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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998 OR
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER 0-22361
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NET.B@NK, INC.
(Exact Name of Registrant as Specified in Its Charter)
GEORGIA 58-2224352
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
950 NORTH POINT PARKWAY, SUITE 350 30005
ALPHARETTA, GEORGIA (Zip Code)
(Address of Principal Executive Offices)
(770) 343-6006
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
--------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of such common equity as of March 8, 1999: $384,619,525
Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 8,598,495 shares of Common Stock at
March 8, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held on April 22, 1999, are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Net.B@nk (the "Bank") is the largest federally-insured bank operating
exclusively on the Internet. Our mission is to profitably provide a broad range
of banking and financial services to the growing number of Internet users. Our
low-cost branchless business model has allowed us to attain profitability within
a year of acquiring our bank charter while continuing to pass along our
operating cost savings to customers in the form of attractive interest rates and
low fees. We strive to maintain high asset quality by employing conservative
credit policies. We plan to attract new accounts through national awareness of
the "Net.B@nk" brand name and to capitalize on increasing consumer use of the
Internet.
During 1998, the Bank's customer accounts grew from 4,755 to 17,408,
deposits grew from $58.7 million to $283.6 million and total assets grew from
$93.2 million to $388.4 million. We believe our growth is attributable to
increasing consumer use of the Internet and our ability to offer a broad array
of convenient, cost-effective, secure banking services to this growing customer
base.
INDUSTRY BACKGROUND
THE INTERNET
The Internet enables millions of people worldwide to access news and
information, communicate with each other and conduct business electronically.
According to International Data Corporation, the number of worldwide Internet
users is projected to grow from an estimated 97.3 million in 1998 to an
estimated 319.8 million by 2002. Additionally, Jupiter Communications estimates
that 27.4 million United States households were on-line (i.e., had access to the
Web, used a consumer on-line service or sent e-mail) in 1997 and that an
estimated 61.4 million households are expected to be on-line in 2002.
The Internet has become a significant marketplace for buying and selling
goods and services. International Data Corporation forecasts that total
worldwide commerce on the Internet will grow from an estimated $32.4 billion in
1997 to an estimated $425.7 billion in 2002. With the emergence of the Internet
as a globally accessible, fully interactive medium, many companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly using electronic commerce. Many consumers are showing
strong preferences for transacting certain types of business, such as paying
bills, booking airline tickets, trading securities and purchasing consumer
products, electronically rather than in person or over the telephone.
Individuals can now conduct these transactions virtually anywhere at any time.
Many consumers have accepted and even welcomed self-directed on-line
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial services. Many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet,
and finance-related Web sites continue to grow in popularity.
ELECTRONIC BANKING
The increasing levels of commerce transacted on the Internet has prompted
the development of electronic banking delivery systems. These forms of
electronic delivery systems provide convenience for customers and allow
financial institutions to lower their overhead costs. The two types of
electronic banking currently available, PC-based home banking and Internet
banking, are very different. The characteristics of each are as follows:
- PC-BASED HOME BANKING. PC-based home banking requires PC-based financial
services software products such as Intuit's QUICKEN, Microsoft's MONEY or
a bank's proprietary software. Each product carries its own set of
instructions that the customer must learn before commencing any banking
transactions. The software resides on the customer's PC along with his or
her account data and
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requires a dial-up modem and manual downloading. Consequently, customers
must conduct PC-based home banking from the PC containing the customer's
software and account data. Customers generally must back up their account
data at frequent intervals to counteract the risk of losing data. Because
the customer must connect with the financial institution via modem and
download his or her account data, real-time transactions are not generally
possible.
- INTERNET BANKING. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for access to the Internet and the financial
institution. Internet banking requires no particular software and does not
restrict the customer's operations to the location of his or her PC.
Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills or transacts other
business on a real-time basis. Account data remains stored on the bank's
secure server at all times, protected by technology designed specifically
to safeguard such information. No downloading or back-up is required, as
the bank's server backs up all data and transactions on a continuous
basis. With Internet banking, the information presented to the customer
remains current at all times.
The use of electronic banking delivery systems, and particularly Internet
banking, is growing as consumers find that electronic banking is both convenient
and cost-effective. According to Jupiter Communications, the number of on-line
banking households in the United States is projected to grow from an estimated
4.5 million in 1997 to an estimated 17.1 million in 2002. Jupiter Communications
further indicates that the percentage of these on-line banking households
utilizing Internet banking is projected to rise from an estimated 8% in 1996 to
an estimated 80% in 2000.
Demographic surveys indicate that Internet users represent an ideal target
market for Internet banking. Recent studies by Jupiter Communications revealed
that, in the United States, approximately 49% of Internet users are college
graduates and that approximately 30% are engaged in professional or managerial
occupations. The survey also indicated that the median age of Internet users is
33, that approximately 61% of Internet users are under the age of 45 and that
the average annual income of an Internet user is over $60,000. The attractive
demographics of Internet users facilitate the growth of Internet banking.
Internet users tend to be young and mobile and thus comfortable with and
receptive to the convenience of on-line commercial transactions. We believe that
as Internet users enter their prime earnings and savings years, there will be an
increased demand for high-yielding savings products. Additionally, Internet
users tend to be professionals with limited amounts of discretionary time and
are attracted to the convenience of "one-stop shopping" for a full range of
financial services.
THE NET.B@NK SOLUTION
As the first federally-insured bank to operate solely on the Internet, the
Bank believes it has a competitive advantage relative to on-line banks with a
less established operating history. In addition, the Bank believes it has a
competitive cost advantage over traditional banks. We also believe our
established position in the marketplace provides us with a competitive advantage
in view of the lead time required for potential competitors to start an Internet
bank. We intend to continue to capitalize on this advantage by aggressively
seeking new customers in order to further build market share.
Net.B@nk's customer demographics parallel those of the general Internet
population and illustrate the Bank's appeal to households with relatively high
incomes. According to John H. Harland Company, as of September 1998, Net.B@nk's
customers had an average age of 44 and a median annual household income in
excess of $50,000. Net.B@nk is ideally positioned to participate in the rapid
growth of the Internet and on-line banking based on its:
- ATTRACTIVE INTEREST RATES AND LOW FEES. The Bank's operating costs are
generally lower than those of traditional "bricks and mortar" banks
because it does not require a traditional branch network to generate
deposits and conduct operations. The Bank passes its savings in operating
costs on to customers by offering attractive interest rates and low fees
in order to generate deposits without
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sacrificing profit margins. We believe the Bank's unique business model
differentiates it from traditional banks offering Internet banking
services because they frequently offset the incremental expense of their
Internet banking services by charging additional fees.
- CONVENIENCE AND EASE OF ACCESS. We believe the Bank provides customers
with a higher level of convenience than can be achieved in a traditional
bank branch or through PC-based home banking. The Internet allows our
customers to conduct banking activities on a real-time, 7-day-a-week,
24-hour-a-day basis from any PC, wherever located, using a secure Web
browser. In addition, the Bank's Web site and electronic banking software
are designed to be user-friendly and to expedite customer transactions
with the Bank.
- BROAD SELECTION OF PRODUCTS AND SERVICES. The Bank offers a broad array of
products and services that customers would typically expect from a
traditional bank. These products and services include checking and money
market accounts, certificates of deposit, electronic bill paying, debit
cards, credit cards, mortgage loans, business equipment leases and
securities brokerage services. We intend to continue to develop additional
products and services such as insurance products, consolidated account
statements, home equity loans and home equity lines of credit.
- HIGH-QUALITY SERVICE AND CUSTOMER SATISFACTION. We continually seek ways
to enhance customer satisfaction. For example, unlike many other banks, we
offer services such as electronic bill payment and ATM cards without
service charges. We also emphasize responsive, courteous customer service
and employ a staff of approximately 20 customer service representatives
(representing approximately 50% of our employees) and five temporary
employees who respond to inquiries from existing and potential customers
and process new accounts. Customers can access account data and
information regarding products and services 24 hours a day and can
currently reach our customer service representatives 18 hours a day by
telephone or e-mail. At present, we are reviewing plans to expand our
customer service hours. We strive for the highest level of customer
satisfaction and believe the significant growth in our customer base
illustrates our ability to meet our customers' needs.
- ADVANCED SECURITY. A significant barrier to on-line financial transactions
has been the secure transmission of confidential information over public
networks. The Bank uses sophisticated technology to provide what we
believe to be among the most advanced security measures currently
available in the Internet banking industry. All banking transactions are
encrypted and all transactions are routed from the Internet server through
a "firewall" that limits access to the Bank server. The Bank's systems
automatically detect attempts by third parties to access other users'
accounts and feature a high degree of physical security, secure modem
access, service continuity and transaction monitoring. See "--Security."
GROWTH STRATEGY
Our objective is to become the leading provider of a full range of on-line
financial services. We intend to accomplish this objective by implementing the
following strategies:
- BUILD NATIONAL BRAND AWARENESS THROUGH INCREASED MARKETING EFFORTS. We are
significantly expanding our marketing program and are working with
nationally known advertising and public relations agencies to build
national awareness of the "Net.B@nk" name through a variety of marketing
initiatives. These initiatives include expanding our advertising media to
include print and direct mail campaigns; continued advertisement on
targeted portals such as Yahoo!, Infoseek and Excite and Web sites such as
Bank Rate Monitor, Motley Fool and Money.com; and continued pursuit of
strategic alliances with other Internet financial services providers. To
fund these initiatives, the Company has increased its marketing expenses
from approximately $695,000 for 1998 to a budgeted $3.6 million for 1999.
By increasing our marketing efforts, we believe that we can expand brand
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awareness of the Bank on a national scale and significantly increase our
customer base. See "-- Marketing."
- LEVERAGE LOW COST STRUCTURE. The Bank's operating costs are generally
lower than those of traditional "bricks and mortar" banks because it does
not require a traditional branch network to generate deposits and conduct
operations. This is demonstrated by the Bank's low ratio of 1998
noninterest expense to average earning assets of 2.1% as compared to 4.4%
for commercial banks with $300 million to $500 million in assets (based on
data provided by FDIC Institution Directory). Additionally, the Bank's
ratio of total assets per employee was $13.9 million as of December 31,
1998 as compared to $2.4 million for commercial banks with $300 million to
$500 million in assets (based on data provided by FDIC Institution
Directory). The Bank passes its operating cost savings on to customers by
offering more attractive interest rates on deposit accounts and lower fees
than those offered generally by traditional banks. We believe this
strategy attracts deposits without sacrificing profit margins. We intend
to continue to leverage the fixed-cost aspect of our branchless business
model to enhance profitability.
- OFFER A BROAD ARRAY OF PRODUCTS AND SERVICES. Our objective is to attract
customers seeking to combine the convenience of Internet banking with the
broad array of products and services typically offered by traditional
banks. Toward this end, the Bank's product and service offerings include
checking and money market accounts, certificates of deposit, electronic
bill paying, debit cards, credit cards, mortgage loans, business equipment
leases and securities brokerage services. We intend to continue to develop
additional products and services such as insurance products, consolidated
account statements, home equity loans and home equity lines of credit. See
"--Products and Services."
- GENERATE NONINTEREST INCOME THROUGH CROSS-MARKETING INITIATIVES. To
generate additional noninterest income and enhance customer loyalty, the
Bank cross-markets a variety of non-deposit products. We offer credit
cards, mortgage loans, business equipment leases, securities brokerage
services and other noninterest income-generating products to existing and
potential depositors through various marketing techniques, such as our Web
site, e-mail, on-line advertising and telemarketing. This strategy enables
the Bank to generate additional earning assets and fee income from a
growing customer base.
- MAINTAIN HIGH ASSET QUALITY. The Bank's loan portfolio strategy is to
maintain a conservative loan mix consisting of home mortgage, home equity,
consumer and construction loans with an emphasis on high credit quality.
At the Bank's current stage of development, it is more cost-effective for
the Bank to purchase most of its loans or act as a participating lender
with other banks rather than originating its own loans. This decreases the
Bank's expenses and allows the Bank to reduce its loan loss exposure by
diversifying its portfolio. The Bank also emphasizes a conservative
securities investment strategy by investing in fixed income securities
such as United States Treasury obligations, collateralized mortgage
obligations and mortgage-backed securities issued by agencies such as
Fannie Mae and Freddie Mac. See "--Lending and Investment Activities."
- OUTSOURCE OPERATIONAL FUNCTIONS. To enhance the flexibility and
scalability of its operations, the Bank outsources its principal
operational functions to leading service providers such as NCR Corporation
("NCR"), The BISYS Group, Inc. ("BISYS") and CheckFree Corporation
("CheckFree"). NCR provides a secure server for the electronic banking
software licensed to the Bank by Edify Corporation ("Edify"). CheckFree
provides electronic bill paying systems for the Bank and BISYS processes
the Bank's transactions and interfaces with NCR's secure server. In each
of these relationships, the Bank benefits from the service provider's
expertise and economies of scale while retaining the flexibility to take
advantage of changes in available technology without affecting customer
service. The Bank can also respond easily to growth because these
third-party service
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providers have the capacity to process a high volume of transactions. See
"--Operations-Service Providers."
PRODUCTS AND SERVICES
DEPOSIT PRODUCTS AND SERVICES. The Bank offers a variety of deposit
products at attractive interest rates in order to build its customer base. The
Bank is able to offer attractive interest rates as a result of its low operating
costs. It also attracts customers by offering convenient services such as free
electronic bill payment, overdraft protection and ATM cards. The Bank's deposit
products and services include:
- DEPOSIT PRODUCTS. The Bank offers two types of interest-bearing checking
accounts, a money market account and 6-, 12- and 30-month certificates of
deposit. The Bank has consistently offered interest rates on its deposit
accounts that are higher than the national average.
- BILL PAYMENT SERVICE. Through services provided by CheckFree, customers
can pay their bills on-line through electronic funds transfer or a written
draft prepared and sent to the creditor. The Bank does not charge a fee
for this service.
- OVERDRAFT PROTECTION. Overdraft protection is available to all interest
checking customers who qualify. Customers with interest checking accounts
may apply for overdraft protection on-line for amounts up to $5,000. If a
customer has both a money market and an interest checking account, the
Bank automatically establishes overdraft protection between those
accounts.
- ATM CARDS. Each customer automatically receives an ATM card when he or she
opens an account. Customers can access their accounts at ATMs affiliated
with the Cirrus, Honor and Avail networks. The Bank does not charge its
own fee for ATM usage, but fees are generally imposed by the operator of
the ATM.
LENDING PROGRAMS. To generate fee income and provide a convenient service
to its customers, the Bank offers on-line loans and credit cards as described
below.
- MORTGAGE LOANS. The Bank's Web site enables customers to obtain interest
rate quotes and apply for mortgage loans on-line. The Bank has an
agreement with First Mortgage Network ("FMN"), whereby the Bank acts as a
loan originator on behalf of FMN. The Bank has similar agreements with
E-loan, Inc. ("E-loan") and Fidelity Mortgage Services, Inc. ("Fidelity")
pursuant to which they forward mortgage applications to the Bank.
Applications received directly through the Bank's Web site are processed
and closed by FMN. Applications received indirectly from either FMN,
E-loan, or Fidelity are processed by such lender, which receives funding
from the Bank and closes the loans. The Bank funds each loan that meets
its underwriting criteria and sells the loans received directly through
the Bank's Web site to FMN or, in the case of loans received indirectly,
to the lender from which it was received, in each case with the servicing
released. The loans are presold to the same sources at the time of closing
so that the Bank does not bear any material risk of loss. The Bank
generally carries loans receivable on its books for an average of
approximately 30 days while it is awaiting receipt of sale proceeds.
During this time, the Bank receives interest on the outstanding balance at
the rate stated in the mortgage note. The Bank receives a portion of the
loan origination fee for providing these funding services. We plan to
expand the Bank's loan offerings to include home equity loans, home equity
lines of credit and automobile loans. We also offer home mortgage loans
that the Bank originates and retains for its own portfolio. See "--Lending
and Investment Activities."
- CREDIT CARDS. The Bank offers its customers Visa-Registered Trademark- and
MasterCard-Registered Trademark- credit cards issued by The Bankers Bank
for no annual fee. The Bankers Bank carries the credit card loans on its
books and the Bank has an income-sharing arrangement with The Bankers
Bank. Customers can apply for these credit cards on-line. The cards
prominently display the "Net.B@nk" logo with the Visa or MasterCard emblem
appearing in the lower right corner of the card.
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NON-BANKING FINANCIAL SERVICES. To serve as a single convenient source for
the financial services needs of Internet users and to generate additional
noninterest income, the Bank offers a full range of non-banking financial
services designed to attract and retain customers. These services currently
include securities brokerage and business equipment leasing services and in the
future will include several new services such as insurance products.
- SECURITIES BROKERAGE SERVICES. The Bank has contracted with UVEST
Investment Services ("UVEST"), a discount brokerage service, to provide
its customers with access to a full line of financial services and
investment products. The Bank has a fee-sharing agreement with UVEST
Customers can purchase securities without writing checks to their brokers,
as trading fees are automatically deducted from their checking or money
market accounts with the Bank. Investment proceeds are automatically
deposited into the customer's deposit account with the Bank. Customers
enjoy 24-hour on-line access, real-time quotes, low commissions and a
professional brokerage staff.
- BUSINESS EQUIPMENT LEASING. In October 1998, the Bank entered into an
agreement with Republic Leasing Company ("Republic") that allows the
Bank's customers, many of whom are independent business owners or
managers, to lease small business equipment through Republic. The Company
has a fee sharing agreement with Republic. Leases range in amounts from
$5,000 to $500,000 and cover virtually all types of business equipment.
Republic provides advice, comparison quotes and immediate equipment lease
financing and holds and services all of its leases.
FUTURE PRODUCTS AND SERVICES. To generate additional interest and fee
income and enhance customer convenience, the Bank plans to introduce in the
future a variety of new products and services. These products and services may
include insurance products, home equity loans, home equity lines of credit, a
proprietary credit card, consolidated account statements, financial planning and
asset allocation services and a system that will allow customers to download
their personal financial account data directly into commercial financial
services software.
LENDING AND INVESTMENT ACTIVITIES
The Bank's loan portfolio strategy is to maintain a conservative loan mix
consisting of home mortgage, home equity, consumer and construction loans with
an emphasis on high credit quality. At the Bank's current stage of development,
it is more cost-effective for the Bank to purchase most of its loans or act as a
participating lender with other banks rather than originating its own loans.
This decreases the Bank's expenses and allows the Bank to reduce its loan loss
exposure by diversifying its portfolio. As it grows, the Bank will continue to
develop its portfolio through purchases, participations and originations.
The Bank builds its loan portfolio in the following ways:
- PURCHASES. The Bank acquires most of its loans by purchasing packages of
specific types of loans, such as mortgage, home equity and consumer loans,
with each package consisting of loans with similar principal amounts,
interest rates and asset quality. The Bank also purchases portions of
commercial loan pools, with the seller retaining a portion of the loans to
decrease the Bank's risk. As of December 31, 1998, purchased loans
accounted for approximately $240.9 million, or 86%, of the Bank's loan
portfolio.
- PARTICIPATIONS. The Bank acts as a participating lender in commercial and
large construction loans with varying banks in the Southeast, including
The Bankers Bank. We anticipate expanding our participations in
construction loans to include loans originated nationwide in order to take
advantage of lower prices for these loans in less competitive geographic
areas. As of December 31, 1998, participations accounted for approximately
$36.9 million, or 13%, of the Bank's loan portfolio.
- DIRECT ORIGINATION. The Bank originates a small number of loans directly
with its customers. As of December 31, 1998, these loans accounted for
approximately $2.6 million, or one percent, of the Bank's loan portfolio.
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In addition, as described in "--Products and Services--Lending
Programs--Mortgage Loans," the Bank has an agreement with FMN whereby the Bank
acts as a loan originator on behalf of FMN and has similar agreements with
E-loan and Fidelity. From May 1998, when the Bank began providing services under
these agreements, to December 31, 1998, the Bank funded $142.1 million of loans
for third parties. As of December 31, 1998, the Bank had $23.2 million in loan
sale proceeds receivable relating to these agreements. In the future, the Bank
may retain a portion of such loans for its own portfolio.
The Bank's loan committee establishes underwriting standards and criteria
for the Bank's loan portfolio and monitors the portfolio on an ongoing basis.
The loan committee applies the same underwriting standards to all of the Bank's
loans, regardless of how they are originated. The Bank has also retained an
outside consulting firm to assist the loan committee in its review of the loan
portfolio and to conduct due diligence on purchased loans.
In addition to loans, the Bank invests deposit funds in various fixed income
securities. Our philosophy of high credit quality also guides our investment
decisions. The Bank's fixed income securities portfolio is comprised primarily
of United States Treasury obligations, collateralized mortgage obligations and
mortgage-backed securities issued by agencies such as Fannie Mae and Freddie
Mac.
MARKETING
Our marketing strategy is aimed at making Net.B@nk the leading brand in the
Internet financial services market. Our marketing strategy is designed to grow
our customer base and includes targeted advertising on the Internet and other
media, developing strategic partnerships that will enhance our product and
service offerings and fostering public relations. We currently market the Bank's
products and services by placing banner ads on portals such as Yahoo!, Infoseek
and Excite and Web sites such as Bank Rate Monitor, Motley Fool and Money.com
that we believe will attract the Bank's target customers. The Bank also derives
a marketing benefit from media coverage that the Bank generates through its
public relations campaign. We believe such coverage increases the general
public's awareness of the Bank and attracts new customers. In addition to these
advertising and public relations activities, we continually seek to form product
and marketing alliances with other Internet financial services providers such as
E-loan, Republic and UVEST to broaden our product and service offerings and
appeal to a broader customer base.
We are currently expanding our marketing strategies to extend beyond our
on-line advertising and public relations campaigns. New initiatives will include
print advertisements in publications aimed at our target customers and potential
strategic partners, direct mail marketing, co-branded credit cards and other
strategic partnerships with Internet financial services providers. We plan to
allocate the majority of our advertising budget to on-line advertising because
we believe it is a rapidly growing medium that best reaches our target audience.
We also plan to increase our cross-marketing initiatives to existing customers.
We realize that our new marketing strategy will require a significant
investment of resources and a commitment to pursue new marketing relationships.
Toward this end, we have increased our marketing expenses from approximately
$695,000 for 1998 to a budgeted $3.6 million for 1999. We plan to hire
additional marketing support staff and believe that a significant increase in
our investment in marketing initiatives will enable the Bank to increase its
name recognition and grow its customer and deposit base on a national scale.
COMPETITION
We believe that the principal competitive factors in the banking industry
are market presence, customer service, convenience, interest rates and product
offerings. While the banking industry is highly competitive, we believe we
compete effectively with our principal competitors, which are traditional banks,
Internet banks and other financial services providers. We believe the Bank's low
cost structure, which allows it to offer attractive interest rates and low fees,
gives it a competitive advantage over traditional
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banks, which must support a physical branch structure. We also believe the
Bank's operating history and name recognition give it an advantage over other
independent Internet banks, which are still in the early stages of operation.
Furthermore, the Bank is able to offer a broader array of products and services
than many non-bank financial services providers. However, most of the Bank's
competitors have larger customer bases, greater name recognition and brand
awareness, greater financial and other resources and longer operating histories
than the Bank. Additionally, new competitors and competitive factors are likely
to emerge, particularly in view of the rapid development of Internet commerce.
OPERATIONS
ACCOUNT ACTIVITY. Customers can access the Bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access the Bank's service menu, they can open a new account, review the status
of an existing account or engage in a transaction. To open a new account, the
customer completes the on-line enrollment form on the Bank's Web site, prints
the signature card, signs it and mails it to the Bank. Customers can make
deposits into an open account at the Bank via direct deposit programs, by
transferring funds between accounts at the Bank, by wire transfer, by mail or in
person at the Bank's principal executive offices. No teller line is maintained,
however, and the Bank does not have or intend to establish a physical branch
system. Customers can also make withdrawals and have access to their accounts at
ATMs that are affiliated with the Cirrus, Honor and Avail networks, which
provides added customer convenience. Customers can apply for loans, review
account activity, enter transactions into an on-line account register, pay bills
electronically, conduct brokerage transactions, receive statements by mail and
print bank statement reports from any PC with a secure Web browser, regardless
of its location.
SERVICE PROVIDERS. We have negotiated relationships with a select group of
service providers who not only provide the Bank with significant quality,
security, reliability, performance and marketing capabilities, but also play an
integral role in implementing the Bank's full financial services strategy.
Because it outsources its principal operational functions to experienced
third-party service providers that have the capacity to process a high volume of
transactions, the Bank can respond easily to growth. Moreover, we have preserved
a degree of flexibility that enables us to assess and evaluate our product
offerings and delivery structure on an ongoing basis and to incorporate other
alliance opportunities as they present themselves. Should any of these
relationships terminate, however, we believe we could secure the required
services from an alternative source without material interruption of the Bank's
operations. Our principal service providers are described below:
- NCR. NCR provides operational support for the Bank's Internet banking and
bill payment applications. Specifically, NCR provides a secure Web site,
software that performs services relating to the Bank's infrastructure and
other electronic banking services. NCR also hosts Edify's electronic
banking software on its secure server and provides the interface necessary
to link the Bank's servers with those used by BISYS and CheckFree.
- BISYS. The Bank receives core systems processing services, such as deposit
account, loan and year-end processing services, from BISYS. The BISYS
server interfaces with NCR's secure server and verifies customer passwords
and identification. BISYS also operates the Bank's ATM and debit card
systems.
- EDIFY. Edify licenses its Electronic Banking System and Electronic
Workforce software, a suite of Internet banking applications, to the Bank.
Edify also maintains the software and provides consulting services as
needed.
- CHECKFREE. CheckFree provides electronic bill paying services to the
Bank's customers. Customers can pay their bills on-line through electronic
funds transfer or a written draft prepared and sent to the creditor.
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- UVEST. UVEST provides discount brokerage services to the Bank's customers.
UVEST executes the trades and receives a commission that is automatically
deducted from the customer's deposit account. The Bank also charges
customers an account fee and an additional fee for each stock trade.
- FIRST MORTGAGE NETWORK. FMN processes mortgage loan applications submitted
through the Bank's Web site. It reviews the application, contacts the
customer and closes the loan for the Bank.
SECURITY
The Bank's ability to provide its customers with secure financial services
over the Internet is of paramount importance. Management continually evaluates
the Internet systems, services and software used in the Bank's operations to
ensure that they meet the highest standards of security. The following are among
the security measures that are in place:
ENCRYPTED TRANSACTIONS. All banking transactions and Internet
communications are encrypted so that sensitive information is not transmitted
over the Internet in a form that can be read or easily deciphered. Encryption of
Internet communications is accomplished through the use of the Netscape Secure
Sockets Layer ("SSL") technology. SSL is the standard for encryption on the
Internet and is currently used by Netscape's NAVIGATOR (Version 2.0 or higher)
and Microsoft's INTERNET EXPLORER (Version 3.0 or higher). Messages between the
Bank server and BISYS are encrypted using DES encryption, which is described in
"--Isolated Bank Server" below.
SECURE LOGON. To eliminate the possibility that a third party may download
the Bank's or a customer's password file, user identification and passwords are
not stored on the Internet or the Web server. Furthermore, passwords are strings
of six to eight alpha-numeric characters, which makes the chance that a password
can be randomly guessed less than one in one trillion.
ISOLATED BANK SERVER. The computer used to provide the Bank's services
cannot be accessed directly through the Internet. It is on a private connection,
or intranet, that provides two-way communication between the isolated bank
server and the NCR Internet Server. Consequently, an Internet user cannot
directly access the computer that actually provides the Bank's services.
All banking services are routed from the NCR server through a firewall. The
firewall is a combined software and hardware product that precisely defines,
controls and limits the access to "internal" computers from "outside" computers
across a network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the network. In other words, the
firewall is a mechanism used to protect the Bank server from the freely
accessible Internet. Furthermore, all messages sent or received between the NCR
server and the Bank server are encrypted using DES encryption. This is a
symmetric key algorithm and is highly secure because it is not susceptible to
standard ciphertext attacks. Thus, even if a perpetrator were able to route a
message to the Bank server through the firewall, the message could not be
encrypted in a way that would be considered valid by the server. As a result,
the Bank server would reject the message.
AUTHENTICATED SESSION INTEGRITY. An authenticated user is any user who
signs onto the Bank site with a valid user ID and password. Although the vast
majority of authenticated users are legitimate bank customers, the Bank server
is programmed to limit exposure to an authenticated user who is attempting to
defraud the Bank. If the authenticated user alters the URL (the command or
request that is sent from the browser to the server) in any way in an attempt to
gain access to other users' accounts, the Bank server immediately detects that
the session integrity variables have been violated. The Bank server will
immediately stop the session and record the attempt in a log so that the Bank's
staff can investigate.
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PHYSICAL SECURITY. All servers and network computers reside in secure NCR
facilities. Currently, computer operations supporting the Bank's Internet access
are based in Columbia, Maryland with backup facilities in Dayton, Ohio. Only
employees with proper photographic identification may enter the primary
building. The computer operations are located in a secure area, with admission
only by key card. Access to the bank server console requires further password
identification.
SECURE MODEM ACCESS. The Bank server and BISYS are connected by a private
line that is not accessible from the public network. The Bank server is
connected to CheckFree by a similar private connection. A dial-up maintenance
port also permits access to the Bank server, The modem that provides the only
access to this port is specially protected and is only enabled on an as-needed
basis.
SERVICE CONTINUITY. NCR and BISYS each provide a fully redundant network
with no single point of failure. The Bank server is also "mirrored" so that
hardware failures or software bugs should cause no more than a few minutes of
service outage. "Mirroring" means that the Bank server is backed up continuously
so that all data is stored in two physical locations. This network and server
redundancy ensures that access to the Bank will be reliable. However, if
customers are not able to access the Bank over the Internet, customers will
retain access to their funds through several means, including paper checks, ATM
cards, customer service and an automated telephone response system.
MONITORING. All customer transactions on the Bank server in BISYS and in
CheckFree produce one or more entries into transactional logs. NCR and the Bank
recognize that it is critical to monitor these logs for unusual or fraudulent
activity. As mentioned previously, any attempt by an authenticated user to
modify the command or request that is sent from the browser to the server will
be logged. Additionally, all financial transactions will be logged. Bank
personnel review these logs regularly, and any abnormal or unusual activity will
be noted and appropriate action will be taken either by the Bank, NCR or both.
Ultimately, vigilant monitoring is the best defense against fraud.
The preceding security measures are designed to ensure that the Bank is set
up in a secure manner. However, over the long term, the security of the Bank
depends upon the procedures and standards used for administration of the
Internet site. Both NCR and BISYS are required to obtain SAS 70 certification
from a national accounting firm. This is a certification by independent auditors
that the NCR and BISYS computer systems are being managed and operated in a
manner consistent with accepted practices. Both BISYS and NCR have received this
certification.
We believe the risk of fraud presented by Internet banking is not materially
different from the risk of fraud inherent in any banking relationship. We
believe the three principal reasons for a breach in bank security are: (i)
misappropriation from the user of the user's account number or password, (ii)
penetration of the bank's server by an outside "hacker" and (iii) fraud
committed by an employee of the bank or one of its service providers. Both
traditional banks and Internet banks are vulnerable to these types of fraud. By
establishing the security measures described above, we believe the Bank has
reduced its vulnerability to the first two types of fraud. To counteract fraud
by employees, associates and consultants, we have established internal
procedures and policies designed to ensure that, as in any bank, proper control
and supervision is exercised over employees, associates and consultants. We also
counteract all types of fraud through daily examination of the Bank's
transactional logs.
SUPERVISION AND REGULATION
BACKGROUND
In connection with its approval of the acquisition of our bank charter on
July 31, 1997, the Office of Thrift Supervision (the "OTS") required Net.B@nk,
Inc. (the "Company") to make certain commitments with respect to its ongoing
operations. These commitments included: (i) to receive prior OTS approval of any
proposed change of senior management or directors for a period of three years,
(ii) to operate within the parameters of the Company's business plan as
submitted to the OTS, (iii) to obtain from an
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independent computer security specialist an independent review of, and written
report regarding, the Internet banking security measures employed by the
Company, (iv) to comply with the OTS policy statement regarding on-line banking,
(v) to ensure that the Company's directors and certain executive officers and
shareholders refrain from disposing of their restricted shares of Common Stock
without the prior consent of the OTS until July 28, 2000, (vi) to obtain the
approval of the Regional Director of the OTS with respect to any changes in the
Company's stock benefit plans effected on or before July 28, 2000, (vii) to
comply with OTS directives, if any, to require the exercise or forfeiture of
participants' rights under the Company's stock benefit plans in the event the
Bank's capital falls below minimum OTS requirements and (viii) to submit to the
OTS a structured project plan describing the steps and timing required to
replace the Web hosting services that were previously provided by AT&T Corp. and
are now provided by NCR. The Company and its directors, executive officers and
shareholders have complied with these conditions to date. On January 8, 1999,
the OTS granted Carolina First permission to sell a portion of its shares of
Common Stock in the Company's February 1999 secondary public offering. As a
condition to its approval, the OTS required that two of the four directors
initially nominated by Carolina First resign following completion of the
offering and that those directors be replaced with two outside directors within
six months of such resignations. The OTS also requires Carolina First's
continued compliance with the condition described in clause (v) above with
respect to its remaining shares of Common Stock. We do not believe that these
commitments materially affect the Bank's operations.
Carolina First currently owns more than five percent of the Company's
outstanding Common Stock. As a result, Carolina First is subject to certain
Federal Reserve Board regulations regarding its relationship with the Company.
Consequently, until the earlier of the date that Carolina First owns less than
five percent of the Company's outstanding Common Stock or July 28, 2000, the
Company will not engage in any activities that are not permissible under
applicable Federal Reserve Board regulations.
Savings and loan holding companies and federal savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect the Company and the Bank.
This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referred to below and is not intended to be
an exhaustive description of the statutes or regulations applicable to the
business of the Company and the Bank. Supervision, regulation and examination of
the Company and the Bank by the regulatory agencies are intended primarily for
the protection of depositors of the Bank rather than shareholders of the
Company. The terms bank, savings institution, savings association, federal
savings bank and thrift are used interchangeably in this section to refer to
savings associations such as the Bank that are subject to supervision and
regulation by the OTS.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
The Company is registered as a holding company under both the Savings and
Loan Holding Company Act (the "SLHCA") set forth in Section 10 of the Home
Owners Loan Act ("HOLA") and the Financial Institutions Code of Georgia
("FICG"). The Company is currently regulated under such acts by the OTS and by
the Georgia Department of Banking and Finance (the "Georgia Department"),
respectively. As a savings and loan holding company, the Company is required to
file with the OTS an annual report and such additional information as the OTS
may require pursuant to the SLHCA. The OTS also has authority to conduct, and in
fact conducts, examinations of the Company and each of its subsidiaries.
Savings and loan holding companies and their subsidiaries are prohibited
from engaging in any activity or rendering any services for or on behalf of
their savings institution subsidiaries for the purpose or with the effect of
evading any law or regulation applicable to the institution. This restriction is
designed to prevent the use of holding company affiliates to evade requirements
of the SLHCA that were enacted to protect the holding company's savings
institution subsidiaries. A unitary thrift holding company, that is, a holding
company that owns only one insured institution whose subsidiary institution
satisfies the qualified thrift lender test (discussed below), is not restricted
to any statutorily prescribed list of permissible
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activities, and the SLHCA and the FICG impose no limits on direct or indirect
non-savings institution subsidiary operations.
The SLHCA and the FICG make it unlawful for any savings and loan holding
company, directly or indirectly, or through one or more subsidiaries or one or
more transactions, to acquire control of another savings association or another
savings and loan holding company without prior approval from the OTS and the
Georgia Department, respectively. An acquisition by merger, consolidation or
purchase of assets of such an institution or holding company or of substantially
all of the assets of such an institution or holding company is also prohibited
without prior OTS or Georgia Department approval. When considering an
application for such an acquisition, the OTS and the Georgia Department take
into consideration the financial and managerial resources and future prospects
of the prospective acquiring company and the institution involved. This includes
consideration of the competence, experience and integrity of the officers,
directors and principal shareholders of the acquiring company and savings
institution. In addition, the OTS and the Georgia Department consider the effect
of the acquisition on the institution, the insurance risk to the Savings
Association Insurance Fund ("SAIF") and the convenience and needs of the
community to be served.
The OTS may not approve an acquisition that would result in the formation of
certain types of interstate banking networks. The OTS is precluded from
approving an acquisition that would result in the formation of a holding company
controlling savings institutions in more than one state unless the acquiring
company or one of its savings institution subsidiaries is authorized to acquire
control of an institution or to operate an office in the additional state
pursuant to a supervisory acquisition authorized under Section 13(k) of the
Federal Deposit Insurance Act (the "FDIA") or unless the statutes of the state
in which the institution to be acquired is located permits such an acquisition.
Savings and loan holding companies are generally allowed to acquire or to
retain as much as 5% of the voting shares of a savings institution or savings
and loan holding company without regulatory approval.
BANK REGULATION
GENERAL. The Bank is a federal savings bank organized under the laws of the
United States and subject to examination by the OTS. The OTS regulates all areas
of the Bank's banking operations including reserves, lending, mergers, payment
of dividends, interest rates, establishment of branches and other aspects of
operations. OTS regulations generally provide that federal savings banks must be
examined no less frequently than every 12 months, unless the federal savings
bank (i) has assets of less than $250 million, (ii) is well capitalized, (iii)
was found to be well managed and its composite condition was found to be
outstanding (or good, if the bank had total assets of not more than $100
million) during its last examination, (iv) is not subject to a formal
enforcement proceeding or an order from the FDIC or another banking agency and
(v) has not undergone a change of control during the previous 12-month period.
Federal savings banks must be examined no less frequently than every 18 months.
The Bank also is subject to assessments by the OTS to cover the costs of such
examinations.
The Bank is also insured and regulated by the FDIC. The major functions of
the FDIC with respect to insured federal savings banks include paying certain
depositors in an amount limited by law in the event an insured bank is closed
without adequately providing for payment of certain claims of depositors and
preventing the continuance or development of unsound and unsafe banking
practices.
Subsidiary institutions of a savings and loan holding company, such as the
Bank, are subject to certain restrictions imposed by the Federal Reserve Act,
and are implemented by HOLA and OTS regulations, on any extension of credit to
the holding company or any of its subsidiaries, on investment in the stock or
other securities thereof and on the taking of such stock or securities as
collateral for loans to any borrower. Such restrictions and regulations are
discussed more fully below. In addition, a holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit or provision of any property or services.
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CAPITAL REQUIREMENTS. OTS regulations require that federal savings banks
maintain (i) "tangible capital" in an amount of not less than 1.5% of adjusted
total assets, (ii) "core capital" in an amount not less than 3.0% of adjusted
total assets and (iii) a level of risk-based capital equal to 8.0% of
risk-weighted assets. Under OTS regulations, the term "core capital" generally
includes common stockholders' equity, noncumulative perpetual preferred stock
and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries less unidentifiable intangible assets (other than
certain amounts of supervisory goodwill) and certain investments in certain
subsidiaries plus 90% of the fair market value of readily marketable purchased
mortgage servicing rights ("PMSRs") and purchased credit card relationships
(subject to certain conditions). "Tangible capital" generally is defined as core
capital minus intangible assets and investments in certain subsidiaries and does
not include PMSRs. Most banks are required to maintain a "minimum-leverage"
ratio related to core capital of at least 4.0% to 5.0% of adjusted total assets.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 200% (again depending upon the nature of the asset) and (iii)
the resulting amounts are added together and constitute total risk-weighted
assets. "Total capital," for purposes of the risk-based capital requirement
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock, subordinated debt and general loan
and lease loss allowances up to 1.25% of risk-weighted assets) less certain
deductions. The amount of supplementary capital that may be counted towards
satisfaction of the total capital requirement may not exceed 100% of core
capital, and OTS regulations require the maintenance of a minimum ratio of core
capital to total risk-weighted assets of 4.0%.
OTS regulations have been amended to include an interest-rate risk component
to the risk-based capital requirement. Under this regulation, an institution is
considered to have excess interest rate risk if, based upon a 200 basis point
change in market interest rates, the market value of an institution's capital
changes by more than 2.0%. This new requirement is not expected to have any
material effect on the ability of the Bank to meet the risk-based capital
requirement. The OTS also revised its risk-based capital standards to ensure
that its standards provide adequately for concentration of credit risk, risk
from nontraditional activities and actual performance and expected risk of loss
on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
Additionally, the Georgia Department requires that savings and loan holding
companies, such as the Company, must maintain a 5.0% Tier 1 capital ratio on a
consolidated basis. As of December 31, 1998, the Company's Tier 1 capital ratio
was 14.44%.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") imposes a regulatory matrix which requires
the federal banking agencies, which include the OTS, the FDIC, the Office of the
Comptroller of Currency and the Federal Reserve Board, to take prompt corrective
action to deal with depository institutions that fail to meet their minimum
capital requirements or are otherwise in a troubled condition. The prompt
corrective action provisions require undercapitalized institutions to become
subject to an increasingly stringent array of restrictions, requirements and
prohibitions, as their capital levels deteriorate and supervisory problems
mount. Should these corrective measures prove unsuccessful in recapitalizing the
institution and correcting its problems, FDICIA mandates that the institution be
placed in receivership.
