<PAGE> 1
As filed with the Securities and Exchange Commission on June 11, 1998
Registration No. 333-38623
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Amendment No. 4 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------------
MAXXIS GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)
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Georgia 4813 58-2278241
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification Number)
Incorporation or Organization) Classification Code Number)
</TABLE>
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 552-4766
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
Maxxis Group, Inc.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
(770) 552-4766
(770) 552-8471 (Fax)
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
------------------------------------
Copies of all correspondence to:
Glenn W. Sturm, Esq.
James Walker IV, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 817-6000
(404) 817-6050 (Fax)
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box.[ ]
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 11, 1998
PROSPECTUS
450,000 SHARES
[MAXXIS LOGO]
COMMON STOCK
This Prospectus relates to the offering (the "Offering") of 450,000 shares
of Common Stock, no par value per share (the "Common Stock" or the "Shares"), of
MAXXIS GROUP, INC., a Georgia corporation (the "Company"). All of the Shares
offered hereby are being sold by the Company. Following the Offering, assuming
the sale of 450,000 Shares offered hereby, the directors and executive officers
and relatives and affiliates of directors and executive officers of the Company
and its subsidiaries, acting as a group and by reason of their ownership of
Common Stock, will hold approximately 48.8% of the voting power (on a fully
diluted basis) of the Company with respect to substantially all
(cover continued on next page)
SEE"RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS,
INCLUDING THE RISK OF SUBSTANTIAL DILUTION, THAT SHOULD BE CONSIDERED
BY PROSPECTIVE PURCHASERS OF THE SHARES OFFERED HEREBY.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==========================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC(1) AND COMMISSIONS(2) COMPANY(3)
- --------------------------------------------------------------------------------------------------------------------------
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Per Share.................. $5.50 $ - $5.50
- --------------------------------------------------------------------------------------------------------------------------
Total...................... $2,475,000 $ - $2,475,000
==========================================================================================================================
</TABLE>
(1) The offering price has been arbitrarily established by the Company. See
"Risk Factors - Arbitrary Determination of Offering Price."
(2) In certain states, this Offering is expected to be made on behalf of
the Company solely by certain of its directors and executive officers,
to whom no commission or other compensation will be paid on account of
such activity, although they will be reimbursed for reasonable expenses
incurred in connection with such activity. The Company believes such
participating officers and directors shall not be deemed brokers under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
based on reliance on Rule 3a4-1 of the Exchange Act. In addition, in
the states of Maryland, North Carolina and Virginia and, in the event
this Offering is registered or qualified in other states where
directors and officers are not permitted to effect offers and sales, in
such other states, the Company intends to offer shares of Common Stock
through broker/dealers who will enter into selling agent agreements
with the Company, whereby they will use their best efforts to sell the
Common Stock in those states. The Company will amend the Registration
Statement to set forth the terms of any agreement with any
broker/dealer.
(3) Before deducting estimated expenses of $400,000 related to the
Offering. See "Use of Proceeds."
PROSPECTIVE PURCHASERS MUST EXECUTE A SUBSCRIPTION AGREEMENT (A
"SUBSCRIPTION AGREEMENT") IN ORDER TO OFFER TO PURCHASE SHARES. ONCE A
SUBSCRIPTION AGREEMENT IS RECEIVED BY THE COMPANY OR A BROKER/DEALER, AS THE
CASE MAY BE, A PROSPECTIVE PURCHASER WILL NOT HAVE THE RIGHT TO REVOKE OR
WITHDRAW SUCH SUBSCRIPTION AGREEMENT. ANY SUBSCRIPTION AGREEMENT MAY BE REJECTED
BY THE COMPANY FOR ANY REASON OR NO REASON WHATSOEVER. ACCEPTANCE OF ANY
PARTICULAR SUBSCRIPTION AGREEMENT BY THE COMPANY SHALL IN NO CASE REQUIRE THE
COMPANY TO ACCEPT ANY OTHER SUBSCRIPTION AGREEMENT. PROSPECTIVE PURCHASERS MUST
WARRANT IN THE SUBSCRIPTION AGREEMENT THAT THEY HAVE RECEIVED A COPY OF THIS
PROSPECTUS, AS AMENDED OR SUPPLEMENTED. SEE "THE OFFERING - HOW TO SUBSCRIBE."
No escrow account has been established, and all subscription funds will
be paid directly to the Company. Upon acceptance of a subscription by the
Company, subscription proceeds will be available for immediate use by the
Company. There can be no assurance that the Company will receive sufficient
proceeds from the Offering to fund any of the stated purposes of the Offering.
See "Use of Proceeds." In addition, there is no minimum number of Shares which
must be sold in this Offering, and there can be no assurance that any or all of
the Shares offered hereby will be sold. Once the Company accepts a subscription,
the Company will not refund the funds received in payment for such subscription
in the event that less than the maximum number of Shares offered hereby are sold
prior to the termination of the Offering. See "The Offering - No Escrow" and
"Risk Factors - No Minimum Offering Amount; Irrevocability of Subscriptions; No
Escrow."
------------------------------------
The date of this Prospectus is , 1998
<PAGE> 3
(cover continued from previous page)
matters submitted to a vote of the shareholders. See "Risk Factors - Management
will Maintain Control of the Company."
Prior to this Offering, there has been no public market for the Shares,
and it is currently anticipated that there will be no active trading market for
the Shares. The price of the Shares has been arbitrarily established by the
Company and does not necessarily bear any relationship to the Company's asset
value, net worth or other established criteria of value. See "Risk Factors -
Arbitrary Determination of Offering Price."
Sales of the Shares are expected to commence on or about June 18, 1998.
This is a "best efforts" offering by the Company, and it will expire on June 30,
1999, unless terminated earlier or extended by the Company for additional 90-day
periods ending no later than December 31, 2000. The Company reserves the right
to terminate the Offering at any time.
The Company intends to offer the Shares primarily to regional and
executive directors and strategic partners of the Company. The Company has
established a minimum subscription of 20 Shares and maximum subscriptions of 20
Shares and 200 Shares, respectively, for each person who qualifies as a regional
or executive director in the Company's marketing system; provided, that the
aggregate number of Shares sold in this Offering shall not exceed 450,000.
However, the Company reserves the right to not sell to any particular regional
or executive director, to waive the maximum subscription amount or to allocate
additional Shares to regional and executive directors without notifying any
purchaser or prospective purchaser. The Company has not established minimum or
maximum subscriptions for strategic partners. See "The Offering."
------------------------------------
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting
requirements of the Exchange Act. The Company has filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement (which term
shall include any amendments thereto) on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Shares to be
offered pursuant hereto. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the Shares, reference is made to the Registration
Statement, including the exhibits and schedules thereto, copies of which may be
examined without charge at the Commission's principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549 and the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, 14th Floor, Chicago, Illinois
60661-2511. Copies of such materials may be obtained from the Public Reference
Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at its public reference facilities in New York, New York, and
Chicago, Illinois, at prescribed rates. The Commission maintains a World Wide
Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's web site is http:\\www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
The Company is not a reporting company as defined by the Commission.
The Company intends to furnish holders of the Shares with annual reports
containing financial statements audited by an independent public accounting firm
and quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
The Company has applied for federal registration for the mark "MAXXIS."
This Prospectus includes product names and other trade names and trademarks of
the Company and of other companies.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including "Risk Factors" and the
consolidated financial statements and related notes thereto, appearing elsewhere
in this Prospectus. Maxxis Group, Inc. conducts all of its business and
operations through its wholly owned subsidiaries: Maxxis 2000, Inc. ("Maxxis
2000"); Maxxis Telecom, Inc. ("Maxxis Telecom"); and Maxxis Nutritional, Inc.
("Maxxis Nutritional"). Unless the context indicates otherwise, all references
to the "Company" or "Maxxis" refer to Maxxis Group, Inc. and its subsidiaries.
On October 8, 1997, the Company effected a one-for-five reverse stock split of
all outstanding shares of Common Stock. On February 17, 1998, the Company
effected a one-for-11 reverse stock split of all outstanding shares of Common
Stock and effected a plan of reorganization pursuant to which each outstanding
share of Class A Common Stock and Class B Common Stock was converted into one
share of Common Stock. All share and per share data have been adjusted to
reflect the reverse stock splits and the reorganization. The Company's fiscal
year ends on June 30 of each year.
THE COMPANY
Maxxis markets telecommunications services and nutritional products in
the United States through its multi-level network marketing system of
"independent associates," or "IAs." The Company currently operates through its
subsidiaries: Maxxis 2000, which conducts network marketing operations; Maxxis
Telecom, which provides long distance services; and Maxxis Nutritional, which
provides private label nutritional products. The Company currently markets
1-Plus long distance service, value-added telecommunications services such as
prepaid phone cards, and nutritional products. The Company was incorporated in
January 1997 and began sponsoring IAs and marketing telecommunications services
in March 1997. For the period of January 24, 1997 to June 30, 1997 (the
"Inception Period") and the nine months ended March 31, 1998, the Company
generated aggregate gross revenues of approximately $2,691,000 and $5,175,000,
respectively.
The Company initially intends to build a customer base for its
telecommunications services without having to commit capital or management
resources to construct its own telecommunications network and transmission
facilities. In February 1997, Maxxis Telecom contracted with Colorado River
Communications, Corp. ("CRC") to obtain switching and network services and to
allow CRC's telecommunications services to be sold by the Company's IAs. In the
future, the Company may contract with other providers of long distance services
and intends to analyze the feasibility of developing its own long distance
network. In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. The Company's nutritional products
are manufactured by various suppliers.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to enroll subscribers with whom the IAs have an ongoing
relationship, such as family members, friends, business associates and
neighbors. The Company also sponsors opportunity meetings at which current IAs
are encouraged to bring in potential candidates for an introduction to the
Company's marketing system. The Company's multi-level network marketing system
and the Company's reliance upon IAs are intended to reduce net marketing costs,
subscriber acquisition costs and subscriber attrition. The Company believes that
its multi-level network marketing system will build a base of potential
customers for additional services and products.
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing to
support the marketing efforts of IAs and introducing new
income opportunities for IAs.
3
<PAGE> 5
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of IAs.
- Offering Additional Telecommunications Products by entering
into agreements for the marketing of additional products that
meet the needs of subscribers, which may include, among
others, paging, conference calling, wireless cable, cellular
and local phone service.
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the
Company recently began marketing a line of private label
nutritional products to its customers and IAs.
- Obtaining Competitive Prices on products and services through
the purchasing power of the Company's nationwide network.
Currently, the Company has five IA positions in its marketing system:
associate; senior associate; director; regional director; and executive
director. A director increases the size of the director's sales organization by
sponsoring additional persons to become senior associates. These senior
associates, and all senior associates that they, in turn, sponsor, become part
of the sales organization of the director who sponsored them. Senior associates,
through the growth of their sales organizations, may become directors, regional
directors or executive directors and thereby increase the size of the sales
organization of the person who was their original sponsor. The organization that
grows below each director through this process is called a "downline."
IAs are paid only by commissions and do not receive any salary from the
Company. All IA commissions are paid directly by the Company and are a specified
percentage or a designated amount of the gross proceeds received by the Company
on the sale of services and products. The Company designates a portion of its
gross commissions as "commission value," or "CV," and allocates the CV among
eligible participants in its marketing system. Currently, 20% of the CV earned
with respect to a long distance subscriber is paid weekly to the IA who
sponsored such subscriber, 75% of the CV is paid monthly to eligible directors
who have the IA who sponsored the subscriber in their downline and the remaining
5% is retained by the Company to be paid out to directors, regional directors
and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as marketing directors ("MDs") are eligible to receive an
additional "Leadership Bonus." The Leadership Bonus is payable quarterly and
equals, in the aggregate, 1% of the total revenues of Maxxis 2000 during the
quarter. The Leadership Bonus is divided equally among all directors, regional
directors and executive directors who qualify for a Leadership Bonus. In order
to encourage the growth of the Company's marketing system, the Company also pays
eligible directors a weekly bonus amount, which is designated as "bonus value,"
or "BV," for each sale of bonus-eligible products. The Company primarily
designates retail priced phone cards and nutritional paks as bonus-eligible
products.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The Company
provides training to all IAs which includes a detailed explanation of the
Company's products, the IA compensation plan and the use of the various
marketing tools available to the IA. The Company encourages senior associates,
directors and regional directors to become MDs. MDs provide personal training to
IAs. To become a MD, a senior associate, director or regional director must
attend a Company approved training school. The fee to attend the training school
is currently $99, and MDs must attend continuing education training schools each
year which also are subject to a fee. National training directors that are
selected by the Company are paid a fee by the Company for training MDs. The
Company does not receive any fees from IAs for the training provided by MDs.
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
4
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As of March 31, 1998, the Company employed approximately 30 people, not
including IAs who are classified by the Company as independent contractors. The
Company's employees are not unionized, and the Company believes its relationship
with its employees is good.
The Company's principal executive office is located at 1901 Montreal
Road, Suite 108, Tucker, Georgia 30084, and its telephone number is (770)
552-4766.
THE OFFERING
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Common Stock outstanding.......................... 1,571,187 shares
Common Stock to be offered hereby................. 450,000 shares
Common Stock to be outstanding after
the Offering..................................... 2,021,187 shares
Use of Proceeds................................... Development of additional product lines, including an internet
access product; development and/or acquisition of
information, accounting and/or inventory control systems; and
for working capital and general corporate purposes. There
can be no assurance that the Company will receive sufficient
proceeds from the Offering to fund any of the proposed uses
of proceeds. See "Use of Proceeds."
Terms of the Offering; Irrevocability
of Subscriptions................................. Prospective purchasers must deliver to the Company or a
broker/dealer, as the case may be, a completed and executed
Subscription Agreement, the form of which is attached hereto
as Appendix A. An executed Subscription Agreement will
constitute a prospective purchaser's offer to purchase shares
of Common Stock as set forth in this Prospectus.
Prospective purchasers submitting completed and executed
Subscription Agreements will not have the right to revoke or
withdraw such Subscription Agreements. See "The Offering
- General."
No Minimum Offering Amount;
No Escrow........................................ There is no minimum number of Shares which must be sold in
this Offering, and there can be no assurance that any or all
of the Shares offered hereby will be sold. No escrow
account has been established, and all subscription funds will
be paid directly to the Company. Upon acceptance of a
subscription by the Company, subscription proceeds will be
available for immediate use by the Company. Once the
Company accepts a subscription, the Company will not
refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares
offered hereby are sold prior to the termination of the
Offering. See "The Offering - No Escrow" and "Risk
Factors - No Minimum Offering Amount; Irrevocability of
Subscriptions; No Escrow."
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Transfer Restrictions............................. Each certificate evidencing the Shares will bear a legend
restricting the transfer of the Shares to individuals in any
jurisdiction where the offer or sale of the Shares would be
unlawful prior to registration or qualification of such offer or
sale under the laws of any such jurisdiction. In addition,
pursuant to the Subscription Agreement, each purchaser of
the Shares offered hereby agrees not to sell or otherwise
transfer the Shares or any securities issued on account of
such Shares during the Lock-up Period (as defined herein).
The Company may impose transfer restrictions during the
Lock-up Period by giving notice to the holders of record of
the Shares. The certificates evidencing the Shares will bear
a legend referencing these potential restrictions on transfer.
See "Risk Factors - Absence of Trading Market; Transfer
Restrictions" and "The Offering - Transfer Restrictions."
Plan of Distribution.............................. In certain states, offers and sales of the Common Stock will be
made on behalf of the Company by certain of its officers
and directors. The officers and directors will receive no
commissions or other remuneration in connection with such
activities, but they will be reimbursed for reasonable
expenses incurred in connection with the Offering. In
addition, in the states of Maryland, North Carolina and
Virginia and in any other states where officers and directors
of the Company are not permitted to make offers and sales,
the Company intends to offer shares of Common Stock
through broker/dealers who will use their best efforts to sell
the Common Stock in those states. See "The Offering -
Plan of Distribution."
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RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider
the matters set forth herein under "Risk Factors," as well as the other
information set forth in this Prospectus.
6
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SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth summary consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period is derived from the audited consolidated financial statements
and other data of the Company. The consolidated financial statements for the
Inception Period were audited by Arthur Andersen LLP, independent public
accountants. The statement of operations data for the nine months ended March
31, 1998 and the balance sheet data as of March 31, 1998 have been derived from
the unaudited condensed consolidated financial statements of the Company which
include all adjustments, consisting of only normal recurring adjustments, which
the Company considers necessary for a fair presentation of the results of
operations for the period. All numbers have been rounded. Results for interim
periods are not necessarily indicative of the results to be expected for a full
fiscal year. The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
related notes thereto appearing elsewhere in this Prospectus.
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JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ............... $2,322,000 $3,939,000
Nutritional products ...................... -- 341,000
Marketing services ........................ 369,000 895,000
---------- ----------
Total revenues ......................... 2,691,000 5,175,000
---------- ----------
Cost of services:
Telecommunications services ............... 761,000 1,081,000
Nutritional products ...................... -- 223,000
Marketing services ........................ 255,000 339,000
---------- ----------
Total cost of services ................. 1,016,000 1,643,000
---------- ----------
Gross margin ................................ 1,675,000 3,532,000
---------- ----------
Operating expenses:
Selling and marketing ..................... 1,089,000 1,994,000
General and administrative ................ 660,000 1,653,000
---------- ----------
Total operating expenses ............... 1,749,000 3,647,000
---------- ----------
Loss before income tax benefit .............. (74,000) (115,000)
Income tax benefit .......................... -- --
---------- ----------
Net loss .................................... $ (74,000) $ (115,000)
========== ==========
PER SHARE DATA:
Net loss per share .......................... $ (0.05) $ (0.07)
========== ==========
Weighted average number of shares outstanding 1,571,187 1,571,187
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AS OF
MARCH 31, 1998
--------------
(UNAUDITED)
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BALANCE SHEET DATA:
Working capital......................................... $ 182,000
Property and equipment, net............................. 146,000
Total assets............................................ 1,068,000
Long-term obligations................................... --
Shareholders' equity.................................... 465,000
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Before purchasing any Shares offered by this Prospectus,
prospective purchasers should carefully consider the following factors relating
to the Company and the Offering, together with the other information and
financial data appearing elsewhere in this Prospectus. This Prospectus contains
"forward-looking statements" relating to, without limitation, future economic
performance, plans and objectives of management for future operations and
projections of revenues and other financial items that are based on the beliefs
of the Company's management, as well as assumptions made by, and information
currently available to, the Company's management. The words "expects,"
"intends," "estimates," "anticipates," "may," "could," "should," "would,"
"will," "plans," "believes" and similar expressions and variations thereof are
intended to identify forward-looking statements. The cautionary statements set
forth in this "Risk Factors" section and elsewhere in this Prospectus identify
important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
NEW ENTERPRISE
The Company currently is in the organizational stage and has a limited
operating history. As a consequence, prospective purchasers of the Shares have
limited information upon which to base an investment decision. The Company's
operations are subject to the risks inherent in the establishment of any new
business. The Company expects that it will incur substantial initial expenses,
and there can be no assurance that the Company will achieve or maintain
profitability. There can be no assurance that the products or services offered
by the Company will receive market acceptance or that the Company's prices and
demand for products and services offered by the Company will be at a level
sufficient to provide profitable operations. The Company has entered into an
agreement with CRC, a provider of switching and network transmission services,
and the Company purchases its private label nutritional products from several
manufacturers. However, there can be no assurance that the Company will be able
to maintain these relationships or enter into new contracts with other suppliers
on terms acceptable to the Company or at all. See "- Dependence upon Suppliers,"
"Business Competition," "- Strategy" and "- Products and Services."
The Company will use the proceeds of the Offering, in part, to pay
organizational and offering expenses in connection with the start-up of the
Company's business and, in particular, the establishment of the Company's
multi-level network marketing system. The Company believes that the proceeds of
the Offering, together with cash generated through operations, will be
sufficient to enable the Company to pay organizational and offering expenses and
to fund continued operations, including the development of additional product
lines. However, there can be no assurance that the Company will generate
sufficient proceeds from this Offering and its ongoing operations to establish
its multi-level network marketing system or to maintain its operations, or that
the Company's business will be successful. See "- Broad Discretion in
Application of Proceeds; Unspecified Acquisitions; Possible Need for Additional
Capital" and "Use of Proceeds."
NO MINIMUM OFFERING AMOUNT; IRREVOCABILITY OF SUBSCRIPTIONS; NO ESCROW
There is no minimum number of Shares which must be sold in this
Offering, and there can be no assurance that any or all of the Shares offered
hereby will be sold. Once a Subscription Agreement is received by the Company, a
prospective purchaser will not have the right to revoke or withdraw such
Subscription Agreement. In addition, the Company reserves the right to reject,
in whole or in part and in its sole discretion, any subscription. No escrow
account has been established, and all subscription funds will be paid directly
to the Company. Acceptance and/or deposit of any subscription funds by the
Company shall not constitute acceptance of a subscription. Upon acceptance of a
subscription by the Company, subscription proceeds will be available for
immediate use by the Company. Once the Company accepts a subscription, the
Company will not refund the funds received in payment for such subscription in
the event that less than the maximum number of Shares offered hereby are sold
prior to the termination of the Offering. See "The Offering - No Escrow."
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BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS; POSSIBLE
NEED FOR ADDITIONAL CAPITAL
The Company intends to use: (i) approximately $53,000, or 2.6%, of the
net proceeds to repay a note outstanding to the Company's Chief Executive
Officer; (ii) approximately $900,000, or 43.4%, of the net proceeds for the
development of additional product lines, including an internet access product;
(iii) approximately $500,000, or 24.1%, of the net proceeds for the development
and/or acquisition of information, accounting and/or inventory control systems;
and (iv) approximately $622,000, or 29.9%, of the net proceeds for working
capital and general corporate purposes. However, the specific uses for much of
the net proceeds will be at the complete discretion of the Board of Directors of
the Company and may be allocated based upon circumstances arising from time to
time in the future.
The Company may in the future use a portion of the net proceeds of the
Offering to pursue acquisitions or complementary services or businesses. Future
acquisitions may result in potentially dilutive issuances of equity securities,
the incurrence of additional debt, the write-off of costs and the amortization
of expenses related to goodwill and other intangible assets, all of which could
have a material adverse effect on the Company's business, financial condition or
results of operations. The Company currently has no agreements or understandings
to engage in any acquisitions. Shareholders may not be entitled to vote on any
potential acquisitions nor have the opportunity to review any potential
acquisition candidate. See "Use of Proceeds."
The Company anticipates that it will require approximately $1.9 million
in capital to fund its ongoing operations through December 31, 1998. The Company
anticipates that the proceeds of this Offering, together with borrowings and
cash generated from operations, will be sufficient to meet the Company's capital
requirements through December 31, 1998. However, there can be no assurance that
the Company will receive enough proceeds from the Offering to fund any of the
proposed uses of proceeds, including raising enough proceeds to fund its
operations or to cover the estimated offering expenses. If the Company does not
receive sufficient funds from its operations, its borrowings and from the
Offering to fund its operations, the Company may need to raise additional
capital. Sources of additional capital may include venture capital financing,
cash flow from operations, lines of credit and private equity and debt
financings. The Company may also require additional financing in the event it
decides to develop additional product lines or to engage in acquisitions. The
extent of additional financing required will depend partially on the success of
the Company's business. There can be no assurance that additional financing will
be available to the Company or, if available, that it can be obtained on terms
acceptable to the Company. The Company's inability to obtain additional capital
on terms favorable to the Company could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
NET LOSS; ACCUMULATED DEFICIT
For the nine months ended March 31, 1998, the Company had a net loss of
$115,000. As of March 31, 1998, the Company had an accumulated deficit of
$189,000 representing accumulated losses from operations during the Inception
Period and the nine months ended March 31, 1998. See "Selected Consolidated
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The Company's operating expenses have
increased as its business has grown and can be expected to increase
significantly if the Company continues to grow. There is no assurance that
future operating results will result in a profit, will eliminate the accumulated
deficit, or will generate positive working capital or that additional losses
from operations will not be sustained by the Company. Accordingly, the Company
may have negative working capital or further increases of its accumulated
deficit in the future
DEPENDENCE ON IAS
The Company's success depends heavily upon its ability to attract,
maintain and motivate a large base of IAs who, in turn, sponsor subscribers,
customers and other IAs. The Company anticipates a significant turnover among
IAs, which the Company believes is typical of businesses involved in direct
selling. The Company encourages existing IAs to sponsor new IAs in order to
maintain or increase the overall IA force. Activities of the IAs in obtaining
new subscribers will particularly be influenced by changes in the level of IA
motivation, which in turn can be positively or negatively affected by general
economic conditions, modifications in commission and training fees and in the
Company's marketing plan, the prices and competitive positions of
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the products and services offered by the Company and a number of other
intangible factors. The Company's ability to attract IAs could be negatively
affected by adverse publicity relating to the Company or its services or its
operations, including its multi-level network marketing system. Administrative
or technological problems of the type that may be encountered by both early
stage and mature companies, such as malfunctions in accounting systems or
computer information systems, may lead to the immediate and dramatic attrition
of IAs and subscribers. The Company has begun establishing its network of IAs.
However, there can be no assurance that the Company will be successful in
establishing a viable network of IAs. Because of the number of factors that
affect the Company's ability to attract and retain IAs, the Company cannot
predict when or to what extent increases or decreases in the level of IA
retention or attrition will occur. In addition, the number of IAs as a
percentage of the population could reach levels that become difficult to exceed
due to the finite number of persons inclined to pursue an independent direct
selling business opportunity. There can be no assurance that the number or
productivity of IAs will be sufficient to support the Company's proposed
products and services in the future or to allow the Company to achieve its
objectives.
The Company is subject to competition for IAs from other network
marketing organizations, including those that market long distance services,
health products, cosmetics and dietary supplements, such as EXCEL
Communications, Inc. ("EXCEL"), American Communications Network ("ACN"), Amway
Corporation ("Amway"), TDG Communications ("TDG"), BeautiControl Cosmetics,
Inc., Herbalife International, Inc. ("Herbalife") and Mary Kay, Inc. EXCEL
representatives sell a variety of long distance telecommunications services, ACN
representatives sell long distance services for LCI International, Inc. ("LCI")
and other long-distance carriers, Amway distributors sell 1-Plus long distance
service for MCI Communications Corporation ("MCI"), TDG sells MCI Paging
Services and the MCI VNet Calling Cards and Herbalife markets food and dietary
supplements. See "Business - Strategy," "- Marketing" and "- Regulation."
RELATIONSHIP WITH IAS
Because IAs are classified as independent contractors, the Company is
unable to provide them the same level of direction and oversight as Company
employees. While the Company has policies and rules in place governing the
conduct of the IAs and intends to review periodically the sales tactics of the
IAs, it may be difficult to enforce such policies and rules. Violations of these
policies and rules might reflect negatively on the Company and may lead to
complaints to or by various federal and state regulatory authorities. Violation
of the Company's policies and rules could subject the Company and its long
distance provider to complaints regarding the unauthorized switching of
subscribers' long distance carriers (also known in the industry as "slamming").
Such complaints could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Relationship with
IAs."
REGULATION OF NETWORK MARKETING; EFFECT OF STATE SECURITIES LAWS
The Company's multi-level network marketing system is subject to or
affected by extensive government regulation including, without limitation,
federal and state regulations governing the offer and sale of business
franchises, business opportunities and securities. Various governmental agencies
monitor direct selling activities, and the Company could be required to supply
information regarding its marketing plan to such agencies. Although the Company
believes that its multi-level network marketing system is in material compliance
with the laws and regulations relating to direct selling activities, there can
be no assurance that legislation and regulations adopted in particular
jurisdictions in the future will not adversely affect the Company's business,
financial condition and results of operations. The Company also could be found
not to be in compliance with existing statutes or regulations as a result of,
among other things, misconduct by IAs, who are considered independent
contractors over whom the Company has limited control, the ambiguous nature of
certain of the regulations and the considerable interpretive and enforcement
discretion given to regulators. Any assertion or determination that the Company
or the IAs are not in compliance with existing statutes or regulations could
have a material adverse effect on the Company's business, financial condition
and results of operations. An adverse determination by any one state on any
regulatory matter could influence the decisions of regulatory authorities in
other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the
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risk that its multi-level network marketing system could be found to be in
noncompliance with applicable laws and regulations, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. Such a decision could require the Company to modify its multi-level
network marketing system, result in negative publicity, or have a negative
effect on distributor morale and loyalty. In addition, the Company's multi-level
network marketing system will be subject to regulations in foreign markets
administered by foreign agencies should the Company expand its network marketing
organization into such markets. See "Business - Marketing" and "- Regulation -
Regulation of Network Marketing."
The primary goal of the Offering is to increase the motivation of
regional and executive directors by allowing them to purchase an interest in the
Company. Accordingly, because the Company desires the ability to offer its
Common Stock to regional and executive directors in California, Florida,
Georgia, Maryland, New York, North Carolina, South Carolina, Virginia and
Washington, the Company has filed the Registration Statement of which this
Prospectus forms a part with the state securities regulators for such states in
order to apply for registration or qualification of the Offering in such states.
Due to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company anticipates that it
will be unable to register or qualify the Offering in certain of these states,
and there can be no assurance that the Company will be able to register or
qualify the Offering in any of these states. Certain of these states require the
Company to sell its securities exclusively through broker-dealers that are
registered in such states. There can be no assurance that the Company will be
successful in engaging registered broker-dealers to sell its securities in such
states upon terms acceptable to the Company or at all. The inability of the
Company to offer and sell the Shares to residents of certain states may limit
the ability of the Company to attract IAs in such states, or lead to increased
attrition of IAs in such states, and may have a material adverse effect on the
Company's business, prospects, financial condition and results of operations. An
adverse determination by any one state regulator on a securities regulatory
matter could influence the decisions of state regulatory authorities in other
jurisdictions. See "Business - Regulation - Effect of State Securities Laws."
INTENSE COMPETITION
The Company faces competition in the United States for both the
products and services it sells and for the sponsoring and retaining of
independent salespeople. The United States long distance telecommunications
industry is intensely competitive, rapidly evolving and subject to rapid
technological change. In addition, the industry is significantly influenced by
the marketing and pricing practices of the major industry participants. AT&T
Corp. ("AT&T"), MCI, Sprint Corporation ("Sprint") and WorldCom, Inc.
("WorldCom") are the dominant competitors in the domestic long distance
telecommunications industry. All of these companies are significantly larger
than the Company and have substantially greater resources. According to a 1995
report by the Federal Communications Commission (the "FCC"), AT&T, MCI, Sprint
and WorldCom accounted for approximately 56%, 17%, 10% and 5%, respectively, of
total domestic long distance revenue for calendar year 1994. Many of the
Company's current and potential competitors have longer operating histories,
greater name recognition, larger customer bases and substantially greater
financial, personnel, marketing, technical and other resources than the Company.
These competitors employ various means to attract new subscribers, including
television and other advertising campaigns, telemarketing programs, network
marketing and cash payments and other incentives. The Company's ability to
compete effectively depends upon, among other factors, its ability to offer high
quality products and services at competitive prices. There can be no assurance
that the Company will be able to compete successfully. See "Business -
Competition."
On February 8, 1996, President Clinton signed into law the
Telecommunications Act of 1996, as amended (the "1996 Telecommunications Act"),
that will allow local exchange carriers ("LECs"), including the Bell Operating
Companies ("BOCs"), to provide long distance telephone service inter-LATA (a
"LATA" is a Local Access and Transport Area), which will likely significantly
increase competition for long distance services. The new legislation also grants
the FCC the authority to deregulate other aspects of the telecommunications
industry. Such increased competition could have a material adverse effect on the
Company's business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs
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<PAGE> 13
into the long distance market, would not have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such products, especially retail outlets, based
upon convenience of purchase, price and immediate availability of the purchased
product. For the most part, the Company's competitors offering comparable
products are substantially larger and have available considerably greater
financial resources than the Company. The market is highly sensitive to the
introduction of new products (including various prescription drugs) that may
rapidly capture a significant share of the market. As a result, the Company's
ability to remain competitive depends in part upon the successful introduction
of new products at competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. There can be no assurance that
other network marketing companies will not convince the Company's existing IAs
to join their organizations. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business - Competition."
DEPENDENCE UPON SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has entered into an agreement (the "1-Plus Agreement") with CRC to
obtain switching and network services. The Company now depends exclusively on
CRC for the transmission of subscriber phone calls and the activation of prepaid
phone cards. Subscribers are long distance customers on CRC's network, and CRC
provides subscriber support for the Company's subscribers. Subscribers have the
right to change their service at any time. The 1-Plus Agreement, which expires
on February 20, 2000, provides that the Company will have such rights to the
subscriber base developed under the agreement only upon achieving certain
minimum levels of monthly revenues on CRC's network. Once the Company reaches
these minimum levels, the Company will have the right to market other carriers
to the subscriber base in the event the Company contracts with such carriers.
There can be no assurance that the Company will achieve the minimum level of
monthly revenues on CRC's network necessary to obtain rights to the subscriber
base. Although the Company does not currently intend to use a different carrier,
minimum monthly revenues may be more difficult to maintain if the Company
utilizes additional carriers, and the Company could be subject to additional
minimum commitments including, but not limited to, minimum monthly revenues or
minimum monthly minutes of usage, with such new carriers. The accurate and
prompt billing of the subscribers originated by the IAs is also dependent upon
CRC. The failure of CRC to accurately and promptly bill subscribers could lead
to a loss of subscribers and could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
would be required to use another carrier if the 1-Plus Agreement were
terminated, the usage or number of subscribers originated by the Company's IAs
exceeded the capacity of CRC or CRC failed to provide quality services. In such
event, or in the event the Company otherwise elected to use other carriers, the
cost paid by the Company for such long distance services might exceed that paid
under the 1-Plus Agreement. If the 1-Plus Agreement is terminated, there can be
no assurance that the Company could enter into new contracts with other
providers
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on terms favorable to the Company or at all, and the termination of the 1-Plus
Agreement or the failure of CRC to provide quality services, quality customer
support or accurate and timely billing could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business - Suppliers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are developed and manufactured by third-party suppliers. Certain of
the nutritional products offered by the Company are proprietary to such
suppliers. The Company does not have any written contracts with or commitments
from any of its suppliers or manufacturers to continue to sell nutritional
products to the Company. The Company believes that its relationships with its
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to the Company.
Accordingly, there is a risk that any or all of the Company's suppliers or
manufacturers, including suppliers which provide proprietary products to the
Company, could discontinue selling their nutritional products to the Company. In
the event any of the third-party manufacturers become unable or unwilling to
continue to provide the nutritional products in required volumes, the Company
would be required to identify and obtain acceptable replacement sources, and no
assurance can be given that any alternative replacement sources would become
available to the Company on a timely basis. See "Business Suppliers."
MANAGEMENT WILL MAINTAIN CONTROL OF THE COMPANY
Following the Offering, assuming the sale of 450,000 Shares offered
hereby, the directors and executive officers and relatives and affiliates of
directors and executive officers of the Company and its subsidiaries will own,
in the aggregate, 987,270 shares of Common Stock which collectively represents
approximately 48.8% of the total outstanding shares of Common Stock, and
investors purchasing in this Offering would own 22.3% of the total outstanding
shares of Common Stock. Accordingly, the directors and executive officers and
relatives and affiliates of directors and executive officers of the Company and
its subsidiaries, acting as a group, will have the ability to elect all of the
directors of the Company and control the Company's management, operations and
affairs for the foreseeable future. See "Principal Shareholders" and
"Description of Capital Stock."
ABILITY TO MANAGE GROWTH
The Company's goal is to develop a nationwide network of IAs and to
offer long distance telecommunications products, nutritional products and other
products and services throughout the United States. The Company's strategy of
growth and expansion will place substantial demands upon the Company's current
management and other resources and may require a substantial amount of working
capital, as well as management, operational and other financial resources. The
success of the Company will depend on various factors, including, among others,
federal and state regulation of the telecommunications industry and dietary
supplement industry, competition and the capability and capacity of the
Company's long distance carriers. Not all of the foregoing factors are within
the control of the Company. The Company's ability to manage growth successfully
will require the Company to develop strong operational, management, financial
and information systems and controls. No assurance can be given that the Company
will experience growth or that, if it does, that management will be able to
manage growth effectively. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business - Strategy," "- Marketing," "- Information Systems," "- Suppliers," "-
Employees" and "Management."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant
extent upon the abilities and efforts of its senior management, particularly
Ivey J. Stokes, its Chairman of the Board, and Thomas O. Cordy, its Chief
Executive Officer and President. The Company does not maintain key man life
insurance on Mr. Stokes, Mr. Cordy or any other person. Many of the Company's
executive officers and other key employees, including the Company's Chief
Financial Officer, Daniel McDonough, have only recently joined the Company. The
loss of the services of any of such individuals could have a material adverse
effect on the Company's business, financial condition and results of operations.
The success of the Company will also depend, in part, upon the Company's ability
to find, hire and retain additional key management personnel. The inability to
find, hire and
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retain such personnel could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Management --
Executive Officers and Directors."
SUBSCRIBER ATTRITION
The Company believes that a high level of subscriber attrition is a
characteristic of the domestic residential long distance industry. Attrition is
attributable to a variety of factors, including the termination of subscribers
for non-payment and the initiatives of existing and new competitors as they
engage in, among other things, national advertising campaigns, telemarketing
programs and the issuance of cash or other forms of incentives. Such attrition
could have a material adverse effect upon the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
REGULATION OF LONG DISTANCE TELEPHONE SERVICES
Various regulatory factors may have an impact on the Company's ability
to compete and on its financial performance. CRC is subject to regulation by the
FCC and by various state public service and public utility commissions. Federal
and state regulations and regulatory trends have had, and may have in the
future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register or be found exempt from registration
by such commissions. While the Company believes that CRC is in compliance with
the applicable state and federal regulations governing telecommunications
service, and the Company believes that it is not required to obtain
certification or to be registered with public utility commissions, there can be
no assurance that the FCC or any state regulatory authority in one or more
states will not raise material issues with regard to CRC's or the Company's
compliance with applicable regulations, or that regulatory activities with
respect to CRC or the Company, will not have a material adverse effect on the
Company's business, financial condition and results of operations.
In February 1996, the enactment of the 1996 Telecommunications Act
served to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended to
ensure that BOCs open their own local markets to competition before the FCC will
approve such application. The Company is unable to determine how the FCC will
rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "- Intense Competition." If the federal
and state regulations requiring the LECs to provide equal access for the
origination and termination of calls by long distance subscribers change or if
the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "Business - Competition" and "- Regulation - Regulation of Long
Distance Telephone Services."
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REGULATION AFFECTING NUTRITIONAL PRODUCTS
The formulation, manufacturing, packaging, labeling, advertising,
distribution and sale of the Company's nutritional products are subject to
regulation by a number of governmental agencies, the most active of which is the
Food and Drug Administration (the "FDA"), which regulates the Company's products
under the Federal Food, Drug, and Cosmetic Act (the "FDCA") and regulations
promulgated thereunder. The Company's products are also subject to regulation by
the Federal Trade Commission (the "FTC"), the Consumer Product Safety Commission
(the "CPSC"), the United States Department of Agriculture (the "USDA") and the
Environmental Protection Agency (the "EPA"). The FDCA has been amended several
times with respect to dietary supplements, most recently by the Nutrition
Labeling and Education Act of 1990 (the "NLEA") and the Dietary Supplement
Health and Education Act of 1994 (the "DSHEA"). The Company's nutritional
products are generally classified and regulated as dietary supplements under the
FDCA, as amended, and therefore are not subject to pre-market approval by the
FDA. However, these products are subject to extensive labeling regulation by the
FDA and can be removed from the market if shown to be unsafe. Moreover, if the
FDA determines on the basis of labeling or advertising claims by the Company,
that the "intended use" of any of the Company's nutritional products is for the
diagnosis, cure, mitigation, treatment or prevention of disease, the FDA can
regulate those products as drugs and require pre-market clearance for safety and
effectiveness. In addition, if the FDA determines that claims have been made
regarding the effect of dietary supplements on the "structure or function" of
the body, such claims could result in the regulation of such products as drugs.
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's products. In the
past several years, the FTC has instituted enforcement actions against several
dietary supplement companies for false and misleading advertising of certain
products. In addition, the FTC has increased its scrutiny of the use of
testimonials. There can be no assurance that the FTC will not question the
Company's advertising or other operations. Moreover, there can be no assurance
that a state will not interpret product claims presumptively valid under federal
law as illegal under that state's regulations. Furthermore, the Company's IAs
and customers may file actions on their own behalf, as a class or otherwise, and
may file complaints with the FTC or state or local consumer affairs offices.
These agencies may take action on their own initiative or on a referral from
IAs, customers or others, including actions resulting in entries of consent
decrees and the refund of amounts paid by the complaining IA or customer,
refunds to an entire class of IAs or customers, or other damages, as well as
changes in the Company's method of doing business. A complaint because of a
practice of one IA, whether or not that practice was authorized by the Company,
could result in an order affecting some or all IAs in a particular state, and an
order in one state could influence courts or government agencies in other
states. Proceedings resulting from these complaints may result in significant
defense costs, settlement payments or judgments and could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Business - Regulation Regulation Affecting Nutritional
Products."
OFFERING ADDITIONAL PRODUCTS AND SERVICES
The Company's strategy includes offering additional products and
services in the future, which may include, among others, paging, wireless cable,
conference calling, cellular phone service and local phone service, additional
nutritional products and other non-communications and non-nutritional related
consumer products. In November 1997, the Company began marketing a line of
private label nutritional products to its customers and its IAs. Entry into new
markets entails risks associated with the state of development of the market,
intense competition from companies already operating in those markets, potential
competition from companies that may have greater financial resources and
experience than the Company, increased selling and marketing expenses and
regulatory issues. There can be no assurance that: (i) the Company will be
successful in developing and marketing new products and services that respond to
the needs of a particular market; (ii) the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products or services; or (iii) its new
products and services will adequately meet the requirements of the marketplace
and achieve market acceptance. Delays in the introduction of new products and
services, the inability of the Company to develop and market such new products
or services and the failure of such products or services to achieve market
acceptance could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business - Competition," "-
Strategy" and "- Products and Services."
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EFFECT OF UNFAVORABLE PUBLICITY
The Company believes the dietary supplement products market is affected
by national media attention regarding the consumption of such products. There
can be no assurance that future scientific research or publicity will not be
unfavorable to the dietary supplement market or any particular product, or be
inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable than or that question earlier
research could have a material adverse effect on the Company's business,
financial condition or results of operations. Because of the Company's
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from the consumption of the Company's
nutritional products, or any similar products distributed by other companies,
could have a material adverse effect on the Company's business, financial
condition or results of operations. Such adverse publicity could arise even if
the adverse effects associated with such products result from failure to consume
such nutritional products as directed. In addition, the Company may not be able
to counter the effects of negative publicity concerning the efficacy of its
nutritional products.
