<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999
REGISTRATION NO. 333-86877
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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>
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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. [ ]
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. [ ]
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(2) PRICE(2) REGISTRATION FEE(3)
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<S> <C> <C> <C> <C>
Common Stock, no par value........... 3,653,550(1) $14 $51,149,700 $14,220
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</TABLE>
(1) Includes 476,550 shares which the underwriters have an option to purchase
from comstar.net to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(3) Previously paid.
---------------------------
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 OCTOBER 27, 1999
(COMSTAR.NET, INC. LOGO)
3,177,000 SHARES
COMMON STOCK
comstar.net, inc. is offering 3,100,000 shares of its common stock, and the
selling shareholders are offering an additional 77,000 shares. This is our
initial public offering, and no public market currently exists for our shares.
We have received approval to list the shares on the Nasdaq National Market,
subject to completion of this offering, under the symbol "CSTX." We anticipate
that the initial public offering price will be between $12.00 and $14.00 per
share.
---------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.
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>
PER SHARE TOTAL
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<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts...................................... $ $
Proceeds to comstar.net..................................... $ $
Proceeds to the selling shareholders........................ $ $
</TABLE>
comstar.net has granted the underwriters a 30-day option to purchase up to
an additional 476,550 shares of common stock to cover any over-allotments.
The underwriters expect to deliver the shares of common stock to purchasers
on , 1999.
---------------------------
SCOTT & STRINGFELLOW, INC. SUNTRUST EQUITABLE SECURITIES
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Summary.......................... 1
Risk Factors..................... 6
Use of Proceeds.................. 26
Capitalization................... 27
Dividend Policy.................. 27
Dilution......................... 28
Selected Financial Data.......... 29
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 31
Business......................... 46
</TABLE>
<TABLE>
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PAGE
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<S> <C>
Management....................... 68
Related Party Transactions....... 75
Principal and Selling
Shareholders................... 76
Description of Capital Stock..... 78
Shares Eligible for Future
Sale........................... 82
Underwriting..................... 84
Legal Matters.................... 87
Experts.......................... 88
Where You Can Find More
Information.................... 88
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 common stock. Unless otherwise stated, all information
in this prospectus assumes that (1) the price of our common stock to the public
will be $13.00 per share, (2) the underwriters will not exercise their
over-allotment option, (3) all outstanding shares of common stock series A and
common stock series B will convert into shares of common stock immediately
before the completion of this offering, and (4) we will effect a one-for-two
reverse stock split of all our outstanding shares immediately before the
completion of this offering.
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 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.
<PAGE> 5
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,
- 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.
2
<PAGE> 6
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 and internationally,
- 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 our common
stock.
3
<PAGE> 7
THE OFFERING
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<S> <C>
Common stock offered by
comstar.net........................ 3,100,000 shares
Common stock offered by the selling
shareholders....................... 77,000 shares
Over-allotment option................ Up to an additional 476,550 shares to be issued
by comstar.net. If the over-allotment option is
exercised in full by the underwriters at a
public offering price per share of $13.00, the
total offering proceeds will be $47,496,150,
underwriting discounts will be $3,324,731 and
proceeds to comstar.net will be $44,171,419.
Common stock to be outstanding
immediately after the offering..... 8,285,893 shares
Use of proceeds...................... Repay debt; develop and deploy new data centers
and services; expand sales, marketing and
advertising efforts; and fund working capital
and general corporate purposes, including
acquisitions.
Proposed Nasdaq National Market
symbol............................. CSTX
</TABLE>
---------------------------
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.
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. 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. 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). The data "as adjusted for the offering"
reflect the sale by us of 3,100,000 shares of common stock at an assumed initial
offering price of $13.00 per share 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)
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
========== ========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------
AS ADJUSTED
FOR THE
ACTUAL OFFERING
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 355,689 $34,860,367
Working capital (deficit)................................... (1,711,409) 36,738,913
Total assets................................................ 2,358,037 36,862,715
Total debt, including current maturities.................... 2,018,555 --
Total shareholders' (deficit) equity........................ (673,693) 35,803,807
</TABLE>
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future.
5
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. Before
you invest in our common stock, 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 trading price of our common stock 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 common
stock, 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 price of our common stock.
RISKS RELATED TO COMSTAR.NET
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.
6
<PAGE> 10
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 business will suffer and the market price of our common stock could decline
substantially.
OUR OPERATING RESULTS AND LIQUIDITY ARE UNPREDICTABLE AND MAY FLUCTUATE, WHICH
MAY CAUSE OUR STOCK PRICE 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.
If our future results of operations fall below the expectations of investors or
public market analysts, the price of our common stock could fall substantially.
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,
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<PAGE> 11
- 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,
- 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 and
international 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,
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<PAGE> 12
- 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 and at various international sites 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.
WE MAY BE UNABLE TO FUND OUR PLANNED BUSINESS EXPANSION AND OTHER CAPITAL
REQUIREMENTS, WHICH MAY LIMIT OUR OPERATIONS AND GROWTH POTENTIAL.
We expect our planned business expansion to require significant cash
expenditures, including increased sales and marketing expenses and expenditures
to establish new data centers and POPs. Although we believe that the net
proceeds of this offering and our cash reserves will be adequate to fund our
operations and the development of additional data centers and POPs until the end
of the year 2000, we may need additional funds either during or after that
period. We may not be able to obtain additional financing or, if additional
financing is available, we may not be able to obtain it on terms favorable to
us. If we raise additional funds by issuing equity securities, your ownership
interest could be significantly diluted, and any additional equity securities we
issue may have rights, preferences or privileges senior to your rights. In
addition, the terms of any additional financing we obtain may significantly
limit our future financing and operating activities. If we cannot obtain
adequate funds to satisfy our capital requirements, we may be forced to limit
our operations and expansion plans significantly, sell assets, or seek to
refinance outstanding obligations. Any of these events could significantly harm
our business and financial condition and limit our growth.
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,
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- 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.
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
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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.
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.