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Pursuant to regulations promulgated under FDICIA, the corrective actions
that the banking agencies either must or may take are tied primarily to an
institution's capital levels. In accordance with the framework adopted by
FDICIA, the banking agencies have developed a classification system, pursuant to
which all banks and thrifts will be placed into one of five categories: well
capitalized institutions, adequately capitalized institutions, undercapitalized
institutions, significantly undercapitalized institutions and critically
undercapitalized institutions. The capital thresholds established for each of
the categories are as follows:
<TABLE>
<CAPTION>
TIER 1
RISK-BASED RISK-BASED
CAPITAL CATEGORY LEVERAGE RATIO CAPITAL CAPITAL
- --------------------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Well Capitalized............................. 5.0% or more 10.0% or more 6.0% or more
Adequately Capitalized....................... 4.0% or more 8.0% or more 4.0% or more
Undercapitalized............................. Less than 4.0% Less than 8.0% Less than 4.0%
Significantly Undercapitalized............... Less than 3.0% Less than 6.0% Less than 3.0%
Critically Undercapitalized.................. 2.0% or less -- --
tangible equity
</TABLE>
The undercapitalized, significantly undercapitalized and critically
undercapitalized categories are successively inclusive; therefore, a critically
undercapitalized institution would also be an undercapitalized institution and a
significantly undercapitalized institution. This overlap ensures that the
remedies and restrictions prescribed for undercapitalized institutions will also
apply to institutions in the lowest two categories.
The downgrading of an institution's category is automatic in two situations:
(i) whenever an otherwise well capitalized institution is subject to any written
capital order or directive and (ii) where an undercapitalized institution fails
to submit or implement a capital restoration plan or has its plan disapproved.
The federal banking agencies may treat institutions with applicable ratios in
the well capitalized, adequately capitalized and undercapitalized categories as
if they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels. FDICIA prohibits
all insured institutions regardless of their level of capitalization from paying
any dividend or making any other kind of capital distribution or paying any
management fee to any controlling person if following the payment or
distribution, the institution would be undercapitalized. While the prompt
corrective action provisions of FDICIA contain no requirements or restrictions
aimed specifically at adequately capitalized institutions, other provisions of
FDICIA and the agencies' regulations relating to deposit insurance assessments,
brokered deposits and interbank liabilities treat adequately capitalized
institutions less favorably than those that are well capitalized. For example, a
depository institution that is not well capitalized is prohibited from accepting
deposits through a deposit broker. However, an adequately capitalized
institution can apply for a waiver to accept brokered deposits. Institutions
that receive a waiver are subject to limits on the rates of interest they may
pay on brokered deposits.
CAPITAL DISTRIBUTIONS. An OTS rule imposes limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers). Under the current rule, a savings association is
classified based on its level of regulatory capital both before and after giving
effect to a proposed capital distribution. Under a proposed rule, the OTS would
conform its three classifications to the five capital classifications set forth
under the prompt corrective action regulations. Under the proposal, institutions
that are at least adequately capitalized would still be required to provide
prior notice. Well capitalized institutions could make capital distributions
without prior regulatory approval in specified amounts in any calendar year.
Under current OTS regulations, a savings association that both before and
after a proposed capital distribution has net capital equal to or in excess of
its capital requirements may, subject to any otherwise applicable statutory or
regulatory requirements or agreements entered into with the regulators, make
capital distributions in any calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (i.e., the percentage by which the
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association's capital-to-assets ratio exceeds the ratio of its fully phased-in
capital requirement to its assets) at the beginning of the calendar year. No
regulatory approval of the capital distribution is required, but prior notice
must be given to the OTS. An institution that either before or after a proposed
capital distribution fails to meet its then applicable minimum capital
requirement or that has been notified that it needs more than normal supervision
may not make any capital distributions without the prior written approval of the
OTS. In addition, the OTS may prohibit a proposed capital distribution, which
would otherwise be permitted by OTS regulations, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
LIQUIDITY. Under OTS regulations, savings associations must maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) in each calendar quarter of not
less than 4% of: (i) the amount of its liquidity base at the end of the
preceding calendar quarter or (ii) the average daily balance of its liquidity
base during the preceding quarter. The average daily balance of either liquid
assets or liquidity base in a quarter is calculated by adding the respective
balance as of the close of each business day in a quarter and, for any
non-business day, as of the close of the nearest preceding business day, and
dividing the total by the number of days in the quarter. The OTS may, to the
extent and under conditions it may prescribe, permit a savings association to
reduce its liquid assets below the minimum amount to meet withdrawals or pay
obligations. In addition, the OTS may suspend part or all of the minimum
liquidity requirements whenever it determines that conditions of national
emergency or unusual economic stress exist. Any such suspension, unless sooner
terminated by its terms or by the OTS, shall terminate after 90 days, but the
OTS may again suspend part or all of such requirement at any time. Savings
institutions also are required to maintain short-term liquid assets to satisfy
Federal Reserve Board requirements.
EQUITY INVESTMENTS. The OTS has revised its risk-based capital regulation
to modify the treatment of certain equity investments and to clarify the
treatment of other equity investments. Equity investments that are permissible
for both savings banks and national banks will no longer be deducted from
savings associations' calculations of total capital over a five-year period.
Instead, permissible equity investments will be placed in the 100% risk-weight
category, mirroring the capital treatment prescribed for those investments when
made by national banks under the regulations of the OCC. Equity investments held
by savings associations that are not permissible for national banks must still
be deducted from assets and total capital.
QUALIFIED THRIFT LENDER REQUIREMENT. A federal savings bank is deemed to be
a "qualified thrift lender" ("QTL") if: (i) the savings association qualifies as
a domestic building and loan association, as such term is defined in section
7701(a)(19) of the Internal Revenue Code of 1986, as amended or (ii) the savings
association's qualified thrift investments equal or exceed 65% of its "portfolio
assets" on a monthly average basis in nine out of every 12 months. Qualified
thrift investments generally consist of (i) various housing related loans and
investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), (ii) certain obligations of the FDIC and (iii) shares of stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% in
the aggregate of portfolio assets: (i) 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination, (ii)
investments in securities of a service corporation that derives at least 80% of
its income from residential housing finance, (iii) 200% of loans and investments
made to acquire, develop or construct starter homes or homes in credit needy
areas (subject to certain conditions), (iv) loans for the purchase or
construction of churches, schools, nursing homes and hospitals and (v) consumer
loans. For purposes of the QTL test, the term "portfolio assets" means the
savings institution's total assets minus goodwill and other intangible assets,
the value of property used by the savings institution to conduct its business
and liquid assets held by the savings institution in an amount up to 20% of its
total assets.
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OTS regulations provide that any savings association that fails to meet the
definition of a QTL must either convert to a national bank charter or limit its
future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national banks.
Further, within one year of the loss of QTL status, a holding company of a
savings association that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL.
LOANS TO ONE BORROWER LIMITATIONS. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make loans to a single borrower in
amounts up to 15% of their unimpaired capital and surplus, plus an additional
10% of capital and surplus for loans secured by readily marketable collateral.
HOLA provides exceptions under which a savings association may make loans to one
borrower in excess of the generally applicable national bank limits. A savings
association may make loans to one borrower in excess of such limits under the
following circumstances: (i) for any purpose, in any amount not to exceed
$500,000 or (ii) to develop domestic residential housing units, in an amount not
to exceed the lesser of $30 million or 30% of the savings association's
unimpaired capital and unimpaired surplus, provided other conditions are
satisfied. The Federal Institutions Reform, Recovery, and Enforcement Act of
1989 provided that a savings association could make loans to one borrower to
finance the sale of real property acquired in satisfaction of debts previously
contracted in good faith in amounts up to 50% of the savings association's
unimpaired capital and unimpaired surplus. The OTS, however, has modified this
standard by limiting loans to one borrower to finance the sale of real property
acquired in satisfaction of debts to 15% of unimpaired capital and surplus. That
rule provides, however, that purchase money mortgages received by a savings
association to finance the sale of such real property do not constitute "loans"
(provided no new funds are advanced and the savings association is not placed in
a more detrimental position holding the note than holding the real estate) and,
therefore, are not subject to the loans to one borrower limitations.
COMMERCIAL REAL PROPERTY LOANS. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to an
amount not in excess of 20% of the savings association's assets, and amounts in
excess of 10% of such total assets must be devoted to small business real
property loans.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA")
and the implementing OTS regulations, federal savings banks have a continuing
and affirmative obligation to help meet the credit needs of their local
communities, including low and moderate-income neighborhoods, consistent with
the safe and sound operation of the institution. The CRA requires the boards of
directors of financial institutions, such as the Bank, to adopt a CRA statement
for each assessment area that, among other things, describes its efforts to help
meet community credit needs and the specific types of credit that the
institution is willing to extend. The regulations promulgated pursuant to CRA
contain three evaluation tests: (i) a lending test which will compare the
institution's market share of loans in low- and moderate-income areas to its
market share of loans in its entire service area and the percentage of a bank's
outstanding loans to low- and moderate-income areas or individuals, (ii) a
services test which will evaluate the provision of services that promote the
availability of credit to low-and moderate-income areas and (iii) an investment
test, which will evaluate an institution's record of investments in
organizations designed to foster community development, small- and
minority-owned businesses and affordable housing lending, including state and
local government housing or revenue bonds.
FAIR LENDING. Congress and various federal agencies (including, in addition
to the bank regulatory agencies, the Department of Housing and Urban
Development, the FTC and the Department of Justice) (collectively the "Federal
Agencies") responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers are
experiencing discrimination in their efforts to obtain loans. In recent years,
the Department of Justice has filed suit against financial
16
<PAGE>
institutions that it determined had discriminated, seeking fines and restitution
for borrowers who allegedly suffered from discriminatory practices. Most, if not
all, of these suits have been settled (some for substantial sums) without a full
adjudication on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of proving lending discrimination were identified: (i)
overt evidence of discrimination, when a tender blatantly discriminates on a
prohibited basis, (ii) evidence of disparate treatment, when a lender treats
applicants differently based on a prohibited factor even where there is no
showing that the treatment was motivated by prejudice or a conscious intention
to discriminate against a person and (iii) evidence of disparate impact, when a
lender applies a practice uniformly to all applicants, but the practice has a
discriminatory effect, even where such practices are neutral on their face and
are applied equally, unless the practice can be justified on the basis of
business necessity.
FDIC INSURANCE ASSESSMENTS. Federal deposit insurance is required for all
federally chartered savings associations. Deposits at the Bank are insured to a
maximum of $100,000 for each depositor by the SAIF. As a SAIF-insured
institution, the Bank is subject to regulation and supervision by the FDIC, to
the extent deemed necessary by the FDIC to ensure the safety and soundness of
the SAIF. The FDIC is entitled to have access to reports of examination of the
Bank made by the OTS and all reports of condition filed by the Bank with the
OTS. The FDIC also may require the Bank to file such additional reports as it
determines to be advisable for insurance purposes. Additionally, the FDIC may
determine by regulation or order that any specific activity poses a serious
threat to the SAIF and that no SAIF member may engage in the activity directly.
Insurance premiums are paid in semiannual assessments. Under a risk-based
assessment system, the FDIC is required to calculate on a semi-annual basis a
savings association's semiannual assessment based on (i) the probability that
the insurance fund will incur a loss with respect to the institution (taking
into account the institution's asset and liability concentration), (ii) the
potential magnitude of any such loss and (iii) the revenue and reserve needs of
the insurance fund. The semiannual assessment imposed on the Bank may increase
depending on the SAIF revenue and expense levels, and the risk classification
applied to the Bank.
The deposit insurance assessment rate charged to each institution depends on
the assessment risk classification assigned to each institution. Under the
risk-classification system, each SAIF member is assigned to one of three capital
groups: "well capitalized," "adequately capitalized" or "less than adequately
capitalized," as such terms are defined under the OTS's prompt corrective action
regulation (discussed above), except that "less than adequately capitalized"
includes any institution that is not well capitalized or adequately capitalized.
Within each capital group, institutions are assigned to one of three supervisory
subgroups--"healthy" (institutions that are financially sound with only a few
minor weaknesses), "supervisory concern" (institutions with weaknesses which, if
not corrected could result in significant deterioration of the institution and
increased risk to the SAIF) or "substantial supervisory concern" (institutions
that pose a substantial probability of loss to the SAIF unless corrective action
is taken). The FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and supervisory
subgroup classification.
Historically, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF"). Deposit
insurance premiums were set to facilitate each fund achieving its designated
reserve ratios. As each fund achieves its designated reserve ratio, however, the
FDIC has the authority to lower the premium assessments for that fund to a rate
that would be sufficient to maintain the designated reserve ratio. In August
1995, the FDIC determined that the BIF had achieved its designated reserve ratio
and approved lower BIF premium rates for deposit insurance by the BIF for all
17
<PAGE>
but the riskiest institutions. On November 14, 1995, the FDIC determined that
BIF deposit insurance premiums for well capitalized banks would be further
reduced to the then-statutory minimum of $2,000 per institution per year,
effective January 1, 1996. Because the SAIF remained significantly below its
designated reserve ratio, insurance premiums for assessable SAIF deposits were
not reduced in either FDIC action.
The financial condition of the SAIF resulted in the adoption of the Deposit
Insurance Funds Act of 1996 ("DIFA"), which was enacted on September 30, 1996 as
part of the Omnibus Consolidated Appropriations Act. Under DIFA, a special
one-time assessment of 65.7 cents per $100 of assessable SAIF deposits was
collected on November 27, 1996 and applied retroactively to SAIF deposits as of
March 31, 1995. DIFA provides that special assessments are deductible under
Section 162 of the Internal Revenue Code in the year in which the assessment is
paid. After collection of the special assessment, the SAIF achieved its
designated reserve ratio and SAIF premium rates became the same as BIF rates.
DIFA further provided that BIF and SAIF were to be merged, creating the "Deposit
Insurance Fund," on January 1, 1999, provided that bank and savings association
charters were combined by that date. The Treasury Department has submitted a
report to Congress on the development of a common charter for all insured
depository institutions. See "--Elimination of Federal Savings Association
Charter."
DIFA further assesses premiums for Financing Corporation Bond debt service
("FICO"). Beginning January 1, 1997, FICO premiums for BIF and SAIF became 1.3
and 6.4 basis points, respectively. Full pro rata sharing of FICO will begin no
later than January 1, 2000.
Effective January 1, 1997, SAIF members had the same risk-based assessment
schedule as BIF members, which is 0 to 27 cents per $100 of deposits. FICO
assessments of 1.3 cents for BIF deposits and 6.4 cents per $100 of deposits for
SAIF deposits were added to the BIF-assessable base and SAIF assessable base,
respectively, until December 31, 1999. Thereafter, approximately 2.4 cents per
$100 of deposits will be added to each regular assessment for all insured
depositors, thereby achieving full pro rata FICO sharing.
Insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the savings association has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings association,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal Housing Finance
Board (the "FHFB"). The FHLBs provide a central credit facility for member
savings associations. Collateral is required. The maximum amount that the FHLB
of Atlanta will advance fluctuates from time to time in accordance with changes
in policies of the FHFB and the FHLB of Atlanta, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings association may obtain will be restricted
in the event the institution fails to constitute a QTL.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board has adopted regulations
that require savings associations to maintain non-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). These
reserves may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the Bank's interest-earning
assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Collateral is required. Federal Reserve Board
regulations, however, require savings associations to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
18
<PAGE>
TRANSACTIONS WITH AFFILIATES RESTRICTIONS. Transactions engaged in by a
savings association or one of its subsidiaries with affiliates of the savings
association generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same manner
and to the same extent as such restrictions apply to transactions engaged in by
a member bank or one of its subsidiaries with affiliates of the member bank.
Section 23A of the Federal Reserve Act imposes both quantitative and qualitative
restrictions on transactions engaged in by a member bank or one of its
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things, that all transactions with affiliates be on terms
substantially the same, and at least as favorable to the member bank or its
subsidiary, as the terms that would apply to, or would be offered in, a
comparable transaction with an unaffiliated party. Exemptions from, and waivers
of, the provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve Board. The HOLA and OTS regulations
promulgated thereunder contain other restrictions on loans and extension of
credit to affiliates, and the OTS is authorized to impose additional
restrictions on transactions with affiliates if it determines such restrictions
are necessary to ensure the safety and soundness of any savings association.
Current OTS regulations are similar to Sections 23A and 23B of the Federal
Reserve Act.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ELIMINATION OF FEDERAL SAVINGS ASSOCIATION CHARTER
In recent years, the Congress has considered legislation that would
eliminate the federal savings association charter. If such legislation is
enacted, the Bank likely would be required to convert its federal savings bank
charter to either a national bank charter or to a state depository institution
charter and the Company would again become a bank holding company subject to
regulation by the Federal Reserve Board and the Georgia Department. Congress has
also considered various legislative proposals that would result in the
restructuring of federal regulatory oversight, including, for example,
consolidation of the OTS into another agency, or creation of a new Federal
banking agency to replace the various such agencies which presently exist. The
Bank is unable to predict whether such legislation will be enacted or, if
enacted, whether the federal savings bank charter will be eliminated.
ITEM 2. PROPERTIES
The Company leases 7,480 square feet of office space for its headquarters
and those of the Bank at 950 North Point Parkway, Suite 350, Alpharetta, Georgia
30005. The office space is subject to a lease that expires in January 31, 2005.
The Company has signed a new lease for approximately 19,615 square feet of
office space for a new headquarters location located at Royal Centre Three,
Suite 100, 11475 Great Oaks Way, Alpharetta, Georgia 30022. We plan to move our
offices to this location in the summer of 1999.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a
party or of which any of its properties are subject; nor are there material
proceedings known to the Company to be contemplated by any governmental
authority; nor are there material proceedings known to the Company, pending or
contemplated, in which any director, officer or affiliate or any principal
security holder of the Company, or any associate of any of the foregoing, is a
party or has an interest adverse to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Information regarding the quarterly high and low sales prices for the
Company's Common Stock, the number of record shareholders and the Company's
dividend policy is contained in the Company's Annual Report to Shareholders for
the year ended December 31, 1998 under the headings "Price Range of Common
Stock" and "Dividends" and is incorporated herein by reference.
On February 10, 1999, the Company consummated a secondary public offering in
which it issued 2,430,000 shares of Common Stock at an aggregate offering price
of $111,780,000, or $46.00 per share, in a firm commitment underwritten offering
managed by Bear, Stearns & Co., Inc., Morgan Keegan & Company, Inc., Raymond
James & Associates, Inc. and Kelton International Ltd., who received an
underwriting discount of $6,147,900 or $2.53 per share. To date, we have used
the net proceeds of the offering to purchase $84 million of loans and have
applied approximately $500,000 to marketing expenses that we expect to total
approximately $3.6 million for 1999. Pending the application of the remaining
net proceeds, we have invested them in short-term, investment grade,
interest-bearing securities.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Selected Financial Data" and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1998 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14 are included in the Company's
Annual Report to Shareholders for the year ended December 31, 1998 and are
hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the headings "Election of Directors," "Executive Officers" and "Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the heading "Compensation of Executive Officers" and "Historical
Information Regarding Repricing, Replacement or Cancellation and Regrant of
Options" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the heading "Security Ownership of Principal Shareholders and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 22, 1999
under the headings "Certain Transactions" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years ended December 31, 1998 and 1997 and the Period from
February 20, 1996 (Date of Incorporation) to December 31, 1996
Consolidated Statements of Shareholders' Equity (Deficit) for the Period
from February 20, 1996 (Date of Incorporation) to December 31, 1996 and
for the Years ended December 31, 1997 and 1998.
Consolidated Statements of Cash Flows for the Years ended December 31,
1998 and 1997 and the Period from February 20, 1996 (Date of
Incorporation) to December 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Financial Data (unaudited)
(b) Reports on Form 8-K:
None
21
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(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation.(1)
3.2 Bylaws.(1)
3.3 Amendments to the Bylaws adopted April 22, 1997.(1)
4.1 See Exhibits 3.1, 3.2 and 3.3 for provisions of the Company's Articles of Incorporation and
Bylaws governing the rights of holders of securities of the Company.
10.1 Amended and Restated Stock Purchase Agreement among the Company and First Alliance/Premier
Bancshares, Inc. dated as of December 18, 1996, as amended by Amendment No. 1 dated as of
February 25, 1997 and by Amendment No. 2 dated as of May 31, 1997.(1)
10.2 Lease Agreement dated as of March 17, 1999 between the Bank and Opus South Corporation.
10.3* 1996 Stock Incentive Plan(1), as amended as of March 19, 1998(2) and as of March 23, 1999.
10.4 Order for Services dated as of September 17, 1998 between the Bank and NCR Corporation.
10.5* Memorandum dated June 11, 1996 from T. Stephen Johnson to Donald S. Shapleigh.(1)
10.6 [Reserved]
10.7 Services Agreement dated as of August 21, 1996 by and between the Company and BISYS, Inc.,
with related addenda.(1)
10.8 BISYS Standard Services Price List and Special Services Price List, dated December 1, 1991.(1)
10.9 Lease Agreement dated as of September 15, 1997 between the Company and Windward Forest
Partners, LLC(2)
10.10++ Services Agreement dated as of October 31, 1997 between the Company and CheckFree
Corporation.(2)
10.11++ Services Agreement dated as of September 26, 1997 between the Company and Edify
Corporation.(2)
10.12++ Services Agreement dated as of June 16, 1997 between the Company and Nova Financial Corp.(2)
10.13++ Additional Service Agreement dated March 13, 1997 between the Company and BISYS, Inc. for
Total Access Banking and End User Software License Agreement for Total Access Banking.(2)
10.14++ Brokerage Service Agreement dated November 21, 1997 between the Company and UVEST Investment
Services, Inc.(2)
13.1 The following portions of the Company's 1998 Annual Report to Shareholders that have been
incorporated by reference herein:
Price Range of Common Stock
Dividends
</TABLE>
22
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Financial Statements, the Notes thereto and the Independent Auditors' Report
thereon
Quarterly Financial Data
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule for the fiscal year ended December 31, 1998 (SEC use only).
</TABLE>
- ------------------------
* Indicates a management compensation plan or agreement.
++ Confidential portions have been redacted pursuant to a Confidential
Treatment Request submitted in accordance with regulations promulgated under
the Securities Exchange Act of 1934, as amended.
(1) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Registration Statement on Form S-1 (Regis. No. 333-23717).
(2) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 0-22361).
(d) Financial Statements
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not
required under the related instructions or are inapplicable and have
therefore been omitted.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 23, 1999.
<TABLE>
<S> <C> <C>
NET.B@NK, INC.
By: /s/ D.R. GRIMES
-----------------------------------------
D.R. Grimes
Vice Chairman and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 23, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ T. STEPHEN JOHNSON
- ------------------------------ Chairman of the Board
T. Stephen Johnson
/s/ D.R. GRIMES
- ------------------------------ Vice Chairman and Chief
D.R. Grimes Executive Officer*
/s/ DONALD S. SHAPLEIGH, JR.
- ------------------------------ President, Chief Operating
Donald S. Shapleigh, Jr. Officer and Director
/s/ ROBERT E. BOWERS
- ------------------------------ Chief Financial Officer
Robert E. Bowers and Director**
/s/ WARD H. CLEGG
- ------------------------------ Director
Ward H. Clegg
/s/ J. STEPHEN HEARD
- ------------------------------ Director
J. Stephen Heard
- ------------------------------ Director
Robin C. Kelton
/s/ THOMAS H. MULLER, JR.
- ------------------------------ Director
Thomas H. Muller, Jr.
/s/ W. JAMES STOKES
- ------------------------------ Director
W. James Stokes
/s/ MACK I. WHITTLE, JR.
- ------------------------------ Director
Mack I. Whittle, Jr.
</TABLE>
- ------------------------
* Principal Executive Officer
** Principal Accounting and Financial Officer
24
<PAGE>
OFFICE
LEASE AGREEMENT
Opus South Corporation, a Florida corporation, as Landlord,
and
NetB@nk, Inc., a Georgia corporation, as Tenant
Dated: March 17, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
BASIC TERMS ......................................................................................................1
ARTICLE 1 LEASE OF PREMISES AND LEASE TERM...............................................................4
1.1 Premises................................................................................................4
1.2 Term, Delivery and Commencement.........................................................................4
1.3 Completion of Tenant's Work.............................................................................5
1.4 Effect of Occupancy.....................................................................................5
ARTICLE 2 RENTAL AND OTHER PAYMENTS......................................................................5
2.1 Base Rent...............................................................................................5
2.2 Additional Rent.........................................................................................6
2.3 Improvement Allowance...................................................................................6
2.4 Delinquent Rental Payments..............................................................................6
2.5 Independent Obligations.................................................................................6
ARTICLE 3 OPERATING EXPENSES - DEFINITION................................................................7
3.1 Operating Expenses......................................................................................7
3.2 Excess Operating Expenses...............................................................................8
3.3 Tenant's Prorata Share of Excess Operating Expenses.....................................................8
3.4 Controllable Expenses Cap...............................................................................9
ARTICLE 4 OPERATING EXPENSES - PAYMENT...................................................................9
4.1 Payment of Operating Expenses...........................................................................9
4.2 Estimation of Tenant's Prorata Share of Excess Operating Expenses.......................................9
4.3 Payment of Estimated Prorata Share of Excess Operating Expenses.........................................9
4.4 Re-Estimation of Tenant's Prorata Share of Excess Operating Expenses...................................10
4.5 Confirmation of Tenant's Prorata Share of Excess Operating Expenses....................................10
4.6 Not Used...............................................................................................10
4.7 Personal Property Taxes................................................................................10
4.8 Landlord's Right to Contest Taxes......................................................................11
4.9 Adjustment for Variable Operating Expenses.............................................................11
ARTICLE 5 USE...........................................................................................11
5.1 Permitted Use..........................................................................................11
5.2 Acceptance of Premises.................................................................................11
5.3 Increased Insurance....................................................................................12
5.4 Laws, Rules and Regulations............................................................................12
5.5 Common Areas...........................................................................................12
5.6 Parking................................................................................................13
5.7 Americans with Disabilities Act........................................................................13
</TABLE>
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<TABLE>
<S> <C>
ARTICLE 6 HAZARDOUS MATERIALS...........................................................................13
6.1 Compliance with Hazardous Materials Laws...............................................................13
6.2 Indemnification........................................................................................14
ARTICLE 7 SERVICES......................................................................................14
7.1 Landlord's Obligations.................................................................................14
7.2 Tenant's Obligations...................................................................................15
7.3 Other Provisions Relating to Services..................................................................16
7.4 Effects on Utilities...................................................................................16
ARTICLE 8 MAINTENANCE AND REPAIR........................................................................16
8.1 Landlord's Obligations.................................................................................16
8.2 Tenant's Obligations...................................................................................17
8.3 Tenant's Waiver of Claims Against Landlord.............................................................17
ARTICLE 9 CHANGES AND ALTERATIONS.......................................................................18
9.1 Landlord Approval......................................................................................18
9.2 Tenant Responsibility for Cost and Insurance...........................................................18
9.3 Construction Obligations and Ownership.................................................................18
9.4 Liens..................................................................................................19
9.5 Indemnification........................................................................................19
ARTICLE 10 RIGHTS RESERVED BY LANDLORD...................................................................19
10.1 Landlord's Entry.......................................................................................19
10.2 Landlord's Cure........................................................................................20
ARTICLE 11 INSURANCE.....................................................................................20
11.1 Landlord's Casualty Insurance Obligations..............................................................20
11.2 Tenant's Casualty Insurance Obligations................................................................21
11.3 Landlord's Liability Insurance Obligations.............................................................21
11.4 Tenant's Liability Insurance Obligations...............................................................21
11.5 Tenant's Miscellaneous Insurance Obligations...........................................................22
11.6 Tenant's Indemnification of Landlord...................................................................22
11.7 Mutual Waivers.........................................................................................22
11.8 Landlord's Deductible..................................................................................23
11.9 Tenant's Property......................................................................................23
11.10 Increase in Insurance...............................................................................23
11.11 Tenant's Failure to Insure..........................................................................23
ARTICLE 12 DAMAGE OR DESTRUCTION.........................................................................24
12.1 Tenantable Within 180 Days.............................................................................24
12.2 Not Tenantable Within 180 Days.........................................................................24
12.3 Property Substantially Damaged.........................................................................24
12.4 Uninsured Casualty or Unavailable Insurance Proceeds...................................................24
12.5 Deductible Payments....................................................................................25
12.6 Landlord's Repair Obligations..........................................................................25
</TABLE>
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<TABLE>
<S> <C>
12.7 Rent Apportionment.....................................................................................25
12.8 Additional Tenant Termination Right....................................................................25
ARTICLE 13 EMINENT DOMAIN................................................................................26
13.1 Termination of Lease...................................................................................26
13.2 Landlord's Repair Obligations..........................................................................26
13.3 Tenant's Participation.................................................................................26
ARTICLE 14 ASSIGNMENT AND SUBLETTING.....................................................................27
14.1 Restriction on Transfers...............................................................................27
14.2 Definition of Assignment...............................................................................27
14.3 Affiliate and Transfer Assignment Rights...............................................................28
14.4 Recapture..............................................................................................28
14.5 Costs..................................................................................................28
14.6 Proceeds...............................................................................................28
ARTICLE 15 DEFAULTS; REMEDIES............................................................................29
15.1 Events of Default......................................................................................29
15.2 Remedies...............................................................................................30
15.3 Costs..................................................................................................31
15.4 No Waiver..............................................................................................32
15.5 Waiver by Tenant.......................................................................................32
ARTICLE 16 PROTECTION OF CREDITORS.......................................................................32
16.1 Subordination..........................................................................................32
16.2 Attornment.............................................................................................33
16.3 Estoppel Certificates..................................................................................33
16.4 Mortgagee Protection Clause............................................................................33
ARTICLE 17 TERMINATION OF LEASE..........................................................................34
17.1 Surrender of Premises..................................................................................34
17.2 Holding Over...........................................................................................34
ARTICLE 18 MISCELLANEOUS PROVISIONS......................................................................35
18.1 Notices................................................................................................35
18.2 Landlord's Continuing Obligations......................................................................35
18.3 Successors.............................................................................................35
18.4 Captions and Interpretation............................................................................35
18.5 Relationship of Parties................................................................................36
18.6 Entire Agreement.......................................................................................36
18.7 Severability...........................................................................................36
18.8 Landlord's Limited Liability...........................................................................36
18.9 Survival...............................................................................................36
18.10 Attorneys' Fees.....................................................................................36
18.11 Broker..............................................................................................37
18.12 Governing Law.......................................................................................37
</TABLE>
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<TABLE>
<S> <C>
18.13 Time is of the Essence..............................................................................37
18.14 Joint and Several Liability.........................................................................37
18.15 Not Used............................................................................................37
18.16 Delivery of Tenant Organization Documents...........................................................37
18.17 Provisions are Covenants and Conditions.............................................................38
18.18 Business Days.......................................................................................38
18.19 Force Majeure.......................................................................................38
18.20 Submission of Lease.................................................................................38
18.21 Not Used............................................................................................38
18.22 Usufruct............................................................................................38
18.23 Security Deposit....................................................................................38
18.24 Special Stipulations................................................................................39
</TABLE>
-iv-
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EXHIBIT "A" LEGAL DESCRIPTION OF LAND
EXHIBIT "B" FLOOR PLAN
EXHIBIT "C" RULES AND REGULATIONS
EXHIBIT "D" WORK LETTER
EXHIBIT "D-1" BASE BUILDING CONDITION
EXHIBIT "E" SPECIAL STIPULATIONS
EXHIBIT "F" JANITORIAL SPECIFICATIONS
EXHIBIT "G" SUBORDINATION NON-DISTURBANCE AND ATTORNMENT
AGREEMENT
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LEASE AGREEMENT
This Lease Agreement (the "Lease") is made and entered into as of March
____, 1999 ("Effective Date"), by and between OPUS SOUTH CORPORATION, a Florida
corporation, as Landlord, and NETB@NK, INC., a Georgia corporation, as Tenant.
BASIC TERMS
The following terms ("Basic Terms") are hereby incorporated into and
made a part of this Lease. Each reference in this Lease to the Basic Terms shall
mean the information set forth below and shall be construed to incorporate all
of the terms provided under the particular section in this Lease pertaining to
such information. In the event of a conflict between the Basic Terms and the
particular section in this Lease, the particular section shall prevail.
<TABLE>
<S> <C> <C>
1. Landlord: Opus South Corporation, a Florida corporation
2. Address of Landlord Normandale Properties South Corporation
for Payment of Rent: 4200 West Cypress Street
Suite 445
Telephone No.: (813) 876-1515
Facsimile No.: (813) 876-7955
3. Address of Landlord Opus South Corporation
for Notices: Suite 144
11675 Great Oaks Way
Alpharetta, Georgia 30202
Attn: Director of Real Estate
Telephone No.: (770) 521-0045
Facsimile No.: (770) 521-0046
With a copy to: Opus U.S. Corporation
700 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Attn: Law Department
Telephone No.: 612-936-4444
Facsimile No.: 612-936-9808
4. Tenant: NetB@nk, Inc., a Georgia corporation
</TABLE>
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<TABLE>
<S> <C> <C>
5. Address of Tenant NetB@nk, Inc.
for Notices: Royal Centre Three, Suite 100
11475 Great Oaks Parkway
Alpharetta, Georgia 30022
Attn: Robert E. Bowers
Telephone No.:
Facsimile No.:
6. Premises: 19,615 rentable square feet located on the first floor and
designated as Suite 100 within the Building located at 11475
Great Oaks Way, commonly known as Royal Centre Three situated
on the parcel of land in the City of Alpharetta, County of
Fulton, State of Georgia described on EXHIBIT "A", together
with the Improvements. The Premises are located within the
Building on EXHIBIT "B". (See Section 1.1).
7. Tenant's Work: The Improvements to be constructed by Landlord as described in
the Work Letter. (See Section 1.3)
8. Tenant Improvements: All Improvements other than the Tenant's Work (See Section 1.3)
9. Lease Term: Initial Lease Term: Approximately seven (7) years beginning on
the Commencement Date and ending on the last day of the
calendar month in which the seventh (7th) anniversary of the
Commencement Date occurs. (See Section 1.2)
10. Base Rent:
Lease Year Base Rent per rentable square foot of the Premises per annum
1 $20.75
2 $21.16
3 $21.58
4 $22.02
5 $22.46
6 $22.90
7 $23.36
The Base Rent is subject to
the provisions of Section
2.1 of this Lease.
</TABLE>
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<TABLE>
<S> <C> <C>
11. Base Year 1999
12. Tenant Insurance: Hazard: (At option of Tenant, see Section 11.2)
Full replacement value on
all tenant furniture,
fixtures, personal property
and equipment.
Liability: (See Section 11.4)
$3,000,000.00 combined limit
13. Security Deposit
or Guaranty: $33,917.60
14. Brokers: William Leonard & Company
</TABLE>
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ARTICLE 1
LEASE OF PREMISES AND LEASE TERM
1.1 PREMISES.
Landlord, for and in consideration of the rents, covenants and
agreements hereinafter set forth, hereby leases to Tenant and Tenant hereby
leases from Landlord, upon and subject to the terms, covenants and conditions
hereinafter set forth, certain space situated within the office building
commonly known as Royal Centre Three ("Building"), currently being constructed
on that certain parcel of land situated in the City of Alpharetta ("City"),
County of Fulton ("County"), State of Georgia ("State") legally described on
EXHIBIT "A" attached hereto and incorporated herein ("Land") and shown and
designated on the floor plan ("Floor Plan") attached hereto as EXHIBIT "B" and
incorporated herein ("Premises"). The Land and Building are sometimes referred
to herein collectively as the "Property." The parties have each had the
opportunity to review the measurement calculations of the Premises and
conclusively agree that the Premises contains 19,615 rentable square feet, and
that such measurement is not subject to challenge or dispute by either Landlord
or Tenant.
1.2 TERM, DELIVERY AND COMMENCEMENT.
Landlord shall use commercially reasonable efforts to deliver occupancy
of the Premises to Tenant on or before June 1, 1999 ("Delivery Date"). Subject
to the provisions for Force Majeure contained in Section 18.19, the initial term
of this Lease ("Initial Term") shall commence on the earlier of (a) the date of
Substantial Completion (as defined in the Work Letter attached hereto as EXHIBIT
"D") of the Tenant's Work (as defined in Section 1.3) or (b) the date the
Tenant's Work would have been substantially completed in accordance with the
definition of Substantial Completion contained in the Work Letter but for Tenant
Delays (as defined in the Work Letter) ("Commencement Date"). The Initial Term
shall end on the last day of the calendar month in which the seventh (7th)
anniversary of the Commencement Date occurs. Any reference to the "Term" of this
Lease or similar reference shall be a reference to the Initial Term. Any
reference to "Lease Year" shall refer to each consecutive twelve (12) month
period during the Term commencing on the Commencement Date. However, if the
Commencement Date occurs on a day which is not the first day of the calendar
month, then the first Lease Year shall be for a period beginning on the
Commencement Date and ending on the last day of the calendar month in which the
Commencement Date occurs plus the following twelve (12) consecutive calendar
months.
Tenant shall, within ten (10) days of written request from Landlord,
execute an acknowledgment of the rentable square footage of the Premises, the
Base Rent, the Additional Rent, Commencement Date and any other terms of this
Lease. However, the failure of Tenant to execute such acknowledgment shall not
affect any obligation of Tenant hereunder or the determination of the
Commencement Date. If Tenant fails to execute and deliver such acknowledgment in
the form proposed by Landlord, Landlord and any prospective purchaser or
encumbrancer may conclusively presume and rely upon the following facts: (i)
that the Premises are in acceptable condition and were delivered in compliance
with all of the requirements of the
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Work Letter and (ii) the Commencement Date is the date specified in the
Landlord's acknowledgment and (iii) any other facts specified in Landlord's
acknowledgment are true and correct.
Tenant shall not occupy the Premises before the Commencement Date
without Landlord's prior written consent. Any early occupancy of the Premises by
Tenant shall be solely for the installation of Tenant's furniture, fixtures and
equipment and shall be subject to all of the terms and conditions of this Lease
other than the obligation to pay Base Rent (as defined in Section 2.1) and
Additional Rent (as defined in Section 2.2).
1.3 COMPLETION OF TENANT'S WORK.
Landlord shall use commercially reasonable efforts to complete, on or
before the Delivery Date, that portion of the improvements identified as
Tenant's Work in the Work Letter set forth in EXHIBIT "D" attached hereto and
incorporated herein. The cost of completing Tenant's Work shall be paid by
Landlord, but only up to the amount of the Improvement Allowance defined in
Section 2.3. All Additional Work (as defined in the Work Letter) shall be paid
for solely by Tenant.
1.4 EFFECT OF OCCUPANCY.
Subject to the punch list provisions of the Work Letter ("Punchlist"),
occupancy of the Premises by Tenant shall establish that Landlord has completed
Tenant's Work as required by this Lease. The Punchlist provisions of the Work
Letter are intended to provide Tenant with its sole and exclusive remedy for
incomplete or defective construction of the Tenant's Work, subject to Landlord's
obligation to repair any latent defects of which Tenant notifies Landlord, in
writing, on or before the date which is five (5) business days prior to the
first anniversary of the date Landlord achieves Substantial Completion of
Tenant's Work. The failure of Tenant to comply with the Punchlist provisions of
the Work Letter shall constitute a waiver by Tenant of any and all rights,
benefits, claims or warranties which may be available to Tenant in connection
with completion of Tenant's Work under the Work Letter, at law or in equity.
ARTICLE 2
RENTAL AND OTHER PAYMENTS
2.1 BASE RENT.
Tenant covenants to pay Landlord in advance on the first day of each
and every calendar month during the Term, without notice, demand, offset,
abatement or deduction, except as expressly provided elsewhere in this Lease, at
the address of Landlord specified at Item 2 of the Basic Terms, or at such other
place as Landlord may from time to time designate in writing, the rental
specified at Item 10 of the Basic Terms ("Base Rent"). In the event the
Commencement Date is not the first day of a calendar month and there are less
than fifteen (15) days remaining in such month, Tenant shall pay to Landlord the
Base Rent for such partial month and the next
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succeeding month on or before the Commencement Date. Base Rent for any partial
month shall be prorated on the basis of the number of days within such calendar
month.
2.2 ADDITIONAL RENT.
All charges payable by Tenant other than Base Rent, however denoted,
shall be deemed "Additional Rent." Unless this Lease provides otherwise, all
Additional Rent shall be paid with the next installment of Base Rent falling
due. Additional Rent for any partial month shall be prorated on the basis of the
number of days within such calendar month. All payments of Additional Rent that
are paid pursuant to an estimation provided by Landlord to Tenant shall be
payable without further demand therefor.
2.3 IMPROVEMENT ALLOWANCE.
Landlord shall provide Tenant an allowance of Twenty-Four and No/100
Dollars ($24.00) per rentable square foot within the Premises ("Improvement
Allowance") to be applied to the Cost of Tenant's Work (as defined in the Work
Letter). The Improvement Allowance shall be used by Landlord to complete
Tenant's Work and shall not be used to pay for any of the Additional Work. In
the event the Cost of Tenant's Work exceeds the Improvement Allowance, as
determined by Landlord pursuant to the Work Letter, Tenant shall pay fifty
percent (50%) of the Cost Differential (as defined in the Work Letter) to
Landlord within five (5) business days of Landlord's invoice therefor and prior
to Landlord commencing Tenant's Work and Tenant shall pay the remaining fifty
percent (50%) of the Cost Differential within five (5) business days following
the Commencement Date.