ABSENCE OF CLINICAL STUDIES
Although many of the ingredients in the Company's nutritional products
are vitamins, minerals, herbs and other substances for which there is a long
history of human consumption, some of the Company's nutritional products contain
ingredients as to which there is little history of human consumption. The
Company has not tested, and has not engaged any independent third party to test,
any of its nutritional products. Accordingly, no assurance can be given that the
Company's nutritional products, even when used as directed, will have the
effects intended. Although the Company believes that its nutritional products
are safe when consumed as directed, the Company has not sponsored clinical
studies on the long-term effect of human consumption. See "- Effect of
Unfavorable Publicity," and "- Product Liability," and "Business - Regulation."
POSSIBLE CLAIMS RELATING TO OWNERSHIP OF PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark
"MAXXIS." In addition, the Company relies upon common law rights to protect
other marks used by the Company and other rights that the Company considers to
be its intellectual property. There can be no assurance that the Company's
measures to protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. See "Business -
Proprietary Rights."
TRANSACTIONS WITH RELATED PARTIES
The Company has in the past entered into agreements and arrangements
with certain officers, directors and principal shareholders of the Company.
Certain of these transactions may have been made on terms more favorable to such
officers, directors and principal shareholders than could have been obtained
from an unaffiliated third party. The Company has adopted a policy requiring
that all material transactions between the Company and its officers, directors
or other affiliates must: (i) be approved by a majority of the disinterested
members of the Board of Directors of the Company; and (ii) be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
See "Certain Transactions."
16
<PAGE> 18
ARBITRARY DETERMINATION OF OFFERING PRICE
The purchase price of the Common Stock was arbitrarily determined by
the Company and does not necessarily bear any relationship to the Company's
asset value, net worth or other established criteria of value. Each prospective
investor should make an independent evaluation of the fairness of such price. No
assurance is or can be given that any of the shares will be able to be resold
for the offering price or for any other amount. See "Capitalization" and
"Dilution."
ABSENCE OF TRADING MARKET; TRANSFER RESTRICTIONS
There is currently no market for the Shares. Although the Company has
filed a Registration Statement with the Commission to register the issuance of
the Shares in the Offering under the Securities Act, it is unlikely that any
trading market will develop for the shares in the future. There are no present
plans for the Shares to be traded on any stock exchange or in the
over-the-counter market. The Shares will be subject to certain restrictions
which will be referenced on legends set forth on the certificates representing
the Shares and which the Company expects to limit the ability of holders to
dispose of the Shares in the over-the-counter market. As a result, investors who
may need or wish to dispose of all or part of their Shares may be unable to do
so. In addition, sales of substantial amounts of the Shares after the Offering
could adversely affect prevailing market prices, if any. See "- Application of
the Penny Stock Rules" and "Shares Eligible for Future Sale."
Each certificate evidencing the Shares will bear a legend restricting
the transfer of the Shares to individuals in any jurisdiction where the offer or
sale of the Shares would be unlawful prior to registration or qualification of
such offer or sale under the laws of any such jurisdiction. The Company is not
obligated to register or qualify, or to maintain the registration or
qualification of, the Shares for sale or resale in any jurisdiction. In
addition, pursuant to the Subscription Agreement, each purchaser of the Shares
offered hereby agrees not to sell or otherwise transfer the Shares or any
securities issued on account of such Shares during the Lock-up Period (as
defined herein). The Company may impose transfer restrictions during the Lock-up
Period by giving notice to the holders of record of the Shares. A purchaser of
the Shares offered hereby will not be able to transfer such Shares during the
Lock-up Period and may have substantial difficulty transferring such Shares
after the expiration of the Lock-up Period. The certificates evidencing the
Shares will bear a legend referencing these potential restrictions on transfer.
See "The Offering - Transfer Restrictions."
ANTI-TAKEOVER CONSIDERATIONS
The Board of Directors has authority to issue up to 10,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by the Company's shareholders. In November 1997, the Company
entered into a demand promissory note to fund expenses incurred in connection
with the launch of the Company's nutritional product line. On March 23, 1998,
the Company converted the $200,000 principal amount of the promissory note into
units (the "Units") at a price of $5.50 per Unit with each Unit consisting of
one share of convertible preferred stock (the "Preferred Stock") and a warrant
(a "Warrant") to purchase one share of Common Stock at a price of $5.50 per
share. The Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution
adjustment only upon a stock split, recapitalization or similar event; (iii)
entitled to a liquidation preference over the Common Stock; and (iv) convertible
into Common Stock at the option of the holder at any time commencing 14 months
following the date of the issuance of the Preferred Stock and automatically upon
the closing of a public offering that occurs at least 14 months following the
issuance of the Preferred Stock and that provides gross proceeds to the Company
of at least $7,500,000. The Warrants are entitled to an antidilution adjustment
only upon a stock split, recapitalization or similar event, are not exercisable
until 14 months following their date of issuance and remain exercisable at the
option of the holder until the seventh anniversary of their issuance. The rights
of the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of the Preferred Stock and any additional
preferred stock that may be issued in the future. In addition, an issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire control of the Company. See "Description of Capital Stock -
Preferred Stock and Warrants."
The Articles, Amended and Restated Bylaws (the "Bylaws") and the
Georgia Business Corporation Code, as amended (the "Georgia Law"), contain
certain additional provisions that could have the effect of making it
17
<PAGE> 19
more difficult for a party to acquire, or of discouraging a party from
attempting to acquire, control of the Company without approval of the Company's
Board of Directors. See "Description of Capital Stock - Certain Provisions of
the Articles, Bylaws and Georgia Law."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock following the Offering could adversely
affect the price of the Company's Common Stock. Upon completion of the Offering,
assuming 450,000 Shares offered hereby are sold, the Company will have
outstanding 2,021,187 shares of Common Stock, 36,359 shares of Preferred Stock
and Warrants to purchase 36,359 shares of Common Stock. Of these shares, the
450,000 Shares offered hereby will be freely tradeable without restriction or
further registration under the Securities Act, unless purchased by "affiliates"
of the Company, as that term is defined in Rule 144 ("Rule 144") under the
Securities Act. However, such shares will be subject to certain restrictions on
transfer, including the restrictions set forth in the Subscription Agreement.
See "The Offering - Transfer Restrictions." The remaining 1,643,905 shares of
Common Stock outstanding upon completion of the Offering and issuable upon the
conversion of outstanding Preferred Stock and the exercise of outstanding
Warrants are "Restricted Securities," as that term is defined in Rule 144. Upon
compliance by the Company with the current public information requirements of
Rule 144(c), all of such Restricted Securities will be eligible for sale in the
open market under, and subject to the restrictions contained in, Rule 144.
The Company and certain of its directors, officers and major
shareholders have entered into a shareholders agreement (the "Shareholders'
Agreement") whereby such shareholders agreed to certain restrictions on the
transfer or other disposition of the shares of Common Stock held by each holder.
In the event a shareholder intends to transfer his or her Common Stock to a
non-permitted transferee, the Company and the remaining shareholders have a
right of first refusal to purchase the transferring shareholder's Common Stock
at fair market value. In addition, if the Company terminates a shareholder's
employment or engagement as a sales representative or consultant for cause (or
the employment or engagement of certain persons associated with a shareholder),
the Company shall have the right to repurchase, at fair market value, a
percentage of the shareholder's Common Stock which begins at 100% and declines
20% per year for each completed year of service with the Company. If either the
right of first refusal or the Company's right to purchase is exercised, either
provision could have the effect of further concentrating the stock ownership and
voting power of the Company. See "Description of Capital Stock - Shareholders'
Agreement" and "Shares Eligible for Future Sale."
DILUTION TO NEW INVESTORS
Investors purchasing shares of Common Stock in the Offering will
experience immediate and substantial dilution of $4.24 per share in net tangible
book value, or 77.1% of the initial public offering price of $5.50 per share. In
addition, assuming the sale of the 450,000 Shares offered hereby, the Board of
Directors of the Company has the authority to issue up to approximately
17,980,000 additional shares of Common Stock, and such amount may be increased
and new securities may be authorized in the future upon the determination of the
Board of Directors with the consent of the shareholders. See "- Management will
Maintain Control of the Company."
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of its Common Stock to officers, directors, key
employees, advisors and consultants of the Company. Exercise of these options
could have a dilutive effect on the shareholders' interest in the Company's
earnings and on net tangible book value per share.
See "Dilution."
LACK OF DIVIDENDS
The Company does not intend to pay any cash dividends with respect to
its Common Stock in the foreseeable future. See "Dividend Policy."
18
<PAGE> 20
APPLICATION OF THE PENNY STOCK RULES
The Common Stock offered hereby may be considered "penny stock." The
Commission has adopted rules that regulate broker/dealer practices in connection
with transactions in "penny stocks." The Commission defines a "broker" as any
person engaged in the business of effecting transactions in securities for the
account of others, but does not include a bank, and a "dealer" as any person
engaged in the business of buying and selling securities for his own account,
through a broker or otherwise, but does not include a bank, or any person
insofar as he buys or sells securities for his own account, either individually
or in some fiduciary capacity, but not as part of a regular business. Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ Stock Market's National Market, provided that current price and
volume information with respect to transactions in such securities is provided
by the exchange or system). The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its salesperson in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from such rules the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction. If
the Common Stock is considered penny stock, these disclosure requirements
imposed on broker-dealers may discourage them from effecting transactions in the
Common Stock, thereby severely limiting the market liquidity of the Common Stock
and the ability of purchasers in the Offering to sell the Common Stock in the
secondary market. See "- Absence of Trading Marketing; Transfer Restrictions."
19
<PAGE> 21
THE OFFERING
GENERAL
The Company intends to offer for sale pursuant to this Prospectus up to
450,000 shares of its Common Stock. The Company intends to offer the Shares to
regional and executive directors and strategic partners of the Company. The
Company has established a minimum subscription of 20 Shares and maximum
subscriptions of 20 Shares and 200 Shares, respectively, for each person who
qualifies as a regional or executive director in the Company's marketing system;
provided, that the aggregate number of Shares sold in this Offering shall not
exceed 450,000. However, the Company reserves the right to not sell shares to
any particular regional or executive director or strategic partner, to waive the
maximum subscription amount or to allocate additional Shares to regional and
executive directors without notifying any purchaser or prospective purchaser.
The Company has not established minimum or maximum subscriptions for strategic
partners.
Subscriptions to purchase Shares may be delivered to the Company until
12:00 p.m., E.S.T., on June 30, 1999, unless all of the Shares are earlier sold
or the Offering is earlier terminated or extended by the Company. The Company
reserves the right to terminate the Offering at any time or to extend the
expiration date for additional 90-day periods not to extend beyond December 31,
2000. The date the Offering terminates is referred to herein as the "Expiration
Date." No notice of an extension of the offering period need be given prior to
any extension, and any such extension will not alter the binding nature of
subscriptions already received by the Company. The Company intends to provide
quarterly communications to all purchasers which will include information
concerning any extensions of the Offering. Extension of the Expiration Date
might cause an increase in the Company's organizational and pre-opening expenses
and in the expenses incurred in connection with this Offering.
Prospective purchasers must deliver to the Company or a broker/dealer,
as the case may be, a completed and executed Subscription Agreement, the form of
which is attached hereto as Appendix A. An executed Subscription Agreement will
constitute a prospective purchaser's offer to purchase shares of Common Stock as
set forth in this Prospectus. Prospective purchasers must warrant in the
Subscription Agreement that they have received a copy of this Prospectus, as
amended or supplemented. Once a Subscription Agreement is received by the
Company or a broker/dealer, as the case may be, a prospective purchaser may not
revoke or withdraw such Subscription Agreement except with the consent of the
Company. In addition, the Company reserves the right to reject, in whole or in
part and in its sole discretion, any subscription for any reason or no reason
whatsoever. Acceptance of any particular Subscription Agreement by the Company
shall in no case require the Company to accept any other Subscription Agreement.
The Company may, in its sole discretion, allocate Shares among prospective
purchasers in the event of an oversubscription for the Shares. In determining
which subscriptions to accept, in whole or in part, the Company may take into
account any factors it considers relevant, including, without limitation, the
order in which subscriptions are received and a prospective purchaser's
perceived potential to do business with, or to direct customers or IAs to, the
Company.
Certificates representing Shares duly subscribed and paid for will be
issued by the Company promptly after the Company accepts a subscription.
NO ESCROW
There is no minimum number of Shares which must be sold in this
Offering, and no escrow account has been established. All subscription funds
will be paid directly to the Company. Acceptance and/or deposit of any
subscription funds by the Company shall not constitute acceptance of a
subscription. Upon acceptance of a subscription by the Company, subscription
proceeds will be available for immediate use by the Company. Once a subscription
is accepted by the Company, the Company will not refund the funds for any
subscription in the event that less than the maximum number of Shares offered
hereby are sold prior to the termination of the Offering. In the event the
Company rejects all, or accepts less than all, of any subscription, the Company
will refund promptly an amount remitted equal to the purchase price for such
Shares multiplied by the number of Shares as to which the subscription is not
accepted. See "Risk Factors - No Minimum Offering Amount; Irrevocability of
Subscriptions; No Escrow."
20
<PAGE> 22
TRANSFER RESTRICTIONS
The Company has filed this Registration Statement of which this
Prospectus forms a part with the state securities commissions of nine states in
order to apply for registration or qualification of the Offering in such states.
Due to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company anticipates that it
will be unable to register or qualify the Offering in certain of these states.
See "Risk Factors - Regulation of Network Marketing; Effect of State Securities
Laws." Each certificate evidencing the Shares will bear a legend restricting the
transfer of the Shares to individuals in any jurisdiction where the offer or
sale of the Shares would be unlawful prior to registration or qualification of
such offer or sale under the laws of any such jurisdiction.
Pursuant to the Subscription Agreement, each purchaser of the Shares
offered hereby: (i) agrees during the Lock-up Period (as defined below) not to
(x) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any of the Shares or (y) enter into any swap or other arrangement
that transfers all or a portion of the economic consequences associated with the
ownership of any Shares (regardless of whether any of the transactions described
in clause (x) or (y) is to be settled by the delivery of Shares, or such other
securities, in cash or otherwise); (ii) authorizes the Company to cause the
transfer agent during the Lock-up Period to decline to transfer any Shares
and/or to note stop transfer restrictions on the transfer books and records of
the Company with respect to any Shares; (iii) agrees that any attempted or
purported transfer not made in accordance with the terms of the Subscription
Agreement shall be void and of no force and effect, and the Company shall have
no obligation whatsoever to recognize any such attempted or purported transfer;
and (iv) agrees that a legend in substantially the following form will be placed
on certificates representing the Shares:
"THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT
TO CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS ARE
SET FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") BY
AND BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. ANY
TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO THE CONDITIONS
SET FORTH IN THE SUBSCRIPTION AGREEMENT. ANY ATTEMPTED OR PURPORTED
TRANSFER OF THESE SHARES THAT IS NOT MADE IN ACCORDANCE WITH THE TERMS
OF THE SUBSCRIPTION AGREEMENT SHALL BE VOID AND OF NO FORCE OR EFFECT,
AND THE ISSUER SHALL HAVE NO OBLIGATION WHATSOEVER TO RECOGNIZE ANY
SUCH ATTEMPTED OR PURPORTED TRANSFER.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD
OR TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH
SHARES WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF
SUCH OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I)
SUCH REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH
JURISDICTION AND SETS FORTH SUCH INFORMATION AS IS IN THE COMPANY'S
SOLE JUDGMENT THEN REQUIRED TO BE DISCLOSED PURSUANT TO THE LAWS AND
REGULATIONS OF SUCH JURISDICTION; OR (II) REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED IN SUCH JURISDICTION AND, IN SUCH CASE,
THE PROSPECTIVE TRANSFEROR, AS A CONDITION TO EFFECTING THE TRANSFER OF
THE SHARES, PROVIDES TO THE COMPANY AT SUCH TRANSFEROR'S EXPENSE A
LEGAL OPINION, WHICH MUST BE SATISFACTORY TO THE COMPANY AND THE
COMPANY'S LEGAL COUNSEL IN THEIR SOLE DISCRETION, STATING THAT THE
OFFER AND SALE OF SUCH SHARES IN SUCH JURISDICTION MAY BE ACCOMPLISHED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH
JURISDICTION.
21
<PAGE> 23
IN ADDITION, THE ISSUER MAY ELECT TO IMPOSE A PROHIBITION ON THE SALE
OR TRANSFER OF THESE SHARES IN THE EVENT THE ISSUER DETERMINES TO FILE
A REGISTRATION STATEMENT WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION THAT SEEKS TO REGISTER SECURITIES OF THE ISSUER IN AN
INITIAL PUBLIC OFFERING THAT IS FIRMLY UNDERWRITTEN. SUCH RESTRICTION
MAY REMAIN IN EFFECT FOR A PERIOD ENDING 180 DAYS FOLLOWING THE
EFFECTIVENESS OF SUCH REGISTRATION STATEMENT. THE ISSUER MAY IMPOSE
THESE CONDITIONS BY GIVING WRITTEN NOTICE TO THE HOLDER OF RECORD OF
THESE SHARES. THE FOREGOING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE SUBSCRIPTION AGREEMENT, A COPY OF WHICH WILL BE
PROVIDED FREE OF CHARGE BY THE ISSUER TO ANY HOLDER, PROSPECTIVE
PURCHASER OR TRANSFEREE OF THESE SHARES UPON THEIR REQUEST."
The transfer restrictions may be imposed and terminated by the Company
by giving notice of the imposition or termination of such restriction (the
"Lock-up Notice") to holders of record of the Shares by first class mail,
postage prepaid (or, at the Company's option, certified mail, return receipt
requested), at the address of the holders of record of the Shares on a date
chosen by the Company that is at least one but no more than 15 days prior to
such mailing. The restrictions and the termination of such restrictions shall be
effective upon receipt of such notice, which date of receipt shall be deemed to
be three days following such mailing. The Lock-up Notice may be given by the
Company such that it is received during the period beginning 15 days prior to
the filing by the Company of a registration statement with the U.S. Securities
and Exchange Commission (the "SEC") whereby the Company first seeks to register
its securities for sale to the public in a firmly underwritten public offering
(the "IPO Registration Statement"), and ending upon the date that the IPO
Registration Statement is declared effective by the SEC (the "Effective Date").
The transfer restrictions shall be effective on the date of receipt of
the Lock-up Notice and shall remain in force and effect until 180 days following
the Effective Date (such period being referred to as the "Lock-up Period") at
which time such Lock-up Period shall automatically terminate; provided, however,
that the Company in its sole discretion may elect to terminate the Lock-up
Period from time to time prior to the expiration of such 180-day period with
respect to an identical specified percentage of each holder's Shares by giving
notice of such earlier termination. The Lock-up Period shall terminate if the
Company files an IPO Registration Statement but such registration statement is
subsequently withdrawn or is not declared effective within 120 days of filing
with the SEC, or if the Company transmits a Lock-up Notice prior to the filing
of an IPO Registration Statement but the IPO Registration Statement is not filed
within 15 days of receipt of such notice; provided, however, that in any such
event the restrictions set forth in Section 3(a)(ii) shall survive and shall be
applicable to each subsequent filing of an IPO Registration Statement by the
Company until an IPO Registration Statement is first declared effective by the
SEC. See "Risk Factors - Absence of Trading Market; Transfer Restrictions."
PLAN OF DISTRIBUTION
In certain states, offers and sales of the Common Stock will be made on
behalf of the Company by certain of its officers and directors. The officers and
directors will receive no commissions or other remuneration in connection with
such activities, but they will be reimbursed for reasonable expenses incurred in
connection with the Offering.
In the states of Maryland, North Carolina and Virginia and, in the
event this Offering is registered or qualified in other states where the
Company's directors and officers are not permitted to effect offers and sales,
in such other states, the Company intends to offer shares of Common Stock
through broker/dealers who are licensed to effect sales in such states. The
Company currently has no agreement with a registered broker-dealer in any such
state, and no assurance can be given that the Company will be able to engage a
broker-dealer in any such state on terms acceptable to the Company or at all.
The Company will amend the Registration Statement to set forth the terms of any
agreement with any broker-dealer.
22
<PAGE> 24
HOW TO SUBSCRIBE
A Subscription Agreement, a form of which is attached hereto as
Appendix A, must be completed, executed and delivered to the Company on or prior
to the Expiration Date. Prospective purchasers should retain a copy of the
completed Subscription Agreement for their records. The subscription price is
due and payable when the Subscription Agreement is delivered. Payment must be
made in United States dollars by cash or by check, bank draft or money order
drawn to the order of Maxxis Group, Inc., in the amount of $5.50 multiplied by
the number of Shares subscribed for.
23
<PAGE> 25
USE OF PROCEEDS
The net proceeds to the Company from the sale of 450,000 Shares offered
hereby (after deducting estimated offering expenses, but not including any
broker/dealer fees and expenses) are estimated to be approximately $2,075,000 if
all the Shares offered hereby are sold. Assuming the sale of all 450,000 Shares
offered hereby, the following table sets forth the intended uses of proceeds
from the Offering:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE
APPLICATION OF PROCEEDS DOLLAR AMOUNT OF NET PROCEEDS
----------------------- ------------- ---------------
<S> <C> <C>
Repayment of promissory note(1) ....................... $ 53,000 2.6%
Development of additional product lines(2) ............ 900,000 43.4
Development and/or acquisition of information,
accounting and/or inventory control systems ........ 500,000 24.1
Working capital and general corporate purposes(3) ..... 622,000 29.9
---------- -----
Total ........................................... $2,075,000 100.0%
========== =====
</TABLE>
(1) On February 28, 1998, the Company entered into a demand promissory note
(the "Cordy Note") with Thomas O. Cordy, the Chief Executive Officer of
the Company, to memorialize a loan from Mr. Cordy to the Company to
fund certain operational expenses. The Cordy Note bears interest at 6%
per annum and is payable on demand at any time.
(2) The Company intends to develop additional product lines to be marketed
through the Company's IAs, including an internet access product.
(3) Such purposes may include general and administrative expenses, capital
expenditures, payment of accounts payable and accrued expenses,
marketing expenses, payment of organizational and offering expenses and
satisfaction of certain corporate obligations.
A portion of the net proceeds may be used for acquisitions of
complementary services or businesses. The Company currently has no agreements or
understandings to engage in any acquisitions. Shareholders may not be able to
vote on any potential acquisitions (unless required by applicable law) nor have
the opportunity to review any potential acquisition candidate. The Company
anticipates that it will require approximately $1.9 million in capital to fund
its ongoing operations through December 31, 1998. The Company anticipates that
the proceeds of this Offering, together with borrowings and cash generated from
operations, will be sufficient to meet the Company's capital requirements
through December 31, 1998. The foregoing allocation of proceeds represents the
Company's current estimate of its allocation of the net proceeds of the Offering
based upon the current status of its business operations, its current plans, and
current economic and industry conditions. Future events, as well as changes in
economic or competitive conditions of the Company's business and the results of
the Company's marketing activities, may make different uses of funds necessary
or desirable. In addition, there can be no assurance that the Company will
receive enough proceeds from the Offering to fund any of the uses of proceeds,
including raising enough proceeds to fund its operations or to cover the
estimated offering expenses. If the Company does not receive sufficient funds
from its operations, its borrowings and from the Offering to fund its
operations, the Company may need to raise additional capital. See "Risk Factors
- - Broad Discretion in Application of Proceeds; Unspecified Acquisitions;
Possible Need for Additional Capital." Pending application of the net proceeds
as described above, the Company will invest such proceeds in short-term,
interest-bearing instruments and investment grade securities.
24
<PAGE> 26
DIVIDEND POLICY
The Company anticipates that for the foreseeable future its earnings,
if any, will be retained for the operation and expansion of its business and
that it will not pay cash dividends. The Company's Board of Directors will
determine the Company's dividend policy in the future based upon, among other
things, the Company's results of operations, financial condition, business
opportunities, capital requirements, contractual restrictions and other factors
deemed relevant at the time.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions."
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
<S> <C>
Preferred Stock, no par value; 10,000,000 shares
authorized; 36,359 shares issued and outstanding ...... $ 200,000
Common Stock, no par value; 20,000,000 shares authorized;
1,571,187 shares issued and outstanding ............... 574,000
Subscription receivable ................................. (120,000)
Accumulated deficit ..................................... (189,000)
---------
Total shareholders' equity ......................... $ 465,000
=========
</TABLE>
25
<PAGE> 27
DILUTION
The net tangible book value of the Company as of March 31, 1998, was
$465,000, or $0.30 per share of Common Stock outstanding. Net tangible book
value per share represents the amount of the Company's total assets (excluding
organizational costs) less total liabilities, divided by the total number of
outstanding shares of Common Stock. After giving effect to the sale of 450,000
Shares offered hereby and the receipt and application of the estimated proceeds
therefrom (at a public offering price of $5.50 per share and after deducting
estimated expenses of the Offering), the pro forma net tangible book value of
the Company at March 31, 1998 would have been $2,540,000, or $1.26 per share of
Common Stock. This represents an immediate increase in the net tangible book
value of $.96 per share to existing shareholders and an immediate dilution to
new investors purchasing shares of Common Stock in the Offering of $4.24 per
share. The following table illustrates the per share dilution to new investors
at March 31, 1998, assuming the Offering was made at that time:
<TABLE>
<S> <C> <C>
Initial offering price per share of Common Stock...................... $5.50
Net tangible book value per share of
Common Stock before the Offering.................................. 0.30
Increase per share attributable to new investors.................... 0.96
----
Pro forma net tangible book value per share of Common
Stock after the Offering............................................ 1.26
-----
Dilution per share to new investors................................... $4.24
=====
</TABLE>
The following table sets forth as of March 31, 1998, after giving
effect to the Offering, the difference between existing shareholders and the new
investors purchasing shares of Common Stock in the Offering with respect to the
number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid to the Company
on an as adjusted basis:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ---------------------- Price
Number Percent Amount Percent Per Share
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders 1,571,187 77.7% $ 574,000 18.8% $0.37
New investors ....... 450,000 22.3 2,475,000 81.2 5.50
--------- ----- ---------- -----
Total ............ 2,021,187 100.0% $3,049,000 100.0%
========= ===== ========== =====
</TABLE>
In addition, the Board of Directors intends (subject to shareholder
approval or ratification) to adopt a stock option plan which will permit the
Company to grant options to purchase shares of Common Stock to officers,
directors, key employees, advisors and consultants of the Company. Exercise of
these options could have a dilutive effect on the shareholders' interest in the
Company's earnings and on net tangible book value per share. See "Risk Factors -
Dilution to New Investors."
26
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for
the periods presented. The Company was incorporated on January 24, 1997 and
began operations in March 1997. The statement of operations data for the
Inception Period and the balance sheet data as of June 30, 1997 are derived from
the audited consolidated financial statements of the Company. The consolidated
financial statements for the Inception Period were audited by Arthur Andersen
LLP, independent public accountants. The statement of operations data for the
nine months ended March 31, 1998 and the balance sheet data as of March 31, 1998
have been derived from the unaudited condensed consolidated financial statements
of the Company which include all adjustments, consisting of only normal
recurring adjustments, which the Company considers necessary for a fair
presentation of the results of operations for the period. All numbers have been
rounded. Results for interim periods are not necessarily indicative of the
results to be expected for a full fiscal year. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
(UNAUDITED)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Telecommunications services ............... $2,322,000 $3,939,000
Nutritional products ...................... -- 341,000
Marketing services ........................ 369,000 895,000
---------- ----------
Total revenues ......................... 2,691,000 5,175,000
---------- ----------
Cost of services:
Telecommunications services ............... 761,000 1,081,000
Nutritional products ...................... -- 223,000
Marketing services ........................ 255,000 339,000
---------- ----------
Total cost of services ................. 1,016,000 1,643,000
---------- ----------
Gross margin ................................ 1,675,000 3,532,000
---------- ----------
Operating expenses:
Selling and marketing ..................... 1,089,000 1,994,000
General and administrative ................ 660,000 1,653,000
---------- ----------
Total operating expenses ............... 1,749,000 3,647,000
---------- ----------
Loss before income tax benefit .............. (74,000) (115,000)
Income tax benefit .......................... -- --
---------- ----------
Net loss .................................... $ (74,000) $ (115,000)
========== ==========
PER SHARE DATA:
Net loss per share .......................... $ (0.05) $ (0.07)
========== ==========
Weighted average number of shares outstanding 1,571,187 1,571,187
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
--------------
(UNAUDITED)
<S> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 182,000
Property and equipment, net.............................. 146,000
Total assets............................................. 1,068,000
Long-term obligations.................................... --
Shareholders' equity..................................... 465,000
</TABLE>
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the "Selected Consolidated Financial Data" and the consolidated financial
statements and notes thereto included elsewhere in this Prospectus. This
Prospectus contains certain forward-looking statements relating to, without
limitation, future economic performance, plans and objectives of management for
future operations and projections of revenues and other financial items that are
based on the beliefs of the Company's management, as well as assumptions made
by, and information currently available to, the Company's management. The
cautionary statements set forth in the "Risk Factors" section and elsewhere in
this Prospectus identify important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to differ materially from those in such forward-looking statements. See
"Risk Factors" for a discussion of factors that could cause or contribute to
such material differences.
GENERAL
Maxxis was incorporated on January 24, 1997 and began accepting IAs and
marketing telecommunications services in March 1997. The Company conducts all of
its business and operations through its wholly-owned subsidiaries Maxxis 2000,
Maxxis Telecom and Maxxis Nutritional.
Maxxis 2000 is a network marketing company that currently markets
1-Plus long distance services, travel cards, prepaid phone cards, 800 service
and international telecommunications services. Maxxis Telecom obtains
telecommunications services through its contract with CRC. Maxxis Telecom also
purchases telecommunications time for its prepaid 5 hour, 1 hour, 30 minute and
10 minute phone cards from CRC. The Company believes that its multi-level
network marketing system allows it to obtain customers for its products in a
cost effective manner and to enhance customer retention because of the
relationships between the Company's IAs and customers. The telecommunications
customer base developed by the Company's IAs provides a potential customer base
for the Company's nutritional products and for future products. Maxxis
Nutritional purchases private label nutritional products which the Company
distributes through its network of IAs.
The Company derives revenues from telecommunications services,
nutritional products and marketing services. Telecommunications services
revenues are comprised of sales of prepaid phone cards to the Company's IAs and
commissions from the Company's agreement with CRC whereby the Company receives a
percentage of the long distance billings received by CRC from the customers
originated by the Company's IAs, net of allowances for bad debts and billing
adjustments. The Company's aggregate revenues from 1-Plus services were $25,000,
or only 0.93% of the Company's total revenues, for the Inception Period, and
$696,000, or 13.4% of the Company's total revenues, for the nine months ended
March 31, 1998. Because of the administrative procedures that must be complied
with in order to establish 1-Plus customers, there is generally a delay of
between three to four months from the time a prospective customer indicates a
desire to become a 1-Plus customer and the time that the Company begins to
receive commissions from such customer's usage. In the future, the Company
believes that commissions generated on the sales of 1-Plus long distance
services will constitute a significant percentage of its total revenues.
Nutritional products revenues include sales of private-label
nutritional products to the Company's IAs. Marketing services revenues include
application fees from IAs and purchases of sales aids by IAs, including
distributor kits which consist of forms, promotional brochures, marketing
materials and presentation materials. Marketing services revenues also include
training fees paid by MDs. To become an associate, individuals (other than
individuals in North Dakota) must complete an application and purchase a
distributor kit for $30. IAs also pay an annual fee in order to maintain their
status as an IA, which fee the Company intends to amortize over the renewal
period. To become a MD, a senior associate, director or regional director must
attend a Company approved training school. The fee to attend the training school
is currently $99, and MDs must attend continuing education training schools each
year which also are subject to a fee. The training fees are recognized at the
time the training is received. The Company does not receive any fees from IAs
for the training provided by MDs.
28
<PAGE> 30
Cost of services consists of telecommunications services costs,
nutritional products costs and marketing services costs. Telecommunications
services cost includes the cost of purchasing activated prepaid phone cards.
Nutritional products cost consists of the cost of purchasing private label
nutritional products. Marketing services cost includes the costs of purchasing
IA distributor kits, sales aids and promotional materials and training costs.
Operating expenses consist of selling and marketing expenses, which include
commissions paid to IAs based on usage of long distance services by subscribers
and sales of IA distributor kits and products to new IAs sponsored into the
Company and sales of additional products to customers, and general and
administrative expenses, which include costs for IA support services,
information systems services and administrative personnel to support the
Company's operations and growth.
The Company has a limited operating history, and its operations are
subject to the risks inherent in the establishment of any new business. The
Company expects that it will incur substantial initial expenses, and there can
be no assurance that the Company will achieve or maintain profitability. If the
Company continues to grow rapidly, the Company will be required to continually
expand and modify its operational and financial systems, add additional IAs and
new customers, and train and manage both current and new employees and IAs. Such
rapid growth would place a significant strain on the Company's operational
resources and systems, and the failure to effectively manage this projected
growth could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - New Enterprise" and "-
Ability to Manage Growth."
RESULTS OF OPERATIONS
The following table sets forth historical revenues and cost of revenues
by category and the percentage of total revenues attributable to each category
for the periods shown.
<TABLE>
<CAPTION>
JANUARY 24, 1997 NINE MONTHS
(INCEPTION) ENDED
TO JUNE 30, 1997 MARCH 31, 1998
---------------- --------------
<S> <C> <C>
Revenues:
Telecommunications services 86.3% 76.1%
Nutritional products ........... -- 6.6
Marketing services ............. 13.7 17.3
----- -----
Total revenues .............. 100.0% 100.0%
===== =====
Cost of services:
Telecommunications services .... 28.3% 20.9%
Nutritional products ........... -- 4.3
Marketing services ............. 9.5 6.5
----- -----
Total cost of services ...... 37.8 31.7
Operating expenses:
Selling and marketing .......... 40.5 38.5
General and administrative ..... 24.5 32.0
----- -----
Total operating expenses .... 65.0% 70.5%
===== =====
</TABLE>
The Company was incorporated in January 1997 and commenced operations
in March 1997. No comparisons are presented for the nine months ended March 31,
1998 because the Company commenced operations in March 1997 and the comparisons
would not be meaningful. Similarly, no comparisons are presented for the
Inception Period because the Company was not in existence for the corresponding
prior period in 1996. Results of operations for the nine months ended March 31,
1998 and the Inception Period are not necessarily indicative of the results to
be expected for a full fiscal year.
29
<PAGE> 31
NINE MONTHS ENDED MARCH 31, 1998
Revenues
Total revenues consist of telecommunications services, nutritional
products and marketing services revenues. Total revenues were $5,175,000 for the
nine months ended March 31, 1998. For the nine months ended March 31, 1998,
telecommunications services revenues were $3,939,000, or 76.1% of total
revenues. Telecommunications services revenues consist of sales of prepaid phone
cards by IAs and commissions generated from long distance usage of customers
originated by IAs. For the nine months ended March 31, 1998, nutritional
products revenues were $341,000, or 6.6% of total revenues. Nutritional products
revenues consist of sales of private label nutritional products. For the nine
months ended March 31, 1998, marketing services revenues were $895,000, or 17.3%
of total revenues. Marketing services revenues consist of application fees paid
by IAs, purchases of sales aids by IAs and training fees paid to become a MD.
Cost of Services
Cost of services includes telecommunications services costs,
nutritional products costs and marketing services costs. Total cost of services
for the nine months ended March 31, 1998 was $1,643,000, or 31.7% of total
revenues. For the nine months ended March 31, 1998, telecommunications services
cost was $1,081,000, or 20.9% of total revenues. Telecommunications services
cost includes the cost of purchasing activated prepaid phone cards from CRC. The
Company then sells activated phone cards to its IAs. Telecommunications services
cost also includes, as a minor component, the costs of materials that are used
to package the phone cards. For the nine months ended March 31, 1998,
nutritional products cost was $223,000, or 4.3% of total revenues. Nutritional
products cost consists of the cost of purchasing private label nutritional
products. Marketing services cost was $339,000, or 6.5% of total revenues, for
the nine months ended March 31, 1998. Marketing services cost primarily consists
of the costs of purchasing IA distributor kits, sales aids and promotional
materials and training costs.
Operating Expenses
For the nine months ended March 31, 1998, selling and marketing
expenses were $1,994,000, or 38.5% of total revenues. Selling and marketing
expenses consist of commissions paid to IAs based on (i) usage of long distance
services, (ii) sales of IA distributor kits and products for any new IAs they
sponsor into the Company and (iii) sales of additional products to customers.
General and administrative expenses were $1,653,000, or 31.9% of total
revenues, for the nine months ended March 31, 1998. General and administrative
expenses consist of salary expense for the Company's customer service personnel,
office staff and executive personnel and the cost of IA support services and
information systems services.
INCEPTION PERIOD (JANUARY 24, 1997 TO JUNE 30, 1997)
Revenues
For the Inception Period, telecommunications services revenues were
$2,322,000, or 86.3% of total revenues, and marketing services revenues were
$369,000, or 13.7% of total revenues. Telecommunications services revenues
consist of sales of prepaid phone cards to the Company's IAs and commissions
generated from 1-Plus services commissions generated from long distance usage of
customers generated by the Company's IAs. This amount was minimal for the
Inception Period because no customers were utilizing long distance services
until May 1997. In the future, the Company believes that commissions generated
on sales of 1-Plus long distance services will constitute a more significant
percentage of telecommunications services revenues. Marketing services revenues
include application fees from IAs, purchases of sales aids by IAs and training
fees paid to become a MD.
30
<PAGE> 32
Cost of Services
Telecommunications services cost was $761,000, or 28.3% of total
revenues, for the Inception Period. Telecommunications services cost includes
the cost of purchasing activated prepaid phone cards. Marketing services cost,
which includes the cost of the IA distributor kits and promotional materials,
was $255,000, or 9.5% of total revenues, for the Inception Period.
Operating Expenses
Selling and marketing expenses principally consist of commissions paid
to IAs based on (i) usage of long distance services, (ii) sales of IA
distributor kits and products for any new IAs they sponsor into the Company and
(iii) sales of additional products to customers. Selling and marketing expenses
were $1,089,000, or 40.5% of total revenues, for the Inception Period.
General and administrative expenses were $660,000, or 24.5% of total
revenues, for the Inception Period. General and administrative expenses consist
primarily of salary expense for the Company's customer service personnel, office
staff and executive personnel. Such expenses also include costs for IA support
services and information systems services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has primarily financed all of its
operations through the sale of its securities in private placements. During the
nine months ended March 31, 1998, cash flows from financing activities totaled
approximately $340,000 related to the sales of equity securities and short-term
borrowings. In November 1997, the Company entered into a demand promissory note
to fund expenses incurred in connection with the launch of the Company's
nutritional product line. As of March 23, 1998, the Company had borrowed
$200,000 under such promissory note. On March 23, 1998, the Company converted
the outstanding principal amount under the promissory note into Units at a price
of $5.50 per Unit with each Unit consisting of one share of Preferred Stock and
one Warrant. In February 1998, the Company entered into the Cordy Note to
memorialize a loan in December 1997 of $53,000 from the Chief Executive Officer
of the Company to fund certain operational expenses. The Cordy Note bears
interest at a fixed rate of 6% per year. The Company intends to repay the Cordy
Note out of the proceeds of the Offering.
As of March 31, 1998, the Company had cash and cash equivalents of
$229,000 and working capital of $182,000. Cash used in operating activities for
the nine months ended March 31, 1998 was $8,000.
The Company's investing activities principally consisted of the
purchase of office and computer equipment for $100,000 and software development
costs of $38,000 for the nine months ended March 31, 1998.
The Company anticipates that it will require approximately $1.9 million
in capital to fund its ongoing operations through December 31, 1998. The Company
anticipates that the proceeds of this Offering, together with borrowings and
cash generated from operations, will be sufficient to meet the Company's capital
requirements through December 31, 1998. However, if the Company does not receive
sufficient funds from its operations, its borrowings and from the Offering to
fund its operations, the Company may need to raise additional capital. In
addition, any increases in the Company's growth rate, shortfalls in anticipated
revenues, increases in expenses or significant acquisitions could have a
material adverse effect on the Company's liquidity and capital resources and
could require the Company to raise additional capital. The Company may also need
to raise additional funds in order to take advantage of unanticipated
opportunities, such as acquisitions of complementary businesses or the
development of new products, or otherwise respond to unanticipated competitive
pressures. Sources of additional capital may include venture capital financing,
cash flow from operations, additional lines of credit and private equity and
debt financings. The Company's cash and financing needs for 1998 and beyond will
be dependent on the Company's level of IA and customer growth and the related
capital expenditures, advertising costs and working capital needs necessary to
support such growth. The Company believes that major capital expenditures may be
necessary over the next few years to develop additional product lines to sell
through its IAs and to develop and/or acquire information, accounting and/or
inventory control
31
<PAGE> 33
systems to monitor and analyze the Company's growing multi-level network
marketing system. The Company has not identified financing sources to fund such
cash needs in 1998 and beyond. There can be no assurance that the Company will
be able to raise any such capital on terms acceptable to the Company or at all.
See "Risk Factors - Broad Discretion in Application of Proceeds; Unspecified
Acquisitions; Possible Need for Additional Capital," "- New Enterprise" and "-
Ability to Manage Growth."
32
<PAGE> 34
BUSINESS
Maxxis markets telecommunications services in the United States through
its multi-level network marketing system of "independent associates," or "IAs."
The Company operates through its subsidiaries: Maxxis 2000, which conducts
network marketing operations; Maxxis Telecom, which provides long distance
services; and Maxxis Nutritional, which provides private label nutritional
products. The Company currently markets both 1-Plus long distance service,
value-added telecommunications services, such as prepaid phone cards, and
nutritional products. The Company was incorporated in January 1997 and began
accepting IAs and marketing telecommunications services in March 1997. For the
Inception Period and the nine months ended March 31, 1998, the Company generated
aggregate gross revenues of approximately $2,691,000 and $5,175,000,
respectively.
The Company initially intends to build a customer base without having
to commit capital or management resources to construct its own
telecommunications network and transmission facilities. In February 1997, Maxxis
Telecom contracted with CRC to obtain switching and network services and to
allow CRC's telecommunications services to be sold by the Company's IAs. In the
future, the Company may contract with other providers of long distance services
and intends to analyze the feasibility of developing its own long distance
network. In November 1997, the Company began marketing several private label
dietary supplements to its customers and IAs. The Company's nutritional products
are manufactured by various suppliers.
The Company conducts its marketing activities exclusively through its
network of IAs. The Company believes that IAs are generally attracted to the
Company's multi-level network marketing system because of the potential for
supplemental income and because the IAs are not required to purchase any
inventory, have no monthly sales quotas or account collection issues, have
minimal required paperwork and have a flexible work schedule. The Company
encourages IAs to enroll subscribers with whom the IAs have an ongoing
relationship, such as family members, friends, business associates and
neighbors. The Company also sponsors opportunity meetings at which current IAs
are encouraged to bring in potential candidates for an introduction to the
Company's marketing system. The Company's multi-level network marketing system
and the Company's reliance upon IAs are intended to reduce net marketing costs,
subscriber acquisition costs and subscriber attrition. The Company believes that
its multi-level network marketing system will continue to build a base of
potential customers for additional services and products.
