISTER," "REGISTERED" and "REGISTRATION"
shall refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act, and the declaration or ordering
of the effectiveness of such registration statement.
(w) "RULE 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(x) "RULE 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor rule that may be promulgated by the Commission.
(y) "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(z) "SELLING EXPENSES" shall mean all underwriting discounts
and commissions applicable to the sale of Registrable Securities and fees and
disbursements of counsel for any holder of Registrable Securities.
(aa) "SERIES A CONVERSION STOCK" shall mean the Common Stock
issuable upon conversion of the outstanding Series A Preferred Stock.
(ab) "SERIES A PREFERRED STOCK" shall mean the Series A
Convertible Preferred Stock, par value $.01 per share, of the Company.
(ac) "SERIES B CONVERSION STOCK" shall mean the Common Stock
issuable upon conversion of the outstanding Series B Preferred Stock.
(ad) "SERIES B PREFERRED STOCK" shall mean the Series B
Convertible Preferred Stock, par value $.01 per share, of the Company,
including the Series B Warrant Shares and Strategic Partner Shares.
(ae) "SERIES B WARRANT SHARES" shall mean the shares of
Series B Preferred Stock issued or issuable upon exercise of the
Alex. Brown Warrants."
(af) "SERIES C OFFERING" shall mean the Company's offering of
Series C Preferred Stock pursuant to its Private Placement Memorandum
dated July 13, 1998, as amended or supplemented from time to time.
(ag) "SERIES C CONVERSION STOCK" shall mean the Common Stock
issuable upon conversion of the outstanding Series C Preferred Stock.
(ah) "SERIES C PREFERRED STOCK" shall mean the Series C
Convertible
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Preferred Stock, par value $.01 per share, of the Company.
(ai) "SPECIAL REGISTRATION STATEMENT" means a registration
statement on Forms S-8 or S-4 or any successor form or other
registration statement relating to an offering to the Company's
employees, or to its security holders in connection with a business
combination.
(aj) "STRATEGIC PARTNER" shall have the meaning set forth
in Section 4.2.
(ak) "STRATEGIC PARTNER SECURITIES" shall mean the Charter
Warrant and the options or warrants to purchase Series B Preferred
Stock issued to the Company's Strategic Partners pursuant to Section
4.2.
(al) "STRATEGIC PARTNER SHARES" shall mean the shares of
Series B Preferred Stock issued or issuable upon exercise of the
Strategic Partner Securities.
(am) "SUBSEQUENT CLOSINGS" shall mean any one or more closings
of the Series C Offering held after the First Closing.
SECTION 1.2 TERMINATION. The parties hereto who are parties to
the Original Stockholders' Agreement hereby covenant and agree that the Original
Stockholders' Agreement is hereby superseded and replaced in their entirety by
this Agreement.
SECTION 1.3 RESTRICTIONS ON TRANSFER.
(a) Each Holder agrees not to make any disposition of all or
any portion of the Preferred Shares or Registrable Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this SECTION 1.3, provided and to the extent such Section is then applicable,
and:
(i) there is then in effect a registration
statement under the Securities Act covering such proposed disposition and such
disposition is made in accordance with such registration statement; or
(ii) such Holder shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed disposition
and, if reasonably requested by the Company, such Holder shall have furnished
the Company with an opinion of counsel, reasonably satisfactory to the Company,
that such disposition will not require registration of such shares under the
Securities Act. It is agreed that the Company will not require opinions of
counsel or prior notice for transactions made pursuant to Rule 144.
(iii) notwithstanding the provisions of
paragraphs (i) and (ii) above, at any time after 6 months from the date Holder
acquired the Preferred Shares or Registrable Securities proposed to be
transferred, no such registration statement or opinion of counsel shall be
necessary for a transfer of such securities by a Holder (A) which is (X) a
partnership to its partners or retired partners in accordance with partnership
interests, (Y) a corporation to its shareholders in accordance with their
interest in the corporation, (Z) a limited liability company
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<PAGE>
to its members or former members in accordance with their interest in the
limited liability company, or (B) by gift to a family member of such Holder or
trust for the benefit of such individual Holder or any of such Holder's family
members, provided the transferee will be subject to the terms of this SECTION
1.3 to the same extent as if such transferee were an original Holder hereunder.
Notwithstanding anything to the contrary contained in this SECTION 1.3, a
Founding Stockholder may transfer his securities provided he complies with
ARTICLE III.
(b) Each certificate representing Preferred Shares and
Registrable Securities shall (unless otherwise permitted by the provisions of
this Agreement), in addition to any other legends required pursuant this
Agreement, be stamped or otherwise imprinted with legends substantially similar
to the following (in addition to any legend required under applicable state
securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY
APPLICABLE STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR
ASSIGNED, AND THE COMPANY IS NOT REQUIRED TO GIVE EFFECT TO ANY
ATTEMPTED SALE, TRANSFER OR ASSIGNMENT, EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT COVERING SUCH SECURITIES UNDER THE ACT
AND ANY APPLICABLE STATE SECURITIES LAWS, (ii) IN A TRANSACTION
PERMITTED BY RULE 144 PROMULGATED UNDER THE ACT AND AS TO WHICH THE
COMPANY HAS RECEIVED REASONABLY SATISFACTORY EVIDENCE OF COMPLIANCE
WITH THE PROVISIONS OF RULE 144, (iii) TO A PERSON WHOM THE SELLER
REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A PROMULGATED UNDER THE ACT PURCHASING FOR ITS OWN
ACCOUNT OF FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER THAT IS
AWARE THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A PROMULGATED UNDER THE ACT, (iv) PURSUANT TO
OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED
STATES WITHIN THE MEANING OF REGULATION S, PURSUANT TO RULE 904 OF
REGULATION S, OR (v) UPON RECEIPT OF A LEGAL OPINION RENDERED BY
COUNSEL (WHO MAY BE AN EMPLOYEE OF THE PARTY FOR WHOM OR ON WHOSE
BEHALF THE OPINION IS BEING RENDERED) REASONABLY SATISFACTORY TO THE
COMPANY TO THE EFFECT THAT THE TRANSACTION DOES NOT REQUIRE
REGISTRATION UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THE PRESENTATION OF THIS CERTIFICATE TO THE TRANSFER AGENT MORE THAN
TWO YEARS AFTER THE DATE OF ISSUANCE SHALL BE DEEMED A REPRESENTATION
BY THE HOLDER THAT THE HOLDER HAS BEEN THE BENEFICIAL OWNER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE FOR AT LEAST TWO YEARS AND
IS FREE TO SELL THE SECURITIES UNDER RULE 144(k) AND ANY APPLICABLE
STATE SECURITIES LAWS.
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THE VOTING, SALE, TRANSFER, ASSIGNMENT, PLEDGE OR ENCUMBRANCE OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO THE
TERMS AND CONDITIONS OF A STOCKHOLDERS' AGREEMENT AMONG THE COMPANY AND
CERTAIN HOLDERS OF OUTSTANDING CAPITAL STOCK OF THE COMPANY. COPIES OF
SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY.
(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any Holder thereof if the Holder shall
have obtained an opinion of counsel at such Holder's expense (which counsel may
be counsel to the Company) reasonably acceptable to the Company to the effect
that the securities proposed to be disposed of may lawfully be so disposed of
without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with respect
to such securities shall be removed upon receipt by the Company of an order of
the appropriate blue sky authority authorizing such removal.
ARTICLE II ELECTION OF DIRECTORS
SECTION 2.1 ELECTION OF DIRECTORS.