2.4 DELINQUENT RENTAL PAYMENTS.
Any installment of Base Rent, Additional Rent or any other charge
payable by Tenant under the provisions hereof and not paid within ten (10) days
of when due shall bear interest at Prime, as hereafter defined, plus four
percent (4%) per annum, not to exceed the maximum interest rate permitted by law
("Maximum Rate of Interest") from the date when the same is due hereunder
through the date the same is paid. For purposes of this Lease, the term "Prime"
shall mean the rate announced from time to time by Wachovia Bank of Georgia,
N.A. as its prime or reference rate. If Wachovia Bank of Georgia, N.A. shall
cease to announce its prime or reference rate, then Landlord shall select the
rate of another financial institution to be substituted therefor. The right to
require payment of interest shall be in addition to all of Landlord's rights and
remedies hereunder, at law or in equity.
2.5 INDEPENDENT OBLIGATIONS.
Any term or provision of this Lease to the contrary notwithstanding,
the covenants and obligations of Tenant to pay Base Rent and Additional Rent
hereunder shall be independent from any obligations, warranties or
representations of Landlord hereunder. Base Rent and Additional Rent are
sometimes collectively referred to herein as "Rent" or "rent."
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ARTICLE 3
OPERATING EXPENSES - DEFINITION
3.1 OPERATING EXPENSES.
"Operating Expenses" shall mean all expenses incurred with respect to
the ownership, maintenance and operation of the Property as determined by
Landlord's accountant in accordance with generally accepted accounting
principles consistently followed, including, but not limited to the following:
all taxes (as defined below); insurance premiums; maintenance and repair costs;
steam, electricity, water, sewer, gas and other utility charges; fuel; lighting;
window washing; janitorial services; trash and rubbish removal; wages payable to
employees of Landlord, whose duties are connected with the operation or
maintenance of the Property (but only for the portion of time allocable to work
related to the Property), together with all payroll taxes, unemployment
insurance, vacation allowances and disability, pension, profit sharing,
hospitalization, retirement and other so-called fringe benefits paid in
connection with such employees amounts paid to contractors or subcontractors for
work or services performed in connection with the operation and maintenance of
the Property; all costs of uniforms, supplies and materials used in connection
with the operation and maintenance of the Property; any expense imposed upon
Landlord, its contractors or subcontractors pursuant to law or pursuant to any
collective bargaining agreement covering such employees; all services, supplies,
repairs, replacements or other expenses for maintaining and operating the
Property; reasonable management fees; common expenses of the Royal Centre
Project, properly allocated among the Building and other buildings in the Royal
Centre Project; and such other expenses as may be ordinarily incurred in the
operation and maintenance of an office complex similar to the Property. The term
"taxes" shall mean any general real property tax, improvement tax, assessment,
special assessment, reassessment, commercial rental tax, in lieu tax, levy,
charge, penalty or similar imposition whatsoever imposed by any authority having
the direct or indirect power to tax, including but not limited to, (a) any city,
county, state or federal entity, (b) any school, agricultural, lighting,
drainage or other improvement or special assessment district, (c) any agency, or
(d) any private entity having the authority to assess the Property pursuant to
the Permitted Encumbrances. Property Taxes shall include (i) all charges or
burdens of whatsoever kind and nature incurred in the use, occupancy, ownership,
operation, leasing or possession of the Property, without particularizing by any
known name and whether any of the foregoing be general, special, ordinary,
extraordinary, foreseen or unforeseen, (ii) any tax or charge for fire
protection, street lighting, streets, sidewalks, road maintenance, refuse,
sewer, water or other services provided to the Property, and (iii) all costs and
expenses, including reasonable attorneys' fees, incurred in connection with any
appeal or contest of Property Taxes by Landlord pursuant to Section 4.6 below.
However, Property Taxes shall not include Landlord's state or federal income,
franchise, estate or inheritance taxes. In the event Landlord is entitled to pay
any of the above listed assessments or charges in installments over a period of
two or more calendar years, then only the minimum installment of such
assessments or charges shall be included within Property Taxes for such calendar
year.
The term "Operating Expenses" shall not include the cost of any capital
improvement to the Property other than replacements required for normal
maintenance and repair; the cost of repairs, restoration or other work
occasioned by fire, windstorm or other insured casualty, except
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for the amount of any deductible under any insurance policy; expenses incurred
in leasing or procuring tenants; leasing commissions; advertising expenses;
expenses for renovating space for tenants; legal expenses incident to
enforcement by Landlord of any lease; interest or principal payments on any
mortgage or other indebtedness of Landlord; depreciation allowance or expense;
the cost of any work or service performed for any tenant (including Tenant) at
such tenant's cost; salaries of officer and executives of Landlord; salaries of
employees above the grade of building manager or whose time is not spent
directly in the operation of the Property; the cost of any items to the extent
Landlord is reimbursed by insurance; rental under any ground lease or other
underlying lease; any costs paid to a corporation related to Landlord to the
extent such cost is in excess of the amount which would have been paid in the
absence of such relationship; charges (including applicable taxes) for
electricity, steam or other utilities provided to other tenants of the Building
in excess of the amounts of utilities to which Tenant is entitled under this
Lease; costs in connection with any repairs following a condemnation; costs and
expenses in connection with any refinancing or sale of the Property; and cost of
complying with any laws, rules, regulations or statutes which were in effect and
applicable to the Property as of the date of this Lease.
Notwithstanding the foregoing, in the event Landlord installs equipment
in, or makes improvements or alterations to, the Property which are for the
purpose of reducing energy, maintenance or other costs, or which are required
under any governmental laws, regulations or ordinances which were not required
on the Commencement Date, Landlord may include in Operating Expenses reasonable
charges for interest paid on such investment and reasonable charges for
depreciation of the same so as to amortize such investment over the reasonable
life of such equipment, improvement or alteration on a straight line basis.
Operating Expenses shall also be deemed to include expenses incurred by Landlord
in connection with city sidewalks adjacent to the Property, any pedestrian
walkway system (either above or below ground) and any other public facility to
which Landlord or the Property is from time to time subject in connection with
operation of the Property.
3.2 EXCESS OPERATING EXPENSES.
"Excess Operating Expenses" shall mean the amount of Operating Expenses
due and incurred by Landlord during any calendar year of the Term in excess of
the Operating Expenses for the Base Year.
3.3 TENANT'S PRORATA SHARE OF EXCESS OPERATING EXPENSES.
"Tenant's Prorata Share of Excess Operating Expenses" (based on the
rentable square footage of the Premises compared to the total rentable square
footage of the Building, which is 165,527) shall mean 11.85% of the Excess
Operating Expenses for the applicable calendar year.
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3.4 CONTROLLABLE EXPENSES CAP.
Notwithstanding anything to the contrary set forth hereinabove,
Landlord does hereby agree that, solely for purposes of determining Tenant's
Prorata Share of Excess Operating Expenses, the portion of the Operating
Expenses attributable to Controllable Expenses (as defined below) will not
increase by more than five percent (5%) per annum, on a cumulative, compounded
basis, over the amount of Controllable Expenses incurred for calendar year 1999,
after the 1999 figure is adjusted for occupancy, as provided in Section 4.9. The
term "Controllable Expenses" shall mean all Operating Expenses other than taxes,
insurance costs and utilities costs. Landlord shall use commercially reasonable
efforts to minimize Operating Expenses, taking into consideration Landlord's
intent to operate the Building as a first-class office building.
ARTICLE 4
OPERATING EXPENSES - PAYMENT
4.1 PAYMENT OF OPERATING EXPENSES.
Tenant covenants and agrees to pay during the Term, as Additional Rent,
Tenant's Prorata Share of Excess Operating Expenses, which are due and payable
during any calendar year of the Term. Tenant's Prorata Share of Excess Operating
Expenses due and payable during the calendar year in which the Lease commences
or terminates shall be prorated as of the Commencement Date or termination date,
as applicable, based upon the number of days of the Term within said calendar
year compared to three hundred sixty-five (365) days.
4.2 ESTIMATION OF TENANT'S PRORATA SHARE OF EXCESS OPERATING EXPENSES.
Landlord shall estimate for each calendar year of the Term (a) Excess
Operating Expenses, (b) Tenant's Prorata Share of Excess Operating Expenses and
(c) the annual and monthly Additional Rent attributable to Tenant's Prorata
Share of Excess Operating Expenses. Said estimates shall be in writing, shall be
delivered to Tenant at the addresses specified in the Basic Terms and shall be
reasonably based upon historical data and known or reasonably expected increases
or decreases.
4.3 PAYMENT OF ESTIMATED PRORATA SHARE OF EXCESS OPERATING EXPENSES.
Commencing January 1, 2000, Tenant shall pay, as Additional Rent, the
estimated amount of Excess Operating Expenses for each calendar year of the Term
in equal monthly installments, in advance, on the first day of each month during
such calendar year. In the event that said estimates are delivered to Tenant
after the first day of January of the applicable calendar year, said estimated
amount shall be payable as Additional Rent in equal monthly installments, in
advance, on the first day of each month over the balance of such calendar year,
with the number of installments being equal to the number of full calendar
months remaining in such calendar year.
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4.4 RE-ESTIMATION OF TENANT'S PRORATA SHARE OF EXCESS OPERATING
EXPENSES.
From time to time during any calendar year of the Term, Landlord may
re-estimate the amount of Excess Operating Expenses and Tenant's Prorata Share
of Excess Operating Expenses. In such event, Landlord shall also re-estimate the
monthly Additional Rent attributable to Tenant's Prorata Share of Excess
Operating Expenses for such calendar year in an amount sufficient to pay the
re-estimated monthly amount over the balance of such calendar year after giving
credit for payments made by Tenant on the previous estimate. Such re-estimate
shall be delivered to Tenant in writing in the manner specified in Section 4.2.
Tenant shall pay said re-estimated amount, in advance, on the first day of each
month remaining in such calendar year.
4.5 CONFIRMATION OF TENANT'S PRORATA SHARE OF EXCESS OPERATING
EXPENSES.
After the end of each calendar year of the Term, Landlord shall cause
its accountants to determine the actual amount of Excess Operating Expenses and
Tenant's Prorata Share of Excess Operating Expenses for such expired calendar
year and deliver a written certification from Landlord's property manager of the
amount thereof to Tenant. If for any calendar year Tenant paid less than the
amounts specified in said certification, Tenant shall pay the unpaid portion of
the same within twenty (20) days after receipt of such certification. If for any
calendar year Tenant paid more than the amounts specified in said certification,
Landlord shall, at Landlord's option, either (a) refund such excess to Tenant,
or (b) credit such excess against the next due monthly installment or
installments of estimated Additional Rent for the then existing calendar year.
Upon receipt of Landlord's written certification of the Excess Operating
Expenses for the expired calendar year, Tenant shall have the right to audit
Landlord's books with respect to Operating Expenses for the expired calendar
year. If Tenant elects to perform such audit, Tenant must notify Landlord of its
desire to perform such audit within thirty (30) days following Landlord's
certification of Excess Operating Expenses and the audit must be performed
within sixty (60) days of the date of such written certification. The audit must
be performed by a reputable independent certified public account (whose
compensation is not based upon achieving a reduction in Tenant's Excess
Operating Expenses nor upon the amount of any such reduction) or by an employee
of Tenant. The audit will be conducted during normal business hours in
Landlord's offices where such books are normally kept. Tenant and the party who
performs such audit must agree, in writing, prior to performing the audit, to
keep and maintain all information obtained in the audit absolutely confidential
except in any arbitration, lawsuit or other proceeding between Landlord and
Tenant and, in that event, such information shall be disclosed only to the
arbitration panel and/or the court, as necessary.
4.6 NOT USED.
4.7 PERSONAL PROPERTY TAXES.
Tenant shall pay, prior to delinquency, all taxes charged against trade
fixtures, furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall use its best efforts to have such trade fixtures,
furnishings, equipment and personal property taxed separately from the Property.
If any of Tenant's trade fixtures, furnishings, equipment and
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personal property is taxed with the Property, Tenant shall pay Landlord for such
taxes within fifteen (15) days after Tenant receives a written statement from
Landlord for the same.
4.8 LANDLORD'S RIGHT TO CONTEST TAXES.
Landlord shall have the right, but not the obligation, to contest the
amount or validity, in whole or in part, of any of the Taxes. All reasonable
costs incurred in connection with any such contests by Landlord including,
without limitation, reasonable, actual fees and expenses of tax consultants and
attorneys, shall be included in Operating Expenses.
4.9 ADJUSTMENT FOR VARIABLE OPERATING EXPENSES.
Notwithstanding anything to the contrary set forth above, it is agreed
that in the event the Building is not fully occupied at any time during a
calendar year (including the Base Year), a reasonable and equitable adjustment
shall be made by Landlord in computing the Operating Expenses for such calendar
year so that Tenant's obligation for payment of any component of Operating
Expenses which adjusts based upon occupancy shall be equal to the amount which
Tenant would have paid for such component of Operating Expenses had the Building
been fully occupied at all times during such calendar year. Landlord agrees that
the amount included in the Base Year Operating Expenses for taxes will reflect
the taxes for the Building as fully assessed.
ARTICLE 5
USE
5.1 PERMITTED USE.
Tenant may use the Premises for general office purposes of a type
reasonable and customary for first-class office buildings only and for no other
purpose. Tenant shall not use the Property, or knowingly permit the Property to
be used, in violation of any Laws (as defined in Section 5.4) or in any manner
which would (a) violate any certificate of occupancy affecting the Property, (b)
make void or voidable any insurance now or hereafter in force with respect to
the Property, (c) cause structural injury to the Property, (d) cause the value
or usefulness of the Property or any portion thereof to substantially diminish
(reasonable wear and tear excepted), or (e) constitute a public or private
nuisance or waste. Promptly upon discovery of any prohibited use, Tenant will
take all necessary steps to discontinue such use.
5.2 ACCEPTANCE OF PREMISES.
Except for the Punchlist items and Landlord's obligation to repair
latent defects of which Tenant notifies Landlord, in writing, on or before the
date five (5) business days prior to the first anniversary of the date Landlord
achieves Substantial Completion of Tenant's Work, Tenant acknowledges that
neither Landlord nor any agent, contractor or employee of Landlord has made any
representation or warranty of any kind whatsoever with respect to the Premises
or the Building, specifically including but not limited to, suitability or
fitness for any particular purpose. Subject to the Punchlist items, Tenant
accepts the Premises in an "as is - where is" condition.
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5.3 INCREASED INSURANCE.
Tenant shall not do or permit to be done anything which will (a)
increase the premium of any insurance policy covering the Premises or the
Property, (b) cause a cancellation of or be in conflict with any such insurance
policy; (c) result in a refusal by any insurance company in good standing to
issue or continue any such insurance in amounts satisfactory to Landlord; or (d)
subject Landlord to any liability or responsibility for injury to any person or
property by reason of any operation in the Premises or use of the Property.
Tenant shall, at Tenant's expense, comply with all rules, orders, regulations
and requirements of insurers and of the American Insurance Association or any
other organization performing a similar function. Tenant shall promptly, upon
demand, reimburse Landlord for any additional premium charges for such policy or
policies caused by reason of Tenant's failure to comply with the provisions of
this section.
5.4 LAWS, RULES AND REGULATIONS.
Tenant acknowledges that this Lease is subject and subordinate to all
liens, easements, declarations, encumbrances, deeds of trust, reservations,
restrictions and other matters affecting the Property ("Permitted Encumbrances")
and any law, regulation, rule, order or ordinance of any governmental entity,
applicable to the Property or the use or occupancy thereof in effect on or after
the Effective Date ("Laws") or any of the Rules and Regulations (as defined
below) promulgated by Landlord. Tenant shall not violate any Permitted
Encumbrances, Laws or Rules and Regulations. A copy of the current Rules and
Regulations promulgated by Landlord are attached hereto and incorporated herein
as EXHIBIT "C", which Rules and Regulations may be amended by Landlord from time
to time in Landlord's sole discretion. Except for the Rules and Regulations
excluding Tenant from parking in designated portions of the parking facilities
comprising a portion of the Common Area, as specified in Section 5.5, Tenant
shall not be obligated to comply with any Rules and Regulations promulgated by
Landlord which are not imposed and enforced in a uniform and nondiscriminatory
manner with respect to all tenants in the Building. Landlord represents to
Tenant that none of the Laws or Permitted Encumbrances prohibit or materially
interfere with Tenant's ability to use the Premises for the use permitted under
this Lease.
5.5 COMMON AREAS.
Landlord hereby grants to Tenant the non-exclusive right, together with
all other occupants of the Building and their agents, employees and invitees, to
use the parking areas, driveways, lobby areas and other common areas of the
Property designated by Landlord from time to time ("Common Area"). Landlord
shall have the sole and exclusive control of the Common Area, as well as the
right to make changes to the Common Area. Landlord's rights shall include, but
not be limited to, the right to (a) restrain the use of the Common Area by
unauthorized persons; (b) place permanent or temporary kiosks, displays, carts
or stands in the Common Area and to lease same to tenants; (c) temporarily close
any portion of the Common Area (i) for repairs, improvements or alterations,
(ii) to discourage unauthorized use, (iii) to prevent dedication or an easement
by prescription, or (iv) for any other reason deemed sufficient
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in Landlord's judgment; (d) change the shape and size of the Common Area, add,
eliminate or change the location of any improvements located on the Common Area
and construct buildings on the Common Area, provided that any such changes shall
not materially and adversely affect Tenant's use of the Common Area; and (e)
impose Laws concerning use of the Common Area, including the right to exclude
Tenant, its agents, employees and invitees, from parking in designated portions
of the parking facilities comprising a portion of the Common Area.
5.6 PARKING.
Tenant's rights to use the parking facilities in the Common Area shall
be for unreserved spaces in an amount equal to five (5) spaces per each one
thousand (1,000) rentable square feet of the Premises. Within such total parking
allocation, two (2) spaces per each one thousand (1,000) rentable square feet of
the Premises will be provided in the covered, access-controlled parking
facility. Initially, Landlord will provide access cards to Tenant at no cost for
each space to which Tenant is entitled. Replacement cards must be paid for by
Tenant at Landlord's then current rate. Such parking spaces shall be provided to
Tenant at no charge throughout the Term of this Lease. Landlord will also
provide, throughout the Term, ten (10) spaces which will be marked for use only
by visitors of the Building.
5.7 AMERICANS WITH DISABILITIES ACT.
Landlord and Tenant acknowledge that the Property may be construed to
be a place of public accommodation under the Americans with Disabilities Act of
1990, as amended ("ADA"). Landlord represents and warrants that the Property
will not violate Title III of ADA (Title III) as interpreted and enforced by
local building inspection authorities as of the Commencement Date. Landlord
shall correct any violation of Title III within any part of the Common Area of
the Property, but shall not be required to correct any violation of Title III
within the Premises after the Commencement Date. Tenant shall correct any
violation of Title III within the Premises after the Commencement Date.
ARTICLE 6
HAZARDOUS MATERIALS
6.1 COMPLIANCE WITH HAZARDOUS MATERIALS LAWS.
Tenant shall not cause or permit any Hazardous Materials or Hazardous
Substances (as defined in any applicable state, federal or local environmental
Laws) to be brought upon, kept or used in connection with the Premises by
Tenant, its agents, employees, contractors or invitees, except for de minimis
amounts of materials, such as copying machine fluids, which are customary for
general office use and which are present in the Premises strictly in compliance
with all applicable Laws.
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6.2 INDEMNIFICATION.
Tenant shall indemnify, defend (with counsel reasonably acceptable to
Landlord) and protect Landlord against, and hold Landlord free and harmless
from, any and all claims, liabilities, damages, costs, penalties, forfeitures,
losses or expenses (including attorneys' fees and the costs and expenses of
enforcing this indemnity) ("Claims") for death or injury to any person or damage
to any property whatsoever arising or resulting in whole or in part, directly or
indirectly, from the presence, treatment, storage, transportation, disposal,
release or management of Hazardous Materials resulting from or in any way
related to Tenant's use of the Premises. Tenant's obligations hereunder shall
include, without limitation and whether foreseeable or unforeseeable, the costs
of (a) any required or necessary repair, clean-up, detoxification or
decontamination of the Property, (b) the implementation of any closure,
remediation or other required action in connection therewith and (c) any costs
and fees incurred in the enforcement of the indemnity action. The obligations of
Tenant under this section shall survive the expiration or other termination of
the Term.
ARTICLE 7
SERVICES
7.1 LANDLORD'S OBLIGATIONS.
Landlord shall provide the following services, the cost of which shall
be deemed Operating Expenses:
7.1.1 JANITORIAL SERVICE.
Nightly Janitorial services on Monday through Friday in the
Premises and on the Property as described in EXHIBIT "F" attached hereto and
made a part hereof.
7.1.2 ELECTRICAL ENERGY.
Electrical energy for lighting and operation of office
machines, air conditioning and heating as required for general office use during
the hours specified in Section 7.1.3. The electrical energy provided will be
sufficient for operation of personal computers and other equipment of similar
low electrical consumption, and for customary fluorescent office lighting but
will not be sufficient for main frame computers, computer rooms or for
non-standard lighting. Tenant shall not use any equipment or lighting requiring
electrical energy in excess of the above standards without receiving Landlord's
prior written consent, which consent shall not be unreasonably withheld but may
be conditioned upon Tenant paying all costs of installing the equipment and
facilities necessary to furnish such excess energy and an amount equal to the
average cost per unit of electricity for the Building applied to the excess use
as determined by an engineer selected by Landlord or by submeter. At the option
of either Landlord or Tenant, a submeter may be provided and installed at
Tenant's expense if allowable under the Laws. All Building standard lighting
bulbs, tubes, ballasts and starters within the Premises shall be replaced by
Landlord with the costs thereof included in Operating Expenses.
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7.1.3 HEATING AND AIR CONDITIONING.
Heat and air conditioning, sufficient to maintain comfortable
temperatures in Landlord's reasonable judgment, on Monday through Friday from
7:00 a.m. to 6:00 p.m. and on Saturdays which are not holidays from 8:00 a.m. to
1:00 p.m. The Building holidays shall be New Year's Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. During other
hours, Landlord shall provide heat and air conditioning upon a reasonable
advance notice from Tenant to Landlord, which advance notice shall not be less
than twenty-four (24) hours; provided, however, that no advance notice will be
required if an automated key pad system is installed which allows Tenant to
access such after-hours service directly. Tenant, upon presentation of a bill
therefor, shall pay Landlord for such extended service at the rate of $20.00 per
hour, subject to increases based on actual increases in Landlord's cost to
provide such extended service (i.e., increases in utility, labor or maintenance
costs). If such extended service is not a continuation of that furnished during
the hours described above, Tenant may be required to pay for a minimum of three
(3) hours of such service. Air conditioning to the Premises is to be provided
based on standard lighting and general office use only.
7.1.4 WATER.
Hot and cold water from the standard building outlets for
lavatory, breakroom, restroom and drinking purposes.
7.1.5 PASSENGER ELEVATOR SERVICE.
Passenger elevator service in common with other tenants to be
provided by automatic elevators. Landlord shall have the right to restrict the
use of elevators for freight purposes to the freight elevator and to hours
determined by Landlord. Landlord shall have the right to limit the number of
elevators in operation on Saturdays, Sundays and holidays, but service shall be
provided through at least one (1) elevator at all times, except in emergencies.
7.2 TENANT'S OBLIGATIONS.
Tenant shall be solely responsible for the payment to Landlord of all
utilities which are separately submetered or separately charged (based on an
engineer's survey), if any, to the Premises or to Tenant and shall make such
payments to Landlord promptly upon invoice. Such amounts shall not be included
as Operating Expenses. Except as provided in Section 7.1 or the Work Letter,
Tenant shall also furnish and pay for all other utilities and services which
Tenant requires with respect to the Premises (including but not limited to
hook-up and connection charges).
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7.3 OTHER PROVISIONS RELATING TO SERVICES.
No interruption in, or temporary stoppage of, any of the aforesaid
services shall be deemed an eviction or disturbance of Tenant's use and
possession, relieve Tenant from any obligation herein set forth or render
Landlord liable for damages or, except as set forth below entitle Tenant to an
abatement of rent. In no event shall Landlord be required to provide any heat,
air conditioning, electricity or other service in excess of that permitted by
voluntary or involuntary guidelines or any applicable Laws. Landlord reserves
the right, from time to time, to make reasonable and non-discriminatory
modifications to the above standards for utilities and services. Notwithstanding
anything to the contrary set forth hereinabove, in the event that the essential
services to the Premises (which the parties hereby agree are electricity, water,
sanitary sewer, elevator and HVAC service) are interrupted and (i) the
interruption continues for five (5) or more consecutive business days, (ii) the
interruption is caused by a matter within Landlord's control, (iii) the
interruption renders all or a portion of the Premises untenantable and (iv)
Tenant actually discontinues use of all or a portion of the Premises, Tenant
shall be entitled to an abatement of Rent, beginning on the sixth (6th) business
day after such interruption begins, based on the portion of the Premises which
is untenantable and which Tenant has discontinued using, with such abatement to
continue until the applicable services have been materially restored by
Landlord. Landlord shall use commercially reasonable efforts to restore
interrupted services.
7.4 EFFECTS ON UTILITIES.
Tenant shall not, without the prior written consent of Landlord, use
any apparatus or device in or about the Premises which shall cause substantial
noise or vibration. Tenant shall not connect any apparatus or device to
electrical current or water except through the electrical and water outlets
installed by Landlord pursuant to the Work Letter.
ARTICLE 8
MAINTENANCE AND REPAIR
8.1 LANDLORD'S OBLIGATIONS.
Except as otherwise provided in this Lease, Landlord shall repair and
maintain the following in good order, condition and repair: (a) the foundations,
exterior walls and roof of the Building, (b) the electrical, mechanical,
plumbing, heating and air conditioning systems, facilities and components
located in the Building and the Premises (other than supplemental HVAC systems
that serve only the Premises, which shall be Tenant's obligation) and (c) the
Common Area. Landlord shall also maintain and repair windows, doors, plate glass
and the exterior surfaces of walls that are adjacent to Common Area, unless such
maintenance and repair becomes necessary in whole or in part due to (i) the
negligence of Tenant, its employees, agents, customers, licensees or invitees in
or about the Premises or Property, or (ii) damage caused by breaking and
entering into the Premises. The cost of Landlord's repair and maintenance
hereunder shall be included in Operating Expenses. Neither Base Rent nor
Additional Rent shall be reduced, nor shall Landlord be liable, for loss or
injury to or interference with property, profits or business arising from or in
connection with any such repairs or maintenance.
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8.2 TENANT'S OBLIGATIONS.
Tenant, at Tenant's sole cost and expense, shall keep and maintain the
Premises (including all non-structural interior portions, supplemental HVAC
systems and equipment; interior surfaces of exterior walls, interior moldings,
partitions and ceilings) in as good order, condition and repair as they were on
the Commencement Date, reasonable wear and tear and damage from fire and other
casualties excepted.
In the event that compliance with any Laws is required after the
Commencement Date, which is due in whole or in part to Tenant's specific use of
the Premises (as opposed to general office use) and/or Tenant's specific actions
or inactions with respect to the Premises, the cost of compliance shall be
Tenant's sole responsibility. Likewise, in the event any governmental authority
requires any alterations to the Building or the Premises as a result of Tenant's
particular use of the Building or as a result of any alterations to the Premises
by Tenant, Tenant shall be obligated for the cost of all such alterations. In
the event such alterations involve the structural, mechanical, electrical, life
safety or heating and air conditioning systems of the Building ("Structural
Alterations"), Landlord shall make such repairs after Tenant deposits with
Landlord an amount sufficient to pay for the cost thereof. In the event the
alterations are not Structural Alterations, Tenant shall make the repairs, at
Tenant's sole cost and expense, subject to the requirements of Article 9 below.
Tenant shall keep the Premises in a neat and sanitary condition and
shall not commit any nuisance or waste on the Premises or in, on or about the
Property. All uninsured damage or injury to the Premises or to the Property
caused by Tenant installing, removing or transporting any furniture, fixtures,
equipment or other property of Tenant, its agents, contractors, servants or
employees shall be repaired, restored and replaced promptly by Tenant at its
sole cost and expense to the satisfaction of Landlord. Tenant shall be solely
responsible for, shall indemnify, protect and defend Landlord against and hold
Landlord harmless from, any penetrations or perforations of the roof or exterior
walls to the Building caused by Tenant. It is the intention of Landlord and
Tenant that Tenant shall maintain the Premises in a first-class and fully
operative condition. All repairs made by Tenant shall be at least equal in
quality and workmanship to the original work and shall be made by Tenant in
accordance with all Laws. The maintenance obligations of Tenant shall apply even
if Tenant has vacated the Premises.
8.3 TENANT'S WAIVER OF CLAIMS AGAINST LANDLORD.
Except as otherwise expressly provided in the Work Letter or this
Lease, Landlord shall not be required to furnish any services or facilities, or
make any repairs or alterations, in, about or to the Premises or the Property.
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ARTICLE 9
CHANGES AND ALTERATIONS
9.1 LANDLORD APPROVAL.
Tenant shall have the right, without Landlord's consent, but with prior
notice to Landlord, to make alterations to the Premises which (i) are not
visible from the elevator lobby of the Building, (ii) do not affect the
structure of the Building or the Building mechanical, electrical, plumbing or
HVAC systems, (iii) do not involve the removal or addition or relocation of any
walls or partitions and (iv) do not cost in excess of $50,000 in any one
instance or in any series of related instances. Otherwise, Tenant shall not make
any alterations, additions or improvements to the Property ("Alterations")
without Landlord's prior written consent, which consent shall not be
unreasonably withheld or delayed. Along with any request for Landlord's consent
and before commencement of the Alterations or delivery of any materials to be
used in the Alterations, Tenant shall furnish Landlord with plans and
specifications, and names and addresses of prospective contractors. All
Alterations shall be constructed (a) promptly by a contractor approved in
writing by Landlord in its sole discretion, (b) in a good and workmanlike
manner, (c) in compliance with all applicable Laws, and (d) in accordance with
all orders, rules and regulations of the Board of Fire Underwriters where the
Premises are located or any other body exercising similar functions.
9.2 TENANT RESPONSIBILITY FOR COST AND INSURANCE.
Tenant shall pay the cost and expense of all Alterations, including a
reasonable charge for Landlord's review, inspection and engineering time and for
any painting, restoring or repairing of the Premises or the Building occasioned
by the Alterations. Prior to commencement of construction of the Alterations,
Tenant shall deliver the following in form and amount satisfactory to Landlord:
(a) demolition and/or lien and completion bonds, (b) builder's all risk
insurance, (c) commercial general liability insurance insuring against
construction related risks and copies of contracts and all necessary permits and
licenses.
9.3 CONSTRUCTION OBLIGATIONS AND OWNERSHIP.
Tenant shall permit Landlord to inspect construction of the
Alterations. Upon completion of the Alterations, Tenant shall furnish Landlord
with contractor affidavits, unconditional lien releases, full and final waivers
of liens (in form satisfactory, under applicable Laws, to extinguish all lien
rights) and receipted bills covering all labor and materials expended and used
in connection with the Alterations. Tenant shall promptly remove any Alterations
constructed in violation of this Article 9 upon Landlord's written request. All
Alterations (other than Tenant's movable trade fixtures, furniture and
equipment) made or installed by Tenant shall become the property of and be
surrendered to Landlord upon termination of this Lease without payment therefor
by Landlord, unless otherwise agreed by Landlord.
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9.4 LIENS.
Tenant shall keep the Premises free from any mechanics', materialmens',
designers' or other liens arising out of any work performed, materials furnished
or obligations incurred by or for Tenant or any person or entity claiming by,
through or under Tenant. If any such liens are filed and Tenant does not provide
for release of the same of record, or provide Landlord with a bond or other
surety satisfactory to Landlord protecting Landlord and the Property against
such liens, within thirty (30) days after receipt of written notice thereof by
Tenant of such filing, Landlord may without waiving its rights and remedies
based upon such breach by Tenant and without releasing Tenant from any
obligations hereunder, cause such liens to be released by any means it shall
deem proper, including payment of the claim giving rise to such lien or posting
a bond to cause the discharge of such lien. In such event, all amounts paid by
Landlord shall immediately be due and payable by Tenant as Additional Rent.
9.5 INDEMNIFICATION.
Tenant hereby agrees to indemnify, protect and defend Landlord against,
and hold Landlord and the Property harmless from, any liability, cost,
obligation, expense (including without limitations reasonable attorneys' fees
and expenses incurred in enforcing this indemnity), or claim of any mechanics',
materialmens', designers' or other liens in any manner relating to or arising
out of any work performed, materials furnished or obligations incurred by or for
Tenant or any person or entity claiming by, through or under Tenant.
ARTICLE 10
RIGHTS RESERVED BY LANDLORD
10.1 LANDLORD'S ENTRY.
Landlord reserves the right at all reasonable times and upon reasonable
notice to Tenant to enter the Premises (except in emergencies, accompanied by an
employee of Tenant) to: (a) inspect the Premises; (b) show the Premises to
prospective purchasers, mortgagees, tenants (but only during the last year of
the Term) and underlying landlords; or (c) otherwise exercise and perform
Landlord's rights and obligations under this Lease. In the case of an emergency,
Landlord and/or its authorized representatives may enter the Premises at any
time using any and all means which Landlord may deem proper. Entry into the
Premises by Landlord in the event of any emergency shall not be construed as a
forcible or unlawful entry into, or detainer of, the Premises or as an eviction
of Tenant from the Premises or any portion thereof.
Tenant shall permit Landlord (or its designees) to erect, use,
maintain, replace and repair pipes, cables, conduits, plumbing and vents, and
telephone, electric and other wires or other items, in, to and through the
Premises, as and to the extent that Landlord may now or hereafter deem necessary
or appropriate for the proper operation and maintenance of the Building;
provided, however, that Landlord shall not materially interfere with Tenant's
business during any such entry.
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10.2 LANDLORD'S CURE.
If Tenant shall default in the performance of its obligations under
this Lease and if such default is not cured within the applicable periods
provided in Article 15, Landlord may but shall not be obligated to, make any
such payment or perform any such act on Tenant's part without waiving its rights
based upon any default of Tenant and without releasing Tenant from any
obligations hereunder. Except as may be specifically provided to the contrary in
this Lease, Tenant shall pay to Landlord, within ten (10) days after delivery by
Landlord to Tenant of statements therefor, sums equal to expenditures reasonably
made and obligations incurred by Landlord in connection with the remedying by
Landlord of Tenant's defaults. If there are any outstanding monetary obligations
of Tenant under this Lease attributable to the period prior to the expiration or
termination of this Lease, such obligations shall survive the termination or
expiration of this Lease and such amount shall be payable to Landlord within ten
(10) days after receipt of notice therefor from landlord.
ARTICLE 11
INSURANCE
11.1 LANDLORD'S CASUALTY INSURANCE OBLIGATIONS.
Landlord shall keep the Property insured for the benefit of Landlord,
its lenders and agents, in an amount equivalent to the full replacement value
thereof (excluding the Land, foundation, grading and excavation costs) against:
(a) loss or damage by fire; and
(b) such other risk or risks which are customarily covered with respect
to buildings and improvements similar in construction, general location, use,
occupancy and design to the Property, including but not limited to windstorms,
hail, explosion, vandalism, malicious mischief, civil commotion and such other
coverage as Landlord may deem appropriate or necessary.
These insurance provisions shall not limit or modify the obligations of
Tenant under any provision of this Lease. Such policy or policies of insurance
shall permit releases of liability as provided herein and/or waiver of
subrogation as to Tenant. Landlord waives, releases and discharges Tenant from
all claims or demands whatsoever which Landlord may have or acquire arising out
of damage to or destruction of the Property, or loss of use thereof occasioned
by fire or other casualty, which claim or demand may arise because of the
negligence or fault of Tenant, its agents, employees, customers or business
invitees, and Landlord agrees to look to the insurance coverage only in the
event of such loss. Notwithstanding the foregoing or anything to the contrary
elsewhere in this Lease, Tenant shall be obligated to continue to pay Rent in
the event of damage to or destruction of the Premises or the Property if such
damage or destruction is occasioned by the negligence or fault of Tenant, its
agents, employees, customers or business invitees. Premiums paid for insurance
under this section shall be included in Operating Expenses.
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11.2 TENANT'S CASUALTY INSURANCE OBLIGATIONS.
Tenant shall be solely responsible for but shall not be obligated to
keep all of its machinery, equipment, furniture, fixtures and personal property
(including all property under the care, custody or control of Tenant) which may
be located in, upon, or about the Premises insured in an amount equivalent to
the full insurable value thereof against:
(a) loss or damage by fire; and
(b) such other risk or risks which are customarily covered
with respect to a tenant's machinery, equipment, furniture, fixtures, personal
property and business located in a building similar in construction, general
location, use, occupancy and design to the Property, including but not limited
to, windstorms, hail, explosions, vandalism, theft, malicious mischief, civil
commotion and such other coverage as Tenant may deem appropriate or necessary.
To the extent Tenant keeps such insurance coverage, all policy or
policies of insurance shall permit release of liability as provided herein
and/or waiver of subrogation as to Landlord. Tenant waives, releases and
discharges Landlord, Landlord's lenders and its agents, employees and
contractors, from all claims or demands whatsoever which Tenant may have or
acquire arising out of damage to or destruction of the machinery, equipment,
furniture, fixtures, personal property or business, and loss of use thereof
occasioned by fire or other casualty, or by any cause whatsoever, including,
without limitation, damage caused by the negligence or fault of Landlord, its
agents, employees, contractors, and Tenant agrees to look to its insurance
coverage only (or if Tenant does not elect to carry such coverage, then to
Tenant's own funds) in the event of such loss.
11.3 LANDLORD'S LIABILITY INSURANCE OBLIGATIONS.
Landlord shall maintain commercial general liability insurance against
claims for personal injury, death or property damage occurring upon, in or about
the Property, such insurance to afford protection to Landlord, its lenders and
agents in amounts deemed reasonably to be appropriate by Landlord. Premiums paid
for insurance under this section shall be included in Operating Expenses.
11.4 TENANT'S LIABILITY INSURANCE OBLIGATIONS.
Tenant shall, at Tenant's sole cost and expense, maintain commercial
general liability insurance against claims for personal injury, death or
property damage occurring upon, in or about the Premises, with combined single
limits of not less than Three Million and No/100 Dollars ($3,000,000.00). Tenant
agrees to include contractual liability coverage in such policy insuring
Tenant's indemnification obligations under this Lease. Any such coverage shall
be deemed primary to any liability coverage secured by Landlord.
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11.5 TENANT'S MISCELLANEOUS INSURANCE OBLIGATIONS.
All policies of commercial general liability insurance shall be written
by companies reasonably satisfactory to Landlord, naming Landlord, Landlord's
lenders and agents as additional insureds thereunder. All policies, or a
memorandum or certificate of such insurance, shall be delivered to Landlord
endorsed "Premium Paid" by the company or agency issuing the same or accompanied
by other evidence satisfactory to Landlord that the premium thereon has been
paid. At such time as insurance limits required of tenants in office buildings
in the area in which the Property is located are generally increased to greater
amounts, Landlord shall have the right to require such greater limits as may
then be customary. All insurance policies required of Tenant shall be written on
an occurrence basis (not a claims made basis) so that they afford coverage for
all claims based upon acts, omissions, injury or damage, which claims occurred
or arose (or the onset of which occurred or arose) in whole or in part during
the policy period. All insurance policies required of Tenant shall require
thirty (30) days written notice by the insurer to Landlord prior to
cancellation.
11.6 TENANT'S INDEMNIFICATION OF LANDLORD.
Tenant agrees to indemnify, defend (with counsel reasonably acceptable
to Landlord) and protect Landlord, Landlord's lenders and managing agent,
against, and hold Landlord, Landlord's lenders and managing agent free and
harmless from, Claims arising from (a) any breach or default on the part of
Tenant in the performance of any covenant or agreement on the part of Tenant to
be performed pursuant to this Lease, (b) from any act or negligence on the part
of Tenant or its agents, contractors, servants, employees or licensees, and (c)
from any accident, injury or damage in or about the Premises and Property to the
extent caused by Tenant, its agents, contractors, servants, employees or
licensees.
11.7 MUTUAL WAIVERS.
Tenant waives, releases and discharges Landlord, Landlord's lenders and
its agents, employees and contractors, from all claims or demands whatsoever
which Tenant may have or acquire arising out of damage to or destruction of the
machinery, equipment, furniture, fixtures, personal property or business, and
loss of use thereof occasioned by fire or other casualty, or by any cause
whatsoever, including, without limitation, damage caused by the negligence or
fault of Landlord, its agents, employees, contractors, and Tenant agrees to look
to its insurance coverage only (or if Tenant does not elect to carry such
coverage, then to Tenant's own funds) in the event of such loss. Landlord
waives, releases and discharges Tenant, Tenant's lenders and its agents,
employees and contractors, from all claims or demands whatsoever which Landlord
may have or acquire arising out of damage to or destruction of the machinery,
equipment, furniture, fixtures, personal property or business, and loss of use
thereof occasioned by fire or other casualty, or by any cause whatsoever,
including, without limitation, damage caused by the negligence or fault of
Tenant, its agents, employees, contractors, and Landlord agrees to look to its
insurance coverage only (or if Landlord does not elect to carry such coverage,
then to Landlord's own funds) in the event of such loss. This paragraph shall
apply especially but not exclusively, to damage caused by the flooding of
basements or other subsurface areas and by refrigerators, sprinkling devices,
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air conditioning apparatus, water, snow, frost, steam, excessive heat or cold,
falling plaster, broken glass, sewage, gas, odors, noise or the bursting or
leaking of pipes or plumbing fixtures and shall apply regardless whether any
such damage results from an Act of God, the act or omission of other tenants or
occupants of the Property or any other persons. Both Landlord and Tenant shall
require to be included in all property insurance policies a waiver of
subrogation by the insurance carrier and each party shall provide to its
insurance carrier any notice required to make such waiver of subrogation
effective.