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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 are completing the development of an important enhancement to our T1,
fractional T1, T3 and fractional T3 leased line Internet access options -- the
eCommerce Guarantee. We expect to include the eCommerce Guarantee in our
customer contracts. Under our eCommerce Guarantee, we will compensate our
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 is
our fault and the interruption causes the customer to lose profits. We are
arranging for an insurance company rated "A" by A.M. Best Company to insure our
liability for the eCommerce Guarantee, and we anticipate that 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 overall
deductible limit for any single event that causes multiple interruptions. We
anticipate that the maximum insured amount per interruption will be $500,000 for
each T3 or fractional T3 line and $25,000 for each T1 or fractional T1 line. We
expect that 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. We have not yet implemented our eCommerce
Guarantee. We cannot assure that it will be implemented at all or, if it is
implemented and included in our customer contracts, that it will be on the terms
and conditions described above. If we include the eCommerce Guarantee in our
customer contracts and incur significant free service obligations or are
required to pay significant amounts as a result of it, we will likely suffer
financial losses for the periods in which we incur the obligations and pay the
amounts.
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
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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.
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
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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. 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,
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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.
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.
In addition, the Patent and Trademark Office has not yet responded to our
application for the comstar.net 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.
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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.
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.
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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.
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
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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.
OUR PLANNED EXPANSION INTO INTERNATIONAL MARKETS MAY BE DIFFICULT, COSTLY AND
UNSUCCESSFUL.
One of our longer-term goals is to expand into international markets, and
we currently plan to open a data center in the London metropolitan area in 2001.
As we have experience operating in only a limited number of markets and no
experience operating internationally, we may not be able to adapt our services
to the needs of customers in different markets. In addition, we may not be able
to obtain the required permits and licenses to hire and train employees and to
market, sell and successfully deliver our services outside the United States. We
intend to outsource the initial operation of our London data center. As a
result, we will depend, at least initially, on others to operate and manage our
London data center. If we enter into international markets, we will face these
and other risks of international operations, any of which could materially and
adversely affect our business and financial performance.
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.
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.
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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 60.3% 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,
- 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.
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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.
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
20
<PAGE> 24
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.
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.
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<PAGE> 25
WE MAY FACE NEW AND DIFFERENT COMPETITIVE PRESSURES IF WE EXPAND TO FOREIGN
MARKETS, AND WE MAY NOT BE ABLE TO RESPOND EFFECTIVELY TO THESE PRESSURES.
If we expand our operations outside the United States, we will face new
competitors and competitive environments. In some cases, we will be forced to
compete with and buy services from government-owned or subsidized
telecommunications providers. Some of these providers may enjoy a monopoly on
telecommunications services essential to our business. We may not be able to
purchase those services at a reasonable price or at all. In addition to the
risks associated with our domestic competitors, foreign competitors may pose an
even greater risk, as they may possess a better understanding of their local
markets and better working relationships with local infrastructure providers and
others. We may not be able to obtain similar levels of local knowledge in
foreign markets, which could place us at a significant competitive disadvantage.
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
22
<PAGE> 26
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 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
THIS IS OUR INITIAL PUBLIC OFFERING, AND A LIQUID MARKET FOR OUR SHARES MAY NOT
DEVELOP.
Before this offering, you could not buy or sell our common stock publicly.
The initial public offering price for the shares will be determined by
negotiation among us, the representatives of the underwriters and the selling
shareholders based on several factors, and it may not indicate future market
prices. You may not be able to sell your stock for a price equal to or greater
than the initial offering price. As this is our initial public offering, the
number of shares available for public sale will be relatively small, and we
cannot predict how liquid the market for our shares will be. An active public
market for our common stock may not develop or be sustained after the offering.
OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES
FOR INDIVIDUAL SHAREHOLDERS.
If our revenues or results of operations fall below the expectations of
investors or public market analysts, the price of our common stock could fall
substantially. The market price of the 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,
- changes in financial estimates by securities analysts,
- the operating and stock price performance of other companies in our
industry, and
- fluctuations in stock market price and volume, which are particularly
common among securities of Internet companies.
Further, the stock markets, and in particular the Nasdaq National Market on
which we intend to list our common stock, have experienced extreme price and
volume
23
<PAGE> 27
fluctuations that have affected the market prices of equity securities of many
technology companies. These fluctuations often have been unrelated or
disproportionate to the operating performance of the companies. Because our
business is Internet-related, the price of our common stock could fluctuate
widely if the market price of equity securities of other Internet-related
companies becomes volatile. In the past, following periods of volatility in the
market price of a company's securities, securities class action litigation has
often been instituted against that company. Litigation of that nature is
expensive and could divert our management's attention and our other resources.
THE FUTURE SALE OF SHARES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.
Substantial sales of our common stock in the public market following this
offering, or the perception by the market that those sales could occur, could
lower the market price of our common stock or make it difficult for us to raise
additional funds through the sale of equity in the future. Those sales also
could make it harder for us to sell stock or equity-related securities in the
future at a time or price that we believe is fair. The shares of common stock
being sold in this offering will generally be freely tradable without
restriction. The remaining 5,108,893 shares of common stock outstanding will be
"restricted securities" as defined in Rule 144 under the Securities Act. Except
as described in the following paragraph, the holders of these securities may
sell them in the future without registration under the Securities Act, subject
to compliance with Rule 144, Rule 701 or any other applicable exemption under
the Securities Act.
We, our directors and executive officers and some of our shareholders have
agreed with the underwriters not to sell any common stock or securities
convertible into or exchangeable for common stock for 180 days after the date of
this prospectus, subject to some exceptions. When these lock-up agreements
expire, 4,992,171 shares of common stock will be eligible for resale in the
future without registration under the Securities Act, subject to compliance with
Rule 144, Rule 701 or any other applicable exemption under the Securities Act.
In addition, within approximately 90 days after the date of this prospectus, we
expect to register under the Securities Act a total of 1,450,000 shares of
common stock issuable on exercise of stock options, of which approximately
553,374 shares will then be issuable and freely tradable upon the exercise of
vested options. You should read "Shares Eligible for Future Sale" for a more
detailed description of these risks.
