<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DATA RETURN CORPORATION
(Exact name of registrant as specified in its charter)
--------------
<TABLE>
<S> <C> <C>
Texas 7379 75-2725988
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
801 Stadium Drive, Suite 117
Arlington, Texas 76011
(817) 461-7715
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Sunny C. Vanderbeck
Chairman and Chief Executive Officer
Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
(817) 461-7715
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C>
Stephen B. Norris Jorge del Calvo
Mark C. Gunnin Stanton D. Wong
William D. Howell Gabriella A. Lombardi
Thompson & Knight, P.C. Christine F. Nakagawa
801 Cherry Street, Suite 1600 Pillsbury Madison & Sutro LLP
Fort Worth, Texas 76102 2550 Hanover Street
(817) 347-1700 Palo Alto, California 94304
(650) 233-4500
</TABLE>
--------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class of Aggregate Offering Amount of
Securities to be Registered Price (1)(2) Registration Fee
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, par value $.001 per share...........$86,250,000...... $23,977.50
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares being registered and the proposed maximum offering price per
share are not included in this table.
(2) Estimated solely for the purpose of calculating the registration fee.
--------------
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 this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
Shares
[LOGO OF DATA RETURN APPEARS HERE]
Common Stock
-----------
This is an initial public offering of shares of common stock of Data
Return Corporation. We are selling all of the shares of common stock under this
prospectus.
There is currently no public market for our shares. It is currently estimated
that the initial public offering price will be between $ and $ per
share. We have applied to have our common stock approved for listing on the
Nasdaq National Market under the symbol "DRTN."
See "Risk Factors" beginning on page 6 about the risks you should consider
before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public offering price......................................... $ $
Underwriting discounts and commissions........................ $ $
Proceeds, before expenses, to us.............................. $ $
</TABLE>
-----------
The underwriters may, under certain circumstances, purchase up to an additional
shares of common stock from us at the initial public offering price
less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
-----------
Joint Lead Managers
Bear, Stearns & Co. Inc. CIBC World Markets
Book Running Manager
-----------
Wit Capital Corporation
The date of this prospectus is , 1999.
<PAGE>
[artwork to come]
<PAGE>
Prospective investors may rely only on the information contained in this
prospectus. Neither Data Return Corporation nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these securities.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Forward-Looking Statements and
Associated Risks................... 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 22
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 31
Management....................... 48
Principal Shareholders........... 54
Certain Transactions............. 55
Description of Capital Stock..... 56
Shares Eligible for Future Sale.. 58
Underwriting..................... 60
Legal Matters.................... 62
Experts.......................... 62
Where You Can Find More
Information..................... 62
Index to Financial Statements.... F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this prospectus), all dealers
that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.
Data Return
Our Company
Data Return is a leading provider of advanced Internet hosting services based
on technologies developed by Microsoft Corporation. Our advanced hosting
services are designed for customers that are deploying sophisticated, high-end
web-based applications, including electronic commerce, through which they can
conduct transactions and manage information worldwide over the Internet. We
believe that hosting on the Microsoft platform offers a greater opportunity
than hosting on other platforms. According to International Data Corp.,
Microsoft Windows NT will be the key engine for growth within the worldwide
server market and Windows NT's market share will grow at a compound annual
growth rate of 25% from 1998 to 2003.
We believe that we are the leading provider of advanced hosting services
based on the Microsoft platform. We provide our customers high quality, high
performance pre-packaged solutions comprised of:
. advanced managed services;
. a scalable deployment architecture; and
. high performance content delivery.
To deliver these solutions, we provide hardware and software supported by
highly-skilled personnel. Our personnel use a combination of commercially
available software and proprietary monitoring and management tools to deliver
high quality performance and reliability. As of May 31, 1999, we hosted over
1,200 web sites for more than 650 customers, including Boeing, First USA,
Honeywell, Microsoft, Motorola, Olin and Ericsson. We provide our services to
companies across many industries located in North and South America, Europe,
Asia, Africa and Australia.
We have strategic relationships with Level 3 Communications, Inc., Compaq
Computer Corporation, Microsoft and Alteon WebSystems, Inc. We believe that
these relationships enhance our credibility with potential customers and
provide us with early access to new products, superior technical services,
training and new business development opportunities. We are currently Level 3's
only preferred provider of Microsoft-based advanced hosting solutions. Our
sales force will train and team with Level 3's sales force to generate new
business opportunities. Further, we will have access to Level 3's U.S. gateways
and Level 3's operations personnel, who will install our equipment at these
gateways. Level 3 also acquired shares of our common stock in exchange for $5.0
million in credit for future bandwidth purchases in excess of our purchase
commitments to Level 3. In addition, Compaq has invested $3.0 million in our
company.
We were incorporated in August 1997 by three former Microsoft product support
engineers. We believe that our exclusive focus on the Microsoft platform and
our approach to offering pre-packaged hosting services have been the major
contributors to our growth. We have achieved an average quarterly revenue
growth rate of 47% since October 1, 1997. We believe the following are among
the key factors that have distinguished our company and our offerings and that
will continue to drive our growth:
. a full range of pre-packaged hosting services, including shared,
dedicated and clustered server solutions supported by advanced managed
services for fixed monthly prices;
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<PAGE>
. high availability and high performance clustering solutions for web
servers and database servers, including geographically dispersed
clusters;
. an advanced and secure network architecture that has delivered network
performance approximately 42% faster on average in the United States and
approximately 24% faster on average internationally compared to the
single fastest backbone provider as measured by an independent third
party (Keynote Systems) through its 60 United States and 24 international
measurement agents dispersed across various cities worldwide;
. an integrated information system which automates our work flows and our
service deployment processes;
. our exclusive focus on hosting and our commitment to serving members of
the Microsoft developer community precludes competition with software
developers and systems integrators; and
. a management team with experience extending across many business and
technology disciplines.
Our Market Opportunity
Forrester Research projects that e-commerce will generate over $3.2 trillion
in revenue by 2003, accounting for almost 5% of all global sales. We believe e-
commerce is driving the current demand for advanced hosting services and will
drive an even larger demand for application hosting services. According to
Forrester Research, the hosting market will grow from $0.9 billion in 1998 to
$14.6 billion in 2003, a 76% compound annual growth rate. We believe that the
trend toward outsourcing the hosting of web sites will continue as businesses
increase the complexity of their web sites and require greater interactivity
for end users.
Our Strategy
Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy to achieve this goal contains the following key
elements:
. maintain focus on advanced hosting on the Microsoft platform;
. offer a full range of highly scalable advanced hosting services;
. maintain non-capital intensive business model;
. enhance our marketing and sales programs;
. leverage strategic relationships;
. provide superior customer service;
. expand our data center presence; and
. expand into new hosting markets.
Our Address and Telephone Number
The address of our principal executive offices is 801 Stadium Drive, Suite
117, Arlington, Texas 76011, and our telephone number is (817) 461-7715.
---------------
Data Return is our service mark. This prospectus also contains trademarks and
tradenames of other companies.
2
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered by Data Return........ shares
Common stock to be outstanding after the
offering.................................. shares
Use of proceeds............................ We intend to use the net proceeds
from this offering to fund our
operations, fund our capital
expenditures, expand our
marketing and sales activities,
repay our $210,000 credit
facility and for working capital
and other general corporate
purposes, including potential
acquisitions and investments and
costs associated with our
anticipated move to a new
headquarters facility.
Proposed Nasdaq National Market symbol..... DRTN
</TABLE>
- -------
Excludes shares to be sold by Data Return if the underwriters' over-
allotment option is exercised in full, as described in "Underwriting."
The number of shares outstanding is based on shares outstanding as of and
excludes:
. shares of common stock issuable upon exercise of options outstanding
at a weighted average exercise price of $ per share; and
. shares of common stock reserved for issuance under our stock option
plans.
---------------
Conventions That Apply to This Prospectus
All information in this prospectus reflects a for one stock split
effected on , 1999.
Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
In the following table, we provide you with summary historical financial
information of Data Return. We have prepared this information using the
financial statements of Data Return for the period from September 22, 1997
(inception) to March 31, 1998 and the year ended March 31, 1999. The financial
statements for the period from September 22, 1997 (inception) to March 31, 1998
and the year ended March 31, 1999 have been audited by Ernst & Young LLP,
independent auditors.
When you read this summary historical financial data, it is important that
you read it in conjunction with the historical financial statements and related
notes contained later in this prospectus, as well as "Management's Discussion
and Analysis of Financial Condition and Results of Operations," also contained
later in this prospectus.
<TABLE>
<CAPTION>
Period from
September 22, 1997
(inception) to Year Ended
March 31, 1998 March 31, 1999
------------------ --------------
(In thousands, except per share
data)
<S> <C> <C>
Statements of Operations Data:
Revenues.................................... $ 336 $ 1,889
Costs and expenses:
Cost of revenue........................... 198 1,105
General and administrative................ 231 1,063
Marketing and sales ...................... 39 663
Stock based compensation.................. 61 349
------ -------
Total costs and expenses.................... 529 3,180
------ -------
Loss from operations........................ (193) (1,291)
Other income (expense)...................... 2 7
------ -------
Net loss.................................... $ (191) $(1,284)
====== =======
Net loss per common share................... $(3.23) $(18.65)
====== =======
Shares used in per share computation........ 59 69
====== =======
Other Financial Data:
EBITDA(1)................................... $ (118) $ (813)
Net cash used in operating activities....... 1 (644)
Net cash used in investing activities....... (55) (939)
Net cash provided by financing activities... 528 1,952
Purchases of property and equipment......... 55 814
<CAPTION>
March 31, 1999
---------------------------------
Pro Forma As
Actual Adjusted(2)
------------------ --------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital............................. $ 561 $
Total assets................................ 2,214
Notes payable and capital lease
obligations--long-term..................... 166
Total shareholders' equity.................. 1,245
</TABLE>
4
<PAGE>
- -------
(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.
(2) On a pro forma as adjusted basis to reflect the sale of shares of our
common stock between March 31, 1999 and the date of this prospectus and to
give effect to the sale of the shares of common stock we are offering under
this prospectus, at an assumed initial public offering price of $ per
share (based upon the midpoint of the filing range), after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses that we will pay and the application of the estimated net proceeds
from this offering as described under "Use of Proceeds."
5
<PAGE>
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the risks and uncertainties described below before you
purchase any of our common stock. These risks and uncertainties are not the
only ones we face. Unknown risks and uncertainties, or ones that we currently
consider immaterial, may also impair our business operations.
If we cannot address the following risks and uncertainties effectively, our
business, financial condition or results of operations could be materially and
adversely affected. In this event, the trading price of our common stock could
decline and you could lose all or a part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors,
including the risks and uncertainties described below and elsewhere in this
prospectus.
We have a limited operating history and our business model is still evolving.
We were incorporated in August 1997 and commenced operations in September of
that year with a focus on advanced hosting services. As a result, we have a
limited operating history and our business model is evolving. Our business and
prospects must be considered in light of the risks frequently encountered by
companies in their early stages of development, particularly companies in the
new and rapidly evolving hosting and related value-added Internet services
market. Some of these risks relate to our ability to:
. build a more comprehensive marketing and sales structure to support our
business;
. increase awareness of our services and our brand;
. provide services to our customers that are reliable, high-quality and
cost-effective;
. continue to build our operations infrastructure to accommodate additional
customers;
. respond quickly to technological developments or service offerings by our
competitors; and
. attract and retain qualified personnel.
We may not be successful in addressing these risks, and if we are not
successful, our business and future financial and operating results could be
adversely affected.
We have a history of substantial losses and we anticipate continuing and
increasing losses.
We have experienced operating losses and negative cash flows from operations
in each quarterly and annual period since incorporating in 1997. As of March
31, 1999, we had an accumulated deficit of approximately $1.5 million. We plan
to increase our operating expenses to expand our marketing and sales
operations, develop our distribution channel, fund greater levels of research
and development, support and improve our operational and financial systems and
broaden customer service and support. We cannot assure you that we will ever be
profitable on a quarterly or annual basis, or that if we achieve profitability,
it will be sustainable.
Our quarterly and annual results may fluctuate, resulting in fluctuations in
the price of our common stock.
Our operating results may fluctuate significantly in the future on a
quarterly and annual basis. Because of these fluctuations, comparisons of our
operating results from period to period are not necessarily meaningful
6
<PAGE>
and should not be relied upon as an indicator of future performance. We expect
to continue to experience significant fluctuations as a result of a variety of
factors, many of which are outside of our control. These factors include:
. demand for and market acceptance of our hosting and value-added Internet
services;
. customer retention;
. size and timing of customer installations and related payments;
. fluctuations in data and voice communications costs;
. timing and magnitude of capital expenditures;
. costs relating to the expansion of operations;
. introduction of new services or enhancements by us or our competitors;
. customer discounts and credits;
. the ability to meet the technological demands of our customers;
. technical difficulties or system downtime affecting the Internet
generally or our hosting operations;
. changes in our pricing policies or those of our competitors;
. changes in regulatory laws and policies;
. economic conditions specific to the hosting industry, as well as general
economic conditions;
. difficulties in collecting accounts receivable; and
. compensation costs related to stock option grants.
We plan to increase our operating expenses to develop our business. If our
revenues do not increase as quickly as our expenses, our operating results will
suffer.
For these and other reasons, in future periods our operating results may fall
below the expectations of securities analysts or investors, which could
negatively affect the market price of our common stock.
We rely on our strategic relationship with Level 3, and if this relationship is
terminated or deteriorates our business will suffer.
We recently entered into a strategic relationship with Level 3. We are
currently Level 3's only preferred provider of Microsoft-based advanced hosting
solutions. Our ability to increase demand for our services depends in part upon
Level 3's referrals of new customers to us. This relationship is non-exclusive,
and our marketing agreement can be terminated by Level 3 if we default on our
obligations under this agreement or are acquired by a competitor of Level 3. If
Level 3 fails to refer new customers to us or refers potential customers to our
competitors or if our relationship with Level 3 deteriorates or is terminated
for any reason, we may not be able to increase our customer base and,
therefore, our revenues as rapidly as we anticipate and our business would
suffer. If we fail to train Level 3's sales personnel, or fail to train them
adequately, we will not realize some of the benefits that we believe we will
receive under this arrangement, including customer referrals. As part of our
relationship, we have committed to purchase a fixed amount of services from
Level 3, including, among other things, bandwidth, co-location space,
installation and maintenance services, over the next five years. We will incur
these expenses even if anticipated increases in sales do not materialize or, in
some circumstances, if the agreement is terminated. We have also agreed to
purchase most of our bandwidth and co-location requirements to the extent they
meet our then-current performance and capacity requirements. We are required to
purchase these services from Level 3 even if these services are available at
lower prices from alternative vendors.
Our relationship with Level 3 also entitles us to offer our services from all
existing and future U.S. Level 3 data centers. We currently rely on Level 3 to
provide most of the data center capacity that we need to provide our hosting
services, and in the future we will be required to purchase most of
7
<PAGE>
our data center capacity from Level 3. Further, Level 3 will provide personnel
at these data centers to install equipment and assist with support as necessary
for us to deliver service in these facilities. If Level 3 fails to perform
these services in a timely or effective manner, or at all, we would be required
to make alternate arrangements, possibly including hiring additional
implementation engineers. In addition, if our relationship with Level 3 is
terminated or if Level 3 does not provide the data center capacity that we
need, we would be required to seek arrangements with other data center
providers or construct our own data centers. We cannot be certain that
alternate data center capacity will be available on commercially reasonably
terms or at all. We currently rely, and for the foreseeable future will
continue to rely, on Level 3 to provide bandwidth and other networking
services. If we are unable to obtain these services from Level 3, we would be
required to seek arrangements with other providers of these services, and we
cannot be certain that alternate services will be available on commercially
reasonable terms or at all.
Our success depends on Microsoft's continued success, and the loss or
deterioration of our relationship with Microsoft could harm our business and
have an adverse impact on our revenues.
We focus on advanced hosting services for Microsoft-based Internet
technologies. If these technologies are not widely used building blocks for
advanced Internet sites in the future, the demand for our services would
decrease and our business would be adversely affected.
Our relationship with Microsoft provides us with access to developments in
Microsoft products before they are generally available, which allows us to
maintain and enhance our technical expertise. If our relationship with
Microsoft deteriorates or if we lose some of the status or privileges we
currently enjoy, our technical expertise could be adversely affected. Our
ability to market our services as a provider of advanced hosting services for
Microsoft-based Internet technologies would also be adversely affected if
Microsoft does not continue to confer certifications and designations on us, or
changes our current certifications or designations. Microsoft confers these
certifications unilaterally and in its sole discretion. Thus, we cannot be
certain that we will continue to enjoy them.
The scalability of our network is unproven.
We must continue to expand and adapt our network infrastructure to
accommodate the increasing number of customers, the amount of information they
wish to transmit and their changing requirements. We face risks related to our
network's ability to be scaled to meet increasing customer levels while
maintaining acceptable performance levels. The expansion and adaptation of our
networking and hosting facility infrastructure will require substantial
financial, operational and management resources as we negotiate bandwidth
capacity with existing and other network infrastructure suppliers. If we are
required to expand our network significantly and rapidly due to increased
usage, additional stress will be placed upon our network hardware, traffic
management systems and hosting facilities as well as our financial, operational
and management resources. Due to the limited deployment of our services to
date, the ability of our network to support a substantially larger number of
customers at high transmission speeds is unknown.
We depend on network providers to support our growth and to provide
reliability, capacity and performance for our network.
Our success partly depends upon the capacity, reliability and security of our
network infrastructure, including the capacity leased from our network
suppliers. Our network currently delivers service through Level 3, MCI
WorldCom, Inc. (including UUNET Technologies, Inc.), e.spire Communications,
Inc., Sprint Corporation, Digex, Incorporated, Cable & Wireless plc and SAVVIS
Communications Enterprises, LLC. Some of these suppliers are also our
competitors. In the future, we may be required to purchase most of our network
capacity from Level 3. We depend on these companies to provide uninterrupted
and error-free service through their telecommunications networks. As our
customers' usage of telecommunications capacity increases, we will need to make
additional investments in our infrastructure to maintain adequate data
transmission
8
<PAGE>
speeds, the availability of which may be limited or the cost of which may be
significant. If capacity is not available to us as our customers' usage
increases, our network may not be able to achieve or maintain sufficiently high
data transmission capacity, reliability or performance. In addition, our
business would suffer if our network suppliers increased the prices for their
services and we were unable to pass along any increased costs to our customers.
Any failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce customer demand for our services and damage our business.
We may not be able to deliver our services if our third-party suppliers do not
provide us with key components of our network infrastructure.
We depend on other companies to supply key components of our network
infrastructure. Any failure to obtain needed products or services in a timely
fashion or at an acceptable cost could adversely affect our business. We buy
servers, routers and switches on an as-needed basis and therefore do not carry
significant inventories of them. We also have no guaranteed supply arrangements
with our vendors. We currently only use servers from Compaq and rely on Compaq
to provide us with access to Compaq technical personnel. We recently entered
into an agreement with Compaq under which we have agreed for the next three
years to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business consistent with
our business plan. Our requirement to purchase these servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the Compaq servers being reasonably
satisfactory to us and upon Compaq's commitment to deliver these servers on the
schedule we request. In addition, we rely on Cisco Systems, Inc. and Alteon to
supply equipment critical to our network. If this equipment were to become
unavailable on commercially reasonable terms, we would be forced to find
alternative equipment. The inability to obtain equipment or technical services
from Compaq, Cisco or Alteon on commercially reasonable terms would force us to
spend time and money selecting and obtaining new equipment, training our
personnel to use different equipment and deploying alternative components
needed to integrate the new equipment, and as a result our business could be
adversely affected.
We operate in a new and evolving market with uncertain prospects for growth and
rapidly changing technology.
Our market is new and rapidly evolving. Growth in demand for and acceptance
of advanced hosting services are highly uncertain. Businesses may not be aware
of the potential benefits of outsourcing or may find it cheaper, more secure or
otherwise preferable to host their web sites internally. Internet technologies,
such as e-commerce applications, which require advanced hosting, may not grow
as rapidly as we expect. If the market for advanced hosting services fails to
grow or grows more slowly than we anticipate, our business, operating results
and financial condition will be adversely affected. Growth in the demand for
our products and services may be inhibited, and we may be unable to sustain
growth in our customer base, for a number of reasons, including:
. our inability to market our products and services in a cost-effective
manner to new customers;
. the inability of customers to differentiate the products and services we
offer from those of our competitors;
. the termination of our customer contracts, which can generally be
canceled on 30 days' notice;
. our inability to strengthen awareness of our brand; and
. reliability, quality or compatibility problems with our services.
9
<PAGE>
Our market is characterized by rapidly changing technology, evolving industry
standards and frequent new product announcements. These characteristics are
magnified by the recent growth of the Internet and the intense competition in
our industry. We are also subject to risks from technological changes in the
way hosting solutions are marketed and delivered. To be successful, we must
adapt to our rapidly changing market by continually improving the performance,
features and reliability of our services and modifying our business strategies
accordingly. We could also incur substantial costs if we need to modify our
services or infrastructure in order to adapt to these changes. Our business
would suffer if we fail to respond to these changes in a timely and cost-
effective manner or at all.
Our business will suffer if Internet usage does not continue to increase or if
the Internet fails to perform reliably.
Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners has recently begun to
increase rapidly. Our success depends in large part on continued growth in the
use of the Internet, and we would be adversely affected if Internet usage does
not continue to grow. Internet usage and growth may be inhibited for a number
of reasons, such as:
. inadequate network infrastructure;
. security concerns;
. uncertainty of legal and regulatory issues concerning the use of the
Internet;
. inconsistent quality of service;
. lack of availability of cost-effective, reliable, high-speed service;
and
. failure of Internet use to expand internationally.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. For example, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could in the future grow
more slowly or decline, which would adversely affect our business.
Our rapid growth and expansion has strained, and may continue to strain, our
resources and create the need for new support systems.
We are currently experiencing rapid growth and intend to continue this
expansion. Since incorporating in August 1997, we had grown from five to 50
employees as of June 1, 1999. We expect that we will need to hire additional
personnel in all areas of our business. If we do not succeed in attracting and
retaining new, qualified personnel and/or retaining our current personnel, our
business could suffer.
The rapid growth of our business and our service offerings has placed, and is
likely to continue to place, a significant strain on our operating and
financial resources. Our future performance will partly depend on our ability
to manage our growth effectively, which will require that we further develop
our operating and financial system capabilities and controls. We are in the
process of implementing new billing and other management information systems.
If our information systems, including the systems that we are currently
implementing, and other infrastructure are unable to support the demands placed
on them by the rapid growth in our business, we may be forced to implement new
systems. If we fail to improve our operational systems or to expand our
customer service capabilities to keep pace with the growth of our business, we
could experience customer dissatisfaction, cost inefficiencies and lost revenue
opportunities, which could harm our operating results. We may not be able to
successfully implement these systems when needed or they may not perform
reliably. In addition, we plan to move to a new headquarters facility in the
third quarter of 1999, which could be disruptive, time-consuming and expensive.
10
<PAGE>
We must expand our direct and indirect sales operations to increase market
awareness of our products and generate increased revenues. We cannot be certain
that we will be successful in these efforts. We plan to increase our sales
force significantly in the second half of 1999. Newly-hired employees will
require training and it will take time for them to achieve full productivity.
Also, through our relationship with Level 3, we intend to begin training their
sales force to sell our products and services in October 1999. We cannot be
certain that we will be able to hire enough qualified individuals in the
future, that newly-hired employees will achieve necessary levels of
productivity or that our Level 3 relationship will result in increased sales.
We may need additional capital and it may not be available.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may require additional
funds during or after that 12-month period. Any required financing may not be
available or may be available only on terms that are not favorable to us.
Further, if additional funds are raised through the issuance of additional
equity securities, the percentage ownership of our shareholders would be
diluted. Any new equity securities may have rights, preferences or privileges
senior to those of our common stock.
We could experience system failures which could harm our business and
reputation.
To succeed, we must be able to operate our network management infrastructure
around the clock without interruption. Our operations depend upon our ability
to protect our network infrastructure, equipment and customer files against
damage from human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and
similar events. Even if we take precautions, we do not have a comprehensive
disaster recovery plan and the occurrence of a natural disaster or other
unanticipated problems at any of our data centers could result in interruptions
in the services we provide to our customers.
Although we have attempted to build redundancy into our network and hosting
infrastructure, we have experienced interruptions in service in the past. Our
network is subject to various points of failure, and a problem with our
routers, switches or other equipment could cause an interruption in the
services we provide to some of our customers. Any future interruptions could:
. cause customers or end users to seek damages for losses incurred;
. require us to replace existing equipment or add redundant facilities;
. damage our reputation for reliable service;
. cause existing customers to cancel their contracts; or
. make it more difficult for us to attract new customers.
Any of these results could damage our business.
Disruption of our services caused by unknown software defects could harm our
business and reputation.
Our service offerings depend on complex software, including software licensed
from third parties and our proprietary software tools. Complex software often
contains defects, particularly when first introduced or when new versions are
released. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. Although we have not
experienced any material software defects to date, it is possible that defects
may occur in the software. These defects could cause service interruptions,
which could damage our reputation or increase our service costs, cause us to
lose revenue, delay market acceptance or divert our development resources.
11
<PAGE>
We face risks associated with the security of our systems.
Despite our design and implementation of a variety of network security
measures, unauthorized access, computer viruses, accidents, misconduct
resulting in disruptions and other disruptions could occur. In addition, we may
incur significant costs to prevent breaches in security or to alleviate
problems caused by breaches. We rely on third-party suppliers such as Level 3
to protect our equipment and hardware against breaches in security. We cannot
be certain that they will provide adequate security, and any breaches that may
occur could result in liability to us, loss of existing customers or the
deterrence of future customers.
We may not be able to protect our intellectual property and proprietary rights.
Proprietary rights are important to our success and our competitive position.
We do not have any patented technology that would prevent competitors from
entering our market. We rely on copyright, trademark and trade secret
protection for our intellectual property. We have entered into some contractual
arrangements with our employees and contractors as well as suppliers,
distributors and some of our key customers in order to limit access to, and any
disclosure of, our proprietary information. The steps we have taken to protect
our intellectual property may be insufficient. Our technology may be
misappropriated or a third party may independently develop similar
technologies. We may need to take legal action to protect our intellectual
property rights, which could be costly and divert the attention of our
technical and management personnel.
We may be accused of infringing the proprietary rights of others.
In addition to the technologies we develop or have developed, we license
certain technologies from third parties and may license additional technologies
in the future. We could become subject to infringement actions based upon our
internally developed technologies and technologies licensed from these third
parties. Any of these claims, with or without merit, could subject us to costly
litigation and divert the attention of our technical and management personnel.
In addition, third parties may change the terms of their license agreements in
ways that would prevent us from using technologies licensed from them on
commercially reasonable terms or that would prevent us from using them at all.
We may not be able to replace those technologies with technologies that have
the same features or functionality on commercially reasonable terms or at all.
If we do not adequately address Year 2000 issues, we may incur significant
costs and our business could suffer.
Currently, many computer and software products are coded to accept only two-
digit entries in the date code field. These date code fields will need to
accept four-digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with Year 2000 requirements. We
cannot predict whether our Year 2000 compliance issues will require us to
upgrade or replace our systems and equipment. Should we be required to upgrade
or replace our systems and equipment, it could represent a significant cost to
us. If we are not successful in identifying and planning for Year 2000 issues,
our business operations could be materially and adversely affected.
Additionally, we cannot evaluate our customers' Year 2000 readiness. Some of
our customers' sites may fail due to Year 2000 issues and any failures may
affect other customers' sites or our network. Also, to the extent that a
customer's site is not functioning correctly and it is not possible to
determine that the malfunction is caused by the customer's software, the
customer may request service credits or we might otherwise have a difficult
time realizing the expected revenues from that customer.
The worst-case scenario related to the Year 2000 issue would be an overall
failure of the Internet, the telecommunications infrastructure and the
electrical grid. If this happened, we would be unable to service our customers
for an uncertain period of time. Any widespread disruption to these systems
would have unpredictable and potentially severe impacts on our business and
financial condition.
12
<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Year 2000."
Regulatory and legal uncertainties could result in significant costs or
otherwise harm our business.
Laws and regulations directly applicable to commerce or communications over
the Internet are becoming increasingly prevalent. For example, the United
States Congress recently enacted Internet legislation regarding children's
privacy, copyrights, taxation and the transmission of sexually explicit
material. Furthermore, the European Union recently enacted privacy regulations.
Even so, the law of the Internet remains largely unsettled. It may take years
to determine whether and how existing laws will be applied to the Internet,
including without limitation, laws regarding intellectual property, privacy,
libel and taxation. The adoption or modification of laws or regulations
relating to the Internet could adversely affect our business. If liability for
materials carried on or disseminated through their systems is imposed on
service providers, we would make efforts to implement measures to reduce our
exposure to such liability. Such measures could require us to expend
substantial resources or discontinue certain product or service offerings. In
addition, increased attention to liability issues, as a result of lawsuits,
legislation and legislative proposals, could divert management attention,
result in unanticipated expenses and harm our business.
The growth and development of the market for e-commerce may lead to enactment
of more stringent consumer protection laws, both in the United States and
abroad. Such laws may impose additional burdens on companies conducting
business online and companies providing services related to conducting business
online. The adoption or modification of laws or regulations relating to e-
commerce could adversely affect our business.
We are not currently subject to direct regulation by the Federal
Communications Commission, the FCC, or any other domestic or foreign government
agency, other than as to regulations applicable to businesses in general.
However, in the future we may be subject to regulation by the FCC or other
federal or state agencies. Our costs could increase and our business could
suffer depending on the extent to which our activities might be regulated.
See "Business--Government Regulation."
We depend on our key personnel.
We depend on the continued service of our key technical, sales and senior
management personnel, including Sunny C. Vanderbeck, our Chairman and Chief
Executive Officer, and Michelle R. Chambers, our President and Chief Operating
Officer. We have entered into three-year employment agreements with
Mr. Vanderbeck and Ms. Chambers, but any of our officers or employees can quit
at any time. Losing one or more of our key employees could harm our business.
We have obtained a key man insurance policy on the life of Mr. Vanderbeck but
not on any other executive officer.
We operate in an extremely competitive market and may not be able to compete
effectively.
The market for hosting and Internet services is highly competitive. There are
few substantial barriers to entry to keep new competitors from entering this
market. We expect that we will face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include:
. technical expertise in developing advanced web hosting solutions;
. quality of service, including network capability, scalability,
reliability and functionality;
. customer service and support;
. variety of services and products offered;
13
<PAGE>
. price;
. brand name recognition;
. Internet system engineering and technical expertise;
. timing of introductions of additional value-added services and products;
. network security;
. financial resources; and
. conformity with industry standards.
We may not have the resources, expertise or other competitive factors to
compete successfully in the future.
Our current and potential competitors include:
. Microsoft advanced hosting providers, such as Digex, MCI WorldCom
(including UUNET), GTE Internetworking Incorporated and USWeb
Corporation/CKS Group, Inc.;
. web and application hosting service providers, such as Interliant, Inc.,
Navisite, Inc. and USinternetworking Inc.;
. application-specific hosting service providers, such as Critical Path,
Inc.;
. co-location providers, such as AboveNet Communications Inc., Exodus
Communications, Inc., Digital Island Inc. and Frontier GlobalCenter;
. local, regional and international Internet service providers, such as
AppliedTheory Corp., Concentric Network Corporation, Globix Corporation,
MindSpring Enterprises, Inc., Verio Inc. and PSINet;
. local, regional and international telecommunications companies, such as
AT&T Corp., British Telecommunications plc, Cable & Wireless, Telecom
Italia SpA, Nippon Telegraph and Telephone Corp., Qwest Communications
International Inc. and the regional Bell operating companies such as
Bell Atlantic Corp. and U S WEST, Inc.;
. systems integrators and large information technology outsourcing
companies, such as International Business Machines Corporation,
Electronic Data Systems Corp., Oracle Corporation, Andersen Consulting
LLP, PricewaterhouseCoopers LLP and others;
. multimedia hosting companies, such as broadcast.com; and
. other hardware, software and technology companies.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we do.
As a result, some of these competitors may be able to:
. develop and expand their network infrastructures and service offerings
more rapidly;
. adapt to new or emerging technologies and changes in customer
requirements more quickly;
. take advantage of acquisition and other opportunities more readily;
. devote greater resources to the marketing and sales of their services;
and
. adopt more aggressive pricing policies.
In addition, these competitors have entered and will likely continue to enter
into joint ventures or other arrangements to provide additional services
competitive with those provided by us. We believe that the market in which we
compete is likely to experience consolidation in the near future, which could
result in increased competition on price and other factors that could adversely
affect our business.
14
<PAGE>
In an effort to gain market share, some of our competitors have offered
hosting services similar to ours at prices lower than ours or with incentives
not matched by us. In addition, some of our competitors may be able to provide
customers with additional benefits that could reduce the overall costs of their
services relative to ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without an adverse impact on our business.
We may face risks associated with international expansion and operations.
In fiscal 1999, approximately 8% of our revenues were derived from our
customers located in Europe and Asia. Our success depends in part on expanding
our customer base internationally. Because our international sales are
denominated in U.S. dollars, currency fluctuations may deter foreign customers
from purchasing our services. In addition, there are certain risks to
conducting business internationally, such as:
. different regulatory requirements and access fees;
. restrictions on exports to foreign countries and other trade barriers;
. different technology standards;
. different privacy, censorship and service provider liability standards
and regulations;
. less protective intellectual property laws;
. the imposition by foreign authorities of currency exchange controls;
. different tax structures which may adversely impact earnings; and
. political and economic instability of certain foreign countries.
Any of these risks could adversely affect our business.
Our stock has no prior trading market and our stock price may be volatile.
There has been no public market for our common stock. We cannot be sure that
an active public market for our common stock will develop or continue after
this offering. The initial public offering price of our common stock has been
determined by negotiations among us and the representatives of the
underwriters. Investors may not be able to sell their common stock at or above
the initial public offering price.
The market price of the shares of our common stock is likely to be highly
volatile and subject to wide fluctuations in response to, among other things,
the following factors:
. actual or anticipated fluctuations in our results of operations;
. announcements of technological innovations;
. new products or services introduced by us or our competitors;
. changes in or failure by us to meet financial forecasts of securities
analysts;
. conditions and trends in the Internet;
. acquisitions or strategic alliances involving us, our competitors, our
suppliers or our customers; and
. general economic or market conditions and other factors.
Further, the stock markets, and in particular the Nasdaq National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology and Internet
related companies and that often have been unrelated or disproportionate to the
operating performance of those companies. The trading prices of many technology
and Internet-related companies' stocks are at or near historical highs and
reflect relative valuations substantially above historical levels. These
trading prices and relative valuations may not be sustained, and broad market
factors may
15
<PAGE>
adversely affect the market price of our common stock. These market
fluctuations, as well as general economic, political and market conditions such
as recessions, interest rates or international currency fluctuations, may
adversely affect the market price of our common stock. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against that company. This
litigation, if instituted against us, would likely result in substantial costs
to us and a diversion of our management's attention and resources, which could
harm our business.
We have broad discretion as to the use of proceeds from this offering.
We intend generally to use the net proceeds from this offering to fund our
operations, for capital expenditures, to expand marketing and sales activities,
to pay off our $210,000 credit facility and for general corporate purposes,
including working capital, costs associated with our anticipated move to a new
headquarters facility and possible strategic investments and acquisitions. If
we acquire or make investments in other businesses, products, services or
technologies, we may not be able to make those acquisitions or investments on
commercially acceptable terms or we could have difficulty assimilating and
integrating any acquired businesses, technologies, services or products. We
have not yet determined the actual expected expenditures and thus cannot
estimate the amounts to be used for each specified purpose. The actual amounts
and timing of these expenditures will vary significantly depending on a number
of factors, including, but not limited to, the amount of cash generated by our
operations and the market response to the introduction of any new service
offerings. Depending on future developments and circumstances, we may use some
of the proceeds for uses other than those described above. Our management will
have significant flexibility in applying the net proceeds of this offering. We
cannot be certain that our use of the proceeds will yield a favorable return.
See "Use of Proceeds."
Our principal shareholders, directors and executive officers will be able to
exert significant influence over us.
After this offering our shareholders who currently own over 5% of our common
stock, our directors and our executive officers will beneficially own
approximately % of our outstanding common stock. These shareholders will be
able to exercise significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of us.
Some provisions of our articles, bylaws and rights plan and of Texas law could
delay or prevent a change of control.
Our articles of incorporation and bylaws contain provisions that could make
it more difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
Some of these provisions:
. authorize the issuance of preferred stock which can be created and
issued by our board of directors without prior shareholder approval,
commonly referred to as "blank check" preferred stock, with rights
senior to those of common stock;
. prohibit certain shareholder actions by written consent;
. establish advance notice requirements for submitting nominations for
election to our board of directors and for proposing matters that can be
acted upon by shareholders at a meeting; and
. provide for a classified board of directors with staggered three-year
terms.
We are also subject to certain provisions of Texas law which could delay,
deter or prevent a change in control of us.
16
<PAGE>
We intend to adopt a shareholder rights plan before this offering is
consummated. This plan will entitle our shareholders to rights to acquire
additional shares of our common stock when a third party acquires 15% of our
common stock or commences or announces its intent to commence a tender offer
for at least 15% of our common stock. This plan could delay, deter or prevent a
change in control of us.
You will suffer immediate and substantial dilution.
The initial public offering price of our common stock is expected to be
substantially higher than the net tangible book value of our common stock.
Therefore, if you purchase our common stock in this offering, you will incur
immediate dilution of approximately $ in the net tangible book value per
share of common stock from the price per share that you pay for such common
stock (based upon an assumed initial public offering price of $ per share).
You will also experience additional dilution upon the exercise of outstanding
stock options at prices below the initial public offering price.
Future sales of our common stock could cause our stock price to decline.
After this offering is completed, shares of our common stock will be
issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the shares of our common stock sold in this offering
will be freely tradable unless purchased by our "affiliates." In connection
with this offering, our officers, directors and some of our shareholders who
together own approximately shares of our common stock agreed to
refrain from selling any shares of our common stock for a period of 180 days
after the date of this prospectus. We cannot be sure what effect, if any,
future sales of our common stock or the availability of shares for future sale
will have on the market price of our common stock. The market price of our
common stock could drop due to sales of a large number of shares of our common
stock in the market after this offering or the perception that these sales
could occur. These factors could also make it more difficult to raise funds
through future offerings of our common stock.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Some of the information in this prospectus contains forward-looking
statements within the meaning of the federal securities laws. These statements
include, among others, statements relating to expenditure levels, the adequacy
of capital resources and plans for expansion of our marketing and sales
efforts, risk factors, use of proceeds, liquidity, strategy, sales and
technology and network operations. These statements may be found under
Prospectus Summary, Risk Factors, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Business. Forward-looking
statements are typically identified by the use of terms such as "may," "will,"
"expect," "intend," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
our actual results could differ materially from those contained in the forward-
looking statements due to a number of factors, including without limitation,
changes in external competitive market factors, changes in our business
strategy or an inability to execute our strategy, unanticipated changes in the
hosting industry, the economy in general and changes in the use of the
Internet. We cannot guarantee future results, levels of activity, performance
or achievements. You should also consider carefully the statements under "Risk
Factors" and other sections of this prospectus, which address additional
factors that could cause our actual results to differ from those set forth in
the forward-looking statements.
17
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of shares of common stock
we are offering will be approximately $ million at an assumed initial public
offering price of $ per share and after deducting the estimated underwriting
discounts and commissions and estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that the net proceeds
will be approximately $ million.
We currently intend to use approximately $ of the net
proceeds to fund our operations and capital expenditures, expand our marketing
and sales activities, fund expenses associated with our anticipated move to a
new headquarters facility and to pay off our $210,000 credit facility. Our
capital expenditures will consist of the acquisition of servers and other
hardware necessary for growth and may include acquisitions or investments in
businesses, products, services or technologies complementary to our current
business. We have no current plans, agreements or commitments with respect to
any acquisition or investment of this type. We intend to use the balance of the
net proceeds for general corporate purposes, including working capital and
strategic investments and acquisitions. Our management may spend the proceeds
from this offering in ways which the shareholders may not deem desirable.
The timing and amount of our actual expenditures will be based on many
factors, including cash flows from operations and the growth of our business.
Until we use the net proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities. We cannot predict whether the proceeds invested will yield a
favorable return.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock. We anticipate
that we will retain earnings to support operations and to finance the growth
and development of our business. Therefore, we do not expect to pay cash
dividends in the foreseeable future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization on March 31, 1999:
. on an actual basis;
. on a pro forma basis to reflect the net proceeds from the sale of shares
of our common stock to private investors between March 31, 1999 and the
date of this prospectus; and
. on a pro forma as adjusted basis to give effect to the sale of the
shares of common stock we are offering, at an assumed initial public
offering price of $ per share (based upon the midpoint of the filing
range), after deducting the estimated underwriting discounts and
commissions and estimated offering expenses that we will pay and the
application of the estimated net proceeds as described under "Use of
Proceeds."
This table should be read in conjunction with the audited financial
statements and the notes relating to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Pro Pro Forma
Actual Forma As Adjusted
------- -------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Cash............................................ $ 843 $ 10,168 $
======= ======== =====
Notes payable and capital lease obligations--
long term...................................... $ 166 $ 166 $
Shareholders' equity:
Preferred stock; $.001 par value, 20,000,000
shares authorized; none issued or
outstanding, actual, pro forma and pro forma
as adjusted.................................. -- -- --
Common stock; $.001 par value; 100,000,000
shares authorized, shares issued and
outstanding, actual; shares issued and
outstanding, pro forma; shares issued and
outstanding, pro forma as adjusted........... -- --
Additional paid-in capital.................... 3,914 18,239
Deferred stock compensation................... (1,195) (1,195)
Accumulated deficit........................... (1,474) (1,474)
------- -------- -----
Total shareholders' equity.................... 1,245 15,570
------- -------- -----
Total capitalization............................ $ 1,411 $ 15,736 $
======= ======== =====
</TABLE>
The number of shares of common stock outstanding excludes:
. shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $ per share;
and
. shares of common stock reserved for future issuance under our
stock option plans.
19
<PAGE>
DILUTION
Our net tangible book value on March 31, 1999, was approximately $1,244,600
or $ per share. "Net tangible book value" is total assets minus the sum of
liabilities and intangible assets. "Net tangible book value per share" is net
tangible book value divided by the total number of shares outstanding.
After giving effect to adjustments relating to the offering described below,
our pro forma net tangible book value on , 1999, would have been $ or
$ per share. The adjustments made to determine pro forma net tangible book
value per share are the following:
. an increase in total assets to reflect the estimated net proceeds of the
offering as described under "Use of Proceeds" (assuming an initial
public offering price of $ per share (based upon the midpoint of the
filing range)); and
. the addition of the number of shares offered by this prospectus to the
number of shares outstanding.
The following table illustrates the pro forma increase in net tangible book
value of $ per share and the dilution (the difference between the offering
price per share and net tangible book value per share) to new investors.
Dilution per share in the table below does not include dilution from the
exercise of options outstanding at , to purchase shares of common stock
at a weighted average exercise price of $ per share. If these options are
exercised, new investors will experience additional dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Net tangible book value per share at , 1999.................. $
Increase in net tangible book value per share attributable to new
investors........................................................ $
----
Pro forma net tangible book value per share after offering.......... $
-----
Dilution per share to new investors................................. $
=====
</TABLE>
The following table summarizes the differences between the number of shares
of common stock purchased from Data Return, the aggregate cash consideration
paid and the average price per share paid by existing shareholders and new
investors purchasing shares of common stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- ---------------------- Price
Number Percent Amount Percent Per Share
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... % % $
New investors...........
-------- -------- --------- ---------
Total................. 100% 100%
======== ======== ========= =========
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data are derived from the financial
statements of Data Return which have been audited by Ernst & Young LLP,
independent auditors. The data should be read in conjunction with the financial
statements, related notes and other financial information contained later in
this prospectus. You should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained later in this
prospectus.
<TABLE>
<CAPTION>
Period from
September 22, 1997
(inception) to Year Ended
March 31, 1998 March 31, 1999
------------------ --------------
(In thousands, except per share
data)
<S> <C> <C>
Statements of Operations Data:
Revenues.................................... $ 336 $ 1,889
Costs and expenses:
Cost of revenue........................... 198 1,105
General and administrative................ 231 1,063
Marketing and sales....................... 39 663
Stock based compensation.................. 61 349
------ -------
Total costs and expenses.................... 529 3,180
------ -------
Loss from operations........................ (193) (1,291)
Other income (expense)...................... 2 7
------ -------
Net loss.................................... $ (191) $(1,284)
====== =======
Net loss per common share................... $(3.23) $(18.65)
====== =======
Shares used in per share computation........ 59 69
====== =======
Other Financial Data:
EBITDA (1).................................. $ (118) $ (813)
Net cash used in operating activities....... 1 (644)
Net cash used in investing activities....... (55) (939)
Net cash provided by financing activities... 528 1,952
Purchases of property and equipment......... 55 814
<CAPTION>
March 31,
---------------------------------
1998 1999
------------------ --------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Working capital............................. $ 321 $ 561
Total assets................................ 734 2,214
Notes payable and capital lease
obligations--long-term..................... 36 166
Total shareholders' equity.................. 430 1,245
</TABLE>
- --------
(1) EBITDA consists of loss from operations plus depreciation and amortization,
including amortization of unearned stock based compensation. EBITDA does
not represent funds available for management's discretionary use and is not
intended to represent cash flow from operations as measured under generally
accepted accounting principles. EBITDA should not be considered as an
alternative to net loss or net cash used in operating activities, but may
be useful to investors as an indication of operating performance. Our
calculations of EBITDA may not be consistent with calculations of EBITDA
used by other companies.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with the financial
statements and other financial information included in this prospectus. This
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those projected in
the forward-looking statements. Please see "Forward-Looking Statements and
Associated Risks" elsewhere in this prospectus. Our fiscal year ends on March
31.
Overview
Data Return is a leading provider of advanced Microsoft-based Internet
hosting services to businesses, web site developers and other organizations.
Our advanced Microsoft hosting services enable our customers to establish and
maintain sophisticated e-commerce and other applications through which they can
conduct transactions and manage information on a worldwide basis over the
Internet. We were incorporated in August 1997 by three former Microsoft product
support engineers and believe we are now the leading provider of advanced
hosting services focused specifically on the Microsoft platform. Our advanced
hosting services are designed for customers deploying sophisticated, high-end
Internet applications that require a professionally-managed environment
incorporating high performance network access, advanced system monitoring and
technical support in highly secure, fault-tolerant facilities. We believe that
we are well positioned to take advantage of the growing demand for advanced
hosting which is being driven by increasing user access to the Internet, e-
commerce and the outsourcing of web services.
The nature of our business is rapidly evolving and we have a limited
operating history. As a result, we believe that period-to-period comparisons of
our revenue and operating results, including our cost of revenue and other
operating expenses as a percentage of total revenue, are not meaningful and
should not be relied upon as indicators of future performance. We do not
believe that our historical growth rates are indicative of future results.
Currently, we derive substantially all of our revenues from advanced hosting
services. We also derive a nominal amount of revenue from technical reviews and
the resale of software and other products. Currently, most of our advanced
hosting revenues are generated from recurring monthly fees. The remainder are
derived from one-time set-up fees for installation. Revenues are billed on a
monthly basis and are recognized as the service is performed. Most of our
customer agreements may be canceled on 30 days' notice.
Our expenses are comprised of:
. cost of revenue, which consists primarily of compensation and related
expenses for technical operations, bandwidth expenses, space in data
centers and depreciation of equipment;
. general and administrative, which consists primarily of compensation and
related expenses and occupancy costs;
. marketing and sales, which consists primarily of advertising and
compensation and related expenses; and
. stock based compensation, which relates to employee options granted at
prices less than fair market value.
We have incurred significant losses since our inception and as of March 31,
1999 had an accumulated deficit of approximately $1.5 million. We intend to
invest heavily in marketing and sales and the continued development of our
network infrastructure and technology. We expect to expand our operations and
workforce, including our network operations, technical support, sales,
marketing and administrative resources. In particular, we intend to expand our
existing inside sales force and create an outside sales force to develop new
sales
22
<PAGE>
channels and relationships. We expect to continue to incur substantial
operating losses for the foreseeable future. We may not be able to successfully
execute our expansion plans.
Results of Operations
The following table sets forth selected financial data for the period from
September 22, 1997 (inception) to March 31, 1998 and for fiscal 1999. Comparing
data for the period from September 22, 1997 (inception) to March 31, 1998 to
data from fiscal 1999 is not necessarily meaningful because of the different
duration of the periods and the growth of our business activities and related
expenses.
<TABLE>
<CAPTION>
% of Revenue
---------------------------------
Period from
September 22, 1997
(inception) to Year Ended
March 31, 1998 March 31, 1999
------------------ --------------
<S> <C> <C>
Revenues...................................... 100.0% 100.0%
Costs and expenses:
Cost of revenue............................. 58.9 58.5
General and administrative.................. 68.5 56.3
Marketing and sales......................... 11.6 35.1
Stock based compensation.................... 18.2 18.5
----- -----
Loss from operations.......................... (57.2) (68.4)
Other income (expense):
Interest income............................. 0.7 1.1
Interest expense............................ (0.1) (0.7)
----- -----
Net loss.................................... (56.6)% (68.0)%
===== =====
</TABLE>
Fiscal 1999
Revenues
We generated revenues of $1,889,000 in fiscal 1999, of which approximately
41% was recognized in the fourth quarter. This increase was due in part to the
addition of two sales people in the third quarter. No single customer in fiscal
1999 accounted for more than 5% of total revenue.
Cost of revenue
During fiscal 1999 cost of revenue was $1,105,300, or 58.5% of revenue. We
increased our systems and customer support personnel from six in April 1998 to
20 in March 1999. We expect our cost of revenue to increase in conjunction with
the growth of our overall business.
General and administrative
General and administrative expense amounted to $1,063,000, or 56.3% of
revenue, in fiscal 1999. We increased our general and administrative personnel
from four employees in April 1998 to eight employees in March 1999. We expect
to significantly increase our general and administrative expenditures.
Marketing and sales
Marketing and sales expense during fiscal 1999 amounted to $662,800, or 35.1%
of revenue. Advertising and other promotional costs were $310,300, or 46.8% of
marketing and sales expense, for fiscal 1999. We
23
<PAGE>
increased our marketing and sales personnel from one to six in fiscal 1999. We
intend to significantly increase our marketing and sales expenditures during
fiscal 2000 to help grow our business.
Stock based compensation
We recorded deferred stock compensation in the amount of $328,000 in
connection with the grant of employee stock options below fair market value
during fiscal 1999. Amortization of stock based compensation amounted to
approximately $348,800 during fiscal 1999. Amortization of substantially all of
the deferred stock compensation remaining at March 31, 1999 will be accelerated
upon the completion of this offering because the vesting period for certain
options will be accelerated to the date of consummation of this offering
pursuant to the underlying option agreements. We expect to record additional
deferred stock compensation of approximately $874,000 as a result of our
issuing additional employee options at less than fair market value subsequent
to fiscal 1999, some of which will also be accelerated upon the completion of
this offering.
Other income (expense)
Other income (expense) consists primarily of interest income on our cash
balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents amounted to
$19,900 during fiscal 1999. We concluded private placements of equity
securities in May 1998 and February 1999, resulting in additional cash balances
available for investment. During fiscal 1999, we incurred interest expense in
the amount of $12,700.
Income taxes
No provision for federal and state income taxes has been recorded as we have
incurred net operating losses from inception through March 31, 1999. As of
March 31, 1999, we had approximately $980,000 of federal net operating loss
carryforwards available to offset future taxable income which expire in varying
amounts beginning in 2013. After this offering, we may experience a change in
control under Section 382 of the Internal Revenue Code, which would limit our
use of these net operating loss carryforwards. Because there is significant
doubt as to whether we will realize any benefit from this deferred tax asset,
we have established a full valuation allowance as of March 31, 1999.
Period from September 22, 1997 (Inception) to March 31, 1998
From September 22, 1997 (inception) to March 31, 1998, we recorded revenues
of $336,100 from fees related principally to shared and dedicated hosting
services, as well as set-up fees. A nominal amount of revenue was derived from
web site design and other consulting services, which were discontinued during
fiscal 1999. We incurred cost of revenue of $198,000 and increased our
technical support staff to seven employees. Marketing and sales expense was
$39,000 for the period, as we established an advertising program and hired a
sales person to help attract and work with our customers and prospects. General
and administrative expense was $230,200 for the period, as we established our
operations and hired a total of five general and administrative personnel. We
recorded deferred stock based compensation of $1,277,000, in connection with
the grant of employee stock options below fair market value during the period.
Amortization of stock based compensation totaled $61,300 for the period, based
on the vesting of stock options held by several employees. Interest income for
the period was $2,200, related primarily to invested cash balances over the
course of the period.
24
<PAGE>
Selected Quarterly Operating Results
The following table sets forth certain unaudited statement of operations data
for the four quarters ended March 31, 1999, as well as the percentage of our
revenue represented by each item. This data has been derived from unaudited
interim financial statements prepared on the same basis as the audited
financial statements contained in this prospectus. The interim financial
statements include all adjustments, consisting of normal recurring adjustments,
that we consider necessary for a fair presentation of such information when
read in conjunction with our financial statements and notes thereto appearing
elsewhere in this prospectus. The operating results for any quarter should not
be considered indicative of the results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
June 30, September 30, December 31, March 31,
1998 1998 1998 1999
--------------- -------------- -------------- --------------
(Dollars in thousands)
% of % of % of % of
$ Revenue $ Revenue $ Revenue $ Revenue
------ ------- ----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 281 100.0% $ 366 100.0% $ 467 100.0% $ 775 100.0%
Costs and expenses:
Cost of revenue....... 205 73.0 243 66.4 280 60.0 377 48.6
General and
administrative....... 213 75.8 211 57.7 243 52.0 396 51.1
Marketing and sales... 105 37.4 165 45.1 163 34.9 230 29.7
Stock based
compensation......... 85 30.2 86 23.5 86 18.4 92 11.9
------ ------ ----- ----- ----- ----- ----- -----
Total costs and
expenses............... 608 216.4 705 192.7 772 165.3 1,095 141.3
------ ------ ----- ----- ----- ----- ----- -----
Loss from operations.... (327) (116.4) (339) (92.7) (305) (65.3) (320) (41.3)
Other income (expense):
Interest income....... 6 2.1 5 1.4 3 0.6 6 0.8
Interest expense...... (1) (0.3) (3) (0.8) (4) (0.8) (5) (0.7)
------ ------ ----- ----- ----- ----- ----- -----
Net loss................ $ (322) (114.6)% $(337) (92.1)% $(306) (65.5)% $(319) (41.2)%
====== ====== ===== ===== ===== ===== ===== =====
</TABLE>
Revenues increased 30.2% during the quarter ended September 30, 1998, 27.6%
during the quarter ended December 31, 1998 and 66.0% during the quarter ended
March 31, 1999, as the size and number of new customer orders rose
significantly during each quarter of fiscal 1999. Cost of revenue increased in
each quarter, but decreased as a percentage of revenue. General and
administrative expense and marketing and sales expense generally increased
quarter over quarter primarily due to the addition of personnel as our business
increased.
Factors Affecting Operating Results
We have experienced significant fluctuations in our results of operations
from quarter to quarter. As a result of these fluctuations, period-to-period
comparison of our operating results is not necessarily meaningful and should
not be relied upon as an indicator of future performance. We expect our future
operating results to fluctuate. Factors that are likely to cause these
fluctuations include:
. demand for and market acceptance of our hosting and value-added Internet
services;
. customer retention;
. size and timing of customer installations and related payments;
. fluctuations in data and voice communications costs;
. timing and magnitude of capital expenditures;
. costs relating to the expansion of operations;
25
<PAGE>
. introduction of new services or enhancements by us or our competitors;
. customer discounts and credits;
. the ability to meet the technological demands of our customers;
. technical difficulties or system downtime affecting the Internet generally
or our hosting operations;
. changes in our pricing policies or those of our competitors;
. changes in regulatory laws and policies;
. economic conditions specific to the hosting industry, as well as general
economic conditions;
. difficulties in collecting accounts receivable; and
. compensation costs related to certain option grants.
As a result of these and other factors, our future operating results may fall
below the expectations of securities analysts and investors. In this event, the
price of our common stock will likely decrease significantly.
Liquidity and Capital Resources
Our cash increased by approximately $369,000 during fiscal 1999 to $843,000.
This net change is partially a result of our raising approximately $1,750,000
from the sale of equity securities offset by approximately $644,000 used to
fund operating activities. In addition, our investment in property and
equipment increased approximately $814,000 during fiscal 1999 to $968,000.
Installation of network infrastructure equipment in our data centers and
purchases of furniture and equipment for new employees accounted for this
increase.
We have credit agreements for equipment financing of up to $250,000. Total
borrowings under these agreements as of March 31, 1999 were approximately
$225,000. We intend to repay the amounts outstanding under these agreements
with a portion of the proceeds of this offering. Capital lease obligations,
including both short-term and long-term portions, decreased approximately
$10,693, net of principal repayments, during fiscal 1999 as we secured
financing for some of our additions to property and equipment. Our credit
agreements and capital lease obligations contain no provisions that would limit
our future borrowing ability.
Since April 1999, we completed additional rounds of common stock financing
through the issuance of approximately 19,522 shares for gross cash proceeds of
$9,375,000. In addition, in July 1999, Level 3 purchased 7,260 shares of common
stock in exchange for a $5.0 million credit to be used against future purchases
of bandwidth in excess of our quarterly purchase commitment.
We believe that our current cash balances, proceeds from the private equity
financings closed since March 31, 1999 and the proceeds of this offering will
be sufficient to meet our working capital and capital expenditure requirements
for at least the next 12 months. Under our agreement with Level 3, we are
required to purchase at least $10.0 million of bandwidth and co-location
services over the next five years. Our quarterly commitment is $200,000 in the
first year, $300,000 in the second year, $400,000 in the third year, $600,000
in the fourth year and $1.0 million in the fifth year of the agreement. We
anticipate that further expansion of our operations will cause us to incur
negative cash flows on a short-term basis, and therefore require us to use our
cash and other liquid resources to support our growth. Our operating and
investing activities on a long-term basis may require us to obtain additional
equity or debt financing. We have no present understandings, commitments or
agreements with respect to any acquisition of other businesses, products,
services or technologies. However, we may evaluate potential acquisitions of
other businesses, products and technologies from time to time. In order to
consummate potential acquisitions, we may need additional equity or debt
financings in the future.
26
<PAGE>
Recent Accounting Pronouncements
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project); and interest costs incurred when developing
computer software for internal use should be capitalized. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Accordingly, we will adopt SOP 98-1 in our financial statements for the year
ending March 31, 2000. We do not expect SOP 98-1 to have a material impact on
our financial statements.
The Year 2000
The information in this section is a "Year 2000 Readiness Disclosure" as
defined in the Year 2000 Information and Readiness Disclosure Act of 1998 and
contains forward-looking statements. These statements include, but are not
limited to, anticipated costs and the date by which we expect to complete
actions and are based on management's current estimates, which are in turn
based on assumptions about future events, including, but not limited to, the
availability of resources, representations received from third parties and
other factors. There can be no guarantee that these estimates will be achieved,
and actual results could differ materially from those anticipated. Specific
factors that might cause material differences include, but are not limited to,
our ability to identify and remediate all relevant systems, results of Year
2000 testing, adequate resolution of Year 2000 issues by business and other
third parties that are service providers, suppliers and customers of ours,
unanticipated system costs, the adequacy of and ability to implement
contingency plans and similar uncertainties. The forward-looking statements
made in this Year 2000 discussion speak only as of the date on which these
statements are made, and we undertake no obligation to update these forward-
looking statements.
Impact of the Year 2000
Currently, many computer and software products are coded to accept two-digit
entries in the date code field. These date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates.
As a result, many companies' software and computer systems will need to be
upgraded or replaced to comply with Year 2000 requirements. Failure to make
such upgrades or replacements could result in system failure or erroneous
calculations, causing disruptions of operations, such as an inability to
process transactions, send invoices and engage in other normal business
activities. We recognize the need to ensure that our operations are not
adversely impacted by Year 2000 software and computer system failures. We are
not currently aware of any Year 2000 compliance problems relating to our
computer systems that would have a significant negative effect on our business,
operating results or financial condition.
Project Plan and State of Readiness
We have made a preliminary assessment of the Year 2000 readiness of our
computer systems and software, including the hardware and software that enable
us to provide and deliver our solutions. We plan to continue our Year 2000
readiness efforts by:
. testing our internal systems for Year 2000 compliance;
. contacting third-party suppliers, vendors and licensors of material
hardware, software and systems that are both directly and indirectly
related to the delivery of our solutions to our customers;
27
<PAGE>
. assessing repair and replacement requirements;
. implementing repair and replacement requirements; and
. creating contingency plans for potential Year 2000 failures.
We have initiated a four-phase plan for addressing Year 2000 issues with the
following estimated dates of completion:
<TABLE>
<CAPTION>
Phase Estimated Date of Completion
----- ----------------------------
<C> <S> <C>
I. Preparation and Information Gathering.... April 30, 1999
II. Develop Project Plan..................... August 31, 1999
III. Execution of Project Plan................ September 30, 1999
IV. Full Compliance.......................... October 31, 1999
</TABLE>
Some elements of the project plan are not dependent upon completion of other
elements. Therefore, we may execute elements of the project plan while there
may be outstanding tasks associated with other elements of the plan.
Phase I - Preparation and Information Gathering. In this phase we determined
our Year 2000 risk. We inventoried our hardware and software and determined
what replacements and modifications were required for our systems and networks
to function properly after December 31, 1999. Upon review of hardware and
software data gathered during the inventory, we gathered Year 2000 compliance
information from our vendors via web site visits, phone calls or
correspondence. Although we have received information from the majority of our
key hardware and software component vendors that the products they supply to us
are currently Year 2000 compliant, we cannot be certain that any representation
made to us by any vendor is complete or accurate. In addition, we cannot be
sure that we have not overlooked critical systems. As we acquire new hardware
and software, we intend to use the same procedures to determine Year 2000
compliance.
We primarily rely on four key hardware and software vendors: Microsoft,
Compaq, Cisco and Alteon. We have tested the Year 2000 compliance of the
products supplied by these vendors. For Microsoft products, the software is
considered Year 2000 compliant if it will function through the end of year
2035. We have identified remedial action that we need to perform on some of our
vendors' products. These upgrades are available, and we intend to install them
by September 30, 1999.
Our internal systems are based upon the same key vendor hardware and software
product families described above. We have been advised by the vendor that our
customer relationship management package is Year 2000 compliant. In 1998, we
upgraded our internal accounting software with a package that, according to the
vendor, would make the system Year 2000 compliant. We are currently installing
a new phone system, and the vendor has informed us that it is Year 2000
compliant.
Phase II - Develop Project Plan. We have a project plan that identifies the
hardware and software replacements and/or modifications discovered during Phase
I. We have assigned departments and resources for completing the project plan
during this phase. While significant achievements were made in identifying
critical Year 2000 issues regarding information technology and non-information
technology related functions, we cannot assure you that critical equipment has
not been overlooked. Some Microsoft products may require additional service
packs and/or patches to make them Year 2000 compliant. In addition, some Compaq
servers have required revisions. We expect that hardware and software
revisions, such as applying updates, service packs and patches, will be
minimal.
Phase III - Execution of Project Plan. We intend to accomplish the hardware
and software replacements and/or modifications identified in Phase I and
execute the project plan created in Phase II. During this phase we are
continuing to test and monitor Year 2000 compliance and the effect of any non-
compliance of our internal systems, vendors, service providers, clients and
their respective systems and monitor the effect of any non-
28
<PAGE>
compliance on our business. We intend to re-evaluate the Year 2000 compliance
of our hardware and software components that have been replaced or modified. We
intend to give priority to those applications or processes posing the greatest
threat of failure and greatest potential impact on our business.
While we believe that we have substantially completed our plan for achieving
Year 2000 compliance, the discovery of additional systems requiring remediation
could have a negative effect on the current plan and the resources required to
implement the plan.
Phase IV - Full Compliance. We intend to be Year 2000 compliant by October
31, 1999 on all components critical to our business. However, we rely upon
hardware and software vendors and do not control the accuracy, timeliness or
completeness of their Year 2000 efforts. In addition, because our ability to
provide services depends on the networks and systems of other carriers, to the
extent that these networks and systems are adversely impacted by Year 2000
problems our ability to provide services to our customers may be adversely
impacted.
Costs
To date we have not incurred any material expenditures in connection with
identifying or evaluating Year 2000 compliance issues. We continue to collect
information and make the necessary revisions to our systems in an ongoing
effort to maintain Year 2000 compliance. We are not aware of any critical
third-party software application which requires replacement. In the event we
are required to make such a replacement, we do not anticipate that such
expenses will be substantial. However, such expenses, if higher than
anticipated, could harm our business and operating results.
Risks and Contingencies
Although we are not currently aware of any Year 2000 compliance problems
relating to our computer systems that would have a material negative impact on
our business, operating results or financial condition, we cannot assure you
that we will not discover Year 2000 compliance problems in our software and
systems that will require substantial revisions or expenditures or replacement.
In addition, we cannot be certain that we will not need to modify or replace
third-party software or hardware incorporated into our computer systems, which
could be time consuming and expensive. If an oversight were to occur by us or
one of our vendors and we or a vendor failed to correct a material Year 2000
problem, we could experience an interruption in or a failure of normal business
activities or operations, such as interruptions in our ability to provide
services to our customers, an inability to market our services to potential new
customers and the loss of customers. Any of these results could have a negative
effect on our business. Moreover, if we fail to adequately address Year 2000
compliance issues, it could result in claims of mismanagement,
misrepresentation or breach of contract and related litigation, and any of
these claims would likely be costly and time-consuming to defend. In addition,
we cannot assure you that government agencies, utility companies,
telecommunications companies, Internet service providers, third-party service
providers, hardware or software manufacturers and others outside of our control
will be Year 2000 compliant. The failure by such entities to be Year 2000
compliant could result in systemic failures beyond our control. Prolonged
Internet, telecommunications, electrical or other failures could decrease the
demand for our services and the use of the Internet or prevent users from
accessing the web sites of our customers. This would materially harm our
business.
Year 2000 issues may also impact the interaction of our systems with the
software, hardware or systems of our suppliers. Furthermore, our ability to
provide services to our customers depends on the networks and systems of other
carriers. Any failures or problems experienced by the networks and systems of
those carriers may adversely impact our ability to provide services to our
customers. In addition, because we rely on our web site as a marketing and
sales tool, any failures or problems affecting the Internet or our web site
could hinder our marketing and sales efforts. We are not evaluating the Year
2000 compliance of our customers' web sites.
In a recent release regarding Year 2000 disclosure, the Securities and
Exchange Commission stated that public companies must disclose the most
reasonably likely worst case Year 2000 scenario. Although it is not
29
<PAGE>
possible to assess the likelihood of any of the following events, each must be
included in a consideration of the worst case scenario, which is an overall
failure of the Internet, the telecommunications infrastructure and the
electrical grid: widespread failure of communications carriers, public
utilities, unavailability of transit for staff, suppliers and clients;
disruption of our ability to gain access to, and continue operating in, office
buildings and other facilities; the failure of significant portions of our
critical computer systems and their respective components, including both
internal business systems and systems controlling operational facilities such
as electrical generation, transmission and distribution systems; and the
failure of outside entities' systems, including systems related to banking and
finance.
We provide our hosting services through a combination of skilled labor,
hardware and software products and services from major vendors within the
computer and telecommunications industries. Because our ability to provide our
services depends on the performance of each of these components, the Year 2000
problem has introduced many risks and uncertainties, and the Year 2000
compliance of many of these components, such as the supply chain, utility
companies and our customers' systems, is beyond our control and in some case
beyond our ability to test. Because of these uncertainties, we are unable to
determine whether the consequences of Year 2000 failures will have a material
impact on our business.
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers, including for lost profits,
or loss of revenue due to service interruptions, inability to fulfill
contractual obligations or bill customers accurately and on a timely basis, and
increased expenses associated with litigation, stabilization of operations
following critical system failures and the execution of contingency plans. We
could also experience an inability by customers and others to pay us on a
timely basis or at all. Under these circumstances, the adverse effects,
although not quantifiable at this time, would be material.
We are continuing to gather information and evaluate the possible impact of
the Year 2000 on our business and to develop contingency plans to implement if
any of our systems are not Year 2000 compliant.
Quantitative and Qualitative Disclosures About Market Risk
All our customer contracts are currently denominated in United States
dollars, and we do not currently invest in derivative financial instruments.
However, we invest our excess cash balances in cash equivalents and are
therefore subject to market risk related to changes in interest rates. We
believe, but cannot be certain, that the effect on our financial position,
results of operation and cash flows of any reasonably likely changes in
interest rates would not be material.
30
<PAGE>
BUSINESS
Our Company
Data Return provides advanced Microsoft-based Internet hosting services to
businesses, web site developers and other organizations. Our hosting services,
which are based on the Microsoft platform, provide support for software such as
Windows NT, Internet Information Server, Active Server Pages, SQL Server and
Site Server Commerce Edition. According to IDC, Microsoft Windows NT will be
the key engine for growth within the worldwide server market and Windows NT's
market share will grow at a compound annual growth rate of 25% from 1998 to
2003. Our advanced Microsoft hosting services enable our customers to establish
and maintain sophisticated e-commerce and other applications through which they
can conduct transactions and manage information on a worldwide basis over the
Internet.
We believe we are now the leading provider of advanced hosting services
focused specifically on the Microsoft platform. We provide our services to
companies across many industries located in North and South America, Europe,
Asia, Africa and Australia. As of May 31, 1999, we hosted over 1,200 web sites
for more than 650 customers, including Boeing, First USA, Honeywell, Microsoft,
Motorola, Olin and Ericsson.
Our advanced hosting services are designed for customers deploying
sophisticated, high-end Internet applications that require a professionally-
managed environment incorporating high performance network access, advanced
system monitoring and technical support in highly secure, fault-tolerant
facilities. We believe that we are well positioned to take advantage of the
rapidly growing demand for advanced hosting which is being driven by the growth
in user access to the Internet, e-commerce and the outsourcing of web services.
We were incorporated in August 1997 by three former Microsoft product support
engineers. We believe that our exclusive focus on the Microsoft platform and
our approach to offering pre-packaged hosting services have been the major
contributors to our growth. We have achieved an average quarterly revenue
growth rate of 47% since October 1, 1997. We believe the following are among
the key factors that have distinguished our company and our offerings and that
will continue to drive our growth:
. a full range of pre-packaged hosting services, including shared,
dedicated and clustered server solutions supported by advanced managed
services for fixed monthly prices;
. high availability and high performance clustering solutions for web
servers and database servers, including geographically dispersed
clusters;
. an advanced and secure network architecture that has delivered network
performance approximately 42% faster on average in the United States and
approximately 24% faster on average internationally compared to the
single fastest backbone provider as measured by Keynote Systems;
. an integrated information system which automates our work flows and our
service deployment processes;
. our exclusive focus on hosting and our commitment to serving members of
the Microsoft developer community precludes competition with software
developers and systems integrators; and
. a management team with experience extending across many business and
technology disciplines.
In addition to the above critical success factors, we have strategic
relationships with Level 3, Compaq, Microsoft and Alteon. We believe that these
relationships enhance our credibility with potential customers and provide us
with early access to new products, superior technical services, training and
new business development opportunities. In July 1999, we entered into a five-
year strategic agreement with Level 3 under which:
. Level 3 has designated us as a preferred provider of advanced Microsoft
hosting services;
. we will train Level 3's sales personnel to identify and refer potential
customers to us on a commission basis;
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. we are entitled to offer our services from the 17 existing and all
future Level 3 gateways in the U.S.;
. Level 3 will provide assistance as needed in the installation and
support of our equipment located in their gateways; and
. Level 3 has acquired shares of our common stock in exchange for $5.0
million in credit for future bandwidth purchases in excess of our
purchase commitment.