11.8 LANDLORD'S DEDUCTIBLE.
Provisions herein to the contrary notwithstanding, in the event any
damage to the Property results from any act or omission of Tenant, its agents,
employees or invitees, and all or any portion of the cost to repair the damage
falls within the deductible under Landlord's insurance policy, Tenant shall pay
to Landlord the amount of such deductible (not to exceed $5,000 per event) as
Additional Rent.
11.9 TENANT'S PROPERTY.
All machinery, equipment, furniture, fixtures and personal property of
Tenant, including all property under the care, custody and control of Tenant,
shall be at the risk of Tenant only, and Landlord shall not be liable for damage
thereto or theft, misappropriation or loss thereof Tenant agrees to indemnify,
defend (with counsel reasonably acceptable to Landlord) and protect Landlord
against, and hold Landlord free and harmless from, claims arising in connection
with such property.
11.10 INCREASE IN INSURANCE.
Tenant shall not do or permit anything to be done in or about the
Premises nor bring or keep anything therein which will in any way increase the
existing rate of or adversely affect in any other way any fire or other
insurance policy upon the Property or any of its contents, or cause a
cancellation of any insurance policy covering the Property or any of its
contents. Notwithstanding anything to the contrary contained herein, Tenant
shall promptly, upon demand, reimburse Landlord for the full amount of any
additional premium charged for such policy by reason of Tenant's failure to
comply with the provisions of this section, it being understood that such demand
for reimbursement shall not be Landlord's exclusive remedy.
11.11 TENANT'S FAILURE TO INSURE.
In the event Tenant fails to provide Landlord with evidence of
insurance required under Section 11.4 and Section 11.5, Landlord may but shall
not be obligated to, without further demand upon Tenant and without waiving or
releasing Tenant from any obligation contained in this Lease, effect such
insurance. In such event, Tenant agrees to repay, upon demand, all sums incurred
by Landlord in effecting such insurance. All such sums shall become Additional
Rent hereunder, but no such payment by Landlord shall relieve Tenant from any
default under this Lease.
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ARTICLE 12
DAMAGE OR DESTRUCTION
12.1 TENANTABLE WITHIN 180 DAYS.
If fire or other casualty shall render the whole or any material
portion of the Premises untenantable, and the Premises can reasonably be
expected to be made tenantable within one hundred eighty (180) days from the
date of such event, then Landlord shall repair and restore the Property and the
Premises to as near their condition prior to the fire or other casualty as is
reasonably possible within such one hundred eighty (180) day period (subject to
delays for causes beyond Landlord's reasonable control) and notify Tenant that
it will be doing so, such notice to be mailed within forty-five (45) days from
the date of such damage or destruction. In such case, this Lease shall remain in
full force and effect, but Rent for the period during which the Premises are
untenantable shall be abated prorata, based upon the portion of the Premises
which is untenantable; provided, however, if 40% or more of the Premises is
untenantable and Tenant discontinues use of all of the Premises, the Rent shall
be totally abated until the restoration is complete. If Landlord is required to
repair the Premises as aforesaid, said work shall be undertaken and prosecuted
with all due diligence and speed.
12.2 NOT TENANTABLE WITHIN 180 DAYS.
If fire or other casualty shall render the whole or any material part
of the Premises untenantable and the Premises cannot reasonably be expected to
be made tenantable within one hundred eighty (180) days from the date of such
event, then either party, by notice in writing to the other sent within
forty-five (45) days from the date of such damage or destruction, may terminate
this Lease effective upon a date within thirty (30) days from the date of such
notice.
12.3 PROPERTY SUBSTANTIALLY DAMAGED.
In the event that more than fifty percent (50%) of the value of the
Property is damaged or destroyed by fire or other casualty, and irrespective of
whether damage or destruction can be made tenantable within one hundred eighty
(180) days thereafter, then at Landlord's option, by written notice to Tenant
sent within forty-five (45) days from the date of such damage or destruction,
Landlord may terminate this Lease effective upon a date within ninety (90) days
from the date of such notice to Tenant.
12.4 UNINSURED CASUALTY OR UNAVAILABLE INSURANCE PROCEEDS.
If fire or other casualty shall render any portion of the Premises or
any material portion of the Property untenantable and the insurance proceeds and
deductible amount are not sufficient to make such repair or if Landlord's lender
requires all or a portion of the proceeds to be applied to the outstanding
balance due under the loan, then Landlord may, by notice to Tenant sent within
forty-five (45) days from the date of such damages or destruction, terminate
this Lease effective upon a date within forty-five (45) days from the date of
such notice.
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12.5 DEDUCTIBLE PAYMENTS.
If the Premises or the Property is damaged, and such damage is of the
type insured against under the casualty insurance maintained by Landlord
hereunder, the cost of repairing said damage up to the amount of the deductible
under said insurance policy shall be included as a part of the Operating
Expenses. If the damage was due to an act or omission of Tenant, Tenant shall
pay Landlord the entire amount of the deductible under Landlord's insurance
policies (not to exceed $5,000.00) as Additional Rent.
12.6 LANDLORD'S REPAIR OBLIGATIONS.
In the event (a) fire or other casualty shall render the whole or any
material part of the Premises untenantable and the Premises cannot reasonably be
expected to be made tenantable within one hundred eighty (180) days from the
date of such event and neither party hereto terminates this Lease pursuant to
its rights herein, (b) more than fifty percent (50%) of the value of the
Property is damaged or destroyed by fire or other casualty, and Landlord does
not terminate this Lease pursuant to its option granted herein or (c) fifty
percent (50%) or less of the value of the Property is damaged or destroyed by
fire or other casualty and neither the whole nor any material portion of the
Premises is rendered untenantable, then in any such event Landlord shall repair
and restore the Premises and the Property to as near their condition prior to
the fire or other casualty as is reasonably possible with a due diligence and
speed (subject to delays for causes beyond Landlord's reasonable control) and
the Rent for the period during which the Premises are untenantable shall be
abated prorata, based upon the portion of the Premises which is untenantable;
provided, however, if 40% or more of the Premises is untenantable and Tenant
discontinues use of all of the Premises, the Rent shall be totally abated until
the restoration is complete. In no event shall Landlord be obligated to repair
or restore any Tenant Improvements or special equipment or improvements
installed by Tenant at Tenant's expense.
12.7 RENT APPORTIONMENT.
In the event of a termination of this Lease pursuant to this Article
12, Rent shall be apportioned on a per diem basis and paid to the date of the
fire or other casualty.
12.8 ADDITIONAL TENANT TERMINATION RIGHT.
If either (i) Landlord undertakes to repair the Premises pursuant to
Section 12.1 above and fails to achieve such repair and restoration within one
hundred eighty (180) days of the date of such casualty, as such date may be
extended for force majeure delays, or (ii) neither Landlord nor Tenant elects to
terminate this Lease and Landlord undertakes the repair and restoration of the
Premises pursuant to Section 12.2 above and fails to achieve such repair and
restoration within thirty (30) days following the expiration of the estimated
repair period set forth in Landlord's notice, as such date may be extended for
force majeure delays, then, in either such event, Tenant shall have the right to
terminate this Lease by written notice to Landlord within thirty (30) days
following the expiration of the applicable time period. If Tenant does not
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exercise its termination right within such thirty (30) day period, Landlord
shall continue to repair and restore the Premises as required herein and Tenant
shall have no further rights to terminate this Lease.
ARTICLE 13
EMINENT DOMAIN
13.1 TERMINATION OF LEASE.
If the whole or any substantial part of the Premises is taken by any
public authority under the power of eminent domain or taken in any manner for
any public or quasi-public use, so as to render the remaining portion of the
Premises unsuitable for the purposes intended hereunder, then this Lease shall
terminate as of the day possession shall be taken by such public authority and
Landlord shall make a pro rata refund of any prepaid Rent. In the event that
fifty percent (50%) or more of the building area or fifty percent (50%) or more
of the value of the Property is taken by public authority under the power of
eminent domain then at Landlord's option by written notice to Tenant, mailed
within sixty (60) days from the date possession shall be taken by such public
authority, Landlord may terminate this Lease effective upon a date within ninety
(90) days from the date of such notice to Tenant.
13.2 LANDLORD'S REPAIR OBLIGATIONS.
In the event this Lease is not terminated pursuant to Section 13.1,
Landlord shall, at its sole cost and expense, restore the Premises and Property
to a complete architectural unit and the Base Rent provided for herein during
the period from and after the date of delivery of possession pursuant to such
proceedings to the termination of this Lease shall be reduced to a sum equal to
the product of the Base Rent provided for herein multiplied by a fraction, the
numerator of which is the fair market rent of the Premises after such taking and
after same has been restored to a complete architectural unit, and the
denominator of which is the fair market rent of the Premises prior to such
taking. In addition, Tenant's Prorata Share of Excess Property Taxes and
Tenant's Prorata Share of Excess Operating Expenses for the same period shall be
adjusted in accordance with Section 4.7 after due consideration of the rentable
square footage of the Premises after the date of delivery of possession pursuant
to such proceedings compared to the rentable square footage of the Building
after the date of delivery of possession pursuant to such proceedings.
13.3 TENANT'S PARTICIPATION.
All damages awarded for such taking under the power of eminent domain
or any like proceedings shall belong to and be the property of Landlord, Tenant
hereby assigning to Landlord its interest, if any, in said award. Tenant shall
have the right to prove in any condemnation proceedings and to receive any
separate award which may be made for damages to or condemnation of Tenant's
movable trade fixtures and equipment and for moving expenses; provided however,
Tenant shall in no event have any right to receive any award for its interest in
this Lease or for loss of leasehold.
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ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 RESTRICTION ON TRANSFERS.
Except as provided in Section 14.3 below, Tenant shall not assign,
mortgage, pledge, transfer, sublease or otherwise encumber or dispose of this
Lease, or any interest therein, or in any manner assign, mortgage, pledge,
transfer or otherwise encumber or dispose of its interest or estate in the
Premises, or any portion thereof ("Transfer"), without obtaining Landlord's
prior written consent in each and every instance, which consent shall not be
unreasonably withheld or delayed. Landlord shall be deemed reasonable in
withholding such consent based on any of the following factors: (i) in
Landlord's reasonable judgment, the character, reputation or business of the
proposed assignee or subtenant is inconsistent with the desired tenant mix or
the quality of the other tenancies in the Building; (ii) the financial condition
of the proposed assignee is not equal to or better than the financial condition
of tenant; (iii) the proposed assignee or subtenant intends to make a use which
is not in keeping with the first-class nature of the Building or which will
violate an exclusive use right granted by Landlord to another tenant of the
Building; (iv) the proposed assignee or subtenant is an existing tenant of the
Building for whom Landlord has space available (on the date the existing tenant
desires to expand) in the Building and desires a length of term which Landlord
is willing to provide; or (v) the proposed assignee or subtenant is a potential
candidate for space in the Building who has asked for and received a bona fide
proposal from Landlord with respect to other space which Landlord currently has
available in the Building and which would be adequate to satisfy the
requirements of the potential assignee or subtenant (disregarding any difference
in rental rate between Landlord's Space and Tenant's Sublease Space) and such
candidate desires the space for a length of term which Landlord is willing to
provide. Notwithstanding anything to the contrary set forth hereinabove, if
Tenant has notified Landlord that it desires to expand the Premises by 50% or
more and Landlord has been unable to satisfy Tenant's expansion requirement
either by providing such additional space in the Building or by providing the
entire requirement in another building in the immediate vicinity owned by Opus
South Corporation or one of its affiliates and, as a result, Tenant desires to
sublease or assign the Premises so that it can relocate to another building,
then, in that event, Landlord shall not be deemed reasonable in withholding its
consent based on either item (iv) or item (v) above. No Transfer shall release
Tenant from its liability under this Lease.
14.2 DEFINITION OF ASSIGNMENT.
For the purposes of this Lease, an "assignment" prohibited by this
Section 9 shall be deemed to include the following: if Tenant is a partnership,
a withdrawal or change (voluntary, involuntary, by operation of law) of any one
or more of the partners thereof, or the dissolution of the partnership; or, if
Tenant consists of more than one person, a purported assignment, transfer,
mortgage or encumbrance (voluntary, involuntary, by operation of law or
otherwise) from one constituent member to any other constituent member, or to
any third party; or, if Tenant is a corporation, any dissolution, merger,
consolidation or other reorganization of Tenant, or any change in the ownership
(voluntary, involuntary, by operation of law, creation of new stock or
otherwise) of fifty percent (50%) or more of its capital stock from the
ownership existing on the
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date of execution hereof, or, the sale of fifty percent (50%) of the value of
the assets of Tenant. This paragraph shall not apply if the stock of Tenant is
publicly traded on a national stock exchange or over-the-counter.
14.3 AFFILIATE AND TRANSFER ASSIGNMENT RIGHTS.
Notwithstanding anything to the contrary set forth in Section 14.1
above, Tenant shall have the right to assign this Lease or sublease all or any
portion of the Premises to any entity which is wholly-owned by Tenant or is
owned by the same parent entity as Tenant or which owns all of Tenant, but
Tenant shall not be released from any of its obligations under this Lease
following any such assignment or sublease. In addition, in the event that all or
substantially all of the assets of Tenant are acquired by another entity or all
or substantially all of the stock of Tenant (or in either event a group,
division, or section of Tenant's business which includes the operations
conducted in the Premises) occurs and the resulting entity will have a net
worth, following the asset or stock acquisition, which is equal to or greater
than the net worth of Tenant immediately prior to the date of such transaction,
such assignment will not require the prior written consent of Landlord. Tenant
must provide Landlord written notice, at least ten (10) business days prior to
any assignment which will be governed by this Section 14.3 and which Tenant
believes does not require the consent of Landlord pursuant to the terms hereof.
14.4 RECAPTURE.
No less than thirty (30) days prior to the effective date of a proposed
assignment or sublease (other than one made pursuant to Subsection 14.2, Tenant
shall offer to reconvey to Landlord, as of said effective date, that portion of
the Premises which Tenant is seeking to assign or sublet, which offer shall
contain an undertaking by Tenant to accept, as full and adequate consideration
for the reconveyance, Landlord's release of Tenant from all future Rent and
other obligations under this Lease with respect to the Premises or the portion
thereof so reconveyed. Landlord, in its absolute discretion, shall accept or
reject the offered reconveyance within thirty (30) days of the offer and if
Landlord accepts, the reconveyance shall be evidenced by an agreement acceptable
to Landlord in form and substance. If Landlord fails to accept or reject the
offer within the thirty (30) day period, Landlord shall be deemed to have
rejected the offer.
14.5 COSTS.
Tenant agrees to pay on behalf of Landlord any and all reasonable costs
actually incurred by Landlord, including reasonable attorney's fees, occasioned
by such Transfer.
14.6 PROCEEDS.
If Landlord rejects or is deemed to have rejected Tenant's offer of
reconveyance and if Landlord gives its consent to any assignment of this Lease
or to any sublease, or if Tenant is otherwise permitted to make any assignment
or sublease pursuant to this Lease, Tenant shall in consideration therefore, pay
to Landlord, as Additional Rent 50% of any and all amounts by which the rent and
any other consideration paid by the subtenant or assignee exceeds the Rent
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due and payable by Tenant to Landlord hereunder, net of all reasonable costs and
expenses actually incurred by Tenant to procure the sublease or assignment
including construction costs, brokerage costs, legal fees, design costs and
concessions. With respect to a sublease of less than the entire Premises, the
Rent due under this Lease shall be appropriately prorated on a per rentable
square foot basis to determine any such excess amounts. Any such excess amounts
shall be paid by Tenant to Landlord as and when payable by the assignee or
subtenant to Tenant.
ARTICLE 15
DEFAULTS; REMEDIES
15.1 EVENTS OF DEFAULT.
The occurrence of any of the following shall constitute a default and
breach of this Lease by Tenant:
15.1.1 FAILURE TO PAY BASE RENT OR ADDITIONAL RENT.
If Tenant fails to pay Base Rent or Additional Rent as and
when due and does not cure such failure within ten (10) days following Tenant's
receipt of written notice from Landlord.
15.1.2 FAILURE TO PERFORM.
If Tenant fails to perform any of Tenant's nonmonetary
obligations under this Lease for a period of thirty (30) days after Tenant's
receipt of written notice from Landlord; provided that if performance as
required by this Lease reasonably requires more than thirty (30) days to
complete, Tenant shall not be in default if Tenant commences such performance
within the thirty (30) day period and thereafter diligently pursues its
completion and accomplishes the cure within ninety (90) days. Landlord shall not
be required to give such notice if Tenants failure to perform constitutes a
noncurable breach of this Lease.
15.1.3 REPEATED DEFAULTS.
Notwithstanding anything to the contrary set forth in Section
15.1.2 above, in the event Tenant fails to perform any non-monetary obligations
under this Lease on more than two (2) occasions in any calendar year, then any
further nonmonetary failure in such calendar year shall constitute an event of
default without any notice or opportunity to cure.
15.1.4 OTHER DEFAULTS.
If (a) Tenant makes a general assignment or general
arrangement for the benefit of creditors; (b) a petition for adjudication of
bankruptcy or for reorganization or rearrangement is filed by or against Tenant
and is not dismissed within thirty (30) days; (c) a trustee or receiver is
appointed to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease and possession is not
restored to Tenant within thirty (30) days; or (d) substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease
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is subjected to attachment, execution or other judicial seizure which is not
discharged within thirty (30) days. If a court of competent jurisdiction
determines that any of the acts described in this subsection is not a default
under this Lease, and a trustee is appointed to take possession (or if Tenant
remains a debtor in possession) and such trustee or Tenant transfers Tenant's
interest hereunder, then Landlord shall receive, as Additional Rent, the
difference between the Rent (or any other consideration) paid in connection with
such assignment or sublease and the Rent payable by Tenant hereunder.
The notices required by this section are intended to satisfy
any and all notice requirements imposed by the Laws and are not in addition to
any such requirements.
15.2 REMEDIES.
Upon the occurrence of any default by Tenant, Landlord may at any time
and from time to time exercise any of the following remedies. Landlord's
exercise of any right or remedy shall not prevent it from exercising any other
right or remedy available at law or in equity.
15.2.1 TERMINATION OF TENANT'S RIGHT TO POSSESSION OF THE
PREMISES.
Terminate Tenant's right to possession of the Premises by any
lawful means, in which case Tenant shall immediately surrender possession of the
Premises to Landlord. In such case, this Lease shall continue in full force and
effect except for Tenant's right to possession. Termination of Tenant's right to
possession shall not be construed as an election by Landlord to terminate this
Lease and Tenant's obligations and liabilities hereunder unless and until
Landlord delivers written notice to Tenant expressly exercising such right of
termination.
15.2.2 RIGHT OF RE-ENTRY AND RELETTING.
Upon termination of Tenant's right to possession of the
Premises, Landlord may but shall not be obligated to, re-enter the Premises and
remove all persons and property from the Premises. Any property removed may be
stored in a public warehouse or elsewhere at the cost of and for the account of
Tenant. Upon such re-entry, Landlord may but shall not be obligated to, relet
the Premises or any part of them, to third parties for Tenant's account. Tenant
shall be liable immediately to Landlord for all costs and expenses incurred by
Landlord in re-entering or reletting the Premises, including but not limited to
(a) maintaining or preserving the Premises after such default, (b) recovering
possession of the Premises, removing persons and property from the Premises and
storing such property, including court costs and reasonable attorneys' fees
incurred in connection therewith, (c) reletting, renovating or altering the
Premises, and (d) real estate commissions paid or payable in connection with
reletting the Premises, said cost and expenses collectively referred to herein
as "Re-entry Costs". Reletting can be for a period shorter or longer than the
remaining Term. Tenant shall continue to pay Rent when due under this Lease,
less the Net Rent (as hereafter defined) actually received by Landlord from
reletting. Net Rent shall mean all rental actually received by Landlord from
reletting less the following: (i) any indebtedness from Tenant to Landlord other
than Rent, which shall be paid first, and (ii) the Reentry Costs, which shall be
paid second. In the event the rental actually received by Landlord
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from reletting exceeds the Rent, any sum remaining will be held by Landlord and
applied to future Rent under this Lease.
15.2.3 TERMINATION OF LEASE.
Terminate this Lease and all of Tenant's rights and
obligations hereunder by delivery of written notice to Tenant. Such termination
shall be effective upon delivery of such notice to Tenant and Tenant shall
immediately surrender possession of the Premises to Landlord. In such event,
Landlord shall be entitled to recover from Tenant and Tenant shall pay to
Landlord immediately upon demand, all damages incurred by Landlord by reason of
Tenant's default, including without limitation (a) all Rent due and payable
under this Lease as of the effective date of the termination; (b) any amount
necessary to compensate Landlord for all detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, including but not
limited to, any costs or expenses incurred in (i) maintaining or preserving the
Premises after such default, (ii) recovering possession of the Premises,
removing persons and property from the Premises and storing such property,
including court costs and reasonable attorneys' fees incurred in connection
therewith (iii) reletting, renovating or altering the Premises, and (iv) real
estate commission paid or payable in connection with reletting the Premises; and
(c) an amount equal to the difference between the present worth, as of the
effective date of the termination, of the Rent for the balance of the Term
remaining after the effective date of the termination (assuming no termination)
and the present worth, as of the effective date of the termination, of a fair
and reasonable market rent for the Premises for the same period. For purposes of
this section, present worth shall be computed by utilizing a discount rate of
six percent (6%). Nothing in this section shall limit or prejudice Landlord's
right to prove and obtain damages in an amount equal to the maximum amount
allowed by the Laws, regardless of whether such damages are greater than the
amounts set forth herein.
15.3 COSTS.
Tenant shall reimburse and compensate Landlord upon demand, as
Additional Rent, for any actual pecuniary loss incurred by Landlord in
connection with, resulting from or related to any breach or default of Tenant
under this Lease, whether or not suit is commenced or judgment entered. Such
loss shall include all reasonable legal fees, costs and expenses incurred in the
negotiation, settlement or enforcement of rights or remedies of Landlord or
necessary to protect Landlord's interest under this Lease in a bankruptcy case
or proceeding under Title II of the United States Code, as amended. Tenant shall
also indemnify, defend (with counsel reasonably acceptable to Landlord) and
protect Landlord against, and hold Landlord free and harmless from, all Claims
incurred by Landlord if Landlord becomes or is made a party to any claim or
action (a) instituted by Tenant, by any third party against Tenant or by or
against any person holding any interest under or using the Premises by license
of or agreement with Tenant; (b) for foreclosure of any lien for labor or
material furnished to or for Tenant or such other person; (c) otherwise arising
out of or resulting from any act or transaction of Tenant or such other person;
or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy
case or proceeding under Title II of the United States Code, as amended.
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15.4 NO WAIVER.
No failure by Landlord to insist upon the performance of any of the
terms of this Lease or to exercise any right or remedy consequent upon a breach
thereof, and no acceptance by Landlord of full or partial rent from Tenant or
any third party during the continuance of any such breach, shall constitute a
waiver of any such breach or of any of the terms of this Lease. None of the
terms of this Lease to be kept, observed or performed by Landlord or by Tenant,
and no breach thereof, shall be waived, altered or modified except by a written
instrument executed by Landlord and/or by Tenant, as the case may be. No waiver
of any default of Tenant herein shall be implied from any omission by Landlord
to take any action on account of such default. One or more waivers by Landlord
shall not be construed as a waiver of a subsequent breach of the same covenant,
term or condition. No statement on a payment check from Tenant or in a letter
accompanying a payment check shall be binding on Landlord. Landlord may, with or
without notice to Tenant, negotiate such check without being bound to the
conditions of such statement.
15.5 WAIVER BY TENANT.
Tenant hereby waives all claims resulting from Landlord's re-entry and
taking possession of the Premises and removing and storing the property of
Tenant as permitted under this Lease and will save Landlord harmless from all
losses, costs or damages occasioned thereby. No such reentry shall be considered
or construed to be a forcible entry by Landlord.
ARTICLE 16
PROTECTION OF CREDITORS
16.1 SUBORDINATION.
If and only if Landlord obtains a Subordination, Non-Disturbance and
Attornment Agreement in substantially the form of that attached hereto as
EXHIBIT "G", this Lease and all rights of Tenant therein, and all interest or
estate of Tenant in the Property or any portion thereof, shall be subject and
subordinate to the lien of any mortgage, deed of trust or other document of like
nature ("Mortgage") which now or at any time may be placed upon the Property or
any portion thereof, and to any replacements, renewals, amendments,
modifications, extensions or refinancing thereof, and to each and every advance
made under any Mortgage. Tenant agrees at any time hereafter, and from time to
time on demand of Landlord, to execute and deliver to Landlord any reasonable
instruments, releases or other documents that may be reasonably required for the
purpose of subjecting and subordinating this Lease to the lien of any Mortgage.
It is agreed that so long as Tenant is not in default in the payment of Rent or
the performance and observance of any covenant, condition, provision, term or
agreement to be performed and observed by Tenant under this Lease, the holder of
any Mortgage shall not interfere with, hinder, molest or disturb Tenant's rights
under this Lease. The lien of any such Mortgage shall not cover Tenant's trade
fixtures or other personal property located in or on the Premises. Landlord
represents and warrants that Landlord is the owner of fee title to the Property
and that, except for a deed to secure debt and other security instruments in
favor of Wachovia Bank of Georgia, N.A.
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("Wachovia"), the Property is not currently subject to any ground leases and is
not encumbered by any Mortgages. Landlord will deliver to Tenant, within thirty
(30) days following the date of this Lease, an SNDA in the agreed, attached
form, executed by Wachovia.
16.2 ATTORNMENT.
If Landlord's interest in the Premises is acquired by any ground
landlord, the holder of any Mortgage at a foreclosure sale or by any new person
or entity as a result of any transfer by Landlord, Tenant shall attorn to the
transferee of or successor to Landlord's interest in the Premises and recognize
such transferee or successor as landlord under this Lease provided such
transferee expressly assumes, in writing, all obligations of Landlord accruing
from and after the date of transfer. Tenant waives the protection of any statute
or rule of Law which gives or purports to give Tenant any right to terminate
this Lease or surrender possession of the Premises upon the transfer of
Landlord's interest.
16.3 ESTOPPEL CERTIFICATES.
16.3.1 CONTENTS.
Upon Landlord's written request, Tenant shall execute, acknowledge and
deliver to Landlord a written statement certifying: (a) that this Lease (and all
guaranties, if any) is unmodified and in full force and effect (or, if there
have been any modifications, that the same is in full force and effect, as
modified, and stating the modifications); (b) that this Lease has not been
canceled or terminated; (c) the last date of payment of Base Rent and Additional
Rent and the time period covered by such payments; (d) whether or not there are
then existing any breaches or defaults by Landlord known by Tenant under this
Lease, and if so, specifying the same and the steps being taken to remedy the
same; (e) specifying any setoffs or defenses in favor of Tenant against the
enforcement of this Lease (or of any guaranties); and (f) such other statements
as required by Landlord, any lender, prospective lender, investor or purchaser.
Tenant shall deliver such statement to Landlord within ten (10) business days
after Landlord's request. Any such statement by Tenant may be given by Landlord
to any lender, prospective lender, investor or purchaser of the Premises and may
be relied upon by such party as true and correct.
16.3.2 FAILURE TO DELIVER.
If Tenant does not deliver such statement to Landlord within
such ten (10) business day period, such failure shall constitute a default under
this Lease entitling Landlord to pursue remedies for breach.
16.4 MORTGAGEE PROTECTION CLAUSE.
Tenant agrees to give the holder of any Mortgage, by registered mail, a
copy of any notice of default served upon Landlord, provided that prior to such
notice Tenant has been notified in writing (by way of notice of assignment of
rents and leases or otherwise) of the address of such holder. Tenant further
agrees that if Landlord shall have failed to cure such default within the
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time provided for in this Lease, then such holder shall have an additional ten
(10) days within which to cure such default or if such default cannot be cured
within that time, then such additional time as may be necessary if, within such
ten (10) day period, the holder has commenced and is diligently pursuing the
remedies necessary to cure such default (including but not limited to
commencement of foreclosure proceedings if necessary to effect such cure) in
which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
ARTICLE 17
TERMINATION OF LEASE
17.1 SURRENDER OF PREMISES.
At the expiration of the Term, Tenant shall surrender the Premises in
the same condition as the same were in on the Commencement Date, reasonable wear
and tear excepted, permitted alterations and damage by casualty or condemnation
excepted, and shall surrender all keys to the Premises to Landlord's managing
agent or to Landlord at the place then fixed for the payment of Base Rent and
shall inform Landlord of all combinations on locks, safes and vaults, if any.
Tenant shall at such time remove all of its property therefrom and all
alterations and improvements placed thereon by Tenant if so requested by
Landlord. Tenant shall repair any damage to the Premises caused by such removal,
and any and all such property not so removed shall, at Landlord's option, become
the exclusive property of Landlord or be disposed of by Landlord at Tenant's
cost and expense without further notice to or demand upon Tenant. All property
of Tenant not removed on or before the last day of the Term shall be deemed
abandoned. Tenant hereby appoints Landlord its agent to remove, at Tenant's
cost, all property of Tenant from the Premises upon termination of this Lease
and to cause its transportation and storage for Tenant's benefit, all at the
sole cost and risk of Tenant and Landlord shall not be liable for damage, theft,
misappropriation or loss thereof and Landlord shall not be liable in any manner
in respect thereto.
17.2 HOLDING OVER.
In the event Tenant remains in possession of the Premises after
expiration of this Lease, and without the execution of a new lease, but with
Landlord's written consent, it shall be deemed to be occupying the Premises as a
tenant from month to month, subject to all the provisions, conditions and
obligations of this Lease insofar as the same can be applicable to a
month-to-month tenancy, except that the Base Rent shall be escalated to one
hundred fifty percent (150%) of Landlord's then current Base Rent for the
Premises according to Landlord's then current rental rate schedule for
prospective tenants. In the event Tenant remains in possession of the Premises
after expiration of this Lease and without the execution of a new lease and
without Landlord's written consent, Tenant shall be deemed to be occupying the
Premises without claim of right and Tenant shall pay a charge for each day of
occupancy an amount equal to one hundred fifty percent (150%) of the Base Rent
and Additional Rent (on a day basis) then currently being charged by Landlord on
new leases in the Property for space similar to the Premises.
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<PAGE>
ARTICLE 18
MISCELLANEOUS PROVISIONS
18.1 NOTICES.
All notices, demands and requests which may be or are required to be
given, demanded or requested by either party to the other shall be in writing.
All notices, demands and requests shall be sent by United States registered or
certified mail, postage prepaid or by an independent overnight courier service,
addressed to the addresses specified in the Basic Terms or at such other place
as either party may designate to the other party by written notice given in
accordance with this section. Notices, demands and requests which shall be given
by mail shall be deemed delivered within three (3) business days of deposit with
the United States Post Office and if delivered by courier shall be deemed
delivered on the next business day after the day of deposit with such courier.
18.2 LANDLORD'S CONTINUING OBLIGATIONS.
The term "Landlord" as used in this Lease, so far as covenants or
obligations on the part of Landlord are concerned, shall be limited to mean and
include only the owner or owners at the time in question of the fee title of the
Property. In the event of any transfer or conveyance of the Property, the then
grantor shall be automatically freed and relieved from and after the date of
such transfer or conveyance of all liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed provided such grantee assumes, in writing, all
obligations of Landlord accruing from and after the date of transfer; provided
that any funds in the hands of such grantor at the time of such transfer, in
which Tenant has an interest, shall be turned over to the grantee for payment to
Tenant in accordance with this Lease.
18.3 SUCCESSORS.
The covenants and agreements herein contained shall bind and inure to
the benefit of Landlord, its successors and assigns, and Tenant and its
permitted successors and assigns.
18.4 CAPTIONS AND INTERPRETATION.
The captions of the Articles and Sections of this Lease are to assist
the parties in reading this Lease and are not a part of the terms or provisions
of this Lease. Whenever required by the context of this Lease, the singular
shall include the plural and the plural shall include the singular. The
masculine, feminine and neuter genders shall each include the other. In any
provision relating to the conduct, acts or omissions of Tenant, the term
"Tenant" shall include Tenant's agents, employees, contractors, invitees,
successors or others using the Premises with Tenant's expressed or implied
permission.
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<PAGE>
18.5 RELATIONSHIP OF PARTIES.
This Lease does not create the relationship of principal and agent, or
of partnership, venture, or of any association or relationship between Landlord
and Tenant, the sole relationship between Landlord and Tenant being that of
landlord and tenant.
18.6 ENTIRE AGREEMENT.
Any exhibits, addenda and schedules attached hereto, and the Work
Letter, shall be incorporated herein as though fully set forth herein. All
preliminary and contemporaneous negotiations are merged into and incorporated in
this Lease. This Lease Agreement together with the Exhibits contains the entire
agreement between the parties. No subsequent alteration, amendment, change or
addition to this Lease shall be binding upon Landlord or Tenant unless reduced
to writing and signed by the party to be charged with their performance.
18.7 SEVERABILITY.
If any covenant, condition, provision, term or agreement of this Lease
shall, to any extent, be held invalid or unenforceable, the remaining covenants,
conditions, provisions, terms and agreements of this Lease shall not be affected
thereby, but each covenant, condition, provision, term or agreement of this
Lease shall be valid and in force to the extent permitted by Law.
18.8 LANDLORD'S LIMITED LIABILITY.
Tenant agrees to look solely to Landlord's equity interest in the
Building (and to any insurance proceeds or condemnation awards not applied to
restoration, to net proceeds of sale and to rents not used to pay Operating
Expenses or debt service) for recovery of any judgment from Landlord, it being
agreed that Landlord (and if Landlord is a partnership, its partners, whether
general or limited, and if Landlord is a corporation, its directors, officers or
shareholders and if Landlord is a limited liability company, its governors,
managers or members) shall never be personally liable for any personal judgment
or deficiency decree or judgment against it, nor shall Tenant be entitled to
reach any of the general corporate assets of Landlord, or its parent corporation
or its affiliated corporations for satisfaction of any such judgment.
18.9 SURVIVAL.
All obligations (together with interest on money obligations at the
Maximum Rate of Interest) accruing prior to expiration of the Term shall survive
the expiration or other termination of this Lease.
18.10 ATTORNEYS' FEES.
In the event of any litigation or judicial action in connection with
this Lease or the enforcement thereof or the enforcement of any indemnity
obligation hereunder, the prevailing party in any such litigation or judicial
action shall be entitled to recover all costs and expenses of
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<PAGE>
any such judicial action or litigation (including, but not limited to,
reasonable attorneys' fees, costs and expenditures fees) from the other party.
18.11 BROKER.
Landlord shall pay the broker(s), if any, listed in the Basic Terms,
pursuant to a separate agreement between Landlord and such broker(s). Landlord
and Tenant each represent and warrant to the other that it has not had any
dealings with any realtors, brokers or agents in connection with the negotiation
of this Lease except as may be specifically set forth in the Basic Terms and
agree to hold the other harmless from the failure to pay any realtors, brokers
or agents (other than the Brokers specified in the Basic Terms) and from any
cost, expense or liability for any compensation, commission or charges claimed
by any realtors, brokers or agents (other than the Brokers specified in the
Basic Terms) claiming by, through or on behalf of it with respect to this Lease
and/or the negotiation hereof. Landlord agrees to pay all amounts due to the
Brokers named in the Basic Terms as a result of this Lease.
18.12 GOVERNING LAW.
This Lease shall be governed by the laws of the State of Georgia. All
covenants, conditions and agreements of Tenant arising hereunder shall be
performable in the county wherein the Premises are located. Any suit arising
from or relating to this Lease shall be brought in the county wherein the
Premises are located, and the parties hereto waive the right to be sued
elsewhere.
18.13 TIME IS OF THE ESSENCE.
Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
18.14 JOINT AND SEVERAL LIABILITY.
All parties signing this Lease as Tenant shall be jointly and severally
liable for all obligations of Tenant.
18.15 NOT USED.
18.16 DELIVERY OF TENANT ORGANIZATION DOCUMENTS.
In the event Tenant is an entity, Tenant shall without charge to
Landlord, at any time and from time to time within ten (10) days after written
request by Landlord, deliver the following instruments and documents:
(a) Certificate of Good Standing from the state of
formation of Tenant and the State, confirming that
Tenant is in good standing under the corporate laws
governing formation;
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<PAGE>
(b) A copy of Tenant's organizational documents and any
amendments or modifications thereof, certified as
true and correct by an appropriate official of
Tenant.
18.17 PROVISIONS ARE COVENANTS AND CONDITIONS.
All provisions, whether covenants or conditions, shall be deemed to be
both covenants and conditions.
18.18 BUSINESS DAYS.
As used herein, the term "business days" shall mean any day which is
not Saturday, Sunday or a legal holiday in the State.
18.19 FORCE MAJEURE.
If Landlord or Tenant shall be delayed or prevented from the
performance of any act required hereunder (excluding, however, the payment of
money) by reason of acts of God, strikes, lockouts, labor troubles, inability to
procure materials, respect of governmental laws or regulations, or by reason of
any order or direct of any legislative, administrative or judicial body, or any
government department, or by reason of not being able to obtain any licenses,
permissions or authorities required therefor, or other causes without fault or
beyond the reasonable control of Landlord or Tenant, performance of such acts by
Landlord or Tenant shall be excused for the period of the delay and the period
of the performance of any such acts shall be extended for a period equivalent to
the period of such delay. Such delays are sometimes referred to in this Lease as
"Force Majeure."
18.20 SUBMISSION OF LEASE.
Submission of this instrument for examination or signature by Tenant
does not constitute a reservation of or an option for lease and is not effective
as a lease or otherwise until execution and delivery by both Landlord and
Tenant.
18.21 NOT USED.
18.22 USUFRUCT. The parties hereby agree that the interest granted by
Landlord to Tenant under this Lease is not an interest in real estate and is not
a leasehold estate but is merely a usufruct.
18.23 SECURITY DEPOSIT. Tenant shall pay Landlord the sum of
Thirty-Three Thousand Nine Hundred Seventeen and 60/100 Dollars ($33,917.60)
(hereinafter referred to as "Security Deposit"), which shall be held by the
Landlord during the Term of this Lease, or any renewal thereof. The Security
Deposit may be commingled by Landlord with its other funds and under no
circumstances will Tenant be entitled to any interest on the Security Deposit.
The Security
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<PAGE>
Deposit may be used by Landlord, at its discretion, to apply to any amount owing
to Landlord hereunder, or to pay the expenses of repairing any damage to the
Premises, except natural wear and tear occurring from normal use of the
Premises, which exists on the day Tenant vacates the Premises, but this right
shall not be construed to limit Landlord's right to recover additional sums from
Tenant for damages to the Premises. In addition to any other rights available to
Landlord hereunder, the Security Deposit shall be forfeited if this Lease should
be terminated prior to the normal Expiration Date of the original term, or of
any renewal thereof as a result of Tenant's default. If there is any balance of
the Security Deposit remaining after all payments have been made, the Security
Deposit, or such balance thereof remaining, will be refunded to the Tenant
within thirty (30) days after fulfillment by Tenant of all obligations
hereunder. Upon sale or conveyance of the Building, Landlord shall transfer or
assign the Security Deposit to any new owner of the Premises, and upon such
transfer all liability of Landlord for the Security Deposit shall terminate.
Notwithstanding anything to the contrary set forth hereinabove, if, during the
first Lease Year, Tenant makes all payments of Rent in a timely manner and no
event of default has occurred during such first Lease Year, Landlord agrees to
apply the Security Deposit as a credit to the first monthly installment of Rent
due during the second Lease Year.
18.24 SPECIAL STIPULATIONS. The Special Stipulations attached hereto as
EXHIBIT E form a part of this Lease and are hereby incorporated by this
reference. In the event of any conflict between the Special Stipulations and the
remaining provisions of this Lease, to the Special Stipulations shall control.
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<PAGE>
Landlord and Tenant have signed this Lease on the dates specified
adjacent to their signatures below.