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 approximately
$36,477,500 million. We have allocated approximately $2.1 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.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION AND PAY A HIGHER PRICE
FOR OUR COMMON STOCK THAN EXISTING SHAREHOLDERS.
The initial public offering price will be substantially higher than the
book value per share of our outstanding common stock and the price per share
paid by existing
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<PAGE> 28
shareholders. If you buy our common stock in this offering, the shares you buy
will experience an immediate dilution in tangible book value per share. The
shares of common stock owned by our existing shareholders will receive a
material increase in the tangible book value per share. The dilution to
investors in this offering will be approximately $8.71 per share. For more
information about this dilution, see "Dilution."
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> 29
USE OF PROCEEDS
The net proceeds to us from the sale of the 3,100,000 shares of common
stock offered by us are estimated to be $36.5 million, assuming an initial
public offering price of $13.00 per share and after deducting the estimated
underwriting discounts and estimated offering expenses payable by us. We will
not receive any proceeds from the sale of shares of common stock by the selling
shareholders. For more information regarding the selling shareholders, see
"Principal and Selling Shareholders."
We intend to use the net proceeds from this offering to:
- repay outstanding debt and accrued interest of approximately $2.1 million
for the following obligations:
<TABLE>
<CAPTION>
PRINCIPAL MATURITY ANNUAL
LENDER AMOUNT DATE INTEREST RATE
- ------------------------------------------------ --------- -------- -------------
<S> <C> <C> <C>
db Telecom Technologies, Inc................ $270,188 1/1/00 10%
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........................................ 618,549 1/1/00 10%
Dr. Samuel F. Dayton and James L. Bruce,
Jr........................................ 283,985 12/27/99 8.75%
</TABLE>
- purchase or lease up to seven new data centers and eleven POPs in
targeted major metropolitan areas throughout the United States, using
approximately $33.6 million for these facilities in the aggregate, and
- expand our sales and marketing staffs and our overall marketing and
advertising efforts, using approximately $2.8 million to increase our
access to and visibility in the marketplace.
We will use any remaining net proceeds from this offering for general corporate
purposes, including research and development of new and enhanced services,
acquisitions and increased working capital requirements resulting from our
growth.
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 and to
provide working capital.
The amount of funds that we actually use for these purposes, other than
debt repayment, will depend on many factors, including revisions to our business
plan, material changes in our revenues or expenses, and other factors described
under "Risk Factors." Accordingly, our management will have significant
discretion over the use and investment of the net proceeds from the offering.
From time to time in the ordinary course of business, we evaluate the
acquisition of customer lists and related customer accounts, businesses,
products, services and technologies that may increase the size of our customer
base or complement our business. We may use a portion of the net proceeds for
any of these acquisitions. Currently, however, we do not have any
understandings, commitments or agreements with respect to any acquisitions, and
we may not be able to identify suitable acquisition candidates or complete any
acquisition.
Pending application of the net proceeds described above, we intend to
invest the net proceeds in investment-grade, interest-bearing securities.
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<PAGE> 30
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 3,100,000 shares
of common stock offered in this offering and the application of the 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
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, including current maturities......... $ 1,972,822 $ --
Obligations under capital leases, including current
portion............................................ 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); 8,285,893
shares issued and outstanding (as adjusted)... 2,122,744 38,600,244
Additional paid in capital........................... 3,522,412 3,522,412
Deferred compensation................................ (117,017) (117,017)
Accumulated deficit.................................. (6,201,832) (6,201,832)
----------- -----------
Total shareholders' (deficit) equity.......... (673,693) 35,803,807
----------- -----------
$ 1,344,862 $35,849,540
=========== ===========
</TABLE>
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business and
do not anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 31
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$(927,196) or $(0.18) per share of common stock. Pro forma net tangible book
value per share is equal to total tangible assets less total liabilities,
divided by the total pro forma number of shares of common stock outstanding,
after giving effect to the conversion of all outstanding shares of common stock
series A and common stock series B into common stock. After giving effect to our
receipt of the net proceeds of our sale of 3,100,000 shares of common stock at
an assumed initial public offering price of $13.00 per share, our adjusted pro
forma net tangible book value as of September 30, 1999 would have been
approximately $35.6 million, or $4.29 per share. This amount represents an
immediate increase in pro forma net tangible book value of $4.47 per share to
existing shareholders and an immediate dilution of $8.71 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $13.00
Pro forma net tangible book value as of September 30,
1999................................................... $(0.18)
Increase in net tangible book value attributable to new
investors.............................................. 4.47
------
Pro forma net tangible book value after the offering........ 4.29
------
Dilution to new investors................................... 8.71
======
</TABLE>
The following table summarizes, on an as adjusted pro forma basis as of
September 30, 1999, the number of shares of common stock purchased from us, the
total consideration paid and the average price per share paid by existing
shareholders and to be paid by new investors at an assumed initial public
offering price of $13.00 per share, before deducting estimated underwriting
discounts and offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 5,185,893 62.6% $ 2,122,744 5.0% $0.41
New investors................... 3,100,000 37.4 40,300,000 95.0 13.00
--------- ----- ----------- ------
Total........................... 8,285,893 100.0% $42,422,744 100.0%
========= ===== =========== ======
</TABLE>
Sales by the selling shareholders in this offering will reduce the number
of shares held by existing shareholders to 5,108,893, or 61.7% of the total
number of shares of common stock outstanding after the offering, and will
increase the number of shares held by new investors to 3,177,000, or 38.3% of
the total number of shares of common stock outstanding after the offering. For
more information regarding these sales, see "Principal and Selling
Shareholders."
The above computations exclude 868,125 shares of common stock issuable
under options outstanding as of September 30, 1999 at a weighted average
exercise price of $11.42 per share. To the extent any of these options are
exercised, new investors will incur further dilution. We have reserved an
additional 581,875 shares of common stock for issuance under our stock option
plans. For more information regarding our stock option plans, see
"Management -- Option Plans."