The Company offers its IAs a number of support services. The Company
currently provides to each IA without charge one printed report describing such
IA's organization and provides additional reports for a fee. In addition, the
Company offers training, information and motivational support to the IA network
through: (i) its training organization; (ii) monthly newsletters; and (iii)
regional rallies.
STRATEGY
The Company's goal is to develop a national distribution system through
which large volumes of telecommunications services, nutritional products and
other products and services may be sold. The Company intends to increase its
revenues by: (i) expanding its marketing network; (ii) increasing the number of
customers who purchase products and services offered by the Company; and (iii)
providing additional products and services for sale through its IAs. The Company
intends to achieve its goal by:
- Growing and Developing its Network of IAs by enhancing the
sponsoring and training services offered to IAs, continuing to
support the marketing efforts of IAs and introducing new
income opportunities for IAs.
- Maintaining and Expanding the Number of Customers by offering
high quality, competitively-priced products and services
through a highly motivated network of IAs.
33
<PAGE> 35
- Offering Additional Telecommunications Products by entering
into agreements for the marketing of additional products that
meet the needs of subscribers, which may include, among
others, paging, conference calling, wireless cable, cellular
and local phone service.
- Improving and Expanding its Product Lines by continuing to
evaluate and offer products that are attractive to its IAs and
customers. In addition to telecommunications products, the
Company recently began marketing a line of private label
nutritional products to its customers and IAs.
- Obtaining Competitive Prices on products and services through
the purchasing power of the Company's nationwide network.
MARKETING
The Company markets products and services exclusively through its
network of IAs. Currently, the Company has five IA positions in its marketing
system: associate; senior associate; director; regional director; and executive
director. IAs are paid only by commissions and do not receive any salary from
the Company. All IA commissions are paid directly by the Company and are a
specified percentage or a designated amount of the gross proceeds received by
the Company on the sale of services and products. The Company designates a
portion of its gross commissions as "commission value," or "CV," and allocates
the CV among eligible participants in its marketing system. Currently, 20% of
the CV earned with respect to a long distance subscriber is paid weekly to the
IA who sponsored such subscriber, 75% of the CV is paid monthly to eligible
directors who have the IA who sponsored the subscriber in their downline and the
remaining 5% is retained by the Company to be paid out to directors, regional
directors and executive directors in the Company's incentive bonus programs. All
directors, executive directors and regional directors who (i) have personally
gathered four active subscribers; (ii) have sponsored at least two new senior
associates who have gathered four active subscribers during the quarter; and
(iii) are certified as MDs are eligible to receive an additional Leadership
Bonus. The Leadership Bonus is payable quarterly and equals, in the aggregate,
1% of the total sales of Maxxis 2000 during the quarter. The Leadership Bonus is
divided equally among all directors, regional directors and executive directors
who qualify for a Leadership Bonus.
To become an associate, individuals (other than individuals in North
Dakota) must complete an application and purchase a distributor kit for $30. IAs
also pay an annual fee in order to maintain their status as IAs. The distributor
kit is a package of basic materials which assists an associate in beginning his
or her business. Associates may gather long distance customers and receive 20%
of the CV generated by such customers. Associates are also entitled to purchase
products from the Company at discounted prices for retail sales. An associate
becomes a senior associate when the associate sells $100 of bonus-eligible
products. Senior associates continue to receive a percentage of CV with regard
to all subscribers personally gathered by them and are also entitled to purchase
products from the Company at discounted prices for retail sales.
To become a director, a senior associate must sponsor two additional
senior associate positions. A director increases the size of the director's
sales organization by sponsoring additional persons to become senior associates.
These senior associates, and all senior associates that they, in turn, sponsor,
become part of the sales organization of the director who sponsored them. Senior
associates, through the growth of their sales organizations, may become
directors, regional directors or executive directors and thereby increase the
size of the sales organization of the person who was their original sponsor. The
organization that grows below each director through this process is called a
"downline." Directors are eligible to receive the same commissions as senior
associates and, if they directly gather and maintain a minimum of four active
1-Plus long distance customers, are eligible to receive a percentage of the CV
produced by each IA that is within 15 levels below them in their downline. In
order to encourage the growth of the Company's marketing system, the Company
also pays eligible directors a bonus amount, which is designated as "bonus
value," or "BV," for each sale of bonus-eligible products. The Company primarily
designates retail priced phone cards and nutritional paks as bonus-eligible
products. Directors become regional directors and executive directors upon the
achievement of certain IA sales goals. Regional directors and executive
directors are eligible to receive the same commissions
34
<PAGE> 36
as directors and, if they qualify, share in the Leadership Bonus. Regional
directors and executive directors are eligible to serve on the Maxxis 2000
Advisory Board, which advises management on issues regarding field leadership.
The maximum aggregate long distance usage commissions the Company may
be required to pay with respect to a single subscriber's long distance usage are
approximately 40% of the gross commissions payable to the Company with respect
to such usage, but the Company anticipates that the actual amounts paid will be
less than 40% as the usage increases. The difference between actual commission
payments and the maximum payment is expected to occur because certain IAs fail
to maintain active status necessary to receive commissions from sales made by
persons in their downline.
RELATIONSHIP WITH IAS
The Company seeks to contractually limit the statements that IAs make
about the Company's business. Each IA also must agree to policies and procedures
to be followed in order to maintain the IA's status in the organization. IAs are
expressly forbidden from making any representation as to the possible earnings
of any IA from the Company. IAs are also prohibited from creating any marketing
literature that has not been pre-approved by the Company. While the Company has
these policies and procedures in place governing the conduct of the IAs, it is
difficult to enforce such policies and procedures. Because the IAs are
classified as independent contractors, the Company is unable to provide them the
same level of direction and oversight as Company employees. Violations of the
Company's policies and procedures may reflect negatively on the Company and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors - Dependence on IAs" and
"- Relationship with IAs."
TRAINING AND MARKETING SUPPORT
The Company provides all IAs with the opportunity to receive training
through the Company's training program. The training is conducted by the
Company's MDs and includes a detailed explanation of the Company's products, the
IA compensation plan and the use of the various marketing tools available to the
IA. The Company intends to publish a newsletter for the IAs containing
informative and motivational articles and recognizing IA achievements. The
Company's first annual convention was held in August 1997, and the Company
intends to continue to hold annual conventions for IAs. This event provides
recognition to the top performers, direct access to senior management and a
chance for IAs to share experiences and develop support systems. The Company
intends to organize additional conventions throughout the country that current
IAs and potential new IAs can attend to learn more about the Company.
The Company encourages senior associates, directors and regional
directors to become MDs. MDs provide personal training to IAs. To become a MD, a
senior associate, director or regional director must attend a Company approved
training school. The fee to attend the training school is currently $99, and MDs
must attend continuing education training schools each year which also are
subject to a fee. National training directors that are selected by the Company
are paid a fee by the Company for training MDs. The Company does not receive any
fees from IAs for the training provided by MDs.
The Company operates a call center to answer IA questions and provide
IA support. This system includes a current database of all IAs, their personal
organizations and their subscribers. In addition, the Company has licensed a
commission processing software system to process the high volume of data
necessary to calculate commissions. This system prepares weekly commission
payments.
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<PAGE> 37
PRODUCTS AND SERVICES
Following is a summary of the various services and products the Company
currently provides to IAs and customers.
Telecommunications Products. The Company markets a variety of long
distance and value-added telecommunications services and products to customers
in equal access areas, which currently include 1-Plus long distance service and
prepaid phone cards.
- 1-Plus Long Distance. The Company's 1-Plus long distance
service serves as a replacement for a customer's former long
distance service (such as the long distance services provided
by AT&T, MCI and Sprint). The 1-Plus services marketed by the
Company are billed on a flat rate basis, where the cost of a
call does not vary depending upon the distance of a call or
the time of day or day of week when the call is originated or
terminated. Residential 1-Plus services marketed by the
Company are billed based on one minute increments, and
business 1-Plus service is billed based on 6-second increments
with a 30-second minimum.
- Prepaid Phone Cards. The Company offers prepaid phone cards in
domestic time increments of 5 hours, 1 hour, 30 minutes and 10
minutes. These cards may be used for domestic and
international calls. If used for international calls, a
greater number of minutes will be deducted from the call in
proportion to the differential between the domestic and
applicable international rate.
The Company may add products to and remove products from its telecommunications
product line from time to time.
Nutritional Products. The Company recently began marketing a line of
private label nutritional products to its IAs and customers. The Company offers
private label dietary supplements that contain herbs, vitamins, minerals and
other natural ingredients. Representative products include:
- 40/30/30 Maxxis Bar - an energy bar intended as a meal
replacement which contains approximately 40% carbohydrates,
30% protein, 30% dietary fat and various vitamins and
minerals.
- Maxx-A-Chol - a dietary supplement which is a specialized
combination of six herbs.
- MAXXIS MSM - a dietary supplement consisting of
methylsulfonylmethane, vitamin C, citrus bioflavonoid complex
and ginseng.
- MAXXIS Multivitamin - a multivitamin nutritional supplement
which is delivered by means of a spray.
- MAXXIS 02 - a nutritional supplement that contains
electrolytes, oxygen, trace elements, enzymes and amino acids.
The Company anticipates adding products to and may remove products from its
nutritional product line from time to time.
Promotional Materials. The Company also derives revenues from the sale
of various educational and promotional materials designed to aid its IAs in
maintaining and building their businesses. Such materials include various sales
aids, informational videotapes and cassette recordings and product and marketing
brochures.
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<PAGE> 38
INFORMATION SYSTEMS
The Company believes that maintaining sophisticated and reliable
transaction processing systems is essential for multi-level network marketing
companies. Accordingly, the Company invests in maintaining and enhancing its
computer systems. The Company's systems are designed to process detailed and
customized IA commission payments, monitor and analyze financial and operating
trends and track each IA's personal organization.
IA SUPPORT
The Company operates a call center where advisors answer IA questions
and provide information to IAs. This system includes a current database of all
IAs, their personal organizations and their subscribers. The Company has
licensed a commission processing software system that incorporates the
provisions of the Company's marketing program for purposes of calculating
commissions. The Company also maintains transaction processing systems that
facilitate the shipment of IA training and marketing materials. In addition, the
Company's order processing system tracks the receiving, storage, shipment and
purchasing of sales aid products.
SUPPLIERS
The Company does not own a long distance network. As a result, Maxxis
Telecom has contracted with CRC to obtain switching and network services. The
Company now depends exclusively on CRC for the transmission of subscriber phone
calls and the activation of prepaid phone cards. Subscribers are long distance
customers on CRC's network, and CRC provides subscriber support for the
Company's subscribers. Subscribers have the right to change their service at any
time. CRC provides subscriber support for the Company. The Company's 1-Plus
Agreement with CRC, which expires on February 20, 2000, provides that the
Company will have such rights to the subscriber base developed under the
agreement upon achieving certain minimum levels of monthly revenues on CRC's
network. Once the Company reaches these minimum levels, the Company will have
the right to market other carriers to the subscriber base in the event the
Company contracts with such carriers. There can be no assurance that the Company
will achieve the minimum level of monthly revenues on CRC's network necessary to
have rights to the subscriber base. Although the Company does not currently
intend to use a different carrier, minimum monthly revenues may be more
difficult to maintain if the Company utilizes additional carriers, and the
Company could be subject to additional minimum commitments including, but not
limited to, minimum monthly revenues or minimum monthly minutes of usage, with
such new carriers. The accurate and prompt billing of subscribers originated by
the IAs is also dependent upon CRC. The failure of CRC to accurately and
promptly bill subscribers could lead to a loss of subscribers and could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company would be required to use another carrier if
the 1-Plus Agreement were terminated, the usage or number of subscribers
originated by the Company's IAs exceeded the capacity of CRC or CRC failed to
provide quality services. In such event, or in the event the Company otherwise
elected to use other carriers, the cost paid by the Company for such long
distance services might exceed that paid under the 1-Plus Agreement. If the
1-Plus Agreement is terminated, there can be no assurance that the Company could
enter into new contracts with other providers on terms favorable to the Company
or at all. The termination of the 1-Plus Agreement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In November 1997, the Company began marketing a line of private label
nutritional products. All of the nutritional products offered and distributed by
the Company are developed and manufactured by third-party suppliers. Certain of
the nutritional products offered by the Company are proprietary to such
suppliers. The Company does not have any written contracts with or commitments
from any of its suppliers or manufacturers to continue to sell nutritional
products to the Company. The Company believes that its relationships with its
suppliers are satisfactory; however, there can be no assurance that any or all
of these suppliers will continue to be reliable suppliers to the Company.
Accordingly, there is a risk that any or all of the Company's suppliers or
manufacturers, including suppliers which provide proprietary products to the
Company, could discontinue selling their nutritional products to the Company. In
the event any of the third-party manufacturers become unable or unwilling to
continue to provide the nutritional products in required volumes, the Company
would be
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<PAGE> 39
required to identify and obtain acceptable replacement sources, and no assurance
can be given that any alternative manufacturing sources would become available
to the Company on a timely basis. See "Risk Factors - Dependence Upon
Suppliers."
SUBSCRIBER SUPPORT
CRC's is responsible for the billing of long distance customers and for
providing customer service. Services are provided under CRC's state, national
and international tariffs. The Company has been informed that CRC possesses all
tariffs necessary to offer such services.
COMPETITION
The Company faces competition in the United States for both the
products and services it sells and for the sponsoring and retaining of
independent salespeople. The United States long distance telecommunications
industry is intensely competitive, rapidly evolving and subject to rapid
technological change. In addition, the industry is significantly influenced by
the marketing and pricing practices of the major industry participants. AT&T,
MCI, Sprint and WorldCom are the dominant competitors in the domestic long
distance telecommunications industry. All of these companies are significantly
larger than the Company and have substantially greater resources. According to a
1995 FCC report, AT&T, MCI, Sprint and WorldCom accounted for approximately 56%,
17%, 10% and 5%, respectively, of total domestic long distance revenue for
calendar year 1994. Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger customer bases and
substantially greater financial, personnel, marketing, technical and other
resources than the Company. These competitors employ various means to attract
new subscribers, including television and other advertising campaigns,
telemarketing programs, network marketing and cash payments and other incentives
to new subscribers. The Company's ability to compete effectively depends upon,
among other factors, its ability to offer high quality products and services at
competitive prices. There can be no assurance that the Company will be able to
compete successfully.
The evolving regulatory environment of the United States
telecommunications industry significantly influences the Company's ability to
compete. On February 8, 1996, President Clinton signed into law the 1996
Telecommunications Act that will allow LECs, including the BOCs, to provide long
distance telephone service inter-LATA, which will likely significantly increase
competition for long distance services. The new legislation also grants the FCC
the authority to deregulate other aspects of the telecommunications industry.
Such increased competition could have a material adverse effect on the Company's
business, financial condition and results of operations.
Telecommunications companies compete for subscribers based on price,
among other things, with major long distance carriers conducting extensive
advertising campaigns to capture market share. There can be no assurance that a
decrease in the rates charged for communications services by the major long
distance carriers or other competitors, whether caused by general competitive
pressures or the entry of the BOCs and other LECs into the long distance market,
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company expects that the telecommunications services markets will
continue to attract new competitors and new technologies, possibly including
alternative technologies that are more sophisticated and cost effective than the
technologies included in the products and services offered by the Company. The
Company does not have the contractual right to prevent subscribers from changing
to a competing service, and the subscribers may terminate their service at will.
The Company also competes in the highly competitive market of dietary
supplements. This market segment includes numerous manufacturers, other network
marketing companies, catalog companies, distributors, marketers, retailers and
physicians that actively compete for the business of consumers. The Company
competes with other providers of such nutritional products, especially retail
outlets, based upon convenience of purchase, price and immediate availability of
the purchased product. For the most part, the Company's competitors offering
comparable products are substantially larger and have available considerably
greater financial resources
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<PAGE> 40
than the Company. The market is highly sensitive to the introduction of new
products (including various prescription drugs) that may rapidly capture a
significant share of the market. As a result, the Company's ability to remain
competitive depends in part upon the successful introduction of new products at
competitive prices.
The Company also competes for IAs with other direct selling
organizations, some of which have longer operating histories and greater
visibility, name recognition and financial resources. The largest network
marketing companies in the Company's markets are EXCEL, ACN and Amway. The
Company competes for new IAs on the basis of the Company's reputation, perceived
opportunity for financial success and quality and range of products offered for
sale. Management envisions the entry of many more direct selling organizations
into the marketplace. There can be no assurance that the Company will be able to
successfully meet the challenges posed by this increased competition. The
Company competes for the time, attention and commitment of its IAs. Given that
the pool of individuals interested in the business opportunities presented by
direct selling is limited in each market, the potential pool of IAs for the
Company's products and services is reduced to the extent other network marketing
companies successfully attract these individuals. There can be no assurance that
other network marketing companies will not convince the Company's existing IAs
to join their organizations. In such event, the Company's business, financial
condition and results of operations could be materially adversely affected.
PROPRIETARY RIGHTS
The Company has applied for a federal registration for the mark
"MAXXIS." In addition, the Company relies upon common law rights to protect
other marks used by the Company and other rights that the Company considers to
be its intellectual property. There can be no assurance that the Company's
measures to protect this intellectual property will prevent or deter the use or
misappropriation of the Company's intellectual property by other parties. The
Company's inability to protect its intellectual property from use or
misappropriation from others could have a material adverse effect upon the
Company's business, financial condition and results of operations. From time to
time, companies may assert other trademark, service mark or intellectual
property rights in marks (including the mark "MAXXIS") or other intellectual
property used by the Company. The Company could incur substantial costs to
defend any legal action taken against the Company. If, in any legal action that
might arise, the Company's asserted trademarks, service marks or other rights
that the Company considers to be its intellectual property should be found to
infringe upon intellectual property rights of other parties, the Company could
be enjoined from further infringement and required to pay damages. In the event
a third party were to sustain a valid claim against the Company, and in the
event any required license were not available on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. Litigation, which could result in substantial
cost to and diversion of resources of the Company, may also be necessary to
enforce intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others.
REGULATION
Regulation of Long Distance Telephone Services. Various regulatory
factors may have an impact on the Company's ability to compete and on its
financial performance. The Company's carrier, CRC, is subject to regulation by
the FCC and by various state public service and public utility commissions.
Federal and state regulations and regulatory trends have had, and may have in
the future, both positive and negative effects on the Company and on the
telecommunications service industry as a whole. FCC policy currently requires
interexchange carriers to provide resale of the use of their transmission
facilities. The FCC also requires LECs to provide all interexchange carriers
with equal access to the origination and termination of calls. If either or both
of these requirements were removed, CRC and, therefore, the Company could be
adversely affected. CRC may experience disruptions in service due to factors
outside CRC's and the Company's control, which may cause CRC to lose the ability
to complete its subscribers' long distance calls. The Company believes that CRC
has made all filings with the FCC necessary to allow CRC to provide interstate
and international long distance service. In order to provide intrastate long
distance service, CRC is required to obtain certification to provide
telecommunications services from the public service or public utility
commissions of each state, or to register or be found exempt from registration
by such commissions. While the Company believes that CRC is in
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<PAGE> 41
compliance with the applicable state and federal regulations governing
telecommunications service, there can be no assurance that the FCC or any state
regulatory authority in one or more states will not raise material issues with
regard to CRC's compliance with applicable regulations, or that regulatory
activities with respect to CRC will not have a material adverse effect on the
Company's business, financial condition and results of operations.
In February 1996, the enactment of the 1996 Telecommunications Act
served to increase competition in the long distance and local telecommunications
markets. The 1996 Telecommunications Act opens competition in the local services
market and, at the same time, contains provisions intended to protect consumers
and businesses from unfair competition by incumbent LECs, including the BOCs.
The 1996 Telecommunications Act allows BOCs to provide long distance service
outside of their local service territories but bars them from immediately
offering in-region inter-LATA long distance services until certain conditions
are satisfied. A BOC must apply to the FCC to provide in-region inter-LATA long
distance services and must satisfy a set of pro-competitive criteria intended to
ensure that BOCs open their own local markets to competition before the FCC will
approve such application. The Company is unable to determine how the FCC will
rule on any such application. The new legislation may result in increased
competition to the Company from others, including the BOCs, and increased
transmission costs in the future. See "Risk Factors - Intense Competition." If
the federal and state regulations requiring the LECs to provide equal access for
the origination and termination of calls by long distance subscribers change or
if the regulations governing the fees to be charged for such access services
change, particularly if such regulations are changed to allow variable pricing
of such access fees based upon volume, such changes could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "- Competition."
Regulation Affecting Nutritional Products. The formulation,
manufacturing, packaging, labeling, advertising, distribution and sale of the
Company's nutritional products are subject to regulation by a number of
governmental agencies, the most active of which is the FDA, which regulates the
Company's nutritional products under the FDCA and regulations promulgated
thereunder. The Company's products are also subject to regulation by the FTC,
the CPSC, the USDA, and the EPA. The FDCA has been amended several times with
respect to dietary supplements, most recently by the NLEA and the DSHEA. The
Company's nutritional products are generally classified and regulated as dietary
supplements under the FDCA, as amended, and therefore are not subject to
pre-market approval by the FDA. However, these products are subject to extensive
labeling regulation by the FDA and can be removed from the market if shown to be
unsafe. Moreover, if the FDA determines on the basis of labeling or advertising
claims by the Company, that the "intended use" of any of the Company's
nutritional products is for the diagnosis, cure, mitigation, treatment or
prevention of disease, the FDA can regulate those products as drugs and require
pre-market clearance for safety and effectiveness. In addition, if the FDA
determines that claims have been made regarding the effect of dietary
supplements on the "structure or function" of the body, such claims could result
in the regulation of such products as drugs.
The FTC and certain states regulate advertising, product claims, and
other consumer matters, including advertising of the Company's nutritional
products. In the past several years the FTC has instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. In addition, the FTC has increased its scrutiny
of the use of testimonials, such as those utilized by the Company. There can be
no assurance that the FTC will not question the Company's past or future
advertising or other operations. Moreover, there can be no assurance that a
state will not interpret product claims presumptively valid under federal law as
illegal under that state's regulations. Furthermore, the Company's IAs and
customers of IAs may file actions on their own behalf, as a class or otherwise,
and may file complaints with the FTC or state or local consumer affairs offices.
These agencies may take action on their own initiative or on a referral from
IAs, customers or others, including actions resulting in entries of consent
decrees and the refund of amounts paid by the complaining IA or customer,
refunds to an entire class of IAs or customers, or other damages, as well as
changes in the Company's method of doing business. A complaint because of a
practice of one IA, whether or not that practice was authorized by the Company,
could result in an order affecting some or all IAs in a particular state, and an
order in one state could influence courts or government agencies in other
states. Proceedings resulting from these complaints may result in significant
defense costs, settlement payments or judgments and could have a material
adverse effect on the Company's business, financial condition or results of
operations.
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Regulation of Network Marketing. The Company's multi-level network
marketing system is subject to or affected by extensive government regulation
including, without limitation, federal and state regulations governing the offer
and sale of business franchises, business opportunities and securities. Various
governmental agencies monitor direct selling activities, and the Company could
be required to supply information regarding its marketing plan to such agencies.
Although the Company believes that its multi-level network marketing system is
in material compliance with the laws and regulations relating to direct selling
activities, there can be no assurance that legislation and regulations adopted
in particular jurisdictions in the future will not adversely affect the
Company's business, financial condition and results of operations. The Company
also could be found not to be in compliance with existing statutes or
regulations as a result of, among other things, misconduct by IAs, who are
considered independent contractors over whom the Company has limited control,
the ambiguous nature of certain of the regulations and the considerable
interpretive and enforcement discretion given to regulators. Any assertion or
determination that the Company or the IAs are not in compliance with existing
statutes or regulations could have a material adverse effect on the Company's
business, financial condition and results of operations. An adverse
determination by any one state on any regulatory matter could influence the
decisions of regulatory authorities in other jurisdictions.
The Company has not obtained any no-action letters or advance rulings
from any federal or state securities regulator or other governmental agency
concerning the legality of the Company's operations, and the Company is not
relying on an opinion of counsel to such effect. The Company accordingly is
subject to the risk that its multi-level network marketing system could be found
to be in noncompliance with applicable laws and regulations, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Such a decision could require the Company to modify its
multi-level network marketing system, result in negative publicity, or have a
negative effect on distributor morale and loyalty. In addition, the Company's
multi-level network marketing system will be subject to regulations in foreign
markets administered by foreign agencies should the Company expand its network
marketing organization into such markets.
Effect of State Securities Laws. Furthermore, the primary goal of the
Offering is to increase the motivation of regional directors by allowing them to
purchase an interest in the Company. Accordingly, because the Company desires
the ability to offer its Common Stock to regional directors in certain states,
the Company will attempt to register or qualify the Offering in such states. Due
to the varying nature of state securities regulations and the considerable
discretion given to state securities regulators, the Company may be unable to
register or qualify the Offering in certain states. The inability of the Company
to offer the Shares to residents of certain states may limit the ability of the
Company to attract IAs in such states, or lead to increased attrition of IAs in
such states, and may have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. An adverse
determination by any one state regulator on a securities regulatory matter could
influence the decisions of securities regulatory authorities in other
jurisdictions.
FACILITIES
The Company operates out of offices in Atlanta, Georgia consisting of
approximately 7,200 square feet of general and administrative office space and
approximately 5,500 square feet of training space. The Company believes that it
will be required to lease or build additional facilities, including at least one
additional call center and new corporate headquarters, in order to meet
adequately its needs in the future. The Company believes that suitable
additional or alternative space will be available in the future on commercially
reasonable terms as needed.
EMPLOYEES
As of March 31, 1998, the Company employed approximately 30 people. The
Company's IAs are classified by the Company as independent contractors; however,
two of the Company's employees are also IAs. The Company's employees are not
unionized, and the Company believes its relationship with its employees is good.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors and executive officers of the Company are set forth
below. The Company's Board of Directors consists of nine directors divided into
three classes of directors, serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or are
removed, or are otherwise disqualified to serve, or until their successors are
elected and qualified. Directors of the Company are elected at the annual
meeting of shareholders. Officers of the Company are appointed at the Board's
first meeting after each annual meeting of shareholders. The ages of the persons
set forth below are as of March 31, 1998.
<TABLE>
<CAPTION>
TERM AS
DIRECTOR
NAME AGE POSITIONS WITH THE COMPANY EXPIRES
- ---- --- -------------------------- -------
<S> <C> <C> <C>
Ivey J. Stokes.................. 39 Chairman of the Board of Directors 1998
Thomas O. Cordy................. 56 Chief Executive Officer, President and
Director 1998
Daniel McDonough................ 50 Chief Financial Officer -
James W. Brown.................. 62 Executive Vice President, Secretary and
Director 1999
Larry W. Gates, II.............. 35 Vice President - Human Resources and
Director 1999
Charles P. Bernstein............ 47 Director 2000
Alvin Curry..................... 41 Director 1998
Robert J. Glover, Jr............ 37 Director 1999
Terry Harris.................... 43 Director 2000
Philip E. Lundquist............. 62 Director 2000
</TABLE>
The Company has adopted a policy requiring that any material
transactions between the Company and persons or entities affiliated with
officers, directors or principal shareholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's
length transactions with independent third parties. Any other matters involving
potential conflicts of interests are to be resolved on a case-by-case basis. See
"Certain Transactions."
IVEY J. STOKES has served as Chairman of the Board of Directors of the
Company since its inception. Mr. Stokes started his marketing career in 1982 at
A.L. Williams Corporation ("A.L. Williams") where he became one of less than 400
National Sales Directors out of 1.3 million insurance agents. In March 1991, Mr.
Stokes left the financial services industry to launch his own independent
marketing firm, Global Marketing Alliance ("Global Alliance"). Over the next
five years, Mr. Stokes became one of the leading money earners in several
national network marketing firms. Mr. Stokes' marketing firm, Global Alliance,
has sponsored and trained over 150,000 distributors since 1991. Mr. Stokes has a
bachelors degree in industrial management from the Georgia Institute of
Technology.
THOMAS O. CORDY has served as Chief Executive Officer, President and a
Director of the Company since May 1997. Prior to that time, he served as
President and Chief Executive Officer of CI Cascade Corp. Mr. Cordy currently
serves as Vice Chairman of the Board of Trustees for Clark Atlanta University,
Chairman of the Board of Renaissance Capital Corporation and a Director of Cox
Enterprises. Mr. Cordy has a bachelors degree from Morehouse College and a
masters degree from Atlanta University. Mr. Cordy has attended the
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Stanford Executive Program at the Stanford School of Business and the University
of Oklahoma National Lending School.
DANIEL MCDONOUGH has served as Chief Financial Officer of the Company
since October 1997. Prior to his employment with the Company, Mr. McDonough
provided financial consulting services to a number of start up companies at
Creative Benefits, Inc. In addition, from 1992 to 1994, Mr. McDonough was the
controller of Jostens Learning Corporation, a $75 million technology company
specializing in educational software. Prior to his employment with Jostens, Mr.
McDonough served as assistant controller to Alumax, Inc., a $2.5 billion
integrated aluminum company with over 100 manufacturing operations throughout
the United States. From 1973 to 1980, Mr. McDonough was employed by Price
Waterhouse & Co. Mr. McDonough is a licensed CPA and also holds a masters of
business administration degree from the University of Buffalo.
JAMES W. BROWN currently serves as Executive Vice President and
Secretary of the Company and has been a Director of the Company since May 1997.
He served as President and Chief Executive Officer of the Company from inception
to April 1997. He has also served as Chief Executive Officer, President and a
Director of Maxxis 2000 since its inception. From 1995 to 1997, Mr. Brown has
served as a manager of NetWorld Communications, L.L.C. Since 1979, Mr. Brown has
also served as President and Chief Executive Officer of Marketing Ideas, Ltd.
Mr. Brown has a bachelors degree from the University of Georgia. He also
attended the John Marshall School of Law and the American Mutual Institute of
Management.
LARRY W. GATES, II has served as Vice President of Human Resources
since the Company's inception and a Director of the Company since May 1997. Mr.
Gates became a part-time independent insurance agent for A.L. Williams in 1989
while serving in the U.S. Army. In 1993, he left the financial services industry
and became a full-time independent marketer of telecommunications services
through his own independent marketing firm, Classic Enterprises. Mr. Gates built
a downline of over 10,000 distributors between 1993 and 1996. Mr. Gates has an
associates degree from Pierre College.
CHARLES P. BERNSTEIN has served as a Director of the Company since May
1997. Since 1992, Mr. Bernstein has also served as President of Harvest Mortgage
Co. From 1989 to 1992, Mr. Bernstein was the Vice President of Nationwide
Mortgage Resources, an underwriter and servicer of loans on residential and
commercial real estate. Mr. Bernstein holds an associates degree from the
University of South Carolina.
ALVIN CURRY has served as a Director of the Company since its
inception. He also serves as Executive Vice President and Chief Operating
Officer of Maxxis 2000. Mr. Curry started his marketing career in 1986 with A.L.
Williams, where he attained the position of Senior Vice President in less than
three years with A.L. Williams. In March 1991, Mr. Curry left the financial
services industry to join Mr. Stokes in Global Alliance. Mr. Curry attended
Northwest Mississippi Junior College and Tacoma Community College, and he
received a degree from the Knapp College of Business.
ROBERT JAMES GLOVER, JR. has served as a Director of the Company since
its inception. Mr. Glover started his marketing career as an independent
insurance agent with A.L. Williams in 1985, where he attained the sales position
of Senior Vice President. In December 1993, Mr. Glover left the financial
services industry and became an independent marketer of telecommunications
services through his own independent marketing firm, Glover Enterprises. Mr.
Glover's network marketing firm has sponsored and trained over 10,000
distributors. Mr. Glover attended Maryland University.
TERRY HARRIS has served as a Director of the Company since May 1997.
Since 1982, Mr. Harris has served as Pastor and President of Tacoma Christian
Center Inc. Mr. Harris has a bachelors degree from the University of Puget Sound
and attended Rhema Bible School.
PHILIP E. LUNDQUIST has served as a Director of the Company since May
1997. He also serves as Chairman of Christopher Partners Inc. Since 1988, Mr.
Lundquist has owned and operated an investment banking consulting company as a
sole proprietorship. From 1985 to 1988, Mr. Lundquist was the Director of
Corporate Finance for Deloitte Haskins & Sells in Atlanta, Georgia. Mr.
Lundquist has a bachelors degree
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<PAGE> 45
from Williams College and attended the Institute of Investment Banking at the
Wharton School, University of Pennsylvania.
COMMITTEES OF THE BOARD
The Company's Board of Directors recently established Executive, Audit
and Compensation Committees. The Executive Committee may, within certain
limitations, during the interval between Board meetings, exercise all of the
powers of the Company's Board of Directors. The Audit Committee is responsible
for reviewing and making recommendations regarding the Company's independent
auditors, the annual audit of the Company's financial statements and the
Company's internal accounting practices and policies. The Compensation Committee
will review and approve compensation arrangements for key employees, key
independent sales representatives and key consultants of the Company.
DIRECTOR COMPENSATION
Members of the Board of Directors are reimbursed for their
out-of-pocket expenses for each meeting attended, but otherwise serve without
compensation.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by the Company's current Chief Executive Officer and its former chief
executive officer for the Inception Period. No executive officers of the Company
received a combined salary and bonus in excess of $100,000 during the Inception
Period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
INCEPTION PERIOD
COMPENSATION
--------------------
SALARY BONUS
NAME AND PRINCIPAL POSITION ($) ($)
- --------------------------- ------ -----
<S> <C> <C>
Thomas O. Cordy(1)......................................... $5,250 $ --
Chief Executive Officer and President
James W. Brown(1).......................................... 7,950 --
Executive Vice President
</TABLE>
- -----------
(1) Mr. Brown served as the Chief Executive Officer and President of the
Company from inception to April 30, 1997, and Mr. Cordy has served as
Chief Executive Officer of the Company since May 1, 1997.
OPTION GRANTS DURING 1997
As of June 30, 1997, no options had been granted to the Chief Executive
Officer of the Company, and no executive officer of the Company received a
combined salary and bonus in excess of $100,000 during the Inception Period.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with Mr.
Cordy, and in September 1997, the Company entered into employment agreements
with each of Messrs. Brown and Curry and Mr. Shawn Dinwiddie (collectively, the
"Employment Agreements"). The Company intends to enter into an employment
agreement with Mr. McDonough. Generally, the Employment Agreements provide for a
minimum weekly salary. In addition, the employee may participate in a bonus
program and shall be eligible to receive quarterly
44
<PAGE> 46
or annual payments of a performance bonus based upon the achievement of targeted
levels of performance and such other criteria as the Board of Directors shall
establish from time to time. Mr. Cordy's employment agreement provides for an
additional bonus payment on July 1, 1998 and the purchase of Class A Common
Stock. Each employee may participate in insurance and other benefit plans of
similarly situated employees, including any stock option plans of the Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by giving
written notice. The Company can terminate each employee upon death or disability
(as defined in the Employment Agreements) or with or without cause upon delivery
to the employee of a notice of termination. If the employee is terminated
because of death, disability or cause, the employee will receive any accrued
compensation through the termination date and any accrued performance bonus,
unless the employee is terminated for cause. If the employee is terminated
without cause, the Company shall pay the employee severance payments equal to
his minimum base salary for each week during the six-month period following the
termination date. If the employee is a director or officer of the Company or any
of its affiliates, the employee shall tender his resignation to such positions
effective as of the termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the employee is terminated without cause, the non-compete period shall be six
months.
SALES REPRESENTATIVE AGREEMENTS
In September 1997, the Company entered into independent sales
representative agreements (collectively, the "Sales Representative Agreements")
with ten independent sales representatives, including Messrs. Stokes, Gates and
Glover. The Sales Representative Agreements provide for a minimum fee of $800.00
per week. Each sales representative shall also be eligible to receive quarterly
payments of a performance bonus which shall be a percentage of total revenue
from Maxxis 2000. To be paid a bonus, a sales representative must have 180 new
activations in a quarter. The bonus amount is then determined by the number of
open centers in that quarter. The bonus ranges from 1% of total revenue from
Maxxis 2000 if four centers are opened to 5% of the revenue if 20 centers are
opened. Each sales representative is an independent contractor, and the Company
does not exercise control over the activities of the sales representatives other
than as set forth in the Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and
the term renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each sales representative upon
death or disability (as defined in the Sales Representative Agreements) or with
or without cause upon delivery to the sales representative of a notice of
termination. If a sales representative is terminated, the sales representative
will receive any accrued fees through the termination date and any accrued
performance bonus, unless the sales representative is terminated for cause. If
the sales representative is a director or officer of the Company or any of its
affiliates, the sales representative shall tender his resignation to such
positions effective as of the termination date. Under the Sales Representative
Agreements, each sales representative agrees to maintain the confidentiality of
the Company's trade secrets and confidential business information.
CONSULTING AGREEMENT
In September 1997, the Company entered into a consulting agreement with
Mr. Robert P. Kelly. The consulting agreement provides for a minimum weekly
salary, and the consultant may participate in a bonus program and shall be
eligible to receive quarterly or annual payments of a performance bonus based
upon the achievement of targeted levels of performance and such other criteria
as the Board of Directors shall establish from time to time. The consultant is
an independent contractor, and the Company does not exercise control over the
activities of the consultant other than as set forth in the consulting
agreement.
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<PAGE> 47
The consulting agreement has a term of one year, and the term renews
daily until either party fixes the remaining term at one year by giving written
notice. The Company can terminate the consultant upon death or disability (as
defined in the consulting agreement) or with or without cause upon delivery to
the consultant of a notice of termination. If the consultant is terminated
because of death, disability or cause, the consultant will receive any accrued
fees through the termination date and any accrued performance bonus, unless the
consultant is terminated for cause. If the consultant is terminated without
cause, the Company shall pay the consultant severance payments equal to his
minimum base salary for each week during the six-month period following the
termination date.
Under the consulting agreement, the consultant agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The consultant also agrees for a period of one year following the
termination date, if he is terminated or resigns for any reason, not to compete
with or solicit employees or customers of the Company or any of its affiliates
within a 30-mile radius of the Company's corporate offices; provided, that if
the consultant is terminated without cause, the non-compete period shall be six
months.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Articles, the Company is obligated to indemnify each of
its directors and officers to the fullest extent permitted by Georgia Law with
respect to all liability and loss suffered and reasonable expenses incurred by
such person in any action, suit or proceeding in which such person was or is
made or threatened to be made a party or is otherwise involved by reason of the
fact that such person is or was a director or officer of the Company. The
Company is obligated to pay the reasonable expenses of the directors or officers
incurred in defending such proceedings if the indemnified party agrees to repay
all amounts advanced by the Company if it is ultimately determined that such
indemnified party is not entitled to indemnification. See "Description of
Capital Stock - Limitations on Liability of Officers and Directors."
STOCK OPTION PLAN
The Board of Directors intends (subject to shareholder approval or
ratification) to adopt a stock option plan which will permit the Company to
grant options to purchase shares of Common Stock to officers, directors, key
employees, advisors and consultants of the Company.
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<PAGE> 48
CERTAIN TRANSACTIONS
On February 16, 1997, Glover Enterprises, Inc., an affiliate of Robert
J. Glover, a director of the Company, loaned the Company $50,000 to fund initial
start-up costs of the Company. The Company has repaid this loan.
During the Inception Period, the Company paid a fee of $184,000 to IS
14, Inc. ("IS 14"), a former Delaware corporation which was controlled by
certain of the directors and officers of the Company. The IS 14 fee was
comprised of compensation for managerial, marketing and administrative services
performed by certain of the Company's officers and sales representatives prior
to the establishment of the Company's payroll. IS 14 has been dissolved, and the
Company will not make any additional payments to IS 14.
Pursuant to Mr. Cordy's employment agreement, The Anchora Company, an
affiliate of Mr. Cordy, purchased 800,000 shares of Class A Common Stock, at a
price of $0.15 per share. In exchange, The Anchora Company gave the Company a
$120,000 full recourse promissory note which bears interest at an annual rate of
8.75%. Mr. Cordy guaranteed the promissory note. The principal and interest on
the promissory note are due and payable on the earlier of May 1, 2002 or the
closing of an underwritten public offering where the Company receives aggregate
net proceeds of at least $5,000,000.
In December 1997, the Company borrowed approximately $53,000 from Mr.
Cordy to fund certain operational expenses. In February 1998, the Company
entered into the Cordy Note to memorialize such borrowing. The Cordy Note bears
interest at a fixed rate of 6% per year and is payable on demand. The Company
intends to repay the Cordy Note out of the proceeds of the Offering.
Certain of the transactions described above may be on terms more
favorable to officers, directors and principal shareholders than they could
obtain in a transaction with an unaffiliated third party. The Company has
adopted a policy requiring that all material transactions between the Company
and its officers, directors or other affiliates must: (i) be approved by a
majority of the disinterested members of the Board of Directors of the Company;
and (ii) be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties. See "Risk Factors - Transactions with Related
Parties."
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<PAGE> 49
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of June 10, 1998, and as adjusted
to reflect the sale of 450,000 Shares of Common Stock offered hereby, by: (i)
each person known by the Company beneficially to own more than 5% of the
outstanding shares of the Common Stock; (ii) each director of the Company; and
(iii) all directors and executive officers of the Company as a group. Except as
otherwise indicated, all persons listed have sole voting and investment power
with respect to their shares.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING(B) THE OFFERING(B)
-------------------- --------------------
NUMBER PERCENTAGE NUMBER PERCENTAGE
------ ---------- ------ ----------
NAME AND ADDRESS(A) OF BENEFICIAL OWNER
- ---------------------------------------
<S> <C> <C> <C> <C>
Alvin Curry(c) ................................ 636,363 40.5% 636,363 31.5%
King David Trust(d) ........................... 454,545 28.9 454,545 22.5
Cynthia Glover, trustee(e) .................... 181,818 11.6 181,818 9.0
The Anchora Company(f) ........................ 72,727 4.6 72,727 3.6
Charles P. Bernstein .......................... -- -- -- --
James W. Brown ................................ 47,272 3.0 47,272 2.3
Thomas O. Cordy(g) ............................ -- -- -- --
Larry W. Gates, II ............................ 45,454 2.9 45,454 2.3
Robert J. Glover(h) ........................... -- -- -- --
Terry Harris .................................. 3,636 * 3,636 *
Philip E. Lundquist ........................... -- -- -- --
Ivey J. Stokes(i) ............................. -- -- -- --
All directors and executive officers as a group
(10 persons) (c) - (i) ...................... 987,270 62.8 987,270 48.8
</TABLE>
- ---------------
* Less than one percent
(a) The address of the King David Trust and Alvin Curry is c/o Maxxis
Group, Inc., 1901 Montreal Drive, Suite 108, Tucker, Georgia 30084. The
address of Cynthia Glover, trustee, U/A Louise Glover dated January 10,
1997 is 7839 Taylor Circle, Riverdale, Georgia 30274. The address of
the Anchora Company is c/o Salem Management Company, Ltd., Design
House, Leeward Highway, P.O. Box 150, Providenciales Turks & Caicos
Island, B.W.I.
