<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
COMSTAR.NET, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 7379 58-2235514
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
2812 SPRING ROAD
SUITE 210
ATLANTA, GEORGIA 30339
(770) 485-6000
(770) 485-6100 (FACSIMILE)
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
CHRISTOPHER K. MARTIN, C.P.A.
CHIEF FINANCIAL OFFICER
COMSTAR.NET, INC.
2812 SPRING ROAD
SUITE 210
ATLANTA, GEORGIA 30339
(770) 485-6000
(770) 485-6100 (FACSIMILE)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------------
Copies to:
<TABLE>
<S> <C>
CHARLES D. VAUGHN, ESQ. M. HILL JEFFRIES, ESQ.
JENNIFER A. MCCOID, ESQ. MARC L. HARRISON, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. ALSTON & BIRD LLP
FIRST UNION PLAZA, SUITE 1400 ONE ATLANTIC CENTER
999 PEACHTREE STREET, N.E. 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30309-3424
(404) 817-6000 (404) 881-7000
(404) 817-6050 (FACSIMILE) (404) 881-4777 (FACSIMILE)
</TABLE>
---------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Units consisting of a Series 1999 Convertible Note with a
Stock Purchase Warrant......................................
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Common Stock, no par value, issuable upon conversion of the
Series 1999 Convertible Notes.............................
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Common Stock, no par value, issuable upon exercise of the
Stock Purchase Warrants(2)................................
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Total....................................................... $5,850,504 $1,545
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933. The common
stock purchase price is based on an per share exercise price of $3.28.
(2) Pursuant to Rule 416, this Registration Statement covers additional shares
that may become issuable as a result of anti-dilution provisions contained
in the Series 1999 Convertible Notes and the Stock Purchase Warrants.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 10, 1999
(COMSTAR.NET, INC. LOGO)
100 INVESTMENT UNITS
CONSISTING OF A SERIES 1999 CONVERTIBLE NOTE
WITH A STOCK PURCHASE WARRANT
comstar.net, inc. is offering 100 investment units at a price of $50,000
per investment unit. Each investment unit consists of a series 1999 convertible
note in the principal amount of $50,000 which is convertible into 15,244 shares
of our common stock and a stock purchase warrant which entitles the holder to
acquire 2,593 shares of our common stock. This is a registered offering to a
limited number of investors. No public market for our investment units or shares
currently exists or will exist as a result of this offering.
We anticipate that we will raise a minimum of $4,000,000 and a maximum of
$5,000,000 in this offering. The minimum permitted purchase will be $500,000 per
entity and $50,000 per individual.
The placement agents must sell the minimum $4,000,000 of investment units
offered if any are sold. The placement agents are required to use their
reasonable efforts to sell the investment units offered. We will end the
offering on December 31, 1999, unless we choose to extend the offering to a date
no later than January 15, 2000. Branch Banking & Trust Company will act as
escrow agent for the offering and will accept, deposit and retain all
subscriptions until the minimum amount is sold.
---------------------------
INVESTING IN THE INVESTMENT UNITS INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
<TABLE>
<CAPTION>
PLACEMENT PROCEEDS
OFFERING AGENTS' TO
PRICE COMMISSIONS COMSTAR.NET
--------------- ----------- -----------
<S> <C> <C> <C>
Per investment unit................................. $ 50,000 $ 3,000 $ 47,000
Total (80 investment units minimum)................. $4,000,000 $240,000 $3,760,000
Total (100 investment units maximum)................ $5,000,000 $300,000 $4,700,000
</TABLE>
We expect to deliver the investment units to purchasers on December ,
1999.
---------------------------
SCOTT & STRINGFELLOW, INC. SUNTRUST EQUITABLE SECURITIES
The date of this prospectus is December , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary.......................... 1
Risk Factors..................... 7
Use of Proceeds.................. 25
Dividend Policy.................. 25
Capitalization................... 26
Selected Financial Data.......... 27
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 29
Business......................... 44
Management....................... 66
Related Party Transactions....... 73
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Principal Shareholders........... 74
Description of Capital Stock..... 76
Description of Notes............. 79
Description of Warrants.......... 81
U.S. Federal Income Tax
Considerations................. 82
Plan of Distribution............. 85
Legal Matters.................... 86
Experts.......................... 86
Where You Can Find More
Information.................... 86
Index to Financial Statements.... F-1
</TABLE>
---------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
In this prospectus, "comstar.net," "we," "us" and "our" refer to
comstar.net, inc. and its subsidiaries unless the context otherwise requires.
<PAGE> 4
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary may not contain all the information that you should consider before
buying shares in this offering. We urge you to read the entire prospectus
carefully, including the information provided under "Risk Factors," before
deciding to invest in our investment units.
We expect to revise this prospectus in two respects immediately before the
registration statement that includes this prospectus becomes effective. First,
we are making this offering primarily to institutional investors and expect that
the final terms of the investment units may vary to some degree from those
described in this prospectus. We will revise this prospectus to reflect any
variation in the final terms from those disclosed initially. Second, based on
those final terms, we will effect a recapitalization of our currently
outstanding shares prior to the closing of this offering to reduce the number of
shares owned by our four founders and increase the number of shares owned by
purchasers in our private placement of shares concluded in June 1999. As a
result of this recapitalization, our private placement investors will own the
number of shares they would have owned had they purchased shares at the final
per share conversion price of the notes offered by this prospectus.
COMSTAR.NET, INC.
OUR BUSINESS
We are a rapidly growing Internet service provider, or ISP, that targets
middle market businesses, educational institutions and governmental
organizations. Our services provide high quality, cost-effective business
solutions that allow our customers to take advantage of the Internet while
outsourcing a significant portion of their Internet technology and staff.
Our primary services, which we tailor to meet each customer's needs,
include:
- dedicated Internet access through our highly reliable network, which
provides our customers with Internet access that is "always on,"
- co-location services, in which we provide secure space to house
customer-owned Internet equipment, and
- managed application hosting, in which we provide and maintain a server
for the customer's exclusive use to install any software application the
customer chooses.
We refer to our co-location services, our managed application hosting
services and some of the other services we offer through our Atlanta, Georgia
data center as data center services. Our managed application hosting services
are similar to the services offered by computer service providers, or CSPs,
which house, maintain and supply power to their customers' Internet equipment.
We can deliver our services to customers throughout the world from our data
center. We also have various other points of presence, or POPs, located in the
southeastern United States that aggregate our customers' Internet traffic and
transport the traffic to our data center. We connect the traffic to very large
ISPs, including UUNET, GTE Internetworking, Sprint and Intermedia Internet, who
provide access to central Internet exchanges. Through our network, most of our
customers' Internet traffic bypasses congested points on the Internet and avoids
breakdowns at the central Internet exchanges
<PAGE> 5
and network access points. We believe our innovative network infrastructure and
superior customer support by our network experts give us a significant
competitive advantage over many other Internet access and Internet-based
solutions providers.
Our senior management team has more than sixty years of combined experience
in designing, implementing and managing telecommunications networks.
OUR INDUSTRY
The number of businesses, educational institutions and governmental
organizations using the Internet as a means of conducting business is growing
rapidly. According to International Data Corporation, corporate Internet access
and value-added services, such as Web hosting and co-location, are the fastest
growing services offered by ISPs. Corporate access revenue and value-added
services revenue were $5.9 billion in 1998 and are expected to grow to
approximately $25.0 billion by 2003.
Many of the enterprises using the Internet lack the expertise to
cost-effectively develop and maintain their Web sites while also managing their
core operations. In addition, these organizations often do not have the
resources needed to keep up with rapidly changing technologies and to support a
network infrastructure that must be both reliable and expandable. As a result,
we believe enterprises of all sizes are seeking collaborative outsourcing
arrangements to:
- acquire reliable Internet access,
- help them establish effective, secure and reliable Web sites,
- provide required monitoring and maintenance of their Internet-related
facilities, and
- control their Internet service costs.
Recent changes in the regulations affecting the telecommunications industry
in the United States and abroad have made it easier and more cost-effective for
new companies to compete with existing carriers in providing local voice and
data communication services. These communication services can often be offered
via the same communication lines over which companies currently offer Internet
access. This increase in competition, combined with customer demand to acquire
all communication services from a single source, is driving the convergence of
voice and data communication technologies toward providers capable of delivering
a broad range of communication services.
OUR BUSINESS STRATEGY
We intend to become a leader in providing businesses, educational
institutions and governmental organizations with high quality, cost-effective
Internet services. To accomplish this objective, we intend to continue to rely
on the following core elements of our business strategy:
- delivering highly reliable Internet access that enables our customers'
traffic to avoid congestion and breakdowns at major Internet exchanges,
- increasing the percentage of our revenues from data center services,
specifically co-location and managed application hosting services, which
typically provide higher margins than our Internet access services,
2
<PAGE> 6
- targeting middle market business, educational and governmental customers,
rather than individual consumers, to take advantage of the outsourcing
needs of these enterprises, and
- providing superior customer support by our network experts.
We intend to further develop our business by focusing on the core elements
of our business strategy discussed above and pursuing the following key growth
strategies:
- expanding our network nationally,
- broadening our marketing activities,
- pursuing strategic sales and distribution alliances,
- engaging in strategic acquisitions, and
- eventually becoming an integrated communications provider offering both
voice and data services.
OUR CUSTOMERS
Since our inception in 1996, we have grown rapidly and now provide Internet
services to more than 500 customers across the United States and in Cuba. In
addition to middle market enterprises, we currently provide service to other
ISPs and larger customers like BellSouth Wireless, Net.B@nk, AGL Resources,
Mohawk Industries, Hartsfield Atlanta International Airport and Guantanamo Bay
Naval Air Station, Cuba under a contract with Local Communications Network.
Our revenues for the year ended December 31, 1998 were $2,142,345, an
increase of 217% from our revenues of $675,569 for the year ended December 31,
1997. Our revenues for the nine months ended September 30, 1999 were $2,288,073,
an increase of 56.3% from our revenues of $1,464,051 for the nine months ended
September 30, 1998. For the nine months ended September 30, 1999, we derived
63.0% of our revenues from providing Internet access and 37.0% of our revenues
from all our other services. For the nine months ended September 30, 1999, our
average monthly revenue per customer was approximately $516.
OUR CORPORATE PROFILE
comstar.net, inc. was formed in March 1996 as ComStar Communications, Inc.,
a Georgia corporation. We changed our name to comstar.net, inc. in July 1999. We
began operating on June 10, 1996, and by December 31, 1996, we had 26 customers.
Our customer base increased to 243 customers at the end of 1997, and to 474
customers at the end of 1998. We had 521 customers at September 30, 1999.
Our principal executive offices are located at 2812 Spring Road, Suite 210,
Atlanta, Georgia 30339, and our main telephone number is (770) 485-6000. We
operate our business primarily from our data center located at our offices in
Atlanta, Georgia. We also have POPs in Raleigh, North Carolina; Birmingham,
Alabama; Athens, Columbus and Gainesville, Georgia; and Miami, Florida. We are
establishing a POP in Houston, Texas.
Our Web site is located at http://www.comstar.net. Information on our Web
site is not, however, part of this prospectus, and you should rely only on the
information contained in this prospectus before deciding to invest in the
investment units.
3
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Minimum offering..................... $4,000,000
Maximum offering..................... $5,000,000
Per investment unit price............ $50,000
Minimum subscription................. $500,000 per entity purchaser and $50,000 per
individual purchaser
Securities offered by comstar.net.... Investment units consisting of a series 1999
convertible note and a stock purchase warrant
Series 1999 convertible note
features........................... Each note matures on April 30, 2000. Simple
interest accrues at 8% per year and is payable
at maturity. The notes are convertible by the
holder in whole at any time before the maturity
date into 15,244 shares of our common stock,
and the initial conversion price per share is
$3.28. The notes are also convertible by the
holder or by us on the closing of the sale by
us of common stock, or securities convertible
into common stock, for $5,000,000 or more in
cash at any time prior to the maturity date.
The notes contain customary anti-dilution
provisions that adjust the conversion price in
the event of stock splits, combinations,
mergers and similar events. In addition, if we
issue securities in the future at a lower price
than the conversion price, the conversion price
will be reduced to that lower price, unless an
exception applies.
Warrant features..................... Each warrant has a ten-year term and is
exercisable immediately for 2,593 shares of our
common stock at an exercise price of $3.28 per
share, the conversion price of the notes. The
warrants contain customary anti-dilution
provisions to reflect stock splits,
combinations, mergers and similar events. In
addition, if we issue securities in the future
at a lower price than the exercise price, the
exercise price will be reduced to that lower
price, unless an exception applies. Each
warrant may be transferred separately from the
related note.
Common stock to be outstanding
immediately after the offering..... 5,185,893 shares
Use of proceeds...................... Provide working capital and repay debt.
</TABLE>
4
<PAGE> 8
SUMMARY FINANCIAL DATA
You should read the following summary financial data of comstar.net along
with "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our financial statements and related
notes included elsewhere in this prospectus. During the nine months ended
September 30, 1999 we incurred compensation expense of approximately $3.4
million as a result of options we granted to purchase our common stock. Without
giving effect to this compensation expense, for the nine months ended September
30, 1999, operating loss would have been $1,156,999, net loss would have been
$1,373,343, net loss per share (basic and diluted) would have been $(.27), and
total shareholders' deficit would have been $(673,693). For an explanation of
the determination of the number of shares used to compute basic and diluted net
loss per share and weighted average shares outstanding, see note 2 of the notes
to our financial statements. The data "as adjusted for the offering -- minimum"
and "as adjusted for the offering -- maximum" reflect the sale by us of
$4,000,000 and $5,000,000 in investment units and our receipt and application of
the estimated net proceeds as described in "Use of Proceeds."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED NINE MONTHS ENDED
(MARCH 5, 1996) DECEMBER 31, SEPTEMBER 30,
TO DECEMBER 31, ------------------------ ------------------------
1996 1997 1998 1998 1999
----------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................... $ 65,398 $ 675,569 $ 2,142,345 $1,464,051 $ 2,288,073
Operating loss............. (267,686) (487,585) (445,138) (237,011) (4,562,394)
Net loss................... (278,120) (547,244) (597,730) (357,132) (4,778,738)
PER SHARE DATA:
Net loss per share (basic
and diluted)............. $ (.06) $ (.11) $ (.12) $ (.07) $ (.93)
========== ========== =========== ========== ===========
Weighted average shares
outstanding.............. 5,000,000 5,000,000 5,002,866 5,000,000 5,117,109
========== ========== =========== ========== ===========
OTHER FINANCIAL DATA:
Purchases of property and
equipment, net........... $ (120,442) $ (263,858) $ (414,329) $ (456,826) $ (304,778)
Net cash used in operating
activities............... (202,080) (402,451) (210,355) (121,240) (1,185,399)
Net cash used in investing
activities............... (120,442) (349,196) (1,010,909) (919,460) (304,778)
Net cash provided by
financing activities..... 328,924 799,921 1,450,209 986,024 1,562,245
EBITDA(1).................. (256,064) (423,788) (162,527) (90,703) (4,341,143)
Insufficient earnings to
cover fixed charges...... 278,120 547,244 597,730 357,132 4,695,994
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the industry. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
5
<PAGE> 9
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
---------------------------------------
AS ADJUSTED AS ADJUSTED
FOR THE FOR THE
OFFERING -- OFFERING --
ACTUAL MINIMUM MAXIMUM
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 355,689 $2,800,604 $3,740,604
Working capital (deficit)............................. (1,711,409) 3,843,676 4,903,676
Total assets.......................................... 2,358,037 4,802,952 5,742,952
Total debt, including current maturities.............. 2,018,555 4,409,561 5,289,766
Total shareholders' (deficit) equity.................. (673,693) (194,516) (74,722)
</TABLE>
DIVIDEND POLICY
We have never paid cash dividends on our common stock, and the terms of the
notes we are offering prohibit us from paying any cash dividends.
RECENT DEVELOPMENTS
In November 1999, we withdrew our registration statement on Form S-1
relating to our proposed initial public offering of our common stock after that
registration statement had been declared effective under the Securities Act of
1933. Because we did not receive the funding anticipated from the initial public
offering, we are making this offering to provide the funds we need to provide
working capital and to repay a portion of our outstanding debt.
---------------------------
Comstar Internet & Wireless(TM), Comstar Internet Service, Inc.(TM),
comstar.net, inc.(TM) and Switch Hotel(TM) are trademarks of comstar.net. We
have applied for federal registration of the Comstar Internet & Wireless (with
logo design)(TM), Comstar Internet Service, Inc. (with logo design)(TM) and
comstar.net, inc. (with logo design)(TM) trademarks.
This prospectus includes statistical data regarding the Internet industry.
This data is taken or derived from information published by International Data
Corporation, a provider of market and strategic information for the technology
industry. We believe that this data is generally indicative of the matters
reflected in this source. This data is inherently imprecise, however, and we
caution you not to place undue reliance on it.
6
<PAGE> 10
RISK FACTORS
An investment in our investment units involves a high degree of risk.
Before you invest in our investment units, you should carefully consider the
risks described below, along with all of the other information included in this
prospectus. Any of the following risks could seriously harm our business and
results of operations. As a result, the value of your investment could decline,
and you could lose part or all of your investment.
Some of the information in this prospectus contains forward-looking
statements that involve substantial risks and uncertainties. You can identify
these statements by forward-looking words such as "anticipate," "believe,"
"continue," "estimate," "expect," "intend," "may," "plan," "will," or similar
words. You should read statements that contain these words carefully because
they:
- discuss our future expectations,
- contain projections of our future results of operations and financial
condition, or
- state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. Events may occur in the future, however, that we have not
accurately predicted or over which we have no control. These events may affect
our future operating results, our ability to implement our business plan, our
efforts to address year 2000 issues and potential competition, among other
things. The risk factors listed in this section, as well as other cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our investment
units, you should be aware that the occurrence of any of the events described in
these risk factors and elsewhere in this prospectus could have a material
adverse effect on our business, financial condition and results of operations
and on the value of your investment.
RISKS RELATED TO COMSTAR.NET
WE FACE A SEVERE CASH SHORTAGE AND WILL NEED ADDITIONAL FINANCING IN THE NEAR
FUTURE TO CONTINUE TO OPERATE AND TO REPAY THE NOTES WHEN THEY BECOME DUE ON
APRIL 30, 2000.
The minimum $4,000,000 to be raised in this offering will allow us to repay
all of our loans that mature in the fourth quarter of 1999 and the first quarter
of 2000. We anticipate, however, that the net proceeds of this offering and our
cash reserves will not be adequate to fund our operations and the development of
additional data centers and POPs. As a result, we expect that we will need
additional funds in the first quarter of 2000 to continue operations. Further,
the notes that we are offering and approximately $900,000 in other loans mature
on April 30, 2000.
We anticipate seeking additional financing in the near future to fund
ongoing capital expenditures and liquidity requirements and to begin to achieve
our goal of purchasing and leasing new data centers and POPs. There is no
guarantee that we will obtain this financing on acceptable terms or at all or
that if we do obtain the financing, it will be adequate to purchase or lease the
required data centers and POPs and satisfy our cash requirements. If we cannot
obtain that financing on terms acceptable to us, we may be forced to curtail our
planned business expansion and may be unable to fund our ongoing operations. In
that happens, we will again face a severe cash shortage that could result in
7
<PAGE> 11
our inability to repay the notes being offered in a timely manner or at all. In
that event, investors in the investment units could lose their entire
investment.
WE ARE AN EARLY STAGE COMPANY IN A RAPIDLY EVOLVING INDUSTRY, WHICH MAKES IT
DIFFICULT TO EVALUATE OUR BUSINESS AND PROSPECTS.
We began operations in June 1996, and our limited operating history makes
an evaluation of us and our prospects difficult. You should consider our
business and our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stages of development,
particularly companies in the new and rapidly evolving market for Internet
services and technologies. Some of the risks we may face as an early stage
company include our ability to:
- implement our business model and strategy and adapt it as needed,
- continue to attract Internet access and data center services customers,
- develop strategic relationships with other Internet-based service
providers that can refer customers to us, and
- continue to develop and upgrade our network systems and infrastructure.
If we fail to manage these early stage risks successfully or the Internet
services industry does not evolve as we expect, current evaluations of our
business and prospects may prove to be inaccurate.
WE EXPECT TO CONTINUE TO SUFFER LOSSES AND EXPERIENCE NEGATIVE CASH FLOW.
We have incurred substantial losses since inception and expect to continue
to suffer substantial losses in the future. Our business has not generated
sufficient cash flow to fund our operations without acquiring capital from other
sources. We have incurred net losses and negative cash flows from operations as
follows:
<TABLE>
<CAPTION>
NET CASH USED IN
NET LOSS OPERATING ACTIVITIES
----------- --------------------
<S> <C> <C>
Period from inception (March 5, 1996) to December
31, 1996........................................ $ (278,120) $ (202,080)
Year ended December 31, 1997...................... (547,244) (402,451)
Year ended December 31, 1998...................... (597,730) (210,355)
Nine months ended September 30, 1999.............. (4,778,738) (1,185,399)
</TABLE>
As of September 30, 1999, we had an accumulated deficit of approximately $6.2
million. We expect to incur additional capital costs and other expenses in
developing and expanding our network and business. As a result, we expect to
incur significant additional losses and negative operating cash flow for the
foreseeable future, and we may not ever be able to achieve profitability. Even
if we do achieve profitability and positive cash flow, we may not be able to
sustain or increase profitability and positive cash flow on a quarterly or
annual basis. If our revenues grow more slowly than we anticipate, or if our
operating expenses exceed our expectations and cannot be adjusted accordingly,
our operating cash flow will decline, our business will suffer and the value of
your investment could decline substantially.
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OUR OPERATING RESULTS AND LIQUIDITY ARE UNPREDICTABLE AND MAY FLUCTUATE, WHICH
MAY CAUSE THE VALUE OF YOUR INVESTMENT TO DECLINE.
Our results of operations are difficult to predict. We have experienced
significant fluctuations on a quarterly and annual basis in our results of
operations, which has affected our liquidity. We expect our operating results
and liquidity to fluctuate significantly from quarter to quarter in the future.
Our results of operations and liquidity may fluctuate significantly in response
to the risk factors described in this section, as well as the following factors,
some of which are beyond our control:
- how quickly we are able to acquire new customers,
- how expensive it is to acquire new customers,
- how much money we have to spend to improve our business and expand our
operations,
- how quickly we are able to develop new services that our customers
require,
- how much our operating expenses increase,
- the mix of services we sell,
- the timing and size of our capital expenditures and changes in our
working capital,
- pricing decisions by us or our competitors,
- whether we experience business disruptions resulting from year 2000
computer problems,
- changes in laws and regulations which affect our business,
- the extent to which we experience increased competition in our markets,
and
- general economic factors that might cause our existing and potential
customers to decrease what they spend on their Internet operations.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE OUR RAPID GROWTH, WHICH IS PLACING AND
MAY CONTINUE TO PLACE A STRAIN ON OUR RESOURCES AND MAY CONTRIBUTE TO FUTURE
LOSSES.
We have rapidly expanded our operations and customer base and anticipate
further growth in the future. Our rapid growth has placed significant demands on
our financial resources, management, personnel, systems, procedures and
controls, which may be inadequate to support our existing and future operations.
If we are unable to manage our growth, we may not be able to implement our
business plan and strategy, and our financial results may suffer. To manage our
growth effectively, we must:
- accurately predict growth in the demand for our Internet access and data
center services and expand our capacity to meet that demand,
- continue to expand and improve our operating and financial systems,
procedures and controls,
- attract, train, motivate, manage and retain key employees, particularly
our network experts,
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- continue to provide high quality Internet access, data center services
and customer support, while dealing with the distractions and strain of
rapid growth,
- acquire and install new equipment and facilities,
- successfully integrate the operations and personnel of any ISPs or other
businesses we acquire, and
- respond quickly and effectively to unanticipated changes in the industry.
IF WE ARE UNABLE TO MANAGE AND EXECUTE OUR PLANNED GEOGRAPHIC EXPANSION, WE MAY
INCUR SUBSTANTIAL COSTS BUT NOT RECEIVE THE REVENUES WE ANTICIPATE.
A key element of our growth strategy is the planned domestic expansion of
our network by opening additional data centers. We cannot guarantee that we will
successfully manage this geographic expansion. To do so we must perform the
following tasks successfully:
- efficiently assess potential markets,
- identify data center sites,
- acquire and make necessary improvements to facilities,
- install equipment,
- expand our employee base to staff new data centers adequately,
- adjust our operational and financial systems to accommodate the new data
centers, and
- integrate the completed data centers into our network.
We may not accurately anticipate the customer demand for the services these
additional data centers will provide, and we may be unable to attract a
sufficient number of customers to our new facilities to justify the expense of
establishing the facility. If we are unable to attract customers for these new
data centers as we expect, our costs of establishing these facilities may exceed
the revenues we derive from them, which would adversely affect our financial
results.
Part of our geographic expansion strategy includes opening POPs throughout
the United States to supplement our data centers. Although the cost to establish
a POP is typically much less than to establish a data center, we also face some
of the above risks in establishing additional POPs.
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WE MAY MAKE ACQUISITIONS OR INVESTMENTS THAT ARE NOT SUCCESSFUL AND THAT
ADVERSELY AFFECT OUR ONGOING OPERATIONS.
To execute our growth strategy, we may make acquisitions and investments to
complement and strengthen our business. We could acquire or invest in
businesses, including other ISPs; customer lists and related customer accounts;
products; services; or technologies. We have very limited experience in these
activities. In making acquisitions or investments, we face numerous risks,
including:
- the difficulty of identifying and hiring one or more senior executives
with acquisition experience,
- the difficulty of identifying suitable acquisition or investment
candidates and negotiating acceptable terms for acquisitions and
investments,
- our need for additional debt or equity financings to complete any
acquisitions,
- the terms of any additional financing used to fund an acquisition may
significantly limit our future financing and operating activities,
- the potential disruption of our ongoing business,
- the potential distraction of our management and diversion of our
resources,
- our inability to maintain uniform standards, controls and procedures,
- the difficulty of successfully integrating the services, products and
personnel of any acquired business or assets into our operations,
- our retention and motivation of key employees of the acquired businesses,
- our entry into geographic markets in which we have little or no prior
experience,
- competition for acquisition opportunities with competitors that are
larger than us or have greater financial and other resources than we
have; and
- our inability to maintain good relations with the customers and suppliers
of the acquired businesses.
OUR MANAGEMENT TEAM HAS WORKED TOGETHER FOR ONLY A SHORT TIME AND MAY EXPERIENCE
INTEGRATION DIFFICULTIES THAT COULD CAUSE OUR BUSINESS TO SUFFER.
We have recently hired several key employees and officers, including our
Chief Operating Officer, Cynthia A. St. Ores; our Chief Financial Officer,
Christopher K. Martin; and our Executive Vice President of Sales and Marketing,
Steven J. Edwards. As a result, our complete management team has worked together
for only a brief time. Our ability to execute our growth strategies effectively
will depend in part on our ability to integrate these and future executives into
our operations. If we are unsuccessful in integrating the new members of our
management team quickly and effectively, our business could suffer
significantly.
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IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, WE MAY HAVE TO EMPLOY LESS
QUALIFIED PERSONNEL AND WE MAY EXPERIENCE HIGH PERSONNEL TURNOVER COSTS.
The loss of the services of one or more of our key employees or our failure
to attract and retain additional qualified personnel could cause us to employ
less qualified personnel, increase our personnel costs or otherwise have a
significant adverse effect on our business. Our success depends in significant
part upon the continued services of our key management, technical and sales
personnel, including our Chief Executive Officer, J. Cary Howell, and our Chief
Technology Officer, Edward N. Landa. None of our officers or employees is a
party to an employment agreement. Any officer or employee can terminate his or
her relationship with us at any time.
To execute our strategy successfully, we must attract, train, retain and
motivate highly qualified management, technical, marketing and sales personnel.
Competition for personnel with the technological and other attributes we require
is intense, and turnover of technical personnel is particularly high in our
industry. We may not be able to attract or retain qualified key personnel, and
we may not recoup the cost of training employees if they leave after a short
time.
IF WE CANNOT IMPLEMENT OUR SALES AND MARKETING PLAN, WE WILL NOT ACHIEVE OUR
PROJECTED GROWTH.
Our projected growth depends on our ability to successfully execute our
sales and marketing plan. Our marketing efforts have been limited in the past,
and we have only recently hired our Executive Vice President of Sales and
Marketing, Steven J. Edwards. To improve our sales and marketing results, we
must recruit and retain a competent and sufficient sales force and marketing
group. If we are unable to develop our sales and marketing expertise, our
business will not grow and our financial results will suffer. If we have
insufficient funds to launch the necessary marketing programs, we may lose
customers or fail to attract additional customers, which would prevent us from
achieving our sales goals and could slow or eliminate our growth.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
PROVIDE ADEQUATE CUSTOMER SUPPORT.
Our ability to continue to grow our business and to retain current and
future customers depends in part on our ability to provide responsive and
knowledgeable customer support through our network experts. A failure to offer
adequate customer support could materially and adversely affect our reputation,
cause us to lose customers or cause demand for our services to decline
significantly.
WE MAY BE UNABLE TO RETAIN OUR CUSTOMERS AFTER THEIR CONTRACTS WITH US EXPIRE,
WHICH WOULD REDUCE OUR REVENUES.
Our success substantially depends not only on adding new customers but on
retaining the ones we have. We face the risk that our current and future
customers may not renew their initial contracts after they expire. Therefore, to
grow as we intend, we must add to our customer base to offset any customer
cancellations. If we fail to retain our existing customers or attract new
customers, we may not only fail to meet our growth projections but may
experience declining revenues.
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DISRUPTIONS OF OUR SERVICES AT OUR DATA CENTER COULD RESULT IN CUSTOMER
CANCELLATIONS, SIGNIFICANT CREDITS FOR FREE SERVICE TO AFFECTED CUSTOMERS AND
LIABILITY FOR DAMAGES THAT EXCEED OUR LIABILITY INSURANCE.
The bulk of our computer and telecommunications equipment, including
critical equipment dedicated to our Internet access services, is presently
located at one data center in Atlanta, Georgia. Despite precautions we take, we
may experience system failures or shut-downs at our data center, particularly
due to natural disasters, vandalism, severed telecommunications lines resulting
from utility construction or repairs near our data center or other unanticipated
problems. If disruptions occur, we may have no means of replacing these services
on a timely basis or at all. Extensive or multiple interruptions in providing
customers with Internet access and other services are primary reasons for
customer decisions to switch to another ISP or cancel their use of Internet
access and related services. Accordingly, any disruption of our services at our
data center could cause us to lose existing customers and damage our ability to
gain new customers.
Our customer contracts currently provide a limited service level warranty
related to the continuous availability of service on a 24 hours per day, seven
days per week basis, except for scheduled maintenance periods. This warranty
provides a credit for free service for disruptions in our Internet access
services. If we incur significant free service obligations because of these
disruptions, we will likely suffer financial losses for the periods in which we
provide the free service. In addition, although our service contracts limit our
liability to our customers for actual damages, we may be found liable for
damages that exceed our liability insurance.
We have developed an important enhancement to our T1, fractional T1, T3 and
fractional T3 leased line Internet access options -- the eCommerce Guarantee. We
will compensate those customers who purchase the eCommerce Guarantee option for
the lost profits, up to $500,000 per access line, for each interruption they
suffer in their Internet access service if the interruption occurs outside the
customer's demarcation point, which is the point at which the customer assumes
responsibility for the communications network, and the interruption causes the
customer to lose profits. An insurance company rated "A" by A.M. Best Company
has insured our liability for the eCommerce Guarantee, and we will be
responsible for a per interruption deductible of $10,000 for each T3 or
fractional T3 line and $2,500 for each T1 or fractional T1 line, with an initial
overall deductible limit of $100,000 for any single event that causes multiple
interruptions. This deductible increases to $250,000 once more than 250 of our
customers are covered by the eCommerce Guarantee and to $500,000 once more than
500 of our customers are covered. The maximum insured amount per interruption is
$500,000 for each T3 or fractional T3 line and $25,000 for each T1 or fractional
T1 line. The maximum amount any customer will be able to recover during the term
of its contract is $500,000 for each T3 or fractional T3 line and $25,000 for
each T1 or fractional T1 line. We will pay the eCommerce Guarantee compensation
first by providing the affected customer with a credit for future access fees
and second by paying the customer in cash within 60 days after the claim is
finally determined for the amount of lost profits in excess of the customer's
contract value. We have not yet implemented our eCommerce Guarantee and we
cannot assure that it will be implemented. If we incur significant free service
obligations or are required to pay significant amounts as a result of our
eCommerce Guarantee, we will likely suffer financial losses for the periods in
which we incur the obligations and pay the amounts.
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BREACHES IN THE SECURITY OF OUR NETWORK COULD REQUIRE US TO PAY MONEY DAMAGES TO
OUR CUSTOMERS FOR LOSS OF INFORMATION AND COULD RESULT IN LOSS OF CUSTOMERS AND
NEGATIVE PUBLICITY.
To conduct electronic commerce and communications effectively, we must
ensure our customers that the information they transmit over our network will be
safe. We provide security for our customers' information by licensing encryption
and authentication technology from others. Despite our design and implementation
of a variety of network security measures, our network, our data center or our
POPs may be the victim of unauthorized access, computer viruses, accidental or
intentional acts and other disruptions of our business. We may be held
responsible and required to pay damages for the loss of any confidential
information stored in our computers or the equipment of our customers arising
from the inappropriate use of our network by others. We may also lose customers
if any of these disruptions occur.
Although we provide industry-standard security measures, these measures
have been defeated in the past, and we cannot guarantee that they will not be
defeated on our network or at our data center or POPs. Any security breach could
result in expensive litigation and harmful publicity. In addition, if many
enterprises choose not to use the Internet because of security concerns, the
growth of the Internet would be inhibited, which would have a material adverse
effect on our business.
IF WE CANNOT EXPAND OUR TELECOMMUNICATIONS NETWORK RAPIDLY OR BROADLY ENOUGH TO
MEET CUSTOMER DEMAND, THE QUALITY OF OUR SERVICE MAY SUFFER.
We must continue to expand and adapt our network infrastructure as the
number of customers and the amount of information they wish to transport
increases and their requirements evolve. A rapid and significant expansion of
our network will place additional stress upon our network hardware and traffic
management systems. The ability of our network to connect and manage a
substantially larger number of customers at high transmission speeds has not
been tested. Consequently, we face the risk that we cannot expand our network as
we intend. Even if we are able to do so, we face the risk that an expanded
network will not maintain the levels of performance our network currently
provides.
From time to time we must upgrade our infrastructure to increase bandwidth
capacity. This allows us to handle increases in information flow while
maintaining the speeds of data transfer our customers require. We believe that
further expansion and improvement of our network infrastructure will require
substantial financial, operational and management resources that may not be
available when we need them. We may not be able to acquire additional network
capacity from our suppliers when we need it, on reasonable terms or at all. In
addition, as we upgrade our infrastructure, we may need to use equipment or
software that is incompatible with our current network. As a result, we may
experience delays in installing the needed equipment or software. Without
additions to our infrastructure, we may not be able to install or maintain
sufficient bandwidth capacity to provide transportation speeds that are
acceptable to our customers, especially if they significantly increase their
usage. If we are unable to maintain acceptable speeds or if we encounter delays
in upgrading our network, we may lose customers and our revenues could decline
significantly.
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A DISRUPTION OR REDUCTION IN THE INTERNET CAPACITY OF ANY OF THE ISPS THAT
PROVIDE OUR INTERNET CONNECTION COULD LOWER THE QUALITY OF OUR SERVICE AND CAUSE
US TO LOSE CUSTOMERS.
Our success depends upon the size, ease of expansion, reliability and
security of our network infrastructure, including the transmission capabilities
we lease from the ISPs that connect us to the Internet. In particular, we depend
on UUNET, GTE Internetworking, Sprint and Intermedia Internet for our Internet
connection. Although we lease Internet access capacity from multiple suppliers,
a disruption or reduction in Internet capacity by any of them could prevent us
from maintaining the high quality of our service and cause us to lose customers.
If our business relationship with any of these providers were to be terminated,
we would need to identify and acquire alternative sources for the service, which
may not be available at all or on prices and terms acceptable to us.
IF PROVIDERS OF LOCAL AND LONG DISTANCE TELECOMMUNICATIONS LINES EXPERIENCE
DISRUPTIONS OR CAPACITY CONSTRAINTS, OUR ABILITY TO PROVIDE SERVICE TO OUR
AFFECTED CUSTOMERS MAY BE ELIMINATED OR SUBSTANTIALLY CONSTRAINED.
We presently rely on BellSouth and other regional and local companies to
provide data communications capacity via local telecommunications lines and
leased long-distance lines to connect us to our customers. We may experience
disruptions or capacity constraints in these telecommunications services. If
disruptions or capacity constraints occur, we may have no means of replacing
these services on a timely basis or at all. In particular, local telephone
service is sometimes available only from BellSouth or another incumbent local
exchange carrier in the markets we serve. Although we believe that the federal
Telecommunications Act of 1996 will generally lead to increased competition in
the local telephone service market, we cannot predict when or to what extent
this will occur or the effect of increased competition on pricing or supply. In
addition, our telecommunica-tions carriers also sell or lease services to our
competitors and either are, or in the future may become, competitors themselves.
As a result, when capacity constraints and disruptions occur, our carriers may
allocate any remaining capacity to themselves or to our competitors.
IF OUR SUPPLIERS ARE UNABLE TO SUPPLY THE EQUIPMENT WE NEED TO MAINTAIN AND
IMPROVE OUR NETWORK AND DATA CENTER SERVICES, OUR SERVICE QUALITY MAY SUFFER AND
WE MAY LOSE CUSTOMERS.
We depend on a few suppliers of hardware components for which alternative
sources are not readily available. We purchase some of our parts from Cisco
Systems, Inc. and Lucent Technologies, Inc. under purchase orders we place from
time to time. We do not have a long-term contract or guaranteed supply
arrangement with these providers, and we do not carry significant inventories of
these parts. If we are unable to obtain these parts on a timely basis and at an
acceptable cost, we could be unable to upgrade or repair our network as required
to remain competitive. As a result, we could lose customers and our business
could be significantly harmed.
OUR SALES CYCLE FOR SOME OF OUR CUSTOMERS IS LONG, AND WE MAY INCUR SUBSTANTIAL
SALES-RELATED EXPENSES BEFORE WE RECEIVE REVENUES, IF ANY, FROM THESE CUSTOMERS.
The period from our initial contact with a potential customer to the
commencement of services for that customer generally varies in relation to the
level of services we provide. For example, services that are more comprehensive
have a four-to-six month sales cycle.
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Our customers' decisions regarding Internet service are often critical to their
business, and they frequently require extensive information and education
regarding the benefits of our Internet access and data center services. We
expect that most of our sales-related expenses will occur before our customers
commit to use our services. This places demands on our working capital and
exposes us to the risk that we may expend significant marketing resources to
pursue customers who ultimately choose not to use our services. Although we
intend to significantly increase our sales and marketing expenditures to attract
new customers, we expect that the sales cycle for new customers who desire more
than basic Internet access will continue to be lengthy.
ANY FAILURE BY US TO PROTECT OUR PROPRIETARY TECHNOLOGY AND OTHER PROPRIETARY
RIGHTS COULD RESULT IN THE LOSS OF OUR RIGHTS, LOSS OF BUSINESS OR INCREASED
COSTS.
One important element of our success and competitive ability is our
technology and our technological expertise. We rely on a combination of
copyright, trademark and trade secret laws and contractual restrictions to
establish and protect proprietary rights in our services. We have no patented
technology that would preclude or inhibit competitors from entering our market.
To limit access to and disclosure of our proprietary information, we enter into
confidentiality agreements with our employees and consultants, and, if possible,
nondisclosure agreements with appropriate suppliers and customers. These
contractual arrangements and any other steps we take to protect our intellectual
property may not prevent misappropriation of our technology or deter others from
developing similar technologies. In addition, the laws of some foreign countries
may not protect our services or intellectual property rights to the same extent
as do the laws of the United States.
To date, we have not been notified that our services infringe the
proprietary rights of others, but others may claim that we infringe their
proprietary rights in current or future products or services. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of competitors in our industry grows. An infringement claim
against us could result in a loss of our proprietary rights and, whether
meritorious or not, could be time-consuming, result in costly litigation, or
require us to pay damages or to enter into royalty or licensing agreements on
terms that are unfavorable to us. Acceptable royalty or licensing agreements
might not be available to us. As a result, any infringement claim could
seriously harm our business.
IF WE FAIL TO PROTECT OUR COMSTAR SERVICE MARKS, IT COULD WEAKEN THE VALUE OF
THE COMSTAR.NET NAME AND RESULT IN OUR LOSS OF CUSTOMERS TO COMPETITORS.
We believe we have begun to build awareness of the comstar.net brand in our
markets, and we intend to use part of the net proceeds from this offering to
further increase market awareness of the comstar.net name. However, several
other companies use the mark "Comstar" and similar terms for their company names
and various products, services, and brands. Some of these companies have
obtained trademark registrations from the United States Patent and Trademark
Office to protect their use of the mark "Comstar" and similar terms. We have
recently filed applications with the United States Patent and Trademark Office
to obtain federal trademark registration of the following marks: comstar.net,
inc., together with our design logo; Comstar Internet Services, Inc., and the
related design; and Comstar Internet & Wireless, Inc., and the related design.
In addition, our wholly owned subsidiary, Comstar Telecom & Wireless, Inc.,
filed an application with the United States Patent and Trademark Office to
obtain federal trademark registration of the mark Comstar Telecom & Wireless,
Inc.
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The United States Patent and Trademark Office has now examined our
application to register the mark Comstar Internet Services, Inc. and the related
design and our application to register the mark Comstar Internet & Wireless,
Inc. and the related design. Registration of both marks has been refused on the
ground that the marks, when used on or in connection with the identified
services, so resemble a currently registered mark for COMSTAR as to be likely to
cause confusion, to cause mistake or to deceive. Registration has also been
provisionally refused in view of a pending application to register a mark that
includes the term COMSTAR owned by a different party. We disagree with the
findings of the examining attorney and are taking steps to vigorously contest
the rejection and pursue the registrations.
The Patent and Trademark Office has not yet responded to our application
for the comstar.net mark or our subsidiary's application for the Comstar Telecom
& Wireless, Inc. mark. If the Patent and Trademark Office issues final
rejections of that application or our other applications discussed above, we
will likely experience greater expense and difficulty in protecting our
trademarks. We may also be unable to stop others from using similar marks in
connection with competing goods or services. If that happens, our customers,
suppliers and others in our industry could confuse us and our products and
services for another person or company and its products and services. This could
weaken the value of the comstar.net name and result in our loss of business to
competitors, which could have a material adverse effect on our business and
financial condition.
WE COULD BE CHARGED WITH TRADEMARK INFRINGEMENT AND INCUR SIGNIFICANT COSTS IN
CONTESTING THESE CHARGES AND FOR ANY RELATED LIABILITY.
Other companies that use or have registrations for the mark "Comstar" or
terms similar to "Comstar" for various products and services, or for their
company or brand name, could claim that we are infringing their federal or state
trademark rights by our use of the mark "comstar.net" or its derivations. An
infringement claim of that nature, whether meritorious or not, could be time
consuming and result in costly litigation. In addition, it could result in our
loss of the right to use the mark "comstar.net" and its derivations, including
losing the right to use them:
- in our corporate name,
- as part of the services we offer, and
- as part of our URL, or our address on the Web, which is currently
www.comstar.net.
Litigation or settlement of an infringement claim could also require us to
pay damages or enter into royalty or licensing agreements on terms that are
unfavorable to us. If we are unable to use the mark "comstar.net" and its
derivations, we will be required to adopt a new company and brand name, and
market our services under a new name. To do so, we will be required to incur
significant costs. Any of these events could have a material and adverse effect
on our business and financial condition.
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POTENTIAL YEAR 2000 PROBLEMS MAY CAUSE US TO LOSE CUSTOMERS AND SUBJECT US TO
SIGNIFICANT LIABILITIES AND COSTS.
The risks posed by year 2000 issues could adversely affect our business in
a number of significant ways. We note in particular that the information
technology systems we depend on may not be year 2000 compliant by the end of
1999. These systems include:
- our own critical information technology and non-information technology
systems,
- the systems of suppliers on which we rely, including the ISPs that
provide our link to the Internet, and
- the systems of our customers, particularly those who maintain their
Internet operations on UNIX-based servers that may be particularly
affected by year 2000 complications.
Further, our costs and liabilities related to year 2000 issues may be
significant, and we may become involved in litigation related to year 2000
issues.
If year 2000 problems cause the failure of any of our systems, the systems
of our suppliers on which we rely, or the servers or other internal systems of
our customers, we could lose customers, suffer significant disruptions in our
business, lose revenues, and incur substantial liabilities and expenses. In
addition, the Internet could face serious disruptions arising from year 2000
issues, which generally may have an adverse impact on traffic and commerce on
the Internet.
Even if year 2000 problems do not cause any of these failures or
disruptions, if our suppliers, current or prospective customers or others expect
that these failures or disruptions will occur, during the fourth quarter of 1999
it could:
- cause potential customers to delay purchases from us until the year 2000,
- reduce the growth of the Internet and electronic commerce,
- hamper existing Internet activity and electronic commerce, and
- reduce the demand for our services.
If this happens, it could materially and adversely affect our business,
particularly our results of operations. For more information about how year 2000
issues affect us, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
IF WE SUCCEED IN OUR GOAL OF BECOMING A COMPETITIVE LOCAL EXCHANGE CARRIER, WE
COULD BE SUBJECT TO NUMEROUS ADDITIONAL RISKS.
One of our goals is to become licensed as a competitive local exchange
carrier, or CLEC, within the state of Georgia and in other states in which we
operate. A CLEC provides local access lines as well as long-distance or other
telecommunications services. The approval process for becoming a CLEC can be
costly and lengthy, and obtaining this approval will divert important management
and capital resources from our business. We have not yet begun the approval
process for becoming a CLEC in any state in which we operate. We may be unable
to obtain approval as a CLEC, if and when we seek such approval, in some or all
of the states in which we operate.
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None of our current management team has any experience in managing a CLEC,
and we may have to retain senior management with that experience to successfully
capitalize on being authorized as a CLEC. We cannot assure you that we will be
able to locate and hire appropriate management personnel on terms we find to be
reasonable or at all.
Even if we do obtain approval to operate as a CLEC, we cannot assure you
that we will be a successful competitor in the industry. Numerous companies,
some of which are our competitors in our current business, already have obtained
this approval and have invested significant resources to build their access
lines, hire and train personnel, develop their services and obtain customers. We
may not be able to fund the substantial capital and other costs that may be
required to operate as a CLEC. In addition, to operate successfully as a CLEC,
we will need to enter into interconnection agreements with incumbent local
exchange carriers, such as BellSouth. These agreements permit carriers to
exchange telecommunications traffic. We may experience difficulties in entering
into these agreements on terms that are acceptable to us and in enforcing these
agreements.
If we attain CLEC status and conduct business as a CLEC, the
telecommunications services that we provide will be subject to significant
regulation at the federal, state and local levels. We may experience delays in
receiving required regulatory approvals or onerous conditions imposed on these
approvals.
Recent federal laws and regulations governing the United States
telecommunications industry remains subject to judicial review and rule-making
by the Federal Communications Commission. As a result, we cannot predict the
effect these laws and regulations will have on our future operations or results.
Federal, state and local authorities have initiated many regulatory actions
regarding important items that impact CLECs. Changes in current or future
regulations adopted by federal, state or local regulators, or other legislative
or judicial initiatives relating to the telecommunications industry, could have
a material adverse effect on us if we become a CLEC.
If we attain CLEC status, we will be required to publicly file our tariffs
with governmental authorities. These tariffs describe the prices we will charge
our customers for telecommunications services and the terms and conditions for
some intrastate, interstate and international telecommunications services. If
governmental regulators or others challenge these tariffs, we could incur
substantial legal and administrative expenses.
We also may be subject to requirements in some states to obtain prior
approval for, or notify the state commission of, any transfers of our voting
securities, sales of our assets, corporate reorganizations involving us,
issuances of our stock or debt instruments and similar transactions involving
us.
MEMBERS OF MANAGEMENT MAY DERIVE BENEFITS FROM OTHER COMPANIES WITH WHICH WE DO
BUSINESS OR IN WHICH WE OWN A SUBSTANTIAL MINORITY INTEREST.
Dr. Samuel F. Dayton, our Chairman of the Board, and James L. Bruce, Jr.,
one of our directors, are substantial shareholders of both comstar.net and db
Telecom Technologies, Inc. Dr. Dayton and Mr. Bruce are also officers and
directors of db Telecom Technologies. Because db Telecom Technologies has in the
past and is expected in the future to perform services for us and engage in
other transactions with us, conflicts of interest may arise in connection with
those transactions. For example, we expect that from time to time we will retain
db Telecom Technologies to perform work for us as a subcontractor on
communications projects.
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In addition, we own 25% of the outstanding common stock of nschool
Communication Systems, Inc., a company involved in developing and licensing
software to link educators, parents and students. We also have a bilateral
license agreement with nschool governing our rights and the rights of nschool
relating to software we developed for nschool. Dr. Samuel F. Dayton, our
Chairman of the Board, is the chairman of the board of directors of nschool. As
a result, conflicts of interest may arise in connection with any transaction
between nschool and us.
We have a policy that requires any material transaction with our officers,
directors, or principal shareholders, or their affiliates, to be on terms no
less favorable to us than we reasonably could have obtained in arm's-length
transactions with independent parties. We believe that all current relationships
between either db Telecom Technologies or nschool on one hand and comstar.net on
the other hand comply with this policy and all future relationships will be made
subject to and must comply with this policy. Nevertheless, transactions between
us and db Telecom Technologies or nschool that are approved under our policy
could result in substantial benefits to Dr. Dayton and/or Mr. Bruce because they
own db Telecom, and substantial benefits to Dr. Dayton because he is the
Chairman of the Board of nschool.
OUR EXISTING SHAREHOLDERS WILL CONTROL SHAREHOLDER ACTIONS AFTER THIS OFFERING,
AND THEY MAY VOTE THEIR SHARES IN WAYS WITH WHICH YOU DISAGREE.
When this offering is closed, our present executive officers, directors and
current holders of more than 5% of the common stock will, in the aggregate,
beneficially own approximately 96.6% of our outstanding common stock. As a
result, these shareholders, voting together, will have the ability to control
all matters submitted to our shareholders for approval, including the election
and removal of directors and any merger, consolidation or sale of all or
substantially all of our assets. This concentration of ownership may have the
effect of delaying or preventing a change in control of comstar.net or of
impeding or discouraging a merger, consolidation, takeover or other business
combination involving comstar.net.
RISKS RELATED TO OUR INDUSTRY
IF OUR TARGET MARKET DOES NOT INCREASE ITS USE OF THE INTERNET, WE WILL BE
UNABLE TO CONTINUE OUR GROWTH.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop, and our success depends upon the continued growth of
the Internet. The Internet will grow only if those enterprises that have relied
upon more traditional means of commerce and communications accept the Internet
as a new medium of communicating, conducting business and exchanging
information. Despite growing interest in the commercial uses of the Internet,
many businesses have not purchased Internet services for a number of reasons,
including:
- inadequate protection of confidential information moving across the
Internet,
- inconsistent quality of service,
- inability to integrate business applications on the Internet,
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<PAGE> 24
- incompatibility between the products of multiple vendors, and
- lack of availability of cost-effective, high-speed services.
Future demand and market acceptance of the Internet may not develop. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, we will be unable to continue our growth or we may grow
more slowly than anticipated.
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT AND RELIABILITY OF THE INTERNET
INFRASTRUCTURE.
The recent growth of the Internet has caused periods of diminished
performance, requiring entities with links to the Internet to periodically
upgrade the links and components that form the infrastructure of the Internet to
alleviate congestion. Because the Internet access we provide is limited by the
speed and reliability of the networks of others, including the ISPs that provide
our connection to the Internet, the public perception of our services could be
undermined by any publicized or perceived downturn in the performance of the
Internet as a whole. Consequently, the emergence and growth of the market for
our services depends on improvements being made to the entire Internet
infrastructure to alleviate congestion.
THE TECHNOLOGY USED IN OUR INDUSTRY IS RAPIDLY CHANGING, AND OUR BUSINESS MAY
SUFFER IF WE DO NOT ADAPT TO THE CHANGING STANDARDS.
Our future success will depend, in part, on our ability to offer services
that:
- incorporate leading technology,
- address the increasingly sophisticated and varied needs of our current
and prospective customers, and
- respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
We may not be able to incorporate future technological advances into our
business on a cost-effective and timely basis or at all. Moreover, technological
advances may encourage our current or future customers to rely on in-house
personnel and equipment to provide the services we currently provide, which
would reduce those customers' need for our services. In addition, we may require
substantial expenditures and lead-time to keep pace and ensure compatibility
with technological advances in our industry.
We believe that our future success also depends upon the continued ability
of our services to work with the products, services and other technologies
offered by various vendors. New products may not be compatible with our network
and services or adequately address the changing needs of our customers. In
addition, industry standards may not be established, or we may not be able to
conform to new standards in a timely fashion to remain competitive. Our failure
to conform to prevailing technology standards, or the failure of common
technology standards to emerge, could limit our ability to compete and adversely
affect our business. In addition, the products, services or technologies
developed by others may make our services less competitive or obsolete.
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<PAGE> 25
OUR INDUSTRY IS VERY COMPETITIVE, AND MANY OF OUR COMPETITORS HAVE GREATER
RESOURCES THAN WE DO.
The Internet services and technologies industries are highly competitive.
The tremendous growth and potential size of the market for Internet services has
attracted many new start-ups as well as existing businesses. It is relatively
easy for new entities to enter the industry, and we expect that competition will
continue to grow as use of the Internet increases. We may not have the resources
or expertise to compete successfully with existing or new competitors, which
include:
- national, regional and local ISPs, including the ISPs that provide our
connection to the Internet,
- national and regional long distance and local exchange telecommunications
carriers,
- cable operators and their affiliates,
- providers of co-location and other data center services, and
- wireless and satellite ISPs.
When compared to us, many of our competitors have substantially greater
financial, technical, marketing and personnel resources; a broader range of
services; larger customer bases; more extensive networks and facilities; longer
operating histories; greater name recognition and market presence; and more
established business relationships in the industry. As a result, some of our
competitors may be better able than we are to:
- develop and expand their network infrastructures and service offerings,
- adapt to new or emerging technologies and changes in customer
requirements,
- take advantage of acquisitions and other opportunities,
- devote resources to the marketing and sale of their services, and
- adopt aggressive pricing policies.
Many cable television operators and other alternative service providers,
such as companies utilizing wireless and satellite-based service technologies,
have begun offering, or have announced their plans to offer, Internet access and
related services. In particular, cable television operators have sought to take
advantage of their existing cable infrastructure to offer Internet access
services. They could prevent us from delivering Internet access through their
wire and cable connections, and are not currently required to permit us to use
their facilities. We expect to experience increased competition from these cable
operators and other alternative service providers.
Advances in technology, as well as changes in the marketplace and the
regulatory environment, are constantly occurring, and we cannot predict the
effect that ongoing or future developments may have on us or on the pricing of
our services. For example, telecommunications companies, including incumbent
local exchange carriers and competitive local exchange carriers, have
increasingly begun to enter the Internet access market. To address the Internet
access requirements of the current business customers of long distance and local
carriers, many carriers are integrating horizontally through acquisitions of or
joint ventures with ISPs, or by wholesale purchase of Internet access from ISPs.
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<PAGE> 26
With these pressures, we may not be able to remain competitive with the
prices of our competitors or with their mix of services. In particular, intense
price competition could significantly reduce our operating margins and adversely
affect our operating results. Any failure by us to compete effectively could
significantly harm our business.
THE MARKET FOR OUTSOURCED INTERNET SOLUTIONS IS UNCERTAIN, AND THE FAILURE OF
THIS MARKET TO DEVELOP AS WE ANTICIPATE COULD PREVENT OUR GROWTH.
Although we believe that the desire of middle market businesses to
outsource their Internet systems and technologies is still growing, future
growth is uncertain. We cannot guarantee that the outsourced Internet solutions
market will ultimately prove to be viable or, if it becomes viable, that it will
grow. The market for our services may not develop as we anticipate, and our
potential customers may not continue to use the Internet for commerce and
communication. To succeed, we must differentiate ourselves from our competition
through service offerings. If we incur increased costs or experience delays in
the development and introduction of new services or enhancements of our existing
services, we may not achieve market acceptance of our services. If our market
develops more slowly than we expect, or if our services do not achieve market
acceptance, we may not achieve our growth plans or develop our business.
OUR INDUSTRY MAY BECOME SUBJECT TO GOVERNMENTAL REGULATION AND OTHER LEGAL
UNCERTAINTIES THAT COULD INCREASE OUR COSTS, RESULT IN DELAYS AND DECREASE THE
DEMAND FOR OUR SERVICES.
We are not currently subject to direct federal, state or local government
regulation as a result of the Internet services we provide, other than
regulations applicable to businesses generally. Currently, only a small body of
laws and regulations directly apply to access to or commerce on the Internet.
Due to the increasing popularity and use of the Internet, however, laws and
regulations may be adopted at the federal, state and local levels. We cannot
predict what regulations may be adopted in the future or to what extent existing
laws and regulations may be altered in response to use of the Internet and the
convergence of traditional telecommunications services with Internet
communications. The adoption of new laws or regulations governing the Internet
or changes made to existing laws might decrease the growth of the Internet. This
would likely decrease the demand for our services or increase the cost of doing
business. Any new laws or regulations or changes to existing laws or regulations
could also subject us and/or our customers to potential liability, which in turn
could have a material adverse effect on our business.
In addition, any one of the numerous states where we provide Internet
services or where we facilitate sales by our customers to end users may require
us to qualify to do business as a foreign corporation in the state. We are
qualified to do business in only a limited number of states, and our failure to
qualify as a foreign corporation in a jurisdiction where we are required to
qualify could subject us to taxes and penalties for failing to qualify,
including the inability to enforce contracts in the jurisdictions. The
application of the laws or regulations of jurisdictions whose laws do not
currently apply to our business could adversely affect our business.
WE MAY BE LIABLE FOR THE MATERIAL OUR CUSTOMERS DISTRIBUTE OVER THE INTERNET.
The law relating to the liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the Web sites we host. For
example, lawsuits may be brought
23
<PAGE> 27
against us claiming that material inappropriate for viewing by young children
can be accessed from Web sites we host. Other potential claims include
defamation, invasion of privacy and copyright infringement. Providers of
Internet services have been sued in the past, sometimes successfully, based on
the content of material available on their networks or through their services.
Our business could suffer if we have to take costly measures to reduce our
exposure to these risks or if we incur liability for, or are required to defend
ourselves against, those types of claims.
RISKS RELATED TO THE OFFERING
THERE IS NO PUBLIC MARKET FOR ANY OF THE SECURITIES WE ARE OFFERING.
No public market exists for our notes, warrants or common stock. We cannot
guarantee that a public market for any of these securities will ever exist or
that investors will be able to sell their convertible notes, warrants or the
shares of common stock into which the notes are convertible or for which the
warrants may be exercised.
THE VALUE OF OUR INVESTMENT UNITS AND OUR COMMON STOCK PRICE MAY BE VOLATILE,
WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR INDIVIDUAL INVESTORS.
The value of the investment units and the underlying common stock may
fluctuate significantly in response to the following and other factors, some of
which are beyond our control:
- variations in quarterly operating results,
- announcements of significant contracts, technological innovations or new
services by us or our competitors, and
- the operating and stock price performance of other companies in our
industry.
Because our business is Internet-related, the value of the investment units and
our common stock could fluctuate widely if the market price of equity securities
of other Internet-related companies becomes volatile.
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING
AND MAY FAIL TO USE THEM EFFECTIVELY TO GROW OUR BUSINESS.
The net proceeds of this offering are estimated to be between approximately
$3,529,000 and approximately $4,469,000. We have allocated approximately $1.2
million of this amount for the repayment of debt, including accrued interest, to
various lenders. Our board of directors and management will have significant
flexibility in applying the remaining net proceeds of this offering, and they
may use these funds for purposes you may think are unwise. Our failure to apply
these funds effectively could impede our ability to grow our business.
OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DISCOURAGE CHANGE IN CONTROL
TRANSACTIONS.
Our articles of incorporation and bylaws contain provisions that may make
it more difficult for others to acquire control of comstar.net, even if the
change in control would be beneficial to our shareholders. If these provisions
discourage any proposed change in control that could be beneficial to
shareholders, our stock price could decline significantly.
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<PAGE> 28
USE OF PROCEEDS
The minimum net proceeds we will receive from the sale of investment units
in this offering will be approximately $3,529,000. The maximum net proceeds we
will receive from the sale of investment units in this offering will be
approximately $4,469,000. We intend to spend all of the net proceeds of this
offering for working capital and to repay outstanding debt and accrued interest
of approximately $1.2 million. The terms of the debt to be repaid are as
follows:
<TABLE>
<CAPTION>
PRINCIPAL MATURITY ANNUAL
LENDER AMOUNT DATE INTEREST RATE
- ------ --------- -------- -------------
<S> <C> <C> <C>
Premier Bank.................................... $100,100 1/15/00 prime + 1%
Premier Bank.................................... 700,000 1/15/00 prime + 1%
Dr. Samuel F. Dayton............................ 140,000 1/15/00* 10%
Dr. Samuel F. Dayton and James L. Bruce, Jr..... 283,985 12/27/99 8.75%
</TABLE>
* or the closing of this offering, if earlier.
We will pay the $283,985 we currently owe to Dr. Dayton and Mr. Bruce,
together with accrued interest, directly to The First National Bank of Commerce,
their lender. This payment will satisfy the remaining balance of the $383,985
that Dr. Dayton and Mr. Bruce borrowed from First National on our behalf, which
they loaned to us to fund our purchase of Athens' ISP, Inc. in July 1998. Dr.
Dayton loaned us $140,000 in November 1999 on a short-term basis to fund working
capital.
Pending application of the net proceeds described above, we intend to
invest the net proceeds in investment-grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock, and we currently
anticipate that we will retain all future earnings for use in our business.
Additionally, the terms of the notes we are offering prohibit us from paying any
cash dividends.
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<PAGE> 29
CAPITALIZATION
The following table describes our capitalization at September 30, 1999 on a
historical basis and as adjusted to give effect to our sale of the minimum
$4,000,000 in investment units and the maximum $5,000,000 in investment units
offered in this offering and the application of the estimated net proceeds from
the offering. The information in the table does not include 868,125 shares of
common stock that may be issued under outstanding options at September 30, 1999
at an exercise price of $11.42 per share. You should read this table along with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
data appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------------------
AS ADJUSTED AS ADJUSTED
ACTUAL -- MINIMUM -- MAXIMUM
----------- ----------- -----------
<S> <C> <C> <C>
Long-term debt, including current
maturities(1)....................... $ 1,972,822 $ 4,409,560 $5,289,766
Obligations under capital leases,
including current portion........... 45,733 45,733 45,733
Shareholders' deficit:
Preferred stock, no par value:
5,000,000 shares authorized, none
issued and outstanding......... -- --
Common stock, no par value:
50,000,000 shares authorized;
5,185,893 shares issued and
outstanding (actual)(2)........ 2,122,744 2,122,744 2,122,744
Additional paid in capital(1)......... 3,522,412 4,001,589 4,121,383
Deferred compensation................. (117,017) (117,017) (117,017)
Accumulated deficit................... (6,201,832) (6,201,832) (6,201,832)
----------- ----------- ----------
Total shareholders' (deficit)
equity...................... (673,693) (194,517) (74,722)
----------- ----------- ----------
$ 1,344,862 $ 4,260,777 $5,260,777
=========== =========== ==========
</TABLE>
(1) Of the $4,000,000 minimum and $5,000,000 maximum gross proceeds of the
investment units we are offering, we have allocated $3,500,000 and
$4,400,000, respectively, to the initial value of the notes and $500,000 and
$600,000, respectively, to additional paid in capital to reflect the
estimated value of the warrants. We cannot assure you that the value
allocated to the warrants reflects the price at which the warrants may
actually be exercised.
(2) Excludes the 207,440 (minimum) and 259,300 (maximum) shares of common stock
issuable upon the exercise of the warrants.
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<PAGE> 30
SELECTED FINANCIAL DATA
The following selected financial data of comstar.net for the period from
inception, March 5, 1996, to December 31, 1996, and for the years ended December
31, 1997 and 1998 and as of December 31, 1997 and 1998 are derived from our
audited financial statements. The selected statement of operations data for the
nine month periods ended September 30, 1998 and 1999 and the selected balance
sheet data as of December 31, 1996 and September 30, 1999 are derived from our
unaudited financial statements which, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the information provided in them. The results of operations for
the nine months ended September 30, 1999 are not necessarily indicative of the
results for a full year. You should read the following data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
During the nine months ended September 30, 1999 we incurred compensation
expense of approximately $3.4 million as a result of options we granted to
purchase our common stock. Without giving effect to this compensation expense,
for the nine months ended September 30, 1999, operating loss would have been
$1,156,999, net loss would have been $1,373,343, net loss per share (basic and
diluted) would have been $(.27), and total shareholders' deficit would have been
$(673,693). For an explanation of the determination of the number of shares used
to compute basic and diluted net loss per share and weighted average shares
outstanding, see note 2 of the notes to our financial statements. The balance
sheet data "as adjusted" as of September 30, 1999 reflect our sale of the
minimum $4,000,000 in investment units and the maximum $5,000,000 in investment
units, respectively, and our receipt and application of the estimated net
proceeds as described in "Use of Proceeds."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996) YEAR ENDED NINE MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
---------------- ------------------------ ------------------------
1996 1997 1998 1998 1999
---------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Internet access................ $ 29,579 $ 399,167 $ 1,334,053 $ 925,005 $ 1,441,132
Data center services........... 33,048 205,171 417,112 269,167 420,814
Circuit rebill................. 276 44,459 255,230 164,888 361,594
Other.......................... 2,495 26,772 135,950 104,991 64,533
---------- ---------- ----------- ---------- -----------
Total............................ 65,398 675,569 2,142,345 1,464,051 2,288,073
---------- ---------- ----------- ---------- -----------
COSTS AND EXPENSES:
Cost of network services....... 73,963 528,835 1,235,862 819,440 1,461,932
Salaries and wages............. 150,448 370,145 521,570 403,030 958,010
General and administrative..... 67,259 131,767 379,036 210,398 615,922
Rent........................... 21,792 33,152 106,417 70,540 87,659
Management fees................ 8,000 42,000 60,000 45,000 30,000
Depreciation and
amortization................. 11,622 57,255 284,598 152,654 291,549
Stock compensation expense..... -- -- -- -- 3,405,395
---------- ---------- ----------- ---------- -----------
OPERATING LOSS................... (267,686) (487,585) (445,138) (237,011) (4,562,394)
---------- ---------- ----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense............... (10,434) (66,201) (150,605) (113,775) (146,046)
Other income (loss)............ -- 6,542 (1,987) (6,346) 12,446
Equity in net loss of
investee..................... -- -- -- -- (82,744)
========== ========== =========== ========== ===========
NET LOSS......................... $ (278,120) $ (547,244) $ (597,730) $ (357,132) $(4,778,738)
========== ========== =========== ========== ===========
</TABLE>
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<PAGE> 31
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996) YEAR ENDED NINE MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
---------------- ------------------------ ------------------------
1996 1997 1998 1998 1999
---------------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
NET LOSS PER SHARE (BASIC AND
DILUTED)....................... $ (.06) $ (.11) $ (.12) $ (.07) $ (.93)
========== ========== =========== ========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING.................... 5,000,000 5,000,000 5,002,866 5,000,000 5,117,109
========== ========== =========== ========== ===========
OTHER FINANCIAL DATA:
Purchases of property and
equipment, net............... $ (120,442) $ (263,858) $ (414,329) $ (456,826) $ (304,778)
Net cash used in operating
activities................... (202,080) (402,451) (210,355) (121,240) (1,185,399)
Net cash used in investing
activities................... (120,442) (349,196) (1,010,909) (919,460) (304,778)
Net cash provided by financing
activities................... 328,924 799,921 1,450,209 986,024 1,562,245
EBITDA (1)..................... (256,064) (423,788) (162,527) (90,703) (4,341,143)
Insufficient earnings to cover
fixed charges................ 278,120 547,244 597,730 357,132 4,695,994
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
AS OF DECEMBER 31, ---------------------------------------
------------------------------------ AS ADJUSTED AS ADJUSTED
1996 1997 1998 ACTUAL -- MINIMUM -- MAXIMUM
--------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............. $ 6,402 $ 54,676 $ 283,621 $ 355,689 $2,800,604 $3,740,604
Working capital
(deficit)............... (379,483) (883,047) (2,174,370) (1,711,409) 3,843,676 4,903,676
Total assets.............. 123,965 529,519 1,649,847 2,358,037 4,802,952 5,742,952
Total debt, including
current maturities...... 328,924 1,128,845 2,214,232 2,018,555 4,409,561 5,289,766
Total shareholders'
(deficit) equity........ (278,120) (825,364) (1,058,272) (673,693) (194,516) (74,722)
</TABLE>
- ---------------
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA is provided because it is a measure
commonly used in the industry. EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not be
considered an alternative to net income as a measure of performance or to
cash flow as a measure of liquidity. EBITDA is not necessarily comparable
with similarly titled measures for other companies.
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<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our financial
statements and related notes and other financial information appearing elsewhere
in this prospectus. This discussion contains forward-looking statements relating
to our future financial performance, business strategy, financing plans and
other future events that involve risks and uncertainties. Our actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of many known and unknown factors, including those
factors described in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a rapidly growing ISP that targets middle market businesses,
educational institutions and governmental organizations. Our primary services
include Internet access, co-location services and managed application hosting
services.
We began operations in June 1996. From inception through December 31, 1996,
we had total revenues of $65,398. During the year ended December 31, 1997, we
expanded operations from one to three POPs and purchased the business customer
lists and related customer accounts of one Atlanta-based ISP to end the year
with revenues totaling $675,569, an approximate ten-fold growth in revenues.
During the year ended December 31, 1998, we expanded our Atlanta data center,
purchased the business customer lists and related customer accounts of two
Atlanta-based ISPs and purchased Athens' ISP, Inc., based in Athens, Georgia.
For the year ended December 31, 1998, we had revenues totaling $2,142,345. For
the nine months ended September 30, 1999, we had revenues totaling $2,288,073.
Our customer base grew as follows during these periods:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE MONTHS
(MARCH 5, 1996) YEAR ENDED ENDED
TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
---------------- ------------- -------------
1996 1997 1998 1999
---------------- ----- ----- -------------
<S> <C> <C> <C> <C>
Customers at beginning of period............. 0 26 243 474
New customers................................ 26 233 297 120
Non-renewing and terminated customers........ 0 (16) (66) (73)
--- --- --- ---
Customers at end of period................... 26 243 474 521
=== === === ===
</TABLE>
Since 1997, our rate of growth has declined due to the lack of capital
needed to expand our network, market and sell our services and add technical and
support staff. The capital we receive from this offering will provide us the
means to repay our maturing debt and fund our operations for the first quarter
of 2000. We anticipate seeking additional financing to repay debt that matures
in April 2000, fund our operations beyond that date, develop our network, expand
our operations into new markets, roll out a new marketing campaign and increase
our sales force.
Although we have experienced significant growth in customers and in
revenues, we have experienced operating losses and negative cash flows from
operations in each quarterly and annual period since our inception. We expect to
continue to incur losses and negative cash flows for the foreseeable future. As
of September 30, 1999, we had an accumulated deficit of approximately $6.2
million.
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<PAGE> 33
We derive most of our revenues from Internet access fees and data center
services. Our data center services currently include co-location, Web hosting
and managed application hosting. We expect revenues derived from our
higher-priced services, such as co-location, managed application hosting and
leased lines, to increase as a percentage of revenues in the future. For
example, monthly T1, fractional T1 and T3 leased line revenues increased by
173.6% for the nine months ended September 30, 1999 over the nine months ended
September 30, 1998. We also expect Web hosting revenues to decline as a
percentage of revenues in the future.
We offer a variety of services to our customers. Depending on the
complexity of their Internet strategies, our customers subscribe to as few as
one service to over 20 services. For the nine months ended September 30, 1999,
the average customer subscribed to 2.9 services. Based on revenues during this
period, our top three Internet access services were ISDN, T1 and frame relay,
and our top two data center services were co-location and Web hosting. For the
nine months ended September 30, 1999, the average number of customers using each
of these services was 378 for ISDN, 41 for leased lines, 21 for frame relay, 35
for co-location and 114 for Web hosting.
We generally provide our services under one-year, two-year and three-year
contracts. Of the 212 contracts signed during the nine months ended September
30, 1999, 172 were one-year contracts, 37 were two-year contracts and three were
three-year contracts. We have experienced a low rate of customer turnover,
averaging 1.4% for the year ended December 31, 1997, 1.5% for the year ended
December 31, 1998 and 1.7% for the nine months ended September 30, 1999.
We charge installation fees for the initial setup of Internet access and
monthly access fees based on a set amount of bandwidth, with additional
incremental fees if the customer orders additional bandwidth. Bandwidth refers
to the amount of data that can be moved in a given period. We charge
installation fees to recover our cost of installing and setting up each customer
for data center services and monthly fees according to the services we provide
under our agreement with the customer. We recognize monthly revenues in the
period in which the services are provided.
Our installation fees are non-refundable and are priced close to or less
than our cost as an incentive to attract the customer. We do not defer
recognition of these fees because we cannot ensure recovery of these costs
through future billings. For example, we may lose the customer in the future. By
recognizing these fees when they are incurred, we match these revenues with the
costs associated with them. We recognize all installation fees in the period in
which the service is installed. Installation revenues were 8.5% of total
revenues for the year ended December 31, 1997, 6.0% for the year ended December
31, 1998 and 2.7% for the nine months ended September 30, 1999.
We also receive revenues from circuit rebill charges, which primarily
result from the resale to our customers of distance-sensitive circuits that we
purchase from local circuit providers such as BellSouth and MCI Worldcom.
Circuit rebill charges consist of both one-time fixed fees for circuit
installations that connect the customer to the local provider and variable
recurring circuit charges. Recurring circuit charges are billed on a monthly
basis and vary based upon circuit type, the distance the circuit spans and/or
the circuit usage, as well as the term of the contract. The local circuit
provider charges us for the installation and recurring charges, and we then
rebill those charges to the customer. Our bill to the customer includes an
add-on charge to the recurring circuit charges for which the provider bills us.
30
<PAGE> 34
We also receive other revenues, consisting primarily of transaction
processing fees and miscellaneous hardware sales. Transaction processing fees
are revenues generated from our e-commerce software and are recognized based on
monthly usage. Hardware sales consist of the resale of some hardware components
to our customers. Because hardware sales are one-time sales, the revenues we
derive from them may vary significantly from period to period.
Our most significant expense item is our cost of network services, which
consists of data communications costs for upstream access, or our connections to
the Internet, and data communications charges for downstream access, or our
connections to our customers. Upstream access costs consist primarily of
payments to network providers such as UUNET, MCI Worldcom, Sprint, GTE
Internetworking and other providers. Our downstream access costs consist
primarily of payments to BellSouth and MediaOne. The next most significant
expense item is salaries and wages paid to our employees.
Our other costs and expenses include:
- selling, general and administrative expenses, including advertising
costs, employee benefits, professional fees, insurance, general office
expense, recruiting, utilities and equipment rentals incurred in the
normal course of business,
- management fees, consisting of charges from db Telecom Technologies,
Inc., an affiliated company that provided us with consulting and
management services through June 30, 1999, after which no more management
fees will accrue,
- depreciation and amortization, consisting primarily of the depreciation
of our fixed assets, ordinarily over a three to ten-year period, and the
amortization of our customer lists, on a customer-by-customer basis, over
the lesser of three years or the period the customer uses our services,
and
- interest incurred on our debt.
We have significantly increased our sales and marketing activities through
the expansion of our sales force, increased emphasis on developing reseller and
referral channels and increased marketing efforts to build the comstar.net
brand. In June 1999, we hired Steven J. Edwards, our Executive Vice President of
Sales and Marketing, to design and implement a comprehensive sales and marketing
plan. Before his hiring, we had not undertaken significant marketing activities.
In the third quarter of 1999, however, we significantly increased our hiring of
sales and marketing personnel to a level that we believe will support our sales
and marketing efforts for the foreseeable future.
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<PAGE> 35
RESULTS OF OPERATIONS
The following table provides a summary statement of operations, expressed
as a percentage of revenues, for the period from inception (March 5, 1996) to
December 31, 1996, for the years ended December 31, 1997 and 1998, and for the
nine months ended September 30, 1998 and 1999. Operating results for any period
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996) YEAR ENDED NINE MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
--------------- ----------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:.............. $65,398 $675,569 $2,142,345 $1,464,051 $2,288,073
======= ======== ========== ========== ==========
Internet access........ 45.2% 59.1% 62.3% 63.2% 63.0%
Data center services... 50.5 30.4 19.5 18.4 18.4
Circuit rebill......... 0.5 6.5 11.9 11.3 15.8
Other.................. 3.8 4.0 6.3 7.1 2.8
------- -------- ---------- ---------- ----------
Total.................. 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======== ========== ========== ==========
COSTS AND EXPENSES:
Cost of network
services............. 113.1% 78.3% 57.7% 56.0% 63.9%
Salaries and wages..... 230.0 54.8 24.3 27.5 41.9
General and
administrative....... 102.9 19.5 17.7 14.4 26.9
Rent................... 33.3 4.9 5.0 4.8 3.8
Management fees........ 12.2 6.2 2.8 3.1 1.3
Stock compensation
expense.............. 0.0 0.0 0.0 0.0 149.0
Depreciation and
amortization......... 17.8 8.5 13.3 10.4 12.7
------- -------- ---------- ---------- ----------
OPERATING LOSS......... (409.3)% (72.2)% (20.8)% (16.2)% (199.5)%
======= ======== ========== ========== ==========
OTHER INCOME (EXPENSE):
Interest expense....... (16.0)% (9.8)% (7.0)% (7.8)% (6.4)%
Other income (loss).... 0.0 1.0 (0.1) (0.4) 0.5
Equity in net loss of
investee............. 0.0 0.0 0.0 0.0 (3.6)
------- -------- ---------- ---------- ----------
NET LOSS............... (425.3)% (81.0)% (27.9)% (24.4)% (209.0)%
======= ======== ========== ========== ==========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
REVENUES
Total revenues increased 56.3% to $2,288,073 for the nine months ended
September 30, 1999 from $1,464,051 for the nine months ended September 30, 1998
due to substantial increases in Internet access revenues, data center services
revenues and circuit rebill revenues as described in the following paragraphs.
The increase in total revenues is attributable primarily to a larger number of
customers and a higher amount of sales per customer. We had 521 customers at
September 30, 1999 with an average monthly billing of approximately $516 per
customer for the nine months ended September 30, 1999 compared with 436
customers with an average monthly billing of approximately $471 per customer for
the nine months ended September 30, 1998. The increase in customers at September
30, 1999 was due primarily to successful marketing efforts and additions to our
sales force. The average monthly billing per customer for the
32
<PAGE> 36
nine months ended September 30, 1999 increased by approximately 9.6% over the
average monthly billing per customer for the nine months ended September 30,
1998 due to existing customers upgrading their level of service and new
customers purchasing our higher-priced data center services. We added SDSL
services in May 1999 and managed application server hosting services in June
1999.
Internet access. Internet access revenues increased to $1,441,132, or
63.0% of total revenues, for the nine months ended September 30, 1999 from
$925,005, or 63.2% of total revenues, for the nine months ended September 30,
1998 primarily due to overall increases in the customer base and average billing
per customer discussed above, along with new services.
Data center services. Data center services revenues increased to $420,814,
or 18.4% of total revenues, for the nine months ended September 30, 1999 from
$269,167, or 18.4% of total revenues, for the nine months ended September 30,
1998 primarily due to the overall increase in the customer base and average
billing per customer discussed above. We completed our expansion of the Atlanta
data center facilities in April 1998. This expanded facility, which allowed us
to offer our data center services to a broader market, was available to us for
the entire nine months ended September 30, 1999, compared to only five of the
nine months ended September 30, 1998.
Circuit rebill. Circuit rebill revenues increased to $361,594, or 15.8% of
total revenues, for the nine months ended September 30, 1999 from $164,888, or
11.3% of total revenues, for the nine months ended September 30, 1998. This
increase is due to new and existing customers purchasing or upgrading to
higher-end, more expensive services such as T1 and frame relay.
Other. Other revenues decreased to $64,533, or 2.8% of total revenues, for
the nine months ended September 30, 1999 from $104,991, or 7.1% of total
revenues, for the nine months ended September 30, 1998. The decrease is
primarily attributable to a $38,433 decrease in revenues from non-recurring
hardware resales.
COST AND EXPENSES
Cost of network services. Cost of network services increased to
$1,461,932, or 63.9% of total revenues, for the nine months ended September 30,
1999 from $819,440, or 56.0% of total revenues, for the nine months ended
September 30, 1998. The increase in cost of network services is due primarily to
the increase in the amount of upstream and downstream access services we
purchased to serve our growing customer base. As a percentage of revenues, the
cost of network services increased due to our purchase of excess upstream
capacity to ensure the availability of bandwidth for network growth.
Salaries and wages. Salaries and wages increased to $958,010, or 41.9% of
total revenues, for the nine months ended September 30, 1999 from $403,030, or
27.5% of total revenues, for the nine months ended September 30, 1998. We had 37
employees, including three new executive officers, as of September 30, 1999
compared to 20 employees at September 30, 1998.
General and administrative. General and administrative expenses increased
to $615,922, or 26.9% of total revenues, for the nine months ended September 30,
1999 from $210,398, or 14.4% of total revenues, for the nine months ended
September 30, 1998. The increase in general and administrative expenses is
attributed primarily to an increase in advertising costs, employee benefits,
professional fees, insurance, general office expenses,
33
<PAGE> 37
recruiting, utilities and bad debt expense. These costs increased as we added
senior management and other personnel to plan for future growth.
Rent. As a percentage of total revenues, rent decreased to 3.8% of total
revenues for the nine months ended September 30, 1999 from 4.8% for the nine
months ended September 30, 1998. Rent increased to $87,659 for the nine months
ended September 30, 1999 from $70,540 for the nine months ended September 30,
1998. The increase in rent is primarily attributable to the addition of the
offices in Athens, Georgia in July 1998, Raleigh, North Carolina in February
1999 and Miami, Florida in April 1999.
Management fees. Management fees decreased to $30,000, or 1.3% of total
revenues, for the nine months ended September 30, 1999 from $45,000, or 3.1% of
total revenues, for the nine months ended September 30, 1998. As of July 1,
1999, we assumed the management functions provided by db Telecom Technologies,
and we expect to incur no further management fees after that date. We expect no
material effects on our results of operations as a result of the cancellation of
this arrangement. For more information about our relationship with db Telecom
Technologies, see "Management -- Compensation Committee Interlocks and Insider
Participation."
Stock compensation expense. We incurred stock compensation expense of
$3,405,395 on September 1, 1999 related to stock options that we granted to our
two outside directors, to two other directors who are principal shareholders and
to db Telecom Technologies employees. See "Management -- Compensation Committee
Interlocks and Insider Participation," "-- comstar.net, inc. Amended and
Restated 1999 Stock Option and Incentive Plan" and "-- comstar.net, inc.
Director Stock Option Plan."
Depreciation and amortization. Depreciation and amortization increased to
$291,549, or 12.7% of total revenues, for the nine months ended September 30,
1999 from $152,654, or 10.4% of total revenues, for the nine months ended
September 30, 1998 as we purchased more network equipment to serve our growing
customer base and office equipment to serve our growing employee base. Property
and equipment totaled $1,154,606 at September 30, 1999, and $838,063 as of
September 30, 1998. During the nine months ended September 30, 1998, we
purchased Athens' ISP and the business customer lists of two Atlanta-based ISPs,
which increased the cost basis of our customer lists by $462,636. Accordingly,
we incurred a full nine months of amortization expense on these customer lists
during the nine months ended September 30, 1999.
Interest expense. Net interest expense decreased as a percentage of total
revenues to 6.4% for the nine months ended September 30, 1999 from 7.8% of total
revenues for the nine months ended September 30, 1998. Interest expense, net of
interest income of $15,280, increased to $146,046 for the nine months ended
September 30, 1999 from $113,775 for the nine months ended September 30, 1998
due to the additional debt we incurred to fund our capital purchases and working
capital needs. Total debt and obligations under capital leases at September 30,
1999 was $2,018,555 compared to $2,095,427 at September 30, 1998.
Other income (loss). Other income increased to $12,446, or 0.5% of total
revenues, for the nine months ended September 30, 1999 from a loss of $6,346, or
(0.4%) of total revenues, for the nine months ended September 30, 1998. We
recognized a non-recurring loss of $14,111 on the sale of fixed assets during
the nine months ended September 30, 1998.
34
<PAGE> 38
Equity in net loss of investee. We own 25% of the outstanding equity
interests of nschool Communication Systems, Inc. Our share of nschool's net loss
was $82,744 for the nine months ended September 30, 1999, which reduced our
investment in nschool to $0.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased 217.1% to $2,142,345 for the year ended December
31, 1998 from $675,569 for the year ended December 31, 1997 due to substantial
increases in Internet access revenues, data center services revenues, circuit
rebill revenues and other revenues as described in the following paragraphs. The
increase in total revenues is attributable primarily to a larger number of
customers, partially offset by a lower amount of sales per customer. We had 474
customers at December 31, 1998 and an average monthly billing of approximately
$476 per customer for the year ended December 31, 1998, as compared to 243
customers at December 31, 1997 and an average monthly billing of approximately
$518 per customer for the year ended December 31, 1997. The increase in
customers at December 31, 1998 was due in part to our purchase of the business
customer lists of two ISPs in April 1998 and July 1998 and our purchase of
Athens' ISP in July 1998. The average monthly billing per customer for the year
ended December 31, 1998 decreased by approximately 8.1% over the average monthly
billing for the year ended December 31, 1997 because revenues from lower-priced
Internet access services increased at a higher rate than revenues from
higher-priced data center services.
Internet access. Internet access revenues increased to $1,334,053, or
62.3% of total revenues, for the year ended December 31, 1998 from $399,167, or
59.1% of total revenues, for the year ended December 31, 1997 primarily due to
the overall increase in the customer base, partially offset by a decrease in the
average monthly billing per customer. Internet access revenues increased 234.2%
for the year ended December 31, 1998 over the year ended December 31, 1997.
Data center services. Data center services revenues increased to $417,112,
or 19.5% of total revenues, for the year ended December 31, 1998 from $205,171,
or 30.4% of total revenues, for the year ended December 31, 1997 primarily due
to the overall increase in the customer base, partially offset by a decrease in
the average monthly billing per customer. We completed our expansion of the
Atlanta data center facilities in April 1998. This expanded facility allowed us
to offer our data center services to a broader market. Data center services
revenues increased 103.3% for the year ended December 31, 1998 over the year
ended December 31, 1997.
Circuit rebill. Circuit rebill revenues increased to $255,230, or 11.9% of
total revenues, for the year ended December 31, 1998 from $44,459, or 6.5% of
total revenues, for the year ended December 31, 1997. The increase is due to new
and existing customers purchasing or upgrading to higher-end, more expensive
services such as T1 and frame relay.
Other. Other revenues increased to $135,950, or 6.3% of total revenues,
for the year ended December 31, 1998 from $26,772, or 4.0% of total revenues,
for the year ended December 31, 1997. The increase is primarily due to a $42,846
increase in non-recurring hardware resales and $37,533 in transaction processing
fees associated with our e-commerce software. We began offering our e-commerce
software for customer use in July 1998.
35
<PAGE> 39
COSTS AND EXPENSES
Cost of network services. As a percentage of total revenues, cost of
network services decreased to 57.7% for the year ended December 31, 1998 from
78.3% for the year ended December 31, 1997. Cost of network services increased
to $1,235,862 for the year ended December 31, 1998 from $528,835 for the year
ended December 31, 1997. This increase in cost of network services is due
primarily to the increase in the amount of upstream and downstream access we
purchased to serve our growing customer base. The decrease as a percentage of
revenues is due to increased use of excess upstream capacity resulting from the
increase in our customer base.
Salaries and wages. As a percentage of total revenues, salaries and wages
decreased to 24.3% for the year ended December 31, 1998 from 54.8% for the year
ended December 31, 1997. Salaries and wages increased to $521,570 for the year
ended December 31, 1998 from $370,145 for the year ended December 31, 1997. The
increase in salaries and wages is primarily due to the increased workforce
needed to serve the expanding customer base. We had 18 employees at December 31,
1998 compared to nine employees at December 31, 1997.
General and administrative. As a percentage of total revenues, general and
administrative expenses decreased to 17.7% for the year ended December 31, 1998
from 19.5% for the year ended December 31, 1997. General and administrative
expenses increased to $379,036 for the year ended December 31, 1998 from
$131,767 for the year ended December 31, 1997. The increase in general and
administrative expenses is primarily attributable to increases in advertising
expenditures, additional insurance policies, professional fees, general office
equipment and computer supply costs as well as dues for our membership in
various industry trade organizations.
Rent. Rent increased to $106,417, or 5.0% of total revenues, for the year
ended December 31, 1998 from $33,152, or 4.9% of total revenues, for the year
ended December 31, 1997. This increase in rent is due primarily to additional
rent incurred with the expansion of our data center and our assumption of a
lease in our acquisition of Athens' ISP.
Management fees. As a percentage of total revenues, management fees
decreased to 2.8% for the year ended December 31, 1998 from 6.2% for the year
ended December 31, 1997. Management fees increased to $60,000 for the year ended
December 31, 1998 from $42,000 for the year ended December 31, 1997. The
increase is directly attributable to an increase in monthly management fees from
$2,000 to $5,000 that became effective on July 1, 1997.
Depreciation and amortization expense. Depreciation and amortization
increased to $284,598, or 13.3% of total revenues, for the year ended December
31, 1998 from $57,255, or 8.5% of total revenues, for the year ended December
31, 1997. The increase in depreciation expense is primarily due to an increase
in the capitalized costs of property and equipment acquired during the year. The
cost basis of property and equipment increased to $849,828 at December 31, 1998
from $384,300 at December 31, 1997. The increase in amortization expense is
directly attributed to the amortization of the customer lists and related
customer accounts purchased from two other ISPs in April and July 1998 and the
amortization of the customer list and related customer accounts acquired with
Athens' ISP in 1998. The cost basis of customer lists increased to $547,974 at
December 31, 1998 from $85,338 at December 31, 1997.
36
<PAGE> 40
Interest expense. As a percentage of total revenues, interest expense
decreased to 7.0% for the year ended December 31, 1998 from 9.8% for the year
ended December 31, 1997. Interest expense increased to $150,605 for the year
ended December 31, 1998 from $66,201 for the year ended December 31, 1997 due to
the additional debt we incurred to fund our capital purchases, customer list
purchases, the Athens' ISP acquisition, and working capital needs. Total debt
and obligations under capital leases at December 31, 1998 was $2,214,232
compared to $1,128,845 at December 31, 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM INCEPTION (MARCH 5,
1996) TO DECEMBER 31, 1996
REVENUES
Total revenues increased 933.0% to $675,569 for the year ended December 31,
1997 from $65,398 for the period from inception to December 31, 1996 due to
substantial increases in Internet access revenues, data center services
revenues, circuit rebill revenues and other revenues as described in the
following paragraphs. The increase in total revenues is primarily attributable
to a full twelve months of operations for the year ended December 31, 1997
compared to only seven months of operations for the period from inception to
December 31, 1996, as well as a significant increase in the number of customers
due to the opening of POPs in Miami, Florida and Raleigh, North Carolina in
August 1997 and another POP in Athens, Georgia in September 1997 and the
purchase of a customer list in July 1997. Overall, our customer base increased
from 26 at December 31, 1996 to 243 at December 31, 1997.
Internet access. Internet access revenues increased to $399,167, or 59.1%
of total revenues, for the year ended December 31, 1997 from $29,579, or 45.2%
of total revenues, for the period from inception to December 31, 1996. This
increase in access revenues resulted primarily from internal growth, from the
opening of the additional POPs and from the acquisition of a customer list
referred to above.
Data center services. Data center services revenues increased to $205,171,
or 30.4% of total revenues, for the year ended December 31, 1997 from $33,048,
or 50.5% of total revenues, for the period from inception to December 31, 1996.
The increase in data center services revenues was attributable to the increase
in the customer base for the reasons described above as well as expanded data
center service offerings.
Circuit rebill. Circuit rebill revenues increased to $44,459, or 6.5% of
total revenues, for the year ended December 31, 1997 from $276, or 0.5% of total
revenues, for the period from inception to December 31, 1996. During the year
ended December 31, 1997, we began offering our customers the option of a total
access package and consolidated billing to include the local circuit fees, which
we previously required our customers to pay directly to the telecommunications
carriers.