(a) Each Stockholder and Holder shall use his or its best
efforts to cause the Company's Board of Directors (the "BOARD OF DIRECTORS") to
consist of seven (7) members, and shall vote all shares of capital stock
presently owned or hereafter acquired by him or it at any meeting of the
stockholders of the Company called and held for such purpose, and shall sign any
consent of stockholders presented for such purpose. In addition, each
Stockholder and Holder shall vote all shares of capital stock of the Company
presently owned or hereafter acquired by such Stockholder or Holder in the
election of directors as follows:
(i) to cause and maintain the election to the Board of
Directors of two (2) designated representatives of Krisbergh
(the "FOUNDING DIRECTORS"), one of whom shall be Krisbergh and
the other of whom shall be Wachob or such other person as is
designated by Krisbergh; provided, that if at any time
Krisbergh beneficially owns less than 20% (as such number may
have been adjusted in accordance with the Certificate of
Incorporation) of the shares of Common Stock originally issued
to him, then Krisbergh shall no longer have the right to
appoint the Founding Directors he would otherwise be entitled
to appoint and both such Founding Directors shall thereafter
be elected by the holders of the Company's voting capital
stock in accordance with law and the Certificate of
Incorporation and Bylaws; and
(ii) to cause and maintain the election to the Board of
Directors of two (2) designated representatives of the Series
A Stockholders (the "SERIES A
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DIRECTORS") one (1) of whom shall be a representative of
Motorola, and the remaining one (1) of whom shall be
designated by the Series A Stockholders other than Motorola
holding a majority of the outstanding shares of Series A
Preferred Stock (excluding for purposes of such vote the
"EXCESS CITICORP STOCK" (as defined in Section 2.1(e)) and the
Series A Preferred Stock held by Motorola); PROVIDED, that if
at any time Motorola holds less than 50% (as such number may
have been adjusted in accordance with the Certificate of
Incorporation) of the shares of Series A Preferred Stock
originally issued to it, then Motorola shall no longer have
the right to designate one (1) Series A Director, and such
director shall thereafter be elected by the Series A
Stockholders holding a majority of the outstanding shares of
Series A Preferred Stock (excluding for purposes of such vote
the Excess Citicorp Stock); and FURTHER PROVIDED, that (A) if
at any time the Series A Stockholders in the aggregate hold
less than 50% (as such number may have been adjusted in
accordance with the Certificate of Incorporation) of the
shares of Series A Preferred Stock originally issued to them
and Motorola holds less than 50% (as such number may have been
adjusted in accordance with the Certificate of Incorporation)
of the shares of Series A Preferred Stock originally issued to
it, then the Series A Stockholders shall no longer have the
right to appoint one (1) of the Series A Directors, and such
director shall thereafter be elected by the holders of the
Company's voting capital stock in accordance with law and the
Certificate of Incorporation and Bylaws, and (B) if at any
time the Series A Stockholders hold in the aggregate less than
25% (as such number may have been adjusted in accordance with
the Certificate of Incorporation) of the shares of Series A
Preferred Stock originally issued to them, then the Series A
Stockholders shall no longer have the right to appoint the
second Series A Director, and such director shall thereafter
be elected by the holders of the Company's voting capital
stock in accordance with law and the Certificate of
Incorporation and Bylaws;
(iii) to cause and maintain the election to the Board of
Directors of one (1) representative (the "SERIES B DIRECTOR")
designated by the Series B Stockholders holding a majority of
the outstanding shares of Series B Preferred Stock; PROVIDED,
that if at any time the Series B Preferred Stock outstanding
represents less than 25% (as such number may have been
adjusted in accordance with the Certificate of Incorporation)
of the Series B Preferred Stock issued and outstanding as of
December 31, 1997, then the Series B Stockholders shall no
longer have the right to designate the Series B Director, and
such director shall thereafter be elected by the holders of
the Company's voting capital stock in accordance with law and
the Certificate of Incorporation and Bylaws; and
(iv) to cause and maintain the election to the Board of
Directors of two (2) persons who shall be independent business
persons of recognized standing in the
telecommunications/media/consumer technology industry
designated by Krisbergh (unless and until Krisbergh
beneficially owns less than 20%) (as such number may have been
adjusted in accordance with the Certificate of Incorporation)
of the shares of Common Stock originally issued to him, at
which time the Company's Chief Executive Officer shall
thereafter designate such
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persons) with the concurrence (which shall not be unreasonably
delayed or withheld) of the holders of a majority of the
shares of Series A Conversion Stock and Series B Conversion
Stock voting together as a class (the "INDEPENDENT DIRECTORS")
(excluding for the purposes of such vote the Excess Citicorp
Stock); PROVIDED, that if at any time the total shares of
Series A Conversion Stock and Series B Conversion Stock
represent less than 50% (as such number may have been adjusted
in accordance with the Certificate of Incorporation) of the
shares of Series A Conversion Stock and Series B Conversion
Stock outstanding as of the final Subsequent Closing, then the
concurrence of such holders shall no longer be required with
respect to the designation of the Independent Directors.
(b) The Company shall use its best efforts to cause the
nomination for election to the Board of Directors of the individuals set forth
in SECTION 2.1(a) and, each Stockholder, in addition to the above requirements,
shall take all other action necessary from time to time (including, without
limitation, the calling of special meetings, the removal of directors, the
filling of vacancies on the Board of Directors, the waiving of notice and
attendance at meetings) to maintain the membership of the Board of Directors as
provided in SECTION 2.1(a). The Series B Director and at least one (1) Series A
Director shall also each serve as a member of any nominating, compensation,
stock option or audit committee of the Board of Directors.
(c) Motorola may, at any time upon prior notice to the
Company, appoint an alternate person to attend any meeting of the Board of
Directors to act as an observer on its behalf if its designated representative
is unavailable.
(d) In addition to the above, any Series B Stockholder owning
more than 20% of the aggregate number of shares of Series B Preferred Stock, and
any Series A Stockholder holding at least 113,765 shares of Series A Preferred
Stock (as such number may have been adjusted in accordance with the Certificate
of Incorporation)(each, an "OBSERVING INVESTOR") shall be entitled to have one
(1) observer attend each meeting of the Board of Directors (subject to the
ability of the Board of Directors to meet in closed session in instances of
potential conflicts of interest), and each such observer shall be given notice
of each meeting by the Company in accordance with the Company's Bylaws and
Certificate of Incorporation and shall be provided with copies of all materials
distributed to the Board of Directors in connection with such meeting as if such
observer were a member of the Board of Directors.
(e) The term "EXCESS CITICORP STOCK" as used herein means that
number of shares of Series A Preferred Stock held by Citicorp that constitutes
"EXCESS CITICORP VOTING SECURITIES," as such term is defined in that certain
letter agreement between the Company and Citicorp dated December 11, 1996. The
Company shall, upon the written request of any Stockholder, advise such
Stockholder as to the number of Excess Citicorp Voting Securities.
SECTION 2.2 VACANCIES AND REMOVAL. Each of the directors
designated in Section 2.1(a) shall be elected at any annual or special meeting
of stockholders (or by written consent in lieu of a meeting of stockholders) and
shall serve until such director's successor is elected and qualified or until
such director's earlier death, resignation or removal. The persons entitled to
name a director pursuant to SECTION 2.1(a) above are referred to in this SECTION
2.1 as the "PRINCIPALS" with respect to that director. If a Principal gives
notice at any time to the Company and the other Stockholders and Holders that an
individual then serving as a director of
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the Company at the designation of such Principal is no longer its designee, then
the Company and the other Stockholders and Holders shall take all action
necessary to remove the director so designated. If an individual designated
under SECTION 2.1(a) and then serving as a director of the Company dies, resigns
or is removed as a director of the Company, then the Company and the
Stockholders and Holders shall take all action in accordance with SECTION 2.1
necessary to elect as a director of the Company any individual newly designated
by the applicable Principals, if any, with respect to the director who died,
resigned or was removed.