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<PAGE> 32
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. 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. 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). The balance sheet data
"as adjusted" as of September 30, 1999 reflect our sale of 3,100,000 shares of
common stock at an assumed initial offering price of $13.00 per share 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)
========== ========== ========== ========== ===========
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
========== ========== ========== ========== ===========
</TABLE>
29
<PAGE> 33
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1999
------------------------------------ ------------------------
1996 1997 1998 ACTUAL AS ADJUSTED
--------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..... $ 6,402 $ 54,676 $ 283,621 $ 355,689 $34,860,367
Working capital (deficit)..... (379,483) (883,047) (2,174,370) (1,711,409) 36,738,913
Total assets.................. 123,965 529,519 1,649,847 2,358,037 36,862,715
Total debt, including current
maturities.................. 328,924 1,128,845 2,214,232 2,018,555 --
Total shareholders' (deficit)
equity...................... (278,120) (825,364) (1,058,272) (673,693) 35,803,807
</TABLE>
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<PAGE> 34
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. However, we believe that the capital we receive from this
offering will provide us the means to grow our business. We expect our rate of
growth to increase, due in part to our plan to use a portion of the net proceeds
of this offering to 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> 35
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.
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<PAGE> 36
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.
An important aspect of our strategy is to significantly increase 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. As a result, we expect sales
and marketing expenses to increase substantially in future periods.
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<PAGE> 37
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
34
<PAGE> 38
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,
35
<PAGE> 39
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.
36
<PAGE> 40
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.
37
<PAGE> 41
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.
38
<PAGE> 42
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
39
<PAGE> 43
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.
40
<PAGE> 44
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>
db Telecom Technologies, Inc.............................. $270,188 1/1/00 10%
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............... 618,549 1/1/00 10%
Dr. Samuel F. Dayton and James L. Bruce, Jr............... 283,985 12/27/99 8.75%
</TABLE>
We used the proceeds of this debt for equipment purchases, the purchase of
Athens' ISP and working capital. We expect to repay all outstanding debt with
the net proceeds of this offering. 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. 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
and to provide working capital. 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 are using
the $2,122,744 proceeds of this 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, 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
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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.
During the 14 months following completion of this offering, we expect to
purchase or lease up to seven new data centers and eleven additional POPs. We
anticipate that the net proceeds of the offering will be used in part to pay for
these additional data centers and POPs.
We believe that the net proceeds of this offering, funds currently on hand
and funds to be provided by operations will be sufficient to meet our
anticipated capital expenditures and liquidity requirements through at least the
end of 2000, excluding the funding of our long term plan to become an integrated
communications provider, for which we will need to find other sources of
capital. However, 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. If we expand more
rapidly than we currently expect or if our working capital needs exceed our
current expectations, 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 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
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- 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.
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
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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 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.
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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.
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
Internet. To capture this emerging customer base, businesses needed a presence
on the Internet and applications to facilitate electronic commerce.
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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,
- 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.
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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-speed dedicated lines. Also included are
ancillary services such as single bill presentment, call forwarding, caller
identification, voicemail and similar services.
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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 customers' businesses. They demand dedicated, high
speed Internet access and knowledgeable, prompt and responsive customer support.
When marketing our services, we
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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 and Internationally. We intend to build
more data centers and POPs in the United States and pursue international
opportunities. 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, Phoenix, Miami, Dallas and San
Francisco. We intend to establish data centers in Denver and London by the end
of the first quarter of 2001. 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 and at various international sites 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
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expertise and market access, while lowering our costs of entering new markets.
These 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
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of our customers' traffic from their server to its destination and back in a
shorter period of 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
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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.
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 are completing the development of an important enhancement to our T1,
fractional T1, T3 and fractional T3 leased line Internet access options -- the
eCommerce Guarantee. We expect to include the eCommerce Guarantee in our
customer contracts. Under our eCommerce Guarantee, we will compensate our
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 is
our fault and the interruption causes the customer to lose profits. We are
arranging for an insurance company rated "A" by A.M. Best Company to insure our
liability for the eCommerce Guarantee, and we anticipate that 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 overall
deductible limit for any single event that causes multiple interruptions. We
anticipate that the maximum insured amount per interruption will be $500,000 for
each T3 or fractional T3 line and $25,000 for each T1 or fractional T1 line. We
expect that 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. We have not yet implemented our eCommerce
Guarantee. We cannot assure that it will be implemented at all or, if it is
implemented and included in our customer contracts, that it will be on the terms
and conditions set forth above.
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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,
Phoenix, Miami, Dallas and San Francisco 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, 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 offered by computer service
providers, or CSPs, is targeted to businesses with high volumes
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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 school 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.
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. 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 intend to expand our Atlanta facilities by leasing an additional
building to house a new data center and to serve as corporate headquarters. The
facility will comprise approximately 40,000 total square feet, including two
data centers of 5,200 and 6,600 square feet.
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 $13,000 in annual rent. We also house
servers in additional offices in Miami, Florida;
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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 September 30, 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 and
President
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.............. 39 -- Chief Operating Officer
Steven J. Edwards................ 49 -- 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 and President since we were incorporated in March 1996,
but he will resign from his position as President effective on the closing of
this offering. 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, the chief executive officer of Netzee, Inc.,
and a director of WebMD, 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
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.
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 the earlier of
January 1, 2000 or the closing of this offering. We intend to repay these loans
and all accrued interest with a portion of the net proceeds from this offering.
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 the
earlier of January 1, 2000 or the closing of this offering. 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. We intend to repay this loan and the
accrued interest with a portion of the net proceeds from this offering.
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 and to provide working capital. 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
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Option and Incentive Plan and are currently exercisable. In September 1999, 500
of the options were forfeited.
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.
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 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
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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.
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.
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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.
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.
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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 series A 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 AND SELLING SHAREHOLDERS
The following table provides information with respect to the beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of the common stock offered by this prospectus, 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,
- all of our directors and executive officers as a group, and
- each selling shareholder.
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 September 30, 1999 and 8,285,893 shares outstanding after this
offering, assuming no exercise of the underwriters' over-allotment option.