Other. Other revenues increased to $26,772, or 4.0% of total revenues, for
the year ended December 31, 1997 from $2,495, or 3.8% of total revenues, for the
period from inception to December 31, 1996. The increase is due primarily to the
increase in revenues from non-recurring hardware resales.
COSTS AND EXPENSES
Cost of network services. As a percentage of total revenues, cost of
network services decreased to 78.3% for the year ended December 31, 1997 from
113.1% for the period
37
<PAGE> 41
from inception to December 31, 1996. Cost of network services increased to
$528,835 for the year ended December 31, 1997 from $73,963 for the period from
inception to December 31, 1996. This increase in cost of network services is due
primarily to the increase in the amount of upstream and downstream access we
purchased to serve our growing customer base. The decrease as a percentage of
total revenues is due to our increased use of excess upstream capacity resulting
from the increase in our customer base.
Salaries and wages. As a percentage of total revenues, salaries and wages
decreased to 54.8% for the year ended December 31, 1997 from 230.0% for the
period from inception to December 31, 1996. Salaries and wages increased to
$370,145 for the year ended December 31, 1997 from $150,448 for the period from
inception to December 31, 1996. We had nine employees at December 31, 1997
compared to seven employees at December 31, 1996.
General and administrative. As a percentage of total revenues, general and
administrative expenses decreased to 19.5% for the year ended December 31, 1997
from 102.9% for the period from inception to December 31, 1996. General and
administrative expenses increased to $131,767 for the year ended December 31,
1997 from $67,259 for the period from inception to December 31, 1996. The
increase in general and administrative expenses is attributed primarily to an
increase in advertising costs, travel and entertainment expenses relating to
potential customers and the new POPs in Miami, Raleigh and Athens; equipment and
software purchases and installation costs related to the expansion of the data
center facilities; and equipment rentals. The decrease as a percentage of
revenues is due to the economies of scale realized, as general and
administrative costs generally do not fluctuate with increases and decreases in
total revenues.
Rent. As a percentage of total revenues, rent decreased to 4.9% for the
year ended December 31, 1997 from 33.3% for the period from inception to
December 31, 1996. Rent increased to $33,152 for the year ended December 31,
1997 from $21,792 for the period from inception to December 31, 1996. This
increase in rent expense is due primarily to a full twelve months of rent in the
year ended December 31, 1997 compared to only seven months for the period from
inception to December 31, 1996.
Management fees. As a percentage of total revenues, management fees
decreased to 6.2% for the year ended December 31, 1997 from 12.2% for the period
from inception to December 31, 1996. Management fees increased to $42,000 for
the year ended December 31, 1997 from $8,000 for the period from inception to
December 31, 1996. We paid db Telecom Technologies $2,000 per month from January
1, 1997 through June 30, 1997 and $5,000 per month from July 1, 1997 through
December 31, 1997 compared to $1,000 per month for the period from inception to
December 31, 1996.
Depreciation and amortization. As a percentage of total revenues,
depreciation and amortization decreased to 8.5% for the year ended December 31,
1997 from 17.8% for the period from inception to December 31, 1996. Depreciation
and amortization increased to $57,255 for the year ended December 31, 1997 from
$11,622 for the period from inception to December 31, 1996. The increase is due
primarily to an increase in capitalized costs of property and equipment acquired
during the year ended December 31, 1997. The cost basis of property and
equipment increased to $384,300 at December 31, 1997 from $120,442 at December
31, 1996. The increase in amortization expense is directly attributed to the
amortization of the customer list and related customer accounts purchased in
July 1997. The cost basis of this customer list and related customer accounts
was $85,338.
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<PAGE> 42
Interest expense. As a percentage of total revenues, interest expense
decreased to 9.8% for the year ended December 31, 1997 from 16.0% for the period
from inception to December 31, 1996. Interest expense increased to $66,201 for
the year ended December 31, 1997, from $10,434 for the period from inception to
December 31, 1996 due to the additional debt we incurred to fund our capital
purchases, the purchase of a customer list in July 1997 and working capital
needs. Total debt at December 31, 1997 was $1,128,845 compared to $328,925 at
December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have funded our operations and capital expenditures
primarily through cash flow from operations; borrowings from banks, shareholders
and db Telecom Technologies; capital leases; and sales of common stock. At
December 31, 1998, we had outstanding debt and accrued interest of $2,349,733.
Our lenders have secured this debt with security interests in our accounts
receivable, inventory, and personal property. At September 30, 1999, we had
outstanding debt and accrued interest of $2,119,879, as follows:
<TABLE>
<CAPTION>
PRINCIPAL MATURITY ANNUAL
LENDER AMOUNT DATE INTEREST RATE
- ------ --------- -------- -------------
<S> <C> <C> <C>
Premier Bank.............................................. $100,100 1/15/00 prime + 1%
Premier Bank.............................................. 700,000 1/15/00 prime + 1%
Dr. Samuel F. Dayton and James L. Bruce, Jr............... 283,985 12/27/99 8.75%
Dr. Samuel F. Dayton and James L. Bruce, Jr............... 618,549 4/30/00 10%
db Telecom Technologies, Inc.............................. 270,188 4/30/00 10%
</TABLE>
We used the proceeds of this debt for equipment purchases, the purchase of
Athens' ISP and working capital.
We expect to use a portion of the net offering proceeds to repay $800,100
of the outstanding debt and accrued interest owed to Premier Bank. We will also
use a portion of the net offering proceeds to pay the $283,985 and accrued
interest that we currently owe to Dr. Dayton and Mr. Bruce directly to The First
National Bank of Commerce. This payment will satisfy the remaining balance of
the $383,985 borrowed from First National by Dr. Dayton and Mr. Bruce on our
behalf, which they loaned to us to fund our purchase of Athens' ISP in July
1998. Additionally, we will use a portion of the net proceeds to repay $140,000
and accrued interest owed to Dr. Dayton under a short-term loan that he extended
to us in November 1999. This loan bears interest at 10% per year and matures on
the earlier of the closing of this offering or January 15, 2000. We expect to
repay the additional $618,549 and accrued interest owed to Dr. Dayton and Mr.
Bruce and the $270,188 and accrued interest owed to db Telecom Technologies with
funds provided by operations. In addition to the debt described above, we have
approximately $46,000 of capital leases that we intend to continue to pay in the
ordinary course of business.
From November 23, 1998 through June 30, 1999, we sold 185,893 shares of our
common stock in a private placement at a price of $11.42 per share. We used the
$2,122,744 of net proceeds of that private placement for working capital.
Net cash used by operating activities was $1,185,399 for the nine months
ended September 30, 1999, $210,355 for the year ended December 31, 1998,
$402,451 for the year ended December 31, 1997 and $202,080 for the period from
inception (March 5,
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1996) to December 31, 1996. Net cash used in investing activities was $304,778
for the nine months ended September 30, 1999, $1,010,909 for the year ended
December 31, 1998, $349,196 for the year ended December 31, 1997 and $120,442
for the period from inception (March 5, 1996) to December 31, 1996. Cash used in
investing activities was primarily for the purchase of Athens' ISP in 1998, the
purchase of customer lists and related customer accounts from other ISPs in 1998
and 1997, the investment in nschool in 1998 and the purchase of property and
equipment in all three years. Financing activities provided cash in the amounts
of $1,562,245 for the nine months ended September 30, 1999, $1,450,209 for the
year ended December 31, 1998, $799,921 for the year ended December 31, 1997 and
$328,924 for the period from inception (March 5, 1996) to December 31, 1996. The
primary source of this cash was proceeds from the issuance of long-term debt in
each of those three years and the issuance of common stock in the year ended
December 31, 1998 and the nine months ended September 30, 1999.
The net proceeds of this offering, funds currently on hand and funds to be
provided by operations will be sufficient to repay the approximately $1.2
million in debt and accrued interest that will become due between the closing of
this offering and January 15, 2000 and fund our working capital needs through
the first quarter of 2000. The proceeds of this offering will not provide the
funds we will need to pursue our long term plans and growth strategies.
We anticipate seeking additional financing in the near future to fund
ongoing capital expenditures and liquidity requirements and to begin to achieve
our goal of purchasing and leasing new data centers and POPs. There is no
guarantee that we will obtain this financing on acceptable terms or at all or
that if we do obtain the financing, it will be adequate to purchase or lease the
required data centers and POPs and satisfy our cash requirements.
In addition, numerous factors, including those described in "Risk Factors,"
could accelerate our need for additional funding. For example, we intend to
grow, in part, through strategic acquisitions, some of which may require
significant cash expenditures, but we cannot predict the timing and amount of
any acquisitions and expenditures that may occur.
Our ability to grow will depend not only on acquisitions but also on our
ability to expand and improve our Internet operations, the effectiveness of our
marketing efforts and our customer support capabilities. In addition, we will
need to raise additional capital from equity or debt sources. If we raise
additional funds by issuing equity or convertible debt securities, shareholders
may experience dilution, and those securities may have rights, preferences or
privileges senior to those of our common stock.
We cannot be sure that we will be able to obtain the additional financing
to satisfy our cash requirements or to implement our growth strategy on
acceptable terms or at all. If we cannot obtain that financing on terms
acceptable to us, we may be forced to curtail our planned business expansion and
may be unable to fund our ongoing operations.
YEAR 2000 COMPLIANCE
OVERVIEW
We rely on computer software programs, internal operating systems and
telephone and other network communications connections to conduct our business.
If any of these programs, systems or network connections are not programmed to
recognize and properly
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process dates after December 31, 1999, significant system failures or errors may
result. These matters are commonly referred to as year 2000 issues, and they
could have a material adverse effect on both our affected customers and us. Our
potential areas of exposure include:
- information technology, including computers, software and systems that we
have developed internally or purchased or licensed from others, such as
our billing system and accounts receivable system,
- non-information technology, including telephone systems and other
equipment that we use internally, and
- external systems, particularly the systems that comprise the Internet and
those services that allow us access to the Internet and our customers to
access our network.
If our operational systems are not year 2000 ready on December 31, 1999, we
may be unable to provide our services.
STATE OF READINESS
Our overall plan to achieve year 2000 readiness includes the following
phases with respect to our information technology and non-information technology
systems:
- assessment of repair requirements, which includes assessing all systems,
significant business processes and connections with others on whom we
depend,
- remediation, which includes updating or modifying systems identified as
critical to our efforts to become year 2000 ready,
- testing of systems which have been altered or replaced as part of our
efforts to become year 2000 ready, and
- contingency planning.
We have completed our assessment phase, including the determination of
whether the system we were reviewing was internally developed, an external
system critical to our operations, or a non-critical system or piece of software
or hardware. We believe that we have completed all necessary modifications with
respect to both our critical and our non-critical systems. We consider any
information technology systems to be "critical" if the failure of that system
would result in our being unable to provide Internet access or data center
services or would prevent us from billing customers. We also have successfully
completed the testing phase of our year 2000 plan.
During the course of our year 2000 plan, we reviewed publicly available
disclosures from the other companies who provide hardware and software that
comprise our critical information technology systems or who operate external
systems on which we rely. Almost all of our outside vendors and providers have
indicated that their hardware, software or systems are, or will be, year 2000
ready. Nevertheless, we remain vulnerable to a significant vendor's or
provider's inability to remedy its own year 2000 issues. We cannot assure you
that the components of our information technology systems provided by others, or
the external systems on which we rely, will be year 2000 ready in a timely
manner. We have not entered into any material contracts with external
contractors to complete our year 2000 plan.
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COSTS
Our costs for assessment, remediation and testing have been minimal to
date, and we do not expect to incur any additional costs that are material.
RISKS
Our failure to correct a material year 2000 problem could result in an
interruption in, or a failure of, normal business activities or operations.
Presently, however, we believe that our most reasonably likely worst case
scenario related to the year 2000 is associated with potential failures of third
party services or products we use in our operations or with the other services
and products our customers use in their operations.
We supply Internet related services to our customers and have not tested
any other products or systems used in our customers' businesses. If our
customers do not successfully address year 2000 issues in their operations, and
as a result they experience temporary or permanent interruptions in their
businesses, we may lose revenues from these customers. We believe that many
businesses, including our customers, are still in the preliminary stages of
analyzing their systems for year 2000 issues. We cannot estimate the potential
expenses involved or delays that may result from the failure of these customers
and third parties to resolve their year 2000 issues in a timely manner. If these
expenses, failures or delays do in fact occur, they may have a material adverse
effect on our business, financial condition or results and operations.
In providing Internet access to our customers, we depend upon providers of
telecommunications and data services, government agencies, utility companies and
other service providers over which we have little or no control. If any of these
entities fails to correct its year 2000 issues, our customers may be unable to
use the Internet, and our operations would suffer. See "Risk
Factors -- Potential year 2000 problems may cause us to lose customers and
subject us to significant liabilities and costs."
CONTINGENCY PLANS
We have no specific contingency plans for year 2000 failures other than the
redundancies already built into our system. For example, we have multiple
connections to ISPs, allowing us to route traffic away from any particular
provider that may experience problems. We believe if one or more of our
providers fail, we will be able to obtain additional connections from either our
current providers or new providers. In addition, we have a back-up generator
powered by diesel fuel that will provide power for approximately 36-48 hours.
Provided we can refuel the generator, we can continue our corporate functions
indefinitely. We have a relationship with a local fuel provider from whom we can
request fuel if there is a lengthy outage. If most or all of our providers fail,
however, we will be unable to furnish our services until our providers are again
able to offer services to us. We have no plans to establish a more specific
contingency plan in the event of year 2000 disruptions.
The estimates and conclusions included in this discussion contain
forward-looking statements and are based on our management's best estimates of
future events. Our expectations about risks, future costs and timely completion
of our year 2000 testing may turn out to be incorrect, and any variance from
these expectations could cause actual results to differ from this discussion.
Factors that could influence risks, amount of future
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costs and the timing of remediation efforts include our success in identifying
and correcting potential year 2000 issues and the ability of others to address
their year 2000 issues.
The statements above related to the ability of our services to operate
properly before, on and after January 1, 2000 are "Year 2000 Readiness
Disclosures" under the Year 2000 Information and Readiness Disclosure Act of
1998. Those statements are not a guaranty, contract or warranty, and our
compliance with that act does not preclude any claims against us based on the
federal securities laws.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement was effective for periods beginning after
December 15, 1997. The adoption of SFAS No. 130 did not have an impact on our
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
services, geographic areas and major customers. This statement was effective for
financial statements for periods beginning after December 15, 1997. The adoption
of SFAS No. 131 did not have a material impact on our financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is, the type of hedge transaction. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." This
statement defers the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. We believe that the adoption of SFAS No. 133 and SFAS No.
137 will not have a material impact on our financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income and expense is sensitive to changes in the general
level of United States interest rates. Changes in United States interest rates
affect the interest that we earn on our cash investments as well as the interest
that we incur on our debt. Based on our cash equivalents balance and level of
debt at September 30, 1999, our exposure to interest rate risk is not material.
We believe our exposure to market risks is immaterial. We hold no market
risk sensitive instruments for trading purposes. At present, we do not employ
any derivative financial instruments, other financial instruments or derivative
commodity instruments to hedge any market risks, and we do not currently plan to
employ them in the future.
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BUSINESS
OVERVIEW
We are a rapidly growing ISP that targets middle market businesses,
educational institutions and government organizations. Our primary services
include:
- dedicated Internet access through our highly reliable network, which
provides our customers with Internet access that is "always on,"
- co-location services, in which we provide secure space to house
customer-owned Internet equipment, and
- managed application hosting, in which we provide a server for the
customer's exclusive use to install any software application the customer
chooses.
We refer to our co-location services, our managed application hosting
services and some of the other services we offer through our data center as data
center services. Our managed application hosting services are similar to the
services offered by computer service providers, or CSPs, which house, maintain
and supply power to their customers' Internet equipment.
We believe our growth and success in serving our target customer base is
the direct result of our competitive strengths, including:
- a network that permits our customers to bypass congested Internet
exchanges and access points and avoid Internet exchange breakdowns,
increasing the speed and reliability of our customers' Internet
connection,
- Internet access that we can tailor to meet each customer's needs,
- knowledgeable and responsive customer support by our network experts,
- business Internet solutions that allow our customers to outsource a
significant portion of their Internet technology and staff, and
- a senior management team with more than sixty years of combined
experience in designing, implementing and managing telecommunications
networks.
We anticipate seeking additional financing in the near future to fund
ongoing capital expenditures and liquidity requirements and to begin to pursue
our business and growth strategies as explained below. There is no guarantee
that we will obtain this financing on acceptable terms or at all or that if we
do obtain the financing, it will be adequate to fund our planned strategies.
INDUSTRY BACKGROUND AND OPPORTUNITY
The Internet was originally conceived as a communications tool to be used
by a limited number of researchers and academics. Today, it has escalated into a
web of approximately 196 million interconnected users. The Internet has evolved
from a static, text-based medium to a graphically rich communications
infrastructure. The creation and rapid development of the desktop computer
simplified access to the Internet, encouraging consumers to seek information
through this new medium. As the breadth of the information expanded, the
Internet's applications and users grew as well. Businesses began investigating
the potential of the Internet to reach the growing volume of customers on the
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Internet. To capture this emerging customer base, businesses needed a presence
on the Internet and applications to facilitate electronic commerce.
THE INTERNET INFRASTRUCTURE
The Internet has emerged as a significant global business communications
medium, enabling millions of people to communicate, publish and retrieve
information, and conduct business electronically. A multi-tiered system of
local, regional and national ISPs has evolved to provide access to the Internet,
transport data and, more recently, to provide value-added Internet services.
ISPs exchange data in packets generated by their customers through direct or
indirect connections with other ISPs. To meet the needs of ISPs to exchange data
at centralized points, large ISPs have established a series of central Internet
exchanges, which facilitate the transmission of data.
Despite the relatively centralized nature of these exchange points, data
traveling across the Internet often makes multiple connections or "hops" through
a variety of local, regional and national ISPs, as it moves from the originating
site, through a central exchange point, and to its final destination. While
these centralized points have the advantage of having dozens of ISPs
interconnected and exchanging Internet data, they increasingly face congestion
problems that cause significantly longer response times for a user. In addition,
because data traveling across the Internet must often make connections through
multiple ISPs, the failure of a single ISP's Internet connection can interrupt a
user's Internet transmission. Many ISPs have sought to improve data transmission
reliability and speed by establishing private "peering connections" and network
access points. This permits the ISPs to directly exchange Internet traffic while
reducing the number of hops in their Internet connection and avoiding the often
congested major Internet exchanges.
THE GROWTH OF THE INTERNET
The Internet has experienced tremendous growth and has become a global
medium for communications and commerce. According to International Data
Corporation, or IDC, the ISP market in the United States reached $10.7 billion
in 1998, representing a 43.0% increase over 1997 revenues. Business-related
Internet access services generated approximately $2.9 billion of the $10.7
billion aggregate 1998 ISP revenue. Moreover, IDC predicts revenues generated
from access services by business-related ISPs will increase by 75.9% to $5.1
billion in 1999 and reach $12.0 billion by 2003, growing at a compound annual
growth rate of 36.2% from 1998 to 2003. In addition, IDC estimates that the
total value of goods and services purchased over the Internet will increase from
$50.5 billion in 1998 to approximately $734.0 billion by the end of 2002.
Trends contributing to the growth of the business-related Internet market
include:
- the increasing availability of high bandwidth capacity,
- the proliferation of Internet access and ancillary Internet services,
- the competitive need of small and mid-sized businesses to automate key
business processes,
- the convenience and speed of conducting business over the Internet,
- the availability of Internet-enabled packaged software applications,
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- an increase in the amount and diversity of business and educational
information available on the Internet and the Web, and
- recent enhancements in the Internet's security and reliability.
The demand generated by these new dynamics, combined with business
customers' high quality service requirements, has fueled the growth of dedicated
access connections and other Internet-related products and services for
businesses.
WEB HOSTING AND CO-LOCATION
To realize the opportunities of the Internet, companies must develop an
attractive Internet presence using a "Web site" that is easily accessible to
potential customers. However, rapid Internet and technology growth have outpaced
the ability of many businesses to develop the necessary internal information
technology knowledge and tools. A variety of companies, including Web hosting
companies and ISPs, have begun to focus on providing Internet co-location and
other Web-related services to their customers. Typically, companies offering
these services build networks of numerous geographically dispersed data centers
to be physically close to their customers. This reduces the cost of the services
and the risk of transmission delay and data loss as data travels through
multiple network connections. According to IDC, corporate Internet access and
value-added services, such as Web hosting and co-location, are the fastest
growing services offered by ISPs. Corporate access revenue and value-added
services revenue were $5.9 billion in 1998 and are expected to grow to
approximately $25.0 billion by 2003.
THE TREND TOWARD OUTSOURCING OF INTERNET OPERATIONS
Many businesses lack the resources and expertise to cost-effectively
develop, maintain and continually upgrade their network facilities and systems.
Also, individuals with the expertise to establish and maintain sophisticated
Internet technology are in great demand and their services are costly.
Furthermore, businesses often find it difficult to keep up with new technologies
and to integrate them into their infrastructure. Even if enterprises possess the
necessary resources to accomplish these tasks, we believe that they often
determine that this ongoing and significant investment in their own Internet
technology and personnel is an inefficient use of their overall resources.
Consequently, many enterprises are seeking outsourcing arrangements for their
Internet needs. These arrangements allow enterprises to focus on their core
operations, enhance the reliability and performance of their Web sites and
reduce their Internet-related operating expenses.
THE CONVERGENCE OF SERVICES IN THE COMMUNICATIONS INDUSTRY
The traditional divisions within the communications industry are
disappearing due to new regulations, customer demand, and technology evolution.
Regulatory changes in the United States and around the world have opened the
communications industry to increased competition. In particular, the
Telecommunications Act of 1996 provides for comprehensive reform of
telecommunications laws in the United States and is designed to foster
competition in the local telecommunications marketplace.
With greater competition in the communications industry, customers have
increasingly demanded that communications providers offer multiple services at
lower prices. These services may include local and long distance calling,
wireless, Internet access, and high-
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speed dedicated lines. Also included are ancillary services such as single bill
presentment, call forwarding, caller identification, voicemail and similar
services.
We believe that these integrated providers will increase efficiency in the
deployment of communications services by selling multiple services in bundles
over a single connection. Enhancements in switching technologies are beginning
to permit the delivery of numerous services over a single network, offering cost
savings over traditional networks which were designed to deliver a limited
number of services. We believe that as competition increases, providers who
offer a range of services in a cost-effective manner will be best positioned to
capitalize on the convergence of services within the communications industry.
These providers will offer a well-designed package of services they can tailor
to satisfy each customer's needs.
THE COMSTAR.NET STRATEGY
CURRENT BUSINESS STRATEGIES
We intend to become a leader in providing businesses, educational
institutions and governmental organizations with high quality, cost-effective
business solutions that will allow our customers to take advantage of the
Internet without having to develop and maintain their own Internet technology
and hire and retain an extensive Internet staff. To achieve this objective, we
intend to continue to rely on the following core elements of our business
strategy:
Providing Highly Reliable Internet Access. We intend to continue
increasing the capacity, fault-tolerance and geographic reach of our network to
support customer growth. Our network is designed to respond quickly, be secure
and provide continuous availability to our clients. We can deliver our services
to customers throughout the world from our Atlanta data center. We connect our
customers' Internet traffic to four very large ISPs who provide access to the
central Internet exchanges. Our innovative network architecture often permits
our customers' Internet traffic to bypass congested points on the Internet and
avoid breakdowns at the Internet exchanges, which increases the speed and
reliability of their Internet connection. We proactively manage and monitor
traffic on the Internet and reroute traffic to provide high quality access.
Increasing the Percentage of our Revenues from Data Center Services. We
intend to generate a higher percentage of our revenues from our data center
services, specifically co-location and managed application hosting services,
which typically provide higher margins than our Internet access services. We
believe that services like our data center services are among the fastest
growing segments of the Internet marketplace. Our data center services provide a
variety of options to our customers, and we work with their management and
information technology teams to analyze their varied Internet service needs and
choose the option that best addresses those needs. We have offered our
co-location services since June 1996, and as of September 30, 1999 we had 35
co-location customers. We have offered our managed application hosting services
since June 1999, and, as of September 30, 1999, had 11 managed application
hosting customers. We intend to emphasize our managed application hosting
business in our marketing, and we have allocated greater resources to developing
these services.
Targeting Middle Market Business, Educational and Governmental
Customers. The Internet service needs of middle market businesses, educational
institutions and governmental organizations differ significantly from those of
the typical individual consumer because Internet access and related services are
often critical to enterprise
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customers' businesses. They demand dedicated, high speed Internet access and
knowledgeable, prompt and responsive customer support. When marketing our
services, we focus on creating the best solution to meet our customers' needs
and not simply promoting our technology. Compared to individual consumers,
enterprise customers are usually less price sensitive and more willing to pay a
premium for custom solutions that meet their needs. As a result, we believe that
providing services to enterprise customers generates greater revenues and higher
margins per customer than servicing individual consumers.
Providing Superior Customer Support by Network Experts. Enterprise
customers seeking broader access to the Internet increasingly face significant
technological challenges, in part because the Internet is an evolving and
rapidly growing medium. In addition, as new and more complex applications for
the Internet are developed, we believe that even sophisticated users will
increasingly encounter problems. Unlike many other ISPs who outsource their
technical support to independent call centers, the comstar.net professionals who
implemented our network are among those who respond to and resolve customer
inquiries and problems. We intend to continue providing superior customer
support by hiring only customer support personnel who can demonstrate the
ability to understand and manage our network. We believe that our strong
emphasis on the superior customer support provided by our network experts has
resulted in a high level of customer satisfaction and significant subscriber
growth from customer referrals.
GROWTH STRATEGIES
We intend to further develop our business by focusing on the core elements
of our business strategy discussed above and pursuing the following key growth
strategies:
Expanding Our Network Nationally. We intend to build more data centers and
POPs throughout the United States. We believe that having a number of widely
distributed and networked data centers and POPs improves network performance and
reliability. We intend to add data centers in the following metropolitan areas
by the end of 2000: Washington, D.C., Chicago, Boston, Miami and Dallas. Before
purchasing or leasing a new data center, we will evaluate the market opportunity
in the proposed location by analyzing Internet usage statistics and specific
economic criteria as well as pre-selling our services in that market. For any
given location we expect to require at least six months to select the
appropriate site, construct or acquire the necessary facilities, install
equipment and hire the operations and sales personnel needed to conduct business
at the site. We have already identified suitable sites for some of our proposed
data center locations. We also intend to supplement the data center expansion by
establishing POPs throughout the United States to aggregate and transport
traffic to and from our planned data centers.
Broadening Our Marketing Activities. We intend to expand our marketing
efforts to increase our customer base. We also intend to increase market
awareness of our name and our commitment to reliable service and superior
customer support. Therefore, while continuing to encourage referrals from
existing customers, we are increasing print publication, radio, outdoor, and
direct mail advertising and telemarketing in targeted metropolitan areas.
Pursuing Strategic Sales and Distribution Alliances. We are pursuing
strategic sales and distribution alliances in markets where there are
substantial opportunities to attract new customers. We believe that establishing
relationships with businesses that provide products and services which
complement our service offerings will permit us to use their expertise and
market access, while lowering our costs of entering new markets. These
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relationships will also give us additional customer referrals and new solutions
to offer existing customers. For example, we currently obtain customer referrals
through our Valued Internet Partner, or VIP program, in which we pay our
partners a fee for referring new customers who ultimately purchase our services.
We will also pursue strategic alliances with resellers or other authorized
partners through our comstar.net Affiliate Partner, or CAP program, which
permits others to resell our services directly to customers in specified
markets. We intend to further expand our customer base by establishing
additional distribution relationships with network integrators, resellers,
system vendors, consulting companies and other ISPs.
Engaging in Strategic Acquisitions. We will continue to consider
acquisitions of strategically located operations and customer lists and
associated customer accounts. In addition, we may consider acquisitions of
businesses, including other ISPs, with complementary products, services or
technologies. We may also consider acquisitions that can provide personnel who
augment our team of network experts.
Eventually Becoming an Integrated Communications Provider, Offering Both
Voice and Data Services. We plan to pursue a long-term strategy of providing a
complete portfolio of voice and data communications services. To achieve our
goal, we plan to undertake, in several states in which we operate, the approval
process necessary to become a competitive local exchange carrier, or CLEC, which
would permit us to provide voice and other data services to complement our
current services. We believe that technology advancements and customer
preferences are driving the convergence of communications services toward
service providers who can offer multiple communication services through a single
network. We also believe that to remain competitive in the face of these
changes, we must eventually become a single-source provider of voice and data
communications services.
NETWORK DESIGN
To increase Internet access speed for our customers, we designed our
network to avoid congested areas on the Internet. Most Internet traffic moves
through central Internet exchanges. To avoid transporting all of our customers'
traffic through these central exchanges and the related network access points,
we have established direct links to very large ISPs, including UUNET, GTE
Internetworking, Sprint and Intermedia Internet. Through this network, we can
dynamically reroute traffic quickly and efficiently. Our network experts monitor
traffic patterns and congestion points throughout the network and reroute our
customers' traffic to a different Internet link when there is excessive
congestion. As a result, we can deliver most of our customers' Internet traffic
while bypassing congested points on the Internet.
Another important characteristic of our network is its high level of
reliability. We maintain multiple links with very large ISPs to protect against
a service outage should one or more links fail. Our equipment automatically
monitors Internet traffic and reroutes it to avoid breakdowns at Internet
exchanges and access points so that our customers' upstream transmissions are
not affected by failures in other systems. In addition, each data center and POP
we operate has multiple fiber or copper telecommunications lines into the
facility so that downstream transmissions operate reliably.
Our network provides optimal service to our customers who are
geographically located relatively close to either a data center or a POP. Close
proximity allows the transportation of our customers' traffic from their server
to its destination and back in a shorter period of
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time. Close proximity also allows us to provide a greater range of services at
lower costs to our customers.
The following diagram describes how our network is linked to very large
ISPs and how we can distribute our customers' traffic:
Central Internet Exchanges diagram
A chart appears here, illustrating the manner in which comstar.net is connected
to major Internet access providers and its customers, showing various ways in
which comstar.net is able to distribute its customers' traffic over the
Internet.
The chart has 3 columns. The first column has five circles, containing the
following text: (1) UUNET, (2) GTE/BBN, (3) Sprint, (4) Intermedia and (5)
Others. The second column has two circles, containing the following text: (1)
comstar.net and(2) other ISP. The third column contains five circles, each of
which contains the following text: business customer. At the far left of the
three columns, there is a bar with the caption ''Central Internet Exchanges'',
illustrating the position of the Central Internet Exchanges.
SERVICES
We create tailored solutions for our customers based on their business and
technical requirements, modifying these solutions as our customers' needs
evolve. Unlike many other ISPs that outsource their technical support to
independent call centers, our highly reliable services are supported by our
knowledgeable and responsive network experts, some of whom are the same
professionals that implemented our network. Our primary services include
dedicated Internet access, co-location services and managed application hosting.
We also offer Web hosting, e-mail services and domain name services.
Our customer contracts require us to provide our services for a one-year,
two-year or three-year term, and contain, among other things, a limited service
level warranty related to the continuous availability of service on a 24 hours
per day, seven days per week basis, except for scheduled maintenance periods.
This warranty provides a credit for free service for disruptions in our Internet
access services. At the end of the term of a contract, a customer may elect to
extend the contract's term on a month-to-month basis. Any change or upgrade in
service, however, typically requires a new contract for a new term.
Internet Access. Our Internet access services are designed to deliver the
ease of expansion, high availability and performance required by moderate to
high volume Internet operations that are central to a customer's business.
Revenues from our Internet access services represented approximately 62.3% of
our revenues for the year ended December 31, 1998 and 63.0% of our revenues for
the nine months ended September 30, 1999.
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Our Internet access options include:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ------- ----------- --------
<S> <C> <C>
T1, Fractional T1 and Leased lines are a dedicated service Leased lines, which are priced
T3 Leased Lines that delivers access speeds from on a per-mile basis, provide a
56Kbps to 44Mbps. customer with a truly private
network where no other entity's
data flows over the same
network. Leased lines are very
cost-effective when reasonably
close to one of our POPs or our
data center.
Frame Relay Frame relay is a dedicated service Gives customers connecting
that delivers access speeds from geographically dispersed
56Kbps to 44Mbps. offices an affordable
alternative with pricing that
is not based on mileage.
Symmetrical Digital SDSL is a dedicated service using Provides inexpensive Internet
Subscriber Line, or digital technology to deliver access access for customers with high
SDSL speeds from 160Kbps to 1.54Mbps. bandwidth requirements.
Integrated Services ISDN is a dial-up service utilizing Provides inexpensive Internet
Digital Network, or digital signaling technology to access for customers with low
ISDN deliver access speeds of either bandwidth requirements.
64Kbps or 128Kbps.
</TABLE>
We have developed an important enhancement to our T1, fractional T1, T3 and
fractional T3 leased line Internet access options -- the eCommerce Guarantee. We
will compensate those customers for the lost profits, up to $500,000 per access
line, for each interruption they suffer in their Internet access service if the
interruption occurs outside the customer's demarcation point, which is the point
at which the customer assumes responsibility for the communications network, and
the interruption causes the customer to lose profits. An insurance company rated
"A" by A.M. Best Company has insured our liability for the eCommerce Guarantee,
and we will be responsible for a per interruption deductible of $10,000 for each
T3 or fractional T3 line and $2,500 for each T1 or fractional T1 line, with an
initial overall deductible limit of $100,000 for any single event that causes
multiple interruptions. This deductible increases to $250,000 once more than 250
of our customers are covered by the eCommerce Guarantee and to $500,000 once
more than 500 of our customers are covered. The maximum insured amount per
interruption is $500,000 for each T3 or fractional T3 line and $25,000 for each
T1 or fractional T1 line. The maximum amount any customer will be able to
recover during the term of its contract is $500,000 for each T3 or fractional T3
line and $25,000 for each T1 or fractional T1 line. We will pay the eCommerce
Guarantee compensation first by providing the affected customer with a credit
for future access fees and second by paying the customer in cash within 60 days
after the claim is finally determined for the amount of lost profits in excess
of the customer's contract value. We have not yet implemented our eCommerce
Guarantee and we cannot assure that it will be implemented.
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Co-location. Through our co-location services, we provide secure space to
house customer-owned Internet equipment. Based upon their business and technical
requirements, customers may select from shared cabinet facilities, exclusive
cabinets or custom-built rooms with additional security features. All
co-location facilities include dedicated electrical power circuits to ensure
that we meet each customer's power requirements. Because the Internet operations
of our co-location customers frequently require hardware and software upgrades,
we give customers unlimited but secure access to their leased co-location space.
Additional space, electrical power and Internet services can be tailored to meet
our customers' needs. Our co-location services represented approximately 10.0%
of our revenues for the year ended December 31, 1998 and approximately 11.4% of
our revenues for the nine months ended September 30, 1999.
Our Atlanta data center houses the computers that operate the core
functions of our business, including communications equipment, data storage and
retrieval systems, security software and hardware and related customer support.
Our data center provides customers with a secure, climate-controlled facility
that they cannot readily or inexpensively create at their own place of business.
The data center contains:
- a power supply with a back-up generator,
- fire suppression and containment capabilities,
- raised floors,
- fully redundant HVAC, and
- high levels of physical security.
We offer the following co-location services:
- SWITCH HOTEL(TM) -- A dedicated, enclosed custom-built room with separate
dedicated power circuits, providing additional security via key-card
entry, access barriers, motion camera and tiles bolted to the floor.
- CABINET CO-LOCATION -- Mid-level service providing an exclusive cabinet
for the customer. This is an economical solution for customers
co-locating multiple servers.
- SERVER CO-LOCATION -- Entry-level service providing an economical
solution for customers co-locating a single server. The customer's server
shares space in a cabinet with the servers of other customers.
We intend to open new data centers in Washington, D.C., Chicago, Boston,
Miami and Dallas before the end of 2000. We believe our data centers will be an
important factor in attracting customers and marketing our data center services.
Managed Application Hosting. Our managed application hosting service,
which we first introduced in June 1999 and which we refer to as our dedicated
application server hosting, or DASH, service, provides a server for the
customer's exclusive use to install any software application the customer
chooses. In addition, we will provide all required maintenance on the server
hardware. This service, which is similar to the services being
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offered by computer service providers, or CSPs, is targeted to businesses with
high volumes of Internet traffic and with Internet-based applications and Web
services that are extremely important to their daily operations. Unlike typical
Web hosting operations that host multiple customers' Web sites on a single
server, we provide our managed application hosting services with only one
customer per server. As a result, a customer need not be concerned about how its
actions or applications might impact other customers' applications housed on the
same server, or how its server might be affected by other customers' actions or
applications.
Our managed application hosting services offer a suite of applications from
leading software vendors that is designed to meet the Internet operations needs
of middle market companies. We also offer proprietary e-commerce and Web
development software as additional options for our managed application
customers. We presently offer these software products only in conjunction with
our managed application hosting services. We implement the applications selected
by the customer in our data center, configure them to meet the needs of the
customer, and package them with a server, security, Internet access, back-up and
operational support. A customer may also use software applications it obtains
from others on the server we provide to the customer in our data center.
Our managed application hosting services are compatible with the products
of many leading hardware and software system vendors, including Cobalt Networks,
VA Linux Systems, Hewlett-Packard Company, Sun Microsystems, Silicon Graphics,
Microsoft Corporation and Allaire Corporation. This multi-vendor flexibility
enables our customers to select their own technical solutions and to integrate
their Internet operations with their existing information technology. We offer
our customers four different levels of managed application hosting service that
range from simple to comprehensive solutions, each of which can be tailored to
meet the specific needs of a given customer. In addition, our customers can
augment their services with hardware or software that we provide or software
that they purchase directly from others.
CUSTOMERS
Most of our customers are middle market businesses, educational
institutions or governmental organizations, but our customer base also includes
other ISPs and several larger companies. The Internet service needs of our
target customers differ significantly from those of typical individual
consumers. Enterprises often view their Internet access and related services as
critical to their business. They demand dedicated, high speed Internet access
and knowledgeable, prompt and often highly technical customer support. When
marketing our services, we focus on creating the best solutions to meet our
customers' needs and not simply promoting our technology. We work with our
customers' management and information technology teams to analyze their Internet
needs and create solutions to specifically address those needs. Compared to
individual consumers, enterprise customers are usually less price sensitive and
more willing to pay a premium for creative solutions crafted to meet their
needs. As a result, we believe that providing Internet services to enterprise
customers generates greater revenues and higher margins per
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customer than servicing individual consumers. As of September 30, 1999, we had
521 customers. We provide service to a number of enterprises, including:
- - Atlanta Convention and Visitors Bureau
- - AGL Resources
- - Atlanta Historical Society
- - BellSouth Wireless Services
- - CLAUS.com
- - Elastic Networks, Inc. (formerly a division of Northern Telecom)
- - Georgia Professional Standards Commission
- - Georgia Society of Certified Public Accountants
- - Guantanamo Bay Naval Air Station, Cuba, through a contract with Local
Communications Network
- - Hartsfield Atlanta International Airport
- - Mohawk Industries
- - National Service Industries
- - nBank
- - Net.B@nk
- - nFront
- - NorthPoint Communications
- - Primerica
- - America Online, through a contract with TeleHouse
- - Tom's Foods
- - WATL-TV Channel 36, Atlanta
Our customer nBank, a division of The First National Bank of Commerce,
provided 9.1% of our revenues for the year ended December 31, 1998 and 10.7% of
our revenues for the nine months ended September 30, 1999. No other customer
accounted for more than 10% of our revenues during either period.
SALES AND MARKETING
We sell our services through a consultative approach developed by our
management team based on their cumulative business experience. We use local
technology-oriented sales personnel to understand individual customer needs and
make the proper recommendations regarding tailored Internet-based solutions. The
local field sales staff is supported by our in-house tele-sales staff based at
our corporate headquarters in Atlanta. We refer to our employees who use the
telephone to directly market and sell our services as our tele-sales staff. We
use our tele-sales staff or our CAP partners, discussed below, to complete sales
to smaller customers and to target customers in markets where we do not have
field sales staff. In addition, we hire independent telemarketing firms to
generate business leads. To support our sales efforts, we have also begun a new
advertising and media campaign to build awareness of our name and quality of
service. We intend to expand our field sales force, further develop our indirect
distribution channels and use telemarketing firms to increase sales leads and
grow our customer base.
Field Sales. Our field sales force consists of technically competent,
locally based and experienced Internet sales representatives. These individuals
have strong Internet technical backgrounds and understand the local
telecommunications tariffs as well as the needs of their local business
communities. In general, members of our field sales staff pursue leads generated
by our telemarketing campaign and our outdoor advertising efforts. Our field
sales personnel also make "cold calls" on potential customers. Most larger sales
are closed by a field salesperson who visits the customer. We believe that this
localized approach allows us to provide better solutions for our customers'
needs.
Tele-sales. Our tele-sales staff contacts smaller potential customers in
the geographic areas we serve as well as potential customers in new markets. We
expect our tele-sales staff to develop the interest of large customers and close
sales to small customers without
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requiring a face-to-face meeting between the customer and a member of our field
sales force.
Indirect Sales. We are developing relationships with partners, including
resellers, network integrators and Web design companies, to use the expertise of
their established sales organizations to help increase our sales.
For example, our Valued Internet Partner, or VIP program, is an agency
relationship that offers referral fees to VIP partners who bring us sales
opportunities that ultimately result in sales of our services. We intend to
expand the VIP program into each new market area we enter. We believe our VIP
program generated a significant number of our new customer installations for the
years ended December 31, 1996, 1997 and 1998. As of September 30, 1999, we had
signed more than 94 VIP partners to the program.
Also, our comstar.net Affiliate Program, or CAP program, allows our
authorized partners to resell our services and maintain a direct relationship
with customers in their local markets. In markets we have not identified as a
high priority for our network expansion, we forward leads directly to our CAP
partners so they can arrange a visit to the customer. We provide service and
technical support 24 hours a day, every day of the year and invoice the partners
at a reduced rate, allowing them to profit from the resale of our services.
Internet Sales. We use the Internet as another source to generate sales.
Our tele-sales staff handles many inquiries regarding our services received via
e-mail, either closing the sale or passing the leads to our field sales force.
We are internally developing systems and applications that will allow us to
receive, accept and implement sales electronically via the Internet.
Telemarketing. We began a telemarketing campaign in May 1999 using an
outside telemarketing firm that we pay on an hourly basis. We also compensate
the firm with performance-based bonuses. We create a sales script used by the
telemarketers and train all telemarketing personnel. Our telemarketing program
seeks to generate leads from small to medium sized businesses that are
pre-qualified for our services in our market areas. We may establish an internal
telemarketing department to ensure the quality of our sales efforts.
Strategic Marketing and Reseller Alliances. We enter into strategic
marketing and reseller alliances with partners to bundle and sell our services
with those of the partners. For example, our agreement with NorthPoint
Communications, Inc. allows us to resell NorthPoint's SDSL service, bundled with
our Internet access service. In addition, NorthPoint jointly funds our marketing
efforts for SDSL services in geographic areas where this service can be offered.
NorthPoint also promotes our services as one of a dedicated number of its
Internet access referral partners.
Branding. As a component of our marketing efforts, we plan to invest
aggressively in building the comstar.net brand. We have already begun outdoor
and radio advertising in the markets we currently serve. We intend to increase
customer awareness of us and our services through an integrated marketing plan,
which combines online and traditional advertising in business and trade
publications, trade show participation, direct mail and public relations
campaigns.
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COMPETITION
The market for Internet access, co-location, and managed application
hosting services is very competitive. The tremendous growth and potential size
of the market for Internet services has attracted many new start-ups as well as
existing businesses. In addition to other national, regional and local ISPs, our
current and prospective competitors include long distance and local exchange
telecommunications carriers, cable television operators and their affiliates,
satellite and wireless communications companies and providers of co-location and
other data center services. We also anticipate that if we offer services as a
CLEC, we will face new competitors that already have established a market
presence for local telecommunications access. When compared to us, many of our
competitors have substantially greater financial, technical, marketing and
personnel resources; larger customer bases; a broader range of services; more
extensive networks and facilities; longer operating histories; greater name
recognition and market presence; and more established business relationships in
the industry. In addition, many of our current competitors have already
developed the capacity to provide, and are providing, local telecommunications
access. Further, intense price competition could significantly reduce our
operating margins and adversely affect our operating results.
The principal competitive factors in our market include:
- Internet system engineering expertise and advanced technical functions,
- price of services,
- availability and quality of customer service and support,
- timing of introductions of new services,
- network capability,
- network security,
- reliability of services,
- financial resources,
- variety and quality of services,
- ease of expansion,
- ability to maintain, expand and add new distribution channels,
- broad geographic presence,
- brand name, and
- conformity with industry standards.
ISPs. Our primary competitors include other ISPs with a significant
national presence that focus on business customers, such as UUNET, GTE
Internetworking, PSINet, Concentric Network, MindSpring Enterprises, Verio and
Intermedia Internet. We also compete with smaller regional and local ISPs in our
targeted geographic regions such as Net Depot and Lyceum. Our customer base
includes smaller ISPs, which may also compete with us for customers in their
markets.
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Value-Added Service Providers. As we increasingly generate revenues from
our co-location and managed application hosting services, competition from other
value-added service providers will become more intense. Value-added service
providers are companies that provide a range of Internet-related services,
including co-location, server hosting, maintenance and security. Our competitors
in this market include co-location providers like Exodus Communications,
Frontier GlobalCenter, Digex and USInternetworking. They also include
application service providers such as NaviSite and Digital Nation, which was
recently acquired by Verio.
Telecommunications Carriers. All of the major long distance companies,
including AT&T, MCI Worldcom and Sprint, offer Internet access services and
compete with us. Local exchange carriers, including the regional Bell operating
companies, have also increasingly begun to enter the Internet access market and
compete with us. We believe that many long distance and local telecommunications
carriers will seek to acquire ISPs, enter into joint ventures with them and
purchase Internet access wholesale from ISPs to address the Internet access
requirements of those carriers' current enterprise customers. Worldcom's
acquisition of UUNET, GTE's acquisition of BBN and Cable & Wireless's
acquisition of internetMCI are indicative of this trend. Accordingly, we expect
to experience increased competition from the traditional large
telecommunications carriers.
Cable Operators, Direct Broadcast Satellite and Wireless Communications
Companies. Many of the major cable television operators, such as MediaOne, have
begun to offer or have announced an intention to offer Internet access through
their existing cable infrastructure. Seeking to take advantage of this installed
cable infrastructure and the Internet access opportunities it affords, many
telecommunications providers have acquired cable companies, such as AT&T's
acquisition of TCI and @Home. While many cable companies are faced with
large-scale upgrades of their existing plant equipment and infrastructure to
support connections to the Internet and become competitive, we believe that some
smaller enterprise customers may be attracted by the combined services already
being offered by cable operators. Other alternative service communications
companies have also announced plans to enter the Internet access market with
various wireless and satellite services and technologies.
GOVERNMENT REGULATION
INTERNET REGULATION
Currently, only a small body of laws and regulations directly apply to
access to or commerce on the Internet. Due to the increasing popularity and use
of the Internet, however, laws and regulations may be adopted at the
international, 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 and the convergence of
traditional telecommunications services with Internet communications. Moreover,
a number of laws and regulations have been proposed and are currently being
considered by federal, state and foreign legislatures with respect to these
issues. We cannot predict the impact on our business of any new laws and
regulations or the manner in which existing and new laws and regulations may be
interpreted and enforced. For example, recently, Congress passed and the
President signed into law:
- The Communications Decency Act, which protects ISPs from defamatory
statements made on or accessible through the provider's service.
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- The Digital Millennium Copyright Act, which provides stronger copyright
protection for software, music and other works on the Internet. Under
this law, ISPs and Web site operators must register with the United
States Copyright Office to avoid liability for infringement by their
subscribers.
- The Child Online Protection Act, which makes it illegal to communicate
material that is harmful to minors on the Internet for commercial
purposes in a manner accessible by minors. This law also requires Web
sites to obtain parental consent before collecting information from
children who are age 12 and younger.
- The Child Protection and Sexual Predator Punishment Act, which imposes
criminal penalties for using the Internet to solicit minors for sexual
purposes, and for sending obscene material to persons under the age of
16.
- The Internet Tax Freedom Act, which imposes a three-year moratorium on
taxes which are multiple or discriminatory, to give state and federal
lawmakers time to develop a more comprehensive approach to Internet
taxation.
In addition, there is substantial uncertainty as to the 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. The vast majority of these laws were adopted before the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of the
Internet, impose taxes or other costly requirements, create uncertainty in the
market or in some other manner have an adverse effect on Internet commerce.
These developments could, in turn, have a material adverse effect on our
business.
While no one has ever filed a claim against us relating to information
carried on, stored on, or disseminated through our network, someone may file a
claim of that type in the future and may be successful in imposing liability on
us. If that happens, we may have to spend significant amounts of money to defend
ourselves against these claims and, if we are not successful in our defense, the
amount of damages that we will have to pay may be significant. Any costs that we
incur as a result of defending these claims or the amount of liability that we
may suffer if our defense is not successful could materially adversely affect
our business. If, as the law in this area develops, we become liable for
information carried on, stored on or disseminated through our network, we may
decide to take actions to reduce our exposure to this type of liability. This
may require us to spend significant amounts for new equipment and discontinue
offering some of our services.
The United Kingdom and the European Union have adopted legislation and
directives that have a direct impact on business conducted over the Internet and
on the use of the Internet. For example, the United Kingdom Defamation Act of
1996 protects ISPs, under some circumstances, from liability for defamatory
materials stored on its servers. The European Directives on the Protection of
Consumers, Data Protection, and Distance Selling are expected to have direct
effects on the use of the Internet for commercial transactions and will create
additional layers of consumer protection legislation with respect to electronic
commerce. In addition, governmental authorities throughout the world are
contemplating numerous other regulatory schemes. As in the United States, there
is uncertainty as to the enactment and impact of foreign regulatory and legal
developments. These developments may have an adverse effect on our business.
Our Internet access service transmits some data over public telephone
lines. Regulations and policies establishing charges, terms and conditions for
communications
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govern these transmissions. As an ISP, we are not currently regulated directly
by the Federal Communications Commission, or the FCC, or any other agency, other
than regulations applicable to businesses generally. We could, however, become
subject in the future to regulation by the FCC and/or other regulatory agencies
if we become classified as a provider of basic telecommunications services. As a
result, compliance with these FCC regulations could affect the charges that we
pay to connect to the local telephone network because ISPs, unlike long distance
telephone companies, are not currently required to pay carrier access charges.
Access charges are assessed by local telephone companies on long-distance
companies for the use of the local telephone network when the local telephone
companies originate and terminate long-distance calls, generally on a per-
minute basis. The payment of access charges has been a matter of continuing
dispute, with long-distance companies arguing that the charges are substantially
in excess of actual costs and local telephone companies arguing that access
charges are justified to subsidize lower local rates for end users. In May 1997,
the FCC reaffirmed its decision that ISPs will not be required to pay these
access charges. Subsequent statements issued by the FCC have not altered this
conclusion. The FCC also has concluded that, unlike providers of basic
telecommunications services, ISPs are not currently required to contribute a
percentage of their revenues to the federal universal service fund and are not
expected to contribute to similar funds established at the state level.
Both the access charge issue and the universal service fund treatment of
ISPs are the subjects of further FCC proceedings and may change. Telephone
companies have requested the FCC to reconsider or reverse its decisions in these
areas, and their arguments are gaining support as Internet-based
telecommunications services begin to compete with conventional
telecommunications services. We cannot predict how these matters will be
resolved but it may adversely affect us if, in the future, ISPs are required to
pay access charges or contribute to the universal service fund.
TELECOMMUNICATIONS REGULATION
We intend to file applications to obtain the regulatory and contractual
approvals we need to provide local and long distance telecommunications services
to our customers. If we are successful in entering this marketplace, then our
services will be subject to varying degrees of federal, state and local
regulation. The FCC regulates the facilities and services of telecommunications
common carriers if those facilities are used to originate or terminate
interstate or international communications. The state regulatory commissions
regulate the same facilities and services if they are used to originate or
terminate intrastate communications. Local governments sometimes impose fees and
other requirements on competitive local exchange carriers, or CLECs. Many of
these regulations are currently the subject of lawsuits, legislative hearings
and administrative proposals that may change the manner in which the
telecommunications industry operates. We cannot predict the outcome of these
proceedings or their impact on our business.
Federal Telecommunications Regulations. If we become a CLEC, we will be
regulated at the federal level under the Communications Act of 1934. The
Communications Act of 1934 was substantially amended by the Telecommunications
Act of 1996. Before the passage of the Telecommunications Act, states typically
granted an exclusive franchise in each local service area to a single dominant
carrier. These were often former subsidiaries of AT&T known as regional Bell
operating companies, or RBOCs. An RBOC generally owned and operated the entire
local exchange network in the local service area it served. The
Telecommunications Act provides for comprehensive reform of the
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telecommunications laws in the United States and is designed to foster
competition in the local telecommunications marketplace by:
- prohibiting state and local governments from granting exclusive
telecommunications franchises,
- requiring incumbent local exchange carriers to grant CLECs the right to
interconnect their CLEC facilities to the incumbent carrier's facilities,
- making it easier for customers to switch service from incumbent local
exchange carriers to CLECs,
- requiring incumbent local exchange carriers and CLECs to permit resale of
their communications services without unreasonable conditions or
restrictions,
- requiring incumbent local exchange carriers and CLECs to provide
reciprocal compensation arrangements for transmitting telephone calls,
and
- requiring incumbent local exchange carriers and CLECs to permit competing
carriers access to poles, ducts, conduits and rights-of-way at regulated
prices.
The Telecommunications Act also provided for the removal of most of the
restrictions imposed on RBOCs by the 1982 consent decree which provided for
divestiture of the RBOCs from AT&T in 1984. For example, the Telecommunications
Act establishes procedures under which an RBOC can offer "in-region" long
distance services, which are provided to customers in the area where the RBOC
provides local exchange service. However, before an RBOC can provide in-region
long distance services in a state, it must obtain FCC approval by showing that:
- competitors exist in the state that use their own communications
facilities,
- the RBOC has entered into interconnection agreements with competitors in
the state where it seeks authority,
- the interconnection agreements satisfy a 14-point "checklist" of
competitive requirements, and
- the entry of the RBOC into the market for long distance services in the
state is in the public interest.
The FCC has not yet granted this authority to any RBOCs, but requests by
RBOCs are the subject of pending appeals at the FCC. When the FCC permits RBOCs
to provide "in region" long distance services, they will begin to compete with
existing long distance carriers. Because RBOCs provide their own local access
services, we expect they will not need the services of CLECs to the same extent
as these existing long distance carriers. If these existing long distance
carriers experience a decline in their businesses as a result of this
competition, it may have an adverse effect on the ability of CLECs to generate
access revenues from providing services to long distance carriers.
FCC Rules Implementing the Local Competition Provisions of the
Telecommunications Act. In August 1996, the FCC adopted rules and policies
implementing the local competition provisions of the Telecommunications Act and
adopted national guidelines regarding:
- the unbundling of incumbent local exchange carriers' network elements,
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- the resale of incumbent local exchange carrier services,
- the pricing of interconnection services and unbundled elements, and
- other local competition issues.
Numerous parties appealed the FCC's rules to the United States Eighth
Circuit Court of Appeals, and in 1997, the Eighth Circuit upheld some of the
FCC's rules but reversed many of the FCC's rules on other issues, including the
rules regarding the pricing of unbundled elements.
In January 1999, the United States Supreme Court largely reversed the
Eighth Circuit's decision and upheld many of the FCC's interconnection rules,
including the FCC's jurisdiction to adopt pricing guidelines under the
Telecommunications Act. The Supreme Court also upheld the FCC's "pick and
choose" rules, which allow CLECs to adopt rates, terms and conditions from
agreements that an incumbent local exchange carrier has with any other carriers.
The Supreme Court did not, however, evaluate the specific pricing method adopted
by the FCC, and we expect the Eighth Circuit to further consider that method.
Additionally, the Supreme Court vacated the FCC rules defining what network
elements must be unbundled and made available to the CLECs by the incumbent
local exchange carriers. The Supreme Court held that the FCC must provide a
stronger rationale to support the degree of unbundling ordered by the FCC. In
response, the FCC recently adopted a standard for determining which network
elements must be unbundled. Applying the revised standard, the FCC reaffirmed
that incumbent local exchange carriers must provide unbundled access to six of
the original seven network elements that the FCC required to be unbundled in its
original order in 1996:
- loops, including loops used to provide high-capacity and advanced
telecommunications services,
- network interface devices,
- local circuit switching (except for large customers in major urban
markets),
- dedicated and shared transport,
- signaling and call-related databases, and
- operations support systems.
The FCC determined that incumbent local exchange carriers are not required
to provide CLECs with the seventh element of the original list -- access to
their operator and directory assistance services. We view the Supreme Court
decision and the FCC's recent determination as favorable developments for the
CLEC industry, although we cannot predict the ultimate outcome of further FCC
and court proceedings resulting from these decisions.
Other Federal Regulation. In general, the FCC has a policy of encouraging
new competitors, like comstar.net, to enter the telecommunications industry and
preventing anti-competitive practices. Therefore, the FCC has established
different levels of regulation for dominant carriers and nondominant carriers.
Large incumbent local exchange carriers such as the RBOCs and GTE Corporation
are currently considered dominant carriers, while CLECs are considered
nondominant carriers. If we gain approval to operate as a nondominant carrier,
we will be subject to relatively limited FCC regulation. At the federal
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level, unlike incumbent local exchange carriers, we will not be subject to price
cap or rate of return regulations, which will give us more freedom to set our
own pricing policies.
As nondominant carriers, CLECs may install and operate facilities for
transmitting domestic interstate communications without prior FCC authorization.
The services of nondominant carriers have been subject to relatively limited
regulation by the FCC, primarily consisting of the filing of tariffs and
periodic reports concerning the carrier's interstate network facilities.
However, nondominant carriers must offer interstate services on a
nondiscriminatory basis, at just and reasonable rates, and remain subject to FCC
compliance procedures. The FCC has sought to eliminate the requirement that
nondominant interstate carriers file tariffs, but has been prevented from doing
so by a federal Court of Appeals. However, the court may permit the FCC to take
this action in the future.
The FCC has granted incumbent local exchange carriers significant
flexibility in pricing their interstate switched access and dedicated services.
In May 1997, the FCC adopted an order which makes various reforms to the
existing rate structure for interstate access that are designed to move access
charges, over time, to more cost based rate levels and structures. We expect
that these changes will reduce access charges and shift charges currently based
on minutes to flat-rate, monthly per line charges. As a result, the aggregate
amount of access charges paid by long distance carriers to local exchange
carriers in the United States may decrease. In August 1999, the FCC implemented
a market-based approach to further access charge reform. This approach will give
incumbent local exchange carriers progressively greater flexibility in setting
rates as competition develops, gradually replacing regulation with competition
as the primary means of setting prices. This series of access charge reforms
will likely have a significant impact on our telecommunications services.
In May 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act which seek to advance universal telephone service.
Universal telephone service includes:
- broad access to advanced telecommunications services in rural and high
cost areas, schools, health care facilities and libraries,
- equitable, nondiscriminatory and predictable funding obligations under
the federal universal service fund, and
- affordable rates for telecommunications services.
All telecommunications carriers providing interstate telecommunications
services, which will include us if we obtain approval to provide interstate
services, must contribute to the federal universal service fund. The FCC may
decide in the future to increase the size of subsidy payments by CLECs or the
scope of the subsidy program. This would increase our costs of operating as a
CLEC.
State Regulation. We believe that most, if not all, states in which we
propose to operate will require a certification or other authorization to offer
intrastate telecommunications services. These certifications generally require a
showing that the carrier has adequate financial, managerial, and technical
resources to offer the proposed services in a manner consistent with the public
interest.
We intend to file applications to obtain intrastate authority for the
provision of dedicated telecommunications services and a full range of local
switched services and long
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distance services. In most states, we will be required to file tariffs
describing the terms, conditions and prices for services that are classified as
intrastate. Additionally, some states may impose reporting, customer service,
quality requirements and universal service requirements. There are many
regulatory proceedings before the states, the outcome of which may affect our
competitive and economic position in the telecommunications services markets.
In addition to obtaining state certifications, we must negotiate terms of
interconnection with the incumbent local exchange carrier before we can begin
providing telecommunication services. Our executed agreements will be subject to
the approval of the state commissions. If we are unable to voluntarily negotiate
an interconnection agreement with the incumbent local exchange carrier, we may
petition the state public service commission to arbitrate any open issues. We
may experience difficulties in entering into these agreements on terms
acceptable to us and in enforcing these agreements.
We also may be subject to requirements in some states to obtain prior
approval for, or notify the state commission of, any transfers of our voting
securities, sales of our assets, corporate reorganizations involving us,
issuances of our stock or debt instruments and similar transactions involving
us.
Local Government Authorizations. Under the Telecommunications Act, local
authorities retain jurisdiction to control access to municipally owned or
controlled easements and other rights of way. In addition, if a
telecommunications provider constructs a fiber optic network, it is often
required to obtain construction permits from local governments. In doing so,
however, municipalities may not prohibit or effectively prohibit any company
from providing any telecommunications services. In addition, the
Telecommunications Act requires that local governmental authorities treat
telecommunications carriers in a non-discriminatory and competitively neutral
manner. Many municipalities will require us to obtain franchises from them and
pay fees to them, often based on a percentage of gross revenues we receive from
providing telecommunications services.
PROPRIETARY RIGHTS
General. Although we believe that our success is more a function of our
technical expertise and customer service than our proprietary rights, our
success and ability to compete depend in part upon our technology. We rely on a
combination of contractual restrictions and copyright, trademark and trade
secret laws to establish and protect our technology. Our policy is to require
employees and consultants and, when possible, suppliers to execute
confidentiality agreements upon the commencement of their relationships with us.
The steps we have taken may not be adequate to prevent misappropriation of our
technology, or our competitors may independently develop technologies that are
substantially equivalent or superior to our technology.
Licenses. We developed some software for nschool Communication Systems,
Inc. and received rights to use the software in exchange for the development of
the software. Specifically, we have the right to use the separable components of
the software for any purpose and to use the combined software product for
limited purposes. We are specifically prohibited from using the software to
provide electronic communications, Internet applications and services to
organized, group-based educational entities.
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Trademarks. We own three federal trademark registration applications,
which are currently pending in the United States Patent and Trademark Office. We
filed two applications in May 1999 and one application in August 1999. In May
1999 we filed applications for the marks ComStar Internet Services, Inc., with
design, and ComStar Internet & Wireless, Inc., with design, and in August 1999
we filed an application for the mark comstar.net, inc., with logo. The
applications are based on our intent to use these marks in commerce in
connection with Internet access, web hosting and co-location services for
businesses. We have used marks containing variations of the word "comstar" since
1996, and no third party has notified us of any objection to our use of any of
these marks.
In addition, our wholly owned subsidiary, Comstar Telecom & Wireless, Inc.,
filed an application for the mark Comstar Telecom & Wireless, Inc. in September
1999. The application is based on our subsidiary's intent to use the mark in
commerce in connection with local exchange carrier and long distance
communication services.
The United States Patent and Trademark Office has now examined our
application to register the mark Comstar Internet Services, Inc. and the related
design and our application to register the mark Comstar Internet & Wireless,
Inc. and the related design. Registration of both marks has been refused on the
ground that the marks, when used on or in connection with the identified
services, so resemble a currently registered mark for COMSTAR as to be likely to
cause confusion, to cause mistake or to deceive. Registration has also been
provisionally refused in view of a pending application to register a mark that
includes the term COMSTAR owned by a different party. We disagree with the
findings of the examining attorney and are taking steps to vigorously contest
the rejection and pursue the registrations. The Patent and Trademark Office has
not yet responded to our application for the comstar.net mark or our
subsidiary's application for the Comstar Telecom & Wireless, Inc. mark. In
addition, we own the Switch Hotel(TM) trademark but have not filed a federal
trademark application for it.
EMPLOYEES
As of September 30, 1999, we employed 37 people, including full-time and
part-time employees. We consider our employee relations to be good. All
employees have entered into non-disclosure, non-compete, and non-solicitation
agreements with us. None of our employees is covered by a collective bargaining
agreement.
FACILITIES
We lease our headquarters facilities in Atlanta, Georgia under a lease that
expires on September 30, 2000. The lease covers approximately 4,200 square feet
and the annual rent is approximately $66,000. The lease relating to the data
center at our Atlanta facility expires on September 30, 2004 and has an annual
rent of approximately $67,000 for the first year. The annual rent will increase
by approximately 4.0% each year for the remainder of the lease. The data center
comprises approximately 4,500 square feet, including external space for a
generator.
We lease approximately 660 square feet of office space in Athens, Georgia,
which contains our POP for that area, as well as several full-time and part-time
employees. We lease this space under an agreement that expires on June 30, 2001.
The annual rent for the Athens facility is approximately $7,600. Our office
space in Miami, Florida and Raleigh, North Carolina each comprises less than 500
square feet and averages approximately
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$13,000 in annual rent. We also house servers in additional offices in Miami,
Florida; Durham, North Carolina; Birmingham, Alabama; Columbus, Georgia; and
Houston, Texas under co-location agreements with various customers and
telecommunications providers.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The executive officers, directors and key employees of comstar.net, and
their ages as of December 1, 1999 are listed in the following table. Immediately
before the completion of this offering, our articles of incorporation will
provide that our board of directors will be divided into three classes, as
nearly equal in number as possible. Class I directors' terms expire at the
annual meeting of shareholders in 2000, Class II directors' terms expire at the
annual meeting of shareholders in 2001, and Class III directors' terms expire at
the annual meeting of shareholders in 2002.
<TABLE>
<CAPTION>
NAME AGE CLASS POSITION
- ---- --- ----- --------
<S> <C> <C> <C>
Samuel F. Dayton, Ph.D........... 63 I Chairman of the Board
J. Cary Howell................... 39 III Chief Executive Officer and
Director
Edward N. Landa.................. 29 I Chief Technology Officer,
Secretary and Director
Christopher K. Martin, C.P.A..... 33 -- Chief Financial Officer and
Treasurer
Cynthia A. St. Ores.............. 40 -- Chief Operating Officer
Steven J. Edwards................ 52 -- Executive Vice President of Sales
and Marketing
Michael A. Dayton................ 37 -- Vice President of Network
Operations
James L. Bruce, Jr............... 55 II Director
Glenn W. Sturm................... 45 III Director
Stephen R. Gross................. 52 II Director
</TABLE>
Samuel F. Dayton, Ph.D., a co-founder of comstar.net, has served as
Chairman of the Board since we were incorporated in March 1996, and he served as
President from our incorporation until November 1999. Since 1994, Dr. Dayton has
also served as Chairman and Chief Executive Officer of db Telecom Technologies,
Inc., which helps telecommunications companies develop and install their
transmission sites, test their equipment for quality and strength of signal, and
maintain their equipment after installation. Dr. Dayton is the father of Michael
A. Dayton.
J. Cary Howell, a co-founder of comstar.net, has served as Chief Executive
Officer and as a director since March 1996. From February 1995 to April 1996,
Mr. Howell was Manager of Network Operations for MindSpring Enterprises, Inc.,
an ISP. From February 1993 to February 1995, Mr. Howell was a communications
consultant with OmniTech Consulting Group, a consulting group for
telecommunications providers such as BellSouth and served as a consultant for
various other companies. From April 1991 to April 1993, Mr. Howell was a Senior
Engineer for Memotec Corporation, a voice and data service provider. In June
1996, Mr. Howell co-founded the Association of Internet Professionals. He is a
life member and served as its first Chairman from June 1996 to May 1998.
Edward N. Landa, a co-founder of comstar.net, has served as Chief
Technology Officer since January 1999, as Vice President of Engineering from
March 1996 to January 1999, and as Secretary and a director since March 1996.
From February 1996 to May 1996, Mr. Landa was an engineer with MindSpring
Enterprises, Inc. From February 1994
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to February 1996, Mr. Landa served as Network Systems Administrator for Lida
Stretch Fabrics, a textile manufacturer. From March 1990 to February 1994, Mr.
Landa worked for the Electric Power Research Institute, a company that
researches technological solutions for the electricity industry, as an employee
of J.A. Jones Applied Research, a research company. Mr. Landa served in various
positions at American Communications Company and its parent American Systems
Corporation, both of which are communications companies, from 1986 to 1988.
Christopher K. Martin, C.P.A., has served as Chief Financial Officer since
March 1999 and as Treasurer since August 1999. From April 1998 to March 1999,
Mr. Martin served as Experienced Manager of the Business Audit Development Team
for Arthur Andersen Performance and Learning in Chicago, Illinois and assisted
in developing the Business Audit methodology being implemented globally by
Arthur Andersen LLP. From September 1990 to February 1998, Mr. Martin served as
an auditor/consultant with the Assurance and Business Advisory Division of
Arthur Andersen in the telecommunications, distribution and logistics,
manufacturing and service industries. From June 1995 to February 1999, Mr.
Martin served as an Experienced Manager within this division. Mr. Martin has
also been a certified public accountant since May 1991.
Cynthia A. St. Ores has served as Chief Operating Officer since July 1999.
From January 1995 to July 1999, Ms. St. Ores served as firmwide technology
implementation specialist with Arthur Andersen. From July 1998 until she joined
comstar.net in July 1999, she was a member of the Knowledge Services Business
Solutions Team at Arthur Andersen, sharing best practices with worldwide firm
personnel and global clients regarding strategies for technology implementation
for knowledge sharing and distance learning environments. From September 1992 to
June 1994, Ms. St. Ores was a research assistant at the University of Illinois.
Steven J. Edwards has served as Executive Vice President of Sales and
Marketing since June 1999. From July 1997 to May 1999, Mr. Edwards served as
Director, Global Business Programs, EMEA (Europe, Middle East, Africa) for Bay
Networks, a hardware provider of networking equipment that was acquired by
Nortel Networks in September 1998. Mr. Edwards served as Director, Customer
Development, EMEA for Bay Networks from May 1996 to June 1997. From June 1993 to
May 1996, Mr. Edwards held various sales positions at SynOptics Communications,
Inc., a hardware provider of networking equipment which merged with another
company and was renamed Bay Networks in October 1994. Mr. Edwards began his
career in 1970 with International Business Machines Corporation and worked in
many sales and marketing functions until his departure in 1989.
Michael A. Dayton has served as Vice President of Network Operations since
August 1999 and served from June 1999 to August 1999 as Vice President of
Finance and Mergers and Acquisitions. Mr. Dayton coordinated our engineering and
accounting functions from June 1997 to June 1999. From September 1994 to May
1997, Mr. Dayton attended the Whiting School of Engineering at Johns Hopkins
University as a graduate student and was also a research scientist at the Center
for Nondestructive Evaluation at Johns Hopkins University. Mr. Dayton is the son
of Dr. Samuel F. Dayton.
James L. Bruce, Jr., a co-founder of comstar.net, has served as a director
since 1996. He has also served as the President and a director of db Telecom
Technologies since 1994. Since 1970, Mr. Bruce has served as an executive with a
variety of businesses in the textile and manufacturing industries.
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Glenn W. Sturm has served as a director since July 1999. Mr. Sturm has been
a partner in the law firm of Nelson Mullins Riley & Scarborough, L.L.P. since
1992, and he presently serves as its Corporate Chairman and as a member of its
Executive Committee. He is a director of Phoenix International Ltd., Inc., The
InterCept Group, Inc. and Towne Services, Inc. Mr. Sturm is a principal of
Capital Appreciation Partners II and the chief executive officer of Netzee, Inc.
Stephen R. Gross has served as a director since July 1999. In 1979, Mr.
Gross co-founded HLB Gross Collins, P.C., a full-service accounting firm in
Atlanta, Georgia. Mr. Gross also serves as a director of the Concert Investment
Series Funds, ebank.com, Inc., Ikon Ventures, Inc. and SuperCorp, Inc.
COMMITTEES OF OUR BOARD OF DIRECTORS
<TABLE>
<CAPTION>
COMMITTEES AND MEMBERS FUNCTION OF COMMITTEES
---------------------- ----------------------
<S> <C>
Executive committee - exercises the power of the board of directors
James L. Bruce, Jr. between board meetings, with some limitations
Samuel F. Dayton
Stephen R. Gross
J. Cary Howell
Audit committee - reviews our audit functions, including our
Glenn W. Sturm accounting and financial reporting practices
Stephen R. Gross - reviews the adequacy of our system of internal
accounting controls and the quality and integrity
of our financial statements
- maintains relations with our independent auditors
Compensation committee - establishes the compensation of our executive
Glenn W. Sturm officers, including salaries, bonuses, commissions,
Stephen R. Gross and benefit plans
- administers our option and incentive plans
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee is or previously has been an
officer or employee of ours. None of our executive officers currently serves as
a member of the compensation committee or as a director of any entity of which
any of our directors serves as an executive officer. Before establishing the
compensation committee in August 1999, our board of directors, acting as a
whole, determined executive compensation. Dr. Samuel F. Dayton, our Chairman of
the Board, and James L. Bruce, Jr., one of our directors, are also directors,
executive officers and the sole shareholders of db Telecom Technologies, and Dr.
Dayton is also the chairman of the board of nschool Communication Systems, Inc.
We have entered into transactions with each of those companies as explained
below.
From the date of our inception in March 1996 and through September 1997,
Dr. Dayton and Mr. Bruce loaned us an aggregate of $618,549. These loans bear
simple interest at a rate of 10% per year and become due on April 30, 2000.
From the date of our inception through June 30, 1999, we have paid monthly
management fees to db Telecom Technologies in exchange for various
administrative, accounting, consulting and other management services. For the
year ended December 31,
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1998, we paid db Telecom Technologies an aggregate amount of $60,000 for
management fees and $4,305 for other services.
In December 1996, db Telecom Technologies agreed to provide additional
periodic loans to us on an "as needed" basis. Under this agreement, db Telecom
Technologies has loaned us an aggregate of $270,188. All amounts extended under
this loan bear simple interest at a rate of 10% per year and become due on April
30, 2000. The repayment of this debt is personally guaranteed by each of Dr.
Dayton, Mr. Bruce, J. Cary Howell, our Chief Executive Officer and a director,
and Edward N. Landa, our Chief Technology Officer and a director.
In May 1998, we established a line of credit with Premier Bank to borrow up
to an aggregate of $700,000 from time to time, at an annual interest rate of
prime plus 1%. Each of Dr. Dayton, Mr. Howell, Mr. Landa and Mr. Bruce gave
personal guarantees to Premier Bank that the amounts due under the credit line
would be repaid. As of September 30, 1999, we owed $700,000 under the line of
credit, which becomes due in January 2000. We intend to repay this loan and the
accrued interest with a portion of the net proceeds from this offering.
In July 1998, Dr. Dayton and Mr. Bruce personally borrowed $383,985 from
The First National Bank of Commerce on our behalf, and then loaned us the money
to fund our purchase of Athens' ISP. We repaid approximately $100,000 of this
loan in February 1999, when Dr. Dayton and Mr. Bruce obtained an extension of
the loan's maturity date to August 27, 1999. The loan, which was subsequently
extended in August 1999, currently accrues interest at the rate of 8.75% per
year, and is due on December 27, 1999. We are obligated to repay the remaining
principal amount of $283,985 and accrued interest with a portion of the net
proceeds of this offering.
In September 1998, we borrowed $200,100 from Premier Bank under a
promissory note bearing interest at an annual rate of prime plus 1%. Dr. Dayton
personally guaranteed the repayment of this note. We made a principal payment of
$50,000 in each of March 1999 and July 1999. The current amount outstanding is
$100,100, and the loan is due in January 2000. We intend to repay this loan and
the accrued interest with a portion of the net proceeds from this offering.
In December 1998, we entered into an agreement with nschool Communication
Systems, Inc., a developer and licensor of software that links educators,
parents and students. Under the agreement, we developed software applications
for nschool in exchange for 25% of the outstanding common stock of nschool. In
addition, we promised not to compete with nschool by utilizing the developed
technology, and nschool granted us the right to match any contract for Internet
access presented to nschool by any other ISP. We granted to nschool a license to
use both the combined software product and the separable components for limited
purposes, and nschool granted to us a license to use the components of the
software for any purpose and to use the combined software product for limited
purposes.
In September 1999, we granted options to purchase an aggregate of 260,000
shares of our common stock to key employees of db Telecom Technologies at an
exercise price of $11.42 per share in connection with consulting services these
employees performed for us. All of these options were granted pursuant to our
Amended and Restated 1999 Stock Option and Incentive Plan and are currently
exercisable. In September 1999, 500 of the options were forfeited.
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In September 1999, the board granted each of Mr. Dayton and Mr. Bruce an
option to purchase 68,750 shares of common stock at an exercise price of $11.42
per share in consideration for their financial and management support of us
since our inception. These options were granted under our Amended and Restated
1999 Stock Option and Incentive Plan, are immediately exercisable and have a
term of ten years from the date of grant.
In November 1999, Dr. Dayton agreed to lend us up to $140,000 to cover
short-term expenses. The outstanding principal amount of this loan earns
interest at a rate of 10% per year and is payable on the earlier of January 15,
2000 or the closing of this offering. As of the date of this prospectus we have
borrowed the full $140,000 from Dr. Dayton under this arrangement. We are
obligated to repay this loan and the accrued interest with a portion of the net
proceeds of this offering.
Since our inception, a substantial portion of our business has resulted
from our relationship with db Telecom Technologies. We expect to continue to
benefit from this relationship in the future, particularly with respect to
educational and governmental contracts we may jointly pursue.
DIRECTOR COMPENSATION
Our bylaws allow our board of directors to determine from time to time the
compensation that directors may receive for their service as directors. Since
inception, however, our directors have served without cash compensation, except
for reimbursement for out-of-pocket expenses for each meeting attended.
We granted to each of Mr. Gross and Mr. Sturm options to purchase 50,000
shares of common stock at an exercise price of $11.42 per share in September
1999. These options were vested with respect to one-third of the shares as of
the date of grant and will vest with respect to the remaining shares in two
equal installments on each of the next two anniversaries of the date they
commenced service on the board. The options have a term of five years from the
date of grant. For additional information regarding options and awards directors
are eligible to receive under the comstar.net Director Stock Option Plan, see
"-- comstar.net, inc. Director Stock Option Plan" below.
EXECUTIVE COMPENSATION
The following table describes all compensation earned by or paid or awarded
to our chief executive officer for services rendered to us in all capacities
during the year ended December 31, 1998. No other officer received compensation
in excess of $100,000 for the year ended December 31, 1998.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
--------------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ALL OTHER COMPENSATION
--------------------------- ---- ------- ----- ----------------------
<S> <C> <C> <C> <C>
J. Cary Howell, Chief Executive
Officer............................ 1998 $69,030 -0- -0-
</TABLE>
EMPLOYMENT AGREEMENTS
As a general matter, we do not enter into employment agreements, and we
have not entered into employment agreements with any of our executive officers.
Rather, the employment relationships with each executive officer are "at will."
However, in connection with the initial employment of each executive officer,
comstar.net and the executive executed an offer letter which outlines the
general compensation and benefits provided to
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the executive, including base salary, targeted annual bonus, option grants and
employee benefits. We granted each of Christopher K. Martin, our Chief Financial
Officer, Cynthia A. St. Ores, our Chief Operating Officer and Steven J. Edwards,
our Executive Vice President of Sales and Marketing, an option to purchase
50,000 shares of common stock at an exercise price of $11.42 per share
concurrently with the commencement of their employment. These options, which
were granted under the comstar.net, inc. Amended and Restated 1999 Stock Option
and Incentive Plan, vest in three equal installments on the first three
anniversaries of the commencement of their employment and have a term of ten
years from the date of grant. In addition, in March 1999 we granted Michael A.
Dayton, our Vice President of Network Operations, an option under the 1999
Option Plan to purchase 50,000 shares of common stock at an exercise price of
$11.42 per share. As of the date of this prospectus, 33,333 shares subject to
the option are vested and the remaining shares vest in June 2000. Mr. Dayton's
options have a term of ten years from the date of grant.
COMSTAR.NET, INC. AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
In March 1999, the board of directors adopted the 1999 Stock Option and
Incentive Plan under which a maximum of 850,000 shares of our common stock were
available to be granted to employees, consultants and others rendering services
to us. In September 1999, we increased the number of shares available for grant
under this plan to 1,150,000 shares, and in October 1999 our shareholders
approved the 1999 Option Plan, as amended. The number of shares that may be
granted under the 1999 Option Plan automatically increases on January 1 of each
calendar year to an amount equal to 15% of our common stock outstanding on
December 31 of the previous year, calculated on a fully diluted basis, if that
amount is greater than the maximum amount previously available for grant under
the 1999 Option Plan. Options may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code, which permits the deferral
of taxable income related to the exercise of the option, or nonqualified options
not entitled to the tax deferral. Incentive stock options may only be granted to
employees, and the exercise price must be at least equal to the fair market
value of the common stock on the date the options are granted. In addition, the
1999 Option Plan allows for awards of restricted stock and stock appreciation
rights.
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The board of directors and the compensation committee administer the 1999
Option Plan. Under the 1999 Option Plan, the number of shares for which options
may be granted and the number of shares that may be issued under unexercised
options are adjusted to take into account some of the events affecting the
common stock, including stock splits, dividends payable in common stock and
business combinations. Within the limits specified in the 1999 Option Plan, the
board of directors and the compensation committee, in their discretion, select
the recipients of awards and the number of options granted under the 1999 Option
Plan and determine other matters such as:
- vesting and exercisability schedules,
- the exercise price of options, which cannot be less than 100% of the fair
market value of the common stock on the date of grant for all stock
options, and
- the duration of awards.
Our general practice has been to make all options granted under the 1999
Option Plan vest in three equal installments on the first three anniversaries of
the date the optionee commences employment. As of September 30, 1999, we had
granted options to purchase 768,625 shares of common stock under the 1999 Option
Plan at an exercise price of $11.42 per share. All of these options have a term
of ten years from the date of grant. In September 1999, 500 of the options were
forfeited.
COMSTAR.NET, INC. DIRECTOR STOCK OPTION PLAN
Our board of directors approved the Director Stock Option Plan in September
1999, and our shareholders approved the Director Stock Option Plan in October
1999. The Director Option Plan provides for the grant of non-qualified stock
options to our non-employee directors. The Director Option Plan authorizes the
issuance of up to 300,000 shares of common stock under options having an
exercise price equal to the fair market value of the common stock on the date
the options are granted. Under the Director Option Plan, the number of shares
for which options may be granted and the number of shares that may be issued
under unexercised options are adjusted to take into account some of the events
affecting the common stock, including stock splits, dividends payable in common
stock and business combinations. The board of directors administers the Director
Option Plan.
The Director Option Plan provides for grants of options to acquire shares
of common stock to each non-employee director who is initially elected to the
board of directors after the date of approval of the Director Option Plan. The
board of directors will establish the number of shares in each grant, the
exercise terms and vesting schedules of each option on the grant date. Each
option will expire five years after the date of grant, unless cancelled sooner
as a result of termination of service or death, or unless the option is fully
exercised before the end of the option period. As of September 30, 1999, options
to acquire 100,000 shares of common stock were outstanding under the Director
Option Plan at an exercise price of $11.42 per share. All of these options have
a term of five years from the date of grant.
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DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
Our articles of incorporation provide that no director will be personally
liable to us or any of our shareholders for any breach of the duties of office,
except that the elimination of liability does not apply to:
- appropriations of business opportunities in violation of the director's
duties,
- knowing or intentional misconduct or violation of law,
- liability for assenting to distributions which are illegal or improper
under Georgia law or our articles of incorporation, and
- liability for any transaction in which the director derived an improper
personal benefit.
In addition, our articles of incorporation state that if Georgia law is
ever amended to allow for greater exculpation of directors than presently
permitted, the directors will be relieved from liabilities to the fullest extent
provided by Georgia law, as so amended. No further action by the board of
directors or our shareholders is required, unless Georgia law provides
otherwise. No modification or repeal of our articles of incorporation will
adversely affect the elimination or reduction in liability provided by them with
respect to any alleged act occurring before the effective date of that
modification or repeal.
We have entered into indemnification agreements with each of our directors
and executive officers that give these individuals similar rights to
indemnification and contribution.
RELATED PARTY TRANSACTIONS
We believe that all of the following transactions, as well as all of the
transactions described in "Management -- Compensation Committee Interlocks and
Insider Participation," were made on terms no less favorable to us than could
have been obtained from other unaffiliated parties. All future transactions,
including loans, between us and our officers, directors, principal shareholders
and their affiliates will be approved by a majority, but not fewer than two, of
our disinterested directors, and will continue to be on terms no less favorable
to us than could be obtained from other unaffiliated parties.
In June 1999, we sold 4,379 shares of common stock at $11.42 per share to
each of Christopher K. Martin, our Chief Financial Officer, and Steven J.
Edwards, our Executive Vice President of Sales and Marketing, each of whom was
an officer at the time of sale.
Our director Glenn W. Sturm is a partner in the law firm of Nelson Mullins
Riley & Scarborough, L.L.P., where he serves as Corporate Chairman and a member
of the executive committee. Nelson Mullins has advised us regarding securities
and corporate law matters since August 1998.
In addition to the transactions described above, other transactions
involving Dr. Samuel F. Dayton, our Chairman of the Board, James L. Bruce, Jr.,
one of our directors and principal shareholders, their affiliates, J. Cary
Howell, our Chief Executive Officer and a director, and Edward N. Landa, our
Chief Technology Officer and a director, are described in
"Management -- Compensation Committee Interlocks and Insider Participation."
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PRINCIPAL SHAREHOLDERS
The following table provides information with respect to the beneficial
ownership of our common stock as of December 9, 1999 by:
- each person known by us to beneficially own more than 5% of the
outstanding shares of common stock,
- each of our directors and executive officers named in the summary
compensation table, and
- all of our directors and executive officers as a group.
Unless otherwise indicated, the address of each of the beneficial owners
identified is c/o comstar.net, inc., 2812 Spring Road, Suite 210, Atlanta,
Georgia 30339. Except as otherwise indicated, the beneficial owners have sole
voting and investment power with respect to all shares of common stock owned by
them. Percentage of ownership is based on 5,185,893 shares of common stock
outstanding as of December 9, 1999. Shares of common stock issuable under
options held by the respective person or group which may be exercised within 60
days after December 9, 1999 are referred to in this prospectus as "presently
exercisable stock options." Under SEC rules, presently exercisable stock options
are deemed to be outstanding and to be beneficially owned by the person or group
holding those options for the purpose of computing the percentage ownership of
the person or group, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person or group.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED
-------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ --------- -------
<S> <C> <C>
Samuel F. Dayton(1)......................................... 1,323,129 25.2%
J. Cary Howell.............................................. 1,241,245 23.2
Edward N. Landa(2).......................................... 1,251,382 23.4
James L. Bruce, Jr.(3)...................................... 1,318,750 25.1
Glenn W. Sturm(4)........................................... 16,667 *
Stephen R. Gross (4)........................................ 16,667 *
All directors and executive officers as a group (9
persons)(5)............................................... 5,176,598 96.6%
</TABLE>
- -------------------------
* Less than 1% of the outstanding common stock.
(1) Includes 68,750 shares of common stock that may be issued on the exercise of
presently exercisable stock options. Also includes 4,379 shares of common
stock held by the Mauney Family Limited Partnership, all of which may be
deemed to be beneficially owned by Dr. Dayton. Dr. Dayton disclaims
beneficial ownership of these 4,379 shares, except to the extent of his
pecuniary interest in the shares.
(2) Includes 5,000 shares of common stock owned by Mr. Landa's wife and 6,132
shares of common stock held by seven trusts of which Mr. Landa is the sole
trustee, all of which may be deemed to be beneficially owned by Mr. Landa.
Mr. Landa disclaims beneficial ownership of all of these 11,132 shares,
except to the extent of his pecuniary interest in the shares.
(3) Includes 200,000 shares of common stock held by Tartan Family Properties,
L.P., all of which may be deemed to be owned by Mr. Bruce. Mr. Bruce
disclaims beneficial ownership of these 200,000 shares except to the extent
of his pecuniary interest in the
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<PAGE> 78
shares. Includes 68,750 shares of common stock that may be issued on the
exercise of presently exercisable stock options. Mr. Bruce's address is c/o
Yonah Manufacturing Company, P.O. Box 280, Cornelia, Georgia 30531.
(4) Consists of 16,667 shares of common stock that may be issued on the exercise
of presently exercisable stock options.
(5) Includes 170,834 shares of common stock that may be issued on the exercise
of presently exercisable stock options granted to our directors, 209,379
shares of common stock held by affiliates of certain members of the group
and 6,132 shares of common stock held by trusts for which members of the
group serve as trustee, which may be deemed to be beneficially owned by
those members.
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DESCRIPTION OF CAPITAL STOCK
The following summary is qualified in its entirety by the provisions of our
articles of incorporation and our bylaws, and by the applicable provisions of
Georgia law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock consists of:
- 50,000,000 shares of common stock, without par value and without
designation as to series, and
- 5,000,000 shares of preferred stock, without par value, with the rights
and preferences the board of directors determines.
COMMON STOCK
The holders of common stock are entitled to one vote for each share they
hold of record for matters on which they are entitled to vote. There are no
sinking fund provisions or any cumulative voting, preemptive, redemption or
conversion rights applicable to the common stock.
The rights, preferences and privileges of holders of common stock are
subject to, and may be adversely affected by, the rights of holders of any
shares of any series of preferred stock that our board of directors may
designate from time to time in the future. Subject to the preference rights of
the holders of any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably any dividends and other distributions that
the board of directors may declare out of funds legally available for that
purpose. On the liquidation, dissolution or winding up of comstar.net, holders
of common stock are entitled to share ratably in all assets remaining after the
payment of our debts and other liabilities, and, if applicable, dividends on our
preferred stock. The outstanding shares of common stock are fully paid and
non-assessable.
PREFERRED STOCK
Under our articles of incorporation, our board of directors has the
authority, without shareholder approval or action, to issue up to 5,000,000
shares of preferred stock in the series and with the preferences, limitations
and relative rights as the board of directors may determine from time to time.
The terms of the voting, conversion, dividend, liquidation, preemptive,
redemption and other rights, privileges and preferences conferred on the holders
of any preferred stock may be more favorable than those granted to holders of
common stock. The designation of any preferred stock with greater rights,
privileges and preferences than those applicable to the common stock may
adversely affect the voting power, market price and other rights and privileges
of the common stock, and may hinder or delay the removal of directors, attempted
tender offers, proxy contests or takeovers, or other attempts to change control
of comstar.net, some or all of which the holders of common stock may desire.
Our board of directors can issue portions of the authorized but unissued
shares of our common stock and preferred stock without obtaining shareholder
approval. The board of directors may use these issuances to retain our current
management team or to prevent a
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tender offer or other attempt to take over comstar.net, some or all of which our
shareholders may desire.
RELEVANT PROVISIONS OF THE ARTICLES, BYLAWS AND GEORGIA LAW
Some of the provisions of our articles of incorporation and bylaws and of
Georgia law, summarized in the following paragraphs, may be considered to have
anti-takeover effects. These provisions may hinder, delay, deter or prevent a
tender offer, proxy contest or other attempted takeover that a shareholder may
deem to be in that shareholder's best interest, including an attempted
transaction that might result in payment of a premium over the market price for
shares the shareholder holds.
Classified Board of Directors; Number, Term and Removal of Directors. Our
board of directors is divided into three classes of directors, each serving for
staggered three-year terms. As a result, approximately one-third of our board of
directors will be elected each year. Our articles of incorporation provide that
we may not have more than 15 directors, and that the number of directors will be
set by resolution of the board of directors under our bylaws. Currently, we have
six directors. Directors may only be removed from the board of directors with
cause upon the affirmative vote of at least a majority of the shareholders
entitled to vote for directors at a duly held shareholders' meeting for which
notice of the removal action was properly given. Upon a vacancy created in the
board of directors by a removal action or for any other reason, including an
increase in the size of the board of directors, a successor or new director may
be appointed only by the affirmative vote of a majority of the directors then in
office. The classification of directors, together with the limitation on the
removal of directors, and the ability of the remaining directors to fill any
vacancies on the board of directors, has the effect of making it more difficult
for shareholders to change the composition of the board of directors. In
particular, it will ordinarily require two annual meetings of shareholders to
change a majority of the board of directors, even if holders of a majority of
the shares outstanding desire to change a majority of the board of directors
before that time.
Shareholder Meetings; Actions by Written Consent of Shareholders. Our
bylaws provide that special meetings of shareholders or a class or series of
shareholders may be called at any time by the board of directors, the Chairman
of the Board or the Chief Executive Officer, and must be called on the written
request of the holders of shares representing at least 25% of the votes entitled
to be cast on each issue presented at the meeting, or a majority of the votes
entitled to be cast if we have more than 100 beneficial owners. The bylaws also
provide that shareholders seeking to bring business before an annual
shareholders' meeting or to nominate candidates for election as directors must
provide notice of their proposed action not less than 45 nor more than 90 days
before the first anniversary of the previous year's annual shareholder meeting,
and, in that notice, provide to us information concerning the proposal or
nominee. This provision may prevent shareholders from bringing matters before
the shareholders at an annual meeting or from making nominations for directors
at an annual meeting. All actions by the shareholders either must be taken at a
meeting with prior notice under the bylaws or without a meeting if a written
consent describing the action to be taken is signed by all shareholders entitled
to vote on the action.