Dated: 3/17/99 LANDLORD:
------------------------------
Opus South Corporation, a
Florida corporation
By: /s/ NEIL RAUENHORST
--------------------------
Name: NEIL RAUENHORST
-----------------------
Title: PRESIDENT & CEO
-----------------------
Dated: 3/15/99 TENANT:
------------------------------
NetB@nk, Inc., a
Georgia corporation
By: /s/ D. R. GRIMES
--------------------------
Name: D. R. GRIMES
------------------------
Title: CEO
-----------------------
By: /s/ ROBERT E. BOWERS
--------------------------
Name: ROBERT E. BOWERS
------------------------
Title: CFO
--------------
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<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF LAND
All that tract or parcel of land lying and being in Land Lots 858 and 906, 1st
District, 2nd Section, City of Alpharetta, Fulton County, Georgia, being more
particularly described as follows:
TO FIND THE TRUE POINT OF BEGINNING, commence at a point formed by the
intersection of the northwesterly right-of-way of North Point Parkway, having a
120 foot right-of-way and the easterly right-of-way of Kimball Bridge Road,
having a varying right-of-way; thence, run northwesterly, along the
northwesterly right-of-way of North Point Parkway right-of-way in a generally
northeasterly direction, a distance of 1,991.27 feet to a point located at the
intersection of the northwesterly right-of-way of North Point Parkway and the
northeasterly right-of-way of Great Oaks Way, having a varying right-of-way,
which point is THE TRUE POINT OF BEGINNING. FROM SAID TRUE POINT OF BEGINNING AS
THUS ESTABLISHED, and leaving the northwesterly right-of-way of North Point
Parkway, run in a generally northwesterly direction along the northeasterly
right-of-way of said proposed Great Oaks Way, the following courses and
distances: South 77 degrees 39 minutes 14 seconds West, a distance of 28.28 feet
to a point; North 57 degrees 20 minutes 46 seconds West, a distance of 42.66
feet to a point; along an arc of curve to the right, having a radius of 391.74
feet, an arc distance of 66.71 feet (said arc being subtended by a chord bearing
North 52 degrees 28 minutes 05 seconds West, a chord distance of 66.63 feet) to
a point; along an arc of curve to the right, having a radius of 101.00 feet, an
arc distance of 8.55 feet (said arc being subtended by a chord bearing North 50
degrees 00 minutes 58 seconds West, a chord distance of 8.55 feet) to a point;
along an arc of curve to the right, having a radius of 392.87 feet, an arc
distance of 44.80 feet (said arc being subtended by a chord bearing North 49
degrees 10 minutes 32 seconds West, a chord distance of 44.78 feet) to a point;
along an arc of curve to the right, having a radius of 396.67 feet, an arc
distance of 60.21 feet (said arc being subtended by a chord bearing North 41
degrees 33 minutes 37 seconds West, a chord distance of 60.15 feet) to a point;
along an arc of curve to the right, having a radius of 79.00 feet, an arc
distance of 10. 14 feet (said arc being subtended by a chord bearing North 33
degrees 32 minutes 08 seconds West, a chord distance of 10.13 feet) to a point;
along an arc of curve to the right, having a radius of 403.74 feet, an arc
distance of 22.05 feet (said arc being subtended by a chord bearing North 28
degrees 17 minutes 42 seconds West, a chord distance of 22.05 feet) to a point;
North 26 degrees 43 minutes 49 seconds West a distance of 301.99 feet to a
point; along an arc of curve to the left, having a radius of 477.74 feet, an arc
distance of 208.16 feet (said arc being subtended by a chord bearing North 39
degrees 12 minutes 46 seconds West, a chord distance of 206.52 feet) to a point;
North 51 degrees 41 minutes 43 seconds West a distance of 78.93 feet to a point;
thence, leaving said proposed right-of-way of Great Oaks Way, run thence North
34 degrees 04 minutes 23 seconds East a distance of 48.00 feet to a point;
thence run North 71 degrees 45 minutes 16 seconds East, a distance of 606.66
feet to a point; thence run South 53 degrees 27 minutes 36 seconds East, a
distance of 614.17 feet to a point located on the northwesterly right-of-way of
the aforementioned North Point Parkway, thence run in a generally southwesterly
direction along said northwesterly right-of-way of North Point Parkway
<PAGE>
the following courses and distances; South 61 degrees 06 minutes 35 seconds
West, a distance of 148.92 feet to a point; along an arc of curve to the left,
having a radius of 1,014.93 feet, an arc distance of 504.06 feet (said arc being
subtended by a chord bearing South 46 degrees 52 minutes 54 seconds West, a
chord distance of 498.90 feet) to a point; South 32 degrees 39 minutes 14
seconds West a distance of 112.74 feet to a point, and THE TRUE POINT OF
BEGINNING.
The above described property contains 10.925 acres, more or less, and is shown
on and described according to that certain ALTA/ACSM Survey for Wachovia Bank of
Georgia , N.A., Opus South Corporation and Chicago Title Insurance Company dated
September 24, 1997, prepared by Engineering & Inspection Systems, Inc., John E.
Norton, Registered Land Surveyor No. 1848, which survey is incorporated herein
by reference.
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<PAGE>
EXHIBIT "B"
FLOOR PLAN
[To Be Attached]
<PAGE>
EXHIBIT "C"
RULES AND REGULATIONS
1. Any sign, lettering, picture, notice or advertisement installed on or in any
part of the Premises and visible from the exterior of the Building, or visible
from the exterior of the Premises, shall be installed at Tenant's sole cost and
expense, and in such manner, character and style as Landlord may approve in
writing. In the event of a violation of the foregoing by Tenant, Landlord may
remove the same without any liability and may charge the expense incurred by
such removal to Tenant.
2. No awning or other projection shall be attached to the outside walls of the
Building. No curtains, blinds, shades or screens visible from the exterior of
the Building or visible from the exterior of the Premises, shall be attached to
or hung in, or used in connection with any window or door of the Premises
without the prior written consent of Landlord. Such curtains, blinds, shades,
screens or other fixtures must be of a quality, type, design and color, and
attached in the manner approved by Landlord.
3. Tenant, its servants, employees, customers, invitees and guests shall not
obstruct sidewalks, entrances, passages, corridors, vestibules, halls,
elevators, or stairways in and about the Building which are used in common with
other tenants and their servants, employees, customers, guests and invitees, and
which are not a part of the Premises of Tenant. Tenant shall not place objects
against glass partitions or doors or windows which would be unsightly from the
Building corridors or from the exterior of the Building and will promptly remove
any such objects upon notice from Landlord.
4. Tenant shall not make excessive noises, cause disturbances or vibrations or
use or operate any electrical or mechanical devices that emit excessive sound or
other waves or disturbances or create obnoxious odors, any of which may be
offensive to the other tenants and occupants of the Building, or that would
Interfere with the operation of any device, equipment, radio, television
broadcasting or reception from or within the Building or elsewhere and shall not
place or install any projections, antennas, aerials or similar devices inside or
outside of the Premises or on the Building.
5. Tenant shall not waste electricity, water or air conditioning and shall
cooperate fully with Landlord to insure the most effective operation of the
Building's heating and air conditioning systems and shall refrain from
attempting to adjust any controls other than unlocked room thermostats, if any,
installed for Tenant's use. Tenant shall keep corridor doors closed.
6. Tenant assumes full responsibility for protecting its space from theft,
robbery and pilferage, which includes keeping doors locked and other means of
entry to the Premises closed and secured after normal business hours.
<PAGE>
7. No person or contractor not employed by Landlord shall be used to perform
janitorial work, window washing, cleaning, maintenance, repair or similar work
in the Premises without the written consent of Landlord, which shall not be
unreasonably withheld or delayed.
8. In no event shall Tenant bring into the Building inflammables, such as
gasoline, kerosene, naphtha and benzine, or explosives or any other article of
Intrinsically dangerous nature. If, by reason of the failure of Tenant to comply
with the provisions of this subparagraph, any insurance premium for all or any
part of the Building shall at any time be increased, Tenant shall make immediate
payment of the whole of the increased insurance premium, without waiver of any
of Landlord's other rights at law or in equity for Tenant's breach of this
Lease.
9. Tenant shall comply with all applicable federal, state and municipal laws,
ordinances and regulations, and Building rules and shall not directly or
indirectly make any use of the Premises which may be prohibited by any of the
foregoing or which may be dangerous to persons or property or may increase the
cost of insurance or, require additional insurance coverage.
10. Landlord shall have the right to prohibit any advertising by Tenant which in
Landlord's reasonable opinion tends to impair the reputation of the Building,
and upon written notice from Landlord, Tenant shall refrain from or discontinue
such advertising.
11. The Premises shall not be used for cooking (except normal break room use
such as coffee machines and microwave ovens for warming, but in no event shall
any open flame or electric element cooking take place), lodging, sleeping or for
any immoral or illegal purpose.
12. Tenant and Tenant's servants, employees, agents, visitors and licensees
shall observe faithfully and comply strictly with the foregoing rules and
regulations and such other and further appropriate rules and regulations as
Landlord or Landlord's agent may from time to time adopt. Reasonable notice of
any additional rules and regulations shall be given in such manner as Landlord
may reasonably elect.
13. Unless expressly permitted by the Landlord, no additional locks or similar
devices shall be attached to any door or window and no keys other than those
provided by the Landlord shall be made for any door. If more than two keys for
one lock are desired by the Tenant. The Landlord may provide the same upon
payment by the Tenant. Upon termination of this Lease or of the Tenant's
possession, the Tenant shall surrender all keys of the Premises and shall
explain to the Landlord all combination locks on safes, cabinets and vaults.
14. Any carpeting cemented down by Tenant shall be installed with a releasable
adhesive. In the event of a violation of the foregoing by Tenant, Landlord may
charge the expense incurred for or in connection with the removal of such
carpeting and adhesive, and any related repairs which may be necessary as a
result thereof, to Tenant.
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<PAGE>
15. The water and wash closets, drinking fountains and other plumbing fixtures
shall not be used for any purpose other than those for which they were
constructed, and no sweepings, rubbish, rags, coffee grounds or other substances
shall be thrown therein. All damages resulting from any misuse of the fixtures
shall be borne by the Tenant who, or whose servants, employees, agents, visitors
or licensees, shall have caused the same. No person shall waste water by
interfering or tampering with the faucets or otherwise.
16. No electric circuits for any purpose shall be brought into the Premises
without Landlord's permission specifying the manner in which some may be done.
17. No bicycle or other vehicle, and no dog (except seeing eye dogs) or other
animal shall be allowed in offices, halls, corridors, or elsewhere in the
Building.
18. Tenant shall not throw anything out of the door or windows, or down any
passageways or elevator shafts.
19. All loading, unloading, receiving or delivery of goods, supplies or disposal
of garbage or refuse shall be made only through entryways and freight elevators
provided for such purposes and indicated by Landlord. Unless caused by the
negligence or willful misconduct of Landlord, its agents or employees, Tenant
shall be responsible for any damage to the Building or the property of its
employees or others and injuries sustained by any person whomsoever resulting
from the use or moving of such articles in or out of the Premises, and shall
make all repairs and improvements required by Landlord or governmental
authorities in connection with the use or moving of such articles.
20. All safes, equipment or other heavy articles shall be carried in or out of
the Premises only at such time and in such manner as shall be prescribed in
writing by Landlord and Landlord shall in all cases have the right to specify
the proper position of any such safe equipment or other heavy article, which
shall only be used by Tenant in a manner which will not interfere with or cause
damage to the Premises or the Building in which they are located, or to the
other tenants or occupants of said Building. Tenant shall be responsible for any
damage to the Building or the property of its employees or others and injuries
sustained by any person whomsoever resulting from the use or moving of such
articles in or out of the Premises, and shall make all repairs and improvements
required by Landlord or governmental authorities in connection with the use or
moving of such articles.
21. Canvassing, soliciting, and peddling in the Building is prohibited and each
Tenant shall cooperate to prevent the same.
22. Vending machines (other than those in break rooms which are exclusively for
the use of Tenant's employees and guests) shall not be installed without
permission of the Landlord.
23. Wherever in these Building Rules and Regulations the word "Tenant" occurs,
it is understood and agreed that it shall mean Tenant's associates, agents,
employees, clerks, servants, contractors and visitors. Wherever the word
"Landlord" occurs, it is understood and
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<PAGE>
agreed that It shall mean Landlord's assigns, agents, employees, clerks,
servants, contractors and visitors.
24. Landlord shall have the right to enter upon the Premises upon reasonable
prior notice (except in emergencies) at all reasonable hours for the purpose of
inspecting the same.
25. Landlord shall have the right to enter the Premises at hours convenient to
the Tenant for the purpose of exhibiting the same to prospective tenants within
the one hundred eighty (180) day period prior to the expiration of this Lease
and at any time while an uncured event of default exists under this Lease.
26. Tenant, its agents, servants, employees, customers, invitees and guests
shall, when using the common parking facilities, if any, in and around the
Building, observe and obey all signs regarding fire lanes and no parking zones,
and when parking always park between the designated lines. Landlord reserves the
right to tow away, at the expense of the owner, any vehicle which is improperly
parked or parked In a no parking zone. All vehicles shall be parked at the sole
risk of the owner, and Landlord assumes no responsibility for any damage to or
loss of vehicles. No vehicles shall be parked on an overnight basis for any
extended period of time.
27. At all times the Property shall be in charge of Landlord's employee in
charge and (a) persons may enter the Property only in accordance with Landlord's
regulations, (b) persons entering or departing from the Property may be
questioned as to their business in the Property, and the right is reserved to
require the use of an Identification card or other access device and the
registering of such persons as to the hour of entry and departure, nature of
visit, and other information deemed necessary for the protection of the
Property, and (c) all entries into and departures from the Property will take
place through such one or more entrances as Landlord shall from time to time
designated provided; however, anything herein to the contrary notwithstanding.
Landlord shall not be liable for any lack of security in respect to the Property
whatsoever. Landlord will normally not enforce clauses (a), (b) and (c) above
from 7:00 a.m. to 6:00 p.m., Monday through Friday, and from 8:00 a.m. to 2:00
p.m. on Saturdays, but it reserves the right to do so or not to do so at any
time and from time to time at its sole discretion. In case of invasion, mob,
riot, public excitement, or other commotion, Landlord reserves the right to
prevent access to the Property during the continuance of the same by closing and
locking the doors or otherwise for the safety of the tenants or the protection
of the Property and the property therein. Landlord shall in no case be liable
for damages for any error or other action taken with regard to the admission to
or exclusion from the Property of any person.
28. All entrance doors to the Premises shall be locked when the Premises are not
in use. All corridor doors shall also be closed during times when the air
conditioning equipment in the Property is operating so as not to dissipate the
effectiveness of the system or place an overload thereon.
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<PAGE>
29. Landlord reserves the right, upon reasonable prior notice to Tenant, at any
time and from time to time to rescind, alter or waive, in whole or in part, any
of these Rules and Regulations when it is deemed necessary, desirable, or proper
in Landlord's judgment, for its best interest or for the best interest of the
tenants of the Property.
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<PAGE>
EXHIBIT "D"
WORK LETTER
1. Landlord shall construct, or cause to be constructed in the Premises, in
accordance with all applicable laws, rules, regulations and ordinances
(including ADA, as it currently exists and as currently interpreted by local
building code requirements), the improvements (the "Tenant's Work") described in
and shown on the Plans (hereinafter defined). Landlord shall cause a preliminary
layout to be prepared with Tenant's cooperation and for Tenant's approval. Upon
approval of the layout, Landlord shall prepare, or cause to be prepared, working
drawings for the construction of the standard building items and improvements,
adequate in detail to perform the Tenant's Work and shall have mechanical
(sprinkler, air conditioning, heating, electrical and plumbing) drawings
prepared by Landlord's mechanical engineer covering mechanical elements of the
Tenant's Work (together with the preliminary layout, the drawings are referred
to as the "Plans"). The Plans (and any modifications thereof) shall comply with
all governmental standards, regulations and requirements and shall be subject to
Tenant's approval (which approval shall not be unreasonably withheld). Tenant
shall not unreasonably withhold its approval of the Plans or any part thereof.
2. Prior to commencing Tenant's Work Landlord or Landlord's agent shall submit
to Tenant a written estimate of the Cost of Tenant's Work. Prior to submitting
such estimate to Tenant, Landlord will submit the Plans to Kinzey Construction
Co. ("Kinzey") and will ask Kinzey to submit a bid for the performance of
Tenant's Work. If Kinzey submits a conforming bid which is lower than the price
at which Landlord will construct Tenant's Work, Landlord will select Kinzey to
perform Tenant's Work and will enter into a construction contract with Kinzey.
In that event, Kinzey shall be obligated to obtain insurance reasonably
satisfactory to Landlord and to comply with all other reasonable construction
rules and regulations promulgated by Landlord for contractors performing work in
the Building, If Kinzey is selected, the amount set forth in Kinzey's bid will
be the amount included in the written estimate of the Cost of Tenant's Work. If
Tenant shall fail either (i) to approve said estimate within five (5) business
days from the receipt thereof, or (ii) provide change requests to the Plans
within five (5) business days from receipt thereof which will reduce the Cost of
Tenant's Work to an amount acceptable to Tenant, then the time between the
expiration of such five (5) business day period and the date Tenant takes either
such action shall be a Tenant Delay. If Tenant desires any changes in the Plans
after having approved the initial Plans and cost estimate, Tenant shall be
required to sign such field order changes requested by Landlord or Landlord's
contractors or agents to evidence any such change desired by Tenant. Tenant
acknowledges Tenant shall be responsible for any and all costs associated with
any such change in the Plans. Any other work desired by Tenant, such as
furniture, fixturing and telecommunications and computer cabling ("Additional
Work"), shall be performed by Tenant at Tenant's sole expense using contractors
and pursuant to planning approved by Landlord, which approval shall not be
unreasonably withheld, conditioned or delayed.
3. (a) In addition to constructing Tenant's Work as described in this Work
Letter, Landlord will also, at Landlord's expense (and not out of the
Improvement Allowance), provide
<PAGE>
certain basic improvements in the Premises as described on "EXHIBIT D-1"
attached hereto and made a part hereof.
(b) The Improvement Allowance described in Section 2.3 of the Lease shall
be applied toward all design costs and all costs of obtaining materials and
constructing the Tenant's Work ("Cost of Tenant's Work"), such costs to include,
without limitation, the cost of preparing the Plans, the cost of any changes to
the Plans and any costs necessary to file the Plans with, and obtain the
necessary permits and approvals of, any governmental authority having
jurisdiction thereof. If the Improvement Allowance is not totally exhausted in
paying the Cost of Tenant's Work, the excess shall be promptly paid to Tenant.
(c) If the Cost of Tenant's Work exceeds the Improvement Allowance, the
amount of such excess ("Cost Differential") shall be paid by Tenant to Landlord
as provided in Section 2.3 of the Lease.
4. Landlord, at Landlord's discretion, may permit Tenant and Tenant's agents to
enter the Premises prior to the Commencement Date of the term of the Lease in
order that Tenant may do Additional Work required by Tenant to make the Premises
ready for Tenant's use and occupancy. If Landlord permits such entry prior to
such Commencement Date, such permission is conditioned upon Tenant and its
agents, contractors, employees and invitees working in harmony and not
interfering with Landlord and its agents, contractors and employees in doing
Tenant's Work and the Work for other tenants and occupants of the Building. If
at any time such entry shall cause or threaten to cause disharmony or
interference, Landlord shall have the right to withdraw such permission upon 24
hours notice to Tenant. Tenant agrees that any such entry into and occupation of
the Premises shall be deemed to be under all of the terms, covenants, conditions
and provisions of the Lease except as to the covenant to pay the rent, and
further agrees Landlord shall not be liable in any way for any injury, loss or
damage which may occur to any of Tenant's work and installations made in the
Premises or to properties placed therein prior to the Commencement Date of the
term of the Lease, the same being at Tenant's sole risk.
5. The Premises shall be deemed substantially completed ("Substantial
Completion") on the date Landlord substantially completes Tenant's Work in
accordance with the Plans and obtains a certificate of occupancy for the
Premises. If Tenant's Substantial Completion of the Premises by Landlord is
delayed due to any act or omission of Tenant or Tenant's representatives,
including any delays by Tenant in the submission of plans, drawings,
specifications or other information or in approving any drawings or estimates or
in giving any authorization or approval or as a result of Tenant's request for
materials that are not available by the time necessary to allow Landlord to
complete Tenant's Work by the targeted Delivery Date, ("Tenant Delay"), Landlord
will be deemed to have achieved Substantial Completion of the Premises on the
date when they would have been ready but for such Tenant Delay. Within five (5)
business days following Landlord's notice to Tenant that Substantial Completion
has been achieved, Tenant's authorized representative (______________) and
Landlord's authorized representative shall conduct a walk-through inspection of
the Premises and shall prepare a list of incomplete or defective items of
Tenant's Work ("Punchlist"). Landlord shall cause the
-2-
<PAGE>
Punchlist items to be completed or corrected as soon as reasonably possible and,
in any event within thirty (30) days of the Commencement Date.
- 3 -
<PAGE>
EXHIBIT "D-1"
BASE BUILDING CONDITION
1. STRUCTURE: The Building structure will be designed for a maximum floor
live load of 100 lb. per square foot for all tenant areas. Live structural loads
include all Tenant added weight to be supported by the Building structure
including walls, doors, furniture, equipment and people.
2. BUILDING SHELL: The Building shell will include a completely finished
Entrance Lobby front and rear on the ground floor. Each floor shall include two
sets of restrooms with ADA compliant drinking fountains and an elevator lobby.
Perimeter and interior columns are wrapped in sheetrock, taped, finished, sanded
and ready for paint. The perimeter knee wall below the windowsill is framed and
ready for sheetrock. The first floor also includes a completed exit corridor as
required by Life Safety Codes. Finishes in the corridor include vinyl wall
covering, vinyl base and carpet. Each floor will also have electrical/telephone,
janitorial and mechanical rooms, and four stairwells. The rest room facilities
on each floor of the premises will have granite lavatory tops, vitreous china
lavatories, and enclosed water closets for women plus urinals and enclosed water
closets for men. Facilities are ADA compliant. Ceramic tile will be placed on
restroom floors and walls. The exit stairwells will be finished with vinyl wall
covering, rubber stair treads and landings in order to promote circulation
between floors.
3. FLOORS: A concrete floor will be installed with a smooth trowel finish
for installation of glued-down carpet. The floor will be poured level and
finished in accordance with current ACI Standard Specifications 117.
4. LIFE SAFETY SYSTEM: A life safety system will be installed in accordance
with the more stringent of applicable national, state and local codes or the
Americans with Disabilities Act Regulation throughout the Building, including
all corridors and stairwells. It shall consist of fire sprinklers, fire alarm
system, elevator recall, emergency lighting, and exit signs as required by
applicable codes per Building plans and specifications. The sprinkler system
will have an approved water flow alarm connection and tamper-proof detection
device connected to a central station. It will include all distribution of
mains, laterals, and heads per sprinkler subcontractor approved shop drawings.
Sprinkler heads shall be of the "semi-recessed" type.
5. DEMISING WALLS: Slab-to-slab sheetrock on each side of the
demising/party walls with sound batt insulation from finished floor to deck
above. Minimum fire rating: 1 hour. Each wall shall be taped, spackled, sanded,
prime-painted and ready to receive finish material. Demising wall cost is shared
between tenants. Corridor walls are as described in and will be installed as
described in the Building Plans and Specifications. In the case of demising
walls between tenants, one-half of the wall is a tenant cost.
6. CORRIDOR WALLS: Fire rated public exit corridors will be installed where
required by local codes. Public side of the corridor walls will receive vinyl
wall covering. The tenant
<PAGE>
side of the corridor will be taped, finished and ready for paint. Painting of
the tenant side of corridors is a tenant cost. Interior tenant partitions shall
consist of 3 5/8" metal studs with one layer of 5/8" gypsum board on each side,
taped, floated, sanded and ready for paint. Paint shall consist of two coats of
flat latex paint. Cost of corridor not shown on Building Plans and
Specifications and necessary for tenant's layout, is a tenant cost. Interior
tenant walls are a tenant cost.
7. CEILING GRID AND TILE: Tenant areas will have a 2x2 ceiling grid in
place with the ceiling tile stacked on the floor. Ceiling tile shall be
fine-textured and non-directional with a reveal edge, equivalent to
Armstrong-Minatone and will have an average noise reduction coefficient of .55.
Tile will be stacked in boxes in the tenant areas for installation as a tenant
cost.
8. DOORS: Tenant Entry doors are solid core mahogany doors 3' x 8'10" tall.
Interior doors are solid core, mahogany veneer with stained finish, 3' x 8'4".
Frames: Knock down steel frames. Hardware: Standard door hardware is Schlage
mortised latchsets with bright chrome finish. Each door shall be hung on two
pair of hinges with similar finish. Entry and interior tenant doors are a tenant
cost.
9. CARPET: Carpeting will be installed in elevator lobbies and in common
corridors shown on base Building plans. Carpet in above areas will be direct,
glue down and have a weight of 34 ounce per square yard. Vinyl base equal to
Roppe will be installed in all carpeted areas. Building standard carpet in
tenant areas shall be purchased and installed at an allowance of $12.00 per
square yard as a tenant cost.
10. WINDOW TREATMENT: Provide and install window treatment on the exterior
windows. Landlord will supply thin-lined, 1" horizontal blinds equal to
Bali-Graber quality.
11. LIGHT FIXTURES: Building standard lighting to provide a minimum of 50
foot-candles maintained at desk level throughout the Premises. Modern
fluorescent lighting fixtures, based on one fixture per 80 usable square feet.
The light fixtures will be 2' by 4', three lamp fixtures. Recessed parabolic
fixtures will be provided which contain eight cell parabolic lens, and minimum
three inch baffle depth. Lamps are to be of the T-8, 3500 degree Kelvin energy
saving type. Ballasts shall also be energy efficient, electronic type.
Connecting whips are attached to the fixtures. These fixtures with attachment
whips are stacked on the floor as part of the base Building. Installation of 2 x
4 fluorescent fixtures is a tenant cost.
12. TELEPHONE SERVICE: Telephone service will be provided by the local
utility and brought to tenant's telephone room. Base Building will include
necessary conduit/sleeves to distribute telephone service between floors.
Sleeves will be provided for the installation of fiber optic cable to the main
Building telephone room. Phone line construction within the tenant space is a
tenant cost.
13. PLUMBING: All sinks and special plumbing is a tenant cost.
- 2 -
<PAGE>
14. FIRE AND EMERGENCY PROTECTION: Installation of all emergency lighting
systems, exit signage and fire extinguishers within a tenant's space as required
by local, state, and federal codes and ordinances is a tenant cost. Minor
relocation of base Building sprinklers may become necessary based upon tenant
layout and would be a tenant cost.
15. HVAC: The Building is conditioned utilizing a Trane "Self Contained,
Water Cooled, Packaged System" consisting of two units per floor, perimeter slot
diffusers fed by fan powered units with strip heat and interior zones served by
VAV boxes are installed in the Building. All interior low-pressure supplies
downstream of VAV's and special returns are tenant costs. There are 33 zones per
floor at approximately 1,250 square feet per zone. Additional zones and/or
special control areas may be added as a tenant cost. The location of interior
thermostats and diffusers will be configured according to Tenant's final space
plan and as part of tenant's cost. The testing and balancing of the tenant's
Premises and additional zones for conference rooms or special computer rooms are
tenant costs.
16. MILLWORK: All millwork is a tenant cost.
17. DESIGN: All design work as well as the cost to prepare partition,
electrical, finish, reflected ceiling, mechanical and plumbing plans is a tenant
cost.
18. INTERIOR GLASS: All interior glass is a tenant cost.
19. SECURITY: An electronically controlled card-access security system is
installed in the Building. A card-access reader is installed on each entry door
to the Building. Each card can be separately coded for individual employee
access, and the system can be configured for several authorized access levels.
If the Tenant selects the same manufacturer to provide an access-card system for
its Premises, one card can be programmed to gain access to the Building as well
as to the Premises. Any security system designed for leased space is a tenant
cost. A closed-circuit surveillance camera system is installed in the Building.
Cameras are installed at several locations on the first floor and at both
entries to the covered parking deck. The monitor for this system is located at
the security guard station in the main Building lobby. Security guard coverage
will be after business hours, weeknights and on weekends. Guard hours are
subject to change. Tenants and visitors entering and exiting the Building after
hours will be asked to sign a guest registry.
- 3 -
<PAGE>
EXHIBIT "E"
SPECIAL STIPULATIONS
1. RENEWAL OPTION. Provided no Event of Default exists at the time of
exercise or as of the commencement date of the Renewal Term (as defined
below), Tenant shall have the right to extend the term of this Lease
for five (5) years ("Renewal Term") with respect to all, but not any
lesser portion of the then current Premises upon all of the following
terms and conditions:
a. Tenant must provide Landlord notice of its exercise of the
option for the Renewal Term not less than nine (9) full months
prior to the expiration date of the Initial Term.
b. The Base Rent for each Lease Year of the Renewal Term shall be
as follows:
<TABLE>
<S> <C>
Lease Year 1 $23.36
Lease Year 2 $23.83
Lease Year 3 $24.30
Lease Year 4 $24.79
Lease Year 5 $25.29
</TABLE>
c. During the Renewal Term Tenant shall continue to pay Tenant's
Prorata Share of Excess Operating Expenses as provided in the
Lease, and the Base Year shall remain the same.
d. Except for Base Rent at the new rate determined pursuant to
subsection b. above, all of the terms and conditions of the
Lease shall remain the same and shall remain in full force and
effect throughout the Renewal Term; provided, however, that
any free rent, improvement allowances, moving allowances,
lease assumption payments, plan design allowances (or
payments) or other similar concessions provided for in the
Initial Term of the Lease shall not apply during the Renewal
Term.
2. RIGHT OF FIRST REFUSAL. Provided no Event of Default then exists under
this Lease and subject and subordinate to all expansion rights of MCI,
Tenant shall have a continuing right of first refusal ("Refusal Right")
to lease that certain space consisting of approximately 10,348 rentable
square feet located as shown on EXHIBIT "B" ("REFUSAL SPACE").
a. If Landlord receives any bona-fide offer for any portion of
the Refusal Space and Landlord is willing to accept to such
bona fide offer, Landlord shall provide written notice to
Tenant ("Refusal Notice"). The Refusal Notice shall specify
the material terms and conditions on which Landlord is willing
to lease the applicable portion of the Refusal Space to the
third party who has made the
<PAGE>
offer. Tenant shall have ten (10) days following its receipt
of any Refusal Notice to notify Landlord, in writing, that
Tenant elects to lease all of the portion of the Refusal Space
specified in the Refusal Notice. If Tenant fails to respond
within such ten (10) day period, Tenant's Refusal Right shall
be deemed waived with respect to the Refusal Space specified
in the Refusal Notice and Landlord shall be free to lease the
applicable portion of the Refusal Space to the third party who
made the bona-fide offer. If Landlord does not enter into a
lease with such third party or if such third party's lease is
terminated or expires (without being renewed), Tenant shall
once again be entitled to the Refusal Right prior to Landlord
leasing the applicable portion of the Refusal Space to a third
party.
b. If Tenant exercises his Refusal Right, the commencement date
with respect to the Refusal Space ("Refusal Space Commencement
Date") shall be the earlier of (i) sixty (60) days after
Landlord delivers the applicable Refusal Space to Tenant or,
(ii) the date on which Tenant begins conducting business in
all or any portion of the Refusal Space. The Term of the Lease
with respect to the Refusal Space shall be coterminus with the
Term with respect to the remainder of the Premises; provided,
however, if the remainder of the Term from the Refusal Space
Commencement Date to the expiration of the Initial Term is
less than three (3) years, Tenant may only exercise this
Refusal Right by simultaneously extending the Term of the
Lease with respect to the original Premises so that there are
at least three (3) full years remaining in the Term of the
Lease with respect to all of the Premises including the
Refusal Space. If Tenant exercises this right to extend the
Term for less than all of the Renewal Term, the Renewal Term
shall be reduced to the period of time remaining after
expiration of the initial Term, as so extended.
c. The terms and conditions applicable to the Refusal Space shall
be those set forth in the Refusal Notice; provided, however,
if the terms set forth in the Refusal Notice include
improvement allowances or other financial concessions and the
term proposed in the Refusal Notice is in excess of the
remainder of the Term of the Lease (as it may be extended
pursuant to paragraph 2(b) above), all such improvement
allowances or other financial concessions shall be reduced to
an amount determined by multiplying the applicable improvement
allowance or financial concession by a fraction, the numerator
of which is the number of months remaining in the Term of the
Lease (as it may have been extended) and the denominator of
which is the total number of months in the term described in
the Refusal Notice. Except as provided above in this Section
2, and except for the terms and conditions set forth in the
Refusal Notice, the Refusal Space shall be added to the
Premises on all the terms and conditions set forth in this
Lease.
3. SATELLITE DISH/TELECOMMUNICATIONS. In addition to the other rights
granted by this Agreement, Tenant shall have the non-exclusive right
but not the obligation, for the duration of the Lease Term to install,
maintain and operate not more than two (2) microwave and satellite
dishes/antennas (not in excess of 1' in diameter), mounted on a
- 2 -
<PAGE>
non-penetrating structure, and related plenum-routed cabling
(collectively, the "Antennas") on the Building's roof (the "Roof"). The
location for any Antennas shall be designated by Landlord. Tenant must
obtain the prior approval of Landlord for the exact design and
specifications of the Antennas and of the plans for the installation
(including screening) of the Antennas, which approval shall not be
unreasonably withheld or delayed. All costs of installation,
maintenance and removal and any required repairs to the Building due to
such removal (if required by Landlord, in its sole discretion, upon
expiration or termination of this Lease) shall be paid by Tenant.
Tenant may only enter the Roof to install or maintain the Antennas with
the accompaniment of a Building engineer. Tenant's Antennas may not
interfere with the operation of any other telecommunication equipment
installed on the Roof by Landlord, its other tenants or its licensees.
Tenant hereby indemnifies Landlord from all claims, damages, costs and
expenses arising out of the installation, maintenance, use or removal
of the Antennas by Tenant. Landlord reserves the right to require
Tenant to relocate the Antennas temporarily if necessary in connection
with repairs, replacement, alterations or improvements to the roof.
Notwithstanding anything to the contrary set forth hereinabove, Tenant
will first explore the viability of satellite dishes placed on ground
mounted pads at locations designated by Landlord. If such ground
mounted satellite dishes adequately serve the Premises, Tenant will not
install any Antennas. Tenant's obligations with respect to any ground
mounted satellite dishes will be the same as Tenant's obligations with
respect to the Antennas.
4. SIGNS. Building standard suite entry signs shall be installed on the
doors to the Premises on each floor or adjacent to the entry to the
Premises as part of Tenant's Work and the cost thereof shall be paid by
Landlord and not deducted from the Improvement Allowance. Tenant shall
also be entitled to a pro rata share of the entries in the Building
directory at no cost to Tenant. Otherwise, Tenant shall not paint or
place signs, placards, or other advertisements of any character upon
the windows or inside walls of the Premises except with the consent of
Landlord which consent may be withheld by Landlord in its absolute
discretion. In addition, Landlord does hereby agree that Tenant shall
be entitled to an entry (non-exclusive) on a monument sign at the
entrance to the Building. The exact location, size, appearance,
materials and design of the monument sign will be selected by Landlord.
The sign will be designed by Landlord's architect. Tenant's entry on
such sign shall be at Tenant's expense, which entry may include
Tenant's corporate logo In the event Tenant subleases space so that
there are not at least 15,000 rentable square feet in the Premises
which are not subject to a sublease, the monument sign right described
herein shall immediately cease and Landlord shall have the right to
remove such sign at Tenant's expense. Upon the expiration or
termination of the Lease, Tenant shall be responsible for removing
Tenant's entry from the monument sign, and for restoring any damage to
the monument resulting from such removal.
5. QUIET ENJOYMENT. So long as Tenant is not in default under the terms of
this Lease, neither Landlord nor anybody claiming by, through or under
Landlord shall interfere with Tenant's quiet use and enjoyment of the
Premises throughout the Term (and the renewal term, if exercised).
- 5 -
<PAGE>
6. DIESEL GENERATOR. Subject to the terms and conditions of this special
stipulation No. 6, Landlord hereby agrees to allow Tenant to install a
diesel powered back-up generator to serve the Premises. The location of
such generator, the method of installation, the contractor used for
such installation and the method of screening of any such generator
shall all be subject to the prior written approval of Landlord, which
approval shall not be unreasonably withheld, conditioned or delayed.
All costs and expenses in connection with the installation, operation
and maintenance of such diesel generator shall be borne by Tenant.
Tenant shall be obligated, at its sole expense, to remove such
generator upon the expiration or termination of this Lease. Tenant does
hereby indemnify and hold Landlord from and against any and all claims,
damages, costs and expenses including, without limitation, any
violations of environmental laws, rules and regulations which arise out
of Tenant's installation or use of such generator.
7. DELAY IN SUBSTANTIAL COMPLETION. If Landlord fails to achieve
Substantial Completion of Tenant's Work (as accelerated by all Tenant
Delays) on or before September 1, 1999, as such date may be extended
for force majeure delays, Tenant shall have the right to terminate this
Lease. Tenant may exercise this right only by written notice to
Landlord on or before September 30, 1999. If Tenant exercises this
right, neither party shall have any further rights, duties, liabilities
or obligations under this Lease. If Tenant does not exercise this right
on or before September 30, 1999, Tenant shall be deemed to have waived
its right to terminate. Notwithstanding anything to the contrary set
forth hereinabove, if Kinzey is selected as the contractor to perform
Tenant's Work, this paragraph shall be of no force and effect
whatsoever and Tenant shall have no right whatsoever to terminate this
Lease if Landlord fails to achieve Substantial Completion of Tenant's
Work on or before September 1, 1999.
- 4 -
<PAGE>
EXHIBIT "F"
JANITORIAL SERVICES
Building surfaces and furnishings shall be maintained in first class
condition, free of odors, spots, stains, visible soil, dust, dirt, scuff marks,
and dirt/chemical build-up. Fixtures that are not in proper working order (e.g.,
lights, towel/towel tissue dispensers, toilets, etc.) shall receive proper
maintenance. Specifically, the following services shall be provided by the
Landlord:
OFFICES
A. DAILY
1. Empty wastebaskets and replace liners as needed.
2. Empty and damp clean ashtrays/receptacles.
3. Dust building furnishings including desks, chairs, and bases,
partitions, telephones, tables, filing cabinets, bookcases,
and shelves.
4. Spot clean desk tops. 5. Clean counter tops.
6. Clean and sanitize drinking fountains.
7. Vacuum carpets.
8. Spot clean carpet and spot mop any hard surface floors with
spills.
9. Spot clean door.
10. Dust mop all hard surfaced floors.
11. Sweep all stairways.
12. Remove all trash and recyclable materials.
13. Wet wipe all tables in eating areas.
B. WEEKLY
1. Low dust all vertical surfaces (floor to 6') including
permanent fixtures/ decorations attached to walls.
2. Clean entire desk tops (where possible).
3. Remove fingerprints from doors, frames, light switches, kick
and push plates, handles and telephones.
4. Spot clean interior window glass. 5. Wash tile floors.
C. MONTHLY
1. Dust Venetian blinds.
2. Remove cobwebs from ceiling areas.
3. Dust air grilles and light fixtures.
4. Vacuum upholstered furniture.
5. Polish and buff (no wax) resilient floors.
6. Clean carpet in high traffic areas (entrances, lobbies, lunch
rooms, main traffic aisles) with dry chemical and/or
extraction method.
<PAGE>
D. QUARTERLY
1. Clean inside windows and partition glass.
2. Polish furniture.
3. High dust surface above 6'.
4. Clean carpet in moderate traffic areas (interior aisles,
private offices, conference rooms) with a dry chemical and/or
extraction method.
5. Wash exterior windows.
E. ANNUALLY
1. Clean carpet in light traffic areas (general office) with a
dry chemical and/or extraction method.
F. AS NECESSARY
1. Replace light bulbs.
LAVATORIES
A. TWICE DAILY
1. Refill all dispensers.
2. Remove all wastepaper and refuse.
B. NIGHTLY
1. Sweep floors.
2. Wash floors.
3. Clean fixtures (toilet, dispensers, sinks, pipes) with
disinfectant.
4. Clean and polish all metal and mirrors.
5. Clean partitions.
C. QUARTERLY
1. Completely wash partitions/walls.
2. Machine scrub floors.
- 2 -
<PAGE>
EXHIBIT "G"
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
THIS AGREEMENT made this _____________ day of ________________, 19___,
among WACHOVIA BANK OF GEORGIA, N.A., a national banking association chartered
pursuant to the laws of the United States of America (hereinafter referred to as
"Lender"), _________________ (hereinafter referred to as "Tenant"), and
________________ (hereinafter referred to as "Landlord").
WITNESSETH:
WHEREAS, Landlord and Tenant have entered into a certain lease
(hereinafter referred to as the " Lease ") dated ___________________, amended
_____________________, relating to the premises described in EXHIBIT "A"
attached hereto and by this reference made a part hereof (hereinafter referred
to as the "Premises"); and
WHEREAS, Lender has made or has committed to make a loan to Landlord in
the principal amount of $___________________ secured by a mortgage or security
deed (hereinafter referred to as the "Mortgage") and an assignment of leases and
rents from Landlord to Lender covering the Premises; and
WHEREAS, Tenant has agreed that the Lease shall be subject and
subordinate to the Mortgage held by Lender, provided Tenant is assured of
continued occupancy of the Premises under the terms of the Lease;
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained, the sum of Ten Dollars ($10.00) and other good and valuable
considerations the receipt and sufficiency of which are hereby acknowledged, and
notwithstanding anything in the Lease to the contrary, it is hereby agreed as
follows:
1. Lender, Tenant and Landlord do hereby covenant and agree that the
Lease with all rights, options, liens and charges created thereby, is and shall
continue to be subject and subordinate in all respects to the Mortgage and to
any renewals, modifications, consolidations, replacements and extensions thereof
and to all advancements made thereunder.
2. Lender does hereby agree with Tenant that, in the event Lender
becomes the owner of the Premises by foreclosure, conveyance in lieu of
foreclosure or otherwise, so long as Tenant complies with and performs its
obligations under the Lease, (a) Lender will take no action which will interfere
with or disturb Tenant's possession or use of the Premises or other rights under
the Lease, and (b) the Premises shall be subject to the Lease and Lender shall
recognize Tenant as the tenant of the Premises for the remainder of the term of
the Lease in accordance with the provisions thereof, provided, however, that
Lender shall not be subject to any offsets or defenses which Tenant might have
against any prior Landlord except those which arose under the provisions of the
Lease out of such Landlord's default and accrued after Tenant
<PAGE>
had notified Lender and given Lender the opportunity to cure same as hereinbelow
provided, nor shall Lender be liable for any act or omission of any prior
Landlord, nor shall Lender be bound by any rent or additional rent which Tenant
might have paid for more than the current month to any prior Landlord nor shall
it be bound by any amendment or modification of the Lease made after the date
hereof without its consent.