ARTICLE III FOUNDING STOCKHOLDERS; STOCK RESTRICTION PROVISIONS; CO-SALE RIGHTS
SECTION 3.1 RESTRICTIONS ON TRANSFER OF SHARES.
(a) Each of the Founding Stockholders agrees that he shall not
sell, assign, transfer, give, donate, pledge or otherwise encumber or dispose of
any shares of Common Stock (a "TRANSFER") now held or hereafter acquired by him,
except by operation of law or as permitted by this Agreement or the Management
Stockholders' Agreement. If any shares of Common Stock are transferred by
operation of law (E.G., in the event of the bankruptcy or death or incapacity of
a Founding Stockholder or of attachment or garnishment of any shares held by a
Founding Stockholder), the transferee shall receive such shares subject to the
provisions of this Agreement and shall be bound by this Agreement to the same
extent as if such transferee were a Founding Stockholder.
(b) Any purported Transfer of shares of Common Stock by a
Founding Stockholder not in accordance with the provisions of this Agreement
shall be void and ineffectual and shall not operate to Transfer any interest or
title to the purported transferee.
(c) The Company shall not cause or permit any Transfer of any
of the shares of Common Stock of a Founding Stockholder to be registered on the
Company's books if such Transfer is prohibited by the terms of this Agreement.
The Company shall be protected in relying on the record of stockholders
maintained by it or on its behalf for all purposes, notwithstanding any notice
of any purported Transfer to the contrary. The Company shall require any
transferee of a Founding Stockholder to become a party to this Agreement by an
instrument satisfactory to it in form and substance as a condition to any
Transfer to the extent required by SECTION 3.2(d).
SECTION 3.2 RIGHT TO PARTICIPATE IN SALES.
(a) CO-SALE RIGHT. If, at any time prior to the consummation
of the Initial Public Offering, either of the Founding Stockholders (as
applicable, the "TRANSFERRING STOCKHOLDER") desires to sell for cash or any
other form of consideration (including a promissory note or other deferred
consideration) to any person or entity other than those persons or entities
described in SECTION 3.2(d) (a "PROPOSED TRANSFEREE") in excess of an aggregate
of 5% (as such number may have been adjusted in accordance with the Certificate
of Incorporation) of the shares of Common Stock originally issued to him, the
Transferring Stockholder shall so notify the Holders, specifying the proposed
purchaser, proposed closing date, price and other terms of such sale, and shall
make effective arrangements (which shall be a condition to any sale by such
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Transferring Stockholder) so that the Holders shall have the right to sell to
the Proposed Transferee, at the same price per share and other terms and
conditions as involved in such sale by the Transferring Stockholder, such number
of shares of Co-Sale Securities then owned by each Holder equal to the number of
shares being sold by the Transferring Stockholder multiplied by the percentage
of the then total outstanding shares of the Common Stock then held by each
Holder, calculated on a fully diluted basis to give effect to the conversion of
all outstanding convertible securities (including the Preferred Shares) and the
exercise of all outstanding options and warrants (a "FULLY DILUTED BASIS").
(b) NOTICE OF INTENT TO PARTICIPATE. If any Holder wishes to
participate in any sale under this SECTION 3.2, it shall notify the Transferring
Stockholder thereof as soon as practicable after such Holder's receipt of the
notice of the Transferring Stockholder's proposed sale of his shares of Common
Stock, and in any event not later than thirty (30) days after the date of
receipt by such Holder of the notice described in SECTION 3.2(a).
(c) SALE TO PROPOSED TRANSFEREE. The Transferring Stockholder
and each Holder exercising its co-sale rights pursuant to SECTION 3.2(a) shall
sell to the Transferee all of the shares proposed to be sold by him or them at
the price and upon the other terms and conditions specified in the notice
described in SECTION 3.2(a). The closing of such sales shall occur at the
offices of the Company on such date as may be agreed by the Transferring
Stockholder, the Proposed Transferee and the transferring Holders, but in no
event later than the 60th day following the date of receipt by the Holders of
the notice described in SECTION 3.2(a) (or if such 60th day is not a business
day, then on the next succeeding business day). Notwithstanding anything in this
SECTION 3.2 to the contrary, there shall be no liability on the part of any
Transferring Stockholder to any Holder if any sale of Co-Sale Securities
pursuant to this SECTION 3.2 is not consummated for whatever reason. It is
understood that each Transferring Stockholder, in his sole discretion, shall
determine whether to effect a sale of shares of Common Stock pursuant to this
SECTION 3.2.
(d) TRANSFERS NOT SUBJECT TO CO-SALE RIGHT. This SECTION 3.2
shall not be applicable to any Transfers made by a Transferring Stockholder: (i)
to a Holder; (ii) of up to an aggregate of 10% of the shares of Common Stock
originally issued to him to any Management Stockholder; (iii) of up to an
aggregate of 5% of the shares of Common Stock originally issued to him in one or
more transactions; or (iv) to such Transferring Stockholder's spouse, parents,
brothers, sisters, children (natural or adopted), stepchildren, grandchildren,
nephews or nieces (collectively, "FAMILY MEMBERS"), to a trust for the benefit
of any Family Member, to a family limited partnership (the partners of which
shall consist entirely of the Transferring Stockholder, any Family Members or
trusts for the benefit of Family Members), or to a corporation wholly owned by
any Family Members; PROVIDED, in the case of clauses (ii) and (iv), that any
such transferee agrees to be bound by the provisions of ARTICLE II, ARTICLE III
and SECTION 5.2 to the same extent as the Founding Stockholders, and in the case
of clause (iii) that any transferee of such shares agrees to be bound by the
provisions of ARTICLE II and SECTION 5.2 to the same extent as the Founding
Stockholders. Upon the sale of any shares of Common Stock to a Proposed
Transferee pursuant to SECTION 3.2(c), such shares shall no longer be subject to
this SECTION 3.2.
SECTION 3.3 LEGEND. Each certificate representing shares of
Common Stock beneficially owned by a Founding Stockholder shall bear a legend in
substantially the following
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form, until such time as the shares of Common Stock represented thereby are no
longer subject to the provisions hereof:
"The sale, transfer or assignment of the securities
represented by this certificate are subject to the terms and
conditions of a certain Amended and Restated Stockholders'
Agreement dated as of September 2, 1998 as amended from time
to time, among the Company and certain holders of its
outstanding capital stock. Copies of such Agreement may be
obtained at no cost by written request made by the holder of
record of this certificate to the Secretary of the Company."
ARTICLE IV RIGHT OF FIRST REFUSAL
SECTION 4.1 RIGHT OF FIRST REFUSAL.
(a) COMPANY SALES. If at any time after the date hereof and
prior to the consummation of the Initial Public Offering, the Company proposes
to issue any equity security, other than in a transaction described in SECTION
4.2, the Company shall first offer in writing to sell to each Holder, his or its
PRO RATA share of the proposed issue of such equity security, at the same price
and on the same terms at which the Company proposes to sell such issue to
others. For purposes hereof, each Holder's PRO RATA share of an issue of equity
securities shall be that percentage of such issue that is equal to that
percentage of such Holder's ownership of Common Stock computed on a fully
diluted basis. The term "EQUITY SECURITY," when used in this ARTICLE IV, shall
mean any stock of the Company, or any security convertible, with or without
consideration, into stock, or any security carrying any warrant, option, or
right to subscribe to, or to purchase any stock, or any such warrant, option, or
right.