Constituency Provisions. Our articles of incorporation permit the board of
directors, its committees and individual directors to consider the interests of
various constituencies, including our employees, customers, suppliers, and
creditors, communities in which we
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maintain offices or operations and other factors which directors deem pertinent
in carrying out and discharging the duties and responsibilities of their
positions and in determining what they believe to be in our best interests. As a
result, it is possible that the board of directors may make a decision that is
in the best interests of some or all of these other constituencies and which is
not in the best interests of all of our shareholders.
Georgia Anti-Takeover Statutes. Some provisions of Georgia law that may
apply to us if we so choose may be considered to have anti-takeover effects and
may hinder, delay, deter or prevent a tender offer, proxy contest or other
attempted takeover that a shareholder may deem to be in his or her best
interest.
Georgia law generally restricts a company from entering into business
combinations with an interested shareholder or an affiliate of an interested
shareholder for a period of five years after the date the shareholder became an
interested shareholder, unless one of the conditions summarized below is met. An
"interested shareholder" is any person or entity that is the beneficial owner of
at least 10% of the company's voting stock. The conditions are:
- before the shareholder became an interested shareholder, the company's
board of directors approved either the business combination or
transaction which resulted in the shareholder becoming an interested
shareholder,
- the interested shareholder acquires 90% of the company's voting stock in
the same transaction in which it exceeds 10%, or
- after becoming an interested shareholder, the shareholder acquires 90% of
the company's voting stock and the holders of a majority of the remaining
voting stock, not including voting stock held by the interested
shareholder, directors or officers of comstar.net or their affiliates,
approve the business combination.
Georgia law states that the above restrictions will not apply unless the
company's bylaws specifically provide that these restrictions are applicable to
the company. We have not elected to be covered by this statute, but we could do
so by action of the board of directors at any time.
Georgia law also imposes fair price and other procedural requirements on
some business combinations with any person who owns 10% or more of the common
stock. These statutory requirements restrict business combinations with, and
accumulations of shares of voting stock of, some Georgia corporations. The
statute will apply to a company only if it elects to be covered by the
restrictions imposed by these statutes. We have not elected to be covered by
this statute, but we could do so by action of our board of directors at any
time.
DIRECTOR EXCULPATION AND INDEMNIFICATION
Our articles of incorporation and bylaws limit the liability of our
directors to us and our shareholders as described above in "Management -
Director and Officer Liability and Indemnification." We have also entered into
indemnification agreements with each of our directors and our executive officers
that give them similar rights to indemnification and contribution.
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<PAGE> 82
DESCRIPTION OF NOTES
Each investment unit includes a series 1999 convertible note. Notes are
offered in principal increments of $50,000, with a minimum of $4,000,000 of
notes and a maximum of $5,000,000 of notes to be sold in the offering. Although
no notes are currently outstanding, we have authorized up to $5,000,000
principal amount of series 1999 convertible notes for issuance. We will not
issue any notes before the closing of this offering. Each note may be
transferred separately from the related warrant.
Each note will mature on April 30, 2000. Simple interest accrues on the
notes at the rate of 8% per annum and is payable in full at maturity. Accrued
interest is payable in cash, but the holder of the note may elect, on conversion
of the note as described below, to receive shares of our common stock in payment
of the accrued interest, based on the conversion price. Repayment of principal
and interest is not secured by any collateral, and there is no indenture or
trustee for the notes. As unsecured obligations, the notes are subordinate in
the right of payment to all of our outstanding senior secured indebtedness.
Each note is convertible into common stock by the holder in whole at any
time before the maturity date. Each note is also convertible by the holder or by
us on the closing of the sale by us of common stock, or securities convertible
into common stock, for cash in a capital raising transaction closed at any time
prior to the maturity date, in which the gross proceeds equal at least
$5,000,000. The initial conversion price is $3.28 per share. Therefore, the note
included in a $50,000 investment unit is initially convertible into a total of
15,244 shares of our common stock. The notes contain customary anti-dilution
provisions that take into account common stock dividends, subdivisions or
combinations of our common stock and reorganizations, mergers or consolidations.
In addition, as a general rule, if we issue shares of common stock, or
options, warrants or other rights convertible into common stock, for a per share
price, exercise price or consideration of less than the conversion price then in
effect, the conversion price shall be reduced to a price equal to the lower per
share price, exercise price or consideration. Exceptions to this general rule
include the following events if approved by a majority of our board of
directors:
- our acquisition of another entity or its assets if we or our shareholders
prior to the transaction own more than 50% of the voting power of the
survivor,
- our issuance of options and warrants to our employees, consultants or
directors under an incentive agreement, or
- our issuance of securities to a strategic joint venture partner.
We have the right to prepay the notes not sooner than 20 days nor later
than 30 days after giving notice. The holder of a note may convert the note into
common stock by surrendering it to us before the 20 day notice period expires.
Events of default include the following:
- a merger or other similar transaction in which we or our shareholders
before the transaction own less than 50% of the voting power of the
surviving entity after the transaction,
- a sale of all or substantially all of our assets,
- our failure to pay principal or interest on the note when due, or
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<PAGE> 83
- our payment of cash dividends on our capital stock.
If an event of default occurs, a holder may elect to cause the principal
and accrued interest to become immediately due and payable and then converted
into the consideration the holder would have received had the holder already
converted the note into common stock. If the event of default is a payment
default or a default because we have paid cash dividends, the holder may, by
giving notice to us, convert the note into common stock at the conversion price.
The notes may be amended or the terms of the notes waived upon the written
consent of comstar.net and the holder of the note. The notes are governed by
Georgia law.
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DESCRIPTION OF WARRANTS
Each investment unit includes a stock purchase warrant. Each warrant has a
ten-year term and is exercisable immediately at a price of $3.28 per share for a
total of 2,593 shares of our common stock. No warrants are currently
outstanding, and we will not issue any warrants before the closing of this
offering. Each warrant may be transferred separately from the related note.
The warrants contain customary anti-dilution provisions that take into
account common stock dividends, subdivisions or combinations of our common stock
and reorganizations, mergers or consolidations.
In addition, as a general rule, if we issue shares of common stock, or
options, warrants or other rights convertible into common stock, for a per share
price, exercise price or consideration of less than the exercise price then in
effect, the exercise price shall be reduced to a price equal to the lower per
share price, exercise price or consideration. Exceptions to this general rule
include the following events if approved by a majority of our board of
directors:
- our acquisition of another entity or its assets if we or our shareholders
prior to the transaction own more than 50% of the voting power of the
survivor,
- our issuance of options and warrants to our employees, consultants or
directors under an incentive agreement, or
- our issuance of securities to a strategic joint venture partner.
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relevant to the original holders of the investment units. This
summary is based upon the Internal Revenue Code of 1986, as amended, Treasury
Regulations, Internal Revenue Service rulings and judicial decisions now in
effect, all of which are subject to change, possibly with retroactive effect, or
different interpretations. The Internal Revenue Service, or IRS, could challenge
one or more of the conclusions described in this prospectus, and we have not
obtained, nor do we intend to obtain, a ruling from the IRS with respect to the
United States federal income tax consequences of acquiring or holding investment
units. This discussion does not purport to deal with all aspects of United
States federal income taxation that may be relevant to a particular holder in
light of the holder's circumstances. Also, it is not intended to be applicable
to all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, foreign persons and
persons holding notes as part of a hedging or conversion transaction or straddle
or other risk reduction transaction) may be subject to special rules. The
discussion also does not discuss the tax consequences arising under the laws of
any state, local or foreign jurisdiction. In addition, this discussion is
limited to persons who will hold the notes and warrants (and common stock into
which the notes and warrants may be converted or exercised) as "capital assets"
within the meaning of Section 1221 of the Internal Revenue Code.
Persons considering the purchase, ownership, conversion, exercise or other
disposition of notes or warrants should consult their own tax advisors regarding
the federal income tax consequences and the consequences arising under the laws
of any state, local or foreign taxing jurisdiction.
GENERAL
Because the original purchasers of the notes also will acquire warrants,
each note will be treated for federal income tax purposes as having been issued
as part of an investment unit consisting of a note and a warrant. The issue
price of an investment unit consisting of a note and a warrant will be the price
the first buyer pays for an investment unit. The issue price of an investment
unit is allocated between the note and the warrant based on their relative fair
market values. We will allocate the issue price of an investment unit between
the note and the warrant in accordance with our determination of their relative
fair market values on the issue date. Although our allocation will not be
binding on the Internal Revenue Service, each holder of an investment unit must
use our allocation unless the holder discloses on its federal income tax return
that it plans to use an allocation that is inconsistent with our allocation.
NOTES
Interest. Holders of the notes will be required to include amounts
received as stated interest on the notes in taxable income in accordance with
their respective methods of accounting for federal income tax purposes. The
notes will be issued with "original issue discount" for federal income tax
purposes; however, the original issue discount will not have to be taken into
income as it accrues. Upon the sale or exchange of the note, a portion of the
original issue discount will be treated as ordinary income. Absent an election
to determine this portion on a constant accrual method, the portion will be
determined on a daily pro rata basis.
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Disposition, Conversion or Retirement. Income or loss upon a sale or other
disposition of a note will generally be short term capital gain or loss
(assuming the note is held for one year or less, except that a portion of the
gain will be treated as ordinary income). Short term capital gains generally are
taxed at the same rate as items of ordinary income.
A holder's conversion of a note into common stock is generally not a
taxable event (except with respect to cash received in lieu of a fractional
share and common stock received as interest, if any). The holder's basis in the
common stock received on conversion of a note will be the same as the holder's
basis in the note at the time of conversion (increased by the value of the
common stock received as interest, if any, but exclusive of any tax basis
allocable to a fractional share), and the holding period for the common stock
received on conversion (other than common stock received as interest, if any)
will include the holding period of the note converted (assuming each is held as
a capital asset).
Cash received in lieu of a fractional share of common stock upon conversion
of a note should be treated as a payment in exchange for the fractional share.
Accordingly, if the common stock is a capital asset in the hands of a note
holder, the receipt of cash in lieu of a fractional share of common stock should
generally result in short term capital gain or loss, if any, measured by the
difference between the cash received for the fractional share and the holder's
basis in the fractional share.
Gain or loss upon a sale or other disposition of the common stock received
upon conversion of a note will be capital gain or loss if the common stock is
held as a capital asset (which gain or loss will be long-term if the holding
period for the common stock is more than one year). In the case of individuals,
long-term capital gains with respect to property held for more than one year
generally are taxed at a maximum 20% federal tax rate. Net capital gain of
corporations is taxed at the same rate as ordinary income, with a maximum
federal tax rate of 35%.
If a note is retired for cash on its maturity date (i.e., April 30, 2000),
the holder would recognize gain or loss, measured by the difference between the
amount of cash (other than for interest) received by the holder and the holder's
basis in the tendered note. Gain or loss recognized by the holder would
generally be short-term capital gain or loss.
Backup Withholding and Information Reporting. Information reporting will
apply to payments of interest or dividends, if any, made by us on, or the
proceeds of the sale or other disposition of, the notes or shares of common
stock with respect to some noncorporate note holders, and backup withholding at
a rate of 31% may apply unless the recipient of the payment supplies a taxpayer
identification number, certified under penalties of perjury, as well as
designated other information or otherwise establishes an exemption from backup
withholding. Any amount withheld under the backup withholding rules will be
allowable as a credit against the holder's federal income tax, provided that the
required information is provided to the Internal Revenue Service.
WARRANTS
Exercise. No gain or loss will be recognized for United States federal
income tax purposes by holders of the warrants upon the exercise thereof in
exchange for common stock (except to the extent of cash, if any, received in
place of the issuance of fractional shares of common stock). A holder's tax
basis in the common stock will equal the sum of
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the tax basis in the warrants plus the exercise price paid on exercise. The
holding period of the common stock received on the exercise of the warrants will
not include the holding period of the warrants. If any cash is received in place
of fractional shares, the holder will recognize gain or loss, and the character
and the amount of the gain or loss will be determined as if the holder had
received the fractional shares and then immediately sold them for cash.
Sale of Warrants or Common Stock. The sale of a warrant ordinarily will
result in the recognition of gain or loss to the holder for United States
federal income tax purposes in an amount equal to the difference between the
amount realized on the sale or exchange and the holder's tax basis in the
warrant. The gain or loss will be capital gain or loss, provided the common
stock would have been a capital asset in the hands of the warrant holder had the
warrant been exercised, and will be long-term capital gain or loss with respect
to the warrants held for more than one year.
Similarly, gain or loss generally will be recognized upon a sale of the
common stock received upon exercise of a warrant in an amount equal to the
difference between the amount realized on the transfer and the holder's adjusted
tax basis in the common stock. The gain or loss will be capital gain or loss,
provided the common stock is held as a capital asset, and will be long-term
capital gain or loss with respect to common stock held for more than one year.
Lapse. If the warrants lapse without exercise, the holder will recognize a
capital loss (assuming the sale or exchange of the warrants by the holder would
have given rise to capital gain or loss) equal to the holder's tax basis in the
warrants. Any capital loss would be long-term if the holding period for the
warrants exceeds one year.
CONSTRUCTIVE DIVIDEND.
If at any time we make a distribution of property to our shareholders that
would be taxable to the shareholders as a dividend for United States federal
income tax purposes and, in accordance with the anti-dilution provisions of the
notes and warrants, the conversion price of the notes and the exercise price of
the warrants are decreased, the decrease may be deemed to be the payment of a
taxable dividend to holders of the notes and warrants.
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PLAN OF DISTRIBUTION
We cannot be certain that we will be able to sell all of the investment
units offered, and it is possible that we will close this offering for less than
the $5,000,000 of investment units being offered.
Scott & Stringfellow, Inc. and SunTrust Equitable Securities Corporation
have agreed to act as placement agents in connection with the offering and will
use their best efforts to place the investment units. Scott & Stringfellow, Inc.
and SunTrust Equitable Securities Corporation have no obligation to buy any
investment units in the offering.
The offering is being made on a minimum-maximum basis, and no investment
units will be sold unless at least $4,000,000 of investment units are sold on or
before December 31, 1999 unless we and the placement agents choose to extend the
offering to a date no later than January 15, 2000. Although neither we nor the
placement agents will purchase investment units in the offering, affiliates of
us and the placement agents are permitted to do so. If the offering is
terminated for any reason, then all funds that were deposited into escrow will
be returned to investors.
All investor funds will be deposited into an escrow account established on
the investors' behalf with Branch Banking & Trust Company. Subscriber checks
will be made payable to the escrow agent. Investors' funds not transmitted
directly to the escrow account will be received by the placement agents. The
placement agents will then promptly transmit them to the escrow account by noon
the business day after receipt. No investor funds will be accepted for deposit
in escrow until the registration statement is declared effective, and we will
not receive any investor funds before issuing the investment units.
We have agreed to pay the placement agents a fee of 6% of the gross
proceeds of this offering. The following table shows the fees that we will pay
to the placement agents in connection with the offering:
<TABLE>
<S> <C>
Per investment unit......................................... $ 3,000
Total minimum............................................... $240,000
Total maximum............................................... $300,000
</TABLE>
We estimate our expenses of this offering, exclusive of the placement
agents' fee, will be $231,000. We also have agreed to indemnify the placement
agents against certain liabilities under the Securities Act of 1933 or to
contribute to payments the placement agents may be required to make in respect
of those liabilities.
No public trading market for our notes, warrants or common stock currently
exists or will exist as a result of this offering. Consequently, the offering
price of the investment units, the conversion price of the notes and the
exercise price of the warrants have been determined by negotiations among us and
the placement agents. The factors we considered in determining the offering
price, conversion price and exercise price included the following:
- the history and future prospects of us and our industry,
- the present state of our development,
- an assessment of our management, and
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- the general condition of the economy and the securities markets at the
time of this offering.
LEGAL MATTERS
The validity of the notes and warrants comprising the investment units and
the underlying common stock offered by this prospectus will be passed upon for
us by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. Glenn W.
Sturm, a partner of Nelson Mullins, is one of our directors and owns options to
purchase 50,000 shares of our common stock. Certain legal matters in connection
with this offering will be passed upon for the placement agents by Alston & Bird
LLP, Atlanta, Georgia.
EXPERTS
The audited financial statements of comstar.net as of December 31, 1997 and
1998, and from the period of inception, March 5, 1996, to December 31, 1996 and
for each of the two years ended December 31, 1997 and 1998, included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The audited financial statements of Athens' ISP as of December 31, 1996 and
1997 and for each of the two years ended December 31, 1997, included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, through the
Electronic Data Gathering and Retrieval, or EDGAR, system, a registration
statement on Form S-1 under the Securities Act for the common stock offered by
this prospectus. This prospectus does not contain all of the information
provided in the registration statement because we have omitted parts of the
registration statement as permitted by SEC rules. For further information about
us and our common stock, you should refer to the registration statement,
including its exhibits and schedule. Statements in this prospectus about any
contract or other document may only be a summary of that document, and in each
instance we refer you to the copy of that contract or other document filed as an
exhibit to the registration statement.
You may read the registration statement at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies of
the registration statement from the Public Reference Room at prescribed rates.
You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet
site at http://www.sec.gov through which you may review the registration
statement. You may also review the registration statement at the offices of the
Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
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We are not presently a reporting company under the Securities Exchange Act
of 1934 and do not file reports or other information with the SEC. On the
effective date of the registration statement, however, we will become a
reporting company and will register our securities under the Exchange Act.
Accordingly, the additional reporting requirements of the Exchange Act will
apply to us, and we will file reports, proxy statements and other information
with the SEC.
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COMSTAR.NET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COMSTAR.NET, INC.
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1997 and 1998, and
September 30, 1999 (unaudited)............................ F-3
Statements of Operations for the Period from Inception
(March 5, 1996) to December 31, 1996, for the Years Ended
December 31, 1997 and 1998, and for the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-4
Statements of Shareholders' Deficit for the Period from
Inception (March 5, 1996) to December 31, 1996, for the
Years Ended December 31, 1997 and 1998, and for the Nine
Months Ended September 30, 1998 and 1999 (unaudited)...... F-5
Statements of Cash Flows for the Period from Inception
(March 5, 1996) to December 31, 1996, for the Years Ended
December 31, 1997 and 1998, and for the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Financial Statements............................... F-7
ATHENS' ISP, INC.
Report of Independent Public Accountants.................... F-24
Balance Sheets as of December 31, 1996 and 1997............. F-25
Statements of Operations and Accumulated Deficit for the
Years Ended December 31, 1996 and 1997.................... F-26
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997............................................. F-27
Notes to Financial Statements............................... F-28
</TABLE>
F-1
<PAGE> 92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To comstar.net, inc.:
We have audited the accompanying balance sheets of COMSTAR.NET, INC. (a
Georgia corporation) as of December 31, 1997 and 1998 and the related statements
of operations, shareholders' deficit, and cash flows for the period from
inception (March 5, 1996) to December 31, 1996 and for each of the two years
ended December 31, 1997 and 1998. 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 comstar.net, inc. as of
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the period from inception (March 5, 1996) to December 31, 1996 and for each
of the two years ended December 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 30, 1999
(except with respect to Note 10,
as to which the date is
November 22, 1999)
F-2
<PAGE> 93
COMSTAR.NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1997 1998 1999
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 54,676 $ 283,621 $ 355,689
Accounts receivable, net of allowance for doubtful
accounts of $19,426, $25,447, and $103,107 in 1997,
1998, and 1999, respectively............................ 74,082 234,390 362,852
Prepaid and other current assets.......................... 0 4,764 33,419
Deferred transaction costs................................ 0 0 548,520
---------- ----------- -----------
Total current assets.................................. 128,758 522,775 1,300,480
---------- ----------- -----------
PROPERTY AND EQUIPMENT:
Computers and telecommunications equipment................ 376,597 689,350 956,103
Furniture and fixtures.................................... 3,628 11,613 23,527
Property under capital leases (Note 8).................... 0 46,886 72,997
Leasehold improvements.................................... 4,075 101,979 101,979
---------- ----------- -----------
384,300 849,828 1,154,606
Less accumulated depreciation............................. (61,765) (195,999) (350,552)
---------- ----------- -----------
Property and equipment, net........................... 322,535 653,829 804,054
---------- ----------- -----------
OTHER ASSETS:
Investment in nschool (Note 4)............................ 0 82,744 0
Acquired customer base, net of accumulated amortization of
$7,112, $157,475, and $294,471 in 1997, 1998, and 1999,
respectively (Note 3)................................... 78,226 390,499 253,503
---------- ----------- -----------
Total other assets.................................... 78,226 473,243 253,503
---------- ----------- -----------
Total assets.......................................... $ 529,519 $ 1,649,847 2,358,037
========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5)............. $ 110,094 $ 902,469 $ 800,100
Note payable to related party (Note 5).................... 57,124 270,188 270,188
Notes payable to shareholders (Note 5).................... 618,549 1,002,534 902,534
Current portion of obligations under capital leases (Note
8)...................................................... 0 28,067 25,892
Accounts payable.......................................... 111,565 113,604 397,926
Accrued liabilities....................................... 34,986 169,729 421,751
Accrued interest.......................................... 60,940 135,501 101,324
Advance billings.......................................... 18,547 75,053 92,174
---------- ----------- -----------
Total current liabilities............................. 1,011,805 2,697,145 3,011,889
---------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 5).......... 343,078 0 0
Obligations under capital leases (Note 8)................. 0 10,974 19,841
---------- ----------- -----------
Total long-term liabilities........................... 343,078 10,974 19,841
---------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' DEFICIT (NOTE 6):
Preferred stock, $0 par value; 5,000,000 shares
authorized, 0 shares issued and outstanding in 1997,
1998, and 1999.......................................... 0 0 0
Common stock, $0 par value:
50,000,000 shares authorized, 0 shares authorized,
issued and outstanding in 1997 and 5,031,946 and
5,185,893 shares issued and outstanding in 1998 and
1999, respectively.................................... 0 364,822 2,122,744
Additional paid-in capital.............................. 0 0 3,522,412
Deferred compensation (Notes 6 and 10).................. 0 0 (117,017)
Accumulated deficit....................................... (825,364) (1,423,094) (6,201,832)
---------- ----------- -----------
Total shareholders' deficit........................... (825,364) (1,058,272) (673,693)
---------- ----------- -----------
Total liabilities and shareholders' deficit........... $ 529,519 $ 1,649,847 $ 2,358,037
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 94
COMSTAR.NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1996) TO YEARS ENDED PERIODS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------------- ------------------------- -------------------------
1996 1997 1998 1998 1999
--------------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet access....... $ 29,579 $ 399,167 $ 1,334,053 $ 925,005 $ 1,441,132
Data center
services............ 33,048 205,171 417,112 269,167 420,814
Circuit rebills....... 276 44,459 255,230 164,888 361,594
Other................. 2,495 26,772 135,950 104,991 64,533
----------- ----------- ----------- ----------- -----------
Total revenues...... 65,398 675,569 2,142,345 1,464,051 2,288,073
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of network
services............ 73,963 528,835 1,235,862 819,440 1,461,932
Salaries and wages.... 150,448 370,145 521,570 403,030 958,010
General and
administrative...... 67,259 131,767 379,036 210,398 615,922
Rent.................. 21,792 33,152 106,417 70,540 87,659
Management fees (Note
9).................. 8,000 42,000 60,000 45,000 30,000
Depreciation and
amortization........ 11,622 57,255 284,598 152,654 291,549
Stock compensation
expense............. 0 0 0 0 3,405,395
----------- ----------- ----------- ----------- -----------
Total costs and
expenses.......... 333,084 1,163,154 2,587,483 1,701,062 6,850,467
----------- ----------- ----------- ----------- -----------
OPERATING LOSS.......... (267,686) (487,585) (445,138) (237,011) (4,562,394)
----------- ----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Interest expense,
net................. (10,434) (66,201) (150,605) (113,775) (146,046)
Other income (loss)... 0 6,542 (1,987) (6,346) 12,446
Equity in net loss of
investee............ 0 0 0 0 (82,744)
----------- ----------- ----------- ----------- -----------
Total other
expenses.......... (10,434) (59,659) (152,592) (120,121) (216,344)
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME
TAXES................. (278,120) (547,244) (597,730) (357,132) (4,778,738)
INCOME TAX BENEFIT...... 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
NET LOSS................ $ (278,120) $ (547,244) $ (597,730) $ (357,132) $(4,778,738)
=========== =========== =========== =========== ===========
NET LOSS PER SHARE:
Basic and diluted..... $ (0.06) $ (0.11) $ (0.12) $ (0.07) $ (0.93)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.... 5,000,000 5,000,000 5,002,866 5,000,000 5,117,109
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 95
COMSTAR.NET, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
----------------------
UNDESIGNATED ADDITIONAL
---------------------- PAID IN DEFERRED ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT TOTAL
--------- ---------- ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception, March 5, 1996.............. 0 $ 0 $ 0 $ 0 $ 0 $ 0
Net loss........................................ 0 0 0 0 (278,120) (278,120)
Issuance of common stock, as previously
reported...................................... 1000 0 0 0 0 0
1-for-2 reverse stock split, effective upon
consummation of proposed initial public
offering...................................... (500) 0 0 0 0 0
--------- ---------- ---------- ---------- ----------- -----------
Balance, December 31, 1996...................... 500 0 0 0 (278,120) (278,120)
Net loss........................................ 0 0 0 0 (547,244) (547,244)
--------- ---------- ---------- ---------- ----------- -----------
Balance, December 31, 1997....................... 500 0 0 0 (825,364) (825,364)
Net loss........................................ 0 0 0 0 (597,730) (597,730)
Exchange of common stock........................ 4,999,500 0 0 0 0 0
Issuance of common stock........................ 31,946 364,822 0 0 0 364,822
--------- ---------- ---------- ---------- ----------- -----------
Balance, December 31, 1998....................... 5,031,946 364,822 0 0 (1,423,094) (1,058,272)
Net loss (unaudited)............................ 0 0 0 (4,778,738) (4,778,738)
Issuance of common stock (unaudited)............ 153,947 1,757,922 0 0 0 1,757,922
Issuance of stock options (unaudited)........... 0 0 3,522,412 (3,522,412) 0 0
Amortization of deferred compensation
(unaudited)................................... 0 0 0 3,405,395 3,405,395
--------- ---------- ---------- ---------- ----------- -----------
Balance, September 30, 1999 (unaudited).......... 5,185,893 $2,122,744 $3,522,412 $ (117,017) $(6,201,832) $ (673,693)
========= ========== ========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 96
COMSTAR.NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996)
TO YEARS ENDED PERIODS ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------ ------------------------
1996 1997 1998 1998 1999
--------------- --------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss..................... $(278,120) $(547,244) $ (597,730) $(357,132) $(4,778,738)
--------- --------- ----------- --------- -----------
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............. 11,622 57,255 284,598 152,654 291,549
Equity in net loss of
investee................. 0 0 0 0 82,744
Stock compensation
expense.................. 0 0 0 0 3,405,395
Changes in operating assets
and liabilities:
Accounts receivable,
net.................... (8,743) (65,339) (160,308) (134,837) (128,462)
Prepaid and other current
assets................. 0 0 (4,764) (20,485) (28,655)
Deferred transaction
costs.................. 0 0 0 0 (548,520)
Accounts payable......... 0 111,565 2,039 28,490 284,322
Accrued liabilities...... 63,114 (28,128) 134,743 80,573 252,022
Accrued interest......... 10,047 50,893 74,561 70,265 (34,177)
Advance billings......... 0 18,547 56,506 59,232 17,121
--------- --------- ----------- --------- -----------
Total adjustments...... 76,040 144,793 387,375 235,892 3,593,339
--------- --------- ----------- --------- -----------
Net cash used in
operating
activities........... (202,080) (402,451) (210,355) (121,240) (1,185,399)
--------- --------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of businesses and
customer base.............. 0 (85,338) (513,836) (462,634) 0
Purchases of property and
equipment, net............. (120,442) (263,858) (414,329) (456,826) (304,778)
Investment in nschool........ 0 0 (82,744) 0 0
--------- --------- ----------- --------- -----------
Net cash used in
investing
activities........... (120,442) (349,196) (1,010,909) (919,460) (304,778)
--------- --------- ----------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
long-term debt............. 15,312 455,355 469,731 369,731 0
Proceeds from note payable to
related party.............. 8,000 55,124 233,080 206,396 0
Proceeds from notes payable
to shareholders............ 306,643 313,250 409,095 383,985 0
Principal payments on
long-term debt............. (1,031) (16,464) (20,434) (16,271) (102,369)
Repayments of note payable to
related party.............. 0 (6,000) (20,016) (20,518) 0
Repayments of notes payable
to shareholders............ 0 (1,344) (25,110) 0 (100,000)
Obligations under capital
leases..................... 0 0 39,041 43,259 6,692
Proceeds from issuance of
common stock............... 0 0 364,822 0 1,757,922
Bank overdraft............... 0 0 0 19,442 0
--------- --------- ----------- --------- -----------
Net cash provided by
financing
activities........... 328,924 799,921 1,450,209 986,024 1,562,245
--------- --------- ----------- --------- -----------
NET INCREASE (DECREASE) IN
CASH......................... 6,402 48,274 228,945 (54,676) 72,068
CASH AT BEGINNING OF PERIOD.... 0 6,402 54,676 54,676 283,621
--------- --------- ----------- --------- -----------
CASH AT END OF PERIOD.......... $ 6,402 $ 54,676 $ 283,621 $ 0 $ 355,689
========= ========= =========== ========= ===========
CASH PAID FOR INTEREST......... $ 387 $ 15,308 $ 76,044 $ 43,510 $ 180,223
========= ========= =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 97
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
AND SEPTEMBER 30, 1998 AND 1999 (UNAUDITED)
1. ORGANIZATION AND BUSINESS OPERATIONS
comstar.net, inc. (formerly Comstar Communications, Inc.) (the "Company")
(a Georgia corporation) is a local, regional, and national provider of Internet
access and other enhanced Internet services to businesses, educational
institutions, and governmental organizations. The Company was incorporated on
March 5, 1996 and commenced operations on June 10, 1996.
The Company has incurred significant net operating losses in each year
since its formation. As of December 31, 1998, the Company had an accumulated
deficit of approximately $1.4 million. The Company expects that it will continue
to incur net losses as it continues to expend substantial resources on sales and
marketing initiatives and expansion efforts. There can be no assurance that the
Company will achieve or sustain profitability or positive cash flow from its
operations.
In addition, any increase in the Company's growth rate, shortfalls in
anticipated revenues, increases in anticipated expenses, increases in the number
of customers acquired, or significant acquisition opportunities could have a
material adverse effect on the Company's liquidity and capital resources and
would require the Company to raise additional capital from public or private
equity or debt sources in order to finance operating losses, anticipated growth,
and contemplated capital expenditures. If such sources of financing are
insufficient or unavailable, the Company will be required to modify its growth
and operating plans in accordance with the extent of available funding and
attempt to attain profitability in its existing markets. The Company may need to
raise additional funds in order to take advantage of unanticipated
opportunities, such as the acquisition of a complementary business or the
development of new services, or otherwise respond to unanticipated competitive
pressures. There can be no assurance that the Company will be able to raise any
such capital on terms acceptable to the Company or at all.
2. SUMMARY OF 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION
The accompanying financial statements for the nine months ended September
30, 1999 and 1998 are unaudited; however, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the unaudited financial statements have been included. The
results for the nine months ended
F-7
<PAGE> 98
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1999 are not necessarily indicative of the results to be obtained
for a full year.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local and long distance
telephone companies, and other companies to provide data communications
capacity. Although management feels that alternative telecommunications
facilities could be found in a timely manner, any disruption of these services
could have an adverse effect on operating results.
SIGNIFICANT CUSTOMERS
During the year ended December 31, 1997, sales to one of the Company's
customers were approximately $128,000, representing approximately 19% of the
Company's total revenues. There were no amounts due from this customer as of
December 31, 1997. There were no sales to customers representing 10% or more of
the Company's revenues during the years ended December 31, 1996 or December 31,
1998.
During the nine months ended September 30, 1999, sales to a different
customer were approximately $244,046, representing approximately 10.7% of the
Company's total revenues. Accounts receivable due from this customer as of
September 30, 1999 totaled approximately $55,403. The loss of this customer
could have a material adverse effect on the Company's future operations
(unaudited).
LONG-LIVED ASSETS
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and cost in excess of net assets acquired related to those assets
to be held and used and for long-lived assets and certain identifiable
intangible assets to be disposed of.
The Company periodically reviews the values assigned to long-lived assets,
such as property and equipment and acquired customer base to determine whether
any impairment exists. If circumstances suggest that the asset values may be
impaired, an assessment of the assets' estimated fair values is performed based
on the estimated undiscounted cash flows expected to be generated from such
assets over the remaining lives of the long-lived assets, and an impairment loss
is recognized in the statement of operations equal to the difference between the
estimated fair values and the assets' carrying values. Management believes that
the long-lived assets in the accompanying balance sheets are appropriately
valued.
F-8
<PAGE> 99
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for improvements
are capitalized, and replacements, maintenance, and repairs that do not improve
or extend the lives of the respective assets are expensed as incurred.
Depreciation is provided on a straight-line basis over the remaining estimated
useful lives, as follows:
<TABLE>
<S> <C>
Computers and telecommunications equipment................ Five years
Furniture and fixtures.................................... Ten years
Leasehold improvements.................................... Three years
</TABLE>
PROPERTY UNDER CAPITAL LEASES
The Company leases certain of its data communication and other equipment
under lease agreements accounted for as capital leases. The assets and
liabilities under capital leases are recorded at the lesser of the present value
of aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Property under capital
leases is depreciated over their estimated useful lives of five years, which is
longer than the terms of the leases.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred.
ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
------- ---------
<S> <C> <C>
Accrued telecommunication expenses.......................... $17,839 $ 69,958
Accrued professional fees................................... 5,000 59,517
Other accrued liabilities................................... 12,147 40,254
------- ---------
$34,986 $ 169,729
======= =========
</TABLE>
REVENUE RECOGNITION
The Company's revenues consist primarily of (i) Internet access, (ii) data
center services, (iii) circuit rebills, and (iv) other revenues. Internet access
revenues consist primarily of recurring revenues received for Internet access
services. Data center services revenues consist primarily of recurring revenues
received for co-location, managed application hosting, E-mail, domain name, and
Web hosting services. Circuit rebills consists primarily of the resale of
distance-sensitive circuits from local loop providers to the Company's
customers. Other revenues consist primarily of transaction processing fees and
miscellaneous hardware sales.
Revenues are recognized as services are provided. Installation and customer
set-up fees are recognized upon completion of services and historically comprise
3% to 8% of total
F-9
<PAGE> 100
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
monthly revenues. Fees billed to customers related to installation and customer
set-up are charged in order to recover the Company's cost of installing and
setting up each customer. Transaction processing fees are generated from the use
of the Company's e-commerce software and are recognized based upon monthly
usage. Hardware sales are recognized upon the delivery of the hardware to the
customer.
ADVANCE BILLINGS
Advance billings represent the liability for billings made to customers in
advance of services being provided. Such amounts are recognized as revenue when
the related services are performed.
LIMITED SERVICE WARRANTIES
The Company's customer contracts provided a limited service level warranty
related to the continuous availability of service. This warranty provides a
credit for free service for disruption in Internet access services. The Company
accrues for such costs as estimated at the time of the sale. Credits issued for
disruption in service were approximately $1,400, $5,200, and $2,800 for the
years ended December 31, 1997 and 1998 and for the nine months ended September
30, 1999 (unaudited), respectively. There were no credits issued during the year
ended December 31, 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, debt, and other
short-term assets and liabilities. Based on the short-term nature or variable
interest rates of these financial instruments, the estimated fair values of the
Company's financial instruments approximate their carrying values as of December
31, 1996, 1997, and 1998.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services and the ability to
terminate access on delinquent accounts. The concentration of credit risk is
mitigated by the large number of customers comprising the customer base. The
carrying amounts of the Company's receivables approximate their fair values as
of December 31, 1997 and 1998.
NET LOSS PER SHARE
Basic and diluted net loss per share was computed in accordance with SFAS
No. 128, "Earnings per Share," using the weighted average number of common
shares outstanding. Basic loss per share is based on the weighted average number
of shares outstanding. Diluted loss per share is based on the weighted average
number of shares outstanding, and the dilutive effect of common stock equivalent
shares issuable upon the exercise of stock options (using the treasury stock
method). Net loss for basic and diluted earnings per
F-10
<PAGE> 101
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
share is the same for basic and diluted earnings per share; therefore, no
reconciliation of the numerator is presented.
On February 4, 1998, the Securities and Exchange Commission released Staff
Accounting Bulletin ("SAB") No. 98, "Computation of Earnings Per Share." SAB No.
98 requires the retroactive inclusion of nominal issuances of common stock and
common stock equivalents on earnings per share calculations for all periods
presented and precludes the use of the treasury stock method for these
issuances. Management believes that all issuances of common stock and stock
options have been made at the current market value at the time of issuance and
that there have been no nominal issuances.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general-purpose financial statements. This statement was effective for
periods beginning after December 15, 1997. The adoption of SFAS No. 130 did not
have an impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which establishes standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. This statement was
effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 did not have an impact on the Company's
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designed as part of a
hedge transaction and, if it is the type of hedge transaction. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133". This
statement defers the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. The Company believes that the adoption of SFAS No. 133 and
SFAS No. 137 will not have a material impact on the Company's financial
statements.
3. ACQUISITIONS
ATHENS' ISP, INC.
On July 1, 1998, Comstar acquired certain assets of Athens' ISP, Inc. under
the terms of an asset purchase agreement. The acquisition consisted primarily of
Internet access business subscribers and related computer and telecommunications
equipment. The
F-11
<PAGE> 102
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
purchase price was $326,678, of which $275,478 was allocated to the customer
list and related accounts and $51,200 was allocated to the equipment acquired.
The customer list and related accounts acquired is being amortized on a
straight-line basis over three years. No goodwill was recorded.
This acquisition was accounted for under the purchase method in accordance
with Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations." Accordingly, the purchase price has been allocated to the net
assets acquired based on their estimated fair values.
The following unaudited pro forma information has been prepared assuming
that the purchase acquisition occurred at the beginning of the year of
acquisition and the year immediately preceding. The unaudited pro forma
information is presented for informational purposes only and may not be
indicative of the actual results of operations which would have occurred had the
purchase acquisitions been consummated at the beginning of the respective
periods, nor is the information necessarily indicative of the results of
operations which may occur in the future operations of the combined entities.
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Pro forma revenues....................................... $ 801,349 $2,232,367
Pro forma loss from operations........................... (604,841) (501,630)
Pro forma loss per share................................. $ (.12) $ (.10)
</TABLE>
ACQUIRED CUSTOMER BASE
The Company capitalizes specific costs incurred related to the purchase of
customer lists and related accounts from other Internet service providers. These
costs include the actual fees paid as well as other expenses specifically
related to the transactions. The following less significant purchases of
customer lists and related accounts occurred during fiscal years 1997 and 1998:
SYSTEMS ATLANTA COMMUNICATIONS SYSTEMS, INC.
On July 25, 1997, the Company acquired the business customer list and
related accounts of Systems Atlanta Communications Systems, Inc. and
certain related generic computer and telecommunications equipment under the
terms of a purchase agreement. The purchase price was $148,343, of which
$85,338 was allocated to the customer list and related accounts and $63,005
was allocated to the equipment acquired.
HOLLANDER, DOWS AND REINHARDT
On April 3, 1998, Comstar acquired the business customer list and
related accounts of Hollander, Dows and Reinhardt under the terms of a
purchase agreement. The purchase price was $30,808, all of which was
allocated to the customer list and related accounts.
F-12
<PAGE> 103
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
WATCH ME NOW, INC.
On July 31, 1998, the Company acquired the business customer list and
related accounts and certain related computer and telecommunications
equipment from Watch Me Now, Inc. under the terms of a purchase agreement.
The purchase price was $179,350, of which $156,350 was allocated to the
customer list and related accounts and $23,000 was allocated to the
equipment acquired.
The Company amortizes customer lists and related accounts over the lesser
of three years or their calculated customer churn. Subsequent to an acquisition
that results in the recording of customer lists or other intangible assets, the
Company continually evaluates whether later events and circumstances have
occurred that indicate that the remaining estimated useful lives of intangible
assets may warrant revision or that the remaining balance of intangible assets
may not be recoverable. When factors indicate that intangible assets should be
evaluated for possible impairment, the Company uses a calculation of customer
churn or an estimate of the related business segment's undiscounted net income
or cash flows, as appropriate, over the remaining life of the assets in
measuring whether such assets are recoverable in accordance with SFAS No. 121.
4. INVESTMENT IN NSCHOOL COMMUNICATIONS SYSTEMS, INC.
On December 18, 1998, the Company entered into an agreement with nschool
Communications Systems, Inc. ("nschool"), an internet communications company
servicing educational institutions. The agreement required the Company to
develop specialized software applications and provide related services to
nschool in exchange for a 25% ownership interest in nschool. In accordance with
APB Opinion No. 17, "Intangible Assets," the ownership interest in nschool was
valued at the cost incurred to develop the software provided. The Company
accounts for the investment in nschool under the equity method of accounting.
The activity between December 18, 1998 and December 31, 1998 was immaterial to
the Company's investment balance.
During the period ending June 30, 1999, the Company recorded its percentage
of the net loss of nschool bringing its investment balance to zero as of June
30, 1999. nschool sustained operating losses during the period ending September
30, 1999 (unaudited), exceeding the Company's investment balance. Therefore, the
Company will track those losses in excess separately, and any subsequent
realization of income from nschool will first go to reduce the excess losses.
F-13
<PAGE> 104
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1998 consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Note payable to related party, interest at 10%,
principal and interest payable at maturity, January 1,
2000 or upon closing of an initial public offering,
whichever is sooner; secured by certain assets of the
Company and personal guarantees by four of the Company's
principal shareholders.................................. $ 57,124 $ 270,188
Note payable to shareholders, interest at 9%, principal
and interest payments payable at maturity, January 31,
1999 (subsequently extended, Note 10)................. 0 383,985
Note payable to shareholders, interest at 10%, principal
and interest payable at maturity, January 1, 2000 or
upon closing of an initial public offering, whichever
is sooner; secured by certain assets of the Company... 618,549 618,549
$200,100 note payable to bank, interest at prime plus 1%
(8.25% at December 31, 1998), principal and interest
payments payable monthly through July 1, 1999; secured
by certain assets of the Company and personal
guarantees by one of the Company's principal
shareholders (subsequently extended, Note 10)......... 0 200,100
$700,000 revolving credit facility, interest at prime
plus 1% (8.25% at December 31, 1997 and 1998),
principal and accrued interest due at maturity, May
25, 1999 secured by certain assets of the Company and
personal guarantees by four of the Company's principal
shareholders (subsequently extended, Note 10)......... 430,369 700,000
$25,085 note payable to bank, interest at prime plus 1%
(8.25% at December 31, 1997 and 1998), principal and
interest payments payable monthly through February 15,
1999; secured by certain assets of the Company........ 15,345 2,369
$15,412 note payable to bank, interest at prime plus 1%
(8.25% at December 31, 1996 and 1997), principal and
interest payments payable monthly through November 5,
1998; secured by certain assets of the Company........ 7,458 0
---------- ----------
1,128,845 2,175,191
Less current portion.................................... 785,767 (2,175,191)
---------- ----------
$ 343,078 $ 0
========== ==========
</TABLE>
In April 1997, the Company entered into a one-year revolving credit
facility (the "Revolving Credit Facility") with a local commercial lending
institution to provide up to
F-14
<PAGE> 105
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
$500,000 of financing for the Company's operations. In May 1998, the Company
extended the Revolving Credit Facility an additional year and increased the
available credit to $700,000. At December 31, 1997 and 1998, $69,631 and $0,
respectively, were available to the Company under the Revolving Credit Facility.
On June 22, 1999, the Company extended the Revolving Credit Facility to October
1, 1999.
In July 1998, two of the Company's principal shareholders entered into a
lending arrangement with a bank on behalf of the Company. In connection with
this lending arrangement, the shareholders then loaned the funds obtained to the
Company with terms that mirrored the terms of the shareholders' note payable to
the bank. The Company has been making principal and interest payments directly
to the bank on behalf of the shareholders since the inception of the obligation.
On February 28, 1999, the shareholders extended the maturity of the obligation
to August 27, 1999, and the interest rate was lowered from 9% to 8.5%.
The principal shareholders of the Company have agreed not to require
repayment of the notes payable to them before June 30, 2000 or upon closing of
an initial public offering, whichever is sooner.
6. SHAREHOLDERS' DEFICIT
COMMON STOCK
In April 1996, the Company's board of directors authorized the creation of
500 shares of zero par value common stock. Each of the Company's four founders
received 125 shares of the common stock.
On November 19, 1998, the Company's board of directors authorized the
creation of 55,000,000 shares of stock of all series. The authorization included
5,000,000 shares of common stock designated as Series A, 5,000,000 shares of
common stock designated as Series B, 40,000,000 shares of undesignated common
stock, and 5,000,000 shares designated as preferred stock. The two classes of
common stock are identical except that shares of common stock Series A are
entitled to one vote per share and shares of common stock Series B are entitled
to ten votes per share. All of the series of stock have zero par values. Two of
the original shareholders exchanged 125 shares each of the previously issued
common stock for 1,250,000 shares each of the Series A common stock. The two
remaining shareholders exchanged their previously issued shares for 1,250,000
shares each of the newly issued Series B common stock. All per share and share
amounts (except for shareholders' deficit) have been restated for the exchanges
(Note 10).
SALE OF COMMON STOCK
In November and December 1998, the Company sold 31,946 shares of Series A
common stock for $11.42 per share to several private investors resulting in
total proceeds of $364,822.
From January 1, 1999 to June 30, 1999, the Company sold 153,947 shares of
Series A common stock to several private investors for total proceeds of
$1,757,922. All shares were sold at $11.42 per share.
F-15
<PAGE> 106
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
EMPLOYEE STOCK OPTION PLAN
On March 1, 1999, the Company's board of directors approved the 1999 Stock
Option and Incentive Plan ("the Plan") to grant incentive stock options to
purchase the Company's common stock. The Plan provided for the issuance of
options to purchase up to 850,000 shares of the Company's common stock; 202,625,
12,500, and 16,000 options were granted to employees of the Company under the
Plan on March 10, 1999, March 12, 1999, and March 30, 1999, respectively, at
$11.42 per share. On May 17, 1999 and June 1, 1999, 7,500 and 50,000 additional
option grants were made to two additional employees at $11.42 per share,
respectively. In the opinion of management, the fair value of the Company's
common stock on the dates of grant was equal to the exercise price; therefore,
no compensation expense was recorded at the dates of grant. As of June 30, 1999,
all options granted under the Plan vest at the rate of one-third per year from
the date of original hire and expire ten years from the date of grant. At June
30, 1999, a total of 288,625 options had been granted, 93,834 of which were
fully vested. No options had been forfeited and none had expired; 561,375 shares
of stock were available for future grants under the Plan as of June 30, 1999. A
summary of the status of the Company's stock options at September 30, 1999
(unaudited) and changes during the period then ended is presented in the
following table:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
PRICE PER
SHARES SHARE
------- ---------
<S> <C> <C>
Outstanding at December 31, 1998............................ 0 $ 0.00
Granted................................................... 768,625 11.42
Forfeited................................................. (500) (11.42)
------- -------
Outstanding at September 30, 1999........................... 768,125 $ 11.42
======= =======
Exercisable at September 30, 1999........................... 490,834 $ 11.42
======= =======
</TABLE>
The Company accounts for its stock-based compensation plan under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123,
"Accounting for Stock-Based Compensation," defines a fair value-based method of
accounting for an employee stock option plan or similar equity instrument and
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB Opinion No. 25. Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma disclosures
of net income and, if presented, earnings per share, as if the fair value-based
method of accounting defined in the statement had been applied.
F-16
<PAGE> 107
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company has computed for pro forma disclosure purposes the value of all
options granted during the period ended September 30, 1999 using the minimum
value method as prescribed by SFAS No. 123 using the following assumptions
(unaudited):
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.6% to 5.9%
Expected dividend yield..................................... 0
Expected lives.............................................. Five years
Expected volatility......................................... 84%
</TABLE>
If the Company had accounted for these grants in accordance with SFAS No.
123, the Company's reported pro forma net loss for the period ended September
30, 1999 would have increased to the following pro forma amount (unaudited):
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(4,778,738)
Pro forma................................................. (7,807,742)
Net loss per share:
Basic and diluted:
As reported............................................ $ (.93)
Pro forma.............................................. (1.53)
</TABLE>
7. INCOME TAXES
Prior to January 1, 1999, the Company was an S corporation and was
generally not subject to corporate level taxes on its net income because such
income was attributed to the Company's stockholders, and taxes on such income
were directly payable by them.
On January 1, 1999, the Company became a C corporation for income tax
purposes. Accordingly, the Company adopted SFAS No. 109, "Accounting for Income
Taxes," which requires the use of the liability method in accounting for income
taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined
based on the difference between the financial reporting and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred income taxes also reflect the
value of net operating losses and offsetting valuation allowances provided
against assets which are not likely to be realized.
F-17
<PAGE> 108
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Upon conversion to C corporation status, the Company recorded deferred
taxes for which it will be responsible resulting from the termination of S
corporation status. The components of the pro forma total deferred tax assets as
of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 9,670
Amortization of customer lists............................ 50,458
Accrued interest.......................................... 51,509
--------
Total deferred tax assets.............................. 111,637
Deferred tax liabilities:
Depreciation of property and equipment.................... 36,953
--------
Net deferred tax assets before valuation allowance..... 74,684
Less valuation allowance.................................. (74,684)
--------
Net deferred tax assets................................ $ 0
========
</TABLE>
At December 31, 1998, the Company provided a valuation allowance against
the entire net deferred tax asset balance because it is uncertain that the net
deferred tax assets resulting from these deferred tax items will not be realized
through future taxable income.
The following summarizes the components of the pro forma income tax benefit
for the years ended December 31, 1996, 1997, and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal...................................... $ 0 $ 0 $ 0
State........................................ 0 0 0
Deferred:
Federal...................................... (94,540) (184,231) (202,185)
State........................................ (11,122) (21,675) (23,787)
Valuation allowance.......................... 105,662 205,906 225,972
--------- --------- ---------
$ 0 $ 0 $ 0
========= ========= =========
</TABLE>
A reconciliation from the federal statutory rate to the pro forma tax
benefit for the years ended December 31, 1996, 1997, and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Statutory federal tax rate............................. (34.0)% (34.0)% (34.0)%
State income taxes, net of federal tax benefits........ (4.0) (4.0) (4.0)
Permanent differences -- meals and entertainment....... 0.0 0.4 0.2
Valuation allowance.................................... 38.0 37.6 37.8
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
F-18
<PAGE> 109
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases office space under noncancelable operating leases
expiring on various dates through 2001. The Company recorded rent expense of
approximately $33,152 and $106,417 for the years ended December 31, 1997 and
1998, respectively, related to these operating leases.
Minimum future payments under noncancelable capital and operating leases as
of December 31, 1998 for each of the next five years ended December 31 are as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
1999....................................................... $ 28,067 $ 68,914
2000....................................................... 22,904 68,914
2001....................................................... 11,005 21,675
2002....................................................... 0 0
2003....................................................... 0 0
-------- --------
Total minimum lease payments............................. 61,976 $159,503
========
Less imputed interest...................................... (22,935)
--------
Present value of minimum capitalized lease payments........ 39,041
Less current portion of capital lease obligations.......... (28,067)
--------
Long-term portion of capital lease obligation.............. $ 10,974
========
</TABLE>
LEGAL PROCEEDINGS
The Company is subject to lawsuits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of any pending
legal proceedings will not have a material adverse effect on the Company's
business or financial condition.
DEPENDENCE ON OTHER INTERNET ACCESS AND TELECOMMUNICATIONS PROVIDERS
The Company depends on other corporations such as UUNET Technologies, Inc.
("UUNET"), GTE Internetworking ("GTE"), Sprint Communications Company, L.P.
("Sprint"), Intermedia Communications, Inc., and other facilities-based and
nonfacilities-based carriers for the Company's subscribers' access to internet.
The Company has entered into supply agreements with Sprint, GTE, UUNET, and
other carriers to provide access to the Internet. The contracts are generally
for a term of one to three years but are subject to early termination in certain
instances. Some of the contracts also contain minimum purchase requirements. In
addition, the Company depends on local carriers such as BellSouth and MediaOne
for their subscribers' transmission to the Company's network. The Company's
ability to maintain and expand business depends in part on its ability to enter
into favorable contracts with the aforementioned access providers and carriers.
The Company's success also depends on the cooperation of interexchange and local
exchange carriers originating and terminating service in a timely manner. The
partial or total loss of
F-19
<PAGE> 110
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ability to initiate or terminate access to the internet would result in a loss
of revenues and could lead to a loss of subscribers.
9. RELATED-PARTY TRANSACTIONS
DBTELECOM TECHNOLOGIES, INC.
dbTelecom Technologies, Inc. ("Teletech") is a communications company that
builds, maintains and installs technology upgrades on cellular and PCS networks.
Teletech is co-owned by two of the shareholders of the Company. In December
1996, Teletech agreed to pay certain operating expenditures on the Company's
behalf and began to charge the Company a management fee for the use of certain
employees of Teletech. All expenditures paid by Teletech are included in the
Company's note payable to Teletech. During 1997 and 1998, Teletech paid $7,124
and $153,065, respectively, in operating expenses on the Company's behalf.
Additionally, Teletech charged the Company management fees of $42,000 and
$60,000 during 1997 and 1998, respectively. As of December 31, 1997 and 1998,
the Company's note payable balance to Teletech was $57,124 and $270,188,
respectively. The Company also reimbursed Teletech directly in cash for various
expenses totaling $4,305 during 1998.
The Company paid Teletech approximately $30,000 in management fees during
the six-month period ended June 30, 1999. On July 1, 1999, the Company assumed
the management functions previously provided by Teletech and therefore will no
longer pay management fees in the future.
NSCHOOL
The Company owns 25% of the outstanding common stock of nschool (Note 4).
In addition to the development of the software, the Company performed services
related to the design of nschool's corporate logo for which it charged a total
of $1,462. One of the Company's principal shareholders and its Chairman of the
board of directors is also the Chairman of the board of directors of nschool.
SALE OF COMMON STOCK TO EXECUTIVES
In connection with the sale of the Company's shares to several private
investors from November 23, 1998 through June 30, 1999 (Note 6), the Company
sold 4,379 shares of common stock at $11.42 per share to each of two executives
of the Company on June 30, 1999.
10. SUBSEQUENT EVENTS
DEBT EXTENSIONS
On July 21, 1999, the Company extended both the Revolving Credit Facility
and the note payable with a local commercial lending institution to November 1,
1999. On October 21, 1999, both the credit facility and note payable were
further extended to January 15, 2000. The Company made two payments of $50,000,
one in each of March and July of 1999 on its note payable to the lending
institution.
F-20
<PAGE> 111
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
On August 27, 1999, the two principal shareholders who had previously
entered into a lending arrangement with a bank and then loaned the monies to the
Company, extended the maturity of that obligation from August 27, 1999 to
December 27, 1999. The interest rate was raised from 8.5% to 8.75%.
SHAREHOLDER LOAN
In November 1999, one of the Company's principal shareholders agreed to
lend the Company up to $140,000 to cover short-term operating expenses. The
outstanding principal amount of this loan earns interest at a rate of 10% per
year and is payable on the earlier of January 15, 2000 or the closing of the
Company's proposed initial public offering. The Company has borrowed
approximately $66,000 from the shareholder under this arrangement as of November
22, 1999.
DIRECTOR APPOINTMENT
On July 29, 1999, a partner in a law firm which is providing services to
the Company with respect to general corporate matters as well as in connection
with the Company's proposed initial public offering was one of two directors
appointed to the board of directors of the Company. As of September 30, 1999,
approximately $268,000 was due to this law firm for previously provided services
(unaudited). No professional fees were paid to this law firm during the year
ended December 31, 1998. Approximately $40,000 was paid to the law firm during
the nine months ended September 30, 1999 (unaudited).
COMPANY NAME CHANGE
On July 29, 1999, the Company's board of directors unanimously voted to
change the name of the Company to comstar.net, inc. from ComStar Communications
Corporation, Inc. The name change became legally effective on August 2, 1999.
The accompanying financial statements have been modified to reflect that change.
STOCK OPTION GRANTS
On July 16, 1999, 50,000 option grants were made to an employee of the
Company under the Plan at $11.42 per share. These options vest at the rate of
one-third per year from the date of original hire and expire ten years from the
date of grant. In the opinion of management, these options were granted at
management's best estimate of fair market value at the date of grant and thus no
compensation expense was recorded.
On September 1, 1999, the Company's board of directors amended the Plan.
The Amended and Restated 1999 Stock Option and Incentive Plan (the "Amended
Plan") provides for an additional 300,000 shares of the Company's common stock
to be available for grant, bringing the total amount of shares available from
850,000 (the original amount provided by the Plan) to 1,150,000.
On September 1, 1999, two of the Company's principal shareholders were
granted 68,750 options each under the Amended Plan at $11.42 per share. These
options vest immediately upon the date of grant and expire ten years from the
date of grant.
F-21
<PAGE> 112
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Compensation expense of approximately $162,000 was recorded in connection with
this grant.
On September 1, 1999, 260,000 option grants were made to certain employees
of Teletech under the Amended Plan at $11.42 per share. These options vest
immediately upon the date of grant and expire ten years from the date of grant.
Compensation expense of approximately $3,204,000 was recorded in connection with
these grants using the fair value method of accounting as prescribed by SFAS No.
123.
DIRECTOR STOCK OPTION PLAN
On September 1, 1999, the Company's board of directors approved the
Director Stock Option Plan (the "Director Plan"). This Director Plan provides
for the issuance of options to purchase up to 300,000 shares of the Company's
common stock. On September 1, 1999, the Company granted 50,000 options each to
two of the Company's directors at $11.42 per share. These options vest one-third
immediately upon the date of grant, and then at a rate of one-third per year for
the next two years from the date they commenced services as directors. The
options expire five years from the date of grant. Compensation expense of
approximately $39,000 was recorded in connection with this grant. The Company's
board of directors will establish the number of shares, exercise terms, and
vesting schedules for all future grants made under the Director Plan.
REVERSE STOCK SPLIT
On September 1, 1999, the Company's Board of Directors approved a 1-for-2
reverse stock split with respect to its outstanding capital stock. The split is
contingent upon the consummation of the Company's proposed initial public
offering. The Board also voted to decrease the number of authorized shares of
its undesignated common stock to 50,000,000, eliminate the authorized shares of
Series A and Series B common stock, and convert all outstanding shares of each
series to shares of common stock without designation as to series. Additionally
the Board voted to require supermajority approval by the directors and
shareholders of change of control transactions, such as mergers, a sale of
substantially all assets, etc., and to implement a classified board of
directors. All common share and per share information in these financial
statements have been retroactively adjusted to reflect the stock split, the
decrease in the number of authorized shares of the Company's undesignated common
stock to 50,000,000 and the elimination of the authorized shares of Series A and
Series B common stock (unaudited).
STOCK OPTION GRANTS
On September 17, 1999, 32,500 options grants were made to four employees of
the Company under the Amended Plan at $11.42 per share. These options vest at
the rate of one-third per year from the date of original hire and expire ten
years from the date of grant. Compensation expense of approximately $38,000 will
be recognized at a rate of one-third per year calculated from the individuals'
original hire dates (unaudited).
F-22
<PAGE> 113
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS (UNAUDITED)
CANCELLED INITIAL PUBLIC EQUITY OFFERING
In November 1999, the Company withdrew a planned initial public equity
offering of its common stock. As a result of the decision not to complete the
offering, the Company wrote off associated expenses of approximately $1,030,000
which primarily related to SEC filing fees, accounting and legal fees, and
printing costs directly attributable to the cancelled initial public equity
offering.
PROPOSED REGISTERED OFFERING
The Company is in the process of registering with the Securities and
Exchange Commission an offering of a minimum of eighty investment units and a
maximum of one hundred investment units, each unit consisting of a Series 1999
convertible Note and a Stock Purchase Warrant. This is a registered offering to
a limited number of investors. There can be no assurance that this offering will
be completed.
DEBT EXTENSIONS
On December 10, 1999 the Company obtained extensions relating to the debt
owed to Teletech and to two of the Company's principal shareholders. The
extensions delayed the maturities until April 30, 2000.
F-23
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Athens' ISP, Inc.:
We have audited the accompanying balance sheets of ATHENS' ISP, INC. (a
Georgia corporation) as of December 31, 1996 and 1997 and the related statements
of operations and shareholders' deficit, and cash flows for each of the two
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 Athens' ISP, Inc. as of
December 31, 1996 and 1997 and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
May 28, 1999
F-24
<PAGE> 115
ATHENS' ISP, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................................................... $ 1,334 $ 4,603
Accounts receivable, net of allowance for doubtful
accounts of $292 and $497 in 1996 and 1997,
respectively........................................ 1,653 2,983
Unbilled revenues...................................... 9,145 28,925
Loan receivable........................................ 505 0
Prepaid expenses....................................... 898 5,793
--------- ---------
Total current assets.............................. 13,535 42,304
--------- ---------
PROPERTY AND EQUIPMENT:
Computer and telecommunications equipment.............. 83,404 95,068
Furniture and fixtures................................. 5,594 6,837
Property under capital leases (Note 2)................. 47,055 47,055
Software............................................... 17,633 18,398
--------- ---------
153,686 167,358
Less accumulated depreciation.......................... (23,287) (53,046)
--------- ---------
Property and equipment, net......................... 130,399 114,312
--------- ---------
OTHER ASSETS:
Organization costs, net of accumulated amortization of
$111 and $206 in 1996 and 1997, respectively........ 364 269
Acquired Customer Base, net of accumulated amortization
of $0 and $1,025 in 1996 and 1997, respectively
(Note 2)............................................ 0 9,940
--------- ---------
Total other assets................................ 364 10,209
--------- ---------
Total assets...................................... $ 144,298 $ 166,825
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current portion of obligations under capital leases
(Note 3)............................................ $ 8,268 $ 9,344
Accounts payable....................................... 10,296 12,050
Accrued liabilities.................................... 1,676 5,091
Accrued interest....................................... 10,010 27,518
Notes payable (Note 4)................................. 218,308 240,401
--------- ---------
Total current liabilities......................... 248,558 294,404
--------- ---------
LONG-TERM LIABILITIES:
Obligations under capital lease (Note 3)............... 13,588 4,244
--------- ---------
SHAREHOLDERS' DEFICIT (NOTE 5):
Common stock, $1 par value............................. 500 500
Accumulated deficit.................................... (118,348) (132,323)
--------- ---------
Total shareholders' deficit....................... (117,848) (131,823)
--------- ---------
Total liabilities and shareholders' deficit....... $ 144,298 $ 166,825
========= =========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-25
<PAGE> 116
ATHENS' ISP, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
REVENUES:
Access................................................. $ 109,652 $ 292,511
--------- ---------
OPERATING EXPENSES:
Cost of service........................................ 61,578 96,280
Payroll................................................ 63,471 106,810
General and administrative............................. 27,240 25,200
Rent................................................... 7,500 14,289
Professional fees...................................... 3,654 2,241
Insurance.............................................. 4,882 7,576
Depreciation and amortization.......................... 21,966 30,879
--------- ---------
Total operating expenses............................ 190,291 283,275
--------- ---------
OPERATING (LOSS) INCOME.................................. (80,639) 9,236
--------- ---------
OTHER (EXPENSES) INCOME:
Interest expense....................................... (9,874) (23,145)
Other.................................................. (6,760) (66)
--------- ---------
Total other (expenses) income....................... (16,634) (23,211)
--------- ---------
NET LOSS................................................. (97,273) (13,975)
ACCUMULATED DEFICIT, BEGINNING OF YEAR................... (20,575) (117,848)
--------- ---------
ACCUMULATED DEFICIT, END OF YEAR......................... $(117,848) $(131,823)
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 117
ATHENS' ISP, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(97,273) $(13,975)
-------- --------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization......................... 21,966 30,879
Gain on sale of equipment............................. 0 196
Changes in operating assets and liabilities:
Accounts receivable, net............................ (1,653) (1,330)
Unbilled revenues................................... (9,145) (19,780)
Prepaid expenses.................................... (898) (4,895)
Accounts payable.................................... 9,620 1,754
Accrued liabilities................................. 1,114 3,415
Accrued interest.................................... 9,643 17,508
-------- --------
Total adjustments................................ 30,647 27,747
-------- --------
Net cash (used in) provided by operating
activities.................................... (66,626) 13,772
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net................. (117,189) (13,868)
Purchase of customer base................................ 0 (10,965)
Loan receivable.......................................... (505) 505
-------- --------
Net cash used in investing activities............ (117,694) (24,328)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt........................... 170,010 39,563
Repayment of debt........................................ (6,546) (17,470)
Obligations under capital lease.......................... 21,856 (8,268)
-------- --------
Net cash provided by financing activities........ 185,320 13,825
-------- --------
NET INCREASE............................................... 1,000 3,269
CASH AT BEGINNING OF YEAR.................................. 334 1,334
-------- --------
CASH AT END OF YEAR........................................ $ 1,334 $ 4,603
======== ========
CASH PAID FOR INTEREST..................................... $ 224 $ 2,232
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE> 118
ATHENS' ISP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND BUSINESS OPERATIONS
Athens' ISP, Inc. (the "Company") (a Georgia corporation) is a local and
regional provider of Internet access services to individuals and small
businesses. The Company has provided Internet access services since September
1995.
2. SUMMARY OF 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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
LONG-LIVED ASSETS
The Company carries long-lived assets, as defined, at cost less accumulated
depreciation and amortization. Long-lived assets are evaluated periodically for
other than temporary impairment. If circumstances suggest that their value may
be impaired and the write-down would be material, an assessment of
recoverability is performed prior to any write-down of the asset. Impairment, if
any, is recognized through a valuation allowance with a corresponding charge
recorded in the income statement. Management believes that the long-lived assets
in the accompanying balance sheets are appropriately valued.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for improvements
are capitalized, and replacements, maintenance, and repairs that do not improve
or extend the lives of the respective assets are expensed as incurred.
Depreciation is provided on a straight-line basis over the remaining estimated
useful lives, as follows:
<TABLE>
<S> <C>
Computers and telecommunications equipment.................. Five years
Furniture and fixtures...................................... Seven years
Software.................................................... Three years
</TABLE>
PROPERTY UNDER CAPITAL LEASES
The Company leases certain data communication and other equipment under
lease agreements accounted for as capital leases. The assets and liabilities
under capital leases are recorded at the lesser of the present value of
aggregate future minimum lease payments, including estimated bargain purchase
options, or the fair value of the assets under lease. Property under capital
leases is depreciated over their estimated useful lives of five years, which is
longer than the terms of the leases.
F-28
<PAGE> 119
ATHENS' ISP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ACQUIRED CUSTOMER BASE
On August 21, 1997, the Company acquired the customer list and related
accounts of Interlinks Online, Inc. ("Interlinks") and some related computer and
telecommunications equipment under the terms of a purchase agreement. The
purchase price was approximately $18,465, of which $10,965 was allocated to the
customer list and related accounts and $7,500 was allocated to the equipment
acquired. The Company capitalized the cost of the customer list and related
accounts and amortizes them over a period of three years.
INCOME TAXES
The Company is an S corporation and is not subject to corporate level taxes
on its net income because such income is attributed to the Company's
stockholders and taxes on such income is directly payable by them.
REVENUE RECOGNITION
The Company's revenues consist primarily of access revenues. Access
revenues are recurring revenues received for Internet access and web domain
hosting services. Revenue related to access services is recognized as the
service is provided. Installation and customer set-up fees are recognized upon
completion of the services. Unbilled revenues as of December 31, 1996 and 1997
consist of revenues associated with services provided in advance of billings.
CREDIT RISK
The Company's accounts receivable potentially subjects the Company to
credit risk, as collateral is generally not required. The Company's risk of loss
is limited due to the ability to terminate access on delinquent accounts. The
carrying amounts of the Company's receivables approximate their fair values as
of December 31, 1997 and 1996.
MAJOR CUSTOMERS
Sales to Kali, Inc. ("Kali"), a computer developer, during 1997 were
approximately 35% of the Company's total sales during 1997. No other customer
accounted for more than 10% of the Company's sales during 1996 and 1997. As of
years ended December 31, 1996 and 1997, respectively, there were no accounts
receivable balances due from Kali.
F-29
<PAGE> 120
ATHENS' ISP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES
OPERATING LEASES
Beginning in 1997, the Company entered into various noncancelable operating
lease agreements for certain telecommunications equipment. The obligations
extend through 2000. The following is a schedule of future minimum rent payments
required under the leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $21,834
1999........................................................ 18,749
2000........................................................ 4,193
2001........................................................ 0
2002........................................................ 0
Thereafter.................................................. 0
-------
Total..................................................... $44,776
=======
</TABLE>
Rent expense for the equipment was $6,789 for the year ended December 31,
1997 and is included in rent in the accompanying statement of operations and
shareholders' deficit. The Company rents office space on a month to month basis.
Office rent expense was $7,500 for the years ended December 31, 1996 and 1997,
respectively.
CAPITAL LEASE
The Company leases telecommunications equipment through a noncancelable
capital lease agreement. The capital lease obligation totaled $21,856 and
$13,588 for the years ended December 31, 1996 and 1997, respectively. The
capital lease obligation is secured by the telecommunications equipment. The
following is a schedule of future minimum payments required under the capital
lease at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $10,500
1999........................................................ 4,375
-------
14,875
Less imputed interest..................................... (1,287)
-------
Net obligations under capital lease.................... $13,588
=======
</TABLE>
F-30
<PAGE> 121
ATHENS' ISP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. DEBT
Debt at December 31, 1996 and 1997 consisted of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Note payable to shareholder, interest at 8.27%% and 8.44%
for 1996 and 1997, respectively, principal and interest
payable on demand........................................ $199,945 $214,945
Note payable to Interlinks, payable monthly through
September 5, 1998, non-interest bearing.................. 0 15,219
Note payable to shareholder for credit card purchases,
non-interest bearing, payable on demand.................. 18,363 10,237
-------- --------
Total debt............................................... $218,308 $240,401
======== ========
</TABLE>
Following are maturities of the debt as of December 31, 1997 for each of
the next five years ending on December 31:
<TABLE>
<S> <C>
1998........................................................ $240,401
1999........................................................ 0
2000........................................................ 0
2001........................................................ 0
2002........................................................ 0
Thereafter.................................................. 0
--------
Total..................................................... $240,401
========
</TABLE>
There were payments of approximately $65,000, $75,000,and $100,000 made
July 1998, January 1999, and April 1999, respectively, against the outstanding
debt balances.
5. SHAREHOLDERS' DEFICIT
In July 1995, the Company authorized for issuance 10,000 shares of common
stock with a $1 par value. There were 500 shares outstanding at December 31,
1996 and 1997, respectively.
6. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is subject to lawsuits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution for these
pending legal proceedings will not have a material adverse effect on the
Company's business or financial condition.
DEPENDENCE ON OTHER INTERNET ACCESS AND TELECOMMUNICATIONS PROVIDERS
The Company depends on other corporations such as Sprint, BellSouth, AT&T,
and other facilities-based and nonfacilities-based carriers for the Company's
subscribers' access to the Internet. The Company's success depends on the
cooperation of interexchange and
F-31
<PAGE> 122
ATHENS' ISP, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
local exchange carriers originating and terminating service in a timely manner.
The partial or total loss of the ability to initiate or terminate access to the
Internet would result in a loss of revenues and could lead to a loss of
subscribers.
7. SUBSEQUENT EVENT
On July 1, 1998, comstar.net,inc. acquired certain assets of Athen's ISP,
Inc. under the terms of an asset purchase agreement. The acquisition consisted
primarily of Internet access business subscribers and related computer and
telecommunications equipment. The purchase price was approximately $327,000. On
the same date, an unrelated party also acquired certain assets of Athens' ISP,
Inc. under a separate asset purchase agreement. The acquisition consisted
primarily of Internet access individual dial-up subscribers, accounts
receivable, and related computer and telecommunications equipment. The purchase
price was approximately $186,000.
F-32
<PAGE> 123
100 INVESTMENT UNITS
CONSISTING OF A SERIES 1999 CONVERTIBLE NOTE
WITH A STOCK PURCHASE WARRANT
(COMSTAR.NET, INC. LOGO)
---------------------
PROSPECTUS
---------------------
SCOTT & STRINGFELLOW, INC.
SUNTRUST EQUITABLE SECURITIES
---------------------
DECEMBER , 1999
---------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made pursuant to this prospectus after the date of this prospectus
shall create an implication that the information contained in this prospectus or
the affairs of comstar.net, inc. have not changed since the date of this
prospectus.
Until (40 days after the date of this prospectus), all dealers
that buy, sell or trade in our common stock, whether or not participating in
this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to their unsold allotments or
subscriptions.
<PAGE> 124
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table describes our expenses in connection with the offering
described in the registration statement. All amounts are estimates and may be
subject to future contingencies except the SEC registration fee and the NASD
fees:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 1,545
NASD fees................................................... 1,085
Blue Sky fees and expenses.................................. 5,000
Printing and engraving...................................... 17,500
Legal fees and expenses..................................... 125,000
Accounting fees and expenses................................ 75,000
Escrow agent fees........................................... 5,000
Miscellaneous expenses...................................... 870
----------
Total..................................................... $ 231,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Georgia Business Corporation Code, as amended, permits a corporation to
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of duty of care or other duty
as a director, except a corporation cannot eliminate or limit the liability of a
director for:
- an appropriation, in violation of his duties, of any business opportunity
of the corporation,
- acts or omissions which involve intentional misconduct or a knowing
violation of law,
- unlawful corporate distributions, or
- any transaction from which the director received an improper personal
benefit.
This provision relates only to breaches of duty by directors in their capacity
as directors, and not in any other corporate capacity, such as officers. It
limits liability only for breaches of fiduciary duties under the Georgia Code,
and not for violation of other laws, such as the federal securities laws. Our
articles of incorporation exonerate our directors from monetary liability to the
extent described above.
In addition to the rights provided by law that are described above, our
bylaws provide broad indemnification rights to our directors and the officers,
employees and agents as the directors may select, with respect to various civil
and criminal liabilities and losses that may be incurred by the director,
officer, agent or employee in any pending or threatened litigation or other
proceedings. This indemnification does not apply in the same situations
described above with respect to the exculpation from liability of our directors.
We are also obligated to reimburse directors and other parties for expenses,
including legal fees, court costs and expert witness fees, incurred by those
persons in defending against any of these liabilities and losses, as long as the
person in good faith believes that he or she complied with the applicable
standard of conduct with respect to the underlying accusations giving rise to
the liabilities or losses and agrees to repay to us any advances made under the
II-1
<PAGE> 125
bylaws if it is ultimately determined that the person is not entitled to
indemnification by us. Any amendment or other modification to the bylaws which
limits or otherwise adversely affects the rights to indemnification currently
provided in the bylaws shall apply only to proceedings based upon actions and
events occurring after the amendment and delivery of notice of it to the
indemnified parties. In addition, if the Georgia Code is ever amended to permit
greater elimination of liability, our articles provide that such greater
protection shall be given automatically to our directors without further board
or shareholder action unless required by law.
We have entered into separate indemnification agreements with each of our
directors and some of our officers. We have agreed, among other things, to
provide for indemnification and advancement of expenses in a manner and under
terms and conditions similar to those stated in the bylaws. Our shareholders
cannot void these agreements. In addition, we hold an insurance policy covering
directors and officers under which the insurer agrees to pay, subject to certain
exclusions, for any claim made against our directors and officers for a wrongful
act that they may become legally obligated to pay or for which we are required
to indemnify the directors or officers.
We believe that the above protections are necessary to attract and retain
qualified persons as directors and officers.
The placement agreement, which is filed as Exhibit 1.1 hereto, also
contains the placement agents' agreement to indemnify our directors and officers
and some other persons against civil liabilities specified in the agreement.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons under the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for indemnification
against these liabilities (other than our payment of expenses incurred or paid
by one of our directors, officers or controlling persons in the successful
defense of any action, suit or proceeding) is asserted by the director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether that indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of that issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
(a) Issuances of Capital Stock
In May 1996, we issued and sold 500 shares of our common stock to 4
investors in exchange for services and other consideration equal to $1.00.
In November 1998, we recapitalized comstar.net by converting the 500 shares
of common stock previously outstanding to 2,500,000 shares of common stock
series A and 2,500,000 shares of common stock series B.
Between November 23, 1998 and June 30, 1999, we sold 185,893 shares of
common stock series A at a price per share of $11.42 to 25 investors in a
private financing for a total of $2,122,744 in cash.
II-2
<PAGE> 126
(b) Certain Grants of Options
As of September 30, 1999, we had issued options to purchase 768,125 shares
of common stock pursuant to the Amended and Restated 1999 Stock Option and
Incentive Plan and options to purchase 100,000 shares of common stock pursuant
to the Director Stock Option Plan.
No placement agents were involved in the foregoing sales of securities.
Each issuance of securities described above was made in reliance on one or more
of the exemptions from registration provided by Sections 3(a)(11), 3(b), 4(2)
and 4(6) of the Securities Act, Regulation D and Rule 701, as promulgated by the
SEC under the Securities Act. All recipients of securities in these transactions
were either (a) eligible participants in a compensatory plan or (b) accredited
investors who represented their intention to acquire the securities for
investment purposes only and not with a view to or for the sale in connection
with any distribution of those shares. We affixed appropriate legends to the
share certificates we issued in those transactions. All recipients of these
securities had adequate access, through their relationships with comstar.net, to
information about us. All of these securities are deemed restricted securities
for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Form of Placement Agreement.
1.2 -- Escrow Instructions.
2.1+ -- Asset Purchase Agreement dated as of June 30, 1998 between
Athens' ISP, Inc. and the registrant.
3.1 -- Amended and Restated Articles of Incorporation dated
November 22, 1999.
3.2 -- Amended and Restated Bylaws.
4.1 -- See Exhibits 3.1 and 3.2 for provisions defining the rights
of comstar.net shareholders.
4.2 -- Form of Series 1999 Convertible Note.
4.3 -- Form of Stock Purchase Warrant.
4.4 -- Amended and Restated Shareholder Agreement dated December 1,
1998, and Amendment No. 1 to Amended and Restated
Shareholder Agreement dated August 31, 1999.
5.1* -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
10.1 -- Amended and Restated 1999 Stock Option and Incentive Plan,
including form of Stock Option Agreement attached thereto.
10.2 -- Director Stock Option Plan, including form of Director Stock
Option Agreement attached thereto.
10.3 -- Form of Indemnification Agreement between comstar.net, inc.
and each of its directors and executive officers.
10.4 -- Lease of office space from The Emerson Center Company dated
September 30, 1999.
10.5 -- Lease of office space from The Emerson Center Company dated
October 15, 1999.
10.6 -- Form of Network Services Agreement between comstar.net and
its customers.
10.7 -- Form of Internet Access Service Addendum to the Network
Services Agreement.
10.8 -- Form of Colocation Service Addendum to the Network Services
Agreement.
10.9 -- Form of Corporate Acceptable Use Policy Addendum to the
Network Services Agreement.
</TABLE>
II-3
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.10 -- Form of Special Access Services Agreement between
comstar.net and its customers.
10.11 -- Form of Non-Solicitation, Confidentiality and Assignment
Agreement between comstar.net, inc. and each of its
employees.
10.12 -- Loan agreement dated July 21, 1999 between Premier Bank and
the registrant.
10.13 -- Modification Note dated July 21, 1999 and loan agreement
dated June 22, 1999 between Premier Bank and the registrant.
10.14 -- Letter Agreement dated July 1, 1998 between Samuel F. Dayton
and the registrant relating to repayment of loans to First
National Bank of Commerce.
10.15 -- Promissory Note dated November 9, 1999 given by the
registrant as maker in favor of Samuel F. Dayton as holder.
10.16 -- Loan Extension and Modification Agreement dated December 10,
1999 between the registrant, db Telecom Technologies, Inc.,
Samuel F. Dayton, James L. Bruce, Jr., J. Cary Howell and
Edward N. Landa.
10.17 -- Form of Subscription Agreement.
21.1 -- Subsidiaries.
23.1* -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in legal opinion to be filed as Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (included on signature pages hereto).
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
* To be filed by amendment.
+ We agree to furnish supplementally a copy of any omitted schedule or exhibit
to the SEC upon request, as provided in Item 601(b)(2) of Regulation S-K.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
We hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in the volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
II-4
<PAGE> 128
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
We hereby undertake to provide to the placement agents, at the closing
specified in the placement agreement, notes and warrants in such denominations
and registered in such names as required by the placement agents to permit
prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC this indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. If a claim for
indemnification against these liabilities (other than our payment of expenses
incurred or paid by one of our directors, officers or controlling persons in the
successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus we file pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 129
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 Atlanta, State of
Georgia, on this 10th day of December, 1999.
comstar.net, inc.
By: /s/ J. CARY HOWELL
-----------------------------------
J. Cary Howell
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each of the undersigned officers
and directors of comstar.net, inc., a Georgia corporation, for himself and not
for one another, does hereby constitute and appoint J. Cary Howell and
Christopher K. Martin, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign his name to any and all amendments,
including post-effective amendments, to this registration statement, and to sign
any registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Section 462(b) of the
Securities Act of 1933, and all post-effective amendments thereto, and to cause
the same (together with all Exhibits thereto and all documents in connection
therewith) to be filed with the SEC, granting unto said attorneys and each of
them full power and authority to do and perform each and every act and thing
necessary and proper to be done in and about the premises, as fully to all
intents and purposes as the undersigned could do if personally present, and each
of the undersigned for himself hereby ratifies and confirms all that said
attorneys-in-fact and agents or any one of them, or his or their substitute or
substitutes, shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ J. CARY HOWELL Chief Executive Officer December 10, 1999
- --------------------------------------------- and Director (Principal
J. Cary Howell Executive Officer)
/s/ CHRISTOPHER K. MARTIN Chief Financial Officer December 10, 1999
- --------------------------------------------- and Treasurer
Christopher K. Martin (Principal Financial
and Accounting Officer)
/s/ SAMUEL F. DAYTON Chairman of the Board December 10, 1999
- ---------------------------------------------
Samuel F. Dayton
/s/ EDWARD N. LANDA Chief Technology Officer, December 10, 1999
- --------------------------------------------- Secretary and Director
Edward N. Landa
</TABLE>
II-6
<PAGE> 130
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ JAMES L. BRUCE, JR. Director December 10, 1999
- ---------------------------------------------
James L. Bruce, Jr.
/s/ GLENN W. STURM Director December 10, 1999
- ---------------------------------------------
Glenn W. Sturm
/s/ STEPHEN R. GROSS Director December 10, 1999
- ---------------------------------------------
Stephen R. Gross
</TABLE>
II-7
<PAGE> 131
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To comstar.net, inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of COMSTAR.NET, INC. (a Georgia corporation) included
in this registration statement and have issued our report thereon dated June 30,
1999 (except with respect to Note 10, as to which the date is November 22,
1999). Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Item 16(b) of the registration statement
is the responsibility of comstar.net inc.'s management and is presented for
purposed of complying with the Securities and Exchange Commission rules and is
not part of the basic financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 30, 1999 (except with respect to Note 10,
as to which the date is November 22, 1999)
S-1
<PAGE> 132
SCHEDULE II
COMSTAR.NET, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
OF YEAR EXPENSES DEDUCTIONS* END OF YEAR
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
For the period from:
March 5, 1996 to December 31, 1996:
Allowance for doubtful accounts...... $ 0 $ 0 $ 0 $ 0
------- ------- ------- -------
For the fiscal year ended:
December 31, 1997: Allowance for
doubtful accounts.................... $ 0 $19,426 $ 0 $19,426
------- ------- ------- -------
December 31, 1998: Allowance for
doubtful accounts.................... $19,426 $24,039 $18,018 $25,447
------- ------- ------- -------
</TABLE>
- ---------------
* Principally charges for which reserves were provided, net of recoveries.
S-2
<PAGE> 133
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1* -- Form of Placement Agreement.
1.2 -- Escrow Instructions.
2.1+ -- Asset Purchase Agreement dated as of June 30, 1998 between
Athens' ISP, Inc. and the registrant.
3.1 -- Amended and Restated Articles of Incorporation dated
November 22, 1999.
3.2 -- Amended and Restated Bylaws.
4.1 -- See Exhibits 3.1 and 3.2 for provisions defining the rights
of comstar.net shareholders.
4.2 -- Form of Series 1999 Convertible Note.
4.3 -- Form of Stock Purchase Warrant.
4.4 -- Amended and Restated Shareholder Agreement dated December 1,
1998, and Amendment No. 1 to Amended and Restated
Shareholder Agreement dated August 31, 1999.
5.1* -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.
10.1 -- Amended and Restated 1999 Stock Option and Incentive Plan,
including form of Stock Option Agreement attached thereto.
10.2 -- Director Stock Option Plan, including form of Director Stock
Option Agreement attached thereto.
10.3 -- Form of Indemnification Agreement between comstar.net, inc.
and each of its directors and executive officers.
10.4 -- Lease of office space from The Emerson Center Company dated
September 30, 1999.
10.5 -- Lease of office space from The Emerson Center Company dated
October 15, 1999.
10.6 -- Form of Network Services Agreement between comstar.net and
its customers.
10.7 -- Form of Internet Access Service Addendum to the Network
Services Agreement.
10.8 -- Form of Colocation Service Addendum to the Network Services
Agreement.
10.9 -- Form of Corporate Acceptable Use Policy Addendum to the
Network Services Agreement.
10.10 -- Form of Special Access Services Agreement between
comstar.net and its customers.
10.11 -- Form of Non-Solicitation, Confidentiality and Assignment
Agreement between comstar.net, inc. and each of its
employees.
10.12 -- Loan agreement dated July 21, 1999 between Premier Bank and
the registrant.
10.13 -- Modification Note dated July 21, 1999 and loan agreement
dated June 22, 1999 between Premier Bank and the registrant.
10.14 -- Letter Agreement dated July 1, 1998 between Samuel F. Dayton
and the registrant relating to repayment of loans to First
National Bank of Commerce.
10.15 -- Promissory Note dated November 9, 1999 given by the
registrant as maker in favor of Samuel F. Dayton as holder.
10.16 -- Loan Extension and Modification Agreement dated December 10,
1999 between the registrant, db Telecom Technologies, Inc.,
Samuel F. Dayton, James L. Bruce, Jr., J. Cary Howell and
Edward N. Landa.
10.17 -- Form of Subscription Agreement.
21.1 -- Subsidiaries.
23.1* -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in legal opinion to be filed as Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (included on signature pages hereto).
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
* To be filed by amendment.
+ We agree to furnish supplementally a copy of any omitted schedule or exhibit
to the SEC upon request, as provided in Item 601(b)(2) of Regulation S-K.
<PAGE> 1
EXHIBIT 1.2
ESCROW INSTRUCTIONS
These Escrow Instructions are given by comstar.net, inc., a Georgia
corporation (the "Company") and Scott & Stringfellow, Inc., a Virginia
corporation and SunTrust Equitable Securities Corporation, a [______________]
corporation (the "Placement Agents"), to Branch Banking & Trust Company, a
national banking association ("Escrow Holder").
1. OFFERING: The Company desires to offer to subscribers for Minimum
Subscriptions (as defined Section 5(a) below) its investment units, consisting
of a Series 1999 Convertible Note and a Stock Purchase Warrant (the "Units"), at
a price per unit of $50,000 (or such other price as specified by the Company or
the Placement Agents), as more particularly set forth in a Registration
Statement on Form S-1 (Reg. No. 333-_____) filed with the Securities and
Exchange Commission (the "Registration Statement"), a copy of which has been
delivered to Escrow Holder. Escrow Holder is not to be concerned with the
Registration Statement, except as specifically set forth below.
2. ESTABLISHMENT OF THE ESCROW: Escrow Holder will open one or more
escrow accounts (the "Escrow"), and either the Company or the Placement Agents,
in accordance with Rule 15c2-4 under the Securities Exchange Act of 1934, as
amended, will deliver to Escrow Holder from time to time for deposit into the
Escrow the full amount of each payment received from each subscriber (the
"Subscription Price"), together with the name, address and taxpayer
identification number of such subscriber, the number of shares subscribed for
and the amount paid therefor and an I.R.S. Form W-9 completed and executed by
each subscriber. Escrow Holder shall have no obligation to accept monies,
documents or instructions from any party other than the Company with respect to
the Escrow. All monies so deposited will be in the form of a subscriber's
personal check in favor of "Branch Banking & Trust Company - comstar.net, inc."
or by wire transfer. Should any such check be returned to Escrow Holder as
uncollectable for any reason, Escrow Holder will charge the amount of such
unpaid check to Escrow, notify the Company of the amount of such return check,
the name of the subscriber and the reason for return, and hold such check
subject to further instructions from the Company or the Placement Agents. Escrow
Holder will hold all monies and other property in the escrow free from any lien,
claim or offset, except as set forth herein, and such monies and other property
shall not become the property of the Company, nor subject to the debts thereof,
unless the conditions set forth in these instructions to disbursement of such
monies to the Company have been fully satisfied.
3. INVESTMENT: All funds will be held by Escrow Holder in a Money
Market Investment Account bearing interest at Escrow Holder's then applicable
rate. No funds will earn interest until Escrow Holder receives an I.R.S. Form
W-9 completed and executed by the Company and the subscriber's check has been
collected in good funds.
4. (a) CANCELLATION BY THE COMPANY: The Company may reject or cancel
any subscription in whole or in part. If the Subscription Price for such
rejected or cancelled subscription has been delivered to Escrow Holder, the
Company will inform Escrow
<PAGE> 2
Holder of the rejection or cancellation, and Escrow Holder upon receiving such
notice will refund to the subscriber the Subscription Price.
(b) CANCELLATION BY SUBSCRIBERS: All Subscriptions are irrevocable,
and no subscriber will have any right to cancel or rescind the subscription,
except as required under the law of any jurisdiction in which the shares are
sold.
5. CLOSING: The Escrow will remain open and the Escrow Holder will
continue to receive subscriptions until the earliest to occur of the following
(the "Closing Date"): (a) the effective date for closing of the Escrow set forth
in a written instruction from the Company and the Placement Agents to the Escrow
Holder after the Escrow Holder has received aggregate Subscription Prices for at
least $4,000,000 in Units ("Minimum Subscriptions"); or (b) December 31, 1999.
On the Closing Date, the Escrow Holder will disburse all monies, instruments and
other documents in the Escrow to the Company or as otherwise instructed by the
Company. If the Minimum Subscriptions have not been received by the Escrow
Holder or the Escrow Holder receives written notice from the Company or the
Placement Agents that the offering has been terminated prior to Closing, the
Escrow Holder will refund all the monies in the Escrow, to the subscribers
without further notice to the Company. Under no circumstances will Escrow Holder
be required to disburse any monies until the check therefor has been collected
in good funds.
6. INSTRUCTIONS AND AMENDMENTS: All notices and instructions to Escrow
Holder must be in writing and may be delivered personally or mailed, certified
or registered mail, return receipt requested, addressed to Branch Banking &
Trust Company, 110 South Stratford Road, Suite 301, Winston-Salem, NC 27104,
Attention: Mark Redmond. All such notices and instructions will be deemed given
when received by Escrow Holder, as shown on the receipt therefor. All
Instructions from the Company will be signed by J. Cary Howell or Chris Martin
and all instructions from the Placement Agents will be signed by _______ or
___________. Unless otherwise provided herein, these instructions may be amended
or further instructions given only to the extent that such amendments or
instructions are consistent with, and do not add materially to, the description
of the Escrow contained in the Registration Statement, unless consented to in
writing by all subscribers whose Subscription Prices have been received by
Escrow Holder therefore and unless disclosed to all subscribers thereafter.
7. FEES: Escrow Holder shall be entitled to an initial, non refundable,
set-up fee of $______ payable concurrently with its acceptance, and upon opening
of this Escrow, plus actual expenses incurred in performing its duties
hereunder. The Company or the Placement Agents will pay Escrow Holder's fees and
expenses provided that upon the close of the escrow, Escrow Holder may withhold
from any amounts disbursed to the Company the amount of its then earned but
unpaid fees and expenses. Fees will be charged pursuant to the fee schedule
attached hereto and incorporated herein by reference.
2
<PAGE> 3
8. EXCULPATION: Escrow Holder will not be liable for:
(a) The genuineness, sufficiency, correctness as to form, manner of
execution or validity of any instrument deposited in the Escrow, nor the
identity, authority or rights of any person executing the same.
(b) Any misrepresentation or omission in the Registration Statement
or any failure to keep or comply with any of the provisions of any agreement,
contract, or other instrument referred to therein; or
(c) The failure of the Company to transmit, or any delay in
transmitting any subscriber's Subscription Price to Escrow Holder.