(b) In accordance with Rule 13d-3 under the Exchange Act, a person is
deemed to be the beneficial owner, for purposes of this table, of any
shares of Common Stock if such person has or shares voting power or
investment power with respect to such security, or has the right to
acquire beneficial ownership at any time within 60 days from June 10,
1998. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares.
(c) Includes 454,545 shares owned by the King David Trust of which Mr.
Curry, a director of the Company, is the trustee. Mr. Curry disclaims
beneficial ownership of such shares.
(d) All such shares are owned by the King David Trust of which Mr. Curry is
the trustee and Mr. Stokes' minor children are the beneficiaries. Mr.
Stokes, the Chairman of the Board, disclaims beneficial ownership of
such shares.
(e) All such shares are owned by Cynthia Glover, trustee, U/A Louise Glover
dated January 10, 1997. Ms. Glover is the wife of Robert J. Glover, a
director of the Company. Mr. Glover is the sole beneficiary and
disclaims beneficial ownership of such shares. In addition, Ms. Glover
disclaims beneficial ownership of such shares.
(f) All such shares are owned by The Anchora Company of which Mr. Cordy,
Chief Executive Officer and President of the Company, is the protector.
Mr. Cordy disclaims beneficial ownership of such shares.
(g) Excludes 72,727 shares owned by The Anchora Company, of which Mr. Cordy
is the protector. Mr. Cordy disclaims beneficial ownership of such
shares.
(h) Excludes 181,818 shares owned by Cynthia Glover, trustee, U/A Louise
Glover dated January 10, 1997 of which Mr. Glover is the sole
beneficiary. Mr. Glover disclaims beneficial ownership of such shares.
(i) Excludes 454,545 shares owned by the King David Trust of which Mr.
Stokes' minor children are the beneficiaries. Mr. Stokes disclaims
beneficial ownership of such shares.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock is only a summary and is
subject to the provisions of the Articles and Bylaws, which are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of Georgia Law.
GENERAL
The Articles authorize the Company to issue up to 20,000,000 shares of
Common Stock. As of the date hereof, 1,571,187 shares of Common Stock are issued
and outstanding and are held of record by 56 shareholders. In addition, the
Articles authorize the Company to issue up to 10,000,000 shares of preferred
stock, no par value per share, with such rights and preferences as the Board of
Directors shall determine.
COMMON STOCK
Each holder of shares of Common Stock is entitled to one vote at
shareholders' meetings for each share held. Subject to the prior rights of any
series of preferred stock that may be issued, holders of shares of Common Stock
are entitled to receive, pro rata, such dividends as may be declared by the
Board of Directors out of funds legally available therefor, and are also
entitled to share, pro rata, in any other distributions to the shareholders. The
Company anticipates that for the foreseeable future its earnings, if any, will
be retained for the operation and expansion of its business and that it will not
pay cash dividends. See "Dividend Policy." There are no redemption or sinking
fund provisions applicable to the Common Stock. Holders of shares of Common
Stock do not have any preemptive rights or other rights to subscribe for
additional shares. The outstanding shares of Common Stock are, and the shares
sold by the Company pursuant to this Offering will be, when issued and paid for,
fully paid and non-assessable.
PREFERRED STOCK AND WARRANTS
The Articles provide that the Board of Directors shall be authorized,
without further action by the holders of the Common Stock, to provide for the
issuance of shares of the preferred stock in one or more classes or series and
to fix the designations, powers, preferences and relative, participating,
optional and other rights, qualifications, limitations and restrictions thereof,
including the dividend rate, conversion rights, voting rights, redemption price
and liquidation preference; and to fix the number of shares to be included in
any such classes or series. Any preferred stock so issued may rank senior to the
Common Stock with respect to the payment of dividends or amounts upon
liquidation, dissolution or winding-up, or both. In addition, any such shares of
preferred stock may have class or series voting rights. Issuances of preferred
stock, while providing the Company with flexibility in connection with general
corporate purposes, may, among other things, have an adverse effect on the
rights of holders of Common Stock and, in certain circumstances, could have the
effect of making it more difficult for a third party to acquire control of the
Company or the effect of decreasing the market price of the Common Stock.
In November 1997, the Company entered into a demand promissory note to
fund expenses incurred in connection with the launch of the Company's
nutritional product line. On March 23, 1998, the Company converted the $200,000
principal amount of the promissory note into 36,359 Units at a price of $5.50
per Unit with each Unit consisting of one share of Preferred Stock and one
Warrant to purchase one share of Common Stock at a price of $5.50 per share. The
Preferred Stock is: (i) non-voting; (ii) entitled to an antidilution adjustment
only upon a stock split, recapitalization or similar event; (iii) entitled to a
liquidation preference over the Common Stock; and (iv) convertible into Common
Stock at the option of the holder at any time commencing 14 months following the
date of the issuance of the Preferred Stock and automatically upon the closing
of a public offering that occurs at least 14 months following the issuance of
the Preferred Stock and that provides gross proceeds to the Company of at least
$7,500,000. The Warrants are entitled to an antidilution adjustment only upon a
stock split, recapitalization or similar event and are not exercisable until 14
months following their date of issuance and remain exercisable at the option of
the holder until the seventh anniversary of their issuance.
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<PAGE> 51
CERTAIN PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW
Certain provisions of the Articles and Bylaws and the Georgia Law,
summarized in the following paragraphs, may be considered to have antitakeover
effects and may hinder, delay, deter or prevent a tender offer, proxy contest or
other attempted takeover that a shareholder may deem to be in such shareholder's
best interest, including such an attempted transaction as might result in
payment of a premium over the market price for shares held by such shareholder.
Classified Board of Directors. The Articles of Incorporation divide the
Board of Directors into three classes of directors serving staggered three-year
terms. As a result, approximately one-third of the Board of Directors are
elected at each annual meeting of shareholders. Currently, the terms of Class I
directors expire in 1998, the terms of Class II directors expire in 1999 and the
terms of Class III directors expire in 2000.
Advance Notice Provisions for Shareholder Nominations and Shareholder
Proposals; Actions by Written Consent of Shareholders. The Bylaws establish an
advance notice procedure for shareholders to make nominations of candidates for
election as directors or to bring other business before any meeting of
shareholders of the Company. Any shareholder nomination or proposal for action
at an upcoming shareholder meeting must be delivered to the Company no later
than the deadline for submitting shareholder proposals pursuant to Rule 14a-8
under the Exchange Act. The presiding officer at any shareholder meeting is not
required to recognize any proposal or nomination which did not comply with such
deadline.
The purpose of requiring shareholders to give the Company advance
notice of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of shareholders.
Although the Bylaws do not give the Board of Directors any power to disapprove
timely shareholder nominations for the election of directors or proposals for
action, they may have the effect of precluding a contest for the election of
directors or the consideration of shareholder proposals if the proper procedures
are not followed and of discouraging or deterring a third party from conducting
a solicitation of proxies to elect its own slate of directors or to approve its
own proposal.
Actions required to be taken at a shareholder meeting may be taken
without a meeting only if the unanimous written consent of the shareholders
entitled to vote at such meeting is obtained and delivered to the Company for
inclusion in its minute book or other corporate records.
Georgia Business Combination Statute. Pursuant to its Bylaws, the
Company is subject to the provisions of the Georgia Law, including provisions
prohibiting various "business combinations" involving "interested shareholders"
for a period of five years after the shareholder becomes an interested
shareholder of the Company. Such provisions prohibit any business combination
with an interested shareholder unless either (i) prior to such time, the Board
of Directors approves either the business combination or the transaction by
which such shareholder became an interested shareholder; (ii) in the transaction
that resulted in the shareholder becoming an interested shareholder, the
interested shareholder became the beneficial owner of at least 90% of the
outstanding voting stock of the Company which was not held by directors,
officers, affiliates thereof, subsidiaries or certain employee option plans of
the Company, or (iii) subsequent to becoming an interested shareholder, such
shareholder acquired additional shares resulting in such shareholder owning at
least 90% of the outstanding voting stock of the Company and the business
combination is approved by a majority of the disinterested shareholders' shares
not held by directors, officers, affiliates thereof, subsidiaries or certain
employee stock option plans of the Company. Under the relevant provisions of the
Georgia Law, a "business combination" is defined to include, among other things,
(i) any merger, consolidation, share exchange or any sale, transfer or other
disposition (or series of related sales or transfers) of assets of the Company
having an aggregate book value of 10% or more of the Company's net assets
(measured as of the end of the most recent fiscal quarter), with an interested
shareholder of the Company or any other corporation which is or, after giving
effect to such business combination, becomes an affiliate of any such interested
shareholder, (ii) the liquidation or dissolution of the Company, (iii) the
receipt by an interested shareholder of any benefit from any loan, advance,
guarantee,
50
<PAGE> 52
pledge, tax credit or other financial benefit from the Company, other than in
the ordinary course of business and (iv) certain other transactions involving
the issuance or reclassification of securities of the Company which produce the
result that 5% or more of the total equity shares of the Company, or of any
class or series thereof, is owned by an interested shareholder. An "interested
shareholder" is defined by the Georgia Law to include any person or entity that,
together with affiliates, beneficially owns or has the right to own 10% or more
of the outstanding voting shares of the Company, or any person that is an
affiliate of the Company and has, at any time within the preceding two-year
period, been the beneficial owner of 10% or more of the outstanding voting
shares of the Company. The restrictions on business combinations shall not apply
to any person who was an interested shareholder before the adoption of the
Bylaws which made the provisions applicable to the Company nor to any persons
who subsequently become interested shareholders inadvertently, subsequently
divest sufficient shares so that the shareholder ceases to be an interested
shareholder and would not, at any time within the five-year period immediately
before a business combination involving the shareholder have been an interested
shareholder but for the inadvertent acquisition.
Constituency Provisions. In addition to considering the effects of any
action on the Company and its shareholders, the Articles permit the Board of
Directors and the committees and individual members thereof to consider the
interests of various constituencies, including employees, customers, suppliers,
and creditors of the Company, communities in which the Company maintains offices
or operations, and other factors which such directors deem pertinent, in
carrying out and discharging the duties and responsibilities of such positions
and in determining what is believed to be in the best interests of the Company.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
The Articles provide that no director shall be personally liable to the
Company or any of its shareholders for any breach of the duties of such
position, except that such elimination of liability does not apply to: (i)
appropriations of business opportunities from the Company in violation of such
director's duties; (ii) knowing or intentional misconduct or violation of law;
(iii) liability for assent to distributions which are illegal or improper under
the Georgia Law or the Articles; and (iv) liability for any transaction in which
an improper personal benefit is derived. In addition, the Articles state that if
the Georgia Law is ever amended to allow for greater exculpation of directors
than presently permitted, the directors shall be relieved from liabilities to
the fullest extent provided by the Georgia Law, as so amended, without further
action by the Board or the shareholders of the Company, unless the Georgia Law
provides otherwise. No modification or repeal of this provision will adversely
affect the elimination or reduction in liability provided thereby with respect
to any alleged act occurring before the effective date of such modification or
repeal.
The Company intends to enter into agreements with each of its current
directors and executive officers pursuant to which it is obligated to indemnify
those persons to the fullest extent authorized by law and to advance payments to
cover defense costs against an unsecured obligation to repay such advances if it
is ultimately determined that the recipient of the advance is not entitled to
indemnification. The indemnification agreements will provide that no
indemnification or advancement of expenses shall be made (a) if a final
adjudication establishes that his actions or omissions to act were material to
the cause of action so adjudicated and constitute: (i) a violation of criminal
law (unless the indemnitee had reasonable cause to believe that his actions were
lawful); (ii) a transaction from which the indemnitee derived an improper
personal benefit; (iii) an unlawful distribution or dividend under the Georgia
Law; or (iv) willful misconduct or a conscious disregard for the just interests
of the Company in a derivative or shareholder action; (b) for liability under
Section 16(b) of the Exchange Act, or (c) if a final decision by a court having
jurisdiction in the matter determines that indemnification is not lawful.
At present, the Company is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of the
Company in which indemnification would be required or permitted under the Bylaws
or the Georgia Law.
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<PAGE> 53
SHAREHOLDERS' AGREEMENT
The Company and certain of its officers, directors and major
shareholders have entered into a Shareholders' Agreement whereby the
shareholders agreed to certain restrictions on the transfer or other disposition
of the shares of Common Stock held by each holder. In the event a shareholder
intends to transfer his or her Common Stock to a non-permitted transferee, the
Company and the remaining shareholders have a right of first refusal to purchase
the transferring shareholder's Common Stock at fair market value. In addition,
if the Company terminates a shareholder's employment or engagement (or the
employment or engagement of certain persons associated with a shareholder) as a
sales representative or consultant for cause, the Company shall have the right
to repurchase, at fair market value, an amount of the shareholder's Common Stock
which begins at 100% and declines 20% per year for each completed year of
service with the Company. If either the right of first refusal or the Company's
right to purchase is exercised, either provision could have the effect of
further concentrating the stock ownership and voting power of the Company. See
"Risk Factors - Shares Eligible for Future Sale."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming the sale of 450,000 Shares
offered hereby, the Company will have outstanding 2,021,187 shares of Common
Stock, 36,359 shares of Preferred Stock and Warrants to purchase 36,359 shares
of Common Stock. Of these shares, the 450,000 shares offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act, unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act. However, such shares will be
subject to certain restrictions on transfer including the restrictions set forth
in the Subscription Agreement. See "The Offering - Transfer Restrictions." The
remaining 1,643,905 shares of Common Stock outstanding upon completion of the
Offering and issuable upon the conversion of outstanding Preferred Stock and the
exercise of outstanding Warrants are "Restricted Securities" under Rule 144 of
the Securities Act in that they were originally issued and sold by the Company
in private transactions in reliance upon exemptions from the registration
provisions of the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
Restricted Securities have been fully paid for and held for at least one year
from the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold in
any three-month period does not exceed the greater of 1% of the then outstanding
shares of the Common Stock (approximately 20,000 shares based on the number of
shares to be outstanding after this Offering) or the average weekly trading
volume in the public market during the four calendar weeks preceding the filing
of the Seller's Form 144. Sales under Rule 144 are also subject to certain
notice requirements and the availability of current public information
concerning the Company. After two years have elapsed from the issuance of
Restricted Securities by the Company, such shares generally may be sold without
limitation by persons who have not been affiliates of the Company for at least
quarter. Rule 144 also provides that affiliates who are selling shares which are
not Restricted Securities must nonetheless comply with the same restrictions
applicable to Restricted Securities with the exception of the holding period
requirements.
Prior to the Offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts of Common Stock in the
open market may adversely affect the market price of the Common Stock offered
hereby. See "Risk Factors - Shares Eligible for Future Sale."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia.
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EXPERTS
The audited consolidated financial statements of the Company as of June
30, 1997 included in this Prospectus and elsewhere in the Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving said report.
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<PAGE> 55
MAXXIS GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants .................................. F-2
Consolidated Balance Sheet as of June 30, 1997 ............................ F-3
Consolidated Statement of Operations for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-4
Consolidated Statement of Shareholders' Equity for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-5
Consolidated Statement of Cash Flows for the
Period from January 24, 1997 (Inception) to June 30, 1997 ............... F-6
Notes to Consolidated Financial Statements ................ ............... F-7
Consolidated Balance Sheets as of March 31 (Unaudited)
and June 30, 1997 ....................................................... F-16
Consolidated Statement of Operations for the
Nine Months ended March 31, 1998 (Unaudited) ............................ F-17
Consolidated Statement of Cash Flows for the
Nine Months ended March 31, 1998 (Unaudited) ............................ F-18
Notes to Consolidated Financial Statements (Unaudited) .................... F-19
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Maxxis Group, Inc.:
We have audited the accompanying consolidated balance sheet of MAXXIS GROUP,
INC. (a Georgia corporation) AND SUBSIDIARIES as of June 30, 1997 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the period from January 24, 1997 (inception) to June 30, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Maxxis Group, Inc. and
subsidiaries as of June 30, 1997 and the results of their operations and their
cash flows for the period from January 24, 1997 (inception) to June 30, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
September 22, 1997
F-2
<PAGE> 57
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
ASSETS
<TABLE>
<CAPTION>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000
Short-term investments 10,000
Telecommunication receivables 25,000
Inventories 185,000
Prepaid expenses 12,000
Other current assets 23,000
---------
290,000
PROPERTY AND EQUIPMENT, NET 92,000
ORGANIZATIONAL COSTS, NET 76,000
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000
OTHER ASSETS 20,000
---------
$ 596,000
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 158,000
Commissions payable 42,000
Accrued liabilities 103,000
---------
303,000
---------
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000
Class A common stock, no par value; 1,363,636 shares authorized, 1,299,992 shares issued
and outstanding 127,000
Class B common stock, no par value; 16,818,182 shares authorized, 0 shares issued and
outstanding 0
Subscription receivable (120,000)
Accumulated deficit (74,000)
---------
Total shareholders' equity 293,000
---------
$596,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE> 58
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Telecommunication services $2,322,000
Marketing services 369,000
----------
Total revenues 2,691,000
----------
COST OF SERVICES:
Telecommunication services 761,000
Marketing services 255,000
----------
Total cost of services 1,016,000
----------
GROSS MARGIN 1,675,000
----------
OPERATING EXPENSES:
Selling and marketing 1,089,000
General and administrative 660,000
----------
Total operating expenses 1,749,000
----------
LOSS BEFORE INCOME TAX BENEFIT (74,000)
INCOME TAX BENEFIT 0
----------
NET LOSS $ (74,000)
==========
NET LOSS PER SHARE $ (0.05)
----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,571,187
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE> 59
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK STOCK
----------------------- SUBSCRIPTION SUBSCRIPTION ACCUMULATED
SHARES AMOUNT DEPOSITS RECEIVABLE DEFICIT TOTAL
--------- -------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 24, 1997 0 $ 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock 1,299,992 127,000 0 (120,000) 0 7,000
Stock subscription deposits 0 0 360,000 0 0 360,000
Net loss 0 0 0 0 (74,000) (74,000)
--------- -------- ------------ ------------ ----------- --------
BALANCE, JUNE 30, 1997 1,299,992 $127,000 $ 360,000 $ (120,000) $ (74,000) $293,000
========= ======== ============ ============ =========== ========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE> 60
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 24, 1997 (INCEPTION)
TO JUNE 30, 1997
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (74,000)
---------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 54,000
Changes in assets and liabilities:
Telecommunication receivables (25,000)
Inventories (185,000)
Prepaid expenses (12,000)
Other assets (43,000)
Commissions payable 42,000
Accounts payable 158,000
Accrued liabilities 103,000
---------
Total adjustments 92,000
---------
Net cash provided by operating activities 18,000
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (99,000)
Purchase of short-term investment (10,000)
Software development and organizational costs (241,000)
---------
Net cash used in investing activities (350,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock subscriptions 360,000
Proceeds from issuance of common stock 7,000
---------
Net cash provided by financing activities 367,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 35,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 0
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,000
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
=========
Cash paid for income taxes $ 0
=========
Stock issued for note receivable $ 120,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE> 61
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND PRESENTATION
DESCRIPTION OF BUSINESS AND OPERATIONS
Maxxis Group, Inc., a Georgia corporation, was incorporated on January 24,
1997 (inception) and is headquartered in Tucker, Georgia. The Company's
principal business operations are carried out through its wholly owned
subsidiaries, Maxxis 2000, Inc. and Maxxis Telecom, Inc., which began
operations in March 1997. Maxxis Group, Inc., together with its wholly owned
subsidiaries (collectively referred to as the "Company"), was founded for
the purpose of providing long-distance services and other consumable
products through a multilevel marketing system of independent associates
("Associates") to subscribers throughout the United States. The Company
currently markets both long-distance services and value-added
telecommunications services, such as travel cards, prepaid phone cards, 800
service, and international telecommunications service.
The Company has a limited operating history, and its operations are subject
to the risks inherent in the establishment of any new business. Since the
Company has only recently made the transition to an operating company, the
Company's ability to manage its growth and expansion will require it to
implement and continually expand its operational and financial systems,
recruit additional employees, and train and manage both current and new
employees. Growth may place a significant strain on the Company's
operational resources and systems, and failure to effectively manage this
projected growth would have a material adverse effect on the Company's
business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
All significant intercompany balances and transactions have been eliminated
in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
REVENUE RECOGNITION
Telecommunications services revenues are primarily comprised of prepaid
phone card sales to Associates. The Company purchases prepaid phone cards
from an independent tariffed long-distance reseller (the "Reseller").
Associates purchase these prepaid phone cards from the Company. Revenues
from the sale of these prepaid phone cards are recognized when the cards are
F-7
<PAGE> 62
sold to the Associates, net of an estimate of sales returns for defective or
unused cards. Associates have the right of return for defective or unused
cards for up to 30 days after the date of purchase.
Telecommunications services also consist of revenues generated from the
Company's agreement with the Reseller that provides for the Company to
receive a percentage of the gross long-distance revenues generated by the
Company's subscribers, less billing adjustments. The Company recognizes
long-distance revenues when services are provided by the Reseller, net of an
estimate for billing adjustments. The Reseller assumes the risk of all bad
debts. Amounts due to the Company related to this agreement are included in
telecommunication receivables in the accompanying balance sheet.
Marketing services revenues primarily consist of receipts from Associates
for application fees and purchases of distributor kits and sales aids, which
include starter kits of forms, promotional brochures, marketing materials,
and presentation materials.
COST OF SERVICES
Telecommunication services costs include the costs of purchasing the prepaid
phone cards from the Reseller.
Marketing services costs include the costs for printing and designing of
applications, starter kits, and sales aids.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses primarily consist of commissions paid to
Associates based on long-distance usage and the cost of sponsoring new
associates.
CONCENTRATIONS OF CREDIT RISK
The Company's subscribers are primarily residential and are not concentrated
in any specific geographic region of the United States. The Company
purchases its prepaid phone card services from a long-distance reseller.
Failure of this reseller to provide quality services and customer support
could have a material adverse effect on the Company's results of operations.
The Company has an additional agreement with the long-distance reseller to
provide subscriber services, which if terminated or canceled may
significantly impact results of operations of the Company. While the Company
believes it could contract with another long-distance reseller, the
potential disruption of services may have a material effect on the Company's
results of operations.
The Company's success will depend heavily on its ability to attract,
maintain, and motivate a large base of Associates who, in turn, sponsor
subscribers, customers, and other Associates. The Company anticipates a
significant turnover among Associates, which the Company believes is typical
of direct selling. The Company has begun establishing its network of
Associates; however, there can be no assurance that the Company will be
successful in establishing a viable network of Associates.
USE OF ESTIMATES
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
F-8
<PAGE> 63
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.
INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C>
Prepaid phone cards $ 25,000
Sales aids 160,000
---------
$ 185,000
=========
</TABLE>
Inventories are valued at the lower of purchased cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of five years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which requires that deferred income tax expenses be provided based
on estimated future tax effects of differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes calculated based on provisions of enacted tax
laws (Note 4).
ORGANIZATIONAL COSTS
The Company has capitalized certain organizational costs related to start-up
activities and the legal formation of the Company. These costs are amortized
over one year, and amortization expense was $25,000 for the period from
inception to June 30, 1997.
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Certain software development costs pertaining to a software application
which is used internally for processing applications and customer service
have been capitalized as incurred. Capitalization of software development
costs begins upon the establishment of technological feasibility. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized software development costs require
considerable judgement by management with respect to certain external
factors, including but not limited to anticipated future revenues, estimated
economic life, and changes in software and hardware technologies. These
software development costs are amortized over the estimated useful life of
three years, and amortization expense was $21,000 for the period from
inception to June 30, 1997.
OTHER ASSETS
Other assets include security deposits for lease obligations totaling
$20,000.
F-9
<PAGE> 64
SHORT-TERM INVESTMENTS
Included in short-term investments is a certificate of deposit recorded at
cost, which approximates the estimated fair value and matures in May 1998.
This investment has been pledged as collateral for one of the Company's cash
accounts.
NET LOSS PER SHARE
Net loss per share is based on the weighted average number of shares of
common stock outstanding under the requirements of Staff Accounting Bulletin
83. As a result, all shares issued prior to the issuance in connection with
the Registration Statement have been included as outstanding since
inception.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, accounts
receivable, and accounts payable. The carrying amounts of cash, accounts
receivable, and accounts payable approximate their fair values because of
the short-term maturity of such instruments.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share," which specifies the computation,
presentation, and disclosure requirements for earnings per share. The
Company will be required to adopt this new standard in the quarter ending
December 31, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. The Company will be required to adopt the new standard
in 1998, and all prior period information will be restated.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments
of an Enterprise and Related Information." This statement requires companies
to determine segments based on how management makes decisions about
allocating resources to segments and measuring their performance.
Disclosures for each segment are similar to those required under current
standards, with the addition of certain quarterly disclosure requirements.
SFAS No. 131 also requires entitywide disclosure about the products and
services an entity provides, the countries in which it holds material assets
and reports material revenues, and its significant customers. The Company
will be required to adopt the new standard in 1998, and all prior period
information presented will be restated.
The effect of adopting the above statements is not expected to be material
to the consolidated financial statements.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 1997:
F-10
<PAGE> 65
<TABLE>
<S> <C>
Furniture and fixtures $99,000
Less accumulated depreciation (7,000)
-------
Property and equipment, net $92,000
=======
</TABLE>
4. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities
are as follows at June 30, 1997:
<TABLE>
<S> <C>
Net operating losses $18,000
Valuation allowance (18,000)
-------
Net deferred tax assets $ 0
=======
</TABLE>
Based on uncertainties associated with the future realization of deferred
tax assets, the Company established a valuation allowance of $18,000 at June
30, 1997. At June 30, 1997, the Company had net operating loss carryforwards
of approximately $50,000, which will expire in the year 2012 unless
previously utilized.
The benefit for income taxes at June 30, 1997 was different than the amount
computed using the statutory income tax rate as follows:
<TABLE>
<S> <C>
Taxes computed at statutory rate $(17,000)
State income taxes, net of federal benefit (2,000)
Nondeductible expenses 1,000
Change in valuation allowance 18,000
--------
$ 0
========
</TABLE>
5. TRANSACTIONS WITH AFFILIATES
The Company has significant transactions with IS 14, Inc. ("IS 14"), which
is affiliated through common ownership. IS 14 has provided funding for
certain expenses incurred by the Company, and all amounts have been repaid
as of June 30, 1997. The Company paid to IS 14 in consideration for
marketing support a fee equivalent to a percentage of revenues totaling
$184,000 from inception to June 30, 1997, which is included in selling and
marketing operating expense in the accompanying consolidated statement of
operations. Amounts due to IS 14 related to this fee and included in
commissions payable in the accompanying consolidated balance sheet totaled
$9,000 at June 30, 1997.
6. SHAREHOLDERS' EQUITY
The articles of incorporation (the "Articles") authorize the Company to
issue up to 1,363,636 shares of Class A common stock and 16,818,182 shares
of Class B common stock. As of June 30, 1997, 1,299,992 shares of Class A
common stock are issued and outstanding and are held of record by 15
shareholders and the Company had received paid subscriptions for 218,181
shares of Class B common stock. In addition, the Articles authorize the
Company to issue up to 10,000,000 shares of preferred stock, no par value
per share, with such rights and preferences as the board of directors shall
determine; however, no preferred stock has been issued as of June 30, 1997.
F-11
<PAGE> 66
In February 1997, the Company sold 1,227,265 shares of the Company's Class A
common stock to the founders of the Company at $.006 per share. In May 1997,
the Company sold 72,727 shares of Class A common stock to an executive
officer for $1.65 per share in exchange for a $120,000 note receivable to an
affiliate of that individual due on the earlier of (i) May 1, 2002 or (ii)
the closing of an underwritten initial public offering with aggregate net
proceeds of at least $5 million. The note is guaranteed by the executive
officer, bears interest at 8.75% per year, compounded annually, and is
classified as a subscription receivable in the balance sheet. Each holder of
the Class A common stock is entitled to ten votes per share with respect to
each company matter voted on.
The Company and all of the holders of Class A common stock have entered into
a shareholders' agreement whereby the shareholders agreed to certain
restrictions on the transfer or other disposition of the shares of Class A
common stock held by each holder. In the event a shareholder intends to
transfer his or her Class A common stock to a nonpermitted transferee, the
Company and the remaining shareholders have a right of first refusal to
purchase the transferring shareholder's Class A common stock at fair market
value. In addition, if the Company terminates a shareholder's employment or
engagement as a sales representative or consultant for cause, the Company
shall have the right to repurchase, at fair market value, an amount of the
shareholder's Class A common stock which starts at 100% and declines 20% per
year for each completed year of service with the Company. If the right of
first refusal or the Company's right to purchase is exercised, these
provisions could have the effect of further concentrating the stock
ownership and voting power of the Company.
Additionally, in February 1997, the Company completed a private placement
offering for 272,727 shares of Class B common stock at a price of $1.65 per
share. The Class B common stock entitles each holder to one vote per share
with respect to each company matter voted on. Potential investors were
required to complete subscription agreements for the Class B common stock
and submit cash at the date of subscription. The Company reserved the right
to reject a subscription and refund amounts to a Class B subscriber at any
time prior to the acceptance of the subscription. At June 30, 1997, the
Company had received paid subscriptions for 218,181 shares of Class B common
stock. However, since these subscriptions had not yet been accepted by the
Company and no shares had been issued as of June 30, 1997, amounts received
from subscribers are included in stock subscription deposits in the
accompanying balance sheet. Subsequent to June 30, 1997, the Company has
accepted these subscriptions and additional subscriptions for 53,014 shares
of the Class B common stock.
Upon the closing of an initial public offering, each share of Class A common
stock then outstanding shall automatically be converted into one fully paid
and nonassessable share of Class B common stock. An "initial public
offering" means a public offering of the Company's capital stock for cash
which is offered and sold in a transaction that is registered under the
Securities Act through one or more underwriters, pursuant to an underwriting
agreement between the Company and such underwriters, resulting in aggregate
net proceeds of $5 million to the Company.
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment and office space under operating
leases. Total rental expense for the period ended June 30, 1997 was
approximately $45,000.
F-12
<PAGE> 67
Minimum lease payments under noncancelable leases for the years subsequent
to June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998 $124,000
1999 72,000
2000 39,000
2001 34,000
2002 and thereafter 0
--------
$269,000
========
</TABLE>
LITIGATION
The Company is subject to various claims and legal actions which arise in
the ordinary course of business. In the opinion of management, the ultimate
resolution of such matters will not have a material adverse effect on the
Company's financial position, liquidity, or results of operations.
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into an employment agreement with the chief
executive officer, and in September 1997, the Company entered into
employment agreements with the executive vice president, the chief financial
officer, and a director (collectively, the "Employment Agreements").
Generally the Employment Agreements provide for a minimum weekly salary. In
addition, the employee may participate in a bonus program and shall be
eligible to receive quarterly or annual payments of a performance bonus
based on the achievement of targeted levels of performance and such other
criteria as the board of directors shall establish from time to time. The
chief executive officer's Employment Agreement provides for an additional
bonus payment on July 1, 1998. Each employee may participate in insurance
and other benefit plans of similarly situated employees, including any stock
option plans of the Company.
Each of the Employment Agreements has a term of one year, and the term
renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each employee upon death or
disability (as defined in the Employee Agreements) or with or without cause
upon delivery of a notice of termination. If the employee is terminated
because of death, disability, or cause, the employee will receive any
accrued compensation through the termination date and any accrued
performance bonus, unless the employee is terminated for cause. If the
employee is terminated without cause, the Company shall pay the employee
severance payments equal to his minimum base salary for each week during the
six-month period following the termination date. If the employee is a
director or officer of the Company or any of its affiliates, the employee
shall tender his resignation to such positions effective as of the
termination date.
Under the Employment Agreements, each employee agrees to maintain the
confidentiality of the Company's trade secrets and confidential business
information. The employee also agrees for a period of one year following the
termination date if he is terminated or resigns for any reason not to
compete with or solicit employees or customers of the Company or any of its
affiliates within a 30-mile radius of the Company's corporate offices,
provided that if the employee is terminated without cause, the noncompete
period shall be six months.
F-13
<PAGE> 68
RELATIONSHIP WITH ASSOCIATES
Because Associates are classified as independent contractors and not as
employees of the Company, the Company is unable to provide them with the
same level of direction and oversight as company employees. While the
Company has policies and rules in place governing the conduct of the
Associates and intends to review periodically the sales tactics of the
Associates, it may be difficult to enforce such policies and rules.
Violation of these policies and rules might reflect negatively on the
Company and may lead to complaints to or by various federal and state
regulatory authorities. Violation of the Company's policies and rules could
subject the Company and its long-distance provider to complaints regarding
the unauthorized switching of subscribers' long-distance carriers (also
known in the industry as "slamming"). Such complaints could have a material
adverse effect on the Company's business, financial condition, and results
of operations.
REGULATION OF NETWORK MARKETING; EFFECT OF STATE LAWS
The Company's network marketing system is subject to or affected by
extensive government regulation, including, without limitation, federal and
state regulations governing the offer and sale of business franchises,
business opportunities, and securities. Various governmental agencies
monitor direct selling activities, and the Company could be required to
supply information regarding its marketing plan to such agencies. Although
the Company believes that its network marketing system is in material
compliance with the laws and regulations relating to direct selling
activities, there can be no assurance that legislation and regulations
adopted in particular jurisdictions in the future will not adversely affect
the Company's business, financial condition, and results of operations. The
Company could also be found to be in noncompliance with existing statutes or
regulations as a result of, among other things, misconduct by Associates,
who are considered independent contractors over whom the Company has limited
control; the ambiguous nature of certain of the regulations; and the
considerable interpretive and enforcement discretion given to regulators.
Any assertion or determination that the Company or the Associates are not in
compliance with existing statutes or regulations could have a material
adverse effect on the Company's business, financial condition, and results
of operations. An adverse determination by any one state on any regulatory
matter could influence the decisions of regulatory authorities in other
jurisdictions.
8. SUBSEQUENT EVENTS
In September 1997, the Company entered into independent sales representative
agreements (collectively, the "Sales Representative Agreements") with ten
independent sales representatives. The Sales Representative Agreements
provide for a minimum weekly salary, and each sales representative shall be
eligible to receive quarterly payments of a performance bonus based on the
achievement of targeted levels of performance. Each sales representative is
an independent contractor, and the Company does not exercise control over
the activities of the sales representatives other than as set forth in the
Sales Representative Agreements.
Each of the Sales Representative Agreements has a term of one year, and the
term renews daily until either party fixes the remaining term at one year by
giving written notice. The Company can terminate each sales representative
upon death or disability (as defined in the Sales Representative Agreements)
or with or without cause upon delivery to the sales representative of a
notice of termination. If a sales representative is terminated, the sales
representative will receive any accrued fees through the termination date
and any accrued performance bonus, unless the sales
F-14
<PAGE> 69
representative is terminated for cause. If the sales representative is a
director or officer of the Company or any of its affiliates, the sales
representative shall tender his resignation to such positions effective as
of the termination date. Under the Sales Representative Agreements, each
sales representative agrees to maintain the confidentiality of the Company's
trade secrets and confidential business information.
9. SUBSEQUENT TO DATE OF AUDITORS' REPORT
All share, per share, and weighted average share information in the
financial statements and notes thereto has been restated to reflect a
one-for-five reverse stock split effective October 8, 1997 and a
one-for-eleven reverse stock split effective February 17, 1998 for all
classes of common stock.
In addition, on February 17, 1998, the Company effected a plan of
reorganization pursuant to which each outstanding share of Class A common
stock and Class B common stock was converted into one share of common stock.
F-15
<PAGE> 70
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF
MARCH 31, 1998 (UNAUDITED)
AND JUNE 30, 1997
<TABLE>
<CAPTION>
June 30, MARCH 31,
ASSETS 1997 1998
- ------------------------------------------------------------------------------------- -------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 35,000 $ 229,000
Short-term investments 10,000 10,000
Telecommunication receivables 25,000 327,000
Inventories 185,000 181,000
Prepaid expenses 12,000 38,000
Other current assets 23,000 0
-------- -----------
290,000 785,000
PROPERTY AND EQUIPMENT, NET 92,000 146,000
ORGANIZATIONAL COSTS, NET 76,000 0
CAPITALIZED SOFTWARE DEVELOPMENT COSTS, NET 118,000 128,000
OTHER ASSETS 20,000 9,000
-------- -----------
$596,000 $ 1,068,000
======== ===========
<CAPTION>
June 30, MARCH 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1998
- ------------------------------------------------------------------------------------- --------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 158,000 $ 273,000
Commissions payable 42,000 84,000
Shareholder note payable 0 53,000
Accrued liabilities 103,000 166,000
Deferred revenue 0 27,000
--------- ----------
303,000 603,000
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Stock subscription deposits 360,000 0
Preferred stock, no par value; 10,000,000 shares authorized; 0 and 36,359
shares issued and outstanding at June 30, 1997 and March 31, 1998,
respectively 0 200,000
Common stock, no par value; 20,000,000 shares authorized, 1,299,992 and
1,571,187 shares issued and outstanding at June 30, 1997 and March 31,
1998, respectively 127,000 574,000
Subscription receivable (120,000) (120,000)
Accumulated deficit (74,000) (189,000)
--------- ----------
Total shareholders' equity 293,000 465,000
--------- ----------
$ 596,000 $1,068,000
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-16
<PAGE> 71
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Telecommunication services $3,939,000
Nutritional products 341,000
Marketing services 895,000
----------
Total revenues 5,175,000
----------
COST OF SERVICES:
Telecommunication services 1,081,000
Nutritional products 223,000
Marketing services 339,000
----------
Total cost of services 1,643,000
----------
GROSS MARGIN 3,532,000
----------
OPERATING EXPENSES:
Selling and marketing 1,994,000
General and administrative 1,653,000
----------
Total operating expenses 3,647,000
----------
LOSS BEFORE INCOME TAX BENEFIT (115,000)
INCOME TAX BENEFIT 0
----------
NET LOSS $ (115,000)
==========
NET LOSS PER SHARE $ (0.07)
==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,571,187
==========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-17
<PAGE> 72
MAXXIS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(115,000)
---------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 150,000
Changes in assets and liabilities:
Telecommunication receivables (302,000)
Inventories 4,000
Prepaid expenses (26,000)
Other assets 34,000
Commissions payable 42,000
Accounts payable 115,000
Accrued liabilities 63,000
Deferred revenue 27,000
---------
Total adjustments 107,000
---------
Net cash used in operating activities (8,000)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (100,000)
Software development costs (38,000)
---------
Net cash used in investing activities (138,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 53,000
Proceeds from issuance of common stock 87,000
Proceeds from sale of preferred stock 200,000
---------
Net cash provided by financing activities 340,000
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 194,000
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 35,000
---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 229,000
=========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 0
=========
Cash paid for income taxes $ 0
=========
Stock issued for note receivable $ 120,000
=========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-18
<PAGE> 73
MAXXIS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to Article 10 of
Regulation S-X of the Securities and Exchange Commission. The accompanying
unaudited consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to achieve a fair statement of
financial position and results for the interim periods presented. All such
adjustments are of a normal and recurring nature. It is suggested that these
consolidated financial statements be read in conjunction with the annual
financial statements of Maxxis Group, Inc. and Subsidiaries (the "Company")
and the notes thereto.
2. PROMISSORY NOTE
On February 28, 1998, a shareholder loan was converted into a demand
promissory note (the "Shareholder Note"). The Shareholder Note accrues
interest at 6% and is payable monthly beginning on January 1, 1998.
3. SHAREHOLDERS' EQUITY
Effective February 17, 1998, the Company declared a one for eleven reverse
stock split for all classes of common stock. The Company also effected a
plan of reorganization pursuant to which each outstanding share of Class A
common stock and Class B common stock was converted into one share of common
stock. All share, per share, and weighted average share information in the
financial statements has been restated for this stock split and
reorganization.
In addition, in February of 1998, the Company amended and restated their
articles of incorporation such that the Company is authorized to issue
20,000,000 and 10,000,000 shares of no par value common stock and nonvoting
preferred stock (the "Preferred Stock"), respectively. The Preferred Stock
has a liquidation preference of $5.50 per share (as adjusted for any
combinations, consolidations, stock distributions, or stock dividends with
respect to such shares) plus all declared or accumulated but unpaid
dividends. 100,000 shares of the Company's Preferred Stock has been
designated as Series A Non-Voting Convertible Preferred Stock (the "Series
A"). The Series A shareholders have the right to convert each share into
shares of common stock, as defined by a formula in the articles of
incorporation, at any time at least 14 months after the date of issuance. As
of March 31, 1998, each share of Series A is convertible into one share of
common stock pursuant to the aforementioned restriction.
On November 26, 1997, the Company entered into a promissory note (the
"Note") agreement with various lenders for an aggregate principal amount up
to $200,000, which was secured primarily by all of the assets of the
Company. The Note accrued interest at 10%, payable monthly beginning on
January 1, 1998, and principal was due on demand. On March 23, 1998, the
Note was exchanged for 36,359 shares of the Series A and 36,359 warrants
(the "Warrants") to purchase the Company's common stock. The Warrants are
exercisable 14 months after the issuance date and provide the right to
purchase common stock at $5.50 per share. The Warrants expire seven years
after the date of issuance.
F-19
<PAGE> 74
APPENDIX A
MAXXIS GROUP, INC. SUBSCRIPTION AGREEMENT
MAXXIS GROUP, INC.
1901 Montreal Road, Suite 108
Tucker, Georgia 30084
Ladies and Gentlemen:
You have informed me that Maxxis Group, Inc., a Georgia corporation
(the "Company"), is offering up to 450,000 shares of its Common Stock, no par
value per share (the "Common Stock"), at a price of $5.50 per share payable as
provided herein and as described in the Prospectus furnished with this
Subscription Agreement to the undersigned (the "Prospectus").
1. SUBSCRIPTION. Subject to the terms and conditions hereof, the
undersigned subscriber hereby tenders this subscription, together with payment
in United States currency by check, bank draft or money order payable to "Maxxis
Group, Inc." in the amount indicted below (the "Funds"), representing the
payment of $5.50 per share for the number of shares of Common Stock indicated
below. The total subscription price must be paid at the time the Subscription
Agreement is executed. Tender of this Subscription Agreement by the undersigned
subscriber constitutes the undersigned subscriber's offer to purchase the number
of shares of Common Stock indicated below.