(b) NOTICE OF OFFERING. The Company's offer described in
SECTION 4.1(a) shall describe the equity security proposed to be issued by the
Company, specifying the quantity, the price and payment terms. Each Holder shall
have thirty (30) days from receipt of such offer to accept the offer in writing,
which acceptance may be as to all or any part of such Holder's PRO RATA share of
such issue. The sale of the portion of the equity securities subscribed for by
any Holder pursuant to this SECTION 4.1(b) shall be held on a date acceptable to
the Company and each subscribing Holder, but in no case more than ninety (90)
days after the date of the Company's offer to the Holders.
(c) SALE TO THIRD PARTIES. In the event the Holders do not
subscribe for all of the issue of the equity securities offered to them pursuant
to this ARTICLE IV, the Company may sell the portion of the securities not
subscribed for, together with the portion of such issue of securities not
subject to rights of first refusal under this ARTICLE IV, at a price no less
favorable to the Company than that specified in such offer and on payment terms
no less favorable to the Company than those specified in such offer. However, if
such sale is not consummated within one hundred and twenty (120) days after the
date the offer pursuant to SECTION 4.1(a) was made, the Company shall not sell
such securities without again complying with SECTION 4.1(a).
SECTION 4.2 ISSUANCES NOT SUBJECT TO PREEMPTIVE RIGHT. The
rights of first refusal granted in SECTION 4.1 shall not apply to the issuance
of the Series C Preferred Stock
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pursuant to the Stock Purchase Agreement, or any shares of Common Stock upon the
conversion of any Preferred Stock, or to any of the following issuances of
equity securities by the Company:
(a) upon the exercise of any right which was not itself issued
in violation of the terms of this ARTICLE IV, including the warrants issued to
Alex. Brown or to Charter Communications, Inc.;
(b) upon the issuance of shares of Common Stock as dividends;
(c) upon the grant or issuance to directors, officers or
employees of, or consultants or advisors to, the Company, of up to 1,400,000
shares of Common Stock (as such number may be adjusted by the Board of Directors
and approved by the holders of a majority of the Series A Conversion Stock and
Series B Conversion Stock, voting together as a class (such aggregate number of
option shares, as the same may be adjusted, is hereinafter referred to as the
"Maximum Option Shares") pursuant to the grant of options under any stock option
plan, stock grant plan or stock purchase plan approved by the Board of
Directors;
(d) upon the issuance of shares of Common Stock in connection
with the establishment of an entity with which the Company has a partnership,
joint venture or other business relationship;
(e) upon the issuance of shares of Common Stock pursuant to
the acquisition of another entity whereby the Company will own or control more
than 50% of the voting power of such entity; or
(f) in connection with, or after consummation of, the Initial
Public Offering.
ARTICLE V DEFAULT
SECTION 5.1 PREFERRED STOCK DEFAULT. A "PREFERRED STOCK
DEFAULT" shall be deemed to have occurred hereunder upon notice to the Company
by Holders of a majority of the aggregate shares of Series A Conversion Stock,
Series B Conversion Stock, and Series C Conversion Stock voting together as a
class, of any of the following events, which event shall have continued
unremedied for a period of sixty (60) days following the Company's receipt of
such notice:
(a) the failure of the Company to redeem the Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock in
accordance with the provisions set forth in the Company's Certificate of
Designation for each such series (including a failure to redeem attributable to
the Company having insufficient funds legally available therefor);
(b) the adjudication of the Company as bankrupt or insolvent
under federal bankruptcy or state insolvency laws; or
(c) the reasonable judgment of an independent third party,
upon the concurrence of Holders holding a majority of the aggregate shares of
Series A Conversion Stock, Series B Conversion Stock and Series C conversion
Stock, that the Company shall be adjudged
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to be bankrupt or insolvent under federal bankruptcy or state insolvency laws
within sixty (60) days.
Notwithstanding the above, the Holders of a majority of the
aggregate shares of Series A Conversion Stock and Series B Conversion Stock
shall have the right at any time to waive any Preferred Stock Default upon
notice to the Company.
SECTION 5.2 RIGHTS UPON DEFAULT. Upon the occurrence of a
Preferred Stock Default, and after thirty (30) days' prior notice delivered to
the Company by the Holders of a majority of the aggregate shares of Series A
Conversion Stock, Series B Conversion Stock and Series C Conversion Stock, the
Stockholders and Holders shall vote their respective shares at the direction of
the Holders of a majority of the aggregate shares of Series A Conversion Stock,
Series B Conversion Stock and Series C Conversion Stock at any meeting of the
Company's stockholders called for the purpose of: (i) determining whether and on
what terms a sale of the Company may occur, and (ii) determining whether and on
what terms to replace the existing directors of the Company (including the
election as directors of any nominees designated by such Holders), and shall
sign any consent of stockholders presented by them thereafter for such purposes.
For purposes of this Agreement, a "SALE" shall include a merger, sale of assets
and sale of stock. Upon the occurrence of a Preferred Stock Default, SECTIONS
2.1(a)(i) and (iv) shall be void and of no further force or effect.
ARTICLE VI COVENANTS OF THE COMPANY
SECTION 6.1 RULE 144. The Company covenants that: (a) at all
times after the Company first becomes subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall use its best efforts
to comply with the then current public information requirements of Rule
144(c)(1); (b) if prior to becoming subject to such reporting requirements an
over-the-counter market develops for the capital stock of the Company, the
Company shall use its best efforts to make publicly available the information
required by Rule 144(c)(2); and (c) at all such times as Rule 144 is available
for use by the holders of any of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series A Conversion Stock and Series
B Conversion Stock and Series C Conversion Stock, the Company shall furnish each
such holder upon request with all information within the possession of the
Company required for the preparation and filing of Form 144.
SECTION 6.2 FINANCIAL STATEMENTS. The Company shall furnish to
the Holders, (a) within ninety (90) days of the end of each fiscal year of the
Company an audited balance sheet, and related audited statements of income and
cash flow of the Company as at the end of and for such fiscal year prepared in
accordance with GAAP, together with a management's discussion and analysis, and
(b) within forty-five (45) days after the end of each of the first three fiscal
quarters of each fiscal year of the Company, a balance sheet and statement of
income and cash flow of the Company as at the end of and for such quarter,
together with a management's discussion and analysis. All statements described
in this SECTION 6.2 (other than in CLAUSE (a) above) shall be unaudited, but
prepared in accordance with GAAP, subject only to normal year-end audit
adjustments.
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SECTION 6.3 RESTRICTIVE AGREEMENTS PROHIBITED. Neither the
Company nor any Founding Stockholder shall become a party to any agreement which
by its terms restricts its or their performance of this Agreement.
SECTION 6.4 KEY-MAN LIFE INSURANCE. The Company shall maintain
in effect, for as long as 50% of the aggregate shares of Original Conversion
Stock remain outstanding, key-man life insurance on the life of Krisbergh in the
amount of $3 million and on the life of Wachob in the amount of $1 million. Such
policies shall name the Company as the beneficiary. The Company shall at all
times retain all the incidents of ownership of such insurance and shall not
borrow upon or otherwise impair its right to receive the proceeds of such
insurance. Any proceeds received by the Company under such key-man life
insurance policies shall be applied first to the redemption of the Preferred
Shares in accordance with their respective Certificates of Designation. Any
proceeds which remain after the Company has complied with its redemption
obligation under the applicable Certificate of Designation shall be retained by
the Company and used for whatever purpose the Company determines.
SECTION 6.5 RESERVATION OF SHARES. From and after the Closing,
the Company shall at all times reserve and keep available, free from preemptive
rights, out of its authorized but unissued capital stock, a sufficient number of
shares of Common Stock for issuance upon the conversion of the Preferred Shares.