Escrow Holder's duties hereunder shall be limited to the safekeeping of monies,
instruments or other documents received by the Escrow Holder into the Escrow,
and for the disposition of same in accordance with this Escrow Agreement and any
further instructions pursuant to this Escrow Agreement.
9. INTERPLEADER: In the event conflicting demands are made or notices
served upon Escrow Holder with respect to the Escrow, Escrow Holder shall have
the absolute right at its election to do either or both of the following:
(a) Withhold and stop all further proceedings in, and performance
of, this escrow; or
(b) File a suit in interpleader and obtain an order from the court
requiring the parties to litigate their several claims and rights among
themselves.
In the event such interpleader suit is brought, Escrow Holder shall be fully
released from any obligation to perform any further duties imposed upon it
hereunder, and the Company shall pay Escrow Holder all costs, expenses and
reasonable attorney's fees expended or incurred by Escrow Holder, (or allocable
to its in-house counsel), the amount thereof to be fixed and a judgment thereof
to be rendered by the court in such suit.
10. INDEMNITY: The Company further agrees to pay on demand, and to
indemnify and hold Escrow Holder harmless from and against, all cost, damages,
judgments, attorney's fees, expenses, obligations and liabilities of any kind or
nature which, in good faith, Escrow Holder may incur or sustain in connection
with or arising out of the Escrow other than such that arise as a result of the
Escrow Holder's gross negligence or willful misconduct, and Escrow Holder is
hereby given a lien upon all the rights, titles, interest of the Company in
monies and other property deposited in the Escrow, to protect Escrow Holder's
rights to indemnity and to indemnify and reimburse Escrow Holder under these
Escrow Instructions.
3
<PAGE> 4
11. RESIGNATION OF ESCROW HOLDER: Escrow Holder may resign herefrom
upon thirty (30) days' written notice to the Company and shall thereupon be
fully released from any obligation to perform any further duties imposed upon it
hereunder; provided that a replacement escrow holder shall have been appointed
by the Company. Escrow Holder will transfer all files and records relating to
the Escrow to any successor escrow holder upon receipt of a copy of executed
escrow instructions designating such successor.
12. FACSIMILE: The Company agrees that Escrow Holder may, but need not,
honor and follow instructions, amendments or other orders ("orders") which shall
be provided by telephone facsimile transmission ("faxed") to Escrow Holder in
connection with this escrow and may act thereon without further inquiry and
regardless of by whom or by what means the actual or purported signature of the
Company may have been affixed thereto if such signature in Escrow Holder's sole
judgment resembles the signature of the Company. The Company indemnifies and
holds Escrow Holder free and harmless from any and all liability, suits, claims
or causes of action which may arise from loss or claim of loss resulting from
any forged, improper, wrongful or unauthorized faxed order. The Company agrees
to pay all attorney fees and cost incurred by Escrow Holder (or allocable to its
in-house counsel), in connection with said claim(s).
13. OTHER:
(a) Time is of the essence of these and all additional or changed
instructions.
(b) These Escrow Instructions may be executed in counterparts, each
of which so executed shall, irrespective of the date of its execution and
delivery, be deemed an original, and said counterparts together shall constitute
one and the same instrument.
(c) These Escrow Instructions shall be governed by, and shall be
construed according to, the laws of the State of Georgia.
(d) The Company will not make any reference to Branch Banking &
Trust Company in connection with the Offering except with respect to its role as
Escrow Holder hereunder, and in no event will the Company state or imply the
Escrow Holder has investigated or endorsed the offering in any manner
whatsoever.
[Remainder of Page Intentionally Left Blank.]
4
<PAGE> 5
IN WITNESS WHEREOF, The parties have executed these Escrow Instructions
as of the date set forth besides such parties' signature below.
"COMPANY"
comstar.net, inc., a Georgia corporation
By:
----------------------------------------
Its:
---------------------------------------
Date:
-----------------------
Address: 2812 Spring Road, Suite 210
Atlanta, Georgia 30339
Phone Number: (770) 485-6000
Fax Number: (770) 486-6100
"PLACEMENT AGENTS"
Scott & Stringfellow, Inc., a Virginia
corporation
By:
----------------------------------------
Its
----------------------------------------
Date:
--------------------------------------
Address:
-----------------------------------
Phone Number: (___) ___-______
Fax Number: (___) ___-______
SunTrust Equitable Securities Corporation,
a ______________ corporation
By:
----------------------------------------
Its
----------------------------------------
Date:
--------------------------------------
Address:
-----------------------------------
-----------------------------------
Phone Number: (___) ___-______
Fax Number: (___) ___-______
5
<PAGE> 6
"ESCROW HOLDER"
Branch Banking & Trust Company,
a national banking association
By:
------------------------------------
Its:
-----------------------------------
Date:
-----------------------
Address: 110 South Stratford Road, Suite 301
Winston-Salem, NC 27104
Phone Number: (336) 733-3242
Fax Number: (___) ___-_____
6
<PAGE> 1
Exhibit 2.1
STATE OF GEORGIA
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is entered into this 30th day of June,
1998, by and between Athens' ISP, Inc., a corporation chartered by the State of
Georgia with its principal office in Clarke County, Georgia (hereinafter
"Seller") and ComStar Communications, Inc., a corporation chartered by the
State of Georgia with its principal office in Cobb County, Georgia (hereinafter
"Buyer").
WITNESSETH:
Whereas, Seller owns certain property and leases certain equipment
involved in the Internet service provider business; and
Whereas, Buyer desires to purchase said property and to assume said
equipment leases as more particularly described herein under the terms and
conditions set forth in this document;
Now, therefore, for and in consideration of the premises and the mutual
promises, agreements, representations, warranties, and covenants hereinafter set
forth, the parties hereto agree as follows:
<PAGE> 2
1.
The property to be sold consists of the equipment listed in Exhibit
"A", attached hereto and made a part hereof, the E-Commerce account with Kali,
Inc., the "Real-time Software Sales System", and all of Sellers "Dedicated
Business Accounts" (as more specifically described in the next sentence) that
are actively in use and service as of 6:00 p.m. on June 30, 1998, including the
customer lists, contracts, licenses, rights, title, and interest in the
accounts, and the ability to transfer said accounts from Seller to Buyer. The
types of Dedicated Business Accounts to be sold include ISDN 128K dedicated,
ISDN 64K dedicated, dedicated telephone modem, collocation, and webhosting.
All of this will be referred to in this Agreement as "Property".
2.
The closing on the matters set out in this Asset Purchase Agreement
will take place at 10:30 a.m. on July 1, 1998, at the law offices of Blasingame,
Burch, Garrard, Bryant & Ashley, P.C., 440 College Avenue North, Athens-Clarke
County, Georgia.
3.
At the closing, Seller will sell, assign, transfer, convey, and deliver
the Property to Buyer free and clear of all liens and encumbrances whatsoever,
and Seller will warrant that the sale is made free and clear of all liabilities,
obligations, security interests, and encumbrances. Seller will warrant and
forever defend the right and title of the above described Property unto the said
Buyer, its successors and assigns, against the lawful claims of all persons
whomsoever, and Seller will indemnify Buyer fully from any and all said claims
of others. Buyer shall assume liability, if any, which arises from or as a
result
<PAGE> 3
of the transferring of accounts billed by credit cards resulting from the
existing account holders' credit cards numbers and information being divulged to
and transferred to Buyer.
4.
At the closing, Seller agrees to transfer unto Buyer all customer
records, lists, profiles, other written or recorded information, contracts, and
licenses having to do with the subject Property.
5.
Seller agrees to be responsible for and to pay any tax or similar
charge or assessment on the sale or transfer of the Property. Any personal
property taxes on the subject Property will be pro-rated between Seller and
Buyer as of July 1, 1998. Buyer will take possession of the subject Property as
of July 1, 1998.
6.
The purchase price to be paid by Buyer to Seller at closing for the
aforesaid Dedicated Business Accounts is set out as follows;
The purchase price is 8.5 times the monetary amount of those accounts
for which service is provided as of 6:00 p.m. on June 30, 1998, billed in June,
1998, for a full month's service for accounts billed on a monthly basis; and 8.5
times the monthly pro-rata monetary amount for those accounts for which service
is provided as of 6:00 p.m. on June 30, 1998, but for which accounts the
customer has paid on a quarterly, semi-annual or annual basis. Accounts
activated after June 1, 1998, and accounts activated after May 1, 1998, billed
on a pro-rated bill in June, which are active as of June 30, 1998, will be paid
at 8.5 times the minimum charge for such accounts. The accounts will be listed
as an exhibit to the Bill of
3
<PAGE> 4
Sale to be presented by Seller to Buyer at the closing. Buyer will pay cash at
the closing.
An "active" account is defined as an account which has two or fewer
open invoices and no unpaid invoices older than 60 days from the invoice date.
An amount subtracted from the above-stated purchase price for the
accounts is an amount representing the "prepays", being those customers who have
paid in advance for service, and the "prepays" having been received by Seller
before July 1, 1998.
All current payments on the accounts invoiced by Seller before July 1,
1998, will belong to Seller. All current payments invoiced by the Buyer on and
after July 1, 1998, on the accounts will belong to Buyer.
Buyer will pay to Seller, in cash at closing, the amount of $33,100.00
for the equipment set out in Exhibit "A".
Buyer will pay to Seller, in cash at closing, the amount of $245,490.00
in consideration for Seller's giving up its contract with Kali, Inc., for the
Kali program and assigning its rights to Buyer. Buyer will enter into a separate
contract with Kali, Inc., effective July 1, 1998. This amount of $245,490.00
will include the consideration paid by Buyer to Seller for the aforementioned
Real-time Software Sales System.
7.
The transition period is that period of time between the date of
signing this Agreement and the closing on July 1, 1998. During said transition
period, Seller will perform all normal billing for the accounts being sold;
Seller will use its best efforts to preserve intact the business, organization,
and management of Seller's business; Seller will keep available the services of
its present officers and employees and conduct business
4
<PAGE> 5
in a normal and ordinary manner; Seller will not incur any indebtedness or enter
into any material contracts or make any capital expenditure or other commitments
which would encumber the Property which is the subject of this Asset Purchase
Agreement; Buyer and its auditors will have immediate access to the books and
records of Seller.
8.
At the closing, Seller will assign and Buyer will assume the leases on
the equipment more fully described in Exhibit "B" attached hereto and made a
part hereof, with the terms and conditions of the leases set out, and the two
leases for the space in the Butler Building located at 337 South Milledge
Avenue, Athens, Georgia, with the Butler Corporation of Athens, Inc., as the
Lessor, copies of said leases shown as Exhibit "C", attached hereto and made a
part hereof. Seller represents and warrants to Buyer that it has the authority
to assign the leases and has the approval of the lessors to so assign these
leases. Buyer shall indemnify and hold Seller harmless from any and all claims,
costs, liabilities or damages arising from or related to the assumed leases
after July 1, 1998, which result from any act, or failure to act by Buyer under
the terms and conditions of the assumed leases.
9.
Buyer will assume, for no monetary consideration, all of Seller's
accounts receivable for the Dedicated Business Accounts being purchased by Buyer
as of July 1, 1998. Seller will have no interest in or responsibility for the
accounts receivable after July 1, 1998. Buyer is responsible for all legal
actions resulting from future efforts at collecting the
5
<PAGE> 6
accounts receivable. Buyer Will keep all amounts received after July 1, 1998,
from the accounts receivable. This accounts receivable provision becomes
effective at the closing.
10.
Buyer agrees to freeze all pricing on all purchased accounts for a
period of three months beginning on July 1, 1998.
11.
Seller and Buyer represent and warrant, each to the other, that they
have the capacity and authority to execute and deliver this Agreement, to
perform hereunder and to consummate the transactions contemplated hereby without
the necessity of any act or consent of any other person whomsoever. This
Agreement constitutes the valid and legally binding obligations of Seller and
Buyer, enforceable against them in accordance with their respective terms.
Seller has good title to the Property, assets, and rights transferred
herein, and represents and warrants to Buyer that it will have good title at the
closing.
Seller agrees to obtain approval of its shareholders and its board of
directors of this Agreement and all transactions set out herein, and Seller
will present to Buyer evidence of such approval at the closing.
12.
At the closing, Seller and James M. Freeman II will sign a Covenant Not
to Compete, with Buyer as the beneficiary of said Covenant, in which Covenant
Seller and Freeman will agree that neither will for a period of three years,
beginning July 1, 1998, directly or indirectly deal with or be engaged with the
sale, servicing, or handling of
6
<PAGE> 7
Dedicated Business Accounts, commercial accounts, or E-Commerce accounts in any
Internet service provider business within the geographical areas of the State of
Georgia serviced by and covered by the telephone area codes of 706, 770, 404,
and 678. Seller and Buyer agree and understand that Freeman will become an
employee of Buyer beginning on July 1, 1998, and an exception will be made to
this provision during the time that Freeman is such an employee of Buyer. Should
Freeman end his employment with Buyer for a reason other than being terminated
for cause or for a voluntary resignation, Freeman can be involved in the
Internet service provider business within the aforementioned geographical areas
but cannot be involved as a principal in any business in the capacity as a
shareholder, officer, or otherwise, and Freeman will not be involved with a
customer or prospective customer of Buyer existing at the time of Freeman's
departure from Buyer's employment. Under no circumstance will Freeman use any
trade secrets, business methods, or proprietary information gained from Buyer
while being an employee of Buyer. Seller and Freeman will agree that they shall
not be involved with or provide E-Commerce services for Kali, Inc., in any
geographical location.
13.
All notices, requests, demands, and other communications hereunder
shall be in writing and shall be delivered by hand during regular business hours
or mailed by
7
<PAGE> 8
registered or certified mail, return receipt requested, first class postage
prepaid, addressed as follows:
To Seller: Athens' ISP, Inc.
c/o Mr. James M. Freeman II
337 South Milledge Avenue
Athens, Georgia 30605
To Buyer: ComStar Communications, Inc.
c/o Mr. Michael A. Dayton
419 Bradford Street
Suite A-2
Gainesville, Georgia 30501
14.
Any failure on the part of Seller, on one hand, and Buyer, on the other
hand, to comply with any of their or its obligations, agreements, or conditions
hereunder may be waived by the other party to whom such compliance is owed. No
waiver of any provision of this Agreement shall be deemed, or shall constitute,
a waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver.
15.
All expenses incurred by the parties hereto in connection with or
related to the authorization, preparation, and execution of this Agreement and
the closing of the transactions contemplated hereby, including, without
limitation of the generality of the foregoing, all fees and expenses of agents,
representatives, counsel and accountants employed by any such party, shall be
borne solely and entirely by the party that has incurred the same.
8
<PAGE> 9
16.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives, successors, and
assigns.
17.
This Agreement constitutes the entire agreement among the parties
hereto and supersedes and cancels any prior agreements, representations,
warranties, or communications, whether oral or written among the parties hereto
relating to the transactions contemplated hereby or the subject matter herein.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged, or terminated orally, but only by an agreement in writing signed by
the party against whom or which the enforcement of such change, waiver,
discharge, or termination is sought.
18.
The terms of this Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia.
19.
This Agreement will be executed in two counterparts, each of which shall
be deemed an original, but both of which together shall constitute one and the
same instrument.
20.
Buyer will take possession of the subject property and assume the
aforesaid leases effective at the closing set out herein.
9
<PAGE> 10
21.
Buyer agrees to waive Seller's compliance with the applicable bulk
sale provisions of the Bulk Sales Law of the Uniform Commercial Code as enacted
and enforced in the State of Georgia.
22.
All representations, warranties, agreements, covenants, and obligations
made or undertaken by Seller in this Agreement or in any document or instrument
executed and delivered pursuant hereto are material, have been relied upon by
Buyer, shall survive the closing hereunder, and shall not merge in the
performance of any obligation by any party hereto. Seller agrees to indemnify
and hold Buyer harmless from and against all liability, loss, damages, or injury
and all reasonable costs and expenses, including reasonable attorney fees and
cost of any suit related thereto, suffered or incurred by Buyer arising from any
misrepresentation by or breach of any covenant or warranty of Seller contained
in this Agreement.
23.
All of the obligations of Buyer to consummate the transactions
contemplated by this Agreement shall be contingent upon and subject to the
satisfaction, on or before the closing date, of each and every one of the
following conditions:
The representations and warranties made by Seller to Buyer in this
Agreement shall be true and correct in all material respects on the closing date
with the same force and effect as though such representations and warranties had
been made on and as of such time.
10
<PAGE> 11
Seller shall have duly performed all of the covenants, acts, and
undertakings to be performed by it on or prior to the closing date in all
material respects.
At the closing, Seller shall have effected the deliveries required of
it pursuant to paragraph 24 below.
No action, proceeding, investigation, regulation or legislation shall
have been instituted, threatened, or proposed before any court, governmental
agency or legislative body to enjoin, restrain, prohibit, or obtain substantial
damages in respect of, or that is related to, or arises out of, this Agreement
or the consummation of the transactions contemplated hereby, or that is related
to or arises out of the assets or the business of Seller, if such action,
proceeding, investigation, regulation or legislation would have a material
adverse effect on the Seller's business.
The equipment listed in Exhibits "A" and "B" shall be in the same
condition as on the date of the signing of this Agreement, ordinary wear and
tear excepted.
Seller's account with Buyer shall have a zero dollar account balance.
Seller will expect to be released from all obligations under the present
existing agreements between Seller and Buyer. In the event there is an account
balance after this release from future performance, at closing, the same should
be paid at closing to zero the account.
The cancellation of the Agreement between Seller and Kali, Inc., and
the transfer of all of Seller's rights with Kali, Inc. to Buyer.
That Buyer and Kali, Inc. shall have entered into an Agreement
effective July 1, 1998.
11
<PAGE> 12
24.
At the closing on July 1, 1998, Seller shall deliver to Buyer the
following:
(a) Certificate of good standing of Seller, as of the most recent
practicable date, from the Secretary of State of Georgia;
(b) Certified resolutions of Seller's shareholders and board of
directors approving this Agreement and all matters set out
herein;
(c) Bills of sale for the Property set out herein;
(d) Assignments of the leases set out herein and evidence of
approval of said assignments of the leases by the lessors
thereto;
(e) Covenant Not to Compete executed by Seller and James M.
Freeman II;
(f) All documents, books, and records concerning the accounts and
equipment being sold;
(g) Evidence of the cancellation of the Agreement between Seller
and Kali, Inc., effective July 1, 1998, so that Buyer may
effect its own agreement with Kali, Inc., as hereinbefore set
out.
25.
Seller agrees to transfer to Buyer and Buyer agrees to assume all
obligations and liabilities thereunder, Seller's contracts with Sprint and
BellSouth.
12
<PAGE> 13
26.
As has been set out in paragraph 1 of this Agreement, at the closing
Seller will transfer to Buyer all of its rights and title in and to its software
program designed and written by Seller known as "Real-time Software Sales
System", along with all rights, copyrights, and ownership of the software. The
software will include the code, code comments, working notes, documentation,
test versions, and compiled software. After the transfer of the software on July
1, 1998, Buyer will have the right to use, change, or sell said software. Seller
will make no warranty about the software's properties, abilities, or future
performance, and will have no liability for any problems resulting from use of
the software. Buyer will agree, if the software is ever made available for
public sale in the future, that the creative efforts of Seller would be
recognized in the "credits" for the software; however, this recognition will not
imply any ownership or right to the software by Seller.
IN WITNESS WHEREOF, each party hereto has executed or caused this
Agreement to be executed on its behalf, all on the day and year first above
written.
ATHENS' ISP, INC.
By: /s/ James M. Freeman
-----------------------------------------
President
Attest: /s/ A. Fetahagic-Freeman
-----------------------------------------
Secretary
13
<PAGE> 14
COMSTAR COMMUNICATIONS, INC.
By: /s/ Michael A. Dayton
-----------------------------------------
Executive Vice President
Attest: /s/ Naen Lawson
-----------------------------------------
BUYER
14
<PAGE> 15
EXHIBIT "A"
SGI R5000 Indy 96MB RAM, 2GB harddrive, CDROM,
w/Maya 1.0 and PowerAnimator 8.1
SGI R5000 Indy 96MB RAM, 6GB harddrive, DAT,
w/ MIPSpro compiler 7.2
SGI 4xR4400 Challenge L, 256MB RAM, 7GB harddrive, CDROM, DAT,
w/ IRIX IDO, Wyse terminal
APC Smart-UPS 2200XLNET
w/SGI IRIX Powerchute Pro and cables
(2) Adtran TSU routers, 1 new, 1 used
Ether switch, (2) Ethernet hubs, (1) rack, (7) desks, (2) bookshelves, (6)
chairs
Informix Dynamic Online Server, version 7.24.UCI-1 IRIX 6.2, 10 user lic.
Informix Dynamic Server OpenLine (priority support), 10 user lic, ends May 11/99
<PAGE> 16
EXHIBIT "B"
Cisco 3600 4-slot Modular Router-AC, w/Cisco 3640 IP feature set, network
module, cards and cables, and maintenance agreement. Balboa Capital
Corporation Lease #003-12212-01, monthly payment of $303.99 (29% of
total monthly amount $1048.26)
<PAGE> 17
EXHIBIT C
[Copy of lease dated August 8, 1995 between The Butler Corporation of Athens,
Inc. and Athens ISP, Inc./James M. Freeman II.]
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
COMSTAR.NET, INC.
ARTICLE ONE
NAME
The name of the Corporation is comstar.net, inc.
ARTICLE TWO
CAPITALIZATION
The total number of shares of all classes which the Corporation has the
authority to issue is 55,000,000, of which: (i) 50,000,000 shares of stock are
designated as Common Stock (without designation as to series), without par value
per share and (ii) 5,000,000 shares are designated as Preferred Stock, without
par value per share. The designations, voting powers, preferences, relative
rights, qualifications, limitations and restrictions of or on each class and
series of stock are as follows:
A. COMMON STOCK
The Corporation is authorized to issue 50,000,000 shares of Common
Stock, without par value per share. Each share of Common Stock shall be entitled
to one vote.
Holders of Common Stock shall be entitled to receive the net assets of
the Corporation upon dissolution, except as may be provided in one or more
Preferred Stock Designations (as such term is defined below).
Prior to the filing of these Amended and Restated Articles of
Incorporation, the Corporation had authority to issue 105,000,000 shares of
capital stock of which: (i) 80,000,000 shares were designated as Common Stock
(without designation as to series), without par value per share; (ii) 10,000,000
shares of stock were designated as Common Stock Series A, without par value per
share; (iii) 10,000,000 shares were designated as Common Stock Series B, without
par value per share; and (iv) 5,000,000 shares were designated as Preferred
Stock, without par value per share. Upon the filing of these Amended and
Restated Articles of Incorporation, all outstanding shares of Common Stock
Series A and Common Stock Series B shall automatically be converted into shares
of Common Stock, without designation as to series, on a two-for-one basis.
Therefore, upon the filing of these Amended and Restated Articles of
Incorporation, a holder of Common Stock Series A or Common Stock Series B shall
receive one share of Common Stock, without designation as to series, for every
two shares of Common Stock Series A or Common Stock Series B such holder holds.
For simplicity and ease of administration, no fractional shares shall be issued;
instead, all fractional shares shall be rounded up to the nearest whole number.
<PAGE> 2
B. PREFERRED STOCK
In addition to the Common Stock, the Corporation shall have the
authority, exercisable by its Board of Directors, to issue up to 5,000,000
shares of Preferred Stock, any part or all of which shares of Preferred Stock
may be established and designated from time to time by the Board of Directors by
filing an amendment (a "Preferred Stock Designation") to these Amended and
Restated Articles of Incorporation, which shall be effective without shareholder
action, in accordance with the appropriate provisions of the Georgia Business
Corporation Code (the "Code"), and any amendment or supplement thereto, in such
series and with such preferences, limitations and relative rights as may be
determined by the Board of Directors. The number of authorized shares of
Preferred Stock may be increased or decreased (but not below the number of
shares thereof then outstanding) by the affirmative vote of a majority of the
votes of the Common Stock, without a vote of the holders of the shares of
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required by law or pursuant to the Preferred Stock Designation or Preferred
Stock Designations establishing the Series of Preferred Stock.
ARTICLE THREE
LIMITATION ON DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(a) any appropriation, in violation of the director's duties, of any
business opportunity of the Corporation;
(b) acts or omissions that involve intentional misconduct or a knowing
violation of law;
(c) liability under Section 14-2-832 (or any successor provision or
redesignation thereof) of the Code; and
(d) any transaction from which the director derived an improper
personal benefit.
If at any time the Code shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Code, as so amended, without further action
by the shareholders, unless the provisions of the Code, as amended, require
further action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article
Three shall not adversely affect the elimination or limitation of liability or
alleged liability pursuant hereto of any
2
<PAGE> 3
director of the Corporation for or with respect to any alleged act or omission
of the director occurring prior to such a repeal or modification.
ARTICLE FOUR
BOARD AND SHAREHOLDER ACTION
REQUIRED FOR CERTAIN TRANSACTIONS
The affirmative vote of at least 66 2/3% of the directors is required
for the following actions by the Corporation to be submitted to a vote of the
shareholders:
(a) a sale of all or substantially all of the assets of the
Corporation;
(b) a liquidation or dissolution of the Corporation;
(c) the merger, consolidation or reorganization of the
Corporation, unless the shareholders of the Corporation
immediately prior to such transaction own at least a majority
of the combined voting power of the Corporation resulting from
such merger, consolidation or reorganization; or
(d) any increase in the number of directors above 15 directors;
provided, further, that the affirmative vote of the holders of 66 2/3% of the
outstanding shares of Common Stock is required for shareholder approval of any
action outlined in the clauses above.
ARTICLE FIVE
DIRECTORS
The Corporation shall have not more than 15 directors, and the number
of directors shall be set by the Board of Directors as provided in the
Corporation's bylaws. The Board of Directors shall be divided into three classes
to be known as Class I, Class II, and Class III, which shall be as nearly equal
in number as possible. Except in the case of death, resignation,
disqualification, or removal for cause, each director shall serve for a term
ending on the date of the third annual meeting of shareholders following the
annual meeting at which the director was elected; provided, however, that each
initial director in Class I shall hold office until the first annual meeting of
shareholders after his election; each initial director in Class II shall hold
office until the second annual meeting of shareholders after his election; and
each initial director in Class III shall hold office until the third annual
meeting of shareholders after his election. Despite the expiration of a
director's term, such director shall continue to serve until his or her
successor, if there is to be any, has been elected and has qualified. In the
event of any increase or decrease in the authorized number of directors, the
newly created or eliminated directorships resulting from such an increase or
decrease shall be apportioned among the three classes of directors so that the
three classes remain as nearly equal in size as possible; provided, however,
that there shall be no classification of additional directors elected by the
Board of Directors until the next meeting of shareholders called for the
purposes of electing directors, at which meeting the terms of all such
additional directors shall expire, and such additional directors positions, if
they are to be
3
<PAGE> 4
continued, shall be apportioned among the classes of directors and nominees
therefor shall be submitted to the shareholders for their vote.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such directors consider
pertinent. This provision solely grants discretionary authority to the directors
and shall not be deemed to provide to any other constituency any right to be
considered.
These Amended and Restated Articles of Incorporation were duly approved
by the Board of Directors, on September 17, 1999 and were duly approved and
adopted by the shareholders on October 14, 1999 in accordance with Section
14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the Corporation has caused these Amended and
Restated Articles of Incorporation to be executed and attested by its duly
authorized officer on November 22, 1999.
/s/ Samuel F. Dayton
----------------------------------------------
Samuel F. Dayton
Chairman of the Board and President
4
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
(formerly ComStar Communications, Inc.)
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE ONE OFFICE......................................................................................1
1.1 REGISTERED OFFICE AND AGENT...................................................................1
1.2 PRINCIPAL OFFICE..............................................................................1
1.3 OTHER OFFICES.................................................................................1
ARTICLE TWO SHAREHOLDER'S MEETINGS......................................................................1
2.1 PLACE OF MEETINGS.............................................................................1
2.2 ANNUAL MEETINGS...............................................................................2
2.3 SPECIAL MEETINGS..............................................................................2
2.4 NOTICE OF MEETINGS............................................................................2
2.5 WAIVER OF NOTICE..............................................................................2
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT....................................................3
2.7 VOTING OF SHARES..............................................................................3
2.8 PROXIES.......................................................................................3
2.9 PRESIDING OFFICER.............................................................................3
2.10 ADJOURNMENTS..................................................................................4
2.11 CONDUCT OF THE MEETING........................................................................4
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING......................................................4
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS.........................................................4
ARTICLE THREE BOARD OF DIRECTORS..........................................................................5
3.1 GENERAL POWERS................................................................................5
3.2 NUMBER, ELECTION AND TERM OF OFFICE...........................................................5
3.3 REMOVAL OF DIRECTORS..........................................................................6
3.4 VACANCIES.....................................................................................6
3.5 COMPENSATION..................................................................................6
3.6 COMMITTEES OF THE BOARD OF DIRECTORS..........................................................7
3.7 QUALIFICATION OF DIRECTORS....................................................................7
3.8 CERTAIN NOMINATION REQUIREMENTS...............................................................7
ARTICLE FOUR MEETINGS OF THE BOARD OF DIRECTORS...........................................................8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
4.1 REGULAR MEETINGS..............................................................................8
4.2 SPECIAL MEETINGS..............................................................................8
4.3 PLACE OF MEETINGS.............................................................................8
4.4 NOTICE OF MEETINGS............................................................................8
4.5 QUORUM........................................................................................8
4.6 VOTE REQUIRED FOR ACTION......................................................................8
4.7 PARTICIPATION BY CONFERENCE TELEPHONE.........................................................9
4.8 ACTION BY DIRECTORS WITHOUT A MEETING.........................................................9
4.9 ADJOURNMENTS..................................................................................9
4.10 WAIVER OF NOTICE..............................................................................9
ARTICLE FIVE OFFICERS...................................................................................10
5.1 OFFICES......................................................................................10
5.2 TERM.........................................................................................10
5.3 COMPENSATION.................................................................................10
5.4 REMOVAL......................................................................................10
5.5 CHAIRMAN OF THE BOARD........................................................................10
5.6 CHIEF EXECUTIVE OFFICER......................................................................10
5.7 PRESIDENT....................................................................................11
5.8 VICE PRESIDENT...............................................................................11
5.9 SECRETARY....................................................................................11
5.10 TREASURER....................................................................................11
ARTICLE SIX DISTRIBUTION AND DIVIDENDS.................................................................11
ARTICLE SEVEN SHARES.....................................................................................12
7.1 SHARE CERTIFICATES...........................................................................12
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS......................................12
7.3 TRANSFERS OF SHARES..........................................................................12
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER.....................................................12
7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES......................................................13
7.6 FIXING OF RECORD DATE........................................................................13
7.7 RECORD DATE IF NONE FIXED....................................................................13
ARTICLE EIGHT INDEMNIFICATION............................................................................13
8.1 INDEMNIFICATION OF DIRECTORS.................................................................13
8.2 INDEMNIFICATION OF OTHERS....................................................................14
8.3 OTHER ORGANIZATIONS..........................................................................14
8.4 DETERMINATION................................................................................14
8.5 ADVANCES.....................................................................................14
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
8.6 NON-EXCLUSIVITY..............................................................................15
8.7 INSURANCE....................................................................................15
8.8 NOTICE.......................................................................................15
8.9 SECURITY.....................................................................................15
8.10 AMENDMENT....................................................................................16
8.11 AGREEMENTS...................................................................................16
8.12 CONTINUING BENEFITS..........................................................................16
8.13 SUCCESSORS...................................................................................16
8.14 SEVERABILITY.................................................................................16
8.15 ADDITIONAL INDEMNIFICATION...................................................................16
ARTICLE NINE MISCELLANEOUS..............................................................................17
9.1 INSPECTION OF BOOKS AND RECORDS..............................................................17
9.2 FISCAL YEAR..................................................................................17
9.3 CORPORATE SEAL...............................................................................17
9.4 ANNUAL STATEMENTS............................................................................17
9.5 NOTICE.......................................................................................17
ARTICLE TEN AMENDMENTS.................................................................................18
</TABLE>
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
References in these Amended and Restated Bylaws to "Articles of
Incorporation" are to the Amended and Restated Articles of Incorporation of
comstar.net, inc., a Georgia corporation (the "Corporation"), as amended and
restated from time to time (the "Articles"). These Amended and Restated Bylaws
are intended to become effective upon the closing of the Corporation's initial
public offering.
All of these Bylaws are subject to contrary provisions, if any, of the
Articles (including provisions designating the preferences, limitations, and
relative rights of any class or series of shares), the Georgia Business
Corporation Code (the "Code"), and other applicable law, as in effect on and
after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
ARTICLE ONE
OFFICE
1.1 REGISTERED OFFICE AND AGENT. The Corporation shall maintain a
registered office and shall have a registered agent whose business office is the
same as the registered office.
1.2 PRINCIPAL OFFICE. The principal office of the Corporation shall be
at the place designated in the Corporation's annual registration with the
Georgia Secretary of State.
1.3 OTHER OFFICES. In addition to its registered office and principal
office, the Corporation may have offices at other locations either in or outside
the State of Georgia.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
2.1 PLACE OF MEETINGS. Meetings of the Corporation's shareholders may
be held at any location inside or outside the State of Georgia designated by the
Board of Directors or any other person or persons who properly call the meeting,
or if the Board of Directors or such other person or persons do not specify a
location, at the Corporation's principal office.
<PAGE> 6
2.2 ANNUAL MEETINGS. The Corporation shall hold an annual meeting of
shareholders, at a date and time determined by the Board of Directors, to elect
directors and to transact any business that properly may come before the
meeting. The annual meeting may be combined with any other meeting of
shareholders, whether annual or special.
2.3 SPECIAL MEETINGS. Special meetings of shareholders of one or more
classes or series of the Corporation's shares may be called at any time by the
Board of Directors, the Chairman of the Board, or the Chief Executive Officer,
and shall be called by the Corporation upon the written request (in compliance
with applicable requirements of the Code) of the holders of shares representing
twenty-five percent (25%) or more of the votes entitled to be cast on each issue
proposed to be considered at the special meeting; provided, however, that at any
time the Corporation has more than 100 beneficial owners (as defined in Section
14-2-110 of the Code) of its shares, such written request must be made by the
holders of a majority of such votes. The business that may be transacted at any
special meeting of shareholders shall be limited to that proposed in the notice
of the special meeting given in accordance with Section 2.4 (including related
or incidental matters that may be necessary or appropriate to effectuate the
proposed business).
2.4 NOTICE OF MEETINGS. In accordance with Section 9.5 and subject to
waiver by a shareholder pursuant to Section 2.5, the Corporation shall give
written notice of the date, time, and place of each annual and special
shareholders' meeting no fewer than 10 days nor more than 60 days before the
meeting date to each shareholder of record entitled to vote at the meeting. The
notice of an annual meeting need not state the purpose of the meeting unless
these Bylaws require otherwise. The notice of a special meeting shall state the
purpose for which the meeting is called. If an annual or special shareholders'
meeting is adjourned to a different date, time, or location, the Corporation
shall give shareholders notice of the new date, time, or location of the
adjourned meeting, unless a quorum of shareholders was present at the meeting
and information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are entitled
to vote at the adjourned meeting.
2.5 WAIVER OF NOTICE. A shareholder may waive any notice required by
the Code, the Articles, or these Bylaws, before or after the date and time of
the matter to which the notice relates, by delivering to the Corporation a
written waiver of notice signed by the shareholder entitled to the notice. In
addition, a shareholder's attendance at a meeting shall be (a) a waiver of
objection to lack of notice or defective notice of the meeting unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (b) a waiver of objection to
consideration of a particular matter at the meeting that is not within the
purpose stated in the meeting notice, unless the shareholder objects to
considering the matter when it is presented. Except as otherwise required by the
Code, neither the purpose of nor the business transacted at the meeting need be
specified in any waiver.
2
<PAGE> 7
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT. (a) Unless otherwise
required by the Code or the Articles, all classes or series of the Corporation's
shares entitled to vote generally on a matter shall for that purpose be
considered a single voting group (a "Voting Group"). If either the Articles or
the Code requires separate voting by two or more Voting Groups on a matter,
action on that matter is taken only when voted upon by each such Voting Group
separately. At all meetings of shareholders, any Voting Group entitled to vote
on a matter may take action on the matter only if a quorum of that Voting Group
exists at the meeting, and if a quorum exists, the Voting Group may take action
on the matter notwithstanding the absence of a quorum of any other Voting Group
that may be entitled to vote separately on the matter. Unless the Articles,
these Bylaws, or the Code provides otherwise, the presence (in person or by
proxy) of shares representing a majority of votes entitled to be cast on a
matter by a Voting Group shall constitute a quorum of that Voting Group with
regard to that matter. Once a share is present at any meeting other than solely
to object to holding the meeting or transacting business at the meeting, the
share shall be deemed present for quorum purposes for the remainder of the
meeting and for any adjournments of that meeting, unless a new record date for
the adjourned meeting is or must be set pursuant to Section 7.6 of these Bylaws.
(b) Except as provided in Section 3.4, if a quorum exists, action on a
matter by a Voting Group is approved by that Voting Group if the votes cast
within the Voting Group favoring the action exceed the votes cast opposing the
action, unless the Articles, a provision of these Bylaws that has been adopted
pursuant to Section 14-2-1021 of the Code (or any successor provision), or the
Code requires a greater number of affirmative votes.
2.7 VOTING OF SHARES. Unless otherwise required by the Code or the
Articles, each outstanding share of any class or series having voting rights
shall be entitled to one vote on each matter that is submitted to a vote of
shareholders.
2.8 PROXIES. A shareholder entitled to vote on a matter may vote in
person or by proxy pursuant to an appointment executed in writing by the
shareholder or by his attorney-in-fact. An appointment of a proxy shall be valid
for 11 months from the date of its execution, unless a longer or shorter period
is expressly stated in the proxy. A proxy is not invalidated by the death or
incompetency of a shareholder unless, before the authority is exercised pursuant
to the proxy, notice of such death or incompetency is received by the corporate
officer responsible for maintaining the list of shareholders.
2.9 PRESIDING OFFICER. Except as otherwise provided in this Section
2.9, the Chairman of the Board, and in his absence or disability the Chief
Executive Officer, shall preside at every shareholders' meeting (and any
adjournment thereof) as its chairman, if either of them is present and willing
to serve. If neither the Chairman of the Board nor the Chief Executive Officer
is present and willing to serve as chairman of the meeting, and if the Chairman
of the Board has not designated another person who is present and willing to
serve, then a majority of the Corporation's directors present at the meeting
shall be entitled to designate a person to serve as chairman. If no director of
the Corporation is present at the meeting or if a majority of the directors who
are present cannot be established, then a chairman
3
<PAGE> 8
of the meeting shall be selected by a majority vote of (a) the shares present at
the meeting that would be entitled to vote in an election of directors, or (b)
if no such shares are present at the meeting, then the shares present at the
meeting comprising the Voting Group with the largest number of shares present at
the meeting and entitled to vote on a matter properly proposed to be considered
at the meeting. The chairman of the meeting may designate other persons to
assist with the meeting.
2.10 ADJOURNMENTS. At any meeting of shareholders (including an
adjourned meeting), a majority of shares of any Voting Group present and
entitled to vote at the meeting (whether or not those shares constitute a
quorum) may adjourn the meeting, but only with respect to that Voting Group, to
reconvene at a specific time and place. If more than one Voting Group is present
and entitled to vote on a matter at the meeting, then the meeting may be
continued with respect to any such Voting Group that does not vote to adjourn as
provided above, and such Voting Group may proceed to vote on any matter to which
it is otherwise entitled; provided, however, that if (a) more than one Voting
Group is required to take action on a matter at the meeting and (b) any one of
those Voting Groups votes to adjourn the meeting (in accordance with the
preceding sentence), then the action shall not be deemed to have been taken
until the requisite vote of any adjourned Voting Group is obtained at its
reconvened meeting. The only business that may be transacted at any reconvened
meeting is business that could have been transacted at the meeting that was
adjourned, unless further notice of the adjourned meeting has been given in
compliance with the requirements for a special meeting that specifies the
additional purpose or purposes for which the meeting is called. Nothing
contained in this Section 2.10 shall be deemed or otherwise construed to limit
any lawful authority of the chairman of a meeting to adjourn the meeting.
2.11 CONDUCT OF THE MEETING. At any meeting of shareholders, the
chairman of the meeting shall be entitled to establish the rules of order
governing the conduct of business at the meeting.
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING. Action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the action is taken by all shareholders entitled to vote on the
action or, if permitted by the Articles, by persons who would be entitled to
vote at a meeting shares having voting power to cast the requisite number of
votes (or numbers, in the case of voting by groups) that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. The action must be evidenced by one or more written
consents describing the action taken, signed by shareholders entitled to take
action without a meeting, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. Where required by Section 14-2-704
or other applicable provision of the Code, the Corporation shall provide
shareholders with written notice of actions taken without a meeting.
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS. Notwithstanding anything to
the contrary in these Bylaws, the only business that may be conducted at an
annual meeting of shareholders shall be business brought before the meeting (a)
by or at the direction of the Board of Directors prior to the meeting, (b) by or
at the direction of the Chairman of the Board or the
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Chief Financial Officer, or (c) by a shareholder of the Corporation who is
entitled to vote with respect to the business and who complies with the notice
procedures set forth in this Section 2.13. For business to be brought properly
before an annual meeting by a shareholder, the shareholder must have given
timely notice of the business in writing to the Secretary of the Corporation. To
be timely, a shareholder's notice must be delivered or mailed to and received at
the principal office of the Corporation, as applicable: (a) if the Corporation
is at such time subject to Regulation 14A promulgated by the Securities and
Exchange Commission - not less than forty-five (45) nor more than ninety (90)
days prior to the first anniversary of the date on which the Corporation first
mailed its proxy materials for the prior year's annual meeting; or (b) if the
Corporation is at such time not subject to Regulation 14A - not less than sixty
(60) nor more than ninety (90) days prior to the first anniversary of the prior
year's annual meeting; provided, in any such event, that if during the prior
year the Corporation did not hold an annual meeting, or if the date of the
meeting has changed more than 30 days from the prior year, the notice to be
timely must be delivered or mailed to and received at the principal office of
the Corporation a reasonable time before the Corporation mails its proxy
materials for the current year. A shareholder's notice to the Secretary shall
set forth a brief description of each matter of business the shareholder
proposes to bring before the meeting and the reasons for conducting that
business at the meeting; the name, as it appears on the Corporation's books, and
address of the shareholder proposing the business; the series or class and
number of shares of the Corporation's capital stock that are beneficially owned
by the shareholder; and any material interest of the shareholder in the proposed
business. The chairman of the meeting shall have the discretion to declare to
the meeting that any business proposed by a shareholder to be considered at the
meeting is out of order and that such business shall not be transacted at the
meeting if (i) the chairman concludes that the matter has been proposed in a
manner inconsistent with this Section 2.13 or (ii) the chairman concludes that
the subject matter of the proposed business is inappropriate for consideration
by the shareholders at the meeting.
ARTICLE THREE
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
managed by, the Board of Directors, subject to any limitation set forth in the
Articles, in bylaws approved by the shareholders, or in agreements among all the
shareholders that are otherwise lawful.
3.2 NUMBER, ELECTION AND TERM OF OFFICE. Except as otherwise provided
in the Articles of Incorporation, the Board of Directors shall consist of a
maximum of fifteen members. The Board of Directors shall have the authority to
change the number of directors from time to time by resolution so long as the
number of directors does not exceed fifteen; provided, however, that no decrease
in the number of directors (if more than one director is elected by a resolution
of the Board of Directors or the shareholders) shall have the effect of
shortening the term of an incumbent director. The Board of Directors shall be
divided into three classes to be known as Class I, Class II, and Class III,
which shall be as nearly equal in number as possible. Except in the case of
death, resignation, disqualification, or removal for cause, each director shall
serve
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for a term ending on the date of the third annual meeting of shareholders
following the annual meeting at which the director was elected; provided,
however, that each initial director in Class I shall hold office until the first
annual meeting of shareholders after his election; each initial director in
Class II shall hold office until the second annual meeting of shareholders after
his election; and each initial director in Class III shall hold office until the
third annual meeting of shareholders after his election. Despite the expiration
of a director's term, such director shall continue to serve until his or her
successor, if there is to be any, has been elected and has qualified. In the
event of any increase or decrease in the authorized number of directors, the
newly created or eliminated directorships resulting from such an increase or
decrease shall be apportioned among the three classes of directors so that the
three classes remain as nearly equal in size as possible; provided, however,
that there shall be no classification of additional directors elected by the
Board of Directors until the next meeting of shareholders called for the
purposes of electing directors, at which meeting the terms of all such
additional directors shall expire, and such additional directors positions, if
they are to be continued, shall be apportioned among the classes of directors
and nominees therefor shall be submitted to the shareholders for their vote.
3.3 REMOVAL OF DIRECTORS. The entire Board of Directors or any
individual director may be removed with cause by the shareholders, provided that
directors elected by a particular Voting Group may be removed only by the
shareholders in that Voting Group. Removal action may be taken only at a
shareholders' meeting for which notice of the removal action has been given, and
a director may be removed only by the holders of a majority of the votes
entitled to be cast. If any removed director is a member of any committee of the
Board of Directors, he shall cease to be a member of that committee when he
ceases to be a director. A removed director's successor, if any, may be elected
at the same meeting to serve the unexpired term.
3.4 VACANCIES. A vacancy occurring in the Board of Directors may be
filled for the unexpired term, unless the shareholders have elected a successor,
by the affirmative vote of a majority of the remaining directors, whether or not
the remaining directors constitute a quorum; provided, however, that if the
vacant office was held by a director elected by a particular Voting Group, only
the holders of shares of that Voting Group or the remaining directors elected by
that Voting Group shall be entitled to fill the vacancy; provided further,
however, that if the vacant office was held by a director elected by a
particular Voting Group and there is no remaining director elected by that
Voting Group, the other remaining directors or director (elected by another
Voting Group or Groups) may fill the vacancy during an interim period before the
shareholders of the vacated director's Voting Group act to fill the vacancy. A
vacancy or vacancies in the Board of Directors may result from the death,
resignation, disqualification, or removal of any director, or from an increase
in the number of directors.
3.5 COMPENSATION. Directors may receive such compensation for their
services as directors as may be fixed by the Board of Directors from time to
time. A director may also serve the Corporation in one or more capacities other
than that of director and receive compensation for services rendered in those
other capacities.
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3.6 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may
designate from among its members an executive committee or one or more other
standing or ad hoc committees, each consisting of one or more directors, who
serve at the pleasure of the Board of Directors. Subject to the limitations
imposed by the Code, each committee shall have the authority set forth in the
resolution establishing the committee or in any other resolution of the Board of
Directors specifying, enlarging, or limiting the authority of the committee. Any
such committee, to the extent provided by resolution, shall have and may
exercise all of the authority of the Board of Directors in the management of the
business and affairs of the Corporation, except that a committee shall have no
authority with respect to (1) amending the Articles or these Bylaws; (2)
adopting a plan of merger or consolidation; (3) the sale, lease, exchange or
other disposition of all or substantially all of the property and assets of the
Corporation; and (4) a voluntary dissolution of the Corporation or a revocation
thereof. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors. A
majority of each committee may determine its action and may fix the time and
places of its meetings, unless otherwise provided by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same to
the Board of Directors when required.
3.7 QUALIFICATION OF DIRECTORS. No person elected to serve as a
director of the Corporation shall assume office and begin serving unless and
until duly qualified to serve, as determined by reference to the Code, the
Articles, and any further eligibility requirements established in these Bylaws.
3.8 CERTAIN NOMINATION REQUIREMENTS. No person may be nominated for
election as a director at any annual or special meeting of shareholders unless
(a) the nomination has been or is being made pursuant to a recommendation or
approval of the Board of Directors of the Corporation or a properly constituted
committee of the Board of Directors previously delegated authority to recommend
or approve nominees for director; (b) the person is nominated by a shareholder
of the Corporation who is entitled to vote for the election of the nominee at
the subject meeting, and the nominating shareholder has furnished timely written
notice to the Secretary of the Corporation, at the Corporation's principal
office, provided, however, that to be timely, a shareholder's notice must be
delivered or mailed to and received at the principal office of the Corporation,
as applicable: (A) if the Corporation is at such time subject to Regulation 14A
promulgated by the Securities and Exchange Commission - not less than forty-five
(45) nor more than ninety (90) days prior to the first anniversary of the date
on which the Corporation first mailed its proxy materials for the prior year's
annual meeting; or (B) if the Corporation is at such time not subject to
Regulation 14A not less than sixty (60) nor more than ninety (90) days prior to
the first anniversary of the prior year's annual meeting; provided, in any such
event, that if during the prior year the Corporation did not hold an annual
meeting, or if the date of the meeting has changed more than 30 days from the
prior year, the notice to be timely must be delivered or mailed to and received
at the principal office of the Corporation a reasonable time before the
Corporation mails its proxy materials for the current year, and such notice
shall (i) set forth with respect to the person to be nominated his or her name,
age, business and residence addresses, principal business or occupation during
the past five years, any affiliation with or
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material interest in the Corporation or any transaction involving the
Corporation, and any affiliation with or material interest in any person or
entity having an interest materially adverse to the Corporation, and (ii) shall
be accompanied by the sworn or certified statement of the shareholder that the
nominee has consented to being nominated and that the shareholder believes the
nominee will stand for election and will serve if elected; or (c) (i) the person
is nominated to replace a person previously identified as a proposed nominee (in
accordance with the provisions of subpart (b) of this Section 3.8) who has since
become unable or unwilling to be nominated or to serve if elected, (ii) the
shareholder who furnished such previous identification makes the replacement
nomination and delivers to the Secretary of the Corporation (at the time of or
prior to making the replacement nomination) an affidavit or other sworn
statement affirming that the shareholder had no reason to believe the original
nominee would be so unable or unwilling, and (iii) such shareholder also
furnishes in writing to the Secretary of the Corporation (at the time of or
prior to making the replacement nomination) the same type of information about
the replacement nominee as required by subpart (b) of this Section 3.8 to have
been furnished about the original nominee. The chairman of any meeting of
shareholders at which one or more directors are to be elected, for good cause
shown and with proper regard for the orderly conduct of business at the meeting,
may waive in whole or in part the operation of this Section 3.8.
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
4.1 REGULAR MEETINGS. A regular meeting of the Board of Directors shall
be held in conjunction with each annual meeting of shareholders. In addition,
the Board of Directors may, by prior resolution, hold regular meetings at other
times.
4.2 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by or at the request of the Chairman of the Board, the President, or any
director in office at that time.
4.3 PLACE OF MEETINGS. Directors may hold their meetings at any place
in or outside the State of Georgia that the Board of Directors may establish
from time to time.
4.4 NOTICE OF MEETINGS. Directors need not be provided with notice of
any regular meeting of the Board of Directors. Unless waived in accordance with
Section 4.10, the Corporation shall give notice of at least one day to each
director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 QUORUM. At meetings of the Board of Directors, a majority of the
directors then in office shall constitute a quorum for the transaction of
business.
4.6 VOTE REQUIRED FOR ACTION. If a quorum is present when a vote is
taken, the vote of a majority of the directors present at the time of the vote
will be the act of the Board of Directors, unless the vote of a greater number
is required by the Code, the Articles, or these
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Bylaws. A director who is present at a meeting of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(a) he objects at the beginning of the meeting (or promptly upon his arrival) to
holding the meeting or transacting business at such meeting; (b) his dissent or
abstention from the action taken is entered in the minutes of the meeting; or
(c) he delivers written notice of his dissent or abstention to the presiding
officer of the meeting before its adjournment or to the Corporation immediately
after adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.
4.7 PARTICIPATION BY TELEPHONE CONFERENCE. Members of the Board of
Directors may participate in a meeting of the Board by means of telephone
conference or similar communications equipment through which all persons
participating may hear and speak to each other. Participation in a meeting
pursuant to this Section 4.7 shall constitute presence in person at the meeting.
4.8 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent, describing the action taken, is signed
by each director and delivered to the Corporation for inclusion in the minutes
or filing with the corporate records. The consent may be executed in
counterparts, and shall have the same force and effect as a unanimous vote of
the Board of Directors at a duly convened meeting.
4.9 ADJOURNMENTS. A meeting of the Board of Directors, whether or not
a quorum is present, may be adjourned by a majority of the directors present to
reconvene at a specific time and place. It shall not be necessary to give notice
to the directors of the reconvened meeting or of the business to be transacted,
other than by announcement at the meeting that was adjourned, unless a quorum
was not present at the meeting that was adjourned, in which case notice shall be
given to directors in the same manner as for a special meeting. At any such
reconvened meeting at which a quorum is present, any business may be transacted
that could have been transacted at the meeting that was adjourned.
4.10 WAIVER OF NOTICE. A director may waive any notice required by the
Code, the Articles, or these Bylaws before or after the date and time of the
matter to which the notice relates, by a written waiver signed by the director
and delivered to the Corporation for inclusion in the minutes or filing with the
corporate records. Attendance by a director at a meeting shall constitute waiver
of notice of the meeting, except where a director at the beginning of the
meeting (or promptly upon his arrival) objects to holding the meeting or to
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting.
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ARTICLE FIVE
OFFICERS
5.1 OFFICERS. The officers of the Corporation shall consist of a Chief
Executive Officer, a President, a Secretary, and a Treasurer, each of whom shall
be elected or appointed by the Board of Directors. The Board of Directors may
also elect a Chairman of the Board from among its members. The Board of
Directors from time to time may create and establish the duties of other offices
and may elect or appoint, or authorize specific senior officers to appoint, the
persons who shall hold such other offices, including a Chief Operating Officer,
a Chief Technology Officer, one or more Vice Presidents (including Executive
Vice Presidents, Senior Vice Presidents, Assistant Vice Presidents, and the
like), one or more Assistant Secretaries, and one or more Assistant Treasurers.
Whether or not so provided by the Board of Directors, the Chairman of the Board
may appoint one or more Assistant Secretaries and one or more Assistant
Treasurers. Any two or more offices may be held by the same person.
5.2 TERM. Each officer shall serve at the pleasure of the Board of
Directors (or, if appointed by a senior officer pursuant to this Article Five,
at the pleasure of the Board of Directors or any senior officer authorized to
have appointed the officer) until his death, resignation, or removal, or until
his replacement is elected or appointed in accordance with this Article Five.
5.3 COMPENSATION. The compensation of all officers of the Corporation
shall be fixed by the Board of Directors or by a committee or officer appointed
by the Board of Directors. Officers may serve without compensation.
5.4 REMOVAL. All officers (regardless of how elected or appointed) may
be removed, with or without cause, by the Board of Directors, and any officer
appointed by another officer may also be removed, with or without cause, by any
senior officer authorized to have appointed the officer to be removed. Removal
will be without prejudice to the contract rights, if any, of the person removed,
but shall be effective notwithstanding any damage claim that may result from
infringement of such contract rights.
5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board (if there be one)
shall preside at and serve as chairman of meetings of the shareholders and of
the Board of Directors (unless another person is selected under Section 2.9 to
act as chairman). The Chairman of the Board shall perform other duties and have
other authority as may from time to time be delegated by the Board of Directors.
5.6 CHIEF EXECUTIVE OFFICER. Unless otherwise provided in these Bylaws
or by resolution of the Board of Directors, the Chief Executive Officer shall be
the principal officer of the Corporation and shall be charged with the general
and active management of the Corporation's affairs of all types. Subject to the
control of the Board of Directors, the Chief Executive Officer shall supervise
and control all of the business of the Corporation. The Chief
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Executive Officer shall have authority to institute or defend legal proceedings
when the directors are deadlocked.
5.7 PRESIDENT. The President (if there be one) shall, in the absence
or disability of the Chief Executive Officer, or at the direction of the Chief
Executive Officer, perform the duties and exercise the powers of the Chief
Executive Officer, whether the duties and powers are specified in these Bylaws
or otherwise.
5.8 VICE PRESIDENT. The Vice President (if there be one) shall, in the
absence or disability of the President, or at the direction of the President or
Chief Executive Officer, perform the duties and exercise the powers of the
President, whether the duties and powers are specified in these Bylaws or
otherwise. If the Corporation has more than one Vice President, the one
designated by the Board of Directors or the President (in that order of
precedence) shall act in the event of the absence or disability of the
President. Vice Presidents shall perform any other duties and have any other
authority as from time to time may be delegated by the Board of Directors or the
President.
5.9 SECRETARY. The Secretary shall be responsible for preparing
minutes of the meetings of shareholders, directors, and committees of directors
and for authenticating records of the Corporation. The Secretary or any
Assistant Secretary shall have authority to give all notices required by law or
these Bylaws. The Secretary shall be responsible for the custody of the
corporate books, records, contracts, and other documents. The Secretary or any
Assistant Secretary may affix the corporate seal to any lawfully executed
documents requiring it, may attest to the signature of any officer of the
Corporation, and shall sign any instrument that requires the Secretary's
signature. The Secretary or any Assistant Secretary shall perform any other
duties and have any other authority as from time to time may be delegated by the
Board of Directors or the President.
5.10 TREASURER. Unless otherwise provided in these Bylaws or by
resolution of the Board of Directors, the Treasurer shall be the Chief Financial
Officer of the Corporation and shall be responsible for the custody of all funds
and securities belonging to the Corporation and for the receipt, deposit, or
disbursement of these funds and securities under the direction of the Board of
Directors. The Treasurer shall cause full and true accounts of all receipts and
disbursements to be maintained and shall make reports of these receipts and
disbursements to the Board of Directors and Chief Executive Officer upon
request. The Treasurer or Assistant Treasurer shall perform any other duties and
have any other authority as from time to time may be delegated by the Board of
Directors or the Chief Executive Officer.
ARTICLE SIX
DISTRIBUTIONS AND DIVIDENDS
Unless the Articles provide otherwise, the Board of Directors, from
time to time in its discretion, may authorize or declare distributions or share
dividends in accordance with the Code.
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ARTICLE SEVEN
SHARES
7.1 SHARE CERTIFICATES. The interest of each shareholder in the
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation, which shall be in such form as the Board of Directors
from time to time may adopt in accordance with the Code. Share certificates
shall be in registered form and shall indicate the date of issue, the name of
the Corporation, that the Corporation is organized under the laws of the State
of Georgia, the name of the shareholder, and the number and class of shares and
designation of the series, if any, represented by the certificate. Each
certificate shall be signed by the Chief Executive Officer, the President, or a
Vice President (or in lieu thereof, by the Chairman of the Board, if there be
one) and may be signed by the Secretary or an Assistant Secretary; provided,
however, that where the certificate is signed (either manually or by facsimile)
by a transfer agent, or registered by a registrar, the signatures of those
officers may be facsimiles.
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS. Prior to
due presentation for transfer of registration of its shares, the Corporation may
treat the registered owner of the shares (or the beneficial owner of the shares
to the extent of any rights granted by a nominee certificate on file with the
Corporation pursuant to any procedure that may be established by the Corporation
in accordance with the Code) as the person exclusively entitled to vote the
shares, to receive any dividend or other distribution with respect to the
shares, and for all other purposes; and the Corporation shall not be bound to
recognize any equitable or other claim to or interest in the shares on the part
of any other person, whether or not it has express or other notice of such a
claim or interest, except as otherwise provided by law.
7.3 TRANSFERS OF SHARES. Transfers of shares shall be made upon the
books of the Corporation kept by the Corporation or by the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for cancellation
or, in the case of a certificate alleged to have been lost, stolen, or
destroyed, the provisions of Section 7.5 of these Bylaws shall have been
complied with.
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER. Notwithstanding any of
the provisions of Section 7.3 of these Bylaws, the Corporation is under a duty
to register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons; (b) reasonable assurance is given
that each required endorsement is genuine and effective; (c) the Corporation has
no duty to inquire into adverse claims or has discharged any such duty; (d) any
applicable law relating to the collection of taxes has been complied with; (e)
the transfer is in fact rightful or is to a bona fide purchaser; and (f) the
transfer is in compliance with applicable provisions of any transfer
restrictions of which the Corporation shall have notice.
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7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person claiming a
share certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 FIXING OF RECORD DATE. For the purpose of determining shareholders
(a) entitled to notice of or to vote at any meeting of shareholders or, if
necessary, any adjournment thereof, (b) entitled to receive payment of any
distribution or dividend, or (c) for any other proper purpose, the Board of
Directors may fix in advance a date as the record date. The record date may not
be more than 70 days (and, in the case of a notice to shareholders of a
shareholders' meeting, not less than 10 days) prior to the date on which the
particular action, requiring the determination of shareholders, is to be taken.
A separate record date may be established for each Voting Group entitled to vote
separately on a matter at a meeting. A determination of shareholders of record
entitled to notice of or to vote at a meeting of shareholders shall apply to any
adjournment of the meeting, unless the Board of Directors shall fix a new record
date for the reconvened meeting, which it must do if the meeting is adjourned to
a date more than 120 days after the date fixed for the original meeting.
7.7 RECORD DATE IF NONE FIXED. If no record date is fixed as provided
in Section 7.6, then the record date for any determination of shareholders that
may be proper or required by law shall be, as appropriate, the date on which
notice of a shareholders' meeting is mailed, the date on which the Board of
Directors adopts a resolution declaring a dividend or authorizing a
distribution, or the date on which any other action is taken that requires a
determination of shareholders.
ARTICLE EIGHT
INDEMNIFICATION
8.1 INDEMNIFICATION OF DIRECTORS. The Corporation shall indemnify and
hold harmless any person (an "Indemnified Person") who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative,
whether formal or informal, including any action or suit by or in the right of
the Corporation (for purposes of this Article Eight, collectively, a
"Proceeding") because he is or was a director of the Corporation, against any
judgment, settlement, penalty, fine, or reasonable expenses (including, but not
limited to, attorneys' fees and disbursements, court costs, and expert witness
fees) incurred with respect to the Proceeding (for purposes of this Article
Eight, a "Liability"), if he acted in a manner he believed in good faith to be
in or not opposed to the best interests of the Corporation, and, in the case of
any criminal proceeding, had no reasonable cause to believe his conduct was
unlawful; provided, however, that no indemnification shall be made for any
Liability for which, under the Code, indemnification may not be authorized by
action of the Board of Directors, the shareholders, or otherwise, including, but
not limited to, any Liability of a
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director to the Corporation for: (a) any appropriation by a director, in
violation of the director's duties, of any business opportunity of the
corporation; (b) any acts or omissions of a director that involve intentional
misconduct or a knowing violation of law; (c) the types of liability set forth
in Code Section 14-2-832; or (d) any transaction from which the director
received an improper personal benefit. Indemnification in connection with a
Proceeding brought by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with the Proceeding.
8.2 INDEMNIFICATION OF OTHERS. The Board of Directors shall have the
power to cause the Corporation to provide to officers, employees, and agents of
the Corporation all or any part of the right to indemnification and other rights
of the type provided under Sections 8.1, 8.5, and 8.11 of this Article Eight
(subject to the conditions, limitations, and obligations specified in those
sections) upon a resolution to that effect identifying officers, employees, or
agents (by position or name) to be indemnified and specifying the particular
rights provided, which may be different for each of the persons identified. Each
officer, employee, or agent of the Corporation so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article Eight.
8.3 OTHER ORGANIZATIONS. The Board of Directors shall provide to each
director, and the Board of Directors shall have the power to cause the
Corporation to provide to any director, officer, employee, or agent of the
Corporation who is or was serving at the Corporation's request as a director,
officer, partner, trustee, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
all or any part of the right to indemnification and other rights of the type
provided under Sections 8.1, 8.5, and 8.11 of this Article Eight (subject to the
conditions, limitations, and obligations specified in those sections) upon a
resolution to that effect identifying the persons to be identified and
specifying the particular rights provided, which may be different for each of
the persons identified. Each person so identified shall be an "Indemnified
Person" for purposes of the provisions of this Article Eight.
8.4 DETERMINATION. Notwithstanding any judgment, order, settlement,
conviction, or plea in any Proceeding, an Indemnified Person shall be entitled
to indemnification as provided in Section 8.1 if a determination that such
Indemnified Person is entitled to such indemnification shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not at the time parties to the Proceeding; (b) if a quorum cannot be
obtained under (a) above, by majority vote of a committee duly designated by the
Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors who are not at the time
parties to the Proceeding; (c) in a written opinion by special legal counsel
selected as required by the Code; or (d) by the shareholders; provided, however,
that shares owned by or voted under the control of directors who are at the time
parties to the Proceeding may not be voted on the determination.
8.5 ADVANCES. To the extent the Corporation has funds reasonably
available to be used for this purpose, expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in defending any Proceeding of the kind
described in Section 8.1 (or in Sections 8.2 or 8.3, if the
14
<PAGE> 19
Board of Directors has specified that advancement of expenses be made available
to such Indemnified Person) shall be paid by the Corporation in advance of the
final disposition of such Proceeding as set forth herein. The Corporation shall
promptly pay the amount of such expenses to the Indemnified Person, but in no
event later than 10 days following the Indemnified Person's delivery to the
Corporation of a written request for an advance pursuant to this Section 8.5,
together with a reasonable accounting of such expenses; provided, however, that
the Indemnified Person shall furnish the Corporation a written affirmation of
his good faith belief that he has met the standard of conduct set forth in the
Code and a written undertaking and agreement to repay to the Corporation any
advances made pursuant to this Section 8.5 if it shall be determined that the
Indemnified Person is not entitled to be indemnified by the Corporation for such
amounts. The Corporation may make the advances contemplated by this Section 8.5
regardless of the Indemnified Person's financial ability to make repayment. Any
advances and undertakings to repay pursuant to this Section 8.5 may be unsecured
and interest-free.
8.6 NON-EXCLUSIVITY. Subject to any applicable limitation imposed by
the Code or the Articles, the indemnification and advancement of expenses
provided by or granted pursuant to this Article Eight shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any provision of the Articles, or
any Bylaw, resolution, or agreement specifically or in general terms approved or
ratified by the affirmative vote of holders of a majority of the shares entitled
to be voted thereon.
8.7 INSURANCE. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while serving in such a capacity,
is also or was also serving at the request of the Corporation as a director,
officer, trustee, partner, employee, or agent of any corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise, against any
Liability that may be asserted against him or incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article Eight.
8.8 NOTICE. If the Corporation indemnifies or advances expenses to a
director under any of Sections 14-2-851 through 14-2-854 of the Code (or any
equivalent provision of these Bylaws) in connection with a Proceeding by or in
the right of the Corporation, the Corporation shall, to the extent required by
Section 14-2-1621 or any other applicable provision of the Code, report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
8.9 SECURITY. The Corporation may designate certain of its assets as
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
15
<PAGE> 20
8.10 AMENDMENT. Any amendment to this Article Eight that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to Proceedings based on actions, events, or
omissions occurring after such amendment and after delivery of notice of such
amendment to the Indemnified Person so affected (collectively, "Post Amendment
Events"). Any Indemnified Person shall, as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice, be
entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.10 cannot be altered, amended, or repealed in a manner effective as to
any Indemnified Person (except as to Post Amendment Events) without the prior
written consent of such Indemnified Person.
8.11 AGREEMENTS. The provisions of this Article Eight shall be deemed
to constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.12 CONTINUING BENEFITS. The rights of indemnification and advancement
of expenses permitted or authorized by this Article Eight shall, unless
otherwise provided when such rights are granted or conferred, continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such person.
8.13 SUCCESSORS. For purposes of this Article Eight, the term
"Corporation" shall include any corporation, joint venture, trust, partnership,
or unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation, or otherwise, and any such successor
shall be liable to the persons indemnified under this Article Eight on the same
terms and conditions and to the same extent as this Corporation.
8.14 SEVERABILITY. Each of the Sections of this Article Eight, and each
of the clauses set forth herein, shall be deemed separate and independent, and
should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other
part thereof or any separate Section or clause of this Article Eight that is not
declared invalid or unenforceable.
8.15 ADDITIONAL INDEMNIFICATION. In addition to the specific
indemnification rights set forth herein, the Corporation shall indemnify each of
its directors and officers as have been designated by the Board of Directors to
the full extent permitted by action of the Board of Directors without
shareholder approval under the Code or other laws of the State of Georgia as in
effect from time to time.
16
<PAGE> 21
ARTICLE NINE
MISCELLANEOUS
9.1 INSPECTION OF BOOKS AND RECORDS. The Board of Directors shall have
the power to determine which accounts, books, and records of the Corporation
shall be available for shareholders to inspect or copy, except for those books
and records required by the Code to be made available upon compliance by a
shareholder with applicable requirements, and shall have the power to fix
reasonable rules and regulations (including confidentiality restrictions and
procedures) not in conflict with applicable law for the inspection and copying
of accounts, books, and records that by law or by determination of the Board of
Directors are made available. Unless required by the Code or otherwise provided
by the Board of Directors, a shareholder of the Corporation holding less than
two percent of the total shares of the Corporation then outstanding shall have
no right to inspect the books and records of the Corporation.
9.2 FISCAL YEAR. The Board of Directors is authorized to fix the
fiscal year of the Corporation and to change the fiscal year from time to time
as it deems appropriate. Unless otherwise provided by resolution of the Board of
Directors, the fiscal year of the Corporation shall be the calendar year and
shall end on December 31 of each calendar year.
9.3 CORPORATE SEAL. The corporate seal will be in such form as the
Board of Directors may from time to time determine. The Board of Directors may
authorize the use of one or more facsimile forms of the corporate seal. The
corporate seal need not be used unless its use is required by law, by these
Bylaws, or by the Articles.
9.4 ANNUAL STATEMENTS. Not later than four months after the close of
each fiscal year, and in any case prior to the next annual meeting of
shareholders, the Corporation shall prepare (a) a balance sheet showing in
reasonable detail the financial condition of the Corporation as of the close of
its fiscal year, and (b) a profit and loss statement showing the results of its
operations during its fiscal year. Upon receipt of written request, the
Corporation promptly shall mail to any shareholder of record a copy of the most
recent such balance sheet and profit and loss statement, in such form and with
such information as the Code may require.
9.5 NOTICE. (a) Whenever these Bylaws require notice to be given to any
shareholder or to any director, the notice may be given by mail, in person, by
courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Notice may be given to any director by electronic mail,
provided that the director has approved the use of such means of transmission as
an acceptable form of service of notice to such director. Electronic mail shall
be deemed an acceptable form of notice upon receipt by a director unless such
director indicates otherwise. Whenever notice is given to a shareholder or
director by mail, the notice shall be sent by depositing the notice in a post
office or letter box in a postage-prepaid, sealed envelope addressed to the
shareholder or director at his or her address as it appears on the books of the
17
<PAGE> 22
Corporation. Any such written notice given by mail shall be effective: (i) if
given to shareholders, at the time the same is deposited in the United States
mail; and (ii) in all other cases, at the earliest of (x) when received or when
delivered, properly addressed, to the addressee's last known principal place of
business or residence, (y) five days after its deposit in the mail, as evidenced
by the postmark, if mailed with first-class postage prepaid and correctly
addressed, or (z) on the date shown on the return receipt, if sent by registered
or certified mail, return receipt requested, and the receipt is signed by or on
behalf of the addressee. Whenever notice is given to a shareholder or director
by any means other than mail, the notice shall be deemed given when received.
(b) In calculating time periods for notice, when a period of time
measured in days, weeks, months, years, or other measurement of time is
prescribed for the exercise of any privilege or the discharge of any duty, the
first day shall not be counted but the last day shall be counted.
ARTICLE TEN
AMENDMENTS
Except as otherwise provided under the Code, the Board of Directors
shall have the power to alter, amend, or repeal these Bylaws or adopt new
Bylaws. Any Bylaws adopted by the Board of Directors may be altered, amended, or
repealed, and new Bylaws adopted, by the shareholders. The shareholders may
prescribe in adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted
shall not be altered, amended, or repealed by the Board of Directors.
18
<PAGE> 1
EXHIBIT 4.2
comstar.net, inc.
SERIES 1999
CONVERTIBLE NOTE
No.
---------------- ---------------
$
------------------------ ------------- ------, ------
FOR VALUE RECEIVED, comstar.net, inc., a Georgia corporation (the
"Maker"), hereby promises to pay to _______________________________________,
(hereinafter referred to as the "Holder"), or registered assigns, subject to
conversion as described below, the principal sum of ____________________________
Dollars ($___________), with interest at a simple rate of eight percent (8%) per
annum, subject to adjustment as provided in paragraph 1(b) below (the "Effective
Rate").
1. The Note.
(a) Accrued interest and principal on this Note shall be due and
payable on April 30, 2000 (the "Maturity Date") or upon the occurrence of an
Event of Default (as defined below) at the principal office of the Holder
located at ____________________________________, or at such other office as the
Holder may from time to time designate in writing to the Maker. The Maker shall
have the right to prepay all of this Note on a date not earlier than twenty (20)
days nor later than thirty (30) days after giving notice to the Holder as
provided in Section 4(b) below.
(b) All agreements herein made are expressly limited so that in no
event whatsoever, whether by reason of advancement of proceeds hereof,
acceleration of maturity of the unpaid balance hereof or otherwise, shall the
amount paid or agreed to be paid to the Holder for the use of the money advanced
or to be advanced hereunder exceed the maximum rate permitted by law (the
"Maximum Rate"). If, for any circumstances whatsoever, the fulfillment of any
provision of this Note or any other agreement or instrument now or hereafter
evidencing, securing or in any way relating to the debt evidenced hereby shall
involve the payment of interest in excess of the Maximum Rate, then, ipso facto,
the obligation to pay interest hereunder shall be reduced to the Maximum Rate;
and if for any circumstance whatsoever, the Holder shall ever receive interest,
the amount of which would exceed the amount collectible at the Maximum Rate,
such amount as would be excessive interest shall be applied to the reduction of
the principal balance remaining unpaid hereunder and not to the payment of
interest. This provision shall control every other provision in any and all
other
<PAGE> 2
agreements and instruments existing or hereafter arising between the Maker
and the Holder with respect to the debt evidenced hereby.
2. Payment of Interest. Unless otherwise notified by the Holder, the
Maker shall pay all accrued interest in cash. If the Maker elects to convert the
debt evidenced by this Note into shares of the Maker's common stock, without par
value ("Common Stock"), as provided below, accrued interest may, at the option
of the Holder, be payable in the form of additional shares of Common Stock which
shall be issued based on the Conversion Price (as defined below).
3. Conversion.
(a) Conversion Into Common Stock. This Note may be converted, at any
time before payment in full of all outstanding principal and accrued and unpaid
interest, into shares of Common Stock (sometimes referred to herein as the
Conversion Shares) at the Conversion Price as follows:
(i) at the election of the Holder at any time on or before the
Maturity Date, provided that if the Maker has given notice of
prepayment pursuant to Section 1(a) above, the Holder may
convert this Note as aforesaid only if the Holder does so
before the twentieth (20th) day after the Maker gives notice
of prepayment pursuant Section 1(a) above; and
(ii) at the election of the Holder or the Maker on the closing
of a Qualified Transaction (as defined below). For purposes of
this Note, a "Qualified Transaction" shall mean the sale by
the Maker of its Common Stock, or securities convertible into
Common Stock, for cash in a capital raising transaction closed
at any time prior to the Maturity Date in which the gross
proceeds equal at least $5,000,000.
(b) Conversion Price. The Conversion Price shall be Three Dollars
and Twenty-Eight Cents ($3.28) per share, subject to adjustment as provided
below.
(c) Adjustment of Conversion Price. If the Maker shall effect any
one or more of the following (each, a "Adjustment Event"): (i) payments of a
dividend in shares of Common Stock, (ii) subdividing of its outstanding shares
of Common Stock, (iii) combination of its outstanding shares of Common Stock
into a smaller number of shares, or (iv) reorganization, merger or consolidation
with another corporation or entity, upon the conversion of this Note, the Holder
will receive, upon conversion of this Note as provided in Section 3(a) hereof,
the number of shares of Common Stock (or the number and kind of applicable
securities or property) as the Holder would have been entitled to receive upon
such Adjustment Event, if he, she or it had been a holder of the number of
shares of Common Stock of the Maker deliverable upon the conversion of this Note
immediately prior to the time of such
2
<PAGE> 3
Adjustment Event, or the record date therefor, as applicable. In addition, if
the Maker shall issue shares of Common Stock, or options, warrants or other
rights convertible into Common Stock, for a per share price, exercise price or
consideration of or valued at less than the Conversion Price then in effect,
then unless such issuance is, or is made in connection with, an "Exempted
Event," as defined below, the Conversion Price shall be reduced to a price equal
to the lower per share price, exercise price or consideration. For the purposes
of this Note, the following shall be deemed to be Exempted Events if approved by
a majority of the Maker's Board of Directors (or with respect to (C) below, a
majority of the members of the Compensation Committee of the Board of
Directors), including a majority of the directors of the Maker who are not
employees of the Maker:
(A) the acquisition of another corporation or entity by the
Maker by merger, purchase of substantially all the assets or other
reorganization as a result of which the Maker or its shareholders prior to the
transaction own more than 50% of the voting power of the resulting corporation
or other entity;
(B) equipment leases or borrowings, direct or indirect, from
financial or other institutions regularly engaged in such business;
(C) the issuance of shares of Common Stock, and options,
warrants or rights convertible into Common Stock, to employees, consultants or
directors of the Maker pursuant to any incentive agreement or arrangement;
(D) a transaction in which the Maker licenses any intellectual
property to be used in the business of the Maker; or
(E) a strategic joint venture or alliance between the Maker
and another party to which the securities are issued, or an affiliate thereof.
(d) Mechanics of Conversion. Upon conversion, the Holder shall
surrender this Note, duly endorsed, at the Maker's principal corporate office,
and shall state therein the name or names in which the certificate or
certificates for Conversion Shares are to be issued. The Maker shall, as soon as
practicable thereafter, issue and deliver to the Holder a certificate or
certificates for the number of Conversion Shares to which the Holder shall be
entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date such Notes are delivered,
and the person or persons entitled to receive the Conversion Shares issuable
upon such conversion shall be treated for all purposes as the record holder or
holders of such Conversion Shares as of such date. No fractional Conversion
Shares shall be issued upon conversion of the debt evidenced hereby. Instead of
any fractional Conversion Shares that would otherwise be issuable upon
conversion of this debt, the Maker shall pay a cash adjustment in respect of
such fractional interest equal to the value of such fractional interest.
3
<PAGE> 4
(e) No Impairment. The Maker will not, by amendment of its Articles
of Incorporation or through any reorganization, recapitalization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Maker but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 3 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the Holders of the
Notes against impairment.
(f) Taxes on Conversion. The issuance of share certificates on
conversion of this Note shall be made without charge to the converting Holder
for any tax in respect of the issue thereof. The Maker shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of shares in any name other than that of the Holder,
and the Maker shall not be required to issue or deliver any certificate in
respect of Conversion Shares unless and until the person or persons requesting
the issuance thereof shall have paid to the Maker the amount of such tax or
shall have established to the satisfaction of the Maker that such tax has been
paid.
(g) Reservation of Conversion Shares. The Maker agrees that the
Maker will at all times have authorized and reserved, and will keep available,
solely for issuance or delivery upon the conversion of this Note, the shares of
Common Stock and other securities and properties as from time to time shall be
receivable upon the conversion of this Note.
(h) No Rights as Shareholders. Prior to the conversion of this Note,
the Holder of this Note shall not be entitled to any rights of a shareholder of
the Maker, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Maker, except as
provided herein or as otherwise agreed.
4. Merger, Consolidation, Sale of Assets or Default.
(a) Acceleration on Merger, Consolidation, Sale of Assets or Default
in Payment; Event of Default. In the event of (i) any merger or consolidation of
the Maker with or into any other corporation or other entity or person, or any
other corporate reorganization in which the Maker shall not be the continuing or
surviving entity, in either case as a result of which the Maker or its
shareholders before the transaction own less than 50% of the voting power of the
resulting corporation or other entity, or any transaction or series of related
transactions by the Maker in which in excess of 50% of the Maker's voting power
is issued for the purpose of combining with or acquisition by one or more
corporations or other entities or persons; (ii) a sale, conveyance or
disposition of all or substantially all of the assets of the Maker; (iii)
default by the Maker in the payment of the principal of or interest on the
indebtedness
4
<PAGE> 5
evidenced by this Note in accordance with the terms hereof, provided, that such
default in payment is not fully cured and/or corrected within five business days
of written notice thereof to Maker; or (iv) payment by the Maker of cash
dividends on its capital stock (the events described in clauses (i), (ii), (iii)
and (iv) being collectively referred to herein as an "Event of Default"), then
at the election of the Holder, the Holder may, by written notice to the Maker,
cause the principal and accrued interest on this Note to become immediately due
and payable at the closing of any such transaction or as of the date of any such
default in clause (iii) or (iv), whereupon the principal and accrued interest
under this Note shall be converted into (a) the kind and amount of shares of
stock and other securities and property receivable upon such merger,
consolidation, reorganization, or disposition of assets as the Holder would have
been entitled to receive upon such event (in the case of subsections (i) and
(ii) above) if such Holder had been a holder of the number of shares of Common
Stock of the Maker deliverable upon the conversion of this Note immediately
prior to such event or the record date therefor, as applicable, or (b) Common
Stock based on the Conversion Price (in the case of subsections (iii) and (iv)
above).
(b) Notices. The Maker shall give the Holder written notice, to the
address specified in Section 1(a) above, of such impending transaction (in the
case of subsections (i) and (ii) above) not later than twenty (20) days prior to
the shareholders' meeting called to approve such transaction, or twenty (20)
days prior to the closing of such transaction, whichever is earlier. The first
of such notices shall describe the material terms and conditions of the
impending transaction and the provisions of this Section 4 and the Maker shall
thereafter give the Holder prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Maker has given the first notice provided for herein or sooner than ten (10)
days after the Maker has given the notice provided for herein of any material
changes, provided, however, that such periods may be shortened upon the written
consent of the Holders.
5. Warrants. The Holder and Maker have executed and delivered to each
other a Stock Purchase Warrant dated the date of this Note.
6. Transfer. Upon surrender of this Note for transfer, a new Note or
new Notes of the same tenor, in an aggregate principal amount equal to the
unpaid principal amount of the Note so surrendered, will be issued to and
registered in the name of the transferee or transferees. The Maker may treat the
person in whose name this Note is registered as the owner hereof for the purpose
of receiving payments and for all other purposes.
7. Note Register. This Note is transferable only upon the books of the
Maker that the Maker shall cause to be maintained for such purpose. Subject to
Section 1 above, the Maker may treat the registered holder of this Note, as the
Holder appears on the Maker's books at any time, as the Holder for all purposes.
5
<PAGE> 6
8. Loss, Etc. of Note. Upon receipt of evidence satisfactory to the
Maker of the loss, theft, destruction or mutilation of this Note, and of
indemnity reasonably satisfactory to the Maker if lost, stolen or destroyed, and
upon surrender and cancellation of this Note if mutilated, and upon
reimbursement of the Maker's reasonable incidental expenses, the Maker shall
execute and deliver to the Holder a new Note of like date, tenor and
denomination.
9. Amendment, Waiver Etc., By Holders. This Note may be one of several
Series 1999 Notes issued by the Maker. The terms of this Note may be amended or
waived only upon the written consent of the Maker and the Holder. No failure to
accelerate the debt evidenced hereby by reason of default hereunder or other
indulgences granted from time to time shall be construed as a novation of this
Note or as a waiver of such right of acceleration or of the right of Holder
thereafter to insist upon strict compliance with the terms of this Note or to
prevent the exercise of such right of acceleration or any other right granted
hereunder or by applicable laws. No extension of the time for payment of the
debt evidenced hereby, made by agreement with any person now or hereafter liable
for payment of the debt evidenced hereby, shall operate to release, discharge,
modify, change or affect the original liability of Maker hereunder or that of
any other person now or hereafter liable for payment of the debt evidenced
hereby, either in whole or in part, unless the Holder agrees otherwise in
writing.
This Note shall be governed by and construed in accordance with the
laws of the State of Georgia.
The Maker hereby waives presentment, demand, notice of nonpayment,
protest and all other demands and notices in connection with the delivery,
acceptance, performance or enforcement of this Note. If an action is brought for
collection under this Note, the Holder shall be entitled to receive all costs of
collection, including, but not limited to, its reasonable attorneys' fees
actually incurred.
WITNESS the following signature and seal:
comstar.net, inc.
a Georgia corporation
By:
--------------------------------------------
J. Cary Howell, Chief Executive Officer
[Corporate Seal]
6
<PAGE> 1
EXHIBIT 4.3
COMSTAR.NET, INC.
STOCK PURCHASE WARRANT
THIS STOCK PURCHASE WARRANT is issued by comstar.net, inc., a Georgia
corporation (the "Company"), on this ___ day of _________, ______ by the Company
to ___________________________________ (hereinafter referred to as "Holder,"
which term shall include any subsequent assignee or transferee of this Warrant).
1. Issuance of Warrant. In consideration of the Holder's providing
certain financing to the Company, the Company hereby grants to the Holder the
right to purchase ____________ (_________) shares of the Company's common stock,
without par value (the "Common Stock"), upon the surrender hereof, at the
Exercise Price (as defined in Section 3 below) per share. The shares of Common
Stock issuable upon exercise of this Warrant are hereinafter referred to as the
"Warrant Shares." The number of Warrant Shares and the Exercise Price are
subject to adjustment as provided in Section 8 below.
2. Term. Subject to the terms and conditions set forth herein, this
Warrant shall be exercisable from the date hereof until 5:00 p.m. eastern time
on the tenth (10th) anniversary of the date of this Warrant (the "Expiration
Date") and shall be void thereafter.
3. Price. The purchase price per share for which the Warrant Shares may
be purchased pursuant to the terms of this Warrant shall be Three Dollars and
Twenty-Eight Cents ($3.28) per share (the "Exercise Price") as adjusted from
time to time pursuant to Section 8 hereof.
4. Exercise.
(a) This Warrant may be exercised by the Holder hereof in whole or
in part at any time and from time to time from the date of hereof until the
Expiration Date by surrender of this Warrant and the Notice of Exercise attached
hereto as Exhibit A, duly completed and executed on behalf of the Holder, at the
principal executive office of the Company, or at such other address as the
Company shall designate in a written notice to the Holder hereof, together with
a certified check payable to the Company for the aggregate Exercise Price of the
Warrant Shares so purchased; provided, however, that this Warrant must be
exercised in minimum increments of five hundred (500) shares (or, if fewer, the
number of Warrant Shares for which this Warrant is then exercisable).
(b) Upon exercise of this Warrant as aforesaid, the person entitled
to receive the Warrant Shares issuable upon such exercise shall be treated for
all purposes as the holder of record of such shares as of the close of business
on the date of exercise. As promptly as practicable on or after such date, and
in any event within ten (10) days thereafter, the Company shall execute and
deliver to the Holder of this Warrant a certificate or certificates for the
total number of whole Warrant Shares for which this Warrant is being exercised,
in such names and denominations as are requested by such Holder. If this Warrant
shall be exercised with respect to fewer than all of the Warrant
<PAGE> 2
Shares, the Company, at its expense, will issue to the Holder a new Warrant
covering the number of Warrant Shares with respect to which this Warrant shall
not have been exercised, which new Warrant shall be identical to this Warrant
except for the number of shares. If, upon exercise of this Warrant, the Holder
would be entitled to acquire a fractional share of the Company's Common Stock,
such fractional share shall be disregarded, and the number of shares subject to
this Warrant shall be rounded down to the next lower number of shares, and the
Holder shall be entitled to receive from the Company a cash payment equal to the
product of the per share Exercise Price multiplied by such fraction. The Company
covenants and agrees that it will pay when due any and all state and federal
issue taxes which may be payable in respect of the issuance of this Warrant or
the issuance of any Warrant Shares upon exercise of this Warrant.
5. Covenants. The Company covenants and agrees that all Warrant Shares
which may be issued upon exercise of this Warrant will, upon issuance and
payment therefor, be legally and validly issued and outstanding, fully paid and
nonassessable. The Company shall at all times reserve and keep available for
issuance upon the exercise of this Warrant such number of authorized but
unissued shares of Common Stock as will be sufficient to permit the exercise in
full of this Warrant.
6. Transfer of Warrant. This Warrant may only be transferred by
presentation of the Warrant to the Company with written instructions for such
transfer. Upon such presentation for transfer, the Company shall promptly
execute and deliver a new Warrant or Warrants in the form hereof in the name of
the assignee or assignees and in the denominations specified in such
instructions.
7. Warrant Holder Not Shareholder. This Warrant does not confer upon
the Holder, as such, any right whatsoever as a shareholder of the Company.
8. Adjustment Upon Changes in the Company Common Stock.
(a) If all or any portion of this Warrant shall be exercised
subsequent to the date of any stock split, stock dividend, recapitalization,
combination of shares of the Company or other similar event occurring after the
date hereof, or the record date therefor, as applicable, then the Holder
exercising this Warrant shall receive, for the aggregate price paid upon such
exercise, the aggregate number and class of shares which such Holder would have
received if this Warrant had been exercised immediately prior to the date of
such stock split, stock dividend, recapitalization, combination of shares or
other similar event, or the record date therefor, as applicable. If any
adjustment under this Section 8(a) would create a fractional share of Common
Stock or a right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares subject to this Warrant
shall be the next higher number of shares, rounding all fractions upward.
Whenever there shall be an adjustment pursuant to this Section 8(a), the Company
shall forthwith notify the Holder or Holders of this Warrant of such adjustment,
setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated. For purposes hereof, the
granting of stock or options pursuant to a merger, asset acquisition, option
agreement or other transaction where all of the shareholders of the Company do
not participate shall not be
-2-
<PAGE> 3
considered a stock split, stock dividend, recapitalization, combination of
shares of the Company, or other similar event giving rise to an adjustment.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event where all
of the shareholders of the Company participate, or the record date therefor, as
applicable, as a result of which all shares of Common Stock shall be changed
into the same or a different number of shares of the same or another class or
classes of securities of the Company or another entity, or the holders of Common
Stock are entitled to receive cash or other property, then the Holder exercising
this Warrant shall receive, for the aggregate price paid upon such exercise, the
aggregate number and class of shares, cash or other property which such Holder
would have received if this Warrant had been exercised immediately prior to such
merger, consolidation, exchange of shares, separation, reorganization or
liquidation or other similar event, or the record date therefor, as applicable.
If any adjustment under this Section 8(b) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock, such
fractional share shall be disregarded and the number of shares subject to this
Warrant shall be the next higher number of shares, rounding all fractions
upward. Whenever there shall be an adjustment pursuant to this Section 8(b), the
Company shall forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
(c) If the Company shall issue shares of Common Stock, or options,
warrants or other rights convertible into Common Stock, for a per share price,
exercise price or consideration of or valued at less than the Exercise Price
then in effect, then unless such issuance is, or is made in connection with, an
"Exempted Event," as defined below, the Exercise Price shall be reduced to a
price equal to the lower per share price, exercise price or consideration. For
the purposes of this Warrant, the following shall be deemed to be Exempted
Events if approved by a majority of the Company's Board of Directors (or with
respect to (C) below, a majority of the members of the Compensation Committee of
the Board of Directors), including a majority of the directors of the Company
who are not employees of the Company:
(A) the acquisition of another corporation or entity by the
Company by merger, purchase of substantially all the assets or other
reorganization as a result of which the Company or its shareholders prior to the
transaction own more than 50% of the voting power of the resulting corporation
or other entity;
(B) equipment leases or borrowings, direct or indirect, from
financial or other institutions regularly engaged in such business;
(C) the issuance of shares of Common Stock, and options, warrants
or rights convertible into Common Stock, to employees, consultants or directors
of the Company pursuant to any incentive agreement or arrangement;
-3-
<PAGE> 4
(D) a transaction in which the Company licenses any
intellectual property to be used in the business of the Company; or
(E) a strategic joint venture or alliance between the Company
and another party to which the securities are issued, or an affiliate thereof.
9. Notice of Certain Events. In case:
(a) the Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive any dividend or other
distribution, or any right to subscribe for or purchase any shares of capital
stock of any class, or to receive any other rights; or
(b) of any capital reorganization, any reclassification of shares
of capital stock of the Company (other than a subdivision or combination of
outstanding shares of Common Stock to which Section 8 applies), or any
consolidation or merger of the Company or the sale or transfer of all or
substantially all of the assets of the Company; or
(c) of any voluntary dissolution, liquidation, or winding up of the
Company;
then the Company shall mail (at least ten (10) days prior to the applicable date
referred to in subclause (x) or in subclause (y) below, as the case may be), to
the Holder at the address set forth in the Company's stock records, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, or rights, or, if a record is not to be taken, the date
as of which the holders of Common Stock of record to be entitled to such
dividend, distribution, or rights are to be determined, or (y) the date on which
such capital reorganization, reclassification, consolidation, merger, sale,
transfer dissolution, liquidation, or winding up is expected to become
effective, and, if applicable, the date as of which it is expected that holders
of Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
capital reorganization, consolidation, merger, sale, transfer, dissolution,
liquidation, or winding up.
10. Governing Law. This Warrant shall be governed by and construed in
accordance with the laws of the State of Georgia applicable to agreements made
entirely within the State.