2. ACCEPTANCE OF SUBSCRIPTION. It is understood and agreed that the
Company shall have the right to accept or reject this subscription in whole or
in part, for any reason whatsoever. The Company may reduce the number of shares
for which the undersigned subscriber has subscribed for any reason whatsoever by
indicating acceptance of less than all of the shares subscribed on its written
form of acceptance. This Subscription Agreement shall not be deemed accepted by
the Company until it is countersigned by a duly authorized officer of the
Company. Acceptance and/or deposit of the Funds by the Company shall not
constitute acceptance of this Subscription Agreement. However, if the Company
determines not to accept this Subscription Agreement, it shall return any Funds
received to the undersigned subscriber promptly following such determination.
3. LIMITATION ON DISPOSITIONS.
(a) To induce the Company to sell shares of Common Stock to the
undersigned subscriber, the undersigned subscriber:
(i) agrees not to sell or transfer the shares of Common Stock
purchased pursuant to this Subscription Agreement or any securities issued in
respect or on account thereof, whether by stock split, stock dividend or
otherwise (collectively, the "Shares") in any jurisdiction where the offer or
sale of such Shares would be unlawful prior to the registration or qualification
of such offer and sale under the laws of such jurisdiction unless: (i) such
registration or qualification is then effective in such jurisdiction and sets
forth such information as is in the Company's sole judgment then required to be
disclosed pursuant to the laws and regulations of such jurisdiction; or (ii)
registration and qualification are not required in such jurisdiction and, in
such case, as a condition to effecting the transfer of the Shares, agrees to
provide to the Company at the subscriber's expense a legal opinion, which must
be satisfactory to the Company and the Company's legal counsel in their sole
discretion, stating that the offer and sale of such Shares in such jurisdiction
may be accomplished without registration or qualification under the laws of such
jurisdiction;
(ii) agrees during the Lock-up Period (as defined in Section 3(c)
below) not to (x) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any Shares or (y) enter into any swap or other arrangement that
transfers all or a portion of the economic consequences
A-1
<PAGE> 75
associated with the ownership of any Shares (regardless of whether any of the
transactions described in clause (x) or (y) is to be settled by the delivery of
Shares, or such other securities, in cash or otherwise);
(iii) authorizes the Company to cause the transfer agent during the
Lock-up Period (as defined in Section 3(c) below) to decline to transfer any
Shares and/or to note stop transfer restrictions on the transfer books and
records of the Company with respect to any Shares;
(iv) agrees that any attempted or purported transfer not made in
accordance with the terms of this Subscription Agreement shall be void and of no
force or effect, and the Company shall have no obligation whatsoever to
recognize any such attempted or purported transfer; and
(v) agrees that a legend in substantially the following form will be
placed on certificates representing the Shares:
THE SHARES REPRESENTED BY THIS CERTIFICATE (THE "SHARES") ARE SUBJECT
TO CONDITIONS THAT MAY LIMIT THEIR TRANSFERABILITY. SUCH CONDITIONS ARE
SET FORTH IN A SUBSCRIPTION AGREEMENT (THE "SUBSCRIPTION AGREEMENT") BY
AND BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES. ANY
TRANSFEREE OF THESE SHARES TAKES SUCH SHARES SUBJECT TO THE CONDITIONS
SET FORTH IN THE SUBSCRIPTION AGREEMENT. ANY ATTEMPTED OR PURPORTED
TRANSFER OF THESE SHARES THAT IS NOT MADE IN ACCORDANCE WITH THE TERMS
OF THE SUBSCRIPTION AGREEMENT SHALL BE VOID AND OF NO FORCE OR EFFECT,
AND THE ISSUER SHALL HAVE NO OBLIGATION WHATSOEVER TO RECOGNIZE ANY
SUCH ATTEMPTED OR PURPORTED TRANSFER.
IN SUMMARY, THESE CONDITIONS PROVIDE THAT THESE SHARES MAY NOT BE SOLD
OR TRANSFERRED IN ANY JURISDICTION WHERE THE OFFER OR SALE OF SUCH
SHARES WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION OF
SUCH OFFER AND SALE UNDER THE LAWS OF SUCH JURISDICTION UNLESS: (I)
SUCH REGISTRATION OR QUALIFICATION IS THEN EFFECTIVE IN SUCH
JURISDICTION AND SETS FORTH SUCH INFORMATION AS IS IN THE COMPANY'S
SOLE JUDGMENT THEN REQUIRED TO BE DISCLOSED PURSUANT TO THE LAWS AND
REGULATIONS OF SUCH JURISDICTION; OR (II) REGISTRATION AND
QUALIFICATION ARE NOT REQUIRED IN SUCH JURISDICTION AND, IN SUCH CASE,
THE PROSPECTIVE TRANSFEROR, AS A CONDITION TO EFFECTING THE TRANSFER OF
THE SHARES, PROVIDES TO THE COMPANY AT SUCH TRANSFEROR'S EXPENSE A
LEGAL OPINION, WHICH MUST BE SATISFACTORY TO THE COMPANY AND THE
COMPANY'S LEGAL COUNSEL IN THEIR SOLE DISCRETION, STATING THAT THE
OFFER AND SALE OF SUCH SHARES IN SUCH JURISDICTION MAY BE ACCOMPLISHED
WITHOUT REGISTRATION OR QUALIFICATION UNDER THE LAWS OF SUCH
JURISDICTION.
IN ADDITION, THE ISSUER MAY ELECT TO IMPOSE A PROHIBITION ON THE SALE
OR TRANSFER OF THESE SHARES IN THE EVENT THE ISSUER DETERMINES TO FILE
A REGISTRATION STATEMENT WITH THE U.S. SECURITIES AND EXCHANGE
COMMISSION THAT SEEKS TO REGISTER SECURITIES OF THE ISSUER IN AN
INITIAL PUBLIC OFFERING THAT IS FIRMLY UNDERWRITTEN. SUCH RESTRICTION
MAY REMAIN IN EFFECT FOR A PERIOD ENDING 180 DAYS FOLLOWING THE
EFFECTIVENESS OF SUCH REGISTRATION STATEMENT. THE ISSUER MAY IMPOSE
THESE CONDITIONS BY GIVING WRITTEN NOTICE TO THE HOLDER OF RECORD OF
THESE SHARES. THE FOREGOING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE SUBSCRIPTION
A-2
<PAGE> 76
AGREEMENT, A COPY OF WHICH WILL BE PROVIDED FREE OF CHARGE BY THE
ISSUER TO ANY HOLDER, PROSPECTIVE PURCHASER OR TRANSFEREE OF THESE
SHARES UPON THEIR REQUEST.
(b) The restriction set forth in Section 3(a)(ii) may be imposed and
terminated by the Company by giving notice of the imposition or termination of
such restriction (the "Lock-up Notice") to holders of record of the Shares by
first class mail, postage prepaid (or, at the Company's option, certified mail,
return receipt requested), at the address of the holders of record of the Shares
on a date chosen by the Company that is at least one but no more than fifteen
days prior to such mailing. The restrictions set forth herein and the
termination of such restrictions shall be effective upon receipt of such notice,
which date of receipt shall be deemed to be three days following such mailing.
The Lock-up Notice may be given by the Company such that it is received during
the period beginning fifteen days prior to the filing by the Company of a
registration statement with the U.S. Securities and Exchange Commission (the
"SEC") whereby the Company first seeks to register its securities for sale to
the public in a firmly underwritten public offering (the "IPO Registration
Statement"), and ending upon the date that the IPO Registration Statement is
declared effective by the SEC (the "Effective Date").
(c) The restrictions set forth in Section 3(a)(ii) hereof shall be
effective on the date of receipt of the Lock-up Notice and shall remain in force
and effect until 180 days following the Effective Date (such period being
referred to as the "Lock-up Period") at which time such Lock-up Period shall
automatically terminate; provided, however, that the Company in its sole
discretion may elect to terminate the Lock-up Period from time to time prior to
the expiration of such 180-day period with respect to an identical specified
percentage of the Shares held as of the date of the Lock-up Notice by each
person who holds Shares. The Lock-up Period shall terminate if the Company files
an IPO Registration Statement but such registration statement is subsequently
withdrawn or is not declared effective within 180 days of filing with the SEC,
or if the Company transmits a Lock-up Notice prior to the filing of an IPO
Registration Statement but the IPO Registration Statement is not filed within 15
days of receipt of such notice; provided, however, that in any such event the
restrictions set forth in Section 3(a)(ii) shall survive and shall be applicable
to each subsequent filing of an IPO Registration Statement by the Company until
an IPO Registration Statement is first declared effective by the SEC.
(d) All obligations of the undersigned subscriber set forth herein
shall be binding upon the undersigned subscriber's heirs, personal
representatives, successors, transferees and assigns. As a condition to allowing
any transfer of Shares, the Company may require the proposed transferee to agree
in writing to the restrictions set forth in this Subscription Agreement.
4. ACKNOWLEDGMENTS. The undersigned subscriber hereby acknowledges that
he or she has received and reviewed a copy of the Prospectus and all amendments
thereto. This Subscription Agreement creates a legally binding obligation, and
the undersigned subscriber agrees to be bound by the terms of this Agreement.
5. REVOCATION. The undersigned subscriber agrees that once this
Subscription Agreement is tendered to the Company, it may not be withdrawn and
that this Agreement shall survive the death or disability of the undersigned
subscriber.
6. GOVERNING LAW. This Subscription Agreement shall be governed by the
laws of the State of Georgia without reference to the principles or rules
governing conflicts of laws. The undersigned subscriber and the Company hereby
consent to the jurisdiction of the state and federal courts sitting in the State
of Georgia.
7. ENTIRE AGREEMENT. This Subscription Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior agreements and
undertakings, both written and oral, between the undersigned and the Company
with respect to the subject matter hereof.
8. ASSIGNMENT. This Subscription Agreement may not be assigned by
operation of law or otherwise without the express written consent of the
Company.
A-3
<PAGE> 77
9. AMENDMENT. This Subscription Agreement may not be amended or
modified, except by an instrument in writing signed by, or on behalf of, the
undersigned and the Company.
BY EXECUTING THIS AGREEMENT, THE UNDERSIGNED SUBSCRIBER IS NOT WAIVING
ANY RIGHTS HE OR SHE MAY HAVE UNDER FEDERAL SECURITIES LAWS, INCLUDING THE
SECURITIES ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
A-4
<PAGE> 78
Please indicate in the space provided below the exact name or names and
addresses in which the stock certificate representing shares subscribed for
hereunder should be registered.
- ---------------------------------- ----------------------------------
Number of Shares Subscribed Name or Names of Subscribers
for (minimum 20 shares) (please print)
$
- ---------------------------------- ----------------------------------
Total Subscription Price at Please indicate form of ownership
$5.50 per share desired (individual, joint tenants
(funds must be enclosed) with right of survivorship,
tenants in common, trust,
corporation, partnership,
custodian, etc.)
Date: (L.S.)
----------------------------- ----------------------------
Signature of Subscriber(s)*
(L.S.)
- ---------------------------------- ----------------------------
Social Security Number or Federal Signature of Subscriber(s)*
Taxpayer Identification Number
STATE OF LEGAL RESIDENCE: STREET (RESIDENCE) ADDRESS:
- ---------------------------------- ----------------------------------
----------------------------------
----------------------------------
City, State and Zip Code
* When signed as attorney, trustee, administrator or guardian, please
give your full title as such. If a corporation, please sign in full
corporate name by president or other authorized officer. In the case of
joint tenants or tenants in common, each owner must sign.
FEDERAL INCOME TAX BACKUP WITHHOLDING
In order to prevent the application of federal income tax backup
withholding, each subscriber must provide the Escrow Agent with a correct
Taxpayer Identification Number ("TIN"). An individual's social security number
is his or her TIN. The TIN should be provided in the space provided in the
Substitute Form W-9, which is set forth below.
Under federal income tax law, any person who is required to furnish his
or her correct TIN to another person, and who fails to comply with such
requirements, may be subject to a $50 penalty imposed by the IRS.
Backup withholding is not an additional tax. Rather, the tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If backup withholding results in an overpayment of taxes, a refund may
be obtained from the IRS. Certain taxpayers, including all corporations, are not
subject to these backup withholding and reporting requirements.
If the shareholder has not been issued a TIN and has applied for a TIN
or intends to apply for a TIN in thee near future, "Applied For" should be
written in the space provided for the TIN on the Substitute Form W-9.
A-5
<PAGE> 79
SUBSTITUTE FORM W-9
Under penalties of perjury, I certify that: (i) the number shown on
this form is my correct Taxpayer Identification Number (or I am waiting for a
Taxpayer Identification Number to be issued to me), and (ii) I am not subject to
backup withholding because: (a) I am exempt from backup withholding; or (b) I
have not been notified by the Internal Revenue Service ("IRS") that I am subject
to backup withholding as a result of a failure to report all interest or
dividends; or (c) the IRS has notified me that I am no longer subject to backup
withholding.
You must cross out item (ii) above if you have been notified by the IRS
that you are subject to backup withholding because of underreporting interest or
dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from
the IRS that you are no longer subject to backup withholding, do not cross out
item (ii).
Each subscriber should complete this section.
- ---------------------------------- ----------------------------------
Signature of Subscriber Signature of Subscriber
- ---------------------------------- ----------------------------------
Printed Name Printed Name
- ---------------------------------- ----------------------------------
Social Security or Employer Social Security or Employer
Identification No. Identification No.
TO BE COMPLETED BY THE COMPANY:
Accepted as of ____________________, 199___, as to ______________
shares.
MAXXIS GROUP, INC.
By:
----------------------------------
Name:
Title:
A-6
<PAGE> 80
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................. 2
Prospectus Summary..................................... 3
Risk Factors........................................... 8
The Offering........................................... 20
Use of Proceeds........................................ 24
Dividend Policy........................................ 25
Capitalization......................................... 25
Dilution............................................... 26
Selected Consolidated Financial Data................... 27
Management's Discussion and
Analysis of Financial Condition
and Results of Operations............................ 28
Business............................................... 33
Management............................................. 42
Certain Transactions................................... 47
Principal Shareholders................................. 48
Description of Capital Stock........................... 49
Shares Eligible for Future Sale........................ 52
Legal Matters.......................................... 52
Experts................................................ 53
Index to Consolidated Financial Statements............. F-1
Subscription Agreement................................. A-1
</TABLE>
================================================================================
================================================================================
450,000 SHARES
[LOGO]
MAXXIS GROUP, INC.
COMMON STOCK
-----------------------------
P R O S P E C T U S
-----------------------------
, 1998
================================================================================
<PAGE> 81
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered hereby:
<TABLE>
<S> <C>
Registration Fee............................................ $ 758
Blue Sky Fees and Expenses.................................. 50,000*
Printing and Engraving...................................... 100,000*
Legal Fees and Expenses..................................... 100,000*
Accounting Fees and Expenses................................ 100,000*
Miscellaneous............................................... 49,242*
--------
Total................................................... $400,000*
========
</TABLE>
- ----------------------
* Estimated for filing purposes.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Georgia Business Corporation Code (the "Georgia Law") permits a
corporation to eliminate or limit the personal liability of a director to the
corporation or its shareholders for monetary damages for a breach of duty,
provided that no provision shall eliminate or limit the liability of a director
for: an appropriation of any business opportunity of the corporation; any act or
omission which involves an intentional misconduct or a knowing violation of law;
any transaction from which the director derives an improper personal benefit; or
any distribution that is illegal under Section 14-2-832 of the Georgia Law. The
Company's Articles contain a provision which limits the liability of a director
to the Company or its shareholders for any breach of duty as a director except
for a breach of duty for which the Georgia Law prohibits such limitation of
liability. This provision does not limit the right of the Company or its
shareholders to seek injunctive or other equitable relief not involving monetary
damages.
The Company's Articles and Bylaws contain certain provisions which
provide indemnification to directors of the Company that is broader than the
protection expressly mandated in Sections 14-2-852 and 14-2- 857 of the Georgia
Law. If a director or officer of the Company has been wholly successful, on the
merits or otherwise, in the defense of any action or proceeding brought by
reason of the fact that such person was a director or officer of the Company,
Sections 14-2-852 and 14-2-857 of the Georgia Law would require the Company to
indemnify such person against expenses (including attorneys' fees) actually and
reasonably incurred in connection therewith. The Georgia Law expressly allows
the Company to provide for greater indemnification rights to its officers and
directors, subject to shareholder approval.
The indemnification provisions in the Company's Articles and Bylaws
require the Company to indemnify and hold harmless each of its directors,
officers, employees and agents to the extent that he or she is or was a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, against expenses (including, but not
limited to, attorneys' fees and disbursements, court costs and expert witness
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with the action, suit or proceeding.
Indemnification would be disallowed under any circumstances where
indemnification may not be authorized by action of the board of directors, the
shareholders or otherwise, including any liability of a director for: (i) any
II-1
<PAGE> 82
appropriation, in violation of his duties, of any business opportunity of the
Company; (ii) any acts or omissions involving intentional misconduct or a
knowing violation of the law; (iii) any unlawful distribution as set forth in
Section 14-2-832 of the Georgia Law; or (iv) any transaction from which the
director received an improper personal benefit. Indemnified persons would also
be entitled to have the Company advance expenses prior to the final disposition
of the proceeding. If it is ultimately determined that they are not entitled to
indemnification, however, such amounts must be repaid.
The Company has the power, under its Bylaws, to obtain insurance on
behalf of any director, officer, employee or agent of the Company against any
liability asserted against or incurred by such person in any such capacity,
whether or not the Company has the power to indemnify such person against such
liability at that time under the Articles, Bylaws or the Georgia Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information relates to securities of the Company issued
or sold since the inception of the Company which were not registered under the
Securities Act:
(i) in February 1997, the Company sold 1,227,265 shares of Common
Stock to the founders of the Company for $0.006 per share;
(ii) in May 1997, in connection with Mr. Thomas O. Cordy's
employment as President and Chief Executive Officer of the
Company, the Company sold 72,727 shares of Common Stock to The
Anchora Company, an entity of which Mr. Cordy serves as
protector, for $1.65 per share;
(iii) in August 1997, the Company sold 271,195 shares of Common
Stock to 42 purchasers in a private placement for $1.65 per
share; and
(iv) in March 1998, the Company converted the principal amount of a
demand promissory note, pursuant to which nine persons had
loaned the Company an aggregate amount of $200,000, into Units
at a price of $5.50 per Unit with each Unit consisting of one
share of Preferred Stock and one Warrant.
Each of these transactions was completed without registration of the
respective securities under the Securities Act in reliance upon the exemptions
provided by Section 4(2) of the Securities Act and the rules and regulations
promulgated thereunder on the basis that such transactions did not involve a
public offering. All share data has been adjusted to reflect a one-for-five
reverse stock split effective October 8, 1997, a one-for-11 reverse stock split
effective February 17, 1998 and the conversion of each outstanding share of
Class A Common Stock and Class B Common Stock for one share of Common Stock
effective February 17, 1998.
ITEM 16. EXHIBITS
The exhibits filed as part of this Registration Statement are as
follows:
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
2.1** Plan of Reorganization of the Company effective as of February 17, 1998.
3.1** Amended and Restated Articles of Incorporation of the Company, as amended to date.
3.2** Amended and Restated Bylaws of the Company, as amended to date.
4.1** See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws defining the
rights of holders of Common Stock of the Company.
4.2** Specimen Common Stock certificate.
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT NO. Exhibit Description
----------- -------------------
<S> <C>
4.3** Shareholders Agreement, dated as of September 1, 1997 among
the Company and the holders of Class A Common Stock.
4.4** Amended and Restated Shareholders Agreement, dated as of
February 18, 1998 among the Company and certain holders of its
Common Stock.
5.1** Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel
to the Company, as to the legality of the shares being
registered.
10.1** Form of Employment Agreement by and between the Company and
certain of its officers.
10.2** Employment Agreement by and between the Company and Thomas O.
Cordy dated May 1, 1997.
10.3** Promissory Note by The Anchora Company in favor of the Company
dated as of May 1, 1997 in the original principal amount of
$120,000.
10.4** Guarantee by Thomas O. Cordy in favor of the Company dated May
1, 1997.
10.5** Form of Independent Sales Representative Agreement by and
between the Company and certain of its sales representatives.
10.6** Consulting Agreement by and between the Company and Robert P.
Kelly dated as of September 1, 1997.
10.7** Software License Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company dated
February 2, 1997.
10.8** Software Service Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company dated
February 2, 1997.
10.9R** Equipment Purchase Agreement between Summit V. Inc., a
subsidiary of Jenkon International, Inc. and the Company dated
February 2, 1997.
10.10** Agreement for 1-Plus Services between Colorado River
Communications Corporation and the Company dated February 20,
1997.+
10.11R Sublease Agreement between DowElanco and the Company dated
February 14, 1997.
10.12** Warehouse lease between Malon D. Mimms and the Company dated
March 17, 1997.
10.13** Warehouse lease between Malon D. Mimms and the Company dated
June 23, 1997.
10.14** Demand Secured Promissory Note dated November 26, 1997 by the
Company in favor of the lenders named on Schedule I thereto.
10.15R Sub-Sublease Agreement between the Company and Simons
Engineering, Inc. dated September 1, 1997.
10.16** Demand Promissory Note dated February 28, 1998 by the Company
in favor of Thomas O. Cordy.
10.17** Form of Stock Purchase Warrant.
21.1** Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2** Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in Exhibit 5.1).
24.1** Power of Attorney.
27.1** Financial Data Schedule.
</TABLE>
- ----------------
** Previously filed.
+ Confidential treatment has been requested for certain confidential
portions of this exhibit pursuant to Rule 406 under the Securities Act.
In accordance with Rule 406, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
II-3
<PAGE> 84
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes as follows:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration
Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Act;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high and of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the SEC pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement.
(2) That, for the purpose of determining any liability
under the Act, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer, or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under
the Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-4
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Atlanta, State of Georgia, on the 10th day of June, 1998.
MAXXIS GROUP, INC.
By: /s/ Thomas O. Cordy
-------------------------------------
Thomas O. Cordy
Chief Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ---------- ----- ----
<S> <C> <C>
* Chairman of the Board June 10, 1998
- ---------------------------------------------
Ivey J. Stokes
/s/ Thomas O. Cordy Chief Executive Officer, President June 10, 1998
- --------------------------------------------- and Director (Principal executive
Thomas O. Cordy officer)
/s/ Daniel McDonough Chief Financial Officer June 10, 1998
- --------------------------------------------- (Principal financial
Daniel McDonough and accounting officer)
* Director and Secretary June 10, 1998
- ---------------------------------------------
James W. Brown
* Director June 10, 1998
- ---------------------------------------------
Charles P. Bernstein
* Director June 10, 1998
- ---------------------------------------------
Alvin Curry
* Director June 10, 1998
- ---------------------------------------------
Larry W. Gates, II
* Director June 10, 1998
- ---------------------------------------------
Robert J. Glover, Jr.
* Director June 10, 1998
- ---------------------------------------------
Terry Harris
* Director June 10, 1998
- ---------------------------------------------
Phil Lundquist
*By: /s/ Thomas O. Cordy
---------------------------------------------
Thomas O. Cordy
Attorney-in-Fact pursuant to the power of
attorney granted in Registration
Statement (No. 333-38623) as filed
October 24, 1997.
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.11R
SUBLEASE
1. PARTIES.
This Sublease, dated ___________________, 1997 is made between
DowElanco ("Sublessor"), and IS 14 Inc. ("Sublessee").
2. MASTER LEASE
Sublessor is the lessee under a written lease dated November 23, 1993,
wherein QRE Holding, a California Corporation ("Lessor") leased to
Sublessor the real property located in the City of Roswell, County of
Fulton, State of Georgia, described as 1080 Holcomb Bridge Road -
Roswell Summit, Building 100, Suite 135 ("Master Premises"). Said lease
is herein referred to as the "Master lease" and is attached hereto as
Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): Approximately 3,938 square feet, Building 100, Suite 135.
The Sublessee agrees to take the premises "As Is"; and that no tenant
improvement work is to be performed by QRE Holding Company as the
landlord relative to the Sublease.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease
has not been amended or modified except as expressly set forth herein,
that Sublessor is not now, and as of the commencement of the Term
hereof will not be, in default or breach of any of the provisions of
the Master Lease, and that Sublessor has no knowledge of any claim by
Lessor that Sublessor is in default or breach of any of the provisions
of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on February 15, 1997,
("Commencement Date"), or when Lessor consents to this Sublease (if
such consent is required under the Master Lease), whichever shall last
occur, and end on November 30, 1998 , ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this
Sublease. In the event the Term commences on a date other than the
Commencement Date, Sublessor and Sublessee shall execute a memorandum
setting forth the actual date of commencement of the Term. Possession
of the Premises ("Possession") shall be delivered to Sublessee on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor
shall not be subject to any liability for such failure, the Termination
Date shall not be extended by the delay, and the validity of this
Sublease shall not be impaired, but rent shall abate until delivery of
Possession. Notwithstanding the foregoing, if Sublessor has not
delivered Possession to Sublessee within ten (10) days after the
Commencement Date, then at any time thereafter and before delivery of
Possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set
forth an effective date for such cancellation which shall be at least
three (3) days after delivery of said notice to Sublessor. If Sublessor
delivers Possession to Sublessee on or before such effective date, this
Sublease shall remain in full force and effect. If Sublessor fails to
deliver Possession to Sublessee on or before such effective date, this
Sublease shall be canceled, in which case all consideration previously
paid by Sublessee to Sublessor on account of this Sublease shall be
returned to Sublessee, this Sublease shall thereafter be of no further
force or effect, and Sublessor shall have no further liability to
Sublessee on account of such delay or cancellation. If Sublessor
permits Sublessee to take Possession prior to the commencement of the
Term, such early Possession shall not advance the Termination Date and
shall be subject to the provisions of this Sublease, including without
limitation the payment of rent. In addition the Subtenant has no right
to extend the lease term.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum
rent, without deduction, setoff, notice, or demand, at
Director - Site Operations - DowElanco - 9330 Zionsville Road
- Indianapolis, IN 46268 or at such other place as Sublessor
shall designate from time to time by notice to Sublessee, the
sum of Five Thousand Three Hundred Thirty Two and 71/100
Dollars ($5,332.71) per month, in advance on the first day of
each month of the Term. Sublessee shall pay to Sublessor upon
execution of this Sublease Five Thousand Three Hundred Thirty
Two and 71/100 Dollars ($5,332,71) as rent for March 1997. If
the Term begins or ends on a day other than the first or last
day of a month, the rent for the partial months shall be
prorated on a per diem basis. Additional provisions: Rent
commencement shall begin March 1, 1997.
<PAGE> 2
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease
the sum of Fifteen Thousand Nine Ninety Eight Hundred and 12/100
Dollars ($15,998.12) as security for Sublessee's faithful performance
of Sublessee's obligations hereunder ("Security Deposit"). If Sublessor
fails to pay rent or other charges when due under this Sublease, or
fails to perform any of its other obligations hereunder, Sublessor may
use or apply all or any portion of the Security Deposit for the payment
of any rent or other amount then due hereunder and unpaid, for the
payment of any other sum for which Sublessor may become obligated by
reason of Sublessee's default or breach, or for any loss or damage
sustained by Sublessor as a result of Sublessee's default or breach. If
Sublessor so uses any portion of the Security Deposit, Sublessee shall,
within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and
Sublessee's failure to do so shall constitute a default under this
Sublease. Sublessor shall not be required to keep the Security Deposit
separate from its general accounts, and shall have no obligation or
liability for payment of interest on the Security Deposit. In the event
Sublessor assigns its interest in this Sublease, Sublessor shall
deliver to its assignee so much of the Security Deposit as is then held
by Sublessor within (10) days after the Term has expired, or Sublessee
has vacated the Premises, or any final adjustment pursuant to
Subsection 6.2 hereof has been made, whichever shall last occur, and
provided Sublessee is not then in default of any of its obligations
hereunder, the Security Deposit or so much thereof as had not
theretofore been applied by Sublessor, shall be applied to the last two
months of the term, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office
purpose, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any
part of the Premises without the prior written consent of Sublessor
which consent shall not be unreasonably withheld (and the consent of
Lessor, if such is required under the term of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sublease as if Sublessor were
the lessor thereunder, Sublessee the lessee thereunder, and the
Premises the Master Premises, except for the following: None*.
Sublessee assumes and agrees to perform the lessee's obligations under
the Master Lease during the Term to the extent that such obligations
are applicable to the Premises, except that the obligation to pay rent
to Lessor under the Master Lease shall be considered performed by
Sublessee to the extent and in the amount rent is paid to Sublessor in
accordance with Section 6 of this Sublease. Sublessee shall not commit
or suffer any act or omission that will violate any of the provisions
of the Master Lease. Sublessor shall exercise due diligence in
attempting to cause Lessor to perform its obligations under the Master
Lease for the benefit of Sublessee. If the Master Lease terminates,
this Sublease shall terminate and the parties shall be relieved of any
further liability or obligation under this Sublease, provided however,
that if the Master Lease terminates as a result of a default or breach
by Sublessor or Sublessee under this Sublease and/or the Master Lease,
then the defaulting party shall be liable to the nondefaulting party
for the damage suffered as a result of such termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor shall not constitute a default or
breach hereunder.
*Except as specifically set forth within this sublease, this sublease is not to
be construed as an amendment to the Lease Agreement in any report.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against the
other arising out of or in connection with this Sublease, the
prevailing party shall be entitled to recover its costs of suit and
reasonable attorney's fees.
12. AGENCY DISCLOSURE:
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except: CB
COMMERCIAL REAL ESTATE GROUP, INC., who represents the Sublessor and
Richard Bowers & Co. who represents Sublessee. In the event that CB
COMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and
Sublessee, Sublessor
2
<PAGE> 3
and Sublessee hereby confirm that they were timely advised of the dual
representation and that they consent to the same, and that they do not
expect said broker to disclose to either of them the confidential
information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
is under the terms of the Master Lease), Sublessor shall pay Broker a
real estate brokerage commission in accordance with Sublessor's
contract with Broker for the subleasing of the Premises, if any, and
otherwise in the amount of Nine Thousand Eight Hundred Twenty Nine and
96/100 Dollars ($9,829.96), for services rendered in effecting this
Sublease. Broker is hereby made a third party beneficiary of this
Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to
be given by either party on the other hereunder shall be in writing.
All notices and demands by the Sublessor to Sublessee shall be sent by
United States Mail, postage prepaid, addressed to the Sublessee at the
Premises, and to the address hereinbelow, or to such other place as
Sublessee may from time to time designate in a notice to the Sublessor.
All notices and demands by the Sublessee to Sublessor shall be sent by
United States Mail, postage prepaid, addressed to the Sublessor at the
address set forth herein, and to such other person or place as the
Sublessor may from time to time designate in a notice to the Sublessee.
Copies of any notices that are sent between the Sublessor and Sublessee
should be sent to QRE Holding Company as the Landlord.
To Sublessor: Director-Site Operations-DowElanco-9330-Zionsville
Road-Indianapolis, IN 46268
To Sublessee: 1700 Westlake Avenue North, Suite 400, Seattle,
Washington 98109
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY VIA
A LETTER BY THE LESSOR. (DATED ________________).
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative
orders having jurisdiction over the parties, property or the subject
matter of this Agreement, including, but not limited to, the 1964 Civil
Rights Act and all amendments thereto, the Foreign Investment In Real
Property Tax Act, the Comprehensive Environmental Response Compensation
and Liability Act and The Americans With Disabilities Act.
Sublessor: DOWELANCO Sublessee: IS 14, INC.
----------------------- ----------------------
By: /s/ Douglas C. Vawter By: /s/ James W. Brown
------------------------------ -----------------------------
Title: Director Site Operations Title: President
--------------------------- --------------------------
Date: 2/14/97 Date: 2/14/97
---------------------------- ---------------------------
3
<PAGE> 4
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor), lessor under the Master Lease, hereby consents to the
foregoing Sublease without waiver of any restriction in the Master Lease
concerning assignment or subletting. Lessor certifies that, as of the date of a
execution hereof, Sublessor is not in default or breach of any of the provisions
of the Master Lease, and that the Master Lease has not been amended or modified
except as expressly set forth in the foregoing Sublease.
Lessor: QRE HOLDING COMPANY, A CALIFORNIA CORPORATION
-------------------------------------------------
By:
-----------------------------------------------------
Title:
--------------------------------------------------
By:
-----------------------------------------------------
Title:
--------------------------------------------------
Date:
---------------------------------------------------
- --------------------------------------------------------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
- --------------------------------------------------------------------------------
SPECIAL STIPULATIONS
Sublessor agrees to sell Sublessee the three (3) existing work stations for
$550.00 each. These work stations will become the property of the Sublessee at
the end of the lease term.
4
<PAGE> 5
EXHIBIT A
LEASE AGREEMENT
ROSWELL SUMMIT OFFICE PARK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C> <C>
1. Lease Data and Exhibits 1
2. Premises 2
3. Commencement - Expiration Dates 2
4. Rent 3
5. Security Deposit 3
6. Uses 3
7. Services and Utilities 3
8. Cost of Services and Utilities 5
9. Real Property Taxes 7
10. Improvements 7
11. Care of Premises 7
12. Acceptance of Premises 7
13. Special Improvements 7
14. Access 8
15. Damage or Destruction 8
16. Waiver of Subrogation 8
17. Indemnification and Liability Insurance 9
18. Assignment and Subletting 10
19. Advertising 11
20. Liens and Insolvency 11
21. Defaults 11
22. Quiet Enjoyment 12
23. Priority 12
24. Surrender of Possession 12
25. Removal of Property 12
26. Non-Waiver 12
27. Holdover 12
28. Condemnation 13
29. Notices 13
30. Costs and Attorney's Fees 14
31. Landlord's Liability 14
32. Waiver of Jury Trial 14
33. Estoppel Certificates 14
34. Transfer of Landlord's Interest 15
35. Right to Perform 15
36. Substituted Premises 15
37. Exculpation of Landlord 15
38. Hazardous Waste 15
39. ADA 16
40. General 16
41. Signature Blocks 19
Exhibit "A" - Floorplan
Exhibit "B" - Special Stipulations
</TABLE>
1
<PAGE> 6
LEASE AGREEMENT
ROSWELL SUMMIT OFFICE PARK
THIS LEASE (the "Lease") made this 23rd day of November, 1993, between
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK ("Landlord"), and DOWELANCO
("Tenant").
As parties thereto, Landlord and Tenant agree that the following terms
as used herein shall have the meanings provided in this Section 1, unless
otherwise specifically modified by provisions of this Lease:
1. LEASE DATA AND EXHIBITS:
1.1 Office Park: ("Park), known as Roswell Summit park situated on
the real property located at 1080 Holcomb Bridge Road,
Roswell, Georgia 30076.
1.2 Premises: Consisting of that area in Building 100 (the
"Building), on the first floor and known as Suite 135 as
outlined on Exhibit A.
1.3 Agreed Areas: As used in this Lease, Landlord and Tenant agree
to the following areas and percentage:
Total rentable area of the Building 63- 286 s.f.
Area of Tenant's Premises 3,516 s.f.
Tenant prorated share of common area 422 s.f.
Tenant total rentable area 3,938 s.f.
Tenant percentage of the Building 6.22 % *
* This percentage shall not vary with the occupancy of the Building.
1.4 Leasehold Improvement Plan Date: September 15, 1993
1.5 Lease Commencement Date: December 1, 1993 or such earlier or
later date as provided In Section 3 hereof ("Commencement
Date").
1.6 Expiration Date: November 30, 1998
1.7 Rent: Rent shall be $4,577.93 per month, which is $54,935.16
per year ("Base Rent"). This Base Rental shall increase in the
second year and each subsequent year by three percent (3%)
compounded annually. Said increases shall be paid on a monthly
basis beginning with the first month of the second year, and
continue for each succeeding year of this Lease. Tenant has
paid to Landlord on the date hereof $4,577.93 to be applied to
the first full month's rent payable plus any prorated month
which is applicable.
1.8 Notices and Payment Address:
Tenant: DowElanco
9330 Zionsville Road
Indianapolis, IN 46268
ATTN: Director, Site Operations
Landlord: The Mutual Life Insurance Company of New York
5775-E Glenridge Drive
Suite 100
Atlanta, GA 30328
ATTN: Regional Vice President
With a copy of all notices to:
ARES
5775-B Glenridge Drive
Suite 220
Atlanta, GA 30328
ATTN: Vice President
<PAGE> 7
1.9 Exhibits: The following exhibits and riders are made apart of
this Lease:
Exhibit A - Floor plan of Premises
Exhibit B - Special Stipulations
2. PREMISES: Landlord does hereby lease to Tenant, and Tenant does hereby
lease from Landlord, upon the terms and conditions herein set forth,
the Premises described in Section 1.2 hereof and as more particularly
shown on Exhibit A attached hereto and Incorporated herein.
3. COMMENCEMENT - EXPIRATION DATES:
3.1 Lease Commencement Date: The Lease Commencement Date
shall be:
3.1.1 The date specified in Section 1.5 unless notice is
delivered pursuant to Subsection 3.1.2 or unless
Tenant occupies earlier, pursuant to Subsection
3.1.3.
3.1.2 Such earlier or later date as may be specified in a
notice delivered to Tenant at least thirty (30) days
before such date upon which the Premises, together
with the common facilities for access and service
thereto, have been completed; or
3.1.3 If Tenant shall occupy the Premises for Permitted
Uses prior to the date specified In Subsection 1.5 or
in the notice provided under Subsection 3.1.2, the
date of such early occupancy.
3.2 Tenant Obligations: If Tenant's improvements are not completed
on the Lease Commencement Date specified in Section 1.5 or as
provided in Subsection 3.1.2 above, whichever is applicable,
due to the failure of Tenant to fulfill any obligation
pursuant to the terms of this Lease or any Exhibit thereto,
including without limitation Tenant's failure to comply with
the Plan Delivery Date described in section 1.4, the Lease
shall be deemed to have commenced upon the Lease Commencement
Date specified in Section 1.5 or as provided in Subsection
3.1.2 above, as applicable.
3.3 Tenant's Termination Rights: In the event a Lease Commencement
Date as provided in Subsection 3.1.2 above does not occur
within sixty (60) days following the Lease Commencement Date
specified in Section 1.5. Tenant may terminate this Lease by
written notice; provided, however, that such period may at
Landlord's sole option be extended by any period, not to
exceed one (1) year from the Lease Commencement Date specified
in Section 1.5 for delays due to casualties, acts of God,
strikes, shortages of labor or materials or other causes
beyond the reasonable control of Landlord. If the Lease
Commencement Date has not occurred within such extension
period, this Lease shall be deemed null and void and all
rights and obligations of the parties shall terminate.
Termination under this Subsection 3.3 shall be Tenant's sole
remedy and Tenant shall have no other rights or claims
hereunder at law or in equity.
3.4 Confirmation of Commencement Date: When a Lease Commencement
Date as provided in Subsection 3.1.2 and 3.1.3 above has been
established as a later or earlier date than the Lease
Commencement Date provided in Section 1.5 hereof, Landlord
shall confirm the same to Tenant in writing.
3.5 Expiration Date: The Lease shall expire on the date specified
in Section 1.6, except that such date may be extended if an
occupancy later than specified in Section 1.5 occurs and is
confirmed per Section 3.4
4. RENT: Tenant shall pay Landlord the rental stated in Section 1.7 hereof
("Base Rent") and Additional Rent as provided in Sections 8 and 9 and
any other additional payments under this Lease without deduction or
offset, payable in lawful money in the United States in advance on or
before the first day of each month to Landlord at the address noted in
Section 1.8 hereof, or to such other party or at such other place as
Landlord may hereafter from time to time designate in writing. Rent for
any partial month at the beginning or end of the Lease term shall be
prorated.
5. SECURITY DEPOSIT: As security for the full and faithful performance of
every covenant or condition of this Lease to be performed by Tenant,
Tenant has paid to Landlord the Security Deposit of -0- , receipt of
which is hereby acknowledged. If Tenant shall default with respect to
any covenant or condition of this Lease, including but not limited to
the payment of Rent, Additional Rent or any other payment due under
this Lease, Landlord may apply all or part of the Security Deposit to
the payment of any sum in default or any other sum which Landlord may
be required to spend or incur by reason of Tenant's default, or any
other sum which Landlord may in its reasonable discretion deem
necessary to spend or incur by reason of Tenant's default. In such
event, Tenant shall upon demand deposit with Landlord the amount so
applied to replenish said Security Deposit. If Tenant shall have
-2-
<PAGE> 8
fully complied with all of the covenants and conditions of this Lease,
but not otherwise, the amount of the Security Deposit then held by
Landlord shall be repaid to Tenant within thirty (30) days after the
expiration or termination of this Lease. In the event of Tenant's
default, Landlord's right to retain the Security Deposit shall be
deemed to be in addition to any and all other rights and remedies at
law or in equity available to Landlord for Tenant's default under this
Lease. Landlord may, in the event the Security Deposit is depleted, at
Landlord's discretion, apply any unpaid rent received at the time of
the execution of the Lease for the purposes of the deposit.
6. USES. The premises are to be used only for general office purposes
("Permitted Uses"), and for no other business or other purposes without
the written consent of Landlord. No act shall be done by Tenant or
Landlord in or about the Premises that is unlawful or that will
increase the existing rate of insurance on the Building. Tenant or
Landlord shall not commit or allow to be committed any waste upon the
Premises, or any public or private nuisance or other act or thing which
disturbs the quite enjoyment of any other tenant in the Building.
Tenant shall not, without the written consent of Landlord, use any
apparatus, machinery or device in or about the Premises which will
cause any substantial noise or vibration. If any of Tenant's office
machines and equipment should disturb the quite enjoyment of any other
Tenant in the Building, then Tenant shall provide adequate insulation,
or take such other action as may be necessary to eliminate the
disturbance. Tenant shall comply with all laws relating to its use or
occupancy of the premises and shall observe such reasonable rules and
regulations as may be adopted and made available to Tenant by Landlord
from time to time for the safety, care and cleanliness of the Premises
and/or the Building, and for the preservation of good order therein.
7. SERVICES AND UTILITIES:
7.1 Duty of Landlord: As long as Tenant is not in default under
any of the provisions of this Lease, Landlord shall maintain
or cause to be maintained the Premises and the public and
common areas of the Park, such as lobbies, elevators, stairs,
corridors, and restrooms, in reasonably good order and
condition except for damage occasioned by any act or omission
of Tenant, the repair of which damage shall be paid for by
Tenant.
7.2 Hours of Service: From 8:00 a.m. to 6:00 p.m. on weekdays
("Normal Business Hours") and 8:00 a.m. to 1:00 p.m. on
Saturday ("Saturday Mornings") (excluding legal holidays),
Landlord shall furnish the Premises with electricity for
lighting and operation of low power usage office machines,
water, heat and air-conditioning, and elevator service.
7.3 Additional Services: During all other hours, Landlord shall
furnish such service except for heat and air-conditioning. If
requested by Tenant, the Landlord shall furnish heat and
air-conditioning at times other than Normal Business Hours and
Saturday Mornings and the cost of such services as established
by Landlord shall be paid by Tenant as additional payment,
payable as provided in Section 4.