SECTION 6.6 NEGATIVE COVENANTS.
(a) The Company covenants that, for so long as 50% or more of
the shares of Original Conversion Stock remain outstanding, the Company shall
not, without the consent of Holders of at least a majority of the aggregate
shares of Series A Conversion Stock, Series B Conversion Stock and Series C
Conversion Stock voting together as a class:
(i) sell, convey or otherwise dispose of or encumber
its property or business, except for (A) sales or
dispositions in the ordinary course of business
and (B) encumbrances securing borrowings of less
than $2,000,000, PROVIDED, HOWEVER, that this
restriction shall not apply to any capital lease
transaction or purchase money security interest
incurred in connection with the acquisition of a
capital asset;
(ii) borrow in excess of $2,000,000, PROVIDED,
HOWEVER, that this restriction shall not apply
to any capital lease transaction or purchase
money security interest incurred in connection
with the acquisition of a capital asset;
(iii) materially change the Company's existing business
model or focus;
(iv) create any subsidiary;
(v) approve the Company's annual operating budget
prior to December 11, 1998;
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(vi) transact business with any affiliate of the
Company on terms less favorable than those the
Company could obtain from an unrelated third
party; or
(vii) amend or modify the Bylaws.
(b) The Company covenants that, for so long as 50% or more of
the shares of Original Conversion Stock remain outstanding, the Company shall
not, without the consent of the Holders of at least a majority of the
outstanding shares of each of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock voting as a separate series:
(i) merge into or consolidate with another
corporation, or effect any transaction or series
of related transactions pursuant to which 50% or
more of the voting power of the Company is
transferred to one or more unaffiliated third
parties;
(ii) enter into any agreement that would restrict the
Company's ability to perform its obligations under
this Agreement); or
(iii) issue additional shares of Common Stock other than
(A) up to the Maximum Option Shares, (B) pursuant
to a transaction or series of related transactions
involving the issuance of up to 20% of the shares
of Common Stock outstanding as of the First
Closing (including, for purposes of such
calculation, the Maximum Option Shares) or (C)
pursuant to the conversion of the Preferred Shares
(including, without limitation, those Preferred
Shares issued pursuant to the Employee Stock
Purchase Plan or upon exercise of the Alex. Brown
Warrants and the Strategic Partner Securities);
PROVIDED, HOWEVER, that this restriction shall not
apply to any issuance in connection with an
Initial Public Offering.
ARTICLE VII REGISTRATION RIGHTS
SECTION 7.1 PIGGYBACK REGISTRATION.
(a) If the Company at any time proposes to register any of its
securities under the Securities Act, other than pursuant to a Special
Registration Statement or, with respect to holders of Series C Preferred Stock
or Series C Conversion Stock only, in connection with an Initial Public
Offering, it shall each such time promptly give notice to the holders of the
Registrable Securities of its intention to do so, and, upon the written request,
given within thirty (30) days after receipt of any such notice, of any such
holder to register any of its Registrable Securities, the Company shall (subject
to SECTION 7.1(b)) use its best efforts to cause all Registrable Securities with
respect to which holders shall have so requested registration to be registered
under the Securities Act, promptly upon receipt of the written request of such
holders for such registration, all to the extent required to permit the sale or
other disposition by the holders of the Registrable Securities so registered in
the manner contemplated by such registration statement.
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(b) If any registration pursuant to this SECTION 7.1 is an
underwritten registration, and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities requested to
be included in such registration by the Holders and the Management Stockholders
exceeds the number which can be sold in such offering without adversely
affecting the offering of securities by the Company for its own account, the
Company shall include in such registration Registrable Securities in the
following order of priority (assuming any such securities are included), unless
the Holders holding a majority of the Series A Conversion Stock, Series B
Conversion Stock and Series C Conversion Stock voting together as a class
otherwise agree: (i) first, the Registrable Securities requested to be included
therein by each Holder, PRO RATA among such Holders on the basis of the number
of Registrable Securities held by each such Holder, up to the number of
Registrable Securities that will result in aggregate net proceeds to such Holder
equal to (A) the Original Series A Purchase Price for any Holder who is a Series
A Stockholder, (B) the Original Series B Purchase Price for any Holder who is a
Series B Stockholder and (C) the Original Series C Purchase Price for any Holder
who is a Series C Stockholder; (ii) second, the Registrable Securities requested
to be included therein by each Management Stockholder, PRO RATA among such
Management Stockholders on the basis of the number of Registrable Securities
held by each such Management Stockholder, up to such number of Registrable
Securities that will result in aggregate net proceeds to such Management
Stockholder from all offerings equal to his proportionate share of the
$2,000,000 valuation for all Management Stockholders' securities; PROVIDED, that
in no event shall the number of Registrable Securities included in the offering
by the Holders and Management Stockholders exceed the number of securities, if
any, that the underwriters determine would not adversely affect the orderly sale
and distribution of the securities being sold by the Company for its own
account. Any Registrable Securities that are available for registration after
the allocations under clauses (i) and (ii) of this SECTION 7.1(b) shall be
allocated among the Holders and Management Stockholders requesting registration
on a PRO RATA basis. If the Holders elect not to register the maximum number of
Registrable Securities allocated to them under clause (i) of this SECTION
7.1(b), then excess Registrable Securities not registered by them shall be
allocated to the Management Stockholders on a PRO RATA basis. Similarly, if the
Management Stockholders elect not to register the maximum number of Registrable
Securities allocated to them under clause (ii) of this SECTION 7.1(b), then the
excess Registrable Securities not registered by them shall be allocated to the
Holders on a PRO RATA basis.
(c) Notwithstanding the foregoing provisions, the Company may
withdraw any registration statement referred to in this SECTION 7.1 without
thereby incurring any liability to the holders of the Registrable Securities.
SECTION 7.2 DEMAND REGISTRATION.
(a) At any time after the earlier of (i) one year after the
consummation of the Initial Public Offering, or (ii) December 11, 1999, Holders
of at least 30% of the Registrable Securities then held by Holders may at any
time request in writing that the Company cause a registration statement to be
filed under the Securities Act (other than on Form S-3 as provided under SECTION
7.3) with respect to at least 20% of the Registrable Securities held by Holders.
The Company shall promptly give notice of such request to the other Holders of
Registrable Securities and afford them the opportunity to include in the
requested registration statement such of their Registrable Securities as they
shall specify in a notice given to the Company within thirty
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(30) days after their receipt of the Company's notice of the request for the
filing of a registration statement. Following receipt of such notices, the
Company shall promptly use its best efforts to cause all Registrable Securities
with respect to which Holders shall have so requested registration to be
registered under the Securities Act, all to the extent required to permit the
sale or other disposition by the Holders of the Registrable Securities so
registered in the manner specified by such holders in their notices and pursuant
to this SECTION 7.2.
(b) The Company shall not be required to file and cause to
become effective more than two (2) registration statements at the demand of the
Holders made under this SECTION 7.2.
(c) If within fifteen (15) days of the exercise of a demand
registration right granted under this SECTION 7.2, the Company or any Management
Stockholder notifies the Holders making such demand that the Company or such
Management Stockholder wishes to register Registrable Securities of the same
class for their respective accounts on the registration statement being filed
pursuant to the demand, then the Company and such Management Stockholder may
include its Registrable Securities in such registration; PROVIDED, HOWEVER, that
if the managing underwriter determines and advises in writing that the inclusion
of any or all of such Registrable Securities for the Company's or such
Management Stockholder's account in the registration statement covered by the
requests for registration made under this SECTION 7.2 would adversely affect the
offering of the Registrable Securities to be sold in such registration by the
Holders, then the requisite number of Registrable Securities for the Company's
and/or such Management Stockholder's account shall be excluded from registration
hereunder.