Shares of common stock issuable under options held by the respective person or
group which may be exercised within 60 days after September 30, 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 SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING NUMBER OF THE OFFERING
------------------- SHARES -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Samuel F. Dayton(1)........................ 1,323,129 25.2% -- 1,323,129 15.8%
J. Cary Howell............................. 1,241,245 23.2 38,500 1,202,745 14.5
Edward N. Landa(2)......................... 1,251,382 23.4 38,500 1,212,882 14.6
James L. Bruce, Jr.(3)..................... 1,318,750 25.1 -- 1,318,750 15.8
Glenn W. Sturm(4).......................... 16,667 * -- 16,667 *
Stephen R. Gross (4)....................... 16,667 * -- 16,667 *
All directors and executive officers as a
group (9 persons)(5)..................... 5,176,598 96.6% 77,000 5,099,598 60.3%
</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
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<PAGE> 80
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 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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<PAGE> 81
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. We will amend and restate our articles of incorporation and our
bylaws immediately before the completion of this offering, and effect a
one-for-two reverse stock split of all our outstanding shares. The discussion
below assumes that the amendment and restatement and the reverse stock split
have occurred.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock will consist of the following after the
amendment and restatement of the articles of incorporation:
- 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.
All shares designated as common stock series A and common stock series B
currently issued and outstanding will be converted automatically by their terms
on a one-for-one basis into shares of common stock without designation
immediately before the completion of this offering. The authorized shares of
common stock series A and common stock series B will be eliminated. Accordingly,
no further information regarding the currently outstanding shares of common
stock series A and common stock series B is given below. As of September 30,
1999, 2,685,893 shares of common stock series A, after giving effect to the
one-for-two reverse stock split, were outstanding and held of record by 44
shareholders; 2,500,000 shares of common stock series B, after giving effect to
the one-for-two reverse stock split, were outstanding and held of record by
three shareholders, and no shares of preferred stock were outstanding.
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.
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<PAGE> 82
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 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
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<PAGE> 83
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 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.
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<PAGE> 84
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is SunTrust Bank,
Atlanta.
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<PAGE> 85
SHARES ELIGIBLE FOR FUTURE SALE
When we complete this offering, we will have 8,285,893 shares of common
stock outstanding, or 8,762,443 shares if the underwriters exercise their
over-allotment option, assuming no exercise of options after September 30, 1999.
Of this amount, the 3,177,000 shares sold in the offering will be freely
tradeable by persons other than our "affiliates," as that term is defined by the
SEC.
We sold the remaining 5,108,893 shares in private transactions. Unless
registered under the Securities Act, these shares, which we refer to as
"restricted shares," as well as shares held by our affiliates must be sold in
accordance with the holding period requirements, volume limits and other
conditions of an applicable exemption from registration, such as Rule 144 or
Rule 701 of the SEC discussed below. Additionally, we and our directors,
executive officers and some other shareholders have agreed not to sell any
common stock or securities convertible into or exchangeable for common stock for
180 days after the date of this prospectus without the prior approval of Scott &
Stringfellow, Inc., subject to some exceptions.
Based on the above, the following table indicates when the shares that will
be outstanding upon completion of this offering will be eligible for sale in the
public market (assuming the underwriters do not exercise their over-allotment
option):
<TABLE>
<CAPTION>
APPROXIMATE
SHARES ELIGIBLE
DAYS AFTER THE DATE OF THIS PROSPECTUS FOR FUTURE SALE COMMENT
- -------------------------------------- --------------- -------
<S> <C> <C>
Upon effectiveness................. 3,177,000 Freely tradeable shares sold in
offering and shares salable
under Rule 144(k) that are not
subject to 180-day lockup.
90 days............................ 47,272 Shares salable under Rule 144,
144(k) or 701 that are not
subject to 180-day lockup.
180 days........................... 5,030,056 Lockup released; shares salable
under Rule 144, 144(k) or 701.
Over 180 days...................... 31,565 Restricted shares held for one
year or less.
</TABLE>
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned shares for at least one
year is entitled to sell within any three-month period commencing 90 days after
the date of this prospectus a number of shares that does not exceed the greater
of:
- 1% of the then outstanding shares of common stock (approximately
shares immediately after the offering), or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale, subject to the filing of a Form 144
with respect to the sale.
Persons selling under Rule 144 must also comply with the rule's requirements
concerning the availability of public information about us, the manner of sale
and filing of notice of sale. However, a person, or persons whose shares are
aggregated, who is not deemed to
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<PAGE> 86
have been an affiliate of comstar.net at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
two years is entitled to sell such shares under Rule 144(k) without regard to
the limitations described above. Persons deemed to be affiliates must always
sell under Rule 144 even after the one year holding period has been satisfied.
Any of our employees or consultants who purchased his or her shares under a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701, which permits nonaffiliates to sell their Rule 701
shares without having to comply with the public information, holding period,
volume limitation or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. As of September 30, 1999, the holders of options to purchase
approximately 575,874 shares of common stock will be eligible to sell their
shares under Rule 701 upon the expiration of the 180-day lockup period, subject
in some cases to vesting of such options.
We intend to file a registration statement on Form S-8 under the Securities
Act within 90 days after the date of this prospectus to register shares of
common stock under outstanding stock options or reserved for issuance under our
1999 Option Plan and our Director Stock Option Plan. This will permit
nonaffiliates to immediately sell those shares in the public market without
limitation and will permit affiliates to immediately sell without compliance
with any holding period requirement but subject to the other conditions of Rule
144.
We cannot estimate the number of shares that will be sold under Rule 144,
Rule 701 or our Form S-8 registration statement, because this will depend on the
market price of our common stock, the personal circumstances of the sellers and
other factors. Before the offering, no public market for our common stock has
existed, and a significant public market for the common stock may not develop or
be sustained after the offering. Any future sale of substantial amounts of the
common stock in the open market may adversely affect the market price of the
common stock offered by this prospectus.
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<PAGE> 87
UNDERWRITING
Scott & Stringfellow, Inc. and SunTrust Equitable Securities Corporation
are acting as representatives of the underwriters named below. Subject to the
terms and conditions in the underwriting agreement among the representatives of
the underwriters, the selling shareholders and us, the underwriters have
severally agreed to purchase from comstar.net and the selling shareholders the
number of shares of common stock indicated opposite their respective names
below, at the public offering price less the underwriting discount shown on the
cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Scott & Stringfellow, Inc...................................