Landlord shall also provide light replacement service for
landlord-furnished lights, toilet room supplies, window
washing at reasonable intervals, and customary building
janitorial service five days per week, Monday through Friday.
No janitorial service shall be provided Saturdays, Sundays, or
legal holidays. The cost of any janitorial service or other
types of services provided or caused to be provided by
Landlord to Tenant which are in addition to the services
ordinarily provided Park Tenants shall be paid in the manner
provided for payment of Rent in Section 4 of this Lease.
7.4 Disclaimer. Landlord shall not be liable for any loss, injury
or damage to property caused by or resulting from any
violation, interruption, or failure of such services due to
any cause whatsoever or from failure to make any repairs or
perform any maintenance. No temporary interruption or failure
of such services incident to making of repairs, alterations,
or improvements, or due to accident, strike, or conditions or
events beyond Landlord's reasonable control shall be deemed an
eviction of Tenant or relieve Tenant from any of Tenant's
obligations hereunder.
7.5 Heat Producing Equipment: Tenant shall not install any
equipment or lights in the Premises which will utilize
electrical service or generate an amount of heat in excess of
that typically used or found in a normal business office use
of the Premises with small business machines, except as
provided to the contrary in Special Stipulations. In the event
Tenant utilizes electrical current in excess of the amount
typically utilized as aforesaid or installs equipment which
generates heat in excess of the amount typically found as
aforesaid, then the Landlord shall have the right to charge
Tenant as additional rent a reasonable sum as reimbursement
for the direct costs of such additional use or service
necessary by reason of Tenant's use. In the event of a
disagreement as to the reasonableness of that amount of such
additional rent, the opinion of a qualified local independent
engineer mutually selected by the Landlord and Tenant shall be
binding upon Landlord and Tenant.
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7.6 Additional Rent: In addition, Tenant shall in advance, on the
first day of each month during the Lease Term, pay Landlord
the reasonable amount estimated by Landlord as the cost of
furnishing electricity directly relating to the leased
premises for the operation of such high power usage equipment
and for the reasonable amount estimated by Landlord as the
cost of operation and maintenance of supplementary
air-conditioning units as necessitated by Tenant's use of
equipment which generates an undue amount of heat. The Rent
stated in Section 1,7 hereof does not include any amount to
cover the cost of furnishing electricity or such additional
air-conditioning for such purposes unless so stated therein,
and such costs shall be paid by Tenant in the manner provided
for payment of Rent in Section 4 of this Lease. Upon ten (10)
days written notice to Tenant of estimated cost and Tenant's
payment to Landlord of such cost, Landlord shall install and
operate at Tenant's cost a monitoring metering system In the
Premises to measure the added demands electricity, heating,
ventilation, and air-conditioning systems resulting from
Tenant's heat generating high power equipment usage, and
after-hours service requirements. In the event of non-payment
of additional payments due from Tenant for any of the above
described additional services, Landlord shall have the same
rights with respect to such non-payment as it has with respect
to the non-payment of Rent hereunder.
8. COST OF SERVICES AND UTILITIES:
8.1 Definitional Terms: In addition to the Rent provided in
Section 1.7 of this Lease, Tenant shall pay to Landlord
increases under this Paragraph 7 as "Additional Rent". These
increases shall be made as provided herein, utilizing the
following definitions:
8.1.1.1 "Cost of Utilities" shall mean all expenses paid or
incurred by Landlord for electricity, water, gas,
sewers, and similar utilities, including any
surcharge imposed for these services.
8.1.1.2 "Other Operational Costs" shall mean all other
expenses paid or incurred by Landlord for
maintaining, operating and repairing the Building and
the personal property used in conjunction therewith,
including, without limitation, the costs of refuse
collection, supplies, janitorial and cleaning
services, window washing, landscape maintenance,
seasonal plantings, services of independent
contractors, compensation (including employment taxes
and fringe benefits) of all persons who perform
duties in connection with the operation, maintenance
and repair of the Building, its equipment and the
Land upon which it is situated, insurance premiums,
licenses, permits and inspection fees, customary
management fees and accounting expenses, real
property taxes, and any other expense or charge
whether or not hereinbefore described which in
accordance with generally accepted accounting and
management practices would be considered an expense
of maintaining, operating or repairing the Buildings.
8.1.1.2.1 Depreciation or amortization of costs
required to be capitalized in accordance
with generally accepted accounting
practices(except Operating Costs shall
include amortization of capital
improvements made subsequent to the initial
development of the building which are
designed that actually improve the
operating efficiency of the Building,
provided that such amortization costs shall
not exceed expected savings In Operating
Costs resulting from such capital
improvements). Any excess shall be included
as an operating expense under 8.1.1.2.
8.1.2 "Calendar Lease Year" shall mean a twelve (12) month
period beginning January 1 and ending December 31.
'Partial Lease Year' shall mean any other period of
time other than a full calendar year.
8.1.3 "Actual Costs" shall mean the actual expenses paid or
incurred by Landlord for Operating costs during any
Calendar Lease Year of the term hereof.
8.1.4 "Estimated Cost Allocable to the Premises" shall mean
Landlord's estimate of cost allocable to the Premises
for the following Calendar Lease Year to be given by
Landlord to Tenant pursuant to Section 8.3 below.
8.2 Base Amount: The base operating costs allocable to the
Tenant's premises shall be the 1994 Actual Costs.
8.3 Additional Rent for Increases in Cost: Thirty (30) days prior to the
commencement of each Calendar lease year (excluding the first Lease
Year) during the term hereof, Landlord shall furnish Tenant a
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written statement of the Estimated Cost Allocable to the Premises for
such Calendar Lease Year, and a calculation of the Additional Rent as
follows: One-twelfth (1/12) of the amount, if any, by which such amount
exceeds the Base Amount shall be Additional Rent payable by Tenant as
provided In Section 4 for each month during such Calendar Lease Year.
If at any time or times during such Calendar Lease Year, it appears to
Landlord that the Estimated or Actual Cost Allocable to the Premises
will vary from Landlord's estimate by more than five percent (5%) on an
annualized basis, Landlord may, by written notice to Tenant, revise its
estimate for such Calendar Lease Year and Additional Rent payments by
Tenant for such Calendar Lease Year shall be based on such revised
estimate.
8.4 Actual Costs: Within ninety (90) days after the close of each Calendar
Lease Year during the term thereof, or as soon thereafter as practical,
Landlord shall deliver to Tenant a written statement setting forth the
Actual Costs allocable to the Premises during the preceding Calendar
lease Year. If such costs for any Calendar Lease Year exceed Estimated
Costs Allocable to the Premises paid by Tenant to Landlord pursuant to
the preceding Section 8.3, then the amount of such overpayment by
Tenant shall be credited by Landlord to the next month's Rent payable
by Tenant.
8.5 Determinations: The determination of Actual Costs and Estimated Costs
shall be made by Landlord to most accurately reflect operating costs
pertaining to the Tenant's premises.
8.6 End of Term: If this Lease shall terminate on a day other than the last
day of a Year, the amount of any adjustment between Estimated Costs
Allocable to the Premises with respect to the Year in which such
termination occurs shall be prorated on the basis which the number of
days from the commencement of such Year in which such termination
occurs to and Including such termination date bears to 365; and any
amount payable by Landlord to Tenant or Tenant to Landlord with respect
to such adjustment shall be payable within thirty (30) days after
delivery by Landlord to Tenant of the statement of Actual Cost
allocable to the Premises with respect to such Partial Year.
8.7 Further Adjustment: In the event the average occupancy level of the
Building in any Lease Year was not ninety-five percent (95%) or more of
full occupancy, then in making the calculations in 8.3 and 8.4 the
Estimated Costs and Actual Costs for such year shall be proportioned
among the Tenants by the Landlord to reflect those costs which would
have occurred had the Building been ninety-five percent (95%) occupied
during such year.
8.8 Base Year: Notwithstanding anything to the contrary in this Section 8
or in Section 9, the Rent payable by Tenant shall in no event be less
than the Rent specified in Section 1.7 of this Lease.
8.9 Non-Payment of Additional Rent: In the event of non-payment of the
Additional Rent hereunder, Landlord shall have the same rights with
respect to such non-payment of Rent hereunder.
9. REAL PROPERTY TAXES:
9.1 "Real Property Taxes": under subsection 8.1.1.2 shall mean
taxes on real property described in Paragraph 2 above and
personal property (including all tenant Improvements which are
paid for by Landlord and not reimbursed by Tenant) which are
assessed as real property and have not been paid by Tenant
directly to the taxing authority; charges and assessments
levied with respect to the Land, the Building, any
improvements, fixtures and equipment, and all other property
of Landlord, real or personal, used directly in the operation
of the Building and located in or on the Building; and any
taxes levied or assessed in addition to or personal property
taxes, or any other tax upon leasing of the Building or rents
paid or collected, but not including any federal or state
income tax or franchise tax.
9.2 Taxes on Improvements Paid for by Tenant and Not Reimbursed by
Landlord: Tenant shall pay, prior to delinquency, all personal
property taxes with respect to all property of Tenant located
on the Premises or the Building. As used in this Section 9.2
and Section 15.4, "Property of Tenant" Includes improvements
which are paid for by Tenant and not reimbursed by Landlord
(and improvements originally paid for by Landlord, the costs
of which are reimbursed by Tenant). In the event property of
Tenant is assessed as real property, Tenant shall pay the
taxes thereon as Additional Rent.
10. IMPROVEMENTS: Upon expiration or sooner termination of this Lease, all
improvements and additions to the Premises, except Tenant's trade
fixtures, shall be deemed property of Landlord.
11. CARE OF PREMISES: Tenant shall take good care of the Premises. Tenant
shall not make any alterations, additions or improvements in or to the
Premises, or make changes to locks on doors, or add, disturb or in any
way change any plumbing or wiring without first obtaining the written
consent of Landlord and, where appropriate, such work will be performed
in accordance with plans and specifications approved by Landlord. All
damages or injury done to the Premises or Park by Tenant or by any
person who may be in or upon the Premises or Park with the express or
implied consent of Tenant, including but not limited to cracking or
breaking of glass of any windows and doors, shall be
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<PAGE> 11
paid for by Tenant and Tenant shall pay for all damage to the
contractors, agents, invitees, licensees, or employees. All normal
repairs necessary to maintain the Premises in a tenantable condition
shall be done by or under the direction of Landlord and at Landlord's
expense except as otherwise provided herein. Landlord shall be the sole
judge as to what repairs are necessary.
12. ACCEPTANCE OF PREMISES: If this Lease shall be entered into prior to
the completion of construction of the Building or completion of Tenant
Improvements in the Premises to be occupied by Tenant, the acceptance
of the Premises by Tenant shall be deferred until receipt by the Tenant
of a Certificate of Occupancy certifying that the Tenant's portion of
the Building Is ready for occupancy. Within five (5) days after receipt
of such notice, Tenant shall make such inspection of the Premises as
Tenant deems appropriate and, except as otherwise notified by Tenant In
writing to Landlord within such period, Tenant shall be deemed to have
accepted the Premises in their then condition. If, as a result of such
inspection, Tenant discovers minor deviations or variations from the
plans and specifications for Tenant's improvements of a nature commonly
found on a "punch list" (as that term is used in the construction
industry), Tenant shall promptly notify Landlord of such deviations.
The existence of such punch list items shall not postpone the
Commencement Date of this Lease nor the obligation of Tenant to pay
Rent.
13. SPECIAL IMPROVEMENTS: Tenant shall reimburse Landlord for Landlord's
cost of making all special improvements requested by Tenant, including
but not limited to counters, partitioning, electrical and telephone
outlets and plumbing connections other than as shown on Exhibit A or
other attachments hereto as being furnished by Landlord; provided,
however, Tenant shall not be obligated to pay for the cost of any
special improvements made without a written request to Tenant by
Landlord.
14. ACCESS: Tenant shall permit Landlord and its agents to enter into and
upon the Premises at all reasonable times for the purpose of inspecting
the Premises or for the purpose of cleaning, repairing, altering or
improving the Premises or the Park. Nothing contained in this Section
14 shall be deemed to impose any obligation upon the Landlord not
expressly stated elsewhere in this Lease. When reasonably necessary
Landlord may temporarily close entrances, doors, corridors, elevators
or other facilities without liability to Tenant by reason of such
closure and without such action by Landlord being construed as an
eviction of Tenant or release of Tenant from the duty of observing and
performing any of the provisions of this Lease. Provided, however, that
such interference is such as to cause the premises to be untenantable
and such interference continues for a period of more than fifteen (15)
consecutive business days, then rent shall abate beginning on the
fifteenth (15th) day. Landlord shall have the right to enter the
Premises with prior written notice for the purpose of showing the
Premises to prospective tenants within the period of 180 days prior to
the expiration or sooner termination of the lease term.
15. DAMAGE OR DESTRUCTION:
15.1 Damage Repair: If the Premises shall be destroyed or rendered
untenantable, (either wholly or in part) by fire or other
casualty, Landlord may, at its option, restore the Premises to
their previous condition, and in the meantime the monthly Rent
shall be abated I n the same proportion as the untenantable
portion of the Premises bears to the whole thereof, and this
Lease shall continue in full force and effect. If the damage
is due directly or indirectly, to the willful misconduct of
Tenant, or its officers, contractors, licensees, agents,
servants, employees, guests, invitees or visitors, there shall
be no abatement of Rent except to the extent Landlord receives
proceeds from any applicable insurance policy to compensate
Landlord for loss of Rent.
15.2 Termination for Material or Uninsured Damages: If the Building
shall be destroyed or damaged by fire or other casualty
insured against under Landlord's fire and extended coverage
insurance policy to the extent that more than ten percent
(10%) thereof is rendered untenantable or in the case the
Building shall be materially destroyed or damaged by any other
casualty other than those covered by such Insurance policy,
notwithstanding that the Tenant Premises may be unaffected
directly by such destruction or damage, Landlord may at its
election, with prior written consent of any first mortgagee,
terminate this Lease by notice In writing to Tenant within
sixty (60) days after such destruction or damage. Such notice
shall be effective thirty (30) days after receipt thereof by
Tenant.
15.3 Business Interruption: Other than rental abatement provided in
Section 15.1 no damages, compensation or claim shall be
payable by Landlord for inconvenience or loss of business
arising from interruption of business, repair or restoration
of the Building or Premises. Landlord shall use its best
efforts to effect repairs and restoration In a prompt manner.
15.4 Insurance: Landlord shall at all times during the term of this
Lease carry a policy of commercial general liability insurance
coverage.
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16. WAIVER OF SUBROGATION: Whether the loss or damage is due to the
negligence of either Landlord or Tenant, their agents or employees or
any other cause, Landlord and Tenant to each herewith and hereby
release and relieve the other, their agents or employees, from
responsibility for, and waive their entire claim of recovery for (I)
any loss or damage to the real or personal property of either located
anywhere in the Park, Including the Buildings themselves, arising out
of or Incident to the occurrence of any of the perils which are covered
by their respective fire Insurance policies, with extended coverage
endorsements, or (II) loss resulting from business Interruption at the
Premises or loss of rental income from the Park, arising out of or
Incident to the occurrence of any of the perils which may be covered by
the business interruption insurance policy and by the loss of rental
Income insurance policy held by Landlord or Tenant. Each party shall
cause its Insurance carriers to consent to such waiver of all rights of
subrogation against the other party. Notwithstanding the foregoing, no
such release shall be effective unless the aforesaid insurance policy
or policies shall expressly permit such a release or contain a waiver
of the carrier's right to be subrogated.
17. INDEMNIFICATION AND TENANT'S INSURANCE:
17.1 Indemnification and Hold Harmless:
(a) Tenant and Landlord hereby indemnify and hold each other
harmless from and against any injury, expense, damage,
liability or claim, imposed on Landlord or Tenant by any
person whomsoever, whether due to damage to the Premises,
claims for injuries to the person or property of any other
tenant of the Building or of any other person in or about the
Building or the Property for any purpose whatsoever, or
administrative or criminal action by a governmental authority,
if such injury, expense, damage, liability or claim results
either directly or indirectly from the act, omission,
negligence, misconduct or breach of any provisions of this
Lease by Tenant or Landlord, the agents, servants, or
employees of Tenant or Landlord, or any other person entering
in the Building or upon the Premises under express or implied
invitation or consent of Tenant or Landlord.
17.2 Tenant's Insurance: Tenant shall carry (at its sole expense
during the Term) (I) fire and extended coverage insurance
insuring Tenant's Improvements to the Premises and any and all
furniture, equipment, supplies, contents and other property
owned, leased, held or possessed by Tenant and contained
therein, such insurance coverage to be in an amount equal to
the full replacement value of such improvements and property,
as such may increase from time to time; (ii) worker's
compensation insurance as required by the laws of the State of
Georgia; and (iii) commercial general liability coverage on an
occurrence basis for injury to or death of a person or persons
and for damage to property occasioned by or arising out of the
condition, use, or occupancy of the Premises, or other
portions of the Building or Property, including contractual
liability and such other coverages and endorsements as are
reasonably required by Landlord, such policy to have a
combined single limit of not less than Three Million and
no/100 Dollars ($3,000,000) for any bodily injury or property
damage occurring as a result of or in connection with the
above. Landlord and Landlord's property manager shall be named
additional insureds on the policies required hereunder and
such policies shall provide that the coverage thereunder is
primary to, and not contributing with, any policy carried by
any such additional insured. Tenant shall have included in all
policies of insurance respectively obtained by it with respect
to the Building or Premises a waiver by the Insurer of all
right of subrogation against the Landlord in connection with
any loss or damage thereby insured against, and Landlord shall
have included in all property insurance policies required to
be maintained by Landlord under this lease a waiver by the
insurer of all right of subrogation against the Tenant in
connection with any loss or damage thereby insured against. To
the full extent permitted by law, Landlord as to its property
insurance policies and Tenant as to all its policies, each
waives all right of recovery against the other for, and agrees
to release the other from liability for, loss or damage to the
extent such loss or damage results from a cause covered by
valid and collectible insurance in effect at the time of such
loss or damage; provided however, that the foregoing release
by each party is conditioned upon the other party's carrying
insurance with the above described waiver of subrogation to
the extent required above, and if such coverage is not
obtained or maintained by either party, then the other party's
foregoing release shall be deemed to be rescinded until such
waiver is either obtained or reinstated. All said insurance
policies shall be carried with companies licensed to do
business in the State of Georgia reasonably satisfactory to
Landlord having. a Best's Rating of A XII or better and shall
be noncancellable and nonamendable except after thirty (30)
days written notice to Landlord. At Landlord's request, duly
executed certificates of such insurance shall be delivered to
Landlord prior to the Commencement Date and at least thirty
(30) days prior to the expiration of each respective policy
term. Landlord shall have the right to periodically review the
coverages required hereunder and in the event Landlord deems
It reasonably necessary to require additional coverage
resulting from inflation or from increases in jury verdicts or
other economic conditions in the jurisdiction where the
Property is located, Tenant shall obtain the coverage
requested by Landlord. Notwithstanding any other provisions in
this Lease to the contrary, Tenant shall have the right to
self-assume or obtain insurance from an insurance
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company that is a wholly owned subsidiary of one (1) of the
two (2) general partners of the Tenant which insurance company
must have a Best's Rating of A XII or better, for all or a
portion of the risk which Tenant is required to provide
insurance coverage under this Lease. In the event Tenant
self-assumes the risk, it will be responsible for all losses
and liabilities to the same extent as if valid and collectible
insurance were in effect. The foregoing provision concerning
the right to self-assume shall only apply to the Tenant as of
the date of this Lease, and to no successors and/or assigns
unless consented to by Landlord in its sole discretion.
18. ASSIGNMENT AND SUBLETTING:
18.1 Assignment of Sublease: Except to a wholly owned subsidiary or
affiliate of Tenant, Tenant shall not sell, assign, mortgage
or transfer this Lease, sublet the Premises or any part
thereof or allow any transfer by operation of law. Tenant
shall, by written notice, advise Landlord of its desire from,
on and after a stated date (which shall not be less than
thirty (30) days nor more than sixty (60) days after the date
of Tenant's notice) to sublet any part or all of the Premises
for any part of the term hereof, and, in such event, Landlord
shall have the right, to be exercised by giving written notice
to Tenant twenty (20) days after receipt of Tenant's notice)
to terminate this Lease as to the portion of the Premises
therein described as of the date stated in Tenant's notice.
Such notice by Tenant shall state the name and address of the
proposed subtenant, and Tenant shall deliver to Landlord a
true and complete copy of the proposed sublease with said
notice. If said notice shall specify all of the Premises, and
Landlord shall give said termination notice with respect
thereto, this Lease shall terminate on the date stated in
Tenant's notice. If, however, this Lease shall terminate
pursuant to the foregoing with respect to less than all the
Premises, the rental (as determined in paragraph 4) and taxes
(as determined in paragraph 9) shall be adjusted on a pro rata
basis to the number of square feet retained by Tenant and this
Lease as so amended shall continue thereafter in full force
and effect. If Landlord, upon receiving said notice by Tenant
with respect to any of the Premises, shall not exercise its
right to terminate, Landlord will not withhold unreasonably
its consent to Tenant's subletting the Premises specific in
said notice provided that all Increases in rent under a
sublease shall be paid to Landlord.
18.2 Sublease Obligations. Any subletting hereunder by Tenant shall
not result in Tenant being released or discharged from any
liability under this Lease. As a condition to Landlord's prior
written consent as provided for in this paragraph, the
subtenant or subtenants shall agree in writing to comply with
and be bound by all of the terms, covenants, conditions,
provisions and agreements of this Lease and Tenant shall
deliver to Landlord, promptly after execution, an executed
copy of each sublease and an agreement of said compliance by
each subtenant.
18.3 Void Assignment or Subletting: Any sale, assignment, mortgage,
or transfer of the Lease or subletting which does not comply
with the provisions of this paragraph shall be void.
19. ADVERTISING: Tenant shall not inscribe any inscription, or post, place,
or in any manner display any sign, graphics, notice, picture, placard
or poster, or any advertising matter whatsoever, anywhere in or about
the Premises or the Park at places visible (either directly or
indirectly as an outline or shadow on a glass pane) from anywhere
outside Tenant's occupied area or at the entrance to Premises without
first obtaining landlord's written consent thereto, such consent to be
at Landlord's sole discretion. Any such consent by Landlord shall be
upon the understanding and condition that Tenant will remove the same
at the expiration or sooner termination of this Lease and Tenant shall
repair any damage to the Premises or the Park caused thereby.
20. LIENS AND INSOLVENCY: Tenant shall keep the Premises and the Park free
from any liens arising out of any work performed, materials ordered or
obligations incurred by or on behalf of Tenant, and Tenant indemnifies
and holds Landlord harmless from any liability for such liens,
including without limitation, liens arising from work performed
pursuant to Exhibit "A'. If Tenant becomes insolvent, voluntarily or
involuntarily bankrupt, or if a receiver or assignee or other
liquidating officer is appointed for the business of Tenant, then
Landlord may terminate this Lease and Tenant's right of possession
under this Lease at Landlord's option and In no event shall this Lease
or any rights or privileges hereunder be an asset of Tenant under any
bankruptcy, insolvency or reorganization proceedings.
21. DEFAULTS: Time is the essence hereof, and it shall be deemed a default
if Tenant shall violate or breach or fail to keep or perform any
covenant, agreement term or condition of this Lease including without
limitation Tenant's obligation to make any and all payments due under
this Lease, whether or not such payments are defined as Rent or
Additional Rent, and if such default or violation shall continue or
shall not be remedied within at least ten (10) days (or, if no default
in the Rent, Additional Rent or any other payments due hereunder Is
involved, within twenty (20) days) after notice in writing thereof is
given by Landlord to Tenant, specifying the matter claimed to be In
default, Landlord, at its option, may Immediately declare this Lease
terminated, and all Tenant's rights hereunder shall be terminated.
Landlord may re-enter the Premises using such force as may be
reasonably necessary, and repossess
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itself thereof, as of its former estate, and remove all persons and
property from the Premises. Notwithstanding any such re-entry, the
liability of Tenant for the full Rent, Additional Rent and other
payments provided for herein shall not be extinguished for the balance
of this Lease, and Tenant shall make good to Landlord any deficiency
arising from such re-letting of the Premises, plus the costs and
expenses of renovating, altering and reletting the Premises, and
including attorney's and/or broker's fees incident to Landlord's
re-entry or reletting. Tenant shall pay any such deficiency each month
as the amount thereof is ascertained by Landlord or, at Landlord's
option, Landlord may recover, in addition to any other sums, the amount
at the time of judgment the balance of the term after judgment exceeds
the amount thereof which Tenant proves could be reasonably avoided,
discounted at the rate of seven percent (7%). In reletting the
Premises, Landlord may grant Rent concessions and Tenant shall not be
credited therefore. Nothing herein shall be deemed to affect the right
of Landlord to recover for indemnification under Section 16 herein
arising prior to the termination of this Lease. In addition to the
remedies for Tenant default provided herein, Landlord shall have any
and all other rights at law or in equity in the event of Tenant's
default.
22. QUITE ENJOYMENT: So long as Tenant Is not in default under any of the
terms and conditions of this Lease, Tenant may peaceably and quietly
have, hold and enjoy the Premises for the term of this Lease.
23. PRIORITY: Upon demand by Landlord or the holder of any first mortgage
or deed of trust now existing or that may hereafter be placed upon the
Premises or the Park, Tenant will execute the Agreement of
Subordination of Mortgage. In the absence of such Agreement, Tenant
agrees that this Lease shall be subordinate to any first mortgage or
deed of trust now existing or hereafter placed upon the Premises or
Park and that any and all advances to be made thereunder, and to
interest thereon, and all renewals, replacements or extension thereof.
Upon demand by Landlord or any first mortgagee as defined above, Tenant
shall execute and deliver subordination and adornment agreements
satisfactory in form and substance to such first mortgagee.
24. SURRENDER OF POSSESSION: Upon expiration of the term of this Lease,
whether by lapse of time or otherwise, Tenant shall promptly and
peacefully surrender the Premises to Landlord in as good condition as
when received by Tenant from Landlord or as thereafter improved,
reasonable use and wear and tear excepted.
25. REMOVAL OF PROPERTY: Tenant shall remove all of its moveable property
and trade fixtures which can be removed without damage to the Premises
at the termination of this Lease either by expiration of term or other
cause, and shall pay Landlord any damages for injury to the Premises or
Park at the termination of this Lease or when Landlord has the right of
re-entry, Landlord may, in accordance with the provisions of applicable
statutes covering commercial Landlord and Tenant matters, remove and
store said property without liability for loss thereof or damage
thereto, such storage to be for the amount and at the expense of
Tenant. If Tenant shall not pay for a period of thirty (30) days or
more, Landlord may, at its option, sell, or permit to be sold, any or
all such property at public or private sale, in such manner and at such
times and places as Landlord in its sole discretion may deem proper,
with ten (10) days notice to Tenant, or as required under applicable
statues, and shall apply the proceeds of such sale: first, to the cost
and expense of such sale, including reasonable attorney's fees actually
incurred; second, to the payment of the costs or charges for storing
any such property; third, to the payment of any other sums of money
which may then be or thereafter become due Landlord from Tenant under
any of the terms hereof, and fourth, the balance if any, to Tenant.
Tenant shall remain liable for any differences.
26. NON-WAIVER: Waiver by Landlord of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such
term, covenant, or condition; or of any subsequent breach of the same
or any other term, covenant, or condition of this Lease, other than the
failure of Tenant to pay particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance
of such Rent.
27. HOLDOVER: If Tenant shall, with the written consent of Landlord, hold
over after the expiration of the term of this Lease, such tenancy shall
be deemed a month-to-month tenancy, which tenancy may be terminated as
provided by applicable state law. During such tenancy. Tenant agrees to
pay Landlord the fair market value for the Premises which shall be
reasonably determined by Landlord but in no event less than the amount
paid in the last month of the expired term and to be bound by all of
the terms, covenants and conditions herein specified, so far as
applicable.
28. CONDEMNATION:
28.1 Substantial Taking: If twenty percent (20%) or more of the
Premises or of such portions of the Park as may be required
for the reasonable use of the Premises, are taken by eminent
domain, this Lease shall automatically terminate as of the
date title vests in the condemnation authority, and all Rents,
Additional Rents, and other payment shall be paid to that
date.
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<PAGE> 15
28.2 Partial Taking: In case of a taking of less than twenty
percent (20%) of the Premises, or a portion of the Park not
required for the reasonable use of the Premises, then this
Lease shall continue in full force and effect, and the Rent
shall be equitably reduced based on the proportion by which
the floor area of the Premises is reduced, such rent reduction
to be effective as of the date title to such portion vests in
the condemnation authority.
28.3 Awards and Damages: Landlord reserves all rights to damages to
the Premises for any partial or entire taking by eminent
domain, and Tenant hereby assigns to Landlord any right Tenant
may have to such damages or awards, and Tenant shall make no.
claim against Landlord or the condemning authority for damages
for termination of the leasehold interest or interference with
Tenant's business. Tenant shall have the right, however, to
claim and recover from the condemning authority compensation
for any loss to which Tenant may be out for Tenant's moving
expenses, business interruption or taking of Tenant's personal
property (not including Tenant's leasehold interest) and any
other award to which Tenant may be entitled, provided that
such damages do not reduce the sums otherwise payable by the
condemnor to Landlord.
29. NOTICES:
29.1 Addresses: All notices under this Lease shall be in writing
and deliverable in person or sent by registered or certified
mail to Landlord and to Tenant at the addresses provided in
Section 1.8 and to the holder of any first mortgage or deed of
trust at such place as such holder shall specify to Tenant in
writing; or such other addresses as, may from time to time, be
designated by any such party in writing. Notices mailed as
aforesaid shall be deemed given on the date of such mailing.
29.2 Additional Notice Required of Tenant: Tenant agrees to give to
Mortgagees and/or Trust Deed Holders, by registered mail, a
copy of any notice of default served upon the Landlord,
provided that prior to such notice Tenant has been notified in
writing (by way of Notice of Assignment of Rents and Lease, or
otherwise) of the addresses of such Mortgagees and/or Trust
Deed Holders. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for
In this Lease, then the Mortgagees and/or Trust Deed Holders
shall have an additional thirty (30) 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 thirty (30) days any Mortgagee and/or Trust Deed 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 affect
such cure), In which event this Lease shall not be terminated
while such remedies are being so diligently pursued.
30. COSTS AND ATTORNEYS FEES: If Tenant or Landlord shall bring any action
for any relief against the other, declaratory or otherwise, arising out
of this Lease, Including any suit by Landlord for the recovery of Rent,
Additional Rent or other payments hereunder, or possession of the
Premises, the losing party shall pay the prevailing party a reasonable
sum for attorneys' fees in such suit, at trial and on appeal, and such
attorneys' fees shall be deemed to have accrued on the commencement of
such action.
31. LANDLORD'S LIABILITY: Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on
the part of Landlord are made and intended not as personal covenants.
undertakings and agreements or for the purpose of binding Landlord
personally or the assets of Landlord except Landlord's interest in the
Premises and Park, but are made and intended for the purpose of binding
only the Landlord's interest in the Premises and Park, as the same way,
from time to time, be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or
enforceable against Landlord or its partners or their respective heirs,
legal representatives, successors and assigns on account of the Lease
or on account of any covenant, or undertaking or agreement of Landlord
contained in this Lease.
32. WAIVER OF JURY TRIAL:
TO THE EXTENT PERMITTED BY LAW, IT IS MUTUALLY AGREED BY AND BETWEEN
LANDLORD AND TENANT THAT THE RESPECTIVE PARTIES HERETO SHALL, AND THEY
DO HEREBY, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM BROUGHT BETWEEN THE PARTIES HERETO OR THEIR SUCCESSORS OR
ASSIGNS ON ANY MATTERS ARISING OUT OF, OR IN ANY WAY CONNECTED WITH,
THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, AND/OR TENANT'S
USE OF, OR OCCUPANCY OF, THE PREMISES. TENANT FURTHER AGREES THAT IT
SHALL NOT INTERPOSE ANY COUNTERCLAIM OR COUNTERCLAIMS IN A SUMMARY
PROCEEDING OR IN ANY ACTION BASED UPON NON-PAYMENT OF RENT REQUIRED BY
TENANT HEREUNDER. THIS WAIVER IS MADE FREELY AND VOLUNTARILY, WITHOUT
DURESS AND ONLY AFTER EACH OF THE PARTIES HERETO HAS HAD THE BENEFIT OF
ADVICE FROM LEGAL COUNSEL ON THIS SUBJECT.
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<PAGE> 16
33. ESTOPPEL CERTIFICATES: Tenant shall, from time to time, upon written
request of Landlord, execute, acknowledge and deliver to Landlord or
its designee a written statement stating: the date this Lease was
executed and the date it expires; the date Tenant entered into
occupancy of the Premises; the amount of minimum monthly rent and the
date to which such rent has been paid; and certifying the following:
that this Lease is In full force and effect and has not been assigned,
modified, supplemented or amended in any way (or specifying the date
and terms of agreement so affecting this Lease); that this Lease
represents the entire agreement between the parties as to this leasing;
that all conditions under this Lease to be performed by the Landlord
have been satisfied, including but without limitation, all co-tenancy
requirements, if any; that all required contributions by landlord to
Tenant on account of Tenant's improvements have been received; that on
this date there are no existing defenses or offsets which the Tenant
has against the enforcement of this Lease by the Landlord; that no Rent
has been paid more than one month in advance; and that no security has
been deposited with Landlord (or, is so, the amount thereof). It is
intended that any such statement delivered pursuant to this paragraph
may be relied upon by a prospective Purchaser of Landlord's interest or
assignee of any mortgage upon Landlord's Interest in the Park. Failure
by Tenant to respond within ten (10) days of receipt by Tenant of a
written request by Landlord as herein provided shall constitute an
event of default of this lease.
34. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or
transfers of Landlord's Interest in the Premises or the Park, other
than a transfer for security purposes only, the transferor shall be
automatically relieved of any and all obligations and liabilities on
the part of Landlord accruing from and after the date of such transfer,
and Tenant agrees to attorn to the transferee.
35. RIGHT TO PERFORM: If Tenant shall fail to pay any sum of money, other
than Rent and Additional Rent required to be paid by it hereunder or
shall fail to perform any other act on its part to be performed
hereunder, and such failure shall continue for ten (10) days after
written notice thereof by Landlord, Landlord may, but shall not be
obligated so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other
act on Tenant's part to be made or performed as provided in this Lease.
Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and -remedies in the event of the non-payment
of sums due under this Section as in the case of default by Tenant in
the payment of Rent.
36. SUBSTITUTED PREMISES: In the event Premises rented to Tenant are less
than 7,000 square feet in area, Landlord reserves the right, at its
option and upon giving thirty (30) days written notice in advance to
the Tenant, to transfer and remove the Tenant from Premises to any
other available rooms and offices of substantially equal size and area
and equivalent rental in the Building of which Premises are a part, or
other buildings within the Pa Landlord shall bear the expense of said
removal including, but not limited to, cost of moving, telephone cable
installation, computer cable, and stationery replacement costs, as well
as the expense of any renovations or alterations necessary to make the
new space substantially conform in layout and appointment with the
original Premises. Landlord may exercise the right to so relocate
Tenant under this paragraph at any time including but not limited to,
the period before Tenant takes possession of Premises. If Landlord
moves Tenant to such new space, this Lease and each and all of its
terms, covenants and conditions shall remain in full force and effect
and be deemed applicable to such new space, and such new space shall
thereafter be deemed to be the "Premises". It is agreed that Park shall
mean any of those present buildings known as, or future buildings that
may be built adjacent to and be known as, Roswell Summit Office Park,
Holcomb Bridge Road, Roswell, Georgia.
37. EXCULPATION OF LANDLORD:
Landlord's liability with respect to or arising from or in connection
with this Lease shall be limited solely to Landlord's interest in the
Building. Neither Landlord, any of the partners of Landlord, any
officer, director, principal, trustee, policyholder, shareholder nor
employee of Landlord shall have any personal liability whatsoever with
respect to this Lease.
Landlord shall have absolutely no personal liability with respect to
any provision of this Lease or any obligation or liability arising from
this Lease or in connection with this Lease. Tenant shall look solely
to the equity of the Landlord in the Building for the satisfaction of
any money judgment to Tenant. Such exculpation of liability shall be
absolute and without exception whatsoever.
38. HAZARDOUS WASTE:
Neither Tenant, its successors or assigns, nor any permitted assignee
or sublessee, licensee or other person or entity acting by or through
Tenant, shall (either with or without negligence) cause or permit the
escape, disposal or release of any "Hazardous Substances, or Materials"
(as hereunder defined). Tenant shall not allow the storage or use of
such Hazardous Substances or Materials In any manner not sanctioned by
law and by the highest standards prevailing in the industry for the
storage and use of such Hazardous Substances or Materials, nor allow to
be brought into the Building or the Premises any such Hazardous
Substances or Materials except to use in the ordinary course of
Tenant's business, relative to
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<PAGE> 17
office copiers and then only if such Hazardous Substances or Materials
are not prohibited by (and are only in amounts permitted by) law, after
notice is given to Landlord of the identity of such Hazardous
Substances or Materials. Without limitation, Hazardous Substances or
Materials shall include any biologically or chemically active substance
and any waste, substance or material described in Section 101 (14) of
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended from time to time, 42 U.S.C. Section 9601 et
seq., the Resource Conservation and Recovery Act, as amended from time
to time, 42 U.S.C. Section 6901 et seq., any applicable state or local
laws and the regulations adopted under these acts. If any lender or
governmental agency shall ever require testing to ascertain whether or
not there has been any release of Hazardous Substances or Materials,
then the reasonable costs thereof shall be reimbursed by Tenant to
Landlord upon demand as additional charges if such requirement applies
to the Premises. In addition, Tenant shall execute affidavits,
representations and the like from time to time at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
Hazardous Substances or Materials on the Premises. Tenant indemnifies
and covenants and agrees at its sole cost and expense, to protect and
save Landlord harmless against and from any and all damages, losses,
liabilities, obligations, penalties, claims, litigation, demands,
defenses, judgments, suits, proceedings, costs, or expenses of any kind
or of any nature whatsoever (including without limitation, reasonable
attorney's fees and expert's fees) which may at any time be imposed
upon, incurred by or asserted or awarded against Landlord arising from
or out of any Hazardous Substances or Materials on, in, under or
affecting the Premises, the Building or the Property or any part
thereof as a result of any act or omission by Tenant, its successors or
assigns, or any permitted assignee, permitted sublessee or licensee or
other person or entity acting at the direction with the consent of
Tenant. The within covenants shall survive the expiration or earlier
termination of the Lease Term.
39. ADA
Tenant shall be responsible for compliance with Title III of the
American with Disabilities Act of 1990 ("ADA") within the Premises and
Landlord shall be responsible for compliance with Title III of the ADA
relative to the Common Areas within the remainder of the Building.
40. GENERAL:
40.1 Headings: The title to sections of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation
of any part hereof. This Lease shall be construed and governed by the
laws of the State of Georgia.
40.2 Heirs and Assigns: All of the covenants, agreements, terms and
conditions contained in this Lease shall inure to and be binding upon
Landlord and Tenant and their respective heirs, executors,
administrators, successors and assigns.
40.3 No Brokers: Tenant represents and warrants to Landlord that it has not
engaged any broker, finder, or other person who would be entitled to
any commission or fees in respect of the negotiation, execution or
delivery of this Lease other than C.B. Commercial Real Estate Group,
Inc. and shall indemnify and hold harmless Landlord against any loss,
cost, liability or expense incurred by Landlord as a result of any
claim asserted by any other broker, finder or other person on the basis
of any arrangements or agreements made or alleged to have been made by
or on behalf of Tenant. The provisions of this Section 40.3 shall not
apply to brokers with whom Landlord has an express written brokerage
agreement.
40.4 Entire Agreement: This Lease contains all covenants and agreements
between Landlord and Tenant relating In any manner to the Rent, use and
occupancy of the Premises and Tenant's use of the Park and other matter
set forth in this Lease. No prior agreements or understanding
pertaining to the same shall be valid or of any force or effect and the
covenants and agreements of this Lease shall not be altered, modified
or added to except in writing signed by Landlord and Tenant.
40.5 Severability: If any clause or provision of this Lease Is or becomes
illegal, invalid, or unenforceable because of present of future laws or
any rule or regulation of any governmental body or entity, effective
during its term, the intention of the Lease shall not be affected
thereby, unless such invalidly is, in the sole determination of
Landlord, essential to the rights of both parties, in which event
Landlord has the right to terminate this Lease on written notice to
Tenant.
40.6 Late Charges: Tenant hereby acknowledges that late payment to Landlord
of Rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. If any Rent or other sum due from
Tenant is not received by Landlord or Landlord's designated agent
within ten (10) days after its due date, then Tenant shall pay to
Landlord a late charge equal to the maximum amount permitted by law (
and in the absence of any governing law, such overdue amount shall bear
interest at two (2) points over the prevailing Prim ' e Rate as quoted
by The Wall Street Journal percent change as of the first day of the
month in which said Rent becomes past due), plus reasonable attorney's
fees incurred by Landlord by reason of Tenant's
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<PAGE> 18
failure to pay Rent and/or other charge when due hereunder. The parties
hereby agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of Tenant's
late payment. Landlord's acceptance of such late charges shall not
constitute a waiver of default with respect to such overdue amount or
estop Landlord from exercising any of the other rights and remedies
granted hereunder.
40.7 Force Majeure: Time periods for Landlord's or Tenant's performance
under any provisions of this Lease shall be extended for periods of
time during which the non-performing party's performance is prevented
due to circumstances beyond the party's control, including without
limitation, strikes, embargoes, governmental regulations, acts of God,
war or other strife.
40.8 Homestead and Attorney's Fees: Tenant hereby waives and renounces for
itself any and all homestead or exemption rights which it may have
under or by virtue of the Constitution and Laws of the United States
and the State of Georgia, and any other state as against any debt
Tenant may owe Landlord under this Lease, and Tenant hereby transfers,
conveys and assigns to Landlord all homestead or exemption rights which
may be allowed or set apart to Tenant including such as may be set
apart in bankruptcy proceedings, to pay any debt Tenant may owe
Landlord hereunder.
40.9 No Waiver: No failure or delay of Landlord to exercise any right or
power given it herein or to insist upon strict compliance by Tenant
with any obligation imposed on it herein, and no custom or practice or
either party hereto at variance with any term hereof shall constitute a
waiver or a modification of the terms hereof by Landlord of any right
it has herein to demand strict compliance with the terms hereof by
Tenant. No officer, agent, or employee of Landlord has or shall have
any authority to waive any provisions of this Lease unless such waiver
is expressly made in writing and signed by an authorized officer of
Landlord.
40.10 Time of Essence: Time is of the essence of this Lease.
40.11 No Estate in Land: This Lease shall create the relationship of Landlord
and Tenant between Landlord and Tenant; no estate shall pass out of
Landlord and Tenant has only a usufruct which is not subject to levy
and sale.