3. Tenant does hereby agree with Lender that, in the event Lender
becomes the owner of the Premises by foreclosure, conveyance in lieu of
foreclosure or otherwise, then Tenant shall attorn to and recognize Lender as
the Landlord under the Lease for the remainder of the term thereof, and Tenant
shall perform and observe its obligations thereunder, subject only to the terms
and conditions of the Lease. Tenant further covenants and agrees to execute and
deliver upon request of Lender, or its assigns, an appropriate agreement of
attornment to lender and any subsequent titleholder of the Premises.
4. So long as the Mortgage remains outstanding and unsatisfied, Tenant
will mail or deliver to Lender, at the address and in the manner hereinbelow
provided, a copy of an notices permitted or required to be given to the Landlord
by Tenant under and pursuant to the terms and provisions of the Lease. At any
time before the rights of the Landlord shall have been forfeited or adversely
affected because of any default of the Landlord, or within the time permitted
the Landlord for curing any default under the Lease as therein provided (but not
less than sixty (60) days from the receipt of notice), Lender may, but shall
have no obligation to, pay any taxes and assessments, make any repairs and
improvements, make any deposits or do any other act or thing required of the
Landlord by the terms of the Lease; and all payments so made and all things so
done and performed by Lender shall be as effective to prevent the rights of the
Landlord from being forfeited or adversely affected because of any default under
the Lease as the same would have been if done and performed by the Landlord.
5. Tenant acknowledges that Landlord will execute and deliver to Lender
an assignment of the Lease as security for said loan, and Tenant hereby
expressly consents to such assignment.
6. Landlord and Tenant hereby certify to Lender that the Lease has been
duly executed by Landlord and Tenant and is in full force and effect; that the
Lease and any modifications and amendments specified herein are a complete
statement of the agreement between Landlord and Tenant with respect to the
leasing of the Premises, and the Lease has not been modified or amended except
as specified herein; that to the knowledge of Landlord and Tenant, no party to
the Lease is in default thereunder; that no rent under the Lease has been paid
more than thirty (30) days in advance of its due date; and that Tenant, as of
this date, has no charge, lien or claim of offset under the Lease, or otherwise,
against the rents or other charges due or to become due thereunder.
7. Unless and except as otherwise specifically provided herein, any and
all notices, elections, approvals, consents, demands, requests and responses
thereto ("Communications") permitted or required to be given under this
Agreement shall be in writing, signed by or on behalf of the party giving the
same, and shall be deemed to have been properly given and shall
- 2 -
<PAGE>
be effective upon the earlier of receipt thereof or deposit thereof in the
United States mail, postage prepaid, certified with return receipt requested, to
the other party at the address of such other party set forth hereinbelow or at
such other address within the continental United States as such other party may
designate by notice specifically designated as a notice of change of address and
given in accordance herewith; provided, however, that the time period in which a
response to any communication must be given shall commence on the date of
receipt thereof, and provided further that no notice of change of address shall
be effective with respect to Communications sent prior to the time of receipt
thereof Receipt of communications hereunder shall occur upon actual delivery
whether by mail telecopy transmission, messenger, courier service, or otherwise)
to an individual party or to an officer or general or limited partner of a party
or to any agent or employee of such party at the address of such party set forth
hereinbelow, subject to change as provided hereinabove. An attempted delivery in
accordance with the foregoing, acceptance of which is refused or rejected, shall
be deemed to be and shall constitute receipt; and an attempted delivery in
accordance with the foregoing by mail, messenger, or courier service (whichever
is chosen by the sender) which is not completed because of changed address of
which no notice was received by the sender in accordance with this provision
prior to the sending of the Communication shall also be deemed to be and
constitute receipt. Any communication, if given to Lender, must be addressed as
follows, subject to change as provided hereinabove:
Wachovia Bank of Georgia, N.A.
Real Estate Finance Division
191 Peachtree Street Mail Code 1810
Atlanta, Georgia 30303
and, if given to Tenant, must be addressed as follows, subject to change as
provided hereinabove:
and, if given to Landlord, shall be addressed as follows:
8. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, legal representatives, successors,
successors-in-title and assigns. When used herein, the term "Landlord" refers to
Landlord and to any successor to the interest of Landlord under the Lease.
- 3 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the date first above written.
Signed, sealed and delivered in..... LENDER:
the presence of:
WACHOVIA BANK OF GEORGIA
By:
- ---------------------------- -----------------------------------------
Unofficial Witness Name:
---------------------------------------
Title:
--------------------------------------
(BANK SEAL)
- ----------------------------
Notary Public
Commission Expiration Date:
(NOTARIAL SEAL)
Signed, sealed and delivered in TENANT:
the presence of:
By:
- ---------------------------- -----------------------------------------
Unofficial Witness Name:
---------------------------------------
Title:
--------------------------------------
Notary Public
Commission Expiration Date:
(NOTARIAL SEAL)
- 4 -
<PAGE>
Signed, sealed and delivered in LANDLORD:
the presence of:
By:
- ---------------------------- -----------------------------------------
Unofficial Witness Name:
---------------------------------------
Title:
--------------------------------------
Notary Public
Commission Expiration Date:
(NOTARIAL SEAL)
- 5 -
<PAGE>
EXHIBIT 10.3
------------
SECOND AMENDMENT TO THE
NET.B@NK, INC.
1996 STOCK INCENTIVE PLAN
THIS SECOND AMENDMENT is made as of this 23rd day of March, 1999, by
Net.B@nk, Inc. a corporation duly organized and existing under the laws of
the State of Georgia (hereinafter called the "Company").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company maintains the Net.B@nk, Inc. 1996 Stock
Incentive Plan (the "Plan"); and
WHEREAS, the Company desires to amend the Plan to increase the
number of shares authorized for issuance thereunder; and
WHEREAS, the Board of Directors of the Company has duly approved and
authorized this amendment to the Plan, subject to the further approval of the
Company's shareholders;
NOW, THEREFORE, the Company does hereby amend the Plan as follows:
1. By deleting, effective as of the date shareholder approval of the Second
Amendment is obtained, the first sentence of Section 2.2 in its entirety and
by substituting therefor the following:
"Subject to adjustment in accordance with Section 5.2, 1,250,000
shares of Stock (the `Maximum Plan Shares') are hereby reserved
exclusively for issuance pursuant to Stock Incentives."
2. Except as specifically amended hereby, the Plan shall remain in full force
and effect as prior to the adoption of this Second Amendment.
3. Notwithstanding the foregoing, the adoption of this Second Amendment is
subject to the approval of the stockholders of the Company and in the event
that the stockholders of the Company fail to approve such adoption within
twelve months of the date of the approval of the Second Amendment by the
Board of Directors of the Company, the adoption of this Second Amendment
shall be null and void.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Second Amendment to
be executed on the day and year first above written.
NET.B@NK, INC.
By: /s/ D.R. GRIMES
--------------------------------------------
Title: Vice Chairman and Chief Executive Officer
-----------------------------------------
ATTEST:
By: /s/ Robert E. Bowers
---------------------------------------
Title: Chief Financial Officer
------------------------------------
(CORPORATE SEAL)
<PAGE>
<PAGE>
EXHIBIT 10.4
- ------------------------------------------------------------------------------
NCR
ORDER FOR SERVICES NCR Corporation
- ------------------------------------------------------------------------------
Customer Name
NET.B@NK
- -------------------------------------------------------------------------------
Street Address
950 NORTH POINT PARKWAY, SUITE 350
- -------------------------------------------------------------------------------
City, State and Zip Code
ALPHARETTA, GA 30005
- -------------------------------------------------------------------------------
Customer Number Initial Term Contract Order Number
60 Months
- -------------------------------------------------------------------------------
YOU AGREE TO PURCHASE OR LICENSE AND NCR CUSTOMER INFORMATION SERVICES (CIS),
ON ACCEPTANCE, AGREES TO FURNISH THE APPLICATIONS LISTED BELOW FOR THE TERM
INDICATED AND THE PRICES SPECIFIED ON THIS ORDER.
TERM - The term for each processing application will commence upon the first
processing of such application by NCR for you and will continue for the
period specified. The term for any periodic Software license granted will
commence upon delivery of the Software to you and will continue for the
period specified. Estimated processing start dates and delivery dates are
subject to change. Thereafter, the term for each such processing application
and each Software license will renew automatically for successive one-year
terms unless written notice of termination for each processing application
and Software license is given. Notice of termination must be given not less
than one hundred eighty (180) days prior to the scheduled end date of the
initial term or renewal term when the termination will become effective.
CHARGES -- Customer shall pay for Processing Services and Software in
accordance with the rates and terms specified in this Order.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NCR Electronic Banking Service 5614
("EBS")
- -------------------------------------------------------------------------------
Ordered NCR Product and Services are subject to the Addendum, dated September
17, 1998, between You and NCR.
- -------------------------------------------------------------------------------
Executed by You NCR Customer Information Services
(Type or Print Name and Title)
Don Shapleigh, President
- -------------------------------------------------------------------------------
Authorized Signature Date Authorized Signature Date
/s/ Don Shapleigh 9/17/98 [Signature illegible] 12/16/98
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ORDER FOR SERVICES NCR CORPORATION
Page 4
- -------------------------------------------------------------------------------
Service Offering
NCR will host & operate your front-end Internet Banking and Bill Payment
application (also known as the EDIFY Electronic Banking System) as more fully
set forth in Attachment A hereto which is incorporated herein by this
reference.
NCR's responsibility is solely for the management of the server located at
NCR's Processing Center and maintenance of that server, including the Edify
application. Fees for third party services (i.e. Bisys, Checkfree,
communications lines) are your responsibility unless otherwise agreed in the
Contract.
You and NCR agree to communicate to their respective employees &
subcontractors the relationship between the parties and the commitments
herein for the purpose of promoting a successful relationship and the
provision of high quality service to your end-users. You and NCR agree that
it will train its respective personnel on the operation and support of the
system to maximize availability and promote a positive working relationship.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Hours of On-line Operations
Standards hours of on-line system availability for NCR's Electronic
Banking Service are 24 hours a day, 7 days a week, excluding scheduled
maintenance downtime.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Reports
You will be able to obtain WEB activity reports through the standard Bank
Administration feature of the EDIFY EBS application.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Supplemental Terms Applicable to NCR Electronic Banking Systems
NCR and its third party suppliers have used commercially reasonable efforts
to mitigate the risk of any unauthorized access to the NCR Electronic Banking
Service and your data residing on NCR's servers. NCR's liability to you for
any unauthorized access caused solely by NCR's intentional and willful acts
is limited to your actual direct damages not to exceed the value of your 4
most recent monthly payments as of the date the unauthorized access occurred.
You agree to comply with United States laws with regard to transmission of
technical data which is exported from the United States. You agree not to use
this service (a) for illegal purposes, or (b) to interfere with or disrupt
other network users, network services, or network equipment.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NCR's Liability
Notwithstanding Section 9.3 of the Addendum, in the event NCR does not
provide Services as defined herein due solely to nonperformance by NCR and
not by any third party, NCR agrees to provide a credit to you, on a
subsequent invoice, equal to the amount of your direct, actual damages
incurred solely due to NCR's nonperformance, not to exceed 5% of the Customer
Fees paid to NCR in the month the direct, actual damages were incurred. This
is your sole and exclusive remedy for direct, actual damages incurred due to
NCR's nonperformance.
- -------------------------------------------------------------------------------
<PAGE>
ORDER FOR SERVICES NCR CORPORATION
Pagd 5
- -------------------------------------------------------------------------------
Support
Your trained personnel will accept all initial calls from your end-users and
your personnel, and will handle all user-solvable items, and all calls for
assistance with browser's, access to the internet, and other items you
provide to your personnel and end-users. Your EDIFY EBS-trained
administrator(s) is responsible for contacting NCR in the event the problem
cannot be corrected without NCR's and/or EDIFY's involvement.
NCR will provide telephone support to your EBS-trained administrator(s) on a
7 x 24 basis to address emergency production-related support requests, and
will be available 8:00 a.m. to 5:00 p.m., local time, Monday through Friday,
excluding Holidays, to assist all other support requests regarding EBS.
NCR's responsibility is solely for the management of the server located at
NCR's Processing Center and maintenance of that server, including the Edify
application. Fees for third party services (i.e. Bisys, Checkfree,
communications lines) are your responsibility unless otherwise agreed in the
Contract. In the event a problem arises which cannot be isolated solely to
the server and/or Edify application at NCR's Processing Center, NCR will
escalate the incident to you at AIB's support telephone number (________ )
for resolution. Escalation procedures for service issues which arise at
either NCR or Net.B@nk including Bisys) are attached as Exhibit B.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Deconversion Services
Upon termination of this Order for any reason, NCR will provide you
deconversion services if you place an Order for deconversion services
sufficiently in advance of the required delivery date of such services to
allow NCR to allocate appropriate resources. Ninety days will be sufficient
notice at all times. As part of the deconversion process, and subject to
Section 11.4 of the Addendum, NCR will return the Edify and related software
acquired by you and provided to NCR, and provide access to NCR's hardware
containing your files to your personnel. NCR will work with your new provider
to convert any computer files, including customer data files and Edify
software files, to a format that is usable by your new service provider. NCR
will provide reasonable assistance with your deconversion activities,
including designation of a primary point of contact with NCR and meeting your
reasonable deconversion schedule.
Prices for deconversion services will be provided at the time such services
are requested and based on NCR's then-current prices. Based on the initial
conversion effort expended by NCR to convert your Edify support from Bisys to
NCR, NCR reasonably estimates the deconversion effort, assuming similar
activities, would be approximately 50 days of effort. NCR's current prices
for Analyst time is $150/hour and Computer time at $500/hour.
The Contract provisions relating to the provision of deconversion services
will survive any termination until the completion of the services.
If a third party can provide certain deconversion services, you can obtain
those services from such third party. Any third party utilized by you may be
required to enter into NCR's standard non-disclosure agreement.
- -------------------------------------------------------------------------------
<PAGE>
ORDER FOR SERVICES NCR CORPORATION
Page 6
Any Services or Products not listed on this Order but requested by you will
be provided at NCR's then-current prices.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5614-1554 Implementation Fee: $79,545 One Time
Includes Server, Windows NT
Operation System, LifeKeeper software,
32-user Oracle database, and Edify
software initial implementation.
Application will run on (2) NCR 4300 NT
40 PP 200/512m, or operationally
equivalent systems.
System configuration is:
-- LifeKeeper Connected
-- (2) Dyadic P6 200/512
-- (8) 128 MB Memory DIMM
-- (2) Adpt - Dual Ethernet PCI
10/100
-- (2) HD Disk - 4 GB 10000 F/W Hot Plug
-- (6) HD Disk - 9 GB 10000 F/W Hot Plug
-- (2) Tape - 8 mm 7/14 GB
-- (2) Internal UPS
-- (2) Power Supply - 625W
-- (2) Windows NTS 4.0, 5 CAL/English
-- (2) 17" Color SVGA Monitor
-- (2) Monitor Power Cable - USA
-- 32 User Oracle License
-- Checkpoint or equivalent Firewall
- -------------------------------------------------------------------------------
5614-1392 Hardware and Software maintenance service, $ 1,500 Month
excluding Edify application
- -------------------------------------------------------------------------------
<PAGE>
ORDER FOR SERVICES NCR CORPORATION
Page 7
- -------------------------------------------------------------------------------
N/A Communication Fees: N/A
Neither Bisys, Checkfree, nor any
other communication fees with any
third party are included and are
your responsibility unless you and
NCR agree in writing that NCR will
source and manage any such
communication line and its
corresponding fee(s).
- -------------------------------------------------------------------------------
5614-1007 Customer Fees*, per customer: Month
-- 1 to 5,000 $1.49 ea.
-- 5,001 to 10,000 $1.45 ea.
-- 10,001 to 20,000 $1.40 ea.
-- 20,001 to 30,000 $1.36 ea.
-- 30,001 to 40,000 $1.32 ea.
-- >40,000 customers $1.28 ea.
- -------------------------------------------------------------------------------
5614-1007 Monthly Minimum Charge (inclusive
of monthly Maintenance Fees and
Customer Fees) $5,000.00 Month Min.
- -------------------------------------------------------------------------------
- -- The Customer Fees include all Services hereunder, except for the
implementation and Deconversion Services, including Equipment and
Software upgrades made by NCR to fulfill its obligations hereunder and
to accommodate growth of your end-user customer base. Other
enhancements (i.e. additional or expanded functionality) will be made
by mutual agreement of the parties and may be chargeable to you.
- -- No NCR Policies as defined in Section 2.2 of the Master Agreement apply
to this Order or Contract.
- -- NCR may only increase prices at the beginning of each Renewal Term and
such increase will not exceed the greater of the United States Bureau
of Labor Statistics, Consumer Price Index for all Urban Consumers, U.S.
City Average, Services (1982-1984=100) as published from time to time
or 5%, and NCR will provide you with written notice of any price
increase 90 days in advance of the effective date. You may contact NCR
at a earlier date (within reason) to obtain the price increase for the
subsequent Renewal Term and it will be provided to you as soon as
reasonably possible. Notwithstanding the foregoing, notices of
increases on any third party pass through charge items will be provided
when NCR receives notice and will be effective as of the date stated on
such notice.
- -- NCR warrants that the NCR 4300, NCR LifeKeeper Software, and MS Windows
NT operation system are or will be Year 2000 Qualified by December 31,
1998, in accordance with NCR's Year 2000 Qualification Requirements
Definition. If any of these components are not Year 2000 Qualified by
this date, if NCR cannot remedy nonconformance within a reasonable
time, you may terminate this Order without payment of early termination
charges provided you deconvert prior to December 31, 1999, if NCR
becomes aware of any Year 2000 issues with other third party equipment
or software used in this operating environment, NCR will advise you of
such issues. You and NCR agree to work together to make appropriate
product adjustments to minimize the impact of any such Year 2000 issues.
- -- There are no NCR Product Specifications applicable to this Order.
<PAGE>
ORDER FOR SERVICES NCR CORPORATION
Page 8
- -- Notwithstanding any terms to the contrary in this Contract, no terms in
this Contract apply to, govern or limit in any way the relationship and
contractual agreements between you and Edify, Bisys, Checkfree and any
other third party with whom you have a direct contractual relationship.
- -- NCR's sole remedy for your breach of your obligations in section 8 of
the Master Agreement is to terminate this Contract if you have not
cured such breach within 30 days of notice thereof. If NCR terminates
under this provision, Services will be provided for up to 6 months
after the end of the cure period to allow for an orderly transition to
a new provider. Termination by NCR will not relieve you of your payment
obligations or any other obligations which survive termination or
expiration.
- -- For the purposes of this Order, the time period stated in paragraph 6.7
of the Addendum will be extended from 2 business days to 5 business
days.
- -- If NCR is unable to reperform Services as warranted under Section 9.0
of the Processing Services Addendum and Section 7.3 of the Master
Agreement and this Order for Services within a reasonable time given
the severity of the problem (including by correcting any non-conforming
Deliverables), you may terminate this Contract without payment of early
termination fees and obtain a refund of your payments to NCR for those
services and/or associated Deliverables. Your refund for this fixed
term Services Contract will not exceed your most recent three monthly
payments for such services. This provision will apply only for the
services specified in this Order for Services.
<PAGE>
ATTACHMENT A TO ORDER FOR SERVICES
(1) Service Description
- -- You have responsibility for the overall project management function for
the migration of your EBS System from Bisys to NCR. NCR will provide
project management and technical support services, resources, and
communication infrastructure necessary for it to perform its
responsibilities associated with the migration of AIB's EBS System from
Bisys to NCR, and NCR's Project Manager will work closely with your
Project Manager to facilitate this effort.
- -- NCR agrees to obtain and install a digital certificate for
implementation of SSL encryption with the assistance of AIB. The third
party charge for such digital certificate will be invoiced to AIB at
NCR's cost.
- -- NCR will provide a secure S.A.S. No. 70 or equivalent complaint
operational environment for the EDIFY Electronic Banking System
Software by March 31, 1999. This shall include, at a minimum:
-- EDIFY Transaction Server
-- Electrical power backed up by a UPS to sustain an electrical outage
of up to two hours.
-- Connectivity to the Bisys host through a 56Kb SDLC link
-- Access to the Internet, protected by NCR's firewall
-- A backup environment along with an implementation plan for a "backup"
transaction server (the cost for all EDIFY backup software licenses
acquired by NCR will be passed to AIB)
If NCR has not provided the S.A.S. No. 70 or equivalent environment by March
31, 1999, you may notify NCR of such nonconformance, and NCR will have 6
months to correct such nonconformance provided that NCR has been taking
reasonable steps to provide this environment. If NCR does not succeed in
providing this environment, you may terminate this Order without payment of
early termination charges.
- -- NCR will host the EDIFY HTML and CGI code necessary to permit
communication between the NCR Windows NT Web Server and the Internet.
- -- NCR will provide monitoring services which include taking corrective
actions as required for monitoring the health of:
-- the NCR Web Server and Firewall
-- NCR's Electronic Banking Service
-- NCR owned and controlled routers providing access to the Internet
-- Connectivity between the NCR Web Server and the EDIFY EBS Server
- -- NCR will consult and cooperate with Bisys and EDIFY to resolve issues
relating to:
-- Oracle database maintenance
-- Host connectivity-related service issues
- -- AIB is responsible for all end-user client service support, and will
refer to EDIFY for EBS application support.
- -- NCR will host and operate the EDIFY Transaction Server and provide 7 x
24 support for this service.
- -- NCR warrants that system components under direct control by NCR will be
up 98% of the time outside of scheduled downtime. NCR will measure
availability monthly. In addition to scheduled maintenance downtime,
other downtime due to reasons beyond NCR's control (i.e. existence of
force majeure condition) will be excluded from the availability
calculation. If the 98% availability is not met for 3 consecutive
months due to reasons within NCR's control, you may terminate this
Order without payment of early termination charges with written notice
to NCR within 30 days of the end of this 3 month period and you
deconvert from NCR Services within 9 months of the end of this 3 month
period. NCR warrants that scheduled maintenance downtime will be
conducted from midnight to 5:00 A.M. Eastern Time on
<PAGE>
Saturday and Sunday nights not to exceed twelve hours per month.
- -- Within 30 minutes of NCR getting notice of a problem that will cause
customer service interruption, NCR will notify AIB of such problem and
provide AIB with an estimated time the problem will be corrected if
known. AIB agrees to provide and man a 7 x 24 hour "hot line" or beeper
service to answer such calls from NCR.
- -- NCR warrants that it will monitor Internet bandwidth and system
hardware availability and increase the bandwidth and system hardware as
AIB growth requires it.
- -- NCR will use commercially reasonable efforts to work with EDIFY, Bisys,
and Checkfree to troubleshoot problems that occur.
- -- NCR warrants that it will use commercially reasonable efforts to
correct any system malfunction, and will apply resources consistent
with the severity of the problem.
- -- NCR will actively monitor the operating environment whether by
electronic means or otherwise, the NCR Web server, firewall, EBS
Transaction server and NCR owned and controlled routers to minimize
downtime.
- -- NCR's liability for any intentional, willful or reckless misconduct
with respect to the security of NCR's Electronic Banking Service is
defined in the Master Agreement under Section 11.6.
- -- An independent review of the implementation of the NCR Electronic
Banking Service will be performed, the cost of which will be the
responsibility of AIB. This review shall be performed by a computer
security specialist and will include attempts to gain unauthorized
and/or undetected access to the system. A report will be completed by
the independent security specialist performing the review stating that,
with reasonable certainty, no unauthorized or undetected access to
customer accounts occurred. This review shall be performed and the
report delivered to AIB in Q1, 1999. NCR further agrees that it will
attempt to correct all deficiencies noted in the report which are under
its control within a reasonable period of time.
- -- NCR may pass through all increases in pass through communications
charges, third party maintenance, Checkpoint annual subscription fees,
digital certificate renewal fees, or other third party charges.
- -- AIB agrees to grant NCR access to its EDIFY EBS application, any and
all customer and account information, operating systems, databases and
third party systems to enable NCR to perform the services described in
this Contract.
- -- NCR agrees to provide AIB with procedures and processes to facilitate
the periodic update of the static pages (Main and Administrative)
hosted on the NCR Web Server.
- -- A party whose performance is delayed or is likely to be delayed due to
a force majeure event shall provide prompt written notice of such event
to the other party and in such notice shall set forth in detail the
steps such party is taking to minimize the effects of the force majeure
event on its inability to perform, such as finding alternate providers
or securing back-up equipment or services.
<PAGE>
ATTACHMENT B TO ORDER FOR SERVICES
NCR ELECTRONIC COMMERCE SOLUTIONS
CONTACT AND ESCALATION LIST
FIRST LEVEL SUPPORT
- -------------------
Help Desk 1-888-279-1673 All
SECOND LEVEL SUPPORT
- --------------------
Brian Fleming (860) 652-1263 East Region
Diane Johnston (410) 720-6597 Central Region
Rege Shaw (410) 720-6844 Central Region
Bob Goble (972) 401-6190 West Region
Christian Cool (757) 459-4318 CIF/Autobank
Charlie Hart (937) 445-6730 General Technical Support
Dave Mills (609) 371-2952 General Technical Support
After Hours (410) 720-6533 Data Center Operations
ELECTRONIC COMMERCE SOLUTIONS MANAGER - ESCALATION LEVEL ONE
- ------------------------------------------------------------
Brett Chandler (410) 720-6680
Pager (800) 759-8888 PIN #1155451
E-Mail [email protected]
ELECTRONIC COMMERCE PRODUCT MANAGEMENT - ESCALATION LEVEL TWO
- -------------------------------------------------------------
Gary Morrison (937) 445-7191
E-Mail [email protected]
Greg Sackenheim (937) 445-1342
GENERAL MANAGER, HORIZONTAL SOLUTIONS - ESCALATION LEVEL THREE
- --------------------------------------------------------------
Greg Hanson (937) 445-4698
Vice President, Customer Information Solutions - Escalation Level Four
Mike Grabeman (937) 445-4600
NET.B@NK
CONTACT AND ESCALATION LIST
(insert information here)
BISYS
CONTACT AND ESCALATION LIST
(insert information here)
<PAGE>
ATTACHMENT B TO ORDER FOR SERVICES
NET.B@NK
CONTACT AND ESCALATION LIST
FIRST LEVEL SUPPORT
- -------------------
Customer Service 1-888-256-6932 All
TECHNICAL SUPPORT - ESCALATION LEVEL ONE
- ----------------------------------------
Tom Cable (770) 753-1404 Chief Technology Officer
(770) 623-1963 (home)
(770) 265-5342 (cell)
Scott Walch (770) 343-1409 Manager of Product Development
(770) 448-3808 (home)
OPERATIONS SUPPORT - ESCALATION LEVEL ONE
Catherine Storey (770) 753-1406 Director of Operations
Stacy Crawford (770) 343-6006 x440 Customer Service Day Supervisor
Maria Peluso-Smith (770) 343-6006 x447 Customer Service Night Supervisor
SENIOR MANAGEMENT - ESCALATION LEVEL TWO
- ----------------------------------------
Don Shapleigh (770) 753-1402 President
(770) 395-1256
BISYS
CONTACT AND ESCALATION LIST
(insert information here)
<PAGE>
BISYS DATA CENTER
CHERRY HILL, NEW JERSEY
AFTER HOURS ESCALATION PROCEDURES
(800) 824-5898 DEPRESS 0 AFTER RECORDING
(609) 424-0150 DEPRESS 0 AFTER RECORDING
(609) 424-5031 FAX
(609) 424-8323 FAX
OPERATIONS TELECOMMUNICATIONS
---------- ------------------
First Level Shift Operator Shift Operator
Second Level Shift Supervisor Shift Supervisor
Third Level Bob Gauthier Doug Jones
Fourth Level Bob Lake John Bush
Fifth Level Bill Johnson Bill Johnson
If Escalation to Bill Johnson is necessary and unsuccessful, contact Alan
Najjar at home
(770) 972-6527.
During business hours, Jan Taylor, Bethann Volz, or Ronnie Henderson can
locate Mr. Johnson.
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA - for the year ended December 31,:
Interest income $ 18,088,044 $ 2,223,165 $ 7,709
Interest expense 11,424,432 1,259,743
------------ ------------ ------------
Net interest income 6,663,612 963,422 7,709
Provision for loan losses 20,132 471,706
------------ ------------ ------------
Net interest income after provision for loan losses 6,643,480 491,716 7,709
Noninterest income 683,092 62,607 60,000
Noninterest expense 5,187,390 6,131,762 3,906,891
------------ ------------ ------------
Net income (loss) before income tax benefit 2,139,182 (5,577,439) (3,839,182)
Income tax benefit 2,324,830
------------ ------------ ------------
Net income (loss) $ 4,464,012 $ (5,577,439) $ (3,839,182)
------------ ------------ ------------
------------ ------------ ------------
Net income (loss) per common share - basic $ 0.73 $ (1.66) $ (4.33)
Net income (loss) per common and potential common share - diluted $ 0.70 $ (1.66) $ (4.33)
Weighted average common shares outstanding - basic 6,149,000 3,354,000 886,000
Weighted average common and potential common shares outstanding - diluted 6,384,000 3,354,000 886,000
BALANCE SHEET DATA - as of December 31,:
Total assets $388,436,736 $ 93,219,809 $ 1,246,449
Total deposits 283,589,151 58,726,763
Shareholders' equity (deficit) 38,754,888 34,117,397 (386,073)
Book value per share 6.29 5.55 (0.31)
PERCENTAGE OF NET INCOME (LOSS) TO:
Average total assets 1.85% (11.81%) (616.02%)
Average shareholders' equity (deficit) 12.25% (33.07%) (1988.84%)
Percentage of average shareholders' equity (deficit)
to average total assets 15.13% 35.71% (30.97%)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL - The Company is a holding company that wholly owns Net.B@nk, formerly
Atlanta Internet Bank, a federal savings bank. The Company was incorporated as a
Georgia corporation on February 20, 1996, for the purpose of forming and,
ultimately, operating Net.B@nk as a wholly owned federal savings bank
subsidiary. During the period from February 20, 1996 to July 31, 1997, pending
regulatory approval and the acquisition of a bank charter, the Company was
operating as a development stage enterprise under an agreement with Carolina
First Bank ("CFB"), a wholly owned subsidiary of Carolina First Corporation,
whereby CFB agreed to hold and service the deposit accounts generated by the
Company in exchange for 1,325,000 shares of the Common Stock valued at $3.8
million. In addition, during the period from February 20, 1996 to July 31, 1997,
the Company was a party to an agreement with First Alliance/Premier Bancshares,
Inc. ("First Alliance") pursuant to which the Company agreed to purchase the
charter of First Alliance's subsidiary, Premier Bank, $5.0 million in loans,
$5.0 million in certificates of deposit, and $2.0 million in unimpaired capital
in exchange for $2.2 million in cash, 41,406 shares of the Common Stock valued
at $125,000, and $75,000 in additional cash for reimbursement of direct
out-of-pocket expenses. On July 11, 1997, the Company received final regulatory
approval from the OTS to purchase a bank charter (the "Charter") from First
Alliance. On July 31, 1997, the Company received approximately $38.4 million in
net proceeds from the sale of 3,500,000 shares of its common stock in its
initial public offering (the "IPO") and consummated its agreements with both
First Alliance and CFB. As a result, Net.B@nk became a wholly owned subsidiary
of the Company. As of December 31, 1998, the Company had 17,408 accounts and
approximately $283.6 million in deposits.
FINANCIAL CONDITION - The Company's assets were $388.4 million at December 31,
1998 compared to $93.2 million at December 31, 1997. The increase of $295.2
million from December 31, 1997 to December 31, 1998 was primarily due to growth
in the Company's loan portfolio resulting from its purchase of approximately
$257.5 million in home equity loans and first and second mortgage loans during
the year ended December 31, 1998. In addition, the Company recorded a $2.3
million deferred tax asset related primarily to previous net operating loss
carryforwards which it expects to realize for tax purposes. Because the Company
achieved profitability in 1998, management now believes that it is more likely
than not that its deferred tax assets will be realized. Loan sale proceeds
receivable of $23.2 million related to loan origination agreements with third
parties has also been recorded. Total liabilities increased $290.6 million from
$59.1 million at December 31, 1997 to $349.7 million at December 31, 1998,
primarily due to the rapid growth of the Company's deposit portfolio as a result
of marketing programs introduced by the Company in the fourth quarter of 1997.
Total shareholders' equity increased $4.6 million from December 31, 1997 to
December 31, 1998. The increase resulted from net income of $4.5 million and
$82,000 in other comprehensive income. On February 10, 1999, the Company
received net proceeds of approximately $105.0 million from the sale of 2,430,000
shares of its common stock in a public offering.
<PAGE>
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID - The
following table sets forth, for the periods subsequent to the formation of
Net.B@nk, information regarding the Company's average balance sheet. The average
yields and rates represent the annualized rates. Information is based on average
monthly balances during the year ended December 31, 1998 and the five months
ended December 31, 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------
Average Interest Average
Balance Earned/Paid Yield/Rate
------------- ------------- ----------
<S> <C> <C> <C>
Interest-Earnings Assets:
Short-term investments $ 11,000,000 $ 633,893 5.76%
Investment securities(1) 48,300,000 2,905,404 6.01%
Loans receivable(2) 182,500,000 14,548,747 7.97%
------------- ------------- ----------
Total interest-earning assets 241,800,000 18,088,044 7.48%
Noninterest-earning assets 2,500,000
------------- ------------- ----------
Total assets $244,300,000
------------- ------------- ----------
------------- ------------- ----------
Interest-Bearing Liabilities - Deposits $177,600,000 $ 10,249,533 5.77%
Other interest-bearing liabilities - short-term borrowings 25,000,000 1,174,899 4.71%
------------- ------------- ----------
Total interest-bearing liabilities 202,600,000 11,424,432 5.64%
Noninterest-bearing liabilities 5,700,000
------------- ------------- ----------
Total liabilities 208,300,000
Equity 36,000,000
------------- ------------- ----------
Total liabilities and equity $244,300,000
------------- ------------- ----------
Net interest-earnings $ 6,663,612
------------- ------------- ----------
------------- ------------- ----------
Net yield on interest-earning assets(3) 2.76%
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
Five Months Ended December 31, 1997
--------------------------------------------
Average Interest Average
Balance Earned/Paid Yield/Rate
----------- ------------ ----------
<S> <C> <C> <C>
Interest-Earnings Assets:
Short-term investments $43,800,000 $ 944,743 5.34%
Investment securities(1) 8,900,000 183,184 7.06%
Loans receivable(2) 30,200,000 1,095,238 8.70%
----------- ------------ ----------
Total interest-earning assets 82,900,000 2,223,165 6.44%
Noninterest-earning assets 2,000,000
----------- ------------ ----------
Total assets $84,900,000
----------- ------------ ----------
----------- ------------ ----------
Interest-Bearing Liabilities - Deposits $48,700,000 $ 1,259,743 5.17%
Noninterest-bearing liabilities 1,000,000
----------- ------------ ----------
Total liabilities 49,700,000
Equity 35,200,000
----------- ------------ ----------
Total liabilities and equity $84,900,000
----------- ------------ ----------
Net interest-earnings $ 963,422
----------- ------------ ----------
----------- ------------ ----------
Net yield on interest-earning assets(3) 2.79%
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
(1) Based on amortized cost; changes in fair value are not considered.
(2) No separate treatment has been made for non-accrual loans.
(3) Net interest income divided by average interest-earning assets.
The following table sets forth a summary of the changes in interest income and
interest expense resulting from changes in volume and rates for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
as Compared to the Year Ended
December 31, 1997
--------------------------------------------------
Net Increase Increase
Increase (Decrease) (Decrease)
(Decrease) Due to Rate1 Due to Volume(1)
------------ -------------- ---------------
<S> <C> <C> <C>
Interest-Bearing Assets:
Short-term investments $ (310,850) $ (58,427) $ (252,423)
Investment securities 2,722,220 (50,100) 2,772,320
Loans, gross 13,453,509 (266,230) 13,719,739
------------ -------------- ---------------
Total interest income 15,864,879 (374,757) 16,239,636
Interest-bearing liabilities:
NOW accounts 91,787 2,478 89,309
Money market 757,639 (104,125) 861,764
Certificates of deposit 8,140,364 (73,172) 8,213,536
Other borrowed funds 1,174,899 1,174,899
------------ -------------- ---------------
Total interest expense 10,164,689 (174,819) 10,339,508
------------ -------------- ---------------
Net interest income $ 5,700,190 $ (199,938) $ 5,900,128
------------ -------------- ---------------
------------ -------------- ---------------
</TABLE>
(1) The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the rate component.
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
GENERAL - Net income for the year ended December 31, 1998 amounted to $4.5
million, an increase of $10.1 million when compared to the $5.6 million loss for
the year ended December 31, 1997. The statement of operations for the year ended
December 31, 1997 reflects the Company's operations before and immediately
following the acquisition of the Charter. Because it did not acquire the Charter
until July 31, 1997, the Company had no earning assets prior to that date. A
substantial portion of the income for the year ended December 31, 1998 resulted
from the recognition of $2.3 million in tax benefits. The benefits resulted from
the reversal of a valuation allowance of $3.3 million previously associated with
the Company's deferred tax assets offset by income tax expense for the year
ended December 31, 1998. As the Company achieved profitability during 1998,
management now believes it is more likely than not that such deferred tax assets
will be realized.
INTEREST INCOME - Interest income related to the Company's loan and investment
portfolio for the year ended December 31, 1998 was $18.1 million as compared
with $2.2 million for the year ended December 31, 1997. The increase in interest
income for the year ended December 31, 1998 as compared to the year ended
December 31, 1997 is a result of the growth of the operations of the Bank.
INTEREST EXPENSE - For the year ended December 31, 1998, $10.2 million in
interest expense was recorded as a result of the Company's increase in customer
deposits. Interest expense of $1.3 million was recorded during the year ended
December 31, 1997, as the Company transferred its deposits to Net.B@nk from CFB
and began paying interest on those deposits. In addition, during the year ended
December 31, 1998, the Company recorded approximately $1.2 million in interest
expense associated with other borrowed funds under its line of credit
agreements.
NET INTEREST INCOME - Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. With the growth in the Company's operations, net interest income
increased to $6.7 million for the year ended December 31, 1998, as compared to
$963,000 for the year ended December 31, 1997.
PROVISION FOR LOAN LOSSES - In connection with the purchase of various loan
portfolios, the Company assesses the inherent loss in the portfolios and records
the necessary allowance by adjusting the premium or discount associated with
each portfolio. During 1998, the Company recorded $3,586,000 as an addition to
premium related to allowance for loan losses for purchased loans. In addition to
this allowance, the Company then records an additional allowance relative to all
loans except for those with a specific reserve already established. The Company
recorded a $20,000 provision for loan losses for the year ended December 31,
1998, as compared with $472,000 recorded during the year ended December 31,
1997. The allowance for loan losses is maintained at a level estimated to be
adequate to provide for probable losses in the loan portfolio. Management
determines the adequacy of the allowance based upon reviews of individual loans,
recent loss experience, current economic conditions, the risk characteristics of
the various categories of loans and other pertinent factors.
NONINTEREST INCOME - For the year ended December 31, 1998, the Company recorded
approximately $683,000 in loan and deposit service charges and fees as compared
with $63,000 recorded during the year ended December 31, 1997. The significant
increase in service charges from the year ended December 31, 1998 to the year
ended December 31, 1997 was driven by the significant increase in both the loan
and deposit portfolios.
NONINTEREST EXPENSES - Noninterest expenses decreased approximately $944,000 for
the year ended December 31, 1998 as compared with the year ended December 31,
1997. The primary component of the decrease during the year ended December 31,
1998 was a $1.4 million decrease in the amortization of the service contract
with CFB as the service contract was fully amortized during the second quarter
of 1997. In addition, salaries and benefits decreased $1.0 million as certain
services were outsourced by the Company and $450,000 of bonuses were paid to the
employees of the Company upon completion of the IPO in July 1997. These
decreases were partially offset by increases in marketing, customer services,
data processing, occupancy and other expenses as the Company moved to its new
offices and began soliciting and serving new deposit customers.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM FEBRUARY 20, 1996 TO
DECEMBER 31, 1996
GENERAL - The Company did not have any earning assets until July 31, 1997, when
it acquired the Charter. The net loss for the year ended December 31, 1997 was
$5.6 million, an increase of $1.7 million when compared to the period from
February 20, 1996 to December 31, 1996. The statement of operations for the
period from February 20, 1996 to December 31, 1996 reflects the initial phase of
the Company's operations, including the acquisition, testing and implementation
of the Internet banking platform, marketing expenses, and the accrual of CFB's
expense reimbursements. Under the servicing agreement with CFB, customer
deposits and the related assets resulting from the Company's marketing efforts,
which began in August 1996, were included in CFB's financial operations.
INTEREST INCOME - Interest income for the year ended December 31, 1997 was $2.2
million. The Company did not record a significant amount of interest income for
the period from February 20, 1996 to December 31, 1996 because the Company had
no investments or loans at that time. On July 31, 1997, the Company received the
net proceeds from the IPO and customer deposits held by CFB and invested those
funds in federal funds, mortgage-backed securities and loans purchased from CFB
and an independent third party.
INTEREST EXPENSE - Because the Company did not begin soliciting deposit accounts
until October 1996, it did not record any interest expense for the period from
February 20, 1996 to December 31, 1996. On July 31, 1997, based on the terms of
the servicing agreement with CFB and the Charter purchase agreement, CFB and
First Alliance transferred approximately $47.8 million in customer deposits and
related assets to the Company. The Company recorded approximately $1.3 million
of interest expense during the year ended December 31, 1997. This amount
includes $163,479 of net interest expense,
<PAGE>
which represents the difference between interest expense paid to customers and
interest income paid to the Company by CFB at contractual rates (as set forth in
the servicing agreement) prior to July 31, 1997.