11. Severability. If any provision(s) of this Warrant or the
application thereof to any person or circumstances shall be invalid or
unenforceable to any extent, the remainder of this Warrant 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.
-4-
<PAGE> 5
12. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
IN WITNESS WHEREOF, the undersigned has caused this Warrant to be executed by
its duly authorized officer to be effective as of the ___ day of _________,
____.
comstar.net, inc.
By:
-----------------------------------------
J. Cary Howell, Chief Executive Officer
Accepted:
- -------------------------------
(Name of Warrant Holder)
By:
-----------------------------
Name:
Title:
-5-
<PAGE> 6
EXHIBIT A
NOTICE OF EXERCISE
To: comstar.net, inc.
The undersigned, the Holder of the foregoing Warrant and pursuant to
the terms hereof, hereby elects to exercise rights represented by said Warrant
for, and to purchase thereunder, shares of the Company's Common Stock covered by
said Warrant, and tenders herewith payment of the purchase price in full for
such shares of $_________, by cash, through the delivery of a certified check.
The undersigned hereby requests that certificates for such shares (or
any other securities or other property issuable upon such exercise) be issued in
the name of and delivered to the undersigned at the address set forth below.
-----------------------------------
Date: By:
------------------------ --------------------------------
Its:
-------------------------------
Address:
------------------------------------
------------------------------------
------------------------------------
-6-
<PAGE> 1
EXHIBIT 4.4
STATE OF GEORGIA
COUNTY OF HALL
AMENDED AND RESTATED
SHAREHOLDER AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, effective as of the first day of
December 1998, is made by and among Sam F. Dayton, James Cary Howell, Edward N.
Landa, and James L. Bruce, Jr., (hereinafter referred to as the
"Shareholders"), and ComStar Communications, Inc., a Georgia corporation (the
"Corporation"). The Shareholders hold all of the issued and outstanding shares
of Common Stock (including all outstanding shares of both series of Common
Stock; the "Shares"). The Shareholders wish to further their mutual interests
in the Corporation, as well as the interests of the Corporation, by imposing
certain restrictions and obligations on the transfer of their Shares, and on
other aspects of their mutual agreements.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and the sum of One Dollar ($1.00) paid by each party to the other, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto do hereby
agree as follows:
ARTICLE I. RESTRICTIONS ON TRANSFERS
No Shareholder may sell, transfer, assign, hypothecate, or otherwise
alienate any of his Shares, now or hereafter owned by him, without the written
consent of all other Shareholders, except by giving notice to all other
Shareholders at least thirty (30) days prior to the date of the proposed
transfer. Such notice must be made by certified mail, return receipt requested
and shall set forth the exact provisions of the proposed transfer. The receipt
by the Shareholders of such notice will create an option in each of the other
Shareholders to purchase the Shares proposed to be transferred by such
Shareholder. The Secretary, or any other officer, shall, within five (5) days
of receipt of such notice, give notice of such proposed transfer to all of the
other Shareholders, and they shall have the opportunity to exercise their
options in the manner provided herein. Any sale or transfer or purported sale
or transfer of such Shares shall be null and void unless the terms, conditions,
and provisions of this agreement are strictly observed and followed.
<PAGE> 2
ARTICLE II. DEATH; INVOLUNTARY TRANSFER
Each Shareholder agrees that upon his death or upon an involuntary
transfer by operation of law, of all or a portion of his Shares, the other
Shareholders shall have an option to purchase all of the Shares transferred,
whether by his death or otherwise. Upon the death of a Shareholder, the
executor or administrator, or upon a transfer, the person acquiring such Shares
(in any such case, the "Transferor") shall promptly notify the Secretary of the
Corporation of such death or transfer. The Secretary shall, within five (5)
days of receipt of such notification, give notice of such death or transfer to
all of the other Shareholders, and they shall have the opportunity to exercise
their options in the manner provided herein. In the event that Shareholders
elect to purchase such Shares, the Transferor shall sell such Shares to those
Shareholders purchasing same.
ARTICLE III. TERMINATION OF OPTION
The option to purchase Shares pursuant to Article I hereof shall
terminate on the date set for the proposed transfer; provided, however, that if
notice of the proposed transfer is delivered to the Shareholders and the
Corporation less than thirty (30) days from the date of such delivery, the
option to purchase Shares pursuant to Article II above shall terminate thirty
(30) days after the delivery of notice to the Corporation of the death of a
Shareholder or of a transfer of Shares. If options to purchase shares are not
exercised in accordance with the procedure outlined in the agreement, the
Shares (a) may be transferred to the proposed transferee as provided in Article
I, or (b) transferred in due course in either case described in Article II
without further restriction on such transfer (but only in the same manner and
on the same terms and conditions as set forth in the notice of proposed
transfer), and said transfer shall be valid and binding; provided, however,
that the transferee, in any case, executes, and agrees to become subject to,
this agreement; and provided, further, that such stock cannot be further
transferred except in accordance with the terms and conditions of this
agreement.
2
<PAGE> 3
ARTICLE IV. EXERCISE OF OPTION
Each Shareholder may exercise his option to purchase all or any portion
of the Shares transferred or proposed to be transferred by delivering written
notice, by certified mail, return receipt requested, or by hand delivery, to
the Secretary of the Corporation of his election to purchase, not less than
five (5) days prior to the expiration of the option period, indicating the
number of Shares he elects to purchase. If the total number of Shares which
such Shareholder elects to purchase exceeds the number of Shares available for
purchase, the number of available shares shall be allocated by the Corporation
among the electing Shareholders on the basis of the number of Shares held by
each such electing Shareholder; provided, however, that the options may be
partially exercised by the other Shareholders with the remainder available for
sale by the Shareholder electing to sell his shares. If the Shareholders elect
to purchase any Shares, the Corporation shall immediately deliver written
notice of such election, by certified mail, return receipt requested, to the
Shareholder proposing such transfer or the Transferor, setting forth the names
of each of the Shareholders who have elected to purchase Shares and the number
of Shares purchased by each of such Shareholders. Upon such notification, the
Shareholder proposing the transfer of such Shares or the Transferor shall sell
such Shares to the Shareholders electing to purchase such Shares, on the terms
and conditions provided herein.
ARTICLE V. PURCHASE PRICE
A. If there is a bonafide offer for the purchase of the Shares proposed
to be transferred, the purchase price per Share shall be the total purchase
price offered by the prospective purchaser divided by the number of Shares
proposed to be transferred.
B. If there is no such bona fide offer or if the Shares have been
transferred involuntarily or by operation of law, or by the death of the
Shareholder, the purchase price per Share shall be the fair market value of
such Shares as determined by agreement of the Transferor, or the Shareholder
proposing to transfer such Shares, and those Shareholders electing to purchase
such Shares.
3
<PAGE> 4
C. If the parties are unable to agree upon a value as provided in
subsection B the provisions of this subsection shall control the valuation of
the Shares rather than the preceding subsection. The electing Shareholders, as
a group, shall nominate an appraiser, and either the Transferor or the
Shareholder proposing such transfer, as applicable, shall nominate an appraiser
to determine the value of such Shares. If the two appraisers are unable to
agree upon the value of such Shares, both appraisers shall agree upon and
appoint a third appraiser to value such Shares. The opinion of the majority of
the three appraisers shall be conclusively binding on all of the parties
concerned.
ARTICLE VI. METHOD OF PAYMENT
The purchase price of the Shares purchased shall be paid in cash. The
certificates for the shares shall be endorsed by the Shareholder proposing the
transfer, or by the Transferor, and delivered to the purchasing Shareholder(s)
or surrendered directly to the Corporation for issuance of a new certificate to
the purchasing Shareholder(s).
ARTICLE VII. DELIVERY OF SHARES
The Shareholder proposing the transfer or the Transferor shall endorse
and deliver the certificates evidencing the transferred Shares to the
Shareholder(s) or the Corporation at the time the payment of the purchase price
is made as set forth herein. From the time of such transfer, the persons
purchasing such Shares shall be treated as the full owners of such Shares and
will be so registered on the books of the Corporation, and will have full
rights otherwise incident to such Shares.
ARTICLE VIII. INSURANCE
[Intentionally omitted.]
ARTICLE IX. LEGAL REMEDIES ON DEFAULT
In the event a default by a Shareholder (a "defaulting Shareholder") in
any payment on the purchase of Shares hereunder continues for a period of more
than 60 days after notice to the defaulting Shareholder(s), the person required
to sell such Shares hereunder ("Seller") may, at his option, elect to sell such
Shares elsewhere. The Seller may also
4
<PAGE> 5
agree with the defaulting Shareholder(s) to alter the terms for the payment of
the purchase price; provided, however, that the Seller may only rescind the
sale if all other Shareholders agree to the rescission.
ARTICLE X. SPECIFIC PERFORMANCE
The Shareholders agree that the Shares of the Corporation cannot be
readily purchased, sold, or evaluated in the open market, that they have a
unique and special value, and the Shareholders would be irreparably damaged if
the terms of this agreement were not capable of being specifically enforced,
and for this reason the Shareholders agree that the purchase of the Shares in
accordance with terms of this agreement shall be specifically enforceable. The
Shareholders further agree that any sale or disposition which does not strictly
comply with the terms and conditions of this agreement may be specifically
restrained, and that such equitable relief provided herein shall not in any way
limit or deny any other remedy at law which a Shareholder might otherwise have.
ARTICLE XI. RESTRICTIONS ON CERTIFICATES
The Shareholders agree that all Share certificates now or hereafter held
by them will be stamped with the following legend prominently on the front of
the certificate, reading as follows:
"THIS SHARE CERTIFICATE IS SUBJECT TO RESTRICTIONS ON TRANSFER. SEE
BACK."
The back side of the certificate is to carry the following endorsement:
"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
AND OPTIONS IN REGARD TO ITS PURCHASE AND TRANSFER BY THE PROVISIONS OF A
SHAREHOLDERS AGREEMENT DATED AS OF DECEMBER 1, 1998, A COPY OF WHICH IS ON FILE
IN THE OFFICE OF THE SECRETARY OF THE CORPORATION."
ARTICLE XII. NOTICE
All notices under this agreement shall be mailed to the parties at the
addresses provided under their signatures, provided that any party may change
his mailing address by delivering written notice of such new address to the
Corporation.
5
<PAGE> 6
ARTICLE XIII. TERM
A. This agreement shall terminate and the certificates representing
the shares subject to this Agreement shall be released from the terms of this
Agreement on the occurrence of the earliest to occur of the following events:
(i) the consummation of a Qualified Initial Public Offering (as
defined below) of the Common Stock of the Company.
(ii) written agreement of the Company and the parties whose vote
is sufficient to amend this agreement as provided below; or
(iii) dissolution of the Company.
"Qualified Initial Public Offering" shall mean the offer and sale by the
Corporation of its equity securities in a transaction underwritten by an
investment banking firm following the completion of which (i) such equity
securities will be listed for trading on any national securities exchange or
(ii) there will be at least two market makers who are making a market in such
equity securities through the Nasdaq National Market System.
B. Notwithstanding anything to the contrary contained in this
agreement, it shall terminate 20 years from the effective date unless it is
renewed within the 20-year period provided in O.C.G.A. Section 14-2-731.
Amendments to this agreement shall be deemed renewals of this Agreement unless
the amendment states to the contrary. If not sooner terminated, this agreement
shall terminate 21 years after the death of the last to die of any individual
Shareholder of the Company living at the date of this Agreement.
C. Upon the termination of this agreement as provided above, the share
certificates held by each Shareholder shall be surrendered to the Company and
the Company shall issue new certificates for the same number of shares but
without the legend required by this agreement.
6
<PAGE> 7
ARTICLE XIV. INUREMENT
Subject to the restrictions against the transfer or assignment as herein
contained, the provisions of this agreement shall inure to the benefit of and
shall be binding upon the assigns, successors in interest, personal
representatives, estates, heirs, and legatees of each of the parties hereto.
Each of the Shareholders agrees that he will not hypothecate or otherwise
create or suffer to exist any lien, claim, or encumbrance upon any of his
shares at any time subject hereto, other than the encumbrance created by this
agreement.
ARTICLE XV. AMENDMENT
Neither this agreement nor any provision hereof may be waived, modified,
terminated or amended except by a written agreement signed by the Company and
the Shareholders holding at least two thirds (2/3) of the Common Stock
(including shares of all series of Common Stock then outstanding, voting as one
voting group) issued and outstanding and entitled to vote then held by all
Shareholders. Any waiver by any party of a breach of any provision of this
agreement shall not operate or be construed as a waiver of any subsequent
breach of that provision or of any other provision hereof. Each of the parties
hereto agrees to execute all such further instruments and documents and to take
all such further action as any other party may reasonably require in order to
effectuate the terms and purposes of this agreement.
ARTICLE XVI. MISCELLANEOUS PROVISIONS
A. This agreement may be executed in any number of counterparts and
each such counterpart shall be deemed to be an original instrument.
B. The parties acknowledge that they are entering into this agreement
freely and voluntarily; that they have ascertained and weighed all the facts
and circumstances likely to influence their judgment herein; that they have
sought and obtained legal advice independently of each other; that they have
been duly apprised of their respective legal rights; that all the provisions
hereof, as well as all questions pertaining thereto, have been fully and
satisfactorily explained to them; that they have given due consideration to
such
7
<PAGE> 8
provisions and questions and that they clearly understand and assent to all the
provisions hereof.
C. Each party shall, at the other party's request at any time
hereafter, take any and all steps and execute, acknowledge and deliver any and
all further instruments and assurances that the other party may reasonably
require for the purpose of carrying out the provisions of this agreement.
D. This agreement is and shall be deemed to be a Georgia agreement,
and shall be governed and construed in all respects by and in accordance with
the laws of the State of Georgia.
E. Time is of the essence of this agreement and all of its terms,
conditions and provisions.
F. This agreement supersedes any and all other agreements, whether
oral or in writing, between the parties with respect to this agreement, and
this agreement contains all of the covenants and agreements between the parties
with respect to the subject matter of this agreement in any manner whatsoever.
Each party to this agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any party, or
anyone acting on behalf of any party, that are not embodied in this agreement,
and that no other agreement, statement, or promise not contained in this
agreement shall be valid or binding.
G. If any paragraph, subparagraph, sentence, clause, phrase, or any
portion of this agreement be declared invalid or unconstitutional by any Court
of competent jurisdiction, or if the provisions of any part of this agreement
as applied to any particular situation or set of circumstances shall be
declared invalid or unconstitutional, such invalidity shall not be construed to
affect the portions of this agreement not so held to be invalid, or the
application of this agreement to other circumstances not so held to be invalid.
It is hereby declared to be the intent of the parties to this agreement to
provide for separable and divisible parts, and to hereby adopt any and all
parts hereof as may not be held invalid for any reason.
8
<PAGE> 9
H. In the event of a breach or threatened breach by either party of
the obligations under this agreement, the parties acknowledge that the
non-breaching party will not have an adequate remedy at law and shall be
entitled to such equitable and injunctive relief as may be available to
restrain the breaching party from the violation of the provisions of this
agreement. Nothing in this paragraph shall be construed as prohibiting the
other party from pursuing any other remedies available for breach or threatened
breach of this agreement, including the recovery of damages from the breaching
party.
I. If any action at law or in equity is necessary to enforce or
interpret the terms of this agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs, and necessary disbursements in addition
to any other relief to which that party may be entitled.
J. The duties and obligations imposed by this agreement and the rights
and remedies available hereunder shall be in addition to, and not in limitation
of, any duties, obligations, rights and remedies otherwise imposed or available
at law.
K. No action or failure to act or to insist in any one or more
instances upon the strict performance of any one or more of the provisions of
this agreement, or to exercise any right herein contained or provided by law by
any party hereto, shall constitute a waiver of any right or duty afforded him
under this agreement, nor shall any such action or failure to act constitute an
approval of or acquiescence in any breach hereunder, nor shall it be construed
as a waiver of the right to subsequently demand strict performance or exercise
such rights, and the rights shall continue unchanged and remain in full force
and effect, except as may be specifically agreed in writing.
L. Additional holders of Shares may join into this Agreement by
executing an agreement to be bound by all of the terms and conditions hereof,
which may be evidenced by the signing of a signature page in the form attached
hereto. Such additional shareholders shall be bound by all of the terms and
shall receive all of the benefits of this agreement on par with the original
signatory shareholders.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this agreement
under seal on the dates indicated by their signatures, to be effective as of
the first day of December, 1998.
[Signatures begin on following page.]
10
<PAGE> 11
SHAREHOLDERS
Date:
------------------
/s/ Sam F. Dayton
--------------------------------(SEAL)
Sam F. Dayton
Address:
--------------------------------
--------------------------------
Date:
------------------
/s/ James C. Howell
--------------------------------(SEAL)
James Cary Howell
Address:
--------------------------------
--------------------------------
Date:
------------------
/s/ Edward N. Landa
--------------------------------(SEAL)
Edward N. Landa
Address:
------------------------------------
------------------------------------
Date:
------------------
/s/ James L. Bruce
--------------------------------(SEAL)
James L. Bruce, Jr.
Address:
------------------------------------
------------------------------------
11
<PAGE> 12
COMSTAR COMMUNICATIONS, INC.
BY: /s/ Sam F. Dayton
----------------------------------
Dr. Sam F Dayton, President
(Corporate Seal)
/s/ Edward N. Landa ATTEST:
----------------------------
Secretary
12
<PAGE> 13
COMSTAR COMMUNICATIONS, INC. SHAREHOLDER AGREEMENT
SIGNATURE PAGE FOR ADDITIONAL SHAREHOLDERS
Date:
------------------
-------------------------------------
Signature
-------------------------------------
Please print name
Address:
-------------------------------------
-------------------------------------
13
<PAGE> 14
AMENDMENT NO. 1 TO
AMENDED AND RESTATED SHAREHOLDER AGREEMENT
AMENDMENT NO. 1 dated this 31st day of August, 1999 by and among
comstar.net, inc. (the "Corporation") and the Shareholders that are parties to
the Amended and Restated Shareholder Agreement, dated as of December 1, 1998,
by and among the Corporation and the Shareholders (the "Original Agreement").
WHEREAS, the Shareholders wish to further their mutual interests in
the Corporation, as well as the interests of the Corporation, by amending the
Original Agreement to permit certain transfers of stock, and
WHEREAS, Article XV of the Original Agreement permits amendment of the
Original Agreement by written agreement signed by certain of the Shareholders,
NOW THEREFORE, in consideration of the mutual premises contained
herein, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows:
1. Article I of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
"(a) No Shareholder may sell, transfer, assign, hypothecate, or
otherwise alienate any of his Shares, now or hereafter owned by him,
without the written consent of all other Shareholders, except by
giving notice to all other Shareholders at least thirty (30) days
prior to the date of the proposed transfer. Such notice must be made
by certified mail, return receipt requested and shall set forth the
exact provisions of the proposed transfer. The receipt by the
Shareholders of such notice will create an option in each of the other
Shareholders to purchase the Shares proposed to be transferred by such
Shareholder. The Secretary, or any other officer, shall, within five
(5) days of receipt of such notice, give notice of such proposed
transfer to all of the other Shareholders, and they shall have the
opportunity to exercise their options in the manner provided herein.
Any sale or transfer or purported sale or transfer of such Shares
shall be null and void unless the terms, conditions, and provisions of
this agreement are strictly observed and followed.
(b) Notwithstanding the foregoing, a Shareholder may freely transfer
any of his Shares at any time to Family Members whether or not for
adequate consideration, by gift, assignment, sale, will, joint tenancy
with right of survivorship, bequest, devise, intestacy or otherwise.
Such transfers may be made outright or in trust, in fee or lesser
estate, or held under a guardianship, conservatorship, or custodian
arrangement. The Shareholders hereby consent to any such transfer
without compliance with the prior notice and approval
<PAGE> 15
provisions of section (a) above and without creating for other
Shareholders the option to purchase the transferred Shares described
in paragraph (a) above. Solely for purposes of this Article I, "Family
Member" shall mean the spouse, issue (including, step-children and
their issue), siblings, parents, siblings-in-law and parents-in-law of
the Shareholder; any trust created for the exclusive benefit of one or
more of such persons; and any entity owned entirely by the Shareholder
and/or one or more of the Shareholder's Family Members."
2. All other provisions and agreements of the Original Agreement
shall remain unchanged.
[Signatures appear on the following page.]
2
<PAGE> 16
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
under seal, to be effective as of the date on which holders of two thirds of
the outstanding Common Stock have signed this Amendment No. 1.
CORPORATION:
comstar.net, inc.
By: /s/ Sam F. Dayton
--------------------
Name: Sam F. Dayton
Title: Chairman/President
SHAREHOLDERS:
date: 08-31-99 /s/ Sam F. Dayton
--------------- --------------------------
Samuel F. Dayton
date: 27-Aug-99 /s/ James Cary Howell
--------------- --------------------------
James Cary Howell
date: 8/27/1999 /s/ Edward N. Landa
--------------- --------------------------
Edward N. Landa
date: 8/28/99 /s/ James L. Bruce
--------------- --------------------------
James L. Bruce, Jr.
date:
--------------- --------------------------
Alan Crumley
date:
--------------- --------------------------
Frank Wiegend
3
<PAGE> 17
date:
--------------- --------------------------
T. Graham Hood
date:
--------------- --------------------------
David Thompson
date:
--------------- --------------------------
Donald Thompson
date:
--------------- --------------------------
E. Davison Burch
date:
--------------- --------------------------
Don Waldrip
date:
--------------- --------------------------
L.G. Hardman, III
date:
--------------- --------------------------
Jesse A. Carter
date:
--------------- --------------------------
Pierpont F. Brown
date:
--------------- --------------------------
Steve Wadley
date:
--------------- --------------------------
Charles W. Blair Jr.
date:
--------------- --------------------------
Edward Klein, III
date:
--------------- --------------------------
John David Boonstra
date:
--------------- --------------------------
Richard Hoving, Jr.
date:
--------------- --------------------------
Vince Dooley
date:
--------------- --------------------------
Barbara Dooley
4
<PAGE> 18
Mauney Family Trust
date: By:
--------------- -----------------------
date:
--------------- --------------------------
George D. Jones
date:
--------------- --------------------------
James M. Intoccio
date:
--------------- --------------------------
James Atherton
date:
--------------- --------------------------
Kay S. Swanson
date:
--------------- --------------------------
Steven J. Edwards
date:
--------------- --------------------------
Samuel D. Holmes
date: 8/27/99 /s/ Chris K. Martin
--------------- --------------------------
Christopher K. Martin
date:
--------------- --------------------------
Arie A. Buurman
5
<PAGE> 1
EXHIBIT 10.1
COMSTAR.NET, INC.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE> 2
COMSTAR.NET, INC.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS.............................................................................. 1
ARTICLE 2 THE PLAN................................................................................. 5
2.1 NAME......................................................................................... 5
2.2 PURPOSE...................................................................................... 5
2.3 EFFECTIVE DATE............................................................................... 5
ARTICLE 3 PARTICIPANTS............................................................................. 5
ARTICLE 4 ADMINISTRATION........................................................................... 6
4.1 DUTIES AND POWERS OF THE COMMITTEE........................................................... 6
4.2 INTERPRETATION; RULES........................................................................ 6
4.3 NO LIABILITY................................................................................. 6
4.4 MAJORITY RULE................................................................................ 6
4.5 COMPANY ASSISTANCE........................................................................... 6
ARTICLE 5 SHARES OF STOCK SUBJECT TO PLAN.......................................................... 7
5.1 LIMITATIONS.................................................................................. 7
5.2 ANTIDILUTION................................................................................. 7
ARTICLE 6 OPTIONS.................................................................................. 9
6.1 TYPES OF OPTIONS GRANTED..................................................................... 9
6.2 OPTION GRANT AND AGREEMENT................................................................... 9
6.3 OPTIONEE LIMITATIONS......................................................................... 9
6.4 $100,000 AND SECTION 162(M) LIMITATIONS...................................................... 10
6.5 EXERCISE PRICE............................................................................... 10
6.6 EXERCISE PERIOD.............................................................................. 10
6.7 OPTION EXERCISE.............................................................................. 10
6.8 RELOAD OPTIONS............................................................................... 12
6.9 NONTRANSFERABILITY OF OPTION................................................................. 12
6.10 TERMINATION OF EMPLOYMENT OR SERVICE......................................................... 12
6.11 EMPLOYMENT RIGHTS............................................................................ 13
6.12 CERTAIN SUCCESSOR OPTIONS.................................................................... 13
6.13 EFFECT OF A CORPORATE TRANSACTION............................................................ 13
ARTICLE 7 RESTRICTED STOCK......................................................................... 13
7.1 AWARDS OF RESTRICTED STOCK................................................................... 13
7.2 NON-TRANSFERABILITY.......................................................................... 13
7.3 LAPSE OF RESTRICTIONS........................................................................ 14
7.4 TERMINATION OF EMPLOYMENT.................................................................... 14
</TABLE>
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<TABLE>
<S> <C> <C>
7.5 TREATMENT OF DIVIDENDS....................................................................... 14
7.6 DELIVERY OF SHARES........................................................................... 14
ARTICLE 8 STOCK APPRECIATION RIGHTS................................................................ 14
8.1 SAR GRANTS................................................................................... 14
8.2 DETERMINATION OF PRICE....................................................................... 14
8.3 EXERCISE OF A SAR............................................................................ 14
8.4 PAYMENT FOR A SAR............................................................................ 15
8.5 STATUS OF A SAR UNDER THE PLAN............................................................... 15
8.6 TERMINATION OF SARS.......................................................................... 15
8.7 NO SHAREHOLDER RIGHTS........................................................................ 15
ARTICLE 9 STOCK CERTIFICATES....................................................................... 16
ARTICLE 10 TERMINATION AND AMENDMENT................................................................ 16
10.1 TERMINATION AND AMENDMENT.................................................................... 16
10.2 EFFECT ON GRANTEE'S RIGHTS................................................................... 17
ARTICLE 11 RELATIONSHIP TO OTHER COMPENSATION PLANS................................................. 17
ARTICLE 12 MISCELLANEOUS............................................................................ 17
12.1 REPLACEMENT OR AMENDED GRANTS................................................................ 17
12.2 FORFEITURE FOR COMPETITION................................................................... 17
12.3 LEAVE OF ABSENCE............................................................................. 17
12.4 PLAN BINDING ON SUCCESSORS................................................................... 18
12.5 SINGULAR, PLURAL; GENDER..................................................................... 18
12.6 HEADINGS, ETC................................................................................ 18
12.7 SECTION 16 COMPLIANCE........................................................................ 18
</TABLE>
<PAGE> 4
comstar.net, inc.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
ARTICLE 1
DEFINITIONS
As used in this Plan, the following terms have the following meanings
unless the context clearly indicates to the contrary:
"Award" means a grant of Restricted Stock or an SAR.
"Board" means the Board of Directors of the Company.
"Cause" means (i) the commission of an act of fraud, embezzlement,
theft or proven dishonesty, or any other illegal act or practice (whether or
not resulting in criminal prosecution or conviction), including theft or
destruction of property of the Company, a Parent, or a Subsidiary, or any other
act or practice which the Committee shall, in good faith, deem to have resulted
in the recipient's becoming unbondable under the Company's, a Parent's or any
Subsidiary's fidelity bond; (ii) the willful engaging in misconduct which is
deemed by the Committee, in good faith, to be materially injurious to the
Company, a Parent or any Subsidiary, monetarily or otherwise, including, but
not limited, improperly disclosing trade secrets or other confidential or
sensitive business information and data about the Company, a Parent or any
Subsidiaries and competing with the Company, a Parent or any Subsidiaries, or
soliciting employees, consultants or customers of the Company, a Parent or any
Subsidiaries in violation of law or any employment or other agreement to which
the recipient is a party; (iii) the willful and continued failure or habitual
neglect by a person who is an Employee to perform his or her duties with the
Company, a Parent or any Subsidiary substantially in accordance with the
operating and personnel policies and procedures of the Company, Parent or the
Subsidiary generally applicable to all their employees; or (iv) other disregard
of rules or policies of the Company, a Parent or any Subsidiary, or conduct
evincing willful or wanton disregard of the interests of the Company, a Parent
or any Subsidiary. For purposes of this Plan, no act or failure to act by the
recipient shall be deemed be "willful" unless done or omitted to be done by
recipient not in good faith and without reasonable belief that the recipient's
action or omission was in the best interest of the Company and/or the
subsidiary. Notwithstanding the foregoing, if the recipient has entered into an
employment agreement that is binding as of the date of employment termination,
and if such employment agreement defines "Cause," then the definition of
"Cause" in such agreement shall apply to the recipient in this Plan. "Cause"
shall be determined by the Committee based upon information presented by the
Company and the Employee and shall be final and binding on all parties hereto.
"Code" means the United States Internal Revenue Code of 1986,
including effective date and transition rules (whether or not codified). Any
reference herein to a specific section of the Code shall be deemed to include a
reference to any corresponding provision of future law.
<PAGE> 5
"Committee" means a committee of at least two Directors appointed from
time to time by the Board, having the duties and authority set forth herein in
addition to any other authority granted by the Board; provided, however, that
with respect to any Options or Awards granted to an individual who is also a
Section 16 Insider, the Committee shall consist of either the entire Board of
Directors or a committee of at least two Directors (who need not be members of
the Committee with respect to Options or Awards granted to any other
individuals) who are Non-Employee Directors, and all authority and discretion
shall be exercised by such Non-Employee Directors, and references herein to the
"Committee" means such Non-Employee Directors insofar as any actions or
determinations of the Committee shall relate to or affect Options or Awards
made to or held by any Section 16 Insider. In selecting the Committee, the
Board shall also consider the benefits under Section 162(m) of the Code of
having a Committee composed of "outside directors" (as that term is defined in
the Code) for certain grants of Options to highly compensated executives. At
any time that the Board shall not have appointed a committee as described
above, any reference herein to the Committee means a reference to the Board.
"Company" means comstar.net, inc., a Georgia corporation.
"Corporate Transaction" means any of the following transactions to
which the Company is a party:
(i) a merger, consolidation, share exchange, combination
or other transaction or series of transactions
(other than a public offering by the Company for
cash of the Company's capital stock, debt or other
securities) in which securities possessing more than
50% of the total combined voting power of the
Company's outstanding securities are transferred to
a person or persons different from the persons
holding those securities immediately prior to such
transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets;
(iii) the liquidation or dissolution of the Company; or
(iv) A change in the composition of the Board as a result
of which fewer than one-half of the incumbent
directors are directors who either:
(a) Had been directors of the Company 24 months
prior to such change; or
(b) Were elected, or nominated for election, to
the Board with the affirmative votes of at
least a majority of the directors who had
been directors of the Company 24 months
prior to such change and who were still in
office at the time of the election or
nomination.
"Director" means a member of the Board and any person who is an
advisory or honorary director of the Company if such person is considered a
director for the purposes of Section 16 of
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the Exchange Act, as determined by reference to such Section 16 and to the
rules, regulations, judicial decisions, and interpretative or "no-action"
positions with respect thereto of the SEC, as the same may be in effect or set
forth from time to time.
"Employee" means an employee of the Employer.
"Employer" means the corporation that employs a Grantee.
"Exchange Act" means the Securities Exchange Act of 1934. Any
reference herein to a specific section of the Exchange Act shall be deemed to
include a reference to any corresponding provision of future law.
"Exercise Price" means the price at which an Optionee may purchase a
share of Stock under a Stock Option Agreement.
"Fair Market Value" on any date means (i) the closing sales price of
the Stock, regular way, on such date on the national securities exchange having
the greatest volume of trading in the Stock during the thirty-day period
preceding the day the value is to be determined or, if such exchange was not
open for trading on such date, the next preceding date on which it was open;
(ii) if the Stock is not traded on any national securities exchange, the
average of the closing high bid and low asked prices of the Stock on the
over-the-counter market on the day such value is to be determined, or in the
absence of closing bids on such day, the closing bids on the next preceding day
on which there were bids; or (iii) if the Stock also is not traded on the
over-the-counter market, the fair market value as determined in good faith by
the Board or the Committee based on such relevant facts as may be available to
the Board, which may include opinions of independent experts, the price at
which recent sales have been made, the book value of the Stock, and the
Company's current and anticipated future earnings.
"Grantee" means a person who is an Optionee or a person who has
received an Award of Restricted Stock or an SAR.
"Incentive Stock Option" means an option to purchase any stock of the
Company, which complies with and is subject to the terms, limitations and
conditions of Section 422 of the Code and any regulations promulgated with
respect thereto.
"Non-Employee Director" shall have the meaning set forth in Rule 16b-3
under the Exchange Act, as the same may be in effect from time to time, or in
any successor rule thereto, and shall be determined for all purposes under the
Plan according to interpretative or "no-action" positions with respect thereto
issued by the SEC.
"Officer" means a person who constitutes an officer of the Company for
the purposes of Section 16 of the Exchange Act, as determined by reference to
such Section 16 and to the rules, regulations, judicial decisions, and
interpretative or "no-action" positions with respect to such rule of the SEC,
as the same may be in effect or set forth from time to time.
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"Option" means an option, whether or not an Incentive Stock Option, to
purchase Stock granted pursuant to the provisions of Article 6 of this Plan.
"Optionee" means a person to whom an Option has been granted under
this Plan.
"Parent" means any corporation (other than the Employer) in an
unbroken chain of corporations ending with the Employer if, at the time of the
grant (or modification) of the Option, each of the corporations other than the
Employer owns stock possessing 50 percent or more of the total combined voting
power of the classes of stock in one of the other corporations in such chain.
"Permanent and Total Disability" has the same meaning as given to that
term by Code Section 22(e)(3) and any regulations or rulings promulgated
thereunder.
"Plan" means the comstar.net, inc. Amended and Restated 1999 Stock
Option and Incentive Plan, the terms of which are set forth herein.
"Purchasable" refers to Stock which may be purchased by an Optionee
under the terms of this Plan on or after a certain date specified in the
applicable Stock Option Agreement.
"Qualified Domestic Relations Order" has the meaning set forth in the
Code or in the Employee Retirement Income Security Act of 1974, or the rules
and regulations promulgated under the Code or such Act.
"Reload Option" has the meaning set forth in Section 6.8 of the Plan.
"Restricted Stock" means Stock issued, subject to restrictions, to a
Grantee pursuant to Article 6 of this Plan.
"Restriction Agreement" means the agreement setting forth the terms of
an Award, and executed by a Grantee as provided in Section 7.1 of this Plan.
"SAR" means a stock appreciation right, which is the right to receive
an amount equal to the appreciation, if any, in the Fair Market Value of a
share of Stock from the date of the grant of the right to the date of its
payment, all as provided in Article 8 of this Plan.
"SAR Price" means the base value established by the Committee for a
SAR on the date the SAR is granted and which is used in determining the amount
of benefit, if any, paid to a Grantee.
"SEC" means the United States Securities and Exchange Commission.
"Section 16 Insider" means any person who is subject to the provisions
of Section 16 of the Exchange Act, as provided in Rule 16a-2 promulgated
pursuant to the Exchange Act.
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"Stock" means the Common Stock, no par value per share, of the Company
or, in the event that the outstanding shares of Stock are hereafter changed
into or exchanged for shares of a different stock or securities of the Company
or some other entity, such other stock or securities.
"Stock Option Agreement" means an agreement between the Company and an
Optionee under which the Optionee may purchase Stock under this Plan, a sample
form of which is attached hereto as Exhibit A (which form may be varied by the
Committee in granting an Option).
"Subsidiary" means any corporation (other than the Employer) in an
unbroken chain of corporations beginning with the Employer if, at the time of
the grant (or modification) of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
ARTICLE 2
THE PLAN
2.1 Name. This Plan shall be known as the "comstar.net, inc.
Amended and Restated 1999 Stock Option and Incentive Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its Subsidiaries and its shareholders by affording certain
employees and Directors of the Company and its Subsidiaries, as well as key
consultants and advisors to the Company or any Subsidiary, an opportunity to
acquire or increase their proprietary interests in the Company. The objective
of the issuance of the Options and Awards is to promote the growth and
profitability of the Company and its Subsidiaries because the Grantees will be
provided with an additional incentive to achieve the Company's objectives
through participation in its success and growth and by encouraging their
continued association with or service to the Company.
2.3 Effective Date. The Plan was adopted by the Board on March 1,
1999 and was amended by the Board on September 1, 1999. If the Company's
shareholders have not approved the Plan on or prior to the first anniversary of
such effective date, then all options granted under the Plan shall be
non-Incentive Stock Options.
ARTICLE 3
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist
of all persons whose participation in the Plan the Committee determines to be
in the best interests of the Company, which shall include, but not be limited
to, all Directors and employees of the Company or any Subsidiary, as well as
key consultants and advisors to the Company or any Subsidiary.
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ARTICLE 4
ADMINISTRATION
4.1 Duties and Powers of the Committee. The Plan shall be
administered by the Committee. The Committee shall select one of its members as
its Chairman and shall hold its meetings at such times and places as it may
determine. The Committee shall keep minutes of its meetings and shall make such
rules and regulations for the conduct of its business as it may deem necessary.
The Committee shall have the power to act by unanimous written consent in lieu
of a meeting, and to meet telephonically. In administering the Plan, the
Committee's actions and determinations shall be binding on all interested
parties. The Committee shall have the power to grant Options or Awards in
accordance with the provisions of the Plan and may grant Options and Awards
singly, in combination, or in tandem. Subject to the provisions of the Plan,
the Committee shall have the discretion and authority to determine those
individuals to whom Options or Awards will be granted and whether such Options
shall be accompanied by the right to receive Reload Options, the number of
shares of Stock subject to each Option or Award, such other matters as are
specified herein, and any other terms and conditions of a Stock Option
Agreement or Restriction Agreement. The Committee shall also have the
discretion and authority to delegate to any Officer its powers to grant Options
or Awards under the Plan to any person who is an employee of the Company but
not an Officer or Director. To the extent not inconsistent with the provisions
of the Plan, the Committee may give a Grantee an election to surrender an
Option or Award in exchange for the grant of a new Option or Award, and shall
have the authority to amend or modify an outstanding Stock Option Agreement or
Restriction Agreement, or to waive any provision thereof, provided that the
Grantee consents to such action.
4.2 Interpretation; Rules. Subject to the express provisions of
the Plan, the Committee also shall have complete authority to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to it, to
determine the details and provisions of each Stock Option Agreement, and to
make all other determinations necessary or advisable for the administration of
the Plan, including, without limitation, the amending or altering of the Plan
and any Options or Awards granted under the Plan as may be required to comply
with or to conform to any federal, state, or local laws or regulations.
4.3 No Liability. Neither any member of the Board nor any member
of the Committee shall be liable to any person for any act or determination
made in good faith with respect to the Plan or any Option or Award granted
hereunder.
4.4 Majority Rule. A majority of the members of the Committee
shall constitute a quorum, and any action taken by a majority at a meeting at
which a quorum is present, or any action taken without a meeting evidenced by a
writing executed by all the members of the Committee, shall constitute the
action of the Committee.
4.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to eligible persons, their
employment, death, retirement, disability, or other termination of employment,
and such other pertinent facts as the Committee
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may require. The Company shall furnish the Committee with such clerical and
other assistance as is necessary in the performance of its duties.
ARTICLE 5
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment pursuant
to the provisions of Section 5.2 of this Plan, the maximum number of shares of
Stock that may be issued hereunder shall be 2,300,000. The number of shares of
Stock available for issuance hereunder shall automatically increase on January
1 of each year beginning January 1, 2000, to an amount equal to equal to
fifteen percent (15%) (the "Fifteen Percent Amount") of the fully-diluted
shares of Stock (assuming the conversion of all outstanding options and
warrants) outstanding on December 31 of the previous year (subject to
adjustment under Section 5.2), provided that the foregoing automatic increase
shall apply only if the Fifteen Percent Amount is greater than the maximum
number theretofore in effect. Any or all shares of Stock subject to the Plan
may be issued in any combination of Incentive Stock Options, non-Incentive
Stock Options, Restricted Stock, or SARs, and the amount of Stock subject to
the Plan may be increased from time to time in accordance with Article 10,
provided that the total number of shares of Stock issuable pursuant to
Incentive Stock Options may not be increased to more than 2,300,000 (other than
pursuant to anti-dilution adjustments and the annual increase provided above)
without shareholder approval. Shares subject to an Option or issued as an Award
may be either authorized and unissued shares or shares issued and later
acquired by the Company. The shares covered by any unexercised portion of an
Option that has terminated for any reason (except as set forth in the following
paragraph), or any forfeited portion of an Award, may again be optioned or
awarded under the Plan, and such shares shall not be considered as having been
optioned or issued in computing the number of shares of Stock remaining
available for option or award hereunder.
If Options are issued in respect of options to acquire stock of any
entity acquired, by merger or otherwise, by the Company (or any Subsidiary of
the Company), to the extent that such issuance shall not be inconsistent with
the terms, limitations and conditions of Code section 422 or Rule 16b-3 under
the Exchange Act, the aggregate number of shares of Stock for which Options may
be granted hereunder shall automatically be increased by the number of shares
subject to the Options so issued; provided, however, that the aggregate number
of shares of Stock for which Options may be granted hereunder shall
automatically be decreased by the number of shares covered by any unexercised
portion of an Option so issued that has terminated for any reason, and the
shares subject to any such unexercised portion may not be optioned to any other
person.
5.2 Antidilution.
a. If (x) the outstanding shares of Stock are changed into
or exchanged for a different number or kind of shares or other
securities of the Company by reason of merger, consolidation,
reorganization, recapitalization, reclassification, combination or
exchange of shares, or stock split or stock dividend, (y) any
spin-off, spin-out or other distribution of assets materially affects
the price of the Company's stock, or (z) there is
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any assumption and conversion to the Plan by the Company of an
acquired company's outstanding option grants, then:
(i) the aggregate number and kind of shares of Stock for
which Options or Awards may be granted hereunder
shall be adjusted proportionately by the Committee;
and
(ii) the rights of Optionees (concerning the number of
shares subject to Options and the Exercise Price)
under outstanding Options and the rights of the
holders of Awards (concerning the terms and
conditions of the lapse of any then-remaining
restrictions), shall be adjusted proportionately by
the Committee.
b. If the Company shall be a party to any reorganization
in which it does not survive, involving merger, consolidation, or
acquisition of the stock or substantially all the assets of the
Company, the Committee, in its discretion, may:
(i) notwithstanding other provisions of this Plan,
declare that all Options granted under the Plan
shall become exercisable immediately notwithstanding
the provisions of the respective Stock Option
Agreements regarding exercisability, that all such
Options shall terminate 30 days after the Committee
gives written notice of the immediate right to
exercise all such Options and of the decision to
terminate all Options not exercised within such
30-day period, and that all then-remaining
restrictions pertaining to Awards under the Plan
shall immediately lapse; and/or
(ii) notify all Grantees that all Options or Awards
granted under the Plan shall be assumed by the
successor corporation or substituted on an equitable
basis with options or restricted stock issued by
such successor corporation.
c. If the Company is to be liquidated or dissolved in
connection with a reorganization described in Section 5.2(b), the
provisions of such Section shall apply. In all other instances, the
adoption of a plan of dissolution or liquidation of the Company shall,
notwithstanding other provisions hereof, cause all then-remaining
restrictions pertaining to Awards under the Plan to lapse, and shall
cause every Option outstanding under the Plan to terminate to the
extent not exercised prior to the adoption of the plan of dissolution
or liquidation by the shareholders, provided that, notwithstanding
other provisions hereof, the Committee may declare all Options granted
under the Plan to be exercisable at any time on or before the fifth
business day following such adoption notwithstanding the provisions of
the respective Stock Option Agreements regarding exercisability.
d. The adjustments described in paragraphs (a) through (c)
of this Section 5.2, and the manner of their application, shall be
determined solely by the Committee, and any such adjustment may
provide for the elimination of fractional share interests; provided,
however, that any adjustment made by the Board or the Committee shall
be made in a
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manner that will not cause an Incentive Stock Option to be other than
an Incentive Stock Option under applicable statutory and regulatory
provisions. The adjustments required under this Article V shall apply
to any successors of the Company and shall be made regardless of the
number or type of successive events requiring such adjustments.
ARTICLE 6
OPTIONS
6.1 Types of Options Granted. The Committee may, under this Plan,
grant either Incentive Stock Options or Options which do not qualify as
Incentive Stock Options. Within the limitations provided in this Plan, both
types of Options may be granted to the same person at the same time, or at
different times, under different terms and conditions, as long as the terms and
conditions of each Option are consistent with the provisions of the Plan.
Without limitation of the foregoing, Options may be granted subject to
conditions based on the financial performance of the Company or any other
factor the Committee deems relevant.
6.2 Option Grant and Agreement. Each Option granted hereunder
shall be evidenced by minutes of a meeting or the written consent of the
Committee and by a written Stock Option Agreement executed by the Company and
the Optionee. The terms of the Option, including the Option's duration, time or
times of exercise, exercise price, whether the Option is intended to be an
Incentive Stock Option, and whether the Option is to be accompanied by the right
to receive a Reload Option, shall be stated in the Stock Option Agreement. No
Incentive Stock Option may be granted more than ten years after the earlier to
occur of the effective date of the Plan or the date the Plan is approved by the
Company's shareholders.
Separate Stock Option Agreements may be used for Options intended to
be Incentive Stock Options and those not so intended, but any failure to use
such separate agreements shall not invalidate, or otherwise adversely affect
the Optionee's interest in, the Options evidenced thereby.
6.3 Optionee Limitations. The Committee shall not grant an
Incentive Stock Option to any person who, at the time the Incentive Stock Option
is granted:
a. is not an Employee of the Company or any of its
Subsidiaries; or
b. owns or is considered to own stock possessing at least
10% of the total combined voting power of all classes of stock of the
Company or any of its Parent or Subsidiary corporations; provided,
however, that this limitation shall not apply if at the time an
Incentive Stock Option is granted the Exercise Price is at least 110%
of the Fair Market Value of the Stock subject to such Option and such
Option by its terms would not be exercisable after five years from the
date on which the Option is granted. For the purpose of this
subsection (b), a person shall be considered to own: (i) the stock
owned, directly or indirectly, by or for his or her brothers and
sisters (whether by whole or half blood), spouse, ancestors and lineal
descendants; (ii) the stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust in proportion to such
person's stock interest, partnership interest or beneficial interest
therein; and (iii) the stock
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which such person may purchase under any outstanding options of the
Employer or of any Parent or Subsidiary of the Employer.
6.4 $100,000 and Section 162(m) Limitations. Except as provided
below, the Committee shall not grant an Incentive Stock Option to, or modify
the exercise provisions of outstanding Incentive Stock Options held by any
person who, at the time the Incentive Stock Option is granted (or modified),
would thereby receive or hold any Incentive Stock Options of the Employer and
any Parent or Subsidiary of the Employer, such that the aggregate Fair Market
Value (determined as of the respective dates of grant or modification of each
option) of the stock with respect to which such Incentive Stock Options are
exercisable for the first time during any calendar year is in excess of
$100,000 (or such other limit as may be prescribed by the Code from time to
time); provided that the foregoing restriction on modification of outstanding
Incentive Stock Options shall not preclude the Committee from modifying an
outstanding Incentive Stock Option if, as a result of such modification and
with the consent of the Optionee, such Option no longer constitutes an
Incentive Stock Option; and provided that, if the $100,000 limitation (or such
other limitation prescribed by the Code) described in this Section 6.4 is
exceeded, the Incentive Stock Option, the granting or modification of which
resulted in the exceeding of such limit, shall be treated as an Incentive Stock
Option up to the limitation and the excess shall be treated as an Option not
qualifying as an Incentive Stock Option. Furthermore, not more than 425,000
shares of Stock may be made subject to Options to any individual in the
aggregate in any one fiscal year of the Company, such limitation to be applied
in a manner consistent with the requirements of, and only to the extent
required for compliance with, the exclusion from the limitation on
deductibility of compensation under Section 162(m) of the Code.
6.5 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be determined by the Committee. Subject to the provisions of
Section 6.3(b) hereof, the Exercise Price of an Incentive Stock Option shall
not be less than the Fair Market Value of the Stock as of the date the Option
is granted (or in the case of an Incentive Stock Option that is subsequently
modified, on the date of such modification).
6.6 Exercise Period. The period for the exercise of each Option
granted hereunder shall be determined by the Committee, but the Stock Option
Agreement with respect to each Option intended to be an Incentive Stock Option
shall provide that such Option shall not be exercisable after the expiration of
ten years from the date of grant (or modification) of the Option.
6.7 Option Exercise.
a. Unless otherwise provided in the Stock Option Agreement
or Section 6.6 of this Plan, an Option may be exercised at any time or
from time to time during the term of the Option as to any or all full
shares which have become Purchasable under the provisions of the
Option, but not at any time as to fewer than 100 shares unless the
remaining shares that have become so Purchasable are fewer than 100
shares. The Committee shall have the authority to prescribe in any
Stock Option Agreement that the Option may be exercised only in
accordance with a vesting schedule during the term of the Option.
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<PAGE> 14
b. An Option shall be exercised by (i) delivery to the
Company at its principal office a written notice of exercise with
respect to a specified number of shares of Stock and (ii) payment to
the Company at that office of the full amount of the Exercise Price
for such number of shares in accordance with Section 6.7(c). If
requested by an Optionee, an Option may be exercised with the
involvement of a stockbroker in accordance with the federal margin
rules set forth in Regulation T (in which case the certificates
representing the underlying shares will be delivered by the Company
directly to the stockbroker).
c. The Exercise Price is to be paid in full in cash upon
the exercise of the Option, and the Company shall not be required to
deliver certificates for the shares purchased until such payment has
been made; provided, however, that in lieu of cash, in the Company's
discretion all or any portion of the Exercise Price may be paid by
tendering to the Company shares of Stock duly endorsed for transfer
and owned by the Optionee, or by authorization to the Company to
withhold shares of Stock otherwise issuable upon exercise of the
Option, in each case to be credited against the Exercise Price at the
Fair Market Value of such shares on the date of exercise (however, no
fractional shares may be so transferred, and the Company shall not be
obligated to make any cash payments in consideration of any excess of
the aggregate Fair Market Value of shares transferred over the
aggregate Exercise Price); provided further, that the Board may
provide in a Stock Option Agreement (or may otherwise determine in its
sole discretion at the time of exercise) that, in lieu of cash or
shares, all or a portion of the Exercise Price may be paid by the
Optionee's execution of a recourse note equal to the Exercise Price or
relevant portion thereof, subject to compliance with applicable state
and federal laws, rules and regulations. Notwithstanding the above,
the Company shall not be obligated to accept tender of shares of Stock
as payment of the Exercise Price if doing so would result in a charge
to the Company's earnings for financial reporting purposes.
d. In addition to and at the time of payment of the
Exercise Price, the Optionee shall pay to the Company in cash the full
amount of any federal, state, and local income, employment, or other
withholding taxes applicable to the taxable income of such Optionee
resulting from such exercise; provided, however, that in the
discretion of the Committee any Stock Option Agreement may provide
that all or any portion of such tax obligations, together with
additional taxes not exceeding the actual additional taxes to be owed
by the Optionee as a result of such exercise, may, upon the
irrevocable election of the Optionee, be paid by tendering to the
Company whole shares of Stock duly endorsed for transfer and owned by
the Optionee, or by authorization to the Company to withhold shares of
Stock otherwise issuable upon exercise of the Option, in either case
in that number of shares having a Fair Market Value on the date of
exercise equal to the amount of such taxes thereby being paid, and
subject to such restrictions as to the approval and timing of any such
election as the Committee may from time to time determine to be
necessary or appropriate to satisfy the conditions of the exemption
set forth in Rule 16b-3 under the Exchange Act, if such rule is
applicable.
e. The holder of an Option shall not have any of the
rights of a shareholder with respect to the shares of Stock subject to
the Option until such shares have been issued and transferred to the
Optionee upon the exercise of the Option.
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<PAGE> 15
6.8 Reload Options.
a. The Committee may specify in a Stock Option Agreement
(or may otherwise determine in its sole discretion) that a Reload
Option shall be granted, without further action of the Committee, (i)
to an Optionee who exercises an Option (including a Reload Option) by
surrendering shares of Stock in payment of amounts specified in
Sections 6.7(c) or 6.7(d) of this Plan; (ii) for the same number of
shares as are surrendered to pay such amounts; (iii) as of the date of
such payment and at an Exercise Price equal to the Fair Market Value
of the Stock on such date; and (iv) otherwise on the same terms and
conditions as the Option whose exercise has occasioned such payment,
except as provided below and subject to such other contingencies,
conditions, or other terms as the Committee shall specify at the time
such exercised Option is granted; provided, however, that the
Committee may require that the shares surrendered in payment as
provided above must have been held by the Optionee for at least six
months prior to such surrender.
b. Unless provided otherwise in the Stock Option
Agreement, a Reload Option may not be exercised by an Optionee (i)
prior to the end of a one-year period from the date that the Reload
Option is granted, and (ii) unless the Optionee retains beneficial
ownership of the shares of Stock issued to such Optionee upon exercise
of the Option referred to above in Section 6.8(a)(i) for a period of
one year from the date of such exercise.
6.9 Nontransferability of Option. Other than as provided below,
no Option shall be transferable by an Optionee other than by will or the laws
of descent and distribution or, in the case of non-Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and, during the lifetime of
an Optionee, Options shall be exercisable only by such Optionee (or by such
Optionee's guardian or legal representative, should one be appointed). However,
a Non-Incentive Stock Option may, in connection with the Optionee's estate
plan, be assigned in whole or in part during Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established for the
exclusive benefit of one or more such family members. The assigned portion
shall be exercisable only by the person or persons who acquire a proprietary
interest in the Option pursuant to such assignment. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Committee may deem appropriate.
6.10 Termination of Employment or Service. The Committee shall
have the power to specify, with respect to the Options granted to a particular
Optionee, the effect upon such Optionee's right to exercise an Option of
termination of such Optionee's employment or service under various
circumstances, which effect may include immediate or deferred termination of
such Optionee's rights under an Option, or acceleration of the date at which an
Option may be exercised in full; provided, however, that in no event may an
Incentive Stock Option be exercised after the expiration of ten years from the
date of its grant.
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<PAGE> 16
6.11 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in the employ of the
Company or any of its Subsidiaries, or shall interfere in any way with the
right of the Company or any of its Subsidiaries to terminate such person's
employment at any time.
6.12 Certain Successor Options. To the extent not inconsistent
with the terms, limitations and conditions of Code section 422 and any
regulations promulgated with respect thereto, an Option issued in respect of an
option held by an employee to acquire stock of any entity acquired, by merger
or otherwise, by the Company (or any Subsidiary of the Company) may contain
terms that differ from those stated in this Article 6, but solely to the extent
necessary to preserve for any such employee the rights and benefits contained
in such predecessor option, or to satisfy the requirements of Code section
424(a).
6.13 Effect of a Corporate Transaction. Unless otherwise decided
by the Board or the Committee at least 10 days prior to the effective time of a
Corporate Transaction, all Options, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable, shall automatically
accelerate so that the Options shall, immediately prior to the effective date
of the Corporate Transaction, become exercisable for all shares at the time
subject to such Options and may be exercised for any or all of those shares as
fully vested shares of Stock.
ARTICLE 7
RESTRICTED STOCK
7.1 Awards of Restricted Stock. The Committee may grant Awards of
Restricted Stock, which shall be governed by a Restriction Agreement between
the Company and the Grantee. Each Restriction Agreement shall contain such
restrictions, terms, and conditions as the Committee may, in its discretion,
determine, and may require that an appropriate legend be placed on the
certificates evidencing the subject Restricted Stock. Shares of Restricted
Stock granted pursuant to an Award hereunder shall be issued in the name of the
Grantee as soon as reasonably practicable after the Award is granted, provided
that the Grantee has executed the Restriction Agreement governing the Award,
the appropriate blank stock powers and, in the discretion of the Committee, an
escrow agreement and any other documents which the Committee may require as a
condition to the issuance of such Shares. If a Grantee shall fail to execute
the foregoing documents within any time period prescribed by the Committee, the
Award shall be void. At the discretion of the Committee, Shares issued in
connection with an Award shall be deposited together with the stock powers with
an escrow agent designated by the Committee. Unless the Committee determines
otherwise and as set forth in the Restriction Agreement, upon delivery of the
Shares to the escrow agent, the Grantee shall have all of the rights of a
shareholder with respect to such Shares, including the right to vote the Shares
and to receive all dividends or other distributions paid or made with respect
to the Shares.
7.2 Non-Transferability. Until any restrictions upon Restricted
Stock awarded to a Grantee shall have lapsed in a manner set forth in Section
7.3, such shares of Restricted Stock shall not be transferable other than by
will or the laws of descent and distribution, or pursuant to a Qualified
Domestic Relations Order, nor shall they be delivered to the Grantee.
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<PAGE> 17
7.3 Lapse of Restrictions. Restrictions upon Restricted Stock
awarded hereunder shall lapse at such time or times (but, with respect to any
award to a Grantee who is also a Section 16 Insider, not less than six months
after the date of the Award) and on such terms and conditions as the Committee
may, in its discretion, determine at the time the Award is granted or
thereafter.
7.4 Termination of Employment. The Committee shall have the power
to specify, with respect to each Award granted to any particular Grantee, the
effect upon such Grantee's rights with respect to such Restricted Stock of the
termination of such Grantee's employment under various circumstances, which
effect may include immediate or deferred forfeiture of such Restricted Stock or
acceleration of the date at which any then-remaining restrictions shall lapse.
7.5 Treatment of Dividends. At the time an Award of Restricted
Stock is made, the Committee may, in its discretion, determine that the payment
to the Grantee of any dividends, or a specified portion thereof, declared or
paid on such Restricted Stock shall be (i) deferred until the lapsing of the
relevant restrictions and (ii) held by the Company for the account of the
Grantee until such lapsing. In the event of such deferral, there shall be
credited at the end of each year (or portion thereof) interest on the amount of
the account at the beginning of the year at a rate per annum determined by the
Committee. Payment of deferred dividends, together with interest thereon, shall
be made upon the lapsing of restrictions imposed on such Restricted Stock, and
any dividends deferred (together with any interest thereon) in respect of
Restricted Stock shall be forfeited upon any forfeiture of such Restricted
Stock.
7.6 Delivery of Shares. Except as provided otherwise in Article 9
below, within a reasonable period of time following the lapse of the
restrictions on shares of Restricted Stock, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such shares and such
shares shall be free of all restrictions hereunder.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 SAR Grants. The Committee, in its sole discretion, may grant
to any Grantee a SAR. The Committee may impose such conditions or restrictions
on the exercise of any SAR as it may deem appropriate, including, without
limitation, restricting the time of exercise of the SAR to specified periods as
may be necessary to satisfy the requirements of Rule 16b-3.
8.2 Determination of Price. The SAR Price shall be established by
the Committee in its sole discretion. The SAR Price shall not be less than 100%
of Fair Market Value of the Stock on the date the SAR is granted for a SAR
issued in tandem with an Incentive Stock Option.
8.3 Exercise of a SAR. Upon exercise of a SAR, the Grantee shall
be entitled, subject to the terms and conditions of this Plan and the
Agreement, to receive the excess for each share of Stock being exercised under
the SAR of (i) the Fair Market Value of such share of Stock on the date of
exercise over (ii) the SAR Price for such share of Stock.
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<PAGE> 18
8.4 Payment for a SAR. At the sole discretion of the Committee,
the payment of such excess shall be made in (i) cash, (ii) shares of Stock, or
(iii) a combination of both. Shares of Stock used for this payment shall be
valued at their Fair Market Value on the date of exercise of the applicable
SAR.
8.5 Status of a SAR under the Plan. Shares of Stock subject to an
Award of a SAR shall be considered shares of Stock which may be issued under
the Plan for purposes of Section 5.1 of this Plan, unless the Agreement making
the Award of the SAR provides that the exercise of such SAR results in the
termination of an unexercised Option for the same number of shares of Stock.
8.6 Termination of SARs. A SAR may be terminated as follows:
a. During the period of continuous employment with the
Company, Parent or Subsidiary, a SAR will be terminated only if it has
been fully exercised or it has expired by its terms.
b. Upon termination of employment, the SAR will terminate
upon the earliest of (i) the full exercise of the SAR; (ii) the
expiration of the SAR by its terms; and (iii) not more than three
months following the date of employment termination; provided,
however, should termination of employment (A) result from the death or
Permanent and Total Disability of the Grantee, the period referenced
in clause (iii) hereof shall be one year or (B) be for Cause, the SAR
will terminate on the date of employment termination. For purposes of
the Plan, a leave of absence approved by the Company shall not be
deemed to be termination of employment unless otherwise provided in
the Agreement or by the Company on the date of the leave of absence.
c. Subject to the terms of the Agreement with the Grantee,
if a Grantee shall die or become subject to a Permanent and Total
Disability prior to the termination of employment with the Company,
Parent or Subsidiary and prior to the termination of a SAR, such SAR
may be exercised to the extent that the Grantee shall have been
entitled to exercise it at the time of death or disability, as the
case may be, by the Grantee, the estate of the Grantee or the person
or persons to whom the SAR may have been transferred by will or by the
laws of descent and distribution.
d. Except as otherwise expressly provided in the Agreement
with the Grantee, in no event will the continuation of the term of a
SAR beyond the date of termination of employment allow the Employee,
or the Employee's beneficiaries or heirs, to accrue additional rights
under the Plan, have additional SARs available for exercise, or
receive a higher benefit than the benefit payable as if the SAR had
been exercised on the date of employment termination.
8.7 No Shareholder Rights. The Grantee shall have no rights as a
shareholder with respect to a SAR. In addition, no adjustment shall be made for
dividends (ordinary or
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<PAGE> 19
extraordinary, whether in cash, securities or other property) or distributions
or rights except as provided in Section 5.2 of this Plan.
ARTICLE 9
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of any Option granted hereunder
or any portion thereof, or deliver any certificate for shares of Restricted
Stock granted hereunder, prior to fulfillment of all of the following
conditions:
a. The admission of such shares to listing on all stock
exchanges on which the Stock is then listed;
b. The completion of any registration or other
qualification of such shares which the Committee shall deem necessary
or advisable under any federal or state law or under the rulings or
regulations of the SEC or any other governmental regulatory body;
c. The obtaining of any approval or other clearance from
any federal or state governmental agency or body which the Committee
shall determine to be necessary or advisable; and
d. The lapse of such reasonable period of time following
the exercise of the Option as the Board from time to time may
establish for reasons of administrative convenience.
Stock certificates issued and delivered to Grantees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant
to applicable federal and state securities laws. The inability of the Company
to obtain approval from any regulatory body having authority deemed by the
Company to be necessary to the lawful issuance and sale of any Stock pursuant
to Options shall relieve the Company of any liability with respect to the
non-issuance or sale of the Stock as to which such approval shall not have been
obtained. The Company shall, however, use its best efforts to obtain all such
approvals.
ARTICLE 10
TERMINATION AND AMENDMENT
10.1 Termination and Amendment. The Board may at any time terminate
the Plan; provided, however, that the Board (unless its actions are approved or
ratified by the shareholders of the Company within twelve months of the date
that the Board amends the Plan) may not amend the Plan to:
a. Increase the total number of shares of Stock issuable
pursuant to Incentive Stock Options under the Plan, except as
contemplated in Section 5.2; or
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<PAGE> 20
b. Change the class of employees eligible to receive
Incentive Stock Options that may participate in the Plan.
10.2 Effect on Grantee's Rights. No termination, amendment, or
modification of the Plan shall affect adversely a Grantee's rights under a
Stock Option Agreement or Restriction Agreement without the consent of the
Grantee or his legal representative.
ARTICLE 11
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
Subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its Subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
Subsidiaries.
ARTICLE 12
MISCELLANEOUS
12.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee may modify
outstanding Options or Awards or accept the surrender of outstanding Options or
Awards and grant new Options or Awards in substitution for them, provided that
no modification of an Option or Award shall adversely affect a Grantee's rights
under a Stock Option Agreement or Restriction Agreement without the consent of
the Grantee or his legal representative.
12.2 Forfeiture for Competition. If a Grantee provides services to
a competitor of the Company, a Parent or any Subsidiaries, whether as an
employee, officer, director, independent contractor, consultant, agent, or
otherwise, such services being of a nature that can reasonably be expected to
involve the skills and experience used or developed by the Grantee while an
Employee, then that Grantee's rights under any Options outstanding hereunder
shall be forfeited and terminated, and any shares of Restricted Stock held by
such Grantee subject to remaining restrictions shall be forfeited, subject in
each case to a determination to the contrary by the Committee.
12.3 Leave of Absence. Unless provided otherwise in a particular
Stock Option Agreement, the following provisions shall apply upon an Optionee's
commencement of an authorized leave of absence:
a. The exercise schedule in effect for such Option shall
be frozen as of the first day of the authorized leave, and the Option
shall not become exercisable for any additional installments of shares
of Stock during the period Optionee remains on such leave.
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<PAGE> 21
b. Should Optionee resume active Employee status within 60
days after the start date of the authorized leave, Optionee shall, for
purposes of the applicable exercise schedule, receive service credit
for the entire period of such leave. If Optionee does not resume
active Employee status within such 60-day period, then no credit shall
be given for the entire period of such leave.
c. If the Option is an Incentive Stock Option, then the
following shall also apply:
If the leave of absence continues for more than three
months, then the Option shall automatically convert to a Non-Incentive
Stock Option under the Federal tax laws upon the expiration of such
three-month period, unless the Optionee's reemployment rights are
guaranteed by statute or written agreement. Following any such
conversion of the Option, all subsequent exercises of the Option,
whether effected before or after Optionee's return to active Employee
status, shall result in an immediate taxable event, and the Company
shall be required to collect from Optionee the Federal, state and
local income and employment withholding taxes applicable to such
exercise.
d. In no event shall the Option become exercisable for any
additional shares or otherwise remain outstanding if the Optionee does
not resume Employee status prior to the Expiration Date of the option
term.
12.4 Plan Binding on Successors. The Plan shall be binding upon
the successors and assigns of the Company.
12.5 Singular, Plural; Gender. Whenever used in this Plan, nouns
in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender.
12.6 Headings, etc., No Part of Plan. Headings of Articles and
Sections of this Plan are inserted for convenience and reference; they do not
constitute part of the Plan.
12.7 Section 16 Compliance. With respect to Section 16 Insiders
and "highly-compensated" persons under Section 162(m) of the Code, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act and with Section 162(m) of the
Code. To the extent any provision of the Plan or action by the Committee fails
to so comply, it shall be deemed void to the extent permitted by law and deemed
advisable by the Committee. In addition, if necessary to comply with Rule 16b-3
with respect to any grant of an Option hereunder, and in addition to any other
vesting or holding period specified hereunder or in an applicable Stock Option
Agreement, any Section 16 Insider acquiring an Option shall be required to hold
either the Option or the underlying shares of Stock obtained upon exercise of
the Option for a minimum of six months.
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<PAGE> 22
[COMSTAR LOGO] STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this the
___ day of ___, 1999, by and between comstar.net, inc., a Georgia corporation
(the "Company"), and ___ (the "Optionee").
WHEREAS, effective as of March 1, 1999, the Board of Directors of the
Company adopted a stock option plan that was subsequently amended by the Board
on September 1, 1999, known as the "comstar.net, inc. Amended and Restated 1999
Stock Option and Incentive Plan" (the "Plan"), and recommended that the Plan be
approved by the Company's shareholders; and
WHEREAS, the Committee has granted the Optionee the right and option (the
"Option") to purchase the number of shares of the Company's common stock (the
"Stock") as set forth below, and in consideration of the granting of that
Option the Optionee intends to continue to perform services as a director,
consultant, advisor, officer or employee of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan.
NOW, THEREFORE, in consideration of the above and the covenants contained
herein, the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the provisions
of the Plan and the terms and definitions of the Plan are incorporated
herein by reference and made a part hereof. A copy of the Plan has been
delivered to, and receipt is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions, limitations and
conditions stated herein, the Company hereby evidences its grant to the
Optionee of the Option to purchase all or any part of the number of shares
of Stock, set forth on Schedule A attached hereto and incorporated herein
by reference. The Option shall be exercisable in the amounts and at the
time specified on Schedule A. The Option shall expire and shall not be
exercisable on the date specified on Schedule A or on such earlier date as
determined pursuant to Section 8, 9, or 10 hereof. Schedule A states
whether the Option is intended to be an Incentive Stock Option.
3. Purchase Price. The price per share to be paid by the Optionee for the
shares subject to this Option (the "Exercise Price") shall be as specified
on Schedule A, which price shall be an amount not less than the Fair
Market Value of a share of Stock as of the Date of Grant (as defined in
Section 11 below) if the Option is an Incentive Stock Option.
4. Exercise Terms. The Optionee must exercise the Option for at least the
lesser of 100 shares or the number of shares of Stock that the Optionee is
eligible to purchase in accordance with the terms hereof and the Plan as
to which the Option remains unexercised (such shares being called
"Purchasable" herein). In the event this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to
its expiration, the shares of Stock with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No portion of this Option shall be transferable
by any Optionee other than by will or the laws of descent and distribution
or, in the case of non-Incentive Stock Options, pursuant to a Qualified
Domestic Relations Order, and no Option shall be transferable by an
Optionee who is an officer, director or holder of 10% or more of any class
of the Company's securities who is or would be required to file reports
pursuant to Section 16 of the Securities Exchange Act of 1934 (a "Section
16 Insider") prior to shareholder approval of the Plan. During the
lifetime of an Optionee, Options shall be exercisable only by such
Optionee (or by such Optionee's guardian or legal representative, should
one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the
Notice of Exercise attached hereto as Schedule B) signed by the Optionee,
or by the such administrators, executors or personal representatives, and
delivered or mailed to the Company as specified is Section 14 hereof to
the attention of the President or such other officer as the Company may
designate. Any such notice shall (a) specify the number of shares of Stock
which the Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase hereunder;
(b) contain such information as may be reasonably required pursuant to
Section 12 hereof; and (c) be accompanied by (i) a certified or cashier's
check payable to the Company in payment of the total Exercise Price (as
defined on Schedule A hereto) applicable to such shares as provided
herein; (ii) shares of Stock owned by the Optionee and duly endorsed or
accompanied by stock transfer powers having a Fair Market Value equal to
the total Exercise Price applicable to such shares purchased hereunder; or
(iii) a certified or cashier's check accompanied by the number of shares
of
<PAGE> 23
Stock whose Fair Market Value when added to the amount of the check equals
the total Exercise Price applicable to such shares purchased hereunder.
Upon receipt of any such notice and accompanying payment, and subject to
the terms hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal representatives, as the
case may be, stock certificates for the number of shares specified in such
notice registered in the name of the person exercising this Option.
7. Adjustment in Option. The number of shares subject to this Option, the
Exercise Price and other matters are subject to adjustment during the term
of this Option in accordance with the Plan.
8. Termination of Employment or Other Relationship.
(a) Except as otherwise specified in Schedule A hereto, in the event of
the termination of the Optionee's employment or other relationship
with the Company or any of its subsidiaries, other than a termination
that is either (i) for cause; (ii) voluntary on the part of the
Optionee and without written consent of the Company; or (iii) for
reasons of death or disability or retirement, the Optionee may
exercise this Option at any time within 90 days after such
termination to the extent of the number of shares which are
Purchasable hereunder at the date of such termination.
(b) Except as specified in Schedule A attached hereto, in the event of a
termination of the Optionee's employment or other relationship with
the Company that is either (i) for cause or (ii) voluntary on the
part of the Optionee and without the written consent of the Company,
this Option, to the extent not previously exercised, shall terminate
immediately and shall not thereafter be or become exercisable.
(c) Unless and to the extent otherwise provided in Schedule A hereto, in
the event of the retirement of the Optionee at the normal retirement
date as prescribed from time to time by the Company or any
subsidiary, the Optionee shall continue to have the right to exercise
any Options for shares which were Purchasable at the date of the
Optionee's retirement (provided that, on the date which is three
months after the date of retirement, the Options will become void and
unexercisable). This Option does not represent an employment contract
and does not confer upon the Optionee any right with respect to the
status or continuance of employment or other relationship by the
Company or by any of its subsidiaries either during or after the term
hereof. This Option shall not be affected by any change of employment
so long as the Optionee continues to be an employee of the Company or
one of its subsidiaries.
9. Disabled Optionee. In the event of termination of employment or other
relationship with the Company because of the Optionee's becoming subject
to a Permanent or Total Disability, the Optionee (or his or her personal
representative) may exercise this Option, within a period ending on the
earlier of (a) the last day of the one year period following the
Optionee's death or (b) the expiration date of this Option, to the extent
of the number of shares which were Purchasable hereunder at the date of
such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A with
respect to the rights of the Optionee upon termination of employment or
other relationship with the Company under Section 8(a) above, in the event
of the Optionee's death while employed by or performing services for the
Company or any of its subsidiaries or within three months after a
termination of such employment or relationship (if such termination was
neither (i) for cause or (ii) voluntary on the part of the Optionee and
without the written consent of the Company), the appropriate portion of
this Option is transferred in accordance with Section 5 hereof many
exercise this Option at any time within a period ending on the earlier of
(a) the last day of the one year period following the Optionee's death or
(b) the expiration date of this Option. If the Optionee was an employee of
or was providing services to the Company at the time of death, this Option
may be so exercised to the extent of the number of shares that were
Purchasable hereunder at the date of death. If the Optionee's employment
or other relationship with the Company terminated prior to his or her
death, this Option may be exercised only to the extent of the number of
shares covered by this Option which were Purchasable hereunder at the date
of such termination.
11. Date of Grant. This Option was granted by the Board of Directors of the
Company on the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges that the
issuance of capital stock of the Company is subject to limitations imposed
by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this
Option that would cause the Company to violate the law or any rule,
regulation, order
<PAGE> 24
or consent decree of any regulatory authority (including without
limitation to the Securities and Exchange Commission) having jurisdiction
over the affairs of the Company. The Optionee agrees that he or she will
provide the Company with such information as is reasonably requested by
the Company or its counsel to determine whether the issuance of Stock
complies with the provisions described by this Section 12.
13. Restriction on Disposition of Shares. The shares purchased pursuant to the
exercise of an Incentive Stock Option shall not be transferred by the
Optionee except pursuant to the Optionee's will, or the laws of descent
and distribution, until such date which is the later of two years after
the grant of such Incentive Stock Option or one year after the transfer of
the shares to the Optionee pursuant to the exercise of such Incentive
Stock Option. The shares of Stock purchased pursuant to the exercise of
this Option shall not be sold, conveyed or otherwise transferred except
pursuant to and in compliance with an effective registration statement
applicable to such shares or a valid exemption from registration (with
proof of such registration or exemption being delivered to and
satisfactory to the Company, in its sole discretion).
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and their
representatives (including in bankruptcy), heirs, successors and
assigns.
(b) This Agreement is executed and delivered in, and shall be governed by
the laws of the State of Georgia.
(c) Any requests or notices to be given hereunder shall be deemed given,
and any elections or exercises to be made or accomplished shall be
deemed made or accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit thereof in the
United States mail, registered, return receipt requested and postage
prepaid, addressed, if to the Optionee, at the address set forth
below and, if to the Company, to the executive offices of the Company
at 2812 Spring Street, Suite 210, Atlanta, GA 30339.
(d) This Agreement may not be modified except in writing executed by each
of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Stock
Option Agreement under seal, all as of the day and year first above written.
comstar.net, inc.
Accepted By:
- ------------------------------------------------------------------------------
Signature
James C. Howell
- ------------------------------------------------------------------------------
Name
CEO
- ------------------------------------------------------------------------------
Title
OPTIONEE
Accepted By:
- ------------------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City, State Zip
ATTEST:
- ------------------------------------------------------------------------------
Secretary or Assistant Secretary
Edward N. Landa
- ------------------------------------------------------------------------------
Name
[SEAL]
<PAGE> 25
[COMSTAR LOGO] SCHEDULE A TO THE
STOCK OPTION AGREEMENT
This Schedule A to the Stock Option Agreement (this "Agreement") is entered
into as of this ____ day of _____ , 1999, by and between comstar.net, inc.,
and ____.
1. Number of Shares Subject to Option: ___ shares.
2. This Option (check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $____ per share.
4. Date of Grant: ____.
5. Option Vesting Schedule:
Check One:
[ ] Options are exercisable with respect to all shares on or after
the date hereof
[ ] Options are exercisable with respect to the number of shares
indicated below on or after the date indicated next to the number
of shares.
Number of Shares Vesting Date
6. Option Exercise Period:
Check One:
[ ] All options expire and are void unless exercised on or before ___.
[ ] Options expire and are void unless exercised on or before the
date indicated next to the number of shares:
Number of Shares Expiration Date
7. Effect of Termination of Employment on Optionee (if different from
that set forth in Sections 8, 9 and 10 of the Stock Option
Agreement).
Not Applicable.
<PAGE> 26
[COMSTAR LOGO] SCHEDULE B TO THE
STOCK OPTION AGREEMENT
NOTICE OF EXERCISE
The undersigned hereby notifies comstar.net, inc., (the "Company") of
this election to exercise the undersigned's stock option to
purchase ____ shares of the Company's common stock (the "Common
Stock"), pursuant to the Stock Option Agreement (the "Agreement")
between the undersigned and the Company dated ____ . Accompanying this
Notice is (1) certified or cashier's check in the amount of $____
payable to the Company, and/or (2)____ shares of the Company's Common
Stock presently owned by the undersigned and duly endorsed or
accompanied by stock transfer powers, having an aggregate Fair Market
Value (as defined in the Plan referenced in the Agreement) as of the
date hereof of $ , such amounts being equal, in the aggregate, to the
purchase price per share set forth in Section 3 of the Agreement
multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to the Plan).
IN WITNESS WHEREOF, the undersigned has set his hand and seal, this
____ day of ___,___.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Position (if other than Optionee)
<PAGE> 1
EXHIBIT 10.2
DIRECTOR STOCK OPTION PLAN
OF
COMSTAR.NET, INC.
ADOPTED: September 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. PURPOSE............................................................................................... 1
2. DEFINITIONS........................................................................................... 1
3. TOTAL AGGREGATE SHARES................................................................................ 2
4. RULE 16B-3 PLAN AND SHAREHOLDER APPROVAL.............................................................. 3
5. TYPE OF OPTIONS....................................................................................... 3
6. GRANTS OF OPTIONS..................................................................................... 3
7. EXERCISE PRICE, VESTING SCHEDULE AND TERM OF OPTION................................................... 3
8. EXERCISE OF OPTION.................................................................................... 4
9. TERMINATION OF OPTION PERIOD.............................................................................5
10. ASSIGNABILITY OF OPTIONS.................................................................................5
11. ADJUSTMENTS..............................................................................................5
12. PURCHASE FOR INVESTMENT............................................................................... 6
13. AMENDMENTS, MODIFICATIONS, SUSPENSION OR DISCONTINUANCE OF THIS PLAN.................................. 6
14. GOVERNMENTAL REGULATION............................................................................... 6
15. MISCELLANEOUS......................................................................................... 7
16. EFFECTIVE DATE AND TERMINATION DATE................................................................... 7
</TABLE>
i
<PAGE> 3
DIRECTOR STOCK OPTION PLAN
OF
COMSTAR.NET, INC.
1. PURPOSE. The Director Stock Option Plan of comstar.net, inc.
(the "Company") is intended as an incentive to retain, as directors of the
Company, persons of training, experience and ability, to encourage the sense of
proprietorship of such persons and to stimulate the active interest of such
persons in the development and financial success of the Company.
2. DEFINITIONS. As used herein, the following terms shall have the
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company,
without par value per share, for so long as such Series of Common Stock remains
outstanding or, if all Common Stock of the Company has been converted into or
exchanged for another class or series of securities, "Common Stock" shall mean
such class or series of securities.
(d) "Date of Grant" shall mean the date on which an Option is
granted to an Eligible Person pursuant to Section 6(c) hereof.
(e) "Director" shall mean a member of the Board.
(f) "Eligible Person(s)" shall mean those persons who are, as of
a specified date, non-employee Directors of the Company.
(g) "ERISA" shall mean the Employee Retirement Income Security
Act, as amended.
(h) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(i) "Fair Market Value" of a Share on any date of reference
shall be the Closing Price on the business day preceding such date. For this
purpose, the "Closing Price" of the Shares on any business day shall be: (i) if
the Shares are listed or admitted for trading on any United States national
securities exchange, the last reported sale price of Shares on such exchange,
as reported in any newspaper of general circulation; (ii) if Shares are quoted
on Nasdaq, or any similar system of automated dissemination of quotations of
securities prices in common use, the average of the closing high bid and low
asked quotations for such day of Shares on such system; (iii) if neither clause
(i) nor (ii) is applicable, the average of the high
<PAGE> 4
bid and low asked quotations for Shares as reported by the National Quotation
Bureau, Incorporated if at least two securities dealers have inserted both bid
and asked quotations for Shares on at least five of the ten preceding days;
(iv) in lieu of the above, if actual transactions in the Shares are reported on
a consolidated transaction reporting system, the last sale price of the Shares
for such day and on such system; or (v) prior to an Initial Public Offering,
the fair market value of such Shares as determined by the Board which, in
making such determination, shall consider and rely upon the prices at which
securities of the Company have previously been sold in transactions between:
(x) the Company and parties who were not, at the time of such sale, affiliated
with the Company; and (y) parties who are were not, at the time of such sale,
affiliated with the Company.
(j) "Initial Grant Date" shall mean the date upon which this
Plan is approved by the Board.
(k) "Initial Public Offering" shall mean the offer and sale by
the Company of its equity securities in a transaction underwritten by an
investment banking firm following the completion of which (i) such equity
securities are listed for trading on any national securities exchange or (ii)
there are at least two market makers who are making a market in such equity
securities through the Nasdaq National Market System.
(l) "Nonqualified Stock Option" shall mean a stock option that
is not an incentive stock option, as defined in Section 422 of the Code.
(m) "Option" shall mean any option granted under this Plan.
(n) "Option Agreement" shall mean an option agreement between
the Company and an Optionee.
(o) "Optionee" shall mean a person to whom an Option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death or disability of such person.
(p) "Plan" shall mean this Director Stock Option Plan of
comstar.net, inc.
(q) "Share(s)" shall mean a share or shares of the Common Stock.
(r) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chains.
3. TOTAL AGGREGATE SHARES. Subject to the adjustments set forth in
Section 11 hereof, a total of 600,000 Shares shall be subject to the Plan. The
Shares subject to the Plan shall consist of unissued Shares or previously
issued Shares reacquired and held by the
2
<PAGE> 5
Company, or any Subsidiary, and such number of Shares shall be and hereby
is reserved for sale for such purpose. Any of such Shares that may remain
unsold and that are not subject to outstanding Options at the termination of
the Plan shall cease to be reserved for the purpose of the Plan, but until
termination of the Plan, the Company shall at all times reserve a sufficient
number of Shares to meet the requirements of the Plan. Should any Option expire
or be canceled prior to its exercise in full, the Shares theretofore subject to
such Option may again be the subject of any Option under the Plan.
4. RULE 16B-3 PLAN AND SHAREHOLDER APPROVAL. The Company intends for
this Plan to comply with the requirements of Rule 16b-3 promulgated by the
Securities and Exchange Commission pursuant to the Exchange Act. Accordingly,
this Plan will be subject to approval by shareholders of the Company owning a
majority of the issued and outstanding shares of Common Stock present or
represented and entitled to vote at a meeting duly held in accordance with
applicable law.
5. TYPE OF OPTIONS. An Option granted hereunder shall be a
Nonqualified Stock Option.
6. GRANTS OF OPTIONS.
(a) Options shall be granted only to Eligible Persons. Each
Option shall be evidenced by an Option Agreement, which shall contain terms
that are not inconsistent with this Plan or applicable laws.
(b) The Options granted to Directors under this Plan shall be in
addition to regular director's fees, if any, or other benefits, if any, with
respect to the Director's position with the Company or its Subsidiaries.
Neither the Plan nor any Options granted under the Plan shall confer upon any
person any right to continue to serve as a Director.
(c) Each Eligible Person who becomes an Eligible Person by
reason of being elected as a Director after the Initial Grant Date shall be
granted on the date of his initial election an Option to acquire the number of
shares of Common Stock determined in the discretion of the Board for his
service as a Director.
(d) No Options shall otherwise be granted hereunder, and the
Board shall not have any discretion with respect to the grant of Options within
the meaning of Rule 16b-3 promulgated under the Exchange Act, or any successor
rule.
7. EXERCISE PRICE, VESTING SCHEDULE AND TERM OF OPTION.
(a) The exercise price of each Share placed under an Option
pursuant to this Plan shall be the Fair Market Value of such Share on the Date
of Grant.
3
<PAGE> 6
(b) Vesting of each Option shall be at the discretion of the
Board and shall be based on the date the Director commences service to the
Company. Options shall vest only if the Optionee is serving as a Director of
the Company on the vesting date.
(c) Each Option granted under this Plan shall have a term of
five years from the Date of Grant of such Option.
8. EXERCISE OF OPTION.
(a) After the six-month anniversary of the Date of Grant of an
Option, such Option may be exercised at any time and from time to time during
the term of such Option, in whole or in part.
(b) Options may be exercised: (i) during the Optionee's
lifetime, solely by the Optionee; (ii) if an Option has been assigned pursuant
to Section 10 hereof, by the successor Optionee; or (iii) after Optionee's
death, by the personal representative of the Optionee's estate or the person or
persons entitled thereto under his will or under the laws of descent and
distribution.
(c) An Option shall be deemed exercised when: (i) the Company
has received written notice of such exercise delivered to the Company in
accordance with the notice provisions of the applicable Option Agreement; (ii)
full payment of the aggregate exercise price of the Shares as to which the
Option is exercised has been tendered to the Company; and (iii) arrangements
that are satisfactory to the Board in its sole discretion have been made for
the Optionee's payment to the Company of the amount, if any, that the Company
determines to be necessary for the Company to withhold in accordance with the
applicable federal or state income tax withholding requirements.
(d) The exercise price of any Shares purchased shall be paid, at
the option of the Optionee (i) solely in cash by certified check, cashier's
check, money order or personal check (if approved by the Board); (ii) in Common
Stock of any series theretofore owned by such Optionee; or (iii) without the
exchange of any funds, by the Optionee electing to receive the full number of
Shares purchasable under the Option then being exercised less that number of
Shares that have a value (i.e., the Fair Market Value of the Shares less the
Exercise Price with respect to such Shares) being equal to the Exercise Price
(or by a combination of the above); provided, however, that, in the case of the
preceding clause (ii), if the Optionee acquired such stock to be surrendered
directly or indirectly from the Company, he shall have owned such stock for six
months prior to using such stock to exercise an Option; provided, further,
however, that such exercise transaction shall not result in a violation of
Section 16 of the Exchange Act. For purposes of determining the amount, if any,
of the exercise price satisfied by payment in Common Stock, such Common Stock
shall be valued at its Fair Market Value on the date of exercise. Any Common
Stock delivered in satisfaction of all or a portion of the exercise price shall
be appropriately endorsed for transfer and assignment to the Company.
4
<PAGE> 7
(e) The Optionee shall not be, nor have any of the rights or
privileges of, a shareholder of the Company with respect to any Shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such Shares shall have been issued by the Company to
the Optionee.
9. TERMINATION OF OPTION PERIOD. The unexercised portion of an
Option shall automatically and without notice terminate and become null and
void and be forfeited upon the earliest to occur of the following:
(a) other than by reason of such Optionee's death or disability
180 days after the date that the Optionee's position as a Director of the
Company terminates;
(b) one year after the death of Optionee;
(c) one year after the date on which the Optionee's position as
Director is terminated by reason of a mental or physical disability determined
by a medical doctor satisfactory to the Company; or
(d) five years after the Date of Grant of such Option.
10. ASSIGNABILITY OF OPTIONS. No Option shall be assignable or
otherwise transferable, except to members of the Optionee's immediate family or
by will, or the laws of descent and distribution, and no Option shall be
transferrable by an Optionee in violation of Section 16 of the Exchange Act.
11. ADJUSTMENTS.
(a) If at any time there shall be an increase or decrease in the
number of issued and outstanding Shares, through the declaration of a stock
dividend or through any recapitalization resulting in a stock split,
combination or exchange of Shares, then appropriate proportional adjustment
shall be made in the number of Shares (and, with respect to Options, the
exercise price per Share): (i) subject to outstanding Options; (ii) reserved
under the Plan; and (iii) granted as subsequent Options.
(b) In the event of a merger, consolidation or other
reorganization of the Company under the terms of which the Company is not the
surviving corporation, but the surviving corporation elects to assume an
Option, each Optionee shall be entitled to receive, upon the exercise of such
Option, with respect to each Share: (i) the number of shares of stock of the
surviving corporation (or equity interest in any other entity); and (ii) any
other notes, evidences of indebtedness or other property, that the Optionee
would have received in connection with such merger, consolidation or other
reorganization had he exercised the Option with respect to such Shares
immediately prior to such merger, consolidation or other reorganization.
5
<PAGE> 8
(c) Except as otherwise expressly provided herein, the issuance
by the Company of shares of its capital stock of any class or securities
convertible into shares of capital stock of any class, either in connection
with direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect and no
adjustment by reason thereof shall be made with respect to, the number of or
exercise price of Shares then subject to outstanding Options granted under the
Plan.
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate: (i)
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issuance by the Company of debt
securities or preferred stock that would rank above the Shares subject to
outstanding Options; (iv) the dissolution or liquidation of the Company; (v)
any sale, transfer or assignment of all or any part of the assets or business
of the Company; or (vi) any other corporate act or proceeding, whether of a
similar character or otherwise.
12. PURCHASE FOR INVESTMENT. As a condition of any issuance of a stock
certificate for Shares, the Board may obtain such agreements or undertakings,
if any, as it may deem necessary or advisable to assure compliance with any
provision of this Plan or any law or regulation, including, but not limited to,
the following:
(a) a representation and warranty by the Optionee to the
Company, at the time his Option is exercised, that he is acquiring the Shares
to be issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(b) a representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Board, necessary or appropriate to
comply with the provisions of any securities law deemed by the Board to be
applicable to the issuance of the Shares and are endorsed upon the certificates
representing the Shares.
13. AMENDMENTS, MODIFICATIONS, SUSPENSION OR DISCONTINUANCE OF THIS
PLAN. For the purpose of complying with changes in the Code or ERISA, the Board
may amend, modify, suspend or terminate the Plan at any time. For the purpose
of meeting or addressing any other changes in legal requirements or any other
purpose, the Board may amend, modify, suspend or terminate the Plan only once
every six months.
14. GOVERNMENTAL REGULATION. This Plan and the granting of Options
and the exercise of Options hereunder, and the obligation of the Company to
sell and deliver shares under such Options, shall be subject to all applicable
laws, rules, and regulations and to such approvals by any governmental agencies
or national securities exchanges as may be required.
6
<PAGE> 9
15. MISCELLANEOUS.
(a) If any provision of this Plan is held invalid for any
reason, such holding shall not affect the remaining provisions hereof, but
instead this Plan shall be construed and enforced as if such provision had
never been included in this Plan.
(b) This Plan shall be governed by the laws of the State of
Georgia.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter gender
shall be a reference to such other gender as is appropriate.
16. EFFECTIVE DATE AND TERMINATION DATE. The effective date of this
Plan is September 1, 1999, the date on which the Board adopted this Plan, but is
subject to the approval of the holders of a majority of the common stock,
without series designation, present either in person or by proxy and entitled
to vote at a duly held meeting of the shareholders of the Company at which a
quorum is present representing a majority of all outstanding voting common
stock, without series designation. In the event that such shareholder approval
is not obtained, all options granted pursuant to the Plan shall be null and
void. This Plan shall terminate on the tenth anniversary of the effective date.
7
<PAGE> 10
[COMSTAR LOGO] STOCK OPTION AGREEMENT
THIS DIRECTOR STOCK OPTION AGREEMENT (this "Agreement"), entered into as
of this the___ day of__ , 1999, by and between comstar.net, inc., a Georgia
corporation (the "Company"), and___ (the "Optionee").
WHEREAS, effective as of September 1, 1999, the Board of Directors of the
Company adopted a stock option plan known as the "Director Stock Option Plan of
comstar.net, inc." (the "Plan"), and recommended that the Plan be approved by
the Company's shareholders; and
WHEREAS, the Committee has granted the Optionee the right and option
(the "Option") to purchase the number of shares of the Company's common stock
(the "Stock") as set forth below, and in consideration of the granting of that
Option the Optionee intends to continue to perform services as a director of
the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan.
NOW, THEREFORE, in consideration of the above and the covenants
contained herein, the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the provisions
of the Plan and the terms and definitions of the Plan are incorporated
herein by reference and made a part hereof. A copy of the Plan has been
delivered to, and receipt is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions, limitations and
conditions stated herein, the Company hereby evidences its grant to the
Optionee of the Option to purchase all or any part of the number of shares
of Stock, set forth on Schedule A attached hereto and incorporated herein
by reference. The Option shall be exercisable in the amounts and at the
time specified on Schedule A. The Option shall expire and shall not be
exercisable on the date specified on Schedule A or on such earlier date as
determined pursuant to Section 8, 9, or 10 hereof. This Option is not an
Incentive Stock Option.