40.12 Construction: This Lease shall be construed under the laws of the State
of Georgia.
40.13 No Access to Roof: Tenant shall have no right of access to the roof of
the Premises or the Building and shall not install, repair or replace
any aerial, fan, air-conditioner or other device on the roof of the
Premises of the Building without the prior written consent of Landlord.
Any aerial, fan, air-conditioner or other device installed without such
written consent shall be subject to removal, at Tenant's expense,
without notice, at any time.
40.14 Parking: Tenant shall have the right to occupy on a nonassigned,
nonexclusive basis, and without charge, four (4) parking spaces in the
parking lot adjacent to the Building for each 1,000 square feet of the
Premises. Tenant agrees to abide by such reasonable rules and
regulations for parking use as Landlord may from time to time impose.
40.15 Tenant Improvement Allowance: Landlord shall construct the Premises
from slab floor to finished and installed ceiling grid, using building
standard materials in accordance with construction drawings which shall
be prepared based upon the floor plan set forth in Exhibit A and which
shall be approved by Tenant, whose approval shall not be unreasonably
withheld. No construction of improvements will commence until the final
construction drawings have been approved and initialed by the Tenant.
Once construction of the improvements has commenced, any subsequent
modifications to the construction drawing shall be made at Tenant's
expense.
40.16 Defective Condition. Tenant agrees to use reasonable efforts to report
in writing to Landlord any defective condition in or about the Premises
known to Tenant, and further agrees to attempt to contact Landlord by
telephone immediately in such instance.
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<PAGE> 19
IN WITNESS WHEREOF, the Lease has been executed the day and year first above set
forth.
LANDLORD: THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
By:
-----------------------------------------
Real Estate Vice President
Date:
-----------------------------------------
TENANT: DOWELANCO
By:
-----------------------------------------
Date:
-----------------------------------------
SOCIAL SECURITY and/or FEDERAL I.D. NUMBER
--------------------------------------------------
--------------------------------------------------
Notary Public
JDD1047 State of Indiana:
SS:
County of Marion:
Before me the undersigned, a Notary Public for
Johnson County, State of Indiana, personally
appeared Douglas C. Vawter and acknowledged the
execution of this instrument this ________ day of
________________, 1993.
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<PAGE> 20
EXHIBIT A FLOOR PLAN #1
EXHIBIT A ELECTRICAL PLAN
EXHIBIT A FLOOR PLAN #2
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<PAGE> 21
EXHIBIT "B"
SPECIAL STIPULATIONS
41. RENEWAL OF LEASE:
Provided this Lease is then if full force and effect and Tenant is in
full compliance with the terms and conditions of this Lease, Landlord
hereby grants to Tenant an option to renew this Lease for one period of
five (5) years, at a rental rate equal to the rental rate then being
offered by Landlord to tenants desiring to lease comparable space in
the Building or in other buildings comparable to the Building, with
comparable amenities and services and comparable parking rights and
privileges, and with consideration of a refurbishment allowance of Five
and no/100 Dollars ($5.00) per rentable square foot, as such rate is
established by Landlord in its reasonable judgment. Tenant shall notify
Landlord no more than twelve (12) months and no less than ten (10)
months prior to the end of the Term if Tenant desires to renew this
Lease under the terms of this Paragraph. If Tenant does give such
notice, Landlord shall indicate to Tenant at least nine (9) months
prior to the end of the Term the rental rate which shall be in effect
for the Term as extended, on the basis as above described. Tenant shall
have thirty (30) days from the date Landlord makes such offer to either
accept or reject such offer. If Tenant rejects such offer or fails to
respond within such thirty (30) day period, then this Lease shall
terminate as of the end of the Term as established herein. If Tenant
accepts such offer, then the Term shall be extended by said five (5)
year period, upon the same terms and conditions as contained in this
Lease, and the rent for such period shall be the rent as offered by
Landlord and accepted by Tenant pursuant to the terms and conditions of
this Paragraph.
42. TERMINATION OF LEASE:
Provided this Lease is then in full force and effect and Tenant is in
full compliance with the terms and conditions of this Lease, Landlord
hereby grants to Tenant an option to terminate this Lease at the end of
the thirty-sixth (36th) month of the term. For purposes of this Section
42, the thirty-sixth (36th) month of the term shall be November, 1996.
If Tenant elects to terminate this Lease at the end of the thirty-sixth
(36th) month of the term, Tenant shall provide Landlord with
irrevocable written notice of its Intent to terminate no later than the
end of the thirtieth (30th) month of the term. In consideration of
Landlord permitting an early termination of this Lease, Tenant agrees
to pay Landlord a termination fee (the "Termination Fee") which will be
in an amount equal to the unamortized tenant improvement costs and
brokerage commissions and six (6) months rent (escalated Base Rent and
Additional Rent) which Termination Fee must be delivered simultaneously
with delivery of Tenant's irrevocable written notice of early
termination.
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<PAGE> 1
EXHIBIT 10.15R
SUB-SUBLEASE
1. PARTIES.
This Sub-Sublease, dated September 1, 1997, is made between Maxxis
2000, Inc. (IS14, Inc.) ("Subtenant #1"), and Simons Engineering, Inc.
("Subtenant #2").
2. MASTER LEASE.
DowElanco (Sublessor) is the lessee under a written lease dated
November 23, 1993, wherein The Mutual Life Insurance Company of New
York ("Lessor") leased to Sublessor the real property located in the
City of Roswell, County of Fulton, State of Georgia, described as 1080
Holcomb Bridge Road - Roswell Summit, Building 100, Suite 135 ("Master
Premises"). Said lease is herein referred to as the "Master Lease" and
is attached hereto as Exhibit "A". The Mutual Life Insurance Company of
New York transferred, sold, assigned and conveyed all of their interest
to QRE Holding Company. QRE Holding Company transferred, sold, assigned
and conveyed all of their interest to Realty Associates Fund IV, L.P.
(New Owner). DowElanco is the Sublessor under a written sublease dated
February 14, 1997, wherein Maxxis 2000, Inc., also known as IS14, Inc.,
(Subtenant #1) is the Sublessee of said premises. Said sublease is
attached hereto as Exhibit "B".
3. PREMISES.
Sublessor and Subtenant #1 hereby sub-subleases to Subtenant #2 on the
terms and conditions set forth in this Sub-sublease the following
portion of the Master Premises ("Premises"): Approximately 3,938 square
feet, Building 100, Suite 135. Subtenant #2 agrees to take the premises
"As Is"; and that no tenant improvement work is to be performed by
Realty Associates Fund IV, L.P. as the landlord relative to the
Sub-Sublease.
4. WARRANTY BY SUBLESSOR AND SUBTENANT #1.
Sublessor and Subtenant #1 warrant and represent to Subtenant #2 that
the Master Lease has not been amended or modified except as expressly
set forth herein, that Sublessor and Subtenant #1 are not now, and as
of the commencement of the Term hereof will not be, in default or
breach of any of the provisions of the Master Lease, and that Sublessor
and Subtenant #1 have no knowledge of any claim by Lessor the Sublessor
or Subtenant #1 are in default or breach of any of the provisions of
the Master Lease or Sublease.
5. TERM.
The Term of this Sub-Sublease shall commence on September 8, 1997
("Commencement Date"), or when Lessor consents to this Sub-Sublease (if
such consent is required under the Master Lease), whichever shall last
occur, and end on November 30, 1998 ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this
Sub-Sublease. In the event the Term commences on a date other than the
Commencement Date, Sublessor, Subtenant #1 and Subtenant #2 shall
execute a memorandum setting forth the actual date of commencement of
the Term. Possession of the Premises ("Possession") shall be delivered
to Subtenant #2 on the commencement of the Term. If for any reason
Subtenant #1 does not deliver Possession to Subtenant #2 on the
commencement of the Term, Subtenant #1 shall not be subject to any
liability for such failure, the Termination Date shall not be extended
by the delay, and the validity of this Sub-Sublease shall not be
impaired, but rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Subtenant #1 has not delivered
Possession to Subtenant #2 within ten (10) days after the Commencement
Date, then at any time thereafter and before delivery of Possession,
Subtenant #2 may give written notice to Subtenant #1 of Subtenant #2's
intention to cancel this Sub-Sublease. Said notice shall set forth an
effective date for such cancellation which shall be at least three (3)
days after delivery of said notice to Subtenant #1. If Subtenant #1
delivers Possession to Subtenant #2 on or before such effective date,
this Sub-Sublease shall remain in full force and effect. If Subtenant
#1 fails to deliver Possession to Subtenant #2 on or before such
effective date, this Sub-Sublease shall be canceled, in which case all
consideration previously paid by Subtenant #2 to Subtenant #1 on
account of this Sub-Sublease shall be returned to Subtenant #2, this
Sub-Sublease shall thereafter be of no further force or effect, and
Subtenant #1 shall have no further liability to Subtenant #2 on account
of such delay or cancellation. If Subtenant #1 permits Subtenant #2 to
take Possession prior to the commencement of the Term, such early
Possession shall not advance the Termination Date and shall be subject
to the provisions of this Sub-Sublease, including without limitation
the payment of rent.
6. RENT.
6.1 Minimum Rent. Subtenant #2 shall pay to Subtenant #1 as minimum
rent, without deduction, setoff, notice, or demand, at 1901 Montreal
Rd., Suite 108, Tucker, Georgia 30084
1
<PAGE> 2
or at such other place as Subtenant #1 shall designate from time to
time by notice to Subtenant #2, the sum of Five Thousand Three Hundred
Thirty-Two and 71/100 Dollars ($5,332.71) per month, in advance on the
first day of each month of the Term. Subtenant #2 shall pay to
Subtenant #1 upon execution of this Sub-Sublease Five Thousand Three
Hundred Thirty-Two and 71/100 Dollars ($5,332.71) as rent for September
1997. If the Term begins or ends on a day other than the first or last
day of the month, the rent for the partial month shall be prorated on a
per diem basis. Additional provisions: Rent commencement will begin
September 8, 1997.
7. SECURITY DEPOSIT.
On the date of execution of this Sub-sublease by Subtenant #2,
Subtenant #2 will pay to Subtenant #1 a security deposit in the amount
of $5,332.71 for Subtenant #2's faithful performance of Subtenant #2's
obligation hereunder (hereinafter "Security Deposit"). If Subtenant #2
fails to pay rent or other charges when due under this Sub-sublease, or
fails to perform any of its other obligations hereunder, Subtenant #1
may use or apply all or any portion of the Security Deposit for the
payment of any rent or other amounts then due hereunder and unpaid, for
the payment of any other sum for which Subtenant #1 may become
obligated by reason of Subtenant #2's default or breach, or for any
loss or damage sustained by Subtenant #1 as a result of Subtenant #2's
default or breach. If Subtenant #1 so uses any portion of the Security
Deposit, Subtenant #2 shall, within (10) days after written demand by
Subtenant #1, restore the Security Deposit to the full amount
originally deposited, and Subtenant #2's failure to do so shall
constitute a default under this Sub-sublease. Subtenant #1 shall not be
required to keep the Security Deposit separate from its general
accounts, and shall have no obligation or liability for payment of
interest on the Security Deposit. In the event Subtenant #1 assigns its
interest in this Sub-sublease, Subtenant #1 shall deliver to its
assignee so much of the Security Deposit as is then held by Subtenant
#1. Within ten (10) days after the Term has expired, or Subtenant #2
has vacated the Premises, or any final adjustment pursuant to Paragraph
5(b) hereof has been made, whichever shall last occur, and provided
Subtenant #2 is not then in default of any of its obligations
hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Subtenant #1, shall be returned to
Subtenant #2 or to the last assignee, if any, of Subtenant #2's
interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office
purposes, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Subtenant #2 shall not assign this Sub-Sublease or further sublet all
or any part of the Premises without the prior written consent of
Sublessor and Subtenant #1 which consent shall not be unreasonably
withheld (and the consent of Lessor, if such is required under the term
of the Master Lease).
10. OTHER PROVISIONS OF SUB-SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sub-Sublease as if Sublessor
were the lessor thereunder, Subtenant #1 the lessee thereunder,
Subtenant #2 the sublessee thereunder, and the Premises the Master
Premises. Subtenant #2 assumes and agrees to perform the lessee's
obligations under the Master Lease during the Term to the extent that
such obligations are applicable to the Premises, except that the
obligation to pay rent to Lessor under the Master Lease shall be
considered performed by Subtenant #2 to the extent and in the amount
rent is paid to Subtenant #1 in accordance with Section 6 of this
Sub-Sublease. Subtenant #2 shall not commit or suffer any act or
omission that will violate any of the provisions of the Master Lease.
Sublessor and Subtenant #1 shall exercise due diligence in attempting
to cause Lessor to perform its obligations under the Master Lease for
the benefit of Subtenant #2. If the Master Lease terminates, this
Sub-Sublease shall terminate and the parties shall be relieved of any
further liability or obligation under this Sub-Sublease, provided
however, that if the Master Lease terminates as a result of a default
or breach by Sublessor, Subtenant #1 or Subtenant #2 under this
Sublease, Sub-Sublease and/or the Master Lease, then the defaulting
party shall be liable to the nondefaulting party for the damage
suffered as a result of such termination. Notwithstanding the
foregoing, if the Master Lease gives Sublessor, or Subtenant #1 any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor or Subtenant #1 shall not
constitute a default or breach hereunder.
* Except as specifically set forth within this Sub-Sublease. This
Sub-Sublease is not to be construed as an amendment to the Lease
Agreement in any report.
2
<PAGE> 3
11. ATTORNEY'S FEES.
If Sublessor, Subtenant #1, Subtenant #2, or Broker shall commence an
action against the other arising out of or in connection with this
Sub-Sublease, the prevailing party shall be entitled to recover its
costs of suit and reasonable attorney's fees.
12. AGENCY DISCLOSURE.
Subtenant #1 and Subtenant #2 each warrant that they have dealt with no
other real estate broker in connection with this transaction except:
Richard Bowers & Co., who represents Subtenant #1 and Cushman &
Wakefield who represents Subtenant #2.
13. COMMISSION.
Upon execution of this Sub-Sublease, and consent thereto by Lessor (if
such consent is required under the terms of the Master Lease),
Subtenant #1 shall pay Broker a real estate brokerage commission in
accordance with Subtenant #1's contract with Broker for the
sub-subleasing of the Premises, if any, and otherwise in the amount of
Seven Thousand One Hundred Forty-Five and 83/100 Dollars ($7,145.83) to
be divided $4,763.89 to Cushman & Wakefield of Georgia, Inc. and
$2,381.94 to Richard Bowers for services rendered in effecting this
Sub-Sublease. Broker is hereby made a third party beneficiary of this
Sub-Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to
be given by either party on the other hereunder shall be in writing.
All notices and demands by Subtenant #1 to Subtenant #2 shall be sent
by United States Mail, postage prepaid, addressed to the Subtenant #2
at the Premises, and to the address hereinbelow, or to such other place
as Subtenant #2 may from time to time designate in a notice to
Subtenant #1. All notices and demands by Subtenant #2 to Subtenant #1
shall be sent by United States Mail, postage prepaid, addressed to
Subtenant #1 at the address set forth herein, and to such other person
or place as Subtenant #1 from time to time designate in a notice to
Subtenant #2. Copies of any notices that are sent between the
Sublessor, Subtenant #1 and Subtenant #2 should be sent to Realty
Associates Fund IV, L.P.
To: Subtenant #1: 1700 Westlake Avenue North, Suite 400, Seattle,
Washington 98109
To: Subtenant #2: One West Court Square, P.O. Box 1286, Decatur,
Georgia 30301-1286
15. CONSENT BY LESSOR.
THIS SUB-SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO
VIA A CONSENT TO SUB-SUBLEASE FORM BY THE LESSOR. (DATED
____________________).
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative
orders having jurisdiction over the parties, property or the subject
matter of this Agreement, including, but not limited to, the 1964 Civil
Rights Act and all amendments thereto, the Foreign Investment In Real
Property Tax Act, the Comprehensive Environmental Response Compensation
and Liability Act, and The Americans With Disabilities Act.
Subtenant #1: Maxxis 2000, Inc. Subtenant #2: Simons Engineering, Inc.
By: /s/ Thomas O. Cordy By: /s/ George T. Ragsdale
--------------------------------- --------------------------------------
Title: President Title: Vice President
------------------------------ -----------------------------------
Date: 9/2/97 Date: 9/2/97
------------------------------- ------------------------------------
3
<PAGE> 4
SUBLESSOR'S CONSENT TO SUB-SUBLEASE
The undersigned ("Sublessor"), Lessee under the Master Lease, hereby consents to
the foregoing Sub-sublease without waiver of any restriction in Master Lease
concerning further assignment or subletting. Sublessor certifies that, as of the
date of Sublessor's execution hereof, Sublessor or Subtenant #1 are not in
default or breach of any of the provisions of the Master Lease or Sublease, and
that the Master Lease or Sublease has not been amended or modified except as
expressly set forth in the foregoing Sub-Sublease.
Sublessor: DowElanco
By: /s/ T. E. Lingafelter
---------------------------------
Title: Manager, Site Operations
------------------------------
Date: Sept. 3, 1997
-------------------------------
CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
SPECIAL STIPULATIONS
Subtenant #1 agrees to steam clean the carpet.
4
<PAGE> 5
EXHIBIT A
LEASE AGREEMENT
ROSWELL SUMMIT OFFICE PARK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C> <C>
1. Lease Data and Exhibits 1
2. Premises 2
3. Commencement - Expiration Dates 2
4. Rent 3
5. Security Deposit 3
6. Uses 3
7. Services and Utilities 3
8. Cost of Services and Utilities 5
9. Real Property Taxes 7
10. Improvements 7
11. Care of Premises 7
12. Acceptance of Premises 7
13. Special Improvements 7
14. Access 8
15. Damage or Destruction 8
16. Waiver of Subrogation 8
17. Indemnification and Liability Insurance 9
18. Assignment and Subletting 10
19. Advertising 11
20. Liens and Insolvency 11
21. Defaults 11
22. Quiet Enjoyment 12
23. Priority 12
24. Surrender of Possession 12
25. Removal of Property 12
26. Non-Waiver 12
27. Holdover 12
28. Condemnation 13
29. Notices 13
30. Costs and Attorney's Fees 14
31. Landlord's Liability 14
32. Waiver of Jury Trial 14
33. Estoppel Certificates 14
34. Transfer of Landlord's Interest 15
35. Right to Perform 15
36. Substituted Premises 15
37. Exculpation of Landlord 15
38. Hazardous Waste 15
39. ADA 16
40. General 16
41. Signature Blocks 19
Exhibit "A" - Floorplan
Exhibit "B" - Special Stipulations
</TABLE>
5
<PAGE> 6
LEASE AGREEMENT
ROSWELL SUMMIT OFFICE PARK
THIS LEASE (the "Lease") made this 23rd day of November, 1993, between
THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK ("Landlord"), and DOWELANCO
("Tenant").
As parties thereto, Landlord and Tenant agree that the following terms
as used herein shall have the meanings provided in this Section 1, unless
otherwise specifically modified by provisions of this Lease:
1. LEASE DATA AND EXHIBITS:
1.1 Office Park: ("Park), known as Roswell Summit park situated on
the real property located at 1080 Holcomb Bridge Road,
Roswell, Georgia 30076.
1.2 Premises: Consisting of that area in Building 100 (the
"Building), on the first floor and known as Suite 135 as
outlined on Exhibit A.
1.3 Agreed Areas: As used in this Lease, Landlord and Tenant agree
to the following areas and percentage:
Total rentable area of the Building 63- 286 s.f.
Area of Tenant's Premises 3,516 s.f.
Tenant prorated share of common area 422 s.f.
Tenant total rentable area 3,938 s.f.
Tenant percentage of the Building 6.22 % *
* This percentage shall not vary with the occupancy of the Building.
1.4 Leasehold Improvement Plan Date: September 15, 1993
1.5 Lease Commencement Date: December 1, 1993 or such earlier or
later date as provided In Section 3 hereof ("Commencement
Date").
1.6 Expiration Date: November 30, 1998
1.7 Rent: Rent shall be $4,577.93 per month, which is $54,935.16
per year ("Base Rent"). This Base Rental shall increase in the
second year and each subsequent year by three percent (3%)
compounded annually. Said increases shall be paid on a monthly
basis beginning with the first month of the second year, and
continue for each succeeding year of this Lease. Tenant has
paid to Landlord on the date hereof $4,577.93 to be applied to
the first full month's rent payable plus any prorated month
which is applicable.
1.8 Notices and Payment Address:
Tenant: DowElanco
9330 Zionsville Road
Indianapolis, IN 46268
ATTN: Director, Site Operations
Landlord: The Mutual Life Insurance Company of New York
5775-E Glenridge Drive
Suite 100
Atlanta, GA 30328
ATTN: Regional Vice President
With a copy of all notices to:
ARES
5775-B Glenridge Drive
Suite 220
Atlanta, GA 30328
ATTN: Vice President
<PAGE> 7
1.9 Exhibits: The following exhibits and riders are made apart of
this Lease:
Exhibit A - Floor plan of Premises
Exhibit B - Special Stipulations
2. PREMISES: Landlord does hereby lease to Tenant, and Tenant does hereby
lease from Landlord, upon the terms and conditions herein set forth,
the Premises described in Section 1.2 hereof and as more particularly
shown on Exhibit A attached hereto and Incorporated herein.
3. COMMENCEMENT - EXPIRATION DATES:
3.1 Lease Commencement Date: The Lease Commencement Date
shall be:
3.1.1 The date specified in Section 1.5 unless notice is
delivered pursuant to Subsection 3.1.2 or unless
Tenant occupies earlier, pursuant to Subsection
3.1.3.
3.1.2 Such earlier or later date as may be specified in a
notice delivered to Tenant at least thirty (30) days
before such date upon which the Premises, together
with the common facilities for access and service
thereto, have been completed; or
3.1.3 If Tenant shall occupy the Premises for Permitted
Uses prior to the date specified In Subsection 1.5 or
in the notice provided under Subsection 3.1.2, the
date of such early occupancy.
3.2 Tenant Obligations: If Tenant's improvements are not completed
on the Lease Commencement Date specified in Section 1.5 or as
provided in Subsection 3.1.2 above, whichever is applicable,
due to the failure of Tenant to fulfill any obligation
pursuant to the terms of this Lease or any Exhibit thereto,
including without limitation Tenant's failure to comply with
the Plan Delivery Date described in section 1.4, the Lease
shall be deemed to have commenced upon the Lease Commencement
Date specified in Section 1.5 or as provided in Subsection
3.1.2 above, as applicable.
3.3 Tenant's Termination Rights: In the event a Lease Commencement
Date as provided in Subsection 3.1.2 above does not occur
within sixty (60) days following the Lease Commencement Date
specified in Section 1.5. Tenant may terminate this Lease by
written notice; provided, however, that such period may at
Landlord's sole option be extended by any period, not to
exceed one (1) year from the Lease Commencement Date specified
in Section 1.5 for delays due to casualties, acts of God,
strikes, shortages of labor or materials or other causes
beyond the reasonable control of Landlord. If the Lease
Commencement Date has not occurred within such extension
period, this Lease shall be deemed null and void and all
rights and obligations of the parties shall terminate.
Termination under this Subsection 3.3 shall be Tenant's sole
remedy and Tenant shall have no other rights or claims
hereunder at law or in equity.
3.4 Confirmation of Commencement Date: When a Lease Commencement
Date as provided in Subsection 3.1.2 and 3.1.3 above has been
established as a later or earlier date than the Lease
Commencement Date provided in Section 1.5 hereof, Landlord
shall confirm the same to Tenant in writing.
3.5 Expiration Date: The Lease shall expire on the date specified
in Section 1.6, except that such date may be extended if an
occupancy later than specified in Section 1.5 occurs and is
confirmed per Section 3.4
4. RENT: Tenant shall pay Landlord the rental stated in Section 1.7 hereof
("Base Rent") and Additional Rent as provided in Sections 8 and 9 and
any other additional payments under this Lease without deduction or
offset, payable in lawful money in the United States in advance on or
before the first day of each month to Landlord at the address noted in
Section 1.8 hereof, or to such other party or at such other place as
Landlord may hereafter from time to time designate in writing. Rent for
any partial month at the beginning or end of the Lease term shall be
prorated.
5. SECURITY DEPOSIT: As security for the full and faithful performance of
every covenant or condition of this Lease to be performed by Tenant,
Tenant has paid to Landlord the Security Deposit of -0- , receipt of
which is hereby acknowledged. If Tenant shall default with respect to
any covenant or condition of this Lease, including but not limited to
the payment of Rent, Additional Rent or any other payment due under
this Lease, Landlord may apply all or part of the Security Deposit to
the payment of any sum in default or any other sum which Landlord may
be required to spend or incur by reason of Tenant's default, or any
other sum which Landlord may in its reasonable discretion deem
necessary to spend or incur by reason of Tenant's default. In such
event, Tenant shall upon demand deposit with Landlord the amount so
applied to replenish said Security Deposit. If Tenant shall have
-2-
<PAGE> 8
fully complied with all of the covenants and conditions of this Lease,
but not otherwise, the amount of the Security Deposit then held by
Landlord shall be repaid to Tenant within thirty (30) days after the
expiration or termination of this Lease. In the event of Tenant's
default, Landlord's right to retain the Security Deposit shall be
deemed to be in addition to any and all other rights and remedies at
law or in equity available to Landlord for Tenant's default under this
Lease. Landlord may, in the event the Security Deposit is depleted, at
Landlord's discretion, apply any unpaid rent received at the time of
the execution of the Lease for the purposes of the deposit.
6. USES. The premises are to be used only for general office purposes
("Permitted Uses"), and for no other business or other purposes without
the written consent of Landlord. No act shall be done by Tenant or
Landlord in or about the Premises that is unlawful or that will
increase the existing rate of insurance on the Building. Tenant or
Landlord shall not commit or allow to be committed any waste upon the
Premises, or any public or private nuisance or other act or thing which
disturbs the quite enjoyment of any other tenant in the Building.
Tenant shall not, without the written consent of Landlord, use any
apparatus, machinery or device in or about the Premises which will
cause any substantial noise or vibration. If any of Tenant's office
machines and equipment should disturb the quite enjoyment of any other
Tenant in the Building, then Tenant shall provide adequate insulation,
or take such other action as may be necessary to eliminate the
disturbance. Tenant shall comply with all laws relating to its use or
occupancy of the premises and shall observe such reasonable rules and
regulations as may be adopted and made available to Tenant by Landlord
from time to time for the safety, care and cleanliness of the Premises
and/or the Building, and for the preservation of good order therein.
7. SERVICES AND UTILITIES:
7.1 Duty of Landlord: As long as Tenant is not in default under
any of the provisions of this Lease, Landlord shall maintain
or cause to be maintained the Premises and the public and
common areas of the Park, such as lobbies, elevators, stairs,
corridors, and restrooms, in reasonably good order and
condition except for damage occasioned by any act or omission
of Tenant, the repair of which damage shall be paid for by
Tenant.
7.2 Hours of Service: From 8:00 a.m. to 6:00 p.m. on weekdays
("Normal Business Hours") and 8:00 a.m. to 1:00 p.m. on
Saturday ("Saturday Mornings") (excluding legal holidays),
Landlord shall furnish the Premises with electricity for
lighting and operation of low power usage office machines,
water, heat and air-conditioning, and elevator service.
7.3 Additional Services: During all other hours, Landlord shall
furnish such service except for heat and air-conditioning. If
requested by Tenant, the Landlord shall furnish heat and
air-conditioning at times other than Normal Business Hours and
Saturday Mornings and the cost of such services as established
by Landlord shall be paid by Tenant as additional payment,
payable as provided in Section 4.
Landlord shall also provide light replacement service for
landlord-furnished lights, toilet room supplies, window
washing at reasonable intervals, and customary building
janitorial service five days per week, Monday through Friday.
No janitorial service shall be provided Saturdays, Sundays, or
legal holidays. The cost of any janitorial service or other
types of services provided or caused to be provided by
Landlord to Tenant which are in addition to the services
ordinarily provided Park Tenants shall be paid in the manner
provided for payment of Rent in Section 4 of this Lease.
7.4 Disclaimer. Landlord shall not be liable for any loss, injury
or damage to property caused by or resulting from any
violation, interruption, or failure of such services due to
any cause whatsoever or from failure to make any repairs or
perform any maintenance. No temporary interruption or failure
of such services incident to making of repairs, alterations,
or improvements, or due to accident, strike, or conditions or
events beyond Landlord's reasonable control shall be deemed an
eviction of Tenant or relieve Tenant from any of Tenant's
obligations hereunder.
7.5 Heat Producing Equipment: Tenant shall not install any
equipment or lights in the Premises which will utilize
electrical service or generate an amount of heat in excess of
that typically used or found in a normal business office use
of the Premises with small business machines, except as
provided to the contrary in Special Stipulations. In the event
Tenant utilizes electrical current in excess of the amount
typically utilized as aforesaid or installs equipment which
generates heat in excess of the amount typically found as
aforesaid, then the Landlord shall have the right to charge
Tenant as additional rent a reasonable sum as reimbursement
for the direct costs of such additional use or service
necessary by reason of Tenant's use. In the event of a
disagreement as to the reasonableness of that amount of such
additional rent, the opinion of a qualified local independent
engineer mutually selected by the Landlord and Tenant shall be
binding upon Landlord and Tenant.
-3-
<PAGE> 9
7.6 Additional Rent: In addition, Tenant shall in advance, on the
first day of each month during the Lease Term, pay Landlord
the reasonable amount estimated by Landlord as the cost of
furnishing electricity directly relating to the leased
premises for the operation of such high power usage equipment
and for the reasonable amount estimated by Landlord as the
cost of operation and maintenance of supplementary
air-conditioning units as necessitated by Tenant's use of
equipment which generates an undue amount of heat. The Rent
stated in Section 1,7 hereof does not include any amount to
cover the cost of furnishing electricity or such additional
air-conditioning for such purposes unless so stated therein,
and such costs shall be paid by Tenant in the manner provided
for payment of Rent in Section 4 of this Lease. Upon ten (10)
days written notice to Tenant of estimated cost and Tenant's
payment to Landlord of such cost, Landlord shall install and
operate at Tenant's cost a monitoring metering system In the
Premises to measure the added demands electricity, heating,
ventilation, and air-conditioning systems resulting from
Tenant's heat generating high power equipment usage, and
after-hours service requirements. In the event of non-payment
of additional payments due from Tenant for any of the above
described additional services, Landlord shall have the same
rights with respect to such non-payment as it has with respect
to the non-payment of Rent hereunder.
8. COST OF SERVICES AND UTILITIES:
8.1 Definitional Terms: In addition to the Rent provided in
Section 1.7 of this Lease, Tenant shall pay to Landlord
increases under this Paragraph 7 as "Additional Rent". These
increases shall be made as provided herein, utilizing the
following definitions:
8.1.1.1 "Cost of Utilities" shall mean all expenses paid or
incurred by Landlord for electricity, water, gas,
sewers, and similar utilities, including any
surcharge imposed for these services.
8.1.1.2 "Other Operational Costs" shall mean all other
expenses paid or incurred by Landlord for
maintaining, operating and repairing the Building and
the personal property used in conjunction therewith,
including, without limitation, the costs of refuse
collection, supplies, janitorial and cleaning
services, window washing, landscape maintenance,
seasonal plantings, services of independent
contractors, compensation (including employment taxes
and fringe benefits) of all persons who perform
duties in connection with the operation, maintenance
and repair of the Building, its equipment and the
Land upon which it is situated, insurance premiums,
licenses, permits and inspection fees, customary
management fees and accounting expenses, real
property taxes, and any other expense or charge
whether or not hereinbefore described which in
accordance with generally accepted accounting and
management practices would be considered an expense
of maintaining, operating or repairing the Buildings.
8.1.1.2.1 Depreciation or amortization of costs
required to be capitalized in accordance
with generally accepted accounting
practices (except Operating Costs shall
include amortization of capital
improvements made subsequent to the initial
development of the building which are
designed that actually improve the
operating efficiency of the Building,
provided that such amortization costs shall
not exceed expected savings In Operating
Costs resulting from such capital
improvements). Any excess shall be included
as an operating expense under 8.1.1.2.
8.1.2 "Calendar Lease Year" shall mean a twelve (12) month
period beginning January 1 and ending December 31.
'Partial Lease Year' shall mean any other period of
time other than a full calendar year.
8.1.3 "Actual Costs" shall mean the actual expenses paid or
incurred by Landlord for Operating costs during any
Calendar Lease Year of the term hereof.
8.1.4 "Estimated Cost Allocable to the Premises" shall mean
Landlord's estimate of cost allocable to the Premises
for the following Calendar Lease Year to be given by
Landlord to Tenant pursuant to Section 8.3 below.
8.2 Base Amount: The base operating costs allocable to the
Tenant's premises shall be the 1994 Actual Costs.
8.3 Additional Rent for Increases in Cost: Thirty (30) days prior to the
commencement of each Calendar lease year (excluding the first Lease
Year) during the term hereof, Landlord shall furnish Tenant a
-4-
<PAGE> 10
written statement of the Estimated Cost Allocable to the Premises for
such Calendar Lease Year, and a calculation of the Additional Rent as
follows: One-twelfth (1/12) of the amount, if any, by which such amount
exceeds the Base Amount shall be Additional Rent payable by Tenant as
provided In Section 4 for each month during such Calendar Lease Year.
If at any time or times during such Calendar Lease Year, it appears to
Landlord that the Estimated or Actual Cost Allocable to the Premises
will vary from Landlord's estimate by more than five percent (5%) on an
annualized basis, Landlord may, by written notice to Tenant, revise its
estimate for such Calendar Lease Year and Additional Rent payments by
Tenant for such Calendar Lease Year shall be based on such revised
estimate.
8.4 Actual Costs: Within ninety (90) days after the close of each Calendar
Lease Year during the term thereof, or as soon thereafter as practical,
Landlord shall deliver to Tenant a written statement setting forth the
Actual Costs allocable to the Premises during the preceding Calendar
lease Year. If such costs for any Calendar Lease Year exceed Estimated
Costs Allocable to the Premises paid by Tenant to Landlord pursuant to
the preceding Section 8.3, then the amount of such overpayment by
Tenant shall be credited by Landlord to the next month's Rent payable
by Tenant.
8.5 Determinations: The determination of Actual Costs and Estimated Costs
shall be made by Landlord to most accurately reflect operating costs
pertaining to the Tenant's premises.
8.6 End of Term: If this Lease shall terminate on a day other than the last
day of a Year, the amount of any adjustment between Estimated Costs
Allocable to the Premises with respect to the Year in which such
termination occurs shall be prorated on the basis which the number of
days from the commencement of such Year in which such termination
occurs to and Including such termination date bears to 365; and any
amount payable by Landlord to Tenant or Tenant to Landlord with respect
to such adjustment shall be payable within thirty (30) days after
delivery by Landlord to Tenant of the statement of Actual Cost
allocable to the Premises with respect to such Partial Year.
8.7 Further Adjustment: In the event the average occupancy level of the
Building in any Lease Year was not ninety-five percent (95%) or more of
full occupancy, then in making the calculations in 8.3 and 8.4 the
Estimated Costs and Actual Costs for such year shall be proportioned
among the Tenants by the Landlord to reflect those costs which would
have occurred had the Building been ninety-five percent (95%) occupied
during such year.
8.8 Base Year: Notwithstanding anything to the contrary in this Section 8
or in Section 9, the Rent payable by Tenant shall in no event be less
than the Rent specified in Section 1.7 of this Lease.
8.9 Non-Payment of Additional Rent: In the event of non-payment of the
Additional Rent hereunder, Landlord shall have the same rights with
respect to such non-payment of Rent hereunder.
9. REAL PROPERTY TAXES:
9.1 "Real Property Taxes": under subsection 8.1.1.2 shall mean
taxes on real property described in Paragraph 2 above and
personal property (including all tenant Improvements which are
paid for by Landlord and not reimbursed by Tenant) which are
assessed as real property and have not been paid by Tenant
directly to the taxing authority; charges and assessments
levied with respect to the Land, the Building, any
improvements, fixtures and equipment, and all other property
of Landlord, real or personal, used directly in the operation
of the Building and located in or on the Building; and any
taxes levied or assessed in addition to or personal property
taxes, or any other tax upon leasing of the Building or rents
paid or collected, but not including any federal or state
income tax or franchise tax.
9.2 Taxes on Improvements Paid for by Tenant and Not Reimbursed by
Landlord: Tenant shall pay, prior to delinquency, all personal
property taxes with respect to all property of Tenant located
on the Premises or the Building. As used in this Section 9.2
and Section 15.4, "Property of Tenant" Includes improvements
which are paid for by Tenant and not reimbursed by Landlord
(and improvements originally paid for by Landlord, the costs
of which are reimbursed by Tenant). In the event property of
Tenant is assessed as real property, Tenant shall pay the
taxes thereon as Additional Rent.
10. IMPROVEMENTS: Upon expiration or sooner termination of this Lease, all
improvements and additions to the Premises, except Tenant's trade
fixtures, shall be deemed property of Landlord.
11. CARE OF PREMISES: Tenant shall take good care of the Premises. Tenant
shall not make any alterations, additions or improvements in or to the
Premises, or make changes to locks on doors, or add, disturb or in any
way change any plumbing or wiring without first obtaining the written
consent of Landlord and, where appropriate, such work will be performed
in accordance with plans and specifications approved by Landlord. All
damages or injury done to the Premises or Park by Tenant or by any
person who may be in or upon the Premises or Park with the express or
implied consent of Tenant, including but not limited to cracking or
breaking of glass of any windows and doors, shall be paid for by Tenant
and Tenant shall pay for all damage to the contractors, agents,
invitees, licensees, or
<PAGE> 11
employees. All normal repairs necessary to maintain the Premises in
a tenantable condition shall be done by or under the direction of
Landlord and at Landlord's expense except as otherwise provided herein.
Landlord shall be the sole judge as to what repairs are necessary.
12. ACCEPTANCE OF PREMISES: If this Lease shall be entered into prior to
the completion of construction of the Building or completion of Tenant
Improvements in the Premises to be occupied by Tenant, the acceptance
of the Premises by Tenant shall be deferred until receipt by the Tenant
of a Certificate of Occupancy certifying that the Tenant's portion of
the Building Is ready for occupancy. Within five (5) days after receipt
of such notice, Tenant shall make such inspection of the Premises as
Tenant deems appropriate and, except as otherwise notified by Tenant In
writing to Landlord within such period, Tenant shall be deemed to have
accepted the Premises in their then condition. If, as a result of such
inspection, Tenant discovers minor deviations or variations from the
plans and specifications for Tenant's improvements of a nature commonly
found on a "punch list" (as that term is used in the construction
industry), Tenant shall promptly notify Landlord of such deviations.
The existence of such punch list items shall not postpone the
Commencement Date of this Lease nor the obligation of Tenant to pay
Rent.
13. SPECIAL IMPROVEMENTS: Tenant shall reimburse Landlord for Landlord's
cost of making all special improvements requested by Tenant, including
but not limited to counters, partitioning, electrical and telephone
outlets and plumbing connections other than as shown on Exhibit A or
other attachments hereto as being furnished by Landlord; provided,
however, Tenant shall not be obligated to pay for the cost of any
special improvements made without a written request to Tenant by
Landlord.
14. ACCESS: Tenant shall permit Landlord and its agents to enter into and
upon the Premises at all reasonable times for the purpose of inspecting
the Premises or for the purpose of cleaning, repairing, altering or
improving the Premises or the Park. Nothing contained in this Section
14 shall be deemed to impose any obligation upon the Landlord not
expressly stated elsewhere in this Lease. When reasonably necessary
Landlord may temporarily close entrances, doors, corridors, elevators
or other facilities without liability to Tenant by reason of such
closure and without such action by Landlord being construed as an
eviction of Tenant or release of Tenant from the duty of observing and
performing any of the provisions of this Lease. Provided, however, that
such interference is such as to cause the premises to be untenantable
and such interference continues for a period of more than fifteen (15)
consecutive business days, then rent shall abate beginning on the
fifteenth (15th) day. Landlord shall have the right to enter the
Premises with prior written notice for the purpose of showing the
Premises to prospective tenants within the period of 180 days prior to
the expiration or sooner termination of the lease term.
15. DAMAGE OR DESTRUCTION:
15.1 Damage Repair: If the Premises shall be destroyed or rendered
untenantable, (either wholly or in part) by fire or other
casualty, Landlord may, at its option, restore the Premises to
their previous condition, and in the meantime the monthly Rent
shall be abated I n the same proportion as the untenantable
portion of the Premises bears to the whole thereof, and this
Lease shall continue in full force and effect. If the damage
is due directly or indirectly, to the willful misconduct of
Tenant, or its officers, contractors, licensees, agents,
servants, employees, guests, invitees or visitors, there shall
be no abatement of Rent except to the extent Landlord receives
proceeds from any applicable insurance policy to compensate
Landlord for loss of Rent.
15.2 Termination for Material or Uninsured Damages: If the Building
shall be destroyed or damaged by fire or other casualty
insured against under Landlord's fire and extended coverage
insurance policy to the extent that more than ten percent
(10%) thereof is rendered untenantable or in the case the
Building shall be materially destroyed or damaged by any other
casualty other than those covered by such Insurance policy,
notwithstanding that the Tenant Premises may be unaffected
directly by such destruction or damage, Landlord may at its
election, with prior written consent of any first mortgagee,
terminate this Lease by notice In writing to Tenant within
sixty (60) days after such destruction or damage. Such notice
shall be effective thirty (30) days after receipt thereof by
Tenant.
15.3 Business Interruption: Other than rental abatement provided in
Section 15.1 no damages, compensation or claim shall be
payable by Landlord for inconvenience or loss of business
arising from interruption of business, repair or restoration
of the Building or Premises. Landlord shall use its best
efforts to effect repairs and restoration In a prompt manner.
15.4 Insurance: Landlord shall at all times during the term of this
Lease carry a policy of commercial general liability insurance
coverage.
16. WAIVER OF SUBROGATION: Whether the loss or damage is due to the
negligence of either Landlord or Tenant, their agents or employees or
any other cause, Landlord and Tenant to each herewith and hereby
release and relieve the other, their agents or employees, from
responsibility for,
<PAGE> 12
and waive their entire claim of recovery for (I) any loss or damage to
the real or personal property of either located anywhere in the Park,
Including the Buildings themselves, arising out of or Incident to the
occurrence of any of the perils which are covered by their respective
fire Insurance policies, with extended coverage endorsements, or (II)
loss resulting from business Interruption at the Premises or loss of
rental income from the Park, arising out of or Incident to the
occurrence of any of the perils which may be covered by the business
interruption insurance policy and by the loss of rental Income
insurance policy held by Landlord or Tenant. Each party shall cause its
Insurance carriers to consent to such waiver of all rights of
subrogation against the other party. Notwithstanding the foregoing, no
such release shall be effective unless the aforesaid insurance policy
or policies shall expressly permit such a release or contain a waiver
of the carrier's right to be subrogated.