Also in July 1999, we entered into a three-year agreement with Compaq. Under
that agreement, Compaq has agreed to include Data Return in any program under
which it approves for recommendation to its customers a specified group of
application service providers. Although Compaq is not required to develop such
a program, it will include us in any such program that it does establish at the
highest level for which we qualify. In addition, Compaq has purchased shares of
our common stock for a purchase price of $3.0 million.
Industry Background
Growth of the Internet
The Internet has emerged as a new medium for communicating, exchanging
information and transacting business. The convenience, global reach and cost
effectiveness of the Internet has created an attractive opportunity for
businesses to both find and interact with consumers, suppliers and other
businesses. IDC projects that the number of Internet users will grow from
approximately 159 million at the end of 1998 to over 410 million at the end of
2002. Further, Forrester Research projects that during the next five years U.S.
online business-to-business trade will exceed $1 trillion. We believe the
growth of the Internet will encourage businesses and other organizations to
either establish new web sites or upgrade existing sites in order to reach and
address the needs of the growing online population.
Increasing Use of the Internet for Electronic Commerce
The rapid growth of the Internet has driven the growth of e-commerce, further
fueling growth of Internet usage. Businesses are increasingly using and relying
on the Internet as both a marketing and a sales channel. We believe the rapid
growth of the online population, caused in part by the decreasing costs of
personal computers and Internet access, has created a large revenue opportunity
for businesses of all sizes. This revenue opportunity is evidenced by the
increasing number of businesses that focus primarily on transacting business
with consumers through the Internet. Forrester Research projects that e-
commerce will generate over $3.2 trillion in revenue by 2003 worldwide,
accounting for almost 5% of all global sales.
The Outsourcing of Web Hosting
To take advantage of the growth of the Internet and the revenue potential
from the growth of e-commerce, businesses are establishing web sites capable of
interacting with customers, vendors and employees. To support e-commerce
applications, these sites must be capable of reliably and securely completing
financial transactions. The process of establishing a web site includes:
. specification of site requirements, including the associated business
work flows and processes;
. development and testing of software consistent with the specifications;
. acquisition and installation of hardware, software and network access in
a controlled environment; and
. physical implementation of the web site onto the Internet.
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Once a web site is implemented, it requires monitoring, maintenance and
management provided by knowledgeable personnel. While some businesses currently
choose to operate and maintain their web sites in-house, we believe that many
businesses, even those with relatively large and sophisticated information
technology departments, will find outsourcing the hosting of their web sites
attractive due to the following factors:
. rapid changes in the various complex technologies involved;
. difficulty of deploying highly sophisticated web applications;
. challenge of hiring and retaining experienced and qualified personnel;
. lack of the infrastructure needed to deploy, expand, upgrade and
maintain essential applications on the Internet around the clock; and
. potential cost savings associated with personnel and system
infrastructure requirements.
We believe that the trend toward outsourcing the hosting of web sites will
continue as businesses increase the complexity of their web sites and require
greater interactivity for end users.
The Outsourcing of Packaged Application Hosting
For many of the above reasons, companies are seeking to outsource the
management of important software applications that can be accessed over the
Internet. These applications govern business processes such as e-mail, sales
force automation, human resource management, decision support, supply chain
management, core financials and overall enterprise resource management. We
believe that the potential benefits of outsourcing these applications include
significant improvements in application availability and reduced ongoing
management costs. According to IDC, information systems outsourcing, which
includes data center, client/server and help desk applications, is the fastest
growing segment of the market, and spending in this area will increase at a
12.2% compound annual growth rate through 2003. Further, IDC projects that
spending on worldwide outsourcing services will increase from $99.0 billion in
1998 to more than $151.0 billion by 2003.
Our Market Opportunity
The Advanced Hosting Opportunity
Advanced hosting is distinguished from basic hosting by requirements for:
. more bandwidth;
. more complex system architectures, including support for extranets and
intranets;
. more complex software technologies;
. a higher level of technical expertise to support these complex systems;
and
. higher system performance and reliability.
Advanced hosting is used to support highly interactive web sites on which
real-time transactions and full-featured e-commerce applications are
implemented. These sites provide users with the ability to interact with
databases and require a high level of expertise for implementation and
maintenance support. For higher volumes of user traffic and transactions,
multiple servers may be required.
As e-commerce becomes increasingly important to businesses worldwide, we
believe that many businesses will outsource the hosting and maintenance of
their high-volume, transactional web sites. Further, beyond e-commerce, we
believe that the hosting market will be driven by a demand for the outsourcing
of other enterprise-wide, business unit and information technology department
functions. According to Forrester
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Research, the hosting market will grow from $0.9 billion in 1998 to $14.6
billion in 2003, a 76% compound annual growth rate.
Hosting on the Microsoft Platform
We believe that the market for advanced hosting on the Microsoft platform
offers a greater opportunity than the market for hosting on other platforms,
such as Unix. Microsoft is the dominant provider of operating systems for
personal computers. We believe that many developers are writing web
applications for the Microsoft platform because of previous experience gained
in the Microsoft architecture, including experience with Basic, Visual Basic
and Active Server Pages. According to Microsoft, more than two million
developers participate in Microsoft's Developer Network and Site Builder
Network programs. We believe that, as businesses demand applications that are
capable of operating on the Internet, developers are increasingly responding by
producing Microsoft-based solutions that require hosting on Microsoft
platforms. For example, IDC reports that Microsoft 32-bit Windows offerings
have the leading position in terms of operating environment license revenues
and license shipments for client operating environments. Additionally, we
believe the momentum toward the Microsoft platform is driven by market demand
for shortened development cycles, lower development costs and lower operating
costs.
Our Solution
Data Return is an advanced hosting provider dedicated to delivering scalable,
reliable and high performance hosting services on the Microsoft platform. By
combining our expertise in managing Microsoft-based Internet technologies, a
scalable deployment architecture and high performance content delivery, we have
developed a family of services that addresses a wide range of customer needs.
Advanced Managed Services
Managing the deployment of business-critical web applications requires an in-
depth understanding of all underlying software, hardware and network
technologies. We use our expertise in Microsoft technologies to provide turnkey
management services for our customers which include:
. consultation and recommendations on standardized system architecture;
. installation, configuration and stress testing of hardware and software;
. ongoing maintenance of hardware and software including content back-ups
and system upgrades;
. a broad array of system and network monitoring and reporting services
provided 24 hours a day; and
. advanced technical support designed to respond to both simple and
complex system issues.
Scalable Deployment Architecture
Our customers require system architecture that is flexible and can be
expanded over time to meet increasing demand. Data Return has developed a
scalable deployment architecture for the Microsoft platform that enables
customers to begin with cost effective shared solutions and then migrate to
dedicated services and high-end multi-server clustered solutions as their site
traffic grows. The flexibility of this architecture allows us to offer a wide
range of hosting solutions to our customers.
High Performance Content Delivery
Overall application performance is an essential component to deploying an
Internet-based application successfully. There are many factors that contribute
to overall performance including the configuration and
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architecture for hardware, software and Internet access. Our private networking
architecture bypasses the congested public exchange points, such as the
Metropolitan Area Exchanges and Network Access Points, increasing speed and
reliability. By taking a comprehensive approach to optimizing application
performance, we have delivered network performance approximately 42% faster on
average in the United States and approximately 24% faster on average
internationally compared to the single fastest backbone provider as measured by
Keynote Systems.
Pre-Packaged Solutions for Advanced Hosting
Unlike co-location, where the customer is responsible for defining and
implementing the deployment architecture, we have developed a range of service
offerings that enables our customers to outsource these responsibilities to us
for their Internet, extranet or intranet applications. By standardizing service
offerings, customers are able to buy pre-packaged solutions that have defined
pricing and specific feature sets. This standardization creates several
advantages for Data Return, including simplification of the sales process and
standardization of customer support.
Our Strategy
Our goal is to take advantage of the growth in Internet usage, e-commerce and
the outsourcing of hosting services to become the leading provider of advanced
hosting services. Our strategy for accomplishing this goal contains the
following key elements:
Maintain Focus on Advanced Hosting on the Microsoft Platform. We intend to
maintain our exclusive focus on Microsoft-based advanced hosting, which enables
us to concentrate our expertise. We believe that we are better able to attract
customers because we have targeted the Microsoft platform, which we believe is
significantly underserved. By focusing on one platform, we are not required to
duplicate systems and operations costs which would be necessary to support
multiple platforms. In addition, by focusing exclusively on advanced hosting
and not engaging in web site development or systems integration services
ourselves, we are able to maintain close relationships with developers and
systems integrators, who serve as a valuable source of referrals.
Offer a Full Range of Highly Scalable Advanced Hosting Services. We attract
customers by offering a full range of Microsoft-based hosting services from
shared and dedicated services to complex, clustered solutions. We intend to
continue working with Microsoft and other technology partners to remain at the
forefront of packaging new technologies into advanced hosting services. We
believe that our advanced hosting customers view their web applications as an
important part of their business strategy and are seeking a growing number of
services. We target larger customers with substantial and complex requirements.
However, our broad range of service offerings also attracts customers with
lower volume requirements who can migrate to more powerful service offerings as
their needs evolve. We believe that our broad range of service offerings
attracts customers who are likely to be long-term customers.
Maintain Non-Capital Intensive Business Model. We deploy our hosting services
within third-party data centers to avoid the high capital expenditures
associated with building our own data centers. We invest in tools and other
forms of intellectual property rather than capital intensive assets to provide
significant financial leverage and increased customer satisfaction.
Specifically, we are able to add value and generate a competitive advantage by
continuing to develop best practices, standardized service offerings and
automated processes that improve operational efficiency.
Enhance Our Marketing and Sales Programs. Through the packaging of our
offerings, we believe we have substantially reduced the complexity of
purchasing advanced hosting services. We intend to substantially
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increase our advertising efforts to further promote awareness of the Data
Return brand and our advanced Microsoft-based hosting offerings. To date, our
sales have been made through our inside sales force, which has focused on
responding to leads and other inquiries generated from advertising and
referrals. In parallel with the expansion of our inside sales force, we intend
to establish an outside sales force to proactively seek larger opportunities.
Additionally, we intend to train Level 3's sales force, as contemplated by our
agreement with Level 3, and to further formalize our partner programs with
developers and systems integrators to identify and refer their leads for
advanced Microsoft-based hosting services to Data Return.
Leverage Strategic Relationships. We have strategic relationships with Level
3, Compaq, Microsoft and Alteon. We believe that these relationships provide us
with early access to new products, superior technical services, training and
new business development opportunities. In some cases, these partners have
provided us with direct and indirect funding. We believe that our association
with industry leaders enhances our credibility with potential customers. We
intend to strengthen our existing relationships and to seek additional
strategic arrangements when appropriate.
Provide Superior Customer Service. We intend to continue to provide high-
quality customer service by maintaining a high level of technological expertise
in our customer support and sales organizations and by proactively monitoring
the performance of our customers' web sites. We believe that we have a
competitive advantage in delivering high-quality customer service through our
standardization of hardware and software solutions, which results in efficient
training, documentation and overall logistics and operations. We intend to
continue leveraging our relationships with Compaq, Microsoft and Alteon to
receive the technical training and support necessary to provide high levels of
customer support during both installation and ongoing maintenance.
Expand Our Data Center Presence. We currently have data centers in Fort Worth
and Dallas, and our agreement with Level 3 allows us to establish data centers
in the 17 current and all future Level 3 gateways located in the U.S. We intend
to provide services through Level 3's network, which is currently planned to be
composed of local networks in approximately 50 cities, over the next five
years. Additionally, our relationship with Level 3 will provide us with access
to bandwidth and personnel to assist in the installation and implementation of
our equipment in their gateways. These capabilities position us to offer
nationwide points of presence for shared, dedicated, clustered and
geographically dispersed clustered hosting services.
Expand into New Hosting Markets. We believe that the execution of the above
elements of our strategy will enable us to address new hosting markets as they
develop. In particular, we believe that we are positioned to expand into the
emerging application service provider market without significant changes to our
operations or business model. We believe that our Microsoft-based hosting
services will be a desirable platform for electronic distribution in the
emerging software rental market. Additionally, we believe that software
companies whose products either draw upon Microsoft technologies or whose
products typically interface to the large installed base of Microsoft systems
will find our hosting services attractive.
Our Services
We have made an extensive effort to package our hosting services into
standardized, definable product offerings. Our services are designed to be
comprehensive in terms of feature sets and to address customers' outsourcing
needs for a wide variety of requirements, including:
. customers accessing public web sites on the Internet;
. employees accessing private web sites through intranets; and
. partners and other designated user groups accessing private or public
web sites through extranets.
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Offerings
Our advanced Microsoft hosting platform allows us to support the Internet,
intranets and extranets for both commercially developed applications and custom
developed applications. To address this wide variety of customer requirements,
Data Return has developed three distinct categories within our service family.
Shared Hosting Services. Shared hosting services are entry level service
plans designed for customers with complex requirements but relatively low
volumes of traffic. We have designed our shared hosting packages to
minimize the cost for customers by providing these services on a server
shared by multiple customers. Our feature-rich plans include options for
database support, commerce support, media services and extensive e-mail
support.
Dedicated Hosting Services. Dedicated hosting services are designed for
customers with more complex requirements, high traffic volumes and who are
seeking greater control over management of their servers. Our dedicated
service plans provide each customer with its own server. These service
plans offer a number of advantages to our customers in addition to those
received in our shared hosting packages, including:
. improved service reliability and content delivery by limiting each
server to a single developer environment;
. greater flexibility in configuration of the specific server
environment; and
. complete server control by providing customers with console-level
server access.
We offer several dedicated service options that range from entry-level web
servers to high performance, multi-processor database servers.
Clustered Hosting Services. For customers that deploy e-commerce enabled
or other business-critical applications or expect very high user traffic
volumes, we have developed a family of clustered hosting services,
including geographically dispersed clusters. Our clustered service plans
distribute content and functionality across multiple servers, which allows
our customers' applications to scale beyond a single server. Additionally,
our clustering services are designed to allow our customers' business-
critical applications to continue operating in the event a server fails.
These services are designed to provide significantly enhanced system
performance and system reliability for application and database services.
These services require specialized hardware and software which we include
in our pre-packaged solutions. We believe that customers will increasingly
require the type of services supported by clustered solutions and therefore
our sales volumes in this category will increase.
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Pricing
We bill for our services on a monthly basis and for a one-time initial setup
fee at the time the server is configured. In addition to our pre-packaged
product offerings, we also work with customers to develop custom configurations
that are based on our standard hosting architecture. Our product offerings and
prices for new installations as of May 31, 1999 are generally described in the
table below.
<TABLE>
<CAPTION>
Service Type Service Level Set-up Fee Monthly Fee
------------ ------------- ---------- -----------
<S> <C> <C> <C>
Shared Hosting Services Shared Level 1.............. $ 100 $ 100
Shared Level 2.............. 150 200
Shared Level 3.............. 200 400
Dedicated Hosting Services Enterprise Dedicated I...... 1,875 1,375
Enterprise Dedicated II..... 3,000 1,500
Enterprise Dedicated III.... 4,500 2,500
Clustered Hosting Services Level I--Configuration 1.... 6,000 3,500
Configuration 2.......... 9,000 4,500
Configuration 3.......... 10,500 5,500
Level II--Configuration 1... 20,000 7,250
Configuration 2......... 23,000 8,750
Configuration 3......... 34,000 10,000
</TABLE>
To further simplify the purchasing process for our customers, all service
plans, including features and pricing, are described on our web site. This
enables our customers to evaluate the various service offerings before
contacting one of our sales representatives, which in turn can shorten our
selling cycle, reduce our customer acquisition costs and ultimately enhance
customer satisfaction by making readily available the necessary technical and
business information for choosing the appropriate service level. We intend to
continually upgrade our web site to provide more product information and
enhanced purchasing capabilities for our existing and prospective customers.
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Customers
We provide hosting services to end user businesses, web site development
firms and other organizations. We have customers in North and South America,
Europe, Asia, Africa and Australia. As of May 31, 1999, we hosted over 1,200
web sites for more than 650 customers ranging from small- and medium-sized
businesses to Fortune 500 companies, and at that time our customers included
the following:
Access Software Microsoft
activeserverpages.com Microtouch
asp101.com Mongoose
Blue Cross Blue Shield of Hawaii Motorola
Boeing Corporation New Yorker Magazine Cartoon
clubwin.com Bank
CoreTech Consulting ntbugtraq.com
Cyber Media India Limited Olin Corporation
Ericsson Palo-Alto Software
Executive Software Proxima Corporation
First USA Sensormatic Electronics
siteserver101.com
Government of Sweden, National Board of Youth Affairs
HNC Software Solomon Software
Honeywell Successories
i2 Technologies Trane
International Data Corp (IDC), India Travel Zoo
Isbister Software Trisoft Design
Italian Tourist Web Guide Tudor Publishing
Kaetron Software Wilsons Leather
wugnet.com
Key Relationships
Level 3
We entered into a five-year relationship with Level 3 in July 1999 and are
currently Level 3's only preferred provider of advanced hosting services for
the Microsoft platform. Our strategic relationship with Level 3 allows us to
leverage our advanced hosting and managed application services with their sales
force and U.S. data center infrastructure. Level 3 provides us with segregated
rack space capacity and environment controls for up to 6,000 servers in its
Dallas gateway and access to the 17 existing and all future U.S. Level 3
gateways. In addition, Level 3 will provide personnel at these data centers to
install equipment and assist with support as necessary for us to deliver
service in these facilities. This reduces the number of implementation
engineers we require to deploy and support solutions for our customers in these
locations. We believe that these benefits, coupled with geographic and network
proximity to our customers, will become a marketing and technological advantage
in the immediate future. Under our agreement with Level 3 we have agreed to
purchase most of our bandwidth and co-location requirements from Level 3 to the
extent they meet our then-current performance and capacity requirements. We
have also made a quarterly purchase commitment to Level 3 ranging from $200,000
in the first year to $1.0 million in the fifth year for a total of $10.0
million. Level 3 can terminate this agreement for a default by us which is not
cured within 30 days of notice or a change of control that results in Data
Return being owned by a competitor of Level 3.
We will train Level 3's sales personnel to identify potential customers for
our advanced hosting services and refer them to us. Level 3's sales personnel
will be paid a commission on all leads that become our customers. As we train
Level 3's sales force at a particular data center, we intend to deploy our own
outside sales force in that region to work with Level 3 to develop and close
joint sales leads. To date, our growth has been driven primarily by our inside
sales force. We believe that the lead generation of Level 3's sales force,
combined with our future outside sales force, positions us to substantially
increase our rate of growth. Level 3 has acquired shares of our common stock in
exchange for $5.0 million in credit for future bandwidth purchases in excess of
our quarterly purchase commitment.
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Compaq
We use Compaq servers exclusively to provide the hardware platform for our
advanced hosting services. Our relationship provides direct contact with
product development engineers and marketing management at multiple levels
within the Compaq organization. We recently entered into a three-year agreement
with Compaq under which we will purchase from Compaq the lesser of 2,000
servers or the number of servers reasonably necessary to adequately operate our
business consistent with our business plan. We are required to purchase these
servers only if Compaq provides financing for the servers on competitive terms,
if the price, performance and quality of the Compaq servers is reasonably
satisfactory to us and if Compaq commits to deliver these servers on the
schedule we request. Also as part of our strategic relationship with Compaq,
Compaq has agreed to include Data Return in any program under which it approves
for recommendation to its customers a specified group of application service
providers. Although Compaq is not required to develop such a program, it will
include us in any such program that it does establish at the highest level for
which we qualify.
We work collaboratively with the Compaq engineering and product marketing
teams on the Distributed Internet Server Array (DISA) architecture to develop
enhanced offerings for multiple server configurations (clustered web and SQL
server solutions). We are also currently working on a Compaq co-funded print
campaign featuring our use of Compaq servers in a clustered environment. We are
also a Compaq Solutions Alliance SELECT Partner. The SELECT Partner designation
is the highest attainable level in this program and provides us with a wide
variety of information, tools, services and networking opportunities.
Microsoft
We are recognized by Microsoft as one of the leading providers of advanced
hosting services on the Microsoft platform. We are a Microsoft Advanced Hosting
Partner and Application Service Provider Partner and have achieved a high level
of integration at all levels within Microsoft. We believe that one of our key
competitive advantages is the level of customer service and support that we can
provide as a result of this enhanced relationship. Our expertise in deploying
and managing the Microsoft Internet platform is also an important factor in our
business partnership with Microsoft. Our status with Microsoft provides us with
the following:
. access to a local, field-based Microsoft representative;
. a corporate-based business development manager;
. designated points of contact in the customer units and product groups;
. escalated technical support;
. advance product notification;
. advance product releases;
. participation in beta programs;
. joint marketing programs; and
. leads and new business development opportunities generated by Microsoft.
Following are some of the Microsoft designations, certifications and related
agreements that Data Return currently has:
. We are one of eight Microsoft Advanced Hosting Partners. This status
signifies our ability to provide database integration, full back-end
transaction processing and advanced content management.
. We are one of ten designated Microsoft Application Service Providers,
defined by Microsoft as being able to provide superior infrastructure,
service and performance for hosted applications on the Microsoft
platform.
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. We are one of six Microsoft Commerce Server Partners. This signifies our
ability to provide customers with an advanced e-commerce hosting
infrastructure.
. We are a Microsoft Windows Media Service Provider. This status signifies
our ability to deploy and maintain streaming media solutions (audio and
video).
. We are designated as a rapid deployment partner for various Microsoft
products. As such, we are responsible for providing feedback on
Microsoft products in the advanced hosting and managed application
markets prior to release, and by doing so we are able to provide
services and gain expertise on these products before the general market.
. We are a Microsoft Certified Solution Provider at the Partner level. The
Partner designation is the highest attainable level in this program. We
believe this designation provides us with preferred access to a broad
range of Microsoft resources and is a distinguishing factor for
development firms and systems integrators looking to identify sources
for advanced hosting.
. We have acquired Microsoft Premier Support, which provides the most
direct, fastest and highest formal escalation path for resolution of
product-related problems within Microsoft, including a technical account
manager at Microsoft who is responsible for ensuring that Microsoft
product support provides timely and accurate resolutions to problems we
or our customers may encounter.
Alteon
Alteon manufactures state-of-the-art switching products capable of supporting
millions of concurrent connections with load balancing and fail-over for
clustered server configurations. We believe we were the first commercial
installation of the Alteon server switching platform for the Microsoft Internet
platform. Our Chairman and Chief Executive Officer, Sunny Vanderbeck, is an
advisory board member of Alteon. The advisory board assists management in
product, marketing and distribution planning. Additionally, we are using the
Alteon WebOS application programming interface to enhance clustered solutions.
These enhanced clustered solutions deliver real-time performance data to the
hardware platforms, providing increased functionality, reliability and
scalability in high-volume and complex deployments.
Marketing and Sales
Our marketing strategy has initially been focused on our product packaging.
We have made an extensive effort to package our hosting services in
standardized, definable product offerings that are competitive in terms of
features, functions and prices. We have made our services easy to purchase by
presenting these packages in detail on our web site, including all set-up and
monthly charges. We believe that this packaging and standardization shortens
our selling cycle and enhances customer satisfaction by making available to
decision makers the technical and business information necessary to choose a
service level.
We intend to substantially increase our marketing expenditures to help build
awareness of our brand and to further generate sales. We have a customer
tracking system that provides us with timely reports as to which marketing
activities are producing the greatest return, which enables us to better
allocate our marketing resources. We currently have a diversified marketing
effort for demand generation. Primarily we market through advertising in
magazines targeted at developers and information service professionals. We also
advertise online, through direct mail and at trade shows and conferences.
Additionally, many web sites of our customers and partners have direct links to
our web site. We intend to increase our spending in all of these areas, and in
particular focus on direct mail because we believe it will significantly help
our outside sales force in their business generation efforts.
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Our sales have predominantly been generated by developer and customer
referrals. We believe that a distinguishing characteristic of our company is
that we do not provide application development services and, therefore, do not
compete with any of our development focused customers. We believe that as more
development companies make the decision to outsource the hosting of their
clients' applications, Data Return will be an attractive alternative to hosting
providers that also offer development services.
Our inside sales force responds to inquiries, which typically have been
generated by advertising and referrals from customers, strategic partners and
developers. We intend to significantly increase our inside sales force during
the second half of 1999 to respond to the inquiries that we believe will be
generated by our increased marketing efforts. Concurrently, we are developing
an outside sales force to proactively seek potential customers. Each outside
salesperson's territory will include one or more Level 3 U.S. gateways. The
outside sales force will work in conjunction with Level 3's sales force to
provide training and ongoing sales support. Both our inside and outside sales
force will be responsible for following up on leads generated by Level 3's
sales force. We intend to continue to add outside salespeople as Level 3 builds
out its U.S. gateways.
We have recently implemented a sales incentive program that we believe has
increased sales productivity and enhanced pre-sales customer service. Our sales
force is paid a commission for each sale that they complete based upon the
customer's first month of recurring revenue. To encourage our sales force to
pursue long-term revenue generating business, we adjust the commission paid to
the sales person if the customer does not use our service for a minimum period
of time. In addition to paying commissions to our inside and outside sales
personnel, we will pay commissions to Level 3's sales force for all sales based
on leads they refer to us. We believe this commission structure will create a
high level of cooperation in the field between Data Return's and Level 3's
sales forces.
Customer Support
We believe a critical element of our customer service is providing a high
level of technical expertise within both our customer support and systems
organizations. Our technical support engineers are expected to be proficient in
at least:
. one major network operating system;
. two applications from our supported product list; and
. either one programming language or one database application.
Further, we require all of our support and systems technicians to become
Microsoft Certified Systems Engineers or Microsoft Certified Professionals.
All systems are monitored and maintained on a 24 hours a day, seven days a
week, or 24x7, basis. We provide standard customer support from 9AM-8PM Central
time Monday through Friday and 12PM-5PM Saturday via both telephone (toll free
for U.S. and Canadian callers) and electronic request forms. We provide
business-critical customer support on a 24x7 basis. We strive to respond within
15 minutes or less for business-critical problems. Response times for all
severity levels are published on our support web site and are prioritized
according to our customers' assessment of severity levels.
Our customer care system provides support personnel with timely online
information regarding the status of all set-up and support incidents.
Additionally, support personnel have access to information regarding the sales
history and current sales activities for each customer account. This
integration of support and sales systems enables us to allocate resources with
a full knowledge of both new business opportunities and any customer support
issues. We believe that this system will support substantially greater
economies of scale and quality of service.
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Infrastructure
We use a platform which is comprised mostly of Internet-related software
products running on Microsoft's Windows NT operating system and Compaq servers.
We use Alteon clustering switches along with Cisco switches and routers to
connect our servers to the Internet. Using our standard platform, we have
gained efficiency and effectiveness in terms of training, documentation, spare
parts, overall support and system performance. We also maintain some legacy
hosting services running on the Unix platform. In addition, our customers
benefit from our ability to support application level services such as SQL
Server, Active Server Pages and Site Server Commerce Edition. Specifically, our
infrastructure consists of the following key elements:
. highly secure, carrier-class data centers;
. a scalable server platform;
. automated deployment processes;
. comprehensive and centralized monitoring and systems management;
. fault-tolerant clustered servers; and
. an advanced, high performance network.
Highly Secure, Carrier-Class Data Centers
Our first data center is located in a Bellcore standard Class A facility in
downtown Fort Worth. Security for the data center is provided with a 24x7 armed
guard and entry restriction via card key access. Power to the building is
provided by redundant connections from separate transformers. The data center
is also equipped with FM200 gas fire suppressant systems, environmental control
systems and redundant networking hardware.
In January 1999, we established our second data center within Level 3's
Dallas gateway. The Level 3 facility provides us with environmental resources
similar to the Fort Worth data center, but on a much larger scale. In addition
to providing greater capacity for server racks and associated environmental
support, the Level 3 facility provides us with access to Level 3's worldwide IP
network. The Level 3 relationship provides us with access to the 17 current and
all future gateways in the U.S. This provides us with the ability to expand not
only bandwidth resources, but also the ability to open new data centers in
major cities across the U.S. on relatively short notice and with relatively
little investment by us. All of Level 3's facilities are highly secure,
carrier-class facilities with advanced security features (which may include
biometric palm readers, video monitoring and card key access), fault-tolerant
power systems (multiple power grids, facilities-based AC/DC battery back-up,
diesel generators) and are sized for scalability.
A Scalable Server Platform
Our standard platform for service delivery uses Compaq servers. These servers
generally run the Windows NT or Windows 2000 operating system, along with
various application software such as Microsoft SQL Server or Microsoft Internet
Information server. Compaq's Distributed Internet Server Array (DISA)
architecture leverages the clustering and load balancing features of Windows NT
Server, Enterprise Edition with Internet Information Server. This architecture
enables us to support scalable, highly-available Internet-enabled applications.
In addition, our standard hardware configuration allows us to maintain standby
hardware for use in the event of hardware failure. While these servers use a
standard hardware and software platform, we apply our expertise in their
configuration and tuning.
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Automated Deployment Processes
We configure and test our hardware and software through the use of both
commercially available and internally built tools. The software installation
process consists of a series of unattended scripts and batch files providing a
fast, consistent and repeatable configuration. As the server is provisioned
with user accounts, web sites and file transfer protocol sites, the automated
script also tests each step to verify that the server is functioning correctly.
We also manually test the installation process to further evaluate the quality
and integrity of the installation.
Comprehensive and Centralized Monitoring and Systems Management
We combine commercial tools and internally built applications to provide
comprehensive and centralized monitoring, analysis and reporting of
application, service and hardware performance on a 24x7 basis. Proactive
hardware and application monitoring maximizes service performance levels and
reliability. Systems administration and management is remotely performed using
an interface which encrypts all client-server communication with a 64-bit
encryption algorithm for added security. Additionally, we offer a customer
control panel, which provides a standard user interface that allows them to
perform the most commonly performed web site administrative tasks. The customer
control panel also allows the customer to electronically submit support
requests to our service and support group for the more advanced administrative
tasks and support issues. This approach to monitoring and systems management
allows us to use the same methodologies and processes across all of our data
centers regardless of geographic location.
Fault-Tolerant Clusters
We currently offer two levels of clustered solutions: level one clustered
application services and level two clustered application and database services.
Level one clustered solutions utilize products from Alteon to provide high
availability and traffic load balancing for application resources, such as web
servers and application servers. In the event of an application server failure,
all traffic is redirected from the failed server to the remaining available
application servers to protect against service outage. Level two clustered
solutions provide enhanced application availability by adding clustered
database services, which are well suited for the clustering of transactional
data resources including Microsoft SQL Server. These solutions are based on
Fibre Channel storage systems from Compaq and the Microsoft Cluster Service. We
also offer geographically dispersed solutions which allows us to load balance
and fail-over applications between data centers.
Advanced High Performance Network
We have based our network hardware on Cisco and Alteon technologies. Our
highly secure network consists of multiple, diverse connections to the Internet
which currently provide us with local access to seven leading backbone
providers. These multiple connections allow us to increase both performance and
reliability by routing traffic over private connections, bypassing congested
public exchange points such as the Metropolitan Area Exchanges and Network
Access Points. By taking a comprehensive approach to optimizing application
performance, we have delivered network performance approximately 42% faster on
average in the United States and approximately 24% on average internationally
compared to the single fastest backbone provider as measured by Keynote
Systems. In addition to increased performance, our network architecture reduces
our dependency on any one network provider, increasing network availability for
our customers. Further, we have our own IP addresses, which reduces our
dependence on specific network providers or other third parties. Our network
security solutions include firewalls, encryption techniques, virtual private
networks and other security technologies and techniques. To date in 1999, we
are one of the top three issuers of Verisign certificates, which enable secure
e-commerce.
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Competition
The markets in which we operate are highly competitive, and competition is
increasing because few apparent substantial barriers to entry exist in the
Internet hosting market. We expect that we will face competition from existing
competitors as well as new market entrants in the future. The primary
competitive factors in our market are:
. technical expertise in developing advanced web hosting solutions;
. quality of service, including network capability, scalability, reliability
and functionality;
. customer service and support;
. variety of services and products offered;
. price;
. brand name recognition;
. Internet system engineering and technical expertise;
. timing of introductions of value-added services and products;
. network security;
. financial resources; and
. conformity with industry standards.
Our current and potential competitors vary by size, product offering and by
geographic region and may elect to partner with each other or with focused
companies like us to deliver service on the Microsoft platform. They include:
. Microsoft advanced hosting providers, such as Digex, MCI WorldCom
(including UUNET), GTE Internetworking and USWeb/CKS Group;
. web and application hosting service providers, such as Interliant,
Navisite and USinternetworking;
. application-specific hosting service providers, such as Critical Path;
. co-location providers, such as AboveNet, Exodus, Digital Island and
Frontier GlobalCenter;
. local, regional and international Internet service providers, such as
AppliedTheory, Concentric, Globix, MindSpring, Verio and PSINet;
. local, regional and international telecommunications companies, such as
AT&T, British Telecommunications, Cable & Wireless, Telecom Italia,
Nippon Telegraph and Telephone, Qwest and the regional Bell operating
companies such as Bell Atlantic and U S WEST;
. systems integrators and large information technology outsourcing
companies, such as IBM, EDS, Oracle, Andersen Consulting,
PricewaterhouseCoopers and others;
. multimedia hosting companies, such as broadcast.com; and
. other hardware, software and technology companies.
We believe that our expertise and exclusive focus on the advanced hosting
segment of the Internet services market enables us to differentiate ourselves
from our competitors. We also believe that our expertise and focus on
Microsoft-based Internet technologies, our customer support and our ability to
maintain a service delivery infrastructure that is designed to parallel or
surpass the performance provided by Internet backbone providers and other
telecommunications carriers will further differentiate us from our competitors.
Additionally, our marketing and sales methodologies are focused on enabling
customers to easily select and deploy solutions based on packaged service
offerings, which can shorten our selling cycle, reduce our customer acquisition
costs and ultimately enhance customer satisfaction.
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Intellectual Property Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We have no patented
technology that would preclude or inhibit competitors from entering our market.
We also rely on certain technologies we license from third parties, and there
can be no assurance these third-party technology licenses will continue to be
available to us on commercially reasonable terms. We have entered into certain
contractual arrangements with our employees and contractors as well as
suppliers, distributors and some of our key customers in order to limit access
to, and disclosure of, our proprietary information. The steps we have taken to
protect our intellectual property may be insufficient. Our technology may be
misappropriated or a third party may already own or independently develop
similar technologies.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to e-commerce on the Internet.
Congress recently enacted the "Digital Millennium Copyright Act," which
became effective in October 1998. The Digital Millennium Copyright Act provides
a limitation on liability of online service providers for copyright
infringement for transmitting, routing or providing connections, transient
storage, caching or storage at the direction of a user, if the service provider
had no knowledge or awareness that the transmitted or stored material was
infringing and meets certain other conditions. Since this law is new and does
not apply outside of the United States, we are unsure of how it will be applied
to limit any liability we may face in the future for any possible copyright
infringement or copyright-related issues. This new law also requires service
providers to follow "notice and take-down" procedures and to meet other
conditions in order to be able to take advantage of the limitation on
liability. We have not yet implemented such procedures, met such conditions or
evaluated the cost of complying with them. However, our customers are subject
to an acceptable use policy which prohibits them from transmitting, storing or
distributing material on or through any of our services which, in our sole
judgment is (1) in violation of any United States local, state or federal law
or regulation, (2) fraudulent online marketing or sales practices or (3)
fraudulent customer information, including identification and payment
information. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, we cannot be certain that
our policy will accomplish this goal or effectively limit our liability.
Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of online services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against online services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon online services companies and Internet access providers are
currently pending.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.
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<PAGE>
Due to the increasing popularity and use of the Internet, it is likely that a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues, such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security, access fees and the convergence of traditional
telecommunications services with Internet communications. The adoption of any
of these laws or regulations might decrease the growth of the Internet, which
in turn could decrease the demand for our services or increase the cost of
doing business or in some other manner harm our business, results of operations
or financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of such laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies.
Employees
As of June 1, 1999, we had 50 employees. None of our employees are covered by
collective bargaining agreements. We believe that our relations with our
employees are good.
Facilities
Our offices are currently located in Arlington, Texas and consist of
approximately 5,000 square feet that are leased until March 31, 2000, and 2,700
square feet that are leased until July 31, 1999. We have entered into a lease
for new office space in Irving, Texas, consisting of approximately 23,000
square feet. The new lease expires October 31, 2001. We anticipate moving into
the new office space in August 1999.
Legal Proceedings
We do not believe that we are subject to any pending or threatened legal
proceedings.
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<PAGE>
MANAGEMENT
Executive Officers and Directors
The following sets forth, as of June 15, 1999, the name, age and position of
our executive officers and directors and nominees to our board:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Sunny C. Vanderbeck..................... 26 Chairman of the Board and Chief Executive
Officer
Michelle R. Chambers.................... 30 President, Chief Operating Officer and
Director
Michael S. Shiff........................ 45 Senior Vice President - Marketing, Sales
and Business Development
Mark A. Bowles.......................... 38 Vice President - Advanced Technology
Deployment
Scott W. Brewer......................... 35 Vice President - Technical Services
Kenneth S. Garber....................... 46 Vice President - Sales
Jason A. Lochhead....................... 26 Vice President - Research and Product
Development and Director
J. Todd Steitle......................... 33 Vice President - Marketing
Stuart A. Walker........................ 34 Vice President - Chief Financial Officer,
Treasurer and Secretary
Nathan Landow........................... 67 Director
T. Geir Ramleth......................... 40 Nominee for Director
</TABLE>
Sunny C. Vanderbeck, a co-founder of our company, has served as Chairman and
Chief Executive Officer since our incorporation in August 1997. Before founding
Data Return, from July 1996 to January 1997, Mr. Vanderbeck was a technical
product manager and Lead Internet/Intranet Consultant for Software Spectrum, a
reseller of Microsoft products. From May 1995 to June 1996, while employed by
Software Spectrum, Mr. Vanderbeck served as an independent consultant to
Microsoft where he served as a team leader for Microsoft Messaging products and
as a product support engineer. From July 1994 to May 1995, Mr. Vanderbeck was
an independent consultant. From 1990 to 1994, Mr. Vanderbeck served as a
Section Leader in the 2nd Ranger Battalion, a U.S. Army Special Operations
unit. Mr. Vanderbeck is a regional finalist for the Ernst & Young Entrepreneur
of the Year award and is a Microsoft Certified Systems Engineer.
Michelle R. Chambers, a co-founder of our company, has served as President
and a director since our inception and was appointed Chief Operating Officer in
April 1998. Before founding Data Return, from October 1996 to March 1997, Ms.
Chambers was a Consultant at Microsoft, where she was a member of the Microsoft
Consulting team responsible for the design and development of the migration
plan for Audionet's (now broadcast.com) platform conversion from Unix to
Windows NT. Prior thereto, Ms. Chambers served as a product support engineer at
Microsoft from February 1995 to October 1996, and was the Corporate E-mail
Coordinator for Arco Exploration and Production Technology from August 1993 to
February 1995. Ms. Chambers is a Microsoft Certified Systems Engineer. Ms.
Chambers graduated magna cum laude from the University of North Texas with a
Bachelor in Business Administration in Business Computer Information Systems.
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<PAGE>
Michael S. Shiff has served as Senior Vice President - Marketing, Sales and
Business Development since June 1999 and previously served as Vice President -
Marketing, Sales and Business Development since March 1998. Mr. Shiff served as
President of MicroVision Medical Systems, a manufacturer of medical imaging
systems, from April 1996 to December 1996. From April 1993 to November 1995,
Mr. Shiff was Vice President of Sales for Kodak Health Imaging Systems, a
manufacturer of medical imaging systems. He also served as Vice President of
Marketing and Sales for Vortech Data, a manufacturer of medical imaging
systems, from March 1989 until Vortech's acquisition by Eastman Kodak in March
1993. Prior thereto, Mr. Shiff was Director of Strategic Sales Development for
Hughes Network Systems, a manufacturer of telecommunications systems, and was
Domestic Marketing Manager for the Satellite Communications Group of M/A-COM
Telecommunications, a manufacturer of telecommunications systems, which was
acquired by Hughes Aircraft. Mr. Shiff graduated with distinction from the
University of Wisconsin with a Bachelor of Science in Education.
Mark A. Bowles has served as Vice President - Advanced Technology Deployment
since June 1999. For the period from March 1998 to May 1999, Mr. Bowles served
as our Director of Service and Support and Executive Director of Technical
Services. Prior to joining Data Return, from February 1997 to March 1998, Mr.
Bowles was a manager of the Advanced Technologies Group at Arthur Andersen LLP,
a public accounting firm. Mr. Bowles also served as a Project Manager at
Interface Teknologies, a systems integration firm, from April 1995 through
February 1997. Mr. Bowles graduated from the University of Texas at Arlington
with a Bachelor of Business Administration.
Scott W. Brewer has served as Vice President - Technical Services since June
1999. Before joining Data Return, Mr. Brewer was with CompuCom Systems, a
technology services company, where he served as Director, Professional Services
from October 1998 to April 1999, General Manager of Houston Sales from May 1998
through October 1998, and Manager, Technical Services, Dallas Sales from
October 1997 through May 1998. Mr. Brewer also served as Manager, Systems
Engineering, Dallas Sales from April 1996 to October 1997 and Consulting
Systems Engineer, Dallas Sales from January 1991 to April 1996 at CompuCom
Systems.
Kenneth S. Garber has served as Vice President - Sales since June 1999. From
March 1996 to May 1999, Mr. Garber was Vice President of Sales and Business
Development for Chroma Vision Medical Systems, Inc., a manufacturer of medical
imaging systems. Prior to that, Mr. Garber served as Vice President and General
Manager of the Imagelink Business Unit for Kodak Health Imaging Systems from
1994 to March 1996. Previously, Mr. Garber held various marketing and sales
positions with Vortech Data, Hughes Network Systems, Satellite Business Systems
and Federal Data Corporation. Mr. Garber graduated from George Washington
University with a Bachelor of Science in Environmental Science.
Jason A. Lochhead, a co-founder of our company, has served as Vice President
- - Research and Product Development and as a director since our inception. From
September 1996 until August 1997, Mr. Lochhead was an independent consultant.
Previously, from September 1995 to September 1996, while employed by Software
Spectrum, Mr. Lochhead served as an independent consultant to Microsoft where
he served as a product support engineer for Microsoft Mail and Microsoft
Exchange. While at Software Spectrum, Mr. Lochhead also served as the Microsoft
Mail Gateway team lead for the period from March 1996 to September 1996. From
July 1993 to September 1995, Mr. Lochhead was a System Administrator at Hughes
Training, a division of Hughes Aircraft. Mr. Lochhead is a Microsoft Certified
Systems Engineer.
J. Todd Steitle has served as Vice President - Marketing since June 1999.
Previously, he served as our Director of Marketing from May 1998 to June 1999.
Before joining Data Return, Mr. Steitle was a sales representative for the
Tools Division of Sybase Corporation, formerly Powersoft Corporation, a
software company, from May 1996 to May 1998. From September 1994 to May 1996,
Mr. Steitle served as Manager of Business Development for Kodak Health Imaging
Systems. Previously, Mr. Steitle held various marketing and sales positions for
Apple Computer Corporation. Mr. Steitle graduated from the University of Texas
in Austin with a Bachelor of Business Administration in Marketing.
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<PAGE>
Stuart A. Walker has served as our Chief Financial Officer since March 1999
and as Vice President - Chief Financial Officer, Treasurer and Secretary since
June 1999. Prior to joining Data Return, Mr. Walker was a consultant with
Eubank, Wofford and Nichols, LLP, a public accounting firm, from June 1998. Mr.
Walker served as Vice President and Chief Financial Officer of Aviation Group,
Inc., an aviation services company, from September 1997 to April 1998. He
served as Corporate Controller of Precept Business Products, Inc., a business
products distribution company, from August 1996 to August 1997. He was Vice
President Finance and Controller of DirectNet Corporation, an educational
technology company, from March 1995 to August 1996. Mr. Walker served in
various capacities at Price Waterhouse LLP in the audit, bankruptcy, consulting
and litigation support areas from September 1988 to March 1995. Mr. Walker is a
Certified Public Accountant and graduate from California Polytechnic State
University, San Luis Obispo with a Bachelor of Science in Business
Administration.
Nathan Landow has served as one of our directors since April 1998. Mr. Landow
has been President of Landow Company, a real estate development company, since
1959.
T. Geir Ramleth has agreed to serve as a director of our company upon
completion of this offering. Mr. Ramleth has been the Chief Executive Officer
and a director of ZeroDotNet, Inc., a private equity firm, since April 1999.
Mr. Ramleth was the President and Chief Executive Officer of Genuity, Inc., an
Internet service provider, from December 1995 to November 1998. Prior to that,
Mr. Ramleth was the Manager of Commercial Systems at Bechtel Group, Inc., an
engineering firm, from February 1995 to December 1995, where he was responsible
for consolidating all commercial systems activities. From February 1993 to
February 1995, Mr. Ramleth was the Practice Director at Oracle Corporation, a
software company. Since January 1998, Mr. Ramleth has served as director at
UWI.com.
Director Compensation
Our directors receive no remuneration for serving on our board of directors.
Board Composition
We currently have five authorized directors. In accordance with the terms of
our restated articles of incorporation, the terms of office of the directors
are divided into three classes:
. Class I, whose term will expire at the annual meeting of shareholders to
be held in 2000;
. Class II, whose term will expire at the annual meeting of shareholders
to be held in 2001; and
. Class III, whose term will expire at the annual meeting of shareholders
to be held in 2002.
Currently, the Class I directors are Jason A. Lochhead and Nathan Landow, the
Class II director is Michelle R. Chambers and the Class III director is Sunny
C. Vanderbeck. T. Geir Ramleth will serve as a Class II director upon
completion of this offering. As part of an agreement with Level 3, they are
entitled to nominate one of their employees to serve on our board of directors.
Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed to vote for Level 3's
nominee. This agreement terminates upon a public offering of our common stock.
At each annual meeting of shareholders after the initial classification or
special meeting in lieu thereof, the successors to directors whose terms will
then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election or special
meeting held in lieu thereof. The authorized number of directors may be changed
only by resolution of the board of directors or a super-majority vote of the
shareholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of one third of the directors. This
classification of the board of directors may have the effect of delaying or
preventing changes in control or management of Data Return.
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<PAGE>
Board Committees
Within 90 days of the closing of this offering, the board will create an
audit committee that will consist of two independent directors and Ms.
Chambers. The audit committee will review, act on and report to the board of
directors on various auditing and accounting matters, including the
recommendation of our independent auditors, the scope of the annual audits,
fees to be paid to the independent auditors, the performance of our independent
auditors and our accounting practices.
Within 90 days of the closing of this offering, the board will create a
compensation committee that will consist of two independent directors and Ms.
Chambers. The compensation committee will determine the salaries and benefits
for our employees, consultants, directors and other individuals compensated by
our company. The compensation committee will also administer our stock option
plans, including determining the stock option grants for our employees,
consultants, directors and other individuals.
Summary Compensation Table
The following table sets forth the total compensation of our Chief Executive
Officer and each other executive officer whose total salary and bonus for
fiscal 1999 exceeded $100,000 (each a named executive officer, and
collectively, the named executive officers).
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
--------------------------- ------------
Other Shares
Fiscal Annual Underlying
Name and Principal Position Year Salary Bonus Compensation Options
- --------------------------- ------ ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sunny C. Vanderbeck............ 1999 $95,000 $5,000 -- --
Chairman and Chief Executive
Officer
Michelle R. Chambers........... 1999 95,000 5,000 -- --
President and Chief Operating
Officer
Michael S. Shiff............... 1999 150,000 8,610 $40,000(1) 12,300
Senior Vice President -
Marketing, Sales and
Business Development
</TABLE>
- --------
(1) Other annual compensation for Mr. Shiff consists of deferred salary.
Stock Option Plans
1998 Stock Option Plan. Our 1998 Stock Option Plan authorizes the issuance of
up to shares of our common stock. To date, we have granted options to
purchase an aggregate of shares of our common stock to employees, directors
and consultants under this plan with a weighted average exercise price of
$ per share. After the completion of this offering, no further options will be
granted under this plan.
The board of directors, or a board committee, has the power to determine the
terms of the options, including the exercise price of the options, the number
of shares subject to each option, the exercisability thereof, and the form of
consideration payable on such exercise, provided that the exercise price must
be at least 100% of fair market value. Incentive stock options granted to any
holder of 10% or more of the combined voting power of all classes of stock must
have an exercise price of not less than 110% of fair market value and be
exercisable for a term of no more than five years.
1999 Long-Term Incentive Plan. Our 1999 Long-Term Incentive Plan was adopted
by our board of directors and shareholders and became effective in July 1999 as
a successor plan to our 1998 Plan. Up to shares of common stock may be
issued under the 1999 Plan.
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<PAGE>
The 1999 Plan provides for the discretionary grant of incentive stock
options, within the meaning of Section 422 of the Internal Revenue Code of
1986, to employees and for the grant of nonstatutory stock options, stock
appreciation rights, performance awards, dividend equivalents, stock payments
and restricted stock to employees and consultants. The 1999 Plan provides that
we cannot issue incentive stock options after June 2009.
The 1999 Plan may be administered by the board or a board committee. The
administrator has the power to determine the terms of the options or other
awards granted, including the exercise price of the options or other awards,
the number of shares subject to each option or other award (up to shares per
year per participant), the exercisability thereof and the form of consideration
payable upon exercise. In addition, the administrator has the authority to
amend, suspend or terminate the 1999 Plan, provided that no such action may
affect any share of common stock previously issued and sold or any option
previously granted under the 1999 Plan without the consent of the holder.
The exercise price of all incentive stock options granted under the 1999 Plan
must be at least equal to the fair market value of the common stock on the date
of grant. The exercise price of nonstatutory stock options and other awards
granted under the 1999 Plan is determined by the administrator, but the
exercise price of nonstatutory stock options must be at least 50% of the fair
market value of the common stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of our outstanding capital stock, the exercise price of any incentive
stock option granted must be at least equal to 110% of the fair market value on
the grant date and the term of such incentive stock option must not exceed five
years. The term of all other options granted under the 1999 Plan may not exceed
ten years.
Options and other awards granted under the 1999 Plan are generally not
transferable by the optionee. Options granted under the 1999 Plan must
generally be exercised within three months after the end of the optionee's
status as an employee, director or consultant, or within one year after such
optionee's termination by disability or death, respectively, but in no event
later than the expiration of the option's term.
The 1999 Plan provides that in the event of a change of control of Data
Return all options and other awards shall be assumed or a substitute option or
award issued by the acquiring company unless the board determines in its sole
discretion to accelerate vesting or remove any restrictions.
Compensation Committee Interlocks and Insider Participation
We currently have no separate compensation or stock option committee or other
board committee performing equivalent functions to determine compensation for
executive officers. These functions are performed by our board of directors,
which includes Mr. Vanderbeck and Ms. Chambers. Within 90 days after we
complete this offering, we intend to establish a compensation committee that
will be composed of Ms. Chambers and two independent directors. No interlocking
relationship exists between any member of our board or our compensation
committee and any member of the board of directors or compensation committee of
any other company, and no such interlocking relationship has existed in the
past.
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<PAGE>
Employment Agreements
Mr. Vanderbeck, Ms. Chambers, Mr. Bowles, Mr. Brewer, Mr. Lochhead and Mr.
Walker have employment agreements expiring on June 30, 2002. These agreements
provide for:
. set base salaries; and
. incentive bonuses determined by the compensation committee or board of
directors.
Each of these executives has agreed not to compete with us during the term of
the agreement and for two years after resignation or termination for cause or
for one year after a termination without cause or any resignation or
termination following a change of control. If there has not been a change in
control, the agreements provide for the payment of salary for 12 months after
any termination by Data Return other than for cause. Further, if the
termination follows a change of control and is not voluntary, it will be made
in a lump sum equal to the following items, or in the case of Mr. Vanderbeck
and Mr. Chambers three times the following items:
. the highest annualized base salary earned during the employee's
employment with us;
. two times the employee's largest bonus during the last two years;
. any unpaid expense, reimbursement or accrued but unpaid salary or
benefit; and
. the estimated cost of insurance coverage for the next 12 months.
If the termination is following a change of control and is voluntary, the base
salary component of these severance payments will, in the case of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker, equal 75% and, in the case of Mr.
Bowles, Mr. Brewer and Mr. Lochhead equal 25%, of the highest annualized base
salary earned during the employee's employment with us.
In addition, upon a change of control, all outstanding options of Mr.
Vanderbeck, Ms. Chambers and Mr. Walker will vest. That number of the
outstanding options of Mr. Bowles, Mr. Brewer and Mr. Lochhead that would have
vested upon their next annual vesting date will immediately vest upon a change
of control, and, if they are terminated within 24 months of a change of
control, all of their options will immediately vest.
We also have employment agreements with Mr. Shiff, Mr. Garber and Mr.
Steitle. Mr. Shiff's agreement expires on December 31, 2002. His agreement
provides for a set base salary plus deferred salary and a fixed performance
bonus. Mr. Shiff's agreement provides for the payment of all accrued salary and
bonus upon his termination by Data Return. Upon a change of control or an
initial public offering, all of Mr. Shiff's outstanding options will vest
immediately. Mr. Shiff has agreed not to compete with us during the term of his
agreement and for one year after his termination.
Mr. Garber's agreement expires on March 31, 2004. His agreement provides for
a set base salary plus commissions. Upon a termination of his employment by
Data Return without cause, Mr. Garber is entitled to the payment of salary for
12 months and the right to participate in benefit plans and exercise his
outstanding options for 12 months. Upon a public offering or change of control,
50% of Mr. Garber's outstanding options vest immediately and the remaining 50%
vest one year later. If Mr. Garber is terminated following a change of control,
he is entitled to 12 months of salary and all of his outstanding options
immediately vest. Mr Garber has agreed not to compete with us during the term
of the agreement and for one year after resignation or termination for cause.
Mr. Steitle's agreement expired on May 3, 1999 and was automatically renewed
for a one year period. His agreement will continue to be renewed automatically
for one year periods unless terminated by either party upon notice at least 15
days prior to a renewal date. Mr. Steitle is entitled to a set base salary.
Upon termination other than for cause, Mr. Steitle is entitled to his accrued
salary. Upon a change of control, or upon an initial public offering or if Mr.
Vanderbeck and Ms. Chambers cease to be executive officers, all of Mr.
Steitle's options immediately vest. Mr. Steitle has agreed not to compete with
us during the term of his agreement and for one year after his agreement.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of , 1999, based on shares outstanding
on that date, and as adjusted to reflect the issuance of additional shares of
common stock in this offering, by the following individuals or groups:
. each person or entity who is known by us to own beneficially more than
5% of our common stock;
. each director;
. each named executive officer; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In general, a person who has voting power
and/or investment power with respect to securities is treated as a beneficial
owner of those securities. Shares subject to options, warrants or rights
currently exercisable or exercisable within 60 days of the date of this
prospectus are considered beneficially owned by the person holding such
options, warrants or rights. Unless indicated otherwise, we believe that the
persons named in the table below have sole voting and investment power with
respect to the shares shown.
Unless otherwise indicated, the address for each 5% shareholder listed in the
table is c/o Data Return Corporation, 801 Stadium Drive, Suite 117, Arlington,
Texas 76011. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them.
To the extent that any shares are issued upon exercise of options or other
rights to acquire capital stock that are presently outstanding or granted in
the future or reserved for future issuance under stock plans, there will be
further dilution to new public investors.
<TABLE>
<CAPTION>
Percentage of
Number of Ownership
Shares -----------------
Beneficially Before After
Beneficial Owner Owned Offering Offering
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Sunny C. Vanderbeck (1)........................ 30,135 29.2% %
Michelle R. Chambers (2)....................... 24,395 23.6
Nathan Landow (3).............................. 19,090 18.5
Michael S. Shiff (4)........................... 3,075 2.9
Jason A. Lochhead.............................. 2,870 2.8
T. Geir Ramleth (5)............................ 9,187 8.9
Level 3 Communications, Inc. (6)............... 7,260 7.0
ZeroDotNet, Inc. (5)(7)........................ 8,828 8.6
All directors and executive officers as a group
(10 persons)(8)............................... 79,790 74.9
</TABLE>
- --------
(1) Consists of 30,135 shares of our common stock owned by DCR Technology Fund
I, Ltd., which is controlled by Mr. Vanderbeck.
(2) Consists of 24,395 shares of our common stock owned by OHG Technology,
Ltd., which is controlled by Ms. Chambers.
(3) Includes 17,800 shares of our common stock owned by the Nathan Landow
Family Limited Partnership, which is controlled by Mr. Landow.
(4) Consists of 3,075 shares of our common stock issuable pursuant to options
that are exercisable within 60 days of , 1999. Mr. Shiff also has
options to purchase 9,225 shares of our common stock which will be
exercisable upon the completion of this offering.
(5) Consists of 8,828 shares of our common stock owned by ZeroDotNet, Inc. and
359 shares of our common stock owned by Mr. Ramleth. Mr. Ramleth is the
Chief Executive Officer of ZeroDotNet, Inc. Mr. Ramleth disclaims
beneficial ownership of all the shares owned by ZeroDotNet, Inc. except to
the extent of his pecuniary interest therein.
(6) The address of Level 3 Communications, Inc. is 3555 Farnam Street, Omaha,
Nebraska 68131.
(7) The address of ZeroDotNet, Inc. is 650 Mission Street, San Francisco,
California 94105.
(8) Includes 3,300 shares of common stock issuable pursuant to options that are
exercisable within 60 days of , 1999.
54
<PAGE>
CERTAIN TRANSACTIONS
On February 20, 1998, we issued 8,000 shares of our common stock to the
Nathan Landow Family Limited Partnership in exchange for $500,000 cash and a
$500,000 promissory note that has been repaid. On December 24, 1998, we issued
10,000 shares of our common stock to the Nathan Landow Family Limited
Partnership for $1,000,000. On April 23, 1999, we issued 1,308 shares of our
common stock to the Nathan Landow Family Limited Partnership for $250,000. Mr.
Landow, one of our directors, controls the Nathan Landow Family Limited
Partnership.
On May 14, 1999, we issued 359 shares of our common stock to Mr. Ramleth, one
of our nominees for director, for $125,000. On May 18, 1999, we issued 4,472
shares of our common stock to ZeroDotNet for $2,000,000. Mr. Ramleth is the
Chief Executive Officer of ZeroDotNet. On July 26, 1999, ZeroDotNet purchased
4,356 shares of common stock for $3.0 million.
On July 1, 1999, we entered into a Strategic Marketing and Sales Agreement
with Level 3 that contemplates our committing to purchase $10.0 million of
services over the next five years. As part of this agreement, we have agreed to
train Level 3 sales personnel to identify and refer potential customers to us
and to pay those sales personnel a commission on sales resulting from their
referrals. On July 26 1999, Level 3 acquired 7,260 shares of our common stock
in exchange for a $5.0 million credit to be applied to the purchase of future
bandwidth services. Pursuant to our Service Credit Agreement dated July 23,
1999 with Level 3, the credit can be applied to bandwidth services in excess of
the minimum purchase under the Strategic Marketing and Sales Agreement
beginning in 2001. We have a right to repurchase the stock in the event that
Level 3 fails to fulfill its obligations under the Service Credit Agreement or
Level 3 does not honor orders submitted by us under the Strategic Marketing and
Sales Agreement. The number of shares subject to this repurchase right will be
reduced pro rata in each quarter of calendar year 2001 by the greater of the
credit applied or 25% of the total shares. In the event that Level 3 defaults
under the Service Credit Agreement and fails to cure within 30 days, Level 3 is
required to pay us $750,000 ratably reduced based on the amount of bandwidth
credit used. Level 3 is entitled to one demand and unlimited "piggyback"
registration rights.
Also on July 23, 1999, Data Return, Sunny C. Vanderbeck, Michelle R. Chambers
and Jason A. Lochhead entered into a Voting Agreement with Level 3. Under that
agreement, Level 3 is entitled to nominate one of its employees to serve on our
board of directors. Mr. Vanderbeck, Ms. Chambers and Mr. Lochhead have agreed
to vote for Level 3's nominee. The Voting Agreement terminates upon the
completion of a public offering of our common stock.
On July 29, 1999, we sold 4,356 shares of our common stock to Compaq for an
aggregate purchase price of $3.0 million. Compaq is entitled to one demand and
unlimited "piggyback" registration rights. Compaq also has a right of first
refusal that does not include this offering and that terminates upon completion
of this offering. Also on July 23, 1999, we entered into an ASP and Server
Agreement with Compaq. Under that agreement, we have agreed for a three-year
period to purchase from Compaq the lesser of 2,000 servers or the number of
servers reasonably necessary to adequately operate our business plan. Our
requirement to purchase these servers is contingent upon Compaq providing
financing for the servers on competitive terms, upon the price, performance and
quality of the Compaq servers being reasonably satisfactory to us and upon
Compaq's commitment to deliver these servers on the schedule we request. Under
the ASP and Server Agreement, Compaq has agreed to include Data Return in any
program under which it approves for recommendation to its customers a specified
group of application service providers. Although Compaq is not required to
develop such a program, it will include us in any such program that it does
establish at the highest level for which we qualify.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summaries highlight selected provisions of our articles of
incorporation and bylaws, as amended. Copies of our articles and bylaws are
available from us upon request. See "Where You Can Find More Information."
Authorized Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.001 per share, and 20,000,000 shares of preferred stock, par value
$.001 per share. As of , 1999, there were shares of common stock
issued and outstanding, and no shares of preferred stock issued and
outstanding. No holder of any shares of our stock has any preemptive or
preferential right to acquire or subscribe for any unissued shares of any class
of stock or any authorized securities convertible into or carrying any right,
option or warrant to subscribe for or acquire shares of any class of stock.
Common Stock
Each share of common stock has identical rights and privileges in every
respect. The holders of our common stock are entitled to vote upon all matters
submitted to a vote of our shareholders and are entitled to one vote for each
share of common stock held.
Subject to the prior rights and preferences, if any, applicable to shares of
preferred stock, the holders of common stock are entitled to receive such
dividends, payable in cash, stock or otherwise, as may be declared by our board
out of any funds legally available for the payment of dividends.
If we voluntarily or involuntarily liquidate, dissolve or wind-up, the
holders of common stock will be entitled to receive after distribution in full
of the preferential amounts, if any, to be distributed to the holders of
preferred stock, all of the remaining assets available for distribution ratably
in proportion to the number of shares of common stock held by them. Holders of
common stock have no preferences or any preemptive, conversion or exchange
rights.
Preferred Stock
Our board is authorized to provide for the issuance of shares of preferred
stock in one or more series, and to fix for each series voting rights, if any,
designations, preferences and relative, participating, optional or other
special rights and such qualifications, limitations or restrictions as provided
in a resolution or resolutions adopted by the board. The board may authorize
the issuance of shares of preferred stock with terms and conditions which could
discourage a takeover or other transaction that holders of some or a majority
of shares of common stock might believe to be in their best interests or in
which holders of common stock might receive a premium for their shares over the
then market price.
Preferred Stock Purchase Rights
We intend to adopt a shareholder rights plan and declare a dividend of
preferred stock purchase rights before this offering is consummated. These
rights will entitle our shareholders to rights to acquire additional shares of
our common stock when a third party acquires 15% of our common stock or
commences or announces its intent to commence a tender offer for at least 15%
of our common stock. The final terms of these rights will be contained in a
rights agreement between us and the rights agent we appoint.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
Anti-Takeover Effects of Provisions of our Articles of Incorporation and Texas
Law
Restated Articles of Incorporation and Bylaws
Pursuant to our articles, the board may issue additional shares of common
stock or establish one or more series of preferred stock having the number of
shares, designations, relative voting rights, dividend rates, liquidation and
other rights, preferences and limitations that the board may decide without
shareholder
56
<PAGE>
approval. Any additional issuance of common stock or designation of rights,
preferences, privileges and limitations with respect to preferred stock could
have the effect of impeding or discouraging the acquisition of control of Data
Return by means of a merger, tender offer, proxy contest or otherwise
(including a transaction in which the shareholders would receive a premium over
the market price for their shares) and thereby protects the continuity of our
management. Specifically, if in the due exercise of its fiduciary obligations,
the board were to determine that a takeover proposal was not in our best
interest, shares could be issued by the board without shareholder approval in
one or more transactions that might prevent or render more difficult or costly
the completion of the takeover by:
. diluting the voting or other rights of the proposed acquiror or
insurgent shareholder group;
. putting a substantial voting block in institutional or other hands that
might undertake to support the incumbent board; or
. effecting an acquisition that might complicate or preclude the takeover.
Our bylaws provide that the board is divided into three classes of one or two
directors each, with each class elected for three-year terms expiring in
successive years. Our articles also allow the board to set the number of
directors in the bylaws with no minimum or maximum number of directors
required. The articles specifically deny cumulative voting in the election of
directors. This could delay or prevent a tender offer or takeover attempt that
a shareholder might consider to be in his or her best interest, including
attempts that might result in a premium over the market price for the shares
held by the shareholders.
Our articles and bylaws provide that special meetings of shareholders
generally can be called only by the president or the board or by holders of at
least 50% of our voting stock and provide for an advance notice procedure for
the nomination, other than by or at the direction of the board or a committee
of the board, of candidates for election as directors as well as for other
shareholder proposals to be considered at annual meetings of shareholders. In
general, we must receive notice of intent to nominate a director or make a
proposal at such meetings no less than 90 days before the meeting. The notice
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the shareholder
submitting the proposal. These provisions of the bylaws:
. may preclude a nomination for the election of directors or preclude the
conduct of business at a particular meeting if the proper procedures are
not followed; and
. may discourage or deter a third party from conducting a solicitation of
proxies to elect its own directors or otherwise attempting to obtain
control of Data Return, even if the conduct of such solicitation or
attempt might be beneficial to us and our shareholders.
Texas Takeover Statute
Subsequent to this offering, we will be subject to Part Thirteen of the Texas
Business Corporation Act ("Part Thirteen"). Subject to certain exceptions, Part
Thirteen prohibits a Texas corporation which is an issuing public corporation
from engaging in any business combination with any affiliated shareholder for a
period of three years following the date that such shareholder became an
affiliated shareholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or
. the business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder at a meeting of shareholders called not less than six months
after the affiliated shareholder's share acquisition date.
In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated with or
controlling or controlled by such entity or person. Part Thirteen defines a
business combination to include, among other similar types of transactions, any
merger, share exchange or conversion of an issuing public corporation involving
an affiliated shareholder.
Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination involving Data Return.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common stock.
We cannot predict what effect, if any, market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. Nevertheless, sales of substantial amounts
of common stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of the common stock and could
impair our future ability to raise capital through the sale of our equity
securities. Upon the closing of this offering, we will have a total of
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of any other stock options. Of the
outstanding shares, the shares being sold in this offering will be
freely tradable, except that any shares held by our "affiliates" may only be
sold in compliance with the limitations described below. The remaining
shares of common stock will be "restricted securities" that may be sold in the
public market only if they are registered under the Securities Act or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act. Subject to the lock-up agreements
described below and the provisions of Rules 144, 144(k) and 701, additional
shares will become available for sale in the public market as follows:
<TABLE>
<S> <C>
Number of Shares Date
---------------- ----
Upon the date of this prospectus (shares
eligible for resale under Rule 144(k) and not
subject to lock-up agreements)
After 90 days from the date of this
prospectus (additional shares eligible for
resale under Rules 144 and 701 and not
subject to lock-up agreements)
After 180 days from the date of this
prospectus (additional shares eligible for
resale under Rules 144 and 701 upon release
of lock-up agreements)
</TABLE>
Rule 144
In general, under Rule 144, a person (or persons whose shares are required to
be aggregated), including an affiliate, who has beneficially owned shares for
at least one year is entitled to sell, within any three-month period commencing
90 days after the date of this prospectus, a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of common stock
(approximately shares immediately after this offering) or (ii) the average
weekly trading volume of the common stock during the four calendar weeks
preceding the date on which notice of that sale is filed.
Rule 144(k)
Under Rule 144(k), a person who is not considered an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell such shares
under Rule 144(k) without regard to the volume limitations described above.
Stock Options
Following the closing of this offering, we intend to file a registration
statement to register for resale the shares of common stock available for
issuance under our stock option plans. Accordingly, shares issued under those
plans will become eligible for resale in the public market from time to time,
subject to the lock-up agreements described below and, in the case of
affiliates, the volume limitations of Rule 144 described above.
As of the date of this prospectus, options to purchase a total of shares of
common stock are outstanding under our stock option plans.
58
<PAGE>
Lock-Up Agreements
Directors, officers and shareholders holding an aggregate of shares of
common stock have agreed that they will not sell, directly or indirectly, or
otherwise dispose of any shares of common stock without the prior written
consent of Bear, Stearns & Co. Inc. for a period of 180 days after the date of
this prospectus. Please refer to our discussion in "Underwriting" for further
discussion of these agreements. We have agreed not to sell, directly or
indirectly, or otherwise dispose of any shares of common stock during the 180-
day period following the date of this prospectus, other than the grant of
options under our stock option plans and the issuance of common stock pursuant
thereto, provided the holders of such shares or options agree to the 180-day
lock-up agreement.
59
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated ,
1999, the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., CIBC World Markets Corp. and Wit Capital Corporation, have severally
agreed to purchase from Data Return the following respective numbers of shares
of common stock at the public offering price less the underwriting discounts
and commissions set forth on the cover of this prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter: Shares
------------ ------
<S> <C>
Bear, Stearns & Co. Inc. ...........................................
CIBC World Markets Corp.............................................
Wit Capital Corporation.............................................
----
Total.............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a "comfort letter" from our accountants, the listing of the common
stock on the Nasdaq National Market and no occurrence of an event that would
have a material adverse effect on our business. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for days from
the date of the underwriting agreement, to purchase up to additional shares
at the public offering price less the underwriting fees. The underwriters may
exercise such option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
such option, each underwriter will become obligated, subject to conditions, to
purchase a number of additional shares approximately proportionate to such
underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the public,
the representatives of the underwriters may change the public offering price
and such concessions.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the common stock.
<TABLE>
<CAPTION>
No
Exercise Full Exercise
-------- -------------
<S> <C> <C>
Per share......................................... $ $
Total............................................. $ $
</TABLE>
60
<PAGE>
In order to facilitate the offering of the common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. Specifically, the underwriters may over-allot shares
of the common stock in connection with this offering, thereby creating a short
position in the common stock for their own account. Additionally, to cover such
over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
The underwriters, at the request of Data Return, have reserved for sale at
the initial public offering price up to of the shares of common stock to
be sold in this offering for sale to employees and directors of Data Return and
other persons designated by Data Return. The number of shares available for
sale to the general public will be reduced to the extent that any reserved
shares are purchased. Any reserved shares not so purchased will be offered by
the underwriters on the same basis as the other shares offered hereby.
Wit Capital Corporation is making a prospectus in electronic format available
on its Internet web site. All dealers purchasing shares from Wit Capital
Corporation in this offering have also agreed to make a prospectus in
electronic format available on web sites maintained by each of the dealers.
Other than the prospectus in electronic format, the information on such web
sites is not part of this prospectus or the registration statement of which
this prospectus forms a part, has not been approved or endorsed by Data Return
or any underwriter in such capacity and should not be relied on by prospective
investors.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter,
e-manager or selected dealer in over public offerings. Except for its
participation as a manager in this offering, Wit Capital has no relationship
with Data Return or any of its founders or significant shareholders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "DRTN."
Directors, officers and shareholders who hold, in the aggregate, shares
of our common stock have agreed that they will not sell, directly or
indirectly, or otherwise dispose of any shares of common stock without the
prior written consent of Bear, Stearns & Co. Inc. for a period of 180 days from
the date of this prospectus. However, Bear, Stearns & Co. Inc. may, in its sole
discretion and at any time or from time to time, without notice to our
shareholders or Nasdaq, release all or any portion of the shares subject to
lock-up agreements. We have agreed that for a period of 180 days after the date
of this prospectus we will not, without the prior written consent of Bear,
Stearns & Co. Inc., sell or otherwise dispose of any shares of common stock.
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock will be
determined by negotiation among Data Return and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparably companies; and
61
<PAGE>
. estimates of our business potential.