SunTrust Equitable Securities Corporation...................
Total..................................................... 3,177,000
========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are committed to
purchase and accept delivery of all the shares of common stock offered by this
prospectus, other than the shares covered by the over-allotment option described
below, if they purchase any. If an underwriter fails to keep its purchase
commitment, the underwriting agreement provides that, in some circumstances, the
purchase commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated. The underwriters reserve the right to
withdraw, cancel or modify this offering and to reject orders in whole or in
part.
The underwriters propose initially to offer the common stock to the public
at the public offering price shown on the cover page of this prospectus, and to
specified dealers at that price less a concession of not more than
$ per share. The underwriters may allow, and the dealers may reallow, a
discount of not more than $ per share to other specified dealers. After
the initial public offering, the representatives may change the public offering
price and the other selling terms at any time without notice.
We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus, to purchase up to a maximum of
476,550 additional shares of common stock to cover over-allotments, if any, at
the same per share price as the initial shares to be purchased by the
underwriters. To the extent the underwriters exercise that option, each
underwriter will be committed, subject to certain conditions, to purchase
additional shares in approximately the same proportion as the number of shares
to be purchased initially by that underwriter bears to the total number of
shares to be purchased initially by all the underwriters.
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<PAGE> 88
The following table shows the underwriting fees that we and the selling
shareholders will pay to the underwriters in connection with the offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' over-allotment option to purchase additional shares of our common
stock.
<TABLE>
<CAPTION>
TO BE PAID BY
TO BE PAID BY COMSTAR.NET SELLING SHAREHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share........................ $ $ $ $
Total............................
</TABLE>
We estimate our expenses of this offering, exclusive of the underwriting
discount, will be $1,001,500. We and the selling shareholders have agreed to
indemnify the underwriters against certain liabilities, including civil
liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of these liabilities.
Upon purchase by the underwriters of the shares of common stock being
offered by this prospectus, we will issue to Scott & Stringfellow, Inc. warrants
to purchase up to 232,500 shares of our common stock at an exercise price equal
to 110% of the initial public offering price. The warrant exercise price has
been determined by negotiation between us and Scott & Stringfellow, Inc. These
warrants may not be exercised until after the first anniversary of the date of
issuance and expire, if not exercised sooner, on the fifth anniversary of the
date of issuance. If these warrants are issued, Scott & Stringfellow, Inc. will
have, at nominal cost, the opportunity to profit from an increase in the market
price of the common stock. To the extent these warrants are exercised, the value
of the common stock may be diluted.
We, our directors and executive officers and some of our shareholders, who
upon the completion of this offering will beneficially own 4,931,763 shares of
our common stock, or approximately 59.5% of our issued and outstanding common
stock, have agreed during the 180-day period following the date of this
prospectus not to, without the prior written consent of Scott & Stringfellow,
Inc.:
- directly or indirectly make, agree to or cause any offer, sale (including
short sale), loan, pledge or other disposition of, or grant any options,
rights or warrants to purchase with respect to, or otherwise transfer or
reduce any risk of ownership of, directly or indirectly, any shares of
our common stock or any securities convertible into or exchangeable or
exercisable for our common stock,
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of the common
stock, or
- in the case of our directors, executive officers and shareholders, make
any demand for or exercise any right with respect to the registration of
shares of our common stock or any securities convertible into or
exchangeable or exercisable for our common stock.
This restriction is subject to some exceptions. In addition, during the 180-day
period, we have also agreed not to file any registration statement with respect
to the registration of any shares of our common stock or any securities
convertible into or exercisable for our common stock, except that we intend to
file a registration statement on Form S-8 under the Securities Act within 90
days after the completion of the offering to register
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<PAGE> 89
shares of common stock issuable under outstanding stock options or reserved for
issuance under our 1999 Stock Option Plan and our Director Option Plan. This
will permit the holders of those shares to sell them in the public market
without compliance with any holding period requirement.
The representatives have informed us that the underwriters do not expect to
make sales of common stock offered by this prospectus to accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
common stock offered by this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to 5.0% of the shares of common stock offered by us for our employees,
directors and other persons we have designated, who have expressed an interest
in purchasing shares of our common stock. The number of shares available for
sale to the general public in this offering will be reduced to the extent those
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered to the general public on the same basis as other shares offered by
this prospectus.
Before this offering, no public trading market for the common stock has
existed. Consequently, the initial public offering price of the common stock has
been determined by negotiations among comstar.net, the representatives of the
selling shareholders and the representatives of the underwriters. The factors
considered in determining the initial public offering price included the
following:
- the history and future prospects of comstar.net and our industry,
- the present state of our development,
- an assessment of our management,
- the general condition of the economy and the securities markets at the
time of this offering, and
- the market prices of and demand for publicly traded common stock of
comparable companies at the time of the offering.
We have received approval to have the common stock listed for quotation on
the Nasdaq National Market, subject to completion of this offering, under the
symbol "CSTX."
Until the distribution of the common stock is completed, rules of the SEC
may limit the ability of the underwriters and specified selling group members to
bid for and purchase the common stock. As an exception to these rules, the
representatives of the underwriters are permitted to engage in specified
transactions that stabilize the price of the common stock. These transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock. If the underwriters create a short position in
the common stock in connection with this offering (that is, if they sell more
shares of common stock than are set forth on the cover page of this prospectus),
the representatives may reduce that short position by purchasing common stock in
the open market. The representatives of the underwriters may also elect to
reduce any short position by exercising all or part of the over-allotment option
described above. The representatives of the underwriters may also impose a
penalty bid on underwriters and selling group members in some cases. This means
that if the representatives purchase shares of common stock in the open market
to reduce the underwriters' short position or to stabilize the price of the
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<PAGE> 90
common stock, they may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of this
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of those purchases. The imposition of a penalty bid
might also have an effect on the price of a security if it discourages resales
of the security. None of comstar.net, the selling shareholders or any of the
underwriters make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the common stock. In addition, the underwriters are not required to
engage in these activities and may end any of these activities at any time. Some
of the underwriters intend to make a market in the common stock upon the
completion of the offering.