17. INDEMNIFICATION AND TENANT'S INSURANCE:
17.1 Indemnification and Hold Harmless:
(a) Tenant and Landlord hereby indemnify and hold each other
harmless from and against any injury, expense, damage,
liability or claim, imposed on Landlord or Tenant by any
person whomsoever, whether due to damage to the Premises,
claims for injuries to the person or property of any other
tenant of the Building or of any other person in or about the
Building or the Property for any purpose whatsoever, or
administrative or criminal action by a governmental authority,
if such injury, expense, damage, liability or claim results
either directly or indirectly from the act, omission,
negligence, misconduct or breach of any provisions of this
Lease by Tenant or Landlord, the agents, servants, or
employees of Tenant or Landlord, or any other person entering
in the Building or upon the Premises under express or implied
invitation or consent of Tenant or Landlord.
17.2 Tenant's Insurance: Tenant shall carry (at its sole expense
during the Term) (I) fire and extended coverage insurance
insuring Tenant's Improvements to the Premises and any and all
furniture, equipment, supplies, contents and other property
owned, leased, held or possessed by Tenant and contained
therein, such insurance coverage to be in an amount equal to
the full replacement value of such improvements and property,
as such may increase from time to time; (ii) worker's
compensation insurance as required by the laws of the State of
Georgia; and (iii) commercial general liability coverage on an
occurrence basis for injury to or death of a person or persons
and for damage to property occasioned by or arising out of the
condition, use, or occupancy of the Premises, or other
portions of the Building or Property, including contractual
liability and such other coverages and endorsements as are
reasonably required by Landlord, such policy to have a
combined single limit of not less than Three Million and
no/100 Dollars ($3,000,000) for any bodily injury or property
damage occurring as a result of or in connection with the
above. Landlord and Landlord's property manager shall be named
additional insureds on the policies required hereunder and
such policies shall provide that the coverage thereunder is
primary to, and not contributing with, any policy carried by
any such additional insured. Tenant shall have included in all
policies of insurance respectively obtained by it with respect
to the Building or Premises a waiver by the Insurer of all
right of subrogation against the Landlord in connection with
any loss or damage thereby insured against, and Landlord shall
have included in all property insurance policies required to
be maintained by Landlord under this lease a waiver by the
insurer of all right of subrogation against the Tenant in
connection with any loss or damage thereby insured against. To
the full extent permitted by law, Landlord as to its property
insurance policies and Tenant as to all its policies, each
waives all right of recovery against the other for, and agrees
to release the other from liability for, loss or damage to the
extent such loss or damage results from a cause covered by
valid and collectible insurance in effect at the time of such
loss or damage; provided however, that the foregoing release
by each party is conditioned upon the other party's carrying
insurance with the above described waiver of subrogation to
the extent required above, and if such coverage is not
obtained or maintained by either party, then the other party's
foregoing release shall be deemed to be rescinded until such
waiver is either obtained or reinstated. All said insurance
policies shall be carried with companies licensed to do
business in the State of Georgia reasonably satisfactory to
Landlord having. a Best's Rating of A XII or better and shall
be noncancellable and nonamendable except after thirty (30)
days written notice to Landlord. At Landlord's request, duly
executed certificates of such insurance shall be delivered to
Landlord prior to the Commencement Date and at least thirty
(30) days prior to the expiration of each respective policy
term. Landlord shall have the right to periodically review the
coverages required hereunder and in the event Landlord deems
It reasonably necessary to require additional coverage
resulting from inflation or from increases in jury verdicts or
other economic conditions in the jurisdiction where the
Property is located, Tenant shall obtain the coverage
requested by Landlord. Notwithstanding any other provisions in
this Lease to the contrary, Tenant shall have the right to
self-assume or obtain insurance from an insurance company that
is a wholly owned subsidiary of one (1) of the two (2) general
partners of the Tenant which insurance company must have a
Best's Rating of A XII or better, for all or a portion of the
risk which Tenant is required to provide insurance coverage
under this Lease. In the event Tenant self-assumes the risk,
it will be responsible for all losses and liabilities to the
<PAGE> 13
same extent as if valid and collectible insurance were in
effect. The foregoing provision concerning the right to
self-assume shall only apply to the Tenant as of the date of
this Lease, and to no successors and/or assigns unless
consented to by Landlord in its sole discretion.
18. ASSIGNMENT AND SUBLETTING:
18.1 Assignment of Sublease: Except to a wholly owned subsidiary or
affiliate of Tenant, Tenant shall not sell, assign, mortgage
or transfer this Lease, sublet the Premises or any part
thereof or allow any transfer by operation of law. Tenant
shall, by written notice, advise Landlord of its desire from,
on and after a stated date (which shall not be less than
thirty (30) days nor more than sixty (60) days after the date
of Tenant's notice) to sublet any part or all of the Premises
for any part of the term hereof, and, in such event, Landlord
shall have the right, to be exercised by giving written notice
to Tenant twenty (20) days after receipt of Tenant's notice)
to terminate this Lease as to the portion of the Premises
therein described as of the date stated in Tenant's notice.
Such notice by Tenant shall state the name and address of the
proposed subtenant, and Tenant shall deliver to Landlord a
true and complete copy of the proposed sublease with said
notice. If said notice shall specify all of the Premises, and
Landlord shall give said termination notice with respect
thereto, this Lease shall terminate on the date stated in
Tenant's notice. If, however, this Lease shall terminate
pursuant to the foregoing with respect to less than all the
Premises, the rental (as determined in paragraph 4) and taxes
(as determined in paragraph 9) shall be adjusted on a pro rata
basis to the number of square feet retained by Tenant and this
Lease as so amended shall continue thereafter in full force
and effect. If Landlord, upon receiving said notice by Tenant
with respect to any of the Premises, shall not exercise its
right to terminate, Landlord will not withhold unreasonably
its consent to Tenant's subletting the Premises specific in
said notice provided that all Increases in rent under a
sublease shall be paid to Landlord.
18.2 Sublease Obligations. Any subletting hereunder by Tenant shall
not result in Tenant being released or discharged from any
liability under this Lease. As a condition to Landlord's prior
written consent as provided for in this paragraph, the
subtenant or subtenants shall agree in writing to comply with
and be bound by all of the terms, covenants, conditions,
provisions and agreements of this Lease and Tenant shall
deliver to Landlord, promptly after execution, an executed
copy of each sublease and an agreement of said compliance by
each subtenant.
18.3 Void Assignment or Subletting: Any sale, assignment, mortgage,
or transfer of the Lease or subletting which does not comply
with the provisions of this paragraph shall be void.
19. ADVERTISING: Tenant shall not inscribe any inscription, or post, place,
or in any manner display any sign, graphics, notice, picture, placard
or poster, or any advertising matter whatsoever, anywhere in or about
the Premises or the Park at places visible (either directly or
indirectly as an outline or shadow on a glass pane) from anywhere
outside Tenant's occupied area or at the entrance to Premises without
first obtaining landlord's written consent thereto, such consent to be
at Landlord's sole discretion. Any such consent by Landlord shall be
upon the understanding and condition that Tenant will remove the same
at the expiration or sooner termination of this Lease and Tenant shall
repair any damage to the Premises or the Park caused thereby.
20. LIENS AND INSOLVENCY: Tenant shall keep the Premises and the Park free
from any liens arising out of any work performed, materials ordered or
obligations incurred by or on behalf of Tenant, and Tenant indemnifies
and holds Landlord harmless from any liability for such liens,
including without limitation, liens arising from work performed
pursuant to Exhibit "A'. If Tenant becomes insolvent, voluntarily or
involuntarily bankrupt, or if a receiver or assignee or other
liquidating officer is appointed for the business of Tenant, then
Landlord may terminate this Lease and Tenant's right of possession
under this Lease at Landlord's option and In no event shall this Lease
or any rights or privileges hereunder be an asset of Tenant under any
bankruptcy, insolvency or reorganization proceedings.
21. DEFAULTS: Time is the essence hereof, and it shall be deemed a default
if Tenant shall violate or breach or fail to keep or perform any
covenant, agreement term or condition of this Lease including without
limitation Tenant's obligation to make any and all payments due under
this Lease, whether or not such payments are defined as Rent or
Additional Rent, and if such default or violation shall continue or
shall not be remedied within at least ten (10) days (or, if no default
in the Rent, Additional Rent or any other payments due hereunder Is
involved, within twenty (20) days) after notice in writing thereof is
given by Landlord to Tenant, specifying the matter claimed to be In
default, Landlord, at its option, may Immediately declare this Lease
terminated, and all Tenant's rights hereunder shall be terminated.
Landlord may re-enter the Premises using such force as may be
reasonably necessary, and repossess itself thereof, as of its former
estate, and remove all persons and property from the Premises.
Notwithstanding any such re-entry, the liability of Tenant for the full
Rent, Additional Rent and other payments provided for herein shall not
be extinguished for the balance of this Lease, and Tenant shall make
good to Landlord any deficiency arising from such re-letting of the
Premises, plus the costs and expenses of renovating, altering and
reletting the Premises, and including attorney's and/or broker's
<PAGE> 14
fees incident to Landlord's re-entry or reletting. Tenant shall pay any
such deficiency each month as the amount thereof is ascertained by
Landlord or, at Landlord's option, Landlord may recover, in addition to
any other sums, the amount at the time of judgment the balance of the
term after judgment exceeds the amount thereof which Tenant proves
could be reasonably avoided, discounted at the rate of seven percent
(7%). In reletting the Premises, Landlord may grant Rent concessions
and Tenant shall not be credited therefore. Nothing herein shall be
deemed to affect the right of Landlord to recover for indemnification
under Section 16 herein arising prior to the termination of this Lease.
In addition to the remedies for Tenant default provided herein,
Landlord shall have any and all other rights at law or in equity in the
event of Tenant's default.
22. QUITE ENJOYMENT: So long as Tenant Is not in default under any of the
terms and conditions of this Lease, Tenant may peaceably and quietly
have, hold and enjoy the Premises for the term of this Lease.
23. PRIORITY: Upon demand by Landlord or the holder of any first mortgage
or deed of trust now existing or that may hereafter be placed upon the
Premises or the Park, Tenant will execute the Agreement of
Subordination of Mortgage. In the absence of such Agreement, Tenant
agrees that this Lease shall be subordinate to any first mortgage or
deed of trust now existing or hereafter placed upon the Premises or
Park and that any and all advances to be made thereunder, and to
interest thereon, and all renewals, replacements or extension thereof.
Upon demand by Landlord or any first mortgagee as defined above, Tenant
shall execute and deliver subordination and adornment agreements
satisfactory in form and substance to such first mortgagee.
24. SURRENDER OF POSSESSION: Upon expiration of the term of this Lease,
whether by lapse of time or otherwise, Tenant shall promptly and
peacefully surrender the Premises to Landlord in as good condition as
when received by Tenant from Landlord or as thereafter improved,
reasonable use and wear and tear excepted.
25. REMOVAL OF PROPERTY: Tenant shall remove all of its moveable property
and trade fixtures which can be removed without damage to the Premises
at the termination of this Lease either by expiration of term or other
cause, and shall pay Landlord any damages for injury to the Premises or
Park at the termination of this Lease or when Landlord has the right of
re-entry, Landlord may, in accordance with the provisions of applicable
statutes covering commercial Landlord and Tenant matters, remove and
store said property without liability for loss thereof or damage
thereto, such storage to be for the amount and at the expense of
Tenant. If Tenant shall not pay for a period of thirty (30) days or
more, Landlord may, at its option, sell, or permit to be sold, any or
all such property at public or private sale, in such manner and at such
times and places as Landlord in its sole discretion may deem proper,
with ten (10) days notice to Tenant, or as required under applicable
statues, and shall apply the proceeds of such sale: first, to the cost
and expense of such sale, including reasonable attorney's fees actually
incurred; second, to the payment of the costs or charges for storing
any such property; third, to the payment of any other sums of money
which may then be or thereafter become due Landlord from Tenant under
any of the terms hereof, and fourth, the balance if any, to Tenant.
Tenant shall remain liable for any differences.
26. NON-WAIVER: Waiver by Landlord of any breach of any term, covenant or
condition herein contained shall not be deemed to be a waiver of such
term, covenant, or condition; or of any subsequent breach of the same
or any other term, covenant, or condition of this Lease, other than the
failure of Tenant to pay particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance
of such Rent.
27. HOLDOVER: If Tenant shall, with the written consent of Landlord, hold
over after the expiration of the term of this Lease, such tenancy shall
be deemed a month-to-month tenancy, which tenancy may be terminated as
provided by applicable state law. During such tenancy. Tenant agrees to
pay Landlord the fair market value for the Premises which shall be
reasonably determined by Landlord but in no event less than the amount
paid in the last month of the expired term and to be bound by all of
the terms, covenants and conditions herein specified, so far as
applicable.
28. CONDEMNATION:
28.1 Substantial Taking: If twenty percent (20%) or more of the
Premises or of such portions of the Park as may be required
for the reasonable use of the Premises, are taken by eminent
domain, this Lease shall automatically terminate as of the
date title vests in the condemnation authority, and all Rents,
Additional Rents, and other payment shall be paid to that
date.
28.2 Partial Taking: In case of a taking of less than twenty
percent (20%) of the Premises, or a portion of the Park not
required for the reasonable use of the Premises, then this
Lease shall continue in full force and effect, and the Rent
shall be equitably reduced based on the proportion by which
the floor area of the Premises is reduced, such rent reduction
to be effective as of the date title to such portion vests in
the condemnation authority.
<PAGE> 15
28.3 Awards and Damages: Landlord reserves all rights to damages to
the Premises for any partial or entire taking by eminent
domain, and Tenant hereby assigns to Landlord any right Tenant
may have to such damages or awards, and Tenant shall make no.
claim against Landlord or the condemning authority for damages
for termination of the leasehold interest or interference with
Tenant's business. Tenant shall have the right, however, to
claim and recover from the condemning authority compensation
for any loss to which Tenant may be out for Tenant's moving
expenses, business interruption or taking of Tenant's personal
property (not including Tenant's leasehold interest) and any
other award to which Tenant may be entitled, provided that
such damages do not reduce the sums otherwise payable by the
condemnor to Landlord.
29. NOTICES:
29.1 Addresses: All notices under this Lease shall be in writing
and deliverable in person or sent by registered or certified
mail to Landlord and to Tenant at the addresses provided in
Section 1.8 and to the holder of any first mortgage or deed of
trust at such place as such holder shall specify to Tenant in
writing; or such other addresses as, may from time to time, be
designated by any such party in writing. Notices mailed as
aforesaid shall be deemed given on the date of such mailing.
29.2 Additional Notice Required of Tenant: Tenant agrees to give to
Mortgagees and/or Trust Deed Holders, by registered mail, a
copy of any notice of default served upon the Landlord,
provided that prior to such notice Tenant has been notified in
writing (by way of Notice of Assignment of Rents and Lease, or
otherwise) of the addresses of such Mortgagees and/or Trust
Deed Holders. Tenant further agrees that if Landlord shall
have failed to cure such default within the time provided for
In this Lease, then the Mortgagees and/or Trust Deed Holders
shall have an additional thirty (30) 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 thirty (30) days any Mortgagee and/or Trust Deed 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 affect
such cure), In which event this Lease shall not be terminated
while such remedies are being so diligently pursued.
30. COSTS AND ATTORNEYS FEES: If Tenant or Landlord shall bring any action
for any relief against the other, declaratory or otherwise, arising out
of this Lease, Including any suit by Landlord for the recovery of Rent,
Additional Rent or other payments hereunder, or possession of the
Premises, the losing party shall pay the prevailing party a reasonable
sum for attorneys' fees in such suit, at trial and on appeal, and such
attorneys' fees shall be deemed to have accrued on the commencement of
such action.
31. LANDLORD'S LIABILITY: Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on
the part of Landlord are made and intended not as personal covenants.
undertakings and agreements or for the purpose of binding Landlord
personally or the assets of Landlord except Landlord's interest in the
Premises and Park, but are made and intended for the purpose of binding
only the Landlord's interest in the Premises and Park, as the same way,
from time to time, be encumbered. No personal liability or personal
responsibility is assumed by, nor shall at any time be asserted or
enforceable against Landlord or its partners or their respective heirs,
legal representatives, successors and assigns on account of the Lease
or on account of any covenant, or undertaking or agreement of Landlord
contained in this Lease.
32. WAIVER OF JURY TRIAL:
TO THE EXTENT PERMITTED BY LAW, IT IS MUTUALLY AGREED BY AND BETWEEN
LANDLORD AND TENANT THAT THE RESPECTIVE PARTIES HERETO SHALL, AND THEY
DO HEREBY, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM BROUGHT BETWEEN THE PARTIES HERETO OR THEIR SUCCESSORS OR
ASSIGNS ON ANY MATTERS ARISING OUT OF, OR IN ANY WAY CONNECTED WITH,
THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, AND/OR TENANT'S
USE OF, OR OCCUPANCY OF, THE PREMISES. TENANT FURTHER AGREES THAT IT
SHALL NOT INTERPOSE ANY COUNTERCLAIM OR COUNTERCLAIMS IN A SUMMARY
PROCEEDING OR IN ANY ACTION BASED UPON NON-PAYMENT OF RENT REQUIRED BY
TENANT HEREUNDER. THIS WAIVER IS MADE FREELY AND VOLUNTARILY, WITHOUT
DURESS AND ONLY AFTER EACH OF THE PARTIES HERETO HAS HAD THE BENEFIT OF
ADVICE FROM LEGAL COUNSEL ON THIS SUBJECT.
33. ESTOPPEL CERTIFICATES: Tenant shall, from time to time, upon written
request of Landlord, execute, acknowledge and deliver to Landlord or
its designee a written statement stating: the date this Lease was
executed and the date it expires; the date Tenant entered into
occupancy of the Premises; the amount of minimum monthly rent and the
date to which such rent has been paid; and certifying the following:
that this Lease is In full force and effect and has not been assigned,
modified, supplemented or amended in any way (or specifying the date
and terms of agreement so affecting this Lease); that this
<PAGE> 16
Lease represents the entire agreement between the parties as to this
leasing; that all conditions under this Lease to be performed by the
Landlord have been satisfied, including but without limitation, all
co-tenancy requirements, if any; that all required contributions by
landlord to Tenant on account of Tenant's improvements have been
received; that on this date there are no existing defenses or offsets
which the Tenant has against the enforcement of this Lease by the
Landlord; that no Rent has been paid more than one month in advance;
and that no security has been deposited with Landlord (or, is so, the
amount thereof). It is intended that any such statement delivered
pursuant to this paragraph may be relied upon by a prospective
Purchaser of Landlord's interest or assignee of any mortgage upon
Landlord's Interest in the Park. Failure by Tenant to respond within
ten (10) days of receipt by Tenant of a written request by Landlord as
herein provided shall constitute an event of default of this lease.
34. TRANSFER OF LANDLORD'S INTEREST: In the event of any transfer or
transfers of Landlord's Interest in the Premises or the Park, other
than a transfer for security purposes only, the transferor shall be
automatically relieved of any and all obligations and liabilities on
the part of Landlord accruing from and after the date of such transfer,
and Tenant agrees to attorn to the transferee.
35. RIGHT TO PERFORM: If Tenant shall fail to pay any sum of money, other
than Rent and Additional Rent required to be paid by it hereunder or
shall fail to perform any other act on its part to be performed
hereunder, and such failure shall continue for ten (10) days after
written notice thereof by Landlord, Landlord may, but shall not be
obligated so to do, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such other
act on Tenant's part to be made or performed as provided in this Lease.
Landlord shall have (in addition to any other right or remedy of
Landlord) the same rights and -remedies in the event of the non-payment
of sums due under this Section as in the case of default by Tenant in
the payment of Rent.
36. SUBSTITUTED PREMISES: In the event Premises rented to Tenant are less
than 7,000 square feet in area, Landlord reserves the right, at its
option and upon giving thirty (30) days written notice in advance to
the Tenant, to transfer and remove the Tenant from Premises to any
other available rooms and offices of substantially equal size and area
and equivalent rental in the Building of which Premises are a part, or
other buildings within the Pa Landlord shall bear the expense of said
removal including, but not limited to, cost of moving, telephone cable
installation, computer cable, and stationery replacement costs, as well
as the expense of any renovations or alterations necessary to make the
new space substantially conform in layout and appointment with the
original Premises. Landlord may exercise the right to so relocate
Tenant under this paragraph at any time including but not limited to,
the period before Tenant takes possession of Premises. If Landlord
moves Tenant to such new space, this Lease and each and all of its
terms, covenants and conditions shall remain in full force and effect
and be deemed applicable to such new space, and such new space shall
thereafter be deemed to be the "Premises". It is agreed that Park shall
mean any of those present buildings known as, or future buildings that
may be built adjacent to and be known as, Roswell Summit Office Park,
Holcomb Bridge Road, Roswell, Georgia.
37. EXCULPATION OF LANDLORD:
Landlord's liability with respect to or arising from or in connection
with this Lease shall be limited solely to Landlord's interest in the
Building. Neither Landlord, any of the partners of Landlord, any
officer, director, principal, trustee, policyholder, shareholder nor
employee of Landlord shall have any personal liability whatsoever with
respect to this Lease.
Landlord shall have absolutely no personal liability with respect to
any provision of this Lease or any obligation or liability arising from
this Lease or in connection with this Lease. Tenant shall look solely
to the equity of the Landlord in the Building for the satisfaction of
any money judgment to Tenant. Such exculpation of liability shall be
absolute and without exception whatsoever.
38. HAZARDOUS WASTE:
Neither Tenant, its successors or assigns, nor any permitted assignee
or sublessee, licensee or other person or entity acting by or through
Tenant, shall (either with or without negligence) cause or permit the
escape, disposal or release of any "Hazardous Substances, or Materials"
(as hereunder defined). Tenant shall not allow the storage or use of
such Hazardous Substances or Materials In any manner not sanctioned by
law and by the highest standards prevailing in the industry for the
storage and use of such Hazardous Substances or Materials, nor allow to
be brought into the Building or the Premises any such Hazardous
Substances or Materials except to use in the ordinary course of
Tenant's business, relative to office copiers and then only if such
Hazardous Substances or Materials are not prohibited by (and are only
in amounts permitted by) law, after notice is given to Landlord of the
identity of such Hazardous Substances or Materials. Without limitation,
Hazardous Substances or Materials shall include any biologically or
chemically active substance and any waste, substance or material
described in Section 101 (14) of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time
to time, 42 U.S.C. Section 9601 et seq., the Resource Conservation and
Recovery Act, as amended from time to time, 42 U.S.C. Section 6901 et
seq., any applicable state or local laws and the regulations adopted
under these acts. If any lender or governmental agency shall ever
require
<PAGE> 17
testing to ascertain whether or not there has been any release of
Hazardous Substances or Materials, then the reasonable costs thereof
shall be reimbursed by Tenant to Landlord upon demand as additional
charges if such requirement applies to the Premises. In addition,
Tenant shall execute affidavits, representations and the like from time
to time at Landlord's request concerning Tenant's best knowledge and
belief regarding the presence of Hazardous Substances or Materials on
the Premises. Tenant indemnifies and covenants and agrees at its sole
cost and expense, to protect and save Landlord harmless against and
from any and all damages, losses, liabilities, obligations, penalties,
claims, litigation, demands, defenses, judgments, suits, proceedings,
costs, or expenses of any kind or of any nature whatsoever (including
without limitation, reasonable attorney's fees and expert's fees) which
may at any time be imposed upon, incurred by or asserted or awarded
against Landlord arising from or out of any Hazardous Substances or
Materials on, in, under or affecting the Premises, the Building or the
Property or any part thereof as a result of any act or omission by
Tenant, its successors or assigns, or any permitted assignee, permitted
sublessee or licensee or other person or entity acting at the direction
with the consent of Tenant. The within covenants shall survive the
expiration or earlier termination of the Lease Term.
39. ADA
Tenant shall be responsible for compliance with Title III of the
American with Disabilities Act of 1990 ("ADA") within the Premises and
Landlord shall be responsible for compliance with Title III of the ADA
relative to the Common Areas within the remainder of the Building.
40. GENERAL:
40.1 Headings: The title to sections of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation
of any part hereof. This Lease shall be construed and governed by the
laws of the State of Georgia.
40.2 Heirs and Assigns: All of the covenants, agreements, terms and
conditions contained in this Lease shall inure to and be binding upon
Landlord and Tenant and their respective heirs, executors,
administrators, successors and assigns.
40.3 No Brokers: Tenant represents and warrants to Landlord that it has not
engaged any broker, finder, or other person who would be entitled to
any commission or fees in respect of the negotiation, execution or
delivery of this Lease other than C.B. Commercial Real Estate Group,
Inc. and shall indemnify and hold harmless Landlord against any loss,
cost, liability or expense incurred by Landlord as a result of any
claim asserted by any other broker, finder or other person on the basis
of any arrangements or agreements made or alleged to have been made by
or on behalf of Tenant. The provisions of this Section 40.3 shall not
apply to brokers with whom Landlord has an express written brokerage
agreement.
40.4 Entire Agreement: This Lease contains all covenants and agreements
between Landlord and Tenant relating In any manner to the Rent, use and
occupancy of the Premises and Tenant's use of the Park and other matter
set forth in this Lease. No prior agreements or understanding
pertaining to the same shall be valid or of any force or effect and the
covenants and agreements of this Lease shall not be altered, modified
or added to except in writing signed by Landlord and Tenant.
40.5 Severability: If any clause or provision of this Lease Is or becomes
illegal, invalid, or unenforceable because of present of future laws or
any rule or regulation of any governmental body or entity, effective
during its term, the intention of the Lease shall not be affected
thereby, unless such invalidly is, in the sole determination of
Landlord, essential to the rights of both parties, in which event
Landlord has the right to terminate this Lease on written notice to
Tenant.
40.6 Late Charges: Tenant hereby acknowledges that late payment to Landlord
of Rent or other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. If any Rent or other sum due from
Tenant is not received by Landlord or Landlord's designated agent
within ten (10) days after its due date, then Tenant shall pay to
Landlord a late charge equal to the maximum amount permitted by law (
and in the absence of any governing law, such overdue amount shall bear
interest at two (2) points over the prevailing Prim ' e Rate as quoted
by The Wall Street Journal percent change as of the first day of the
month in which said Rent becomes past due), plus reasonable attorney's
fees incurred by Landlord by reason of Tenant's failure to pay Rent
and/or other charge when due hereunder. The parties hereby agree that
such late charges represent a fair and reasonable estimate of the cost
that Landlord will incur by reason of Tenant's late payment. Landlord's
acceptance of such late charges shall not constitute a waiver of
default with respect to such overdue amount or estop Landlord from
exercising any of the other rights and remedies granted hereunder.
40.7 Force Majeure: Time periods for Landlord's or Tenant's performance
under any provisions of this Lease shall be extended for periods of
time during which the non-performing party's performance is
<PAGE> 18
prevented due to circumstances beyond the party's control, including
without limitation, strikes, embargoes, governmental regulations, acts
of God, war or other strife.
40.8 Homestead and Attorney's Fees: Tenant hereby waives and renounces for
itself any and all homestead or exemption rights which it may have
under or by virtue of the Constitution and Laws of the United States
and the State of Georgia, and any other state as against any debt
Tenant may owe Landlord under this Lease, and Tenant hereby transfers,
conveys and assigns to Landlord all homestead or exemption rights which
may be allowed or set apart to Tenant including such as may be set
apart in bankruptcy proceedings, to pay any debt Tenant may owe
Landlord hereunder.
40.9 No Waiver: No failure or delay of Landlord to exercise any right or
power given it herein or to insist upon strict compliance by Tenant
with any obligation imposed on it herein, and no custom or practice or
either party hereto at variance with any term hereof shall constitute a
waiver or a modification of the terms hereof by Landlord of any right
it has herein to demand strict compliance with the terms hereof by
Tenant. No officer, agent, or employee of Landlord has or shall have
any authority to waive any provisions of this Lease unless such waiver
is expressly made in writing and signed by an authorized officer of
Landlord.
40.10 Time of Essence: Time is of the essence of this Lease.
40.11 No Estate in Land: This Lease shall create the relationship of Landlord
and Tenant between Landlord and Tenant; no estate shall pass out of
Landlord and Tenant has only a usufruct which is not subject to levy
and sale.
40.12 Construction: This Lease shall be construed under the laws of the State
of Georgia.
40.13 No Access to Roof: Tenant shall have no right of access to the roof of
the Premises or the Building and shall not install, repair or replace
any aerial, fan, air-conditioner or other device on the roof of the
Premises of the Building without the prior written consent of Landlord.
Any aerial, fan, air-conditioner or other device installed without such
written consent shall be subject to removal, at Tenant's expense,
without notice, at any time.
40.14 Parking: Tenant shall have the right to occupy on a nonassigned,
nonexclusive basis, and without charge, four (4) parking spaces in the
parking lot adjacent to the Building for each 1,000 square feet of the
Premises. Tenant agrees to abide by such reasonable rules and
regulations for parking use as Landlord may from time to time impose.
40.15 Tenant Improvement Allowance: Landlord shall construct the Premises
from slab floor to finished and installed ceiling grid, using building
standard materials in accordance with construction drawings which shall
be prepared based upon the floor plan set forth in Exhibit A and which
shall be approved by Tenant, whose approval shall not be unreasonably
withheld. No construction of improvements will commence until the final
construction drawings have been approved and initialed by the Tenant.
Once construction of the improvements has commenced, any subsequent
modifications to the construction drawing shall be made at Tenant's
expense.
40.16 Defective Condition. Tenant agrees to use reasonable efforts to report
in writing to Landlord any defective condition in or about the Premises
known to Tenant, and further agrees to attempt to contact Landlord by
telephone immediately in such instance.
<PAGE> 19
IN WITNESS WHEREOF, the Lease has been executed the day and year first above set
forth.
LANDLORD: THE MUTUAL LIFE INSURANCE COMPANY OF NEW YORK
By:
-----------------------------------------
Real Estate Vice President
Date:
-----------------------------------------
TENANT: DOWELANCO
By:
-----------------------------------------
Date:
-----------------------------------------
SOCIAL SECURITY and/or FEDERAL I.D. NUMBER
--------------------------------------------------
--------------------------------------------------
Notary Public
JDD1047 State of Indiana:
SS:
County of Marion:
Before me the undersigned, a Notary Public for
Johnson County, State of Indiana, personally
appeared Douglas C. Vawter and acknowledged the
execution of this instrument this ________ day of
________________, 1993.
<PAGE> 20
EXHIBIT A FLOOR PLAN #1
EXHIBIT A ELECTRICAL PLAN
EXHIBIT A FLOOR PLAN #2
<PAGE> 21
EXHIBIT "B"
SPECIAL STIPULATIONS
41. RENEWAL OF LEASE:
Provided this Lease is then if full force and effect and Tenant is in
full compliance with the terms and conditions of this Lease, Landlord
hereby grants to Tenant an option to renew this Lease for one period of
five (5) years, at a rental rate equal to the rental rate then being
offered by Landlord to tenants desiring to lease comparable space in
the Building or in other buildings comparable to the Building, with
comparable amenities and services and comparable parking rights and
privileges, and with consideration of a refurbishment allowance of Five
and no/100 Dollars ($5.00) per rentable square foot, as such rate is
established by Landlord in its reasonable judgment. Tenant shall notify
Landlord no more than twelve (12) months and no less than ten (10)
months prior to the end of the Term if Tenant desires to renew this
Lease under the terms of this Paragraph. If Tenant does give such
notice, Landlord shall indicate to Tenant at least nine (9) months
prior to the end of the Term the rental rate which shall be in effect
for the Term as extended, on the basis as above described. Tenant shall
have thirty (30) days from the date Landlord makes such offer to either
accept or reject such offer. If Tenant rejects such offer or fails to
respond within such thirty (30) day period, then this Lease shall
terminate as of the end of the Term as established herein. If Tenant
accepts such offer, then the Term shall be extended by said five (5)
year period, upon the same terms and conditions as contained in this
Lease, and the rent for such period shall be the rent as offered by
Landlord and accepted by Tenant pursuant to the terms and conditions of
this Paragraph.
42. TERMINATION OF LEASE:
Provided this Lease is then in full force and effect and Tenant is in
full compliance with the terms and conditions of this Lease, Landlord
hereby grants to Tenant an option to terminate this Lease at the end of
the thirty-sixth (36th) month of the term. For purposes of this Section
42, the thirty-sixth (36th) month of the term shall be November, 1996.
If Tenant elects to terminate this Lease at the end of the thirty-sixth
(36th) month of the term, Tenant shall provide Landlord with
irrevocable written notice of its Intent to terminate no later than the
end of the thirtieth (30th) month of the term. In consideration of
Landlord permitting an early termination of this Lease, Tenant agrees
to pay Landlord a termination fee (the "Termination Fee") which will be
in an amount equal to the unamortized tenant improvement costs and
brokerage commissions and six (6) months rent (escalated Base Rent and
Additional Rent) which Termination Fee must be delivered simultaneously
with delivery of Tenant's irrevocable written notice of early
termination.
<PAGE> 22
EXHIBIT B
SUBLEASE
1. PARTIES.
This Sublease, dated ___________________, 1997 is made between
DowElanco ("Sublessor"), and IS 14 Inc. ("Sublessee").
2. MASTER LEASE
Sublessor is the lessee under a written lease dated November 23, 1993,
whereinQRE Holding, a California Corporation ("Lessor") leased to
Sublessor the real property located in the City of Roswell, County of
Fulton, State of Georgia, described as 1080 Holcomb Bridge Road -
Roswell Summit, Building 100, Suite 135 ("Master Premises"). Said lease
is herein referred to as the "Master lease" and is attached hereto as
Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): Approximately 3,938 square feet, Building 100, Suite 135.
The Sublessee agrees to take the premises "As Is"; and that no tenant
improvement work is to be performed by QRE Holding Company as the
landlord relative to the Sublease.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease
has not been amended or modified except as expressly set forth herein,
that Sublessor is not now, and as of the commencement of the Term
hereof will not be, in default or breach of any of the provisions of
the Master Lease, and that Sublessor has no knowledge of any claim by
Lessor that Sublessor is in default or breach of any of the provisions
of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on February 15, 1997,
("Commencement Date"), or when Lessor consents to this Sublease (if
such consent is required under the Master Lease), whichever shall last
occur, and end on November 30, 1998 , ("Termination Date"), unless
otherwise sooner terminated in accordance with the provisions of this
Sublease. In the event the Term commences on a date other than the
Commencement Date, Sublessor and Sublessee shall execute a memorandum
setting forth the actual date of commencement of the Term. Possession
of the Premises ("Possession") shall be delivered to Sublessee on the
commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor
shall not be subject to any liability for such failure, the Termination
Date shall not be extended by the delay, and the validity of this
Sublease shall not be impaired, but rent shall abate until delivery of
Possession. Notwithstanding the foregoing, if Sublessor has not
delivered Possession to Sublessee within ten (10) days after the
Commencement Date, then at any time thereafter and before delivery of
Possession, Sublessee may give written notice to Sublessor of
Sublessee's intention to cancel this Sublease. Said notice shall set
forth an effective date for such cancellation which shall be at least
three (3) days after delivery of said notice to Sublessor. If Sublessor
delivers Possession to Sublessee on or before such effective date, this
Sublease shall remain in full force and effect. If Sublessor fails to
deliver Possession to Sublessee on or before such effective date, this
Sublease shall be canceled, in which case all consideration previously
paid by Sublessee to Sublessor on account of this Sublease shall be
returned to Sublessee, this Sublease shall thereafter be of no further
force or effect, and Sublessor shall have no further liability to
Sublessee on account of such delay or cancellation. If Sublessor
permits Sublessee to take Possession prior to the commencement of the
Term, such early Possession shall not advance the Termination Date and
shall be subject to the provisions of this Sublease, including without
limitation the payment of rent. In addition the Subtenant has no right
to extend the lease term.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum
rent, without deduction, setoff, notice, or demand, at
Director - Site Operations - DowElanco - 9330 Zionsville Road
- Indianapolis, IN 46268 or at such other place as Sublessor
shall designate from time to time by notice to Sublessee, the
sum of Five Thousand Three Hundred Thirty Two and 71/100
Dollars ($5,332.71) per month, in advance on the first day of
each month of the Term. Sublessee shall pay to Sublessor upon
execution of this Sublease Five Thousand Three Hundred Thirty
Two and 71/100 Dollars ($5,332,71) as rent for March 1997. If
the Term begins or ends on a day other than the first or last
day of a month, the rent for the partial
<PAGE> 23
months shall be prorated on a per diem basis. Additional
provisions: Rent commencement shall begin March 1, 1997.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease
the sum of Fifteen Thousand Nine Ninety Eight Hundred and 12/100
Dollars ($15,998.12) as security for Sublessee's faithful performance
of Sublessee's obligations hereunder ("Security Deposit"). If Sublessor
fails to pay rent or other charges when due under this Sublease, or
fails to perform any of its other obligations hereunder, Sublessor may
use or apply all or any portion of the Security Deposit for the payment
of any rent or other amount then due hereunder and unpaid, for the
payment of any other sum for which Sublessor may become obligated by
reason of Sublessee's default or breach, or for any loss or damage
sustained by Sublessor as a result of Sublessee's default or breach. If
Sublessor so uses any portion of the Security Deposit, Sublessee shall,
within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and
Sublessee's failure to do so shall constitute a default under this
Sublease. Sublessor shall not be required to keep the Security Deposit
separate from its general accounts, and shall have no obligation or
liability for payment of interest on the Security Deposit. In the event
Sublessor assigns its interest in this Sublease, Sublessor shall
deliver to its assignee so much of the Security Deposit as is then held
by Sublessor within (10) days after the Term has expired, or Sublessee
has vacated the Premises, or any final adjustment pursuant to
Subsection 6.2 hereof has been made, whichever shall last occur, and
provided Sublessee is not then in default of any of its obligations
hereunder, the Security Deposit or so much thereof as had not
theretofore been applied by Sublessor, shall be applied to the last two
months of the term, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for general office
purpose, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any
part of the Premises without the prior written consent of Sublessor
which consent shall not be unreasonably withheld (and the consent of
Lessor, if such is required under the term of the Master Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are
incorporated into and made a part of this Sublease as if Sublessor were
the lessor thereunder, Sublessee the lessee thereunder, and the
Premises the Master Premises, except for the following: None*.
Sublessee assumes and agrees to perform the lessee's obligations under
the Master Lease during the Term to the extent that such obligations
are applicable to the Premises, except that the obligation to pay rent
to Lessor under the Master Lease shall be considered performed by
Sublessee to the extent and in the amount rent is paid to Sublessor in
accordance with Section 6 of this Sublease. Sublessee shall not commit
or suffer any act or omission that will violate any of the provisions
of the Master Lease. Sublessor shall exercise due diligence in
attempting to cause Lessor to perform its obligations under the Master
Lease for the benefit of Sublessee. If the Master Lease terminates,
this Sublease shall terminate and the parties shall be relieved of any
further liability or obligation under this Sublease, provided however,
that if the Master Lease terminates as a result of a default or breach
by Sublessor or Sublessee under this Sublease and/or the Master Lease,
then the defaulting party shall be liable to the nondefaulting party
for the damage suffered as a result of such termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor shall not constitute a default or
breach hereunder.
*Except as specifically set forth within this sublease, this sublease is not to
be construed as an amendment to the Lease Agreement in any report.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against the
other arising out of or in connection with this Sublease, the
prevailing party shall be entitled to recover its costs of suit and
reasonable attorney's fees.
12. AGENCY DISCLOSURE:
<PAGE> 24
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except: CB
COMMERCIAL REAL ESTATE GROUP, INC., who represents the Sublessor and
Richard Bowers & Co. who represents Sublessee. In the event that CB
COMMERCIAL REAL ESTATE GROUP, INC. represents both Sublessor and
Sublessee, Sublessor and Sublessee hereby confirm that they were timely
advised of the dual representation and that they consent to the same,
and that they do not expect said broker to disclose to either of them
the confidential information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
is under the terms of the Master Lease), Sublessor shall pay Broker a
real estate brokerage commission in accordance with Sublessor's
contract with Broker for the subleasing of the Premises, if any, and
otherwise in the amount of Nine Thousand Eight Hundred Twenty Nine and
96/100 Dollars ($9,829.96), for services rendered in effecting this
Sublease. Broker is hereby made a third party beneficiary of this
Sublease for the purpose of enforcing its right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to
be given by either party on the other hereunder shall be in writing.
All notices and demands by the Sublessor to Sublessee shall be sent by
United States Mail, postage prepaid, addressed to the Sublessee at the
Premises, and to the address hereinbelow, or to such other place as
Sublessee may from time to time designate in a notice to the Sublessor.
All notices and demands by the Sublessee to Sublessor shall be sent by
United States Mail, postage prepaid, addressed to the Sublessor at the
address set forth herein, and to such other person or place as the
Sublessor may from time to time designate in a notice to the Sublessee.
Copies of any notices that are sent between the Sublessor and Sublessee
should be sent toQRE Holding Company as the Landlord.
To Sublessor: Director-Site Operations-DowElanco-9330-Zionsville
Road-Indianapolis, IN 46268
To Sublessee: 1700 Westlake Avenue North, Suite 400, Seattle,
Washington 98109
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY VIA
A LETTER BY THE LESSOR. (DATED _____________________).
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative
orders having jurisdiction over the parties, property or the subject
matter of this Agreement, including, but not limited to, the 1964 Civil
Rights Act and all amendments thereto, the Foreign Investment In Real
Property Tax Act, the Comprehensive Environmental Response Compensation
and Liability Act and The Americans With Disabilities Act.
Sublessor: DOWELANCO Sublessee: IS 14, INC.
---------------------- --------------------------
By: /s/ Douglas C. Vawter By: /s/ James W. Brown
----------------------------- ---------------------------------
Title: Director Site Operations Title: President
-------------------------- ------------------------------
Date: 2/14/97 Date: 2/14/97
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LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor), lessor under the Master Lease, hereby consents to the
foregoing Sublease without waiver of any restriction in the Master Lease
concerning assignment or subletting. Lessor certifies that, as of the date of a
execution hereof, Sublessor is not in default or breach of any of the provisions
of the Master Lease, and that the Master Lease has not been amended or modified
except as expressly set forth in the foregoing Sublease.
Lessor: QRE HOLDING COMPANY, A CALIFORNIA CORPORATION
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By:
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Title:
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By:
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Title:
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Date:
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CONSULT YOUR ADVISORS - This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous materials and underground storage
tanks.
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SPECIAL STIPULATIONS
Sublessor agrees to sell Sublessee the three (3) existing work stations for
$550.00 each. These work stations will become the property of the Sublessee at
the end of the lease term.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and all references to our firm) included in or made a part of this registration
statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Atlanta, Georgia
June 10, 1998