CIBC World Markets Corp. acted as the placement agent for the sale of shares
of Data Return's common stock in May and July 1999. In compensation for its
services, CIBC World Markets Corp. received a fee. In addition, individuals
affiliated with CIBC World Markets Corp. purchased shares of common stock on
terms substantially similar to the terms under which other investors purchased
shares of common stock at approximately the same time.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Data Return by Thompson & Knight, P.C., Fort Worth, Texas. Pillsbury
Madison & Sutro LLP, Palo Alto, California, is acting as counsel for the
underwriters in connection with various legal matters relating to the shares of
common stock offered by this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at March 31, 1998 and 1999 and for the period from September 22,
1997 (inception) through March 31, 1998 and for fiscal 1999 as set forth in
their report. We have included our financial statements in this prospectus in
reliance on Ernst & Young LLP's report given on their authority as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (including
exhibits, schedules and amendments) under the Securities Act with respect to
the shares of common stock to be sold in this offering. This prospectus does
not contain all the information set forth in the registration statement. For
further information with respect to us and the shares of common stock to be
sold in this offering, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. In each
instance reference is made to the copy of that contract, agreement or other
document filed as an exhibit to the registration statement.
You may read and copy all or any portion of the registration statement or any
other information Data Return files at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
public reference rooms. Our SEC filings, including the registration statement,
are also available to you on the SEC's web site (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act, and, in accordance with
those requirements, will file periodic reports, proxy statements and other
information with the SEC.
This prospectus is part of the registration statement and does not contain
all of the information included in the registration statement. Whenever a
reference is made in this prospectus to any contract or other document of ours,
the reference may not be complete, and you should refer to the exhibits that
are a part of the registration statement for a copy of the contract or
document.
This prospectus includes statistical data that were obtained from industry
publications generated by International Data Corporation, Forrester Research
Corp. and Keynote Systems, Inc. These industry publications generally indicate
that the authors of these publications have obtained information from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
their information. While we believe these industry publications to be reliable,
we have not independently verified their data.
62
<PAGE>
DATA RETURN CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of March 31, 1998 and 1999.............................. F-3
Statements of Operations for the period from September 22, 1997
(inception) to March 31, 1998 and the Year Ended March 31, 1999.......... F-4
Statements of Changes in Shareholders' Equity for the period from
September 22, 1997 (inception) to March 31, 1998 and the Year Ended March
31, 1999................................................................. F-5
Statements of Cash Flows for the period from September 22, 1997
(inception) to March 31, 1998 and the Year Ended March 31, 1999.......... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Data Return Corporation
We have audited the accompanying balance sheets of Data Return Corporation as
of March 31, 1998 and 1999, and the related statements of operations, changes
in shareholders' equity and cash flows for the period from September 22, 1997
(inception) to March 31, 1998 and the year ended March 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Data Return Corporation at
March 31, 1998 and 1999, and the results of its operations and its cash flows
from September 22, 1997 (inception) to March 31, 1998 and the year ended March
31, 1999 in conformity with generally accepted accounting principles.
Dallas, Texas
May 18, 1999, except for Note 9,
as to which the date is July 29, 1999
F-2
<PAGE>
DATA RETURN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash............................................... $ 473,800 $ 842,800
Restricted cash.................................... -- 125,000
Accounts receivable, net of allowance for doubtful
accounts of $6,800 in 1998 and $20,100 in 1999.... 91,100 368,400
Prepaid and other.................................. 24,800 28,200
----------- -----------
Total current assets................................. 589,700 1,364,400
Property and equipment, net.......................... 141,400 826,000
Other assets......................................... 3,100 23,300
----------- -----------
Total assets......................................... $ 734,200 $ 2,213,700
=========== ===========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable................................... $ 108,600 $ 288,900
Accrued expenses................................... 60,500 132,900
Deferred revenue................................... 76,900 286,100
Notes payable and capital lease obligations--
current........................................... 22,500 95,200
----------- -----------
Total current liabilities............................ 268,500 803,100
Notes payable and capital lease obligations--long-
term................................................ 36,200 166,000
Commitments and contingencies........................ -- --
Shareholders' equity:
Preferred stock, $.001 par value; 20,000,000 shares
authorized, none issued or outstanding............ -- --
Common stock, $.001 par value; 100,000,000 shares
authorized; 65,400 and 76,400 issued and
outstanding in 1998 and 1999...................... 65 76
Additional paid-in capital......................... 2,335,635 3,913,624
Receivable for shares issued....................... (500,000) --
Deferred stock compensation........................ (1,215,700) (1,194,900)
Accumulated deficit................................ (190,500) (1,474,200)
----------- -----------
Total shareholders' equity........................... 429,500 1,244,600
----------- -----------
Total liabilities and shareholders' equity........... $ 734,200 $ 2,213,700
=========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-3
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
September 22, 1997
(inception) to Year Ended
March 31, 1998 March 31, 1999
------------------ --------------
<S> <C> <C>
Revenues.................................... $ 336,100 $ 1,889,000
Costs and expenses:
Cost of revenue........................... 198,000 1,105,300
General and administrative................ 230,200 1,063,000
Marketing and sales....................... 39,000 662,800
Stock based compensation.................. 61,300 348,800
--------- -----------
Total costs and expenses.................... 528,500 3,179,900
--------- -----------
Loss from operations........................ (192,400) (1,290,900)
Other income (expense):
Interest income........................... 2,200 19,900
Interest expense.......................... (300) (12,700)
--------- -----------
Net loss.................................... $(190,500) $(1,283,700)
========= ===========
Net loss per common share:
Basic and diluted......................... $ (3.23) $ (18.65)
========= ===========
Shares used in computing basic and diluted
net loss per share......................... 59,042 68,836
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Receivable Deferred
------------- Paid-In for Shares Stock Accumulated Shareholders'
Shares Amount Capital Issued Compensation (Deficit) Equity
------ ------ ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--September 22,
1997 (inception)
Initial issuance of
common stock........... 57,400 $ 57 $ 58,643 $ -- $ -- $ -- $ 58,700
Issuance of common
stock.................. 8,000 8 999,992 (500,000) -- -- 500,000
Deferred compensation
related to stock
options................ -- -- 1,277,000 -- (1,277,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 61,300 -- 61,300
Net loss................ -- -- -- -- -- (190,500) (190,500)
------ ---- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1998................... 65,400 65 2,335,635 (500,000) (1,215,700) (190,500) 429,500
Issuance of common
stock.................. 11,000 11 1,249,989 500,000 -- -- 1,750,000
Deferred compensation
related to stock
options................ -- -- 328,000 -- (328,000) -- --
Amortization of deferred
stock compensation..... -- -- -- -- 348,800 -- 348,800
Net loss................ -- -- -- -- -- (1,283,700) (1,283,700)
------ ---- ---------- --------- ----------- ----------- -----------
Balance--March 31,
1999................... 76,400 $ 76 $3,913,624 -- $(1,194,900) $(1,474,200) $ 1,244,600
====== ==== ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
DATA RETURN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
September 22, 1997 Year Ended
(inception) to March 31,
March 31, 1998 1999
------------------ -----------
<S> <C> <C>
Operating activities
Net loss...................................... $ (190,500) $(1,283,700)
Adjustments to reconcile net loss to net cash
flows used in operating activities:
Depreciation and amortization............... 12,900 129,500
Stock based compensation expense............ 61,300 348,800
Provision for doubtful accounts............. 6,800 40,400
Changes in operating assets and liabilities:
Accounts receivable........................ (71,900) (317,700)
Prepaid and other.......................... (16,500) (3,200)
Other assets............................... (3,100) (20,200)
Accounts payable and accrued expenses...... 125,500 252,700
Deferred revenue........................... 76,900 209,200
---------- -----------
Net cash used in operating activities......... 1,400 (644,200)
Investing activities
Purchases of property and equipment........... (55,400) (814,200)
Purchase of certificate of deposit restricted
as to use.................................... -- (125,000)
---------- -----------
Net cash used in investing activities......... (55,400) (939,200)
Financing activities
Proceeds from notes payable................... 11,700 250,000
Payments on notes payable and capital leases.. (200) (47,600)
Net proceeds from issuance of common stock.... 516,300 1,750,000
---------- -----------
Net cash provided by financing activities..... 527,800 1,952,400
---------- -----------
Net increase in cash.......................... 473,800 369,000
Cash at beginning of the year................. -- 473,800
---------- -----------
Cash at end of year........................... $ 473,800 $ 842,800
========== ===========
Supplemental disclosure of cash flows
information
Noncash investing and financing activities:
Deferred compensation....................... $1,277,000 $ 328,000
Equipment acquired under capital leases..... 38,900 --
Shares issued for note receivable........... 500,000 --
Net assets contributed for common stock..... 42,400 --
Cash paid for interest...................... -- 11,400
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1.Organization, Basis of Presentation and Significant Accounting Policies
Organization
Data Return Corporation (the "Company") was incorporated in August 1997 under
the laws of the State of Texas and commenced operations on September 22, 1997
(inception). The Company primarily provides advanced Microsoft Internet hosting
services to businesses, web site developers and other organizations. The
Company's advanced Microsoft hosting services enable its customers to establish
and maintain e-commerce and other applications through which they can conduct
transactions and manage information on a worldwide basis over the Internet.
The Company's computer equipment, principally servers, is primarily located
in separate facilities owned by two of its vendors. The vendors provide data
center facilities and bandwidth connectivity to the Company on a contractual
basis.
Basis of Presentation
The accompanying financial statements of the Company reflect the operations
and financial position of the Company for the period from its inception on
September 22, 1997 to March 31, 1998 and for fiscal 1999. The Company was
formed when its founders contributed net assets, principally computer
equipment, with an approximate fair market value of $42,000 and cash of
approximately $17,000 as consideration for 57,400 shares of the Company's
common stock.
The Company does not expect to generate positive cash flow from its
operations for several years. As a result, the Company has obtained and intends
to continue to seek funding from external sources. In addition, the Company
intends to file a registration statement for the initial public offering of the
Company's common stock. The Company contemplates using the proceeds from the
proposed public offering to fund its operations, fund its capital expenditures,
expand its marketing and sales activities, repay its credit facility and for
working capital and other general corporate purposes, including potential
acquisitions and investments and expenses associated with its anticipated move
to a new headquarters facility. Management of the Company believes that the
proceeds from the private issuance of common stock described in Note 9 as well
as the proceeds received, if any, of the proposed public offering will be
sufficient to meet the Company's projected cash needs for at least the next 12
months.
In the event the proposed public offering does not close, management believes
the Company can curtail operating and capital outlays to levels that can be
supported for at least the next 12 months with the proceeds from the private
issuance of common stock described in Note 9.
Significant Accounting Policies
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues are primarily derived from monthly recurring hosting service fees
and from set-up fees. Basic services, defined as accounts expected to generate
less than $400 monthly, do not require a contract. More complex services
require a contract that is generally six months in length. These contracts
generally are cancelable by either party without penalty upon 30 days' notice.
Revenues from these contracts are recognized ratably over the contractual
period as service is delivered. Payments received for billings in advance of
F-7
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)
providing services are deferred until the period such services are provided.
Set-up fees are separately priced from hosting services and are recognized at
the time a new customer account is created. Therefore, the customer has no
expectation of any future value from set-up fees after the account is set up
and the service is activated. Set-up costs consist primarily of labor by
technical support personnel to activate the new service and are incurred at the
time of set-up. No future set-up costs are incurred. There is no obligation of
the Company to perform any future set-up services, and the set-up fees are non-
refundable. Following expiration of the initial contract period and upon
renewal of the contract by the customer, there are no additional set-up charges
and the renewal prices for hosting services are generally unchanged from the
original contract period.
The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally three years for computer equipment and up to seven years for
furniture and fixtures. Equipment acquired under capital leases is amortized
using the straight-line method over the lesser of the lease term or the
estimated useful life of the asset, generally three years. The cost of license
agreements with software vendors are amortized over the term of the agreements.
Restricted Cash
Restricted cash consists of a certificate of deposit which is pledged as
collateral for the Company's notes payable.
Impairment of Long-Lived Assets
In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.
Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
amounted to $25,200 and $296,400 for the period from September 22, 1997
(inception) to March 31, 1998, and the year ended March 31, 1999, respectively.
F-8
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
1.Organization, Basis of Presentation and Significant Accounting Policies--
(Continued)
Stock Based Compensation
The Company accounts for employee stock based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, because the alternative fair value
accounting model provided under Statement of Financial Accounting Standards No.
123, Accounting for Stock Based Compensation (SFAS 123) is not required.
Accordingly, in cases where exercise prices equal or exceed fair market value
of the underlying common stock, the Company recognizes no compensation expense.
In cases where exercise prices are less than the fair value, compensation is
recognized over the lesser of the period of performance or vesting period.
Income Taxes
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income (loss) be disclosed with equal prominence as net income
(loss). The Company's comprehensive loss is equal to its net losses for all
periods presented.
Segment Reporting
The Company operated during all periods in a single segment when applying the
management approach defined in Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information.
Internally Developed Software
On March 4, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP 98-1). SOP 98-1 requires computer software
costs related to internal software that are incurred in the preliminary project
stage to be expensed as incurred. Once the capitalization criteria of SOP 98-1
have been met, external direct costs of materials and services consumed in
developing or obtaining internal-use computer software; payroll and payroll-
related costs for employees who are directly associated with and who devote
time to the internal-use computer software project (to the extent of the time
spent directly on the project); and interest costs incurred when developing
computer software for internal use should be capitalized. SOP 98-1 is effective
for financial statements for fiscal years beginning after December 15, 1998.
Accordingly, the Company will adopt SOP 98-1 in its financial statements for
the year ending March 31, 2000. The Company does not expect SOP 98-1 to have a
material impact on its financial statements.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares of
common stock outstanding during each period for basic and diluted earnings per
share. No common stock equivalents are considered in the calculation of diluted
earnings per share as the Company has incurred a loss for all periods presented
and the effect of common stock equivalents would be anti-dilutive.
F-9
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
2.Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Electronics and computer equipment......................... $ 94,400 $ 852,600
Computer software.......................................... -- 39,400
Furniture and office equipment............................. 7,700 14,800
Leasehold improvements..................................... 5,000 10,600
Capital leases--equipment.................................. 47,200 51,100
-------- ---------
154,300 968,500
Less accumulated depreciation and amortization............. (12,900) (142,500)
-------- ---------
$141,400 $ 826,000
======== =========
</TABLE>
3.Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31,
----------------
1998 1999
------- --------
<S> <C> <C>
Bonuses........................................................ -- $ 42,800
Deferred compensation.......................................... $40,000 40,000
Commissions.................................................... -- 20,800
Other.......................................................... 20,500 29,300
------- --------
$60,500 $132,900
======= ========
</TABLE>
4.Notes Payable
The Company entered into two separate note agreements for $125,000 each with
a commercial bank. The notes are cross collateralized by a $125,000 certificate
of deposit at the bank and all computer equipment acquired with the loan
proceeds. The notes bear interest at 9.25 percent and 6.9 percent. The notes
are due in equal monthly installments of principal and interest of $3,990 and
$3,871, respectively. Future principal payments at March 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000................................................................... $ 78,900
2001................................................................... 85,500
2002................................................................... 60,400
--------
$224,800
========
</TABLE>
5.Shareholders' Equity
Common Stock
Pursuant to a Stock Sales Agreement (the Agreement) dated February 20, 1998,
between the Company and a private investor, the Company sold 8,000 shares of
its common stock for $125 per share. The Agreement provided for the issuance of
the shares in return for $500,000 cash and a promissory note in the amount of
$500,000 that has been repaid. The Agreement provided the investor the right to
acquire an additional 10,000 shares of the Company's common stock during a
specified period in 2001 for $100 per share and
F-10
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5.Shareholders' Equity--(Continued)
provided the Company the right to require the investor to purchase the shares
for a period beginning in February 1999 through August 2001. In February of
1999, the Company exercised its rights under the Agreement and sold 10,000
shares of its common stock to the investor for $100 per share.
The Agreement also provides the investor additional rights including: a right
of first refusal to participate in any future equity offerings up to the total
amount of such offerings and on the same terms as those offered to other
investors, a right to designate two members of the Company's five member Board
of Directors and a requirement for unanimous approval by the Board of Directors
for certain transactions.
The investor's rights terminate upon the earlier to occur of: the mutual
agreement of the Company and the investor, events the result of which are such
that the investor owns less than 5 percent of the issued and outstanding common
stock of the Company, consummation of a public offering of the Company's
capital stock or a breach by the investor of his obligations.
Stock Based Compensation Arrangements
The Company's 1998 Stock Option Plan (the Plan) provides for the issuance to
employees of options to acquire 12,300 shares of common stock. The options are
to be issued at fair market value, as defined, and vest as approved by the
Board of Directors. Options generally expire 10 years from the date of grant
and automatically expire at termination of employment. The vesting period for
options to acquire 3,350 shares of common stock accelerates to the effective
date of any registration statement filed by the Company or in the event of a
merger or acquisition of the Company.
Subsequent to March 31, 1999, the Company adopted the 1999 Long-Term
Incentive Plan. See Note 9.
The following table summarizes the stock option activity related to the
Company:
<TABLE>
<CAPTION>
Per Share
Number of Exercise Weighted Average
Shares Price Exercise Price
--------- ------------ ----------------
<S> <C> <C> <C>
Outstanding options--September 22,
1997................................. -- $ -- $ --
Granted............................. 13,300 5.87-6.60 5.92
------ ------------ ------
Outstanding options--March 31, 1998... 13,300 5.87-6.60 5.92
Granted............................. 3,975 20.89-60.93 40.66
------ ------------ ------
Outstanding options--March 31, 1999... 17,275 $5.87-$60.93 $13.91
====== ============ ======
Options exercisable--March 31, 1999... 3,408 $5.87-$ 6.60 $ 5.94
====== ============ ======
</TABLE>
Outstanding options as of March 31, 1999, had a weighted average remaining
contractual life of approximately nine years and a weighted average fair value
at issuance of $96.52 based on the minimum value method.
Certain employees of the Company have been granted options under the Plan to
purchase shares of the Company's common stock at less than fair market value.
Prior to the adoption of the Plan, an employee was granted 12,300 options at a
price below fair market value which vest over 4 years. The vesting period for
the 12,300 options accelerates to the effective date of any registration
statement filed by the Company. The Company recorded deferred compensation
expense of $1,277,000 and $328,000 for the period from September 22, 1997
(inception) through March 31, 1998 and the year ended March 31, 1999,
respectively, for the difference between the exercise price and the deemed fair
market value of the Company's common stock underlying certain options granted.
These amounts are being amortized over the vesting period of the individual
options, generally four years. The stock compensation expense charged to income
amounted to $61,300 and $348,800 for the period for September 22, 1997
(inception) to March 31, 1998 and the year ended March 31, 1999, respectively.
F-11
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
5.Shareholder's Equity--(Continued)
As discussed in Note 1, the Company accounts for its stock based awards to
employees using the intrinsic value method in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and its related
interpretations.
SFAS No. 123 requires the disclosure of pro forma net income (loss) and net
income (loss) per share as if the Company had adopted the fair value method
since September 22, 1997 (inception). Under SFAS No. 123, the fair value of
stock based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future price volatility and expected
time to exercise, which greatly affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method using the following weighted average assumption: expected life,
four years; risk free interest rate of 6 percent; no dividends during the
expected term; and a volatility of zero as the Company is private and has no
trading history. If the computed values of the Company's stock based awards
were amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $191,320 ($3.24 per basic and
diluted share) and $1,289,160 ($18.73 per basic and diluted share) for the
period from September 22, 1997 (inception) to March 31, 1998 and the year ended
March 31, 1999, respectively.
6.Income Tax Information
At March 31, 1998 and 1999, the Company had temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
such amounts as measured by tax laws. Significant components of the Company's
deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
March 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 26,000 $ 333,000
Stock based compensation................................. 21,000 139,000
Accrued expenses......................................... 16,000 22,000
Allowance for bad debts.................................. 2,000 7,000
-------- ---------
Total deferred tax assets.................................. 65,000 501,000
Less: valuation allowance................................ (65,000) (501,000)
-------- ---------
Net deferred tax asset..................................... $ -- $ --
======== =========
</TABLE>
At March 31, 1999, the Company's net operating loss carryforward for federal
income tax purposes is approximately $980,000, expiring in 2013 and 2014. The
effective tax rate differs from the statutory rate primarily because the
Company has recorded a valuation reserve for its net deferred tax benefit for
the period ended March 31, 1998 and the year ended March 31, 1999. In
connection with the equity transactions that have taken place since its
inception and the proposed initial public offering , the Company may experience
a change in control pursuant to Internal Revenue Code Section 382. As such, the
net operating loss carryforward may be limited as to its possible use in future
periods.
F-12
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7.Commitments
Leases
The Company leases office space and office equipment under operating leases.
Future noncancelable lease payments under the Company's lease commitments at
March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
Year Ended March 31:
2000.......................................... $20,500 $102,100
2001.......................................... 20,200 56,500
2002.......................................... 3,300 11,100
------- --------
44,000 $169,700
========
Less amount representing interest............... (7,600)
-------
Present value of lease payments................. 36,400
Current portion of capital leases............... 15,200
-------
Noncurrent portion of capital leases............ $21,200
=======
</TABLE>
The Company recorded rent expense of $13,300 for the period from September
22, 1997 (inception) to March 31, 1998, and $60,500 for the year ended March
31, 1999.
Bandwidth and Co-Location Agreements
The Company has entered into agreements for bandwidth, co-location space and
dedicated Internet access with multiple vendors. The agreements are generally
three year commitments and require penalties for early termination. The
agreements are generally subject to a master contract which allows for service
order upgrades at the Company's request. Following are the Company's minimum
commitments at March 31, 1999.
<TABLE>
<S> <C>
Year Ended March 31:
2000............................................................... $ 525,000
2001............................................................... 475,000
2002............................................................... 175,000
----------
$1,175,000
==========
</TABLE>
Subsequent to year end, the Company entered into an agreement with a vendor
which requires the Company to acquire an additional $10.0 million of services
over the next five years (See Note 9).
8.International Operations
International revenues were approximately $43,500 and $189,000 for the period
from September 22, 1997 (inception) to March 31, 1998 and fiscal 1999,
respectively. The Company's international revenues were primarily generated
from customers located in Europe and Asia. In fiscal 1999, revenues from
customers located in Europe and Asia accounted for approximately 6% and 2% of
total revenues, respectively. Total assets from international operations,
comprised of accounts receivable, were $16,700 and $32,700 of total assets as
of March 31, 1998 and 1999, respectively.
9.Subsequent Events
Proposed Public Offering of Common Stock (Unaudited)
The Board of Directors of the Company has authorized management of the
Company to file a registration statement with the Securities and Exchange
Commission for the initial public offering of the Company's
F-13
<PAGE>
DATA RETURN CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
common stock. The Company contemplates using the proceeds from the proposed
public offering to fund its operations, fund its capital expenditures, expand
its marketing and sales activities, repay its credit facility and for working
capital and other general corporate purposes, including potential acquisitions
and investments and expenses associated with its anticipated move to a new
headquarters facility.
Adoption of the 1999 Long-Term Incentive Plan
In July 1999, the Company adopted the 1999 Long-Term Incentive Plan. The Plan
provides for the issuance of up to 12,000 options to acquire its common stock.
Issuance of Common Stock
Subsequent to year end, the Company issued 19,522 shares of common stock to
private investors for total cash consideration of $9.375 million through July
29, 1999.
In addition, on July 26, 1999, Level 3 Communications, Inc. (Level 3)
acquired 7,260 shares of the Company's common stock in exchange for a $5.0
million credit to be applied to the purchase of future bandwidth services. Use
of the credit is as allowed by the Service Credit Agreement. The credit can be
applied as payment for services in excess of the minimum purchases required
under the Strategic Marketing and Sales Agreement (see below) beginning on
January 1, 2001. The Company has a right to repurchase the stock in the event
that Level 3 fails to fulfill its obligations under the Service Credit
Agreement or fails to deliver the bandwidth pursuant to the terms of the
Service Credit Agreement. The number of shares subject to this repurchase right
will be reduced pro rata in each quarter of calendar year 2001 by the greater
of the credit applied to future purchases of bandwidth or 25% of the total
shares. The stock can be repurchased by the Company at the original purchase
price. In the event the repurchase right is exercised, Level 3 is required to
pay the Company $750,000 ratably reduced based on the amount of bandwidth
credit used by the Company.
Strategic Marketing and Sales Agreement
The Company entered into a Strategic Marketing and Sales Agreement with Level
3 on July 1, 1999. The Strategic Marketing and Sales Agreement provides that
the Company will acquire most of its requirements for co-location space,
technical assistance, broadband service and private line service (collectively
the "Services") over a five year period commencing with the date of the
agreement, which are substantially similar or perform substantially the same
function as the Services from Level 3. The Agreement also provides for joint
sales and marketing efforts between the Company and Level 3, including cross
training of personnel, and provides that Level 3 will designate the Company as
a preferred provider for Advanced Microsoft Hosting Service. The Company will
pay commission to Level 3 personnel for new customers generated by their leads.
The Company's commitment for the Services is as follows: a quarterly
commitment of $200,000 in year one, a quarterly commitment of $300,000 in year
two, a quarterly commitment of $400,000 in year three, a quarterly commitment
of $600,000 in year four and a quarterly commitment of $1.0 million in year
five. The total minimum commitment is $10.0 million. Payments for the minimum
quarterly purchase commitments will be required regardless of whether the
Company uses the Services. The Company can apply the $5.0 million credit
described above beginning on January 1, 2001 to purchases in excess of its
minimum quarterly commitments required by the Strategic Marketing and Sales
Agreement. Pricing of the Services will be based on Level 3's established
market prices at the time the service is provided.
ASP and Server Agreement
The Company entered into an agreement with Compaq to purchase the lesser of
2,000 servers or the number of servers reasonably necessary to operate the
Company's business. The requirement to purchase the servers is contingent upon
Compaq providing financing for the servers on competitive terms, upon the
price, performance and quality of the servers being reasonably satisfactory to
the Company and upon Compaq's commitment to deliver these servers on the
schedule we request.
F-14
<PAGE>
[Artwork To Come]
<PAGE>
[Artwork To Come]
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution
The following is an itemized statement of the amounts of all expenses payable
by the Registrant in connection with the registration of the common stock
offered hereby (estimated except for the Registration Fee, NASD Filing Fee and
Nasdaq National Market listing fee), other than underwriting discounts and
commissions:
<TABLE>
<S> <C>
Registration Fee-Securities and Exchange Commission........... $ 23,977.50
NASD Filing Fee............................................... 9,125.00
Nasdaq National Market listing fee............................
Blue Sky fees and expenses.................................... 10,000.00
Accountants' fees and expenses................................ 150,000.00
Legal fees and expenses....................................... 150,000.00
Printing and engraving expenses............................... 300,000.00
Transfer agent and registrar fees............................. 30,000.00
Miscellaneous................................................. 326,897.50
-------------
Total......................................................... $1,000,000.00
=============
</TABLE>
ITEM 14. Indemnification of Directors and Officers
We have authority under Article 2.02A.(16) and 2.02-1 of the Texas Business
Corporation Act (the "TBCA") to indemnify our directors and officers to the
extent provided for in the TBCA. Our Restated Articles of Incorporation permit
indemnification of directors and officers to the fullest extent permitted by
law.
The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a
director, officer, employee or agent of the corporation, if it is determined
that such person (i) conducted himself in good faith; (ii) reasonably believed,
in the case of conduct in his official capacity as a director or officer of the
corporation, that his conduct was in the corporation's best interests, and, in
all other cases, that his conduct was at least not opposed to the corporation's
best interests; and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe that this conduct was unlawful.
A corporation may indemnify a person under the TBCA against judgments,
penalties, (including excise and similar taxes), fines, settlement, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Article Eight of our Restated Articles of Incorporation provides that, to the
fullest extent permitted by the TBCA as it exists or as it may be amended, no
director shall be personally liable to Data Return or our shareholders for
monetary damages for breach of fiduciary duty as a director.
Prior to consummation of this offering, we intend to obtain directors and
officers liability insurance.
II-1
<PAGE>
Reference is made to Section of the underwriting agreement filed as
Exhibit 1.1 hereto, indemnifying the officers and directors of the registrant
against certain liabilities.
ITEM 15. Recent Sales of Unregistered Securities
Set forth in chronological order is information regarding all securities sold
and employee stock options granted by the Registrant since August 17, 1997 (the
date of incorporation).
(1) Since August 17, 1997, the Registrant has granted to employees
options to purchase an aggregate of 24,374 shares of Common Stock at a
weighted average exercise price of $77.31.
(2) On August 17, 1997, the Registrant issued 30,135 shares to Sunny
Vanderbeck, 24,395 shares to Michelle Chambers and 2,870 to Jason Lochhead,
the founders of the Registrant, in exchange for assets contributed to the
Registrant.
(3) On February 20, 1998, the Registrant issued 8,000 shares of Common
Stock to Nathan Landow Family Limited Partnership for a purchase price of
$1,000,000.
(4) On December 22, 1998, the Registrant issued 800 shares of Common
Stock to Dexter Stewart RIRA for a purchase price of $100,000.
(5) On December 24, 1998, the Registrant issued 10,000 shares of Common
Stock to Nathan Landow Family Limited Partnership for a purchase price of
$1,000,000.
(6) On February 1, 1999, the Registrant issued 200 shares of Common Stock
to Nathan Landow Family Limited Partnership for a purchase price of
$25,000.
(7) On April 23, 1999, the Registrant issued 1,308 shares of Common Stock
to Nathan Landow for an aggregate purchase price of $250,000.
(8) On April 26, 1999, the Registrant issued 2,450 shares of Common Stock
to two investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 1,225 shares to David Slagel
for a purchase price of $250,000; 1,225 shares to Steve Loftus for a
purchase price of $250,000.
(9) On May 5, 1999, the Registrant issued 1,862 shares of Common Stock to
four investors for an aggregate purchase price of $500,000. The
distribution of such shares was as follows: 1,081 shares to Tom O'Shea for
a purchase price of $290,000; 409 shares to Bob Nolan for a purchase price
of $110,000; 279 shares to Bruce Eatroff for a purchase price of $75,000;
93 shares to Tim Brown for a purchase price of $25,000.
(10) On May 14, 1999, the Registrant issued 718 shares of Common Stock to
two investors for an aggregate purchase price of $250,000. The distribution
of such shares was as follows: 359 shares to Andrew Evans for a purchase
price of $125,000; 359 shares to T. Geir Ramleth for a purchase price of
$125,000.
(11) On May 18, 1999, the Registrant issued 4,472 shares of Common Stock
to ZeroDotNet, Inc. for a purchase price of $2,000,000.
(12) On July 26, 1999, the Registrant issued 7,260 shares of Common Stock
to Level 3 Communications, Inc. for $5,000,000 in credit for future
bandwidth purchases.
(13) On July 26, 1999, the Registrant issued 4,356 shares of Common Stock
to ZeroDotNet, Inc. for a purchase price of $3,000,000.
(14) On July 29, 1999, the Registrant issued 4,356 shares of Common Stock
to Compaq Computer Corporation for a purchase price of $3,000,000.
The sale of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or, with respect to issuances to
employees, directors and consultants, Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. All such transactions
were completed on the dates given.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules
(a)Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Articles of Incorporation of the Registrant
3.2* Amended and Restated Bylaws of the Registrant
4.1* Form of Common Stock Certificate
5.1 Opinion of Thompson & Knight, P.C.
10.1+ Strategic Marketing and Sales Agreement dated July 1, 1999, by and between Data Return
Corporation and Level 3 Communications, LLC.
10.2 Restricted Stock Purchase Agreement dated July 23, 1999, by and between Data Return
Corporation and Level 3 Communications, LLC.
10.3 Service Credit Agreement dated July 23, 1999, by and between Data Return Corporation and
Level 3 Communications, LLC.
10.4+ Customer Order dated April 28, 1999, executed by Data Return Corporation and Level 3
Communications, LLC
10.5+ Managed Services Proposal for Data Return dated March 6, 1997, by and between Data Return
Corporation and American Communications Services, Inc.
10.6 Basic Internet Services Agreement dated December 12, 1997, between Data Return Corporation
and Savvis Communications Enterprises, L.L.C.
10.7 Commercial Lease Agreement dated April 1, 1998, between Data Return Corporation and
DSW Property Management, for approximately 5,088 square feet situated at 801 Stadium Drive,
Suite 120, Arlington, Texas 76011.
10.8 Commercial Lease Agreement dated July 14, 1997, between Data Return Corporation and
DSW Property Management, for approximately 2,713 square feet situated at 801 Stadium Drive,
Suite 117, Arlington, Texas 76011.
10.9** 1999 Long-Term Incentive Plan
10.10** 1998 Stock Option Plan
10.11** Employment Agreement effective as of May 3, 1998, between Data Return Corporation and
Todd Steitle.
10.12** Employment Agreement dated March 18, 1999, between Data Return Corporation and
Kenneth S. Garber.
10.13** Employment Agreement effective as of January 15, 1998, between Data Return Corporation and
Michael S. Shiff.
10.14** Form of Employment Agreement dated July 1, 1999 between Data Return Corporation and each of
Sunny C. Vanderbeck, Michelle R. Chambers, Jason A. Lochhead, Stuart A. Walker, Mark A. Bowles
and Scott W. Brewer.
10.15* Sublease dated June 28, 1999, between Data Return Corporation and Eastman Kodak Company,
for approximately 22,663 square feet situated at 222 Las Colinas Boulevard in Irving, Texas.
10.16* Investor's Rights Agreement dated as of July 29, 1999, between Data Return Corporation and CPQ
Holdings, Inc.
23.1 Consent of Thompson & Knight, P.C. (included in Exhibit 5.1 above)
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney (included in Page II-5)
27.1 Financial Data Schedule
99.1 Consent of International Data Corp. dated July 9, 1999.
99.2 Consent of T. Geir Ramleth to being nominated to the Board of Directors of Data Return Corporation.
</TABLE>
II-3
<PAGE>
- --------
+ Confidential treatment has been requested with respect to certain portions
of these agreements.
* To be filed by amendment.
** Management contract or compensatory plan or arrangement required to be filed
as an exhibit hereto
(b)Financial Statement Schedules
None.
ITEM 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at the time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, State of
Texas, on July 28, 1999.
Data Return Corporation
By: /s/ Sunny C. Vanderbeck
----------------------------------
Sunny C. Vanderbeck
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose names
appear below appoint and constitute Sunny C. Vanderbeck and Stuart A. Walker,
and each of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to execute any and all amendments to the
within Registration Statement, and to sign any and all registration statements
relating to the same offering of securities as this Registration Statement that
are filed pursuant to Rule 462(b) of the Securities Act of 1933, as amended,
and to file the same, together with all exhibits thereto, with the Securities
and Exchange Commission, the National Association of Securities Dealers, Inc.,
and such other agencies, offices and persons as may be required by applicable
law, granting unto each said attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each said attorney-in-fact and agent may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons on
, 1999 in the capacities indicated:
Signature Title Date
/s/ Sunny C. Vanderbeck Chairman of the July 28, 1999
_________________________________ Board, Chief
Sunny C. Vanderbeck Executive Officer
and Director
(Principal
Executive Officer)
/s/ Michelle R. Chambers July 28, 1999
_________________________________
Michelle R. Chambers President, Chief July 28, 1999
Operating Officer
and Director
/s/ Jason A. Lochhead
_________________________________
Jason A. Lochhead Vice President--
Research and
Product Development
and Director
July 28, 1999
/s/ Stuart A. Walker
_________________________________ July 28, 1999
Stuart A. Walker
Vice President--
Chief Financial
Officer, Treasurer
and Secretary
(Principal
Financial and
Accounting Officer)
/s/ Nathan Landow
_________________________________
Nathan Landow
Director
II-5
<PAGE>
EXHIBIT 5.1
[THOMPSON & KNIGHT LETTERHEAD]
(817) 347-1700
July 29, 1999
Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
Dear Sirs:
We have acted as counsel for Data Return Corporation, a Texas corporation
(the "Company"), in connection with the offering and sale by the Company (the
"Offering") of shares (the "Shares") of Common Stock, par value $0.001 per share
("Common Stock"), of the Company having a value (based on aggregate offering
price) of $86,250,000, consisting of (i) shares (the "Firm Shares") of Common
Stock to be sold to the underwriters (the "Underwriters") that will be named in
the Underwriting Agreement to be entered into between the Company and Bear,
Stearns & Co. Inc., CIBC World Markets and Wit Capital Corporation, as
representatives of the Underwriters (the "Underwriting Agreement"), and (ii)
additional shares (the "Over-Allotment Shares") of Common Stock that will be
purchasable by the Underwriters pursuant to an over-allotment option contained
in the Underwriting Agreement. The Firm Shares and, if the over-allotment
option is exercised by the Underwriters, the Over-Allotment Shares are to be
offered to the public by the Underwriters pursuant to the Underwriting
Agreement.
We have participated in and are familiar with the corporate proceedings of
the Company relating to the preparation of the Company's Registration Statement
on Form S-1 (the "Registration Statement") filed with the Securities and
Exchange Commission on this date with respect to the registration of the Shares
under the Securities Act of 1933, as amended (the "1933 Act").
In connection with the foregoing, we have examined the originals or copies
certified or otherwise authenticated to our satisfaction of the Registration
Statement, and such corporate records of the Company, certificates of public
officials and of officers of the Company, and other agreements, instruments and
documents as we have deemed necessary to require as a basis for the opinion
hereinafter expressed. As to various questions of fact material to such
opinion, we have, where relevant facts were not independently established,
relied upon certificates or statements of responsible officers of the Company.
<PAGE>
Based upon the foregoing and in reliance thereon, and subject to the
assumptions and qualifications hereinafter specified, it is our opinion that
upon (a) the taking of action by the Board of Directors of the Company (or a
duly constituted committee thereof) to determine the price at which the Shares
are to be sold under the Underwriting Agreement and (b) the sale, upon
effectiveness of the Registration Statement, of the Shares in accordance with
the terms of the Underwriting Agreement for the price so determined, the Shares
will be duly authorized by all necessary corporate action on the part of the
Company, validly issued, fully paid and nonassessable.
In rendering the opinion expressed herein, we have assumed that no action
heretofore taken by the Board of Directors of the Company in connection with the
matters described or referred to herein will be modified, rescinded or withdrawn
after the date hereof. We have also assumed that the Underwriting Agreement
will be executed and delivered by one or more officers of the Company duly
authorized to do so by the Board of Directors.
We are members of the Bar of the State of Texas only and do not purport to
be experts on the laws of any state or jurisdiction other than the State of
Texas and the United States, and we express no opinion herein as to the effect
that the laws and decisions of courts of any jurisdiction other than the United
States and the State of Texas may have upon the opinion expressed herein. We
hereby consent to the reference to this firm in the Prospectus included in the
Registration Statement under the caption "Legal Matters" as the attorneys who
will pass upon the legal validity of the Shares, and to the filing of this
opinion as Exhibit 5.1 to the Registration Statement. The foregoing, however,
shall not constitute "consent" to the use of our name as experts as provided for
in Sections 7 and 11 of the 1933 Act.
Respectfully submitted,
THOMPSON & KNIGHT
A Professional Corporation
By: /s/ Stephen B. Norris
---------------------
Stephen B. Norris, Attorney
<PAGE>
Exhibit 10.1
July 1, 1999
Page 1
STRATEGIC MARKETING AND SALES AGREEMENT
THIS STRATEGIC MARKETING AND SALES AGREEMENT ("Agreement") is made and
entered into this 1st day of July, 1999, by and between LEVEL 3 COMMUNICATIONS,
LLC, a Delaware limited liability company ("Level 3") and DATA RETURN
CORPORATION, a Texas corporation ("Customer"). This Agreement modifies that
certain Customer Order (including the Standard Terms and Conditions for Delivery
of Services, a copy of which is attached hereto as Exhibit D) executed by Level
3 and Customer dated April 28, 1999; the Customer Order, and the Standard Terms
and Conditions, are hereby incorporated into this Agreement. The terms and
provisions contained in this Agreement modify the terms contained in the
Customer Order as set forth herein. To the extent that the terms of this
Agreement are inconsistent with the terms in any Customer Order (including the
Standard Terms and Conditions), the terms set forth in this Agreement shall
control.
ARTICLE 1
DEFINED TERMS
1.1 Advanced Microsoft Hosting Service. "Advanced Microsoft Hosting
----------------------------------
Service" shall mean hosting services delivered by Customer on the Microsoft
platform and which has a Monthly Recurring Charge of one hundred dollars
($100.00) or more per customer.
1.2 Broadband Services. "Broadband Services" shall mean the services
------------------
provided by Level 3 to Customer originating in the United States hereunder.
Broadband Services shall include (a) a local ethernet connection for
distribution of content to other networks on the local ethernet in a Gateway
Facility, (b) InterGateway transport, with traffic terminating to any customer
on the Level 3 Network or any Level 3 peer through non-paid peering points, and
(c) transit services, with traffic terminating to Level 3 transit connections.
1.3 Capacity Forecasts. "Capacity Forecasts" shall mean forecasts of
------------------
Customer's reasonably anticipated needs for Broadband Services, Colocation
Space, Private Line Service and other associated services and products which
Level 3 can provide.
1.4 Colocation Space. "Colocation Space" shall mean space within Level
----------------
3's Gateway Facilities in the United States which is used by Customer for the
placement of electronic communications equipment and connection of such
equipment to other parties or networks (including, but not limited to, the Level
3 Network).
1.5 Technical Assistance: "Technical Assistance" shall mean technical
--------------------
support provided by Level 3 personnel within the Gateway Facility. Technical
Assistance services shall be purchased in blocks of hourly time, and will cover
basic hardware and operational functions such as: Power Cycling Equipment;
Securing Cables; Setting Switches; Hot Swapping Components; Swapping Backup
Tapes; and physical equipment Installs (but excluding configuration of such
equipment).
1.6 Gateway Facility. "Gateway Facility" shall mean Level 3's leased or
----------------
owned facility in various cities in the United States where connections to the
Level 3 Network can be accomplished.
1.7 Level 3 Network. "Level 3 Network" shall mean Level 3's leased or
---------------
owned Internet Protocol network, including the bandwidth capacity and
connections to other networks and
<PAGE>
July 1, 1999
Page 2
providers, and such future network capacity, connections and technologies as
Level 3 shall hereafter acquire, lease or develop.
1.8 Monthly Recurring Charges. "Monthly Recurring Charges" shall mean the
-------------------------
monthly charges for the various services delivered hereunder, as set forth in
Exhibit A.
1.9 Nonrecurring Charges. "Nonrecurring Charges" shall mean the charges
--------------------
for the installation and reconfiguration of the various services delivered to
each party hereunder, as set forth in Exhibit A.
1.10 Off-Net Services. "Off-Net Service" shall mean Broadband Services
----------------
that are not delivered through direct non-paid transit or peering connections to
the Level 3 Network (i.e., those Broadband Services that are delivered through
paid transit connections provided by other carriers).
1.11 On-Net Service. "On-Net Service" shall mean Broadband Services that
--------------
are delivered through direct connections to the Level 3 Network (i.e., those
Broadband Services that are not delivered through paid transit connections
provided by other carriers).
1.12 Preferred Provider. "Preferred Provider" refers to a designation by
------------------
Level 3 under Level 3's "Value Added Partner" program where Level 3 recommends
(with appropriate disclaimers of any liability resulting from a customer's
reliance on such recommendation) the services and/or products provided by a
Preferred Provider based on the unique capabilities of the designated company.
1.13 Private Line Service. "Private Line Service" shall mean point to
--------------------
point dedicated transport service connecting two locations, one of which is
located within the continental United States.
1.14 Term. "Term" shall mean the period of time that commences upon
----
execution of this Agreement and ends five (5) years thereafter, unless sooner
terminated in accordance with the requirements of the Standard Terms and
Conditions.
ARTICLE 2
PURCHASE COMMITMENT
2.1 Services Included. Level 3 agrees to sell to Customer, and Customer
-----------------
agrees to purchase from Level 3, the following Services: Colocation Space
(including Technical Assistance); Broadband Services; Private Line Services
(collectively the "Services").
2.2 Revenue Commitment. Provided Level 3 is delivering Services in
------------------
accordance with the requirements of this Agreement, Customer shall, on a monthly
basis during the Term order and pay for the following volumes of Services (the
"Revenue Commitment"):
Contract Year* Cumulative Monthly Recurring Charges Per Quarter
-------------- ------------------------------------------------
1 $ 200,000
2 $ 300,000
3 $ 400,000
4 $ 600,000
<PAGE>
July 1, 1999
Page 3
5 $1,000,000
* Each "Contract Year" shall be measured as each full year after execution of
this Agreement (so that Contract Year 1 ends one year from execution hereof).
The Revenue Commitment is a "take-or-pay" commitment; on a quarterly basis
Customer will be billed for the greater of (a) its actual usage of Services, or
(b) the billing amount that would have been charged if the Revenue Commitment
had been satisfied.
2.3 Requirements Commitment. Commencing twelve (12) months after
-----------------------
execution hereof, Customer shall satisfy no less than ** of its requirements for
all services which are substantially similar to and perform substantially the
same function as the Services (including Colocation Space) through purchases
from Level 3. Commencing eighteen (18) months after execution hereof and
continuing for the remainder of the Term, Customer shall satisfy no less than **
of its requirements for all services which are substantially similar to and
perform substantially the same function as the Services through purchases from
Level 3. Satisfaction of the foregoing percentage requirements will be
determined by measuring Customer's use of (a) total Mbps of Broadband Services,
and (b) total square feet of Colocation Space.
2.4 Price for Broadband Service. In the event that, during the Term of
---------------------------
this Agreement, Level 3's standard prices for Broadband Services are (taken as a
whole and for customers making a dollar volume commitment which, on a monthly
basis, is equal to or greater than the Revenue Commitment made by Customer
herein) less than the prices for Broadband Services as set forth in Exhibit A,
then the Monthly Recurring Charges for Broadband Services delivered to Customer
hereunder shall, from and after such date, be reduced so that such Monthly
Recurring Charges are no greater than the standard discounted prices offered for
such other customers.
ARTICLE 3
PURCHASE AND DELIVERY OF BROADBAND SERVICES
3.1 The Broadband Services. Level 3 shall, except as otherwise provided
----------------------
herein and upon request of Customer, deliver and provide Broadband Services to
Customer. The Monthly Recurring Charges and Nonrecurring Charges applicable to
the ordering and delivery of the Broadband Services are set forth in Exhibit A
attached hereto. Customer hereby requests, and Level 3 hereby agrees to
provide, the Broadband Services described in Exhibit B attached hereto, which
Broadband Services shall be delivered to Customer at the locations identified in
Exhibit B.
3.2 Terms and Conditions. Except as modified by the terms of this
--------------------
Agreement, the terms and conditions applicable to Level 3's delivery of, and
Customer's purchase of, the Broadband Services shall be as set forth in Level
3's Terms and Conditions for Delivery of Services attached hereto as Exhibit D.
The Broadband Services shall be considered to be "Services" as defined in Level
3's Terms and Conditions.
3.3 Forecasts and Capacity Management. Customer will submit Capacity
---------------------------------
Forecasts to Level 3 on a quarterly basis during the Term. Level 3 will, on a
periodic basis throughout the Term, evaluate Customer's consumption and use of
Services and consult with Customer regarding the ordering and provisioning of
sufficient capacity to meet Customer's needs.
** CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC.
<PAGE>
July 1, 1999
Page 4
ARTICLE 4
ADDITIONAL TERMS RELATING TO COLOCATION SPACE
4.1 Agreement to Service Order. The terms set forth in this Article 4
--------------------------
shall supplement and, to the extent inconsistent therewith, supersede, the terms
and conditions set forth in the Customer Order.
4.2 Colocation Space. Subject to availability, Level 3 shall, upon
----------------
request of Customer, deliver and provide Colocation Space to Customer in Level
3's Gateway Facilities (only those located in the United States) for the Term
hereof. The Monthly Recurring Charges and Nonrecurring Charges applicable to
the ordering and delivery of the Colocation Space (including charges for
consumption of power) are set forth in Exhibit A attached hereto. The minimum
term for Customer's use of Colocation Space (the "Colocation Term") shall be
five (5) years from the date upon which the Colocation Space was delivered to
Customer (regardless of whether the Term of this Agreement expires prior to such
time).
4.3 Order for Colocation Space. Customer hereby orders, and Level 3
--------------------------
hereby agrees to provide, the Colocation Space within the Gateway Facilities
identified and set forth in Exhibit B attached hereto. Level 3 shall complete
the build-out of the Space and shall make such Space available to Customer on or
before February 1, 1999. Level 3 agrees to make individual Colocation Space
available within 60 days of Customer's request.
ARTICLE 5
PREFERRED PROVIDER STATUS AND COOPERATIVE MARKETING
5.1 Designation as Preferred Provider. Upon execution of this Agreement
---------------------------------
and subject to execution Level 3's standard agreement "Value Added Partners",
Level 3 will designate Customer as a Preferred Provider for Advanced Microsoft
Hosting Service. Such designation is non-exclusive, and shall continue and
remain in place only for so long as Level 3 determines. Level 3 may, in its
discretion, cease such designation at any time; provided, however, that in the
event that Level 3 ceases such designation other than "For Cause" (as defined
below), and Level 3 has designated or subsequently designates another entity as
its Preferred Provider for Advanced Microsoft Hosting Service, or discontinues
the entire Preferred Provider and Value Added Partner Programs, then Customer
may terminate its purchase commitments contained in Sections 2.3 hereof, and all
other obligations shall continue in full force and effect. For purposes of the
foregoing, "For Cause" termination by Level 3 shall mean a termination which
results from Level 3's reasonable determination that the quality of service or
the breadth and usefulness of service offerings provided by Customer are
materially changed, so that such service offerings are (in Level 3's judgement)
inadequate to support continued designation of Customer as a Preferred Provider
(which shall occur only after Level 3 has given Customer thirty (30) days
advance written notice and Customer has failed to take such steps as Level 3
reasonably determines are necessary to continue Customer's designation as a
Preferred Provider). Notwithstanding the foregoing, the following procedure
shall apply to a termination "For Cause" during the first year after execution
of this Agreement. In the event that, during such time, Level 3 becomes aware
of demonstrable and material deficiencies in Customer's delivery or service
offerings, Level 3 may, on thirty (30) days' written notice to Customer and
provided Customer has not within such time taken steps to cure the deficiencies
specified by Level 3, suspend Customer's designation as a Preferred Provider.
Upon such suspension, Customer shall have a period of one hundred twenty (120)
days within which to cure the deficiencies specified by Level 3. In the event
Customer fails to do so, then Level 3 may
<PAGE>
July 1, 1999
Page 5
terminate the designation as a Preferred Provider and such termination shall be
deemed to be "For Cause" hereunder.
5.2 Sales Training. No later than September 30, 1999, Customer and Level
--------------
3 will develop a mutually agreed schedule for Customer to provide sales training
to the Level 3 sales staff at operational Gateway Facilities during 2000, and as
required through the length of this contract. The sales training will be
sufficient to provide the Level 3 sales staff with a basic working knowledge of
the Advanced Microsoft Hosting Service offered by Customer so that the sales
staff can identify Prospects which might be able to use the Advanced Microsoft
Hosting Service in their business applications. Sales training will be provided
at Customer's expense (except that Level 3 will be responsible for the payment
of compensation of such personnel and travel and lodging expenses incurred by
its personnel in connection therewith), and will be prioritized according to a
mutually agreed upon schedule to coincide, to the extent feasible, with the
opening of each new Gateway Facility.
5.3 Prospect Contacts. Each party will cause its employed and independent
-----------------
sales force to assist the other party's employed and independent sales force in
the sale of the other party's services (so that Level 3 shall provide leads to
Customer for the sale of Advanced Microsoft Hosting Services, and Customer shall
provide Level 3 with leads for the sale of Service) as set forth herein. Such
assistance shall include providing customers who may have an interest in or need
for the other party's services ("Prospects") with the name and marketing
materials for the services of the other party, providing the other party with
names of Prospects and (where such party determines appropriate) introducing the
other party's professional sales staff to Prospects. The referral of Prospects
contemplated hereby is non-exclusive; either party may provide referrals to
other suppliers of services competitive with the services provided by the other
party. Notwithstanding the foregoing, both parties agree that they will inform
the other of all Prospect leads of which they become aware during the Term (but
either party may also refer or provide such Prospect leads to other companies).
A failure or alleged failure of either party to refer a Prospect to the other,
to provide marketing material respecting the other's service to such Prospect,
or to otherwise perform the cooperative marketing envisioned by this Article 4
shall not constitute a default in the performance of this Agreement.
5.4 Managers. Each party shall identify management personnel to supervise
--------
and monitor the performance of the cooperative marketing contemplated by this
Article 4. Level 3 will identify a "Channel Manager" for the management of this
Agreement to oversee all activities in connection with such cooperative
marketing and to supervise and monitor local cooperative marketing activities.
The Channel Manager's general responsibilities are delineated in Exhibit C. The
Channel Manager will schedule and moderate a day-long seminar for regional sales
groups, which seminars shall be conducted by Customer at its sole cost and
expense, and which will cover the following general topics:
a. overview of Customer and the Advanced Microsoft Hosting Services, as
well as an overview of web hosting services generally;
b. an overview of Level 3 incentive programs for the sales personnel will
be presented by the Channel Manager; and
c. processes for qualification and referral of Prospects.
<PAGE>
July 1, 1999
Page 6
The marketing managers for each party shall use good faith efforts to assure
that the seminars are attended by all relevant and required personnel (it being
Level 3's goal to assure that at least ninety percent (90%) of its sales staff
attends such seminar). The marketing managers of each party will work together
to jointly develop sales support materials, including an overview of the
Customer/Level 3 service package, comprehensive sales kit for distribution to
Prospects and development of a web site (or development of additional pages to
the Level 3 and Customer web sites) to promote the services of each party.
Level 3 shall, within forty five (45) days after execution of this Agreement,
generate a written plan for implementation of the foregoing activities. While
no sales quota or other objective performance criteria is applicable to either
party's performance of this Article 4, the parties agree to define specific
strategic goals of the relationship, periodically evaluate the performance of
both parties hereunder, and work together in good faith to take steps designed
to ensure that the specific strategic goals of the parties are met. The parties
agree that a failure or alleged failure of a party to perform any obligation
imposed by this Article 4 shall not constitute a material default in the
performance of this Agreement.
5.5 Value Added Partner Program. Level 3 will make Customer a
---------------------------
participant in Level 3's "Value Added Partner" program (which is generally
described in Exhibit C) and will provide Customer with all of the benefits
associated with such program (including participation in the web-enabled
customer support system ("WECSS") when such system is implemented by Level 3).
Level 3 reserves the right to change the terms of its "Value Added Partners"
program at any time; provided, however, that in the event that Level 3
materially alters the Value Added Partners program during the Term of this
Agreement, Level 3 and Customer shall meet and discuss measures to preserve the
benefits associated with the program.
5.6 Vendor Relationships. Customer acknowledges that Level 3 has
--------------------
established relationships and high level contacts with certain vendors
(including Microsoft and Compaq) and this Agreement and the relationship created
hereby will not give Customer any right to participate in or otherwise influence
or affect Level 3's business dealings and relationships with such vendors.
Customer also has independent business relationships with certain vendors
(including Microsoft and Compaq) and intends and commits to use those business
relationships in connection with a good faith effort to generate increased
platform demand for Level 3's Services. Further, it is Level 3's intention to
feature Customer's Advanced Microsoft Hosting Services as part of Level 3's
relationship with Microsoft and Compaq. Toward this objective, Customer and
Level 3 will work cooperatively together to address Microsoft initiatives such
Microsoft's Business to Consumer and Business to Business E-Commerce programs in
a manner that features Level 3's Services and Customer's Advanced Microsoft
Hosting Services. Likewise, Data Return and Level 3 will work cooperatively
together to address Compaq market development initiatives in a manner that
features Level 3's Services and Customer's Advanced Microsoft Hosting Services.
5.7 Product Development. Customer and Level 3 will work together to
-------------------
develop new products and services to grow the Advanced Microsoft Hosting
Services. To the extent allowed by Customer's contractual commitments and non-
disclosure agreements with Microsoft, Customer will involve Level 3 in the
"Windows 2000" readiness deployment partners task force.
5.8 Commissions. A sale to a Prospect shall only generate Commission, as
-----------
defined below, if a sale is closed within 120 days of initial introduction of
the Prospect to the selling party. Each party will pay to the other the
commission ("Commission") set forth in this Section. The Commission payable by
Customer hereunder shall be equal to thirty percent (30%) of the gross recurring
revenue (not including any set-up fees) received by Customer in the first full
billing
<PAGE>
July 1, 1999
Page 7
month after initiation of delivery of service to the Prospect received by
Customer as a result of a sale of services to a Prospect introduced to Customer
by Level 3. The Commission payable by Level 3 shall be determined in accordance
with Exhibit D. Only the party which initiated a sales call to a Prospect shall
be entitled to a Commission; any dispute respecting which party is entitled to a
Commission on the sale of services to a Prospect shall be resolved by designated
sales management for each party. A party's failure to pay a Commission allegedly
owing as a result of a good faith dispute shall not constitute a material
default of this Agreement.
5.9 Prospect Terms and Conditions. Each party shall have the sole and
-----------------------------
absolute discretion respecting the terms and conditions for such party's
agreement for the sale of services to Prospects. Nothing in this Agreement
shall be construed to be a binding commitment on the part of either party to
sell services to Prospects. Each party shall be solely responsible for the
performance of any agreements it enters into with any Prospects. Neither party
shall have (or represent to any Prospects that it has) the authority to act as
agent for the other, enter into contracts for, or otherwise commit the other
party to, the delivery of services to any Prospect. Each party shall use its
best efforts to preserve the goodwill and business reputation of the other party
in connection with the cooperative marketing of services contemplated hereby.
ARTICLE 6
DEFAULT AND TERMINATION
In the event that, other than as may be caused by an event of force majeure or
by the wrongful actions or omissions of the other party, a party fails to timely
observe or perform any material covenant, agreement, obligation, term or
condition required to be observed or performed hereunder, which failure is not
cured within thirty (30) days after receipt of written notice thereof (a
"Default"), then the other party may, in addition to any other remedies which it
has hereunder (including but not limited to the remedies set forth in Exhibit D,
which remedies would be applicable for a Default hereunder), terminate this
Agreement by providing written notice of termination to the defaulting party.
In the event that this Agreement is terminated as a result of a Default by
Customer (other than a Default in the payment of money due), then Customer may,
notwithstanding such termination, continue to use the Colocation Space ordered
by Customer hereunder for a period of not longer than 150 days after the
effective date of termination; PROVIDED, however, that (a) Customer timely pays
any charges due for the use of such Colocation Space during such period, and (b)
Customer abides by all other terms and conditions applicable to the use of such
Colocation Space during such period.
ARTICLE 7
GENERAL PROVISIONS
7.1 Press Releases.
--------------
(a) Neither party shall, without the advance written consent of the other
party (which may be granted or withheld in the sole discretion of such party),
issue any press release respecting this Agreement or the terms hereof or
otherwise disclose this Agreement or the terms hereof to any other party.
(b) In the event either party shall be required to disclose all or any
part of this Agreement in, or attach all or any part of this Agreement to, any
regulatory filing or statement, each party agrees to discuss and work
cooperatively, in good faith, with the other party, to protect, to the
<PAGE>
July 1, 1999
Page 8
extent possible, those items or matters which the other party deems confidential
and which may, in accordance with applicable laws, be deleted therefrom.
7.2 No Agency. This Agreement does not constitute either party as the
---------
agent or legal representative of the other party and does not create a
partnership or joint venture between the parties. Neither party shall have any
authority to agree for or bind the other party in any manner whatsoever, unless
otherwise authorized to do so in writing during the Term. This Agreement
confers no rights of any kind upon any third party.
7.3 Entire Agreement; Amendment. This Agreement (including the Customer
---------------------------
Order) sets forth the entire understanding of the parties and supersedes any and
all prior agreements, arrangements or understandings relating to the subject
matter hereof. No subsequent amendment to this Agreement shall be effective or
binding unless it is made in writing by authorized representatives of the
parties.
7.4 Enforceability. If any part of any provision of this Agreement or any
--------------
other Agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, said part
shall be ineffective to the extent of such invalidity only, without in any way
affecting the remaining parts of said provision or the remaining provisions of
this Agreement.
7.5 Governing Law. This Agreement is made pursuant to and shall be
-------------
construed and enforced in accordance with the laws in force in the State of
Colorado.
7.6 Non-Exclusive. This Agreement is non-exclusive. Except as might result
-------------
from Section 2.3, nothing in this Agreement shall prevent either party from
entering into similar arrangements with, or otherwise providing services to, any
other person or entity.
7.7 Notices. All notices or other communications which are required or
-------
permitted herein shall be in writing and sufficient if delivered personally,
sent by prepaid overnight air courier, or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
IF TO LEVEL 3
LEVEL 3 COMMUNICATIONS, LLC
1025 Eldorado Blvd.
Broomfield, Colorado 80021
Attn: General Counsel
IF TO CUSTOMER:
DATA RETURN CORPORATION
801 Stadium Drive
Suite 117
Arlington, Texas 76011
Attn: President
or at such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. Any such
communication shall be deemed to have been given when delivered if delivered
personally, on the business day after dispatch if sent by overnight air courier,
or on the third business day after posting if sent by mail
<PAGE>
July 1, 1999
Page 9
7.8 Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective successors and
assigns.
7.9 Change of Control. In the event that there is a Change of Control (as
-----------------
defined below) which results in either party owing or being owned by a Direct
Competitor (as defined below) of the other party, then the other party shall (if
it is not then in Default hereunder) have the rights and alternatives specified
herein. If a Change of Control which results in Level 3 owning or being owned by
or being under common ownership with a Direct Competitor of Customer occurs,
then Customer shall have the right, by written notice delivered to Level 3
within thirty (30) days after Customer learns of such event, to elect to:
(a) terminate the obligations of both parties under Article 5 of this
Agreement; and/or
(b) terminate its obligations under Section 2.3 of this Agreement, in which
event Customer would remain obligated to satisfy the purchase commitment
contained in Section 2.2 hereof.
If a Change of Control which results in Customer owning or being owned by or
being under common ownership with a Direct Competitor of Level 3 occurs, then
Level 3 shall have the right, by written notice delivered to Customer within
thirty (30) days after Level 3 learns of such event, to elect to:
(y) terminate the obligations of both parties under Article 5 of the
Agreement; and/or
(z) terminate this Agreement (including the provision of Service to
Customer) in its entirety, in which event Customer would be responsible for
payment of a termination charge equal to the Revenue Commitment for the
balance of the Term hereof (so that if the Agreement was terminated on the
fourth anniversary of the date of this Agreement, for example, Customer
would pay a termination charge of $4 million ($1 million multiplied by the
remaining quarters in the Term).
Provided Customer is not then in default of any other material terms, Customer
shall be permitted a reasonable period of time (not to exceed ninety (90) days)
within which to terminate consumption of Service delivered hereunder (except
that any obligation to vacate the Colocation Space shall occur within the time
frames set forth in Article 6 hereof). For purposes of the foregoing, "Change
of Control" shall mean the act, by any person or entity, of obtaining "control",
meaning ownership (direct or indirect), of more than twenty five percent (25%)
of the equity, or the ability to direct more than twenty five percent (25%) of
voting power, or ability to direct management policies, of an entity. With
respect to Customer, a "Direct Competitor" is any entity that derives revenue
that is greater than or equal to Customer from the sale or delivery of Advanced
NT Hosting Services. With respect to Level 3, a "Direct Competitor" is any
entity that derives more than eighty percent (80%) of its revenue from the sale
or delivery of Services.
7.10 International Negotiations. Promptly following the date hereof, the
--------------
parties agree to negotiate in good faith to enter into an agreement or
agreements for Services on a world-wide basis upon substantially the same terms
and conditions as provided in this Agreement, with appropriate changes to
address (a) non-United States legal issues with respect to the countries in
which such services are to be performed, and (b) different pricing terms to be
agreed by the parties to take into
<PAGE>
July 1, 1999
Page 10
account different costs to Level 3 of providing such services outside of the
United States. Neither party shall be obligated to execute any such agreement or
agreements, and the failure or alleged failure of either party to negotiate in
good faith shall not constitute a Default under Article 6 hereof.
7.11 Multiple Counterparts. This Agreement may be executed in one or more
---------------------
counterparts, which when taken together, shall constitute one and the same
document. The parties hereby agree that facsimile signatures are valid and
binding on the parties.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
LEVEL 3 COMMUNICATIONS, LLC
By: /s/ Michael C. Knaisch
------------------------------
Its: V.P. WEBBUSINESS
-----------------------------
Dated: JULY 1, 1999
---------------------------
DATA RETURN, INC.
By: /s/ Sunny C. Vanderbeck
------------------------------
Its: Chairman & CEO
-----------------------------
Dated: July 1, 1999
---------------------------
Exhibit A - Pricing
Exhibit B - Colocation Space Ordered by Customer
Exhibit C - Level 3 Value Added Partner Program
Exhibit D - Standard Terms and Conditions for Delivery of Services
<PAGE>
July 1, 1999
Page 11
Exhibit A
Pricing for Broadband Services and Colocation Space
A. Broadband Services Monthly Recurring Charges:
- ---------------------------------------------------
<TABLE>
<CAPTION>
Intra-Gateway Exchange
- -----------------------------------------------------------------------------------------------------
Ethernet Port Speed Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100 Mbps $ $ $
- -----------------------------------------------------------------------------------------------------
1000 Mbps $ $ $
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
On-Net Transport
- -----------------------------------------------------------------------------------------------------
Monthly Mbps Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
000-500 Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
500-999 Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
$1,000+ Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Off-Net Transit
- -----------------------------------------------------------------------------------------------------
Monthly Mbps Year 1* Year 2* Year 3*
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
100+ Mbps/mo $ $ $
- -----------------------------------------------------------------------------------------------------
</TABLE>
The foregoing prices for Broadband Services shall be applicable if and only if
Customer is satisfying the Revenue Commitment for Broadband Services set forth
in the Agreement.
B. Broadband Services--Nonrecurring Charges*:
- -----------------------------------------------
Intra-Gateway Exchange Ports: $
C. Colocation Space--Monthly Recurring Charges*:
- --------------------------------------------------
$
D. Colocation Space--Nonrecurring Charges*:
- ---------------------------------------------
$
E. Technical Service Package (applies only to use during business hours. After
hours rates apply per hour for service after hours
Charges* Non-Recurring
1 hour $ N/A
3 hour $ N/A
5 hour $ N/A
<PAGE>
July 1, 1999
Page 12
10 hour $ N/A
On-Demand $ N/A
$ N/A
* CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC.
Exhibit B
Customer's Colocation Space Order
[To be completed by Customer]
<PAGE>
July 1, 1999
Page 13
Exhibit C
The Level 3 Value Added Partner Program
The Level 3 Value Added Partner Program was developed with the understanding
that our Partner relationships are truly interdependent and are an important
component in positioning Level 3 for success in the telecommunications market.
We have developed a Partner program that is committed to giving our Partners the
products, services, and support they need to meet and exceed their business
objectives while meeting customers' demands.
Level 3 takes pride in carefully selecting Partners that share the idea of
interdependent relationships, quality service and technologically advanced
solutions. The Level 3 Partner Alliance Program is your opportunity to become
part of a highly innovative, industry-leading team experienced in building
powerful relationships.
The Program Philosophy
The Value Added Partner Program was developed to build strategic relationships
that enable Level 3 and its Partners to offer customers one complete solution
for their business and telecommunication needs. As a Level 3 Value Added
Partner, you can expect to work closely with our direct sales teams to offer
Level 3 services alongside their existing value added services. Level 3
acknowledges the value that our Partners bring and has put processes in place to
promote interaction between you and our direct sales team. We strive to ensure
that you have access to, and maximize the use of unique Level 3 resources
designed to help you exceed your business objectives.
Our Value Added Partner Program offers:
. A dedicated support team with proven experience in supporting
successful Partner relationships
. A team sales approach with Level 3 sales organization
. A comprehensive product and service mix that allows you to offer
integrated solutions to your customers
. Innovative management tools
. An aggressive Partner compensation plan
. A unique training certification program
Partner Support
Level 3 realizes that you are dependent on us to be able to service your
customers' needs timely and efficiently. Our Partner support begins with a
dedicated account support and customer care team that has been built by
management well experienced in the Partner industry. Our Partner program also
ensures superior provisioning processes and is in the process of implementing
industry first support tools that will empower you to proactively manage your
customers and proactively respond to their needs.
Each Partner's account team consists of the Channel Sales Manager (CSM), Partner
Account Consultant, Sales Engineer, and Program Coordinator. The Channel Sales
Manager serves as the single point of contact and works with our Partners
through the contracting process and on a day-to-day basis to coordinate and
support sales and retention opportunities. The other members of the
<PAGE>
July 1, 1999
Page 14
Partner's dedicated support team play a critical role in ensuring that the
Partner's orders are implemented in an effective and timely manner.
Finally, the Level 3 Partner Help Desk makes it easy for our Partners by
providing a one-stop shop for Partner inquiries on products, programs, pricing,
or order status and escalations. The Partner Help Desk is unique in that it is
managed by real-time support and is dedicated to serve our Partners only.
Products
As a Level 3 Value Added Partner you will have access to a host of products that
will complete your portfolio and enable you to meet your customers' evolving
needs. Between the value add services our Partners offer, and Level 3 products
and services, customers are provided with one solution.
Our entire product suite will include:
. Dedicated Internet Access
. Private Line
. Managed Modem
. Colocation
. Voice services
Tools
Level 3's superior products and support team are backed by quality back office
systems and innovative support tools. We know that as a Value Added Partner, you
are dependent on the information we provide and timeliness in which we provide
that information. Level 3 is committed to providing advanced on-line systems
that empower you to proactively manage your business.
Access to our On-Line Customer Service Center will ultimately include:
. On-line network performance monitoring
. On-line repair ticket submitting and tracking
. On-line order entry and status inquiry
. On-line access to customer invoices
. On-line communications and training
Compensation
Our highly competitive compensation plan has been designed to reinforce the
relationship between Level 3 and our Value Added Partners. Our compensation plan
provides you with commissions based on net aggregated billed revenues. You will
receive timely monthly payments as well as product specific one-time payments.
Our compensation structure has been designed to avoid channel conflict and
promote interaction between you and our Direct Sales force. Whether the
interaction to complete a sale is initiated by a Level 3 Sales Representative or
Level 3 Value Added Partner, both the VAP and Level 3 Sales
<PAGE>
July 1, 1999
Page 15
Representative receive 100% compensation and 100% of quota relief. This industry
unique plan promotes Partner interaction and drives both Level 3 sales and your
sales.
Training and Certification
The Level 3 Partner Alliance Program consists of a select group of Partners, and
therefore offers a thorough contracting and certification process. We recognize
the value in selecting our Partners carefully and providing you with the
knowledge base they need to succeed. Our Partner certification program has been
customized to meet your needs as a Partner and ensures that you are well
prepared to sell and represent Level 3 today and in the future as each of our
companies grow.
<PAGE>
July 1, 1999
Page 16
[LOGO OF LEVEL(3) COMMUNICATIONS
APPEARS HERE]
General Terms and Conditions
For Delivery of Service
These Terms and Conditions for Delivery of Service are applicable to Customer
Orders executed by Customer for Services delivered by Level 3 Communications,
LLC ("Level 3"), and are incorporated into each Customer Order. The Terms and
Conditions include these General Terms and Conditions for Delivery of Service
and all terms and conditions attached hereto which relate to any Service
provided by Level 3 to Customer. These Terms and Conditions are applicable to
sales of Services originating or terminating in the United States.
DEFINITIONS
-----------
Confidential Information: Licensed Software, and all source code, source
documentation, inventions, know-how, and ideas, updates and any documentation
and information related to the Licensed Software, and any non-public information
regarding the business of a party provided to either party by the other party
where such information is marked or otherwise communicated as being
"proprietary" or "confidential" or the like, or where such information is, by
its nature, confidential.
Committed Data Rate: A commitment made by Customer (where applicable)
obligating it to order and pay for a minimum amount of a Level 3 Service
expressed in Megabits per second (Mbps).
Customer: The person, firm or corporation so named on the Customer Order.
Customer Order: A request for Level 3 Service submitted by the Customer for
acceptance by Level 3.