NET INTEREST INCOME - Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing liabilities)
and the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income was $963,000 for the year ended December 31,
1997. Because the Company did not receive the Charter until July 31, 1997, the
Company was not allowed to hold investments, loans, or customer deposits during
the period from February 20, 1996 to December 31, 1996, and therefore, no
significant amount of net interest income was recorded for the period from
February 20, 1996 to December 31, 1996.
PROVISION FOR LOAN LOSSES - The Company purchased its first loans during the
period from July 31, 1997 to December 31, 1997. During such period, the Company
recorded a provision for loan losses of $472,000. The allowance for loan losses
is maintained at a level estimated to be adequate to provide for potential
losses in the loan portfolio. Management determines the adequacy of the
allowance based upon reviews of individual loans, recent loss experience,
current economic conditions, the risk characteristics of the various categories
of loans and other pertinent factors.
NONINTEREST INCOME - For the period from July 31, 1997 to December 31, 1997, the
Company recorded approximately $63,000 in loan and deposit service charges and
fees. Only miscellaneous management fees received of $60,000 were recorded
during the period from February 20, 1996 to December 31, 1996.
NONINTEREST EXPENSES - Noninterest expenses increased $2.2 million from $3.9
million during the period from February 20, 1996 to December 31, 1998 to $6.1
million for the year ended December 31, 1998. The primary components of the
increase during the year ended December 31, 1997 were an increase of $1.6
million in salaries and benefits, which reflects the payment of approximately
$450,000 in bonuses to employees; the amortization of approximately $343,000 in
stock plan expense; increases of $305,000, $391,000, and $236,000 in customer
service, data processing and marketing, respectively, reflecting the growth of
the Company's deposit base and related support functions; and an increase of
approximately $260,000 in other operating expenses consisting primarily of legal
and accounting fees. The above increases were offset by a $960,000 decrease in
the amortization of the service contract with CFB as the service contract was
fully amortized during the second quarter of 1997. The expenses for the period
from February 20, 1996 to December 31, 1996 reflect only the initial phase of
the Company's operations, including the acquisition, testing, and implementation
of the Internet banking platform, marketing expenses, and the accrual of CFB's
expense reimbursements.
STOCK OPTIONS
The Company has a 1996 Stock Incentive Plan (the "Plan"), which authorizes the
grant to key employees, officers, directors, and consultants of the Company of
nonqualified and incentive stock options to purchase shares of Common Stock,
derivative securities related to the value of the Common Stock or cash awards.
The Plan currently limits the number of shares which may be awarded to 600,000
and these shares are reserved for the Plan. The Board of Directors plans to
submit to the Company's shareholders an amendment to the Plan increasing the
number of shares of Common Stock issuable under the Plan to 1,250,000.
Generally, the options expire ten years from the date of the grant. A summary of
the status of the options granted under the Plan as of December 31, 1998, 1997,
and 1996 and the activity during such periods follows:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Average Average Average
December 31, Exercise December 31, Exercise December 31, Exercise
1998 Price 1997 Price 1996 Price
------------ ---------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 366,456 $ 5.98 16,562 $ 1.21 -- $ --
Granted 191,000 19.49 352,875 5.82 16,562 $ 1.21
Exercised (11,196) 3.62 -- -- -- --
Terminated (13,876) 6.58 (2,981) 3.62 -- --
------------ ---------- ------------ --------- ------------ ---------
Outstanding at end of period 532,384 $ 10.89 366,456 $ 5.98 16,562 $ 1.21
------------ ---------- ------------ --------- ------------ ---------
------------ ---------- ------------ --------- ------------ ---------
</TABLE>
In connection with the issuance of some of the options issued during the year
ended December 31, 1997, $390,484 of compensation expense will be recognized
over the vesting period. Certain of those options vested immediately on July 28,
1997, upon completion of the IPO, and $319,704 of unamortized compensation
expense was recognized. The other options vest one-third on the first
anniversary of the date of issuance, one-third on the second anniversary of the
date of issuance, and one-third on the third anniversary of the date of
issuance. Of the vested options, 236,141 cannot be exercised and sold until July
28, 2000, in accordance with an agreement signed with the OTS. As such, of the
532,384 options outstanding as of December 31, 1998, 279,021 were exercisable.
MARKET RISK
ASSET AND LIABILITY MANAGEMENT - The Company's principal business is the
originating and purchasing of loans, funded by customer deposits and, to the
extent necessary, other borrowed funds. Consequently, a significant portion of
the Company's assets and liabilities are monetary in nature and fluctuations in
interest rates, specifically the prime rate, will affect the Company's future
net interest income and cash flows. This interest rate risk is the Company's
primary market risk exposure. The Company does not enter into derivative
financial instruments such as futures, forwards, swaps, and options. Also, the
Company has no market risk-sensitive instruments held for trading purposes. The
Company's exposure to market risk is reviewed on a regular basis by its
management.
<PAGE>
The following table sets forth the interest rate risk of the Company's assets
and liabilities as of December 31, 1998:
<TABLE>
<CAPTION>
Term to Maturity
-----------------------------------------------------------------------------------------------
Over Five
Year Years and
One Two Three Four Five Insensitive
------------- ------------- ------------ ----------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Cash and cash
equivalents $ 446,940
Federal funds
sold 12,013,243
Investment
securities 882,178 $ 58,582,884
Stock of Federal
Home Loan Bank
of Atlanta 2,000,000
Loan sale
proceeds
receivable 23,202,679
Loans receivable 42,561,397 $ 2,225,802 $ 1,483,868 $ 741,934 233,414,601
------------- ------------- ------------ ----------- ---------------- --------------
Total interest-
earning
assets 79,106,437 2,225,802 1,483,868 741,934 293,997,485
Noninterest earning
assets 10,881,210
Total assets $ 79,106,437 $ 2,225,802 $ 1,483,868 $ 741,934 $304,878,695
------------- ------------- ------------ ----------- ---------------- --------------
------------- ------------- ------------ ----------- ---------------- --------------
Interest-Bearing Liabilities:
Interest-bearing
deposits $ 267,925,399 $ 1,128,734 $ 5,189,478 $ 60,000
Interest-free deposits $ 9,285,540
Other borrowed funds 60,000,000
Other interest-free
liabilities and
equity 44,847,585
------------- ------------- ------------ ----------- ---------------- --------------
Total liabilities
and equity $ 267,925,399 $ 1,128,734 $ 5,189,478 $ 60,000 $114,133,125
------------- ------------- ------------ ----------- ---------------- --------------
------------- ------------- ------------ ----------- ---------------- --------------
Net interest rate
sensitivity gap $(188,818,962) $ 1,097,068 $ (3,705,610) $ 681,934 $190,745,570
Cumulative gap (188,818,962) (187,721,894) (191,427,504) (190,745,570) $(190,745,570)
Net interest rate
sensitivity gap
as a percent
of interest-
earning assets (238.69)% 49.29% (249.73)% 91.91% 64.88%
Cumulative gap as
a percent of
cumulative
interest-earning
assets (238.69)% (230.81)% (231.15)% (228.28)% (228.28)% 0.00%
</TABLE>
<TABLE>
<CAPTION>
Weighted
Average
Interest
Total Fair Value Rate
------------ ------------ ---------
<S> <C> <C> <C>
Interest-Earning
Assets:
Cash and cash
equivalents $ 446,940 $ 446,940
Federal funds
sold 12,013,243 12,013,243 5.00%
Investment
securities 59,465,062 59,465,062 6.71%
Stock of Federal
Home Loan Bank
of Atlanta 2,000,000 2,000,000
Loan sale
proceeds
receivable 23,202,679 23,202,679 6.70%
Loans receivable 280,427,602 278,607,376 7.54%
------------ ------------ ------
Total interest-
earning
assets 377,555,526 375,735,300
Noninterest earning
assets 10,881,210 10,881,210
------------ ------------ ------
Total assets $388,436,736 $386,616,510
------------ ------------ ------
------------ ------------ ------
Interest-Bearing Liabilities:
Interest-bearing
deposits $274,303,611 $274,709,385 5.54%
Interest-free deposits 9,285,540 9,285,540
Other borrowed funds 60,000,000 59,924,400 5.01%
Other interest-free
liabilities and
equity 44,847,585 44,847,585
------------ ------------ ------
Total liabilities
and equity $388,436,736 $388,766,910
------------ ------------ ------
------------ ------------ ------
Net interest rate
sensitivity gap
Cumulative gap
Net interest rate
sensitivity gap
as a percent
of interest-
earning assets
Cumulative gap as
a percent of
cumulative
interest-earning
assets
</TABLE>
The Company measures interest rate sensitivity as the difference between amounts
of interest-earning assets and interest-bearing liabilities that mature within a
given period of time. The difference, or the interest rate sensitivity "gap,"
provides an indication of the extent to which an institution's interest rate
spread will be affected by changes in interest rates. The above table does not
consider interest rate adjustments on the Company's adjustable rate loans. A gap
is considered positive when the amount of interest-rate sensitive assets exceeds
the amount of interest-rate sensitive liabilities and is considered negative
when the amount of interest-rate sensitive liabilities exceeds the amount of
interest-rate sensitive assets. In a rising interest rate environment, an
institution with a positive gap would be in a better position than an
institution with a negative gap to invest in higher yielding assets or have its
assets yields adjusted upward, which would result in the yield on its assets
increasing at a faster pace than the cost of its interest-bearing liabilities.
During a period of falling interest rates, however, an institution with a
positive gap would tend to have its assets maturing at a faster rate than one
with a negative gap, which would tend to reduce or restrain the growth of its
net interest income.
LENDING ACTIVITIES
GENERAL - At December 31, 1998 and 1997, the Company's loans receivable
portfolio totaled $280.4 million and $44.9 million, or 72.2% and 48.2% of total
assets, respectively. The majority of the Company's loans were purchased from
other originating institutions. The Company has concentrated its purchasing
activities on one- and three-year adjustable rate mortgage loans, home equity
lines of credit, fixed residential mortgages and auto loans. The Company also
participates in construction loans with other institutions.
<PAGE>
LOAN PORTFOLIO COMPOSITION - The following table sets forth the composition of
the Company's loan portfolio by type of loan as of December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
Amount % Amount %
----------------------- -----------------------
<S> <C> <C> <C> <C>
Residential mortgages $144,361,069 51.4 $ 13,953,501 31.0
Construction 27,996,691 10.0 5,399,624 12.0
Commercial 8,556,264 3.1 4,478,053 10.0
Home equity lines 89,053,532 31.8 4,412,013 9.8
Auto 7,803,648 2.8 14,623,745 32.6
Personal and other 2,656,399 0.9 2,066,471 4.6
------------ ----- ------------ -----
Total loans $280,427,603 100.0 $ 44,933,407 100.0
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
CONTRACTUAL PRINCIPAL REPAYMENTS - The following table sets forth certain
information at December 31, 1998, regarding the dollar amount of loans maturing
in the Company's total loan portfolio, based on the contractual terms to
maturity. Loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
Due 1 Year Due 1-5 After 5 Weighted
or Less Years Years Total Average Yield
------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Residential mortgages $144,361,069 $144,361,069 7.25%
Construction $ 27,996,691 27,996,691 7.75%
Commercial 8,556,264 8,556,264 8.33%
Home equity lines 89,053,532 89,053,532 7.75%
Auto and other loans 6,008,442 $ 4,451,605 10,460,047 8.50%
------------ ------------ ------------ ------------ ----
Total $ 42,561,397 $ 4,451,605 $233,414,601 $280,427,603 7.54%
------------ ------------ ------------ ------------ ----
------------ ------------ ------------ ------------ ----
</TABLE>
The following table sets forth the dollar amount of total loans due after one
year from December 31, 1998, as shown in the preceding table, which have fixed
interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rate Adjustable Rate Total
<S> <C> <C> <C>
Residential mortgages $ 58,193,633 $ 86,167,436 $144,361,069
Home equity lines 89,053,532 89,053,532
Other loans 4,451,605 4,451,605
------------ ------------ ------------
Total $ 62,645,238 $175,220,968 $237,866,206
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
A savings institution generally may not make loans to one borrower and related
entities in an amount which exceeds 15% of its unimpaired capital and surplus,
although loans in an amount equal to an additional 10% of unimpaired capital and
surplus may be made to a borrower and its related entities if the loans are
fully secured by readily marketable securities. At December 31, 1998, the
Company's limit on loans to one borrower was approximately $5.8 million (15%
unimpaired capital and surplus). At December 31, 1998, the Company had not made
any loans to any one borrower, including persons or entities related to the
borrower, exceeding the limitation.
ASSET QUALITY AND NONPERFORMING ASSETS - During the years ended December 31,
1998 and 1997, the Company did not have any significant loans on nonaccrual
status, significant loans past due 90 days or more, or restructured loans.
CONCENTRATIONS OF CREDIT RISK - At December 31, 1998, a majority of the
Company's loans were with customers residing in the Western and Southeastern
United States. At December 31, 1997, all of the Company's loans were with
customers residing in the Southeastern United States.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level management considers adequate to provide for probable losses in the loan
portfolio. As the majority of the Company's portfolio is purchased, an estimate
of the loss inherent in the purchased portfolio is made and an allowance for
loan losses is recorded by adjusting the premium associated with the purchased
loans. Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent factors.
Loans which management deems uncollectible are charged to the allowance.
Provisions for loan losses and recoveries on loans previously charged off are
added to the allowance.
Although management uses the best information available to make determinations
with respect to the provisions for loan losses, additional provisions for loan
losses may be necessary in the future should economic or other conditions change
substantially. In addition, the OTS, as an integral part of the examination
process, periodically reviews the Company's allowance for loan losses. The
agency may require the Company to recognize additions to such allowance based on
their judgments about the information available to them at the time of their
examination.
<PAGE>
The following table sets forth an analysis of the Company's allowance for loan
losses during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Balance - Beginning of year $ 453,444
----------- -----------
Allowance recorded in connection with the purchase of loan pools 3,585,926
----------- -----------
Provision for loan losses 20,132 471,706
----------- -----------
Loans charged off:
Residential mortgages (326,852)
Equipment leases (31,492) (8,477)
Auto (171,006)
Home equity lines (44,230)
Other (13,558) (9,785)
----------- -----------
Total loans charged off (587,138) (18,262)
----------- -----------
Balance - End of year $ 3,472,364 $ 453,444
----------- -----------
----------- -----------
Allowance for loan losses as a percent of total loans outstanding 1.24% 1.01%
----------- -----------
----------- -----------
</TABLE>
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at December 31, 1998 and
1997:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------- ------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Amount Total
<S> <C> <C> <C> <C>
Residential mortgages $1,844,473 51.4% $ 46,425 31.0%
Construction 38,000 10.0% 52,400 12.0%
Commercial 81,395 3.1% 112,887 10.0%
Home equity lines 1,484,221 31.8% 48,951 9.8%
Auto 8,978 2.8% 179,984 32.6%
Other 15,297 0.9% 12,797 4.6%
---------- ----- ---------- -----
$3,472,364 100.0% $ 453,444 100.0%
---------- ----- ---------- -----
---------- ----- ---------- -----
</TABLE>
INVESTMENT SECURITIES - The investment policy of the Company, as established by
the Board of Directors, is designed primarily to provide and maintain liquidity
and to generate a favorable return on investments without incurring undue
interest rate risk, credit risk, and investment portfolio asset concentrations.
The Company's investment policy is currently implemented by the investment
committee within the parameters set by the Board of Directors.
The Company is authorized to invest in obligations issued or fully
guaranteed by the United States government, certain federal agency obligations,
certain time deposits, negotiable certificates of deposit issued by commercial
banks and other insured financial institutions, investment grade corporate debt
securities, and other specified investments.
Securities classified as available for sale are reported at fair value,
with unrealized gains and losses, net of tax, excluded from earnings and
reported in other comprehensive income. At December 31, 1998 and 1997, all of
the Company's investment securities were classified as available for sale. At
December 31, 1998 and 1997, investments in the debt and/or equity securities of
any one issuer did not exceed more than 10% of the Company's shareholders'
equity.
The following table sets forth certain information relating to the
Company's available-for-sale securities at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
Gross
------------------------- Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $58,330,285 $ -- $ 2,045 $58,328,240
U.S. government agencies 882,442 -- 264 882,178
Habitat bonds and other 254,644 -- -- 254,644
----------- ---------- ----------- -----------
$59,467,371 $ -- $ 2,309 $59,465,062
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------
Gross
------------------------- Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $ 8,127,863 $ -- $ -- $ 8,127,863
U.S. government agencies obligations 10,009,346 -- 83,063 9,926,283
----------- ---------- ----------- -----------
$18,137,209 $ -- $ 83,063 $18,054,146
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
<PAGE>
The following table sets forth the amount of the Company's investment securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1998. The actual maturity of
the Company's investment securities may differ from contractual maturity as
certain of the Company's investment securities are subject to call provisions
which allow the issuer to accelerate the maturity date of the security:
<TABLE>
<CAPTION>
Contractually Maturing
------------------------------------------------
Weighted Greater Weighted
5-1O Average Than Average
Years Yield 1O Years Yield
<S> <C> <C> <C> <C>
Collateralized mortgage obligations $5,986,729 6.96% $52,341,511 6.82%
U.S. Government and agency obligations 882,178 7.54%
Habitat bonds and other -- 254,644 3.50%
---------- ---- ----------- ----
$5,986,729 6.96% $53,478,333 6.71%
---------- ---- ----------- ----
---------- ---- ----------- ----
</TABLE>
SOURCES OF FUNDS
GENERAL - The Company's primary sources of funds are deposits, borrowings,
prepayments and maturities of outstanding loans, sales of loans, maturities of
investment securities and other short-term investments and funds provided from
operations. While scheduled loan payments and maturing investment securities and
short-term investments are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Company invests excess funds in
overnight deposits and other short-term interest-earning assets. The Company can
use cash generated through the retail deposit market, its traditional funding
source, to offset the cash utilized in investing activities. The Company's
available-for-sale securities and short-term interest-earning assets can also be
used to provide liquidity for lending and other operational requirements. As an
additional source of funds, the Company has line of credit agreements totaling
$82 million. See Note 8 of the Notes to the Company's consolidated financial
statements.
DEPOSITS - The Company's deposit products include a broad selection of deposit
instruments, including commercial checking accounts, negotiable order of
withdrawal ("NOW") accounts, money market accounts and term certificate
accounts. Deposit account terms vary, with the principal differences being the
minimum balance required, the time periods the funds must remain on deposit and
the interest rate.
The Company utilizes nontraditional marketing methods to attract new
customers and savings deposits. The Company's target market includes Internet
users, on-line shoppers and special niche customers. The Company markets its
products and services by placing banner advertisements on portals and Websites
that it believes will attract the Bank's target customers. The Bank also derives
a marketing benefit from media coverage. Additionally, the Company continually
seeks to form product and marketing alliances with other financial services
providers to broaden its product and service offerings and appeal to a broader
customer base.
The Company has been competitive in the types of accounts and range of
interest rates it has offered on its deposit products. Deposit levels have
increased during the years ended December 31, 1998 and 1997, primarily as a
result of competitive rates offered by the Company and Internet advertising. The
weighted average interest rate paid during the years ended December 31, 1998 and
1997, was 5.77% and 5.17%, respectively. Although market demand generally
dictates which deposit maturities and rates will be accepted by the public, the
Company intends to continue to promote checking and NOW accounts as well as
longer term certificates of deposit to the extent possible and consistent with
asset and liability management goals.
The following table sets forth the dollar amount of deposits and weighted
average interest rates in the various types of deposit programs offered by the
Company at December 31, 1998 and 1997, respectively:
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------------
Weighted Weighted
Average Average
Interest Interest
Amount Percentage Rate Amount Percentage Rate
<S> <C> <C> <C> <C> <C> <C>
Demand checking accounts $ 9,285,540 3.3% N/A $ 293,054 0.5% N/A
Interest bearing:
NOW accounts 6,090,704 2.1% 3.49% 1,573,283 2.7% 3.28%
Money market 65,325,880 23.0% 5.13% 36,534,967 62.2% 5.51%
Certificates of deposit under $100,000 197,162,916 69.5% 5.74% 16,662,365 28.4% 6.22%
Certificates of deposit over $100,000 5,724,111 2.1% 5.74% 3,663,094 6.2% 6.22%
------------ ----- ----- ----------- ----- -----
Total deposits $283,589,151 100.0% $58,726,763 100.0%
------------ ----- ----- ----------- ----- -----
------------ ----- ----- ----------- ----- -----
</TABLE>
<PAGE>
The following table presents the average balance of each deposit type and the
average rate paid on each deposit type for the years ended December 31, 1998 and
1997, respectively:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1998 1997
------------------------ -----------------------
Average Average Average Average
Balance Rate Paid Balance Rate Paid
<S> <C> <C> <C> <C>
Demand checking accounts $ 2,730,769 N/A $ 300,000 N/A
NOW accounts 5,423,077 1.96% 1,728,571 3.28%
Money market 46,015,385 5.48% 33,328,571 5.51%
Certificates of deposit under $100,000 122,354,337 6.04% 11,433,435 6.22%
Certificates of deposit over $100,000 3,814,894 6.04% 2,209,423 6.22%
</TABLE>
The following table shows maturity information for the Company's certificates of
deposit at December 31, 1998:
<TABLE>
<CAPTION>
Maturity Date
------------------------------------------------------
One Year 1 to 2 2 to 3 3 to 4
or Less Years Years Years Total
<S> <C> <C> <C> <C> <C>
4.01 - 6.00% $169,227,411 $1,128,734 $5,189,478 $60,000 $175,605,623
6.01 - 8.00% 27,281,404 27,281,404
------------ ---------- ---------- ------- ------------
Total $196,508,815 $1,128,734 $5,189,478 $60,000 $202,887,027
------------ ---------- ---------- ------- ------------
------------ ---------- ---------- ------- ------------
</TABLE>
The following table sets forth the maturities of the Company's certificates of
deposit having principal amounts of $100,000 or more at December 31, 1998:
<TABLE>
<S> <C>
Within three months $3,011,146
Over three months through six months 421,451
Over six months through one year 1,782,206
Over one year 509,308
----------
Total certificates of deposit with balances of $100,000 or more $5,724,111
----------
----------
</TABLE>
CAPITAL RESOURCES - Net.B@nk is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure of Net.B@nk
to meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Net.B@nk must meet specific capital guidelines that involve quantitative
measures of Net.B@nk's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. Net.B@nk's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. In addition, under
regulatory guidelines, Net.B@nk may not pay a dividend to the Company if doing
so would cause Net.B@nk to be less than adequately capitalized, as defined
below.
Quantitative measures established by regulation to ensure capital adequacy
require Net.B@nk to maintain minimum amounts and ratios set forth in the table
below. Net.B@nk's regulatory agency, the OTS, requires Net.B@nk to maintain
minimum ratios of tangible capital to tangible assets of 1.5%, core capital to
tangible assets of 3.0%, and total risk-based capital to risk-weighted assets of
8.0%. Net.B@nk is also subject to prompt corrective action requirements set
forth by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires
the Bank to maintain minimum total and Tier I Capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I Capital (as
defined) to average assets (as defined). Management believes that as of December
31, 1998 Net.B@nk met all the capital adequacy requirements to which it was
subject.
As of December 31, 1998, the most recent notification from the OTS
categorized Net.B@nk as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized Net.B@nk must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. No conditions or events have occurred since that notification that
management believes would change the institution's category.
On February 10, 1999, the Company received net proceeds of approximately
$105.0 million from the sale of 2,430,000 shares of its common stock in a public
offering.
<PAGE>
Net.B@nk's actual capital amounts and ratios as of December 31, 1998 and
1997, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
To Be Categorized
as "Well Capitalized"
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Plan
----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total capital (to risk-weighted assets) $38,297 15.36% $19,947 8.0% $24,934 10.0%
Core capital (to tangible assets) $35,996 9.31% $11,595 3.0% $19,325 5.0%
Tangible capital (to tangible assets) $35,996 9.31% $ 5,798 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $35,996 14.44% N/A N/A $14,960 6.0%
December 31, 1997
Total capital (to risk-weighted assets) $23,652 47.8% $ 3,956 8.0% $ 4,948 10.0%
Core capital (to tangible assets) $23,735 28.3% $ 2,517 3.0% $ 4,196 5.0%
Tangible capital (to tangible assets) $23,735 28.3% $ 1,259 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $23,735 48.0% N/A N/A $ 2,969 6.0%
</TABLE>
Under current OTS regulations, the Company may make capital distributions
in any calendar year up to 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(i.e., the percentage by which the Company's capital-to-assets ratio exceeds the
ratio of its fully phased-in capital requirement to its assets) at the beginning
of the calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
During the year ended December 31, 1998, the Company and Net.B@nk entered
into line of credit agreements with The Bankers Bank. The Company is a party to
one such agreement and the Bank is a party to two such agreements. Under the
terms of the Company's agreement, the Company may borrow 50% of the tangible
equity of Net.B@nk, up to $17.0 million, using the stock of the Bank as
collateral. Any amounts borrowed under this line bears interest at a fixed rate
of 8.00% per annum. During the year ended December 31, 1998, the Company
borrowed and repaid $12 million under the line. Under the terms of the
agreements, the Bank may borrow $5.0 million under an unsecured general purpose
line and 99.0% of the value of its investment securities under another line.
Both of the lines bear interest at 25 basis points above the Federal Funds rate
or 5.00% at December 31, 1998. Under these agreements at December 31, 1998, the
Company had an outstanding borrowing of $20 million with no stated maturity
secured by investment securities.
Effective October 16, 1998, the Company borrowed $20 million from the
Federal Home Loan Bank ("FHLB") at a fixed rate of 4.43%. The borrowings are
callable at the two-year anniversary date. If not called at the two-year date,
the borrowings extend for an additional three years at 4.43%. This borrowing is
secured by the Company's investment securities. In addition, on December 2,
1998, the Company borrowed $20 million from the FHLB at 25 basis points over the
Federal Funds rate (5.0% at December 31, 1998) with a maturity date of December
2, 1999. The Company pledged first mortgage loans as collateral for this
borrowing.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130"), and restated prior
periods to conform to the presentation required by SFAS 130. SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components. SFAS 130 requires unrealized gains or losses, net of tax, on the
Company's available-for-sale securities, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. The adoption of SFAS 130 had no impact on the Company's net income or
shareholders' equity.
As of April 1, 1998, the Company adopted Statement of Position 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE ("SOP 98-1"). SOP 98-1 allows for the capitalization of costs related to the
development and implementation of software obtained for internal use including
materials, payroll, and interest costs once the criteria of the SOP have been
met. As of December 31, 1998, $592,402 of these related costs had been
capitalized.
As of December 31, 1998, the Company adopted SFAS 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131 establishes annual
and interim reporting standards for an enterprise's business segments and
related disclosures about its products, services, geographic areas, and major
customers. The adoption of SFAS 131 had no effect on the Company's financial
statements for the year ended December 31, 1998 because the Company only has one
reportable segment.
In June 1998, Statement of Financial Accounting Standards 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 133") was issued. SFAS
133 establishes standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of SFAS 133 is not expected to have
a significant effect on the Company's financial statements.
YEAR 2OOO
The Company is working to resolve the potential impact of the Year 2000 on the
ability of the computerized information systems it uses to accurately process
information that may be date sensitive. Any of the programs the Company or its
service providers use that recognize a date using "00" as the year 1900 rather
than the Year 2000 could result in errors or system failures that could
ultimately cause Net.B@nk or its service providers to become unable to process
customer transactions. This would require the Bank to cease operations pending
resolution of the problem. Such an eventuality would materially adversely affect
the Company's business, financial condition, and results of operations.
Accordingly, management is devoting significant attention to identifying Year
2000 issues and testing its in-house and external systems for Year 2000
compliance. To date, the Company has incurred Year 2000 remediation costs
<PAGE>
of approximately $21,000 and has budgeted approximately $35,000 for total
remediation costs. The Company has been utilizing working capital to fund its
Year 2000 compliance program and anticipates that it will continue to do so.
The Company began testing its in-house information technology ("IT")
systems during the second quarter of 1998 and completed such testing during the
third quarter of 1998. Management has not identified, and does not anticipate,
any significant risks or issues relating to non-IT systems.
The Company is also assessing the Year 2000 compliance of its outside
vendors and service providers. Because the Company primarily contracts with
outside vendors for its computer application programs, management believes the
Company's principal risk relating to Year 2000 issues lies in the potential
inability of those vendors to process date sensitive information involving the
Year 2000. The Company began testing the systems provided by these vendors for
Year 2000 compliance in the third quarter of 1998, with an OTS-mandated
completion date of June 30, 1999. In addition, management is contacting each of
the Company's vendors to obtain a commitment that they are or will timely be
Year 2000 compliant. If such assurances are not forthcoming, or if management
believes for any reason that any of its vendors will not be Year 2000 compliant
when required, management plans to contract with other vendors that would be
able to provide similar services at similar costs. Although the Company cannot
offer any assurances, management believes that such vendors are and will be
available. Alternatively, the Company could bring the outsourced services
in-house by licensing the applicable software and converting it to run on the
Company's platforms or form a correspondent relationship with an unaffiliated
Year 2000 compliant bank that could service Net.B@nk's customers and accounts
until the Company could provide such services on a Year 2000 compliant basis.
Management believes that the Company could implement any of the forgoing
contingency plans without a material interruption in its business and without a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1998 and 1997 and the
period from February 20, 1996 to December 31, 1996 is summarized as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
1998
Interest income $ 2,207 $ 4,253 $ 5,284 $ 6,343
Interest expense 1,304 2,714 3,220 4,186
------- ------- ------- -------
Net interest income 903 1,539 2,064 2,157
------- ------- ------- -------
Provision for loan losses 4 6 6 4
------- ------- ------- -------
Net interest income after provision for loan losses 899 1,533 2,058 2,153
Noninterest income 123 104 190 266
Noninterest expense 1,173 1,397 1,290 1,327
------- ------- ------- -------
Net income (loss) before income taxes (151) 240 958 1,092
Income tax benefit (expense) 3,029 (345) (359)
------- ------- ------- -------
Net income (loss) $ (151) $ 3,269 $ 613 $ 733
------- ------- ------- -------
------- ------- ------- -------
Basic net income (loss) per common and common
equivalent share outstanding $ (0.02) $ 0.53 $ 0.10 $ 0.12
------- ------- ------- -------
Diluted net income (loss) per common and common
equivalent share outstanding $ (0.02) $ 0.51 $ 0.10 $ 0.11
------- ------- ------- -------
1997
Interest income $ 6 $(1,518) $ 902 $ 1,315
Interest expense 103 37 465 655
------- ------- ------- -------
Net interest income (loss) (97) (37) 437 660
------- ------- ------- -------
Provision for loan losses 392 80
------- ------- ------- -------
Net interest income (loss) after provision for loan losses (97) (37) 45 580
Noninterest income 30 33
Noninterest expense 1,703 1,383 1,593 1,452
------- ------- ------- -------
Net loss $(1,800) $(1,420) $(1,518) $ (839)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted net loss per common share outstanding $ (1.44) $ (1.11) $ (0.32) $ (0.14)
------- ------- ------- -------
1996
Interest income $ $ $ $ 8
Interest expense
------- ------- ------- -------
Net interest income 8
------- ------- ------- -------
Provision for loan losses
------- ------- ------- -------
Net interest income after provision for loan losses 8
Noninterest income 40 20
Noninterest expense 15 56 1,217 2,619
------- ------- ------- -------
Net income (loss) $ 25 $ (36) $(1,217) $(2,611)
------- ------- ------- -------
------- ------- ------- -------
Basic and diluted net income (loss) per common share outstanding $ 0.03 $ (0.04) $ (1.22) $ (2.09)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Basic and diluted net income (loss) per common and common equivalent share
has been calculated based on the weighted average number of shares outstanding
during the quarter in accordance with SFAS 128. Potential common shares have not
been included in the calculation related to those quarters with a net loss
because they were antidilutive. There were no potential common shares
outstanding for the period from February 20, 1996 to March 31, 1996. All
previously reported per share amounts have been restated to conform to SFAS 128.
The total for the quarters differs from the net loss per share as shown on the
statement of operations because of the issuance of shares previously recorded as
stock subscriptions receivable during the years of 1997 and 1996.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash $ 446,940 $ 250,535
Federal funds sold 12,013,243 28,853,057
------------- -------------
Total cash and cash equivalents 12,460,183 29,103,592
SECURITIES AVAILABLE FOR SALE - At fair value (amortized cost of
$59,467,371 and $18,137,209, respectively) 59,465,062 18,054,146
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost 2,000,000 225,000
LOANS RECEIVABLE - Net of allowance for loan losses of
$3,472,364 and $453,444, respectively 276,955,239 44,479,963
ACCRUED INTEREST RECEIVABLE 2,582,627 372,237
FURNITURE AND EQUIPMENT - Net 1,321,918 388,508
BANK CHARTER 330,167 344,167
DEFERRED INCOME TAXES 2,297,125
LOAN SALE PROCEEDS RECEIVABLE 23,202,679
OTHER ASSETS 7,821,736 252,196
------------- -------------
$ 388,436,736 $ 93,219,809
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 283,589,151 $ 58,726,763
Other borrowed funds 60,000,000
Accounts payable and accrued liabilities 6,092,697 375,649
------------- -------------
349,681,848 59,102,412
COMMITMENTS AND CONTINGENCIES (NOTE 18)
SHAREHOLDERS' EQUITY:
Preferred stock, no par (10,000,000 shares authorized, none outstanding)
Common stock, $.01 par (100,000,000 shares authorized, 6,156,758 and
6,145,562 shares issued and outstanding, respectively) 61,568 61,456
Additional paid-in capital 43,671,732 43,631,314
Unamortized stock plan expense (24,279) (75,689)
Accumulated deficit (4,952,609) (9,416,621)
Accumulated other comprehensive loss, net of tax (1,524) (83,063)
------------- -------------
Total shareholders' equity 38,754,888 34,117,397
------------- -------------
$ 388,436,736 $ 93,219,809
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
Period from
February 20, 1996
Year Ended (Date of
December 31, Incorporation)
----------------------------- to December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C>
INTEREST INCOME:
Loans $ 14,548,747 $ 1,095,238
Investment securities 2,905,404 183,184
Short-term investments 633,893 944,743 $ 7,709
------------ ------------ ------------
Total interest income 18,088,044 2,223,165 7,709
INTEREST EXPENSE:
Deposits 10,249,533 1,259,743
Other borrowed funds 1,174,899
------------ ------------ ------------
Total interest expense 11,424,432 1,259,743
------------ ------------ ------------
NET INTEREST INCOME 6,663,612 963,422 7,709
PROVISION FOR LOAN LOSSES 20,132 471,706
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,643,480 491,716 7,709
------------ ------------ ------------
NONINTEREST INCOME:
Service charges and fees 683,092 62,607
Management fees 60,000
------------ ------------ ------------
Total noninterest income 683,092 62,607 60,000
------------ ------------ ------------
NONINTEREST EXPENSES:
Salaries and benefits 1,429,675 2,396,347 836,427
Amortization of service contract with affiliate 1,440,000 2,400,000
Customer services 1,377,635 310,285 4,951
Marketing 694,631 524,494 288,584
Data processing 316,590 539,013 148,159
Depreciation and amortization 272,354 217,440 18,934
Office expenses 175,019 177,054 56,765
Occupancy 147,169 107,304 19,330
Travel and entertainment 88,341 64,759 38,794
Other 685,976 355,066 94,947
------------ ------------ ------------
Total noninterest expenses 5,187,390 6,131,762 3,906,891
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 2,139,182 (5,577,439) (3,839,182)
INCOME TAX BENEFIT 2,324,830
------------ ------------ ------------
NET INCOME (LOSS) 4,464,012 (5,577,439) (3,839,182)
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on securities arising during years
ended December 31, 1998 and 1997, net of taxes of $45,454 and
($42,790), respectively 88,235 (83,063)
Less reclassification adjustment for gains included in
net income, net of taxes of $ 3,450 (6,696)
------------ ------------ ------------
Total other comprehensive income (loss) 81,539 (83,063)
------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 4,545,551 $ (5,660,502) $ (3,839,182)
------------ ------------ ------------
------------ ------------ ------------
NET INCOME (LOSS) PER COMMON SHARE AND
POTENTIAL COMMON SHARE:
Basic $ 0.73 $ (1.66) $ (4.33)
Diluted 0.70 (1.66) (4.33)
WEIGHTED AVERAGE COMMON AND POTENTIAL
COMMON SHARES OUTSTANDING:
Basic 6,149,000 3,354,000 886,000
Diluted 6,384,000 3,354,000 886,000
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Unamortized
Affiliate
Service
Common Additional Common Stock Contract
Common Stock Paid-in Stock Subscriptions Expense,
Shares ($.01 Par) Capital Subscribed Receivable Net of Tax
--------- ----------- ----------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -
February 19, 1996
Proceeds from issuance
of common stock:
Incorporation,
February 20, 1996 759,094 $ 7,591 $ (7,362)
March 31, 1996 49,688 497 (482)
April 1, 1996 142,438 1,424 18,571
September 17, 1996 298,122 2,981 997,129
Contribution of
services from
affiliate 31,232
Issuance of 1,354,814
shares of common
stock subscriptions $3,844,185 $(4,185) $(3,840,000)
Issuance of 16,562
compensatory
stock options 30,000
Amortization of stock
plan expense
Net loss, including
amortization of service
contract for the period
from February 20, 1996
(date of incorporation)
to December 31, 1996 2,400,000
--------- --------- ----------- -------------- ------------ ---------- -
BALANCE -
December 31, 1996 1,249,342 12,493 1,069,088 3,844,185 (4,185) (1,440,000)
Proceeds from issuance
of common stock:
March 31, 1997 19,876 199 2,591 (2,790) 2,790
April 2, 1997 9,938 100 1,295 (1,395) 1,395
July 28, 1997 3,500,000 35,000 38,216,520
July 31, 1997 1,366,406 13,664 3,951,336 (3,840,000)
Issuance of 163,970
compensatory stock
options 390,484
Amortization of service
contract 1,440,000
Amortization of stock
plan expense
Other comprehensive
loss
Net loss for the year
ended December 31,
1997
--------- --------- ----------- -------------- ------------ ---------- -
BALANCE -
December 31, 1997 6,145,562 61,456 43,631,314 -- -- --
Exercised stock options 11,196 112 40,418
Other comprehensive
income, net of tax
Amortization of stock
plan expense
Net income for the year
ended December 31,
1998
--------- --------- ----------- -------------- ------------ ---------- -
BALANCE -
December 31, 1998 6,156,758 $61,568 $43,671,732 $ -- $ -- $ --
--------- --------- ----------- -------------- ------------ ---------- -
--------- --------- ----------- -------------- ------------ ---------- -
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Unamortized Comprehensive
Stock Income
Plan Accumulated (Loss),
Expense Deficit Net of Tax Total
--------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
BALANCE -
February 19, 1996
Proceeds from issuance
of common stock:
Incorporation,
February 20, 1996 $ 229
March 31, 1996 15
April 1, 1996 19,995
September 17, 1996 1,000,110
Contribution of
services from
affiliate 31,232
Issuance of 1,354,814
shares of common
stock subscriptions
Issuance of 16,562
compensatory
stock options $ (30,000)
Amortization of stock
plan expense 1,528 1,528
Net loss, including
amortization of service
contract for the period
from February 20, 1996
(date of incorporation)
to December 31, 1996 $(3,839,182) (1,439,182)
--------- ----------- -------- -----------
BALANCE -
December 31, 1996 (28,472) (3,839,182) (386,073)
Proceeds from issuance
of common stock:
March 31, 1997 2,790
April 2, 1997 1,395
July 28, 1997 38,251,520
July 31, 1997 125,000
Issuance of 163,970
compensatory stock
options (390,484) --
Amortization of service
contract 1,440,000
Amortization of stock
plan expense 343,267 343,267
Other comprehensive
loss $(83,063) (83,063)
Net loss for the year
ended December 31,
1997 (5,577,439) (5,577,439)
--------- ----------- -------- -----------
BALANCE -
December 31, 1997 (75,689) (9,416,621) (83,063) 34,117,397
Exercised stock options 40,530
Other comprehensive
income, net of tax 81,539 81,539
Amortization of stock
plan expense 51,410 51,410
Net income for the year
ended December 31,
1998 4,464,012 4,464,012
--------- ----------- -------- ------------
BALANCE -
December 31, 1998 $ (24,279) $(4,952,609) $ (1,524) $38,754,888
--------- ----------- -------- -----------
--------- ----------- -------- -----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
February 2O, 1996
Year Ended (Date of
December 31, Incorporation)
--------------------- to December 31,
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 4,464,012 $ (5,577,439) $ (3,839,182)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 251,147 211,607 17,406
Amortization of service contract 1,440,000 2,400,000
Amortization of stock plan expense 51,410 343,267 1,528
Amortization of premiums on investment securities 237,040 49,331
Amortization of premiums on purchased loans 2,541,016 116,509
Amortization of trademark 6,417
Amortization of Bank Charter 14,790 5,833
Amortization of start-up costs 2,280
Provision for loan losses 20,132 471,706
Contribution of services from affiliate 31,232
Changes in assets and liabilities which provide
(use) cash:
Increase in accrued interest receivable (2,210,390) (372,237)
Increase in other assets (7,569,540) (142,363) (311,799)
Increase in loan proceeds receivable (23,202,679)
Increase (decrease) in payables and accrued liabilities 5,717,048 (373,267) 748,916
Increase in deferred tax benefit (2,297,125)
------------- ------------- -------------
Net cash used in operating activities (21,976,722) (3,824,773) (951,899)
INVESTING ACTIVITIES:
Purchases of securities available for sale (52,502,591) (19,347,623)
Purchase of Federal Home Loan Bank stock (1,775,000) (225,000)
Principal repayments on investment securities 11,104,635 1,161,085
Purchase of Habitat bonds (250,000)
Origination and purchase of loans (352,665,802) (52,909,291)
Principal payments on loans 117,703,710 7,838,834
Purchase of Premier Bank charter (350,000)
Capital expenditures (592,065) (249,906) (183,390)
Capitalized software costs (592,492)
Proceeds from return of equipment 17,738
------------- ------------- -------------
Net cash used in investing activities (279,569,605) (64,064,163) (183,390)
FINANCING ACTIVITIES:
Assumption of Premier deposits 5,000,000
Transfer of deposits from affiliate 42,977,650
Other borrowed funds, net of repayments 60,000,000
Increase in deposits 224,862,388 10,749,113
Advances from (repayments to) affiliate (883,606) 883,606
Net proceeds from the sale of stock 40,530 38,380,705 1,020,349
------------- ------------- -------------
Net cash provided by financing activities 284,902,918 96,223,862 1,903,955
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16,643,409) 28,334,926 768,666
CASH AND CASH EQUIVALENTS:
Beginning of Period 29,103,592 768,666
End of Period $ 12,460,183 $ 29,103,592 $ 768,666
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for interest $ 5,694,481 $ 1,184,549
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1998 and 1997, and for the years ended December 31, 1998 and
1997 and for the period from February 20, 1996 (Date of Incorporation) to
December 31, 1996
1. ORGANIZATION AND BASIS OF PRESENTATION
Net.B@nk, Inc. (the "Company") is a bank holding company that wholly owns the
outstanding stock of Net.B@nk, formerly Atlanta Internet Bank, a federal savings
bank. The Company was incorporated as a Georgia corporation on February 20,
1996, for the primary purpose of forming and, ultimately, operating Net.B@nk.