3. Purchase Price. The price per share to be paid by the Optionee for the
shares subject to this Option (the "Exercise Price") shall be as specified
on Schedule A, which price shall be an amount not less than the Fair
Market Value of a share of Stock as of the Date of Grant (as defined in
Section 11 below).
4. Exercise Terms. The Optionee must exercise the Option for at least the
lesser of 100 shares or the number of shares of Stock that the Optionee is
eligible to purchase in accordance with the terms hereof and the Plan as
to which the Option remains unexercised (such shares being called
"Purchasable" herein). In the event this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to
its expiration, the shares of Stock with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No portion of this Option shall be transferable
by an Optionee other than by will or the laws of descent and distribution
or, pursuant to a Qualified Domestic Relations Order, and no Option shall
be transferable by an Optionee who is an officer, director or holder of
10% or more of any class of the Company's securities who is or would be
required to file reports pursuant to Section 16 of the Securities Exchange
Act of 1934 (a "Section 16 Insider") prior to shareholder approval of the
Plan. During the lifetime of an Optionee, Options shall be exercisable
only by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the
Notice of Exercise attached hereto as Schedule B) signed by the Optionee,
or by such administrators, executors or personal representatives, and
delivered or mailed to the Company as specified in Section 14 hereof to
the attention of the Chief Financial Officer or such other officer as the
Company may designate. Any such notice shall (a) specify the number of
shares of Stock which the Optionee or the Optionee's administrators,
executors or personal representatives, as the case may be, then elects to
purchase hereunder; (b) contain such information as may be reasonably
required pursuant to Section 12 hereof; and (c) be accompanied by (i) a
certified or cashier's check payable to the Company in payment of the
total Exercise Price (as defined on Schedule A hereto) applicable to such
shares as provided herein; (ii) shares of Stock owned by the Optionee and
duly endorsed or accompanied by stock transfer powers having a Fair Market
Value equal to the total Exercise Price applicable to such shares
purchased hereunder; or (iii) a certified or cashier's check accompanied
by the number of shares of Stock whose Fair Market Value when added to the
amount of the check equals the total Exercise Price applicable to such
shares purchased hereunder. Upon receipt of any such notice and
accompanying payment,
<PAGE> 11
and subject to the terms hereof, the Company agrees to issue to the
Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, stock certificates for the number of
shares specified in such notice registered in the name of the person
exercising this Option.
7. Adjustment in Option. The number of shares subject to this Option, the
Exercise Price and other matters are subject to adjustment during the term
of this Option in accordance with the Plan.
8. Termination of Directorship.
(a) Except as otherwise specified in Schedule A hereto, in the event of
the termination of the Optionee's directorship with the Company or
any of its subsidiaries, other than a termination that is either (i)
for Cause; (ii) voluntary on the part of the Optionee and without
written consent of the Company; or (iii) for reasons of death or
disability or retirement, the Optionee may exercise this Option at
any time within 90 days after such termination to the extent of the
number of shares which were Purchasable hereunder at the date of such
termination.
(b) Except as specified in Schedule A attached hereto, in the event of a
termination of the Optionee's directorship with the Company that is
either (i) for Cause or (ii) voluntary on the part of the Optionee
and without the written consent of the Company, this Option, to the
extent not previously exercised, shall terminate immediately and
shall not thereafter be or become exercisable.
(c) Unless and to the extent otherwise provided in Schedule A hereto, in
the event that the Optionee is not elected to the board for another
term as prescribed by the Company or any subsidiary, the Optionee
shall continue to have the right to exercise any Options for shares
which were Purchasable at the date of expiration of the Optionee's
term (provided that, on the date which is three months after the date
of expiration of the Optionee's term, where the Optionee is not
reelected, the Options will become void and unexercisable). This
Option does not represent an employment contract and does not confer
upon the Optionee any right with respect to the status or continuance
of a directorship or other relationship by the Company or by any of
its subsidiaries either during or after the term hereof.
9. Disabled Optionee. In the event of termination of a directorship with the
Company because of the Optionee's becoming subject to a Permanent and
Total Disability, the Optionee (or his or her personal representative) may
exercise this Option, within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death or (b) the
expiration date of this Option, to the extent of the number of shares
which were Purchasable hereunder at the date of such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A with
respect to the rights of the Optionee upon termination of directorship
with the Company under Section 8(a) above, in the event of the Optionee's
death while a director of the Company or any of its subsidiaries or within
three months after a termination of directorship (if such termination was
neither (i) for cause nor (ii) voluntary on the part of the Optionee and
without the written consent of the Company), the appropriate persons
described in Section 6 hereof or persons to whom all or a portion of this
Option is transferred in accordance with Section 5 hereof may exercise
this Option at any time within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death or (b) the
expiration date of this Option. If the Optionee was a director of the
Company at the time of death, this Option may be so exercised to the
extent of the number of shares that were Purchasable hereunder at the date
of death. If the Optionee's directorship with the Company terminated prior
to his or her death, this Option may be exercised only to the extent of
the number of shares covered by this Option which were Purchasable
hereunder at the date of such termination.
11. Date of Grant. This Option was granted by the Board of Directors of the
Company on the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges that the
issuance of capital stock of the Company is subject to limitations imposed
by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this
Option that would cause the Company to violate the law or any rule,
regulation, order or consent decree of any regulatory authority (including
without limitation the Securities and Exchange Commission) having
jurisdiction over the affairs of the Company. The Optionee agrees that he
or she will provide the Company with such information as is reasonably
requested by the Company or its counsel to determine whether the issuance
of Stock complies with the provisions described by this Section 12.
<PAGE> 12
13. Restriction on Disposition of Shares. The shares purchased pursuant to the
exercise of a Stock Option shall not be transferred by the Optionee except
pursuant to the Optionee's will, or the laws of descent and distribution,
until such date which is the later of two years after the grant of such
Stock Option or one year after the transfer of the shares to the Optionee
pursuant to the exercise of such Stock Option. The shares of Stock
purchased pursuant to the exercise of this Option shall not be sold,
conveyed or otherwise transferred except pursuant to and in compliance
with an effective registration statement applicable to such shares or a
valid exemption from registration (with proof of such registration or
exemption being delivered to and satisfactory to the Company, in its sole
discretion).
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and their
representatives (including in bankruptcy), heirs, successors and
assigns.
(b) This Agreement is executed and delivered in, and shall be governed by
the laws of, the State of Georgia.
(c) Any requests or notices to be given hereunder shall be deemed given,
and any elections or exercises to be made or accomplished shall be
deemed made or accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit thereof in the
United States mail, registered, return receipt requested and postage
prepaid, addressed, if to the Optionee, at the address set forth
below and, if to the Company, to the executive offices of the Company
at 2812 Spring Street, Suite 210, Atlanta, Georgia 30339.
(d) This Agreement may not be modified except in writing executed by each
of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Director Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Director
Stock Option Agreement under seal, all as of the day and year first above
written.
comstar.net, inc.
Accepted By:
- ------------------------------------------------------------------------------
Signature
James C. Howell
- ------------------------------------------------------------------------------
Name
CEO
- ------------------------------------------------------------------------------
Title
OPTIONEE
Accepted By:
- ------------------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City, State Zip
ATTEST:
- ------------------------------------------------------------------------------
Secretary or Assistant Secretary
Edward N. Landa
- ------------------------------------------------------------------------------
Name
[SEAL]
<PAGE> 13
[COMSTAR LOGO] SCHEDULE A TO THE
STOCK OPTION AGREEMENT
This Schedule A to the Stock Option Agreement (this "Agreement") is entered
into as of this___ day of___ , 1999, by and between comstar.net. inc., and____.
1. Number of Shares Subject to Option: ___ shares.
2. Option Exercise Price: $____ per share.
3. Date of Grant: ____.
4. Option Vesting Schedule:
Check One:
[ ] Options are exercisable with respect to all shares on or after
the date hereof
[ ] Options are exercisable with respect to the number of shares
indicated below on or after the date indicated next to the number
of shares.
Number of Shares Vesting Date
---------------- ------------
5. Option Exercise Period:
Check One:
[ ] All options expire and are void unless exercised on or before___.
[ ] Options expire and are void unless exercised on or before the
date indicated next to the number of shares:
Number of Shares Expiration Date
---------------- ---------------
6. Effect of Termination of Employment on Optionee (if different from
that set forth in Sections 8, 9 and 10 of the Stock Option
Agreement).
Not Applicable.
<PAGE> 14
[COMSTAR LOGO] SCHEDULE B TO THE
STOCK OPTION AGREEMENT
NOTICE OF EXERCISE
The undersigned hereby notifies comstar.net, inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase_____ shares of the Company's common stock (the "Common Stock"),
pursuant to the Director Stock Option Agreement (the "Agreement") between the
undersigned and the Company dated_____ . Accompanying this Notice is (1) a
certified or a cashier's check in the amount of $_____ payable to the Company,
and/or (2)____ shares of the Company's Common Stock presently owned by the
undersigned and duly endorsed or accompanied by stock transfer powers, having
an aggregate Fair Market Value (as defined in the Plan referenced in the
Agreement) as of the date hereof of $ , such amounts being equal, in the
aggregate, to the purchase price per share set forth in Section 3 of the
Agreement multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to the Plan).
IN WITNESS WHEREOF, the undersigned has set his hand and
seal, this____ day of ___,___.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
-----------------------------------------
Signature
-----------------------------------------
Name
-----------------------------------------
Position (if other than Optionee)
<PAGE> 1
EXHIBIT 10.3
COMSTAR.NET, INC.
DIRECTOR'S AND OFFICER'S
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of _______________________ 1999, between
comstar.net, inc., a Georgia corporation (the "Corporation"), and the member of
the Board of Directors and/or the officer of the Corporation named on the
signature page hereof (the "Executive").
WHEREAS, the Executive is a member of the Board of Directors and/or an
officer of the Corporation and in such capacity is performing a valuable
service to the Corporation; and
WHEREAS, the Corporation's Bylaws (the "Bylaws") and Sections 14-2-850
through 14-2-859 of the Georgia Business Corporation Code, as amended to date
(the "State Statute") provide for the indemnification of the directors and
officers of the Corporation; and
WHEREAS, the Bylaws and State Statute specifically contemplate that
contracts may be entered into between the Corporation and the members of its
Board of Directors and officers with respect to indemnification of such
directors and officers; and
WHEREAS, in order to provide to the Executive assurances with respect
to the protection provided against liabilities that he may incur in the
performance of his duties to the Corporation, and to thereby induce the
Executive to serve as a member of its Board of Directors and/or as an officer
of the Corporation, the Corporation has determined and agreed to enter into
this contract with the Executive.
NOW, THEREFORE, in consideration of the premises and the Executive's
continued service as a director and/or an officer after the date hereof, the
parties agree as follows:
1. INDEMNIFICATION. Subject only to the exclusions set forth in
Section 2 hereof, and in addition to any other indemnity to which the Executive
may be entitled under the State Statute or any bylaw, resolution or agreement
(but without duplication of payments with respect to indemnified amounts), the
Corporation hereby further agrees to hold harmless and indemnify the Executive,
to the fullest extent permitted by law, including, but not limited to, holding
harmless and indemnifying the Executive against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Executive in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation), to which the Executive is, was, or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that the Executive
is, was, or at any time becomes a director, officer, employee or agent of the
Corporation, or a predecessor corporation, or is or was serving or at any time
serves at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, employee
benefit plan, joint
<PAGE> 2
venture, trust, or other enterprise.
2. LIMITATIONS ON INDEMNITY. No indemnity pursuant to Section 1
hereof shall be paid by the Corporation:
(a) with respect to any proceeding in which the Executive is
adjudged, by final judgment not subject to further appeal, liable
to the Corporation or is subjected to injunctive relief in favor
of the Corporation:
(i) for any appropriation, in violation of his duties, of
any business opportunity of the Corporation;
(ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law;
(iii) for the types of liability set forth in Section
14-2-832 of the Georgia Business Corporation Code; or
(iv) for any transaction from which the Executive received
an improper personal benefit;
(b) with respect to any suit in which final judgment is
rendered against the Executive for an accounting of profits, made
from the purchase or sale by the Executive of securities of the
Corporation, pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 or similar provisions of any
federal, state, or local statutory law, or on account of any
payment by the Executive to the Corporation in respect of any
claim for such an accounting; or
(c) if a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
3. CONTRIBUTION. If the indemnification provided in Section 1 is
unavailable, then in respect of any threatened, pending, or completed action,
suit, or proceeding in which the Corporation is jointly liable with the
Executive (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute, to the extent it is not lawfully prevented from
doing so, to the amount of expenses, judgments, fines, and settlements paid or
payable by the Executive in such proportion as is appropriate to reflect (i)
the relative benefits received by the Corporation on the one hand and the
Executive on the other hand from the transaction from which such action, suit,
or proceeding arose, and (ii) the relative fault of the Corporation on the one
hand and of the Executive on the other in connection with the events which
resulted in such expenses, judgments, fines, or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the
Corporation on the one hand and of the Executive on the other shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines, or settlement
amounts. The Corporation agrees that it would not be just and equitable if
<PAGE> 3
contribution pursuant to this Section 3 were determined by pro rata allocation
or any other method of allocation that does not take account of the foregoing
equitable considerations.
4. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period the Executive is
a director, officer, employee, or agent of the Corporation (or is serving at
the request of the Corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise)
and shall continue thereafter for so long as the Executive shall be subject to
any possible claim or threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, or investigative, by reason of the fact
that the Executive was a director of the Corporation or serving in any other
capacity referred to herein.
5. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Executive of notice of the commencement of any action, suit, or proceeding, the
Executive will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation in writing of the
commencement thereof, but the omission to so notify the Corporation will not
relieve the Corporation from any liability which it may have to the Executive
otherwise than under this Agreement. With respect to any such action, suit, or
proceeding as to which the Executive so notifies the Corporation:
(a) the Corporation will be entitled to participate therein at
its own expense; and
(b) subject to Section 6 hereof, and if the Executive shall
have provided his written affirmation of his good faith belief
that his conduct did not constitute behavior of the kind described
in paragraph 2(a) hereof and that he is entitled to
indemnification hereunder, the Corporation may assume the defense
thereof.
After notice from the Corporation to the Executive of its election so
to assume such defense, the Corporation will not be liable to the Executive
under this Agreement for any legal or other expenses subsequently incurred by
the Executive in connection with the defense thereof, other than reasonable
costs of investigation or as otherwise provided below. The Executive shall have
the right to employ his separate counsel in such action, suit, or proceeding,
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the expense of
the Executive unless (i) the employment of counsel by the Executive has been
authorized by the Corporation, (ii) counsel designated by the Corporation to
conduct such defense shall not be reasonably satisfactory to the Executive, or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of such
counsel shall be at the expense of the Corporation. For the purposes of clause
(ii) above, the Executive shall be entitled to determine that counsel
designated by the Corporation is not reasonably satisfactory if, among other
reasons, the Executive shall have been advised by qualified counsel that,
because of actual or potential conflicts of interest in the matter between the
Executive, other officers or directors similarly indemnified by the
Corporation, and/or the Corporation, representation of the Executive by counsel
designated by the Corporation is likely to materially and adversely affect the
Executive's
<PAGE> 4
interest or would not be permissible under applicable canons of legal ethics.
The Corporation shall not be liable to indemnify the Executive under
this Agreement for any amounts paid in settlement of any action or claim
effected without the Corporation's written consent. The Corporation shall not
settle any action or claim in any manner which would impose any penalty or
limitation on the Executive without the Executive's written consent. Neither
the Corporation nor the Executive will unreasonably withhold consent to any
proposed settlement.
6. ADVANCEMENT AND REPAYMENT OF EXPENSES. Upon request therefor
accompanied by reasonably itemized evidence of expenses incurred, and by the
Executive's written affirmation of his good faith belief that his conduct met
the standard applicable to indemnification pursuant to Section 1 hereof and did
not constitute behavior of the kind described in Section 2(a) hereof and that
he is entitled to indemnification hereunder, the Corporation shall advance to
the Executive the reasonable expenses (including attorneys' fees and costs of
investigation and defense (including the fees of expert witnesses, other
professional advisors, and private investigators)) incurred by him in defending
any civil or criminal suit, action, or proceeding for which the Executive is
entitled (assuming an applicable standard of conduct is met) to indemnification
pursuant to this Agreement. The Executive agrees to reimburse the Corporation
for all reasonable expenses paid by the Corporation, whether pursuant to this
Section or Section 5 hereof, in defending any action, suit, or proceeding
against the Executive in the event and to the extent that it shall ultimately
be determined that the Executive is not entitled to be indemnified by the
Corporation for such expenses under this Agreement. Any advances and the
Executive's agreement to repay shall be unsecured and interest-free.
7. ENFORCEMENT.
(a) The Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on
it hereby in order to induce the Executive to serve as a director
and/or officer of the Corporation and acknowledges that the
Executive will in the future be relying upon this Agreement in
continuing to serve in such capacity.
(b) In the event the Executive is required to bring any action
to enforce rights or to collect moneys due under this Agreement
and is successful in such action, the Corporation shall reimburse
the Executive for all of the Executive's reasonable fees and
expenses in bringing and pursuing such action.
8. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable in whole or in
part for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof.
<PAGE> 5
9. GOVERNING LAW; SUCCESSORS; AMENDMENT AND TERMINATION.
(a) This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Georgia, without
regard to its conflict of law principles.
(b) This Agreement shall be binding upon the Executive and
the Corporation and its successors and assigns (including any
transferee of all or substantially all of its assets and any
successor by merger or otherwise by operation of law), and
shall inure to the benefit of the Executive, his heirs,
personal representatives, and assigns and to the benefit of
the Corporation and its successors and assigns.
(c) No amendment, modification, termination, or cancellation
of this Agreement shall be effective unless in writing signed
by both parties hereto.
(d) References to the male gender shall include the female
gender, and vice versa.
[Signatures appear on following page.]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
in counterparts or otherwise, as of the day and year first above written.
EXECUTIVE COMSTAR.NET, INC.
By:
- --------------------------------------- --------------------------------
Name: Name (Print):
---------------------------------- ----------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 10.4
OFFICE LEASE
BUILDING: EMERSON CENTER
LANDLORD: THE EMERSON CENTER COMPANY
TENANT: COMSTAR.NET, INC.
DBA SAME
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
TABLE OF CONTENTS.................................................... 2
1. CERTAIN LEASE PROVISIONS............................................. 3
2. PREMISES............................................................. 4
2.1 Definition....................................................... 4
2.2 Public Areas..................................................... 4
3. TERM.................................................................
3.1 Term............................................................. 4
3.2 Delay in Commencement............................................ 4
3.3 Early Possession................................................. 4
3.4 Delivery of Possession........................................... 4
3.5 Holding Over..................................................... 4
4. RENT................................................................. 4
4.1 Base Rent........................................................ 4
4.2 Additional Rent.................................................. 4
4.3 Parking and Storage.............................................. 5
4.4 Acceptance of Rental Payments.................................... 5
5. ESCALATIONS OF RENT.................................................. 5
5.1 Determination.................................................... 5
5.2 Indexing......................................................... 5
6. SHARED EXPENSES...................................................... 5
6.1 Determination.................................................... 5
6.2 Escalations...................................................... 5
6.3 Statements....................................................... 6
7. SECURITY DEPOSIT..................................................... 7
8. USE.................................................................. 7
8.1 Use.............................................................. 7
8.2 Compliance With Law.............................................. 7
8.3 Waste and Nuisance............................................... 7
8.4 Conditions of Premises........................................... 7
8.5 Insurance Cancellation........................................... 7
8.6 Landlord's Rules and Regulations................................. 7
9. LANDLORD'S SERVICES................................................... 7
9.1 Basic Services................................................... 8
9.2 Initial Construction............................................. 8
9.3 Interruption of Service.......................................... 8
10. MAINTENANCE, REPAIRS AND ALTERATIONS................................. 8
10.1 Landlord's Obligations.......................................... 8
10.2 Tenant's Obligations............................................ 8
10.3 Surrender....................................................... 9
10.4 Alterations and Additions....................................... 9
11. TENANT'S USE OF PUBLIC AREAS........................................ 10
12. TAXES AND TELEPHONE.................................................. 10
12.1 Personal Property Taxes......................................... 10
12.2 Evidence of Payment............................................. 10
12.3 Telephone....................................................... 10
13. INSURANCE AND INDEMNITY.............................................. 10
13.1 Liability Insurance............................................. 10
13.2 Property Insurance.............................................. 10
13.3 Insurance Policies.............................................. 10
13.4 Waiver Of Subrogation........................................... 10
13.5 Hold Harmless................................................... 11
13.6 Exemption of Landlord from Liability............................ 11
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
14. DAMAGE OR DESTRUCTION........................................... 11
14.1 Option to Terminate Lease.................................. 11
14.2 Obligation to Repair or Restore............................ 11
14.3 Fault of Tenant............................................ 11
14.4 Obligations of Tenant...................................... 11
14.5 Termination by Tenant...................................... 11
15. CONDEMNATION.................................................... 12
16. ASSIGNMENT AND SUBLETTING....................................... 12
16.1 Landlord's Consent Required................................ 12
16.2 No Release of Tenant....................................... 12
16.3 Attorneys Fees and Administrative Fees..................... 13
16.4 Right to Collect Rent...................................... 13
17. DEFAULTS; REMEDIES.............................................. 13
17.1 Defaults................................................... 13
17.2 Remedies in Default........................................ 13
17.3 Default by Landlord........................................ 14
17.4 Late Charges............................................... 14
18. RIGHTS OF MORTGAGEES............................................ 14
18.1 Subordination.............................................. 14
18.2 Mortgagee's Consent to Amendments.......................... 15
18.3 Mortgagee's Right to Cure.................................. 15
19. NOTICES......................................................... 15
20. RELOCATION...................................................... 15
21. QUIET POSSESSION................................................ 15
22. OPTIONS......................................................... 15
23. LANDLORD'S LIEN................................................. 15
24. HAZARDOUS MATERIALS............................................. 16
25. GENERAL PROVISIONS.............................................. 16
25.1 Estoppel Certificate....................................... 16
25.2 Landlord's Interests....................................... 16
25.3 Severability............................................... 16
25.4 Interest on Past Due Obligations; Certified Funds.......... 17
25.5 Time of the Essence........................................ 17
25.6 Captions................................................... 17
25.7 Entire Agreement........................................... 17
25.8 Waivers.................................................... 17
25.9 Recording.................................................. 17
25.10 Determinations by Landlord................................ 17
25.11 Cumulative Remedies....................................... 17
25.12 Covenants and Conditions.................................. 17
25.13 Binding Effect; Choice of Law............................. 17
25.14 Attorneys Fees............................................ 17
25.15 Landlord's Access......................................... 17
25.16 Auctions.................................................. 17
25.17 Merger.................................................... 17
25.18 Corporate Authority....................................... 17
25.19 Signs..................................................... 17
25.20 Brokers................................................... 18
25.21 Guarantor................................................. 18
25.22 Governing Law............................................. 18
25.23 Joint and Several Liability............................... 18
25.24 No Joint Venture.......................................... 18
</TABLE>
EXHIBITS
Exhibit A -- Legal Description
Exhibit B -- Premises Site Plan
Exhibit D -- Rules and Regulations
Exhibit E -- Guaranty
<PAGE> 4
OFFICE LEASE
This Lease, dated for reference purposes only Sept. 30, 1999, is made
by and between THE EMERSON CENTER COMPANY (the "Landlord"), and COMSTAR
COMMUNICATIONS, INC., (the "Tenant").
1. CERTAIN LEASE PROVISIONS
The description and amounts set forth below are qualified by their usage
elsewhere in this Lease, including those Sections referred to in parentheses
following such descriptions:
1.1 Tenant's address and telephone number (Section 19):
Tenant Name: COMSTAR.NET, INC.
----------------------------------------------
Doing Business As (DBA): Same
----------------------------------
Address: 2812 SPRING ROAD, SUITE 210, ATLANTA, GA 30339
---------------------------------------------------
Telephone:
------------------------------------------------
1.2 Premises. (Section 2.1):
Building Name: EMERSON CENTER Suite No.: 210
-------------------------- --------
Address: 2812 SPRING ROAD, ATLANTA, GA 30339
--------------------------------------------------
1.3 Leased Area. (Section 2.1): 4,219 rentable sq. ft.
--------------
1.4 Total Building Area. (Section 2.1): 126,979 rentable sq. ft.
------------
1.5 Tenant's Pro-Rata Share of Building Area. (Section 2.1): 3.32 %
---------
1.6 Lease Term (Section 3.1): ONE (1) year(s), Zero (0) month(s).
----------- ---- ------ ---
1.7 Commencement Date. (Section 3.1): OCTOBER 1, 1999 .
--------------- -----
1.8 Expiration Date. (Section 3.1, 3.2): SEPTEMBER 30, 2000 .
-----------------------
1.9 Base Rent for Lease Term. (Section 4.1): $66,027.35
------------------
1.10 Base Rent, Monthly Installments. (Sections 4.1, 5.2):
From 10-01-99 - 09-30-00 Annually $ 66,027.35 Monthly $ 5,502.25
----------- ------------ ----------- --------
1.11 (a) Address of Landlord for rent payments (Sections 4.1, 4.2):
The Emerson Center Company, c/o The Frank M Darby Company
----------------------------------------------------------------------
3384 Peachtree Road, Suite 400, Atlanta, GA 30326
----------------------------------------------------------------------
(b) Address of Landlord for notices. (Sections 6.3, 19):
The Emerson Center Company, c/o Tarragon Realty Investors, Inc.
-----------------------------------------------------------------------
3100 Monticello, Suite 200, Dallas, TX 75205 - Attn.:Chris W. Clinton
-----------------------------------------------------------------------
(c) Address of Tenant for notices (Sections 6.3, 19):
2812 Spring Road, Suite 210, Atlanta, GA 30339
-----------------------------------------------------------------------
1.12 Geographic Area for CPI Calculation. (Section 5.2): N/A
------------
1.13 Base Month for CPI Calculation. (Section 5.2): N/A
------------
1.14 Landlord's Share of Operating Expenses.(Section 6.2):Base Year 1999 Actuals
per rentable square foot ----------------------
1.15 Landlord's Share of Real Estate Taxes.(Section 6.2): Base Year 1999 Actuals
per rentable square foot ----------------------
1.16 Security Deposit. (Section 7): $ 0.00
------------
1.17 Use. (Section 8.1): General Office
-----------------------
1.18 Brokers. (Section 25.20): Frank M. Darby Company
----------------------------------------------
-----------------------------------------------------------------------
1.19 Addendum(s). (Sections 3.2, 4.3, 9.2, 22): The following addendum(s) are
attached to this Lease:
This Lease consists of 25 articles on 18 pages, plus Exhibits A, B, D, G
and 0
---
additional page(s) of Addendum(s).
Page 3
Tenant's Initials JCH
--------
Landlord's Initials CC
--------
<PAGE> 5
2. PREMISES.
2.1 Definition. Landlord hereby leases to Tenant and Tenant leases from
Landlord for the term, at the rental, and upon all of the conditions set forth
herein, that certain real property known by suite number and address specified
in Section 1.2 hereof, consisting of the approximate amount of rentable square
feet specified in Section 1.3 hereof, and which is referred to herein as the
Premises. The Premises are located in an office building presently consisting of
the total number of rentable square feet specified in Section 1.4 hereof, which
office building, the real property on which it is situated (the legal
description of which is attached hereto as Exhibit A), and any parking
facilities or structures appurtenant thereto are hereinafter collectively
referred to as the "Building". The Premises are depicted in Exhibit B attached
hereto and incorporated herein by this reference, but the depiction of possible
uses, tenants or locations on Exhibit B shall not be construed to be a warranty
or representation by Landlord that any such uses, tenants or locations presently
exist or will continue to exist. Tenant's share of the total amount of square
feet of the Building is equal to the pro-rata share specified in Section 1.5
hereof, and said percentage shall hereinafter be referred to as the Tenant's
"Pro-Rata Share".
2.2 Public Areas. As long as this Lease remains in effect and Tenant is
not in default hereunder, Tenant shall have the nonexclusive right, in common
with the Landlord, other tenants, subtenants and invitees, to use the public
areas of the Building which consist of the entrance foyer and lobby of the
Building, the common corridors on the floor of the Building on which the
Premises are situated and other areas appurtenant to or servicing the elevators,
shipping and receiving areas and lavatories in the Building, provided that
Landlord shall have the right at any time and from time to time to exclude
therefrom such areas as Landlord may determine so long as access to the Premises
is not unreasonably denied.
3. TERM.
3.1 Term. The term of this Lease shall be the term specified in Section
1.6 hereof, commencing on the Commencement Date specified in Section 1.7 hereof
and ending on the Expiration Date specified in Section 1.8 hereof unless sooner
terminated pursuant to any provision of this Lease.
3.2 Delay in Commencement. Notwithstanding said Commencement Date, if for
any reason Landlord cannot deliver possession of the Premises to Tenant on said
date, Landlord shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Tenant
hereunder. However, in such case Tenant shall not be obligated to pay rent until
possession of the Premises is tendered to Tenant, which date shall be
the new Commencement Date, and the Expiration Date shall remain unchanged. Upon
Landlord's request, the parties agree to execute in writing an Addendum to
certify the Commencement Date and Expiration Date hereof, but this Lease shall
not be affected in any manner if either party fails or refuses to execute such
Addendum.
3.3 Early Possession. In the event that Landlord shall permit Tenant to
occupy the Premises prior to the Commencement Date, such occupancy shall be
subject to all of the provisions of this Lease and Tenant shall be obligated to
pay rental and all other charges incurred under this Lease in addition to any
obligations which commence on the Commencement Date. Said early possession shall
not advance the Expiration Date of this Lease.
3.4 Delivery of Possession. Tenant shall be deemed to have taken
possession of the Premises when the earliest of any of the following occur: (a)
five business days after Landlord or Landlord's agent, architect or contractor
notifies Tenant that the Premises are ready for occupancy; or (b) Tenant
commences to occupy or otherwise make use of the Premises. If Tenant is notified
pursuant to Section 3.4(a), Tenant agrees to occupy the Premises within twenty
business days thereafter. As used in this Lease, "business days" shall mean
Mondays through Fridays. Tenant agrees that, upon the request of Landlord,
Tenant will execute a document certifying the date on which Tenant took
possession of the premises.
3.5 Holding Over. If Tenant remains in possession of the Premises or any
part thereof after the expiration of the term hereof, such occupancy shall be a
tenancy from month to month at a monthly rental equal to 150% of the Base Rent
and Additional Rent payable hereunder. The foregoing provisions of this Section
3.5 shall neither be construed to give the Tenant any right to remain in
possession of the Premises or any part thereof after the expiration of the term
hereof nor to waive any of the Landlord's rights under this Lease to collect any
damages to which it may be entitled, whether direct or consequential.
4. RENT.
4.1 Base Rent. The Base Rent for the Premises for the entire term of this
Lease shall be as specified in Section 1.9, subject to adjustment pursuant to
the application of Section 3.2 relative to postponement of the installments
specified in Section 1.10, in advance, on the first day of each month of the
term hereof. Tenant shall pay Landlord upon the execution of this Lease the sum
specified in Section 1.10 as the installment of Base Rent for the first full
calendar month of the term of the Lease. Provided, however, that if the
Commencement Date does not occur on the first day of a month, the aforesaid
payment shall be for the initial thirty days of the Lease and the next monthly
installment of Base Rent shall be due on the first day of the first full
calendar month of the term but shall be prorated to cover only those days of
said calendar month not previously paid by the Tenant by its initial payment.
Base Rent for any period during the term hereof which is less than one calendar
month shall be a pro rata portion of the monthly installment based upon the
actual number of days the Lease is in effect during said calendar month. All
rents shall be payable in lawful money of the United States of America without
notice or demand and without any deduction, offset or abatement, and shall be
payable to Landlord at the address stated in Section 1.11(a) or to such other
persons or at such other places as Landlord may designate in writing. The
payment of Base Rent hereunder shall be an independent covenant.
4.2 Additional Rent. Both Tenant and Landlord expressly understand and
agree that all other sums, excepting Base Rent as described in Sections 4.1 and
5, which may from time to time become due under this Lease shall be deemed
Additional Rent. Additional Rent shall include, but not be limited to, late
charges, interest, Shared Expenses as described in Section 6, attorneys' fees,
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security deposits and any cash bonds which may by circumstance be required to be
posted hereunder. Both Tenant and Landlord expressly understand and agree that
all monies paid by Tenant hereunder shall be first credited to Additional Rent
(and allocated among different items of Additional Rent as Landlord may
determine), and only then to Base Rent. All payments of Additional Rent shall be
in lawful money of the United States of America, shall be paid without any
deduction, offset or abatement, and shall be payable to Landlord at the address
stated in Section 1.11(a) or to such other persons or at such other places as
Landlord may designate in writing. The obligation to make payments of Additional
Rent hereunder shall be an independent covenant.
4.3 Parking and Storage. Tenant agrees to pay to Landlord the amount of
Additional Rent for parking as set forth in any Parking Addendum incorporated in
this Lease, and the amount of Additional Rent for storage as set forth in any
Storage Space Addendum incorporated in this Lease, in advance for each month on
the first day of each month of the term hereof. Unless Tenant executes a Parking
Addendum or Storage Space Addendum, Tenant shall have no right to use any
parking facilities or storage facilities of the Building, respectively.
4.4 Acceptance of Rental Payments. No acceptance by Landlord of a lesser
sum than the Base Rent and/or Additional Rent then due shall be deemed to be
other than on account of the earliest amount of such rental due (unless
Landlord elects otherwise), nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as rent be deemed an accord and
satisfaction or compromise and settlement, and Landlord may accept such check
or payment without prejudice to Landlord's right to recover the balance of such
payments due or to pursue any other remedy as provided in this Lease.
6. SHARED EXPENSES.
6.1 Determination. The monthly obligations for Additional Rent as
described in Section 4.2 shall be annually adjusted in accordance with the
provisions of Section 6.2 below.
6.2 Escalations. (a) Landlord agrees to expend as its share of Operating
Expenses paid for and sustained by the Landlord during any calendar year an
amount not greater than that specified in Section 1.14. Said sum shall
constitute the maximum payable by Landlord as its contribution toward Operating
Expenses. The term "Operating Expense" means the total amounts paid or payable,
whether by the Landlord or otherwise on behalf of the Landlord, in connection
with the ownership, leasing, management, maintenance, repair and operation of
the Building, other than those expenses described in Section 6.2(b). Operating
Expense shall include, without limiting the generality of the foregoing, the
aggregate of the amount paid for heating, air conditioning, and providing
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electricity and water and sewer charges to the Building, other than that paid
by individual tenants, the amount paid to any persons or entities for all labor
and/or wages (including the cost to Landlord of workmen's compensation and
disability insurance, payroll taxes, welfare and fringe benefits), for services
rendered, and materials provided to the Building; administrative expenses
related to the Building; any costs incurred for any capital improvements or
structural repairs to the Building to effect labor savings or otherwise reduce
Operating Expenses, or required by law or by any governmental or
quasi-governmental authority having jurisdiction over the Building, which costs
shall be amortized over the useful life of the applicable capital improvements
or structural repairs; the cost of accounting services necessary to compute
the rent and charges payable by tenants of the Building; fees for management,
legal, accounting, inspection and consulting services pertaining to the
Building; the cost of guards and other protection services; and the amount paid
for premiums for all insurance procured by Landlord to insure the Building as
may be required or permitted under this Lease (including, without limitation,
business interruption insurance, and if there is a mortgage or deed of trust on
the Building, such insurance as may be required by the holder of such mortgage
or deed of trust). Notwithstanding the foregoing, Operating Expenses shall not
include the costs of special services rendered to tenants (including Tenant)
for which a special or separate charge is made, any costs of preparation of
space for new tenants in the Building, any costs borne directly by Tenant under
this Lease, leasing commissions, depreciation or interest payments, or debt
service payments made to a mortgagee.
(b) Landlord agrees to expend as its share of Real Estate Taxes paid for
and sustained by the Landlord during any calendar year an amount not greater
than that specified in Section 1.15. Said sum shall constitute the maximum
payable by Landlord as its contribution toward Real Estate Taxes. Real Estate
Taxes shall include general and special taxes, assessments, duties and levies,
charged and levied upon or assessed against the Building and/or any improvement
situated on the real property on which the Building stands, any leasehold
improvement, fixtures, installations, additions and equipment used in the
maintenance or operation of the Building, whether owned by Landlord or Tenant,
not paid directly by the Tenant. Further, if at any time during the term of
this Lease, the method of taxation of real estate prevailing at the time of
execution hereof shall be or has been altered so as to cause the whole or any
part of the taxes now or hereafter levied, assessed or imposed on real estate
to be levied, assessed or imposed upon Landlord, wholly or partially, as a
capital levy or otherwise, or on, or measured by the rents received from the
Building, then such new or altered taxes attributable to the Premises shall be
deemed to be included within the term "Real Estate Taxes" for purposes of this
paragraph. The reference to "Building" in this subparagraph shall include, as
allocated by the Landlord, improvements or facilities utilized in common by the
Building and other buildings upon or adjacent to the real property on which the
Building stands.
(c) Commencing on the first day of the first January after the
Commencement Date, and continuing thereafter during the term of this Lease,
Tenant shall pay to Landlord monthly in advance on the first day of each month,
without notice or demand and without any deduction, offset or abatement, in
lawful money of the United States of America, 1/12 of the amount of the
Tenant's Pro-Rata Share of the Shared Expenses as estimated by Landlord to be
incurred for the calendar year in which the monthly payments are to be made. If
the Expiration Date is not December 31, the monthly payments owing hereunder
during the last partial calendar year of the Lease shall be appropriately
adjusted. For the period from the Commencement Date to December 31 in the same
calendar year, Tenant shall not pay estimated Shared Expenses but shall be
obligated for its actual Pro-Rata Share of Shared Expenses for said period upon
receipt of Landlord's Statement described below. The term "Shared Expenses"
shall mean the amount by which Operating Expenses and Real Estate Taxes
incurred in any period exceed the amount of Landlord's obligation for the same
as specified in Section 1.14 and 1.15.
(d) In each calendar year after the year in which the Commencement Date
occurs, Landlord shall send to Tenant a Landlord's Statement which shall set
forth the actual amount of Shared Expenses, with the exception of those States
in which real estate taxes are billed on other than a calendar year basis, in
that event Landlord's statement of Real Estate Taxes will be based on the Real
Estate Tax Fiscal Year and sent within a reasonable time after receipt of Real
Estate Tax Statements, and Tenant's Pro-Rata Share thereof for the preceding
calendar year or portion thereof and the estimated amount of Shared Expenses
and Tenant's Pro-Rata Share thereof for the calendar year in which the
Landlord's Statement is given. Landlord's failure to render a Landlord's
Statement with respect to any period shall not eliminate or reduce Tenant's
obligation to pay Shared Expenses and shall not prejudice Landlord's right to
render a Landlord's Statement with respect to any subsequent period. The
obligations of Tenant under the provisions of this paragraph with respect to
any increase in rent shall survive the expiration or any sooner termination of
the term of the Lease. Within 15 days next following the notification by
Landlord of the contents of its Landlord's Statement, Tenant shall pay to
Landlord the entire amount of Tenant's Pro-Rata Share of actual Shared Expenses
for the prior period covered by the Landlord's Statement less the amount of
Shared Expenses actually paid by Tenant for said period, plus Tenant shall also
then pay to Landlord such amount as is necessary to assure than, through the
calendar month in which the Landlord's Statement is given, the Tenant has paid
to Landlord the full amount of estimated Shared Expenses for the calendar year
in which Landlord's Statement is given, as if the Landlord's Statement were
given on January 1 of said calendar year. For each month following for the
remainder of said calendar year, Tenant shall pay the monthly estimated Shared
Expenses set forth in the Landlord's Statement. In the event that the estimated
payments made by the Tenant in the calendar year preceding the date on which
the Tenant is given notice of the Landlord's Statement exceed the Tenant's
Pro-Rata Share of actual Shared Expenses for such calendar year, then should
the Tenant not be otherwise in default hereunder, the amount of such excess
shall be applied by the Landlord to the next succeeding installments of monthly
estimated payments of Shared Expenses.
6.3 Statements. Nothing in this Lease shall be construed to require
Landlord to render the statements described in Sections 5.2 and 6.2
simultaneously or in any particular order. All reasonable determinations by
Landlord pursuant to Section 6 shall be presumed to be correct. Until Tenant is
advised of the adjustment in its obligation to pay Shared Expenses, if any,
pursuant to the provisions of Section 6.2. Tenant's monthly rental shall
continue to be paid at the then current rent (including all prior adjustments
thereto pursuant to this Lease). Upon written notice to Landlord of not less
than fifteen business days, Tenant shall have the right to review the
documentation relied upon by Landlord relating to the computation of Shared
Expenses, which review shall occur at the location specified in Section
1.11(b). All Shared Expenses shall be computed on the actual basis. In
computing Shared Expenses, no cost or expense may be accounted more than once,
any expenses which are paid by the proceeds of insurance shall be excluded, and
any expenses which are separately metered or billed directly to and separately
paid by any other tenant shall be excluded. Tenant shall have the right to
cause an audit to be made of Landlord's computation of Shared Expenses, at the
location of the Corporate Office in Dallas, Texas, at Tenant's sole expense,
not more frequently than once per calendar year. Tenant shall not be entitled
to withhold or deduct any portion of Base Rent or Additional Rent during the
pendency of any such audit. Any errors disclosed by such audit shall be
promptly corrected, provided that Landlord shall have the right to cause
another independent audit to be made of such computations, and in the event of
a disagreement between the auditors, the audit disclosing the least amount of
deviation from Landlord's original computations shall be conclusively deemed to
be correct.
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7. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon execution hereof the sum specified
in Section 1.16 as security for Tenant's faithful performance of Tenant's
obligations hereunder. If Tenant fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provisions of this Lease,
Landlord may without notice to Tenant use, apply or retain all or any portion of
said deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default or to compensate Landlord for any loss or damage which Landlord
may suffer thereby. If Landlord so uses or applies all or any portion of said
deposit, Tenant shall within five (5) days after written demand therefor deposit
cash with Landlord in an amount sufficient to restore said deposit to the full
amount hereinabove stated. Landlord shall not be required to keep said deposit
separate from its general accounts and Tenant shall not be entitled to interest
on such deposit. If Tenant performs all of Tenant's obligations hereunder, said
deposit or so much thereof as had not theretofore been applied by Landlord,
shall be returned, without payment of interest or other increment for its use,
to Tenant (or, at Landlord's option, to the last assignee, if any, of the
Tenant's interest hereunder) within sixty (60) days after either the expiration
of the term hereof or after Tenant has vacated the Premises, whichever is later.
Landlord shall deliver the funds deposited herein by Tenant to the purchaser of
the Building in the event the Building is sold (or give such purchaser a credit
against the purchase price in the amount of such deposit), and thereupon
Landlord shall be discharged from all further liability with respect to such
deposit. If Tenant shall default under this Lease more than two (2) times in any
twelve (12) month period, irrespective of whether or not such default is cured,
then the security deposit shall, within ten (10) days after demand by Landlord,
be increased by Tenant to an amount equal to the greater of: (i) three (3) times
the amount specified in Article 1.16; (ii) three (3) months' fixed rent; or
(iii) as may be otherwise required by Landlord.
8. USE.
8.1 Use. The Premises shall be used and occupied only for the uses
specified in Section 1.17 hereof, provided that the foregoing shall not be
construed as a representation or guarantee by the Landlord that such business
may lawfully be conducted on the Premises.
8.2 Compliance With Law. In the event it is determined by the applicable
governmental unit that the Premises violates any building code, regulation or
ordinance, then it shall be the obligation of the Landlord, after written notice
from Tenant which includes a copy of the governmental unit's determination, to
promptly, at Landlord's sole cost and expense, rectify any such violation. In
the event Tenant does not give to Landlord written notice of any such violation
within thirty (30) days from the date on which Tenant takes possession of the
Premises, it shall be conclusively deemed that such violation, whether the same
is patent or latent, did not exist and the correction of the same shall be the
obligation and expense of the Tenant at the direction of the Landlord, provided,
however, that nothing in this Section shall be construed to require or permit
the Tenant to make any structural changes to the Building not caused by Tenant's
improvements or the nature of Tenant's occupancy of the Premises.
8.3 Waste and Nuisance. Tenant shall not commit, suffer or permit any
waste, damage, disfiguration or injury to the Premises, the common areas in the
Building, or the fixtures and equipment located therein or thereon. Tenant
shall not permit or suffer any overloading of the floors thereof, and shall not
place therein any heavy business machinery, safes, computers, data processing
machines, or other items heavier than customarily used for general office
purposes without first obtaining the written consent of Landlord. Tenant shall
not use or permit to be used any part of the Building for any dangerous,
noxious or offensive trade or business, and shall not cause or permit any
nuisance, noise, action, or disturbance of other tenants, in, at or on the
Premises.
8.4 Conditions of Premises. Except as provided in Section 8.2, Tenant
hereby accepts the Premises in their condition existing as of the date of the
commencement hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. In addition, except as provided in
Section 8.2, Tenant shall at Tenant's expense, comply promptly with all
applicable laws, statutes, ordinances, rules, regulations, orders, restrictions
of record, and requirements in effect during the term or any part of the term
hereof regulating the use by Tenant of the Premises.
8.5 Insurance Cancellation. Notwithstanding the provisions of Section
8.2 hereinabove, no use shall be made or permitted to be made of the Premises,
nor acts done which will cause the cancellation of any insurance policy
covering said Premises or the Building, and if Tenant's use of the Premises
causes an increase in said insurance rates, Tenant shall pay any such increase
as Additional Rent, which, together with interest on any amount paid therefor
by Landlord, shall be payable by Tenant on the next succeeding date on which a
Base Rental payment is due.
8.6 Landlord's Rules and Regulations. Tenant shall faithfully observe
and comply with the reasonable rules and regulations that Landlord shall from
time to time promulgate, including without limitation any rules and regulations
attached to this Lease, which are hereby incorporated wherein by this
reference. Landlord reserves the right from time to time to make all reasonable
modifications to said rules and regulations. The additions and modification to
those rules and regulations shall be binding upon Tenant upon Landlord giving
notice of them to Tenant. Landlord shall not be responsible to Tenant for the
nonperformance of any of said rules and regulations by any other tenants or
occupants.
9. LANDLORD'S SERVICES.
9.1 Basic Services. Subject to any law, rule or governmental order or
regulation, and further subject to any circumstance beyond the control of the
Landlord, Landlord shall furnish the following services:
(a) Air conditioning and heat, whichever be required, 24 hours a
day, 7 days a week, 365 days a year.
(b) Hot and cold water for lavatory purposes and electric current
for lighting the Premises and for ordinary
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will overload the wiring insulations or interfere with the use thereof by
Landlord or any other tenant in the Building. If a further supply of water is
required by Tenant, then at Tenant's expense, Landlord shall have the option to
install and maintain a water meter to register such consumption, and Tenant
shall pay as Additional Rent for water consumed, at the cost to Landlord, and
for sewer rents and all other rents and charges based upon such consumption of
water;
(c) General day-to-day janitorial service (excluding carpet shampooing
and hard surface floor waxing) five days a week, and elevator service during
the same hours for which air conditioning and heat services are provided as set
forth above, provided, however, that in the event Tenant is delinquent in
making any installment payment of rent under this Lease for a period of 15 days
or more after it shall become due, Landlord may discontinue furnishing any or
all of the services described in this Section 9 until all arrears of rental
payments, plus interest and late charges and any other sums due under this
Lease, shall have been paid in full. Whenever heat generating machines or
equipment are used by Tenant in the Premises which affect the temperature
otherwise maintained by the air conditioning system, as determined by Landlord,
Landlord reserves the right to install supplementary air conditioning units in
the Premises, and the costs therefor, including the cost of installation,
operation and maintenance thereof, shall be paid by Tenant to Landlord upon
demand by Landlord. If Tenant, as determined by Landlord, requires electric
current in excess of that usually furnished or supplied to the Premises,
Landlord may, at its election, either cause an electric current meter to be
installed in the Premises so as to measure the electric current consumed for
such excess use or determine the value of such excess used by causing an
independent electric engineer or consulting firm, selected by Landlord, to
conduct a survey of Tenant's use of electric current and to certify such
determination in writing to Landlord and Tenant. The cost of any such meter or
survey, as the case may be, and of the installation, maintenance or survey, as
the cause may be indicates such excess use by Tenant of electric current,
Tenant agrees to pay to Landlord, as Additional Rent, promptly upon demand
therefor by Landlord, the amount determined to be due for the electric current
consumed by Tenant, as shown by said meter or as indicated in said survey, as
the case may be, at the rate charged for such service by the local public
authority or the local public utility, as the case may be, furnishing the same,
plus any additional expenses incurred by Landlord in keeping account of the
electric current consumed.
(d) Notwithstanding anything in this Lease to the contrary, Tenant
will not without the prior written consent of Landlord, use any apparatus or
device in the Premises which will in any way increase the amount of electricity
or water usually furnished or supplied for use of the Premises as general
office space. Tenant shall not connect with any electric current except through
existing electrical outlets in the Premises, or to any water pipes, any
apparatus or device for the purposes of using electric current or water. If
Tenant shall require water or electric current in excess of that usually
furnished or supplied for use of the Premises. Tenant must first procure the
written consent of Landlord to the use thereof. With the prior written consent
of Landlord, Tenant may maintain and operate data processing equipment on the
Premises, but all additional costs in connection therewith (including, but not
limited to, additional support flooring, insulation, electric outlets and
temperature maintenance facilities) shall be borne solely by Tenant and the
utility services utilized by or for such equipment shall be separately metered
and the cost of such utility services with metering shall be borne solely by
Tenant. At Tenant's request, and with Landlord's prior approval, Landlord shall
furnish the services described in this Section at times other than specified in
Section 9.1 (a), provided that Tenant shall pay the entire cost thereof as
reasonably determined by Landlord as Additional Rent, notwithstanding the fact
that such services may also benefit portions of the Building other than the
Premises (in which event Landlord shall not receive collectively from all
tenants paying for any portion of such additional services more than the actual
cost to Landlord of providing the same).
9.2 Initial Construction. Landlord agrees to perform the work and make such
installations in the Premises as set forth in the Work Letter Addendum which,
if attached hereto as indicated in Section 1.19, constitutes additional
provisions of this Lease which are hereby incorporated by reference. Tenant
acknowledges that it will examine the Premises before taking possession
hereunder and agrees that unless Tenant furnishes Landlord with a notice in
writing specifying any apparent defect in the construction within twenty
business days after such taking of possession pursuant to Section 3.4, it shall
be conclusively deemed that Tenant has examined the Premises and that the same
were in good order and that Landlord had satisfactorily completed the work it
agreed to perform. Tenant agrees that there is no promise, representation, or
undertaking by or binding upon Landlord with respect to any construction,
alteration, remodeling or redecorating in or to the Premises except as
expressly set forth in the Work Letter Addendum.
9.3 Interruption of Services. Landlord reserves the right from time to time
to install, use, maintain, repair, replace and relocate any mechanical,
plumbing, and electrical equipment serving the Premises and other parts of the
Building, and to alter or relocate any other facility in the Building.
Interruption or curtailment of any service maintained in the Building, if
caused by strikes, mechanical difficulties, actions of the Landlord under the
first sentence of this Section 9.3, or for any other reason beyond Landlord's
control, shall not entitle Tenant to any claim against Landlord or to any
abatement in rent, nor shall the same constitute constructive or partial
eviction. Unless due to the gross negligence of Landlord, Landlord shall not be
liable to Tenant for any injury or damage resulting from defects in the
plumbing, heating, or electrical systems in the Building or for any damage
resulting from water seepage into the Building or for any act or failure to act
by any other Tenants at the Building or for any damage resulting from wind
storm, hurricane or rain storm.
10. MAINTENANCE, REPAIRS AND ALTERATIONS
10.1 Landlord's Obligations. Subject to the provisions of Sections 8.2 and
14, and except for damage caused by any negligent or intentional act or
omission of Tenant, Tenant's agents, employees, representatives, customers or
invitees, in which event Tenant shall repair the damage, at its sole expense,
Landlord shall keep in good order, condition and repair the structural portions
of the Building and those portions of the Building which are not occupied or
leased by any tenant, and all costs incurred by Landlord in making any such
repairs or performing such maintenance shall be Operating Expenses as defined
in Section 6.2, provided that Landlord shall have no obligation to perform any
act which is the obligation of Tenant or any other tenant in the Building.
Tenant expressly waives the benefits of any statute now or hereafter in effect
which would otherwise afford Tenant the right to make repairs at Landlord's
expense or to terminate this Lease because of Landlord's failure to keep the
Premises in good order, condition and repair. Other than as specifically
provided in this Section 10.1, Landlord shall not be obligated to make any
repairs or improvements of any kind, in, upon, about, or to the Premises or the
Building.
10.2 Tenant's Obligations. Subject to the provisions of Sections 8.2 and
14, Tenant, at Tenant's expense, shall keep in good order, condition and repair
the Premises and every part thereof including, without limiting the generality
of the foregoing, all plumbing, electrical and lighting facilities and
equipment within the Premises, fixtures, interior walls and interior surfaces
of exterior
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walls, ceilings, windows, doors, plate glass and skylights located within the
Premises. All repairs made by the Tenant shall be at least of the same quality,
design and class as that of the original work. Tenant agrees that it will abide
by, keep and observe all reasonable rules and regulations which Landlord may
make from time to time for the management, safety, care and cleanliness of the
Building and grounds, the parking of vehicles and the preservation of good order
therein as well as for the convenience of other occupants and tenants of the
Building. All damage or injury to the Building or to the Premises, fixtures,
appurtenances and/or equipment caused by the Tenant moving property in or out of
the Building or the Premises or by Tenant's installation or removal of
furniture, fixtures, or other property, or from any other cause of any kind or
nature whatsoever due to carelessness, omission, neglect, improper conduct, or
other cause of the Tenant, its agents, employees, invitees, contractors or
subcontractors shall be repaired, restored, or replaced promptly by the Tenant
at its sole cost and expense to the satisfaction of the Landlord. In the event
that the Tenant fails to keep the Premises in good order, condition and repair
while this Lease remains in effect, then as soon as possible after written
demand (which written demand shall not be required in the case of an emergency),
Landlord may restore the Premises to such good order and condition and make such
repairs without liability to Tenant for any loss or damage that may accrue to
Tenant's property or business by reason thereof, and upon completion thereof
Tenant shall pay to Landlord upon demand and as Additional Rent the cost of
restoring the Premises to such good order and condition, together with interest
thereon from the date paid.
10.3 Surrender. On the last day of the term hereof or on any sooner
termination or date on which Tenant ceases to possess the Premises, Tenant shall
surrender the Premises to Landlord in good and clean condition, ordinary wear
and tear excepted. Prior to such surrender Tenant shall repair any damage to the
Premises occasioned by its removal of trade fixtures, furnishings and
equipment, which repair shall include the patching and filling of holes and
repair of structural damage. Tenant agrees to indemnify Landlord and hold
Landlord harmless from and against any liability (including reasonable
attorneys' fees) of Landlord to third parties resulting from Tenant's failure
to timely comply with the provisions of this Section 10.3.
10.4 Alternations and Additions. (a) Tenant shall not, without Landlord's
prior written consent, make any alterations, improvements or additions
(referred to collectively herein as "Alterations") in, on or about the Premises.
Landlord may require that Tenant remove any or all of said Alterations at the
expiration of the term or such other time at which Tenant ceases to possess the
Premises, and restore the Premises to their prior condition. Should Tenant make
any Alterations without the prior approval of the Landlord, Landlord may
require that Tenant immediately remove any or all of such items and/or Landlord
may declare a default by Tenant under this Lease. Except in connection with
normal interior decorating of the Premises, Tenant shall not place any holes in
any part of the Premises, and in no event shall Tenant place any exterior or
interior signs or interior drapes, blinds, or similar items visible from the
outside of the Premises without the prior written approval of Landlord.
(b) Any Alterations in, on or about the Premises that Tenant shall desire
to make shall be presented to Landlord in written form with proposed detailed
plans. If Landlord shall give its consent, the consent shall be deemed
conditioned upon Tenant acquiring a permit to do the work from appropriate
governmental agencies, the furnishing of a copy thereof to Landlord prior to
the commencement of the work and the compliance by Tenant with all conditions
of said permit and with all specifications in the plans in a prompt and
expeditious manner. Tenant shall not permit any of the work to be performed by
persons not currently licensed under any applicable licensing laws or
regulations pertaining to the types of work to be performed. Landlord shall not
be deemed unreasonable in the exercise of its discretion for withholding
approval of any Alterations which involve or might affect any structural or
exterior element of the Building, any area or element outside of the Premises,
or any facility serving any area of the Building outside of the Premises, or
which will require unusual expense to re-adapt the Premises to normal office
use on the termination or expiration of the Lease, unless in the latter case
Tenant either desires to or is required to make repairs or Alterations in
accordance with this Lease, Landlord may require Tenant, at Tenant's sole cost
and expense, to obtain and provide to Landlord a lien and completion bond (or
such other applicable bond as determined by Landlord) in an amount equal to one
and one-half (1-1/2) times the estimated cost of such improvements, to insure
Landlord against liability including but not limited to liability for
mechanic's and materialmen's liens and to insure completion of the work.
(c) Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Tenant at or for use
in the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or the Building. Tenant shall give
Landlord not less than ten (10) days notice prior to the commencement of any
work in, on or about the Premises, and Landlord shall have the right to post
notices of non-responsibility in, on or about the Premises as provided by law.
Tenant shall have no power or authority to do any act or make any contract
which may create or be the basis for any lien upon the interest of the Landlord,
the Premises or the Building, or any portion thereof. If any mechanics or other
lien or any notice of intention to file a lien shall be filed or delivered with
respect to the Premises or the Building, based upon any act of the Tenant or of
anyone claiming through the Tenant, or based upon work performed or materials
supplied allegedly for the Tenant, Tenant shall cause the same to be canceled
and discharged of record within fifteen (15) days after the filing or delivery
thereof. If Tenant has not so canceled the lien within fifteen (15) days as
required herein, Landlord may pay such amount, and the amount so paid together
with interest thereon from the date of payment and all legal costs and charges,
including attorneys fees, incurred by Landlord in connection with said payment
and cancellation of the lien or notice of intent shall be Additional Rent and
shall be payable on the next succeeding date on which a Base Rental installment
is due. Landlord may, at its option and without waiving any of its rights set
forth in the immediately preceding sentence, permit Tenant to contest the
validity of any such lien or claim, provided that in such circumstances the
Tenant shall at its expense defend itself and Landlord against the same and
shall pay and satisfy any such adverse judgment that may be rendered thereon
before the enforcement thereof against the Landlord, the Premises or the
Building, provided further that Landlord may at any time require the Tenant to
deposit with the court exercising jurisdiction over such claim, such amount as
may be necessary under applicable statutes to cause the release and discharge
of the lien, and if Tenant shall not immediately make such payment upon the
request of Landlord, Landlord may make said payment and the amount so paid,
together with interest thereon from the date of payment and all legal costs and
charges, including attorneys fees, incurred by Landlord in connection with said
payment shall be deemed Additional Rent and shall be payable on the next
succeeding date on which a Base Rental installment is due. In addition,
Landlord may require Tenant to pay Landlord's attorney fees and costs in
participating in such action if Landlord shall decide it is in its best
interest to do so. Nothing herein contained shall be construed as a consent on
the part of Landlord to subject the interest and estate of Landlord to
liability under any lien law of the state in which the Premises are situated,
for any reason or purpose whatsoever, it being expressly understood that
Landlord's interest and estate shall not be subject to such liability and that
no person shall have any right to assert any such lien.
(d) Unless Landlord requires their removal, as set forth in Section
10.4(a), all Alterations which may be made on the Premises shall, at the
expiration of the term or such other time at which Tenant ceases to possess the
Premises, become the
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property of Landlord and remain upon and be surrendered with the Premises.
Notwithstanding the provisions of this Section 10.4(d), Tenant's machinery and
equipment, other than that which is affixed to the Premises so that it cannot
be removed without material damage to the Premises, shall remain the property
of Tenant and may be removed by Tenant subject to the provisions of Section
10.3 hereof and provided further that Tenant is not in default under this Lease
at the time Tenant ceases to possess the Premises.
11. TENANT'S USE OF PUBLIC AREAS.
Tenant's non-exclusive use of the public areas described in Section 2.2
shall be subject to such Reasonable Rules and Regulations promulgated by
Landlord pursuant to Section 8.6. Tenant agrees to repair at its cost all
deteriorations or damages to the public areas occasioned by its negligence or
intentional misconduct or that of its officers, agents, representatives,
customers, employees or invitees.
12. TAXES AND TELEPHONE.
12.1 Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon leasehold improvements, fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Premises or elsewhere. If Tenant shall cause said leasehold improvements,
trade fixtures, furnishings, equipment and all other personal property to be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within (10) days after receipt of a written notice from
Landlord setting forth the taxes applicable to Tenant's property, and if Tenant
fails to do so, Landlord may make such payment and the amount so paid, together
with interest thereon from the date paid, shall be Additional Rent and shall be
due and payable to Landlord on the next succeeding date on which a Base Rental
installment is due.
12.2 Evidence of Payment. Tenant shall promptly deliver to Landlord, upon
Landlord's written request, receipts for payments of all taxes, charges, rates,
dues, assessments and licenses in respect of all improvements, equipment and
facilities of the Tenant on or in the Premises which were due and payable
within a period up to one year prior to Landlord's making such request.
12.3 Telephone. Tenant shall separately arrange and pay for the
furnishing of and use of all telephone services as Tenant may deem necessary
for its use of the Premises, and Landlord shall have no liability in connection
therewith.
13. INSURANCE AND INDEMNITY.
13.1 Liability Insurance. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of bodily injury and
property damage insurance, insuring Landlord and Tenant against any liability
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be in an amount not less
than $500,000 per person, $500,000 per occurrence for bodily injury, and
$500,000 for property damage, or $1,500,000 combined single limit for said
items. The limits of said insurance shall not, however, limit the liability of
Tenant hereunder. Tenant shall also obtain and keep in force during the term of
this Lease, at Tenant's expense, "all risk" or "special coverage form"
insurance upon the property of every description and kind owned by the Tenant
and located in the Building or for which Tenant is legally liable or installed
by or on behalf of the Tenant, including without limitation, furniture,
fittings, installations, alternations, additions, partitions, fixtures and
anything in the nature of leasehold improvements in an amount not less than 80%
of the full replacement cost thereof. Such insurance shall insure the Tenant
and Landlord, and in the event that there shall be a dispute as to the amount
which comprises the full replacement cost, the decision of the Landlord shall
be conclusive. If Tenant shall fail to procure and maintain the insurance
required hereunder, Landlord may but shall not be required to procure and
maintain the same, and any amount so paid by Landlord for such insurance shall
be Additional Rent which, together with interest thereon from the date paid,
shall be due and payable by Tenant on the next succeeding date on which a Base
Rental installment is due. If in the opinion of Landlord the amount of
liability insurance required hereunder is not adequate, then not more
frequently than once during each option, extension or renewal term of this
Lease, if any, Tenant shall increase said insurance coverage as required by
Landlord. Provided, however, that in no event shall the amount of the liability
insurance increase by more than fifty percent of the amount of the insurance
during the preceding term of this Lease. However, the failure of Landlord to
require any additional insurance coverage shall not be deemed to relieve Tenant
from any obligations under this Lease.
13.2 Property Insurance. Landlord shall obtain and keep in force during
the term of this Lease fire and extended coverage on the Building (including
Building standard leasehold improvements). Landlord may also, but shall not be
required to, procure any other insurance policies respecting the Premises or
Building which Landlord deems necessary.
13.3 Insurance Policies. Insurance required by Tenant hereunder shall be
in companies rated A+, AAA or better in "Best's Insurance Guide". Tenant shall
deliver to Landlord prior to taking possession of the Premises copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with loss payable clauses reasonably satisfactory to
Landlord. No such policy shall be cancelable or subject to reduction of
coverage or other modification except after ten (10) days' prior written notice
to Landlord. Tenant shall, within ten (10) days prior to the expiration of
such policies, furnish Landlord with renewals thereof, or Landlord may order
such insurance and charge the cost thereof to Tenant, which amount, together
with interest thereon, shall be Additional Rent and shall be payable by Tenant
on the next succeeding date on which a Base Rental payment is due. Tenant shall
not do or permit to be done anything which shall invalidate the insurance
policies referred to in Section 13.1. Tenant shall forthwith, upon Landlord's
demand, reimburse Landlord for any additional premiums attributable to any act
or omission or operation of Tenant causing an increase in the cost of
insurance.
13.4 Waiver of Subrogation. As long as their respective insurers so
permit, Tenant and Landlord each waives any and all rights of recovery against
the other, or against the officers, employees, agents and representatives of
the other for loss or damage to such waiving party or its property or the
property of others under its control, where such loss or damage is insured
against under any insurance policy in force at the time of such loss or damage.
Tenant and Landlord shall, upon obtaining the policies of insurance required
hereunder, give notice to the insurance carriers that the foregoing mutual
waiver of subrogation is contained in this Lease and
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obtain policies of insurance, if obtainable, which shall include a waiver by
the insurer of all right of subrogation against Landlord or Tenant in
connection with any loss or damage thereby insured against.
13.5 Hold Harmless. Tenant shall indemnify, defend and hold Landlord
harmless from any and all claims, liabilities, damages and costs, including
attorneys fees, incurred by Landlord which arise from Tenant's use of the
Premises or the Building or from the conduct of its business or from any
activity, work or things which may be permitted or suffered by Tenant in, on or
about the Premises or the Building, and shall further indemnify, defend and
hold Landlord harmless from and against any and all claims, liabilities,
damages and costs, including attorneys fees, incurred by Landlord which arise
from any breach or default in the performance of any obligation on Tenant's
part to be performed under any provision of this Lease or which arise from any
negligence of Tenant or any of its agents, representatives, customers,
employees or invitees.
13.6 Exemption of Landlord from Liability. Tenant hereby agrees that
Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom, including without limitation from any relocation by Landlord
of Tenant within the Building (except as expressly provided otherwise in
Section 20), or for damage to the goods, wares, merchandise or other property
of Tenant, Tenant's employees, representatives, agents, invitees, customers or
any other person in, on or about the Premises or Building, nor shall Landlord
be liable for injury to the person of Tenant, Tenant's employees,
representatives, agents, customers, or invitees, whether any such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, and whether the said damage or injury
results from conditions arising upon the Premises or any other cause, and
whether the said damage or injury results from conditions arising upon the
Premises or Building, or from other sources or places, and regardless of
whether the cause of such injury or the means of repairing the same is
inaccessible to Landlord or Tenant, unless such injury, loss of income or
damage is caused by the Landlord's gross negligence. Landlord shall not be
liable for any damages arising from any act or neglect of any other tenant, if
any, of the Building. Tenant hereby assumes all risk of damage to property or
injury to persons in, on or about the Premises or the Building from any cause
and Tenant hereby waives all claims in respect thereof against Landlord,
excepting where said damage arises out of the gross negligence of Landlord.
14. DAMAGE OR DESTRUCTION
14.1 Option to Terminate Lease. If the Premises or any part thereof
shall be damaged or destroyed by fire or other casualty, the Landlord may, at
its option and subject to Section 14.2 hereinbelow, elect to terminate this
Lease by giving notice to the Tenant within ninety (90) days after Landlord
receives actual notice of the fire or other casualty, and thereupon the term of
this Lease shall expire by lapse of time upon the tenth day after such notice
is given. Instead of exercising said option, Landlord may elect to repair or
restore the Premises to the same condition as existed before such damage or
destruction. Upon electing to repair or restore, Landlord may proceed with
reasonable dispatch to perform the necessary work, and the Base Rent to be paid
until such work is completed shall be abated in proportion of the Premises
being unusable for a period equal to one day or less, but Landlord shall not be
liable to Tenant for any delay which arises by reason of labor strikes,
adjustments of insurance or any other cause beyond Landlord's control, and in
no event shall Landlord be liable for any loss of profits or income.
Notwithstanding the foregoing, there shall be no abatement, apportionment or
reduction in the rental obligations of Tenant if the damage or destruction is
caused by the Tenant or Tenant's agents, representatives, employees, customers
or invitees.
14.2 Obligation to Repair or Restore. If and only if all of the following
circumstances exist with respect to damage or destruction to the Premises,
Landlord may not elect to terminate the Lease as provided in Section 14.1
hereof but rather must elect to repair or restore the Premises:
(a) There is no fault or neglect on the part of the Tenant, Tenant's
agents, representatives, employees, customers or invitees which contributed to
the damage or destruction;
(b) The damage or destruction to the Premises is less than fifty
percent (50%) of the replacement cost thereof as determined by Landlord;
(c) The Landlord is fully insured for the casualty which causes the
damage or destruction and the insurance proceeds have been made available
therefor by the holder or holders of any mortgages or deeds of trust covering
the Premises;
(d) The date of the damage or destruction is greater than one year
prior to the Expiration Date of this Lease or any renewal, modification or
extension thereof; and
(e) Less than sixty percent (60%) of the rentable feet of the
Building is so damaged or destroyed, as determined by Landlord, regardless of
the percentage of rentable square feet of the Premises which may be damaged or
destroyed.
14.3 Fault of Tenant. Landlord may exercise its option to repair or
restore as described in Section 14.1 even if such damage or destruction is due
to the fault or neglect of Tenant, Tenant's agents, representatives, employees,
customers or invitees, but in such event Landlord's election to repair or
restore shall be without prejudice to any other rights and remedies of Landlord
under this Lease, and there shall be no apportionment or abatement of any rent
of any kind and Landlord shall not be liable for any other loss to Tenant of
any nature whatsoever.
14.4 Obligations of Tenant. Except as provided in this Section 14, none
of Tenant's obligations under this Lease shall be affected by any damage or
destruction of the Premises by any cause whatsoever. Tenant hereby expressly
waives any and all rights it might otherwise have under any law, regulation or
statute which would act to modify the provisions of the immediately preceding
sentence.
14.5 Termination by Tenant. In the event that more than sixty percent
(60%) of rentable square feet of the Premises shall be damaged or destroyed by
fire or other casualty not caused by the Tenant or Tenant's agents,
representatives, employees, customers or invitees, either party may terminate
this Lease by giving notice to the other within thirty (30) business days after
the date of the fire
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or other casualty, and upon such termination the rental obligations of the
Tenant shall be duly apportioned as of the date of such fire or other casualty,
provided, however, that Tenant shall have no right to terminate the Lease under
this Section 14.5 if Tenant is in default of any of its obligations under the
Lease as of the date of the fire or other casualty.
15. CONDEMNATION
If the Premises are taken under any public or private power of eminent
domain, or sold by Landlord under the threat of the exercise of said power (all
of which is herein referred to as "condemnation"), or if any portion of the
Building is so condemned so that it would not be practical, in Landlord's
judgment, to continue to maintain the Building, this Lease shall terminate as of
the date of the condemning authority takes title or possession, whichever occurs
first. If only a portion of the Premises are so condemned, Landlord shall have
the right, if more than sixty percent (60%) of rentable square feet of the
Premises are so condemned, to terminate this Lease as of the date the condemning
authority takes title or possession, whichever occurs first, by Landlord's
giving written notice of such termination to Tenant not later than thirty (30)
days after said date, but should Landlord elect not to so terminate this Lease,
the Lease shall remain in full force and effect as to the portion of the
Premises not so taken, and Tenant's rental obligations shall be reduced
proportionately to reflect the number of rentable square feet remaining in the
Premises, and such rental reduction, if any, shall take effect as of the date
which is thirty (30) days after the date of which the condemning authority takes
title or possession, whichever first occurs. If repairs or restorations to that
portion of the Premises not so taken are deemed necessary by Landlord to render
such portion reasonably suitable for the purposes for which is was leased, as
determined by Landlord, Landlord shall perform such work at its own cost and
expense but in no event shall Landlord be required to expend any amount greater
than the amount received by Landlord as compensation for the portion of the
Premises taken by the condemnator. All awards for the taking of any part of the
Premises or any payment made under the threat of the exercise of power of
eminent domain shall be the property of Landlord, whether made as compensation
for diminution of value of the leasehold or for the taking of the fee or as
severance damages. No award for any partial or entire taking shall be
apportioned, and Tenant hereby assigns to Landlord any award which may be made
in such taking or condemnation, together with any and all rights of Tenant now
or hereafter arising in or to the same or any part thereof, except that any
award or other compensation made for any taking is subject to the rights of the
first mortgagee up to the amount of its lien and of any junior mortgagee, as may
be permitted by the first mortgagee, up to the full amount of such junior lien;
provided, however, that Tenant shall be entitled to any award for loss of or
damage to Tenant's trade fixtures and removable personal property and/or for the
interruption of or damage to Tenant's business.
16. ASSIGNMENT AND SUBLETTING
16.1 Landlord's Consent Required. Tenant shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet or otherwise transfer or
encumber all or any part of Tenant's interest in this Lease or in the Premises
without Landlord's prior written consent. Any attempted assignment, transfer,
mortgage, encumbrance or subletting without such consent shall be void and shall
constitute a breach of the Lease. Any transfer of Tenant's interest in this
Lease or in the Premises from Tenant by merger, consolidation or liquidation, or
by any subsequent change in the ownership of fifty percent (50%) or more of the
capital stock of Tenant shall be deemed a prohibited assignment within the
meaning of this Section 16. As a condition of obtaining Landlord's consent,
Tenant shall submit to Landlord together with its request for consent the name
of the proposed assignee or subtenant, the terms and provisions of the proposed
transaction, and such information as to the nature of the proposed assignee's or
subtenant's business and its financial responsibility and standing as Landlord
may reasonably require, together with the effective date of the proposed
transfer which shall be at least sixty (60) days after the date of submission of
such information to Landlord. Landlord's failure to consent to any proposed
transfer under this Section shall not be deemed unreasonably withheld if (a) the
occupancy resulting from such transfer will not be consistent with the general
character of the business carried on by the tenants of the Building or violates
any rights or options held by any other tenant of the building; or (b) the
proposed occupant pursuant to the transfer does not have the financial strength
and stability to perform its rental obligations or Landlord is unable to obtain
guaranties from one or more affiliates of the proposed occupant in order to
secure such financial obligations; or (c) any proposed sublease does not
incorporate this Lease in its entirety so as to be subject to this Lease's
terms, or any such sublease does not require the sublessee to attorn to Landlord
at Landlord's option in the event of a default by Tenant under this Lease; or
(d) if Tenant does not execute an agreement with Landlord requiring Tenant to
pay to Landlord, as Additional Rent, one hundred percent (100%) of all moneys or
other consideration received by Tenant from its transferee (whether paid to
Tenant as consideration for Tenant's transfer of property or other assets to the
transferee or as consideration for the transferee's occupancy of the Premises)
in excess of the amounts owed by Tenant to Landlord under this Lease, which
Additional Rent shall be paid to Landlord as and when received by Tenant.
16.2 No Release of Tenant. Regardless of Landlord's consent, no
subletting or assignment or other transfer described in Section 16.1 shall
release Tenant of Tenant's obligation or alter the primary liability of Tenant
to pay the rent and to perform all other obligations to be performed by Tenant
hereunder. Consent to one assignment, subletting or other transfer shall not be
deemed consent to any subsequent act. In the event of default by any assignee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against said assignee or successor. Landlord may consent to subsequent
assignments, subletting, or transfers of this Lease or amendments or
modifications to this Lease with assignees or successors of Tenant without
notifying Tenant and without obtaining its consent thereto and such action shall
not relieve Tenant of liability under this Lease. In the event Landlord allows
assignment or subletting hereunder, neither Tenant, the assignee of Tenant, or
the sublessee of Tenant shall have any option to extend the term of this Lease
even if such option is otherwise granted to Tenant herein and notwithstanding
the provisions of any such option granted to Tenant herein, and all rights and
options to extend this Lease otherwise granted to Tenant shall be deemed
terminated and canceled as of the date of such assignment, subletting or other
transfer. Notwithstanding anything in this Lease to the contrary, Landlord shall
have no obligation to grant consent to any transfer as defined in Section 16.1
if Tenant is in default under this Lease at the time the request for consent is
made or at any time thereafter through the effective date of the transfer. In
addition, Tenant acknowledges that its intent in executing this Lease is to
occupy the Premises and not to make speculative usage of the Premises, and
therefore Landlord shall have no obligation whatsoever to consent to any
proposed transfer if the rentals payable by the proposed occupant to the Tenant
are less than the rentals sought to be received by the Landlord for vacant space
in the Building as of the date on which the Tenant is requesting the Landlord's
consent to the transfer. In the event that Tenant proposes to assign this Lease
or to sublet all of the Premises, Landlord shall have the right, exercisable by
notice in writing after receipt of the request by Tenant, to terminate this
Lease upon execution of an agreement between Landlord and the proposed assignee
or subtenant, provided that Landlord shall not have any such termination right
if Tenant
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withdraws such request within ten (10) days of being notified by Landlord that
it has elected to exercise said termination right.
16.3 Attorneys Fees and Administrative Fees. In the event Tenant shall
request the consent of Landlord to any assignment, subletting or transfer or if
Tenant shall request the consent of Landlord for any other act which Tenant
proposes to do under any other provision of this Lease, then Tenant shall pay
Landlord's attorneys fees incurred in connection with the consideration or
evaluation of such request. In addition thereto, in the event that Landlord
shall consent to a sublease, assignment or transfer under Section 16.1, Tenant
shall pay Landlord administrative fees of Two Hundred Dollars ($200) incurred in
connection with giving such consent.
16.4 Right to Collect Rent. The acceptance of rent by Landlord from any
person other than Tenant shall not be deemed to be a waiver by Landlord of any
provision of this Lease. If the Premises are sublet or occupied by anyone other
than Tenant and Tenant is in default hereunder, or this Lease is assigned by
Tenant, then, in any such event, Landlord may collect rent from the assignee,
subtenant or occupant and apply the net amount collected to the rent reserved
in this Lease, but no such collection shall be deemed a waiver of the covenant
in this Lease against assignment and subletting or the acceptance of such
assignee, subtenant or occupant as tenant, or a release of Tenant from further
performance of the covenants contained in this Lease.
17. DEFAULTS; REMEDIES
17.1 Defaults. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Tenant:
(a) The vacating or abandonment of the Premises by Tenant; or
(b) The failure by Tenant to make any payment of Base Rent,
Additional Rent or any other payment required to be made by Tenant hereunder,
as and when due, where such failure shall continue for a period of three (3)
days; or
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Tenant, other than described in paragraph (b) above, where such failure
shall continue for a period of five (5) business days after written notice
thereof from Landlord to Tenant; provided, however, that if the nature of
Tenant's default as determined by Landlord is such that more than five (5)
business days are reasonably required for its cure, then Tenant shall not be
deemed to be in default if Tenant commences such cure as soon as possible
within said five (5) business day period and thereafter diligently prosecutes
such cure to completion, and in any case completes said cure within twenty (20)
business days after the aforesaid written notice, or
(d) (i) The insolvency of the Tenant or the execution by the Tenant
of an assignment for the benefit of creditors, or the convening by Tenant of a
meeting of its creditors, or any class thereof, for the purpose of effecting a
moratorium upon or extension or composition of its debts; or the failure of the
Tenant to generally pay its debts as they mature; or (ii) the filing by or for
reorganization or arrangement under any law relating to bankruptcy (unless in
the case of a petition filed against Tenant, the same is dismissed within sixty
(60) days); or (iii) the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty (30)
days.
17.2 Remedies in Default. (a) In the event of any such default or breach
by Tenant, Landlord shall have the right at any time thereafter, with or
without notice or demand and without limiting Landlord in the exercise of any
right or remedy which Landlord may otherwise have by reason of such default or
breach, to terminate this Lease at its option or to re-enter and at its option
to attempt to re-let without terminating this Lease and remove all persons and
property from the Premises, using any force as may reasonably be necessary to
accomplish said purposes, all without service of notice or resort to legal
process and without being deemed guilty of trespass or forcible entry or
becoming liable for any loss or damage which may be occasioned thereby.
(b) If Tenant shall fail to remove any effects which it is entitled
to remove from the Premises upon the termination of this Lease, or any
extension or renewal hereof, or upon a re-entry by Landlord for any cause
whatsoever, or upon Tenant's ceasing to possess the Premises for any reason, the
Landlord, at its option, may remove the same and store or dispose of the said
effects without liability for loss or damage thereto, and Tenant agrees to pay
to Landlord on demand any and all expenses incurred in such removal, including
Court costs, attorneys fees, storage and insurance charges on such effects for
any length of time the same shall be in Landlord's possession; or the Landlord,
at its option, without notice, may sell such effects, or any of them, at
private or public sale and without legal process, for such price or
consideration as the Landlord may obtain, and apply the proceeds of such sale
upon any amounts due under this Lease from the Tenant to the Landlord, and upon
the expenses incidental to the removing, cleaning the Premises, selling said
effects, and any other expense, rendering the surplus, if any, to the Tenant;
provided, however, in the event the proceeds of such sale or sales are
insufficient to reimburse the Landlord, Tenant shall pay such deficiency upon
demand. Tenant acknowledges and agrees that any such disposition of Tenant's
property in the above-described manner by the Landlord shall be deemed to be
commercially reasonable and that no bailment shall be created by Landlord's
exercise of any of its rights under this subparagraph (b).
(c) Should Landlord elect to re-enter, as herein provided, or should
it take possession pursuant to legal proceedings, or pursuant to any notice
provided for by law, it may make such alterations, additions, improvements and
repairs as may be necessary in order to re-let the Premises, and may but need
not re-let the Premises or any part thereof for such term or terms (which may
be for a term extending beyond the term of this Lease) and at such rental or
rentals and upon such other terms and conditions as Landlord may determine to be
advisable; upon each such re-letting all rentals received by the Landlord;
shall be applied i) first to the payment of any costs and expenses of such
re-letting, including brokerage fees and attorney's fees and the cost of such
alterations, additions, improvements and repairs; ii) second, to the payment of
Base Rent due and unpaid hereunder, and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same may become due and
payable hereunder provided that Tenant shall have no right to claim any
interest in all or any portion of said residue and if the rent and other
charges paid or to be paid to
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Landlord by any new tenant pursuant to any re-letting exceed the monetary
obligations of Tenant, Tenant shall have no right to claim any interest in all
or any portion of said excess. If such rental received from such re-letting
during any month be less than that to be paid during the month by Tenant
hereunder, Tenant shall pay any such deficiency to Landlord, and such deficiency
shall be calculated and paid monthly on the date on which the rent would have
been payable hereunder if possession had not been retaken. If, during the
existing term of this Lease, the premises covered thereby include other premises
not part of the Premises, a fair apportionment of the rent received from such
re-letting and the expenses incurred in connection therewith as provided
aforesaid will be made in determining the net proceeds from such re-letting, and
the expenses incurred in connection therewith as provided aforesaid will be made
in determining the net proceeds from such re-letting, and any rent concessions
will be equally apportioned over the term of the new lease. Landlord shall in no
event be liable in any way whatsoever for failure to re-let the Premises for any
reason, or in the event the Premises are re-let, for failure to collect the rent
thereof under such re-letting. No such reentry or taking possession of the
Premises by Landlord, nor any acts pursuant thereto, shall be construed as an
election on its part to terminate this Lease unless a written notice of such
termination be given to Tenant by Landlord. No notice from Landlord under this
Lease or under any applicable forcible entry and detainer or eviction statute or
similar law shall constitute an election by Landlord to terminate this Lease
unless such notice specifically so states. Notwithstanding any such re-letting
without termination, Landlord may at any time thereafter elect to terminate this
Lease for such previous breach.
(d) Should Landlord at any time terminate this Lease for any
default or breach, in addition to any other remedies it may have, it may recover
from Tenant all damages it may incur by reason of such default or breach,
including the cost of recovering the Premises, reasonable attorneys fees, and
including the worth at the time of such termination of the excess, if any, of
the amount of rent and such other charges as are required to be paid by Tenant
under the terms of this Lease for the remainder of the stated term over the then
reasonable rental value of the Premises for the remainder of the stated term,
all of which amounts shall be immediately due and payable from Tenant to
Landlord; provided, however, that if the then reasonable rental value of the
Premises exceeds the value of the rent and other charges required to be paid by
Tenant under this Lease as aforesaid, Tenant shall have no right to claim any
interest in all or any portion of such excess. In determining the rent which
would be payable by Tenant hereunder, subsequent to default, the annual rent for
each year of the unexpired term shall be equal to the average annual Base Rent
and Additional Rent paid or payable by Tenant from the Commencement Date of this
Lease to the time of default, or during the preceding three (3) full calendar
years, whichever is shorter; and
(e) Each of the remedies set forth hereinabove in this Section 17
shall not be exclusive, but rather shall be considered cumulative with any other
legal or equitable remedy now or hereafter available to Landlord under the laws
or judicial decisions of the state in which the Premises are located. To the
extent such waiver is permitted by law, the parties waive trial by jury in any
action or proceeding brought in connection with this Lease. Suit or suits for
the recovery of the amount of damages set forth hereinabove may be brought by
Landlord, from time to time, at Landlord's election, and nothing herein shall be
deemed to require Landlord to await the date whereon this Lease or the term
hereof would have expired had there been no event of default. Nothing contained
in this Lease shall limit or prejudice the right of Landlord to prove and obtain
as liquidated damages in any bankruptcy, insolvency, receivership,
reorganization or dissolution proceeding an amount equal to the maximum allowed
by any statue or rule of law governing such proceeding and in effect at the
time when such damages are to be proved, whether or not such amount be greater,
equal to or less than the amounts recoverable, either as damages or rent,
referred to in any of the preceding provisions of this Section.
17.3 Default by Landlord. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within thirty (30)
days after written notice by Tenant to Landlord and to the holder of any first
mortgage or deed of trust covering the Premises, specifying the manner in which
Landlord has failed to perform such obligation; provided however, that if the
nature of Landlord's obligation is such that more than thirty (30) days are
required for performance as determined by Landlord, then Landlord shall not be
in default if Landlord commences performance within such thirty day period and
thereafter diligently prosecutes the same to completion; provided further that
Landlord's obligation to perform any act under this Lease shall be excused for
any period of time during which Landlord is prevented from performing because of
any circumstance beyond Landlord's control. Tenant's remedies upon Landlord's
default are further limited by Section 18.3 and 25.2 below.
17.4 Late Charges. Tenant hereby acknowledges that late payment by Tenant
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Base Rent, Additional Rent or any other sum
due from Tenant shall not be received by Landlord or Landlord's designee within
ten (10) days after paid amount is due, then Tenant shall immediately pay to
Landlord a late charge equal to ten percent (10%) of such over due amount or
the sum of One Hundred Dollars ($100.00), whichever is greater. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the cost Landlord will incur by reason of late payment by Tenant and is in
addition to interest due under Section 25.4. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, or prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
18. RIGHTS OF MORTGAGEES.
18.1 Subordination. As used throughout this Section 18, the term
"mortgagee" shall refer to the holder of a Mortgage or deed of trust or ground
lease affecting the Premises. This Lease and the rights of Tenant hereunder
shall be and are hereby made subject and subordinate to the provisions of any
ground lease, mortgage or deed of trust affecting the Premises, and to each
advance made or hereafter to be made under the same, and to all renewals,
modifications, consolidations and extensions thereof and all substitutions
therefor. This Section 18 shall be self-operative and no further instrument of
subordination shall be required. However, in confirmation of the provisions of
this Section 18, Tenant shall execute and deliver promptly any certification or
instrument that Landlord or any mortgagee may request, and failing to do so
within ten (10) days after written demand, Tenant does hereby make, constitute
and irrevocably appoint Landlord as Tenant's attorney-in-fact and Tenant's
name, place and stead, to do so, and/or Landlord may declare this Lease to be
in default. If any mortgagee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and shall
give written notice thereof to Tenant, this Lease shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease is dated prior or
subsequent to the date of said mortgage, deed of trust or ground lease or the
date of recording thereof. Tenant shall and does hereby agree to attorn to any
mortgagee or successor in title and to recognize such mortgagee or successor as
its Landlord in the event any such person or entity succeeds to the interest of
Landlord.
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Notwithstanding any other provision of this Lease, in the event that any
mortgagee or its respective successor in title shall succeed to the interest or
Landlord hereunder, the liability of such mortgagee or successor shall exist
only so long as it is the owner of the Building, or any interest therein, or is
the tenant under said ground lease.
18.2 Mortgagee's Consent to Amendments. No assignment of this Lease and no
agreement to make or accept any surrender, termination or cancellation of this
Lease and no agreement to modify so as to reduce the rent, change the term, or
otherwise materially change the rights of Landlord under this Lease, or to
relieve Tenant of any obligation or liability under this Lease, shall be valid
unless consented to by Landlord's mortgagees of record, if such is required by
the mortgagees, in writing. No Base Rent, Additional Rent, or any other charge
(with the exception of the security deposit described in this Lease) shall be
paid more than ten (10) days prior to the due date thereof and payments made in
violation of this provision (except to the extent that such payments are
actually received by a mortgagee) shall be a nullity as against any such
mortgagees of record, and Tenant shall be liable for the amount of such
payments to such mortgagees.
18.3 Mortgagee's Right to Cure. No act or failure to act on the part of
Landlord which would entitle Tenant under the terms of this Lease, or by law,
to be relieved of Tenant's obligations hereunder or to terminate this Lease,
shall result in a release or termination of such obligations or termination of
this Lease unless (a) Tenant shall have first given written notice of
Landlord's act of failure to act to Landlord's mortgagees of record, if any,
specifying the act or failure to act on the part of Landlord which could or
would give basis to Tenant's rights; and (b) failure to act on such mortgagees,
after receipt of such notice, have failed or refused to correct or cure the
condition complained of within a reasonable time thereafter, provided that
nothing contained in this Section shall be deemed to impose any obligation on
any such mortgagees to correct or cure any condition. As used herein, a
"reasonable time" includes a reasonable time to obtain title to the mortgaged
premises if the mortgagee elects to do so and a reasonable time to correct or
cure the condition if such condition is determined to exist, but in no event
less than 120 days from the date of the mortgagees' receipt of the above
described notice.
19. NOTICES
Except as provided in Section 17.1(b) and 22, whenever under this lease
provision demand is made for any notice or declaration of any kind, or where it
is deemed desirable or necessary by either party to give or serve any such
notice, demand or declaration to the other party, it shall be in writing and
served either personally or sent by certified United States mail, return
receipt requested, postage prepaid, addressed either to the address set forth
in Section 1.1 or 1.11(b), or to such other address as may be given by a party
to the other by proper notice hereunder, or, in the case of notices to the
Tenant, to the Premises. The date of personal delivery (as evidenced by such
evidence of service as provided for in said rules) or the date on which the
certified mail is deposited with the United States Postal Service shall be the
date on which any proper notice hereunder shall be deemed given.
20. RELOCATION
Tenant agrees that Landlord may relocate Tenant to other space in the Building
containing substantially the same amount of rentable square feet as is
contained in the Premises, provided that the actual cost of physically
relocating Tenant (excluding any and all consequential or other costs to
Tenant) and the cost of altering the new space to make it comparable to the
Premises is borne by the Landlord; provided, however, that Landlord may not
exercise said right to relocate Tenant if the Premises consist of more than ten
percent (10%) of the rentable square feet in the Building. In addition,
Landlord shall pay costs incurred by Tenant as a result of the relocation,
including without limitation costs incurred in changing addresses stationery,
business cards, directories, advertising and other such items, but in no event
shall Landlord's obligation to pay cost imposed in this sentence exceed the sum
of $500. In the event that the new Premises in which the Tenant is relocated
does not consist of the identical number of rentable square feet as specified
in Section , the parties shall execute an instrument specifying the new
number of square feet in the Premises and the change in the number of square
feet contained in the Premises shall be deemed effective as of the date on
which the Tenant occupies the new premises in which it is relocated.
21. QUIET POSSESSION
Upon Tenant paying the sums due hereunder and observing and performing all of
the covenants, conditions and provisions on Tenant's part to be observed and
performed hereunder, Tenant shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
22. OPTIONS
In the event that the Tenant, by addendum attached to this Lease, is expressly
given an option to renew or extend the term of this Lease, or any option to
purchase the Premises or Building or any right of first refusal to purchase the
Premises or other property of Landlord, then each of such options and rights
are personal to Tenant and may not be exercised by or assigned, voluntarily or
involuntarily, by or to anyone other than Tenant. No such option described
hereinabove may be exercised by the Tenant except in strict accordance with the
terms and provisions of the option and provided that Tenant is not in default
under this Lease either at the time Tenant gives notice of its intent to
exercise the option or at the time at which the option is to be exercised.
Notwithstanding the provisions of Section 19, notice of exercise of any option
shall be deemed given only when actually received by Landlord.