Facilities: Any and all devices supplied by Level 3 used to deliver Services,
including but not limited to all terminal and other equipment, wires, lines,
circuits, ports, routers, switches, channel service units, data service units,
cabinets, racks, private rooms and the like. Facilities shall not include any
such devices sold to Customer by Level 3 and paid for by Customer or owned by
Customer or any third party.
Licensed Software: Computer software, in object code format only, the use of
which is required for use of Service ordered by Customer.
Premises: The location(s) occupied by Customer or its end users to which Service
will be delivered by Level 3. Premises does not include Space as defined below.
Revenue Commitment: A commitment made by Customer obligating it to order and
pay for a minimum volume of Services during an agreed term.
Service: A service offered by Level 3 pursuant to a Customer Order.
Space: The location(s) within Level 3 gateways into which Customer is permitted
to colocate telecommunications or internet equipment pursuant to a colocation
Customer Order accepted by Level 3.
Target Install Date: A written communication from Level 3 to Customer
indicating the date upon which it is anticipated that Services will be available
to Customer.
SECTION 1. CUSTOMER ORDERS
1.1 Submission of Customer Orders. To order any Service, Customer may submit to
-----------------------------
Level 3 an order form for Services, completed with Level 3's assistance
("Customer Order") requesting the provision of Service. Level 3's delivery of a
Target Install Date respecting such Service shall constitute Level 3's
acceptance of the Customer Order. The Customer Order and its backup detail shall
set forth the Service, the Premises and/or Space, the prices to be charged for
Services and any applicable term and/or Revenue Commitment.
1.2 Undertaking of Level 3. If Level 3 issues a Target Install Date respecting
----------------------
Services, Level 3 will furnish such Services in accordance with the Terms and
Conditions and any Customer Orders.
SECTION 2. BILLING AND PAYMENT
2.1 Payment of Bills. Level 3 bills all charges incurred by Customer on a
----------------
monthly basis. Level 3 bills in advance for all Services to be provided during
the ensuing month, except for charges which are dependent upon usage of Service,
which are billed in arrears. Billing for partial months will be prorated based
on a Calendar month. All bills are due upon receipt, and become past due thirty
(30) days later. The unpaid balance of any past due bills shall bear interest at
a rate of 1.5% per month (prorated on a daily basis beginning on the past due
date), or the highest rate allowed by law, whichever is less.
To the extent Customer orders any service designated as "Burstable," the
following billing method shall apply: Customer will be billed as set forth
above for its Committed Data Rate. In addition, over each month, Customer's
usage of the Service will be sampled by Level 3 in five minute inbound and
outbound averages.
<PAGE>
July 1, 1999
Page 17
At the end of the month, the top ten percent of the inbound and outbound
averages shall be discarded. The highest of the resulting ninetieth percentile
for inbound and outbound traffic will be compared to the Committed Data Rate. If
the ninetieth percentile of either inbound or outbound traffic is higher than
the Committed Data Rate, Customer will, in addition to being billed for its
Committed Data Rate, be billed for its utilization of the Service that exceeds
their Committed Data Rate, which shall be billed at the contracted-for price per
Mbps.
2.2 Taxes and Fees. Except for taxes based on Level 3's net income and ad
--------------
valorem, personal and real property taxes imposed on Level 3's property,
Customer shall be responsible for payment of all sales, use, gross receipts,
excise, access, bypass, franchise or other local, state and federal taxes, fees,
charges, or surcharges, however designated, imposed on or based upon the
provision, sale or use of the Services.
2.3 Regulatory and Legal Changes. In the event of any change in applicable law,
----------------------------
regulation, decision, rule or order that materially increases the costs or other
terms of delivery of Service, Level 3 and Customer agree to negotiate regarding
the rates to be charged to Customer to reflect such increase in cost and, in the
event that the parties are unable to reach agreement respecting new rates within
thirty (30) days after Level 3's delivery of written notice requesting
renegotiation, then (a) Level 3 may pass such increased costs through to
Customer, and (b) Customer may terminate the affected Customer Order without
termination liability upon sixty (60) days' prior written notice.
2.4 Disputed Bills. In the event that Customer disputes any portion of a Level
--------------
3 bill, Customer must pay the undisputed portion of the bill and submit a
written claim for the disputed amount. All claims must be submitted to Level 3
within sixty (60) days of receipt of billing for those Services. Customer
acknowledges that it is able to and that it is reasonable to require Customer to
dispute bills within that time, and Customer therefore waives the right to
dispute charges not disputed within the time frame set forth above.
2.5 Credit Approval and Deposits. Customer shall provide Level 3 with credit
----------------------------
information as requested, and delivery of Service is subject to credit approval.
Level 3 may require Customer to make a deposit (which will not exceed Customer's
estimated charges for two months' Service) as a condition to Level 3's
acceptance of any Customer Order, or as a condition to Level 3's continuation of
Service, which deposit shall be held by Level 3 as security for payment of
Customer's charges. At such time as the provision of Service to Customer is
terminated, the amount of the deposit will be credited to Customer's account and
any credit balance which may remain will be refunded.
2.6 Fraudulent Use of Services. Customer is responsible for all charges
--------------------------
attributable to Customer incurred respecting the Services, even if incurred as
the result of fraudulent or unauthorized use of the Services, unless Level 3 has
actual knowledge of the same and fails to notify Customer thereof. Level 3 may,
but is not obligated to, detect or report unauthorized or fraudulent use of
Services.
SECTION 3. DISCONTINUANCE OF CUSTOMER ORDERS
3.1 Discontinuance of Customer Order by Level 3. Level 3 may terminate any
-------------------------------------------
Customer Order and discontinue Service without liability:
A. If Customer fails to pay a past due balance for Services within thirty (30)
days of written notice thereof provided by Level 3;
B. If Customer violates any law, rule, regulation or policy of any government
authority having jurisdiction over the Services; if Customer makes a material
misrepresentation in any submission of information in a Customer Order or other
submission of information to Level 3; if Customer engages in any fraudulent use
of the Services; or if a court or other government authority having jurisdiction
over the Services prohibits Level 3 from furnishing the Services;
C. If Customer fails to cure its breach of any provision of these Terms and
Conditions or any Customer Order within thirty (30) days written notice thereof
provided by Level 3;
D. If Customer files bankruptcy, for reorganization, or fails to discharge an
involuntary petition therefore within sixty (60) days;
E. If Customer's use of the Services materially exceeds Customer's credit
limit, unless within fourteen (14) days written notice thereof by Level 3,
Customer provides adequate security for payment for the Services.
3.2 Effect of Discontinuance. Upon Level 3's discontinuance of Service to
------------------------
Customer, Level 3 may, in addition to all other remedies that may be available
to Level 3 at law or in equity, assess and collect from Customer any applicable
termination charge.
3.3 Resumption of Service. If Service has been discontinued by Level 3 and
---------------------
Customer requests that Service be restored, Level 3 shall have the sole and
absolute discretion to restore such Service. Nonrecurring charges, with the
exception of any charges for the build-out of Colocation Space already paid by
Customer, may apply to restoration of Service.
3.4 Discontinuance of Customer Order by Customer. Customer shall have the
--------------------------------------------
right to terminate any Customer Order and discontinue Service prior to the end
of the agreed term with respect to which a Customer Order has been executed
without payment of any
<PAGE>
July 1, 1999
Page 18
applicable termination charge if: (i) such Service is Unavailable (as defined
below) on two or more separate occasions of more than eight (8) hours each in
any 30 day period, and (ii) following written notice thereof from Customer to
Level 3, Level 3 has an Unavailability event of more than 12 hours at any time
within the 12 month period immediately following said notice. For purposes of
the foregoing, Unavailability shall mean the period of time beginning when
Customer reports an outage in its Service to the Level 3 Customer Service and
Support Organization (1-877-4LEVEL3) and shall end when the Service is
operative. Unavailability shall not apply to any outage which is caused by
Customer, Customer's end users or any third party, which results from failure of
power or equipment provided by Customer or others, which occurs or continues
during any period in which Level 3 is not given access to the Premises or the
Space, or which results from maintenance events. Customer must exercise its
right to terminate under this Section, in writing, no later than thirty (30)
days after the Unavailability event giving rise to a right of termination
hereunder.
SECTION 4. DELIVERY OF SERVICES
4.1 Level 3 Access to Premises and Space. Customer shall allow Level 3 access
------------------------------------
to the Premises to the extent reasonably determined by Level 3 for the
installation, inspection and scheduled or emergency maintenance of Facilities
relating to the Service. Level 3 shall notify Customer two (2) business days in
advance of any regularly scheduled maintenance that will require access to the
Premises. Level 3 retains the right to access any Space for any legitimate
business purpose.
4.2 Level 3 Facilities. Level 3 will use reasonable efforts to provide and
------------------
maintain the Facilities in good working order. Customer shall not and shall not
permit others to rearrange, disconnect, remove, attempt to repair, or otherwise
tamper with any of the Facilities. If the same occurs without first obtaining
Level 3's written approval, in addition to being a breach by Customer of
Customer's obligations hereunder, Customer shall (1) pay Level 3 the cost to
repair any damage to the Facilities caused thereby; and (2) be responsible for
the payment of service charges in the event that maintenance or inspection of
the Facilities is required as a result of Customer's breach of this Section. In
no event shall Level 3 be liable to Customer or any other person for
interruption of Service or for any other loss, cost or damage caused or related
to improper use or maintenance of the Facilities, unless the same is caused by
the negligence of Level 3, and then only to the extent of Section 5.2
4.3 Title and Power. Title to all Facilities (except as otherwise agreed)
---------------
shall remain with Level 3. The electric power consumed by such Facilities on the
Premises shall be provided by and maintained at the expense of Customer.
Electric power to the Space shall be provided by Level 3.
4.4 Customer-Provided Equipment. Level 3 may install certain Customer provided
---------------------------
communications equipment upon installation of Service and the Facilities, but
unless otherwise agreed by Level 3 in writing, Level 3 shall not thereafter be
responsible for the operation or maintenance of any Customer provided
communication equipment. Level 3 shall not be responsible for the transmission
or reception of signals by Customer-provided equipment or for the quality of, or
defects in, such transmission.
4.5 Removal of Facilities. Customer agrees to allow Level 3 to remove all
---------------------
Facilities from the Premises:
A. after termination of the Service in connection with which the Facilities
were used; and
B. for repair, replacement or otherwise as Level 3 may determine is necessary,
but Level 3 shall use reasonable efforts to minimize disruptions to the Service
caused thereby.
At the time of such removal, the Facilities shall be in the same condition as
when installed, normal wear and tear excepted. Customer shall reimburse Level 3
for the depreciated cost of any Facilities not in such condition.
4.6 Service Subject to Availability. The furnishing of Service is subject to
-------------------------------
the availability thereof, on a continuing basis, and is limited to the capacity
of Level 3 to provide the Service as well as the capacity which Level 3 may
obtain from other carriers to furnish Service from time to time as required at
the sole discretion of Level 3. Nothing in these Terms and Conditions shall be
construed to obligate Customer to submit, or Level 3 to accept, Customer Orders.
In the event Service becomes unavailable pursuant to this paragraph 4.6,
Customer shall have the rights set forth in Section 3.4 of these Terms and
Conditions.
SECTION 5. OBLIGATIONS AND LIABILITY LIMITATION
5.1 Obligations of the Customer. Customer shall be responsible for:
---------------------------
A. The payment of all charges applicable to the Service;
B. Damage or loss of the Facilities installed on the Premises or in the Space
(unless caused by the negligence or willful misconduct of the employees or
agents of Level 3);
C. Providing the level of power, heating and air conditioning necessary to
maintain the proper environment on the Premises for the provision of Service;
D. Providing a safe place to work and complying with all laws and regulations
regarding the working conditions on the Premises;
<PAGE>
July 1, 1999
Page 19
E. Granting Level 3 or its employees access to the Premises as set forth in
Section 4.1 of these Terms and Conditions; and
F. Keeping Level 3's Facilities located on Premises free and clear of any liens
or encumbrances.
5.2 Liability. Except as provided in Section 8.4, the liability of Level 3 for
---------
damages arising out of the furnishing of or the failure to furnish Service,
including but not limited to mistakes, omissions, interruptions, delays,
tortious conduct, representations, errors, or other defects, whether caused by
acts of commission or omission, shall be limited to the extension of credit
allowances or refunds due under any applicable Service Level Agreement. Except
as provided in Section 8.4, the extension of such credit allowances or refunds
shall be the sole remedy of Customer and the sole liability of Level 3.
5.3 No Special Damages. Notwithstanding any other provision hereof, neither
------------------
party shall be liable for any indirect, incidental, special, consequential,
exemplary or punitive damages (including but not limited to damages for lost
profits or lost revenues), whether or not caused by the acts or omissions or
negligence of its employees or agents, and regardless of whether such party has
been informed of the possibility or likelihood of such damages.
5.4 Disclaimer of Warranties. LEVEL 3 MAKES NO WARRANTIES OR REPRESENTATIONS,
------------------------
EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR
OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
USE, EXCEPT THOSE EXPRESSLY SET FORTH IN ANY APPLICABLE SERVICE LEVEL AGREEMENT.
SECTION 6. SOFTWARE TERMS
6.1 License. If and to the extent that Customer requires the use of Licensed
-------
Software in order to use the Service supplied under any Customer Order, Customer
shall have a nonexclusive, nontransferable (except pursuant to paragraph 8.2
hereof) license to use such Licensed Software only and solely to the extent
required to permit delivery of the Service. Customer may not claim title to or
any ownership interest in any Licensed Software (or any derivations or
improvements thereto), and Customer shall execute any documentation reasonably
required by Level 3 to memorialize Level 3's existing and continued ownership of
the Licensed Software.
6.2 Restrictions. Customer agrees that it shall not:
------------
A. copy the Licensed Software except for emergency backup purposes or as
permitted by the express written consent of Level 3;
B. reverse engineer, decompile or disassemble the Licensed Software;
C. sell, lease, license or sublicense the Licensed Software; or
D. create, write or develop any derivative software or any other software
program based on the Licensed Software.
SECTION 7. CONFIDENTIAL INFORMATION
7.1 Disclosure and Use. Any Confidential Information disclosed by either party
------------------
shall be kept by the receiving party in strict confidence and not disclose to
any third party (except as authorized by these Terms and Conditions) without
the disclosing party's express written consent. Each party agrees to treat all
Confidential Information of the other in the same manner as it treats its own
proprietary information, but in no case will the degree of care be less than
reasonable care.
7.2 Restricted Use. Each party agrees:
--------------
A. to use Confidential Information only for the purposes of performance of any
Customer Order or as otherwise expressly permitted by these Terms and
Conditions;
B. not to make copies of Confidential Information or any part thereof except for
purposes consistent with these Terms and Conditions; and
C. to reproduce and maintain on any copies of any Confidential Information such
proprietary legends or notices (whether of disclosing party or a third party) as
are contained in or on the original or as the disclosing party may otherwise
reasonably request.
7.3 Exceptions. Notwithstanding the foregoing, each party's confidentiality
----------
obligations hereunder shall not apply to information which:
A. is already known to the receiving party;
B. becomes publicly available without fault of the receiving party;
C. is rightfully obtained by the receiving party from a third party without
restriction as to disclosure, or is approved for release by written
authorization of the disclosing party;
D. is developed independently by the receiving party without use of the
disclosing party's Confidential Information;
E. is required to be disclosed by law.
7.4 Publicity. This agreement grants no right to use any party's or its
---------
affiliates' trademarks, service marks or trade names or to otherwise refer to
the other party in any marketing, promotional or advertising materials or
activities. Neither party shall issue any publication or press release relating
to, or otherwise disclose the existence of, or the terms and conditions of any
contractual relationship between Level 3 and Customer, except as may be required
by law.
<PAGE>
July 1, 1999
Page 20
7.5 Remedies. Notwithstanding any other section of these Terms and Conditions,
--------
the non-breaching party shall be entitled to seek equitable relief to protect
its interests, including but not limited to preliminary and permanent injunctive
relief. Nothing stated herein shall be construed to limit any other remedies
available to the parties.
7.6 Survival. The obligations of confidentiality and limitation of use shall
--------
survive the termination of any applicable Customer Order.
SECTION 8. GENERAL TERMS
8.1 Force Majeure. Neither party shall be liable, nor shall any credit
-------------
allowance or other remedy be extended, for any failure of performance or
equipment due to causes beyond such party's reasonable control, including but
not limited to: acts of God, fire, flood or other catastrophes; any law, order,
regulation, direction, action, or request of any governmental entity or agency,
or any civil or military authority; national emergencies, insurrections, riots,
wars; unavailability of rights-of-way or materials; or strikes, lock-outs, work
stoppages, or other labor difficulties. In the event any of the foregoing occur
and Level 3 is unable to deliver the Service for fourteen (14) consecutive days,
Customer shall not be obligated to pay Level 3 for the affected Service for so
long as Level 3 is unable to deliver them, provided, however, that the term of
the Customer Order respecting those Services shall be extended for a period of
time equal to the period of time for which Level 3 was unable to provide and
Customer was not required to pay for the affected Service.
8.2 Assignment or Transfer. Except with respect to a merger or sale of
----------------------
substantially all of Customer's assets, Customer may not transfer, sublease or
assign the use of Service without the express prior written consent of Level 3,
and then only when such transfer or assignment can be accomplished without
interruption of the use or location of Service. Level 3 will not unreasonably
withhold its consent. These Terms and Conditions shall apply to any transferees
or assignees. Customer shall remain liable for the payment of all charges due
under each Customer Order.
8.3 Notices. Notices hereunder shall be deemed properly given when delivered,
-------
if delivered in person, or when sent via facsimile, overnight courier,
electronic mail or when deposited with the U.S. Postal Service, (a) with respect
to Customer, the address listed on any Customer Order, or (b) with respect to
Level 3, to: Contracts Administration, Level 3 Communications, LLC, 1450
Infinite Drive, Louisville, CO 80027. Customer shall notify Level 3 of any
changes to its addresses listed on any Customer Order.
8.4 Indemnification by Level 3. Level 3 shall indemnify, defend and hold
--------------------------
Customer harmless from any claim, loss, damage, expense or liability (including
attorney's fees and court costs) (hereinafter "Claims") made against Customer
for property damage, patent infringement or personal injury caused by Level 3's
negligence or willful misconduct.
8.5 Indemnification by Customer. Customer shall indemnify, defend and hold
---------------------------
Level 3 harmless from Claims (including Claims for patent infringement) (i) made
against Level 3 by any end user of Customer in connection with the delivery or
consumption of Service, (ii) made against Level 3 arising out of any commission
or negligent omission by Customer in connection with the Service, or (iii)
arising from Customer's negligence or willful misconduct.
8.6 Application of Tariffs. Level 3 may elect or be required to file with the
-----------------------
appropriate regulatory agency tariffs respecting the delivery of certain
Service. In the event that such tariffs are filed respecting Service ordered by
Customer, then (to the extent such provisions are not inconsistent with the
terms of a Customer Order) the terms set forth in the applicable tariff shall
govern Level 3's delivery of, and Customer's consumption or use of, such
Service.
8.7 Contents of Communications Level 3 does not monitor and shall have no
--------------------------
liability or responsibility for the content of any communications transmitted
via the Service, and Customer shall hold Level 3 harmless from any and all
claims (including claims by governmental entities seeking to impose penal
sanctions) related to such content attributable to Customer or its agents,
employees or end users.
8.8 Entire Understanding These Terms and Conditions, including any Customer
--------------------
Orders executed hereunder, constitute the entire understanding of the parties
related to the subject matter hereof. In the event of any conflict between these
Terms and Conditions and the terms and conditions of any Customer Order, these
Terms and Conditions shall control. These Terms and Conditions shall be
governed and construed in accordance with the laws of the state of Colorado.
8.9 No Waiver. No failure by either party to enforce any rights hereunder shall
---------
constitute a waiver of such right(s).
<PAGE>
July 1, 1999
Page 21
ADDITIONAL TERMS AND CONDITIONS
FOR PRIVATE LINE SERVICE
The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders metropolitan (local), city to city (within the
United States) and international (from the United States to another country)
private line, non-switchable circuits (the "Private Line Services").
1. Any state or federal tariffs applicable to the Private Line Services to be
delivered under any Customer Order are incorporated into the terms thereof.
Level 3's pricing to Customer for Private Line Services may, if required, be
subject to PUC or other regulatory approval.
2. The nonrecurring charges and monthly recurring rates for the Private Line
Services provided by Level 3 are shall be set forth in each Customer Order.
3. The rates and other charges set forth in each Customer Order are established
in reliance on the term commitment made therein, and Customer shall pay the same
in accordance therewith. In the event that Customer terminates Services ordered
in any Customer Order which is accepted by Level 3 or in the event that the
delivery of Services is terminated due to a failure of Customer to satisfy the
requirements set forth in these Terms and Conditions prior to the end of the
agreed term, Customer shall (unless Customer has made a Revenue Commitment) pay
a termination charge equal to the percentage of the monthly recurring charges
for the terminated Private Line Services calculated as follows:
A. 100% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 1-12 of the agreed term; plus
B. 75% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 13-24 of the agreed term; plus
C. 50% of the monthly recurring charge that would have been incurred for the
Private Line Service for months 25 through the end of the agreed term.
In the event that a Revenue Commitment is made and is then being satisfied by
Customer, Customer may terminate, rearrange or reconfigure the Private Line
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.
4. Level 3 makes the Service Level Agreements in the attached Exhibit "A"
respecting Private Line Service.
<PAGE>
July 1, 1999
Page 22
Standard Service Level Agreement (SLA)
--------------------------------------
International / US National Private Line
International/National Private Line service will be backed by a Standard Service
Level Agreement that has two components: a Service Delivery SLA and a Network
Performance SLA.
NOTE: The total number of credits per month for both Service Delivery is limited
to four days.
Service Delivery SLA
- --------------------
<TABLE>
<CAPTION>
============================================================================================
US On-net City Standard Service Delivery Intervals
(US NPLS and IPL)
============================================================================================
Nx64K, DS1, E1* DS3 0C3/0C12
- --------------------------------------------------------------------------------------------
US NPLS IPL US NPLS IPL US NPLS IPL
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
On-Net 20 20 30 30 40 30
working working working working working
days days days days days
- --------------------------------------------------------------------------------------------
Off-Net building 30 60 45 60 60 ICB
within SSA working working working working working
(either end) days days days days days
- --------------------------------------------------------------------------------------------
Off-net building 30 60 45 60 70 ICB
outside SSA (within working working working working working
50 miles) days days days days days
(either end)
============================================================================================
<CAPTION>
============================================================================================
US Domestic Served Standard Service Delivery Intervals
Off-net City1
============================================================================================
DS1 DS3 0C3
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
One side of the 30 working days 45 working days 60 working days (70 days
circuit is served by would apply if the
an off-net city POP customer location served
by the gateway city is
outside of the SSA)
============================================================================================
</TABLE>
* Off-net building must have DS3 local service availability in order to
support
** E1 delivery is available in NYC only and is dependant upon local
availability of E1 delivery
. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.
. Mean Time to Respond - Within 30 minutes
. 2 hour calendar month Average Time To Repair (ATTR)
If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:
. Any customer inquiry to the Level 3 Customer Service Center that results in
a Time to Respond of Greater than 30 minutes will result in a one day
service credit when the customer notifies Level 3 of the failure.
. ATTR is calculated as a monthly average. All reported customer trouble
tickets will be totaled over the month, then the average time to close each
ticket will be calculated. If the ATTR is greater than 2 hours, the
customer will receive a one day service credit.
<PAGE>
July 1, 1999
Page 23
. Credits will only be applied to events where the Customer reports a failure
to the Level 3 Customer Care organization. Customers must report any
Service Delivery failures within five business days of the event
Network Performance SLA
. 99.99 % Service Availability
. Target Bit Error Rate 1
End-to-end link (Level 3 on-net) Less than 1 x 10-11 at T1 Rate
(equivalent rate for DS0 1x10-6)
End-to-end link (Non-Level 3 access) Less than 1 x 10-7 (Dependent
on local supplier)
. Target Severely Errored Seconds 2
End-to-end link (Level 3 fiber access) Less than 0.008%
End-to-end link (Non-Level 3 access) Less than 0.013% (Dependent on
local supplier)
. Availability refers to customer's access point to the Level 3 Backbone
Network, including their Level 3 provided local access circuit.
. Availability does not include regularly scheduled or emergency maintenance
events, or customer caused outages or disruptions.
. Customers may report service unavailability events of longer than 15
consecutive minutes to Level 3 customer service within 48 hours of the
event. If the event is confirmed by Level 3 customer service, the customer
will receive a pro-rated service credit that equals the time of the
unavailability.
NOTES:
. All measurements are based on monthly averages.
. These guarantees only apply to the Level 3 Network (including the Local
Access to the customer). They do not apply to off-net city circuits which
do not transit the Level 3 Backbone Network (or the portion the circuit
which does not transit the Level 3 Backbone)
. This SLA does not apply to periods of regularly scheduled or emergency
maintenance that Level 3 performs on its network or associated hardware and
software.
. Credits will only be applied to events where the Customer reports a network
performance failure to the Level 3 Customer Care organization.
. Customers must report any Network Performance failures (unavailability or
delay) within 48 hours (two business days) of the service affecting event
in order to receive a credit. Customers must report any Service Delivery
failures within five business days of the event.
- -----------------------
1 Bit Error Rate Figure excludes periods of more than 10 seconds having error
rates equal to, or worse than 1x10-3
2 Severely Errored Seconds have bit error rates, to, or worse than 1x10-3
<PAGE>
July 1, 1999
Page 24
ADDITIONAL TERMS AND CONDITIONS
FOR TELEPHONY AND IP COLOCATION
The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders the use of space within Level 3 gateways to be
used for the purpose of colocating telecommunications equipment or equipment
used for connection to the internet (the "Space").
1. Customer is granted the right to occupy the Space identified in a Customer
Order. Customer shall be permitted reasonable access to the Space subject to any
and all rules, regulations and access requirements imposed by Level 3 governing
such access. Customer may submit multiple Customer Orders requesting use of
different Space, each of which shall be governed by the terms hereof.
2. Customer shall be permitted to use the Space only for placement and
maintenance of communications equipment. The nonrecurring and monthly recurring
charges for the Space and any Services ordered by Customer shall be set forth in
each Customer Order. Customer hereby agrees, within six (6) months of ordering
such Space, to use the Space for placement and maintenance of telecommunications
or internet access equipment. In the event Customer fails to fill said Space as
set forth herein, Level 3 has the right to reclaim the proportion of Space not
being used exclusively as indicated above, if the same is not cured within
forty-five (45) days' prior notice thereof to Customer. Customer agrees to
immediately vacate such recaptured Space and Level 3 shall reduce the Colocation
fees allocated to such recaptured Space. Customer further agrees that no refunds
shall be made to Customer regarding such recaptured Space.
3. Level 3 shall perform such janitorial services, environmental systems
maintenance, power plant maintenance and other actions as are reasonably
required to maintain the gateway in which the Space is located in a condition
which is suitable for the placement of telecommunications and internet access
equipment. Customer shall maintain the Space in an orderly and safe condition,
and shall return the Space to Level 3 at the conclusion of the term set forth in
the Customer Order in the same condition (reasonable wear and tear excepted) as
when such Space was delivered to Customer. EXCEPT AS EXPRESSLY STATED HEREIN OR
IN ANY CUSTOMER ORDER, THE SPACE SHALL BE DELIVERED AND ACCEPTED "AS IS" BY
CUSTOMER, AND NO REPRESENTATION HAS BEEN MADE BY LEVEL 3 AS TO THE FITNESS OF
THE SPACE FOR CUSTOMER'S INTENDED PURPOSE.
4. The term of use of the Space shall begin on the later to occur of the date
requested by Customer or the date that Level 3 completes the build-out of the
Space. Customer's use of the Space beyond the initial term shall be on a
month-to-month basis, unless Customer and Level 3 have agreed in writing to a
renewal of the right to use such Space. Customer hereby agrees to pay for the
Space and any related Services for the term of this Agreement. The rates and
other charges set forth in each Customer Order are established in reliance on
the term commitment made therein. In the event that Customer terminates a
Customer Order for Space which is accepted by Level 3 or in the event that the
Customer Order is terminated due to a failure of Customer to satisfy the
requirements set forth herein or in the Customer Order prior to the end of the
agreed term, Customer shall pay a termination charge equal to the costs incurred
by Level 3 in returning the Space to a condition suitable for use by other
parties, plus the percentage of the monthly recurring fees for the terminated
Space calculated as follows:
a. 100% of the monthly recurring fees that would have been charged for the Space
for months 1-12 of the agreed term; plus
b. 75% of the monthly recurring fees that would have been charged for the Space
for months 13-24 of the agreed term; plus
c. 50% of the monthly recurring fees that would have been charged for the Space
for months 25 through the end of the agreed term.
In the event that a Revenue Commitment is made and is then being satisfied by
Customer, Customer may terminate the Space ordered pursuant to a Customer Order
without payment of the termination charge specified above; PROVIDED, HOWEVER,
that Customer shall be responsible for payment of Level 3's then-current
standard nonrecurring charges applicable to such termination.
5. Level 3 shall use reasonable efforts to complete the build-out and make the
Space available to Customer on or before the date requested by Customer. In the
event that Level 3 fails to complete the build-out within sixty (60) days of the
date requested by Customer, then Customer may terminate its rights to use such
Space and receive a refund of any fees paid for the use or build-out of such
Space.
6. Customer shall abide by any posted or otherwise communicated rules relating
to use of, access to, or
<PAGE>
July 1, 1999
Page 25
security measures respecting the Space. Customers use of the Space will be
immediately terminated in the event Customer or any of its agents or employees
is found in Level 3's gateway with any firearms, drugs, alcohol or is found
engaging in any criminal activity, eavesdropping, foreign intelligence, card
selling or slamming. Persons found engaging in any such activity or in
possession of the aforementioned prohibited items will be immediately escorted
from the gateway. In the event that unauthorized parties gain access to the
Space through access cards, keys or other access devices provided to Customer,
Customer shall be responsible for any damages incurred as a result thereof.
Customer shall be responsible for the cost of replacing any security devices
lost or stolen after delivery thereof to Customer. In addition, Level 3 shall
have the right to terminate Customer's use of the Space or the Services in the
event that: (a) Level 3's rights to use the facility within which the Space is
located terminates or expires for any reason; (b) Customer has violated the
terms hereof or of any Customer Order submitted hereunder; (c) Customer makes
any material alterations to the Space without first obtaining the written
consent of Level 3; (d) Customer allows personnel or contractors to enter the
Space who have not been approved by Level 3 in advance; or (e) Customer violates
any posted or otherwise communicated rules relating to use of or access to the
Space. With respect to items (b), (c), (d) and (e) immediately above, unless the
same interferes or has the potential to interfere with other Level 3 Colocation
customers, Level 3 shall provide Customer a written notice of the foregoing and
a 10-day opportunity to cure the same before terminating Customer's rights to
the Space.
7. Customer may sublease the Space under the following conditions: i) all
proposed sublessees must be approved, in writing, by Level 3 in Level 3's sole
discretion; ii) Customer hereby guarantees that all Sublessees shall abide by
all terms and conditions set forth between Customer and Level 3; iii) Customer
shall indemnify, defend and hold Level 3 harmless from all claims brought
against Level 3 arising from any act or omission of any subcontractor and iv)
any sublessee shall be considered customer's agent and all of sublessees' acts
and omissions and usage of the Space or Services hereunder shall be attributable
to Customer for the purposes of these Terms and Conditions.
8. Level 3 reserves the right to change the location or configuration of the
Space, provided, however, that Level 3 shall not arbitrarily or discriminatorily
require such changes. Level 3 and Customer shall work in good faith to minimize
any disruption in Customer's services that may be caused by such changes in
location or configuration of the Space.
9. Prior to occupancy and during the term of use of any Space, Customer shall
procure and maintain the following minimum insurance coverage: (a) Workers'
Compensation in compliance with all applicable statutes of appropriate
jurisdiction. Employer's Liability with limits of $500,000 each accident; (b)
Commercial General Liability with combined single limits of $1,000,000 each
occurrence; and (c) "All Risk" Property insurance covering all of Customers
personal property located in the Space. Customer's Commercial General Liability
policy shall be endorsed to show Level 3 (and any underlying property owner, as
requested by Level 3) as an additional insured. All policies shall provide that
Customer's insurers waive all rights of subrogation against Level 3. Customer
shall furnish Level 3 with certificates of insurance demonstrating that Customer
has obtained the required insurance coverages prior to occupancy of the Space.
Such certificates shall contain a statement that the insurance coverage shall
not be materially changed or cancelled without at least thirty (30) days prior
written notice to Level 3. Customer shall require any contractor entering the
Space on its behalf to procure and maintain the same types, amounts and coverage
extensions as required of Customer above.
10. Customer may order and pay for Level 3 to perform certain limited ("remote
hands") maintenance services on Customer's equipment within the space, which
shall be performed in accordance with Customer's directions. "Remote hands"
maintenance services includes power cycling equipment. Level 3 shall in no event
be responsible for the repair, configuration or tuning of equipment, or for
installation of Customer's equipment (although Level 3 will provide reasonable
assistance to Customer in such installation).
<PAGE>
July 1, 1999
Page 26
ADDITIONAL TERMS AND CONDITIONS
FOR DEDICATED, RAPID ACCESS AND DIAL UP
INTERNET ACCESS
The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders dedicated, rapid access and/or dial-up
Internet Access Service (the "Internet Access Services").
1. Any state or federal tariffs applicable to the Internet Access Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
Internet Access Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.
2. The nonrecurring charges and monthly recurring rates for the Internet Access
Services provided by Level 3 to Customer are set forth in each Customer Order.
3. The rates and other charges set forth in each Customer Order are established
in reliance on the term and/or volume commitment made therein, and Customer
agrees to pay the same. In the event that Customer terminates Internet Access
Services ordered in any Customer Order which is accepted by Level 3 or in the
event that the delivery of Internet Access Services is terminated due to a
failure of Customer to satisfy the requirements set forth herein or in the
Customer Order prior to the end of the agreed term, Customer shall (unless
Customer has made a Revenue Commitment) pay a termination charge equal to the
percentage of the monthly recurring charges for the terminated Internet Access
Services calculated as follows:
a. 100% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 1-12 of the agreed term; plus
b. 75% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 13-24 of the agreed term; plus
c. 50% of the monthly recurring charge that would have been incurred for the
Internet Access Service for months 25 through the end of the agreed term.
Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the Internet Access
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.
4. Level 3 provides only access to the Internet; Level 3 does not operate or
control the information, services, opinions or other content of the Internet.
Customer agrees that it shall make no claim whatsoever against Level 3 relating
to the content of the Internet or respecting any information, product, service
or software ordered through or provided by virtue of the Internet.
5. This Section 5 applies only to Customers who order Dial-Up Internet Access
Services. The Dial-Up Internet Access Services shall be used only by an officer,
director, employee or agent ("Employee") of Customer. Customer shall assure that
each Employee accessing the Dial-Up Internet Access Service abides by these
Terms and Conditions. Prior to any Employee accessing Dial-Up Internet Access
Services, such Employee will be required to accurately complete an on-line
registration process. During this registration process, each Employee will be
required to identify himself/herself through some means satisfactory to Level 3.
Pursuant to the registration process, by clicking an "ACCEPT" icon, each
Employee will (i) agree to accurately complete the registration; (ii) agree to
abide by all of the provisions, terms, limitations, conditions and restrictions
of these Terms and Conditions; and (iii) agree to use the Dial-Up Internet
Access Services in accordance with any requirements set forth in the online
registration process and for the legitimate business purposes of Customer only.
Each Employee will also receive a password which such Employee will agree to
keep in strict confidence and which will be required whenever accessing the
Dial-Up Internet Access Services.
6. If Customer orders Burstable Dedicated Internet Access Services pursuant to a
Customer Order, the Customer shall be permitted to make two (2) changes to its
Committed Data Rate each contract year, provided that such change be to a higher
Committed Data Rate.
7. This Section 7 applies only to Customers who order Dedicated Internet Access
and Rapid Access Services. Level 3 makes the following Service Level Agreements
attached as Exhibit "A" respecting Dedicated Internet Access and Rapid Access
Service.
<PAGE>
July 1, 1999
Page 27
Standard Service Level Agreement (SLA)
--------------------------------------
Release 1
---------
Internet Dedicated Access
Dedicated Internet Access service will be backed by a Standard Service Level
Agreement that has two components: a Service Delivery SLA and a Network
Performance SLA.
NOTE: The total number of credits per month for both Service Delivery and
Network Performance is limited to four days.
Service Delivery SLA
. 30 Calendar Day Installation Guarantee for Customers buying Dedicated
Internet Access in speeds from 64 Kbps - 1.544 Kbps within the Standard
Service Area.
. 45 Calendar Day Installation Guarantee for Customers buying Dedicated
Internet Access in speeds from 3 Mbps - 45 Mbps within the Standard Service
Area.
. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.
. Time to Respond - Within 30 minutes
. 2 hour calendar month Average Time To Repair (ATTR)
If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:
. Any customer inquiry to the Level 3 Customer Service Center that results in
a Time to Respond of Greater than 30 minutes will result in a one day
service credit when the customer notifies Level 3 of the failure.
. ATTR is calculated as a monthly average. All reported customer trouble
tickets will be totaled over the month, then the average time to close each
ticket will be calculated. If the ATTR is greater than 2 hours, the
customer will receive a one day service credit.
. Credits will only be applied to events where the Customer reports a failure
to the Level 3 Customer Care organization. Customers must report any
Service Delivery failures within five business days of the event.
Network Performance SLA
Service Availability
. Availability refers to customer's access point to the Level 3 Internet
network, including their Level 3 provided local access circuit, and the
customer's port.
. Unavailability Events are defined as any outage of the Level 3 provided
local access circuit and the customer's port of longer than 15 consecutive
minutes.
. The Availability Guarantee does not extend to the performance of Internet
networks controlled by other companies, or traffic exchange points
(including NAPs and MAEs) which are controlled by other companies.
. Availability does not include regularly scheduled or emergency maintenance
events, or customer caused outages or disruptions.
. Customers may report service unavailability events of longer than 15
consecutive minutes to Level 3 customer service within 48 hours of the
event. If the event is confirmed by Level 3 customer service, the customer
will receive a pro-rated service credit that equals the time of the
unavailability.
<PAGE>
July 1, 1999
Page 28
. 40 ms One-Way Delay Guarantee
. The Delay guarantee refers to the average delay parameters among the Level
3 Gateway sites in the United States. It does not extend to the customer's
local access circuit, transit or peering connections, or to circuits to the
traffic exchange points, including NAPs and MAEs.
. Delay is measured as the average delay, over a calendar month, of traffic
between all major Gateways on the Level 3 U.S. Internet network.
. Level 3 will publicly report the Average Monthly Delay measurement for the
Level 3 U.S. Internet Network at the end of every month.
. If the customer reports that Level 3 has failed to meet the Delay
guarantee, and this is confirmed by Level 3 customer service, the customer
will be issued one day service credit.
NOTES:
. All measurements are based on monthly averages.
. These guarantees only apply to the Level 3 Internet Network. They do not
apply to NAP or transit connections, or to any traffic once it leaves the
Level 3 network.
. This SLA does not apply to periods of regularly scheduled or emergency
maintenance that Level 3 performs on its network or associated hardware and
software.
. Credits will only be applied to events where the Customer reports a network
performance failure to the Level 3 Customer Care organization.
. Customers must report any Network Performance failures (unavailability or
delay) within 48 hours (two business days) of the service affecting event
in order to receive a credit. Customers must report any Service Delivery
failures within five business days of the event.
<PAGE>
July 1, 1999
Page 29
ADDITIONAL TERMS AND CONDITIONS
FOR MANAGED MODEM - DEDICATED AND QUICKSTART
TRANSIT SERVICES
The following additional terms and conditions are applicable where, pursuant to
a Customer Order Customer orders services required to allow access to "Dedicated
Services," "Dedicated Service with QuickStart" and "Transit Services" as offered
by Level 3 (the "Managed Modem Services") ordered by Customer under any Customer
Order.
1. Any state or federal tariffs applicable to the Managed Modem Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
Managed Modem Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.
2. In the event Customer orders "Dedicated Service," end user traffic will be
routed through and aggregated in Level 3's facility, sent to the Customer's
Premises via a dedicated circuit, and then routed to its final destination by
Customer. In the event that Customer orders "Transit Services," End User traffic
will be routed to Level 3's facility and then routed to its final destination by
Level 3 via the Internet. Dedicated Service with "QuickStart" will initially be
provisioned to the Customer in the same fashion as Transit Services, until such
time as Level 3 has provisioned the dedicated circuit to send end user traffic
from Level 3's facility to the Customer's Premises. QuickStart will then be
migrated to standard Dedicated Service. Customers ordering Dedicated Services
will be required to make a portion of the Premises available to Level 3 for the
placement of equipment necessary to provide such Dedicated Services. For
Dedicated Service, all Customer CPE as well as the private line necessary to
support this service will be ordered, installed and managed by Level 3. Any
telephone numbers assigned to Customer for the purpose of providing Managed
Modem Services hereunder shall be property of Level 3; PROVIDED, however, that
Level 3 shall be obligated to release such numbers to Customer upon expiration
or termination hereof if and only if Customer is then in compliance with all of
the terms contained herein or in the General Terms and Conditions.
3. Section 1.1 of the General Terms and Conditions for Delivery of Service
notwithstanding, a Customer order for Managed Modem Service shall be accepted by
Level 3 once Level 3 has provisioned and tested the ports. Customer's billing
respecting said ports shall commence once tested and found to be functioning
properly by Level 3 notwithstanding Customer's: i) refusal to accept the ports
or ii) Customer's refusal to acknowledge communications by Level 3 to Customer
respecting the ports. Termination liability shall apply once a Customer Order
for these Services is accepted by Level 3.
4. Customer shall have the option to purchase twenty percent (20%) port overage
from Level 3. If ordered, Level 3 shall provision an additional twenty percent
(20%) of ports over the number of ports actually ordered by Customer to accept
Customer traffic in the event Customer's traffic bursts and its usage exceeds
the capacity of the ports actually ordered. In the event Customer chooses not to
purchase twenty percent (20%) port overage from Level 3, if the Customer's
traffic bursts as set forth above, Customer will get a busy signal in the event
its ordered capacity is exceeded.
5. Customer must utilize all Managed Modem ports provisioned hereunder at no
less than fifty percent (50%) of the capacity of such port. Customer agrees to
allow Level 3 to monitor Customer's utilization of the ports provisioned herein.
In the event Customer is Under-Utilizing (as defined below) such ports, Level 3
retains the right to reclaim such ports after which Customer shall have no
further right to use the ports Under-Utilized. Termination liability shall apply
to any ports reclaimed pursuant to this paragraph.
For the purpose of this Section, "Under-Utilization" shall mean the use of less
than fifty percent (50%) of the capacity of any given port for any sixty (60)
day period as determined by Level 3. Under-Utilization shall not be applicable
to the first sixty (60) day period immediately following the provisioning of any
Managed Modem port.
6. The nonrecurring charges and monthly recurring rates for the Managed Modem
Services provided by Level 3 to Customer shall be set forth in each Customer
Order. Level 3 will dedicate the specified number of ports to Customer in the
Level 3 facilities as identified in each Customer Order. Customer may be
responsible for additional monthly charges if Customer's use of the Managed
Modem Services requires and utilizes more ports than the number committed to and
ordered by Customer.
7. The rates and other charges set forth in each Customer Order are established
in reliance on the term commitment made therein, and Customer agrees to pay the
same. In the event that Customer terminates Managed Modem Services ordered in
any Customer Order which is accepted by Level 3 or in the event that the
delivery of Managed Modem Services is terminated due to a failure of Customer to
satisfy the requirements
<PAGE>
July 1, 1999
Page 30
set forth herein or in the Customer Order prior to the end of the agreed term,
Customer shall (unless Customer has made a Revenue Commitment) pay a termination
charge equal to the percentage of the monthly recurring charges for the
terminated Managed Modem Services calculated as follows:
a. 100% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 1-12 of the agreed term; plus
b. 75% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 13-24 of the agreed term; plus
c. 50% of the monthly recurring charge that would have been incurred for the
Managed Modem Service for months 25 through the end of the agreed term.
Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the Managed Modem
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges for such
termination, rearrangement or reconfiguration.
8. Level 3 provides only access to the Internet; Level 3 does not operate or
control the information, services, opinions or other content of the Internet.
Customer agrees that it shall make no claim whatsoever against Level 3 relating
to the content of the Internet or respecting any information, product, service
or software ordered through or provided by virtue of the Internet.
9. Level 3 makes the Service Level Agreement attached as Exhibit "A" respecting
Managed Modem Services.
<PAGE>
July 1, 1999
Page 31
Standard Service Level Agreement (SLA)
--------------------------------------
Release 1
---------
Managed Modem
Managed Modem service will be backed by a Service Delivery SLA.
NOTE: The total number of credits per month is limited to four days.
Service Delivery SLA
. 30 Calendar Day Installation Guarantee for Customers buying Managed Modem
service in speeds from 64 Kbps - 1.544 Kbps within
the Standard Service Area.
. 45 Calendar Day Installation Guarantee for Customers buying Managed Modem
service in speeds from 3 Mbps - 45 Mbps within the Standard Service Area.
. Single toll-free number to reach Level 3 Customer Service for all customer
issues, including technical, billing, and product inquiries.
. Time to Respond - Within 30 minutes
. 2 hour calendar month Average Time To Repair (ATTR)
If Level 3 fails to meet any of the guarantees above, Level 3 will review all
reported failures at the end of the month, and calculate the applicable credits:
. Any customer inquiry to the Level 3 Customer Service Center that results in
a Time to Respond of Greater than 30 minutes will result in a one day
service credit when the customer notifies Level 3 of the failure.
. ATTR is calculated as a monthly average. All reported customer trouble
tickets will be totaled over the month, then the average time to close each
ticket will be calculated. If the ATTR is greater than 2 hours, the
customer will receive a one day service credit.
. Credits will only be applied to events where the Customer reports a failure
to the Level 3 Customer Care organization. Customers must report any
Service Delivery failures within five business days of the event.
<PAGE>
July 1, 1999
Page 32
ADDITIONAL TERMS AND CONDITIONS
FOR IP CROSSROADS
The following additional terms and conditions are applicable where, pursuant to
a Customer Order, Customer orders IP CrossRoads.
1. Any state or federal tariffs applicable to the IP CrossRoads Services to be
delivered under any Customer Order are incorporated into the terms thereof. The
IP CrossRoads Services shall at all times be used in compliance with Level 3's
then-current Acceptable Use Policy and Privacy Policy, as amended by Level 3
from time to time and which are available through Level 3's web site.
2. The nonrecurring charges and monthly recurring rates for the IP CrossRoads
Services provided by Level 3 to Customer are set forth in each Customer Order.
3. The rates and other charges set forth in each Customer Order are established
in reliance on the term and/or volume commitment made therein, and Customer
agrees to pay the same. In the event that Customer terminates IP CrossRoads
Services ordered in any Customer Order which is accepted by Level 3 or in the
event that the delivery of IP CrossRoads Services is terminated due to a failure
of Customer to satisfy the requirements set forth herein or in the Customer
Order prior to the end of the agreed term, Customer shall (unless Customer has
made a Revenue Commitment) pay a termination charge equal to the percentage of
the monthly recurring charges for the terminated IP CrossRoads Services
calculated as follows:
a. 100% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 1-12 of the agreed term; plus
b. 75% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 13-24 of the agreed term; plus
c. 50% of the monthly recurring charge that would have been incurred for the IP
CrossRoads Service for months 25 through the end of the agreed term.
Customer may, in the event that a Revenue Commitment is made and is then being
satisfied by Customer, terminate, rearrange or reconfigure the IP CrossRoads
Services ordered under a Customer Order without payment of the termination
charge specified above; PROVIDED, HOWEVER, that Customer shall be responsible
for payment of Level 3's then-current standard nonrecurring charges applicable
to such termination, rearrangement or reconfiguration.
4. Level 3 provides only access to the Internet; Level 3 does not operate or
control the information, services, opinions or other content of the Internet.
Customer agrees that it shall make no claim whatsoever against Level 3 relating
to the content of the Internet or respecting any information, product, service
or software ordered through or provided by virtue of the Internet.
5. If Customer orders IP CrossRoads Services pursuant to a Customer Order, the
Customer shall be permitted to make two (2) changes to its Committed Data Rate
each contract year, provided that such change be to a higher Committed Data
Rate.
6. Level 3 reserves the right, but does not undertake the obligation, to provide
any Customer or potential customer bound by a Nondisclosure Agreement access to
a list of (i) Level 3's Customers which are connected to the IP Crossroads
Intra-Gateway Exchange Network Platform; and/or (ii) Autonomous Systems Internet
Networks connected to the IP Crossroads On-Net Transport Network Platform.
By this Agreement, Customer consents to such disclosures.
Level 3 makes no guarantee of any Customer's willingness to exchange Internet
traffic with any other customer. Level 3 will, however, use reasonable efforts
to arrange an introduction between customers or prospective customers bound by a
Nondisclosure Agreement to facilitate an agreement between them respecting the
exchange of Internet traffic.
Level 3 undertakes no obligations and accepts no liability for the
configuration, management, performance or any other issue relating to Customer's
routers or other customer provided equipment used for access to or the exchange
of traffic in connection with Level 3's IP Crossroads Service.
7. Level 3 makes the Service Level Agreement attached as Exhibit "A" respecting
IP Crossroads Service.
<PAGE>
July 1, 1999
Page 33
[LOGO OF LEVEL(3) COMMUNICATIONS APPEARS HERE]
- ---------------------------------
IP CrossRoads
- ---------------------------------
Service Level Agreement
Level 3 IP CrossRoads Service is backed by the following Service Level
Agreement. If the Level 3 Obligation is missed, the credit set forth below will
be issued to the Customer when requested.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Level 3 Obligation Credit
- --------------------------------------------------------------------------------------------
<S> <C>
Installation - Level 3 guarantees installation of IP CrossRoads Service in Level 1 day
3's standard service area, within the following time frames upon Level 3's
acceptance of a Customer order: 20 business days or less for Ethernet port
speeds of 10Mbps, 100Mbps, or 1000Mbps terminating in Level 3 Colocation
- --------------------------------------------------------------------------------------------
Response Time - Level 3's response time to any issue reported to and confirmed 1 day
by Level 3 Customer Service will be 30 minutes or less. As soon as an issue is
reported, Level 3 will open a trouble ticket.
Resolution Time - Level 3's mean time to resolve ("MTTR") Customer issues 1 day
relating to the technical performance or nonperformance of Level 3's IP
CrossRoads Service will be 2 hours or less, on a monthly average basis. MTTR is
calculated by taking the monthly aggregate of time to close all trouble tickets
relating to the technical performance of Level 3's IP CrossRoads Service,
divided by the number of trouble tickets opened that month.
The Response Time and Resolution Time Obligations are depicted on the timeline
below:
[TIMELINE APPEARS HERE]
- --------------------------------------------------------------------------------------------
100% Service Availability - Service Unavailability means an IP CrossRoads outage 1 day
was confirmed by Level 3 Customer Service. This outage is reported by a Customer
within 48 hours of the outage, which relates to the Customer's access point on
the Level 3 Internet Network, including the Customer's Level 3-provided port and
local access circuit. Service Unavailability does not include outages associated
with maintenance events, customer-caused outages or disruptions, the performance
of Internet networks controlled by other companies, or traffic exchange points
that are controlled by other companies. Customers will receive credits,
calculated monthly as an aggregate of all Service Unavailability events in
15-minute increments.
- --------------------------------------------------------------------------------------------
Delay Guarantee - 40 ms one-way. Delay refers to the one-way average delay over 1 day
a calendar month of traffic between all major gateways on the Level 3 U.S.
Internet Network. Delay does not apply to Customer's local access circuit,
transit or peering connections, circuits to the traffic exchange points,
maintenance events, or to customer-caused outages or disruptions. Customer may
obtain a report from Level 3 if there is a question whether a delay has
occurred. This request must be made within five (5) days from the last day of
the month in question.
- --------------------------------------------------------------------------------------------
</TABLE>
Contact Level 3 Customer Service toll-free at: 1-877-4LEVEL3 (877-453-8353) for
all issues, including technical, billing, and product inquiries.
The total number of credits per month is limited to five (5) days. Customer must
request credits within five days of the end of any month to receive credits.
<PAGE>
Exhibit 10.2
RESTRICTED STOCK PURCHASE AGREEMENT
This RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made as of
the 23rd day of July 1999, by and between Data Return Corporation, a Texas
corporation (the "Corporation"), and Level 3 Communications, LLC ("Purchaser").
In consideration of the mutual covenants and representations set forth
herein, the Corporation and Purchaser agree as follows:
1. Purchase and Sale of Stock.
---------------------------
Subject to the terms and conditions of this Agreement, the Corporation
hereby agrees to sell to Purchaser and the Purchaser agrees to purchase from the
Corporation on the Closing Date (as herein defined), 7,260 shares of the
Corporation's Common Stock (the "Stock") at a price of $688.67 per share, for an
aggregate purchase price of $5,000,000. The purchase price for the Stock shall
be paid by the execution and delivery by the Purchaser of a Service Credit
Agreement between the Corporation and the Purchaser in the form attached hereto
as Exhibit A.
2. Closing.
--------
The purchase and sale of the Stock shall occur at a Closing that shall be
held immediately after the execution of this Agreement or at such other time and
place (the "Closing Date") as agreed to by the Corporation and Purchaser. At the
Closing, Purchaser shall deliver to the Corporation the Service Credit
Agreement, and the Corporation will issue a certificate representing the Stock
registered in the name of the Purchaser.
3. Purchase Option.
----------------
(a) From the Closing Date through December 31, 2001 (the "Vesting Period"),
all (and only all) of the Stock that has not vested pursuant to subparagraph (b)
(the "Unvested Stock") shall be subject to the right and option of the
Corporation to repurchase the Stock (the "Purchase Option") as set forth in this
Section 3. The Purchase Option shall be exercisable by the Corporation only if
either (i) Purchaser shall have materially breached the Service Credit Agreement
and such material breach shall not have been cured within the time periods
contemplated by the Service Credit Agreement or (ii) in the event that the
Delivery Condition (as defined below) shall not have been satisfied prior to
December 31, 2001 (a "Purchase Option Event"). Following a Purchase Option
Event, the Corporation shall have the right, as provided in subparagraph (c)
hereof, to purchase from the Purchaser, at the purchase price per share
originally paid as set forth in Section 1 hereof (the "Option Price"), the
Unvested Stock. For purposes of this Agreement, "Delivery Condition" shall be
satisfied if the Purchaser has honored orders submitted by the Corporation for
available connectivity services (including but not limited to "Broadband
Service" and "Private Line Service," but excluding "Colocation Space" (each as
defined in the Strategic Marketing and Sales Agreement (the "Marketing
Agreement") between the Purchaser and the Corporation dated July 1, 1999)
("Qualified Service") such that the Corporation has paid or is obligated to pay
the Purchaser a minimum of:
(i) $500,000 (cumulative) for delivery of Qualified Service from the date
of execution of the Marketing Agreement; and
<PAGE>
(ii) $100,000 (cumulative) for delivery of Qualified Service during
calendar year 2001.
If the Corporation has not submitted orders for Qualified Service of sufficient
volume to permit the Purchaser to satisfy the Delivery Condition prior to
December 31, 2001, then the Delivery Condition shall be deemed satisfied.
(b) (i) Vesting. Provided that the Delivery Condition has been satisfied
-------
or is deemed satisfied, the Stock will vest on March 31, 2001, June 30, 2001,
September 30, 2001 and December 31, 2001 (each a "Vesting Date"). The number of
shares that shall vest on each Vesting Date will be in proportion to the
percentage of the service credit that is applied by the Purchaser from January
1, 2001 through the applicable Vesting Date. Notwithstanding the foregoing,
provided that the Delivery Condition has been satisfied or is deemed satisfied,
in no event shall the aggregate number of shares of Stock that have vested be
less than the following percentages as of the Vesting Date indicated: March 31,
2001 - 25%; June 30, 2001 - 50%; September 30, 2001 - 75%; December 31, 2001 -
100%.
Example. The following example is for illustration purposes: if on
March 31, 2001, the Purchaser has provided the Corporation $2,000,000 of
Services that are applied to the service credit, 40% of the Stock originally
issued or 2,904 shares shall vest. If as of June 30, 2001 (and assuming the
events of the prior sentence), the Purchaser has provided the Corporation an
additional $1,000,000 of Services that are applied to the services credit for
a total of $3,000,000 since January 1, 2001, 60% of the Stock originally
issued or an additional 1,452 shares shall vest. If, however, as of June 30,
2001 the Purchaser has provided the Corporation no additional Services that
are applied to the services credit and the Delivery Condition has been
satisfied or is demed satisfied, 50% of the Stock originally issued, or an
additional 726 shares, shall vest.
(ii) Notwithstanding the foregoing, in the event that a Purchase Option
Event occurs within the last 15 business days prior to a Vesting Date, the
vesting of the Stock that is otherwise required by subparagraph (b)(i) shall be
delayed until the expiration of the Purchase Option Period specified in
subparagraph (c) (the "Delayed Vesting Date").
(iii) Vesting Procedures. Within five business days after the later of the
------------------
Vesting Date or the Delayed Vesting Date, the Purchaser shall deliver to the
Corporation or its transfer agent the certificate evidencing the Unvested Stock.
Within two business days after receipt of the stock certificate representing the
Unvested Stock, the Corporation or its transfer agent shall redeliver to the
Purchaser a stock certificate without a restrictive legend relating to the
Purchase Option for all stock which has vested hereunder to the Purchaser and an
additional stock certificate evidencing the remaining Unvested Stock, if
necessary.
(c) Within 15 business days following a Purchase Option Event (the
"Purchase Option Period"), the Corporation shall notify Purchaser by written
notice delivered or mailed as provided in subparagraph 9(c), as to whether it
wishes to purchase the Unvested Stock pursuant to exercise of the Purchase
Option. If the Corporation elects to purchase the Unvested Stock hereunder, the
closing of the repurchase transaction shall occur within two business days after
Page 2 of 30
<PAGE>
receipt of such notice at a place and time specified by the Corporation, or, at
Corporation's option, such closing may be consummated by mail as provided in
Section 9(c) hereof. Immediately upon receipt of the notice contemplated by the
prior sentence, the Services Credit Agreement shall terminate and be of no
further effect and any unused portion of the credit contemplated by the Service
Credit Agreement shall be forfeited. At such closing, the Corporation shall
tender the Service Credit Agreement as payment for the Unvested Stock and the
Purchaser shall tender the certificates representing the Unvested Stock. The
Corporation shall not be obligated to pay cash for the exercise of the Purchase
Option. Thereafter, such repurchased Unvested Stock shall no longer be deemed
outstanding.
(d) In the event that a Purchase Option Event occurs and the Corporation
fails to exercise the Purchase Option during the Purchase Option Period, then
the Service Credit Agreement shall remain in full force and effect and (i) if
the Purchase Option Event resulted from a failure to satisfy the Delivery
Condition, Purchaser shall become vested in 100% of the Unvested Stock; or (ii)
if the Purchase Option Event resulted from a breach of the Service Credit
Agreement, Purchaser shall continue to become vested in the Stock pursuant to
the schedule set forth in Section 3(b)(i) above.
4. Stock Splits, etc.
------------------
If, from time to time during the term of this Agreement:
(a) there is any stock dividend or liquidating dividend of cash and/or
property, stock split or other change in the character or amount of any of the
outstanding securities of the Corporation; or
(b) there is any consolidation, merger or sale of all, or substantially
all, of the assets of the Corporation;
then, in such event, any and all new, substituted or additional securities
or other property to which the Purchaser is entitled by reason of its ownership
of Unvested Stock shall be immediately subject to this Agreement and be included
in the definition of "Unvested Stock" for all purposes with the same force and
effect as the shares of Unvested Stock presently subject to the Purchase Option
and other terms of this Agreement. While the aggregate Option Price shall remain
the same after each such event, the Option Price per share of Unvested Stock
upon execution of the Purchase Option shall be appropriately adjusted.
Notwithstanding the foregoing, any and all new, substituted or additional
securities or other property to which the Purchaser is entitled by reason of its
ownership of Stock that has vested pursuant to the provisions of this Agreement
shall be treated as vested Stock for purposes of this Agreement.
5. Restriction on Transfer.
------------------------
The Purchaser shall not sell, transfer, pledge, hypothecate or otherwise
dispose of any shares of Unvested Stock. The Corporation shall not be required
(i) to transfer on its books any shares of Unvested Stock which shall have been
sold or transferred in violation of any of the provisions set forth in this
Agreement, or (ii) to treat as owner of such shares or to accord the right to
vote as such owner or to pay dividends to any transferee to whom such shares
shall have been so transferred. The Corporation shall, however, be required (i)
to transfer on its books any
Page 3 of 30
<PAGE>
shares of Stock that have vested in accordance with the provisions set forth in
this Agreement, and (ii) to treat as owner of such shares and to accord the
right to vote as such owner and to pay dividends to any transferee to whom such
shares shall have been transferred.
6. Legends.
--------
(a) All certificates representing any of the shares of Unvested Stock
subject to the provisions of this Agreement shall have endorsed thereon the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHT OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE CORPORATION."
(b) All certificates representing any of the shares of Stock subject to
the provisions of this Agreement shall have endorsed thereon the following
legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
7. Representations of the Corporation.
----------------------------------
Except as set forth in the Disclosure Letter delivered to Purchaser
simultaneously with the execution of this Agreement (the "Disclosure Letter"),
the Corporation represents and warrants to the Purchaser as follows:
7.1 Organization and Standing; Articles and Bylaws. The Corporation is a
-----------------------------------------------
corporation duly organized and existing under, and by virtue of, the laws of the
State of Texas and is in good standing under such laws. The Corporation has
requisite corporate power and authority to own and operate its properties and
assets, and to carry on its business as presently conducted and as currently
proposed to be conducted. The Corporation has filed all necessary documents to
qualify to do business as a foreign corporation in, and the Corporation is in
good standing under the laws of, each jurisdiction in which the conduct of the
Corporation's business or the nature of the property owned requires such
qualification, except where the failure to so qualify would not have a material
adverse effect on the business, properties, prospects, profits or condition
(financial or otherwise) of the Corporation (a "Material Adverse Effect"). The
Corporation has furnished the Purchaser with copies of its Articles of
Incorporation and Bylaws, as amended. Those copies are true, correct and
complete and contain all amendments through the Closing Date.
7.2 Corporate Power. The Corporation will have at the Closing Date all
----------------
requisite legal and corporate power and authority to execute and deliver this
Agreement and the Service Credit Agreement, to sell and issue the Stock
hereunder and to carry out and perform its obligations under the terms of this
Agreement and the Service Credit Agreement.
Page 4 of 30
<PAGE>
7.3 Subsidiaries. The Corporation has no subsidiaries or affiliated
-------------
companies and does not otherwise own or control, directly or indirectly, any
equity interest in any corporation, association or business entity.
7.4 Capitalization. The authorized capital stock of the Corporation
---------------
consists of 100,000,000 shares of Common Stock, par value $.001 per share (the
"Common Stock"), of which 76,400 shares are issued and outstanding, and
20,000,000 shares of Preferred Stock, $.001 par value per share, none of which
is issued and outstanding. The outstanding shares have been duly authorized and
validly issued, and are fully paid and nonassessable. The Corporation has
reserved 24,600 shares of Common Stock for issuance to employees, consultants or
directors under stock plans or arrangements approved by the Board of Directors.
Options to purchase 22,959 shares of Common Stock are issued and outstanding
under the Corporation's employee stock option plan. All outstanding securities
of the Corporation were issued in compliance with applicable federal and state
securities laws. Except as set forth above, there are no options, warrants or
other rights to purchase any of the Corporation's authorized and unissued
capital stock. The holders of record of the presently issued and outstanding
shares of Common Stock and options to purchase Common Stock, and the exercise
prices and periods during which such options may be exercised, are as set forth
in the Disclosure Letter.
7.5 Authorization. All corporate action on the part of the Corporation,
--------------
its directors and shareholders necessary for the authorization, execution,
delivery and performance of this Agreement by the Corporation, the
authorization, sale, issuance and delivery of the Stock and the performance of
all of the Corporation's obligations hereunder has been taken or will be taken
prior to the Closing Date. This Agreement and the Service Credit Agreement, when
executed and delivered by the Corporation, shall constitute a valid and binding
obligation of the Corporation, enforceable in accordance with their terms,
except as enforceability thereof may be limited by any applicable bankruptcy,
reorganization, insolvency or other laws affecting creditors' rights generally
or by general principles of equity. The Stock, when issued in compliance with
the provisions of this Agreement, will be validly issued, fully paid and
nonassessable; and the Stock will be free of any liens or encumbrances, other
than any liens or encumbrances created by or imposed upon the holders thereof as
a result of this Agreement or the Service Credit Agreement or through no action
of the Corporation; provided, however, that the Stock will be subject to
restrictions on transfer under the terms of this Agreement and state and/or
federal securities laws. The Stock is not subject to any preemptive rights or
rights of first refusal.
7.6 Financial Statements. The audited balance sheet of the Corporation as
---------------------
at March 31, 1999 fairly presents the financial position of the Corporation as
at the date thereof, and the related statements of income, retained earnings and
changes in financial position for the fiscal periods ended on such date fairly
present the results of operations and changes in financial position of the
Corporation for the period indicated. All such financial statements, including
the schedules and notes thereto, were prepared in accordance with generally
accepted accounting principles ("GAAP") applied consistently throughout the
periods involved.
7.7 Absence of Changes. Since March 31, 1999: (a) the Corporation has not
-------------------
entered into any transaction which was not in the ordinary course of business;
(b) there has been no materially adverse change in the business, properties,
prospects, profits or condition (financial or otherwise) of the Corporation
other than changes which, individually or in the aggregate, have
Page 5 of 30
<PAGE>
not had a Material Adverse Effect ; (c) there has been no damage to, destruction
of or loss of physical property (whether or not covered by insurance) that has
had a Material Adverse Effect; (d) the Corporation has not declared or paid any
dividend or made any distribution on its stock, or redeemed, purchased or
otherwise acquired any of its stock; (e) the Corporation has not increased the
compensation of any of its officers, or the rate of pay of its employees as a
group, except as part of regular compensation increases in the ordinary course
of business; (f) there has been no resignation or termination of employment of
any key officer, consultant or employee of the Corporation, and the Corporation
does not know of the impending resignation or termination of employment of any
such officer, consultant or employee that if consummated would have a Material
Adverse Effect on its business; (g) there has been no labor dispute involving
the Corporation or its employees and none is pending or, to the Corporation's
knowledge, threatened; (h) there has not been any change, except in the ordinary
course of business, in the contingent obligations of the Corporation, by way of
guaranty, endorsement, indemnity, warranty or otherwise; (i) there have not been
any loans made by the Corporation to any of its employees, officers or directors
other than travel advances and office advances made in the ordinary course of
business; (j) there has not been any acceleration or prepayment of any
indebtedness for borrowed money or the refunding of any such indebtedness; and
(k) to the best knowledge of the Corporation, there has been no other event or
condition of any character pertaining to and having a Material Adverse Effect on
the assets or business of the Corporation.
7.8 Material Liabilities. The Corporation has no material liabilities or
---------------------
obligations, absolute or contingent (individually or in the aggregate), except
(i) the liabilities and obligations set forth in the Financial Statements, (ii)
liabilities and obligations which have been incurred subsequent to March 31,
1999 in the ordinary course of business which have not caused a Material
Adverse Effect, (iii) liabilities and obligations under leases for its principal
offices and for equipment, and (iv) liabilities and obligations under sales,
procurement and other contracts and arrangements entered into in the normal
course of business.
7.9 Title to Properties and Assets; Liens, etc. The Corporation has good
-------------------------------------------
and marketable title to its properties and assets, and has good title to all its
leasehold interests, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than (i) the lien of current taxes not yet due and
payable, and (ii) mortgages, pledges, liens, leases, encumbrances or charges
that would not have a Material Adverse Effect.
7.10 Compliance with Other Instruments, None Burdensome, etc. The
--------------------------------------------------------
Corporation is not in violation of any term of its Articles of Incorporation or
Bylaws, or, in any material respect, of any term or provision of any material
mortgage, indebtedness, indenture, contract, agreement, instrument, judgment or
decree, and to the best of its knowledge is not in violation of any order,
statute, rule or regulation applicable to the Corporation where such violation
would cause a Material Adverse Effect. The execution, delivery and performance
of and compliance with this Agreement and the Service Credit Agreement, have not
resulted and will not result in any material violation of, or conflict with, or
constitute a material default under, the Corporation's Articles of Incorporation
or Bylaws or any of its agreements or result in the creation of, any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the
Corporation.
Page 6 of 30
<PAGE>
7.11 Patents and Other Intangible Assets. The Corporation owns, or is
------------------------------------
licensed or otherwise possesses rights to use, free and clear of all liens and
claims, all patents, trademarks, service marks, trade names and copyrights that
are material to the business of the Corporation as it is currently conducted
(the "Intellectual Property Rights"). No claims with respect to the
Corporation's Intellectual Property Rights have been asserted or are, to the
Corporation's knowledge, threatened by any person (i) against the use by the
Corporation of any of the Corporation's Intellectual Property Rights or (ii)
challenging the ownership or right to use by the Corporation of the
Corporation's Intellectual Property Rights.
7.12 Litigation, etc. There is no legal action, suit, arbitration or other
----------------
legal, administrative or other governmental investigation, inquiry or proceeding
(whether federal, state, local or foreign) pending or, to the Corporation's
knowledge, threatened against or affecting the Corporation or the Corporation's
properties, assets or business. After reasonable inquiry of its directors and
officers, the Corporation is not aware of any fact which might result in or form
the basis for any such action, suit, arbitration, investigation, inquiry or
other proceeding. The Corporation is not subject to any order, writ, judgment,
injunction, decree, determination or award of any court or of any governmental
agency or instrumentality (whether federal, state, local or foreign).
7.13 Employees.
----------
(a) The Corporation is in full compliance with all laws regarding
employment, wages, hours, equal opportunity, collective bargaining and payment
of social security and other taxes except to the extent that noncompliance would
not, in the aggregate, have a Material Adverse Effect. The Corporation is not
engaged in any unfair labor practice or discriminatory employment practice and
no complaint of any such practice against the Corporation is filed, or, to the
Corporation's knowledge threatened to be filed with or by the National Labor
Relations Board, the Equal Employment Opportunity Commission or any other
administrative agency, federal or state, that regulates labor or employment
practices, nor is any grievance filed or, to the Corporation's knowledge,
threatened to be filed, against the Corporation by any employee pursuant to any
collective bargaining or other employment agreement to which the Corporation is
a party or is bound. The Corporation is in compliance with all applicable
foreign, federal, state and local laws and regulations regarding occupational
safety and health standards except to the extent that noncompliance will not
have a Material Adverse Effect, and has received no complaints from any foreign,
federal, state or local agency or regulatory body alleging violations of any
such laws and regulations.
(b) The employment of all persons and officers employed by the
Corporation is terminable at will without any penalty or severance obligation of
any kind on the part of the employer. All sums due for employee compensation and
benefits and all vacation time owing to any employees of the Corporation have
been duly and adequately accrued on the accounting records of the Corporation.
To the Corporation's knowledge, all employees of the Corporation are either
United States citizens or resident aliens specifically authorized to engage in
employment in the United States in accordance with all applicable laws.
(c) The Corporation is not aware that any of its employees is obligated
under any contract (including licenses, covenants or commitments of any nature)
or other agreement, or
Page 7 of 30
<PAGE>
subject to any judgment, decree or order of any court or administrative agency,
that would interfere with the use of such employee's best efforts to promote the
interests of the Corporation or that would conflict with the Corporation's
business as proposed to be conducted.
(d) The Corporation is not aware that any officer or key employee, or
that any group of key employees, intends to terminate their employment with the
Corporation, nor does the Corporation have a present intention to terminate the
employment of any of the foregoing.