There are restrictions on the offer and sale of the common stock in the
United Kingdom. All applicable provisions of the Financial Services Act 1986 and
the Public Offers of Securities Regulations 1995 with respect to anything done
by any person in relation to the common stock in, from or otherwise involving
the United Kingdom must be complied with.
Each underwriter has also agreed that it has:
- not offered or sold and, prior to the date six months after the date of
issue of the shares of common stock, will not offer or sell any shares of
common stock to persons in the United Kingdom except to persons whose
ordinary activities involve them in acquiring, holding, managing or
disposing of investments, as principal or agent, for the purpose of their
businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the
meaning of the Public Offers of Securities Regulations 1995,
- complied, and will comply with, all applicable provisions of the
Financial Services Act 1986 of Great Britain with respect to anything
done by it in relation to the shares of common stock in, from or
otherwise involving the United Kingdom, and
- only issued or passed on, and will only issue or pass on, in the United
Kingdom any document received by it in connection with the issuance of
the shares of common stock to a person who is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 (as amended) of Great Britain or
is a person to whom the document may otherwise lawfully be issued or
passed on.
LEGAL MATTERS
The validity of the 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 underwriters by Alston
& Bird LLP, Atlanta, Georgia.
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<PAGE> 91
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 SEC, 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.
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. In addition, after the completion of this offering, we intend to
furnish our shareholders with annual reports containing audited financial
statements and with quarterly reports containing unaudited summary financial
information for each of the first three quarters of each fiscal year.
88
<PAGE> 92
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-23
Balance Sheets as of December 31, 1996 and 1997............. F-24
Statements of Operations and Accumulated Deficit for the
Years Ended December 31, 1996 and 1997.................... F-25
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997............................................. F-26
Notes to Financial Statements............................... F-27
</TABLE>
F-1
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the one-for-two reverse stock split of the outstanding shares of
common stock and the recapitalization of the Company's equity discussed in Note
10 to comstar.net inc.'s financial statements is effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 30, 1999
(except with respect to Note 10,
as to which the date is
September 1, 1999)
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.
F-2
<PAGE> 94
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> 95
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> 96
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> 97
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> 98
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> 99
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> 100
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> 101
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> 102
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> 103
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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%.
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. 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.
F-21
<PAGE> 113
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
PROPOSED INITIAL PUBLIC OFFERING OF COMMON STOCK
The Company is in the process of registering with the Securities and
Exchange Commission shares of its common stock. There can be no assurance that
this offering will be completed.
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> 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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<PAGE> 123
3,177,000 SHARES
(COMSTAR.NET, INC. LOGO)
COMMON STOCK
---------------------
PROSPECTUS
---------------------
SCOTT & STRINGFELLOW, INC.
SUNTRUST EQUITABLE SECURITIES
---------------------
, 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 (25 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........................................ $ 15,150
NASD fees................................................... 5,948
Nasdaq fees................................................. 72,875
Blue Sky fees and expenses.................................. 5,000
Printing and engraving...................................... 200,000
Legal fees and expenses..................................... 450,000
Accounting fees and expenses................................ 250,000
Transfer agent fees......................................... 875
Miscellaneous expenses...................................... 1,652
----------
Total..................................................... $1,001,500
==========
</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
II-1
<PAGE> 125
rise to the liabilities or losses and agrees to repay to us any advances made
under the 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 underwriting agreement, which is filed as Exhibit 1.1 hereto, also
contains the underwriters' 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 $2,122,754 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 underwriters 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 Underwriting Agreement.
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 20, 1998 and Articles of Amendment to the Amended
and Restated Articles of Incorporation dated July 29, 1999.
3.2** -- Form of Amended and Restated Articles of Incorporation to be
filed upon the completion of this offering.
3.3** -- Bylaws.
3.4** -- Form of Amended and Restated Bylaws to be effective upon the
completion of this offering.
4.1 -- See Exhibits 3.1 through 3.4 for provisions defining the
rights of comstar.net shareholders.
4.2 -- Specimen common stock certificate.
4.3** -- 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.
</TABLE>
II-3
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
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 -- Form of Warrant.
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.
** Previously filed.
+ 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 to provide to the underwriters, at the closing
specified in the underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter 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
II-4
<PAGE> 128
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 amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Atlanta,
State of Georgia, on this 26th day of October, 1999.
comstar.net, inc.
By: /s/ SAMUEL F. DAYTON
-----------------------------------
Samuel F. Dayton
President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ J. CARY HOWELL Chief Executive Officer and October 26, 1999
- --------------------------------------------- Director (Principal
J. Cary Howell Executive Officer)
/s/ CHRISTOPHER K. MARTIN Chief Financial Officer and October 26, 1999
- --------------------------------------------- Treasurer (Principal
Christopher K. Martin Financial and Accounting
Officer)
/s/ SAMUEL F. DAYTON Chairman of the Board and October 26, 1999
- --------------------------------------------- President
Samuel F. Dayton
* Chief Technology Officer, October 26, 1999
- --------------------------------------------- Secretary and Director
Edward N. Landa
* Director October 26, 1999
- ---------------------------------------------
James L. Bruce, Jr.
* Director October 26, 1999
- ---------------------------------------------
Glenn W. Sturm
* Director October 26, 1999
- ---------------------------------------------
Stephen R. Gross
*By: /s/ CHRISTOPHER K. MARTIN
----------------------------------------
Christopher K. Martin
Attorney-in-fact
</TABLE>
II-6
<PAGE> 130
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
After the one-for-two reverse stock split of the outstanding shares of
common stock and the recapitalization of the Company's equity discussed in Note
10 to comstar.net inc.'s financial statements are effected, we expect to be in a
position to render the following audit report.
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 30, 1999 (except with respect to Note 10,
as to which the date is September 1, 1999)
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 September 1,
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-1
<PAGE> 131
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> 132
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
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 20, 1998 and Articles of Amendment to the Amended
and Restated Articles of Incorporation dated July 29, 1999.