23. LANDLORD'S LIEN
Tenant hereby grants to Landlord a lien upon and security interest in all
furniture, fixtures, equipment, inventory, merchandise and other personal
property belonging to the Tenant and located in, on or about the Premises or
Building at any time
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while this Lease is in effect, whether such items are presently owned by Tenant
or are after acquired, to secure the payment of all Base Rent, Additional Rent
and other charges due and to become due under this Lease and to further secure
the faithful performance of all of the other obligations of this Lease required
to be performed by Tenant, said lien to be prior to any other lien on such
property except a lien in favor of the seller or lessor of such property to
secure the unpaid purchase price or lease payments thereof. All exemption laws
are hereby expressly waived by Tenant. This lien and security interest may be
foreclosed in the same manner as a Financing Statement under the version of the
Uniform Commercial Code enacted in the state in which the Premises are situated,
or pursuant to any similar law so enacted if a version of the Uniform Commercial
Code is not in effect, and the filing of this Lease in accordance with said law
shall constitute full lawful notice of this lien. In lieu of filing this Lease
or in addition thereto, Landlord may require Tenant at any time to execute a
Financing Statement, Security Agreement or any other similar documents required
by the laws of the state in which the Premises are situated to perfect this lien
and security interest, and Tenant shall immediately execute the same upon the
demand of Landlord. In the event Tenant fails or refuses to do so within ten
(10) days after written demand, Tenant does hereby make, constitute and
irrevocably appoint Landlord as Tenant's attorney-in-fact in Tenant's name,
place and stead, to do so and/or Landlord may declare this Lease to be in
default.
24. HAZARDOUS MATERIALS
Tenant covenants not to introduce any hazardous or toxic materials onto
the Building, the Premises, or the grounds surrounding the Building, without
(a) first obtaining Landlord's written consent and (b) complying with all
applicable federal, state and local laws or ordinances pertaining to the
transportation, storage, use or disposal of such materials, including but not
limited to obtaining proper permits.
If Tenant's transportation, storage, use or disposal of hazardous or toxic
materials on the Building, the Premises, or the grounds surrounding the
Building results in (1) contamination of the soil or the surface or ground
water or (2) loss or damage to person(s) or property, then Tenant agrees to
respond in accordance with the following paragraph:
Tenant agrees (i) to notify Landlord immediately or any contamination,
claim of contamination, loss or damage, (ii) after consultation and approval by
Landlord, to clean up and (iii) to indemnify, defend and hold Landlord harmless
from and against any claims, suits, causes of action, costs and fees, including
attorney's fees, arising from or connected with any such contamination, claim
of contamination, loss or damage. This provision shall survive the termination
of this Lease.
25. GENERAL PROVISIONS
25.1 Estoppel Certificate. (a) Tenant shall at any time upon not less
than ten (10) days prior written notice from Landlord, execute, acknowledge
and deliver to Landlord a statement in writing: (i) certifying that this
Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification, identifying the instruments of modification
and certifying that this Lease, as so modified, is in full force and effect),
and the date to which the Base Rent, security deposit, Additional Rent and
other charges are paid in advance, if any, (ii) acknowledging that there are
not, to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults, if any, which are claimed. Any such
statement may be conclusively relied upon by any prospective purchaser,
encumbrancer or other transferee of the Premises.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant: (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that no rent has
been paid in advance; and
(c) If Landlord desires to finance or refinance the Premises or the
Building, or any part thereof, Tenant hereby agrees to deliver to Landlord
and/or to any lender designated by Landlord such financial records of Tenant
as may be reasonably required by such lender. Such statements may include but
not be limited to the past three (3) years' financial statements of Tenant. All
such financial statements shall be received by Landlord in confidence and
shall be used only for the purposes herein set forth.
25.2 Landlord's Interest and Liability. The term "Landlord" as used
herein shall mean only the owner or owners at the time in question of the fee
title or a tenant's interest in a ground lease of the real property on which
the improvements comprising the Building are situated. In the event of any
transfer of such title or interest, Landlord herein named (and in case of any
subsequent transfers the then grantor), shall be relieved from and after the
date of such transfer of all liability as respects Landlord's obligations
thereafter to be performed, provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer in which Tenant has an interest
shall be delivered to the grantee. The obligations contained in this Lease to
be performed by Landlord shall, except as aforesaid, be binding on Landlord's
successors and assigns only during their respective periods of ownership.
Anything to the contrary elsewhere in this Lease notwithstanding, Tenant shall
look solely to the estate and property of the Landlord in the Building for the
satisfaction of the Tenant's remedies for the collection of a judgment (or
other judicial process) requiring the payment of money by the Landlord in the
event of any default or breach by the Landlord with respect to any of the
terms, covenants and conditions of the Lease to be observed and/or performed by
the Landlord, and no other property or assets of the Landlord shall be subject
to levy, execution or other enforcement procedure for the satisfaction of the
Tenant's remedies.
25.3. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
25.4. Interest on Past Due Obligations; Certified Funds. Except as may
expressly be provided in this Lease to the contrary, any amount due to Landlord
not paid when due shall bear interest at the rate of seven percent(7%) per annum
greater than the Discount Rate of the Federal Reserve Bank as the same may
fluctuate from and after the date on which the payment was first due through the
date on which the payment is paid in full, provided, however, that the payment
of such interest shall in no event exceed the highest rate allowed under
applicable law. Payment of such interest shall not excuse or cure any default by
Tenant under this Lease. In the event that either Tenant is more than ten (10)
days late in making any payment due under the Lease, or any payment from Tenant
to Landlord does not clear the bank or is returned for insufficient funds, and
either such condition occurs on two or more
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occasions, or each occurs once, Landlord shall have the right at any time
thereafter to require that all succeeding monthly installments of Base Rent and
all succeeding payments of Additional Rent be paid to Landlord in certified
funds drawn on a bank located in the metropolitan area in which the Premises
are located. Said right may be exercised by Landlord by giving notice of such
requirements to Tenant, but the giving of such notice and the exercise of this
right by Landlord shall not be construed to be a waiver of any default by
Tenant or any other right which Landlord may exercise under this Lease.
25.5 Time of The Essence. Time is of the essence in the performance by
Tenant of its obligations hereunder.
25.6 Captions. Any captions contained in this Lease are not a part
hereof, are for convenience only, and are not to be given any substantive
meaning in construing this Lease.
25.7 Entire Agreement. This Lease contains the entire agreement and
understanding between the parties hereto. There are no oral understandings,
terms, or conditions, and neither party has relied upon any representations,
express or implied, not contained in this Lease. All prior understandings,
terms, or conditions are deemed merged in this Lease. No modification of this
Lease shall be binding unless such modification shall be in writing and signed
by the parties hereto. Tenant acknowledges that it has not been induced to enter
into this Lease by any promises or representatives not expressly set forth in
this Lease, and if any such representations were made prior to the execution of
this Lease, Tenant acknowledges that it has not relied on the same, and that
Landlord shall have no liability with respect to any such representations.
25.8 Waivers. No failure by either party to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to exercise
any right or remedy consequent upon a breach thereof, and no acceptance of full
or partial rent or the continuance of any such breach, shall constitute a
waiver of any such breach of such agreement, term, covenant or condition or a
relinquishment of the right to exercise such right or remedy. No agreement,
term, covenant or condition hereof to be performed or complied with by either
party, and no breach thereof, shall be waived, altered or modified except by a
written instrument executed by the other party. No waiver of any breach shall
affect or alter this Lease, but each and every agreement, term, covenant or
condition hereof shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof. Notwithstanding any
termination of this Lease, the same shall continue in force and effect as to
any provisions of the Lease, including remedies, which require or permit
observance or performance of Landlord or Tenant subsequent to termination.
25.9 Recording. Tenant shall not record this Lease. Any such recordation
by Tenant shall be a breach of this Lease.
25.10 Determinations by Landlord. Whenever in this Lease the Landlord is
to make any determination or decision, the Landlord shall make its
determination or decision in the exercise of its reasonable discretion and
judgment; however, any such determination or decision shall not bind the
Landlord if it has not been confirmed in writing.
25.11 Cumulative Remedies. No remedy or election by Landlord hereunder
shall be deemed exclusive, but shall wherever possible be cumulative with all
other remedies at law or in equity to which Landlord may be entitled.
25.12 Covenants and Conditions. Each provision of this Lease performable
by Tenant shall be deemed both a covenant and a condition.
25.13 Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment, subletting or transfer by Tenant and subject to the
provisions of Section 25.2, this Lease shall bind the parties, their personal
representatives, heirs, successors and assigns. This Lease shall be governed by
the laws of the state where the Premises are located.
25.14 Attorneys Fees. In the event of litigation relating to this Lease,
the prevailing party shall be entitled to recover from the losing party any
costs or reasonable attorneys fees incurred by the prevailing party in
connection with such litigation. If Landlord utilizes the services of an
attorney to enforce any of its rights hereunder but which does not result in
the bringing of an action, Tenant shall immediately pay to Landlord upon demand
therefor the amount of such attorneys fees incurred.
25.15 Landlord's Access. Landlord and Landlord's agents, representatives
and designees shall have the right to enter the Premises as reasonably
necessary or desirable to Landlord for the purpose of inspecting the same,
showing the same to prospective purchasers, tenants, lenders or other
transferees, making such alterations, repairs, improvements or additions to the
Premises or to the Building as Landlord may deem necessary or desirable, or for
any other reasonable purpose as Landlord may determine. Landlord may at any
time place in, on or about the Premises any "For Sale", or "For Lease" or
similar signs, all without rebate of rent or liability to Tenant.
25.16 Auctions. Tenant shall not conduct any auction, liquidation sale,
or going out of business sale in, on or about the Premises.
25.17 Merger. The voluntary or other surrender of this Lease by Tenant,
or a mutual cancellation thereof, shall not work a merger, and shall, at the
option of the Landlord, terminate all or any existing subtenancies or may, at
the option of Landlord, operate as an assignment to Landlord of any or all of
such subtenancies.
25.18 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
25.19 Signs. Landlord may prescribe a uniform pattern of identification
signs for tenants to be place on the outside of the doors leading into their
respective premises, and other than such identification signs, Tenant shall not
install, paint, display, inscribe, place or affix, or otherwise attach, any
sign, fixture, advertisement, notice, lettering or direction on any part of the
outside of the Building or in the interior or other portion of the Building
without obtaining the prior written consent of the Landlord.
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25.20 Brokers. The parties hereto acknowledge that the brokers named in
Section 1.18 were the sole real estate brokers that represented the Landlord
herein, and that no commissions are owed by Landlord to any other brokers
whatsoever, and Tenant agrees to indemnify Landlord from claims for commission
from any other brokers arising out of the execution of this Lease.
25.21 Guarantor. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Tenant under this Lease.
25.22 Governing Law. This lease shall be governed by and construed in
accordance with the laws of the state in which the Building is located.
25.23 Joint and Several Liability. If two or more individuals,
corporations, partnerships or other business associates (or any combination of
two or more thereof) shall sign this Lease as Tenant, the liability of each
such individual, corporation, partnership or other business association to pay
rent and perform all other obligations hereunder shall be deemed to be joint
and several, and all notices, payments and agreements given or made by, with or
to any one of such individuals, corporations, partnerships or other business
association shall be deemed to have been given or made by, with or to all of
them. In like manner, if Tenant shall be a partnership or other business
association, the members of which are, by virtue of statute or federal law,
subject to personal liability, the liability of each such member be joint and
several.
25.24 No Joint Venture. Any intention to create a joint venture or
partnership relation between the parties hereto is hereby expressly disclaimed.
The parties hereto have executed this Lease on the first page hereof on the
dates specified immediately below their respective signatures.
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR COMMUNICATIONS, INC.
BY: TARRAGON REALTY INVESTORS, INC.
ITS: MANAGING GENERAL PARTNER
BY: /s/ Christopher Clinton By: /s/ James C. Howell
--------------------------------- ----------------------
ITS: Senior Vice President ITS: CEO
-------------------------------- ---------------------
DATE: October 15, 1999 DATE: 30-September-1999
------------------------------- --------------------
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<PAGE> 20
EXHIBIT A, LEGAL DESCRIPTION
TO OFFICE BUILDING LEASE
BETWEEN
THE EMERSON CENTER COMPANY, LANDLORD
AND
COMSTAR COMMUNICATIONS, INC., TENANT
All that tract or parcel of land lying and being in Land Lots 880 and 881 of
the 17th District, Second, Cobb County, Georgia and being more particularly
described as follows:
Commence at a point located on the southeastern right-of-way line
of Spring Road (a 100 foot right-of-way at said point), said
point being 299.6 feet easterly from the eastern right-of-way
line of the Hargrove Road Extension (an 80 foot right-of-way)
thence continuing along said southeastern right-of-way line of
Spring Road North 53 degrees 02' 30" East 64.75 feet to a point
(at this point, the width of the southeastern right-of-way line
as measured from the centerline of Spring Road changes from a
distance of 50 feet to a distance of 100 feet); thence South 36
degrees 57' 30" east 50.00 feet to a point; thence South 30
degrees 35' 18" East 68.94 feet to a point; thence South 49
degrees 01' 13" East 117.35 feet to a point; thence South 49
degrees 43' 19" East 15.38 feet to an iron pin; thence North 53
degrees 02' 30" East 576.13 feet to an iron pin; thence along the
southwestern line of property now or formerly owned by Steak &
Ale of Atlanta South 36 degrees 57' 34" East 445.08 feet to an
iron pin; thence along the eastern line of Interstate 285 South
28 degrees 02' 44" West 527.2 feet to an iron pin; thence leaving
said western line of the Interstate 285 North 68 degrees 22' 42"
West 118.47 feet to a point; thence North 20 degrees 26' 02" East
208.75 feet to a point; thence North 69 degrees 33' 57" West
218.39 feet to an iron pin; thence North 20 degrees 26' 02" East
20.00 feet to a point; thence North 69 degrees 39' 21" West 25.50
feet to a point; thence North 62 degrees 37' 44" West 116.15 feet
to a point; thence North 43 degrees 06' 18" West 48.39 feet to a
point; thence North 26 degrees 25' 37" West 100.09 feet to a
point and the point of beginning, containing 7.14 acres.
The above-described courses, distances and acreage are taken from that certain
survey for Phoenix Mutual Life Insurance Company, dated September 4, 1979 and
prepared by Donald W. Harkeroad, Registered Land Surveyor No. 1578, said survey
having been revised on October 15, 1979 and being recorded in Plat Book 74,
Page 167, records of the Clerk of Superior Court of Cobb County, Georgia.
TOGETHER with the following easements:
1. Easement from Humble Oil and Refining Company to Fletcher Emerson,
Trustee, dated June 26, 1972, recorded in Deed Book 1338, Page 538, aforesaid
records.
2. Easement from Rujan Investments, Inc. to Fletcher Emerson, Trustee,
dated June 23, 1972 recorded in Deed Book 1338, Page 540, aforesaid records.
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<PAGE> 21
EXHIBIT B, PREMISES SITE PLAIN
TO OFFICE BUILDING LEASE
BETWEEN
THE EMERSON CENTER COMPANY, LANDLORD
AND
COMSTAR COMMUNICATIONS, INC., TENANT
[MAP]
EMERSON CENTER
BUILDING 2812
2ND FLOOR
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<PAGE> 1
EXHIBIT 10.5
OFFICE LEASE
BUILDING: EMERSON CENTER
LANDLORD: THE EMERSON CENTER COMPANY
TENANT: COMSTAR.NET, INC.
DBA SAME
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
TABLE OF CONTENTS.................................................... 2
1. CERTAIN LEASE PROVISIONS............................................. 3
2. PREMISES............................................................. 4
2.1 Definition....................................................... 4
2.2 Public Areas..................................................... 4
3. TERM.................................................................
3.1 Term............................................................. 4
3.2 Delay in Commencement............................................ 4
3.3 Early Possession................................................. 4
3.4 Delivery of Possession........................................... 4
3.5 Holding Over..................................................... 4
4. RENT................................................................. 4
4.1 Base Rent........................................................ 4
4.2 Additional Rent.................................................. 4
4.3 Parking and Storage.............................................. 5
4.4 Acceptance of Rental Payments.................................... 5
5. ESCALATIONS OF RENT.................................................. 5
5.1 Determination.................................................... 5
5.2 Indexing......................................................... 5
6. SHARED EXPENSES...................................................... 5
6.1 Determination.................................................... 5
6.2 Escalations...................................................... 5
6.3 Statements....................................................... 6
7. SECURITY DEPOSIT..................................................... 7
8. USE.................................................................. 7
8.1 Use.............................................................. 7
8.2 Compliance With Law.............................................. 7
8.3 Waste and Nuisance............................................... 7
8.4 Conditions of Premises........................................... 7
8.5 Insurance Cancellation........................................... 7
8.6 Landlord's Rules and Regulations................................. 7
9. LANDLORD'S SERVICES................................................... 7
9.1 Basic Services................................................... 8
9.2 Initial Construction............................................. 8
9.3 Interruption of Service.......................................... 8
10. MAINTENANCE, REPAIRS AND ALTERATIONS................................. 8
10.1 Landlord's Obligations.......................................... 8
10.2 Tenant's Obligations............................................ 8
10.3 Surrender....................................................... 9
10.4 Alterations and Additions....................................... 9
11. TENANT'S USE OF PUBLIC AREAS........................................ 10
12. TAXES AND TELEPHONE.................................................. 10
12.1 Personal Property Taxes......................................... 10
12.2 Evidence of Payment............................................. 10
12.3 Telephone....................................................... 10
13. INSURANCE AND INDEMNITY.............................................. 10
13.1 Liability Insurance............................................. 10
13.2 Property Insurance.............................................. 10
13.3 Insurance Policies.............................................. 10
13.4 Waiver Of Subrogation........................................... 10
13.5 Hold Harmless................................................... 11
13.6 Exemption of Landlord from Liability............................ 11
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
14. DAMAGE OR DESTRUCTION............................................ 11
14.1 Option to Terminate Lease................................... 11
14.2 Obligation to Repair or Restore............................. 11
14.3 Fault of Tenant............................................. 11
14.4 Obligations of Tenant....................................... 11
14.5 Termination by Tenant....................................... 11
15. CONDEMNATION..................................................... 12
16. ASSIGNMENT AND SUBLETTING........................................ 12
16.1 Landlord's Consent Required................................. 12
16.2 No Release of Tenant........................................ 12
16.3 Attorneys Fees and Administrative Fees...................... 13
16.4 Right to Collect Rent....................................... 13
17. DEFAULTS; REMEDIES............................................... 13
17.1 Defaults.................................................... 13
17.2 Remedies in Default......................................... 13
17.3 Default by Landlord......................................... 14
17.4 Late Charges................................................ 14
18. RIGHTS OF MORTGAGEES............................................. 14
18.1 Subordination............................................... 14
18.2 Mortgagee's Consent to Amendments........................... 15
18.3 Mortgagee's Right to Cure................................... 15
19. NOTICES.......................................................... 15
20. RELOCATION....................................................... 15
21. QUIET POSSESSION................................................. 15
22. OPTIONS.......................................................... 15
23. LANDLORD'S LIEN.................................................. 15
24. HAZARDOUS MATERIALS.............................................. 16
25. GENERAL PROVISIONS............................................... 16
25.1 Estoppel Certificate........................................ 16
25.2 Landlord's Interests....................................... 16
25.3 Severability............................................... 16
25.4 Interest on Past Due Obligations; Certified Funds.......... 17
25.5 Time of the Essence........................................ 17
25.6 Captions................................................... 17
25.7 Entire Agreement........................................... 17
25.8 Waivers.................................................... 17
25.9 Recording.................................................. 17
25.10 Determinations by Landlord................................ 17
25.11 Cumulative Remedies....................................... 17
25.12 Covenants and Conditions.................................. 17
25.13 Binding Effect; Choice of Law............................. 17
25.14 Attorneys Fees............................................ 17
25.15 Landlord's Access......................................... 17
25.16 Auctions.................................................. 17
25.17 Merger.................................................... 17
25.18 Corporate Authority....................................... 17
25.19 Signs..................................................... 17
25.20 Brokers................................................... 18
25.21 Guarantor................................................. 18
25.22 Governing Law............................................. 18
25.23 Joint and Several Liability............................... 18
25.24 No Joint Venture.......................................... 18
</TABLE>
EXHIBITS
Exhibit A -- Legal Description
Exhibit B -- Premises Site Plan
Exhibit D -- Rules and Regulations
Exhibit E -- Guaranty
<PAGE> 4
OFFICE LEASE
This Lease, dated for reference purposes only October 15, 1999, is made
by and between THE EMERSON CENTER COMPANY (the "Landlord"), and COMSTAR
COMMUNICATIONS, INC., (the "Tenant").
1. CERTAIN LEASE PROVISIONS
The description and amounts set forth below are qualified by their usage
elsewhere in this Lease, including those Sections referred to in parentheses
following such descriptions:
1.1 Tenant's address and telephone number (Section 19):
Tenant Name: COMSTAR.NET, INC.
----------------------------------------------
Doing Business As (DBA): Same
----------------------------------
Address: 2812 SPRING ROAD, SUITE 240, ATLANTA, GA 30339
---------------------------------------------------
Telephone:
------------------------------------------------
1.2 Premises. (Section 2.1):
Building Name: EMERSON CENTER SUITE No.: 240
-------------------------- --------
Address: 2812 SPRING ROAD, ATLANTA, GA 30339
--------------------------------------------------
1.3 Leased Area. (Section 2.1): 4,558 rentable sq. ft.
--------------
1.4 Total Building Area. (Section 2.1): 126,979 rentable sq. ft.
------------
1.5 Tenant's Pro-Rata Share of Building Area. (Section 2.1): 3.59 %
---------
1.6 Lease Term (Section 3.1): Five (5) year(s), Zero (0) month(s).
----------- ---- ------ ---
1.7 Commencement Date. (Section 3.1): OCTOBER 1, 1999 .
------------------------
1.8 Expiration Date. (Section 3.1, 3.2): SEPTEMBER 30, 2004 .
-----------------------
1.9 Base Rent for Lease Term. (Section 4.1): $348,823.74
------------------
1.10 Base Rent, Monthly Installments. (Sections 4.1, 5.2):
From 10-01-99 - 09-30-00 Annually $ 67,367.24 Monthly $ 5613.94
----------- ------------ ----------- --------
From 10-01-00 - 09-30-01 Annually $ 69,965.30 Monthly $ 5830.44
----------- ------------ ----------- --------
From 10-01-01 - 09-30-02 Annually $ 72,608.94 Monthly $ 6050.75
----------- ------------ ----------- --------
From 10-01-02 - 09-30-03 Annually $ 75,389.32 Monthly $ 6282.44
----------- ------------ ----------- --------
From 10-01-03 - 09-30-04 Annually $ 78,306.44 Monthly $ 6525.54
----------- ------------ ----------- --------
1.11 (a) Address of Landlord for rent payments (Sections 4.1, 4.2):
The Emerson Center Company, c/o the Frank M Darby Company
----------------------------------------------------------------------
3384 Peachtree Road, Suite 400, Atlanta, GA 30326
----------------------------------------------------------------------
(b) Address of Landlord for notices. (Sections 6.3, 19):
The Emerson Center Company, c/o Tarragon Realty Investors, Inc.
-----------------------------------------------------------------------
3100 Monticello, Suite 200, Dallas, TX 75205 - Attn.: Chris W. Clinton
-----------------------------------------------------------------------
(c) Address of Tenant for notices (Sections 6.3, 19):
2812 Spring Road, Suite 240, Atlanta, GA 30339
-----------------------------------------------------------------------
1.12 Geographic Area for CPI Calculation. (Section 5.2): N/A
------------
1.13 Base Month for CPI Calculation. (Section 5.2): N/A
------------
1.14 Landlord's Share of Operating Expenses. (Section 6.2): Base Year 1999
Actuals
-----------------
1.15 Landlord's Share of Real Estate Taxes. (Section 6.2): Base Year 1999
Actuals
-----------------
1.16 Security Deposit. (Section 7): $3,937.50 (on file)
---------------------
1.17 Use. (Section 8.1): General Office
-----------------------
1.18 Brokers. (Section 25.20): Frank M. Darby Company
----------------------------------------------
1.19 Addendum(s). (Section 3.2, 4.3, 9.2, 22): The following addendum(s) are
attached to this Lease:
This Lease consists of 25 articles on 18 pages, plus Exhibits A, B, D, G and
1 additional page(s) of Addendum(s).
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<PAGE> 5
2. PREMISES.
2.1 Definition. Landlord hereby leases to Tenant and Tenant leases from
Landlord for the term, at the rental, and upon all of the conditions set forth
herein, that certain real property known by suite number and address specified
in Section 1.2 hereof, consisting of the approximate amount of rentable square
feet specified in Section 1.3 hereof, and which is referred to herein as the
Premises. The Premises are located in an office building presently consisting of
the total number of rentable square feet specified in Section 1.4 hereof, which
office building, the real property on which it is situated (the legal
description of which is attached hereto as Exhibit A), and any parking
facilities or structures appurtenant thereto are hereinafter collectively
referred to as the "Building". The Premises are depicted in Exhibit B attached
hereto and incorporated herein by this reference, but the depiction of possible
uses, tenants or locations on Exhibit B shall not be construed to be a warranty
or representation by Landlord that any such uses, tenants or locations presently
exist or will continue to exist. Tenant's share of the total amount of square
feet of the Building is equal to the pro-rata share specified in Section 1.5
hereof, and said percentage shall hereinafter be referred to as the Tenant's
"Pro-Rata Share".
2.2 Public Areas. As long as this Lease remains in effect and Tenant is
not in default hereunder, Tenant shall have the nonexclusive right, in common
with the Landlord, other tenants, subtenants and invitees, to use the public
areas of the Building which consist of the entrance foyer and lobby of the
Building, the common corridors on the floor of the Building on which the
Premises are situated and other areas appurtenant to or servicing the elevators,
shipping and receiving areas and lavatories in the Building, provided that
Landlord shall have the right at any time and from time to time to exclude
therefrom such areas as Landlord may determine so long as access to the Premises
is not unreasonably denied.
3. TERM.
3.1 Term. The term of this Lease shall be the term specified in Section
1.6 hereof, commencing on the Commencement Date specified in Section 1.7 hereof
and ending on the Expiration Date specified in Section 1.8 hereof unless sooner
terminated pursuant to any provision of this Lease.
3.2 Delay in Commencement. Notwithstanding said Commencement Date, if for
any reason Landlord cannot deliver possession of the Premises to Tenant on said
date, Landlord shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Tenant
hereunder. However, in such case Tenant shall not be obligated to pay rent until
possession of the Premises is tendered to Tenant, which date shall be
the new Commencement Date, and the Expiration Date shall remain unchanged. Upon
Landlord's request, the parties agree to execute in writing an Addendum to
certify the Commencement Date and Expiration Date hereof, but this Lease shall
not be affected in any manner if either party fails or refuses to execute such
Addendum.
3.3 Early Possession. In the event that Landlord shall permit Tenant to
occupy the Premises prior to the Commencement Date, such occupancy shall be
subject to all of the provisions of this Lease and Tenant shall be obligated to
pay rental and all other charges incurred under this Lease in addition to any
obligations which commence on the Commencement Date. Said early possession shall
not advance the Expiration Date of this Lease.
3.4 Delivery of Possession. Tenant shall be deemed to have taken
possession of the Premises when the earliest of any of the following occur: (a)
five business days after Landlord or Landlord's agent, architect or contractor
notifies Tenant that the Premises are ready for occupancy; or (b) Tenant
commences to occupy or otherwise make use of the Premises. If Tenant is notified
pursuant to Section 3.4(a), Tenant agrees to occupy the Premises within twenty
business days thereafter. As used in this Lease, "business days" shall mean
Mondays through Fridays. Tenant agrees that, upon the request of Landlord,
Tenant will execute a document certifying the date on which Tenant took
possession of the premises.
3.5 Holding Over. If Tenant remains in possession of the Premises or any
part thereof after the expiration of the term hereof, such occupancy shall be a
tenancy from month to month at a monthly rental equal to 150% of the Base Rent
and Additional Rent payable hereunder. The foregoing provisions of this Section
3.5 shall neither be construed to give the Tenant any right to remain in
possession of the Premises or any part thereof after the expiration of the term
hereof nor to waive any of the Landlord's rights under the Lease to collect any
damages to which it may be entitled, whether direct or consequential.
4. RENT.
4.1 Base Rent. The Base Rent for the Premises for the entire term of this
Lease shall be as specified in Section 1.9, subject to adjustment pursuant to
the application of Section 3.2 relative to postponement of the installments
specified in Section 1.10, in advance, on the first day of each month of the
term hereof. Tenant shall pay Landlord upon the execution of this Lease the sum
specified in Section 1.10 as the installment of Base Rent for the first full
calendar month of the term of the Lease. Provided, however, that if the
Commencement Date does not occur on the first day of a month, the aforesaid
payment shall be for the initial thirty days of the Lease and the next monthly
installment of Base Rent shall be due on the first day of the first full
calendar month of the term but shall be prorated to cover only those days of
said calendar month not previously paid by the Tenant by its initial payment.
Base Rent for any period during the term hereof which is less than one calendar
month shall be a pro rata portion of the monthly installment based upon actual
number of days the Lease is in effect during said calendar month. All rents
shall be payable in lawful money of the United States of America without notice
or demand and without any deduction, offset or abatement, and shall be payable
to Landlord at the address stated in Section 1.11(a) or to such other persons
or at such other places as Landlord may designate in writing. The payment of
Base Rent hereunder shall be an independent covenant.
4.2 Additional Rent. Both Tenant and Landlord expressly understand and
agree that all other sums, excepting Base Rent as described in Sections 4.1 and
5, which may from time to time become due under this Lease shall be deemed
Additional Rent.
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<PAGE> 6
Additional Rent shall include, but not be limited to, late charges, interest,
Shared Expenses as described in Section 6, attorneys' fees, security deposits
and any cash bonds which may by circumstance be required to be posted hereunder.
Both Tenant and Landlord expressly understand and agree that all monies paid by
Tenant hereunder shall be first credited to Additional Rent (and allocated among
different items of Additional Rent as Landlord may determine), and only then to
Base Rent. All payments of Additional Rent shall be in lawful money of the
United State of America, shall be paid without any deduction, offset or
abatement, and shall be payable to Landlord at the address stated in Section
1.11(a) or to such other persons or at such other places as Landlord may
designate in writing. The obligation to make payments of Additional Rent
hereunder shall be an independent covenant.
4.3 Parking and Storage. Tenant agrees to pay to Landlord the amount of
Additional Rent for parking as set forth in any Parking Addendum incorporated in
this Lease, and the amount of Additional Rent for storage as set forth in any
Storage Space Addendum incorporated in this Lease, in advance for each month on
the first day of each month of the term hereof. Unless Tenant executes a
Parking Addendum or Storage Space Addendum, Tenant shall have no right to use
any parking facilities or storage facilities of the Building, respectively.
4.4 Acceptance of Rental Payments. No acceptance by Landlord of a lesser
sum than the Base Rent and/or Additional Rent then due shall be deemed to be
other than on account of the earliest amount of such rental due (unless Landlord
elects otherwise), nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction or compromise and settlement, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
payments due or to pursue any other remedy as provided in this Lease.
6. SHARED EXPENSES
6.1 Determination. The monthly obligations for Additional Rent as
described in Section 4.2 shall be annually adjusted in accordance with the
provisions of Section 6.2 below.
6.2 Escalations. (a) Landlord agrees to expend as its share of Operating
Expenses paid for and sustained by the Landlord during any calendar year an
amount not greater than that specified in Section 1.14. Said sum shall
constitute the maximum payable by Landlord as its contribution toward Operating
Expenses. The term "Operating Expense" means the total amounts paid or payable,
whether by the Landlord or otherwise on behalf of the Landlord, in connection
with the ownership, leasing, management, maintenance, repair and operation of
the Building, other than those expenses described in Section 6.2(b). Operating
Expense shall
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-----------
<PAGE> 7
include, without limiting the generality of the foregoing, the aggregate of the
amount paid for heating, air conditioning, and providing electricity and water
and sewer charges to the Building, other than that paid by individual tenants,
the amount paid to any persons or entities for all labor and/or wages (including
the cost to Landlord of workmen's compensation and disability insurance, payroll
taxes, welfare and fringe benefits), for services rendered, and materials
provided to the Building; administrative expenses related to the Building; any
costs incurred for any capital improvements or structural repairs to the
Building to effect labor savings or otherwise reduce Operating Expenses, or
required by law or by any governmental or quasi-governmental authority having
jurisdiction over the Building, which costs shall be amortized over the useful
life of the applicable capital improvements or structural repairs; the cost of
accounting services necessary to compute the rent and charges payable by tenants
of the Building; fees for management, legal, accounting, inspection and
consulting services pertaining to the Building; the cost of guards and other
protection services; and the amount paid for premiums for all insurance procured
by Landlord to insure the Building as may be required or permitted under this
Lease (including, without limitation, business interruption insurance, and if
there is a mortgage or deed of trust on the Building, such insurance as may be
required by the holder of such mortgage or deed of trust). Notwithstanding the
foregoing, Operating Expenses shall not include the costs of special services
rendered to tenants (including Tenant) for which a special or separate charge is
made, any costs of preparation of space for new tenants in the Building, any
costs borne directly by Tenant under this Lease, leasing commissions,
depreciation or interest payments, or debt service payments made to a mortgagee.
(b) Landlord agrees to expend as its share of Real Estate Taxes paid for
and sustained by the Landlord during any calendar year an amount not greater
than that specified in Section 1.15. Said sum shall constitute the maximum
payable by Landlord as its contribution toward Real Estate Taxes. Real Estate
Taxes shall include general and special taxes, assessments, duties and levies,
charged and levied upon or assessed against the Building and/or any improvement
situated on the real property on which the Building stands, any leasehold
improvement, fixtures, installations, additions and equipment used in the
maintenance or operation of the Building, whether owned by Landlord or Tenant,
not paid directly by the Tenant. Further, if at any time during the term of
this Lease, the method of taxation of real estate prevailing at the time of
execution hereof shall be or has been altered so as to cause the whole or any
part of the taxes now or hereafter levied, assessed or imposed on real estate
to be levied, assessed or imposed upon Landlord, wholly or partially, as a
capital levy or otherwise, or on, or measured by the rents received from the
Building, then such new or altered taxes attributable to the Premises shall be
deemed to be included within the term "Real Estate Taxes" for purposes of this
paragraph. The reference to "Building" in this subparagraph shall include, as
allocated by the Landlord, improvements or facilities utilized in common by the
Building and other buildings upon or adjacent to the real property on which the
Building stands.
(c) Commencing on the first day of the first January after the
Commencement Date, and continuing thereafter during the term of this Lease,
Tenant shall pay to Landlord monthly in advance on the first day of each month,
without notice or demand and without any deduction, offset or abatement, in
lawful money of the United States of America, 1/12 of the amount of the
Tenant's Pro-Rata Share of the Shared Expenses as estimated by Landlord to be
incurred for the calendar year in which the monthly payments are to be made. If
the Expiration Date is not December 31, the monthly payments owing hereunder
during the last partial calendar year of the Lease shall be appropriately
adjusted. For the period from the Commencement Date to December 31 in the same
calendar year, Tenant shall not pay estimated Shared Expenses but shall be
obligated for its actual Pro-Rata Share of Shared Expenses for said period upon
receipt of Landlord's Statement described below. The term "Shared Expenses"
shall mean the amount by which Operating Expenses and Real Estate Taxes
incurred in any period exceed the amount of Landlord's obligation for the same
as specified in Section 1.14 and 1.15.
(d) In each calendar year after the year in which the Commencement Data
occurs, Landlord shall send to Tenant a Landlord's Statement which shall set
forth the actual amount of Shared Expenses, with the exception of those States
in which real estate taxes are billed on other than a calendar year basis, in
that event Landlord's statement of Real Estate Taxes will be based on the Real
Estate Tax Fiscal Year and sent within a reasonable time after receipt of Real
Estate Tax Statements, and Tenant's Pro-Rata Share thereof for the preceding
calendar year or portion thereof and the estimated amount of Shared Expenses
and Tenant's Pro-Rata Share thereof for the calendar year in which the
Landlord's Statement is given. Landlord's failure to render a Landlord's
Statement with respect to any period shall not eliminate or reduce Tenant's
obligation to pay Shared Expenses and shall not prejudice Landlord's right to
render a Landlord's Statement with respect to any subsequent period. The
obligations of Tenant under the provisions of this paragraph with respect to
any increase in rent shall survive the expiration or any sooner termination of
the term of the Lease. Within 15 days next following the notification by
Landlord of the contents of its Landlord's Statement, Tenant shall pay to
Landlord the entire amount of Tenant's Pro-Rata Share of actual Shared Expenses
for the prior period covered by the Landlord's Statement less the amount of
Shared Expenses actually paid by Tenant for said period, plus Tenant shall also
then pay to Landlord such amount as is necessary to assure than, through the
calendar month in which the Landlord's Statement is given, the Tenant has paid
to Landlord the full amount of estimated Shared Expenses for the calendar year
in which Landlord's Statement is given, as if the Landlord's Statement were
given on January 1 of said calendar year. For each month following for the
remainder of said calendar year, Tenant shall pay the monthly estimated Shared
Expenses set forth in the Landlord's Statement. In the event that the estimated
payments made by the Tenant in the calendar year preceding the date on which
the Tenant is given notice of the Landlord's Statement exceed the Tenant's
Pro-Rata Share of actual Shared Expenses for such calendar year, then should
the Tenant not be otherwise in default hereunder, the amount of such excess
shall be applied by the Landlord to the next succeeding installments of monthly
estimated payments of Shared Expenses.
6.3 Statements. Nothing in this Lease shall be construed to require
Landlord to render the statements described in Sections 5.2 and 6.2
simultaneously or in any particular order. All reasonable determinations by
Landlord pursuant to Section 6 shall be presumed to be correct. Until Tenant is
advised of the adjustment in its obligation to pay Shared Expenses, if any,
pursuant to the provisions of Section 6.2. Tenant's monthly rental shall
continue to be paid at the then current rent (including all prior adjustments
thereto pursuant to this Lease). Upon written notice to Landlord of not less
than fifteen business days, Tenant shall have the right to review the
documentation relied upon by Landlord relating to the computation of Shared
Expenses, which review shall occur at the location specified in Section
1.11(b). All Shared Expenses shall be computed on the actual basis. In
computing Shared Expenses, no cost or expense may be accounted more than once,
any expenses which are paid by the proceeds of insurance shall be excluded, and
any expenses which are separately metered or billed directly to and separately
paid by any other tenant shall be excluded. Tenant shall have the right to
cause an audit to be made of Landlord's computation of Shared Expenses, at the
location of the Corporate Office in Dallas, Texas, at Tenant's sole expense,
not more frequently than once per calendar year. Tenant shall not be entitled
to withhold or deduct any portion of Base Rent or Additional Rent during the
pendency of any such audit. Any errors disclosed by such audit shall be
promptly corrected, provided that Landlord shall have the right to cause
another independent audit to be made of such computations, and in the event of
a disagreement between the auditors, the audit disclosing the least amount of
deviation from Landlord's original computations shall be conclusively deemed to
be correct.
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7. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon execution hereof the sum specified
in Section 1.16 as security for Tenant's faithful performance of Tenant's
obligations hereunder. If Tenant fails to pay rent or other charges due
hereunder, or otherwise defaults with respect to any provisions of this Lease,
Landlord may without notice to Tenant use, apply or retain all or any portion of
said deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Landlord may become obligated by reason of
Tenant's default or to compensate Landlord for any loss or damage which Landlord
may suffer thereby. If Landlord so uses or applies all or any portion of said
deposit, Tenant shall within five (5) days after written demand therefor deposit
cash with Landlord in an amount sufficient to restore said deposit to the full
amount hereinabove stated. Landlord shall not be required to keep said deposit
separate from its general accounts and Tenant shall not be entitled to interest
on such deposit. If Tenant performs all of Tenant's obligations hereunder, said
deposit or so much thereof as had not theretofore been applied by Landlord,
shall be returned, without payment of interest or other increment for its use,
to Tenant (or, at Landlord's option, to the last assignee, if any, of the
Tenant's interest hereunder) within sixty (60) days after either the expiration
of the term hereof or after Tenant has vacated the Premises, whichever is later.
Landlord shall deliver the funds deposited herein by Tenant to the purchaser of
the Building in the event the Building is sold (or give such purchaser a credit
against the purchase price in the amount of such deposit), and thereupon
Landlord shall be discharged from all further liability with respect to such
deposit. If Tenant shall default under this Lease more than two (2) times in any
twelve (12) month period, irrespective of whether or not such default is cured,
then the security deposit shall, within ten (10) days after demand by Landlord,
be increased by Tenant to an amount equal to the greater of: (i) three (3) times
the amount specified in Article 1.16; (ii) three (3) months' fixed rent; or
(iii) as may be otherwise required by Landlord.
8. USE.
8.1 Use. The Premises shall be used and occupied only for the uses
specified in Section 1.17 hereof, provided that the foregoing shall not be
construed as a representation or guarantee by the Landlord that such business
may lawfully be conducted on the Premises.
8.2 Compliance With Law. In the event it is determined by the applicable
governmental unit that the Premises violates any building code, regulation or
ordinance, then it shall be the obligation of the Landlord, after written notice
from Tenant which includes a copy of the governmental unit's determination, to
promptly, at Landlord's sole cost and expense, rectify any such violation. In
the event Tenant does not give to Landlord written notice of any such violation
within thirty (30) days from the date on which Tenant takes possession of the
Premises, it shall be conclusively deemed that such violation, whether the same
is patent or latent, did not exist and the correction of the same shall be the
obligation and expense of the Tenant at the direction of the Landlord, provided,
however, that nothing in this Section shall be construed to require or permit
the Tenant to make any structural changes to the Building not caused by Tenant's
improvements or the nature of Tenant's occupancy of the Premises.
8.3 Waste and Nuisance. Tenant shall not commit, suffer or permit any
waste, damage, disfiguration or injury to the Premises, the common areas in the
Building, or the fixtures and equipment located therein or thereon. Tenant
shall not permit or suffer any overloading of the floors thereof, and shall not
place therein any heavy business machinery, safes, computers, data processing
machines, or other items heavier than customarily used for general office
purposes without first obtaining the written consent of Landlord. Tenant shall
not use or permit to be used any part of the Building for any dangerous,
noxious or offensive trade or business, and shall not cause or permit any
nuisance, noise, action, or disturbance of other tenants, in, at or on the
Premises.
8.4 Conditions of Premises. Except as provided in Section 8.2, Tenant
hereby accepts the Premises in their condition existing as of the date of the
commencement hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use of the
Premises, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. In addition, except as provided in
Section 8.2, Tenant shall at Tenant's expense, comply promptly with all
applicable laws, statutes, ordinances, rules, regulations, orders, restrictions
of record, and requirements in effect during the term or any part of the term
hereof regulating the use by Tenant of the Premises.
8.5 Insurance Cancellation. Notwithstanding the provisions of Section
8.2 hereinabove, no use shall be made or permitted to be made of the Premises,
nor acts done which will cause the cancellation of any insurance policy
covering said Premises or the Building, and if Tenant's use of the Premises
causes an increase in said insurance rates, Tenant shall pay any such increase
as Additional Rent, which, together with interest on any amount paid therefor
by Landlord, shall be payable by Tenant on the next succeeding date on which a
Base Rental payment is due.
8.6 Landlord's Rules and Regulations. Tenant shall faithfully observe
and comply with the reasonable rules and regulations that Landlord shall from
time to time promulgate, including without limitation any rules and regulations
attached to this Lease, which are hereby incorporated wherein by this
reference. Landlord reserves the right from time to time to make all reasonable
modifications to said rules and regulations. The additions and modification to
those rules and regulations shall be binding upon Tenant upon Landlord giving
notice of them to Tenant. Landlord shall not be responsible to Tenant for the
nonperformance of any of said rules and regulations by any other tenants or
occupants.
9. LANDLORD'S SERVICES.
9.1 Basic Services. Subject to any law, rule or governmental order or
regulation, and further subject to any circumstance beyond the control of the
Landlord, Landlord shall furnish the following services:
(a) Air conditioning and heat, whichever be required, 24 hours a
day, 7 days a week, 365 days a year.
(b) Hot and cold water for lavatory purposes and electric current
for lighting the Premises and for ordinary
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office appliances and office machines only, provided that Tenant shall not use
any electrical equipment which in Landlord's opinion will overload the wiring
insulations or interfere with the use thereof by Landlord or any other tenant
in the Building. If a further supply of water is required by Tenant, then at
Tenant's expense, Landlord shall have the option to install and maintain a
water meter to register such consumption, and Tenant shall pay as Additional
Rent for water consumed, at the cost to Landlord, and for sewer rents and all
other rents and charges based upon such consumption of water;
(c) General day-to-day janitorial service (excluding carpet shampooing
and hard surface floor waxing) five days a week, and elevator service during
the same hours for which air conditioning and heat services are provided as set
forth above, provided, however, that in the event Tenant is delinquent in
making any installment payment of rent under this Lease for a period of 15 days
or more after it shall become due, Landlord may discontinue furnishing any or
all of the services described in this Section 9 until all arrears of rental
payments, plus interest and late charges and any other sums due under this
Lease, shall have been paid in full. Whenever heat generating machines or
equipment are used by Tenant in the Premises which affect the temperature
otherwise maintained by the air conditioning system, as determined by Landlord,
Landlord reserves the right to install supplementary air conditioning units in
the Premises, and the costs therefor, including the cost of installation,
operation and maintenance thereof, shall be paid by Tenant to Landlord upon
demand by Landlord. If Tenant, as determined by Landlord, requires electric
current in excess of that usually furnished or supplied to the Premises,
Landlord may, at its election, either cause an electric current meter to be
installed in the Premises so as to measure the electric current consumed for
such excess use or determine the value of such excess use by causing an
independent electrical engineer or consulting firm, selected by Landlord, to
conduct a survey of Tenant's use of electric current and to certify such
determination in writing to Landlord and Tenant. The cost of any such meter or
survey, as the case may be, and of the installation, maintenance or survey, as
the cause may be indicates such excess use by Tenant of electric current,
Tenant agrees to pay to Landlord, as Additional Rent, promptly upon demand
therefor by Landlord, the amount determined to be due for the electric current
consumed by Tenant, as shown by said meter or as indicated in said survey, as
the case may be, at the rate charged for such service by the local public
authority or the local public utility, as the case may be, furnishing the same,
plus any additional expenses incurred by Landlord in keeping account of the
electric current consumed.
(d) Notwithstanding anything in this Lease to the contrary, Tenant
will not without the prior written consent of Landlord, use any apparatus or
device in the Premises which will in any way increase the amount of electricity
or water usually furnished or supplied for use of the Premises as general
office space. Tenant shall not connect with any electric current except through
existing electrical outlets in the Premises, or to any water pipes, any
apparatus or device for the purposes of using electric current or water. If
Tenant shall require water or electric current in excess of that usually
furnished or supplied for use of the Premises. Tenant must first procure the
written consent of Landlord to the use thereof. With the prior written consent
of Landlord, Tenant may maintain and operate data processing equipment on the
Premises, but all additional costs in connection therewith (including, but not
limited to, additional support flooring, insulation, electrical outlets and
temperature maintenance facilities) shall be borne solely by Tenant and the
utility services utilized by or for such equipment shall be separately metered
and the cost of such utility services with metering shall be borne solely by
Tenant. At Tenant's request, and with Landlord's prior approval, Landlord shall
furnish the services described in this Section at times other than specified in
Section 9.1 (a), provided that Tenant shall pay the entire cost thereof as
reasonably determined by Landlord as Additional Rent, notwithstanding the fact
that such services may also benefit portions of the Building other than the
Premises (in which event Landlord shall not receive collectively from all
tenants paying for any portion of such additional services more than the actual
cost to Landlord of providing the same).
9.2 Initial Construction. Landlord agrees to perform the work and make such
installations in the Premises as set forth in the Work Letter Addendum which,
if attached hereto as indicated in Section 1.19, constitutes additional
provisions of this Lease which are hereby incorporated by reference. Tenant
acknowledges that it will examine the Premises before taking possession
hereunder and agrees that unless Tenant furnishes Landlord with a notice in
writing specifying any apparent defect in the construction within twenty
business days after such taking of possession pursuant to Section 3.4, it shall
be conclusively deemed that Tenant has examined the Premises and that the same
were in good order and that Landlord had satisfactorily completed the work it
agreed to perform. Tenant agrees that there is no promise, representation, or
undertaking by or binding upon Landlord with respect to any construction,
alteration, remodeling or redecorating in or to the Premises except as
expressly set forth in the Work Letter Addendum.
9.3 Interruption of Services. Landlord reserves the right from time to time
to install, use, maintain, repair, replace and relocate any mechanical,
plumbing, and electrical equipment serving the Premises and other parts of the
Building, and to alter or relocate any other facility in the Building.
Interruption or curtailment of any service maintained in the Building, if
caused by strikes, mechanical difficulties, actions of the Landlord under the
first sentence of this Section 9.3, or for any other reason beyond Landlord's
control, shall not entitle Tenant to any claim against Landlord or to any
abatement in rent, nor shall the same constitute constructive or partial
eviction. Unless due to the gross negligence of Landlord, Landlord shall not be
liable to Tenant for any injury or damage resulting from defects in the
plumbing, heating, or electrical systems in the Building or for any damage
resulting from water seepage into the Building or for any act or failure to act
by any other Tenants at the Building or for any damage resulting from wind
storm, hurricane or rain storm.
10. MAINTENANCE, REPAIRS AND ALTERATIONS
10.1 Landlord's Obligations. Subject to the provisions of Sections 8.2 and
14, and except for damage caused by any negligent or intentional act or
omission of Tenant, Tenant's agents, employees, representatives, customers or
invitees, in which event Tenant shall repair the damage, at its sole expense,
Landlord shall keep in good order, condition and repair the structural portions
of the Building and those portions of the Building which are not occupied or
leased by any tenant, and all costs incurred by Landlord in making any such
repairs or performing such maintenance shall be Operating Expenses as defined
in Section 6.2, provided that Landlord shall have no obligation to perform any
act which is the obligation of Tenant or any other tenant in the Building.
Tenant expressly waives the benefits of any statute now or hereafter in effect
which would otherwise afford Tenant the right to make repairs at Landlord's
expense or to terminate this Lease because of Landlord's failure to keep the
Premises in good order, condition and repair. Other than as specifically
provided in this Section 10.1, Landlord shall not be obligated to make any
repairs or improvements of any kind, in, upon, about, or to the Premises or the
Building.
10.2 Tenant's Obligations. Subject to the provisions of Sections 8.2 and
14, Tenant, at Tenant's expense, shall keep in good order, condition and repair
the Premises and every part thereof including, without limiting the generality
of the foregoing, all
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plumbing, electrical and lighting facilities and equipment within the Premises,
fixtures, interior walls and interior surfaces of exterior walls, ceilings,
windows, doors, plate glass and skylights located within the Premises. All
repairs made by the Tenant shall be at least of the same quality, design and
class as that of the original work. Tenant agrees that it will abide by, keep
and observe all reasonable rules and regulations which Landlord may make from
time to time for the management, safety, care and cleanliness of the Building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the Building.
All damage or injury to the Building or to the Premises, fixtures,
appurtenances and/or equipment caused by the Tenant moving property in or out
of the Building or the Premises or by Tenant's installation or removal of
furniture, fixtures, or other property, or from any other cause of any kind or
nature whatsoever due to carelessness, omission, neglect, improper conduct, or
other cause of the Tenant, its agents, employees, invitees, contractors or
subcontractors shall be repaired, restored, or replaced promptly by the Tenant
at its sole cost and expense to the satisfaction of the Landlord. In the event
that the Tenant fails to keep the Premises in good order, condition and repair
while this Lease remains in effect, then as soon as possible after written
demand (which written demand shall not be required in the case of an
emergency), Landlord may restore the Premises to such good order and condition
and make such repairs without liability to Tenant for any loss or damage that
may accrue to Tenant's property or business by reason thereof, and upon
completion thereof Tenant shall pay to Landlord upon demand and as Additional
Rent the cost of restoring the Premises to such good order and condition,
together with interest thereon from the date paid.
10.3 Surrender. On the last day of the term hereof or on any sooner
termination or date on which Tenant ceases to possess the Premises, Tenant shall
surrender the Premises to Landlord in good and clean condition, ordinary wear
and tear excepted. Prior to such surrender Tenant shall repair any damage to the
Premises occasioned by its removal of trade fixtures, furnishings and
equipment, which repair shall include the patching and filling of holes and
repair of structural damage. Tenant agrees to indemnify Landlord and hold
Landlord harmless from and against any liability (including reasonable
attorneys' fees) of Landlord to third parties resulting from Tenant's failure
to timely comply with the provisions of this Section 10.3.
10.4 Alterations and Additions. (a) Tenant shall not, without Landlord's
prior written consent, make any alterations, improvements or additions
(referred to collectively herein as "Alterations") in, on or about the Premises.
Landlord may require that Tenant remove any or all of said Alterations at the
expiration of the term or such other time at which Tenant ceases to possess the
Premises, and restore the Premises to their prior condition. Should Tenant make
any Alterations without the prior approval of the Landlord, Landlord may
require that Tenant immediately remove any or all of such items and/or Landlord
may declare a default by Tenant under this Lease. Except in connection with
normal interior decorating of the Premises, Tenant shall not place any holes in
any part of the Premises, and in no event shall Tenant place any exterior or
interior signs or interior drapes, blinds, or similar items visible from the
outside of the Premises without the prior written approval of Landlord.
(b) Any Alterations in, on or about the Premises that Tenant shall
desire to make shall be presented to Landlord in written form with proposed
detailed plans. If Landlord shall give its consent, the consent shall be deemed
conditioned upon Tenant acquiring a permit to do the work from appropriate
governmental agencies, the furnishing of a copy thereof to Landlord prior to
the commencement of the work and the compliance by Tenant with all conditions
of said permit and with all specifications in the plans in a prompt and
expeditious manner. Tenant shall not permit any of the work to be performed by
persons not currently licensed under any applicable licensing laws or
regulations pertaining to the types of work to be performed. Landlord shall not
be deemed unreasonable in the exercise of its discretion for withholding
approval of any Alterations which involve or might affect any structural or
exterior element of the Building, any area or element outside of the Premises,
or any facility serving any area of the Building outside of the Premises, or
which will require unusual expense to re-adapt the Premises to normal office
use on the termination or expiration of the Lease, unless in the latter case
Tenant either desires to or is required to make repairs or Alterations in
accordance with this Lease, Landlord may require Tenant, at Tenant's sole cost
and expense, to obtain and provide to Landlord a lien and completion bond (or
such other applicable bond as determined by Landlord) in an amount equal to one
and one-half (1-1/2) times the estimated cost of such improvements, to insure
Landlord against liability including but not limited to liability for
mechanic's and materialmen's liens and to insure completion of the work.
(c) Tenant shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Tenant at or for use in
the Premises, which claims are or may be secured by any mechanic's or
materialmen's lien against the Premises or the Building. Tenant shall give
Landlord not less than ten (10) days notice prior to the commencement of any
work in, on or about the Premises, and Landlord shall have the right to post
notices of non-responsibility in, on or about the Premises as provided by law.
Tenant shall have no power or authority to do any act or make any contract
which may create or be the basis for any lien upon the interest of the
Landlord, the Premises or the Building, or any portion thereof. If any
mechanics or other lien or any notice of intention to file a lien shall be
filed or delivered with respect to the Premises or the Building, based upon any
act of the Tenant or of anyone claiming through the Tenant, or based upon work
performed or materials supplied allegedly for the Tenant, Tenant shall cause
the same to be canceled and discharged of record within fifteen (15) days after
the filing or delivery thereof. If Tenant has not so canceled the lien within
fifteen (15) days as required herein, Landlord may pay such amount, and the
amount so paid together with interest thereon from the date of payment and all
legal costs and charges, including attorneys fees, incurred by Landlord in
connection with said payment and cancellation of the lien or notice of intent
shall be Additional Rent and shall be payable on the next succeeding date on
which a Base Rental installment is due. Landlord may, at its option and without
waiving any of its rights set forth in the immediately preceding sentence,
permit Tenant to contest the validity of any such lien or claim, provided that
in such circumstances the Tenant shall at its expense defend itself and
Landlord against the same and shall pay and satisfy any such adverse judgment
that may be rendered thereon before the enforcement thereof against the
Landlord, the Premises or the Building, provided further that Landlord may at
any time require the Tenant to deposit with the court exercising jurisdiction
over such claim, such amount as may be necessary under applicable statutes to
cause the release and discharge of the lien, and if Tenant shall not
immediately make such payment upon the request of Landlord, Landlord may make
said payment and the amount so paid, together with interest thereon from the
date of payment and all legal costs and charges, including attorneys fees,
incurred by Landlord in connection with said payment shall be deemed Additional
Rent and shall be payable on the next succeeding date on which a Base Rental
installment is due. In addition, Landlord may require Tenant to pay Landlord's
attorney fees and costs in participating in such action if Landlord shall
decide it is in its best interest to do so. Nothing herein contained shall be
construed as a consent on the part of Landlord to subject the interest and
estate of Landlord to liability under any lien law of the state in which the
Premises are situated, for any reason or purpose whatsoever, it being expressly
understood that Landlord's interest and estate shall not be subject to such
liability and that no person shall have any right to assert any such lien.
(d) Unless Landlord requires their removal, as set forth in Section
10.4(a), all Alterations which may be made
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on the Premises shall, at the expiration of the term or such other time at which
Tenant ceases to possess the Premises, become the property of Landlord and
remain upon and be surrendered with the Premises. Notwithstanding the provisions
of this Section 10.4(d), Tenant's machinery and equipment, other than that which
is affixed to the Premises so that it cannot be removed without material damage
to the Premises, shall remain the property of Tenant and may be removed by
Tenant subject to the provisions of Section 10.3 hereof and provided further
that Tenant is not in default under this Lease at the time Tenant ceases to
possess the Premises.
11. TENANT'S USE OF PUBLIC AREAS.
Tenant's non-exclusive use of the public areas described in Section 2.2
shall be subject to such Reasonable Rules and Regulations promulgated by
Landlord pursuant to Section 8.6. Tenant agrees to repair at its cost all
deteriorations or damages to the public areas occasioned by its negligence or
intentional misconduct or that of its officers, agents, representatives,
customers, employees or invitees.
12. TAXES AND TELEPHONE.
12.1 Personal Property Taxes. Tenant shall pay prior to delinquency all
taxes assessed against and levied upon leasehold improvements, fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Premises or elsewhere. If Tenant shall cause said leasehold improvements,
trade fixtures, furnishings, equipment and all other personal property to be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within (10) days after receipt of a written notice from
Landlord setting forth the taxes applicable to Tenant's property, and if Tenant
fails to do so, Landlord may make such payment and the amount so paid, together
with interest thereon from the date paid, shall be Additional Rent and shall be
due and payable to Landlord on the next succeeding date on which a Base Rental
installment is due.
12.2 Evidence of Payment. Tenant shall promptly deliver to Landlord, upon
Landlord's written request, receipts for payments of all taxes, charges, rates,
dues, assessments and licenses in respect of all improvements, equipment and
facilities of the Tenant on or in the Premises which were due and payable
within a period up to one year prior to Landlord's making such request.
12.3 Telephone. Tenant shall separately arrange and pay for the
furnishing of and use of all telephone services as Tenant may deem necessary
for its use of the Premises, and Landlord shall have no liability in connection
therewith.
13. INSURANCE AND INDEMNITY.
13.1 Liability Insurance. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of bodily injury and
property damage insurance, insuring Landlord and Tenant against any liability
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be in an amount not less
than $500,000 per person, $500,000 per occurrence for bodily injury, and
$500,000 for property damage, or $1,500,000 combined single limit for said
items. The limits of said insurance shall not, however, limit the liability of
Tenant hereunder. Tenant shall also obtain and keep in force during the term of
this Lease, at Tenant's expense, "all risk" or "special coverage form"
insurance upon the property of every description and kind owned by the Tenant
and located in the Building or for which Tenant is legally liable or installed
by or on behalf of the Tenant, including without limitation, furniture,
fittings, installations, alternations, additions, partitions, fixtures and
anything in the nature of leasehold improvements in an amount not less than 80%
of the full replacement cost thereof. Such insurance shall insure the Tenant
and Landlord, and in the event that there shall be a dispute as to the amount
which comprises the full replacement cost, the decision of the Landlord shall
be conclusive. If Tenant shall fail to procure and maintain the insurance
required hereunder, Landlord may but shall not be required to procure and
maintain the same, and any amount so paid by Landlord for such insurance shall
be Additional Rent which, together with interest thereon from the date paid,
shall be due and payable by Tenant on the next succeeding date on which a Base
Rental installment is due. If in the opinion of Landlord the amount of
liability insurance required hereunder is not adequate, then not more
frequently than once during each option, extension or renewal term of this
Lease, if any, Tenant shall increase said insurance coverage as required by
Landlord. Provided, however, that in no event shall the amount of the liability
insurance increase by more than fifty percent of the amount of the insurance
during the preceding term of this Lease. However, the failure of Landlord to
require any additional insurance coverage shall not be deemed to relieve Tenant
from any obligations under this Lease.
13.2 Property Insurance. Landlord shall obtain and keep in force during
the term of this Lease fire and extended coverage on the Building (including
Building standard leasehold improvements). Landlord may also, but shall not be
required to, procure any other insurance policies respecting the Premises or
Building which Landlord deems necessary.
13.3 Insurance Policies. Insurance required by Tenant hereunder shall be
in companies rated A+, AAA or better in "Best's Insurance Guide". Tenant shall
deliver to Landlord prior to taking possession of the Premises copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with loss payable clauses reasonably satisfactory to
Landlord. No such policy shall be cancelable or subject to reduction of
coverage or other modification except after ten (10) days' prior written notice
to Landlord. Tenant shall, within ten (10) days prior to the expiration of
such policies, furnish Landlord with renewals thereof, or Landlord may order
such insurance and charge the cost thereof to Tenant, which amount, together
with interest thereon, shall be Additional Rent and shall be payable by Tenant
on the next succeeding date on which a Base Rental payment is due. Tenant shall
not do or permit to be done anything which shall invalidate the insurance
policies referred to in Section 13.1. Tenant shall forthwith, upon Landlord's
demand, reimburse Landlord for any additional premiums attributable to any act
or omission or operation of Tenant causing an increase in the cost of
insurance.
13.4 Waiver of Subrogation. As long as their respective insurers so
permit, Tenant and Landlord each waives any and all rights of recovery against
the other, or against the officers, employees, agents and representatives of
the other for loss or damage to such waiving party or its property or the
property of others under its control, where such loss or damage is insured
against under any insurance policy in force at the time of such loss or damage.
Tenant and Landlord shall, upon obtaining the policies of insurance
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required hereunder, give notice to the insurance carriers that the foregoing
mutual waiver of subrogation is contained in this Lease and obtain policies of
insurance, if obtainable, which shall include a waiver by the insurer of all
right of subrogation against Landlord or Tenant in connection with any loss or
damage thereby insured against.
13.5 Hold Harmless. Tenant shall indemnify, defend and hold Landlord
harmless from any and all claims, liabilities, damages and costs, including
attorneys fees, incurred by Landlord which arise from Tenant's use of the
Premises or the Building or from the conduct of its business or from any
activity, work or things which may be permitted or suffered by Tenant in, on or
about the Premises or the Building, and shall further indemnify, defend and
hold Landlord harmless from and against any and all claims, liabilities,
damages and costs, including attorneys fees, incurred by Landlord which arise
from any breach or default in the performance of any obligation on Tenant's
part to be performed under any provision of this Lease or which arise from any
negligence of Tenant or any of its agents, representatives, customers,
employees or invitees.
13.6 Exemption of Landlord from Liability. Tenant hereby agrees that
Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom, including without limitation from any relocation by Landlord
of Tenant within the Building (except as expressly provided otherwise in
Section 20), or for damage to the goods, wares, merchandise or other property
of Tenant, Tenant's employees, representatives, agents, invitees, customers or
any other person in, on or about the Premises or Building, nor shall Landlord
be liable for injury to the person of Tenant, Tenant's employees,
representatives, agents, customers, or invitees, whether any such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, and whether the said damage or injury results from
conditions arising upon the Premises or any other cause, and whether the said
damage or injury results from conditions arising upon the Premises or Building,
or from other sources or places, and regardless of whether the cause of such
injury or the means of repairing the same is inaccessible to Landlord or
Tenant, unless such injury, loss of income or damage is caused by the
Landlord's gross negligence. Landlord shall not be liable for any damages
arising from any act or neglect of any other tenant, if any, of the Building.
Tenant hereby assumes all risk of damage to property or injury to persons in,
on or about the Premises or the Building from any cause and Tenant hereby
waives all claims in respect thereof against Landlord, excepting where said
damage arises out of the gross negligence of Landlord.
14. DAMAGE OR DESTRUCTION
14.1 Option to Terminate Lease. If the Premises or any part thereof
shall be damaged or destroyed by fire or other casualty, the Landlord may, at
its option and subject to Section 14.2 hereinbelow, elect to terminate this
Lease by giving notice to the Tenant within ninety (90) days after Landlord
receives actual notice of the fire or other casualty, and thereupon the term of
this Lease shall expire by lapse of time upon the tenth day after such notice
is given. Instead of exercising said option, Landlord may elect to repair or
restore the Premises to the same condition as existed before such damage or
destruction. Upon electing to repair or restore, Landlord may proceed with
reasonable dispatch to perform the necessary work, and the Base Rent to be paid
until such work is completed shall be abated in proportion of the Premises
being unusable for a period equal to one day or less, but Landlord shall not be
liable to Tenant for any delay which arises by reason of labor strikes,
adjustments of insurance or any other cause beyond Landlord's control, and in
no event shall Landlord be liable for any loss of profits or income.
Notwithstanding the foregoing, there shall be no abatement, apportionment or
reduction in the rental obligations of Tenant if the damage or destruction is
caused by the Tenant or Tenant's agents, representatives, employees, customers
or invitees.
14.2 Obligation to Repair or Restore. If and only if all of the following
circumstances exist with respect to damage or destruction to the Premises,
Landlord may not elect to terminate the Lease as provided in Section 14.1
hereof but rather must elect to repair or restore the Premises:
(a) There is no fault or neglect on the part of the Tenant, Tenant's
agents, representatives, employees, customers or invitees which contributed to
the damage or destruction;
(b) The damage or destruction to the Premises is less than fifty
percent (50%) of the replacement cost thereof as determined by Landlord;
(c) The Landlord is fully insured for the casualty which causes the
damage or destruction and the insurance proceeds have been made available
therefor by the holder or holders of any mortgages or deeds of trust covering
the Premises;
(d) The date of the damage or destruction is greater than one year
prior to the Expiration Date of this Lease or any renewal, modification or
extension thereof; and
(e) Less than sixty percent (60%) of the rentable square feet of the
Building is so damaged or destroyed, as determined by Landlord, regardless of
the percentage of rentable square feet of the Premises which may be damaged or
destroyed.
14.3 Fault of Tenant. Landlord may exercise its option to repair or
restore as described in Section 14.1 even if such damage or destruction is due
to the fault or neglect of Tenant, Tenant's agents, representatives, employees,
customers or invitees, but in such event Landlord's election to repair or
restore shall be without prejudice to any other rights and remedies of Landlord
under this Lease, and there shall be no apportionment or abatement of any rent
of any kind and Landlord shall not be liable for any other loss to Tenant of
any nature whatsoever.
14.4 Obligations of Tenant. Except as provided in this Section 14, none
of Tenant's obligations under this Lease shall be affected by any damage or
destruction of the Premises by any cause whatsoever. Tenant hereby expressly
waives any and all rights it might otherwise have under any law, regulation or
statute which would act to modify the provisions of the immediately preceding
sentence.
14.5 Termination by Tenant. In the event that more than sixty percent
(60%) of rentable square feet of the Premises shall be damaged or destroyed by
fire or other casualty not caused by the Tenant or Tenant's agents,
representatives, employees, customers
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or invitees, either party may terminate this Lease by giving notice to the
other within thirty (30) business days after the date of the fire or other
casualty, and upon such termination the rental obligations of the Tenant shall
be duly apportioned as of the date of such fire or other casualty, provided,
however, that Tenant shall have no right to terminate the Lease under this
Section 14.5 if Tenant is in default of any of its obligations under the Lease
as of the date of the fire or other casualty.
15. CONDEMNATION
If the Premises are taken under any public or private power of eminent
domain, or sold by Landlord under the threat of the exercise of said power (all
of which is herein referred to as "condemnation"), or if any portion of the
Building is so condemned so that it would not be practical, in Landlord's
judgment, to continue to maintain the Building, this Lease shall terminate as
of the date of the condemning authority takes title or possession, whichever
occurs first. If only a portion of the Premises are so condemned, Landlord
shall have the right, if more than sixty percent (60%) of rentable square feet
of the Premises are so condemned, to terminate this Lease as of the date the
condemning authority takes title or possession, whichever occurs first, by
Landlord's giving written notice of such termination to Tenant not later than
thirty (30) days after said date, but should Landlord elect not to so terminate
this Lease, the Lease shall remain in full force and effect as to the portion
of the Premises not so taken, the Tenant's rental obligations shall be reduced
proportionately to reflect the number of rentable square feet remaining in the
Premises, and such rental reduction, if any, shall take effect as of the date
which is thirty (30) days after the date of which the condemning authority
takes title or possession, whichever first occurs. If repairs or restorations
to that portion of the Premises not so taken are deemed necessary by Landlord
to render such portion reasonably suitable for the purposes for which it was
leased, as determined by Landlord, Landlord shall perform such work at its own
cost and expense but in no event shall Landlord be required to expend any
amount greater than the amount received by Landlord as compensation for the
portion of the Premises taken by the condemnator. All awards for the taking of
any part of the Premises or any payment made under the threat of the exercise
of power of eminent domain shall be the property of Landlord, whether made as
compensation for diminution of value of the leasehold or for the taking of the
fee or as severance damages. No award for any partial or entire taking shall be
apportioned, and Tenant hereby assigns to Landlord any award which may be made
in such taking or condemnation, together with any and all rights of Tenant now
or hereafter arising in or to the same or any part thereof, except that any
award or other compensation made for any taking is subject to the rights of the
first mortgagee up to the amount of its lien and of any junior mortgagee, as
may be permitted by the first mortgagee, up to the full amount of such junior
lien; provided, however, that Tenant shall be entitled to any award for loss of
or damage to Tenant's trade fixtures and removable personal property and/or for
the interruption of or damage to Tenant's business.
16. ASSIGNMENT AND SUBLETTING
16.1 Landlord's Consent Required. Tenant shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet or otherwise transfer or
encumber all or any part of Tenant's interest in this Lease or in the Premises
without Landlord's prior written consent. Any attempted assignment, transfer,
mortgage, encumbrance or subletting without such consent shall be void and
shall constitute a breach of the Lease. Any transfer of Tenant's interest in
this Lease or in the Premises from Tenant by merger, consolidation or
liquidation, or by any subsequent change in the ownership of fifty percent
(50%) or more of the capital stock of Tenant shall be deemed a prohibited
assignment within the meaning of this Section 16. As a condition of obtaining
Landlord's consent, Tenant shall submit to Landlord together with its request
for consent the name of the proposed assignee or subtenant, the terms and
provisions of the proposed transaction, and such information as to the nature
of the proposed assignee's or subtenant's business and its financial
responsibility and standing as Landlord may reasonably require, together with
the effective date of the proposed transfer which shall be at least sixty (60)
days after the date of submission of such information to Landlord. Landlord's
failure to consent to any proposed transfer under this Section shall not be
deemed unreasonably withheld if (a) the occupancy resulting from such transfer
will not be consistent with the general character of the business carried on by
the tenants of the Building or violates any rights or options held by any other
tenant of the building; or (b) the proposed occupant pursuant to the transfer
does not have the financial strength and stability to perform its rental
obligations of Landlord is unable to obtain guaranties from one or more
affiliates of the proposed occupant in order to secure such financial
obligations; or (c) any proposed sublease does not incorporate this Lease in
its entirety so as to be subject to this Lease's terms, or any such sublease
does not require the sublessee to attorn to Landlord at Landlord's option in
the event of a default by Tenant under this Lease; or (d) if Tenant does not
execute an agreement with Landlord requiring Tenant to pay to Landlord, as
Additional Rent, one hundred percent (100%) of all moneys or other
consideration received by Tenant from its transferee (whether paid to Tenant as
consideration for Tenant's transfer of property or other assets to the
transferee or as consideration for the transferee's occupancy of the Premises)
in excess of the amounts owed by Tenant to Landlord under this Lease, which
Additional Rent shall be paid to Landlord as and when received by Tenant.
16.2 No Release of Tenant. Regardless of Landlord's consent, no
subletting or assignment or other transfer described in Section 16.1 shall
release Tenant of Tenant's obligation or alter the primary liability of Tenant
to pay the rent and to perform all other obligations to be performed by Tenant
hereunder. Consent to one assignment, subletting or other transfer shall not be
deemed consent to any subsequent act. In the event of default by any assignee
of Tenant or any successor of Tenant in the performance of any of the terms
hereof, Landlord may proceed directly against Tenant without the necessity of
exhausting remedies against said assignee or successor. Landlord may consent to
subsequent assignments, subletting, or transfers of this Lease or amendments or
modifications to this Lease with assignees or successors of Tenant without
notifying Tenant and without obtaining its consent thereto and such action
shall not relieve Tenant of liability under this Lease. In the event Landlord
allows assignment or subletting hereunder, neither Tenant, the assignee of
Tenant, or the sublessee of Tenant shall have any option to extend the term of
this Lease even if such option is otherwise granted to Tenant herein and
notwithstanding the provisions of any such option granted to Tenant herein, and
all rights and options to extend this Lease otherwise granted to Tenant shall be
deemed terminated and canceled as of the date of such assignment, subletting or
other transfer. Notwithstanding anything in this Lease to the contrary,
Landlord shall have no obligation to grant consent to any transfer as defined
in Section 16.1 if Tenant is in default under this Lease at the time the
request for consent is made or at any time thereafter through the effective
date of the transfer. In addition, Tenant acknowledges that its intent in
executing this Lease is to occupy the Premises and not to make speculative usage
of the Premises, and therefore Landlord shall have no obligation whatsoever to
consent to any proposed transfer if the rentals payable by the proposed
occupant to the Tenant are less than the rentals sought to be received by the
Landlord for vacant space in the Building as of the date on which the Tenant is
requesting the Landlord's consent to the transfer. In the event that Tenant
proposes to assign this Lease or to sublet all of the Premises, Landlord shall
have the right, exercisable by notice in writing after receipt of the request
by Tenant, to terminate this Lease upon execution of an agreement between
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Landlord and the proposed assignee or subtenant, provided that Landlord shall
not have any such termination right if Tenant withdraws such request within ten
(10) days of being notified by Landlord that it has elected to exercise said
termination right.
16.3 Attorneys Fees and Administrative Fees. In the event Tenant shall
request the consent of Landlord to any assignment, subletting or transfer or if
Tenant shall request the consent of Landlord for any other act which Tenant
proposes to do under any other provision of this Lease, then Tenant shall pay
Landlord's attorneys fees incurred in connection with the consideration or
evaluation of such request. In addition thereto, in the event that Landlord
shall consent to a sublease, assignment or transfer under Section 16.1, Tenant
shall pay Landlord administrative fees of Two Hundred Dollars ($200) incurred in
connection with giving such consent.
16.4 Right to Collect Rent. The acceptance of rent by Landlord from any
person other than Tenant shall not be deemed to be a waiver by Landlord of any
provision of this Lease. If the Premises are sublet or occupied by anyone other
than Tenant and Tenant is in default hereunder, or this Lease is assigned by
Tenant, then, in any such event, Landlord may collect rent from the assignee,
subtenant or occupant and apply the net amount collected to the rent reserved
in this Lease, but no such collection shall be deemed a waiver of the covenant
in this Lease against assignment and subletting or the acceptance of such
assignee, subtenant or occupant as tenant, or a release of Tenant from further
performance of the covenants contained in this Lease.
17. DEFAULTS; REMEDIES
17.1 Defaults. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Tenant:
(a) The vacating or abandonment of the Premises by Tenant; or
(b) The failure by Tenant to make any payment of Base Rent,
Additional Rent or any other payment required to be made by Tenant hereunder,
as and when due, where such failure shall continue for a period of three (3)
days; or
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Tenant, other than described in paragraph (b) above, where such failure
shall continue for a period of five (5) business days after written notice
thereof from Landlord to Tenant; provided, however, that if the nature of
Tenant's default as determined by Landlord is such that more than five (5)
business days are reasonably required for its cure, then Tenant shall not be
deemed to be in default if Tenant commences such cure as soon as possible
within said five (5) business day period and thereafter diligently prosecutes
such cure to completion, and in any case completes said cure within twenty (20)
business days after the aforesaid written notice, or
(d) (i) The insolvency of the Tenant or the execution by the Tenant
of an assignment for the benefit of creditors, or the convening by Tenant of a
meeting of its creditors, or any class thereof, for the purpose of effecting a
moratorium upon or extension or composition of its debts; or the failure of the
Tenant to generally pay its debts as they mature; or (ii) the filing by or for
reorganization or arrangement under any law relating to bankruptcy (unless in
the case of a petition filed against Tenant, the same is dismissed within sixty
(60) days; or (iii) the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within
thirty (30) days; or (iv) the attachment, execution or other judicial seizure
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty (30)
days.
17.2 Remedies in Default. (a) In the event of any such default or breach
by Tenant, Landlord shall have the right at any time thereafter, with or
without notice or demand and without limiting Landlord in the exercise of any
right or remedy which Landlord may otherwise have by reason of such default or
breach, to terminate this Lease at its option or to re-enter and at its option
to attempt to re-let without terminating this Lease and remove all persons and
property from the Premises, using any force as may reasonably be necessary to
accomplish said purposes, all without service of notice or resort to legal
process and without being deemed guilty of trespass or forcible entry or
becoming liable for any loss or damage which may be occasioned thereby.
(b) If Tenant shall fail to remove any effects which it is entitled
to remove from the Premises upon the termination of this Lease, or any
extension or renewal hereof, or upon a re-entry by Landlord for any cause
whatsoever, or upon Tenant's ceasing to possess the Premises for any reason, the
Landlord, at its option, may remove the same and store or dispose of the said
effects without liability for loss or damage thereto, and Tenant agrees to pay
to Landlord on demand any and all expenses incurred in such removal, including
Court costs, attorneys fees, storage and insurance charges on such effects for
any length of time the same shall be in Landlord's possession; or the Landlord,
at its option, without notice, may sell such effects, or any of them, at
private or public sale and without legal process, for such price or
consideration as the Landlord may obtain, and apply the proceeds of such sale
upon any amounts due under this Lease from the Tenant to the Landlord, and upon
the expenses incidental to the removing, cleaning the Premises, selling said
effects, and any other expense, rendering the surplus, if any, to the Tenant;
provided, however, in the event the proceeds of such sale or sales are
insufficient to reimburse the Landlord, Tenant shall pay such deficiency upon
demand. Tenant acknowledges and agrees that any such disposition of Tenant's
property in the above-described manner by the Landlord shall be deemed to be
commercially reasonable and that no bailment shall be created by Landlord's
exercise of any of its rights under this subparagraph (b).
(c) Should Landlord elect to re-enter, as herein provided, or should
it take possession pursuant to legal proceedings, or pursuant to any notice
provided for by law, it may make such alterations, additions, improvements and
repairs as may be necessary in order to re-let the Premises, and may but need
not re-let the Premises or any part thereof for such term or terms (which may
be for a term extending beyond the term of this Lease) and at such rental or
rentals and upon such other terms and conditions as Landlord may determine to be
advisable; upon each such re-letting all rentals received by the Landlord;
shall be applied i) first to the payment of any costs and expenses of such
re-letting, including brokerage fees and attorney's fees and the cost of such
alterations, additions, improvements and repairs; ii) second, to the payment of
Base Rent due and unpaid hereunder, and the residue, if any, shall be held by
Landlord and applied in payment of future rent as the same may become due and
payable hereunder provided that Tenant
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shall have no right to claim any interest in all or any portion of said residue
and if the rent and other charges paid or to be paid to Landlord by any new
tenant pursuant to any re-letting exceed the monetary obligations of Tenant,
Tenant shall have no right to claim any interest in all or any portion of
said excess. If such rental received from such re-letting during any month be
less than that to be paid during the month by Tenant hereunder, Tenant shall
pay any such deficiency to Landlord, and such deficiency shall be calculated
and paid monthly on the date on which the rent would have been payable
hereunder if possession had not been retaken. If, during the existing term of
this Lease, the premises covered thereby include other premises not part of the
Premises, a fair apportionment of the rent received from such re-letting and
the expenses incurred in connection therewith as provided aforesaid will be
made in determining the net proceeds from such re-letting and the expenses
incurred in connection therewith as provided aforesaid will be made in
determining the net proceeds from such re-letting, and any rent concessions
will be equally apportioned over the term of the new lease. Landlord shall in
no event be liable in any way whatsoever for failure to re-let the Premises for
any reason, or in the event the Premises are re-let, for failure to collect the
rent thereof under such re-letting. No such reentry or taking possession of the
Premises by Landlord, nor any acts pursuant thereto, shall be construed as an
election on its part to terminate this Lease unless a written notice of such
termination be given to Tenant by Landlord. No notice from Landlord under this
Lease or under any applicable forcible entry and detainer or eviction statute or
similar law shall constitute an election by Landlord to terminate this Lease
unless such notice specifically so states. Notwithstanding any such re-letting
without termination, Landlord may at any time thereafter elect to terminate
this Lease for such previous breach.
(d) Should Landlord at any time terminate this Lease for any
default or breach, in addition to any other remedies it may have, it may recover
from Tenant all damages it may incur by reason of such default or breach,
including the cost of recovering the Premises, reasonable attorneys fees, and
including the worth at the time of such termination of the excess, if any, of
the amount of rent and such other charges as are required to be paid by Tenant
under the terms of this Lease for the remainder of the stated term over the then
reasonable rental value of the Premises for the remainder of the stated term,
all of which amounts shall be immediately due and payable from Tenant to
Landlord; provided, however, that if the then reasonable rental value of the
Premises exceeds the value of the rent and other charges required to be paid by
Tenant under this Lease as aforesaid, Tenant shall have no right to claim any
interest in all or any portion of such excess. In determining the rent which
would be payable by Tenant hereunder, subsequent to default, the annual rent for
each year of the unexpired term shall be equal to the average annual Base Rent
and Additional Rent paid or payable by Tenant from the Commencement Date of this
Lease to the time of default, or during the preceding three (3) full calendar
years, whichever is shorter; and
(e) Each of the remedies set forth hereinabove in this Section 17
shall not be exclusive, but rather shall be considered cumulative with any
other legal or equitable remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Premises are located.
To the extent such waiver is permitted by law, the parties waive trial by jury
in any action or proceeding brought in connection with this Lease. Suit or
suits for the recovery of the amount of damages set forth hereinabove may be
brought by Landlord, from time to time, at Landlord's election, and nothing
herein shall be deemed to require Landlord to await the date whereon this Lease
or the term hereof would have expired had there been no event of default.
Nothing contained in this Lease shall limit or prejudice the right of Landlord
to prove and obtain as liquidated damages in any bankruptcy, insolvency,
receivership, reorganization or dissolution proceeding an amount equal to the
maximum allowed by any statute or rule of law governing such proceeding and in
effect at the time when such damages are to be proved, whether or not such
amount be greater, equal to or less than the amounts recoverable, either as
damages or rent, referred to in any of the preceding provisions of this
Section.
17.3 Default by Landlord. Landlord shall not be in default unless
Landlord fails to perform obligations required of Landlord within thirty (30)
days after written notice by Tenant to Landlord and to the holder of any first
mortgage or deed of trust covering the Premises, specifying the manner in which
Landlord has failed to perform such obligation; provided however, that if the
nature of Landlord's obligation is such that more than thirty (30) days are
required for performance as determined by Landlord, then Landlord shall not be
in default if Landlord commences performance within such thirty day period and
thereafter diligently prosecutes the same to completion; provided further that
Landlord's obligation to perform any act under this Lease shall be excused for
any period of time during which Landlord is prevented from performing because of
any circumstance beyond Landlord's control. Tenant's remedies upon Landlord's
default are further limited by Section 18.3 and 25.2 below.
17.4 Late Charges. Tenant hereby acknowledges that late payment by Tenant
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of Base Rent, Additional Rent or any other sum
due from Tenant shall not be received by Landlord or Landlord's designee within
ten (10) days after paid amount is due, then Tenant shall immediately pay to
Landlord a late charge equal to ten percent (10%) of such over due amount or
the sum of One Hundred Dollars ($100.00), whichever is greater. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the cost Landlord will incur by reason of late payment by Tenant and is in
addition to interest due under Section 25.4. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's default with respect
to such overdue amount, or prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
18. RIGHTS OF MORTGAGEES.
18.1 Subordination. As used throughout this Section 18, the term
"mortgagee" shall refer to the holder of a Mortgage or deed of trust or ground
lease affecting the Premises. This Lease and the rights of Tenant hereunder
shall be and are hereby made subject and subordinate to the provisions of any
ground lease, mortgage or deed of trust affecting the Premises, and to each
advance made or hereafter to be made under the same, and to all renewals,
modifications, consolidations and extensions thereof and all substitutions
therefor. This Section 18 shall be self-operative and no further instrument of
subordination shall be required. However, in confirmation of the provisions of
this Section 18, Tenant shall execute and deliver promptly any certification or
instrument that Landlord or any mortgagee may request, and failing to do so
within ten (10) days after written demand, Tenant does hereby make, constitute
and irrevocably appoint Landlord as Tenant's attorney-in-fact and Tenant's
name, place and stead, to do so, and/or Landlord may declare this Lease to be
in default. If any mortgagee or ground lessor shall elect to have this Lease
prior to the lien of its mortgage, deed of trust or ground lease, and shall
give written notice thereof to Tenant, this Lease shall be deemed prior to such
mortgage, deed of trust or ground lease, whether this Lease is dated prior or
subsequent to the date of said mortgage, deed of trust or ground lease or the
date of recording thereof. Tenant shall and does hereby agree to attorn to any
mortgagee or successor in title and
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to recognize such mortgagee or successor as its Landlord in the event any such
person or entity succeeds to the interest of Landlord. Notwithstanding any other
provision of this Lease, in the event that any mortgagee or its respective
successor in title shall succeed to the interest or Landlord hereunder, the
liability of such mortgagee or successor shall exist only so long as it is the
owner of the Building, or any interest therein, or is the tenant under said
ground lease.
18.2 Mortgagee's Consent to Amendments. No assignment of this Lease and no
agreement to make or accept any surrender, termination or cancellation of this
Lease and no agreement to modify so as to reduce the rent, change the term, or
otherwise materially change the rights of Landlord under this Lease, or to
relieve Tenant of any obligation or liability under this Lease, shall be valid
unless consented to by Landlord's mortgagees of record, if such is required by
the mortgagees, in writing. No Base Rent, Additional Rent, or any other charge
(with the exception of the security deposit described in this Lease) shall be
paid more than ten (10) days prior to the due date thereof and payments made in
violation of this provision (except to the extent that such payments are
actually received by a mortgagee) shall be a nullity as against any such
mortgagees of record, and Tenant shall be liable for the amount of such payments
to such mortgagees.
18.3 Mortgagee's Right to Cure. No act or failure to act on the part of
Landlord which would entitle Tenant under the terms of this Lease, or by law, to
be relieved of Tenant's obligations hereunder or to terminate this Lease, shall
result in a release or termination of such obligations or termination of this
Lease unless (a) Tenant shall have first given written notice of Landlord's act
of failure to act to Landlord's mortgagees of record, if any, specifying the act
or failure to act on the part of Landlord which could or would give basis to
Tenant's rights; and (b) such mortgagees, after receipt of such notice, have
failed or refused to correct or cure the condition complained of within a
reasonable time thereafter, provided that nothing contained in this Section
shall be deemed to impose any obligation on any such mortgagees to correct or
cure any condition. As used herein, a "reasonable time" includes a reasonable
time to obtain title to the mortgaged premises if the mortgagee elects to do so
and a reasonable time to correct or cure the condition if such condition is
determined to exist, but in no event less than 120 days from the date of the
mortgagees' receipt of the above described notice.
19. NOTICES.
Except as provided in Section 17.1(b) and 22, whenever under this lease
provision demand is made for any notice or declaration of any kind, or where it
is deemed desirable or necessary by either party to give or serve any such
notice, demand or declaration to the other party, it shall be in writing and
served either personally or sent by certified United States mail, return receipt
requested, postage prepaid, addressed either to the address set forth in Section
1.1 or 1.1(b), or to such other address as may be given by a party to the other
by proper notice hereunder, or, in the case of notices to the Tenant, to the
Premises. The date of personal delivery (as evidenced by such evidence of
service as provided for in said rules) or the date on which the certified mail
is deposited with the United States Postal Service shall be the date on which
any proper notice hereunder shall be deemed given.
20. RELOCATION.
Tenant agrees that Landlord may relocate Tenant to other space in the
Building containing substantially the same amount of rentable square feet as is
contained in the Premises, provided that the actual cost of physically
relocating Tenant (excluding any and all consequential or other costs to Tenant)
and the cost of altering the new space to make it comparable to the Premises is
borne by the Landlord; provided, however, that Landlord may not exercise said
right to relocate Tenant if the Premises consist of more than ten percent (10%)
of the rentable square feet in the Building. In addition, Landlord shall pay
costs incurred by Tenant as a result of the relocation, including without
limitation costs incurred in changing addresses on stationery, business cards,
directories, advertising and other such items, but in no event shall Landlord's
obligation to pay cost imposed in this sentence exceed the sum of $500. In the
event that the new Premises in which the Tenant is relocated does not consist of
the identical number of rentable square feet as specified in Section ____, the
parties shall execute an instrument specifying the new number of square feet in
the Premises and the change in the number of square feet contained in the
Premises shall be deemed effective as of the date on which the Tenant occupies
the new premises in which it is relocated.
21. QUIET POSSESSION.
Upon Tenant paying the sums due hereunder and observing and performing all
of the covenants, conditions and provisions on Tenant's part to be observed and
performed hereunder, Tenant shall have quiet possession of the Premises for the
entire term hereof subject to all of the provisions of this Lease.
22. OPTIONS.
In the event that the Tenant, by addendum attached to this Lease, is
expressly given an option to renew or extend the term of this Lease, or any
option to purchase the Premises or Building or any right of first refusal to
purchase the Premises or other property of Landlord, then each of such options
and rights are personal to Tenant and may not be exercised by or assigned,
voluntarily or involuntarily, by or to anyone other than Tenant. No such option
described hereinabove may be exercised by the Tenant except in strict accordance
with the terms and provisions of the option and provided that Tenant is not in
default under this Lease either at the time Tenant gives notice of its intent to
exercise the option or at the time at which the option is to be exercised.
Notwithstanding the provisions of Section 19, notice of exercise of any option
shall be deemed given only when actually received by Landlord.
23. LANDLORD'S LIEN.
Tenant hereby grants to Landlord a lien upon and security interest in all
furniture, fixtures, equipment, inventory,
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merchandise and other personal property belonging to the Tenant and located in,
on or about the Premises or Building at any time while this Lease is in effect,
whether such items are presently owned by Tenant or are after acquired, to
secure the payment of all Base Rent, Additional Rent and other charges due and
to become due under this Lease and to further secure the faithful performance of
all of the other obligations of this Lease required to be performed by Tenant,
said lien to be prior to any other lien on such property except a lien in favor
of the seller or lessor of such property to secure the unpaid purchase price or
lease payments thereof. All exemption laws are hereby expressly waived by
Tenant. This lien and security interest may be foreclosed in the same manner as
a Financing Statement under the version of the Uniform Commercial Code enacted
in the state in which the Premises are situated, or pursuant to any similar law
so enacted if a version of the Uniform Commercial Code is not in effect, and the
filing of this Lease in accordance with said law shall constitute full lawful
notice of this lien. In lieu of filing this Lease or in addition thereto,
Landlord may require Tenant at any time to execute a Financing Statement,
Security Agreement or any other similar documents required by the laws of the
state in which the Premises are situated to perfect this lien and security
interest, and Tenant shall immediately execute the same upon the demand of
Landlord. In the event Tenant fails or refuses to do so within ten (10) days
after written demand, Tenant does hereby make, constitute and irrevocably
appoint Landlord as Tenant's attorney-in-fact in Tenant's name, place and stead,
to do so, and/or Landlord may declare this Lease to be in default.
24. HAZARDOUS MATERIALS
Tenant covenants not to introduce any hazardous or toxic materials onto
the Building, the Premises, or the grounds surrounding the Building, without
(a) first obtaining Landlord's written consent and (b) complying with all
applicable federal, state and local laws or ordinances pertaining to the
transportation, storage, use or disposal of such materials, including but not
limited to obtaining proper permits.
If Tenant's transportation, storage, use or disposal of hazardous or toxic
materials on the Building, the Premises, or the grounds surrounding the
Building results in (1) contamination of the soil or the surface or ground
water or (2) loss or damage to person(s) or property, then Tenant agrees to
respond in accordance with the following paragraph:
Tenant agrees (i) to notify Landlord immediately of any contamination,
claim of contamination, loss or damage, (ii) after consultation and approval by
Landlord, to clean up and (iii) to indemnify, defend and hold Landlord harmless
from and against any claims, suits, causes of action, costs and fees, including
attorney's fees, arising from or connected with any such contamination, claim
of contamination, loss or damage. This provision shall survive the termination
of this Lease.