7.14 Certain Transactions. The Corporation is not indebted, directly or
---------------------
indirectly, to any of its officers, directors or shareholders or to their
respective spouses or children, in any amount whatsoever; none of said officers,
directors or, to the Corporation's knowledge, shareholders, or any members of
their immediate families, are indebted to the Corporation or have any direct or
indirect ownership interest in any firm or corporation with which the
Corporation is affiliated or with which the Corporation has a business
relationship, or any firm or corporation which competes with the Corporation,
except that officers, directors and/or shareholders of the Corporation may own
less than 1% of the stock of publicly traded companies which may compete with
the Corporation. No officer, director or shareholder, or any member of their
immediate families, is, directly or indirectly, interested in any material
contract with the Corporation. The Corporation is not a guarantor or indemnitor
of any indebtedness of any other person, firm or corporation.
7.15 Material Contracts and Obligations. All agreements, contracts,
-----------------------------------
indebtedness, liabilities and other obligations to which the Corporation is a
party or by which it is bound that are material to the conduct and operations of
its business and properties are valid, binding and in full force and effect in
all material respects, assuming due execution by the other parties to such
agreements and contracts, except as enforceability thereof may be limited by any
applicable bankruptcy, reorganization, insolvency or other laws affecting
creditors' rights generally or by general principles of equity.
7.16 Registration Rights. Except as set forth in this Agreement, the
--------------------
Corporation is not under any contractual obligation to register (as defined in
Section 9 below) any of its presently outstanding securities or any of its
securities which may hereafter be issued.
7.17 Governmental Consent, etc. No consent, approval or authorization of
--------------------------
(or designation, declaration of filing with) any governmental authority on the
part of the Corporation is required in connection with the valid execution and
delivery of this Agreement and the Service Credit Agreement, or the offer, sale
or issuance of the Stock, or the consummation of any other transaction
contemplated hereby, except qualification (or taking such action as may be
necessary to secure an exemption from qualification, if available) of the offer
and sale of the Stock under applicable state securities laws, which filings and
qualifications, if required, will be accomplished in a timely manner.
7.18 Offering. Subject to the accuracy of the Purchaser's representations
---------
and warranties in Section 8 hereof, the offer, sale and issuance of the Stock to
be issued in conformity with the terms of this Agreement constitute transactions
exempt from the registration requirements of Section 5 of the Securities Act of
1933, as amended (the "Securities Act").
Page 8 of 30
<PAGE>
7.19 Brokers or Finders; Other Offers. The Corporation has not incurred,
---------------------------------
and will not incur, directly or indirectly, as a result of any action taken by
the Corporation, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with this Agreement.
7.20 Tax Matters. Except to the extent that it would not have a Material
------------
Adverse Effect, the Corporation: (i) has timely filed all tax returns that are
required to have been filed by it with all appropriate federal, state, county
and local governmental agencies (and all such returns fairly reflect the
Corporation's operations for tax purposes); (ii) has timely paid all taxes owed
by it for which it is obligated to withhold from amounts owing to any employee
(including without limitation social security taxes), creditor or third party
(other than taxes the validity of which are being contested in good faith by
appropriate proceedings); and (iii) has not waived any statute of limitations
with respect to taxes or agreed to any extension of time with respect to a tax
assessment or deficiency. The assessment of any additional taxes for periods for
which returns have been filed is not expected to exceed the recorded liability
therefor, and, to the Corporation's knowledge, there are no material unresolved
questions or claims concerning the Corporation's tax liability. The
Corporation's tax returns have not been reviewed or audited by any federal,
state, local or county taxing authority. There is no pending dispute with any
taxing authority relating to any of said returns which, if determined adversely
to the Corporation, would result in the assertion by any taxing authority of any
valid deficiency in any material amount for taxes.
7.21 Insurance. The Corporation has fire, casualty and liability insurance
----------
policies, in such amounts and with such coverage as it believes are reasonable
for the business in which it is engaged.
7.22 Environmental and Safety Regulations. The Corporation knows of no
-------------------------------------
violation or violations by the Corporation, its employees or agents of any
environmental or safety statute, law or regulation that in the aggregate would
have a Material Adverse Effect, and, to the best of its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation. No action, proceeding, permit revocation, writ,
injunction or claim is pending or, to the Corporation's knowledge, threatened
concerning the Corporation's facilities and the Corporation is not aware of any
fact or circumstance which could involve the Corporation in any environmental
litigation or impose any material environmental liability upon the Corporation.
As of the Closing Date, no Hazardous Material (as defined below) is present on
any Corporation facility and, to the Corporation's knowledge, no reasonable
likelihood exists that any Hazardous Material present on other property will
come to be present on a Corporation facility. There are no underground storage
tanks, asbestos or PCBs present on any Corporation facility. For the purposes of
this Section 7.22 the term "Hazardous Material" shall mean any material or
substance that is prohibited or regulated by any environmental law or that has
been designated by any governmental authority to be radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment.
7.23 Employee Benefit Plans. The Corporation does not have any "Employee
-----------------------
Benefit Plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended.
7.24 Illegal or Unauthorized Payments; Political Contributions. Neither
---------------------------------------------------------
the Corporation nor, to the best of its knowledge (after reasonable inquiry of
its officers and
Page 9 of 30
<PAGE>
directors), any of its officers, directors, employees, agents or other
representatives of the Corporation or any other business entity or enterprise
with which the Corporation is or has been affiliated or associated, has, on
behalf of the Corporation or in connection with its business, directly or
indirectly, made or authorized any payment, contribution or gift of money,
property, or services, whether or not in contravention of applicable law, (a) as
a kickback or bribe to any Person or (b) to any political organization, or the
holder of or any aspirant to any elective or appointive public office, in each
case except for personal political contributions not involving the direct or
indirect use of funds of the Corporation.
7.25 Disclosure. This Agreement with the Exhibits hereto, when taken as a
-----------
whole, do not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
The business plan delivered to Purchaser by the Corporation (the "Business
Plan") is the business plan used by the Corporation in its business, subject to
changes made after the date thereof in the ordinary course of business that are
not, in the aggregate, material. The assumption upon which the projections and
estimates contained in the Business Plan are based or were derived or based upon
reasonable expectations at the time such assumptions, projections and estimates
were made. The Corporation does not believe that any assumptions of fact or
statements of opinion contained in, or providing a basis for information
contained in, the Business Plan were unreasonable, untrue or false in any
material respect at the time made, provided, that the projections contained
therein are not a guaranty of performance.
8. Representations and Warrants of the Purchaser.
---------------------------------------------
The Purchaser hereby represents and warrants to the Corporation with
respect to the purchase of the Stock as follows:
8.1 Experience. It has substantial experience in evaluating and investing
----------
in private placement transactions of securities in companies similar to the
Corporation so that it is capable of evaluating the merits and risks of its
investment in the Corporation and has the capacity to protect its own interests.
8.2 Investment. It is acquiring the Stock for investment for its own
-----------
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof. It understands that the Stock has not
been, and will not be, registered under the Securities Act by reason of a
specific exemption from the registration provisions of the Securities Act, the
availability of which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of such Purchaser's representations as
expressed herein.
8.3 Rule 144. It acknowledges that the Stock must be held indefinitely
--------
unless subsequently registered under the Securities Act or unless an exemption
from such registration is available. It is aware of the provisions of Rule 144
promulgated under the Securities Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Corporation, the resale occurring not less than one year after a party has
purchased and paid for the security to be sold, the sale
<PAGE>
being effected through a "broker's transaction" or in transactions directly with
a "market maker" and the number of shares being sold during any three-month
period not exceeding specified limitations.
8.4 No Public Market. It understands that no public market now exists for
----------------
any of the securities issued by the Corporation and that the Corporation has
made no assurances that a public market will ever exist for the Corporation's
securities.
8.5 Access to Data. It has had an opportunity to discuss the
--------------
Corporation's business, management and financial affairs with the Corporation's
management and has had the opportunity to review the Corporation's facilities,
financial statements and other information that it has requested. It has had the
opportunity to request all information that it felt was necessary to an
investment decision, and all requests have been fulfilled. It has also had an
opportunity to ask questions of officers of the Corporation, which questions
were answered to its satisfaction. It understands that such discussions, as well
as any written information issued by the Corporation, were intended to describe
certain aspects of the Corporation's business and prospects but were not a
thorough or exhaustive description.
8.6 Authorization. This Agreement and the Service Credit Agreement when
--------------
executed and delivered by the Purchaser will constitute valid and legally
binding obligations of the Purchaser, enforceable in accordance with their
respective terms, except as enforceability thereof may be limited by any
applicable bankruptcy, reorganization, insolvency or other laws affecting
creditors' rights generally or by general principles of equity.
8.7 Brokers or Finders. The Corporation has not incurred and will not
------------------
incur, directly or indirectly, as a result of any action taken by the Purchaser,
any liability for brokerage or finders' fees or agents' commissions or any
similar charges in connection with this Agreement.
8.8 Organization and Standing; Articles and Bylaws. Purchaser is a
-----------------------------------------------
limited liability company duly organized and existing under, and by virtue of,
the laws of the State of Delaware and is in good standing under such laws.
8.9 Corporate Power. Purchaser will have at the Closing Date all
---------------
requisite legal and limited liability company power and authority to execute and
deliver this Agreement and the Service Credit Agreement and to carry out and
perform its obligations under the terms of this Agreement and the Service Credit
Agreement.
8.10 Authorization. All action on the part of Purchaser necessary for the
--------------
authorization, execution, delivery and performance of this Agreement by
Purchaser and the performance of all of Purchaser's obligations hereunder has
been taken or will be taken prior to the Closing Date. This Agreement and the
Service Credit Agreement, when executed and delivered by Purchaser, shall
constitute a valid and binding obligation of Purchaser, enforceable in
accordance with their terms, except as enforceability thereof may be limited by
any applicable bankruptcy, reorganization, insolvency or other laws affecting
creditors' rights generally or by general principles of equity.
Page 11 of 30
<PAGE>
8.11 Compliance with Other Instruments, None Burdensome, etc. The
--------------------------------------------------------
execution, delivery and performance of and compliance with this Agreement and
the Service Credit Agreement, have not resulted and will not result in any
material violation of, or conflict with, or constitute a material default under,
Purchaser's organizational documents.
8.12 No consent, approval or authorization of (or designation, declaration
of filing with) any governmental authority on the part of Purchaser is required
in connection with the valid execution and delivery of this Agreement and the
Service Credit Agreement, or the purchase of the Stock, or the consummation of
any other transaction contemplated hereby.
Section 9. Registration Rights.
-------------------
9.1 Definitions.
-----------
As used in this Section 9:
(a) the terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and any post-effective amendments filed or
required to be filed) and the declaration or ordering of effectiveness of such
registration statement;
(b) the term "Registrable Securities" means (i) shares of Stock, (ii) any
additional shares of Common Stock of the Corporation acquired by the Purchaser
or any transferee of the Purchaser and (iii) any capital stock of the
Corporation issued as a dividend or other distribution with respect to, or in
exchange for or in replacement of, the shares of Common Stock of the Corporation
referred to in clause (i) or (ii);
(c) the term "Holder" shall mean any holder of Registrable Securities;
(d) the term "Initiating Holder" shall mean any Holder or Holders who in
the aggregate are Holders of more than 20% of the then outstanding Registrable
Securities;
(e) "Registration Expenses" shall mean all expenses incurred by the
Corporation in compliance with Sections 9.2 and 9.3 hereof , including, without
limitation, all registration and filing fees, printing expenses, fees and
disbursements of counsel for the Corporation, fees and expenses of one counsel
for all the Holders (up to a maximum of $10,000), blue sky fees and expenses and
the expense of any special audits incident to or required by any such
registration (but excluding the compensation of regular employees of the
Corporation, which shall be paid in any event by the Corporation); and
(f) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all expenses of
one counsel to the Holders in in excess of $10,000 for any offering.
9.2 Requested Registration.
----------------------
Page 12 of 30
<PAGE>
(a) Request for Registration. If the Corporation shall receive from an
------------------------
Initiating Holder a written request that the Corporation effect any registration
with respect to all or a part of the Registrable Securities, the Corporation
will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders of Registrable Securities; and
(ii) as soon as practicable, use its diligent best efforts to effect such
registration (including, without limitation, the execution of an undertaking to
file post-effective amendments, appropriate qualification under applicable blue
sky or other state securities laws and appropriate compliance with applicable
regulations issued under the Securities Act) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Corporation
within 10 business days after written notice from the Corporation is given under
Section 9.2(a)(i) above; provided that the Corporation shall not be obligated to
effect, or take any action to effect, any such registration pursuant to this
Section 9.2:
(A) In any particular jurisdiction in which the Corporation would be
required to execute a general consent to service of process in effecting
such registration, qualification or compliance, unless the Corporation is
already subject to service in such jurisdiction and except as may be
required by the Securities Act or applicable rules or regulations
thereunder;
(B) After the Corporation has effected one (1) such registration
pursuant to this Section 9.2 and such registrations have been declared or
ordered effective by the Securities and Exchange Commission. The timing
for the request to have the registration statement being declared or
ordered effective by the Securities and Exchange Commission shall be
determined by the Initiating Holders.
The registration statement filed pursuant to the request of the Initiating
Holders may, subject to the provisions of Section 9.2(b) below, include other
securities of the Corporation or which are held by holders of Common Stock of
the Corporation who, by virtue of agreements with the Corporation, are entitled
to include their securities in any such registration.
The registration rights set forth in this Section 9 shall be assignable, in
whole or in part, to any transferee of at least 5% of the Stock (who shall be
bound by all obligations of this Section 9).
(b) Underwriting. If the Initiating Holders intend to distribute the
------------
Registrable Securities covered by their request by means of an underwriting,
they shall so advise the Corporation as a part of their request made pursuant to
Section 9.2.
If the Corporation or holders of securities of the Corporation other than
Registrable Securities who are entitled, by contract with the Corporation or
otherwise, to have securities included in such a registration (the "Other
Stockholders") request such inclusion, the Corporation shall offer to include
the securities of such Other Stockholders in the underwriting and may condition
such offer on their acceptance of the further applicable provisions of this
Page 13 of 30
<PAGE>
Section 9. The Holders whose shares are to be included in such registration and
the Corporation shall (together with all Other Stockholders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting by the Holders and
reasonably acceptable to the Corporation. Notwithstanding any other provision
of this Section 9.2, if the representative advises the Holders in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the securities of the Corporation to be issued by the Corporation
or held by Other Stockholders shall be excluded from such registration to the
extent so required by such limitation. If, after the exclusion of such shares,
further reductions are still required, the number of shares included in the
registration by each Holder shall be reduced on a pro rata basis (based on the
number of shares held by such Holder), by such minimum number of shares as is
necessary to comply with such request. No Registrable Securities or any other
securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. If any of the
Holders or any Other Stockholder who has requested inclusion in such
registration as provided above disapproves of the terms of the underwriting,
such person may elect to withdraw therefrom by written notice to the
Corporation, the underwriter and the Initiating Holders. The securities so
withdrawn shall also be withdrawn from registration.
(d) Notwithstanding the foregoing, if the Corporation shall furnish to the
Holders requesting the filing of a registration statement pursuant to this
Section 9.2, a certificate signed by the Chairman of the Board of Directors,
Chief Executive Officer or Chief Financial Officer of the Corporation stating
that in the good faith judgment of the Board of Directors of the Corporation, it
would be seriously detrimental to the Corporation and its stockholders for such
registration statement to be filed and it is therefore essential to defer the
filing of such registration statement, then the Corporation shall have the right
to defer such filing for a period of not more than 120 days after receipt of the
request of the Initiating Holders; provided, however, that the Corporation may
not utilize this right more than once in any twelve (12) month period.
9.3 Corporation Registration.
------------------------
(a) Inclusion in Registration. If the Corporation shall determine after
-------------------------
the Qualified Public Offering to register any of its equity securities either
for its own account or for the account of a security holder or holders
exercising their respective demand registration rights, other than a
registration relating solely to employee benefit plans, or a registration
relating solely to a transaction specified in Rule 145 promulgated under the
Securities Act, or a registration on any registration form which does not permit
secondary sales or does not include substantially the same information as would
be required to be included in a registration statement covering the sale of
Registrable Securities, the Corporation will:
(i) promptly give to each of the Holders a written notice thereof (which
shall include a list of the jurisdictions in which the Corporation intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related qualification under blue
sky laws or other compliance), and in any underwriting involved therein, all the
Registrable Securities
Page 14 of 30
<PAGE>
specified in a written request or requests, made by the Holders within fifteen
(15) days after receipt of the written notice from the Corporation described in
clause (i) above, except as set forth in Section 9.3(b) below. Such written
request may specify all or a part of the Holders' Registrable Securities. The
Corporation shall not be required to include any Registrable Securities in any
registration unless the Holder furnishes to the Corporation in writing such
information with respect to the Holder and the distribution of such Registrable
Securities as the Corporation may from time to time reasonably request in
writing.
(b) Underwriting. If the registration of which the Corporation gives
------------
notice is for a registered public offering involving an underwriting, the
Corporation shall so advise each of the Holders as a part of the written notice
given pursuant to Section 9.3(a)(i). In such event, the right of each of the
Holders to registration pursuant to this Section 9.3 shall be conditioned upon
such Holders' participation in such underwriting and the inclusion of such
Holders' Registrable Securities in the underwriting to the extent provided
herein. The Holders whose shares are to be included in such registration shall
(together with the Corporation and the Other Stockholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected for underwriting by the Corporation. Notwithstanding any other
provision of this Section 9.3, if the representative determines that marketing
factors require a limitation on the number of shares to be underwritten the
representative may (subject to the allocation priority set forth below) limit
the number of Registrable Securities to be included in the registration and
underwriting. The Corporation shall so advise all Holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be allocated
in the following manner: the securities of the Corporation held by officers,
directors and Other Stockholders of the Corporation (other than securities held
by holders who by contractual right initiated the demand for such registration
("Demanding Holders")) shall be excluded from such registration and underwriting
to the extent required by such limitation, and, if a limitation on the number of
shares is still required, the number of shares that may be included in the
registration and underwriting by each of the Holders and Demanding Holders shall
be reduced, on a pro rata basis (based on the number of shares proposed to be
sold by such Holder or Demanding Holder), by such minimum number of shares as is
necessary to comply with such limitation. If any of the Holders or any Other
Stockholder disapproves of the terms of any such underwriting, such person may
elect to withdraw therefrom by written notice to the Corporation and the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
(c) Qualified Public Offering. For purposes of this Agreement, Qualified
-------------------------
Public Offering shall mean an initial public offering which places a pre-money
valuation on the Common Stock of the Corporation equal to at least two (2) times
$688.67 (subject to adjustment for the events outlined in Section 4 above) and
in which the aggregate net proceeds to the Company are at least $30 million.
Page 15 of 30
<PAGE>
9.4 Expenses of Registration
------------------------
All Registration Expenses incurred in connection with any registration,
qualification or compliance pursuant to this Section 9 shall be borne by the
Corporation, and all Selling Expenses shall be borne by the Holders of the
securities so registered pro rata on the basis of the number of their shares so
registered.
9.5 Registration Procedures
-----------------------
In the case of each registration effected by the Corporation pursuant to
this Section 9, the Corporation will keep the Holders, as applicable, advised in
writing as to the initiation of each registration and as to the completion
thereof. The Corporation will:
(a) keep such registration effective for a period of (i) with respect to a
registration statement filed on the Securities and Exchange Commission's ("SEC")
Form S-3 or any replacement form thereof, 120 days with respect to an offering
initiated by the Holders or for the period contemplated by the plan of
distribution in the case of a registration initiated by the Corporation or an
Other Stockholder or until the Holders, as applicable, have completed the
distribution described in the registration statement relating thereto, whichever
first occurs and (ii) with respect to a registration statement filed on the
SEC's Form S-1 or any replacement form thereof 60 days with respect to an
offering initiated by the Holders or for the period contemplated by the plan of
distribution in the case of a registration initiated by the Corporation or an
Other Stockholder or until the Holders, as applicable, have completed the
distribution described in the registration statement relating thereto, whichever
first occurs; provided, however, that such period specified in either clause
(i) or (ii) above shall be extended for a period of time equal to the period
during which the Holders, as applicable, refrain from selling any securities
included in such registration in accordance with the provisions hereof;
(b) furnish such number of prospectuses and other documents incident
thereto as each of the Holders, as applicable, from time to time may reasonably
request;
(c) notify the Holder, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing,
and, at the request of the Holder, the Corporation will prepare a supplement or
amendment to such prospectus so that, as thereafter delivered to the purchasers
of such Registrable Securities, such prospectus will not contain an untrue
statement of a material fact or omit to state any fact necessary to make the
statements therein not misleading, or of the determination by the Corporation
that a post-effective amendment to a registration statement would be required
under the Securities Act, and, at the request of the Holder, the Corporation
will prepare and file a post-effective amendment to the registration statement
as required under the Securities Act; provided, however, that, if the
Corporation shall furnish to Holders a certificate signed by the Chairman of the
Board of Directors, Chief Executive Officer or Chief Financial Officer of the
Corporation stating that in the good faith judgment of the Board of Directors of
the Corporation, it would be seriously detrimental to the Corporation and its
stockholders for sales to be made pursuant to
Page 16 of 30
<PAGE>
such registration statement to be filed and it is therefore essential to defer
the sale of securities pursuant to such registration statement, then the
Corporation shall have the right to prevent the sale of securities pursuant to
such registration statement for a period of not more than 120 days; provided,
further, however, that the Corporation may not utilize this right more than once
in any twelve (12) month period; and
(d) furnish, on the date that such Registrable Securities are delivered to
the underwriters for sale, if such securities are being sold through
underwriters or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (1) an opinion, dated as of such date, of the counsel representing
the Corporation for the purposes of such registration, in form and substance as
is customarily given to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the Holders participating
in such registration, addressed to the underwriters, if any, and to the Holders
participating in such registration and (2) a letter, dated as of such date, from
the independent certified public accountants of the Corporation, in form and
substance as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering and reasonably satisfactory to a
majority in interest of the Holders participating in such registration,
addressed to the underwriters, if any, and if permitted by applicable accounting
standards, to the Holders participating in such registration.
(e) Each Holder agrees that upon receipt of any notice from the Corporation
of the happening of any event of the kind described in Section 9.5(c), such
person will forthwith discontinue such person's disposition of Registrable
Securities pursuant to the registration statement relating to such Registrable
Securities until such person's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 9.5(c) and, if so directed by the
Corporation, will deliver to the Corporation all copies, other than permanent
file copies, then in such person's possession of the prospectus relating to such
Registrable Securities current at the time of receipt of such notice, or certify
as to the destruction of the same.
9.6 Indemnification.
---------------
(a) The Corporation will indemnify each of the Holders, as applicable, each
of its officers, directors and partners, and each person controlling each of the
Holders, with respect to each registration which has been effected pursuant to
this Section 9, and each underwriter, if any, and each person who controls any
underwriter, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Corporation of the Securities
Act or any rule or regulation thereunder applicable to the Corporation and
relating to action or inaction required of the Corporation in connection with
any such registration, qualification or compliance, and will reimburse each of
the Holders, each of its officers, directors and partners, and each person
controlling each of the Holders, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending any such claim, loss,
damage, liability or action, provided that the
Page 17 of 30
<PAGE>
Corporation will not be liable in any such case to the extent that any such
claim, loss, damage, liability or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Corporation by the Holders or underwriter and stated to be specifically for use
therein.
(b) Each of the Holders will, if Registrable Securities held by it are
included in the securities as to which such registration, qualification or
compliance is being effected, indemnify the Corporation, each of its directors
and officers and each underwriter, if any, of the Corporation's securities
covered by such a registration statement, each person who controls the
Corporation or such underwriter, each Other Stockholder and each of their
officers, directors, and partners, and each person controlling such Other
Stockholder against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document made by such Holder,
or any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements by such Holder therein
not misleading, and will reimburse the Corporation and such Other Stockholders,
directors, officers, partners, persons, underwriters or control persons for any
legal or any other expenses reasonably incurred in connection with investigating
or defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Corporation by such
Holder and stated to be specifically for use therein; provided, however, that
the obligations of each of the Holders hereunder shall be limited to an amount
equal to the net proceeds to such Holder of securities sold as contemplated
herein.
(c) Each party entitled to indemnification under this Section 9.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld) and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Indemnifying Party and the Indemnified Party in such action, in which case the
fees and expenses of counsel shall be at the expense of the Indemnifying Party;
provided, that, under no circumstances shall the Indemnifying Party be required
to pay the fees and expenses of more than one counsel for the Indemnified
Parties), and provided further that the failure of any Indemnified Party to give
notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 9 unless the Indemnifying Party is materially
prejudiced thereby. If defense is assumed by the Indemnifying Party, the
Indemnifying Part shall not be subject to any liability for any settlement
requiring the payment of money or any other obligation by the Indemnifying Party
that is required to be performed made by the Indemnified Party without its
consent. No Indemnifying Party, in the defense of any such claim or litigation
shall, except with the consent of each Indemnified Party, consent to entry of
any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the
Page 18 of 30
<PAGE>
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect to such claim or litigation. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with the defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 9.7 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions which resulted in such loss, liability, claim,
damage or expense, as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
determined by reference to, among other things, whether the untrue (or alleged
untrue) statement of a material fact or the omission (or alleged omission) to
state a material fact relates to information supplied by the Indemnifying Party
or by the Indemnified Party and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with any underwritten public offering contemplated by this
Agreement are in conflict with the foregoing provisions, the provisions in such
underwriting agreement shall be controlling.
(f) The foregoing indemnity agreement of the Corporation and the Holders is
subject to the condition that, insofar as they relate to any loss, claim,
liability or damage made in a preliminary prospectus but eliminated or remedied
in the amended prospectus on file with the Securities and Exchange Commission at
the time the registration statement in question becomes effective or the amended
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424(b) promulgated under the Securities Act (the "Final Prospectus"), such
indemnity agreement shall not inure to the benefit of any underwriter if a copy
of the Final Prospectus was furnished to the underwriter and was not furnished
to the person asserting the loss, liability, claim or damage at or prior to the
time such action is required by the Securities Act.
9.7 Information by the Holders.
--------------------------
Each of the Holders holding securities included in any registration shall
furnish to the Corporation such information regarding such Holder and the
distribution proposed by such Holder as the Corporation may reasonably request
in writing and as shall be reasonably required in connection with any
registration, qualification or compliance referred to in this Section 9.
Page 19 of 30
<PAGE>
9.8 Rule 144 Reporting.
------------------
With a view to making available the benefits of certain rules and
regulations of the Securities and Exchange Commission which may permit the sale
of restricted securities to the public without registration, the Corporation
agrees to:
(a) make and keep public information available as those terms are
understood and defined in Rule 144, at all times from and after ninety (90) days
following the effective date of the first registration under the Securities Act
filed by the Corporation for an offering of its securities to the general
public;
(b) use its best efforts to file with the Securities and Exchange
Commission in a timely manner all reports and other documents required of the
Corporation under the Securities Act and the Securities Exchange Act of 1934
(the "Exchange Act") at any time after it has become subject to such reporting
requirements; and
(c) so long as the Holder owns any Registrable Securities, furnish to the
Holder upon request, a written statement by the Corporation as to its compliance
with the reporting requirements of Rule 144 (at any time from and after ninety
(90) days following the effective date of the first registration statement filed
by the Corporation for an offering of its securities to the general public), and
of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the Corporation, and such other reports and documents so
filed as the Holder may reasonably request in availing itself of any rule or
regulation of the Securities and Exchange Commission allowing the Holder to sell
any such securities without registration.
9.9 Termination.
-----------
The registration rights set forth in this Section 9 shall expire (i) as to
any Holder if, in the opinion of counsel to the Corporation, all of the
Registrable Securities then owned by such Holder could be sold in any 90-day
period pursuant to Rule 144 under the Securities Act (without giving effect to
the provisions of Rule 144(k)) and (ii) as to all Holders whose rights have not
expired pursuant to clause (i), on the seventh anniversary of the Closing Date.
Section 10. Purchaser's Conditions to Closing
---------------------------------
The Purchaser's obligation to purchase the Stock on the Closing Date is
subject to the fulfillment of the following conditions, unless waived in writing
by the Purchaser:
10.1 Representations and Warranties Correct. The representations and
---------------------------------------
warranties made by the Corporation in Section 7 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date
10.2 Covenants. All covenants, agreements and conditions contained in
----------
this Agreement to be performed by the Corporation on or prior to the Closing
Date shall have been performed or complied with in all material respects.
Page 20 of 30
<PAGE>
10.3 Compliance Certificate. The Corporation shall have delivered to the
-----------------------
Purchaser a certificate of the Corporation, executed by the President of the
Corporation, dated on the Closing Date, and certifying, among other things, the
fulfillment of the conditions specified in Sections 10.1 and 10.2 of this
Agreement.
10.4 Compliance with State Securities Laws. The Corporation shall have
--------------------------------------
obtained all permits and qualifications required by any state for the offer and
sale of the Stock, or shall have the availability of exemptions therefrom.
10.5 Legal Matters. All material matters of a legal nature which pertain
--------------
to this Agreement and the transactions contemplated hereby shall have been
reasonably approved by counsel to the Purchaser.
10.6 Service Credit Agreement. The Corporation shall have entered into
------------------------
the Service Credit Agreement.
10.8 Voting Agreement. The Corporation, Sunny C. Vanderbeck and Michelle
----------------
Chambers shall have entered into the Voting Agreement in the form attached
hereto as Exhibit B.
10.8 Opinion of Corporation's Counsel. The Purchaser shall have received
---------------------------------
from Thompson & Knight, P.C., counsel to the Corporation, an opinion dated the
Closing Date, in form and substance satisfactory to the Purchaser, to the effect
that, except as set forth in the Disclosure Letter:
(a) The Corporation is a corporation duly organized, validly existing and
in good standing under the laws of the State of Texas, and the Corporation has
the requisite corporate power and authority to own its properties and to conduct
its business as currently conducted
(b) The Corporation has the requisite corporate power and authority to
execute, deliver and perform this Agreement. The Agreement has been duly and
validly authorized by the Corporation, duly executed and delivered by an
authorized officer of the Corporation and constitutes a legal, valid and binding
obligation of the Corporation, subject to bankruptcy and other laws of general
application affecting the rights and remedies of creditors and except insofar as
the enforceability of the indemnification provisions of Section 9 of the
Agreement may be limited by applicable laws and except that no opinion need be
given as to the availability of equitable remedies.
(d) The capitalization of the Corporation is as follows:
(i) Preferred Stock. 20,000,000 shares of Preferred Stock, none of which
are issued and outstanding.
(ii) Common Stock. 100,000,000 shares of Common Stock, of which 76,400
shares have been duly authorized, issued and delivered and are validly
outstanding, fully paid and nonassessable .
(iii) Except for 24,600 shares of Common Stock reserved for issuance to
prospective employees upon exercise of outstanding employee stock options, to
such counsel's knowledge,
Page 21 of 30
<PAGE>
there are no preemptive rights or options, warrants, conversion privileges or
other rights (or agreements for any such rights) outstanding to purchase or
otherwise obtain any of the Corporation's securities.
(iv) The Stock has been duly authorized, validly issued and assuming
payment of the consideration contemplated by this Agreement by the Purchaser
upon such payment will be fully paid and nonassessable.
(e) The certificates representing shares of Stock are in due and proper
form and have been duly and validly executed by the officers of the Corporation
named thereon.
(f) The execution, delivery, performance and compliance with the terms of
this Agreement do not violate any provision of any applicable federal, state or
local law, rule or regulation or of any judgment, writ, decree or order
customarily applicable to transactions of the type contemplated by this
Agreement and applicable to the Corporation or any provision of the
Corporation's Articles of Incorporation or Bylaws.
(g) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations or filings with, and
federal or state governmental authority on the part of the Corporation, in each
case as is customarily applicable to transactions of the type contemplated by
the Agreement and applicable to the Corporation required in connection with the
consummation of the transactions contemplated by this Agreement have been
obtained and to such counsel's knowledge are effective as of the Closing Date,
and such counsel is not aware of any proceedings, or threat thereof, which
question the validity thereof.
(h) Based in part upon the representations of the Purchaser in this
Agreement, the offer and sale of the Stock pursuant to the terms of this
Agreement is exempt from the registration requirements of Section 5 of the
Securities Act by virtue of Section 4(2) thereof and from the qualification
requirements of the securities laws of the state of Texas and Colorado, or all
requisite permits, qualifications and orders have been obtained.
(i) Such counsel is not aware of any action, proceeding or investigation
pending against the Corporation or any of its officers, directors or employees,
or that any of the foregoing has received any threat thereof, which questions
the validity of the Agreement, the Service Credit Agreement, the Marketing
Agreement or the Voting Agreement or the right of the Corporation or its
officers, directors and employees to enter into such agreements or which might
result, either individually or in the aggregate, in any Material Adverse Effect,
nor is such counsel aware of any litigation pending against the Corporation or
any of its officers, directors or employees, or that any of the foregoing has
received any threat thereof, by reason of the proposed activities of the
Corporation, the past employment relationships of its officers, directors or
employees, or negotiations by the Corporation or any of its officers or
directors with possible investors in the Corporation or its business.
(j) The Marketing Agreement, the Service Credit Agreement and the Voting
Agreement have each been duly authorized, executed and delivered by the parties
thereto and assuming due authorization, execution and delivery by the Purchaser,
such agreements constitute legal, valid and binding obligations of the
Corporation, subject to bankruptcy and other laws of
Page 22 of 30
<PAGE>
general application affecting the rights and remedies of creditors and except
that no opinion need be given as to the availability of equitable remedies.
(k) To such counsel's knowledge, the Corporation is not in violation of any
provisions of its Articles of Incorporation or Bylaws, and neither of such
documents is in violation of any provision of the Corporation Law of the State
of Texas.
10.9 Receipt of Waiver of Preemptive Rights. The Nathan Landow Family
---------------------------------------
Limited Partnership shall have permanently waived in writing all preemptive
rights held in connection with the transactions contemplated by this Agreement
and such waiver shall be in full force and effect on the Closing Date.
Section 11. Corporation's Conditions to Closing
-----------------------------------
The Corporation's obligation to issue the Stock on the Closing Date is
subject to the fulfillment of the following conditions, unless waived in writing
by the Corporation:
11.1 Representations and Warranties Correct. The representations and
---------------------------------------
warranties made by the Purchaser in Section 8 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date.
11.2 Covenants. All covenants, agreements and conditions contained in
----------
this Agreement to be performed by the Purchaser on or prior to the Closing Date
shall have been performed or complied with in all material respects.
11.3 Compliance Certificate. The Purchaser shall have delivered to the
-----------------------
Corporation a certificate of the Corporation, executed by a Vice President of
the Purchaser, dated the Closing Date, and certifying, among other things, the
fulfillment of the conditions specified in Sections 11.1 and 11.2 of this
Agreement.
11.4 Legal Matters. All material matters of a legal nature which pertain
--------------
to this Agreement and the transactions contemplated hereby shall have been
reasonably approved by counsel to the Corporation.
11.5 Opinion of Purchaser's Counsel. The Corporation shall have received
--------------------------------
from the General Counsel or the Assistant General Counsel of the Purchaser, an
opinion dated the Closing Date, in form and substance satisfactory to the
Purchaser, to the effect that:
(a) The Purchaser is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware, and the
Corporation has the requisite power and authority to own its properties and to
conduct its business.
(b) The Purchaser has the requisite corporate power and authority to
execute, deliver and perform this Agreement. The Agreement has been duly and
validly authorized by the Purchaser, duly executed and delivered by an
authorized officer of the Purchaser and constitutes a legal, valid and binding
obligation of the Purchaser, subject to bankruptcy and other laws of general
application affecting the rights and remedies of creditors and except insofar as
the enforceability of the indemnification provisions of Section 9 of the
Agreement may be limited by
Page 23 of 30
<PAGE>
applicable laws and except that no opinion need be given as to the availability
of equitable remedies.
(c) To such counsel's knowledge, the execution, delivery, performance and
compliance with the terms of this Agreement do not violate any provision of any
applicable federal, state or local law, rule or regulation or of any judgment,
writ, decree or order customarily applicable to transactions of the type
contemplated by this Agreement and applicable to Purchaser or any provision of
Purchaser's Operating Agreement.
(d) All consents, approvals, orders or authorizations of, and all
qualifications, registrations, designations, declarations or filings with, and
federal or state governmental authority on the part of Purchaser, in each case
as is customarily applicable to transactions of the type contemplated by the
Agreement and applicable to Purchaser required in connection with the
consummation of the transactions contemplated by this Agreement have been
obtained, and such counsel is not aware of any proceedings, or threat thereof,
which question the validity thereof.
(e) Such counsel is not aware of any action, proceeding or investigation
pending against Purchaser or any of its officers, directors or employees, or
that any of the foregoing has received any threat thereof, which questions the
validity of the Agreement, the Service Credit Agreement, the Marketing Agreement
or the Voting Agreement or the right of Purchaser or its officers, directors and
employees to enter into such agreements.
(f) The Marketing Agreement, the Service Credit Agreement and the Voting
Agreement have each been duly authorized, executed and delivered by the
Purchaser and assuming due authorization, execution and delivery by the other
parties thereto, such agreements constitute legal, valid and binding obligations
of the Purchaser, subject to bankruptcy and other laws of general application
affecting the rights and remedies of creditors and except that no opinion need
be given as to the availability of equitable remedies..
Section 12. Affirmative Covenants of the Corporation
----------------------------------------
The Corporation hereby covenants and agrees as follows:
12.1 Financial Information. Subject to Section 12.3, the Corporation will
----------------------
mail the following reports to the Purchaser for so long as the Purchaser is a
holder of any of the Stock:
(a) As soon as practicable after the end of each fiscal year, and in any
event within 90 days thereafter, consolidated balance sheets of the Corporation
and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of operations and consolidated statements of cash flows
of the Corporation and its subsidiaries, if any, for such year, prepared in
accordance with GAAP and setting forth in each case in comparative form similar
information for the previous fiscal year, all in reasonable detail and audited
by independent public accountants of national standing selected by the
Corporation.
(b) As soon as practicable after the end of the first, second and third
quarterly accounting periods in each fiscal year of the Corporation and in any
event within 45 days thereafter, a consolidated balance sheet of the Corporation
and its subsidiaries, if any, as of the
Page 24 of 30
<PAGE>
end of each such quarterly period, and consolidated statements of operations and
consolidated statements of cash flows of the Corporation and its subsidiaries,
if any, for such period and for the current fiscal year to date, prepared in
accordance with GAAP (other than for accompanying notes), all in reasonable
detail and certified by an officer of the Corporation, subject to changes
resulting from year-end audit adjustments, by the principal financial or
accounting officer of the Corporation.
(c) Contemporaneously with their delivery to holders of the Corporation's
Common Stock, a copy of each report or other communication delivered to holders
of its Common Stock.
12.2 Additional Information. Subject to Section 12.3, as long as the
-----------------------
Purchaser holds not less than 50% of the Stock, as adjusted for
recapitalizations, stock splits, stock dividends and the like, the Corporation
will deliver or provide to the Purchaser:
(a) As soon as practicable after the end of each fiscal month, and in any
event within 30 days thereafter, unaudited consolidated balance sheets of the
Corporation as of the end of such month, unaudited consolidated statements of
operations and unaudited consolidated statement of cash flows (with respect to
the statement of cash flows, if regularly prepared by the Corporation) for each
month and for the current fiscal year to date. Such fiscal statements shall be
prepared in accordance with GAAP consistently applied (other than accompanying
notes), all in reasonable detail and signed, subject to year-end audit
adjustments, by the principal financial or accounting officer of the
Corporation.
(b) Within 30 days prior to the beginning of each fiscal year, an "Annual
Plan." The Annual Plan shall set forth full and complete forecasted balance
sheets, statements of operations, and statements of cash flows for such fiscal
year and for each month within that year. The Annual Plan shall also describe
the marketing, production, research and development, organization and staffing,
and financial strategies which support the Annual Plan's forecasted figures.
(c) Promptly after each meeting or the execution of an action by written
consent, copies of the minutes of proceedings or actions by written consent of
Corporation's Board of Directors and shareholders.
(d) With reasonable promptness, such other information and data with
respect to the Corporation and its subsidiaries, if any, as the Purchaser may
from time to time reasonably request.
(e) For so long as the Purchaser is eligible to receive reports under
this Section 12.2, it shall also have the right, at its expense, to visit and
inspect any of the properties of the Corporation or any of its subsidiaries, to
examine its books of account and records, and to discuss their affairs, finances
and accounts with their officers, all at such reasonable times as often as may
be reasonably requested.
12.3 Termination of Covenants. The covenants set forth in Sections 12.1
-------------------------
and 12.2 shall terminate and be of no further force or effect at such time as
the Corporation is required to file reports pursuant to Sections 13 or 15(d) of
the Exchange Act. The covenants set forth in Sections 12.4 through 12.7 shall
terminate upon the closing of a Qualified Public Offering.
Page 25 of 30
<PAGE>
12.4 Other Insurance. From and after the Closing, the Corporation shall,
----------------
subject to the approval of the Board of Directors, use its best efforts to
obtain and maintain such insurance with coverages and in amounts as shall be
determined by the Board of Directors, including officers' and directors'
liability insurance, to the extent that such insurance is available on
commercially reasonable terms.
12.5 Taxes and Other Liabilities. The Corporation will pay and discharge,
----------------------------
before the same become delinquent and before penalties accrue thereon, all
taxes, assessments and governmental charges upon or against it or any of its
properties, and all its other material liabilities at any time existing, except
to the extent and so long as (a) the same are being contested in good faith and
by appropriate proceedings in such manner as not to cause any Material Adverse
Effect or the loss of any right of redemption from any sale thereunder and (b)
the Corporation shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting principles) deemed by it
adequate with respect thereto.
12.6 Notice of Litigation and Disputes. The Corporation will promptly
----------------------------------
notify the Purchaser of any suits or litigation instituted against it, or
disputes that have a high probability of resulting in a suit which, if
determined adversely to the Corporation, would have a Material Adverse Effect on
the Corporation.
12.7 Election of Directors. The Corporation will use its best efforts to
----------------------
cause a representative of the Purchaser, who shall be an employee of the
Purchaser, to be elected to the Corporation's Board of Directors, and in the
event of any vacancy on the Board of Directors, the Corporation and the
Purchaser will use their best efforts to fill the vacancy such that the Board
will include such representative.
13. Miscellaneous.
--------------
13.1 Governing Law, Venue. This Agreement shall be governed in all
---------------------
respects by the internal laws of the State of Texas. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of Colorado, County of Denver, or, if it has or can acquire jurisdiction, in the
United States District Court for the District of Colorado, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such action or proceeding and waives any objection to
venue laid therein. Process in any action or proceeding referred to in the
preceding sentence may be served on any party anywhere in the world.
13.2 Survival. The representations, warranties, covenants and agreements
---------
made herein shall survive any investigation made by the Purchaser and the
closing of the transactions contemplated hereby.
13.3 Successors and Assigns. Except as otherwise provided herein, the
-----------------------
provisions hereof shall inure to the benefit of, and be binding upon, the
successors and assigns of the parties hereto; provided, however, that the rights
of the Purchaser to purchase the Stock shall not be assignable without the
consent of the Corporation.
13.4 Entire Agreement: Amendment. This Agreement and the other documents
----------------------------
delivered pursuant hereto on the Closing Date and the Nondisclosure Agreement
executed by the
Page 26 of 30
<PAGE>
Purchaser and the Corporation constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof,
and no party shall be liable or bound to any other party in any manner by any
warranties, representations or covenants except as specifically set forth herein
or therein. Except as expressly provided herein, neither this Agreement nor any
term hereof may be amended, waived, discharged or terminated other than by a
written instrument signed by the party against whom enforcement of any such
amendment, waiver, discharge or termination is sought.
13.5 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, sent by facsimile, or otherwise delivered by
hand or by a nationally-recognized overnight courier, addressed (a) if to a
Purchaser, as follows:
Level 3 Communications, LLC
1025 Eldorado Blvd.
Broomfield, CO 80021
Attention: General Counsel
Facsimile: 303-926-3467
or at such other address or facsimile number as the Purchaser shall have
furnished to the Corporation in writing, or (b) if to any other holder of any
Stock at such address or facsimile number as such holder shall have furnished
the Corporation in writing, or, until any such holder so furnishes an address or
facsimile number to the Corporation, then to and at the address or facsimile
number of the last holder of such Stock who has so furnished an address or
facsimile number to the Corporation, or (c) if to the Corporation, as follows:
Data Return Corporation
801 Stadium Drive
Suite 117
Arlington, Texas 76011
Attention: Chief Executive Officer
Facsimile: 817-274-1141
or at such other address or facsimile number as the Corporation shall have
furnished to the Purchaser.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given (x) in the case of
personal delivery or delivery by facsimile, on the date of such delivery, (y) in
the case of a nationally-recognized overnight courier, on the next business day
after the date when sent and (z) in the case of mailing, on the third business
day following that on which the piece of mail containing such communication has
been deposited in a regularly maintained receptacle for the deposit of the
United States mail, addressed and mailed as aforesaid.
13.6 Delays or Omissions. Except as expressly provided herein, no delay or
--------------------
omission to exercise any right, power or remedy accruing to any holder of any
Stock, upon any breach or default of the Corporation under this Agreement, shall
impair any such right, power or remedy of
Page 27 of 30
<PAGE>
such holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. Any waiver, permit, consent or approval of any kind or character on
the part of any holder of any breach or default under this Agreement, or any
waiver on the part of any holder of any provisions or conditions of this
agreement, must be in writing and shall be effective only to the extent
specifically set forth in such writing. All remedies, either under this
Agreement or by law or otherwise afforded to any holder, shall be cumulative and
not alternative.
13.7 Expenses. The Corporation and the Purchaser shall bear its own
---------
expenses incurred on its behalf with respect to this Agreement and the
transactions contemplated hereby.
13.8 Counterparts. This Agreement may be executed in any number of
-------------
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
13.9 Severability. In the event that any provision of this Agreement
-------------
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
13.10 Titles and Subtitles. The titles and subtitles used in this
---------------------
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
13.11 Publicity. Neither party shall issue any public announcement or
---------
press release relating to the execution of this Agreement without the prior
approval of the other party, which approval shall not be unreasonably withheld.
In this event either party shall be required to disclose all or any part of this
Agreement in, or attach all or any part of this Agreement to, any regulatory
filing or statement, each party agrees to discuss and work cooperatively, in
good faith, with the other party, to protect, to the extent possible, those
items or matters which the other party deems confidential and which may, in
accordance with applicable laws, be deleted therefrom.
13.12 Definition of Knowledge.
-----------------------
(a) For purposes of this Agreement and all documents delivered on the
Closing Date, knowledge or aware shall mean with respect to an individual, that
individual will be deemed to have knowledge or to be aware of a particular fact
or other matter if: (a) such individual is actually aware of such fact or other
matter; or (b) a prudent individual could be expected to discover or otherwise
become aware of such fact or other matter in the course of conducting a
reasonably comprehensive investigation concerning the existence of such fact or
other matter. A corporation, limited liability company or firm shall be deemed
to have knowledge or to be aware of a particular fact or other matter if any
individual who is serving, or who has served, as a director, manager, officer or
partner of such corporation, limited liability company or firm has, or at any
time had, knowledge or awareness of such fact or other matter.(b) When any
provision of this Agreement requires the knowledge or awareness of the
Corporation, knowledge or awareness shall mean the knowledge or awareness (as
defined in clause (a) above) of the
Page 28 of 30
<PAGE>
Corporation's Chief Executive Officer, President and Chief Operating Officer,
Vice President - Chief Financial Officer and Senior Vice President, Marketing,
Sales and Business Development.
[Signature page follows.]
Page 29 of 30
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DATA RETURN CORPORATION
By: /s/ Sunny C. Vanderbeck
---------------------------------------
Name: Sunny C. Vanderbeck
Title: CEO
LEVEL 3 COMMUNICATIONS, LLC
By: /s/ Douglas Bradbury
---------------------------------------
Name: Douglas Bradbury
Title: Chief Financial Officer
Page 30 of 30
<PAGE>
Exhibit 10.3
SERVICE CREDIT AGREEMENT
THIS SERVICE CREDIT AGREEMENT (the "Credit Agreement") is entered into this
23rd day of July, 1999, by and between LEVEL 3 COMMUNICATIONS, LLC, a Delaware
limited liability company ("Level 3") and DATA RETURN CORPORATION, a Texas
corporation ("Customer").
RECITALS
Customer and Level 3 have entered into a Strategic Marketing and Sales
Agreement dated July 1, 1999 (the "Marketing Agreement") pursuant to which,
among other things, Customer agreed to purchase minimum quantities of "Broadband
Services" (as defined in the Marketing Agreement); and
Customer and Level 3 have entered into a Restricted Stock Purchase
Agreement dated July 23rd, 1999 (the "Restricted Stock Purchase Agreement"),
pursuant to which, among other things, Level 3 agreed to acquire, and Customer
agreed to convey to Level 3, an equity interest in Customer; and
Under the terms of the Restricted Stock Purchase Agreement and as
consideration for the conveyance of the equity interest described therein, the
parties agreed that Level 3 would execute this Credit Agreement respecting
credits which may be available (as defined below) for certain quantities of
Broadband Services purchased by Customer under the Marketing Agreement or
otherwise as specified herein.
NOW, THEREFORE, the parties agree as follows:
1. Defined Terms. Capitalized terms used but not defined herein shall
-------------
have the meanings set forth in the Marketing Agreement.
2. Credit for Purchase of Broadband Services.
-----------------------------------------
(a) In each month commencing January 1, 2001, Customer shall be entitled to
a credit of up to but not exceeding a cumulative total of five million dollars
($5,000,000.00), which credit may be applied against, and only against (except
as set forth in subparagraph (b) below), amounts owed by Customer for purchase
of "Excess Broadband Services" (as defined below). For purposes hereof, "Excess
Broadband Services" shall mean all Broadband Services purchased and paid for by
Customer in any quarter which are in excess of the quarterly Revenue Commitment
set forth in Section 2.2 of the Marketing Agreement; provided, that the
quarterly Revenue Commitment will be deemed satisfied first through the purchase
of any Services other than Broadband Services.
<PAGE>
Thus, as an example, if Customer's Monthly Recurring Charges for Broadband
Services in the first three months of 2001 were as follows:
January $100,000
February $150,000
March $200,000
then (because the applicable quarter under the Marketing Agreement commenced on
January 1, 2001) Customer would be entitled to a credit on the invoice showing
March billings of $150,000 (i.e., the extent to which the cumulative quarterly
billings exceeded the quarterly Revenue Commitment of $300,000 set forth in
Section 2.2 of the Marketing Agreement). If, on the other hand, the Monthly
Recurring Charges for the first three months of 2001 were as follows:
January $400,000
February $500,000
March $600,000
then Customer would be entitled to a credit in the invoice showing January
billings of $100,000, and would be further entitled to a credit on the February
and March billings of $500,000 and $600,000 respectively (Customer having
satisfied fully the quarterly Revenue Commitment in the month of January). If
Customer's cumulative billings during any quarter did not satisfy the quarterly
Revenue Commitment set forth in Section 2.2 of the Marketing Agreement, then no
credit would be available.
(b) In the event that the Marketing Agreement is terminated by Customer as
the result of Level 3's Default thereof (as set forth in Article 6 of the
Marketing Agreement), then the credit (or the unused portion thereof) may be
applied against Customer's purchases of all Broadband Services commencing
January 1, 2001 (and Level 3 hereby agrees to provide such Broadband Services to
Customer pursuant to the Standard Terms and Conditions, provided such Broadband
Services are available at the time of Customer's submission of a Customer Order
therefor).
3. Application of Credits. Customer may apply the credits only against
----------------------
payments which would otherwise be due for Excess Broadband Services (or for all
Broadband Services under the circumstance described in Section 2(b) above), and
shall provide a written statement (which shall be delivered contemporaneously
with Customer's payment of each applicable monthly invoice) setting forth the
amount of the credit claimed and taken. Written notices respecting the amount
of credit taken by Customer shall be delivered by prepaid overnight air courier
or by certified mail, postage prepaid, return receipt requested, to the
following:
LEVEL 3 COMMUNICATIONS, LLC
1025 Eldorado Blvd.
Broomfield, Colorado 80021
Attn: Mike Knaisch, VP Web Business
2
<PAGE>
4. Expiration of Credits. Any credits not fully used on or before July 1,
---------------------
2004 shall be forfeited by Customer. In addition, the credits granted to
Customer hereunder shall be terminated in the event that the Marketing Agreement
is terminated by Level 3 as a result of Customer's Default under Article 6
thereof.
5. Assignment. Customer may not assign this Credit Agreement, or the
----------
credits granted hereunder, to any other party without the advance written
consent of Level 3.
6. Default by Level 3. In the event that, other than as may be caused by
------------------
an event of force majeure or by the wrongful actions or omissions of Customer,
Level 3 fails to timely observe or perform any material covenant, agreement,
obligation, term or condition required to be observed or performed hereunder,
which failure is not cured within thirty (30) days after receipt of written
notice thereof, then Customer may elect to either:
(a) seek specific performance of this Credit Agreement before a court of
competent jurisdiction, or
(b) terminate this Credit Agreement, in which event:
(i) any unused portion of the credit provided hereunder shall be
terminated, and
(ii) Customer must exercise its right under the Restricted Stock
Purchase Agreement to repurchase all unvested stock then held by Level 3,
and
(iii) Level 3 shall (but only in the event that Customer repurchases
all unvested stock, if any, under the Restricted Stock Purchase Agreement)
pay Liquidated Damages (as defined below) to Customer.
For purposes hereof, "Liquidated Damages" shall be seven hundred and fifty
thousand dollars ($750,000.00), less an amount equal to the percentage of the
credit actually used and applied against invoices prior to such date (so that if
Customer had used forty percent (40%) of the credit, the Liquidated Damages
would be reduced by forty percent (40%)). (which the other party may declare a
default in the performance hereof.
7. Default by Customer. In the event that, other than as may be caused by
-------------------
an event of force majeure or by the wrongful actions or omissions of Level 3,
Customer fails to timely observe or perform any material covenant, agreement,
obligation, term or condition required to be observed or performed hereunder,
which failure is not cured within thirty (30) days after receipt of written
notice thereof, then Level 3 may, in addition to any other remedies that it has,
terminate this Credit Agreement.
<PAGE>
8. Press Releases. Neither party shall, without the advance written
--------------
consent of the other party, issue any press release respecting this Credit
Agreement or the terms hereof or otherwise disclose this Credit Agreement or the
terms hereof to any other party.
9. Entire Agreement; Amendment. This Credit Agreement (and the Marketing
---------------------------
Agreement, Restrictive Stock Purchase Agreement and any applicable Customer
Order) sets forth the entire understanding of the parties and supersedes any and
all prior agreements, arrangements or understandings relating to the subject
matter hereof. No subsequent amendment to this Credit Agreement shall be
effective or binding unless it is made in writing by authorized representatives
of the parties.
10. Enforceability. If any part of any provision of this Credit Agreement
--------------
or any other agreement, document or writing given pursuant to or in connection
with this Credit Agreement shall be invalid or unenforceable under applicable
law, said part shall be ineffective to the extent of such invalidity only,
without in any way affecting the remaining parts of said provision or the
remaining provisions of this Credit Agreement.
11. Governing Law. This Credit Agreement is made pursuant to and shall be
-------------
construed and enforced in accordance with the laws in force in the State of
Colorado.
12. Successors and Assigns. This Credit Agreement shall be binding upon
----------------------
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
13. Multiple Counterparts. This Credit Agreement may be executed in one
---------------------
or more counterparts, which when taken together, shall constitute one and the
same document. The parties hereby agree that facsimile signatures are valid and
binding on the parties.
[Signature page follows.]
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Credit Agreement
as of the day and year first above written.
DATA RETURN CORPORATION
By: /s/ Sunny C. Vanderbeck
----------------------------------------
Name: Sunny C. Vanderbeck
Title: CEO
LEVEL 3 COMMUNICATIONS, LLC
By: /s/ Douglas Bradbury
----------------------------------------
Name: Douglas Bradbury
Title: Chief Financial Officer
5
<PAGE>
Exhibit 10.4
<TABLE>
<CAPTION>
<S> <C> <C>
4/27/99 LEVEL 3 COMMUNICATIONS PRICE QUOTE
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
AM Gary Ensminger DATE 21-Apr-99 REVISION INFORMATION
COMPANY Data Return Corp.
------------------------------------- -------------------------
CUSTOMER Sunny Vanderbeck LOCATION A REVISION DATE
------------------------------------- ------------------------------
STREET 801 Stadium Drive, Ste 117
------------------------------------- ------------------------------
CITY,ST ZIP Arlington, TX 75011
------------------------------------- -------------------------
PHONE 817-454-7715 LOCATION B OLD QUOTE ID
------------------------------------- -----------------------------
-----------------------------
PRICE QUOTE ID Dat36271Gar
- ------------------------------------------------------------------------------------------------------------------------------------
QTY PROD ITEM CODE N2 DESCRIPTION TERM S-VOL 1999MRC 2000MRC 2001MRC INSTALL NOTES
- ------------------------------------------------------------------------------------------------------------------------------------
480 COL COL-SPC-CABUS Full Cabinet-US 3YEAR $ $ * $ * $ * $ * No hold fees
applicable
to this order
- ------------------------------------------------------------------------------------------------------------------------------------
$ * $ * $ * $ *
1999MRC 2000MRC 2001MRC INSTALL
Customer Approval of Customer Order Form ------------------------------------------
This Price Quote is governed by Level 3 Communications, LLC's
Terms and Conditions for Delivery of Service(which are available RAMP-UP PERIOD
for Customer's review either upon request or on Level 3's web site), -------------------
and shall be incorporated into the Customer Order submitted by Customer
for the forgoing Services.
IF LEVEL 3 DOES NOT HAVE LOCAL ACCESS CAPACITY:
THE ORDER WILL BE PUT ON HOLD UNTIL CAPACITY IS AVAILABLE OR
THE CUSTOMER MAY REQUEST REPRICING AT OFF-NET RATES.
Level (3)
COMMUNICATIONS
- ------------------------------------------------------------------------------------------------------------------------------------
APPROVALS
- ------------------------------------------------------------------------------------------------------------------------------------
[SIGNATURE APPEARS HERE]
- ------------------------------------------------------------------------------------------------------------------------------------
Authorized Customer Signature Date:
/s/ Sunny C. Vanderbeck April 28, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
Typed or Printed Name Date:
Sunny C. Vanderbeck
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC.
<PAGE>
Exhibit 10.5
ACSI
Dialtone To Data,
Here To Anywhere.
Managed Services Proposal
For
Data Return
March 6, 1997
<PAGE>
Copyright (C) 1996, American Communications Services, Inc. All rights
reserved.
This document contains American Communications Services, Inc.
confidential information. No part of this document may be reproduced
or transmitted in any form or by any means, electronic or mechanical,
for any purpose, without the express written permission of American
Communications Services, Inc.
<PAGE>
1. Executive Summary
Introduction
In today's increasingly competitive environment, information is key to the
success of any business and as technology changes, the complexity of your
communications requirements can be overwhelming. Therefore, it is critical to
work with a telecommunications provider who can provide a consultative approach
to identifying your needs and offer a single, simple communications solution.
ACSI is committed to understanding your business and your particular
application. Then, we customize a solution to address your specific needs and
make that complex solution transparent to the user. ACSI takes care of all the
details of setting up your network so you can focus on your core business.
ACSI is a fast-growing alternative provider of local telecommunications
services. Our "self-healing" fiber optic networks are built to Bellcore
standards and engineered to meet the most critical benchmarks for network
reliability and security.
ACSI offers switched and dedicated data transport and standards-based
networking. Our high-bandwidth data network, ACSINet, builds on ACSI's existing
SONET-based fiber rings, and allows seamless integration of other ACSI services
with the ACSINet platforms.
ACSINet supports three native access networking protocols - Internet Protocol
(IP), Frame Relay, and ATM and a variety of LAN protocols and access methods
from your site, depending upon your application. In addition, ACSI's skilled
staff brings you a variety of managed services - design, consultation and
integration services tailored to address your specific applications.
Customer Support
The ACSI Network Management Center (NMC) is a single point of contact for all
customers. The Network Management Center provides proactive service and
responds around the clock to your needs by monitoring the network using state-
of-the-art computer software and database systems. Our NMC also provides remote
network management and implements remote alarm configurations for our customers'
private networks. The NMC is available seven days a week, 24 hours a day. The
NMC serves as your interface for trouble reporting and status report updates and
is also responsible for isolation and correction of network problems.
1
<PAGE>
Network Deployment and Expansion
The ACSINet high bandwidth backbone data network is currently being deployed on
a nationwide basis, with future plans to expand offshore. This data network has
presence in 26 cities in 15 states. There are 43 points of presence planned by
the end of the year. The following map depicts the network deployment for 1996.
[graphic]
Conclusion
ACSINet provides a total solution capability with proven, carrier-grade, state-
of-the-art technology platforms. ACSINet is your one-stop shop for equipment and
services supporting your LAN connectivity, multimedia applications, and Internet
applications and services among many other data transport needs. Our data
network has been designed to provide seamless integration with other carriers as
well as with ACSI's metropolitan area network nodes to address your LAN and WAN
requirements.
2
<PAGE>
2. ACSINet Solution
Proposed Solution
On behalf of ACSI Advanced Technologies, Inc., I am pleased to submit to you a
turn key solution supporting your requirements for dedicated access to the
Internet in Ft. Worth, TX.
The proposed solution includes the following equipment (the "ACSI Equipment")
and transmission lines ("Lines"):
. One (1) Cisco 4700 Router equipped with a 1-port Fast Ethernet card,
1-port DS3 ATM card.
. One (1) 4 port serial card.
. One (1) 4Mbps Internet Access (upgradable to a DS3).
The proposed solution for each site will be implemented based on the network
topology illustrated in the diagram below:
[graphic]
3. Responsibilities
ACSI
. ACSI shall allocate appropriate rack space to house to the ACSI
Equipment.
. ACSI shall provision one 4 Meg Internet Access.
. ACSI shall provide 8x5 maintenance for the ACSI Equipment.
. ACSI shall provide 24x7 maintenance for the Lines.
. ACSI shall be responsible for remote monitoring and management of the
ACSI Equipment.
3
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Data Return
. Data Return shall initiate maintenance calls for the ACSI Equipment
and the Lines by contacting ACSI.
. Data Return shall provide management, maintenance, and administration
of the server.
4. Demarcation
The proposed service will terminate at the 100 BaseT port on the Router. ACSI
shall not be responsible for any malfunction related to non-ACSI equipment
and/or lines connected to the aforementioned demarcation devices.
5. Contractual Terms
The term of this contract is a period of 36 months commencing on the date on
which full service is first activated for Data Return. Services and maintenance
are provided for the term of the contract only. See Appendix A for applicable
Terms and Conditions.
4
<PAGE>
6. Pricing Terms
ACSI will provide the proposed solution according to the following Rate
Schedule. This Rate Schedule is valid for 30 days following the date of this
proposal.
<TABLE>
<CAPTION>
--------------------------------------------------
Rate Schedule
--------------------------------------------------
Monthly Non-
Recurring Recurring
Charges/1/* Charges/1/*
--------------------------------------------------
<S> <C> <C>
Managed Services $ $
--------------------------------------------------
Collocation $ $
--------------------------------------------------
4 Mbps Internet Access $ $
--------------------------------------------------
Total (Standard Pricing) $ $
--------------------------------------------------
Total (Zero Down) $
--------------------------------------------------
</TABLE>
________________________
/1/ Charges exclude all applicable local, state and federal taxes.
The following is a ramp up Rate Schedule for Internet Access up to 45 Mbps.
----------------------------
Ramp Up Rate Schedule
----------------------------
Monthly
Port Connection Recurring
Charges*
----------------------------
6 Mbps $
----------------------------
10 Mbps $
----------------------------
15 Mbps $
----------------------------
45 Mbps $
----------------------------
* CONFIDENTIAL PORTION OMITTED AND FILED SEPARATELY WITH THE SEC
5
<PAGE>
7. Service Implementation
Service will be available 30 days following a signed contract between Data
Return and ACSI. Note that the final implementation date is subject to the
availability of transmission lines from the Local Exchange Carrier/Inter-
Exchange Carrier, and hardware/software from ACSI's equipment vendors.
<TABLE>
<CAPTION>
/s/ Michael Marrion /s/ Sunny Vanderbeck March 7, 1997
- ------------------------ --------------- ------------------------- ------------------
<S> <C> <C> <C>
Michael Marrion Date Sunny Vanderbeck Date
EVP & GM Data Return
Advanced Data Services
</TABLE>
6
<PAGE>
Appendix A
ACSI Advanced Data Services, Inc.
Terms and Conditions
Rates
Rates are set forth on the Rate Schedule and the Data Service Order Form for the
amount and term of contract indicated therein. Services provided on a month-to-
month basis shall be subject to a price increase upon 30 days written notice to
the customer. Unless ADS receives notification of service cancellation prior to
the effective date of a price increase, services shall commence to be billed at
the new price. Services and network components provided under a term
arrangement have been priced based upon the length of contract term. In case of
early contact termination, the customer shall be liable for payment in full of
all unarnortized charges for the remaining term of contract.
Payment
Payment for the Non-Recurring Charges (NRC) is due upon the signing of the
contract by both parties. Payment for Monthly Recurring Charges shall commence
upon activation of services and shall be billed the first day of the month
following service implementation. Prices for services are FOB Annapolis,
Maryland unless otherwise stated.
Use of ADS Components
For provision of custom network services, ADS may provide equipment to be
dedicated to a customer implementation either within an ACSI/ADS facility or
directly at the customer site ("ADS Equipment"). Managed Services shall be
charged to the customer in conjunction with networking services and are subject
to the same terms and conditions as stated herein, as applicable. ADS Equipment
shall include maintenance in accordance with ADS' standard maintenance plan
(5x8) unless specified otherwise. Unless specifically stated otherwise, the
customer shall provide management and configuration services for ADS Equipment.
ADS Equipment remains the property of ADS and is available for customer use
through the term of contract; however, ADS may remove any items of ADS Equipment
and replace them with other items, so long as the removal and replacement is
done at the sole cost and expense of ADS, and so long as the removal and
placement does not cause any interruption in services. Customer has no property
rights in any ADS Equipment. Customer will provide such agreements from
customer's landlord as ADS may request in order to protect the rights of ADS and
ADS Equipment. Services provided within the ACSI/ADS Data Network shall be
maintained on a 7x24 basis.
Bandwidth
Stated bandwidth applies only to those connections provided as part of the ADS
service connection and network transport services. No guarantee of end-to-end
bandwidth is made for circuits and connections outside of ADS' network.
Use of Services
ADS services are only to be used for lawful purposes. ADS exercises no control
whatsoever over the content of any information passing through it. Customer
agrees not to transmit, re-transmit, or store material in violation of any
federal or state laws and/or regulations, including laws related to copyrighted
materials or any material or communications protected as a trade secret. As a
customer of ADS and a user of its services, customer agrees to indemnify and to
hold harmless ADS from any and all claims resulting form any use of the services
which causes damage to customers or any other party.
7
<PAGE>
ADS shall not be liable, either in the contract or in tort, for protecting the
customer from unauthorized access to its transmission facilities or customer-
owned equipment, or for unauthorized access or alteration, theft, or destruction
of a customer's data files, programs, or information through accident,
fraudulent means or devices, of any other method, even should such access occur
as a result of ADS negligence.
ADS shall not be in any way responsible for claims or damages caused by a
customer, through fault, negligence or failure to perform customer
responsibilities, claims against a customer by any other party, any act or
omission of any party furnishing services and/or products, or the installation
and/or removal of any and all equipment supplies by any Service Provider [or by
ADS].
InterNIC-allocated IP addresses, used in provisioning certain ADS services, are
not transferable to customers and, in the event of termination of services for
any reason, shall remain under the control of ADS.
Customer and ADS Responsibilities, Limits on Liability
Customer is responsible for assessing its need for and use of ADS services and
ADS has not made and does not make any representation and warranty regarding
whether ADS services will meet customer's requirements. ADS will exercise
reasonable commercial efforts to provide the services and products listed on the
Data Service Order Form, but does not guarantee any connection to any third-
party network or the results of customer's use of the services. ADS will not be
responsible for performance of its obligations hereunder where delayed or
hindered by war, riots, embargoes, strikes, or acts of its vendors and
suppliers, concealed acts of workmen (whether ADS or others), or any other
cause, foreseeable or unforeseeable, which is not within the control of ADS.
ADS is not responsible for maintenance, service, repair and/or replacement of
equipment owned by the customer. ADS is not responsible for any line sizing,
bandwidth calculation, or service quality or degradation for third-party
services.
ADS MAKES NO WARRANTIES, EITHER EXPRESSED OR IMPLIED, FOR SERVICES AND PRODUCTS
IT PROVIDES, AND SPECIFICALLY DISCLAIMS THE WARRANTIES OF TITLE, MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE.
THE PARTIES WILL NOT BE LIABLE TO EACH OTHER FOR ANY CONSEQUENTIAL, INDIRECT OR
SPECIAL DAMAGES WITH RESPECT TO ANY CLAIMS REGARDING THE SERVICES AND PRODUCTS
TO BE PROVIDED HEREUNDER. CUSTOMER'S CLAIMS FOR DIRECT LOSSES RELATED TO THIS
AGREEMENT SHALL BE LIMITED TO THE AMOUNT IT HAS PAID TO ADS FOR SERVICES. ANY
LEGAL ACTION ARISING OUT OF FAILURE, MALFUNCTION OR DEFECTS IN SERVICES OR GOODS
SHALL BE BROUGHT WITHIN A PERIOD OF ONE YEAR OF THE OCCURRENCE OR IS DEEMED
WAIVED.
Transfer and Assignment
The customer may not sell, assign or transfer any of its rights or obligations
under this service order without the prior written consent of ADS. ADS reserves
the right to transfer third-party services to ACSI-based facilities at any time
during the contract term
___________________________________ ________________________
ACSI/ADS Date
___________________________________ ________________________
Data Return Date
8
<PAGE>
Exhibit 10.6
SAVVIS
COMMUNICATIONS
BASIC INTERNET SERVICES AGREEMENT
This BASIC INTERNET SERVICES AGREEMENT (the "Agreement") is entered into this 12
day of December, 1997 between SAVVIS COMMUNICATIONS ENTERPRISES, L.L.C.
("SAVVIS"), and DATA RETURN CORPORATION ("You").
1. SAVVIS shall provide You one (1) dedicated connection(s) to the Internet
through SAVVIS' network from SAVVIS' closest Point of Presence (POP) at DS-
3 12mbps bandwidth (the "Connection"). You shall pay SAVVIS the sum of
$9,550 per month for the Connection plus a one time installation fee of
$1,000, the receipt of which is hereby acknowledged. SAVVIS will not
provide Your local loop nor is the charge therefor included herein. You
shall also be responsible for all connection and local access charges
incurred by SAVVIS and which apply to the Connection and You will be billed
by SAVVIS for such amounts. You will receive from SAVVIS the requirements
necessary to provide You with the Connection, which shall include, but not
be limited to, router configuration information, local loop information and
the demarcation point (the "Requirements") and the date on which the
Requirements must be fulfilled. If SAVVIS has not arranged for the local
loop, the demarcation point is considered to be the port on SAVVIS' switch.
If SAVVIS has arranged for the local loop, the WAN port on Your router is
the demarcation point. You acknowledge that You have received a Product
Specification Sheet relating to the Connection.
2. The Connection will be activated on or before March 25, 1998 (the
"Activation Date") and shall be for a period ending on the last day of the
month which is 36 months subsequent to the Activation Date at which time
this Agreement shall automatically renew for successive 36 month terms
unless terminated by either party at least 30 days prior to the then
current date for termination. SAVVIS reserves the right to change its
rates for any renewal term by notifying You at least 60 days in advance of
the effective date of such rate change. You acknowledge that circumstances
beyond the control of SAVVIS may cause a delay in turning up the Connection
in which case billing shall commence on the date the Connection is
activated; provided, however, in the event the delay in activating the
Connection is the result of Your failure to comply with or provide any of
the Requirements billing for the Connection shall commence on the
Activation Date.
3. This Agreement does not include equipment.
1
<PAGE>
4. You will be invoiced monthly in advance for all amounts due and owing to
SAVVIS. All payments are due within 30 days after the date of such
invoice. You will be deemed to be in default hereunder if payment is not
received within 30 days after the date of such invoice and in addition to
its other remedies, SAVVIS shall charge You an interest rate equal to the
lesser of 1-1/2% per month or the maximum amount permitted by the law of
Your state.