(d) If the Holders making such demand propose to sell their
Registrable Securities in a firm commitment underwriting and the managing
underwriter advises such Holders that not all of their Registrable Securities
can be included in such offering, then the requisite number of Registrable
Securities shall be excluded from registration on a basis PRO RATA (as provided
in Section 7.1(b)) among the Holders of the Registrable Securities requesting
such registration.
(e) Provided the Company has honored its obligations under
SECTION 7.1, no demand registration right granted in this SECTION 7.2 may be
exercised during any period of time beginning on the date the Company files a
registration statement with the Commission registering any of its securities for
sale to the public and ending on the earlier to occur of (i) 120 days after the
date on which the registration statement is declared effective by the Commission
or otherwise becomes effective, and (ii) the 180th day after the date of such
filing.
SECTION 7.3 FORM S-3 REGISTRATIONS. In addition to the rights
provided the Holders in SECTIONS 7.1 and 7.2, if the registration of Registrable
Securities under the Securities Act can be effected on Form S-3 (or any similar
form promulgated by the Commission), then upon the written request of one or
more Holders owning Registrable Securities constituting at least 1% of the
Company's outstanding capital stock, the Company will so notify each Holder, and
then will, as expeditiously as possible, use its best efforts to effect
qualification and registration under the Securities Act on Form S-3 of all or
such portion of the Registrable Securities as the Holder or Holders shall
specify pursuant to this SECTION 7.2, PROVIDED, that the Company shall have no
obligation to file a registration statement under this SECTION 7.2 if: (i) the
gross proceeds from the offering will be or are reasonably expected to be less
than $1,000,000;
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(ii) the Company has already effected a registration for the Holders pursuant to
this SECTION 7.3 during the prior twelve (12) months; (iii) the Registrable
Securities with respect to which registration is requested may be sold by the
Holders thereof within one three month period without compliance with the
registration requirements of the Securities Act pursuant to Rule 144 and such
Registrable Securities are listed on the New York Stock Exchange, the American
Stock Exchange or the NASDAQ National Market; or (iv) the Company has already
effected a total of two (2) registrations for the Holders pursuant to this
SECTION 7.3.
SECTION 7.4 REGISTRATION PROCEDURES. If and whenever the
Company is under an obligation pursuant to the provisions of ARTICLE VII of this
Agreement to use its best efforts to effect the registration of any Registrable
Securities the Company shall, as expeditiously as practicable:
(a) prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its best efforts
to cause such registration statement to become effective;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at least 120 days and to comply with the provisions of the Securities Act with
respect to the sale or other disposition of all Registrable Securities covered
by such registration statement for such period;
(c) furnish to each selling holder such numbers of copies of
each prospectus (including each preliminary prospectus) in conformity with the
requirements of the Securities Act, and such other documents as such seller may
reasonably request in order to facilitate the public sale or other disposition
of such Registrable Securities;
(d) use its best efforts to register or qualify the
Registrable Securities covered by such registration statement under the
securities or blue sky laws of such jurisdictions as the managing underwriter,
if any, or if there is no managing underwriter, the holders of a majority of the
Registrable Securities, shall request (PROVIDED, that the Company shall not be
required to consent to general service of process for all purposes in any
jurisdiction where it is not then qualified), and do any and all other acts or
things which may be reasonably necessary or advisable to enable such seller to
consummate the public sale or other disposition in such jurisdictions of such
Registrable Securities;
(e) notify each seller of the Registrable Securities covered
by such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act within the appropriate
period mentioned in CLAUSE (b) of this SECTION 7.4, of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing, and at the request of any such seller prepare and furnish to such
seller a reasonable number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement
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of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in the light
of the circumstances then existing; and
(f) furnish on the date that such Registrable Securities are
delivered to the underwriters for sale pursuant to such registration or, if such
Registrable Securities are not being sold through underwriters, on the date that
the registration statement with respect to such Registrable Securities becomes
effective: (i) an opinion, dated such date, of the independent counsel
representing the Company for the purposes of such registration, addressed to the
underwriters, if any, and at the request of any holder or holders of Registrable
Securities requesting registration pursuant to this ARTICLE VII, to the holder
or holders making such request, stating that such registration statement has
become effective under the Securities Act and that (1) to the best knowledge of
such counsel, no stop order suspending the effectiveness thereof has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Securities Act; (2) the registration statement, the
related prospectus, and each amendment or supplement thereto, comply as to form
in all material respects with the requirements of the Securities Act and the
applicable rules and regulations of the Commission thereunder (except that such
counsel need express no opinion as to financial statements contained therein);
(3) such counsel has no reason to believe that either the registration statement
or the prospectus, or any amendment or supplement thereto, contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading
(except that such counsel need express no opinion as to financial statements
contained therein); (4) the description in the registration statement or the
prospectus, or any amendment or supplement thereto, of all legal and
governmental matters and all contracts and other legal documents or instruments
are accurate and fairly present the information required to be shown; (5) such
counsel does not know of any legal or governmental proceedings, pending or
contemplated, required to be described in the registration statement or
prospectus, or any amendment or supplement thereto, which are not described as
required, nor of any contracts or documents or instruments of a character
required to be described in the registration statement or prospectus, or any
amendment or supplement thereto, or to be filed as exhibits to the registration
statement which are not described and filed as required; and (6) such other
legal matters with respect to such registration as the underwriters, if any, and
any such holder or holders requesting such opinion may reasonably request; and
(ii) in the case of an underwritten offering a comfort letter, dated such date,
from the independent certified public accountants of the Company, addressed to
the underwriters and the Board of Directors in the customary form.
SECTION 7.5 DELAY IN REGISTRATION. Notwithstanding anything
contained in this Agreement to the contrary, the Company reserves the right to
delay any such registration pursuant to this ARTICLE VII, or to withhold efforts
to cause such registration statement to become effective in each case for a
period of not more than 120 days, if the Company determines in good faith that
such registration might (a) interfere with or affect the negotiation or
completion of any material transaction that is being contemplated by the
Company, or (b) involve initial or continuing disclosure obligations materially
adverse to the best interests of the Company's stockholders. If, after a
registration statement becomes effective, the Company advises the holders of the
Registrable Securities covered by such registration statement pursuant to
SECTION 7.4(e) that the Company considers it appropriate for the registration
statement to be amended, the
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holders shall suspend any further sales of their registered securities until the
Company advises them that the registration statement has been amended.
SECTION 7.6 INFORMATION TO BE FURNISHED BY HOLDERS OF
REGISTRABLE SECURITIES Each prospective seller of Registrable Securities
registered or to be registered under any registration statement shall furnish to
the Company such information and execute such documents regarding the
Registrable Securities held by such seller and the intended method of
disposition thereof as the Company shall reasonably request in connection with
the action to be taken by the Company.
SECTION 7.7 EXPENSES OF REGISTRATION. The Company shall pay
all Registration Expenses in connection with each registration pursuant to this
ARTICLE VII. All Selling Expenses in connection with each registration pursuant
to ARTICLE VII shall be borne by the seller or sellers therein in proportion to
the number of Registrable Securities included by each in such registration, or
in such other proportions as they may agree upon.