25. GENERAL PROVISIONS
25.1 Estoppel Certificate. (a) Tenant shall at any time upon not less
than ten (10) days prior written notice from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing: (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification, identifying the instruments of modification and certifying
that this Lease, as so modified, is in full force and effect), and the date to
which the Base Rent, security deposit, Additional Rent and other charges are
paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults, if any, which are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser, encumbrancer or other transferee of
the Premises.
(b) Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant: (i) that this Lease is in full force and
effect, without modification except as may be represented by Landlord, (ii)
that there are no uncured defaults in Landlord's performance, and (iii) that no
rent has been paid in advance; and
(c) If Landlord desires to finance or refinance the Premises or the
Building, or any part thereof, Tenant hereby agrees to deliver to Landlord
and/or to any lender designated by Landlord such financial records of Tenant as
may be reasonably required by such lender. Such statements may include but not
be limited to the past three (3) years' financial statements of Tenant. All
such financial statements shall be received by Landlord in confidence and shall
be used only for the purposes herein set forth.
25.2 Landlord's Interest and Liability. The term "Landlord" as used
herein shall mean only the owner or owners at the time in question of the fee
title or a tenant's interest in a ground lease of the real property on which
the improvements comprising the Building are situated. In the event of any
transfer of such title or interest, Landlord herein named (and in case of any
subsequent transfers the then grantor), shall be relieved from and after the
date of such transfer of all liability as respects Landlord's obligations
thereafter to be performed, provided that any funds in the hands of Landlord or
the then grantor at the time of such transfer in which Tenant has an interest
shall be delivered to the grantee. The obligations contained in this Lease to
be performed by Landlord shall, except as aforesaid, be binding on Landlord's
successors and assigns only during their respective periods of ownership.
Anything to the contrary elsewhere in this Lease notwithstanding, Tenant shall
look solely to the estate and property of the Landlord in the Building for the
satisfaction of the Tenant's remedies for the collection of a judgment (or
other judicial process) requiring the payment of money by the Landlord in the
event of any default or breach by the Landlord with respect to any of the
terms, covenants and conditions of the Lease to be observed and/or performed by
the Landlord, and no other property or assets of the Landlord shall be subject
to levy, execution or other enforcement procedure for the satisfaction of the
Tenant's remedies.
25.3 Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
25.4 Interest on Past Due Obligations; Certified Funds. Except as may
expressly be provided in this Lease to the contrary, any amount due to Landlord
not paid when due shall bear interest at the rate of seven percent (7%) per
annum greater than the Discount Rate of the Federal Reserve Bank as the same may
fluctuate from and after the date on which the payment was first due through the
date on which the payment is paid in full, provided, however, that the payment
of such interest shall in no event exceed the highest rate allowed under
applicable law. Payment of such interest shall not excuse or cure any default by
Tenant under this Lease. In the event that either Tenant is more than ten (10)
days late in making any payment due under the Lease, or any payment
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from Tenant to Landlord does not clear the bank or is returned for insufficient
funds, and either such condition occurs on two or more occasions, or each
occurs once, Landlord shall have the right at any time thereafter to require
that all succeeding monthly installments of Base Rent and all succeeding
payments of Additional Rent be paid to the Landlord in certified funds drawn on
a bank located in the metropolitan area in which the Premises are located. Said
right may be exercised by Landlord by giving notice of such requirements to
Tenant, but the giving of such notice and the exercise of this right by
Landlord shall not be construed to be a waiver of any default by Tenant or any
other right which Landlord may exercise under this Lease.
25.5 Time of The Essence. Time is of the essence in the performance by
Tenant of its obligations hereunder.
25.6 Captions. Any captions contained in this Lease are not a part
hereof, are for convenience only, and are not to be given any substantive
meaning in construing this Lease.
25.7 Entire Agreement. This Lease contains the entire agreement and
understanding between the parties hereto. There are no oral understandings,
terms, or conditions, and neither party has relied upon any representations,
express or implied, not contained in this Lease. All prior understandings,
terms, or conditions are deemed merged in this Lease. No modification of this
Lease shall be binding unless such modification shall be in writing and signed
by the parties hereto. Tenant acknowledges that it has not been induced to
enter into this Lease by any promises or representatives not expressly set forth
in this Lease, and if any such representations were made prior to the execution
of this Lease, Tenant acknowledges that it has not relied on the same, and that
Landlord shall have no liability with respect to any such representations.
25.8 Waivers. No failure by either party to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to exercise
any right or remedy consequent upon a breach thereof, and no acceptance of full
or partial rent or the continuance of any such breach, shall constitute a waiver
of any such breach of such agreement, term, covenant or condition or a
relinquishment of the right to exercise such right or remedy. No agreement,
term, covenant or condition hereof to be performed or complied with by either
party, and no breach thereof, shall be waived, altered or modified except by a
written instrument executed by the other party. No waiver of any breach shall
affect or alter this Lease, but each and every agreement, term, covenant or
condition hereof shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof. Notwithstanding any
termination of this Lease, the same shall continue in force and effect as to any
provisions of the Lease, including remedies, which require or permit observance
or performance of Landlord or Tenant subsequent to termination.
25.9 Recording. Tenant shall not record this Lease. Any such recordation
by Tenant shall be a breach of this Lease.
25.10 Determinations by Landlord. Whenever in this Lease the Landlord is
to make any determination or decision, the Landlord shall make its
determination or decision in the exercise of its reasonable discretion and
judgment; however, any such determination or decision shall not bind the
Landlord if it has not been confirmed in writing.
25.11 Cumulative Remedies. No remedy or election by Landlord hereunder
shall be deemed exclusive, but shall wherever possible be cumulative with all
other remedies at law or in equity to which Landlord may be entitled.
25.12 Covenants and Conditions. Each provision of this Lease performable
by Tenant shall be deemed both a covenant and a condition.
25.13 Binding Effect; Choice of Law. Subject to any provisions hereof
restricting assignment, subletting or transfer by Tenant and subject to the
provisions of Section 25.2, this Lease shall bind the parties, their personal
representatives, heirs, successors and assigns. This Lease shall be governed by
the laws of the state where the Premises are located.
25.14 Attorneys Fees. In the event of litigation relating to this Lease,
the prevailing party shall be entitled to recover from the losing party any
costs or reasonable attorneys fees incurred by the prevailing party in
connection with such litigation. If Landlord utilizes the services of an
attorney to enforce any of its rights hereunder but which does not result in
the bringing of an action, Tenant shall immediately pay to Landlord upon demand
therefore the amount of such attorneys fees incurred.
25.15 Landlord's Access. Landlord and Landlord's agents, representatives
and designees shall have the right to enter the Premises as reasonably
necessary or desirable to Landlord for the purpose of inspecting the same,
showing the same to prospective purchasers, tenants, lenders or other
transferees, making such alterations, repairs, improvements or additions to the
Premises or to the Building as Landlord may deem necessary or desirable, or for
any other reasonable purpose as Landlord may determine. Landlord may at any
time place in, on or about the Premises any "For Sale", or "For Lease" or
similar signs, all without rebate of rent or liability to Tenant.
25.16 Auctions. Tenant shall not conduct any auction, liquidation sale,
or going out of business sale in, on or about the Premises.
25.17 Merger. The voluntary or other surrender of this Lease by Tenant, or
a mutual cancellation thereof, shall not work a merger, and shall, at the option
of the Landlord, terminate all or any existing subtenancies or may, at the
option of Landlord, operate as an assignment to Landlord of any or all of such
subtenancies.
25.18 Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation or in accordance with the Bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
25.19 Signs. Landlord may prescribe a uniform pattern of identification
signs for tenants to be placed on the outside of the doors leading into their
respective premises, and other than such identification signs, Tenant shall not
install, paint, display, inscribe, place or affix, or otherwise attach, any
sign, fixture, advertisement, notice, lettering or direction on any part of the
outside of the
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Building or in the interior or other portion of the Building without obtaining
the prior written consent of the Landlord.
25.20 Brokers. the parties hereto acknowledge that the brokers named in
Section 1.18 were the sole real estate brokers that represented the Landlord
herein, and that no commissions are owed by Landlord to any other brokers
whatsoever, and Tenant agrees to indemnify Landlord from claims for commission
from any other brokers arising out of the execution of this Lease.
25.21 Guarantor. In the event that there is a guarantor of this Lese,
said guarantor shall have the same obligations as Tenant under this Lease.
25.22 Governing Law. This lease shall be governed by and construed in
accordance with the laws of the state in which the Building is located.
25.23 Joint and Several Liability. If two or more individuals,
corporations, partnerships or other business associates (or any combination of
two or more thereof) shall sign this Lease as Tenant, the liability of each
such individual, corporation, partnership or other business association to pay
rent and perform all other obligations hereunder shall be deemed to be joint
and several, and all notices, payments and agreements given or made by, with or
to any one of such individuals, corporations, partnerships or other business
associations shall be deemed to have been given or made by, with or to all of
them. In like manner, if Tenant shall be a partnership or other business
association, the members of which are, by virtue of statute or federal law,
subject to personal liability, the liability of each such member be joint and
several.
25.24 No Joint Venture. Any intention to create a joint venture or
partnership relation between the parties hereto is hereby expressly disclaimed.
The parties hereto have executed this Lease on the first page hereof on the
dates specified immediately below their respective signatures.
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR.NET, INC.
BY: TARRAGON REALTY INVESTORS, INC.
ITS: MANAGING GENERAL PARTNER
BY: /s/ Christopher Clinton By: /s/ Michael A. Dayton
--------------------------------- ----------------------
ITS: SR. V.P. ITS: VP FINANCE
-------------------------------- ---------------------
DATE: 10/15/99 DATE: 10-12-99
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EXHIBIT A, LEGAL DESCRIPTION
TO OFFICE BUILDING LEASE
BETWEEN
THE EMERSON CENTER COMPANY, LANDLORD
AND
COMSTAR.NET, INC.
All that tract or parcel of land lying and being in Land Lots 880 and 881 of
the 17th District, Second, Cobb County, Georgia and being more particularly
described as follows:
Commence at a point located on the southeastern right-of-way line of Spring
Road (a 100 foot right-of-way at said point), said point being 299.6 feet
easterly from the eastern right-of-way line of the Hargrove Road Extension
(an 80 foot right-of-way) thence continuing along said southeastern
right-of-way line of Spring Road North 53 degrees 02' 30" East 64.75 feet to
a point (at this point, the width of the southeastern right-of-way line as
measured from the centerline of Spring Road changes from a distance of 50
feet to a distance of 100 feet); thence South 36 degrees 57' 30" east 50.00
feet to a point; thence South 30 degrees 35' 18" East 68.94 feet to a point;
thence South 49 degrees 01' 13" East 117.35 feet to a point; thence South 49
degrees 43' 19" East 15.38 feet to an iron pin; thence North 53 degrees 02'
30" East 576.13 feet to an iron pin; thence along the southwestern line of
property now or formerly owned by Steak & Ale of Atlanta South 36 degrees 57'
34" East 445.08 feet to an iron pin; thence along the eastern line of
Interstate 285 South 28 degrees 02' 44" West 527.2 feet to an iron pin;
thence leaving said western line of the Interstate 285 North 68 degrees 22'
42" West 118.47 feet to a point; thence North 20 degrees 26' 02" East 208.75
feet to a point; thence North 69 degrees 33' 57" West 218.39 feet to an iron
pin; thence North 20 degrees 26' 02" East 20.00 feet to a point; thence North
69 degrees 39' 21" West 25.50 feet to a point; thence North 62 degrees 37'
44" West 116.15 feet to a point; thence North 43 degrees 06' 18" West 48.39
feet to a point; thence North 26 degrees 25' 37" West 100.09 feet to a point
and the point of beginning, containing 7.14 acres.
The above-described courses, distances and acreage are taken from that certain
survey for Phoenix Mutual Life Insurance Company, dated September 4, 1979 and
prepared by Donald W. Harkeroad, Registered Land Surveyor No. 1578, said survey
having been revised on October 15, 1979 and being recorded in Plat Book 74,
Page 167, records of the Clerk of Superior Court of Cobb County, Georgia.
TOGETHER with the following easements:
1. Easement from Humble Oil and Refining Company to Fletcher Emerson,
Trustee, dated June 26, 1972, recorded in Deed Book 1338, Page 538, aforesaid
records.
2. Easement from Rujan Investments, Inc. to Fletcher Emerson, Trustee,
dated June 23, 1972 recorded in Deed Book 1338, Page 540, aforesaid records.
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EXHIBIT B, PREMISES SITE PLAN
TO OFFICE BUILDING LEASE
BETWEEN
THE EMERSON CENTER COMPANY, LANDLORD
AND
COMSTAR.NET, INC., TENANT
[MAP]
EMERSON CENTER
BUILDING 2812
2ND FLOOR
APPROXIMATELY 6,923 SQUARE FEET
SUITE 202 : 1,953 SQUARE FEET VACANT
SUITE 204 : 799 SQUARE FEET RELOCATION/TERMINATION
SUITE 205 : 200 SQUARE FEET VACANT
SUITE 270 : 875 SQUARE FEET VACANT
SUITE 250 : 3,096 SQUARE FEET RELOCATION
*RELOCATION/TERMINATION OPTION REQUIRES 60 DAY NOTICE
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1ST ADDENDUM TO LEASE
BETWEEN
THE EMERSON CENTER COMPANY, AS LANDLORD
AND
COMSTAR.NET, INC., AS TENANT
WHEREAS Landlord and Tenant are the parties to the above described Lease for
ther Premises; and
WHEREAS, the parties desire to amend said Lease;
NOW THEREFORE, in consideration of the mutual promises and obligations
contained herein, the adequacy and sufficiency of which is hereby acknowledged,
Landlord and Tenant contract and agree as follows:
1. Restoration of the Premises: No later than the last day of the Term,
Tenant shall, at Tenant's sole cost and expense, remove all Tenant's personal
property and, if required to do so by Landlord, remove any fixtures, cables and
wires and repair all injury done by or in connection with the installation
and/or removal of said property within the Demised Premises, on the roof, and
within the parking areas belonging to the Building and surrender the Demised
Premises and any areas of the roof and/or parking areas used exclusively by
Tenant in a condition substantially similar to their original condition,
reasonable wear and tear excepted, and reasonably acceptable to Landlord.
2. Special Equipment: Landlord and Tenant hereby acknowledge that, as part
of the Lease, Landlord has granted Tenant certain rights to install special
equipment and services without any requirement to pay rent and other charges
for said installations, including the following:
(A) Tenant has elected to install a self contained generator located in
the southeast quadrant of the parking lot for the Building, as shown on page 2
of this 1st Addendum, which is incorporated into the Lease by reference. This
area, measuring approximately 100 square feet, and the equipment installed
thereon shall be the sole responsibility of Tenant, including the maintenance of
the site and equipment in a manner that will not unreasonably interrupt nor
interfere with any other tenant of the Building, in the sole opinion of
Landlord.
(B) Up to one satellite dish or similar antenna located upon the roof so
long as Tenant remains solely responsible for the installation, maintenance,
operation and restoration of any damages resulting directly or indirectly from
such installation, maintenance and operation and so long as use and operation
of said antenna does not (i) conflict with any governing laws, codes and/or
ordinances, and (ii) does not interfere electrically, or in any manner
whatsoever, with the equipment of the Building and other tenants.
3. Exemption of Landlord from Liability: With respect to any agreement
between Landlord and Tenant for the installation, maintenance and operation of
any Special Equipment referred to in Paragraph 2 hereinabove, the Tenant agrees
to be the sole party responsible for the installation, operation, maintenance
and removal of the equipment and shall forever indemnify and hold harmless the
Landlord for any reason whatsoever against claims, damages, events of
destruction, and liabilities, including but not limited to, damages costs,
expenses, assessments, penalties, fines, losses, judgments, and attorney's fees
that Landlord may suffer due to the existence of Tenant's Special Equipment at
the Building.
EXCEPT AS HEREBY AMENDED, all other provisions of the Lease are hereby
confirmed and ratified.
IN WITNESS WHEREOF, the parties hereto have executed this 1st Addendum by
signatures below:
LANDLORD: The Emerson Center Company TENANT: Comstar Communication, Inc.
BY: Tarragon Realty Investors, Inc.
ITS: General Partner
BY: /s/ Christopher Clinton, VP BY: /s/ Michael A. Dayton
---------------------------- -------------------------------
DATE: Oct. 15, 1999 DATE: Oct. 12, 1999
--------- ---------
<PAGE> 23
1st ADDENDUM TO LEASE
BETWEEN
The Emerson Center Company, AS LANDLORD
AND
COMSTAR.NET, INC., AS TENANT
[MAP]
Site Map of Building 2812 with location of Generator:
Page 2
<PAGE> 1
EXHIBIT 10.6
NETWORK SERVICES
COMSTAR-------------------------------------------------------------------------
AGREEMENT
Thank you for doing business with Comstar Communications, Inc. (us or we). We
are committed to providing you with the highest quality Network Services
(Services). If, at any time, you have questions or problems, or are not
completely satisfied, please let us know. Our goal is to do our very best for
you.
This Comstar Network Services Agreement (Agreement) covers the following major
Service we may provide to you:
(a) Internet Access;
(b) Connectivity Services;
(c) Equipment Rental;
(d) Standard Colocation; and
(e) Dedicated Server Colocation.
ACCEPTANCE
By signing below, you acknowledge your review and acceptance of the terms and
conditions contained in this document or any applicable Service Addenda. This
Agreement can only be modified in a written document executed by both parties.
Any attempts to make modifications to these terms and conditions are void, and
will not be enforceable. Our entire agreement consists of this Agreement, an
accepted Service Quote, our corporate Acceptable Use Policy, and any applicable
Service Addenda. In the event of a conflict between any of these documents, the
terms and conditions of the applicable Addendum shall prevail.
Accepted By:
- --------------------------------------------------------------------------------
Customer Signature
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Company
RATES
The rates that we charge for Services are as specified in the accepted Sales
Quote. That document also specifies the length of the term of the Agreement
between us.
If you terminate a contract before the end of the agreed upon term, you will be
required to pay seventy-five percent (75%) of the remaining value of this
Agreement. In addition, if we provide Services via a third-party, you will be
charged all costs we incur for such early termination with our service provider.
UPGRADES
If you upgrade your current Services before the end of the agreed upon term, no
early termination penalty will be charged. You will be required to purchase the
upgrade under a new term commitment with a minimum of twelve (12) months and
early termination penalties apply to the upgraded Services as stated in the
Rates section of this Agreement.
PAYMENT
You will be billed on a cycle billing period. Your first bill will include all
non-recurring charges, charges for the first full month of Service, and the
pro-rated amount for Services provided during the month of installation. You
agree to pay all charges within thirty (30) days of the date of our invoice to
you. You shall pay us interest on overdue payments at the rate of one and
one-half percent (1-1/2%) or the maximum-rate allowable by law, whichever is
greater. If you do not pay an invoice within thirty (30) days, we reserve the
right to disconnect Services. If your check is returned by your bank, you will
be billed a twenty-five dollar ($25) return check fee.
We reserve the right to bill you retroactively for any Services for which we
previously had not billed, provided such retroactive billing occurs within one
year after the Service is provided.
You also agree to pay all applicable taxes resulting from any transaction under
this Agreement. This does not include taxes based on our net income.
USE OF FACILITIES AND EQUIPMENT
Along with the Services, we may rent to you Standard Comstar-provided Customer
Premise Equipment (Standard CPE). The Standard CPE will either be located at our
facility or directly on your premises.
1
<PAGE> 2
Standard CPE only includes equipment manufactured by Comstar-approved vendors.
All equipment that you rent from us will be our property, and will be made
available for your use only for the term of this Agreement. You have no property
rights in the rented equipment. We reserve the right to replace any rented
equipment at our expense and with minimal interruption to Services.
If you purchase Colocation services from us, such Services will be provided to
you under the terms and conditions of the Colocation Addendum which is hereby
incorporated herein.
You agree to: (1) refrain from modifying rented equipment, or authorizing others
to do the same; (2) obtain authorization from your landlord, as we may request,
in order to protect our rights in the rented equipment; and (3) provide us with
sufficient, free, and safe access to your facilities for us to fulfill our
obligations including retrieval of rented equipment upon termination or
expiration of this Agreement.
USE OF SERVICES
You agree to fully comply with our corporate Acceptable Use Policy ("AUP"),
which is attached hereto and hereby made a part of this Agreement. Violation of
our corporate AUP by you or any of your customers may result in immediate
termination of Services. You agree to independently assess your need for the
Services. You also agree to indemnify us and to hold us harmless for any and all
claims resulting from any use of the Services that cause damage to us, our other
customers, or any third party. This indemnification also extends to any utility
company that we may use to provide Services.
LETTERS OF AGENCY
In cases in which you ask us to act as your authorized agent for ordering and
coordinating local and long distance access circuits for services outside of
this Agreement, you will execute a Letter of Agency.
BANDWIDTH
We do not guarantee bandwidth or port speed for circuits and connections outside
of our network.
PATENTS & COPYRIGHT
If a third party claims that equipment we provide to you infringes that party's
patent or copyright, we will defend you against that claim at our expense and
pay all costs, damages, and attorney's fees that a court finally awards,
provided that you: (1) promptly notify us in writing of the claim; and (2) allow
us to control, and cooperate with us in, the defense and any related settlement
negotiations.
If such a claim is made or appears likely to be made, you agree to permit us to
enable you to continue to use the equipment, or to modify it, or replace it with
equipment that is at least functionally equivalent.
This is our entire obligation to you regarding any claim of intellectual
property right infringement.
TERM RENEWAL
At the end of the Term of this Agreement, this Agreement will automatically
continue on a month-to-month basis, at the then current Comstar Service List
Price, until the Agreement is terminated by either party giving the other at
least 30 days prior written notice of its intent to terminate.
LIMITS ON LIABILITY
Your sole remedy for any failure or non-performance of the Services shall be
outlined in the Comstar Service Level Agreement, attached and made part of this
Agreement. For any other claim for damages concerning our performance, we are
liable only for: (1) payments referred to in our patent and copyright terms
described herein; (2) bodily injury, including death, and damage to real
property and tangible personal property; and (3) the amount of any other actual
loss or damage, up to the lesser of $100,000 or the actual charges (if monthly
recurring, 12 months' charges apply) for the Service that is the subject of the
claim.
This limit also applies to any of our subcontractors. It is the maximum for
which we are collectively responsible.
Under no circumstances are we, the utility companies we use to provide Service,
or our subcontractors, liable for any of the following: (1) the content of the
information passing over our network; (2) unauthorized access to your
transmission facilities or to equipment you own; (3) unauthorized access or
damage to, alteration, theft, destruction or loss of, your records or data; (4)
economic consequential damages (including lost profits or savings) or incidental
damages, even if we are informed of their possibility; (5) claims for damages
caused by you, through fault, negligence or failure to perform your
responsibilities; (6) claims against you by any other party; or (7) any act or
omission of any other party furnishing services and/or products, or the
installation and/or removal of any and all equipment supplies by any other
service provider.
WARRANTIES
For each Service, we warrant that we perform it in a competent manner.
WE DO NOT WARRANT UNINTERRUPTED OPERATION OF THE SERVICE AND SPECIFICALLY
DISCLAIM ANY OTHER WARRANTIES, EITHER EXPRESSED OR IMPLIED, INCLUDING THE
WARRANTIES OF TITLE, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
WE WILL NOT BE LIABLE TO EACH OTHER FOR ANY CONSEQUENTIAL, INDIRECT OR SPECIAL
DAMAGES WITH RESPECT TO ANY CLAIMS REGARDING THE SERVICES TO BE PROVIDED
HEREUNDER.
2
<PAGE> 3
CREDIT
Your execution of this Agreement signifies your acceptance of our initial and
continuing credit approval procedures and policies. We reserve the right to
withhold initiation or full implementation of Service until we are satisfied
with our initial credit review and approval. We may require a security deposit
before Services are provided.
If there is a material adverse change in your creditworthiness we may: (1)
interrupt Service; (2) deny requests for additional Services; or (3) require a
deposit.
TRANSFER AND ASSIGNMENT
You may not sell, assign or transfer any of your rights or obligations under
this Agreement without our prior written consent. We reserve the right to
transfer Services we provide to you via a third-party network to Comstar-based
facilities at any time during the term of this Agreement.
FORCE MAJEURE
We are not responsible for performing our obligations when they are delayed or
hindered by war, riots, embargoes, strikes or Acts of God.
GOVERNING LAW
This Agreement shall be governed by the laws of the State of Georgia.
SEVERABILITY
If any terms of this Agreement are held to be invalid, illegal, or
unenforceable, the validity, legality, and enforceability of the remaining terms
will not be in any way affected.
NOTICES
Notice to either party shall be delivered by first-class, pre-paid US mail to
the respective address.
For Comstar:
Comstar Communications, Inc.
2812 Spring Road
Suite 200
Atlanta, GA 30339
- --------------------------------------------------------------------------------
Attention
For Customer:
- --------------------------------------------------------------------------------
Company Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
City, State, Zip
- --------------------------------------------------------------------------------
Attention
3
<PAGE> 1
EXHIBIT 10.7
[COMSTAR LOGO] INTERNET ACCESS SERVICE ADDENDUM TO THE
-----------------------------------------------------------------
NETWORK SERVICES AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote, and our corporate Acceptable Use Policy
represent the entire agreement between us for the Services described in this
Addendum.
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- -------------------------------------------------------------------------------
Title
- -------------------------------------------------------------------------------
Company
SERVICE DESCRIPTION
Our Internet Access Service (Service) provides high-speed dedicated Internet
connectivity. There are five (5) Internet Access service types: Leased Line,
Digital Subscriber Line (DSL), Integrated Services Digital Network (ISDN),
Dedicated Server Colocation and Standard Colocation.
Colocation service allows you to colocate your Customer Premise Equipment (CPE)
in our facility.
Due to the overhead requirements associated with the Ethernet protocol, if you
purchase a 10Mbps Ethernet connection to the Internet you will receive
effective throughput limited to 4-6Mbps.
If you purchase Frame Relay Internet Access service you understand that we will
provision as a minimal requirement, a Committed Information Rate (CIR) equal to
twenty-five percent (25%) of the purchased Internet Access port speed. We will
guarantee the provisioned CIR at all times under normal network conditions,
from the CPE to our Internet backbone. You may have additional bandwidth
available above the CIR, which is not guaranteed by us, but is available based
on the network utilization at the time of data transmission.
SERVICE DEMARCATION
We will be responsible for the on-going management, and troubleshooting of all
components up to the demarcation point. The demarcation point of Internet
Access Services is determined by the purchased service type.
The demarcation point for Leased Line service is the established demarcation
point at your site for the telecommunications access circuit.
The demarcation point for ISDN is the established demarcation point at your
site for the telecommunications access circuit.
The demarcation point for DSL is the established demarcation point at your site
for the telecommunications access circuit.
There is no demarcation point for the Dedicated Server Colocation. Comstar is
responsible for maintaining network connectivity to the server under this
service.
The demarcation point for Standard Colocation service is at the cable, and
including the connecting cable, that interconnects the CPE and our backbone
equipment.
OUR RESPONSIBILITIES
Access Circuit - We will provision a telecommunications circuit for Leased Line
Internet Access service, from your premise to our nearest Internet Point of
Presence (POP). We will order the circuit to be terminated at the established
telecommunications demarcation point at your site unless otherwise instructed.
You will be responsible for any fees charged by the LEC for the extension of
the circuit to another location. We will be responsible for the on-going
management and troubleshooting of the telecommunications circuit up to the
demarcation point.
Customer Premise Equipment - If you rent CPE from us, the initial configuration
of the equipment will be performed by our Engineering during the activation
process. The initial setup will be a standard configuration, establishing
routing between the CPE and our Internet Backbone. The installation of the CPE
will be done via a tele-install between one of our Engineers and a contact at
your site. Our Engineers on a time and materials basis will provide additional
configuration. We will provide monitoring of CPE and the access circuit.
1
<PAGE> 2
All Standard CPE will come with one of the following maintenance features:
- - Registered access to the manufacturers on-line support services, 24
hours a day, 7 days a week.
- - Software updates via the on-line support service.
- - Next business-day delivery of advance replacement parts, provided the
request is received by our Network Operations Center (NOC) prior to
3:00pm Eastern Time.
IP Address Allocation - We adhere to the American Registry of Internet Numbers
(ARIN) recommended guidelines for allocation of Internet IP address space to
its customers. Under ARIN recommendations, we do not permit the portability of
our IP address space. We allocate address space to you for the duration of this
Agreement. Upon Service termination, you will be required to forfeit any
allocated address space to us. We will allocate address space during the
installation process. It is required that documented justification be submitted
to us prior to the allocation of address space. You may request up to a /20
CIDR allocation (equivalent to 16 Class C size networks) from us. You agree to
accept Service regardless of the number of IP addresses justified according to
ARIN guidelines. If you require larger blocks of address space you must
petition ARIN directly. We will assist you in preparing your petition to ARIN
on a time and materials basis.
We will route IP address networks attained directly from ARIN, however, we will
not route IP address networks that you were assigned from another Internet
Service Provider (ISP), except when you are dually homed between that ISP and
us.
Domain Name Service (DNS) - Secondary DNS is provided standard with the
Service. You may also elect to have us provide primary DNS for an additional
monthly fee. In this instance, we will be responsible for the administration of
your DNS tables on our Domain Name Server.
Primary DNS includes the initial set up of your DNS records, as well as the
ongoing management and support of the tables.
If you wish to make modifications to DNS records you will need to engage us to
administer the change. You will be permitted two requests per week.
If you provide access and/or hosting services to your customers, we will
provide secondary DNS for your domains only. We will not provide DNS services
for your end-users.
Newsfeed - We offer you a newsfeed for an additional monthly fee.
We provision newsfeeds in a server-to-server architecture. We will allow your
end-users to direct their newsreaders to our servers for news service for a
fee.
We offer full newsfeeds only. You will not have the ability to restrict
specific newsgroups or hierarchies from being fed to your server.
Activation Services - Following the installation of the access circuit and CPE,
one of our Engineers will activate the Service. Once routing is established
between the CPE and our Internet Backbone, the Engineer will run a series of
tests from the CPE to points on the Global Internet.
Service implementation will be complete and billing will begin when the
following criteria have been met:
1 any Comstar-supplied CPE is installed and operational;
2 IP connectivity to the Internet (including routing outside our
network) exists;
3 In cases when the CPE configuration supports it, our Network
Operations will verify IP routing through a traceroute test;
4 Comstar-supplied Primary and/or Secondary DNS services are operational
for your domain;
5 Comstar-supplied Newsfeed is established; and
6 You order is turned over to our Network Operations Center for
management.
Billing will not be delayed nor any credits issued if any of the above criteria
is not met due to any of the following circumstances.
- - A News server on your LAN is not operational;
- - You fail to provide hostname and IP address allocations to enable us
to set up Primary DNS service;
- - Delays in the availability of CPE you provide; or
- - Delays in the configuration of your LAN components or applications.
Management - Our Network Operations Center will manage all components up to the
Service demarcation point, 24 hours a day, 7 days a week.
YOUR RESPONSIBILITIES
- - Initiate maintenance calls for the Comstar-rented CPE and the access
lines by contacting us;
- - Ongoing configuration of all rented CPE following the initial
configuration by us;
- - Additional wiring and cabling required for CPE; and
- - Managing the LAN environment, defined as equipment located on the LAN
side of the router. If we isolate a problem beyond the demarcation
point, you are responsible for fault resolution and we assume no
responsibility. You have no remedy or claim for service credit for
Service outages or Service degradations caused by problems beyond the
demarcation point
2
<PAGE> 1
EXHIBIT 10.8
[COMSTAR LOGO] COLOCATION SERVICE ADDENDUM TO THE
-----------------------------------------------------------------
NETWORK SERVICES AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote, and our corporate Acceptable Use Policy
represent the entire agreement between us for the Services described in this
Addendum.
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- -------------------------------------------------------------------------------
Title
- -------------------------------------------------------------------------------
Company
LICENSE TO OCCUPY
We grant to you a license to occupy the portion of the Premises depicted in
each Colocation Schedule (the "Space"). The Space is accepted "As-Is" by you.
You may use the Space only for the purposes of installing, maintaining and
operating certain computing, cabling and telecommunications equipment.
You may not use the Space to interconnect with telecommunications services
provided to you by third parties, without the express written consent of us. If
you should interconnect the Equipment with equipment or services of any entity
other than us, without our written consent, you shall be in breach of this
Agreement.
This grant of License to you shall in no way limit our right to maintain and
operate our facilities in such a manner as will best enable us to fulfill our
service requirements.
CHARGES
All fees associated with this Agreement are specified in the attached
Colocation Schedule ("Exhibit 1").
MAINTENANCE AND INSPECTIONS.
You shall provide us with 24-hour notification prior to any maintenance,
repair, or installation of the Equipment. Routine maintenance by you shall be
scheduled during normal business hours of the facility in which you are
Colocated unless prior approval is received from the facility manager.
Your employees, agents or contractor(s) shall be permitted to enter or work in
the Space only when accompanied by an authorized Comstar employee or agent.
Comstar's authorized employee or agent shall have the authority, without
subjecting us to any liability, to suspend your work operations in and around
the Space, if in the discretion of the said employee or agent, any hazardous
conditions arise. The presence of our personnel shall not relieve you of your
responsibility to conduct your work operations in a safe and workmanlike
manner.
You shall pay a fee of $125.00 per hour, or portion thereof, with a
minimum charge of three (3) hours, for each Comstar employee or contractor that
is dispatched during non-business hours. This fee shall be subject to change
upon thirty (30) days advance written notification to you.
In the event of an emergency, our work shall take precedence over any and all
of your operations, and we may rearrange the Equipment without any liability.
If you experience an emergency, you shall immediately notify us prior to
performing any repair or maintenance necessary to correct the emergency
situation.
REMOVAL AND RELOCATION
We shall not arbitrarily or capriciously require you to relocate the Equipment;
however, upon ninety (90) days' prior written notice or, in the event of an
emergency, such time as may be reasonable, we may require you to relocate the
Equipment; provided, however, the site of relocation shall afford comparable
environmental conditions for the Equipment, shall be no further than ten (10)
air-miles from the original location and comparable accessibility to the
Equipment.
1
<PAGE> 2
If Equipment causes unacceptable interference to existing or future Comstar
circuits or equipment, you may be required to remove or relocate the offending
Equipment. The cost of relocating the Equipment and cabling will be your
responsibility.
If you cease to use services purchased from us, you shall immediately remove
the Equipment in the Space unless agreed upon by both parties as an addendum to
this Agreement. If you fail to remove said Equipment following ten-(10) days
notice from us, we may, at our option, terminate the License or remove said
Equipment. You shall be responsible for all costs and expenses associated with
removal and storage of the Equipment.
INSURANCE
You shall obtain and keep in full force and effect at all times for the
duration of this Agreement, with a carrier or carriers satisfactory to us,
insurance policies of the following kinds and in the following amounts:
(i) Worker's Compensation complying with the law of the State or States
of operation, whether or not such coverage is required by law; and
Employer's Liability insurance with limits of $500,000 per incident,
$500,000 disease policy limit and $500,000 per employee.
(ii) Commercial General Liability insurance with a combined single limit
for bodily injury and property damage of $1,000,000 each occurrence
and General and Products Liability aggregates of $2,000,000, each
covering all your obligations or your operations.
The policy shall include no modifications that reduce the standard coverage
provided under a Commercial General Liability Insurance policy form.
You shall furnish us with certificates of such insurance upon request by us.
Each policy shall provide that no change or cancellation shall become effective
except upon thirty (30) days prior written notice to us of such change or
cancellation. In the event of any change or cancellation not acceptable to us,
we may demand that you obtain replacement coverage. If you fail to obtain
replacement coverage within ten (10) days after such demand by us, you will be
in default of this Agreement.
You waive your right, and your underwriters right, of subrogation against us,
our officers, directors, agents, and employees thereof, and corporate
shareholders and their officers, directors, agents and employees thereof,
providing that such waiver in writing, prior to loss does not void or alter
coverage.
We, and our affiliates, shall not insure or be responsible for any loss or
damage to property of any kind owned or leased by you or your employees,
servants and agents. Any policy of insurance covering the property owned or
leased by you against loss by physical damage shall provide that the
underwriters have given their permission to waive their rights of subrogation
against us, our affiliates and their directors, officers and employees, as well
as their subsidiaries, including the directors, officers and employees thereof.
If you utilize contractor(s) per this Agreement, then you shall require such
contractor(s) to comply with these insurance requirements and supply
certificates of insurance upon our request.
INDEMNIFICATION AND LIABILITY.
You shall defend, hold harmless, and indemnify us from all claims, demands,
actions, damages, judgements, expenses and costs (including attorney's fees),
and liabilities for injury, death on the premises or property damage arising
out of your access to or use of the Premises.
We shall not be liable for any damages to the Equipment colocated on our
Premises, except to the extent that such damage is caused by gross negligence
or intentional acts by us, our agents or employees.
2
<PAGE> 1
EXHIBIT 10.9
[COMSTAR LOGO] CORPORATE ACCEPTABLE USE POLICY ADDENDUM TO THE
------------------------------------------------------------------
NETWORK SERVICES
AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote represent the entire agreement between us
for the Services described in the Service Addendum(s).
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Company
INTRODUCTION
Our Internet Access Service (Service) provides high-speed dedicated Internet
connectivity. We have certain legal and ethical responsibilities regarding the
use of its computer network and equipment involved in these services.
System abuse is strictly prohibited. We may terminate your Service immediately
and may bill you for any resulting charges if you, your employees or
contractor(s) engage in system abuse.
This Acceptable Use Policy Addendum was created to help you understand our
definition of system abuse. The examples listed here is not exclusive of all
possible actions that may be deemed as abuse. You are asked only to use your
best judgement.
ABUSE OF SERVICE
Actions which constitute system abuse include, but are not limited to:
Utilizing any service in the commission of a crime;
Attempting to circumvent user authentication of any host, network, or account on
our systems or the Internet at large ("cracking");
Attempting in any way to interfere with or deny service to any user or any host
on the Internet;
Forging Email or USENET header information to conceal your identity as the
author, conceal the origination address of the Email, or conceal the host from
which the Email was originated;
Sending of unsolicited mail messages, either commercial or non-commercial
("junk mail");
Forwarding or multiple posting of chain letters of any type;
Posting of inappropriate messages to USENET newsgroups e.g., posting large
numbers of unsolicited Email indiscriminately ("spamming");
Attempt to cancel, supersede, or otherwise interfere with Email or USENET posts
other than one's own; and
Engaging in harassment whether through language, frequency, or size of
messages.
This Acceptable Use Policy is subject to revision at anytime that we determine
a change is necessary. We will inform you of those changes by whatever means we
deem most effective. It is your responsibility to ensure that the use of our
network conforms to the policies currently in effect.
COOPERATION WITH LAW ENFORCEMENT
We will cooperate with Law Enforcement officials by providing whatever
information they require, so long as they present authorization from a United
States Court that has jurisdiction over the territory and subject matter that
they are seeking.
1
<PAGE> 1
EXHIBIT 10.10
[COMSTAR LOGO] SPECIAL ACCESS SERVICES
-----------------------------------------------------------------
AGREEMENT
Thank you for doing business with Comstar Communications, Inc. We are committed
to providing you with the highest quality of telecommunications services. If,
at any time, you have questions or problems, or are not completely satisfied,
please let us know. Our goal is to do our best for you.
ACCEPTANCE By signing below, you acknowledge your review and acceptance of the
terms and conditions contained in this Agreement. This Agreement can only be
modified in a written document executed by both parties. Any attempts to make
modifications to these terms and conditions are void, and will not be
enforceable.
We provide the Special Access Services to you under the terms of our, or third
party, applicable state and federal tariffs (Tariffs). Our entire agreement
consists of this Agreement and its Attachments, and the applicable Tariffs.
This Agreement supersedes any prior or contemporaneous proposals, discussions
or agreements, written or oral, concerning Comstar services.
With the exception of any special pricing and term commitments contained
herein, in the event of any conflict between the terms of this Agreement and
its Attachments, and the terms of our, or third party, Tariffs.
Accepted By:
- --------------------------------------------------------------------------------
Company
- --------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Customer Signature
- --------------------------------------------------------------------------------
Date
SPECIAL ACCESS SERVICES (Services) are defined as digital or analog
transmission channels connecting two locations that either originate or
terminate on Comstar-owned or leased telecommunications facilities. You will be
charged for all of the following service elements: channel termination, channel
mileage, multiplexing, and any special line conditioning required to prepare
the channels to transmit signals.
TERM COMMITMENT You agree to purchase the Services for the Term specified in
Attachment A. Based on this Term, you will receive the Services at the rates
specified in Attachment A. This Agreement will automatically renew for an
additional Term of equal length with the initial Term unless Comstar receives
advance written notice from you at least thirty (30) days prior to the end of
the initial Term of your desire not to renew the Agreement.
EARLY TERMINATION PENALTY If you decide to terminate the Services prior to the
end of the Term, you will be subject to early termination charges equal to one
hundred percent (100%) of the number of months remaining in the Term multiplied
by the monthly rate for the Services. You shall be obligated to pay such charges
within thirty (30) days of termination. If we provide the Services via a third
party, you will be charged all costs we incur for such early termination with
our service provider.
PAYMENT You will be billed at the beginning of each month. Your first bill will
include all non-recurring charges, charges for the first full month of Service,
and the pro-rated amount for Services provided during the month of
installation. You agree to pay all charges within thirty (30) days of the date
of our invoice to you ("Due Date"). You shall pay us interest on overdue
payments at the rate of one and a half percent (1.5%) or the maximum rate
allowable by law. If you do not pay all undisputed amounts by the Due Date we
reserve the right to disconnect Services. You will have up to ninety (90) days
(commencing five (5) days after remittance of the bill) to initiate a dispute
over charges or to receive credits, if applicable. We reserve the right to bill
you retroactively for any Services for which we previously had not billed. If
your check is returned by your bank, you will be billed a twenty-five dollar
($25) return check fee. You also agree to pay all applicable taxes resulting
from any transaction under this Agreement. This does not include taxes based on
our net income.
LETTERS OF AUTHORIZATION In cases in which you and Comstar agree to have
Comstar act as your authorized agent for ordering and coordinating local and
long distance access circuits for services outside of this Agreement, you will
execute a Letter of Authorization.
CREDIT Your execution of this Agreement signifies your acceptance of our
initial and continuing credit approval procedures and policies. We reserve the
right to withhold initiation or full implementation of the Services until we
are satisfied with our initial credit review and approval. We may require a
security deposit before Services are provided.
If there is a material adverse change in your creditworthiness we may: (1)
interrupt Service; (2) deny requests for additional Services or (3) require a
deposit.
TRANSFER AND ASSIGNMENT You may not sell, assign or transfer any of your rights
or obligations under this Agreement without our prior written consent. We
reserve the right to transfer Services we provide to you via a third-party
network to Comstar-based facilities at any time during the term of this
Agreement.
FORCE MAJEURE We are not responsible for performing our obligations when they
are delayed or hindered by war, riots, embargoes, strikes, or other Acts of
God.
<PAGE> 1
EXHIBIT 10.11
NON-SOLICITATION, CONFIDENTIALITY AND ASSIGNMENT AGREEMENT
EMPLOYEE:____________________________________ DATE:______________________
THIS AGREEMENT ("Agreement") is made and entered into on the date set
forth below, by and between comstar.net, inc. ("Company") and the undersigned
employee ("Employee").
In the course of Employee's employment by Company, Employee may have
access to Company's most sensitive and most valuable trade secrets and
confidential information, the use, application or disclosure of which may cause
substantial and possible irreparable damage to the business and asset value of
Company. Accordingly, Employee accepts and agrees to be bound by the following
provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, of the employment or continued employment of Employee by
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
1. For purposes of this Agreement, the following definitions shall
apply:
(a) "TRADE SECRETS" shall mean any information of Company,
without regard to form, including, but not limited to, technical or
nontechnical data, a formula, a pattern, a compilation, a program, a device, a
method, a technique, a drawing, a process, financial data, financial plans,
product plans, or a list of actual or potential customers or suppliers, which
is not commonly known by or available to the public and which information (i)
derives economic value, actual or potential, from not being generally known to
and not being readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
Trade Secrets also include any information described in this paragraph (a)
which Company obtains from another party which Company treats as proprietary or
designates as trade secrets, whether or not owned or developed by Company.
(b) "CONFIDENTIAL INFORMATION" shall mean any data or
information, other than Trade Secrets, that is of value to Company and is not
generally known to competitors of Company. To the extent consistent with the
foregoing, Confidential Information includes, but is not limited to, lists of
any information about Company's executives and employees, marketing techniques,
price lists, pricing policies, Company's business methods, and contracts and
contractual relations with Company's customers and suppliers. Confidential
Information also includes any information described in this paragraph (b) which
Company obtains from another party which Company treats as proprietary or
designates as confidential information, whether or not owned or developed by
Company.
<PAGE> 2
(c) "EMPLOYEE WORKS" shall mean any and all works of
authorship, code, inventions, discoveries, and work product, whether or not
patentable or eligible for copyright, and in whatever form, which are, have
been or will be created, made, or developed by Employee in the course of
employment with Company, during Employee's regular business hours with Company,
on the Company's premises, or using the Company's resources or equipment.
(d) The terms "TRADE SECRETS" and "CONFIDENTIAL INFORMATION"
shall not include any materials or information of the types specified above to
the extent that such materials or information (i) are or become publicly known
or generally utilized by others engaged in the same business or activities in
which Company utilized, developed, or otherwise acquired such information; or
(ii) are known to Employee prior to employment, having been lawfully received
from parties other than Company; or (iii) are furnished to others by Company
with no restriction on disclosure. Failure to mark any of the Trade Secrets or
Confidential Information as confidential shall not affect their status as Trade
Secrets or Confidential Information under this Agreement.
2. Employee recognizes and acknowledges that Company is engaged in
activities which involve, and continue to involve, the use of skilled experts
and the expenditure of substantial amounts of time and money. As a result of
such investments of skill, time, and money, Company has developed certain Trade
Secrets and Confidential Information which give Company significant advantages
over its competitors. Due to the nature of Employee's employment by Company,
Employee may have frequent direct and indirect contact with various customers
of Company and may be presented with, have access to, and/or participate in the
development of proprietary software, Trade Secrets, and Confidential
Information. These constitute valuable, special and unique assets of Company,
and any use or disclosure thereof contrary to the terms of this Agreement may
cause substantial loss of competitive advantage and other serious injury to
Company.
3. For the reasons recited above, Employee covenants and agrees to
all of the following:
(a) During the term of employment by Company and after the
termination thereof, whether such termination is at the instance of Employee or
Company, Employee will not, except as expressly authorized or directed by
Company, use, copy, duplicate, transfer, transmit, disclose, or permit any
unauthorized person access to, any Trade Secrets belonging to Company, any of
Company's customers, any of Customer's business partners or subcontractors, or
any related third party so long as they remain Trade Secrets. Employee will
abide by Company's policies and regulations, as established from time to time,
for the protection of its Confidential Information.
(b) During the term of employment by Company and for a period
of two (2) years after termination, whether such termination is at the instance
of Employee or Company, Employee will not, except as expressly authorized or
directed by Company, use, copy, duplicate, transfer, transmit, disclose, or
permit any unauthorized person access to, any Confidential
2
<PAGE> 3
Information belonging to Company, any of Company's customers, any of Customer's
business partners or subcontractors, or any related third party.
(c) Upon request of Company and in any event upon the
termination of employment with Company, Employee will deliver to Company all
memoranda, notes, records, tapes, documentation, disks, manuals, files or other
documents, and all copies thereof in any form, concerning or containing Trade
Secrets, Confidential Information, or Employee Works that are in Employee's
possession, whether made or compiled by Employee, furnished to Employee or
otherwise obtained by Employee.
(d) All Employee Works shall be the property of Company.
Employee will promptly disclose to Company any such Employee Works and shall
execute and deliver such confirmatory assignments, instruments, or documents as
Company deems necessary or desirable without requiring Company to provide any
further consideration therefor. Employee agrees to and hereby does assign to
Company all right, title, and interest in and to any and all Employee Works,
including all worldwide copyrights, patent rights, and all trade secret and all
confidential information embodied therein. Employee waives any and all moral
rights Employee may have in any Employee Works, including but not limited to
the right to acknowledgement as author.
(e) During the term of employment by Company and for a period
of one (1) year after termination, whether such termination is at the instance
of Employee or Company, Employee shall not directly or indirectly, through one
or more intermediaries or otherwise, solicit or attempt to solicit Customers,
to induce or encourage them to acquire or obtain from anyone other than
Company, service competitive with or substitute for any Company Service. For
purposes of this Section, a "Customer" refers to any person or group of persons
with whom Employee has or had direct material contact with regard to selling,
delivery or support of Company Services, including servicing such person's or
group's account, during the period of two (2) years preceding the date hereof;
and "Company Services" refers to the services that Company offered or sold
within six (6) months prior to the date hereof.
(f) During the term of employment by Company and for a period
of one (1) year after termination, whether such termination is at the instance
of Employee or Company, Employee shall not, directly or indirectly, through one
or more intermediaries or otherwise, employ, induce, solicit for employment, or
assist others in employing, inducing or soliciting for employment any
individual who is at any time during such period an employee of Company for the
purpose of providing services that are the same or similar to the Company
Services.
4. Employee is not subject to any employment, non-disclosure,
confidentiality, non-compete, or other agreement with any third party which
would prevent or prohibit Employee from fulfilling his duties for Company. If
Employee is the subject of any such agreement, and has any doubt as to its
applicability to Employee's position with Company, Employee will provide a copy
of such agreement to Company so that Company can make a determination as to its
effect on Employee's ability to work for Company.
3
<PAGE> 4
5. Employee agrees not to use or include in Employee Works any
copyrighted, restricted or protected code, specifications, concepts, trade
secrets, or confidential information of any third party or any other
information which Employee would be prohibited from using by any
confidentiality, non-disclosure or other agreement with any third party.
6. The restrictions contained in this Agreement are considered by
the parties hereto to be fair and reasonable and necessary for the protection
of the legitimate business interests of Company. It is recognized that damages
in the event of breach of the provisions of this Agreement by Employee would be
difficult, if not impossible, to ascertain, and it is therefore agreed that
Company, in addition to and without limiting any other remedy or right it may
have, shall have the right to an injunction or other equitable relief in any
court of competent jurisdiction, enjoining any such breach. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which Company may have.
7. If any provision or any part of any provision of this Agreement
shall not be valid for any reason, such provision shall be entirely severable
from, and shall have no effect upon, the remainder of this Agreement. Any such
invalid provision shall be subject to partial enforcement to the extent
necessary to protect the interests of the Company.
8. This Agreement shall be binding upon the parties to this
Agreement and their respective heirs, administrators, executors, successors and
assigns.
9. This Agreement and the rights and liabilities of the parties to
the Agreement will be determined in accordance with the laws of the State of
Georgia, excluding choice of law principles. Company and Employee irrevocably
consent to the exclusive jurisdiction and venue of the courts of any county in
the State of Georgia and the district courts of Georgia, in any judicial
proceeding brought to enforce this Agreement. The parties agree that any forum
other than the State of Georgia is an inconvenient forum and that a lawsuit (or
non-compulsory counterclaim) brought by one party against another party, in a
court of any jurisdiction other than the State of Georgia should be forthwith
dismissed or transferred to a court located in the State of Georgia.
10. The intent of this Agreement is to provide Company with all
remedies afforded to it under applicable law, including but not limited to
those remedies under the Georgia Trade Secrets Act, O.C.G.A.
10-1-760 et seq., as amended.
11. This Agreement shall be deemed effective at the earlier to occur
of the commencement of the employment relationship between Company and Employee
or Employee's initial possession, knowledge or acquisition of Company's Trade
Secrets or Confidential Information. The protection afforded hereunder is in
addition to and does not replace any prior confidentiality or non-disclosure
obligation of Employee to Company.
12. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by Company and Employee.
4
<PAGE> 5
13. This Agreement may be executed in one or more counterparts, each
of which will constitute an original but all of which together constitute a
single document.
IN WITNESS WHEREOF, the parties have executed this Agreement.
COMPANY:
comstar.net, inc. EMPLOYEE:
By: Signature:
---------------------------------------- ----------------------
Name (Print): Name (Print):
------------------------------ -------------------
Title:
-------------------------------------
5
<PAGE> 1
EXHIBIT 10.12
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMSTAR COMMUNICATIONS INC PREMIER BANK GAINESVILLE OFFICE ACCOUNT #: TX582235514
P O BOX 267 311 GREEN STREET Loan Number 60051710
GAINESVILLE, GA 30503 GAINESVILLE, GA 30501 Date JULY 21, 1999
Maturity Date NOV. 1, 1999
Loan Amount $100,100.00
Renewal Of 3
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS SOC SEC #: GDH/JCS/15
"I" includes each borrower above, "You" means the lender, its successors
joint and severally and assigns.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of ONE HUNDRED THOUSAND ONE HUNDRED AND NO/100
************************** Dollars $100,100.00
[XX] SINGLE ADVANCE: I will receive all of this principal sum on
________________. No additional advances are contemplated under this note.
[ ] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On _____________ I will receive the
amount of $_________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are ________________________
___________________________________________________________________________
___________________________________________________________________________
[ ] OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on ______________.
[ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from JULY
21, 1999 at the rate of 9.000% per year until FIRST CHANGE DATE.
[XX] VARIABLE RATE: This rate may then change as stated below.
[XX] INDEX RATE: The future rate will be 1.000% OVER the following index
rate: PREMIER BANK'S PRIME RATE.
___________________________________________________________________________
___________________________________________________________________________
[ ] NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
[XX] FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY. A change in the interest rate will take effect ON THE SAME DAY.
[XX] LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than 99.990% or less than 1.000%. The
rate may not change more than ____________% each
____________________________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments.
[XX] The amount of each scheduled payment will change.
[XX] The amount of the final payment will change.
[ ] ______________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[XX] on the same fixed or variable rate basis in effect before maturity
(as indicated above).
[ ] at a rate equal to _____________________________________________________.
[XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 5.000% OF THE LATE PAYMENT WITH A MINIMUM OF
$25.00 AND A MAXIMUM OF $100.00.
[XX] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which [XX] are [ ] are not included in the principal amount above :
$100.00 LOAN FEE.
PAYMENTS: I agree to pay this note as follows:
[XX] INTEREST: I agree to pay accrued interest ON THE 1ST DAY OF EACH MONTH
BEGINNING SEPTEMBER 1, 1999.
[XX] PRINCIPAL: I agree to pay the principal NOVEMBER 1, 1999.
[ ] INSTALLMENTS: I agree to pay this note in _____ payments. The first
payment will be in the amount of $ ____________________________________________
and will be due ___________________________________. A payment of $ ___________
will be due _______________________________________________________ thereafter.
The final payment of the entire unpaid balance of principal and interest will
be due _____________________________________________________________________.
[ ] If checked, and this loan is secured by a first lien on real estate, then
any accrued interest not paid when due (whether due by reason of a schedule of
payments or due because of lenders demand) will become part of the principal
thereafter, and will bear interest at the interest rate in effect from time to
time as provided for in this agreement.
ADDITIONAL TERMS:
ALL COLLATERAL IS ALSO SECURING LOAN OF EVEN NAME BEING LOAN NUMBER 60046455
<TABLE>
<S> <C>
[XX] SECURITY: This note is separately secured by PURPOSE: The purpose of this loan is BUSINESS:
(describe separate document by type and date): RENEWAL 60051710
SECURITY AGREEMENT OF EVEN NAME AND DATE SIGNATURES AND SEALS: IN WITNESS WHEREOF, I HAVE
SIGNED MY NAME AND AFFIXED MY SEAL ON THIS 21ST
(This section is for your internal use. Failure to DAY OF JULY, 1999. BY DOING SO, I AGREE
list a separate security document does not mean the TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE
agreement will not secure this note.) 2). I HAVE RECEIVED A COPY ON TODAY'S DATE.
COMSTAR COMMUNICATIONS INC
Signature for Lender ___________________________________________ (Seal)
BY:
X_________________________________________________ ___________________________________________ (Seal)
GEORGE D HENDERSON DR SAM F DAYTON, PRESIDENT
__________________________________________________ ___________________________________________ (Seal)
___________________________________________ (Seal)
(page 1 of 2)
</TABLE>
<PAGE> 2
DEFINITIONS: As used on page 1, "[X]" means the terms that apply to this loan.
"I," "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW: The law of the state of Georgia will govern this note. Any term
of this note which is contrary to applicable law will not be effective, unless
the law permits you and me to agree to such variation. If any provision of this
agreement cannot be enforced according to its terms, this fact will not affect
the enforceability of the remainder of this agreement. No modification of this
agreement may be made without your express written consent. Time is of the
essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal advanced at that time. You and I may provide in this agreement for
accrued interest not paid when due to be added to principal. Notwithstanding
anything to the contrary, I do not agree to pay and you do not intend to
charge any rate of interest that is higher than the maximum rate of interest
you could charge under applicable law for the extension of credit that is
agreed to here (either before or after maturity). If any notice of interest
accrual is sent and is in error, we mutually agree to correct it, and if you
actually collect more interest than allowed by law and this agreement, you agree
to refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on this
note. You do not guarantee by selecting this index, or the margin, that the
rate on this note will be the same rate you charge on any other loans or class
of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of this
note. For the purpose of interest calculation, the accrual method will determine
the number of days in a "year." If no accrual method is stated, then you may
use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the "PAYMENTS BY
LENDER" paragraph below, or if we have agreed that accrued interest not paid
when due may be added to principal.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and add them to the unpaid principal
under this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession
for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to an account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to hold
you harmless from any such claims arising as a result of your exercise of your
right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a
residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the terms
of any separate instrument creating the security interest and, to the extent not
prohibited by law and not contrary to the term of the separate security
instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1)
I fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) any collateral securing this
note is used in a manner or for a purpose which threatens confiscation by a
legal authority; (9) I change my name or assume an additional name without first
notifying you before making such a change; (10) I fail to plant, cultivate and
harvest crops in due season; (11) any loan proceeds are used for a purpose
that will contribute to excessive erosion of highly erodible land or to the
conversion of wetlands to produce an agricultural commodity, as further
explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-Off" paragraph
herein.
(3) You may demand security, additional security, or additional parties
to be obligated to pay this note as a condition for not using any
other remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right to
later use any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to later consider the event as a default
if it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee, not
to exceed 15 percent of the principal and interest then owed, you incur with
such attorney plus court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay the
reasonable attorney's fees and costs you incur to collect this debt as awarded
by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest);
(3) give notice that amounts due have not been paid (notice of dishonor);
or
(4) give me notice prior to seizure of my personal property when you are
seeking to foreclose a secured interest in any of my personal
property used to secure a commercial transaction.
I waive any defenses I have based on suretyship or impairment of
collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a
separate guarantee or endorsement). You may sue me alone, or anyone else who is
obligated on this note, or any number of us together, to collect this note. You
may do so without any notice that it has not been paid (notice of dishonor).
You may without notice release any party to this agreement without releasing
any other party. If you give up any of your rights, with or without notice, it
will not affect my duty to pay this note. Any extension of new credit to any of
us, or renewal of this note by all or less than all of us will not release me
from my duty to pay it. (Of course, you are entitled to only one payment in
full.) I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my liability for
payment of the note. I will not assign my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any change in my address. I will give any notice to you by mailing
it first class to your address stated on page 1 of this agreement, or to any
other address that you have designated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(not required) THROUGH:
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(page 2 of 2)
<PAGE> 1
EXHIBIT 10.13
MODIFICATION NOTE
NOTE: 60046455
COMSTAR COMMUNICATIONS, INC.
WHEREAS, the undersigned "Borrower" heretofore became indebted to Premier Bank
(hereinafter "Holder") under the terms of a certain Note attached hereto,
including all prior modifications applicable thereto and attached hereto, and
WHEREAS, Borrower, pursuant to the prior written consent of Holder, as evidenced
by a written authorization of commitment from Holder, desires to modify certain
terms of said Note as set forth hereinbelow, and
WHEREAS, Holder is willing to accept such modification terms:
NOW, THEREFORE, the Note, including all prior modifications thereto, is hereby
modified as follows:
EXTEND MATURITY DATE FROM OCTOBER 1, 1999 TO NOVEMBER 1, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Borrower affirms all terms and conditions of the Note, and all prior
modifications, except as otherwise modified herein.
Witness the hand and seal of the undersigned this 21st day of July, 1999.
ComStar Communications, Inc.
/s/ H. Cooper Elsy /s/ Sam F. Dayton
- ------------------------------------ -------------------------------------
Witness Dr. Sam F. Dayton, President
/s/ Joy Irwin
- ------------------------------------
Notary
Officer: GDH/jcs
-------------
<PAGE> 2
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMSTAR COMMUNICATIONS INC PREMIER BANK GAINESVILLE OFFICE ACCOUNT #: GDH/JCS/15
P O BOX 267 311 GREEN STREET Loan Number 60046455
GAINESVILLE, GA 30503 GAINESVILLE, GA 30501 Date JUNE 22, 1999
Maturity Date OCTOBER 1, 1999
Loan Amount $700,100.00
Renewal Of 1
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS SOC SEC #: 582235514
"I" includes each borrower above, "You" means the lender, its successors
joint and severally. and assigns.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of SEVEN HUNDRED THOUSAND ONE HUNDRED AND NO/100
************************** Dollars $700,100.00
[ ] SINGLE ADVANCE: I will receive all of this principal sum on
________________. No additional advances are contemplated under this note.
[XX] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On JUNE 22, 1999 I will receive the
amount of $700,000.00 and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are AT THE LENDERS
DISCRETION
___________________________________________________________________________
___________________________________________________________________________
[XX] OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on OCTOBER 1, 1999.
[ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from
JUNE 22, 1999 at the rate of 8.750% per year until FIRST CHANGE DATE.
[XX] VARIABLE RATE: This rate may then change as stated below.
[XX] INDEX RATE: The future rate will be 1.000% OVER the following index
rate: PREMIER BANK'S PRIME RATE.
___________________________________________________________________________
___________________________________________________________________________
[ ] NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
[XX] FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY. A change in the interest rate will take effect ON THE SAME DAY.
[XX] LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than 99.990% or less than 1.000%. The
rate may not change more than ____________% each ____________________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments.
[XX] The amount of each scheduled payment will change. [XX] The amount of
the final payment will change.
[ ] ______________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[XX] on the same fixed or variable rate basis in effect before maturity
(as indicated above).
[ ] at the rate equal to ________________________________________________.
[XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 5.000% OF THE LATE PAYMENT WITH A MINIMUM OF
$25.00 AND A MAXIMUM OF $100.00.
[XX] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which [XX] are [ ] are not included in the principal amount above:
LOAN FEE $100.00.
PAYMENTS: I agree to pay this note as follows:
[XX] INTEREST: I agree to pay accrued interest ON THE 1ST DAY OF EACH MONTH
BEGINNING AUGUST 1, 1999 _______________________________________________________
_______________________________________________________________________________.
[XX] PRINCIPAL: I agree to pay the principal OCTOBER 1, 1999 ___________________
_______________________________________________________________________________.
[ ] INSTALLMENTS: I agree to pay this note in _____ payments. The first
payment will be in the amount of $ ____________________________________________
and will be due ___________________________________. A payment of $ ___________
will be due _______________________________________________________ thereafter.
The final payment of the entire unpaid balance of principal and interest will
be due _____________________________________________________________________.
[ ] If checked, and this loan is secured by a first lien on real estate, then
any accrued interest not paid when due (whether due by reason of a schedule of
payments or due because of lenders demand) will become part of the principal
thereafter, and will bear interest at the interest rate in effect from time to
time as provided for in this agreement.
ADDITIONAL TERMS:
FOR COMPLETE DESCRIPTION OF COLLATERAL REFER TO SECURITY AGREEMENT OF EVEN NAME
DATED 6-22-99
<TABLE>
<CAPTION>
- ---------------------------------------------------
<S> <C>
[XX] SECURITY: This note is separately secured by PURPOSE: The purpose of this loan is BUSINESS:
(describe separate document by type and date): RENEWAL _________________________________________.
SECURITY AGREEMENT DATED 6-22-99; VARIOUS SIGNATURES AND SEALS: IN WITNESS WHEREOF, I HAVE
RECORDED UCC-1'S SIGNED MY NAME AND AFFIXED MY SEAL ON THIS 22ND
DAY OF JUNE, 1999. BY DOING SO, I AGREE TO THE
(This section is for your internal use. Failure to TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2).
list a separate security document does not mean the I HAVE RECEIVED A COPY ON TODAY'S DATE.
agreement will not secure this note.)
- --------------------------------------------------- COMSTAR COMMUNICATIONS INC
Signature for Lender ___________________________________________ (Seal)
/S/ GEORGE HENDERSON BY: /S/ SAM F. DAYTON
__________________________________________________ ___________________________________________ (Seal)
GEORGE HENDERSON DR. SAM F. DAYTON, PRESIDENT
__________________________________________________ ___________________________________________ (Seal)
___________________________________________ (Seal)
(page 1 of 2)
</TABLE>
<PAGE> 3
DEFINITIONS: As used on page 1, "[X]" means the terms that apply to this loan.
"I," "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW: The law of the state of Georgia will govern this note. Any term
of this note which is contrary to applicable law will not be effective, unless
the law permits you and me to agree to such variation. If any provision of this
agreement cannot be enforced according to its terms, this fact will not affect
the enforceability of the remainder of this agreement. No modification of this
agreement may be made without your express written consent. Time is of the
essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal advanced at that time. You and I may provide in this agreement for
accrued interest not paid when due to be added to principal. Notwithstanding
anything to the contrary, I do not agree to pay and you do not intend to
charge any rate of interest that is higher than the maximum rate of interest
you could charge under applicable law for the extension of credit that is
agreed to here (either before or after maturity). If any notice of interest
accrual is sent and is in error, we mutually agree to correct it, and if you
actually collect more interest than allowed by law and this agreement, you agree
to refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on this
note. You do not guarantee by selecting this index, or the margin, that the
rate on this note will be the same rate you charge on any other loans or class
of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of this
note. For the purpose of interest calculation, the accrual method will determine
the number of days in a "year." If no accrual method is stated, then you may
use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the "PAYMENTS BY
LENDER" paragraph below, or if we have agreed that accrued interest not paid
when due may be added to principal.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you ad I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and add them to the unpaid principal
under this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession
for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to any account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to hold
you harmless from any such claims arising as a result of your exercise of your
right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a
residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the terms
of any separate instrument creating the security interest and, to the extent not
prohibited by law and not contrary to the terms of the separate security
instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) any collateral securing this
note is used in a manner or for a purpose which threatens confiscation by a
legal authority; (9) I change my name or assume an additional name without first
notifying you before making such a change; (10) I fail to plant, cultivate and
harvest crops in due season; (11) any loan proceeds are used for the purpose
that will contribute to excessive erosion of highly erodible land or to the
conversion of wetlands to produce an agricultural commodity, as further
explained in 7 C.F.R. Part 1940, subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-Off" paragraph
herein.
(3) You may demand security, additional security, or additional parties
to be obligated to pay this note as a condition for not using any
other remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right to
later use any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to later consider the event as a default
if it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all cost of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee, not
to exceed 15 percent of the principal and interest then owed, you incur with
such attorney plus court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay the
reasonable attorney's fees and costs you incur to collect this debt as awarded
by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amount due (presentment);
(2) obtain official certification of nonpayment (protest);
(3) give notice that amounts due have not been paid (notice of dishonor);
or
(4) give me notice prior to seizure of my personal property when you are
seeking to foreclose a secured interest in any of my personal
property used to secure a commercial transaction.
I waive any defenses I have based on suretyship or impairment of
collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a
separate guarantee or endorsement). You may sue me alone, or anyone else who is
obligated on this note, or any number of us together, to collect this note. You
may do so without any notice that it has not been paid (notice or dishonor).
You may without notice release any party to this agreement without releasing
any other party. If you give up any of your rights, with or without notice, it
will not affect my duty to pay this note. Any extension of new credit to any of
us, or renewal of this note by all or less than all of us will not release me
from my duty to pay it. (Of course, you are entitled to only one payment in
full.) I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my liability for
payment of the note. I will not assign my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any change in my address. I will give any notice to you by mailing
it first class to your address stated on page 1 of this agreement, or to any
other address that you have designated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(not required) THROUGH:
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
- ------------------------------------------------------------------------------------------------------------------
(page 2 of 2)
</TABLE>
<PAGE> 1
EXHIBIT 10.14
[ComStar Logo]
July 1, 1998
James Cary Howell
Edward N. Landa
ComStar Communications, Inc.
2812 Spring Road, Suite 210
Atlanta, GA 30339
Re: Letter Agreement
Dear Cary and Ed:
As we have discussed, banking officials at the First National Bank of
Commerce ("First National") have refused to grant a loan to ComStar
Communications, Inc. ("ComStar") which would permit it to purchase the assets of
Athens, Georgia ISP. It was explained to us that the bank does not provide loans
to "Start-up", that is, new businesses that are still losing money.
It was further suggested to us that First National would make a loan to
myself and James L. Bruce, Jr. personally with the understanding that the
proceeds of the loan would be for the purpose of purchasing the assets of the
Athens, Georgia ISP. Since such a loan would still be linked to ComStar, Jim
Bruce and I will still have to provide substantial collateral to guarantee the
loan.
You two have verbally approved such a plan, and the purpose of this
Letter Agreement is to provide a written record of the transaction. Jim Bruce
and I will borrow the sum of Three Hundred Eighty-three thousand nine hundred
ten dollars ($383,910.00) from First National and provide the necessary personal
guarantees of repayment as well as substantial collateral to secure the loan.
The money will be placed in ComStar's bank account for the purpose of issuing
appropriate checks to the owners of the Athens, Georgia ISP.
By this Letter Agreement, all stockholders of ComStar agree that the
amount of $383,910.00 will be placed on the books of account of ComStar as a
loan made to the corporation by Sam F. Dayton, James L. Bruce, Jr., and dB
Telecom Technologies, Inc. (the latter if suggested by the financial advisors
of Sam F. Dayton, James L. Bruce, Jr. and dB Telecom Technologies, Inc.).
By this Letter Agreement, all stockholders further ratify previous loans
made to ComStar by Sam F. Dayton, James L. Bruce, Jr. and dB Telecom
Technologies, Inc. and direct that the current amount of $383,910.00 be added to
the overall debts which are payable to Sam F. Dayton, James L. Bruce, Jr., and
dB Telecom Technologies, Inc. Debts owned by ComStar to Sam F. Dayton and James
L., Bruce, Jr. shall, in the aggregate be equal. All provisions of previous loan
agreements which have been agreed to by the stockholders are incorporated into
this Letter Agreement by reference and shall be construed as being integral to
its construction.
<TABLE>
<S> <C> <C> <C> <C>
2812 Spring Road * Suite 210 * Atlanta, Georgia 30339 USA * Phone: 770.333.8779 * Fax: 770.333.8578
</TABLE>
<PAGE> 2
Page 2. Letter Agreement dated July 1, 1998. ComStar/Dayton, Bruce, dB Telecom
Technologies.
It is further agreed among the parties to this Letter Agreement that
debt service including principal, interest, fees and taxes on this loan shall be
paid promptly by ComStar to First National and that Sam F. Dayton, James L.
Bruce, Jr., and dB Telecom Technologies, Inc. shall be indemnified and held
harmless, including the provision by ComStar of any legal expenses incurred by
Sam F. Dayton, James L. Bruce, Jr. and dB Telecom Technologies, Inc., as a
result of any adverse consequences should the loan not be serviced in a timely
manner. It is understood by all parties to this Letter Agreement that the
actions of Sam F. Dayton, James L. Bruce, Jr., and dB Telecom Technologies, Inc.
are gratuitous in nature, and are not required by any ComStar policy or Bylaw.
Sincerely,
/s/ Sam F. Dayton
For Sam F. Dayton and James L. Bruce, Jr.
Same F. Dayton, Ph.D.
President and Stockholder
ComStar Communications, Inc.
Agreed to and accepted this 1st day of July, 1998.
/s/ James C. Howell /s/ Edward N. Landa
- ---------------------------------- ---------------------------------------------
James Cary Howell, CEO/Stockholder Edward N. Landa, VP and Secretary/Stockholder
<PAGE> 1
EXHIBIT 10.15
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE GEORGIA SECURITIES ACT OF 1973, AS
AMENDED (THE "GEORGIA ACT"), IN RELIANCE UPON AN EXEMPTION CONTAINED IN THE
GEORGIA ACT, AND HAS NOT BEEN REGISTERED UNDER ANY OTHER STATE SECURITIES LAW OR
THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS NOTE HAS BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, HYPOTHECATED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF, NOR WILL ANY ASSIGNEE OR TRANSFEREE OF
THIS NOTE BE RECOGNIZED BY THE CORPORATION AS HAVING AN INTEREST IN SUCH NOTE,
IN THE ABSENCE OF (I) AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THIS
NOTE UNDER THE GEORGIA ACT, THE 1933 ACT OR ANY APPLICABLE STATE SECURITIES LAW
OR (II) AN OPINION OF COUNSEL, WHICH OPINION OF COUNSEL SHALL BE SATISFACTORY TO
THE CORPORATION, TO THE EFFECT THAT THE TRANSACTION BY WHICH SUCH NOTE WILL BE
OFFERED FOR SALE, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF, IS
OTHERWISE IN COMPLIANCE WITH THE REGISTRATION REQUIREMENTS OF SUCH ACTS.
PROMISSORY NOTE
November 9, 1999
comstar.net, inc., a Georgia corporation (the "Corporation"),
unconditionally promises to pay to the order of DR. SAMUEL F. DAYTON the
principal sum of One Hundred Forty Thousand and 00/100 Dollars ($140,000.00),
or, if less, the aggregate unpaid balance of all loans made by the holder to the
Corporation, in legal tender of the United States, with an initial simple
interest rate thereon as of the date of this Promissory Note (this "Note") of
ten percent (10%) per annum on the unpaid balance. All unpaid principal and all
accrued and unpaid interest shall be due and payable in full on the earlier of
(a) the closing date of the Corporation's initial public offering of its common
stock by Scott & Stringfellow, Inc. and SunTrust Equitable Securities as
managing underwriters, or (b) January 15, 2000.
The Corporation covenants, promises and agrees as follows:
1. INTEREST. Interest shall be calculated on the basis of three
hundred sixty (360) days per year for the actual number of days elapsed. All
payments of principal or interest shall be made at Gainesville, Georgia or at
such other place as may be designated by the holder. All payments received from
the Corporation will be applied first to interest to the extent then accrued and
then to principal.
2. PREPAYMENT. This Note is subject to prepayment at the option
of the Corporation in whole or in part before its maturity date at any time and
from time to time without penalty or premium..
<PAGE> 2
3. DEFAULT.
3.1 The entire unpaid balance of the principal amount and
all interest accrued and unpaid on this Note shall, at the election of the
holder, be and become immediately due and payable upon the occurrence of any of
the following events (a "Default Event"):
(a) the nonpayment by the Corporation when due
of principal and interest or principal or interest or of any other payment as
provided in this Note; or
(b) if the Corporation (i) applies for or
consents to the appointment of, or if there shall be a taking of possession by,
a receiver, custodian, trustee or liquidator for the Corporation or any of its
property; (ii) becomes generally unable to pay its debts as they become due;
(iii) makes a general assignment for the benefit of creditors or becomes
insolvent; (iv) files or is served with any petition for relief under the
federal Bankruptcy Code or any similar federal or state statute; (v) has any
judgment entered against it in excess of $50,000.00 in any one instance or in
the aggregate during any consecutive 12-month period or has any attachment or
levy made to or against any of its property or assets; (vi) defaults with
respect to any evidence of indebtedness or liability for borrowed money, or any
such indebtedness shall not be paid as and when due and payable; or (vii) has
assessed or imposed against it, or if there shall exist, any general or specific
lien for any federal, state or local taxes or charges against any of its
property or assets.
3.2 If the maturity date of this note is accelerated as
provided in this paragraph, this Note shall bear interest at the simple interest
rate of fourteen (14%) per annum, commencing on the date of such acceleration
without further notice. Each right, power or remedy of the holder upon the
occurrence of any Default Event as provided for in this Note or now or hereafter
existing at law or in equity or by statute shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
this Note or now or hereafter existing at law or in equity or by statute, and
the exercise or beginning of the exercise by the holder of any one or more of
such rights, powers or remedies shall not preclude the simultaneous or later
exercise by the holder of any or all such other rights, powers or remedies.
4. MISCELLANEOUS.
4.1. No failure or delay by the holder to insist upon the
strict performance of any term of this Note or to exercise any right, power or
remedy consequent upon a default hereunder shall constitute a waiver of any such
term or of any such breach, or preclude the holder from exercising any such
right, power or remedy at any later time or times. By accepting payment after
the due date of any amount payable under this Note, the holder shall not be
deemed to waive the right either to require payment when due of all other
amounts payable under this Note, or to declare a default for failure to effect
such payment of any such other amount.
4.2. The failure of the holder to give notice of any
failure or breach of the Corporation under this Note shall not constitute a
waiver of any right or remedy in respect of such continuing failure or breach or
any subsequent failure or breach.
2
<PAGE> 3
4.3. All notices and communications under this Note shall
be in writing and shall be either delivered in person or accompanied by a signed
receipt therefor or mailed first-class United States certified mail, postage
prepaid, and addressed as follows:
if to the Corporation, to:
comstar.net, inc.
2812 Spring Road, Suite 210
Atlanta, Georgia 30339
with a copy to:
Charles D. Vaughn, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, N.E., Suite 1400
Atlanta, Georgia 30309
and, if to the holder, to the address of the holder
on the books of the Corporation.
Any notice of communication shall be deemed given and received
as of the date of such delivery or if mailed, on the fourth day after the same
is deposited in the mail.
4.4 Nothing contained in this Note shall be deemed to
establish or require the payment of interest to the holder at a rate in excess
of the maximum rate permitted by Applicable Law (meaning each applicable law,
statute, code, act, ordinance, order, judgment, decree, injunction, rule,
regulation and other requirement of each governmental authority having
jurisdiction over the subject matter). If the rate of interest required to be
paid under this Note exceeds the maximum rate permitted by Applicable Law, the
rate of interest required to be paid hereunder shall be automatically reduced to
the maximum rate permitted by Applicable Law, and any amounts collected in
excess of the permissible amount shall be deemed a prepayment of principal on
this Note (and provided that if this Note has been or would thereby be paid in
full, then any such excess amount shall be promptly refunded to the
Corporation).
4.5. This Note shall be governed by and construed and
enforced in accordance with the laws of the State of Georgia, or, where
applicable, the laws of the United States.
4.6. This Note constitutes the full and entire
understanding between the Corporation and the holder and supercedes all prior
oral or written agreements and understandings relating to the subject matter
hereto. Neither this Note nor any terms hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the
Corporation and the holder.
3
<PAGE> 4
4.7 In addition to all principal and accrued interest on
this Note, the Corporation agrees to pay (a) all reasonable costs and expenses
incurred by the holder of this Note in collecting any amounts owing under this
Note through any reorganization, bankruptcy or any other proceeding and (b)
reasonable attorneys' fees actually incurred when and if this Note is placed in
the hands of an attorney for collection after default.
IN WITNESS WHEREOF, the Corporation has caused this Note to be executed
and sealed by its duly authorized officers.
comstar.net, inc.
By: /s/ Samuel F. Dayton
---------------------------------------
Samuel F. Dayton, President
4
<PAGE> 1
EXHIBIT 10.16
LOAN EXTENSION AND MODIFICATION AGREEMENT
THIS LOAN EXTENSION AND MODIFICATION AGREEMENT is made and entered into
as of the 10th day of December, 1999, by and among comstar.net, inc., a Georgia
corporation (the "Borrower"), Samuel F. Dayton and James L. Bruce, Jr., each of
whom is a resident of the State of Georgia (each an "Founder Lender" and
together, the "Founder Lenders"), and db Telecom Technologies, Inc., a Georgia
corporation with its principal office in Gainesville, Georgia (the "db Lender"
and together with the Founder Lenders, the "Lenders").
RECITALS:
WHEREAS, the Founder Lenders made a loan to the Borrower in the
original principal amount of Six Hundred Eighteen Thousand Five Hundred
Forty-Nine Dollars ($618,549) and the db Lender made a loan to the Borrower in
the original principal amount of Two Hundred Seventy Thousand One Hundred
Eighty-Eight Dollars ($270,188) (collectively, the "Loans"), both of which are
evidenced by a letter agreement dated April 6, 1999 and subsequently amended by
further letter agreements on each of December 4, 1996, May 5, 1999 and August
10, 1999 (collectively, the "Loan Agreement");
WHEREAS, the Borrower and the Lenders have agreed to extend the
maturity dates of the Loans as described in this Agreement; and
WHEREAS, the Borrower, and the Lenders desire to modify the terms of
the Loan Agreement to evidence the extension of the maturity dates and to
require the Borrower to make certain other promises with respect to the Loans;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants contained herein, the agreement of the Lenders to extend the maturity
dates of the Loans, and the sum of Ten and No/100 Dollars ($10.00), paid in hand
by each party to the other, the receipt, adequacy, and sufficiency of all of
which are hereby acknowledged, the parties agree as follows:
1. Extension of Maturity Date. The Loan Agreement is hereby modified by
substituting April 30, 2000 (the "Extended Maturity Date") for the maturity date
set forth in the Loan Agreement, with the effect that the entire principal
balance of the Loans outstanding on the Extended Maturity Date, together with
all accrued and unpaid interest thereon, shall be due and payable on the
Extended Maturity Date.
2. Outstanding Amounts Owed Founder Lenders. The Borrower and the
Founder Lenders hereby acknowledge and agree that the outstanding principal
balance of the Loan between them as of the date of this Agreement is $618,549.
<PAGE> 2
3. Outstanding Amounts Owed db Lender. The Borrower and the db Lender
hereby acknowledge and agree that the outstanding principal balance of the Loan
between them as of the date of this Agreement is $270,188.
4. Effect of Modification on Loan Agreement. The Loan Agreement, as
modified by this Agreement, remains in full force and effect in accordance with
its terms, and the Lenders and the Borrower hereby ratify and confirm the same.
The Borrower acknowledges that it is fully obligated under the terms of the Loan
Agreement.
5. Repayment of Short-Term Debt. The parties hereto hereby acknowledge
that the Borrower shall use a portion of the net proceeds of the sale of the
Borrower's Series 1999 Convertible Notes to repay the $140,000 loaned to the
Borrower by Samuel F. Dayton in November 1999 to finance the short term
liquidity needs of the Borrower, as evidenced by a Promissory Note between Dr.
Dayton and the Borrower dated November 9, 1999.
6. Successors and Assigns. This Agreement shall bind each party hereto
and his or its heirs, executors, administrators, legal representatives,
successors, and assigns and shall inure to the benefit of, and be enforceable
by, each party hereto and his, its or their successors and assigns, including,
without limitation, each and every person who shall from time to time be or
become the holder of any of the Loan Documents.
7. Notices. Notices under this Agreement shall be given in writing and
shall be deemed served at the earlier of (a) receipt, (b) five (5) days after
deposit in the United States mail, sent certified or registered mail, return
receipt requested, postage prepaid, or (c) upon transmission via facsimile
machine, and addressed to the parties at the following addresses, or at such
other addresses as the parties shall designate in writing:
<PAGE> 3
If to the Founder Lenders:
Samuel F. Dayton
db Telecom Technologies, Inc.
419 Bradford Street, N.W.
Suite A-2
Gainesville, Georgia 30501
James L. Bruce, Jr.
Yonah Manufacturing Company
482 Chattahoochee Street
Cornelia, GA 30531
If to the db Lender:
db Telecom Technologies, Inc.
419 Bradford Street, N.W.
Suite A-2
Gainesville, Georgia 30501
Attn: President
If to the Borrower:
comstar.net, inc.
2812 Spring Road
Suite 210
Atlanta, Georgia 30339
Attn: Chief Executive Officer
Personal delivery to a party or to any officer, partner, agent, or employee of
such party at its address herein shall constitute receipt. Rejection or other
refusal to accept or inability to deliver because of changed address of which no
notice has been received also shall constitute receipt.
8. Amendment. This Agreement may be terminated, amended, supplemented,
waived, released or modified only by an instrument in writing signed by the
party against whom the enforcement of the termination, amendment,
supplementation, waiver, release, or modification is sought.
9. Governing Law. This Agreement shall be deemed to be a contract made
under, and for all purposes shall be governed by and construed in accordance
with, the internal laws of the State of Georgia.
<PAGE> 4
10. Multiple Counterparts; Pronouns; Captions; Severability. This
Agreement may be executed in multiple counterparts (including by facsimile),
each of which shall be deemed an original but all of which shall constitute but
one and the same document. Captions are for reference only and in no way limit
the terms of this Agreement. Wherever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but invalidation of any one or more of the provisions of this
Agreement shall in no way affect any of the other provisions hereof, which shall
remain in full force and effect.
IN WITNESS WHEREOF, the Borrower, the Lenders, the db Lender have
executed and sealed this Loan Extension and Modification Agreement as of the day
and year first above written.
BORROWER:
comstar.net, inc.
[CORPORATE SEAL]
By: /s/ J. Cary Howell, CEO
------------------------------------
Name and Title: J. Cary Howell, CEO
LENDERS:
/s/ Samuel F. Dayton
---------------------------------------
Samuel F. Dayton
/s/James L. Bruce, Jr.
---------------------------------------
James L. Bruce, Jr.
db LENDER:
db Telecom Technologies, Inc.
[CORPORATE SEAL]
By: /s/Samuel F. Dayton
-------------------------------------
Name and Title: Samuel F. Dayton
----------------------
<PAGE> 1
EXHIBIT 10.17
COMSTAR.NET, INC.
SUBSCRIPTION AGREEMENT
To: comstar.net, inc.
2812 Spring Road, Suite 210
Atlanta, Georgia 30339
Attention: Chief Financial Officer
Dear Sir:
The undersigned (the "Subscriber") hereby tenders Subscriber's
subscription to comstar.net, inc., a Georgia corporation, on the terms and
conditions hereinafter set forth:
1. SUBSCRIPTION FOR UNITS
Subscriber hereby irrevocably subscribes for and agrees to purchase
investment units consisting of a Series 1999 Convertible Note ("Note") with a
Stock Purchase Warrant ("Warrant"). In that regard, Subscriber irrevocably
subscribes for and agrees to purchase the amount of the Note indicated below
(with a minimum investment of $500,000 for entities and $50,000 for
individuals):
Amount of Note subscribed for: $
-----------------
Subscriber acknowledges that Subscriber will receive, along with the referenced
Note, a Warrant for the number of shares of comstar.net's common stock as set
forth in the Warrant provided to Subscriber along with this Agreement.
2. REPRESENTATIONS AND WARRANTIES OF SUBSCRIBER
In order to induce comstar.net to accept this subscription, Subscriber
hereby represents and warrants as follows:
(A) If Subscriber is an entity and consequently is subscribing for
at least $500,000 of the units, Subscriber represents that Subscriber is
purchasing the units in the ordinary course of its business for Subscriber's
own account, with the intention of holding the units for investment, with no
arrangement with any person to resell or otherwise participate directly or
indirectly in a distribution of the units or any part thereof.
(B) Subscriber understands that no federal or state agency or
securities exchange has recommended or endorsed the purchase of the units.
(C) Subscriber recognizes that, prior to this offer, there has been
no public market for the units and that, after this offering, there will be no
public market for the Note or the Warrant or the common stock into which they
are convertible or exercisable, as applicable.
(D) The information heretofore provided to comstar.net by Subscriber
as to Subscriber is true and correct as of the date hereof, and Subscriber
agrees to advise comstar.net prior to its acceptance of this
1
<PAGE> 2
subscription of any material change in any such information. Subscriber agrees
that the representations and warranties of Subscriber set forth in this Section
2 shall survive the acceptance of this subscription, in the event that such
subscription is accepted.
(E) Subscriber is either (a) an entity with its principal executive
office set forth on the signature page to this Agreement or (b) an individual
with his or her principal residence set forth on the signature page to this
Agreement, and Subscriber has no present intent of changing such location or
residence, as applicable. If the location of Subscriber's principal executive
office or residence, as applicable, changes to a state other than the state
indicated by Subscriber before Subscriber purchases the units and before the
units are delivered to Subscriber, Subscriber covenants and agrees to properly
notify comstar.net.
(F) When executed by Subscriber, this Subscription Agreement
(including these representations and warranties) will constitute a valid and
binding obligation of Subscriber, enforceable in accordance with its terms.
(G) Subscriber understands and agrees that the subscription set
forth herein will not be binding upon comstar.net until it is accepted by
comstar.net in writing, that acceptance of any or all subscriptions is within
the sole discretion of comstar.net and that comstar.net may choose to accept or
reject any or all subscriptions, including this subscription, for any reason or
no reason, in its sole discretion.
3. GOVERNING LAW AND INTERPRETATION
This Subscription Agreement shall be construed in accordance with and
governed by the laws of the State of Georgia, without regard to the principles
of conflict of law.
4. NOTICES
The address of record for Subscriber maintained by comstar.net for all
purposes of this Subscription Agreement and the units shall be that address set
forth beneath Subscriber's signature on this Subscription Agreement. Subscriber
may change its address of record only by notifying comstar.net in the manner
prescribed herein. Any notice under this Agreement or with respect to the units
shall be in writing and shall be deemed to have been sufficiently given or
served and effective for all purposes when presented personally or five days
after deposit with the United States Postal Service, by registered or certified
mail, postage pre-paid, addressed to comstar.net at its principal place of
business and to Subscriber at the address of record maintained by comstar.net
with respect to Subscriber.
5. COUNTERPARTS
This Subscription Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument. Facsimile transmission
of signatures shall be deemed originals.
6. MISCELLANEOUS
(A) Notwithstanding any of the representations, warranties,
acknowledgments, or agreements made herein by Subscriber, Subscriber does not
hereby or in any other manner waive any rights granted to Subscriber under
applicable federal or state securities laws.
(B) Words importing the singular number hereunder shall include the
plural number and vice versa, and any pronoun used herein shall be deemed to
cover all genders.
2
<PAGE> 3
(C) SUBSCRIBER AGREES THAT SUBSCRIBER MAY NOT CANCEL, TERMINATE, OR
REVOKE THIS SUBSCRIPTION AGREEMENT (EXCEPT AS OTHERWISE SPECIFICALLY PERMITTED
UNDER APPLICABLE SECURITIES LAWS), AND THAT THIS SUBSCRIPTION AGREEMENT SHALL
SURVIVE THE DEATH OR DISSOLUTION OF SUBSCRIBER AND SHALL BE BINDING UPON
SUBSCRIBER'S HEIRS, EXECUTORS, ADMINISTRATORS, SUCCESSORS, AND ASSIGNS.
IN WITNESS WHEREOF, the undersigned has executed this Subscription
Agreement this day of __________ , ____.
- -----------------------------------
NAME OF SUBSCRIBER
By:
Name:
-------------------------------
Title:
-------------------------------
Address of Subscriber:
------------------------------------
------------------------------------
------------------------------------
ACCEPTED AS OF:
- ----------------------, ----------:
comstar.net, inc.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
3
<PAGE> 1
EXHIBIT 21.1
Subsidiaries
Comstar Telecom & Wireless, Inc.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made part of this
Registration Statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COMSTAR.NET FOR THE YEAR ENDED DECEMBER 31,1997,
DECEMBER 31, 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1 1
<CASH> 54,676 283,621 355,689
<SECURITIES> 0 0 0
<RECEIVABLES> 93,508 259,837 465,959
<ALLOWANCES> (19,426) (25,447) (103,107)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 128,758 522,775 1,300,480
<PP&E> 384,300 849,828 1,154,606
<DEPRECIATION> (61,765) (195,199) (350,552)
<TOTAL-ASSETS> 529,519 1,649,847 2,358,037
<CURRENT-LIABILITIES> 1,011,805 (2,697,145) 3,011,889
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 364,822 2,122,744
<OTHER-SE> (825,364) (1,423,094) (6,201,832)
<TOTAL-LIABILITY-AND-EQUITY> 529,519 1,649,847 2,358,037
<SALES> 675,569 2,142,345 2,288,073
<TOTAL-REVENUES> 675,569 2,142,345 2,288,073
<CGS> 528,835 1,235,862 1,461,932
<TOTAL-COSTS> 1,163,154 2,587,483 6,850,467
<OTHER-EXPENSES> 59,659 152,592 216,344
<LOSS-PROVISION> 19,426 24,039 82,408
<INTEREST-EXPENSE> (66,201) (150,605) (146,046)
<INCOME-PRETAX> (547,244) (597,730) (4,778,738)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (547,244) (597,730) (4,778,738)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (547,244) (597,730) (4,778,738)
<EPS-BASIC> (.11) (.12) (.93)
<EPS-DILUTED> (.11) (.12) (.93)
</TABLE>