5. SAVVIS offers You access to the Internet. You hereby acknowledge that the
Internet is not owned, operated, managed by or in any way affiliated with
SAVVIS or any of its affiliates, and that it is a separate network of
computers independent of SAVVIS. Your use of the Internet is solely at
Your own risk and is subject to all applicable local, state, national and
international laws and regulations. Access to the Internet is dependent on
numerous factors, technologies and systems, many of which are beyond
SAVVIS' authority and control.
6. SAVVIS' network may only be used for lawful purposes. The transmission of
any material in violation of any United States or state regulations is
prohibited. This includes, but is not limited to, copyrighted material,
material legally judged to be threatening or obscene, material protected by
trade secret or material that is otherwise deemed to be proprietary or
judged by SAVVIS to be inappropriate or improper as determined by SAVVIS in
its reasonable judgment subject to industry standards which items shall be
deemed to include, but not be limited to, bulk e-mail messages. In the
event that You engage in activities that SAVVIS judges to be inappropriate
or improper, You shall have five (5) business days after the receipt of
notice from SAVVIS in which to cause such activities, the failure to do so
constituting a default hereunder.
7. Access to other networks connected to SAVVIS' network must comply with the
rules appropriate for that other network. SAVVIS exercises no control
whatsoever over the content of the information passing through its network.
8. SAVVIS MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED
TO, THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. THIS
INCLUDES LOSS OF DATA RESULTING FROM DELAYS, NONDELIVERIES, MISDELIVERIES
OR SERVICE INTERRUPTION HOWEVER CAUSED. USE OF ANY INFORMATION OBTAINED BY
SAVVIS' NETWORK IS AT YOUR OWN RISK. SAVVIS SPECIFICALLY DISCLAIMS ANY
RESPONSIBILITY FOR THE ACCURACY OR QUALITY OF INFORMATION OBTAINED THROUGH
ITS SERVICES.
9. Routine maintenance and periodic system repairs, upgrades and
reconfigurations may result in temporary impairment or interruption in
service. As a result, SAVVIS does not guarantee continuous or
uninterrupted service and reserves the right from time to time to
temporarily reduce or suspend service without notice. If you notify SAVVIS
immediately in the event of the failure of Your Connection and SAVVIS
determines in its reasonable commercial judgment that the Connection is
unavailable to You. SAVVIS will, upon Your request credit Your account in
the following manner: (i) if the Connection is
2
<PAGE>
unavailable for one (1) or more consecutive hours during any calendar
month, SAVVIS will credit Your account for such month in an amount equal to
1/30th of the amount due for such month and (ii) if the Connection is
unavailable for an aggregate of four (4) or more hours in any calendar
month, SAVVIS will credit Your account in an amount equal 7/30ths of the
amount due for such month. Schedule or routine maintenance shall not be
deemed to be the unavailability of Your Connection. The Connection shall
not be deemed to have failed and no failure shall be deemed to have
occurred if the interruption in services is due to force majeure or to
circumstances beyond the control of SAVVIS such as the failure being caused
by the local loop provider. The provisions set forth in this Paragraph 9
shall be Your sole and exclusive remedy in the event of the unavailability
of Your Connection.
SAVVIS reserves the right to, from time to time, monitor Your activity.
Upon the occurrence of a default by You of any provision hereunder, SAVVIS
reserves the right, in addition to any other remedies which may be
available to it, to terminate this Agreement and the services provided to
You hereunder. In addition, upon the occurrence of any default hereunder,
75% of the cumulative total of the balance of all monthly payments
remaining on this Agreement shall become due and payable as of that date as
liquidated damages and not as a penalty. You acknowledge that the amounts
payable pursuant to the preceding sentence are equitable compensation to
SAVVIS, and are intended to reasonably compensate SAVVIS for the losses
which are occasioned by Your failure to honor Your obligations hereunder
and that the exact amount of damages is difficult or impractical to
establish.
10. Notwithstanding the provisions of Paragraph 9 hereof, at any time during
the term hereof, if You are not otherwise in default under any of the terms
and provisions of the Agreement, You may terminate this Agreement by giving
SAVVIS thirty (30) days' written notice. Upon Your early termination of
this Agreement, You shall pay to SAVVIS an amount equal to the difference
between the monthly fee payable hereunder (which You acknowledge is the
monthly fee payable for a three (3) year term) and the fee which would have
been payable (as set forth below) which difference shall be multiplied by
the number of months this Agreement was in force and effect. Such amount
shall be payable by You to SAVVIS concurrently with the delivery of Your
notice of termination.
<TABLE>
<CAPTION>
Month of Termination Fee Payable Difference
-------------------- ----------- ----------
<S> <C> <C>
1-12 (deemed to be monthly pricing) $12,000 $2,800
13-24 (deemed to be 1 year pricing) $11,400 $1,800
25-36 (deemed to be 2 year pricing) $10,800 $1,600
</TABLE>
By way of example, if You terminate this Agreement in month 16, You will be
deemed to have entered into a 1 year Agreement and in order to terminate
this Agreement You would pay to SAVVIS the sum of $28,800 which is 16
months times $1,800. If You terminate this Agreement in month 29, You
would be deemed to have entered into a 2
3
<PAGE>
year Agreement and in order to terminate this Agreement You would pay to
SAVVIS the sum of $46,400 which is 29 months times $1,600. This Fee shall
not exceed 75% of the remaining total outstanding balance.
The provisions of this Section shall not be available to You if You are
otherwise in default of any other term or provision of this Agreement.
11. You shall indemnify SAVVIS, its affiliates, officers, directors, licensees
and licensers from any and all claims and expenses, including, without
limitation, reasonable attorney's fees arising from Your breach of any
provision of this Agreement.
12. This Agreement is deemed to be entered into in the State of Missouri and
shall not become a binding obligation of SAVVIS until it has been executed
by an officer of SAVVIS. The parties agree that any dispute arising under
this Agreement shall be arbitrated by the American Arbitration Association
and that such dispute shall be governed by and construed in accordance with
the laws of the State of Missouri.
13. SAVVIS may assign this Agreement without Your prior consent and all of
SAVVIS' rights, title and interest herein shall inure to the benefit of
such assignee, its successors and assigns. This Agreement shall not be
assignable by You except with the written consent of SAVVIS. Subject to
the foregoing, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
14. Each party may disclose the existence of this Agreement without the consent
of the other however, neither party may disclose any of the terms and
conditions of this Agreement without the prior written consent of the
other.
15. This Agreement may be modified only by a written instrument signed by the
party against which the modification is being enforced.
16. Any notice required to be given hereunder shall be in writing and shall be
deemed to have been delivered when deposited in the United States mail,
registered or certified mail, return receipt requested with adequate
postage affixed and addressed to the persons set forth in the signature
block hereto or to such other address as either party may provide to the
other in accordance with the provisions hereof. A copy of any notice to
SAVVIS shall be sent to Vice President - General Counsel at the address set
forth below.
17. This Agreement contains the entire agreement of the parties hereto with
respect to the matters covered hereby and supersedes any other prior or
simultaneous agreement related to such matters. Concurrently with the
activation of the Connection the Basic Internet Services Agreement dated
December 10, 1997 between the parties and the Connection being provided
thereunder shall terminate and all of the rights, duties and obligations of
the parties, with the exception of Your obligations to make payments
thereunder, shall terminate.
4
<PAGE>
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first above written.
SAVVIS COMMUNICATIONS DATA RETURN CORPORATION
ENTERPRISES, L.L.C.
By: /s/ Robert B. Murphy, Jr. By: /s/ Sunny C. Vanderbeck
--------------------------------- ----------------------------------
Printed Name: Robert B. Murphy, Jr. Printed Name: Sunny C. Vanderbeck
----------------------- ------------------------
Title: EVP, CEO Title: CEO
------------------------------ -------------------------------
Address: 7777 Bonhomme, Suite 1501 Address: 801 Stadium Dr.
St. Louis, MO 63105 Arlington, TX 76011
Phone: Phone: (817) 461-7715
5
<PAGE>
Exhibit 10.7
COMMERCIAL LEASE AGREEMENT
THIS LEASE AGREEMENT hereafter referred to as "Lease" is made and entered
into between DSW Property Management hereafter referred to as "Lessor" and Data
Return Corporation, hereafter referred to as "Lessee."
1. LEASED PREMISES: In consideration of the rents, terms, provisions and
covenants of this Lease Agreement, Lessor hereby leases, lets and demises to
Lessee the following described premises (referred to as "Leased Premises") and
containing approximately 5088 square feet situated at 801 Stadium Drive, Suite
120, Arlington, Texas 76011, further described in Exhibit A hereto.
2. TERM: Subject to and upon the conditions set forth below, the term of
this Lease shall commence on April 1, 1998 and shall terminate the last day of
March 31, 2000 (See Special Provisions).
3. RENT: Shall be as follows (subject to possible escalations in property
taxes, insurance, utilities and/or any adjustments to rent spelled out under
SPECIAL PROVISIONS).
Total monthly rent payment: $2,975.00
which amount shall be payable to Lessor at the address shown below on the first
day of the month. One monthly installment of rent shall be due and payable on
the date of execution of this Lease by Lessee for the first month's rent and a
like monthly installment shall be due and payable on or before the first day of
each calendar month succeeding the "commencement date" during the lease term
provided, that if the "commencement date" should be a date other than the first
day of a calendar month, the monthly rental set forth above shall be prorated to
the end of that calendar month, and all succeeding installments of rent shall be
payable on or before the first day of each succeeding calendar month during the
lease term.
a. On the date of execution of this Lease by Lessee, a security
deposit shall be paid by Lessee in the amount of $ (See SPECIAL
PROVISIONS) and is held for the performance by Lessee of Lessee's covenants
and obligations under this Lease, it being expressly understood that the
deposit shall not be considered an advance payment of rental or a measure
of Lessor's damage in case of default by Lessee. Upon the occurrence of any
event of default by Lessee or breach by Lessee of Lessee's covenants under
this Lease, Lessor may, from time to time without prejudice to any other
remedy, use the security deposit to the extent necessary to make good any
arrears of rent and/or any damage, injury, expense or liability caused to
Lessor by the event of default or breach of covenant and Lessee shall
immediately restore said security deposit to the full amount required under
this Lease.
b. If any increase in the fire and extended coverage insurance
premiums paid by Lessor for the building in which Lessee occupies space is
caused by Lessee's use and occupancy of the Leased Premises, or if Lessee
vacates the Leased Premises and causes an increase in such premiums, then
Lessee shall pay as additional rental the amount of such increase to
Lessor.
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<PAGE>
c. Other remedies for non-payment of rent notwithstanding, if the
monthly rental payment is not received by Lessor (U.S. Postmark date
accepted as date received) on or before the tenth day of the month which
rent is due, or if any other payment due Lessor by Lessee is not received
by Lessor on or before the tenth day of the month, an additional TEN
PERCENT (10%) each month of such past due amount shall become due and
payable in addition to such amounts owed under this Lease. Partial
payments of rent and/or monies due from Lessee and accepted by Lessor do
not constitute payment in full. All checks for rents and/or monies due
under the terms of this Lease received by Lessor from Lessee and returned
for insufficient funds will incur an additional twenty-five dollar ($25.00)
charge to be paid by Lessee to Lessor along with the original amount plus
any applicable late fees in a cashable legal tender form and delivered in
person by Lessee and/or its agents at Lessor's official address.
4. SIGNS: No signs, pictures, notices or advertisements may be displayed
on any part of the exterior of the building on the Leased Premises without the
prior approval of Lessor as to location, size, color, material and manner of
attachment. Lessee shall maintain the Lessor-approved sign in good condition.
5. USAGE: Lessee warrants and represents to Lessor that the Leased
Premises shall be used and occupied only for the purposes of office
space/warehouse usage. Unacceptable businesses are automotive repair and
maintenance, restaurant, paint and body repair, club high personal usage
businesses or businesses in Lessor's sole opinion not compatible with the
business complex. Lessee shall occupy the Leased Premises, conduct its
business, and control its agents, employees, invitees and visitors in such a way
as is lawful, reputable, safe and will not create any nuisance or otherwise
interfere with, annoy or disturb any other tenant in its normal business
operations or Lessor in its management of the building. Lessee shall not
commit, or suffer to be committed, any waste on the Leased Premises.
6. INSURANCE: Lessee shall not permit the Leased Premises to be used in
any way which would, in the opinion of Lessor, be unusually hazardous because of
fire or would in any way increase or render void the fire insurance on leasehold
improvements or contents belonging to any tenant in the building. If at any
time during the term of this Lease the State Board of Insurance or other
insurance authority disallows any of Lessor's sprinkler credits or imposes an
additional penalty or surcharge in Lessor's insurance premiums because of
Lessee's original or subsequent placement or use of storage rack or bins, method
of storage or nature of Lessee's inventory or any other act of Lessee, Lessee
agrees to pay as additional rental the increase in Lessor's insurance premiums.
If an increase in the fire and extended coverage premiums paid by Lessor for the
building in which Lessee occupies space is caused by Lessee's use or occupancy
of the Leased Premises, then Lessee shall pay as additional rental the amount of
such increase to Lessor.
7. UTILITY SERVICE: Lessor shall provide the normal utility service
connections into the Leased Premises. Lessor also reserves the right to change
utility services without liability for interruption of service. Lessee shall
pay the cost of all utility services, including, but not limited to, initial
connection charges, all charges for gas, water and electricity used on the
Premises, or tubes, Lessee shall pay all costs caused by Lessee introducing
excessive pollutants into the sanitary sewer system, including permits, fees and
charges levied by any governmental subdivision for any pollutants or solids
other than ordinary human waste. Lessee shall be responsible for the
installation and maintenance of any dilution tanks, holding tanks, setting
tanks, sewer sampling devices, sand traps, grease traps or similar devices as
may be required by the governmental subdivision for Lessee's use of the sanitary
sewer system. If the Leased Premises are in a multi-occupancy building, Lease
shall pay all surcharges levied due to Lessee's use of sanitary sewer or waste
removal services insofar as such surcharges effect Lessor or other tenants in
the building. Lessor shall not be required to pay for any services, supplies or
upkeep in connection with the Leased Premises. However, in a multi-occupancy
building Lessor may provide water and/or other services to the Leased Premises
in which case Lessee agrees to pay to Lessor the stipulated amount or amounts
under this Lease for such services.
8. TAXES, INSURANCE, AND UTILITY INCREASES: If during the first year or
any subsequent year of this Lease, there should be increases in the cost of any
of the following: the property taxes, building insurance, commercial water,
sewer, and garbage fees, then such increases may at Lessor's discretion, be
passed on to the Lessee by raising the rent upon one full month's notice thereof
from Lessor to Lessee. The increase in the monthly rental payment and fees
shall increase by taking amount of the monthly increases times the percent of
the Lessee's leased space square footage to the total building's square footage.
9. REPAIRS AND MAINTENANCE: Unless otherwise expressly provided herein,
Lessor shall not be required to make any improvements, replacements or repairs
of any kind or character to the Leased Premises
2
<PAGE>
during the term of this Lease except such repairs as are set forth in this
subparagraph. Lessor shall maintain only the roof, foundation, underground
plumbing, outside and underground electrical, outside maintenance, and the
structural soundness of the exterior walls (excluding all windows, window glass,
plate glass and all doors) of the building in good repair and condition except
for reasonable wear and tear. Lessee shall repair and pay for any damage caused
by Lessee's negligence or default. Lessee shall give written notice to Lessor of
the need for Lessor obligated repairs, which repairs shall then be reasonably
made by Lessor. Lessor shall not be liable to Lessee, except as expressly
provided in this Lease, for any damage or inconvenience, and Lessee shall not be
entitled to any abatement or reduction of rent by reason of any repairs,
alterations or additions made by Lessor under this Lease.
a. Lessee shall, at its own risk and expense, maintain all other
parts of the building and other improvements on the Leased Premises in good
repair and condition (including all necessary replacements), including, but
not limited to the electrical fixtures, light bulb replacement, plumbing
fixtures, pest control, air conditioning equipment, etc. Lessee shall take
good care of all the property and its fixtures. Should Lessee neglect to
keep and maintain the Leased Premises, then Lessor shall have the right,
but not the obligation, to have the work done and any reasonable costs
therefore shall be charged to Lessee as additional rental and shall become
payable by Lessee with the payment of the rental next due thereunder.
b. All requests for repairs or maintenance that are the
responsibility of Lessor pursuant to any provision of this Lease must be
made in writing to Lessor at the address set forth below.
10. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Lessee shall comply with
all laws, ordinances, orders, rules and regulations of state, federal, municipal
or other agencies or bodies having jurisdiction relating to the use, condition
and occupancy of the Leased Premises. Lessee further agrees to comply with the
following:
a. Nothing to be stored on the outside of the building.
b. No inoperative or unlicensed vehicles are to be left in the
parking area.
c. User shall keep the immediate area outside its Leased Premises
clean of trash.
d. Lessee shall not disturb adjoining tenants with offensive
materials, odors, or loud noises.
e. Lessee shall use the trash dumpsites for on-site created garbage
use only and shall break down all empty cartons in order to use
the dumpsters effectively.
f. If Lessee's dumpster use is in Lessor's sole opinion excessive,
Lessee shall be required to make alternative arrangements for its
disposal of garbage.
g. Lessee shall not at any time occupy any part of the Leased
Premises as sleeping or lodging quarters.
h. No pets or animals are allowed in Leased Premises.
11. ALTERATIONS AND IMPROVEMENTS: Lessee shall not make or allow to be
made any alterations or physical additions in or to the Leased Premises without
first obtaining the written consent of Lessor. Any alterations, physical
additions or improvements to the Leased Premises made by Lessee shall at once
become the property of Lessor and shall be surrendered to Lessor upon the
termination of this Lease. This clause shall not apply to moveable Trade
Fixtures owned by Lessee that may be removed by Lessee at the end of the term of
this Lease if Lessee is not then in default and if Trade Fixtures are not then
subject to any other rights, liens and interests of Lessor.
12. CONDEMNATION: If the Leased Premises shall be taken or condemned for
any public purpose or for any reason whatsoever to such an extent to render it
untenantable, Lessor or Lessee shall have the option to terminate this Lease
effective as of the date of taking or condemnation and any prepaid future rents
paid to Lessor by Lessee shall be refunded. Should a portion or all of the
Property of which the Leased Premises is a part be taken or condemned for any
public purpose or for any reason whatsoever, Lessor may at his sole option
terminate this Lease effective as of the date of taking or condemnation. If
such option is exercised by Lessor, Lessor shall be obligated to refund any
prepaid
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future rents paid to Lessor by Lessee. Any awards and/or proceeds from any
taking or condemnation shall be for Lessor's benefit and Lessee waives all
claims thereto.
13. FIRE AND CASUALTY: If the Leased Premises should be totally destroyed
by fire, tornado or other casualty, or if the Leased Premises should be so
damaged so that rebuilding or repairs cannot reasonably be completed within one
hundred eighty (180) working days after the date of written notification by
Lessee to Lessor of the destruction, this Lease shall terminate and the rent
shall be abated for the unexpired portion of the Lease, effective as of the date
of the written notification.
a. If the Leased Premises should be partially damaged by fire,
tornado or other casualty, and rebuilding or repairs can reasonably be
completed within ninety (90) working days from the date of written
notification by Lessee to Lessor of the destruction, this Lease shall not
terminate, but Lessor may at its sole risk and expense proceed with
reasonable diligence to rebuild or repair the building or other
improvements to substantially the condition in which they existed prior to
the damage. If the Leased Premises are to be rebuilt or repaired and are
untenable in whole or in part following the damage, and the damage or
destruction was not caused or contributed to by act or negligence of
Lessee, its agents, employees, invitees or those for whom Lessee is
responsible, the rent payable under this Lease during the period for which
the Leased Premises are untenable shall be adjusted to such an extent as
may be fair and reasonable under the circumstances. In the event that
Lessor fails to complete the necessary repairs or rebuilding within ninety
(90) working days from the date of written notification by Lessee to Lessor
of the destruction, Lessee may at its option terminate this Lease by
delivering written notice of termination to Lessor, whereupon all rights
and obligations under the Lease shall cease to exist.
14. CASUALTY INSURANCE: Lessor shall at all times during the term of this
Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company, insuring the
building against loss or damage by fire, explosion or other hazards and
contingencies; provided, that Lessor shall not be obligated in any way or manner
to insure any personal property (including but not limited to, any furniture,
machinery, goods or supplies) of Lessee or which Lessee may have upon, or within
the Leased Premises or any fixtures installed by or paid for by Lessee upon or
within the Leased Premises or any additional improvements which Lessee may
construct on the Leased Premises. Lessor shall in no way be obligated or liable
to replace, repair or reimburse Lessee for any damages to Lessee's personal
property (including but not limited to any Trade Fixtures, inventory, goods or
supplies) and/or any interruption of Lessee's business no matter whom or what
caused such damage. It is highly recommended that Lessee obtain sufficient
insurance to cover its personal property. Any insurance which may be carried by
Lessor or Lessee insuring against damage to the building or buildings and/or any
contents therein shall be for the sole benefit of the party carrying such
insurance and under its sole control.
15. HOLD HARMLESS: Lessor, its employees and agents, shall not be liable
to Lessee and/or Lessee's employees, agents, invitees, licensees or visitors, or
to any other person, for any injury or death to person or damage to property on
or about the Leased Premises caused by the negligence or misconduct of Lessee,
its agents, servants or employees, or of any other person entering upon or about
the Leased Premises under express or implied invitation by Lessee, or caused by
the building and/or buildings and improvements located thereon of which the
Leased Premises is a part, becoming out of repair, or caused by leakage of gas,
oil, water or steam or by electricity emanating from the Leased Premises.
Lessee agrees to indemnify and hold harmless Lessor, its employees and agents
from any loss, attorneys' fees, expenses or claims arising out of any such
damage or injury. It is highly recommended that Lessee add the Lessor as an
additional insured on their liability insurance policy.
16. QUIET ENJOYMENT: Lessor warrants that he has full right to execute and
to perform this Lease and to grant the estate demised and that Lessee, upon
payment of the required rents and performing the terms, conditions, covenants
and agreements contained in this Lease, shall peaceably and quietly have, hold
and enjoy the Leased Premises during the full term of this Lease as well as any
extension or renewal thereof.
17. LESSOR'S RIGHT OF ENTRY: Lessor shall have the right, at all
reasonable hours, to enter the Leased Premise for the following reasons:
inspection, cleaning or making repairs, making alterations or additions as
Lessor may deem necessary or desirable, determining Lessee's use of the Leased
Premises, or determining if an act of default under this Lease has occurred.
Lessor shall have the right to (during the last 30 days of this Lease and during
business hours) to show the Leased Premises to prospective tenant.
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18. ASSIGNMENT OR SUBLEASE: Lessee shall have the right to transfer and
assign, in whole or in part, its rights and obligations in the building and
property that are the subject of this Lease with the following exceptions
(unacceptable businesses are automotive repair, restaurant, paint and body shop,
private club, high personnel usage business or business in Lessor's sole opinion
not compatible with the business complex). Lessee shall not assign this Lease
or sublet all or any part of the Leased Premises without the prior written
consent of Lessor which consent shall not be unreasonably withheld. Lessor
shall have the option, upon receipt from Lessee of written request for Lessor's
consent to subletting or assignment, to cancel this Lease as of the date the
requested subletting or assignment is to be effective. The option shall be
exercised, if at all, within fifteen (15) days following Lessor's receipt of
written notice by delivery to Lessee of written notice of Lessor's intention to
exercise the option. In the event of any assignment or subletting, Lessee shall
nevertheless at all times, remain fully responsible and liable for the payment
of the rent and for compliance with all of its other obligations under the
terms, provisions and covenants of this Lease. Upon the occurrence of an "event
of default" as defined below, if all or any part of the Leased Premises are then
assigned or sublet, Lessor, in addition to any other remedies provided by this
Lease or provided by law, may, at its option, collect directly from the assignee
or subtenant all rents becoming due to Lessee by reason of the assignment or
sublease, and Lessor shall have a security interest in all properties on the
Leased Premises to secure payment of such sums. Any collection directly by
Lessor from the assignee or subtenant shall not be construed to constitute a
notation or a release of Lessee from the further performance of obligations
under this Lease.
19. LANDLORD'S LIEN: As security for Lessee's payment of rent, damages and
all other payments required to be made by this Lease, Lessee hereby grants to
Lessor a lien upon all property of Lessee now or subsequently located upon the
Leased Premises. If Lessee abandons or vacates any substantial portion of the
Leased Premises or in default in the payment of any rentals, damages or other
payments required to be made by this Lease or is in default of any other
provision of this Lease, Lessor may enter upon the Leased Premises without
liability for trespass, by picking or changing locks if necessary, and take
possession of all or any part of the personal property, and may sell all or any
part of the personal property at a public or private sale, in one or successive
sales with or without notice, to the highest bidder for cash, and on behalf of
Lessee, sell and convey all or part of their personal property to the highest
bidder, delivering to the highest bidder all of Lessee's title and interest in
the personal property sold him. The proceeds of the sale of the personal
property shall be applied by Lessor toward the reasonable costs and expenses of
the sale, including attorney's fees, and then toward the payment of all sums
then due by Lessee to Lessor under the terms of this Lease; any excess remaining
shall be paid to Lessee or any other person entitled thereto by law.
20. UNIFORM COMMERCIAL CODE: To the extent, if any, this Lease grants
Lessor any lien or lien rights greater than provided by the laws of this State
(the State in which the Leased Premises are located) pertaining to "Landlord's
Liens," this Lease is intended as and constitutes a security agreement within
the meaning of the Uniform Commercial Code of this State and, Lessor, in
addition to the rights prescribed in this Lease, shall have all of the rights,
titles, liens and interests in and to Lessee's property now or hereafter located
upon the Leased Premises which are granted a secured party, as that term is
defined, under this State's Uniform Commercial Code to secure the payment to
Lessor of the various amounts provided in this Lease. Lessee will on request
execute and deliver to Lessor a financing statement for the purpose of
perfecting Lessor's security interest under this Lease or Lessor may file this
Lease or a copy thereof as a financing statement.
21. DEFAULT: The following shall be deemed to be events of default by
Lessee under this Lease:
a. Failure to pay when due any designated installment of rent or any
other payment required pursuant to this Lease and such failure shall
continue for a period of fifteen (15) days.
b. Failure to correct any other breach of a condition or requirement
of this Lease, other than the payment of Rent or any other payment required
pursuant to this Lease, within ten (10) days after written notice to
Lessee.
c. Adjudication a bankruptcy, insolvency, assignment for the benefit
of creditors, proceedings under the National Bankruptcy Act or the
appointment of a receiver or trustee of all of or substantially all of
Lessee's assets.
d. The substantial abandonment of the Leased Premises by Lessee or
failure of Lessee to operate its business from the Leased Premises and the
continuance of such failure for thirty (30) days.
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22. LESSOR'S REMEDIES: Upon occurrence of an event of default, the Lessor
may pursue any one or more of the following remedies:
a. REMEDIES, TENANT REMAINING IN POSSESSION: Upon the occurrence of
any event of default enumerated in paragraph 21 hereof, Lessor shall have
the option of (i) terminating the Lease by written notice thereof to
Lessee, (ii) continuing this Lease in full force and effect, or (iii)
curing such default on behalf of Lessee.
(1) In the event Lessor shall terminate this Lease, the
following shall occur. Upon written notice to Lessee, this Lease shall
be ended to Lessee and all persons holding under Lessee, and all of
Lessee's rights shall be forfeited and lapsed, as fully as if this
Lease had expired by lapse of time and there shall immediately become
due and payable the amount by which (i) the total of the rent and the
benefits which would have accrued to Lessor under this Lease for the
remainder of the term if the terms and provisions of this Lease had
been fully complied with by Lessee exceeds (ii) the then-fair-market
rental value of the premises for the balance of the term (it being the
intention of both parties hereto that Lessor shall receive the benefit
of its bargain); and the Lessee shall immediately surrender the Leased
Premises to Lessor. If Lessee shall fail to do so, Lessor may without
notice and prejudice to any other remedy available enter and take
possession of the Leased Premises and remove Lessee and/or anyone
occupying the Leased Premises and its effects without being liable to
prosecution or any claim for damages, in addition to the sum
immediately due from Lessee under the foregoing provision, there shall
be recoverable from Lessee:
(a) the cost of restoring said Leased Premises to good
condition, normal wear and tear excepted;
(b) all accrued sums, plus interest at the rate of ten
percent (10%) per annum and charges, if in
arrears, under the terms of this Lease up to the
date of termination;
(c) Lessor's cost of recovering possession of the
Leased Premises; and
(d) Rent and sums accruing subsequent to the date of
termination pursuant to the holdover provisions of
paragraph 8.
(2) In the event that Lessor shall elect to continue this Lease
in full force and effect and Lessee shall continue to be liable for
all rents, Lessor shall nevertheless have all the rights of re-entry
upon said Leased Premises without becoming liable for damages, or
guilty of a trespass and Lessor after re-entry may relet the Leased
Premises or any part thereof, for a period of time equal to or lesser
or greater than the remainder of the term on whatever terms and
conditions Lessor, at Lessor's sole discretion, deems advisable.
Against the rents and sums due from Lessee to Lessor during the
remainder of the term, credit shall be given Lessee in the net amount
of rent received from the new tenant after deduction by Lessor for:
(i) the cost incurred by Lessor in reletting the Leased Premises
(including, without limitation, remodeling costs, brokerage fees and
the like; (ii) the accrued sums, plus interest and late charges if in
arrears, under the terms of this Lease; (iii) Lessor's cost of
recovering possession of the Leased Premises; and (iv) the cost of
storing any of Lessee's property left on the Leased Premises after re-
entry.
Notwithstanding any provision in this paragraph 23 to the
contrary, upon the default of any substitute tenant or upon the
expiration of the lease term of such substitute tenant before the
expiration of the term hereof, Lessor may, at Lessor's election,
either relet to still another substitute tenant, or terminate this
Lease and exercise its rights under this paragraph 22.
(3) In the event Lessor shall elect to cure the default of
Lessee at Lessor's expense, the cost of such cure plus interest
thereon at the rate of ten percent (10%) per annum shall become
additional rent and shall become due immediately.
b. REMEDIES, ABANDONMENT: Upon abandonment, Lessor shall have the
option of either: (1) terminating this Lease by written notice thereof to
Lessee, or (2) continuing this Lease in full force and
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effect. 22a(1) shall be applicable except subparagraph (c) (costs of
recovering possession) and subparagraph (d) (holdover rent). In the event
Lessor shall continue this Lease in full force and effect, Lessor may from
time to time sue Lessee to recover all amounts accrued to the date of suit
under the terms and provisions of the Lease (plus legal costs) without such
suit constituting termination of this Lease or relet the Leased Premises
under all the terms and provisions hereof except costs of recovering the
Leased Premises.
23. WAIVER OF DEFAULT OR REMEDY: Failure of Lessor to declare an event of
default immediately upon its occurrence, or delay in taking any action in
connection with an event of default, shall not constitute a waiver of the
default, but Lessor shall have the right to declare the default at any time and
take such action as is lawful or authorized under this Lease. Pursuit of any
one or more of the remedies set forth in paragraph 22 above shall not preclude
pursuits of any one or more of the other remedies provided elsewhere in this
Lease or provided by law, nor shall pursuit of any remedy provided constitute a
forfeiture or waiver of any rent or damages accruing to Lessor by reason of the
violation of any of the terms, provisions or covenants of this Lease. Failure
by Lessor to enforce one or more of the remedies provided upon an event of
default shall not be deemed or construed to constitute a waiver of the default
or of any other violation or breach of any of the terms, provisions and
covenants contained in this Lease.
24. SURRENDER AT TERMINATION: At the expiration or termination of this
Lease, Lessee shall peaceably vacate the Leased Premises and deliver all
alterations and additions thereto in good repair and condition, reasonable wear
and tear expected, restoring the Leased Premises wherever necessary and leaving
it clean and neat. Any of Lessee's trade fixtures and/or personal property not
removed at the expiration or other termination of this Lease (or within seventy-
two (72) hours after a termination by reason of Lessee's default may be
appropriated, sold, destroyed or otherwise disposed of by Lessor without notice
or obligation to compensate Lessee or to account for such disposition, Lessee
shall pay to Lessor all costs incurred by Lessor in connection therewith.
Lessee's obligations under this section shall survive expiration or other
termination of this Lease.
25. ACTS OF GOD: Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
by or prevented by an act of God or force majeure.
26. ATTORNEY'S FEES: In the event Lessee defaults in the performance of
any of the terms, covenants, agreements or conditions contained in this Lease
and Lessor places in the hands of an attorney the enforcement of all or any part
of this Lease, the collection of any rent due or to become due or recovery of
the possession of the Leased Premises, Lessee agrees to pay Lessor reasonable
attorney's fees for the services of the attorney, whether suit is actually filed
or not. In no event shall the attorney's fees be less than fifteen percent
(15%) of the outstanding balance owed by Lessee to Lessor.
27. HOLDING OVER: Unless otherwise notified by Lessor, if Lessee shall
continue to occupy the Leased Premises following the expiration of this Lease
Agreement, such occupancy shall be deemed a month-to-month tenancy. During such
tenancy all terms, provisions and conditions of the Lease Agreement shall apply
to the month-to-month tenancy except those terms, provisions and conditions
pertaining to the Lease Term. Such month-to-month tenancy may be terminated by
either Lessor or Lessee with at least one full month's previous written notice
to the other party.
a. If Lessee continues to occupy the Leased Premises after the
expiration or earlier termination of this Lease Agreement against Lessor's
will or if Lessee fails to renew this Lease Agreement at Lessor's request
prior to the expiration of this Lease Agreement or under a month-to-month
tenancy one full month after notice of such lease renewal request from
Lessor to Lessee, Lessee agrees to pay Lessor as Liquidated Damages for
each month of continued occupancy an amount equal to one and one-half (1.5)
times the rent being paid for the month the Lease Agreement expires or is
terminated. No receipt of money after the expiration or termination of
this Lease Agreement shall reinstate or extend this Lease or affect any
prior notice given by Lessor to Lessee.
28. RIGHTS OR MORTGAGEE: Lessee accepts this Lease subject and subordinate
to any recorded mortgage, deed of trust or other lien presently existing upon
the Leased Premises. Lessor is hereby irrevocably vested with full power and
authority to subordinate Lessee's interest under this Lease to any mortgage,
deed of trust or other lien hereafter placed on the Leased Premises, and Lessee
agrees upon demand to execute additional instruments subordinating this Lease as
Lessor may require. If the interests of Lessor under this Lease shall be
transferred by reason of foreclosure or other proceedings for enforcement of any
mortgage on the Leased Premises, Lessee shall be bound to
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the transferee (sometimes called the "Purchaser") under the terms, covenants and
conditions of this Lease for the balance of the term remaining, and any
extensions or renewals, with the same force and effect as if the Purchaser were
Lessor under this Lease, and Lessee agrees to attorn to the Purchaser, including
the mortgagee under any such mortgage if it be the Purchaser's as its Lessor,
the attornment to be effective and self-operative without the execution of any
further instruments upon the Purchaser succeeding to the interest of Lessor
under this Lease. The respective rights and obligations of Lessee and the
Purchaser upon the attornment, to the extent of the then remaining balance of
the term of this Lease, and any extensions and renewals, shall be and are the
same as those set forth in this Lease.
29. LIABILITY OF LESSOR - SALE BY LESSOR: Lessee shall look solely to
Lessor's interest in the building and land upon which the Leased Premises is
situated, for recovery of any judgment against Lessor. A sale, conveyance, or
assignment of Lessor's interest in the Leased Premises shall operate to release
Lessor from all the covenants, terms, and conditions of this Lease, expressed or
implied, and Lessee agrees to look solely to the successor in interest of the
Lessor for the performance of such obligations.
30. ESTOPPEL CERTIFICATES: Lessee agrees to furnish promptly, from time to
time, upon request of Lessor or Lessor's mortgagee, a statement certifying that
Lessee is in possession of the Leased Premises; the Leased Premises are
acceptable; the Lease is in full force and effect; the Lease is unmodified;
Lessee claims no present charge, lien, or claim of offset against rent; the rent
is paid for the current month, but is not paid and will not be paid for more
than one month in advance; there is no existing default by reason of some act or
omission by Lessor; and such other matters as may be reasonably required by
Lessor or Lessor's mortgagee.
31. SUCCESSORS: This Lease shall be binding upon and inure to the benefit
of Lessor and Lessee and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should Lessor's
interest in the Leased Premises cease to exist for any reason during the term of
the Lease then notwithstanding the happening of such event, this Lease
nevertheless shall remain unimpaired and in full force and effect and Lessee
hereunder agrees to attorn to the then owner of the Leased Premises.
32. RENT TAX: If applicable in the jurisdiction where the Leased Premises
are situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Lessor by Lessee under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the rent
upon which the tax is based as set forth above.
33. NOTICE: All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth below, or any other address
Lessor may specify from time to time by written notice delivered to Lessee.
a. All payments required to be made by Lessor to Lessee shall be
payable to Lessee at the address set forth below, or at any other address
within the United States as Lessee may specify from time to time by written
notice.
b. Any notice or document required or permitted to be delivered by
this Lease shall be deemed to be delivered (whether or not actually
received) when deposited in the United States Mail, postage prepaid,
certified or registered mail, return receipt requested, addressed to the
parties at the respective addresses (Legal Address) set out at the end of
the main body of this Lease.
34. DEFINITIONS: These definitions apply to the terms defined as those
terms used throughout this Lease.
a. "Abandon" means the vacating of all or a substantial portion of
the Leased Premises by Lessee, whether or not Lessee is in default of the
rental payments due under this Lease.
b. An "Act of God' or "force majeure" is defined for purpose of this
Lease as strikes, lockouts, sit-downs, material or labor restrictions by
any governmental authority, riots, floods, washouts, explosions,
earthquakes, fire, storms, acts of the public enemy, wars, insurrections
and any other cause not reasonable within the control of Lessor and which
by the exercise of due diligence Lessor is unable, wholly or in part, to
prevent or overcome.
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c. The "commencement date" shall be the date set forth in paragraph
2. The "commencement date" shall constitute the commencement of this Lease
Agreement for all purposes, whether or not Lessee has actually taken
possession.
d. "Real property tax" means all city, state and county taxes and
assessments including special district taxes or assessments.
e. The captions appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of such paragraph.
35. ACCEPTANCE OF LEASED PREMISES: Lessee acknowledges that it has
inspected the Leased Premises and accepts the same and the improvements erected
thereon in their present condition as suitable for the purpose for which the
same are leased.
36. SEVERABILITY: Should any part or provision of this Lease or the
application thereof to any person or circumstance be invalid or unenforceable to
any extent, the remainder of this Lease and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
37. CORPORATE AUTHORITY: If Lessee executes this Lease as a corporation,
the person or persons executing this Lease on behalf of Lessee do hereby
personally represent and warrant that Lessee is a duly authorized and existing
corporation and the Lessee is qualified to do business in the state in which the
Leased Premises are located. That the corporation has full right and authority
to enter into this Lease, and that each person signing on behalf of the
corporation is authorized to do so. In the event any representation or warranty
is false, all persons who execute this Lease shall be liable, individually, as
Lessee.
38. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: IT IS EXPRESSLY AGREED
BY LESSEE, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT
THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE
ENTIRE AGREEMENT OF THE PARTIES, THAT THERE ARE, AND WERE, NO VERBAL
REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR
PROMISES AND/OR IMPLICATIONS BY WAY OF LESSOR'S ACTIONS OR LACK THEREOF
PERTAINING TO THIS LEASE OR THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS
NOT INCORPORATED IN WRITING IN THIS LEASE. LESSOR AND LESSEE EXPRESSLY AGREE
THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS OR
OF ANY OTHER KIND ARISING OUT OF THIS LEASE. IT IS LIKEWISE AGREED THAT THIS
LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN
WRITING SIGNED BY BOTH LESSOR AND LESSEE.
39. PLACE OF PERFORMANCE: Any legal suit arising from or relating to this
Lease shall be brought in Collin County in the State of Texas, except eviction
proceedings, which shall take place in the county where the Leased Premises
lies.
40. SPECIAL PROVISIONS:
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1. SECURITY DEPOSIT: Lessee shall not be required to post a
security deposit as a result of taking the leased premises
"as is". However, Lessee shall be liable to pay, prior to
termination of the Lease, for any damages to the Leased
Premises or repair any items in disrepair. All rents and
other fees required under this Lease shall have to be paid
in advance of Lease termination.
2. EARLY TERMINATION: Lessee may terminate this Lease any time
after April 1, 1999 by giving Lessor two (2) months written
notice of a desire to vacate the Leased Premises. Notice
becomes effective on the first day of the month following
receipt of the notice. Lessor shall at that time be allowed
to market and show the Leased Premises to potential tenants.
If the Lessor is unable to find another client to take the
Leased Premises, Lessee shall be required to pay a
termination penalty equivalent to $5,950.00 to be made
payable in the form of a cashier's check five (5) days prior
to Lease termination. If during the five (5) days prior to
Lease termination, Lessor shall find a qualified new tenant
for the space, Lessor shall be required to refund the
termination penalty within ten (10)
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days following the termination date. The new tenant must
take possession of the Leased Premises and have paid all
deposits and rents.
3. PARKING: Parking is limited to the areas immediately in
front and behind the Leased Premises and on a not-to-
interfere basis at other tenants within the 801-803 Stadium
Drive complex. Should excessive parking become a problem, in
the sole opinion of the Lessor, Lessee shall be required to
lease additional off-site parking for employee use at
Lessee's expense.
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Executed the 31 day of March, 1998.
LESSOR: LESSEE:
DSW Property Management Data Return Corporation
- -------------------------------------------- ---------------------------------
(Lessor Name) (Lessee Name)
a ((Lessor Business Type)) a corporation
------------------------------------------ -------------------------------
(ex: corporation, partnership or sole (ex: corporation, partnership or
proprietor) sole proprietor)
by /s/ Harold L. Sickler by /s/ Michelle R. Chambers
---------------------------------------- ------------------------------
Signature Signature
Harold L. Sickler, Owner/Managing Partner Michelle R. Chambers
- -------------------------------------------- ---------------------------------
(Print Name and Title) (Print Name and Title)
Ph # (972) 248-1091 Ph #'s (0) 817-461-7715
(972) 790-9733 Pager 817-227-1875
(Fax) 817-274-1141
LESSOR'S LESSEE'S
LEGAL ADDRESS: LEGAL MAILING ADDRESS:
6825 LEVELLAND DR., SUITE 3A 801 Stadium Dr., Ste 117
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DALLAS, TEXAS 75252 Arlington, TX 76011
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GRAPHIC OF STADIUM, ARLINGTON, TEXAS 76011
EXHIBIT "A"
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The Leased Premises can be legally described as a portion (Suite 120) of
that one story building known as 801 Stadium Drive situated on Lot 1, Block 2,
Stadium Oaks, an addition to the City of Arlington, Tarrant County, Texas, as
recorded in Volume 388-164, Page 5 of the Plat Records of Tarrant County, Texas.
[Graphic of Leased Premises]
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Exhibit 10.8
COMMERCIAL LEASE AGREEMENT
THIS LEASE AGREEMENT hereafter referred to as "Lease" is made and entered
into between DSW Property Management hereafter referred to as "Lessor" and DATA
RETURN CORPORATION hereafter referred to as "Lessee".
1. LEASED PREMISES: In consideration of the rents, terms, provisions and
covenants of this Lease Agreement, Lessor hereby leases, lets and demises to
Lessee the following described premises (referred to as "Leased Premises") and
containing approximately 2,713+/- square feet situated at 801 Stadium Drive,
Suite 117, Arlington, Texas 76011 further described in exhibit A attached
hereto.
2. TERM: Subject to and upon the conditions set forth below, the term of
this Lease shall commence on August 1, 1997 and shall terminate the last day of
July 31, 1999.
3. RENT: Shall be as follows (subject to possible escalations in
property taxes, insurance, utilities and or any adjustments to rent spelled out
under SPECIAL PROVISIONS.)
Total monthly rent payment: $1,400.00
which amount shall be payable to Lessor at the address shown below on the first
day of the month. One monthly installment of rent shall be due and payable on
the date of execution of this Lease by Lessee for the first month's rent and a
like monthly installment shall be due and payable on or before the first day of
each calendar month succeeding the "commencement date" during the lease term
provided, that if the "commencement date" should be a date other than the first
day of a calendar month, the monthly rental set forth above shall be prorated to
the end of that calendar month, and all succeeding installments of rent shall be
payable on or before the first day of each succeeding calendar month during the
lease term.
a. On the date of execution of this Lease by Lessee, a security
deposit shall be paid by Lessee in the amount of $1,400.00 and is held for the
performance by Lessee of Lessee's covenants and obligations under this Lease, it
being expressly understood that the deposit shall not be considered an advance
payment of rental or a measure of Lessor's damage in case of default by Lessee.
Upon the occurrence of any event of default by Lessee or breach by Lessee of
Lessee's covenants under this Lease, Lessor may, from time to time without
prejudice to any other remedy, use the security deposit to the extent necessary
to make good any arrears of rent and/or any damage, injury, expense or liability
caused to Lessor by the event of default or breach of covenant and Lessee shall
immediately restore said security deposit to the full amount required under this
Lease.
b. If any increase in the fire and extended coverage insurance
premiums paid by Lessor for the building in which Lessee occupies space is
caused by Lessee's use and occupancy of the Leased Premises, or if Lessee
vacates the Leased Premises and causes an increase in such premiums, then Lessee
shall pay as additional rental the amount of such increase to Lessor.
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c. Other remedies for non payment of rent notwithstanding, if the
monthly rental payment is not received by Lessor (U.S. Postmark date accepted as
date received) on or before the tenth day of the month for which rent is due, or
if any other payment due Lessor by Lessee is not received by Lessor on or before
the tenth day of the month an additional TEN PERCENT (10%) each month of such
past due amount shall become due and payable in addition to such amounts owed
under this Lease. Partial payments of rent and or monies due from Lessee and
accepted by Lessor do not constitute payment in full. All checks for rents and
or monies due under the terms of this Lease received by Lessor from Lessee and
returned for insufficient funds will incur an additional twenty five dollar
($25.00) charge to be paid by Lessee to Lessor along with the original amount
plus any applicable late fees in a cashable legal tender form and delivered in
person by Lessee and or its agent at Lessor's official address.
4. SIGNS: No signs, pictures, notices or advertisements may be displayed
on any part of the exterior of the building on the Leased Premises without the
prior approval of Lessor as to location, size, color, material and manner of
attachment. Lessee shall maintain the Lessor-approved sign in good condition.
5. USAGE: Lessee warrants and represents to Lessor that the Leased
Premises shall be used and occupied only for the purposes of office
space/warehouse usage. Lessee shall occupy the Leased Premises, conduct its
business, and control its agents, employees, invitees and visitors in such a way
as is lawful, reputable, safe and will not create any nuisance or otherwise
interfere with, annoy or disturb any other tenant in its normal business
operations or Lessor in its management of the building. Lessee shall not
commit, or suffer to be committed, any waste on the Leased Premises.
6. INSURANCE: Lessee shall not permit the Leased Premises to be used in
any way which would, in the opinion of Lessor, be unusually hazardous because of
fire or would in any way increase or render void the fire insurance on leasehold
improvements or contents belonging to any tenant in the building. If at any
time during the term of this Lease the State Board of Insurance or other
insurance authority disallows any of Lessor's sprinkler credits or imposes an
additional penalty or surcharge in Lessor's insurance premiums because of
Lessee's original or subsequent placement or use of storage rack or bins, method
of storage or nature of Lessee's inventory or any other act of Lessee, Lessee
agrees to pay as additional rental the increase in Lessor's insurance premiums.
If an increase in the fire and extended coverage premiums paid by Lessor for the
building in which Lessee occupies space is caused by Lessee's use or occupancy
of the Leased Premises, then Lessee shall pay as additional rental the amount of
such increase to Lessor.
7. UTILITY SERVICE: Lessor shall provide the normal utility service
connections into the Leased Premises. Lessor also reserves the right to change
utility services without liability for interruption of service. Lessee shall
pay the cost of all utility services, including, but not limited to, initial
connection charges, all charges for gas, water and electricity used on the
Premises, or tubes, Lessee shall pay all costs caused by Lessee introducing
excessive pollutants into the sanitary sewer system, including permits, fees and
charges levied by any governmental subdivision for any pollutants or solids
other than ordinary human waste. Lessee shall be responsible for the
installation and maintenance of any dilution tanks, holding tanks, setting
tanks, sewer sampling devices, sand traps, grease traps or similar devices as
may be required by the governmental subdivision for Lessee's use of the sanitary
sewer system. If the Leased Premises are in a multi-occupancy building, Lessee
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shall pay all surcharges levied due to Lessee's use of sanitary sewer or waste
removal services insofar as such surcharges effect Lessor or other tenants in
the building. Lessor shall not be required to pay for any services, supplies or
upkeep in connection with the Leased Premises. However, in a multi-occupancy
building Lessor may provide water and or other services to the Leased Premises
in which case Lessee agrees to pay to Lessor the stipulated amount or amounts
under this Lease for such services.
8. TAXES, INSURANCE, AND UTILITY INCREASES: If during the first year or
any subsequent year of this Lease, there should be increases in the cost of any
of the following: the property taxes, building insurance, commercial water,
sewer, and garbage fees, then such increases may at Lessors discretion, be
passed on to the Lessee by raising the rent upon one full months notice thereof
from Lessor to Lessee. The increase in the monthly rental payment and fees
shall increase by taking amount of the monthly increases times the percent of
the Lessee's leased space square footage to the total buildings square footage.
9. REPAIRS AND MAINTENANCE: (a) Unless otherwise expressly provided
herein, Lessor shall not be required to make any improvements, replacements or
repairs of any kind or character to the Leased Premises during the term of this
Lease except such repairs as are set forth in this subparagraph. Lessor shall
maintain only the roof, foundation, underground plumbing, outside and
underground electrical, outside maintenance, and the structural soundness of the
exterior walls (excluding all windows, window glass, plate glass and all doors)
of the building in good repair and condition except for reasonable wear and
tear. Lessee shall repair and pay for any damage caused by Lessee's negligence
or default. Lessee shall give written notice to Lessor of the need for Lessor
obligated repairs, which repairs shall then be reasonably made by Lessor.
Lessor shall not be liable to Lessee, except as expressly provided in this
Lease, for any damage or inconvenience, and Lessee shall not be entitled to any
abatement or reduction of rent by reason of any repairs, alterations or
additions made by Lessor under this Lease.
a. Lessee shall, at its own risk and expense, maintain all other
parts of the building and other improvements on the Leased Premises in good
repair and condition (including all necessary replacements), including, but not
limited to the electrical fixtures, light bulb replacement, plumbing fixtures,
pest control, air conditioning equipment, etc. Lessee shall take good care of
all the property and its fixtures. Should Lessee neglect to keep and maintain
the Leased Premises, then Lessor shall have the right, but not the obligation,
to have the work done and any reasonable costs therefore shall be charged to
Lessee as additional rental and shall become payable by Lessee with the payment
of the rental next due thereunder.
b. All requests for repairs or maintenance that are the
responsibility of Lessor pursuant to any provision of this Lease must be made in
writing to Lessor at the address set forth below.
10. COMPLIANCE WITH LAWS, RULES AND REGULATIONS: Lessee shall comply with
all laws, ordinances, orders, rules and regulations of state, federal, municipal
or other agencies or bodies having jurisdiction relating to the use, condition
and occupancy of the Leased Premises. Lessee further agrees to comply with the
following:
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a. Nothing to be stored on the outside of the building.
b. No inoperative or unlicensed vehicles are to be left in the
parking area.
c. User shall keep the immediate area outside its Leased Premises
clean of trash.
d. Lessee shall not disturb adjoining tenants with offensive
materials, odors, or loud noises.
e. Lessee shall use the trash dumpsites for on-site created garbage
use only and shall break down all empty cartons in order to use
the dumpsters effectively.
f. Lessee shall be required to furnish its own garbage dumpster if
Lessee's use is determined by Lessor to be excessive.
g. Lessee shall not at any time occupy any part of the Leased
Premises as sleeping or lodging quarters.
h. No pets or animals are allowed in Leased Premises.
11. ALTERATIONS AND IMPROVEMENTS: Lessee shall not make or allow to be
made any alterations or physical additions in or to the Leased Premises without
first obtaining the written consent of Lessor. Any alterations, physical
additions or improvements to the Leased Premises made by Lessee shall at once
become the property of Lessor and shall be surrendered to Lessor upon the
termination of this Lease. This clause shall not apply to moveable Trade
Fixtures owned by Lessee that may be removed by Lessee at the end of the term of
this Lease if Lessee is not then in default and if Trade Fixtures are not then
subject to any other rights, liens and interests of Lessor.
12. CONDEMNATION: If the Leased Premises shall be taken or condemned for
any public purpose or for any reason whatsoever to such an extent to render it
untenantable Lessor or Lessee shall have the option to terminate this Lease
effective as of the date of taking or condemnation and any prepaid future rents
paid to Lessor by Lessee shall be refunded. Should a portion or all of the
Property of which the Leased Premises is a part be taken or condemned for any
public purpose or for any reason whatsoever Lessor may at his sole option
terminate this Lease effective as of the date of taking or condemnation if such
option is exercised by Lessor, Lessor shall be obligated to refund any prepaid
future rents paid to Lessor by Lessee. Any awards and or proceeds from any
taking or condemnation shall be for Lessors benefit and Lessee waives all claims
thereto.
13. FIRE AND CASUALTY: a. If the Leased Premises should be totally
destroyed by fire, tornado or other casualty, or if the Leased Premises should
be so damaged so that rebuilding or repairs cannot reasonably be completed
within one hundred eighty (180) working days after the date of written
notification by Lessee to Lessor of the destruction, this Lease shall terminate
and the rent
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shall be abated for the unexpired portion of the Lease, effective as of the date
of the written notification.
a. If the Leased Premises should be partially damaged by fire,
tornado or other casualty, and rebuilding or repairs can reasonably be completed
within ninety (90) working days from the date of written notification by Lessee
to Lessor of the destruction, this Lease shall not terminate, but Lessor may at
its sole risk and expense proceed with reasonable diligence to rebuild or repair
the building or other improvements to substantially the condition in which they
existed prior to the damage. If the Leased Premises are to be rebuilt or
repaired and are untenable in whole or in part following the damage, and the
damage or destruction was not caused or contributed to by act or negligence of
Lessee, its agents, employees, invitees or those for whom Lessee is responsible,
the rent payable under this Lease during the period for which the Leased
Premises are untenable shall be adjusted to such an extent as may be fair and
reasonable under the circumstances. In the event that Lessor fails to complete
the necessary repairs or rebuilding within ninety (90) working days from the
date of written notification by Lessee to Lessor of the destruction, Lessee may
at its option terminate this Lease by delivering written notice of termination
to Lessor, whereupon all rights and obligations under the Lease shall cease to
exist.
14. CASUALTY INSURANCE: Lessor shall at all times during the term of this
Lease maintain a policy or policies of insurance with the premiums paid in
advance, issued by and binding upon some solvent insurance company, insuring the
building against loss or damage by fire, explosion or other hazards and
contingencies; provided, that Lessor shall not be obligated in any way or manner
to insure any personal property (including but not limited to, any furniture,
machinery, goods or supplies) of Lessee or which Lessee may have upon or within
the Leased Premises or any fixtures installed by or paid for by Lessee upon or
within the Leased Premises or any additional improvements which Lessee may
construct on the Leased Premises. Lessor shall in no way be obligated or liable
to replace, repair or reimburse Lessee for any damages to Lessee's personal
property (including but not limited to any Trade Fixtures, inventory, goods or
supplies) and or any interruption of Lessee's business no matter whom or what
caused such damages. It is highly recommended that Lessee obtain sufficient
insurance to cover its personal property. Any insurance which may be carried by
Lessor or Lessee insuring against damage to the building or buildings and or any
contents therein shall be for the sole benefit of the party carrying such
insurance and under its sole control.
15. HOLD HARMLESS: Lessor, its employees and agents, shall not be liable
to Lessee and or Lessee's employees, agents, invitees, licensees or visitors, or
to any other person, for any injury or death to person or damage to property on
or about the Leased Premises caused by the negligence or misconduct of Lessee,
its agents, servants or employees, or of any other person entering upon or about
the Leased Premises under express or implied invitation by Lessee, or caused by
the building and or buildings and improvements located there on of which the
Leased Premises is a part, becoming out or repair, or caused by leakage of gas,
oil, water or steam or by electricity emanating from the Leased Premises.
Lessee agrees to indemnify and hold harmless Lessor it's employees and agents
from any loss, attorney's fees, expenses or claims arising out of any such
damage or injury. It is highly recommended that Lessee add the Lessor as an
additional insured on their liability insurance policy.
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16. QUIET ENJOYMENT: Lessor warrants that he has full right to execute
and to perform this Lease and to grant the estate demised and that Lessee, upon
payment of the required rents and performing the terms, conditions, covenants
and agreements contained in this Lease, shall peaceably and quietly have, hold
and enjoy the Leased Premises during the full term of this Lease as well as any
extension or renewal thereof.
17. LESSOR'S RIGHT OF ENTRY: Lessor shall have the right, at all
reasonable hours, to enter the Leased Premise for the following reasons:
inspection, cleaning or making repairs, making alterations or additions as
Lessor may deem necessary or desirable, determining Lessee's use of the Leased
Premises, or determining if an act of default under this Lease has occurred.
Lessor shall have the right to (during the last 30 days of this lease and during
business hours) to show the Leased Premises to prospective tenant.
18. ASSIGNMENT OR SUBLEASE: Lessee shall have the right to transfer and
assign, in whole or in part, its rights and obligations in the building and
property that are the subject of this Lease with the following exceptions
(unacceptable businesses are automotive repair, restaurant, paint and body shop,
private club, high personnel usage business or business in Lessor's sole opinion
not compatible with the business complex). Lessee shall not assign this Lease
or sublet all or any part of the Leased Premises without the prior written
consent of Lessor which consent shall not be unreasonably withheld. Lessor
shall have the option, upon receipt from Lessee of written request for Lessor's
consent to subletting or assignment, to cancel this Lease as of the date the
requested subletting or assignment is to be effective. The option shall be
exercised, if at all, within fifteen (15) days following Lessor's receipt of
written notice by delivery to Lessee of written notice of Lessor's intention to
exercise the option. In the event of any assignment or subletting, Lessee shall
nevertheless at all times, remain fully responsible and liable for the payment
of the rent and for compliance with all of its other obligations under the
terms, provisions and covenants of this Lease. Upon the occurrence of an "event
of default" as defined below, if all or any part of the Leased Premises are then
assigned or sublet, Lessor, in addition to any other remedies provided by this
Lease or provided by law, may, at its option, collect directly from the assignee
or subtenant all rents becoming due to Lessee by reason of the assignment or
sublease, and Lessor shall have a security interest in all properties on the
Leased Premises to secure payment of such sums. Any collection directly by
Lessor from the assignee or subtenant shall not be construed to constitute a
notation or a release of Lessee from the further performance of obligations
under this Lease.
19. LANDLORD'S LIEN: As security for Lessee's payment of rent, damages and all
other payments required to be made by this Lease, Lessee hereby grants to Lessor
a lien upon all property of Lessee now or subsequently located upon the Leased
Premises. If Lessee abandons or vacates any substantial portion of the Leased
Premises or in default in the payment of any rentals, damages or other payments
required to be made by this Lease or is in default of any other provision of
this Lease, Lessor may enter upon the Leased Premises without liability for
trespass, by picking or changing locks if necessary, and take possession of all
or any part of the personal property, and may sell all or any part of the
personal property at a public or private sale, in one or successive sales with
or without notice, to the highest bidder for cash, and on behalf of Lessee, sell
and convey all or part of their personal property to the highest bidder,
delivering to the highest bidder all of Lessee's title and interest in the
personal property sold him. The proceeds of the sale of the personal property
shall be applied by Lessor toward the reasonable costs and expenses of the sale,
including attorney's fees,
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and then toward the payment of all sums then due by Lessee to Lessor under the
terms of this Lease; any excess remaining shall be paid to Lessee or any other
person entitled thereto by law.
20. UNIFORM COMMERCIAL CODE: To the extent, if any, this Lease grants
Lessor any lien or lien rights greater than provided by the laws of this State
(the State in which the Leased Premises arc located) pertaining to "Landlord's
Liens", this Lease is intended as and constitutes a security agreement within
the meaning of the Uniform Commercial Code of this State and, Lessor, in
addition to the rights prescribed in this Lease, shall have all of the rights,
titles, liens and interests in and to Lessee's property now or hereafter located
upon the Leased Premises which are granted a secured party, as that term is
defined, under this State's Uniform Commercial Code to secure the payment to
Lessor of the various amounts provided in this Lease. Lessee will on request
execute and deliver to Lessor a financing statement for the purpose of
perfecting Lessor's security interest under this Lease or Lessor may file this
Lease or a copy thereof as a financing statement.
21. DEFAULT: The following shall be deemed to be events of default by
Lessee under this Lease:
a. Failure to pay when due any designated installment of rent or any
other payment required pursuant to this lease and such failure
shall continue for a period of fifteen (15) days.
b. Failure to correct any other breach of a condition or requirement
of this lease, other than the payment of Rent or any other
payment required pursuant to this Lease, within ten (10) days
after written notice to Lessee.
c. Adjudication as a bankruptcy, insolvency, assignment for the
benefit of creditors, proceedings under the National Bankruptcy
Act or the appointment of a receiver of trustee of all of or
substantially all of Lessee's assets.
d. The substantial abandonment of the Leased Premises by Lessee or
failure of Lessee to operate its business from the Leased
Premises and the continuance of such failure for thirty (30)
days.
22. LESSOR'S REMEDIES: Upon occurrence of an event of default, the Lessor
may pursue any one or more of the following remedies:
a. REMEDIES, TENANT REMAINING IN POSSESSION: Upon the occurrence of
any event of default enumerated in paragraph 21 hereof, Lessor
shall have the option of (i) terminating the Lease by written
notice thereof to Lessee, (ii) continuing this lease in full
force and effect, or (iii) curing such default on behalf of
Lessee
(1) In the event Lessor shall terminate this Lease, the
following shall occur. Upon written notice to Lessee, this Lease shall be ended
to Lessee and all persons holding under Lessee, and all of Lessee's rights shall
be forfeited and lapsed, as fully as if this Lease had expired by lapse of time
and there shall immediately become due and payable the amount by which
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(i) the total of the rent and the benefits which would have accrued to Lessor
under this Lease for the remainder of the term if the terms and provisions of
this Lease had been fully complied with by Lessee exceeds (ii) the then-fair-
market rental value of the premises for the balance of the term (it being the
intention of both parties hereto that Lessor shall receive the benefit of its
bargain); and the Lessee shall immediately surrender the Leased Premises to
Lessor. If Lessee shall fail to do so Lessor may without notice and prejudice to
any other remedy available enter and take possession of the Leased Premises and
remove Lessee and or anyone occupying the Leased Premises and its effects
without being liable to prosecution or any claim for damages, in addition to the
sum immediately due from Lessee under the foregoing provision, there shall be
recoverable from Lessee:
(a) the cost of restoring said Leased Premises to good
condition, normal wear and tear excepted;
(b) all accrued sums, plus interest at the rate of ten percent
(10%) per annum and late charges, if in arrears, under the
terms of this Lease up to the date of termination:
(c) Lessor's cost of covering possession of the Leased Premises;
and
(d) rent and sums accruing subsequent to the date of termination
pursuant to the holdover provisions of paragraph 8.
(2) In the event that Lessor shall elect to continue this Lease in
full force and effect and Lessee shall continue to be liable for all rents,
Lessor shall nevertheless have all the rights of re-entry upon said Leased
Premises without becoming liable for damages, or guilty of a trespass and Lessor
after re-entry may relet the Leased Premises or any part thereof, for a period
of time equal to or lesser of greater than the remainder of the term on whatever
terms and conditions Lessor, at Lessor's sole discretion, deems advisable.
Against the rents and sums due from Lessee to Lessor during the remainder of the
term, credit shall be given Lessee in the net amount of rent received from the
new tenant after deduction by Lessor for: (i) the cost incurred by Lessor in
reletting the Leased Premises (including, without limitation, remodeling costs,
brokerage fees and the like; (ii) the accrued sums, plus interest and late
charges if in arrears, under the terms of this lease; (iii) Lessor's cost of
recovering possession of the Leased Premises; and (iv) the cost of storing any
of Lessee's property left on the Leased Premises after re-entry.
Notwithstanding any provision in this paragraph 23 to the contrary, upon
the default of any substitute tenant or upon the expiration of the Lease term of
such substitute tenant before the expiration of the term hereof, Lessor may, at
Lessor's election, either relet to still another substitute tenant, or terminate
this Lease and exercise its rights under this paragraph 22.
(3) In the event Lessor shall elect to cure the default of Lessee at
Lessor's expense, the cost of such cure plus interest thereon at the rate of ten
percent (10%) per annum shall become additional rent and shall become due
immediately.
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b. REMEDIES, ABANDONMENT: Upon abandonment, Lessor shall have the
option of either: (1) terminating this Lease by written notice thereof to
Lessee, or (2) continuing this Lease in full force and effect. 22a(1) shall be
applicable except subparagraph (c) (costs of recovering possession) and
subparagraph (d) (holdover rent). In the event Lessor shall continue this Lease
in full force and effect, Lessor may from time to time sue Lessee to recover all
amounts accrued to the date of suit under the terms and provisions of the Lease
(plus legal costs) without such suit constituting termination of this Lease or
relet the Leased Premises under all the terms and provisions hereof except costs
of recovering the Leased Premises.
23. WAIVER OF DEFAULT OR REMEDY: Failure of Lessor to declare an event of
default immediately upon its occurrence, or delay in taking any action in
connection with an event of default, shall not constitute a waiver of the
default, but Lessor shall have the right to declare the default at any time and
take such action as is lawful or authorized under this Lease. Pursuit of any
one or more of the remedies set forth in paragraph 22 above shall not preclude
pursuits of any one or more of the other remedies provided elsewhere in this
Lease or provided by law, nor shall pursuit of any remedy provided constitute a
forfeiture or waiver of any rent or damages accruing to Lessor by reason of the
violation of any of the terms, provisions or covenants of this Lease. Failure
by Lessor to enforce one or more of the remedies provided upon an event of
default shall not be deemed or construed to constitute a waiver of the default
or of any other violation or breach of any of the terms, provisions and
covenants contained in this Lease.
24. SURRENDER AT TERMINATION: At the expiration or termination of this
Lease, Lessee shall peaceably vacate the Leased Premises and deliver all
alterations and additions thereto in good repair and condition, reasonable wear
and tear expected, restoring the Leased Premises wherever necessary and leaving
it clean and neat. Any of Lessee's trade fixture's and or personal property not
removed at the expiration or other termination of this Lease (or within seventy
two (72) hours after a termination by reason of Lessee's default may be
appropriated, sold, destroyed or otherwise disposed of by Lessor without notice
or obligation to compensate Lessee or to account for such disposition, Lessee
shall pay to Lessor all costs incurred by Lessor in connection therewith.
Lessee's obligations under this section shall survive expiration or other
termination of this Lease.
25. ACTS OF GOD: Lessor shall not be required to perform any covenant or
obligation in this Lease, or be liable in damages to Lessee, so long as the
performance or non-performance of the covenant or obligation is delayed, caused
by or prevented by an act of God or force majeure.
26. ATTORNEY'S FEES: In the event Lessee defaults in the performance of
any of the terms, covenants, agreements or conditions contained in this Lease
and Lessor places in the hands of an attorney the enforcement of all or any part
of this Lease, the collection of any rent due or to become due or recovery of
the possession of the Leased Premises, Lessee agrees to pay Lessor reasonable
attorney's fees for the services of the attorney, whether suit is actually filed
or not. In no event shall the attorney's fees be less than fifteen percent
(15%) of the outstanding balance owed by Lessee to Lessor.
27. HOLDING OVER: a. Unless otherwise notified by Lessor, if Lessee
shall continue to occupy the Leased Premises following the expiration of this
Lease Agreement such occupancy shall be deemed a month-to-month tenancy. During
such tenancy all terms, provisions and
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conditions of the Lease Agreement shall apply to the month-to-month tenancy
except those terms, provisions and conditions pertaining to the Lease Term. Such
month-to-month tenancy may be terminated by either Lessor or Lessee with at
least one full months previous written notice to the other party.
a. If Lessee continues to occupy the Leased Premises after the
expiration or earlier termination of this Lease Agreement against Lessor's will
or if Lessee fails to renew this Lease Agreement at Lessor's request prior to
the expiration of this Lease Agreement or under a month-to-month tenancy one
full month after notice of such lease renewal request from Lessor to Lessee,
Lessee agrees to pay Lessor as Liquidated damages for each month of continued
occupancy an amount equal to one and a half (1.5) times the rent being paid for
the month the Lease Agreement expires or is terminated. No receipt of money
after the expiration or termination of this Lease Agreement shall reinstate or
extend this Lease or affect any prior notice given by Lessor to Lessee.
28. RIGHTS OR MORTGAGEE: Lessee accepts this Lease subject and
subordinate to any recorded mortgage, deed of trust or other lien presently
existing upon the Leased Premises. Lessor is hereby irrevocably vested with full
power and authority to subordinate Lessee's interest under this Lease to any
mortgage, deed of trust or other lien hereafter placed on the Leased Premises,
and Lessee agrees upon demand to execute additional instruments subordinating
this Lease as Lessor may require. If the interests of Lessor under this Lease
shall be transferred by reason of foreclosure or other proceedings for
enforcement of any mortgage on the Leased Premises, Lessee shall be bound to the
transferee (sometimes called the "Purchaser") under the terms covenants and
conditions of this Lease for the balance of the term remaining, and any
extensions or renewals, with the same force and effect as if the Purchaser were
Lessor under this Lease, and Lessee agrees to attorn to the Purchaser, including
the mortgagee under any such mortgage if it be the Purchasers as its Lessor, the
attornment to be effective and self-operative without the execution of any
further instruments upon the Purchaser succeeding to the interest of Lessor
under this Lease. The respective rights and obligations of Lessee and the
Purchaser upon the attornment, to the extent of the then remaining balance of
the term of this Lease, and any extensions and renewals, shall be and are the
same as those set forth in this Lease.
29. LIABILITY OF LESSOR - SALE BY LESSOR: Lessee shall look solely to
Lessor's interest in the building and land upon which the Leased Premises is
situated, for recovery of any judgment against Lessor. A sale, conveyance, or
assignment of Lessor's interest in the Leased Premises shall operate to release
Lessor from all the covenants, terms, and conditions of this Lease, expressed of
implied, and Lessee agrees to look solely to the successor in interest of the
Lessor for the performance of such obligations.
30. ESTOPPEL CERTIFICATES: Lessee agrees to furnish promptly, from time
to time, upon request of Lessor or Lessor's mortgagee, a statement certifying
that Lessee is in possession of the Leased Premises; the Leased Premises are
acceptable; the Lease is in full force and effect; the Lease is unmodified;
Lessee claims no present charge, lien, or claim of offset against rent; the rent
is paid for the current month, but is not paid and will not be paid for more
than one month in advance; there is no existing default by reason of some act or
omission by Lessor; and such other matters as may be reasonable required by
Lessor or Lessor's mortgagee.
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31. SUCCESSORS: This Lease shall be binding upon and inure to the benefit
of Lessor and Lessee and their respective heirs, personal representatives,
successors and assigns. It is hereby covenanted and agreed that should Lessor's
interest in the Leased Premises cease to exist for any reason during the term of
the Lease then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect and Lessee
hereunder agrees to attorn to the then owner of the Leased Premises.
32. RENT TAX: If applicable in the jurisdiction where the Leased Premises
are situated, Lessee shall pay and be liable for all rental, sales and use taxes
or other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Lessor by Lessee under the terms of this
Lease. Any such payment shall be paid concurrently with the payment of the rent
upon which the tax is based as set forth above.