SECTION 7.8 INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless each holder
of Registrable Securities, its executive officers, directors and controlling
persons (within the meaning of the Securities Act) and each person who
participates as an underwriter or controlling person of an underwriter (within
the meaning of the Securities Act) with respect to a registration statement
pursuant to this ARTICLE VII against any loss, claims, damages or liabilities to
which any of them may become subject under the Securities Act or otherwise
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement of any material
fact contained in a registration statement including Registrable Securities
owned by such holder, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or arise out of or are based
upon the omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and shall reimburse
any of them for any legal or other expenses reasonably incurred by any of them
in connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company shall not be liable
hereunder in any such case if any such loss, claim, damage, or liability arises
out of or is based upon any untrue statement or omission made in such
registration statement, prospectus or amendment or supplement thereto in
reliance upon and in conformity with written information furnished to the
Company for such purpose by such holder or by its representative or by any
underwriter on behalf of such holder or if the untrue statement or omission is
corrected in a supplement or amendment to the prospectus provided by or on
behalf of the Company to such holder in a timely fashion which is not used by
such holder.
(b) Each holder of Registrable Securities joining in any
registration statement of the Company pursuant to this ARTICLE VII of this
Agreement shall, severally, but not jointly, indemnify and hold harmless the
Company, its executive officers, directors, and controlling persons (within the
meaning of the Securities Act) and each person who participates as an
underwriter or controlling person of an underwriter (within the meaning of the
Securities Act) with respect to a registration statement pursuant to this
ARTICLE VII against any losses, claims, damages, or liabilities to which any of
them may become subject under the Securities Act or otherwise, but only to the
extent that as such losses, claims, damages, or liabilities (or actions in
21
<PAGE>
respect thereof) arise out of or are based upon any untrue statement of any
material fact contained in such registration statement, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereto, or arise out of or are based upon the omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, made in reliance upon and in conformity with written
information furnished to the Company by such holder or by its representative or
by any underwriter on behalf of such holder for such purpose, and shall
reimburse any of them for any legal or other expenses reasonably incurred by
them in connection with investigating or defending, any such loss, claim,
damage, liability or action; PROVIDED, that such holder's liability hereunder
shall not exceed the net proceeds realized by such holder from the Registrable
Securities sold by it in the offering made pursuant to the registration
statement.
(c) Promptly after receipt by an indemnified party under this
SECTION 7.8 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against an indemnifying
party, notify the indemnifying party of the commencement thereof and the
indemnifying party shall have the right to assume the defense thereof with
counsel mutually satisfactory to the parties. The failure to notify an
indemnifying party promptly of the commencement of any such action, if
prejudicial to the ability to defend such action, shall, to the extent
prejudicial, relieve such indemnifying party of any liability to the indemnified
party under this SECTION 7.8, but the omission so to notify the indemnifying
party will not relieve such party of any liability that such party may have to
any indemnified party other than under this SECTION 7.8.
(d) If the indemnification provided for in this SECTION 7.8 is
unavailable to or insufficient to hold harmless an indemnified party under
SECTION 7.8(a) or (b) in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect not only the relative benefits received by the Company on the one
hand and the holders of Registrable Securities on the other, but also the
relative fault of the Company on the one hand and the holders of Registrable
Securities on the other, in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by or on behalf of the Company on the one hand or the
holders of Registrable Securities on the other, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
(e) The Company and the holders of Registrable Securities
agree that it would not be just and equitable if contributions pursuant to
SECTION 7.8(d) were determined by PRO RATA allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to above in SECTION 7.8(d). The amount paid or payable by an indemnified party
as a result of the losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to above in SECTION 7.8(d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with
22
<PAGE>
investigating or defending any such action or claim. Notwithstanding the
provisions of SECTION 7.8(d): (i) no person or entity guilty of fraudulent
misrepresentation (within the meaning of SECTION 11(f) of the Securities Act)
shall be entitled to contribution from any person or entity who was not guilty
of such fraudulent misrepresentation, and (ii) no holder of Registrable
Securities shall be required to contribute any amount in excess of the proceeds
received by such holder in the offering.
SECTION 7.9 UNDERWRITING AGREEMENT. If Registrable Securities
are sold pursuant to a registration statement in an underwritten offering
pursuant to this ARTICLE VII, the Company and the holders of Registrable
Securities if participating therein agree to enter into an underwriting
agreement containing customary representations and warranties with respect to
the business and operations of an issuer of, or, as the case may be, the seller
of the securities being registered and customary covenants and agreements to be
performed by such issuer or seller including, without limiting the generality of
the foregoing, customary provisions with respect to indemnification by the
Company of the underwriters of such offering.
SECTION 7.10 TRANSFER OF REGISTRATION RIGHTS. The registration
rights conferred hereunder shall inure to the benefit of the holders of
Registrable Securities to whom Series A Preferred Stock, Series B Preferred
Stock or Series C Preferred Stock was issued to and any person or entity who
acquires at least 20% of any such holder's Registrable Securities; PROVIDED,
such holder gives the Company at least fifteen (15) days' prior notice of such
transfer.
SECTION 7.11 MARKET-STAND-OFF AGREEMENT.
(a) If requested by the Company and an underwriter of Common
Stock (or other securities of the Company), a holder of Registrable Securities
shall not sell or otherwise transfer or dispose of any Common Stock (or other
securities of the Company) held by such holder (other than those included in the
registration) during the one hundred eighty (180) day period following the
effective date of a registration statement of the Company filed under the
Securities Act, PROVIDED, that:
(i) such agreement shall only apply to the first such
registration statement of the Company, including securities to be sold on its
behalf to the public in an underwritten offering; and
(ii) those officers, directors and employees of the
Company that the underwriter has reasonably requested be bound by a similar
agreement have done so.
(b) The obligations described in this SECTION 7.11 shall not
apply to any Special Registration Statement. The Company may impose
stop-transfer instructions with respect to the shares of Common Stock (or other
securities of the Company) subject to the foregoing restriction until the end of
said one hundred eighty (180) day period.
ARTICLE VIII MISCELLANEOUS
23
<PAGE>
SECTION 8.1 DURATION OF AGREEMENT. Except for the provisions
of ARTICLE VII, the rights and obligations of the parties under this Agreement
shall terminate, on the earlier to occur of the following: (a) immediately prior
to the consummation of the Initial Public Offering; (b) immediately prior to the
consummation of the sale of all, or substantially all, of the Company's assets
or all of the Common Stock either through a direct sale, merger, reorganization,
consolidation or other form of business combination in which control of the
Company is transferred in a transaction approved by the requisite percentage of
Series A Stockholders, Series B Stockholders and Series C Stockholders pursuant
to ARTICLE VI.
SECTION 8.2 SEVERABILITY; GOVERNING LAW. If any provisions of
this Agreement shall be determined to be illegal or unenforceable by any court
of law, the remaining provisions shall be severable and enforceable to the
maximum extent possible in accordance with their terms. This Agreement is made
pursuant to, and shall be construed and enforced in accordance with, the laws of
the State of Delaware (and United States federal law, to the extent applicable),
irrespective of the principal place of business, residence or domicile of the
parties hereto, and without giving effect to otherwise applicable principles of
conflicts of law. Any legal action, suit or proceeding arising out of or
relating to this Agreement may be instituted in any federal court in the Eastern
District of Pennsylvania or in any state court in Delaware County, Pennsylvania,
and each party waives any objection which such party may now or hereafter have
to the laying of the venue of any such action, suit or proceeding, and
irrevocably submits to the jurisdiction of any such court. Any and all service
of process and any other notice in any such action, suit or proceeding shall be
effective against any party if given as provided herein. Nothing herein
contained shall be deemed to affect the right of any party to serve process in
any other manner permitted by law or to commence legal proceedings or otherwise
proceed against any other party in any jurisdiction other than Pennsylvania.