During the period from February 20, 1996 to July 31,1997, pending regulatory
approval and the acquisition of a bank charter, the Company was operating as a
development stage enterprise under an agreement with Carolina First Bank
("CFB"), a wholly owned subsidiary of Carolina First Corporation, whereby CFB
agreed to hold and service the deposit accounts generated by the Internet
banking operations of the Company in exchange for 1,325,000 shares of the
Company's common stock valued at $3,840,000. In addition, during the period from
February 20, 1996 to July 31, 1997, the Company was a party to an agreement with
First Alliance/Premier Bancshares, Inc. ("First Alliance") pursuant to which the
Company had agreed to purchase the charter of First Alliance's subsidiary,
Premier Bank, $5 million of loans, $5 million of certificates of deposit and $2
million in unimpaired capital for $2,150,000 in cash, 41,406 shares of the
Company's common stock valued at $125,000, and $75,000 in additional cash for
reimbursement of direct out-of-pocket expenses.
On July 11, 1997, the final regulatory approval from the Office of Thrift
Supervision ("OTS") was received. On July 31, 1997, the Company received
approximately $38.4 million in net proceeds from the sale of 3,500,000 shares of
its common stock in an initial public offering and consummated its agreements
with both First Alliance and CFB. As a result, Net.B@nk, a federal savings bank,
became a wholly owned subsidiary of the Company.
2. ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and with general practice within the banking
industry. The following is a summary of the more significant policies:
CONSOLIDATION - The consolidated financial statements of the Company include the
financial statements of Net.B@nk, the Company's wholly owned subsidiary. All
intercompany balances and transactions have been eliminated in consolidation.
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 the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INTEREST RATE RISK - The Company's assets and liabilities are generally monetary
in nature, and interest rate changes have an impact on the Company's
performance. The Company decreases the effect of interest rate changes on its
performance by striving to match maturities and interest sensitivity between
loans, investment securities, deposits, and other borrowings. However, a
significant change in interest rates, specifically the prime rate, could have a
material effect on the Company's results of operations.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, demand deposits due from banks, and federal
funds sold to banks.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE - Investment securities classified as
available-for-sale are carried at fair value. Unrealized holding gains or
losses, net of tax, on available-for-sale securities are reported as a net
amount in other comprehensive income. Gains and losses from dispositions are
based on the net proceeds and the adjusted carrying amounts of the securities
sold using the specific identification method. Any decreases in investment value
other than temporary declines would be recognized in operations. Premiums and
discounts are recognized in interest income using the interest method over the
period to maturity.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is maintained at a
level estimated to be adequate to provide for probable losses in the loan
portfolio. As the majority of the Company's portfolio is purchased, an estimate
of the loss inherent in the purchased portfolio is made and an allowance for
loan losses is recorded by adjusting the premium associated with the purchased
loans. Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans, and other pertinent factors.
Loans deemed uncollectible are charged to the allowance. Provisions for loan
losses and recoveries on loans previously charged off are added to the
allowance.
<PAGE>
FURNITURE AND EQUIPMENT - Furniture and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of each asset. The Company evaluates the
estimated useful lives of assets on a periodic basis to determine whether events
or circumstances warrant revised estimated useful lives or whether any
impairment exists. Management believes no impairment existed at December 31,
1998.
BANK CHARTER - The value of the charter is being amortized on a straight-line
basis over 25 years. The carrying value of the charter is
periodically reviewed to assess recoverability based on expected undiscounted
cash flows and operating income of Net.B@nk. Impairment would be recognized in
operating results if a permanent diminution in value was expected. The Company
also evaluates the amortization period of the bank charter to determine whether
events or circumstances warrant revised estimates of the useful life. Management
believes that no impairment of the bank charter existed at December 31, 1998.
INTEREST INCOME ON LOANS - Interest on loans is generally recorded over the term
of the loan based on the unpaid principal balance. Accrual of interest is
discontinued when either principal or interest becomes 90 days past due or when,
in management's opinion, collectibility of such interest is doubtful.
PREMIUM ON LOANS PURCHASED - Premiums on loans purchased from third parties are
capitalized and amortized over the average life of the loan as an adjustment to
yield. Such premiums are classified with the loan balance to which they relate
for financial reporting purposes.
INCOME TAXES - Provisions for income taxes are based upon amounts reported in
the statements of income and include deferred taxes for net operating loss
carryforwards and temporary differences between financial statement and tax
bases of assets and liabilities using enacted tax rates for the year in which
the temporary differences are expected to reverse. The Company records a
valuation allowance when management believes it is more likely than not that
deferred tax assets will not be realized.
NET INCOME (LOSS) PER SHARE - In February 1997, Statement of Financial
Accounting Standards 128, Earnings Per Share ("SFAS 128") was issued. SFAS 128
establishes standards for computing and presenting earnings per share
information for entities with publicly held common stock. In accordance with
SFAS 128, basic net income per share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed based on the weighted average number of common and potential
dilutive common shares outstanding during the period. All previously reported
per share amounts have been restated to conform to SFAS 128.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1996 and
1997 financial statements to conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS - As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards 130, REPORTING COMPREHENSIVE INCOME
("SFAS 130"), and restated prior periods to conform to the presentation required
by SFAS 130. SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. SFAS 130 requires unrealized gains or
losses, net of tax, on the Company's available-for-sale securities, which prior
to adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. The adoption of SFAS 130 had no impact on the
Company's net income or shareholders' equity.
As of April 1, 1998, the Company adopted Statement of Position 98-1,
ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL
USE ("SOP 98-1"). SOP 98-1 allows for the capitalization of costs related to the
development and implementation of software obtained for internal use including
materials, payroll, and interest costs once the criteria of the SOP have been
met.
As of December 31, 1998, $592,402 of these related costs had been
capitalized. As of December 31, 1998, the Company adopted SFAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131
establishes annual and interim reporting standards for an enterprise's
business segments and related disclosures about its products, services,
geographic areas, and major customers. The adoption of SFAS 131 had no effect
on the Company's financial statements for the year ended December 31, 1998
because the Company only has one reportable segment-banking.
In June 1998, Statement of Financial Accounting Standards 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS 133"), was issued. SFAS
133 establishes standards for derivative instruments and hedging activities and
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The adoption of SFAS 133 is not expected to have
a significant effect on the Company's financial statements.
3. ACQUISITION
Effective July 31, 1997, the Company acquired all of the outstanding stock of
Premier Bank, FSB for $2,150,000 in cash, 41,406 shares of the Company's common
stock valued at $125,000 and $75,000 in additional cash for reimbursement of
direct out-of-pocket expenses. The acquisition was accounted for as a purchase
and the bank charter was recorded at $350,000. This amount is being amortized
over 25 years. Revenues, net loss,
<PAGE>
and basic and diluted net loss per common share and potential dilutive common
share for the Company for the year ended December 31, 1997, and for the period
from February 20, 1996 to December 31, 1996 would not have been materially
affected assuming the transaction had occurred on January 1, 1997 and February
20, 1996, respectively.
4. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The amortized cost, estimated fair value and gross unrealized gains and losses
of investment securities available for sale are as follows:
<TABLE>
<CAPTION>
Gross
------------------------
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
At December 31, 1998
Collateralized mortgage obligations $58,330,285 $2,045 $58,328,240
United States government agencies 882,442 264 882,178
Habitat bonds and other 254,644 $ -- 254,644
------------ -------- ------- -----------
$59,467,371 $ -- $2,309 $59,465,062
------------ -------- ------- -----------
------------ -------- ------- -----------
At December 31, 1997
Collateralized mortgage obligations $ 8,127,863 $ -- $ 8,127,863
United States government agencies 10,009,346 $83,063 9,926,283
------------ -------- ------- -----------
$ 18,137,209 $ -- $83,063 $18,054,146
------------ -------- ------- -----------
------------ -------- ------- -----------
</TABLE>
The amortized cost and estimated fair value of these securities at December 31,
1998, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because the borrower may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
At December 31, 1998
Due after five years through ten years $ 5,983,682 $ 5,986,729
Due after ten years 53,483,689 53,478,333
----------- -----------
$59,467,371 $59,465,062
----------- -----------
----------- -----------
</TABLE>
There were no significant sales, or calls of securities, for the years ended
December 31, 1998 and 1997, or for the period from February 20, 1996 (date of
incorporation) to December 31, 1996.
5. LOANS
The Company's primary loan strategy is to originate or purchase high credit
quality packages of loans from other financial institutions. The servicing on
all loan purchases is retained by the selling institutions. As of December 31,
1998, fees paid for servicing range from .25% to 3.75%. A summary of loans
purchased during the year ended December 31, 1998 and 1997 follows:
<TABLE>
<CAPTION>
Types of Loans Principal Premium Range of Stated
Purchased Amount Amount Interest Rates
<S> <C> <C> <C>
1998 First and second mortgages $134,789,041 $ 5,002,363 6.12 - 16.99%
Home equity lines 122,746,433 7,247,263 7.25 - 13.00%
------------ ----------- -------------
$257,535,474 $12,249,626
------------ ----------- -------------
------------ ----------- -------------
1997 First and second mortgages, auto and
unsecured loans $ 36,804,000 $ 808,832 6.0 - 12%
Automobile leases 6,100,000 11.5%
------------ ----------- -------------
$ 42,904,000 $ 808,832
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
There were no loans purchased during the year ended December 31, 1996.
<PAGE>
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Residential mortgages $144,361,069 $13,953,501
Construction 27,996,691 5,399,624
Commercial 8,556,264 4,478,053
Home equity lines 89,053,532 4,412,013
Auto 7,803,648 14,623,745
Personal and other 2,656,399 2,066,471
------------ -----------
280,427,603 44,933,407
Less allowance for loan losses 3,472,364 453,444
------------ -----------
Total $276,955,239 $44,479,963
------------ -----------
------------ -----------
</TABLE>
The Company provides lines of credit and overdraft protection to its
banking customers on a nationwide basis. At December 31, 1998 and 1997,
outstanding lines of credit totaled $200,000 and $29,000, respectively, and
unused commitments totaled $937,000 and $353,000, respectively. The Company's
home equity lines are secured by residential property. At December 31, 1998, a
majority of the Company's loans were with customers residing in the Western and
Southeastern United States. At December 31, 1997, all of the Company's loans
were with customers residing in the Southeastern United States.
The Company had unearned income of $29,776 and $351,202, at December 31,
1998 and 1997, respectively.
6. ALLOWANCE FOR LOAN LOSS
An analysis of the allowance for loan losses for the years ended December 31,
1998 and 1997 follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Balance - Beginning of year $ 453,444
Allowance recorded in connection with the purchase of loan pools 3,585,926
Provision for loan losses 20,132 $471,706
Loans charged off (587,138) (18,262)
---------- --------
Balance - End of year $3,472,364 $453,444
---------- --------
---------- --------
</TABLE>
The Company considers a loan to be impaired when it is probable that it
will be unable to collect all amounts due according to the original terms of the
loan agreement. The Company measures impairment of a loan on a loan by loan
basis. Amounts of impaired loans that are not probable of collection are charged
off immediately. During the years ended December 31, 1998 and 1997, the Company
had no significant amount of impaired loans or nonaccrual loans. The amount of
impaired loans written off during the years ended December 31, 1998 and 1997 was
$587,138 and $18,262, respectively. The Company had no restructured loans as of
December 31, 1998 and 1997, respectively.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of its lending activities to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and lines of credit. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments and evaluates each
customer's creditworthiness on a case-by-case basis. At December 31, 1998 and
1997, the Company had outstanding loan commitments of $47,617,700 and
$8,332,568, respectively.
The amount of collateral obtained by the Company, if deemed necessary, for
these commitments, upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held, if any, varies but may include
inventory, equipment, real estate, or other property. The accounting loss the
Company would incur if the borrower failed completely to perform according to
the terms of the contract and the collateral proved to be of no value is equal
to the face amount of the commitment.
7. LOAN ORIGINATION AGREEMENTS
During the year ended December 31, 1998, the Company entered into separate
agreements with three unrelated third parties whereby the Company acts as a loan
originator on behalf of the third parties. Under the terms of the agreements,
the third parties are required to purchase all loans, including the related
servicing of these loans, originated by the Company, unless the Company elects
to retain the loans. As a result of the agreements, loans originated for the
third parties for which the purchase price has not yet been received are
accounted for as receivables.
<PAGE>
8. DEPOSITS AND OTHER BORROWINGS
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------------
Amount Percentage Amount Percentage
<S> <C> <C> <C> <C>
Demand checking accounts $ 9,285,540 3.3% $ 293,054 0.5%
Interest bearing:
NOW accounts 6,090,704 2.1% 1,573,283 2.7%
Money markets 65,325,880 23.0% 36,534,967 62.2%
Certificates of deposit under $100,000 197,162,916 69.5% 16,662,365 28.4%
Certificates of deposit over $100,000 5,724,111 2.1% 3,663,094 6.2%
------------ ----- ------------ -----
Total deposits $283,589,151 100.0% $ 58,726,763 100.0%
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
At December 31, 1998, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<S> <C>
Within three months $ 76,566,728
Over three months through six months 48,393,173
Over six months through one year 71,548,914
Over one year 6,378,212
------------
Total $202,887,027
------------
------------
</TABLE>
During the year ended December 31, 1998, the Company and Net.B@nk entered
into line of credit agreements with The Bankers Bank. The Company is a party to
one such agreement and Net.B@nk is a party to two such agreements. Under the
terms of the Company's agreement, the Company may borrow 50% of the tangible
equity of Net.B@nk, up to $17 million, using the stock of Net.B@nk as
collateral. Any amounts borrowed under this line bears interest at a fixed rate
of 8.00% per annum. During the year ended December 31, 1998, the Company
borrowed and repaid $12 million under the line. Under the terms of Net.B@nk's
agreements, Net.B@nk may borrow $5 million under an unsecured general purpose
line and 99% of the value of its investment securities under another line. Both
of the lines bear interest at 25 basis points above the Federal Funds rate
(5.00% at December 31, 1998). Under these agreements at December 31, 1998, the
Company has an outstanding borrowing of $20 million with no stated maturity
secured by investment securities.
Effective October 16, 1998, the Company borrowed $20 million from the
Federal Home Loan Bank ("FHLB") at a fixed rate of 4.43%. The borrowings are
callable at the two-year anniversary date. If not called at the two-year date,
the borrowings extend for an additional three years at 4.43%. This borrowing is
secured by the Company's investment securities. In addition, on December 2,
1998, the Company borrowed $20 million from the FHLB at 25 basis points over the
Federal Funds rate (5.00% at December 31, 1998) with a maturity date of December
2, 1999. The Company pledged first mortgage loans as collateral for this
borrowing.
9. FURNITURE AND EQUIPMENT
Furniture and equipment as of December 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Furniture and fixtures $ 234,440 $ 56,145
Equipment 284,388 190,483
Software 1,340,663 428,306
---------- ----------
Total 1,859,491 674,934
Less accumulated depreciation 537,573 286,426
---------- ----------
Furniture and equipment, net $1,321,918 $ 388,508
---------- ----------
---------- ----------
</TABLE>
<PAGE>
10. LEASES
The Company leases its facilities and certain other equipment under operating
lease agreements. Future minimum payments as of December 31, 1998 under these
leases follow:
<TABLE>
<S> <C>
1999 $128,028
2000 130,872
2001 133,788
2002 136,788
2003 and beyond 295,156
</TABLE>
Rent expense for the years ended December 31, 1998 and 1997, and for the
period from February 20, 1996 (date of incorporation) to December 31, 1996, was
$110,011, $91,868, and $17,850, respectively.
11. INCOME TAXES
The Company provides deferred income taxes for net operating loss carryforwards
and for temporary differences between financial statement and tax bases of
assets and liabilities using enacted tax rates in effect for the year in which
the temporary differences are expected to reverse. As of December 31, 1998, the
Company had state and federal net operating loss carryforwards of $6,182,993
which will expire in 2012 and 2011, if not utilized.
The Company did not incur any income taxes during 1996 and 1997. For the
year ended December 31, 1998, the Company's income tax benefit results from the
reversal of the valuation allowance as of December 31, 1997, relating to net
operating loss carryforwards offset by taxable income for the period. As the
Company achieved profitability in 1998, management now believes that it is more
likely than not that such assets will be realized, and thus, reversed the
valuation allowance in accordance with SFAS 109, ACCOUNTING OF INCOME TAXES.
As of December 31, 1998 and 1997, the Company had deferred tax assets and
deferred tax liabilities as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 2,102,218 $ 2,962,303
Allowance for loan losses (244,089) 165,369
Start-up costs 112,043 170,761
Loan premium amortization 357,348
Other, net (30,395) (38,402)
----------- -----------
2,297,125 3,260,031
Less valuation allowance -- 3,260,031
----------- -----------
Net deferred tax asset $ 2,297,125 $ --
----------- -----------
----------- -----------
</TABLE>
The Company's income tax benefit consists of current and deferred income tax
benefit as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-----------
<S> <C>
Current $ (58,490)
Deferred (2,266,340)
-----------
Income tax benefit $(2,324,830)
-----------
-----------
</TABLE>
The benefit for income taxes is reconciled to the tax computed by applying the
federal statutory rate of 34% to income before income taxes as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1998
-----------
<S> <C>
Income tax at statutory rate $ 727,322
Reversal of valuation allowance (3,260,031)
Other 207,879
-----------
Income tax benefit $(2,324,830)
-----------
-----------
</TABLE>
<PAGE>
12. OTHER EXPENSE
items comprising other expense:
<TABLE>
<CAPTION>
February 2O,
Year Ended Year Ended 1996 to
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Accounting, legal and professional services $423,290 $238,650 $ 84,183
Consultants -- 52,739
Annual report 93,395
Investor relations 40,011 6,946
Other 129,280 56,731 10,764
-------- -------- --------
$685,976 $355,066 $ 94,947
-------- -------- --------
-------- -------- --------
</TABLE>
13. EMPLOYEE BENEFIT PLAN
Effective December 31, 1997, the Company adopted a 401(k) plan (the "Plan")
which covers substantially all of its employees. The Company, at its discretion,
matches 25% of employee contributions to the Plan, up to a maximum Company
contribution of 1% of an employee's compensation. The Company expensed $10,100
during 1998 related to the plan.
14. SHAREHOLDERS' EQUITY
On March 17, 1997, the Company declared a 33.125 for one stock split of its
common stock effected in the form of a stock dividend payable on the effective
date of the initial public offering. All references to share and per share
amounts reflect the split. Also, additional paid-in capital has been charged and
common stock has been credited retroactively with $12,116 to reflect the stock
split.
On February 10, 1999, the Company received net proceeds of approximately
$105,000,000 from the sale of 2,430,000 shares of its common stock in a public
offering.
Under current OTS regulations, the Company may make capital distributions
in any calendar year up to 100% of its net income to date during the calendar
year plus the amount that would reduce by one-half its "surplus capital ratio"
(i.e., the percentage by which the Company's capital-to-assets ratio exceeds the
ratio of its fully phased-in capital requirement to its assets) at the beginning
of the calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
15. STOCK OPTIONS
The Company has a 1996 Stock Incentive Plan (the "Plan"), which provides that
key employees, officers, directors, and consultants of the Company may be
granted nonqualified and incentive stock options to purchase shares of common
stock of the Company, derivative securities related to the value of the common
stock, or cash awards. The Plan limits the number of shares which may be awarded
to 600,000 and these shares are reserved for the Plan. Generally, the options
expire ten years from the date of the grant.
A summary of the status of the Plan and activity follows:
<TABLE>
<CAPTION>
Weighted- Weighted- Weighted-
Average Average Average
December 31, Exercise December 31, Exercise December 31, Exercise
1998 Price 1997 Price 1996 Price
------- --------- ------- -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of period 366,456 $ 5.98 16,562 $ 1.21
Granted 191,000 19.49 352,875 5.82 16,562 $ 1.21
Exercised (11,196) 3.62 --
Terminated (13,876) 6.58 (2,981) 3.62
------- --------- ------- -------- ------ --------
Outstanding at end of period 532,384 $ 10.89 366,456 $ 5.98 16,562 $ 1.21
------- --------- ------- -------- ------ --------
------- --------- ------- -------- ------ --------
</TABLE>
In connection with the issuance of some of the options during the year
ended December 31, 1997, $390,484 of compensation expense will be recognized
over the vesting period. Certain of those options vested immediately on July 28,
1997, upon completion of the Initial Public Offering, and $319,704 of
unamortized compensation expense was recognized. The other options vest
one-third on the first anniversary of the date of issuance, one-third on the
second anniversary of the date of issuance, and one-third on the third
anniversary of the date of issuance. Of the vested options, 236,141 cannot be
exercised and sold until July 28, 2000 in accordance with an agreement signed
with the OTS. As such, of the 532,384 options outstanding as of December 31,
1998, 279,021 are exercisable.
<PAGE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Number Weighted-
Outstanding Average Weighted- Exercisable
at Remaining Average at
Exercise December 31, Contractual Exercise December 31,
Prices 1998 Life Prices 1998
----- ------- --- ----- ------
<S> <C> <C> <C> <C>
$ 1.21 140,781 8.0 $ 1.21 140,781
3.62 16,197 8.2 3.62 7,290
10.00 173,906 8.2 10.00 86,950
11.00 15,000 8.6 11.00 5,000
11.25 20,000 9.0 11.25 --
16.75 3,000 9.1 16.75 --
15.75 62,500 9.7 15.75 9,000
23.81 101,000 10.0 23.81 30,000
</TABLE>
The Company accounts for its stock-based compensation plan under Accounting
Principles Board 25. The Company has adopted SFAS 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION ("SFAS 123"), for disclosure purposes. For SFAS 123 purposes, the
fair value of each option granted under the Company's stock option plan during
the years ended December 31, 1998 and 1997, and during the period from February
20, 1996 to December 31, 1996, was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used:
<TABLE>
<CAPTION>
Options Granted
Options Granted February 2O,
Year Ended as of July 3O, 1996 to
December 31, 1997 July 29,
1998 (IPO Date) 1997
<S> <C> <C> <C>
Fair value $ 12.06 $ 7.54 $ 0.97
Expected life (years) 5 5 5
Risk-free interest rate 4.96% 5.95% 6.2%
Dividend rate 0.0% 0.0% 0.0%
Expected volatility 70.0% 75.0% 0.0%
Forfeiture rate 1.0% 1.0% 0.0%
</TABLE>
Had compensation cost for the Company's stock options granted been
determined based on the fair value at the grant dates for awards under the plan
consistent with a method prescribed in SFAS 123 utilizing the assumptions
described above, the Company's net income (loss) and net income (loss) per
common share and potential dilutive common share for the years ended December
31, 1998 and 1997, and the period from February 20, 1996 to December 31, 1996,
would have changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Period from
February 20, 1996
Year Ended Year Ended to
December 31, December 31, December 31,
1998 1997 1996
<S> <C> <C> <C>
Net income (loss):
As reported $ 4,464,012 $ (5,577,439) $ (3,839,182)
------------- ------------- -------------
Pro forma $ 3,959,813 $ (5,504,245) $ (4,012,534)
------------- ------------- -------------
Net income (loss) per share:
As reported:
Basic $ 0.73 $ (1.66) $ (4.33)
------------- ------------- -------------
Diluted $ 0.70 $ (1.66) $ (4.33)
------------- ------------- -------------
Pro forma:
Basic $ 0.64 $ (1.64) $ (4.53)
------------- ------------- -------------
Diluted $ 0.62 $ (1.64) $ (4.53)
------------- ------------- -------------
</TABLE>
<PAGE>
16. EARNINGS PER SHARE
Basic and diluted net income (loss) per common and potential common share has
been calculated based on the weighted average number of shares outstanding in
accordance with SFAS 128. In accordance with SFAS 128, the following schedule
reconciles the numerators and denominators of the basic and diluted net income
per common and potential common share. The only periods presented relate to
those with net income as potential common shares would be anti-dilutive to
periods with net loss.
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
---------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ----------- ---------
<S> <C> <C> <C>
Net income $4,464,012
Basic EPS 4,464,012 6,148,884 $ 0.73
--------
Effect of Dilutive Securities -
Options to purchase common shares 234,822
---------- ---------- --------
Diluted EPS $4,464,012 $6,383,706 $ 0.70
---------- ---------- --------
---------- ---------- --------
</TABLE>
17. CAPITAL AQEQUACY
Net.B@nk is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure of Net.B@nk to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Net.B@nk must meet specific capital guidelines that involve quantitative
measures of Net.B@nk's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. Net.B@nk's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. In addition, under
regulatory guidelines, Net.B@nk may not pay a dividend to the Company if doing
so would cause Net.B@nk to be less than adequately capitalized, as defined
below.
Quantitative measures established by regulation to ensure capital adequacy
require Net.B@nk to maintain minimum amounts and ratios set forth in the table
below. Net.B@nk's regulatory agency, the OTS, requires Net.B@nk to maintain
minimum ratios of tangible capital to tangible assets of 1.5%, core capital to
tangible assets of 3.0%, and total risk-based capital to risk-weighted assets of
8.0%. Net.B@nk is also subject to prompt corrective action requirements set
forth by the Federal Deposit Insurance Corporation ("FDIC"). The FDIC requires
the Bank to maintain minimum total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that Net.B@nk meets all the capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the OTS
categorized Net.B@nk as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized Net.B@nk must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes would have changed the institution's category.
Net.B@nk's actual capital amounts and ratios as of December 31, 1998 and
1997, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
To Be Categorized
As Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Plan
----------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Total capital (to risk-weighted assets) $38,297 15.36% $19,947 8.0% $24,934 10.0%
Core capital (to tangible assets) 35,996 9.31% 11,595 3.0% 19,325 5.0%
Tangible capital (to tangible assets) 35,996 9.31% 5,798 1.5% N/A N/A
Tier I capital (to risk-weighted assets) 35,996 14.44% N/A N/A 14,960 6.0%
December 31, 1997
Total capital (to risk-weighted assets) $23,652 47.8% $ 3,956 8.0% $ 4,948 10.0%
Core capital (to tangible assets) 23,735 28.3% 2,517 3.0% 4,196 5.0%
Tangible capital (to tangible assets) 23,735 28.3% 1,259 1.5% N/A N/A
Tier I capital (to risk-weighted assets) 23,735 48.0% N/A N/A 2,969 6.0%
</TABLE>
18. COMMITMENTS AND CONTINGENCIES
As of December 31, 1998, the Company was a party to an agreement with BISYS
Corporation ("BISYS"), which provides Net.B@nk with core bank processing
services. The Company also receives operational support for the Bank's Internet
banking and bill paying operations from NCR Corporation, professional
programming services from Edify Corporation, item processing services from
Intercept (formerly NOVA Financial Corporation), and electronic bill payment
processing services from CheckFree Corporation. Under the terms of the
agreements, the Company pays ongoing monthly payments for customer support and
processing services.
<PAGE>
19. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CFB - Certain of the Company's cash accounts and time deposits
were on deposit with CFB until July 31, 1997. The Company received $0 and $7,709
in interest income related to these accounts during the year ended December 31,
1997 and for the period from February 20, 1996 to December 31, 1996,
respectively. For the period from February 20, 1996 to December 31, 1996, the
Company received $60,000 in management fees from CFB. The Company expensed $0,
$1,217,459, and $883,606 for the years ended December 31, 1998 and 1997, and for
the period from February 20, 1996 (date of incorporation) to December 31, 1996,
respectively, for fees paid to CFB for various advisory, consulting, custodial
services, and net interest expense. The Company recorded $31,232 in consulting
expense and contributed capital for consulting services contributed by CFB
during the period from February 20, 1996 to December 31, 1996. In addition,
during the year ended December 31, 1997, the Company purchased $36.8 million in
loans from CFB. The purchase price included a premium of $808,832. CFB continues
to service these loans for a fee ranging from .375% to 2% of the loan balance.
During the year ended December 31, 1998, the Company was included in a loan
participation with CFB in the amount of $246,600. This loan is serviced by CFB.
OTHER TRANSACTIONS - The Company paid $60,000, $104,958, and $67,032 for the
years ended December 31, 1998 and 1997, and the period from February 20, 1996
(date of incorporation) to December 31, 1996, respectively, in consulting fees
to a director. In addition, the Company expensed $246,265 and $278,418 for
amounts paid to a company owned by the Chairman of the Board of the Company for
accounting and management services provided to the Company during the year ended
December 31, 1997, and for the period from February 20, 1996 to December 31,
1996, respectively.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------
Carrying Fair
Amount Value
<S> <C> <C>
Assets:
Cash $ 446,940 $ 446,940
Federal funds sold 12,013,243 12,013,243
Securities available for sale 59,465,062 59,465,062
Loans 280,427,603 278,607,376
Loan sale proceeds receivable 23,202,679 23,202,679
Liabilities:
Noninterest bearing deposits 9,285,540 9,285,540
Interest bearing deposits - certificates of deposit 202,887,027 203,292,801
Interest bearing deposits - other 71,416,584 71,416,584
Other borrowed funds 60,000,000 59,924,400
<CAPTION>
December 31, 1997
-----------------------------
Carrying Fair
Amount Value
<S> <C> <C>
Assets:
Cash $ 250,535 $ 250,535
Federal funds sold 28,853,057 28,853,057
Securities available for sale 18,054,146 18,054,146
Loans 44,933,407 46,109,296
Liabilities:
Noninterest bearing deposits 293,054 293,054
Interest bearing deposits - certificates of deposit 20,325,459 20,478,013
Interest bearing deposits - other 38,108,250 38,108,250
</TABLE>
The carrying amounts of cash and due from banks and federal funds sold are
a reasonable estimate of their fair value due to the short-term nature of these
financial instruments. The fair value of investment securities and loans is
based on quoted market prices and dealer quotes. The fair value of time deposits
and other borrowed funds is estimated by discounting the future cash flows using
Net.B@nk's current interest rates for such financial instruments.
<PAGE>
As required by SFAS 107, demand deposits are shown at their face value. No
additional value has been ascribed to core deposits, which generally bear a low
rate of or no interest and do not fluctuate in response to changes in interest
rates.
The fair value estimates presented herein are based on pertinent
information available to management at December 31, 1998 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
21. CONDENSED FINANCIAL STATEMENTS OF THE COMPANY (PARENT ONLY)
As of December 31, 1996, Net.B@nk was not a subsidiary of the Company.
Therefore, the Company's financial statements as of December 31, 1996, include
only parent company amounts. The condensed balance sheets of the Company (parent
only) as of December 31, 1998 and 1997 follow:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
Assets:
Cash $ 44,398 $ 10,122,666
Investment in subsidiary 38,426,644 23,734,818
Other assets 283,846 269,357
------------ ------------
Total assets $ 38,754,888 $ 34,126,841
------------ ------------
------------ ------------
Liabilities $ -- $ 9,444
Shareholders' equity:
Common stock 61,568 61,456
Additional paid-in capital 43,671,732 43,631,314
Unamortized stock plan expense (24,279) (75,689)
Accumulated deficit (4,952,609) (9,416,621)
Accumulated other comprehensive loss, net of tax (1,524) (83,063)
------------ ------------
Total shareholders' equity 38,754,888 34,117,397
------------ ------------
$ 38,754,888 $ 34,126,841
------------ ------------
------------ ------------
</TABLE>
The condensed statements of operations and comprehensive income and cash
flows for years ended December 31, 1998 and 1997 follow:
Condensed Statements of Operations and Comprehensive Income (Loss)
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
<S> <C> <C>
Net interest income $ 162,006 $ 87,984
Expenses (58,281) (4,150,859)
----------- -----------
Income (loss) before income (loss) of Bank 103,725 (4,062,875)
Income (loss) of Bank 4,360,287 (1,514,564)
----------- -----------
Net income (loss) 4,464,012 (5,577,439)
Other comprehensive income (loss) of Bank 81,539 (83,063)
----------- -----------
Comprehensive income (loss) $ 4,545,551 $(5,660,502)
----------- -----------
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Operating activities:
Net income (loss) $ 4,464,012 $ (5,577,439)
Adjustments to reconcile net income (loss)
to net cash used by operating activities:
Amortization 51,410 1,783,266
(Income) loss of subsidiary (4,360,287) 1,514,564
Changes in assets and liabilities:
(Increase) decrease in other assets (14,489) 125,363
Decrease in other liabilities (9,444) (1,623,078)
Net cash used by operating activities 131,202 (3,777,324)
------------ ------------
Investing activities - investment in subsidiary (10,250,000) (25,249,381)
Financing activities - net proceeds from sale of stock 40,530 38,380,705
(Decrease) increase in cash and cash equivalents (10,078,268) 9,354,000
------------ ------------
Cash:
Beginning of year 10,122,666 768,666
End of year $ 44,398 $ 10,122,666
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 23,111 $ 163,479
------------ ------------
</TABLE>
<PAGE>
Independent auditors' report
Board of Directors and Shareholders
Net.B@nk, Inc.
We have audited the consolidated balance sheets of Net.B@nk, Inc. and its
subsidiary (the "Company") as of December 31, 1998 and 1997, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity (deficit) and cash flows for the years ended December 31,
1998 and 1997, and the period from February 20, 1996 (date of incorporation) to
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997, and the period from February 20, 1996
(date of incorporation) to December 31, 1996 in conformity with generally
accepted accounting principles.
DELLOITTE & TOUCHE LLP
Atlanta, Georgia
February 16, 1999
<PAGE>
Net.B@nk, Inc.
Board of Directors and Executive Officers
T. STEPHEN JOHNSON, Chairman, began his 25-year career in banking at Trust
Company Bank of Georgia (now SunTrust) and currently serves as President of T.
Stephen Johnson & Associates, Inc., a bank consulting firm.
D.R. GRIMES, Vice Chairman, Chief Executive Officer, formerly served as
Chief Technology Officer with Servantis Systems, Inc. (SSI), which was acquired
by CheckFree Corporation. His 25-year career in banking and banking technology
was initiated at Trust Company Bank of Georgia.
ROBERT E. BOWERS, Director, Chief Financial Officer, is a CPA, and
previously served as CFO for CheckFree Corporation. He served as a Director and
CFO of SSI before it was acquired by CheckFree.
WARD H. CLEGG, Director, also serves as a director of Resource BancShares
Corporation. Additionally, he has worked with the Company on a consulting basis.
J. STEPHEN HEARD, Director, is Area Vice President of Hartford Computer
Group, Inc., having retired from IBM after a 30-year career in marketing, sales
and systems engineering.
MARY E. JOHNSON, Corporate Secretary (Non-Director), has served as
Controller of T. Stephen Johnson & Associates, Inc. since 1986 and is a director
of Chattahoochee National Bank.
ROBIN C. KELTON, Director, is Chairman of Kelton International Ltd., an
investment banking firm based in London and New York specializing in the banking
and insurance industries.
THOMAS H. MULLER, JR., Director, is Chief Financial Officer of SpectRx,
Inc, a medical device company, and is President of Muller & Associates, a firm
providing financial management services to entrepreneurial enterprises.
DONALD S. SHAPLEIGH, JR., Director, President, Chief Operating Officer, has
worked over 23 years in senior-level retail and corporate banking positions for
Bank South, N.A. and SouthTrust Bank.
W. JAMES STOKES, Director, serves as Managing Director of the Southeast
Bank Fund. Formerly a bank regulator, he also serves as Senior Vice President
and Head of Analysis of T. Stephen Johnson & Associates, Inc.
MACK I. WHITTLE, JR., Director, has served as President and Chief Executive
Officer of Carolina First Corporation since 1986. He is also a director of
Carolina First Corporation and Carolina First Bank.
THOMAS L. CABLE has served as Chief Technology Officer of the Company and
the Bank since May 1997.
CATHERINE STOREY has served as Operations Manager of the Company and the
Bank since July 1998.
JEFFREY B. WATSON has served as Senior Lending Officer of the Bank since
1997.
<PAGE>
PRICE RANGE OF COMMON STOCK
Since February 5, 1999, the Common Stock has been traded on the Nasdaq
National Market under the symbol "NTBK." From July 28, 1997 to February 5, 1999,
the stock was traded on the Nasdaq SmallCap Market under the same symbol. The
table at right sets forth for the periods indicated the high and low bid prices
per share of Common Stock as reported on the Nasdaq SmallCap Market and Nasdaq
National Market.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
1997
Third quarter (commencing July 28, 1997) $13.25 $ 8.63
Fourth quarter $12.38 $ 9.13
1998
First quarter $25.25 $11.25
Second quarter $31.63 $22.00
Third quarter $36.38 $15.75
Fourth quarter $35.44 $10.75
1999
First quarter (through March 1, 1999) $68.25 $26.00
</TABLE>
On March 9, 1999, there were approximately 6,800 beneficial owners and 90
holders of record of Common Stock.
DIVIDENDS
We have not declared or paid any cash or other dividends on the Common
Stock. For the foreseeable future, we intend to retain earnings to grow our
business and strengthen our capital base. In addition, the Office of Thrift
Supervision regulates the dividends that the Bank can pay to the Company.
<PAGE>
Net.B@nk(TM)
Corporate Headquarters
Net.B@nk, Inc.
P.O. Box 2368
Alpharetta, Georgia 30023-2368
(770) 343-6006
CORPORATE & NEW ACCOUNT INFORMATION
For more information about Net.B@nk, Inc. or to open an account with Net.B@nk,
visit our web site at http://www.netbank.com.
STOCK LISTING AND SYMBOLS
The Company's common stock is traded on the Nasdaq National Market Systems under
the symbol "NTBK".
TRANSFER AGENT AND REGISTRAR
For information relating to stock certificates, changes of address, or transfer
of ownership, contact: SunTrust Bank, Atlanta 58 Edgewood Avenue Suite 225
Atlanta, Georgia 30303 (404) 588-7815 or (800) 568-3476
LEGAL COUNSEL
Powell, Goldstein, Frazer & Murphy LLP
16th Floor
191 Peachtree Street, NE
Atlanta, Georgia 30303
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
15th Floor
191 Peachtree Street
Atlanta, Georgia 30303
<PAGE>
ANNUAL MEETING
The Annual Meeting of Net.B@nk Shareholders will be held at the Country Club of
the South, Gallery Room, 4100 Old Alabama Road, Alpharetta, Georgia on Thursday,
April 22, 1999, at 10:00 a.m.
FINANCIAL INFORMATION AND CORPORATE REPORTS
Analysts and investors seeking information about Net.B@nk Inc. may contact the
CFO. Annual reports, quarterly shareholder reports, quarterly Form 10Qs, and
copies of Net.B@nk's Annual Report on Form 10K, as filed with the Securities
Exchange Commission, are available on our web site and upon written request
without charge. Please direct your requests to:
Robert E. Bowers
Chief Financial Officer
Net.B@nk, Inc.
950 North Point Parkway
Suite 350
Alpharetta, Georgia 30005
Telephone: (770) 343-6006
Facsimile: (770) 343-9344
Media and Public Relations
Eve McDowell
Director of Marketing
Telephone: (770) 343-6006
Facsimile: (770) 343-9344
Analysts Following Net.B@nk, Inc.
Bear, Stearns & Co. Inc.
Scott Ehrens
Sean Ryan
New York, New York
(212) 272-2000
Morgan Keegan & Company, Inc.
Christopher T. Kelley
Memphis, Tennessee
(901) 579-4559
Raymond James
Richard Bove
St. Petersburg, Florida
(727) 573-3800
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
Nos. 333-43073 and 333-64697 of Net.B@nk, Inc. on Form S-8 of our report
dated February 16, 1999, incorporated by reference in this Annual Report on
Form 10-K of Net.B@nk, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 26, 1999
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