33. NOTICE: a. All rent and other payments required to be made by Lessee
shall be payable to Lessor at the address set forth below, or any other address
Lessor may specify from time to time by written notice delivered to Lessee.
a. All payments required to be made by Lessor to Lessee shall be
payable to Lessee at the address set forth below, or at any other
address within the United States as Lessee may specify from time
to time by written notice.
b. Any notice or document required or permitted to be delivered by
this Lease shall be deemed to be delivered (whether or not
actually received) when deposited in the United States Mail,
postage prepaid, certified or registered mail, return receipt
requested, addressed to the parties at the respective addresses
(Legal Address) set out at the end of the main body of this
Lease.
34. DEFINITIONS: These definitions apply to the terms defined as those
terms used throughout this Lease.
a. "Abandon" means the vacating of all or a substantial portion of
the Leased Premises by Lessee, whether or not Lessee is in
default of the rental payments due under this Lease.
b. An "act of God" or "force majeure" is defined for purpose of this
Lease as strikes, lockouts, sit-downs, material or labor
restrictions by any governmental authority, riots, floods,
washouts, explosions, earthquakes, fire, storms, acts of the
public enemy, wars, insurrections and any other cause not
reasonable within the control of Lessor and which by the exercise
of due diligence Lessor is unable, wholly or in part, to prevent
or overcome.
c. The "commencement date" shall be the date set forth in paragraph
2. The "commencement date" shall constitute the commencement of
this Lease Agreement for all purposes, whether or not Lessee has
actually taken possession.
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d. "Real property tax" means all city, state and county taxes and
assessments including special district taxes or assessments.
e. The captions appearing in this Lease are inserted only as a
matter of convenience and in no way define, limit, construe or describe the
scope or intent of such paragraph.
35. ACCEPTANCE OF LEASED PREMISES: Lessee acknowledges that it has
inspected the Leased Premises and accepts the same and the improvements erected
thereon in their present condition as suitable for the purpose for which the
same are leased.
36. SEVERABILITY: Should any part or provision of this Lease or the
application thereof to any person or circumstance be invalid or unenforceable to
any extent, the remainder of this Lease and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
37. CORPORATE AUTHORITY: If Lessee executes this Lease as a corporation,
the person or persons executing this Lease on behalf of Lessee do hereby
personally represent and warrant that Lessee is a duly authorized and existing
corporation and the Lessee is qualified to do business in the state in which the
Leased Premises are located. That the corporation has full right and authority
to enter into this Lease, and that each person signing on behalf of the
corporation is authorized to do so. In the event any representation or warranty
is false, all persons who execute this Lease shall be liable, individually, as
Lessee.
38. ENTIRE AGREEMENT AND LIMITATION OF WARRANTIES: IT IS EXPRESSLY AGREED
BY LESSEE, AS A MATERIAL CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT
THIS LEASE, WITH THE SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE
ENTIRE AGREEMENT OF THE PARTIES, THAT THERE ARE, AND WERE, NO VERBAL
REPRESENTATIONS, WARRANTIES, UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR
PROMISES AND OR IMPLICATIONS BY WAY OF LESSORS ACTIONS OR LACK THEREOF
PERTAINING TO THIS LEASE OR THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS
NOT INCORPORATED IN WRITING IN THIS LEASE. LESSOR AND LESSEE EXPRESSLY AGREE
THAT THERE ARE AND SHALL BE NO IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS OR
OF ANY OTHER KIND ARISING OUT OF THIS LEASE. IT IS LIKEWISE AGREED THAT THIS
LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED EXCEPT BY AN INSTRUMENT IN
WRITING SIGNED BY BOTH LESSOR AND LESSEE.
39. PLACE OF PERFORMANCE: Any legal suit arising from or relating to this
Lease shall be brought in Collin County to the state of Texas except eviction
proceedings which shall take place in the county where the Leased Premises lies.
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Executed the 14h day of July, 1997.
LESSOR: LESSEE:
DSW Property Management Data Return
- -------------------------------------------- -------------------------------
(Lessor Name) (Lessee Name)
a General Partnership a (Business Type ex: Corporation,
Partnership, Sole Proprietor)
by: /s/ Harold L. Sickler by: /s/ Sunny C. Vanderbeck
---------------------------------------- -----------------------------
Signature Signature
Harold L. Sicklen, Owner/Managing Partner Sunny C.Vanderbeck, CEO
- -------------------------------------------- ---------------------------------
(Print Name and Title) (Print Name and Title)
Ph# (972) 248-1091 Ph#'s (0)_______________
(972) 790-9733 (H)_______________
Claude Armstrong (B)_______________
(Fax)_____________
LESSOR'S LESSEE'S
LEGAL ADDRESS: LEGAL ADDRESS:
6825 LEVELLAND DR- SUITE 3A 801 STADIUM
---------------------------------
DALLAS, TEXAS 75252 SUITE 117
---------------------------------
ARLINGTON, TX 76011
---------------------------------
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GRAPHIC OF STADIUM DRIVE, ARLINGTON, TEXAS 76011
(All Square Footages Are Approximate)
EXHIBIT "A"
-----------
The Leased Premises can be legally described as a
portion (Suite 117) of that one story building known as 801
Stadium Drive situated on Lot 1, Block 2, Stadium Oaks, an
addition to the City of Arlington, Tarrant County, Texas, as
recorded in Volume 388-164, Page 5 of the Plat Records of
Tarrant County, Texas.
[Graphic of Leased Premises]
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ATTACHMENT "B"
1. Lessee may at their own expense, construct the wall and door denoted in
attachment "C". All construction work must be of quality materials and
workmanship, and must be completed according to local building codes. All
plans must be subject to Lessor's prior approval, and Lessor may at his own
discretion inspect the work at any time.
2. Area "B" denoted on Attachment "C" may be finished out by Lessee at their
own expense. All plans must be approved by Lessor in advance and must be of
quality workmanship and built according to local building codes.
3. Lessor agrees to warrant the air conditioning/heating (HVAC) system for a
period of 90 days commencing August 1, 1997 and ending October 29, 1997.
Lessee must change the filters regularly, at least every 3 months. Lessee
is responsible for any damage incurred to the HVAC system that results from
neglect, vandalism during the warranty period.
4. Should Lessee incorporate at any time in the future, during the period
covered by this Lease, and upon presentation of such incorporation
documentation to Lessor, this Lease shall be changed by attachment of an
addendum that refers to such incorporation. The addendum shall make
amendment to all areas of the Lease where the Lessee is mentioned, changing
the obligation of the Lessee to the incorporated entity
5. Lessee shall pay and be responsible for all flooring in the leased
premises.
ATTACHMENT "B"
15
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EXHIBIT 10.9
DATA RETURN CORPORATION
1999 LONG-TERM INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT AND PURPOSE
1.1 Establishment. Data Return Corporation, a Texas corporation, hereby
establishes the Data Return Corporation 1999 Long-Term Incentive Plan, as set
forth in this document.
1.2 Purpose. The purposes of the Plan are to attract able persons to
enter the employ of the Company, to encourage Employees to remain in the employ
of the Company and to provide motivation to Employees to put forth maximum
efforts toward the continued growth, profitability and success of the Company,
by providing incentives to such persons through the ownership and performance of
the Common Stock of Data Return. A further purpose of the Plan is to provide a
means through which the Company may attract able persons to become directors of
Data Return and consultants and independent contractors of the Company and to
provide such individuals with incentive and reward opportunities. Toward these
objectives, Awards may be granted under the Plan to Employees, Consultants and
Outside Directors on the terms and subject to the conditions set forth in the
Plan.
1.3 Effectiveness. The Plan shall become effective as of July 23, 1999,
the date of its adoption by the Board, provided it is duly approved by the
holders of at least a majority of the shares of Common Stock present or
represented and entitled to vote at a meeting of the shareholders of Data Return
duly held in accordance with applicable law within twelve months after the date
of adoption of the Plan by the Board. If the Plan is not so approved, the Plan
shall terminate and any Award granted hereunder shall be null and void.
ARTICLE 2. DEFINITIONS
2.1 Affiliate. "Affiliate" means a "parent corporation" or a "subsidiary
corporation" of Data Return, as those terms are defined in Section 424(e) and
(f) of the Code.
2.2 Award. "Award" means any Option, SAR, Restricted Stock, Dividend
Equivalent or Other Incentive Award granted under the Plan, whether singly, in
combination or in tandem, to a Participant.
2.3 Award Agreement. "Award Agreement" means a written agreement between
Data Return and a Participant that sets forth the terms, conditions,
restrictions and/or limitations applicable to an Award.
2.4 Board. "Board" means the Board of Directors of Data Return.
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2.5 Code. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, including regulations thereunder and successor provisions and
regulations thereto.
2.6 Committee. "Committee" means the Compensation Committee of the
Board, or such other committee of the Board as may be designated by the Board to
administer the Plan; provided that the Committee shall consist of three or more
directors of Data Return, all of whom are both a "Non-Employee Director" within
the meaning of Rule 16b-3 under the Exchange Act and an "outside director"
within the meaning of the definition of such term as contained in Treasury
Regulation Section 1.162-27(e)(3) interpreting Section 162(m) of the Code, or
any successor definitions adopted. The members of the Committee shall be
appointed from time to time by, and shall serve at the discretion of the Board.
2.7 Common Stock. "Common Stock" means the Common Stock of Data Return,
or any stock or other securities of Data Return hereafter issued or issuable in
substitution or exchange for the Common Stock.
2.8 Company. "Company" means Data Return and its Affiliates.
2.9 Consultant. "Consultant" means any individual performing services who
is treated by Data Return or an Affiliate as an independent contractor for
employment tax purposes.
2.10 Data Return. "Data Return" means Data Return Corporation, a Texas
corporation, and any successor thereto.
2.11 Dividend Equivalents. "Dividend Equivalents" means an Award granted
to a Participant pursuant to Article 10.
2.12 Effective Date. "Effective Date" means the date an Award is
determined to be effective by the Committee or the Board upon the grant of such
Award.
2.13 Employee. "Employee" means any person treated as an employee by Data
Return or an Affiliate. "Employee" shall not include a Consultant or an Outside
Director.
2.14 Exchange Act. "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, including rules thereunder and successor
provisions and rules thereto.
2.15 Fair Market Value. "Fair Market Value" means the fair market value of
the Common Stock, as determined by the Committee in good faith or, (i) if the
Common Stock is traded in the over-the-counter market, the average of the
representative closing bid and asked prices as reported by the National
Association of Securities Dealers Automated Quotation System ("NASDAQ") for the
date the option is granted (or if there was no quoted price for such date of
grant, then for the last preceding business day on which there was a quoted
price), or (ii) if the Common Stock is traded in the NASDAQ National Market
System, the last sale price as reported by the NASDAQ National Market System for
the date the option is granted (or if there are no sales for such date of grant,
then for the last preceding business day on which there were
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sales), or (iii) if the Common Stock is listed on any national stock exchange,
the average of the highest and lowest selling prices for such stock as quoted on
such exchange for the date the option is granted (or if there are no sales for
such date of grant, then for the last preceding business day on which there were
sales).
2.16 Incentive Stock Option. "Incentive Stock Option" means an option to
purchase shares of Common Stock that is intended to meet the requirements of
Section 422(b) of the Code.
2.17 Nonqualified Stock Option. "Nonqualified Stock Option" means an
option to purchase shares of Common Stock that is not intended to meet the
requirements of Section 422(b) of the Code.
2.18 Option. "Option" means an option to purchase shares of Common Stock
granted to a Participant pursuant to Article 7, and includes both Incentive
Stock Options and Nonqualified Stock Options.
2.19 Other Incentive Award. "Other Incentive Award" means an Award granted
to a Participant pursuant to Article 11.
2.20 Outside Director. "Outside Director" means an individual duly elected
or chosen as a director or advisory director of Data Return who is not also an
Employee.
2.21 Participant. "Participant" means any Employee, Consultant or Outside
Director to whom an Award has been granted under the Plan.
2.22 Plan. "Plan" means this Data Return Corporation 1999 Long-Term
Incentive Plan.
2.23 Restricted Stock. "Restricted Stock" means an Award of shares of
Common Stock granted to a Participant pursuant to, and with such restrictions as
are imposed under, Article 9. Restricted Stock shall constitute issued and
outstanding shares of Common Stock for all corporate purposes.
2.24 SARs. "SARs" means an Award of stock appreciation rights granted to a
Participant pursuant to Article 8.
ARTICLE 3. PLAN ADMINISTRATION
3.1 Responsibility of Committee. Subject to the terms and provisions of
the Plan, including, without limitation, Section 3.6, the Plan shall be
administered by the Committee. The Committee shall have total and exclusive
responsibility to control, operate, manage and administer the Plan in accordance
with its terms.
3.2 Authority of Committee. The Committee shall have all the
authority that may be necessary or helpful to enable it to discharge its
responsibilities with respect to the Plan. Without limiting the generality of
the preceding sentence, the Committee shall have the
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exclusive right, subject to the provisions of Section 3.6, to: (i) interpret the
Plan and the Award Agreements executed hereunder; (ii) determine eligibility for
participation in the Plan; (iii) decide all questions concerning eligibility
for, and the amount of, Awards payable under the Plan; (iv) construe any
ambiguous provision of the Plan or any Award Agreement; (v) prescribe the form
of the Award Agreements embodying Awards granted under the Plan; (vi) correct
any defect, supply any omission or reconcile any inconsistency in the Plan or
any Award Agreement; (vii) issue administrative guidelines as an aid to
administer the Plan and make changes in such guidelines as it from time to time
deems proper; (viii) make regulations for carrying out the Plan and make changes
in such regulations as it from time to time deems proper; (ix) determine whether
Awards should be granted singly, in combination or in tandem; (x) to the extent
permitted under the Plan, grant waivers of Plan terms, conditions, restrictions
and limitations; (xi) accelerate the exercise, vesting or payment of an Award
when such action or actions would be in the best interests of the Company; (xii)
grant Awards in replacement of Awards previously granted under the Plan or any
other employee benefit plan of the Company; and (xiii) take any and all other
actions it deems necessary or advisable for the proper operation or
administration of the Plan.
3.3 Discretionary Authority. The Committee shall have full discretionary
authority in all matters related to the discharge of its responsibilities and
the exercise of its authority under the Plan, including, without limitation, its
construction of the terms of the Plan and its determination of eligibility for
participation and Awards under the Plan. The decisions of the Committee and its
actions with respect to the Plan shall be final, conclusive and binding on all
persons having or claiming to have any right or interest in or under the Plan,
including Participants and their respective estates, beneficiaries and legal
representatives.
3.4 Action by the Committee. The Committee may act only by a
majority of its members. Any determination of the Committee may be made,
without a meeting, by a writing or writings signed by all of the members of the
Committee. In addition, the Committee may authorize any one or more of its
members to execute and deliver documents on behalf of the Committee.
3.5 Delegation of Authority. Notwithstanding anything contained in
the Plan to the contrary, the Committee may, in its discretion, delegate some or
all of its authority under the Plan to any person or persons; provided however,
that any such delegation shall be in writing; and provided further that only the
Committee may select and grant Awards to Employees who are subject to Section 16
of the Exchange Act or who are "covered employees" within the meaning of Section
162(m) of the Code.
3.6 Board Authority. Notwithstanding the authority hereby delegated
to the Committee to administer the Plan, the Board shall have sole and exclusive
authority, subject to the express provisions of the Plan, to grant Awards under
the Plan to Outside Directors, to determine the terms, conditions, restrictions
and/or limitations applicable to such Awards and to make all other
determinations and take any and all other actions it deems necessary or
advisable with respect to such Awards. The Board shall have no authority under
the Plan to select and grant Awards to Employees or Consultants. Such authority
is vested exclusively in the Committee.
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<PAGE>
3.7 Liability; Indemnification. No member of the Committee or the Board
nor any person to whom authority has been delegated by the Committee, shall be
personally liable for any action, interpretation or determination made in good
faith with respect to the Plan or Awards granted hereunder, and each member of
the Committee and the Board shall be fully indemnified and protected by Data
Return with respect to any liability he or she may incur with respect to any
such action, interpretation or determination, to the extent permitted by
applicable law and to the extent provided in the Certificate of Incorporation
and Bylaws of Data Return, as amended from time to time, or under any agreement
between any such member and Data Return.
ARTICLE 4. ELIGIBILITY
All Employees, Consultants and Outside Directors are eligible to
participate in the Plan. The Committee shall select, from time to time,
Participants from those Employees and Consultants and the Board shall select,
from time to time, Participants from those Outside Directors, who, in the
opinion of the Committee or the Board, can further the Plan's purposes. In
making this selection, the Committee and the Board may give consideration to the
functions and responsibilities of the Participant, his or her past, present and
potential contributions to the growth and success of the Company and such other
factors deemed relevant by the Committee or the Board. Once a Participant is so
selected, the Committee or the Board shall determine the type and size of Award
to be granted to the Participant and shall establish in the related Award
Agreement the terms, conditions, restrictions and/or limitations applicable to
the Award, in addition to those set forth in the Plan and the administrative
rules and regulations, if any, established by the Committee. No Employee or
Consultant is entitled to receive an Award unless selected by the Committee, and
no Outside Director is entitled to receive an Award unless selected by the
Board.
ARTICLE 5. FORM OF AWARDS
Awards may, at the Committee's or the Board's sole discretion, be granted
under the Plan in the form of Options pursuant to Article 7, SARs pursuant to
Article 8, Restricted Stock pursuant to Article 9, Dividend Equivalents pursuant
to Article 10, Other Incentive Awards pursuant to Article 11 or a combination
thereof. All Awards shall be subject to the terms, conditions, restrictions and
limitations of the Plan. The Committee or the Board may, in its sole judgment,
subject any Award to such other terms, conditions, restrictions and/or
limitations (including, but not limited to, the time and conditions of exercise,
vesting or payment of an Award and restrictions on transferability of any shares
of Common Stock issued or delivered pursuant to an Award), provided they are not
inconsistent with the terms of the Plan. Awards under a particular Article of
the Plan need not be uniform, and Awards under two or more Articles of the Plan
may be combined into a single Award Agreement. Any combination of Awards may be
granted at one time and on more than one occasion to the same Participant.
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ARTICLE 6. SHARES SUBJECT TO THE PLAN
6.1 Available Shares. The maximum number of shares of Common Stock that
shall be available for grant of Awards under the Plan shall not exceed a total
of 8,000, subject to adjustment as provided in Sections 6.2 and 6.3. Shares of
Common Stock issued pursuant to the Plan may be shares of original issuance or
treasury shares or a combination of the foregoing, as the Board, in its
discretion, shall from time to time determine.
6.2 Adjustments for Recapitalizations and Reorganizations.
(a) The shares with respect to which Awards may be granted under the
Plan are shares of Common Stock as presently constituted, but if, and
whenever, prior to the expiration or satisfaction of an Award theretofore
granted, Data Return shall effect a subdivision or consolidation of shares
of Common Stock or the payment of a stock dividend on Common Stock without
receipt of consideration by Data Return, the number of shares of Common
Stock with respect to which such Award may thereafter be exercised or
satisfied, as applicable, (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the exercise
price per share shall be proportionately reduced, and (ii) in the event of
a reduction in the number of outstanding shares shall be proportionately
reduced, and the exercise price per share shall be proportionately
increased.
(b) If Data Return recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of
an Award theretofore granted the Participant shall be entitled to (or
entitled to purchase, if applicable) under such Award, in lieu of the
number of shares of Common Stock then covered by such Award, the number and
class of shares of stock or other securities to which the Participant would
have been entitled pursuant to the terms of the recapitalization if,
immediately prior to such recapitalization, the Participant had been the
holder of record of the number of shares of Common Stock then covered by
such Award.
(c) In the event of changes in the outstanding Common Stock by reason
of recapitalizations, reorganizations, mergers, consolidations,
combinations, separations (including a spin-off or other distribution of
stock or property), exchanges or other relevant changes in capitalization
occurring after the date of grant of any Award and not otherwise provided
for by this Section 6.2, any outstanding Awards and any Award Agreements
evidencing such Awards shall be subject to adjustment by the Committee at
its discretion as to the number, price and kind of shares or other
consideration subject to, and other terms of, such Awards to reflect such
changes in the outstanding Common Stock.
(d) In the event of any changes in the outstanding Common Stock
provided for in this Section 6.2, the aggregate number of shares available
for grant of Awards under the Plan may be equitably adjusted by the
Committee, whose determination shall be conclusive. Any adjustment
provided for in this Section 6.2 shall be subject to any required
stockholder action.
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6.3 Adjustments for Awards. The Committee shall have full discretion to
determine the manner in which shares of Common Stock available for grant of
Awards under the Plan are counted. Without limiting the discretion of the
Committee under this Section 6.3, unless otherwise determined by the Committee,
the following rules shall apply for the purpose of determining the number of
shares of Common Stock available for grant of Awards under the Plan:
(a) Options and Restricted Stock. The grant of Options and Restricted
Stock shall reduce the number of shares available for grant of Awards under
the Plan by the number of shares subject to such Award.
(b) SARs. The grant of SARs shall not affect the number of shares
available for grant of Awards under the Plan.
(c) Dividend Equivalents. The grant of Dividend Equivalents shall not
affect the number of shares available for grant of Awards under the Plan,
but such number of shares shall be reduced by any shares issued in payment
or settlement of Dividend Equivalents.
(d) Other Incentive Awards. The grant of an Other Incentive Award in
the form of Common Stock or that may be paid or settled only in Common
Stock shall reduce the number of shares available for grant of Awards under
the Plan by the number of shares subject to such Award. The grant of an
Other Incentive Award that may be paid or settled only for cash shall not
affect the number of shares available for grant of Awards under the Plan.
The grant of an Other Incentive Award that may be paid or settled in either
Common Stock or cash shall reduce the number of shares available for grant
of Awards under the Plan by the number of shares subject to such Award.
(e) Termination. If any Award referred to in paragraphs (a) and (d)
above (other than an Other Incentive Award that may be paid or settled only
for cash) is canceled or forfeited, or terminates, expires or lapses, for
any reason (other than the termination of a Related Option (as defined in
Section 8.1) upon exercise of its corresponding SARs), the shares then
subject to such Award shall again be available for grant of Awards under
the Plan.
(f) Payment of Exercise Price and Withholding Taxes. If previously
acquired shares of Common Stock are used to pay the exercise price of an
Award, or shares of Common Stock that would be acquired upon exercise of an
Award are withheld to pay the exercise price of such Award, the number of
shares available for grant of Awards under the Plan other than Incentive
Stock Options shall be increased by the number of shares delivered or
withheld as payment of such exercise price. If previously acquired shares
of Common Stock are used to pay withholding taxes payable upon exercise,
vesting or payment of an Award, or shares of Common Stock that would be
acquired upon exercise, vesting or payment of an Award are withheld to pay
withholding taxes payable upon exercise, vesting or payment of such Award,
the number of shares
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available for grant of Awards under the Plan other than Incentive Stock
Options shall be increased by the number of shares delivered or withheld as
payment of such withholding taxes.
ARTICLE 7. OPTIONS
7.1 General. Awards may be granted to Employees, Consultants and Outside
Directors in the form of Options. These Options may be Incentive Stock Options
or Nonqualified Stock Options, or a combination of both; provided, however, that
(i) no Incentive Stock Options shall be granted later than 10 years from the
date of adoption of the Plan by the Board and (ii) only Employees shall be
eligible to receive Incentive Stock Options.
7.2 Terms and Conditions of Options. An Option shall be exercisable in
whole or in such installments and at such times as may be determined by the
Committee or the Board. The price at which a share of Common Stock may be
purchased upon exercise of a Nonqualified Stock Option shall be determined by
the Committee or the Board, but such exercise price shall not be less than 50%
of the Fair Market Value of a share of Common Stock on the Effective Date of the
Option's grant. Except as otherwise provided in Section 7.3, the term of each
Option shall be as specified by the Committee or the Board; provided, however,
that, unless otherwise designated by the Committee or the Board, no Options
shall be exercisable later than 10 years from the Effective Date of the Option's
grant.
7.3 Restrictions Relating to Incentive Stock Options. Options granted in
the form of Incentive Stock Options shall, in addition to being subject to the
terms and conditions of Section 7.2, comply with Section 422(b) of the Code.
Accordingly, to the extent that the aggregate Fair Market Value (determined at
the time the respective Incentive Stock Option is granted) of Common Stock with
respect to which Incentive Stock Options are exercisable for the first time by
an individual during any calendar year under all incentive stock option plans of
Data Return and its Affiliates exceeds $100,000, such excess Incentive Stock
Options shall be treated as options which do not constitute Incentive Stock
Options. The Committee shall determine, in accordance with applicable
provisions of the Code, which of a Participant's Incentive Stock Options will
not constitute Incentive Stock Options because of such limitation and shall
notify the Participant of such determination as soon as practicable after such
determination. The price at which a share of Common Stock may be purchased upon
exercise of an Incentive Stock Option shall be determined by the Committee, but
such exercise price shall not be less than 100% of the Fair Market Value of a
share of Common Stock on the Effective Date of the Option's grant. No Incentive
Stock Option shall be granted to an Employee under the Plan if, at the time such
Option is granted, such Employee owns stock possessing more than 10% of the
total combined voting power of all classes of stock of Data Return or an
Affiliate, within the meaning of Section 422(b)(6) of the Code, unless (i) on
the Effective Date of grant of such Option, the exercise price of such Option is
at least 110% of the Fair Market Value of the Common Stock subject to the Option
and (ii) such Option by its terms is not exercisable after the expiration of
five years from the Effective Date of the Option's grant.
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7.4 Additional Terms and Conditions. The Committee or the Board may
subject any Award of an Option to such other terms, conditions, restrictions
and/or limitations as it determines are necessary or appropriate, provided they
are not inconsistent with the Plan.
7.5 Exercise of Options. Subject to the terms and conditions of the Plan,
Options shall be exercised by the delivery of a written notice of exercise to
Data Return, setting forth the number of shares of Common Stock with respect to
which the Option is to be exercised, accompanied by full payment for such
shares.
Upon exercise of an Option, the exercise price of the Option shall be
payable to Data Return in full either: (i) in cash or an equivalent acceptable
to the Committee or (ii) in the discretion of the Committee and in accordance
with any applicable administrative guidelines established by the Committee, by
(a) tendering previously acquired nonforfeitable, unrestricted shares of Common
Stock having an aggregate Fair Market Value at the time of exercise equal to the
total exercise price (including an actual or deemed multiple series of exchanges
of such shares), (b) with respect to Nonqualified Stock Options only,
withholding shares which otherwise would be acquired on exercise having an
aggregate Fair Market Value at the time of exercise equal to the total exercise
price or (c) a combination of the forms of payment specified in clauses (i),
(ii)(a) or (ii)(b) above.
The Committee, in its sole and absolute discretion, may approve the
extension of a loan to a Participant who is an Employee to assist the
Participant in paying the exercise price of an Option; provided, however, that
no such loan shall be for an amount greater than the excess of (i) the exercise
price of the shares of Common Stock issuable upon exercise of the Option over
(ii) the par value of such shares of Common Stock. Any such loan will be made
on such terms and conditions as the Committee shall deem to be appropriate.
In addition, any grant of a Nonqualified Stock Option under the Plan may
provide that payment of the exercise price of the Nonqualified Stock Option may
also be made in whole or in part in the form of shares of Restricted Stock or
other shares of Common Stock that are subject to risk of forfeiture or
restrictions on transfer. Unless otherwise determined by the Committee or the
Board at the time of grant of such Nonqualified Stock Option, whenever the
exercise price of such Nonqualified Stock Option is paid in whole or in part by
means of the form of consideration specified in the immediately preceding
sentence, the shares of Common Stock received by the Participant upon the
exercise of such Option shall be subject to the same risk of forfeiture and
restrictions on transfer as those that applied to the consideration surrendered
by the Participant. However, the risk of forfeiture and restrictions on transfer
shall apply only to the same number of shares of Common Stock received by the
Participant upon exercise as applied to the forfeitable or restricted Common
Stock surrendered by the Participant in payment of the exercise price.
Payment of the exercise price of an Option may also be made, in the
discretion of the Committee, by delivery to Data Return or its designated agent
of an executed irrevocable option exercise form together with irrevocable
instructions to a broker-dealer to sell or margin a sufficient portion of the
shares with respect to which the Option is exercised and deliver the sale or
margin loan proceeds directly to Data Return to pay for the exercise price and
any required withholding taxes.
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As soon as reasonably practicable after receipt of written notification of
exercise of an Option and full payment of the exercise price and any required
withholding taxes, Data Return shall deliver to the Participant, in the
Participant's name, a stock certificate or certificates in an appropriate amount
based upon the number of shares of Common Stock purchased under the Option.
7.6 Termination of Service. Each Award Agreement embodying the Award of
an Option shall set forth the extent to which the Participant shall have the
right to exercise the Option following termination of the Participant's
employment or service with the Company. Such provisions shall be determined in
the sole discretion of the Committee or the Board, need not be uniform among all
Options granted under the Plan and may reflect distinctions based on the reasons
for termination of employment or service. Subject to Section 6.2 and Article
12, in the event that a Participant's Award Agreement embodying the Award of an
Option does not set forth such termination provisions, the following termination
provisions shall apply with respect to such Award:
(a) Death or Disability. If the employment or service of a
Participant shall terminate by reason of death or permanent and total
disability (within the meaning of Section 22(e)(3) of the Code),
outstanding Options held by the Participant may be exercised, to the extent
then vested, no more than one year from the date of such termination of
employment or service, unless the Options, by their terms, expire earlier.
(b) Other Termination. If the employment or service of a Participant
shall terminate for any reason other than the reasons set forth in
paragraph (a) above, whether on a voluntary or involuntary basis,
outstanding Options held by the Participant may be exercised, to the extent
then vested, no more than three months from the date of such termination of
employment or service, unless the Options, by their terms, expire earlier.
(c) Termination for Cause. Notwithstanding paragraphs (a) and (b)
above, if the employment or service of a Participant shall be terminated by
reason of such Participant's fraud, dishonesty or performance of other acts
detrimental to the Company, all outstanding Options held by the Participant
shall immediately be forfeited to the Company and no additional exercise
period shall be allowed, regardless of the vested status of the Options.
7.7 Maximum Option Grants. Notwithstanding any provision contained in the
Plan to the contrary, the maximum number of shares of Common Stock for which
Options and SARs may be granted under the Plan to any one Participant during a
calendar year is 1,000.
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ARTICLE 8. SARS
8.1 General. The Committee may from time to time grant SARs in
conjunction with all or any portion of any Option (the "Related Option") either
(i) at the time of the initial Option grant (not including any subsequent
modification that may be treated as a new grant of an Incentive Stock Option for
purposes of Section 424(h) of the Code) or (ii) with respect to Nonqualified
Stock Options, at any time after the initial Option grant while the Nonqualified
Stock Option is still outstanding. SARs shall not be granted other than in
conjunction with an Option granted hereunder.
8.2 Terms and Conditions. SARs granted hereunder shall comply with the
following conditions and also with the terms of the Award Agreement governing
the Related Option:
(a) The SAR shall expire no later than the expiration of the Related
Option.
(b) Upon the exercise of an SAR, the Participant shall be entitled to
receive from Data Return or the appropriate Affiliate in cash an amount
equal to the excess of the aggregate Fair Market Value of the shares of
Common Stock with respect to which the SAR is then being exercised
(determined as of the date of such exercise) over the aggregate purchase
price of such shares as provided in the Related Option.
(c) SARs shall be exercisable (i) only at such time or times and only
to the extent that the Related Option shall be exercisable, (ii) only when
the Fair Market Value of the shares subject to the Related Option exceeds
the purchase price of the shares as provided in the Related Option, and
(iii) only upon surrender of the Related Option or any portion thereof with
respect to the shares for which the SARs are then being exercised.
(d) Upon the exercise of an SAR, the Related Option shall be deemed to
have been terminated to the extent of the number of shares of Common Stock
with respect to which such SARs are exercised. Upon the exercise or
termination of the Related Option, the SARs with respect to such Related
Option shall be deemed to have been terminated to the extent of the number
of shares of Common Stock with respect to which the Related Option was so
exercised or terminated.
8.3 Exercise of SARs. Each exercise of SARs, or a portion thereof, shall
be evidenced by a notice in writing to Data Return.
ARTICLE 9. RESTRICTED STOCK
9.1 General. Awards may be granted to Employees, Consultants and Outside
Directors in the form of Restricted Stock. Restricted Stock shall be awarded in
such numbers and at such times as the Committee or the Board shall determine.
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9.2 Restriction Period. At the time an Award of Restricted Stock is
granted, the Committee or the Board shall establish a period of time (the
"Restriction Period") applicable to such Restricted Stock. Each Award of
Restricted Stock may have a different Restriction Period, in the discretion of
the Committee or the Board. The Restriction Period applicable to a particular
Award of Restricted Stock shall not be changed except as permitted by Section
6.2, Section 9.3 or Article 12.
9.3 Other Terms and Conditions. Restricted Stock awarded to a Participant
under the Plan shall be represented by a stock certificate registered in the
name of the Participant or, at the option of Data Return, in the name of a
nominee of Data Return. Subject to the terms and conditions of the Award
Agreement, a Participant to whom Restricted Stock has been awarded shall have
the right to receive dividends thereon during the Restriction Period, to vote
the Restricted Stock and to enjoy all other stockholder rights with respect
thereto, except that (i) the Participant shall not be entitled to possession of
the stock certificate representing the Restricted Stock until the Restriction
Period shall have expired, (ii) Data Return shall retain custody of the
Restricted Stock during the Restriction Period, (iii) the Participant may not
sell, transfer, pledge, exchange, hypothecate or otherwise dispose of the
Restricted Stock during the Restriction Period and (iv) a breach of the terms
and conditions established by the Committee or the Board pursuant to the Award
of the Restricted Stock shall cause a forfeiture of the Restricted Stock. At
the time of an Award of Restricted Stock, the Committee or the Board may, in its
sole discretion, prescribe additional terms, conditions, restrictions and/or
limitations applicable to the Restricted Stock, including, but not limited to,
rules pertaining to the termination of employment or service (by reason of
death, permanent and total disability, or otherwise) of a Participant prior to
expiration of the Restriction Period.
9.4 Payment for Restricted Stock. A Participant shall not be required to
make any payment for Restricted Stock awarded to the Participant, except to the
extent otherwise required by the Committee or the Board or by applicable law.
9.5 Miscellaneous. Nothing in this Article 9 shall prohibit the exchange
of shares of Restricted Stock issued under the Plan pursuant to a plan of
reorganization for stock or securities of Data Return or another corporation
that is a party to the reorganization, but the stock or securities so received
for shares of Restricted Stock shall, except as provided in Section 6.2 or
Article 12, become subject to the restrictions applicable to the Award of such
Restricted Stock. Any shares of stock received as a result of a stock split or
stock dividend with respect to shares of Restricted Stock shall also become
subject to the restrictions applicable to the Award of such Restricted Stock.
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ARTICLE 10. DIVIDEND EQUIVALENTS
Dividend Equivalents may be granted under the Plan to Employees,
Consultants and Outside Directors, either as a component of another Award or as
a separate Award, subject to such terms, conditions, restrictions and/or
limitations as the Committee or the Board may establish. In general, and
subject to such terms, conditions, restrictions and/or limitations as the
Committee or the Board may establish, an Award of Dividend Equivalents shall
confer upon the Participant a right to receive, in the event of a cash or stock
dividend or other distribution paid or made on the outstanding shares of Common
Stock, an amount equal to the dividend or other distribution that would have
been received by the Participant had the shares of Common Stock covered by the
Award been issued and outstanding on the record date established for such
dividend or other distribution. Dividend Equivalents may be paid currently or
may be deemed to be reinvested in additional shares of Common Stock (which may
thereafter accrue additional Dividend Equivalents). Any such reinvestment shall
be at the Fair Market Value of the Common Stock at the time thereof. Dividend
Equivalents may be paid in cash, shares of Common Stock, other Awards or other
property, or a combination thereof, in a single payment or in installments, and
at such time or times as the Committee or the Board shall determine. Dividend
Equivalents granted as a component of another Award may provide that such
Dividend Equivalents shall be paid upon exercise, payment or settlement of or
lapse of restrictions on such other Award, and that such Dividend Equivalents
shall expire or be forfeited under the same conditions as such other Award.
Dividend Equivalents granted as a component of another Award may also contain
terms and conditions different from such other Award.
ARTICLE 11. OTHER INCENTIVE AWARDS
Other Incentive Awards may be granted under the Plan to Employees,
Consultants and Outside Directors based upon, payable in or otherwise related
to, in whole or in part, shares of Common Stock if the Committee or the Board,
in its sole discretion, determines that such Other Incentive Awards are
consistent with the purposes of the Plan. Subject to the terms and provisions
of the Plan, Other Incentive Awards may be granted to Employees, Consultants and
Outside Directors in such amount, upon such terms and at any time and from time
to time as shall be determined by the Committee or the Board. Each grant of an
Other Incentive Award shall be evidenced by an Award Agreement that shall
specify the amount of the Other Incentive Award and the terms, conditions,
restrictions and/or limitations applicable to such Award. Payment of Other
Incentive Awards shall be made at such times and in such form, which may be
cash, shares of Common Stock or other property (or a combination thereof), as
established by the Committee or the Board, subject to the terms of the Plan.
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ARTICLE 12. CORPORATE CHANGE
In the event of a proposed sale of all or substantially all of the assets
of the Company, or the merger or other combination (the "Transaction") of the
Company with or into another entity, each Award under the Plan shall be assumed
or an equivalent award shall be substituted by such successor entity or a parent
or subsidiary of such successor entity, unless the Board determines, in the
exercise of its sole discretion and in lieu of such assumption or substitution,
to (i) accelerate the vesting of all outstanding Options and establish a new
exercise date, (ii) cause all restrictions (other than restrictions imposed by
law) and conditions of all Restricted Stock, Dividend Equivalents and Other
Incentive Awards to be deemed to have been satisfied and/or (iii) cause all
other criteria and objectives, the attainment of which are a pre-condition to
exercise, vesting, payment or settlement of all Dividend Equivalents and Other
Incentive Awards then outstanding, to be deemed to have been fully satisfied at
the maximum criteria levels. For purposes of this Section, an Option granted
under the Plan shall be deemed to be assumed if, following the Transaction, the
Option confers the right to purchase at the exercise price (provided that for
such purposes the Fair Market Value of the Common Stock shall be the value per
share of the consideration paid in the Transaction), for each share of stock
subject to the Option immediately prior to the Transaction, the consideration
(whether stock, cash or other securities or property) received in the
Transaction by holders of Shares for each Share held on the effective date of
the transaction (and if such holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the outstanding
shares of Common Stock); provided, however, that if such consideration received
in the Transaction was not solely common equity of the successor entity or its
parent (as defined in Section 424(e) of the Code), the Board may, with the
consent of the successor entity and the Participant, provide for the
consideration to be received upon exercise of the Option to be solely common
equity of the successor entity or its parent equal in fair market value to the
per share consideration received by holders of Common Stock in the Transaction.
ARTICLE 13. AMENDMENT AND TERMINATION
The Board may at any time suspend, terminate, amend or modify the Plan, in
whole or in part; provided, however, that no amendment or modification of the
Plan shall become effective without the approval of such amendment or
modification by the stockholders of Data Return if Data Return, on the advice of
counsel, determines that such stockholder approval is necessary or desirable.
Upon termination of the Plan, the terms and provisions of the Plan shall,
notwithstanding such termination, continue to apply to Awards granted prior to
such termination. No suspension, termination, amendment or modification of the
Plan shall adversely affect in any material way any Award previously granted
under the Plan, without the consent of the Participant holding such Award
(except that such consent shall not be required in the case of an amendment or
modification required following a change in law or interpretation thereof to
cause Options and SARs under the Plan to continue to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code).
The Committee or the Board may amend the terms of any outstanding Award
granted pursuant to this Plan, but any amendment that would adversely affect the
Participant's rights under an outstanding Award shall not be made without the
written consent of the Participant
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(except that such consent shall not be required in the case of an amendment or
modification required following a change in law or interpretation thereof to
cause Options and SARs under the Plan to continue to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code). The
Committee or the Board may, with a Participant's written consent, cancel any
outstanding Award or accept any outstanding Award in exchange for a new Award.
ARTICLE 14. MISCELLANEOUS
14.1 Award Agreements. After the Committee or the Board grants an Award
under the Plan to a Participant, Data Return and the Participant shall enter
into an Award Agreement setting forth the terms, conditions, restrictions and/or
limitations applicable to the Award and such other matters as the Committee or
the Board may determine to be appropriate. The terms and provisions of the
respective Award Agreements need not be identical. In the event of any conflict
between an Award Agreement and the Plan, the terms of the Plan shall govern.
14.2 Additional Conditions. Except as otherwise provided in a Participant's
Award Agreement, notwithstanding anything in the Plan to the contrary: (i) Data
Return may, if it shall determine it necessary or desirable for any reason, at
the time of grant of any Award or the issuance of any shares of Common Stock
pursuant to any Award, require the recipient of the Award or such shares of
Common Stock, as a condition to the receipt thereof, to deliver to Data Return a
written representation of present intention to acquire the Award or such shares
of Common Stock for his or her own account for investment and not for
distribution; and (ii) if at any time Data Return further determines, in its
sole discretion, that the listing, registration or qualification (or any
updating of any such document) of any Award or shares of Common Stock issuable
pursuant thereto is necessary on any securities exchange or market or under any
federal or state securities or blue sky laws, or that the consent or approval of
any governmental or regulatory body is necessary or desirable as a condition of,
or in connection with, the grant of any Award, the issuance of shares of Common
Stock pursuant thereto or the removal of any restrictions imposed on such
shares, such Award shall not be awarded or such shares of Common Stock shall not
be issued or such restrictions shall not be removed, as the case may be, in
whole or in part, unless such listing, registration, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to Data Return.
14.3 Regulatory Approvals and Listings. Notwithstanding anything contained
in the Plan to the contrary, Data Return shall have no obligation to issue or
deliver shares of Common Stock under the Plan prior to (i) the obtaining of any
approval from any governmental agency which Data Return shall, in its sole
discretion, determine to be necessary or advisable, (ii) the admission of such
shares to listing on the stock exchange or stock market on which the Common
Stock may be listed and (ii) the completion of any registration or other
qualification of such shares under any Federal or state law or ruling of any
governmental body which Data Return shall, in its sole discretion, determine to
be necessary or advisable.
14.4 Transferability. Each Nonqualified Stock Option shall provide that
such Option shall be exercisable only by the Participant or by a person or
entity to which the Participant is permitted to transfer the Option in
accordance with this Section 14.4. A Nonqualified Stock Option granted under the
Plan shall be transferrable by the Participant only as follows:
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(a) By will or the laws of descent and distribution upon the death of the
Participant;
(b) By gift or a domestic relations order to a "family member" of the
Participant, as such term is defined in the instructions to Form S-8 under the
Securities Act of 1933, as amended, including without limitation trusts in which
family members of the Participant have more than 50% of the beneficial interest,
foundations in which such family members control the management of assets, and
any other entity in which such family members or the Participant own more than
50% of the voting interests; or
(c) To an entity in which more than 50% of the voting interests are owned
by the Participant or the Participant's family members in exchange for an
interest or interests in that entity.
Each permitted transferee will execute an agreement satisfactory to the Company
agreeing to be bound by the terms and provisions of this Plan and the
Participant's original option agreement relating to the option.
No other Award granted under the Plan may be sold, transferred, pledged,
exchanged, hypothecated or otherwise disposed of, other than by will or pursuant
to the applicable laws of descent and distribution. Further, no such Award
shall be subject to execution, attachment or similar process. Any attempted
sale, transfer, pledge, exchange, hypothecation or other disposition of an Award
not specifically permitted by the Plan or an Award Agreement shall be null and
void and without effect. All Awards granted to a Participant under the Plan
shall be exercisable during his or her lifetime only by such Participant or, in
the event of the Participant's legal incapacity, by his or her guardian or legal
representative.
14.5 Withholding Taxes. The Company shall be entitled to deduct from any
payment made under the Plan, regardless of the form of such payment, the amount
of all applicable income and employment taxes required by law to be withheld
with respect to such payment, may require the Participant to pay to the Company
such withholding taxes prior to and as a condition of the making of any payment
or the issuance or delivery of any shares of Common Stock under the Plan and
shall be entitled to deduct from any other compensation payable to the
Participant any withholding obligations with respect to Awards under the Plan.
In accordance with any applicable administrative guidelines it establishes, the
Committee may allow a Participant to pay the amount of taxes required by law to
be withheld from or with respect to an Award by (i) withholding shares of Common
Stock from any payment of Common Stock due as a result of such Award or (ii)
permitting the Participant to deliver to the Company previously acquired shares
of Common Stock, in each case having a Fair Market Value equal to the amount of
such required withholding taxes. No payment shall be made and no shares of
Common Stock shall be issued pursuant to any Award unless and until the
applicable tax withholding obligations have been satisfied.
14.6 No Fractional Shares. No fractional shares of Common Stock shall be
issued or delivered pursuant to the Plan or any Award granted hereunder, and no
payment or other adjustment shall be made in respect of any such fractional
share.
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14.7 Notices. All notices required or permitted to be given or made under
the Plan or any Award Agreement shall be in writing and shall be deemed to have
been duly given or made if (i) delivered personally, (ii) transmitted by first
class registered or certified United States mail, postage prepaid, return
receipt requested, (iii) sent by prepaid overnight courier service or (iv) sent
by telecopy or facsimile transmission, answer back requested, to the person who
is to receive it at the address that such person has theretofore specified by
written notice delivered in accordance herewith. Such notices shall be
effective (i) if delivered personally or sent by courier service, upon actual
receipt by the intended recipient, (ii) if mailed, upon the earlier of five days
after deposit in the mail or the date of delivery as shown by the return receipt
therefor or (iii) if sent by telecopy or facsimile transmission, when the answer
back is received. Data Return or a Participant may change, at any time and from
time to time, by written notice to the other, the address that it or such
Participant had theretofore specified for receiving notices. Until such address
is changed in accordance herewith, notices hereunder or under an Award Agreement
shall be delivered or sent (i) to a Participant at his or her address as set
forth in the records of the Company or (ii) to Data Return at the principal
executive offices of Data Return clearly marked "Attention: LTIP
Administration".
14.8 Binding Effect. The obligations of Data Return under the Plan shall
be binding upon any successor corporation or organization resulting from the
merger, consolidation or other reorganization of Data Return, or upon any
successor corporation or organization succeeding to all or substantially all of
the assets and business of Data Return. The terms and conditions of the Plan
shall be binding upon each Participant and his or her heirs, legatees,
distributees and legal representatives.
14.9 Severability. If any provision of the Plan or any Award Agreement is
held to be illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining provisions of the Plan or such agreement, as the case
may be, but such provision shall be fully severable and the Plan or such
agreement, as the case may be, shall be construed and enforced as if the illegal
or invalid provision had never been included herein or therein.
14.10 No Restriction of Corporate Action. Nothing contained in the Plan
shall be construed to prevent Data Return or any Affiliate from taking any
corporate action (including any corporate action to suspend, terminate, amend or
modify the Plan) that is deemed by Data Return or such Affiliate to be
appropriate or in its best interest, whether or not such action would have an
adverse effect on the Plan or any Awards made or to be made under the Plan. No
Participant or other person shall have any claim against Data Return or any
Affiliate as a result of such action.
14.11 Governing Law. The Plan shall be governed by and construed in
accordance with the internal laws (and not the principles relating to conflicts
of laws) of the State of Texas, except as superseded by applicable federal law.
14.12 No Right, Title or Interest in Company Assets. No Participant shall
have any rights as a stockholder of Data Return as a result of participation in
the Plan until the date of issuance of a stock certificate in his or her name
and, in the case of Restricted Stock, unless and
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until such rights are granted to the Participant under the Plan. To the extent
any person acquires a right to receive payments from the Company under the Plan,
such rights shall be no greater than the rights of an unsecured creditor of the
Company, and such person shall not have any rights in or against any specific
assets of the Company. All of the Awards granted under the Plan shall be
unfunded.
14.13 Risk of Participation. Nothing contained in the Plan shall be
construed either as a guarantee by Data Return or its Affiliates, or their
respective stockholders, directors, officers or employees, of the value of any
assets of the Plan or as an agreement by Data Return or its Affiliates, or their
respective stockholders, directors, officers or employees, to indemnify anyone
for any losses, damages, costs or expenses resulting from participation in the
Plan.
14.14 No Guarantee of Tax Consequences. No person connected with the Plan
in any capacity, including, but not limited to, Data Return and the Affiliates
and their respective directors, officers, agents and employees, makes any
representation, commitment or guarantee that any tax treatment, including, but
not limited to, Federal, state and local income, estate and gift tax treatment,
will be applicable with respect to any Awards or payments thereunder made to or
for the benefit of a Participant under the Plan or that such tax treatment will
apply to or be available to a Participant on account of participation in the
Plan.
14.15 Other Benefits. No Award granted under the Plan shall be considered
compensation for purposes of computing benefits or contributions under any
retirement plan of Data Return or any Affiliate, nor affect any benefits or
compensation under any other benefit or compensation plan of Data Return or any
Affiliate now or subsequently in effect.
14.16 No Right to Continued Employment or Grants. Participation in the
Plan shall not give any Employee any right to remain in the employ of Data
Return or any Affiliate, and Data Return and its Affiliates reserve the right to
terminate the employment of any Employee at any time. Further, participation in
the Plan shall not give any Outside Director any right to continue as a director
of Data Return. The adoption of the Plan shall not be deemed to give any
Employee, Consultant, Outside Director or other individual any right to be
selected as a Participant or to be granted an Award.
14.17 Miscellaneous. Headings are given to the articles and sections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction of the Plan or
any provisions hereof. The use of the masculine gender shall also include within
its meaning the feminine. Wherever the context of the Plan dictates, the use of
the singular shall also include within its meaning the plural, and vice versa.
IN WITNESS WHEREOF, this Plan has been executed as of this 26th day of
July, 1999.
DATA RETURN CORPORATION
By /s/ Sunny C. Vanderbeck
-----------------------------------------------
Title: Chairman and Chief Executive Officer
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EXHIBIT 10.10
DATA RETURN CORPORATION
STOCK OPTION PLAN
-----------------
Section 1. Purpose. It is the purpose of the Plan to promote the
interests of the Company and its shareholders by attracting, retaining and
stimulating the performance of selected Employees and giving such Employees the
opportunity to acquire a proprietary interest in the Company and an increased
personal interest in its continued success and progress. Unless otherwise
specified in the option agreement, each Option granted under the Plan will
qualify as an "incentive stock option" within the meaning of Section 422(b) of
the Code.
Section 2. Definitions. As used herein the following terms have the
following meanings:
(a) "Affiliate" means any parent or subsidiary corporation of the
Company within the meaning of Section 424(e) and (f) of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Common Stock" means the common stock, $1.00 par value, of the
Company.
(e) "Company" means Data Return Corporation, a Texas corporation.
(f) "Employee" means any regular salaried officer or key employee of
the Company or an Affiliate.
(g) "Fair Market Value" means the fair market value of the subject
property as determined in good faith by the Committee in its best judgment.
(h) "Option" means any option to purchase shares of Common Stock
granted pursuant to the provisions of the Plan.
(i) "Optionee" means an Employee who has been granted an Option under
the Plan.
(j) "Plan" means this Data Return Corporation Stock Option Plan.
Section 3. Number of Shares. Options may be granted by the Company
from time to time under the Plan to purchase an aggregate of 24,600 shares
of the authorized Common Stock. If any Option expires or terminates for any
reason without having been exercised in full, the unpurchased shares subject to
such expired or terminated Option shall be available for purposes of the Plan.
<PAGE>
Section 4. Administration of the Plan. The Plan shall be administered
by the Board. The following provisions shall apply to the administration of the
Plan by the Board:
(a) The Board shall have full authority subject to the express
provisions of the Plan to interpret the Plan, to provide, modify and
rescind rules and regulations relating to it, to determine the terms and
provisions of each Option and the form of each option agreement evidencing
an Option granted under the Plan and to make all other determinations and
perform such actions as the Board deems necessary or advisable to
administer the Plan. In addition, the Board shall have full authority,
subject to the express provisions of the Plan, to determine the Employees
to whom Options shall be granted, the time or date of grant of each such
Option, the number of shares subject thereto, and the price at which such
shares may be purchased. In making such determinations, the Board may take
into account the nature of the services rendered by the Employee, his or
her present and potential contributions to the success of the Company's
business and such other facts as the Board in its discretion shall deem
appropriate to carry out the purposes of the Plan.
(b) No member of the Board shall be liable for any action taken or
determination made in good faith with respect to the Plan or any Option
granted hereunder.
Section 5. Grant of Options. At any time and from time to time during
the duration of the Plan and subject to the express provisions thereof, Options
may be granted by the Board to any Employee for such number of shares of Common
Stock as the Board in its discretion shall deem to be in the best interest of
the Company and which will serve to further the purposes of the Plan. The
Board, in its discretion, may designate any Option so granted as an incentive
stock option intended to qualify under Section 422 of the Code.
Section 6. Option Price. The purchase price per share of Common Stock
under each Option shall be determined by the Board but in no event shall be less
than 100% of the Fair Market Value per share of Common Stock at the time the
Option is granted; provided, however, that the purchase price per share of
Common Stock under any incentive stock option granted to an Optionee who, at the
time such incentive stock option is granted, owns stock possessing more than l0%
of the total combined voting power of all classes of stock of the Company or any
Affiliate shall be at least ll0% of the Fair Market Value per share of Common
Stock at the date of grant. Upon exercise of an Option, the purchase price
shall be paid in full in cash or, with the consent of the Board and if and to
the extent provided for under the option agreement for such Option, in cash
and/or by delivery of shares of Common Stock already owned by the Optionee
having an aggregate Fair Market Value (determined as of the date of exercise)
equal to the purchase price, including an actual or deemed multiple series of
exchanges of such shares. The proceeds of such sale shall constitute general
funds of the Company. Upon exercise of an Option, the Optionee will be required
to pay to the Company the amount of any federal, state or local taxes required
by law to be withheld in connection with such exercise.
Section 7. Option Period and Terms of Exercise of Options. Except as
otherwise provided for herein, each Option granted under the Plan shall be
exercisable during such period commencing on or after the date of the grant of
such Option as the Board shall determine; provided, however, that the otherwise
unexpired portion of any Option shall expire and become null and void no later
than upon the first to occur of (i) the expiration of 10 years from the date
such Option was granted, (ii) the expiration of three months from the date of
the termination of the Optionee's
-2-
<PAGE>
employment with the Company or an Affiliate for any reason other than death or
disability, or (iii) the expiration of one year from the date of the termination
of the Optionee's employment with the Company or an Affiliate by reason of death
or disability. Anything herein to the contrary notwithstanding, the otherwise
unexpired portion of any option granted hereunder shall expire and become null
and void immediately upon an Optionee's termination of employment with the
Company or an Affiliate by reason of such Optionee's fraud, dishonesty or
performance of other acts detrimental to the Company or an Affiliate, as
determined by the Board in its sole discretion. Any incentive stock option
granted to an Optionee who, at the time such incentive stock option is granted,
owns stock possessing more than l0% of the total combined voting power of all
classes of stock of the Company or any Affiliate shall not be exercisable after
the expiration of five years from the date of its grant. Under the provisions of
any option agreement evidencing an Option, the Board may limit the number of
shares purchasable thereunder in any period or periods of time during which the
Option is exercisable and may impose such other terms and conditions upon the
exercise of an Option and the shares to be purchased as are not inconsistent
with the terms of this Plan; provided, however, that the Board, in its
discretion, may accelerate the exercise date of any Option to any date following
the date of grant.
Section 8. Nontransferability of Options. An Option granted under the
Plan shall be transferable by the Optionee only by will or by the laws of
descent and distribution and shall be exercisable during the lifetime of the
Optionee only by the Optionee, or if the Optionee is legally incompetent, by the
Optionee's legal representative.
Section 9. Termination of Employment. Transfers of employment between
the Company and any of its Affiliates shall not be considered to be a
termination of employment for the purposes of this Plan. Nothing in the Plan or
in any option agreement evidencing an Option granted under the Plan shall confer
upon any Optionee any right to continue in the employ of the Company or any
Affiliate or in any way interfere with the right of the Company or any Affiliate
to terminate the employment of the Optionee at any time, with or without cause.
Section 10. Adjustments Upon Changes in Common Stock. In the event the
Company shall effect a split of the Common Stock or dividend payable in Common
Stock, or in the event the outstanding Common Stock shall be combined into a
smaller number of shares, the maximum number of shares as to which Options may
be granted under the Plan shall be decreased or increased proportionately. In
the event that before delivery by the Company of all of the shares of Common
Stock in respect of which any Option has been granted under the Plan, the
Company shall have effected such a split, dividend or combination, the shares
still subject to such Option shall be increased or decreased proportionately and
the purchase price per share shall be decreased or increased proportionately so
that the aggregate purchase price for all of the then optioned shares shall
remain the same as immediately prior to such split, dividend or combination.
In the event of a reclassification of Common Stock not covered by the
foregoing, or in the event of a liquidation or reorganization (including a
merger, consolidation, spinoff or sale of assets) of the Company or an
Affiliate, the Board shall make such adjustments, if any, as it may deem
appropriate in the number, purchase price and kind of shares covered by the
unexercised portions of Options theretofore granted under the Plan. The
provisions of this Section shall only be applicable if, and only to the extent
that, the application thereof does not conflict with any valid governmental
statute, regulation or rule.
-3-
<PAGE>
Section 11. Amendment and Termination of the Plan. Subject to the right
of the Board to terminate the Plan prior thereto, the Plan shall terminate at
the expiration of 10 years from February 20 1998, the date of adoption of
------------,
the Plan by the Board. No Options may be granted after termination of the Plan.
The Board may alter or amend the Plan but may not without the approval of the
shareholders of the Company make any alteration or amendment thereof which
operates (i) to increase the total number of shares of Common Stock which may be
granted under the Plan (other than as provided in Section 10 hereof), (ii) to
extend the term of the Plan or the maximum exercise period provided in Section 7
hereof, (iii) to decrease the minimum purchase price provided in Section 6
hereof (other than as provided in Section 10 hereof), or (iv) to materially
modify the requirements as to eligibility for participation in the Plan.
No termination or amendment of the Plan shall adversely affect the rights
of an Optionee under an outstanding Option, except with the consent of such
Optionee.
Section 12. Modification of Options. Subject to the terms and
conditions of and within the limitations of the Plan, the Board may modify,
extend or renew outstanding Options granted under the Plan (including the
conversion of an incentive stock option qualified under Section 422 of the Code
to a nonqualified stock option), or accept the surrender of Options outstanding
hereunder (to the extent not theretofore exercised) and authorize the granting
of new Options in substitution therefor. Notwithstanding the foregoing, no
modification of an Option shall, without the consent of the Optionee, alter or
impair any rights or obligations under any Option theretofore granted to such
Optionee, except as may be necessary, with respect to incentive stock options,
to satisfy the requirements of Section 422(b) of the Code.
Section 13. Requirements of Law. The granting of Options and the
issuance of Common Stock upon the exercise of an Option shall be subject to all
applicable laws, rules and regulations and to such approval by governmental
agencies as may be required.
Section 14. Investment Letter and Legend. The Company's obligation to
deliver Common Stock with respect to an Option shall be conditioned upon its
receipt from the Employee to whom such Common Stock is to be delivered of an
executed investment letter containing such representations and agreements as the
Board may determine to be necessary or advisable in order to enable the Company
to issue and deliver such Common Stock to such Employee in compliance with the
Securities Act of 1933 and other applicable federal, state or local securities
laws or regulations.
Section 15. Restrictions on Transfer of Shares. The Common Stock
acquired pursuant to the exercise of Options shall be subject to such
restrictions and agreements regarding sale, assignment, encumbrances or other
transfer as are in effect among the shareholders of the Company at the time such
Common Stock is acquired, as well as to such other restrictions as the Board
shall deem advisable.
Section 16. Effective Date of the Plan. The Plan shall become
effective, as of the date of its adoption by the Board, when it has been duly
approved by the holders of at least a majority of the shares of Common Stock
present or represented and entitled to vote at a meeting of the shareholders of
the Company duly held in accordance with applicable law within twelve months
after the date of adoption of the Plan by the Board. If the Plan is not so
approved, the Plan shall terminate and any Option granted hereunder shall be
null and void.
-4-
<PAGE>
Section 17. Gender. Words of any gender used in the Plan shall be
construed to include any other gender, unless the context requires otherwise.
IN WITNESS WHEREOF, this Plan has been executed at Arlington, Texas, on
this 20th day of February, 1998, to be effective as of February 20, 1998.
DATA RETURN CORPORATION
By: /s/ Michelle R. Chambers
-----------------------------
Name: Michelle R. Chambers
-----------------------
Title: President
----------------------
By: /s/ Sunny C. Vanderbeck
-----------------------------
Name: Sunny C. Vanderbeck
-----------------------
Title: CEO
----------------------
By: /s/ Jason Lochhead
-----------------------------
Name: Jason Lochhead
-----------------------
Title: Vice President -
Research and
Development
----------------------
-5-
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), effective as of May 3, 1998,
between Data Return Corporation, a Texas corporation (the "Company"), and Todd
Steitle, an individual ("Employee");
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires to be
employed by the, all on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company and Employee hereby agree as follows:
1. Employment. The Company and Employee hereby agree that Employee shall
be employed by the Company, for the period set forth in Section 2, in the
position and with the duties and responsibilities set forth in Section 3, and
upon the other terms and conditions herein provided.
2. Term. The employment of Employee by the Company shall be for the one
year period commencing as of the effective hereof, unless further extended or
sooner terminated as herein provided (the "Employment Term"). At the end of the
initial or any renewal one year term hereof this Agreement shall be
automatically renewed for an additional one year term unless either party hereto
gives the other party notice of nonrenewal at least fifteen (15) days prior to
the end of the then current term hereof.
3. Position and Duties.
(a) During the Employment Term, Employee shall be employed as the Marketing
Director of the Company, and such shall report directly to the VP of Sales,
Marketing, and Business Development. Employee shall be initially responsible for
packaging and promoting Company service offerings, providing sales support, and
developing distribution channels. In addition, Employee shall have such duties,
functions, responsibilities and authority as reasonably determined by the
Company from time to time.
(b) During the Employment Term, Employee shall devote his full time, skill,
and attention and his best efforts during normal business hours to the business
and affairs of the Company to the extent necessary to discharge the duties and
responsibilities delegated and assigned to Employee herein or pursuant hereto,
except for usual, ordinary, and customary periods of vacation and absence due to
illness or other disability.
<PAGE>
4. Compensation. During the Employment Term the Company shall pay to
Employee for his services hereunder a base salary at the rate of $90,000 per
year, payable in equal installments as nearly as practicable on the fifteenth
and last days of each month in arrears, in accordance with the general payroll
practices of the Company. In addition, the Employee shall have the opportunity
to earn a commission of up to $25,000 per year, to be earned based on a prorata
basis (plus or minus) based on the achievement of the Company's annual revenue
goals as shall be determined by the Company. The Company shall make advance
monthly payments of this commission ($2,083.33 per month), which advance
payments must be repaid to the Company in the event the revenue goals are not
achieved. The Company shall withhold from any payments to be made to Employee
hereunder such amounts (including social security contributions and federal
income taxes) as shall be required by federal, state, and local withholding tax
laws. Inasmuch as the Employee's efforts may not be reflected in the Company's
revenues for some time, the Employee will be granted a commission equal to what
the employee would earn if the Company met revenue goals for the first 180 (one
hundred eighty) days of employment.
5. Stock Options. Concurrently herewith the Company has granted to
Employee options to acquire 500 shares of the Company's common stock which vest
at a rate of 20% per year over the five year period commencing on Employee's
first date of employment by the Company. In addition, the Company agrees to
grant options to purchase up to an additional 500 shares of its common stock
which will vest at a rate of 20% per year over the five year period commencing
on the date of issuance (the "Additional Options") in such amounts (up to 100
shares per year) as shall be determined by the Company in its sole discretion
based on Employee's annual review job performance review with the Chief
Executive Officer of the Company. In the event the Company is acquired, goes
public, or both of Michelle Chambers and Sunny Vanderbeck cease being executive
officers of the Company, then (i) all Additional Options granted to Employee as
of such date shall be become fully vested and (ii) the Company shall grant to
Employee fully vested additional options to purchase common stock of the Company
in an amount equal to 500 minus the sum of (A) the number of shares covered by
the Additional Options issued as of such date, plus (B) for each year prior to
such date an amount equal to 100 minus the number of Additional Options granted
to Employee with respect to such year. (For example, if the Company completes an
Initial Public Offering in three years, and prior to such event the Company
granted 100 Additional Options to Employee during the first year of this
Agreement, and 80 Additional Options during the second year, then all 180
Additional Options would immediately vest, and the Company would issue Employee
300 fully vested Additional Options at such time. In this scenario, the Employee
would have been granted a total of 980 options (500 signing + 180 granted during
term + 300 granted at IPO.) All stock options granted pursuant hereto shall be
granted under the terms of the Company's incentive stock option plan.
5. Termination of Employment.
(a) Death. Employee's employment hereunder shall terminate automatically
upon his death.
2
<PAGE>
(b) Disability. Employee's employment hereunder shall terminate
automatically upon the total and permanent disability (whether physical or
mental) ("Disability") of Employee. For purposes of this Agreement, the
"Disability" of Employee shall be deemed to have occurred if Employee shall have
become unable to continue the proper performance of his duties hereunder on a
full-time basis as a result of his physical or mental incapacity, which is
determined to be total and permanent by a qualified medical doctor selected by
the Company and reasonably acceptable to Employee or his legal representative.
(c) Termination by Company for Cause. The Company may terminate Employee's
employment hereunder for "Cause" (as defined below). For purposes of this
Agreement, "Cause" shall mean any of the following:
(i) conduct by Employee that constitutes fraud, dishonesty, or a
criminal act with respect to the Company;
(ii) embezzlement of funds or misappropriation of other property by
Employee from the Company;
(iii) acts of dishonesty by Employee that constitute a felony under
the laws of the State of Texas and that result or are intended to result,
directly or indirectly, in gain to or personal enrichment of Employee at
the expense of the Company;
(iv) conviction of Employee of a felony or of any other crime that
involves fraud, dishonesty, or moral turpitude;
(v) the breach by Employee of any of the provisions of this Agreement;
or
(vi) conduct by Employee that, in the good faith opinion of the Board
of Directors of the Company, is materially detrimental to the Company or
reflects unfavorably on the Company or Employee in any material respect to
such an extent that the Company's best interests reasonably require
Employee's discharge in the good faith judgement of the Company's Board of
Directors.
(d) Termination Without Cause. The Company and Employee each shall have the
right to terminate Employee's employment hereunder, without or without cause, at
any time, upon giving the other at least fifteen (15) days prior notice of
termination.
6. Noncompetition.
(a) Except as otherwise provided in Section 6(e) below, during the term of
this Agreement and for a period of one (1) year thereafter, Employee shall not,
directly or indirectly, for his own account or for the benefit of any other
person:
3
<PAGE>
(i) engage or participate in, or own any interest in, provide any
financing for, perform any service for, or act in any other capacity for
any business or organization which engages or participates, directly or
indirectly, in, any business or activity, that is competitive with the web
hosting and related businesses of the Company as conducted by it during or
at the termination of the Employment Term;
(ii) employ, solicit for employment, or advise or recommend to any
other person that such other person employ or solicit for employment, any
employee of the Company;
(iii) solicit or induce, or in any manner attempt to solicit or
induce, any customer of the Company (A) to cease being, or any prospective
customer not to become, a customer of the Company or (B) to divert any
business of such customer from the Company; or
(iv) otherwise interfere with, disrupt, or attempt to interfere with
or disrupt the relationship, contractual or otherwise, between the Company
and any of its customers, clients, suppliers, consultants, or employees.
(b) Employee regards the restrictions contained in this Section as
reasonable in scope, duration, and geographic territory and as designed to
provide the Company with limited, legitimate, and reasonable protection against
subsequent diminution of the value of the business of the Company attributable
to any actions of Employee contrary to such restrictions. Employee acknowledges
that irreparable damage would occur in the event any of the provisions of this
Section 6 were breached and accordingly agrees that the Company shall be
entitled (without being required to prove damages or furnish any bond or other
security) to an injunction or injunctions to prevent breaches of the provisions
of this Section 6, and shall be entitled to enforce specifically the provisions
of this Section 6, in any court of the United States or any state thereof having
jurisdiction, in addition to any other remedy to which the Company may be
entitled under this Agreement or at law or in equity. It is the intent and
understanding of the parties hereto that if, in any action before any court or
governmental entity legally empowered to enforce the provisions of this Section
6, any term, restriction, covenant, or promise in this Section 6 is found to be
unreasonable and for that reason unenforceable, then such term, restriction,
covenant, or promise shall be deemed modified to the extent necessary to make it
enforceable by such court or governmental entity. Further, during any period in
which Employee is in breach of any covenant contained in Section 6(a), the time
period of such covenant shall be extended for an amount of time that Employee is
in breach thereof.
(c) The covenants of Employee contained in this Section 6 are ancillary to
and independent of any other provision of this Agreement, and the existence of
any claim or cause of action of Employee against the Company or any shareholder,
director, or officer of the Company, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by the Company of
the covenants of Employee contained in this Section 6.
4
<PAGE>
(d) The provisions of this Section 6 shall continue in effect
notwithstanding termination or expiration of Employee's employment hereunder for
any reason.
(e) Nothing contained in this Section 6 shall be construed to prohibit
Employee from investing in stock or other securities listed on a national
securities exchange or actively traded in the over-the-counter market of any
corporation or other entity engaged in a business or activity competitive with
the business of the Company or any of its subsidiaries, provided that the
Employee and the members of his immediate family shall not, directly or
indirectly, hold more than a total of one percent (1%) of all such shares of
stock or other securities issued and outstanding.
7. Confidentiality. Employee recognizes and acknowledges that the
Company's trade secrets and other confidential or proprietary information, as
they may exist from time to time, are valuable, special, and unique assets of
the Company's business, access to and knowledge of which are essential to the
performance of Employee's duties hereunder. Accordingly, during the Employment
Term and thereafter without limitation of time, Employee shall hold in strict
confidence and shall not, directly or indirectly, disclose or reveal to any
person, or use for his own personal benefit or for the benefit of anyone else,
any trade secrets, confidential dealings, or other confidential or proprietary
information of any kind, nature, or description (whether or not acquired,
learned, obtained, or developed by Employee alone or in conjunction with others)
belonging to or concerning the Company or any of its affiliates, or any of their
customers or clients or others with whom they now or hereafter have a business
relationship, except (i) with the prior written consent of the Company duly
authorized by its Board of Directors, (ii) in the course of the proper
performance of Employee's duties hereunder, or (iii) as required by applicable
law or legal process. Employee confirms that all such information constitutes
the exclusive property of the Company. The provisions of this Section 7 shall
continue in effect notwithstanding termination of Employee's employment
hereunder for any reason.
8. Business Records. Given the secretive and competitive environment in
which the Company does business and the fiduciary relationship that Employee
will have with the Company hereunder, Employee agrees to promptly deliver to the
Company, upon termination of his employment hereunder, or at any other time when
the Company so requests, all memoranda, notes, records, drawings, manuals, and
other documents (and all copies thereof and therefrom) in any way relating to
the business or affairs of the Company or any of its affiliates or any of their
clients, whether made or compiled by Employee or furnished to him by the Company
or any of its employees, customers, clients, consultants, or agents, which
Employee may then possess or have under his control. Employee confirms that all
such memoranda, notes, records, drawings, manuals, and other documents (and all
copies thereof and therefrom) constitute the exclusive property of the Company.
The obligation of confidentiality set forth in Section 7 shall continue
notwithstanding Employee's delivery of any such documents to the Company. The
provisions of this Section 8 shall continue in effect notwithstanding
termination of Employee's employment hereunder for any reason.
5
<PAGE>
9. Notices. All notices, requests, demands, and other communications
required or permitted to be given or made hereunder by either party hereto shall
be in writing and shall be deemed to have been duly given or made (i) when
delivered personally, (ii) when sent by telefax, or (iii) when deposited in the
United States mail, first class registered or certified mail, postage prepaid,
return receipt requested, to the party for which intended at the addresses
specified on the signature page hereof for such parties (or at such other
addresses as shall be specified by the parties by like notice).
10. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto concerning the subject matter hereof and supersedes
all prior agreements and understandings, both written and oral, between the
parties with respect to such subject matter.
11. Binding Effect; Assignment; No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and assigns; provided,
however, that no party shall assign or otherwise transfer this Agreement or any
of their rights or obligations hereunder without the prior written consent of
the other party. Nothing in this Agreement, express or implied, is intended to
or shall confer upon any person other than the parties hereto, and their
respective heirs, legal representatives, successors, and permitted assigns, any
rights, benefits, or remedies of any nature whatsoever under or by reason of
this Agreement.
12. Amendment. This Agreement may not be modified or amended in any
respect except by an instrument in writing signed by both of the parties hereto.
13. Waiver. Any term or condition of this Agreement may be waived at any
time by the party hereto which is entitled to have the benefit thereof, but such
waiver shall only be effective if evidenced by a writing signed by such party,
and a waiver on one occasion shall not be deemed to be a waiver of the same or
any other type of breach on a future occasion. No failure or delay by a party
hereto in exercising any right or power hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right or power.
14. Severability. If any provision of this Agreement is held to be
unenforceable, (a) this Agreement shall be considered divisible, (b) such
provision shall be deemed inoperative to the extent it is deemed unenforceable,
and (c) in all other respects this Agreement shall remain in full force and
effect; provided, however, that if any such provision may be made enforceable by
limitation thereof, then such provision shall be deemed to be so limited and
shall be enforceable to the maximum extent permitted by applicable law.
15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
6
<PAGE>
16. Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only, do not constitute a part of this Agreement, and
shall not affect in any manner the meaning or interpretation of this Agreement.
17. Counterparts. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
Address: Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
Attention: Sunny Vanderbeck By: /s/ Sunny C. Vanderbeck
-----------------------------
Name: Sunny C. Vanderbeck
------------------------
Title: CEO
-----------------------
Address:
1704 Endicot Drive
Plano, Texas 75026
/s/ Todd Steitle
-----------------------------
Todd Steitle
7
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
The following sets forth the Agreement by and between Kenneth S. Garber
("Employee") and Data Return Corporation ("Company"):
1. Position and Duties. Director of Sales reporting to the Vice President of
Marketing, Sales and Business Development. This senior management position
shall be responsible for directing a sales organization where skills in the
development and execution of sales strategies, strategic planning and
business fundamentals will drive the attainment of profitable order input,
order fulfillment, revenue recognition, and a high level of customer
satisfaction. Future duties will be of comparable or higher responsibility
and status relative to initial position.
2. Start Date. Employee shall begin his position and performance of duties with
Company on or before May 31, 1999.
3. Salary. Employee shall receive a base salary of $130,000 per year, paid in
accordance with Company's usual practice, subject to annual increases based
primarily on performance with consideration given to inflation. Employee
shall be paid commissions based on quotas set to the Company's annual revenue
objective. Commissions will be set so that earnings at 100% of quota equal
$20,000 for a total targeted compensation of $150,000 per year.
4. Equity. Employee shall be granted 2,000 Stock Options based on 105,000
outstanding shares. These options will vest over four years, at the rate of
25% per year. If an IPO or change of control precedes full vesting, 50% of
the unvested portion will be vested at IPO or change of control and the
balance will be vested one year after IPO or change of control The strike
price will be $50.00 per share. Other discretionary grants or options may be
awarded in a consistent manner with other senior managers.
5. Relocation. Company will pay relocation costs up to $20,000 associated with
Employee's relocation from California to Texas. These costs may include
expenses associated with 2 house hunting trips, realty fees, legal and dosing
cost, and all moving, traveling and temporary housing expenses.
6. Vacation. Employee will be granted 3 weeks of vacation per year for the first
three years and 4 weeks per year beginning in the fourth year.
7. Benefits. During the term of employment, Employee shall be eligible to
participate in all Company Medical, Dental, Life Insurance and Pension Plans
in accordance with current policy.
8. Term. The term of this Agreement shall commence on March 31, 1999 and shall
continue in effect as to Employee until March 31, 2004 or until such time as
terminated as provided in paragraph 9, 10, 11, 12 and 13.
9. Termination upon Death. In the event of the death of Employee, the employment
of, and this Agreement with respect to, such deceased Employee shall be
terminated; provided that any accrued salary, any accrued guaranteed minimum
bonuses and vested stock options as of the date of termination shall be paid
to the legal representative of Employee's estate.
10. Termination for Disability. Company may terminate Employee's employment
should Employee become disabled, including disability by reason of any
emotional or mental disorders, physical diseases or injuries, and as a
result of such disability Employee is unable to work on a full-time basis
for a continuous period of six months or more or any six months in a twelve
month period. Upon such termination any accrued salary, any accrued
guaranteed minimum bonuses and vested stock options as of the date of
termination shall be paid to Employee.
11. Termination for Cause. Defined as indictment or conviction of a felony or
negligent conduct or violation of company policy or poor performance causing
material harm to the Company. Termination for Cause shall be done in writing
accompanied by a written statement of the reasons. Prior written warning
with a
<PAGE>
minimum of 90 days opportunity for corrective action is required before
termination for violation of company policy or poor performance.
12. Termination Other than for Cause. Company retains the right to terminate
this Agreement and/or Employee's employment at any time for any reason other
than cause. In such event Employee shall have the right to immediately
exercise all vested stocks and options or Employee may defer exercising the
vested stocks and options for a period of up to 12 months from date of
termination. Additionally, 50% of all granted but not yet vested options
will become immediately vested and exercisable. Furthermore, Company agrees
to pay Employee an amount equal to his monthly base salary for 12 months as
severance pay. Employee shall continue to participate as an employee in the
Company's medical, dental and life insurance plans for the same period as
the severance period.
13. Termination following a Change in Control. Should a change in control of the
Company take place, Employee shall be provided with severance pay and the
continuation of certain benefits upon an involuntary or constructive
termination of the Employee's employment within two years following the
occurrence of a change in control Specifically, Employee shall be entitled
to the following: the immediate vesting of all granted stock immediate
exercisability of all options or Employee may defer exercising the vested
stocks and options for a period of up to 12 months from date of termination
immediate payment of all performance contingent sums under incentive
programs; and immediate vesting of pension benefits. Furthermore, Company
agrees to pay Employee an amount equal to his monthly base salary for 12
months as severance pay. Employee shall continue to participate as an
employee in the Company's medical, dental and life insurance plans for the
same period as the severance period.
14. Noncompetition
Employee agrees to not compete with the Company during the term of the
employment.
a. Employee agrees to not compete with the Company for a period of one year
following the date of resignation or Termination for Cause.
b. At the Company's option, Employee agrees to not compete with the Company
for a period of one year following the date of Termination for Convenience,
provided that the Company pays the employee an amount equal to the
employee's prior year's annual income, including salary and bonus, such
amount to be paid on a bi-monthly basis.
1. Change, Modification and Waiver. No change or modification of this Agreement
shall be valid unless it is in writing and signed by Employee and Chairman
or CEO of Company. No waiver of any provision of this Agreement shall be
valid unless it is in writing and signed by the party against whom the
waiver is sought to be enforced. The failure of a party to insist upon
strict performance of any provision of this Agreement in any one or more
instances shall not be construed as a waiver or relinquishment of the right
to insist upon strict compliance with such provision in the future.
2. Notices. Any notice required or permitted to be given under this Agreement
shall be deemed delivered when given by registered or certified mail
addressed to the party to whom such notice is being given. The addresses of
the parties, which may be changed from time to time in writing, are as
follows:
Employee Company
-------- -------
Kenneth S. Garber Data Return Corporation
4 Mackenzie Lane 801 Stadium Drive, Suite 117
Coto de Caza, CA 92679 Arlington, TX 76011
3. Governing Law of this Agreement. The validity of this Agreement and the
interpretation and performance of all its terms shall be governed
exclusively by the laws of the State of Texas.
<PAGE>
4. Entire Agreement. This Agreement constitutes the entire agreement between
the Company and Employee. Each party has carefully read this Agreement,
understands all of its provisions, and freely and voluntarily enters into
it.
IN WITNESS whereof the parties have affixed their signatures below this 18th
day of March, 1999.
Data Return Corporation Kenneth S. Garber
By: /s/ Sunny C. Vanderbeck By: /s/ Kenneth S. Garber
-------------------------- ------------------------
Its: Chairman and CEO
-------------------------
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (this "Agreement"), effective as of January 1, 1998,
between Data Return Corporation, a Texas corporation (the "Company"), and
Michael S. Shiff, an individual ("Employee");
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires to be
employed by the Company, on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements herein contained, and intending to be legally bound hereby, the
Company and Employee hereby agree as follows:
1. Employment. The Company and Employee hereby agree that Employee shall
be employed by the Company, for the period set forth in Paragraph 2, in the
position and with the duties and responsibilities set forth in Paragraph 3, and
upon the other terms and conditions herein provided.
2. Term. The employment of Employee by the Company shall be for a period
commencing effective as of January 1, 1998 and ending on December 31, 2002,
unless further extended or sooner terminated as herein provided (the "Employment
Term").
3. Position and Duties. During the Employment Term, Employee shall hold
the position of Vice President of Marketing, Sales and Business Development and
shall report directly to the President of the Company. Employee initially shall
be responsible for development of the Company's business plan and working to
secure funding for the Company as described in paragraph 8 hereof. Employee
shall further be responsible for working with senior management of the Company
to develop strategic plans, develop new business opportunities and for managing
the marketing and sales personnel within the Company. In addition, Employee
shall have such duties, functions, responsibilities and authority as determined
from time to time by the President and the Chief Executive Officer of the
Company.
4. Compensation and Related Matters.
(a) Base Salary.
(i) Subject to adjustment as provided in Paragraph 4(a)(ii) below,
during the Employment Term, the Company shall pay to Employee for his
services hereunder a base salary at the following amounts per year, payable
(except as provided below) in equal installments as nearly as practicable
on the fifteenth and last days of each month in arrears, in accordance with
the general payroll practices of the Company:
<PAGE>
<TABLE>
<CAPTION>
Year Base Salary Deferred 1998 Base Salary
---- ----------- -------------------------
<S> <C> <C>
1998 $150,000
1999 $190,000 $20,000
2000 $205,200 $20,000
2001 $221,616
2002 $239,345
</TABLE>
(ii) Notwithstanding the foregoing, no Base Salary shall accrue until
the date upon which the funding referenced in Paragraph 8 hereof is
received by the Company. The Base Salary for any particular year shall be
prorated based upon the following formula: A/365 x Base Salary, where A is
the number of days left in such year after the date on which the funding
referenced in Paragraph 8 is received by the Company.
(iii) The Company shall pay the Deferred 1998 Base Salary in the
amount shown above on October 31, 1999 and October 31, 2000. The Deferred
1988 Base Salary for 1999 and 2000 shall be prorated based upon the
following formula A/365 x $20,000, where A is the number of days left in
1998 after the date on which the funding referenced in Paragraph 8 is
received by the Company.
(iv) The Company shall withhold from any payments to be made to
Employee hereunder such amounts (including social security contributions
and federal income taxes) as shall be required by federal, state, and local
withholding tax laws.
(b) Performance Bonus. During each year during the Employment Term,
Employee shall receive a bonus based upon the annual sales of the Company during
each year of the Employment Term. By December 31 of each year commencing
December 31, 1997, the Company shall adopt, with input from the Employee, a
sales target for the next year which sales target shall represent a realistic
sales objective for the Company for such year. Employee's performance bonus
shall be an amount equal to A/B x C/365 x D, where A is equal to the Company's
actual annual sales for the year in question, B is equal to the sales target for
such year, C is equal to the number of days left in such year after the date on
which the funding referenced in Paragraph 8 is received by the Company and D is
equal to the following amounts for the following years:
<TABLE>
<CAPTION>
Year Base Performance Bonus
---- ----------------------
<S> <C>
1998 $10,000
1999 $50,000
2000 $55,000
2001 $60,500
2002 $66,550
</TABLE>
2
<PAGE>
The Performance Bonus shall be reconciled and paid within thirty (30) days after
end of each calender quarter.
(c) Employee Benefits. During the Employment Term, Employee shall be
entitled to participate in any and all Company employee benefit plans, programs,
and arrangements provided by the Company to its employees generally, subject to
and on a basis consistent with the terms, conditions and overall administration
(including eligibility and vesting requirements) of such plans, programs and
arrangements.
(d) Expenses. During the Employment Term, Employee shall be entitled to
receive prompt reimbursement for all reasonable expenses incurred by Employee in
performing his duties and responsibilities hereunder upon the presentation by
Employee of an itemized accounting of such expenditures, including receipts
where required for federal income tax regulations.
(e) Vacations. During the Employment Term, Employee shall be entitled to
not less than three (3) weeks paid vacation during each twelve-month period
commencing on the date of this Agreement through 1999 and four (4) weeks paid
vacation during each twelve-month period thereafter. Employee shall also be
entitled to the approximately ten (10) paid holidays given by the Company to its
employees.
(f) Fringe Benefits. During the Employment Term, Employee shall be
entitled to fringe benefits in accordance with the policies, practices, and
procedures of the Company from time to time in effect, commensurate with
Employee's position and at least comparable to those received by any other
executive officer of the Company. Without limiting the provisions of the
immediately preceding sentence, during the Employment Term, Employee also shall
be entitled to prompt reimbursement for the amount that Employee pays for
private, individual life insurance coverage obtained by him on his own life,
provided that the aggregate amount of such reimbursement shall not exceed
$ 1,000 per year.
5. Termination of Employment.
(a) Death. Employee's employment hereunder shall terminate automatically
upon his death.
(b) Disability. Employee's employment hereunder shall terminate
automatically upon the total and permanent disability (whether physical or
mental) ("Disability") of Employee. For purposes of this Agreement, the
"Disability" of Employee shall be deemed to have occurred if Employee shall have
become unable to continue the proper performance of his duties hereunder on a
full-time basis for a continuous period of six (6) months or more than six (6)
months in a twelve (12) month period (the expiration of either such periods the
"Disability Effective Date") as a result of his physical or mental incapacity,
which is determined to be total and permanent by a qualified medical doctor
selected by the Company and reasonably acceptable to Employee or his legal
representative.
3
<PAGE>
(c) Termination by Company. The Company may terminate Employee's
employment hereunder for Cause (hereinafter defined). For purposes of this
Agreement, "Cause" shall mean any of the following:
(i) willful misconduct by Employee that is materially and
demonstrably detrimental to the Company, monetarily or otherwise, provided
that prior written warning with reasonable opportunity for corrective
action is provided by the Company;
(ii) acts of dishonesty by Employee that result in a felony
conviction under the laws of the State of Texas or Federal laws;
(iii) acts of dishonesty by Employee that result in a felony
conviction under the laws of the State of Texas or Federal laws and that
result or are intended to result, directly or indirectly, in gain to or
personal enrichment of Employee at the expense of the Company; and
(iv) breach by the Employee of the agreement as set forth in section
8 hereof.
(d) Termination by Company for Convenience. The Company may terminate
Employee's employment for Convenience (hereinafter defined). For purposes of
this Agreement, "Convenience" shall mean any termination by the Company of
Employee's employment other than for Cause.
(e) Resignation by Employee. Employee may terminate his employment
hereunder by resigning at any time during the Employment Term for any reason.
(f) Notice of Termination and Notice of Resignation. Any termination of
Employee's employment hereunder by the Company or any termination of Employee's
employment hereunder by Employee's resignation (other than a termination
pursuant to Paragraph 6(a)) shall be communicated by a Notice of Termination or
Notice of Resignation to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" or "Notice of Resignation" shall mean a
written notice which (i) indicates the specific termination provision in this
Agreement relied upon, (ii) in the case of a termination for Disability or
Cause, sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employee's employment under the provision so
indicated, and (iii) specifies the Date of Termination or Date of Resignation
(as hereinafter defined).
(g) Date of Termination and Date of Resignation. For purposes of this
Agreement, "Date of Termination" shall mean the effective date of termination of
Employee's employment hereunder, which date shall be (i) if Employee's
employment is terminated by his death, the date of his death, (ii) if Employee's
employment is terminated because of his Disability, the Disability Effective
Date, (iii) if Employee's employment is terminated by the Company for Cause, the
date specified in the Notice of Termination, which date shall in no event be
earlier than, or more than ten (10) business days after, the date such notice is
given, and (iv) if Employee's employment is terminated for Convenience, the
tenth (10th) business day following the date on which the Notice of Termination
is given; provided, however, that if within five (5) business days after any
Notice of Termination is given, Employee notifies the Company that a dispute
exists concerning the termination, the Date of Termination shall be the date on
which the dispute is finally determined (but only if determined in favor of
Employee), either by mutual written agreement of the parties, by a final
judgment, order,
4
<PAGE>
or decree of a court of competent jurisdiction (the time for appeal therefrom
having expired and no appeal having been perfected). For purposes of this
Agreement, "Date of Resignation" shall mean the tenth (10th) business day
following the date on which the Notice of Resignation is given.
7. Obligations of Company Upon Termination of Employment.
(a) If Employee's employment hereunder is terminated for Cause, the Company
shall thereafter have no further obligations to the Employee under this
Agreement except to pay all Base Salary, Deferred 1998 Base Salary, Performance
Bonus and Employee Benefits accrued through the Date of Termination.
(b) If Employee's employment hereunder is terminated by the Company for
Convenience or if Employee resigns, (i) the Company shall pay all Base Salary,
Deferred 1998 Base Salary, Performance Bonus and all employee benefits and
fringe benefits specified in Paragraphs 4(c) and 4(f) accrued through the Date
of Termination.
(c) If the Company or substantially all of its assets is sold or if the
Company makes an initial public offering, (i) all options granted to Employee
shall immediately vest and become exercisable and (ii) all accrued Base Salary,
Deferred 1998 Salary and Performance Bonus shall be paid immediately.
(d) If, in connection with or as a result of the sale of the Company, the
sale of substantially all of the Company's assets, or an initial public offering
by the Company Employee's employment with the Company is terminated, all of
Employee's employee benefits and fringe benefits specified in paragraphs 4(c)
and 4(f) shall be continued until the first to occur of one (1) year following
such sale or initial public offering or Employee's acceptance of another full
time position of employment. This provision shall not be construed to shorten
any time period during which benefits are required to be continued under any
Federal or state law or regulation.
7. Company Funding. Employee shall use his best efforts to assist the
Company to secure funding in an amount of not less than approximately $800,000.
Such funding shall be upon terms and conditions acceptable to the Company.
Employee shall not be liable in any manner to the Company in the event such
funding is not raised.
8. Noncompetition. Employee agrees to not compete with the Company during
the term of employment.
(a) Employee agrees to not compete with the Company for a period of one
year following the date of Resignation or Termination for Cause.
(b) At the Company's option, Employee agrees to not compete with the
Company for a period of one year following the date of Termination for
Convenience, provided that the Company pays the employee an amount equal to
the employees prior year's annual income, including salary and bonus, such
amount to be paid on a bi-monthly basis.
(c) However, in any event, the Company does not and will not deem the
Employee's business activities in satellite communications and sales force
automation to be competitive with the Company's business.
9. Notices. All notices, requests, demands, and other communications
required or permitted to be given or made hereunder by either party hereto shall
be in writing and shall be deemed to have been duly given or made (i) when
delivered personally, (ii) when sent by telefax, or (iii) when deposited in the
United States mail, first class registered, certified mail, postage prepaid,
return receipt requested, or with Federal Express, prepaid, to the party for
which intended at the addresses specified on the signature page hereof for such
parties (or at such other addresses as shall be specified by the parties by like
notice).
5
<PAGE>
10. Grant of Stock Option. Concurrently with the execution and delivery
by the parties of this Agreement, the Company shall grant to Employee an option
(the "Option") to purchase from the Company that number of shares of Company
stock equal to fifteen percent (15%) of the issued and outstanding shares of
Company common stock, $1.00 par value per share, in accordance with the
following terms and conditions:
(a) All vested option ("stock") shall be subject to the terms and
conditions of the Company's then-current shareholder's agreement which employee
shall execute as a condition precedent to the exercise of any options.
(b) The purchase price of the common stock covered by the Option shall be
$58.74 per share (the "Option Price") based upon the understanding that 10,000
shares are issued and outstanding, and that the value of the Company as of this
Agreement is $587,427.24 as determined by the formula '1' (one) multiplied by
Annualized Quarterly Revenue based upon the most recent quarter completed. This
amount shall be payable upon exercise by certified or cashier's check.
(c) The Option shall be exercisable in whole or in part at any time, or in
part from time to time, during the period beginning on the date of this
Agreement and ending on the date which is ten (10) years from the date of this
Agreement; provided, however, upon the termination of Employee's employment with
the Company (I) any stock acquired pursuant to the Option shall be subject to
repurchase by the Company in accordance with the percentages set forth in
subparagraphs 10(b)(i), (ii) and (iii) and (II) the Option shall expire in
accordance with the percentages set forth subparagraphs 10(b)(i), (ii) and
(iii), as follows:
(i) If Employee is terminated for Cause other than for the reason
specified 5(c)(iii) or if Employee resigns, the Company shall have the
right to (i) repurchase the following percentage of all Company stock
acquired by Employee pursuant to the Option at a price per share equal to
the Option Price and (ii) cancel the following percentage of the Option
then outstanding:
Date of Termination Percentage of Employee's Stock and Option
------------------- Subject to Repurchase and Cancellation
--------------------------------------
On or before December 31, 1998 100%
From January 1, 1999 through December 31, 1999 67%
From January 1, 2000 through December 31, 2000 33%
On or after January 1, 2001 None
(ii) If employee is terminated for Cause at any time during the term
hereof for the reason specific in 5(c)(iii), the Company shall have the
right to repurchase all of the Company Stock acquired by the Employee
pursuant to the Option at a per share price equal to the Option Price and
cancel all of the Option then outstanding.
(iii) Except as provided in subparagraph (d) below if the Company
terminates Employee's employment for Convenience, the Company shall have
the right to (i) repurchase the following percentage of all Company stock
acquired by Employee pursuant to the Option at a price per share equal to
the Option Price and/or (ii) cancel the following percentage of the Option
then outstanding:
6
<PAGE>
Date of Termination Percentage of Employee's Stock and Option
------------------- Subject to Repurchase and Cancellation
--------------------------------------
On or before March 1, 1998 100%
March 2, 1998 through December 31, 1998 67%
From January 1, 1999 through December 31, 1999 33%
On or after January 1, 2000 None
(iv) If the funding referred to in Section 7 above occurs on or before
March 1, 1998 and prior to the termination of Employee for Convenience, the
percentage (of Employee's Stock and Option Subject to Repurchase and
Cancellation) referred to in subsection (iii) above for the period on or
before March 1, 1998 shall be reduced to 67%.
(iii) If Employee's employment is terminated prior to January 1, 2001
in connection with (i) the sale of the Company or substantially all of its
assets or (ii) an initial public offering, the Company shall not have the
right to (i) repurchase any Company stock acquired by Employee pursuant to
the Option or (ii) cancel the Option or any portion thereof.
(d) The Option shall not be transferable except by will or pursuant to the
laws of descent and distribution.
(e) The Option shall be evidenced by a stock option agreement in form and
substance mutually satisfactory to the parties which shall contain the terms and
conditions set forth above and such other terms and conditions as the Company
and Employee shall mutually agree upon.
11. Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto concerning the subject matter hereof and supersedes
all prior agreements and understandings, both written and oral, between the
parties with respect to such subject matter.
7
<PAGE>
12. Binding Effect; Assignment; No Third Party Benefit. This Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors, and assigns; provided,
however, that no party shall assign or otherwise transfer this Agreement or any
of their rights or obligations hereunder without the prior written consent of
the other party. Nothing in this Agreement, express or implied, is intended to
or shall confer upon any person other than the parties hereto, and their
respective heirs, legal representatives, successors, and permitted assigns, any
rights, benefits, or remedies of any nature whatsoever under or by reason of
this Agreement.
13. Amendment. This Agreement may not be modified or amended in any
respect except by an instrument in writing signed by both of the parties hereto.
14. Waiver. Any term or condition of this Agreement may be waived at any
time by the party hereto which is entitled to have the benefit thereof, but such
waiver shall only be effective if evidenced by a writing signed by such party,
and a waiver on one occasion shall not be deemed to be a waiver of the same or
any other type of breach on a future occasion. No failure or delay by a party
hereto in exercising any right or power hereunder shall operate as a waiver
thereof nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right or power.
15. Severability. If any provision of this Agreement is held to be
unenforceable, (a) this Agreement shall be considered divisible, (b) such
provision shall be deemed inoperative to the extent it is deemed unenforceable,
and (c) in all other respects this Agreement shall remain in full force and
effect; provided, however, that if any such provision may be made enforceable by
limitation thereof, then such provision shall be deemed to be so limited and
shall be enforceable to the maximum extent permitted by applicable law.
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO
THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.
17. Descriptive Headings. The descriptive headings herein are inserted
for convenience of reference only, do not constitute a part of this Agreement,
and shall not affect in any manner the meaning or interpretation of this
Agreement.
18. Counterparts. This Agreement may be executed by the parties hereto in
any number of counterparts, each of which shall be deemed an original, but all
of which shall constitute one and the same agreement.
19. Indemnification. Indemnification for Employee shall be the same as
provided to other officers of the Company.
20. Amendments. Both parties agree to make reasonable amendments, as may
be necessary through February 28, 1998 so as to bring this Agreement in
alignment with the Company's corporate documents and/or to bring the corporate
documents in alignment with this Agreement, with the intent that the material
components of this Agreement, including but not limited to the 15% stock option,
the vesting schedule, and the salary and bonus will remain substantially as
written herein.
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first set forth above.
DATA RETURN CORPORATION
Address:
801 Stadium Drive, Suite 117
Arlington, Texas 76011
By: /s/ Sunny C. Vanderbeck
---------------------------
Name: Sunny C. Vanderbeck
----------------------
Title: CEO
----------------------
Address:
5500 Weatherby Lane
Plano, Texas 75093 /s/ Michael S. Shiff
---------------------------
Michael S. Shiff
9
<PAGE>
EXHIBIT 10.14
FORM OF EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), dated as of July 1, 1999 is
between Data Return Corporation, a Texas corporation, and _________________
("Employee").
R E C I T A L S:
A. Employee has been employed by Employer, and Employer and Employee
desire to enter into a written agreement to specify the terms and conditions of
Employee's continued employment with Employer.
B. Employer considers the maintenance of a sound management team,
including Employee, essential to protecting and enhancing its best interests and
those of its stockholders.
C. Employer recognizes that the possibility of a change in control of
Employer may result in the departure or distraction of management to the
detriment of Employer and its stockholders.
D. Employee is an executive officer of Employer and an integral member of
its management team.
E. Employer has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of selected
members of Employer's management team to their assigned duties without the
distraction arising from the possibility of a change in control of Employer.
NOW, THEREFORE, in consideration of Employee's past and future employment
with Employer and other good and valuable consideration the parties agree as
follows:
SECTION 1. Employment. Employer hereby employs Employee, and Employee
hereby accepts employment, upon the terms and subject to the conditions
hereinafter set forth.
SECTION 2. Duties. Employee shall be employed as Vice President of the
Company, or such other position to which he may be appointed by the Board of
Directors. Employee agrees to devote his full time and best efforts to the
performance of the duties attendant to his executive position with Employer.
SECTION 3. Term. The term of employment of Employee hereunder shall
commence on the date of this Agreement (the "Commencement Date") and continue
until June 30, 2002 unless earlier terminated pursuant to Section 6 or Section
10.
SECTION 4. Compensation and Benefits. In consideration for the services
of Employee hereunder, Employer shall compensate Employee as follows:
(a) Base Salary. Until the termination of Employee's employment hereunder,
Employer shall pay Employee, semi-monthly in arrears, a base salary at an annual
rate of not less
-1-
<PAGE>
than _____________ (as it may be increased from time to time, the "Base
Salary"). The Base Salary as then in effect may not be decreased at any time
during the term of Employee's employment hereunder and shall be reviewed by
Employer each October. Any increase in the Base Salary shall be in the sole
discretion of the Compensation Committee of the Board of Directors of the
Company.
(b) Management Incentive Bonus. Employee shall be eligible to receive from
Employer such annual management incentive bonuses as may be provided in
management incentive bonus plans adopted from time to time by Employer.
(c) Vacation. Employee shall be entitled to a minimum of 120 hours of paid
vacation per year at the reasonable and mutual convenience of Employer and
Employee. Unless otherwise approved by the Compensation Committee of the Board
of Directors of the Company, accrued vacation not taken in any applicable period
shall not be carried forward or used in any subsequent period.
(d) Insurance Benefits. Employer shall provide Employee with health,
dental and any other insurance generally provided by Employer for its other
executive officers.
SECTION 5. Expenses. The parties anticipate that in connection with the
services to be performed by Employee pursuant to the terms of this Agreement,
Employee will be required to make payments for travel, entertainment of business
associates and similar expenses. Employer shall reimburse Employee for all
reasonable expenses of types authorized by Employer and incurred by Employee in
the performance of his duties hereunder. Employee shall comply with such budget
limitations and approval and reporting requirements with respect to expenses as
Employer may establish from time to time.
SECTION 6. Termination.
(a) General. Employee's employment hereunder shall commence on the
Commencement Date and continue until the end of the term specified in Section 3,
except that the employment of Employee hereunder shall terminate prior to such
time in accordance with the following:
(i) Death or Disability. Upon the death of Employee during the term
of his employment hereunder or, at the option of Employer, in the event of
Employee's Disability, upon 30 days' notice to Employee.
(ii) For Cause. For "Cause" immediately upon written notice by
Employer to Employee. A termination shall be for Cause if:
(1) Employee commits a criminal act involving moral turpitude; or
(2) Employee commits a material breach of any of the covenants, terms
and provisions hereof or fails to obey lawful and written directions
which are proper,
-2-
<PAGE>
reasonable and which relate to the business of the employer and are
delivered to Employee by the Company's Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer or its
Board of Directors or by any of the Company's Executive Vice
Presidents or Senior Vice Presidents.
(iii) Without Cause. Without Cause upon notice by Employer to
Employee. Without limiting the foregoing, for purposes of Section 6(b)(ii)
the termination of Employee's employment hereunder upon the expiration of
the term of his employment specified in Section 3 shall be treated as a
termination by Employer without Cause pursuant to this Section 6(a)(iii).
(b) Severance Pay and Bonuses.
(i) Termination Upon Death or Disability. Employee shall not be
entitled to any Separation Payments or any other severance pay or other
compensation upon termination of his employment hereunder pursuant to
Section 6(a)(i) except for the following (which shall be paid promptly
after termination, except as specified in subsection (4) below):
(1) his Base Salary accrued but unpaid as of the date of termination;
(2) unpaid expense reimbursements under Section 5 for expenses
incurred in accordance with the terms hereof prior to termination;
(3) compensation for accrued, unused vacation as of the date of
termination, determined in accordance with Employer's policies and
procedures then in effect; and
(4) any bonus to which Employee would have been entitled for the Bonus
Period if he were still employed hereunder on the last day of the
Bonus Period. Any such bonus shall be paid to Employee at the same
time bonuses are paid in respect of the Bonus Period to other
employees of Employer entitled to receive bonuses for the Bonus
Period. In the event the determination of Employee's bonus in respect
of the Bonus Period involves any subjective assessment, such
assessment shall be made in a manner most favorable to Employee. For
purposes of this Section 6(b)(i)(4), the term "Bonus Period" means the
full fiscal year or other applicable bonus period during which
Employee's employment hereunder was terminated (or during which
Employee became Disabled, in the event of a termination for
Disability).
(ii) Termination Without Cause; Separation Payments. In the event
Employee's employment hereunder is terminated pursuant to Section
6(a)(iii), Employer shall pay Employee Separation Payments as Employee's
sole remedy in connection with such termination. "Separation Payments" are
payments made at the semi-monthly rate of
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Employee's Base Salary in effect immediately preceding the date of
termination. Separation Payments shall be made for months after the date
of termination (the "Separation Payment Period") and shall be paid by
Employer in equal semi-monthly payments in arrears. Separation Payments
shall be reduced by the amount of any personal services income earned by
Employee during the Separation Payment Period. Separation Payments shall be
made for the number of months specified above without regard to the number
of months remaining in the term of this Agreement. Notwithstanding the
foregoing, Employer's obligation to make, and Employee's right to receive,
Separation Payments shall terminate immediately upon any violation by
Employee of any covenant contained in Section 8 or 9 hereof. Employer shall
also promptly pay Employee the following:
(1) his Base Salary accrued but unpaid as of the date of termination;
(2) unpaid expense reimbursements under Section 5 for expenses
incurred in accordance with the terms hereof prior to termination; and
(3) compensation for accrued, unused vacation as of the date of
termination, determined in accordance with Employer's policies and
procedures then in effect.
This Section 6(b)(ii) is subject to the provisions of Section 10(j) dealing
with the coordination of payments in the event of a Change In Control.
(iii) Termination For Cause; Voluntary Termination. Employee shall
not be entitled to any Separation Payments or any other severance pay or
other compensation upon termination of his employment hereunder pursuant to
Section 6(a)(ii), or upon Employee's voluntary termination of his
employment hereunder, except for the following (which shall be paid
promptly after termination):
(1) his Base Salary accrued but unpaid as of the date of termination;
(2) unpaid expense reimbursements under Section 5 for expenses
incurred in accordance with the terms hereof prior to termination; and
(3) compensation for accrued, unused vacation as of the date of
termination, determined in accordance with Employer's policies and
procedures then in effect.
(c) Transfers of Employment. Employee's employment hereunder shall
continue until the earlier of the following:
(i) Employee's employment with all Employers terminates; or
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(ii) the last Employer (other than the Company) by which Employee is
employed under this Agreement ceases to be a subsidiary or affiliate of the
Company. For purposes of Section 6(b)(ii), the termination of Employee's
employment hereunder pursuant to this Section 6(c)(ii) shall be treated as
a termination by Employer without Cause pursuant to Section 6(a)(iii).
SECTION 7. Inventions; Assignment.
(a) Inventions Defined. All rights to discoveries, inventions,
improvements, designs, work product and innovations (including without
limitation all data and records pertaining thereto) that relate to the business
of Employer, whether or not specifically within Employee's duties or
responsibilities and whether or not patentable, copyrightable or reduced to
writing, that Employee may discover, invent, create or originate during the term
of his employment hereunder or otherwise, and for a period of six months
thereafter, either alone or with others and whether or not during working hours
or by the use of the facilities of Employer ("Inventions"), shall be the
exclusive property of Employer. Employee shall promptly disclose all Inventions
to Employer, shall execute at the request of Employer any assignments or other
documents Employer may deem necessary to protect or perfect its rights therein,
and shall assist Employer, at Employer's expense, in obtaining, defending and
enforcing Employer's rights therein. Employee hereby appoints Employer as his
attorney-in-fact to execute on his behalf any assignments or other documents
deemed necessary by Employer to protect or perfect its rights to any Inventions.
(b) Covenant to Assign and Cooperate. Without limiting the generality of
the foregoing, Employee shall assign and transfer, and does hereby assign and
transfer, to Employer the world-wide right, title and interest of Employee in
the Inventions. Employee agrees that Employer may file copyright registrations
and apply for and receive patents (including without limitation Letters Patent
in the United States) for the Inventions in Employer's name in such countries as
may be determined solely by Employer. Employee shall communicate to Employer
all facts known to Employee relating to the Inventions and shall cooperate with
Employer's reasonable requests in connection with vesting title to the
Inventions and related copyrights and patents exclusively in Employer and in
connection with obtaining, maintaining, protecting and enforcing Employer's
exclusive copyrights and patent rights in the Inventions.
(c) Successors and Assigns. Employee's obligations under this Section 7
shall inure to the benefit of Employer and its successors and assigns and shall
survive the expiration of the term of this Agreement for such time as may be
necessary to protect the proprietary rights of Employer in the Inventions.
(d) Consideration and Expenses. Employee shall perform his obligations
under this Section 7 at Employer's expense, but without any additional or
special compensation therefor.
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SECTION 8. Confidential Information.
(a) Acknowledgment of Proprietary Interest. Employee acknowledges that all
Confidential Information is a valuable, special and unique asset of Employer's
business, access to and knowledge of which are essential to the performance of
Employee's duties hereunder. Employee acknowledges the proprietary interest of
Employer in all Confidential Information. Employee agrees that all Confidential
Information learned by Employee during his employment with Employer or
otherwise, whether developed by Employee alone or in conjunction with others or
otherwise, is and shall remain the exclusive property of Employer. Employee
further acknowledges and agrees that his disclosure of any Confidential
Information will result in irreparable injury and damage to Employer.
(b) Confidential Information Defined. "Confidential Information" means all
confidential and proprietary information of Employer, written, oral or
computerized, as it may exist from time to time, including without limitation
(i) information derived from reports, investigations, experiments, research and
work in progress, (ii) methods of operation, (iii) market data, (iv) proprietary
computer programs and codes, (v) drawings, designs, plans and proposals, (vi)
marketing and sales programs, (vii) client and supplier lists and any other
information about Employer's relationships with others, (viii) historical
financial information and financial projections, (ix) network and system
architecture (x) all other concepts, ideas, materials and information prepared
or performed for or by Employer and (xi) all information related to the business
plan, business, products, purchases or sales of Employer or any of its suppliers
and customers, other than information that is publicly available.
(c) Covenant Not To Divulge Confidential Information. Employer is entitled
to prevent the disclosure of Confidential Information. As a portion of the
consideration for the employment of Employee and for the compensation being paid
to Employee by Employer, Employee agrees at all times during the term of his
employment hereunder and thereafter to hold in strict confidence and not to
disclose or allow to be disclosed to any person, firm or corporation, other than
to persons engaged by Employer to further the business of Employer, and not to
use except in the pursuit of the business of Employer, the Confidential
Information, without the prior written consent of Employer. This Section 8
shall survive and continue in full force and effect in accordance with its terms
after, and will not be deemed to be terminated by, any termination of this
Agreement or of Employee's employment with Employer for any reason.
(d) Return of Materials at Termination. In the event of any termination or
cessation of his employment with Employer for any reason, Employee shall
promptly deliver to Employer all property of Employer, including without
limitation all documents, data and other information containing, derived from or
otherwise pertaining to Confidential Information. Employee shall not take or
retain any property of Employer, including without limitation any documents,
data or other information, or any reproduction or excerpt thereof, containing,
derived from or pertaining
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to any Confidential Information. The obligation of confidentiality set forth in
this Section 8 shall continue notwithstanding Employee's delivery of such
documents, data and information to Employer.
SECTION 9. Noncompetition.
(a) Covenant Not To Compete. Employee acknowledges that during the term of
his employment Employer has agreed to provide to him, and he shall receive from
Employer, special training and knowledge, including without limitation the
Confidential Information. Employee acknowledges that the Confidential
Information is valuable to Employer and, therefore, its protection and
maintenance constitutes a legitimate interest to be protected by Employer by the
enforcement of the covenant not to compete contained in this Section 9.
Employee also acknowledges that such covenant not to compete is ancillary to
other enforceable agreements of the parties, including without limitation the
agreements regarding Confidential Information in Section 8 and the agreements
regarding the payment of Separation Payments and other severance pay and of the
Termination Payment in Section 6 and Section 10, respectively. Therefore, after
termination of Employee's employment hereunder, (unless extended pursuant to the
terms of this Section 9) for a period of (x) two years if Employee is terminated
for Cause or if Employee resigns and (y) one year if Employee is terminated
without Cause, Employee shall not directly or indirectly
(i) engage, alone or as a shareholder, partner, member, manager,
director, officer, employee of or consultant to any other business
organization that engages or is planning to engage, anywhere in North
America or in any other geographic area in or with respect to which
Employee has any duties or responsibilities during the term of his
employment with Employer, in the business of outsourced managed computer
services in a hosted environment or any other business activities that were
either conducted by Employer prior to the termination of Employee's
employment hereunder or proposed to be conducted by Employer at any time
prior to the time of such termination (the "Designated Industry");
(ii) divert to any competitor of Employer any customer of Employer; or
(iii) solicit or encourage any director, officer, employee of or
consultant to Employer to end his relationship with Employer or commence
any such relationship with any competitor of Employer.
Notwithstanding the foregoing, Employee's noncompetition obligations
hereunder shall not preclude Employee from owning less than five percent of the
voting power or economic interest in any publicly traded corporation conducting
business activities in the Designated Industry.
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(b) No Offset. The representations and covenants contained in this Section
9 on the part of Employee shall be construed as ancillary to and independent of
any other provision of this Agreement, and the existence of any claim (monetary
or otherwise) or cause of action of Employee against Employer or any officer,
director or shareholder of Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement by Employer of the
covenants of Employee contained in this Section 9.
(c) Extension of Duration; Survival. If Employee violates any covenant
contained in this Section 9, Employer shall not, as a result of such violation
or the time involved in obtaining legal or equitable relief therefor, be
deprived of the benefit of the full period of any such covenant. Accordingly,
the covenants of Employee contained in this Section 9 shall be deemed to have
the duration specified in Section 9(a), which period shall be extended by a
number of days equal to the sum of (i) the total number of days Employee is in
violation of any of the covenants contained in this Section 9 prior to the
commencement of any litigation relating thereto and (ii) the total number of
days the parties are involved in such litigation, through the date of entry by a
court of competent jurisdiction of a final judgment enforcing the covenants of
Employee in this Section 9. This Section 9 shall survive and continue in full
force and effect in accordance with its terms after, and will not be deemed to
be terminated by, any termination of this Agreement or of Employee's employment
with Employer for any reason.
(d) Severability. If at any time the provisions of this Section 9 are
determined to be invalid or unenforceable by reason of being vague or
unreasonable as to area, duration or scope of activity, this Section 9 shall be
considered divisible and shall be immediately amended to only such area,
duration and scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter, and
Employee agrees that this Section 9 as so amended shall be valid and binding as
though any invalid or unenforceable provision had not been included herein.
SECTION 10. Termination of Employment in Connection With a Change In
Control.
(a) Applicability. The provisions of this Section 10 shall apply in lieu
of all conflicting provisions in this Agreement in the event Employee's
employment with Employer is terminated in a Triggering Termination. Each of the
following events constitutes a "Triggering Termination" when Employee's
employment with Employer is:
(i) actually terminated by Employer during an Applicable Period for
any reason other than for Good Reason;
(ii) Constructively Terminated by Employer during an Applicable Period
for any reason other than for Good Reason;
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(iii) terminated by Employee for any reason other than death, or for
no reason, in the period commencing 180 days after the Change In Control
and ending 210 days after the Change In Control; or
(iv) terminated pursuant to Section 6(c)(ii) during an Applicable
Period.
(b) Termination Payment.
(i) Amount. Upon the occurrence of a Triggering Termination, Employer
shall pay Employee a lump sum payment in cash (the "Termination Payment")
equal to one times the sum of the following items:
(1) Employee's annualized base compensation determined by using the
highest annual base compensation rate in effect at any time during
Employee's employment with Employer; provided, that, in the case of a
Triggering Termination under Section 10(a)(iii), the amount to be
received under this Section 10(b)(i)(1) shall be % of such
annualized base compensation;
(2) two times the Target Bonus that would be payable to Employee by
Employer for the bonus period in which the Change In Control occurred;
provided that the amount determined under this Section 10(b)(i)(2)
shall not be less than 60% of the amount determined under Section
10(b)(i)(1);
(3) the amount of Employee's Base Salary accrued but unpaid as of the
date of the Triggering Termination;
(4) reimbursement under Section 5 for unpaid expenses incurred in
the performance of his duties hereunder prior to the date of the
Triggering Termination;
(5) any other benefit accrued but unpaid as of the date of the
Triggering Termination; and
(6) an amount that represents the estimated cost to Employee of
obtaining the insurance coverage provided to Employee for the 12 month
period following the expiration of his continuation (COBRA) rights;
provided that this Section 10(b)(i)(6) shall be applied without regard
to, and the amount payable under this Section 10(b)(i)(6) is in
addition to, any continuation (COBRA) rights or conversion rights
under any plan provided by Employer, which rights are not affected by
any provision hereof.
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(ii) Time for Payment; Interest. Employer shall pay the Termination
Payment to Employee concurrently with the Triggering Termination or, if the
Triggering Termination occurs before the Change In Control, concurrently
with the Change In Control. Employer's obligation to pay to Employee any
amounts under this Section 10, including without limitation the Termination
Payment and any Gross Up Payment due under Section 10(d), shall bear
interest at the rate of 18% per annum or, if different, the maximum rate
allowed by law until paid by Employer, and all accrued and unpaid interest
shall bear interest at the same rate, all of which interest shall be
compounded daily.
(c) Change In Control. A Change in Control shall be deemed to have
occurred for purposes hereof when a "change in control" of Employer occurs that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item on any similar schedule or
form) promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), whether or not Employer is then subject to such reporting
requirement; provided, however, that, without limitation, such a Change in
Control shall be deemed to have occurred if (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Corporation representing 40% or more of the
combined voting power of Employer's then outstanding securities without the
prior approval of at least two-thirds of the members of Employer's Board of
Directors in office immediately prior to such person attaining such percentage
interest; (ii) Employer is a party to a merger, consolidation, share exchange,
sale of assets or other reorganization, or a proxy contest, as a consequence of
which, on the day after such transaction is consummated or event occurs, its
shareholders own less than 50% of the shares of Employer or the surviving
entity, as the case may be, and the members of its Board of Directors in office
immediately prior to such transaction or event constitute less than a majority
of the Board of Directors of Employer or the surviving entity, as the case may
be, thereafter; (iii) during any 15-month period, individuals who at the
beginning of such period constituted Employer's Board of Directors (including
for this purpose any new director, whose election or nomination for election by
Employer's shareholders, or election or appointment by Employer's Board of
Directors, was approved by a vote of at least two-thirds of the directors then
still in office who were directors at the beginning of such period) cease for
any reason to constitute at least a majority of Employer's Board of Directors;
or (iv) an entity becomes an acquiring person or a distribution of rights occurs
or is triggered (whether or not the distribution occurs) under any rights
agreement or plan of Employer.
(d) Gross Up Payment.
(i) Excess Parachute Payment. If Employee incurs the tax (the "Excise
Tax") imposed by Section 4999 of the Code on "excess parachute payments"
within the
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meaning of Section 280G(b)(1) of the Code as the result of any payments or
distributions by Employer to or for the benefit of Employee (whether paid
or payable or distributed or distributable pursuant to the terms of this
Agreement or otherwise) or as a result of the acceleration of vesting of
Options, Restricted Stock or other rights (collectively, the "Payments"),
or if Employee would incur the Excise Tax if the Change In Control
satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code, then
without regard to whether the Change In Control in fact satisfies the
requirements of Section 280G(b)(2)(A)(i) of the Code, Employer shall pay to
Employee an amount (the "Gross Up Payment") such that the net amount
retained by Employee, after deduction of (1) any Excise Tax owed, or that
would be owed if the Change In Control satisfied the requirements of
Section 280G(b)(2)(A)(i) of the Code, upon any Payments (other than
payments provided by this Section 10(d)(i)) and (2) any federal, state and
local income and employment taxes owed (together with penalties and
interest) and Excise Tax owed, or that would be owed if the Change In
Control satisfied the requirements of Section 280G(b)(2)(A)(i) of the Code,
upon the payments provided by this Section 10(d)(i), shall be equal to the
amount of the Payments (other than payments provided by this Section
10(d)(i)).
(ii) Applicable Rates. For purposes of determining the Gross Up
Payment amount, Employee shall be deemed:
(1) to pay federal income taxes at the highest marginal rate of
federal income taxation applicable to individual taxpayers in the
calendar year in which the Gross Up Payment is made (which rate shall
be adjusted as necessary to take into account the effect of any
reduction in deductions, exemptions or credits otherwise available to
Employee had the Gross Up Payment not been received);
(2) to pay additional employment taxes as a result of the receipt of
the Gross Up Payment in an amount equal to the highest marginal rate
of employment taxes applicable to wages; provided that if any
employment tax is applied only up to a specified maximum amount of
wages, such limit shall be taken into account for purposes of such
calculation; and
(3) to pay state and local income taxes at the highest marginal rates
of taxation in the state and locality of Employee's residence on the
date of the Triggering Termination, net of the maximum reduction in
federal income taxes that could be obtained from deduction of such
state and local taxes.
(iii) Determination of Gross Up Payment Amount. The determination of
the Gross Up Payment amount shall be made, at Employer's expense, by Ernst
& Young LLP or another nationally recognized public accounting firm
selected by Employee (in
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either case, the "Accountants"). If the Excise Tax amount payable by
Employee, based upon a "Determination," is different from the Excise Tax
amount computed by the Accountants for purposes of determining the Gross Up
Payment amount, then appropriate adjustments to the Gross Up Payment amount
shall be made in the manner provided in Section 10(d)(iv). For purposes of
determining the Gross Up Payment amount prior to any Determination of the
Excise Tax amount, the following assumptions shall be utilized:
(1) that portion of the Termination Payment that is attributable to
the items described in Sections 10(b)(i)(1), (2), (3) and (7), and the
Gross Up Payment, shall be treated as Parachute Payments;
(2) no portion of any payment made pursuant to Sections 10(b)(i)(4),
(5) or (6) or Section 11(c) shall be treated as a Parachute Payment;
(3)the "ascertainable fair market value" (as set forth in Prop. Treas.
Reg. (S)1.280G-1, Q&A 13) of the Options, the vesting of which was
accelerated by the Change In Control as provided in the Incentive Plan
and as further provided in Section 10(i), shall be equal to the
product of (I) and (II) as set forth below:
(I) the number of shares covered by such Options; and
(II) the difference between:
a. the fair market value per share of the underlying
common stock as of the date of the Change In Control; and
b. the exercise price per share of stock subject to
such Options; and
(4)for purposes of applying the rules set forth in Prop. Treas. Reg.
(S)1.280G-1, Q&A 24(c) to a payment described in Prop. Treas. Reg.
(S)1.280G-1, Q&A 24(b), the amount reflecting the lapse of the
obligation to continue performing services shall be equal to the
minimum amount allowed for such payment as set forth in Prop. Treas.
Reg. (S)1.280G-1, Q&A 24(c)(2) (or if Prop. Treas. Reg. (S)1.280G-1
has been superseded by temporary or final regulations, the minimum
amount provided for in any temporary or final regulations that
supersede Prop. Treas. Reg. (S)1.280G-1 and that are applicable to the
Termination Payment, Gross Up Payment, or both).
(iv) Time For Payment. Employer shall pay the estimated Gross Up
Payment amount in cash to Employee concurrent with the payment of the
Termination Payment.
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Employee and Employer agree to reasonably cooperate in the determination of
the actual Gross Up Payment amount. Further, Employee and Employer agree to
make such adjustments to the estimated Gross Up Payment amount as may be
necessary to equal the actual Gross Up Payment amount based upon a
Determination, which in the case of Employee shall refer to refunds of
prior overpayments and in the case of Employer shall refer to makeup of
prior underpayments.
(e) Term. Notwithstanding the provisions of Section 3, if a Change In
Control occurs prior to June 29, 2002, Sections 10, 11 and 12 shall continue in
effect for a period of 24 months after the date of the Change In Control.
(f) No Duty to Mitigate Damages. Employee's rights and privileges under
this Section 10 shall be considered severance pay in consideration of his past
service and his continued service to Employer from the Commencement Date, and
his entitlement thereto shall neither be governed by any duty to mitigate his
damages by seeking further employment nor offset by any compensation that he may
receive from future employment.
(g) Arbitration. Except as provided in Section 10(i) and in Section 11(d)
with respect to Section 10(k), any controversy or claim arising out of or
relating to this Section 10, or the breach thereof, shall be settled exclusively
by arbitration in Dallas, Texas, in accordance with the Commercial Arbitration
Rules of the American Arbitration Association then in effect. Judgment upon the
award rendered by the arbitrator may be entered in, and enforced by, any court
having jurisdiction thereof.
(h) No Right To Continued Employment. This Section 10 shall not give
Employee any right of continued employment or any right to compensation or
benefits from Employer except the rights specifically stated herein.
(i) Restricted Stock and Exercise of Stock Options. Employee may hold
options ("Options") issued under the Incentive Plan, that become immediately
exercisable upon a Change In Control. In addition, Employee may hold restricted
stock ("Restricted Stock") issued under the Incentive Plan, pursuant to which
applicable restrictions will lapse upon a Change In Control. Upon a Change In
Control, the portion of Employee's Options that would have vested, and the
portion of Employee's Restricted Stock that would have become unrestricted, on
the next annual vesting date, shall immediately vest and become unrestricted,
respectively, and the vesting date for the remainder of such Options and
Restricted Stock shall be accelerated by one year. In addition, if Employee is
terminated for any reason other than for Good Reason during an Applicable
Period, (a) all of Employee's Options shall immediately vest and Employee shall
have the right to exercise such Options for 90 days following such termination
and (b) all Restricted Stock shall be become unrestricted. Notwithstanding
anything to the contrary contained herein, if Employee would receive more
favorable treatment under the Incentive Plan or any agreement thereunder, such
treatment shall control. Employer shall take no action to facilitate a
transaction involving a Change In Control, including without limitation
redemption of any rights issued pursuant to any rights agreement, unless it has
taken such action as may be necessary to ensure that Employee has the
opportunity to exercise all Options he may then hold, and obtain certificates
containing no restrictive legends in respect of any Restricted Stock he may then
hold, at a time and in a manner that shall give Employee the opportunity to sell
or exchange the securities of Employer acquired upon exercise of his Options and
upon receipt of unrestricted certificates for shares of Common Stock in respect
of his Restricted Stock, if any (collectively, the "Acquired Securities"), at
the earliest time and in the most advantageous manner any holder of the same
class of securities as the Acquired Securities is able to sell or exchange such
securities in connection with such Change In Control. Employer acknowledges
that its covenants in the preceding sentence (the "Covenants")are reasonable and
necessary in order to protect the legitimate interests of Employer in
maintaining Employee as one of its employees and that any violation of the
Covenants by Employer would result in irreparable injuries to Employee, and
Employer therefore acknowledges that in the event of any violation of the
Covenants by Employer or its directors, officers or employees, or any of their
respective agents, Employee shall be entitled to obtain from any court of
competent jurisdiction temporary, preliminary and permanent injunctive relief in
order to (i) obtain specific performance of the Covenants, (ii) obtain specific
performance of the exercise of his Options, delivery of certificates containing
no restrictive legends in respect of his Restricted Stock and the sale or
exchange of the Acquired Securities in the advantageous manner contemplated
above or (iii) prevent violation of the Covenants; provided nothing in this
Agreement shall be deemed to prejudice Employee's rights to damages for
violation of the Covenants.
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(j) Coordination With Other Payments.
(i) After the termination of Employee's employment hereunder:
(1) if Employee is entitled to receive Separation Payments; and
(2) Employee subsequently becomes entitled to receive a Termination
Payment, Gross Up Payment or both, then,
(ii) prior to the disbursement of the Termination Payment and Gross Up
Payment:
(1) the payment date of all unpaid Separation Payments shall be
accelerated to the payment date of the Termination Payment and such
Separation Payments shall be made (in this event, Employer waives any
requirement that Employee reduce the Separation Payments by the amount
of any income earned by Employee thereafter); and
(2) the Termination Payment shall be reduced by the amount of the
Separation Payments so accelerated and made.
(k) Noncompetition.
(i) Employee acknowledges that during the term of his employment
Employer has agreed to provide to him, and he shall receive from Employer,
special training and knowledge, including without limitation the
Confidential Information.
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Employee acknowledges that the Confidential Information is valuable to
Employer and, therefore, its protection and maintenance constitutes a
legitimate interest to be protected by Employer by the enforcement of the
covenant not to compete contained in this Section 10(k). Employee also
acknowledges that such covenant not to compete is ancillary to other
enforceable agreements of the parties, including without limitation the
agreements regarding Confidential Information in Section 8 and the
agreements regarding the payment of the Termination Payment in this Section
10. Therefore, following the occurrence of a Triggering Termination,
Employee shall not directly or indirectly
(1) for a period of one year following the date of the Triggering
Termination (unless extended pursuant to the terms of this Section
10(k)) engage, alone or as a shareholder, partner, member, manager,
director, officer, employee of or consultant to, any entity other than
Employer that is in existence on the date of the Triggering
Termination and is at that time engaged directly, or indirectly
through any subsidiary, division or other business unit (individually,
an "Entity"), anywhere in North America or in any other geographic
area in or with respect to which Employee has any duties or
responsibilities during the term of his employment with Employer, in
the Designated Industry; or
(2) for a period of one year following the date of the Triggering
Termination (unless extended pursuant to the terms of this Section
10(k)) solicit or encourage any director, officer, employee of or
consultant to Employer to end his relationship with Employer and
commence any such relationship with any competitor of Employer in the
Designated Industry.
(ii) Notwithstanding the foregoing, an Entity shall not be deemed to
be engaged in the Designated Industry if the business of the Designated
Industry is incidental to such Entity's business. The business of the
Designated Industry shall be deemed incidental to an Entity's business so
long as
(1) the aggregate revenue of such Entity attributable to such
business is 40% or less of the total revenues of such Entity for the
full fiscal quarter of such Entity immediately preceding the date of
the Triggering Termination or any of the eight immediately subsequent
fiscal quarters of such Entity; and
(2) such Entity is not a member of a group of Entities under
common control that includes one or more Entities in the Designated
Industry;
(iii) The representations and covenants contained in this Section
10(k) on the part of Employee shall be construed as ancillary to and
independent of any other provision of this Agreement, and the existence of
any claim (monetary or otherwise) or
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<PAGE>
cause of action of Employee against Employer or any officer, director or
shareholder of Employer, whether predicated on this Agreement or otherwise,
shall not constitute a defense to the enforcement by Employer of the
covenants of Employee contained in this Section 10(k).
(iv) If Employee violates any covenant contained in this Section
10(k), Employer shall not, as a result of such violation or the time
involved in obtaining legal or equitable relief therefor, be deprived of
the benefit of the full period of any such covenant. Accordingly, the
covenants of Employee contained in this Section 10(k) shall be deemed to
have durations as specified in Section 10(k)(i)(1) and (2), which periods
shall be extended by a number of days equal to the sum of (i) the total
number of days Employee is in violation of any of the covenants contained
in this Section 10(k) prior to the commencement of any litigation relating
thereto and (ii) the total number of days the parties are involved in such
litigation, through the date of entry by a court of competent jurisdiction
of a final judgment enforcing the covenants of Employee in this Section
10(k). This Section 10(k) shall survive and continue in full force and
effect in accordance with its terms after, and will not be deemed to be
terminated by, any termination of this Agreement.
(v) If at any time the provisions of this Section 10(k) are determined
to be invalid or unenforceable by reason of being vague or unreasonable as
to area, duration or scope of activity, this Section 10(k) shall be
considered divisible and shall be immediately amended to only such area,
duration or scope of activity as shall be determined to be reasonable and
enforceable by the court or other body having jurisdiction over the matter;
and Employee agrees that this Section 10(k) as so amended shall be valid
and binding as though any invalid or unenforceable provision had not been
included herein. Notwithstanding the foregoing, Employee's noncompetition
obligations hereunder shall not preclude Employee from owning stock with
less than five percent of the voting power or economic interest in any
publicly traded corporation conducting business activities in the
Designated Industry.
SECTION 11. General.
(a) Notices. All notices and other communications hereunder shall be
in writing or by written telecommunication, and shall be deemed to have
been duly given if delivered personally or if mailed by certified mail,
return receipt requested or by written telecommunication, to the relevant
address set forth below, or to such other address as the recipient of such
notice or communication shall have specified to the other party in
accordance with this Section 11(a):
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<PAGE>
If to Employer, to: with a copy to:
Data Return Corporation Thompson & Knight, P.C.
801 Stadium Drive, Suite 117 801 Cherry Street, Suite 1600
Arlington, Texas 76011 Ft. Worth, Texas 76102
Attention: Chief Executive Officer Attention: Stephen B. Norris
Facsimile Number: (817) 274-1141 Facsimile Number (817) 347-1700
If to Employee, to:
(b) Withholding; No Offset. All payments required to be made to Employee
by Employer under this Agreement shall be subject to the withholding of such
amounts, if any, relating to federal, state and local taxes as may be required
by law. No payments under Section 10 shall be subject to offset or reduction
attributable to any amount Employee may owe to Employer or any other person.
(c) Legal and Accounting Costs. Employer shall pay all attorneys' and
accountants' fees and costs incurred by Employee as a result of any breach by
Employer of its obligations under this Agreement, including without limitation
all such costs incurred in contesting or disputing any determination made by
Employer under Section 10 or in connection with any tax audit or proceeding to
the extent attributable to the application of Section 4999 of the Code to any
payment under Section 10. Reimbursements of such costs shall be made by
Employer within 15 days after Employee's presentation to Employer of any
statements of such costs and thereafter shall bear interest at the rate of 18%
per annum or, if different, the maximum rate allowed by law until paid by
Employer, and all accrued and unpaid interest shall bear interest at the same
rate, all of which interest shall be compounded daily.
(d) Equitable Remedies. Each of the parties hereto acknowledges and agrees
that upon any breach by Employee of his obligations under any of Sections 7, 8,
9 and 10(k), Employer shall have no adequate remedy at law and accordingly shall
be entitled to specific performance and other appropriate injunctive and
equitable relief.
(e) Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision shall be fully severable, and
this Agreement shall be construed and enforced as if such illegal, invalid or
unenforceable provision never comprised a part hereof, and the remaining
provisions hereof shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision or by its severance
herefrom. Furthermore, in lieu of such illegal, invalid or unenforceable
provision, there shall be added automatically as part
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<PAGE>
of this Agreement a provision as similar in its terms to such illegal, invalid
or unenforceable provision as may be possible and be legal, valid and
enforceable.
(f) Waivers. No delay or omission by either party in exercising any right,
power or privilege hereunder shall impair such right, power or privilege, nor
shall any single or partial exercise of any such right, power or privilege
preclude any further exercise thereof or the exercise of any other right, power
or privilege.
(g) Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, and all of which together shall
constitute one and the same instrument.
(h) Captions. The captions in this Agreement are for convenience of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
(i) Reference to Agreement. Use of the words "herein," "hereof," "hereto,"
"hereunder" and the like in this Agreement refer to this Agreement only as a
whole and not to any particular section or subsection of this Agreement, unless
otherwise noted.
(j) Binding Agreement. This Agreement shall be binding upon and inure to
the benefit of the parties and shall be enforceable by the personal
representatives and heirs of Employee and the successors and assigns of
Employer. This Agreement may be assigned by the Company or any Employer to any
Employer; provided that in the event of any such assignment, the Company shall
remain liable for all of its obligations hereunder and shall be liable for all
obligations of all such assignees hereunder. If Employee dies while any amounts
would still be payable to him hereunder, such amounts shall be paid to
Employee's estate. This Agreement is not otherwise assignable by Employee.
(k) Entire Agreement. This Agreement contains the entire understanding of
the parties, supersedes all prior agreements and understandings relating to the
subject matter hereof, with the exception of written option (or other incentive
award) and shareholders' or stock restriction agreements, and may not be amended
except by a written instrument hereafter signed by each of the parties hereto.
Employee and the Company hereby agree that, if any other employment agreement
between Employee and the Company (or any other Employer) is in existence on the
Commencement Date, then this Agreement shall supersede such other employment
agreement in its entirety, and such other employment agreement shall no longer
be of any force and effect after the date hereof.
(l) Governing Law. This Agreement and the performance hereof shall be
construed and governed in accordance with the laws of the State of Texas,
without regard to its choice of law principles.
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<PAGE>
(m) Gender and Number. The masculine gender shall be deemed to denote the
feminine or neuter genders, the singular to denote the plural, and the plural to
denote the singular, where the context so permits.
(n) Assistance in Litigation. During the term of this Agreement and for a
period of two years thereafter, Employee shall, upon reasonable notice, furnish
such information and proper assistance to Employer as may reasonably be required
by Employer in connection with any litigation in which Employer is, or may
become, a party and with respect to which Employee's particular knowledge or
experience would be useful. Employer shall reimburse Employee for all
reasonable out-of-pocket expenses incurred by Employee in rendering such
assistance. The provisions of this Section 11(n) shall continue in effect
notwithstanding termination of Employee's employment hereunder for any reason.
SECTION 12. Definitions. As used in this Agreement, the following terms
will have the following meanings:
(a) Accountants has the meaning ascribed to it in Section 10(d)(iii).
(b) Acquired Securities has the meaning ascribed to it in Section 10(i).
(c) Agreement has the meaning ascribed to it in the heading of this
document.
(d) Applicable Period means, with respect to any Change In Control, the
period of 27 months commencing 3 months before the Change In Control and ending
24 months after the Change In Control.
(e) Base Salary has the meaning ascribed to it in Section 4(a).
(f) Cause has the meaning ascribed to it in Section 6(a)(ii).
(g) Change In Control has the meaning ascribed to it in Section 10(c).
(h) Code means the Internal Revenue Code of 1986, as amended.
(i) Commencement Date has the meaning ascribed to it in Section 3.
(j) Company means Data Return Corporation, a Texas corporation.
(k) Confidential Information has the meaning ascribed to it in Section
8(b).
(l) Constructively Terminated with respect to an Employee's employment with
Employer will be deemed to have occurred if Employer:
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<PAGE>
(i) demotes Employee to a lesser position, either in title or
responsibility, than the highest position held by Employee with Employer at
any time during Employee's employment with Employer;
(ii) decreases Employee's compensation below the highest level in
effect at any time during Employee's employment with Employer or reduces
Employee's benefits and perquisites below the highest levels in effect at
any time during Employee's employment with Employer (other than as a result
of any amendment or termination of any employee or group or other executive
benefit plan, which amendment or termination is applicable to all
executives of Employer); or
(iii) requires Employee to relocate to a principal place of business
more than 100 miles from the principal place of business occupied by
Employer on the first day of an Applicable Period.
(m) Covenants has the meaning ascribed to it in Section 10(i).
(n) Designated Industry has the meaning ascribed to it in Section
9(a)(i)(1).
(o) Determination has the meaning ascribed to such term in Section 1313(a)
of the Code.
(p) Disability with respect to Employee shall be deemed to have occurred
whenever Employee is rendered unable to engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment
that can be expected to result in death or that has lasted or can be expected to
last for a continuing period of not less than 12 months. In the case of any
dispute, the determination of Disability will be made by a licensed physician
selected by Employer, which physician's decision will be final and binding.
(q) Employee has the meaning ascribed to it in the heading of this
Agreement.
(r) Employer refers collectively to the Company and its subsidiaries and
other affiliates. In Section 10, the term "Employer" shall be deemed to refer
to the Company, and for purposes of Section 10, Employee shall be deemed to be
employed by the Company and all compensation and benefits paid or provided to
Employee by any Employer under this Agreement at any time shall be deemed to
have been paid or provided to Employee by the Company.
(s) Entity has the meaning ascribed to it in Section 10(k)(i)(1).
(t) Excise Tax has the meaning ascribed to it in Section 10(d)(i).
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<PAGE>
(u) Good Reason means the termination of Employee's employment with
Employer as a result of Employee's commission of a felony or failure to obey
written directions which are proper, reasonable and which relate to the business
of the employer and are delivered to Employee by Employer's Chairman of the
Board, President, Chief Executive Officer, Chief Operating Officer or its Board
of Directors or by any of Employer's Executive Vice Presidents or Senior Vice
Presidents.
(v) Gross Up Payment has the meaning ascribed to it in Section 10(d)(i).
(w) Incentive Plan means any stock option or equity incentive plan adopted
by Employer from time to time.
(x) Inventions has the meaning ascribed to it in Section 7(a).
(y) Options has the meaning ascribed to it in Section 10(i).
(z) Parachute Payments has the meaning ascribed to such term in Section
280G(b)(2) of the Code.
(aa) Payments has the meaning ascribed to it in Section 10(d)(i).
(bb) Restricted Stock has the meaning ascribed to it in Section 10(i).
(cc) Separation Payment Period has the meaning ascribed to it in Section
6(b)(ii).
(dd) Separation Payments has the meaning ascribed to it in Section
6(b)(ii).
(ee) Target Bonus means, with respect to each Employee, the dollar amount
that is equal to the established percentage of such Employee's Base Salary that
would be paid to Employee under the management incentive bonus plan of Employer
assuming the measurement criteria contained in such plan with respect to
Employee were achieved for the bonus period in which the Change In Control
occurred.
(ff) Termination Payment has the meaning ascribed to it in Section
10(b)(i).
(gg) Triggering Termination has the meaning ascribed to it in Section
10(a).
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<PAGE>
EXECUTED as of the date and year first above written.
Data Return Corporation
By _______________________________________
Sunny C. Vanderbeck,
Chief Executive Officer
__________________________________________
[Employee]
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<PAGE>
Exhibit 23.2
We consent to the reference to our firm under the captions "Summary Financial
Information", "Selected Financial Data" and "Experts" and to the use of our
report dated May 18, 1999, except for Note 9, as to which the date is July 29,
1999, in the Registration Statement (Form S-1 No. 33- ) and related
Prospectus of Data Return Corporation dated July 29, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
July 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 842,800
<SECURITIES> 0
<RECEIVABLES> 368,400
<ALLOWANCES> 20,100
<INVENTORY> 0
<CURRENT-ASSETS> 1,364,400
<PP&E> 826,000
<DEPRECIATION> 142,500
<TOTAL-ASSETS> 2,213,700
<CURRENT-LIABILITIES> 803,100
<BONDS> 166,000
0
0
<COMMON> 76
<OTHER-SE> 1,244,524
<TOTAL-LIABILITY-AND-EQUITY> 2,213,700
<SALES> 0
<TOTAL-REVENUES> 1,889,000
<CGS> 0
<TOTAL-COSTS> 1,105,300
<OTHER-EXPENSES> 2,074,600
<LOSS-PROVISION> 40,400
<INTEREST-EXPENSE> 12,700
<INCOME-PRETAX> (1,283,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,283,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,283,700)
<EPS-BASIC> (18.65)
<EPS-DILUTED> (18.65)
</TABLE>
<PAGE>
Exhibit 99.1
(214) 969-1788
E-Mail: [email protected]
July 9, 1999
Frank Gens
International Data Corp.
Five Speen St.
Framingham, MA 01701
Dear Mr. Gens:
As a follow-up to my letter dated June 25, 1999 to Mr. Paul Ryan, our
client, Data Return Corporation, hereby requests your consent to reference
certain language from your reports in a registration statement. Data Return
Corporation is proposing an initial public offering of its common stock ("IPO").
In connection with the IPO, we anticipate filing a registration statement on
Form S-1 with the Securities and Exchange Commission (the "Registration
Statement"), containing certain information as to projections and other data
concerning the Internet market. The current language of the portions of the
Registration Statement referencing your report are attached for your review.
To acknowledge your consent to the foregoing, please execute the signature
block below and fax this letter back to the undersigned at (214) 969-1751. We
intend to file the Registration Statement on July 15, 1999 and would therefore
appreciate your feedback on this matter as soon as possible. We appreciate your
immediate attention to this matter. If you have any questions or would like
additional information, please call the undersigned at (214) 969-1788.
Best Regards,
William D. Howell
Acknowledged and Consented:
INTERNATIONAL DATA CORP.
By:/s/ Francis R. Gens
-------------------
Francis R. Gens, Sr. VP, Internet Research
- ------------------------------------------
Please print name and title
<PAGE>
EXHIBIT A
IDC projects that the number of Internet users will grow from approximately 159
million at the end of 1998 to over 410 million at the end of 2002.
For example, IDC reports that Microsoft 32-bit Windows offerings have the
leading position in terms of operating environment license revenues and license
shipments for client operating environments.
According to International Data Corp., Microsoft Windows NT will be the key
engine for growth within the worldwide server market.
According to IDC, information systems outsourcing, which includes data center,
client/server and help desk applications, is the fastest growing segment of the
market, and spending in this area will increase at a 12.2% compound annual
growth rate through 2003.
<PAGE>
Exhibit 99.2
July 23, 1999
Data Return Corporation
801 Stadium Drive, Suite 117
Arlington, Texas 76011
Ladies and Gentlemen:
I hereby consent to the reference to me and of my becoming a Director of
Data Return Corporation in the Registration Statement on Form S-1 of Data Return
Corporation filed with the Securities and Exchange Commission.
Sincerely Yours,
/s/ Thor Geir Ramleth
Thor Geir Ramleth