SECTION 8.3 INJUNCTIVE RELIEF . It is acknowledged that it
will be impossible to measure the damages that would be suffered by the parties
if any party fails to comply with the provisions of this Agreement, and that in
the event of any such failure there will not be an adequate remedy at law. The
parties shall, therefore, be entitled to obtain specific performance of the
non-complying party's obligations hereunder and to obtain immediate injunctive
relief. The non-complying party shall not argue, as a defense to any proceeding
for such specific performance or injunctive relief, that there is an adequate
remedy at law.
SECTION 8.4 BINDING EFFECT. This Agreement shall be binding
upon and, except as provided herein, shall inure to the benefit of the parties
hereto and their respective successors, personal representatives, heirs and
permitted assigns.
SECTION 8.5 MODIFICATION OR AMENDMENT. Neither this Agreement
nor any provision hereof can be modified, amended, waived, changed, discharged
or terminated except by an instrument in writing, signed by the Founding
Stockholders, Series A Stockholders holding more than 50% of the outstanding
shares of Series A Preferred Stock, Holders holding more than 50% of the Series
B Conversion Stock, and Holders holding more than 50% of the Series C Common
Stock and any such amendment, waiver, discharge or termination shall be binding
on all Stockholders and Holders, but in no event shall the obligation of any
Stockholder or Holder hereunder be materially increased, except upon written
consent of such Stockholder or Holder.
24
<PAGE>
SECTION 8.6 COUNTERPARTS. This Agreement may be executed in
one or more counterparts each of which shall be deemed to be an original, but
all of which taken together shall constitute one and the same instrument.
SECTION 8.7 NOTICES. Notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally by
hand or nationally recognized courier addressed (a) if to a Stockholder or
Holder or their transferees, as indicated on the list of Stockholders and
Holders attached hereto as SCHEDULES I, II, III, IV AND V, or at such other
address as such holder or permitted assignee shall have furnished to the Company
in writing, or (b) if to the Company, at its principal place of business, or at
such other address or facsimile number as the Company shall have furnished to
each Stockholder or Holder in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer or
delivery. Notwithstanding anything to the contrary contained herein, to the
extent the Holders of Series B Preferred Stock or Series C Preferred Stock have
designated a representative to act on their behalf, then notice by the Company
to such designated representatives shall be deemed sufficient notice to each
holder of Series B Preferred Stock or Series C Preferred Stock, respectively,
and such representatives shall undertake to provide such notice to all Holders
of Series B Preferred Stock.
SECTION 8.8 MERGER PROVISION. This Agreement along with all
exhibits and schedules hereto, constitute the entire agreement among the parties
hereto pertaining to the subject matter hereof and supersede all prior
agreements and understandings, whether oral or written, of any of the parties
hereto concerning the subject matter hereof (other than the Management
Stockholders' Agreement).
SECTION 8.9 FURTHER ASSURANCES. From and after the date of
this Agreement, the parties hereto upon the request of any other party shall
execute and deliver such instruments, documents and other writings as may be
reasonably necessary or desirable to confirm and carry out and to effectuate
fully the intent and purposes of this Agreement.
SECTION 8.10 AUTHORIZATION. Each Founding Stockholder
represents and warrants that (i) this Agreement has been duly executed and
delivered by him, (ii) he is not a party to any similar agreement which could
interfere with his rights and obligations hereunder, and (iii) his entering into
or compliance with this Agreement will not breach the provisions of any contract
or agreement to which he is a party.
SECTION 8.11 DELAYS OR OMISSIONS. No delay or omission to
exercise any right, power or remedy accruing to any Stockholder, upon any breach
or default of the Company under this Agreement shall impair any such right,
power or remedy of such Stockholder nor shall it be construed to be a waiver of
any such breach or default, or an acquiescence therein, or of or in any similar
breach or default thereafter occurring; nor shall any waiver of any single
breach or default be deemed a waiver of any other breach or default therefore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any Stockholder of any breach or default under this
Agreement or any waiver on the part of any Stockholder of any provisions or
conditions of this Agreement must be made in writing and shall be effective only
to
25
<PAGE>
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any Stockholder, shall be
cumulative and not alternative.
SECTION 8.12 RIGHTS; SEPARABILITY. Unless otherwise expressly
provided herein, a Stockholder's rights hereunder are several rights, not rights
jointly held with any of the other Stockholders.
SECTION 8.13 INFORMATION CONFIDENTIAL. Each Stockholder and
Holder acknowledges that the information received by it pursuant hereto may be
confidential and for its use only, and it shall not use such confidential
information in violation of the Exchange Act or reproduce, disclose or
disseminate such information to any other person or entity (other than its
employees or agents having a need to know the contents of such information, and
its attorneys), except in connection with the exercise of rights under this
Agreement, unless the Company has made such information available to the public
generally or such Stockholder and Holder is required to disclose such
information by a governmental body.
SECTION 8.14 TITLES AND SUBTITLES. The titles of the Articles
and Sections of this Agreement are for convenience by reference only and are not
to be considered in construing or interpreting this Agreement.
SECTION 8.15 ADDITIONAL PARTIES. The Board of Directors of the
Company may, without the consent of the Preferred Stockholders or any other
party hereto, join any person who holds or becomes a holder of the Company's
capital stock as an additional party hereto. Any such joinder shall be reflected
on an appropriate Schedule hereto.
[SIGNATURE PAGES TO FOLLOW]
26
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this First
Amended and Restated Stockholders' Agreement effective as of the day and year
first above written.
WORLDGATE COMMUNICATIONS, INC.
By /s/ Randall Gort
-----------------------------------
27
<PAGE>
SIGNATURE PAGE TO WORLDGATE COMMUNICATIONS, INC.
FIRST AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
/s/ Stockholders Named in Schedules hereto
------------------------------------------
Subscriber's Name
By:
---------------------------------------
Name:
Title:
28
<PAGE>
Exhhibit 23.1
Consent Of Independent Accountants
We consent to the inclusion in this Registration Statement on Form
S-1 of our report, which will be issued upon the effectiveness of the stock
split as described in Note 10 to the financial statements, dated February 8,
1999 except as to the information in Note 10,for which the date is ,
1999, on our audits of the financial statements of Worldgate Communications,
Inc. We also consent to the references to our firm under the captions
"Selected Financial Data" and" Experts."
PricewaterhouseCoopers LLP
Philadelphia,Pennsylvania
February 8,1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THE BALANCE SHEET AT DECEMBER 31, 1996, 1997 AND 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 1,693 4,880 368
<SECURITIES> 5,881 12,438 0
<RECEIVABLES> 0 106 572
<ALLOWANCES> 0 0 0
<INVENTORY> 0 620 2,737
<CURRENT-ASSETS> 7,583 18,120 3,848
<PP&E> 0 271 780
<DEPRECIATION> 0 22 137
<TOTAL-ASSETS> 7,583 18,412 5,621
<CURRENT-LIABILITIES> 463 1,938 7,097
<BONDS> 0 591 1,127
8,571 34,366 49,276
0 0 0
<COMMON> 91 91 91
<OTHER-SE> 1,530 779 426
<TOTAL-LIABILITY-AND-EQUITY> 7,583 18,412 5,621
<SALES> 0 141 1,022
<TOTAL-REVENUES> 0 141 1,022
<CGS> 0 0 0
<TOTAL-COSTS> 2,929 14,588 28,365
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 2 17 101
<INCOME-PRETAX> (2,923) (14,041) (27,020)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (2,923) (14,041) (27,020)
<EPS-PRIMARY> (0.33) (1.81) (3.64)
<EPS-DILUTED> (0.33) (1.81) (3.64)
</TABLE>