3.2** -- Form of Amended and Restated Articles of Incorporation to be
filed upon the completion of this offering.
3.3** -- Bylaws.
3.4** -- Form of Amended and Restated Bylaws to be effective upon the
completion of this offering.
4.1 -- See Exhibits 3.1 through 3.4 for provisions defining the
rights of comstar.net shareholders.
4.2 -- Specimen common stock certificate.
4.3** -- 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 -- Form of Warrant.
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> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
27.1** -- Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ 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 1.1
__________ SHARES
COMSTAR.NET, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
___________, 1999
SCOTT & STRINGFELLOW, INC.
SUNTRUST EQUITABLE SECURITIES CORPORATION
As representatives of the several
Underwriters named in Schedule I hereto
c/o Scott & Stringfellow, Inc.
909 East Main Street
Richmond, Virginia 23219
Dear Sirs:
comstar.net, inc., a Georgia corporation (the "Company"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), and certain shareholders of the Company named in Schedule II
hereto (the "Selling Shareholders" and, together with the Company, the
"Sellers") severally propose to sell to the several Underwriters, an aggregate
of __________ shares of the Company's Common Stock, no par value per share (the
"Firm Securities"), of which ___________ shares are to be issued and sold by the
Company and ___________ shares are to be sold by the Selling Shareholders, each
Selling Shareholder selling the number of Firm Securities set forth opposite
such Selling Shareholder's name in Schedule II hereto. The Company also proposes
to issue and sell to the several Underwriters not more than an additional
_________ shares of the Company's Common Stock, no par value per share (the
"Optional Securities"), if requested by the Underwriters as provided in Section
3. The Firm Securities and the Optional Securities are collectively referred to
herein as the "Securities." The Company's Common Stock, no par value per share,
is referred to herein as "Common Stock."
Additionally, on the First Delivery Date (as defined in Section 5), the
Company will sell to Scott & Stringfellow, Inc. ("S&S") for $__________ a
warrant to purchase an aggregate of __________ shares
<PAGE> 2
of Common Stock (equal to 7.5% of the Firm Securities to be issued and sold by
the Company) in substantially the form of Annex I hereto (the "Warrant").
In connection with the transactions contemplated by this Underwriting
Agreement (this "Agreement"), the Company has prepared and filed with the
Securities and Exchange Commission (the "Commission"), in accordance with the
provisions of the Securities Act of 1933, as amended, and the rules and
regulations of the Commission thereunder (collectively, the "Act"), a
registration statement on Form S-1 (File No. 333-86877), including a prospectus,
relating to the Securities. Any preliminary prospectus included in such
registration statement, as amended, or filed by the Company with the Commission
pursuant to Rule 424(a) under the Act in connection with the offering of the
Securities is referred to herein as a "Preliminary Prospectus." The registration
statement, as amended at the time it became effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Act, is referred to herein as the
"Registration Statement"; and the prospectus in the form first used to confirm
sales of Securities is referred to herein as the "Prospectus." If the Company
has filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to and agrees with each Underwriter
that:
(a) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement) has been declared effective by the Commission, and any Rule
462(b) Registration Statement filed after the effectiveness of this Agreement
will become effective no later than 10:00 p.m., Richmond, Virginia time, on the
date of this Agreement; and the Company has not received and has no knowledge
that any stop order suspending the effectiveness of the Registration Statement
has been issued or that any proceeding for that purpose has been instituted or
threatened by the Commission.
(b) The Company has not received and has no knowledge that any
order preventing or suspending the use of any Preliminary Prospectus has been
issued by the Commission. Each Preliminary Prospectus, at the time of filing
thereof, complied in all material respects with the applicable requirements of
the Act, and did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representation and warranty set forth in
this Section 1(b) does not apply to statements or omissions in any such
Preliminary Prospectus made in reliance upon and in conformity with information
relating to any Underwriter furnished in writing to the Company by such
Underwriter through you expressly for use therein.
(c) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is
-2-
<PAGE> 3
required to file a Rule 462(b) Registration Statement after the effectiveness of
this Agreement, such Rule 462(b) Registration Statement and any amendments
thereto, when they become effective (A) will not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading and (B) will comply
in all material respects with the Act and (iv) the Prospectus does not contain
and, as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this Section 1(c) do not apply to statements or omissions in the Registration
Statement or the Prospectus made in reliance upon and conformity with
information relating to any Underwriter furnished in writing to the Company by
such Underwriter through you expressly for use therein. The statistical and
market-related data included in the Prospectus are based on or derived from
independent sources which the Company believes to be reliable and accurate in
all material respects or represent the Company's good faith estimates that are
made on the basis of data derived from such sources.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as set forth therein, (i)
there has not been any change in the capital stock or long term debt of the
Company or Comstar Telecom & Wireless, Inc., a Georgia corporation (the
"Subsidiary"), or any issuance of options, warrants or rights to purchase
capital stock of the Company or the Subsidiary (except options to purchase up to
[___________] shares of Common Stock granted to new employees of the Company
under the Company's Amended and Restated 1999 Stock Option and Incentive Plan),
(ii) there has not been any material adverse change or any development involving
a prospective material adverse change in or affecting the business, general
affairs, condition (financial or otherwise) or results of operations of the
Company and the Subsidiary, taken as a whole, and (iii) neither the Company nor
the Subsidiary has entered into any material transaction or incurred any
material liability or obligation, direct or contingent.
(e) Each of the Company and the Subsidiary has been duly organized
and is validly existing as a corporation in good standing under the laws of the
State of Georgia, with the requisite corporate power and authority to conduct
its business as described in the Registration Statement and the Prospectus and
to own, lease and operate its properties; each of the Company and the Subsidiary
is duly qualified as a foreign corporation for the transaction of business and
is in good standing under the laws of each other jurisdiction in which it is
required to be qualified, except where the failure to be so qualified would not,
singly or in the aggregate, have a material adverse effect on the prospects,
business, general affairs, condition (financial or otherwise) or results of
operations of the Company and the Subsidiary, taken as a whole (a "Material
Adverse Effect"); and each of the Company and the Subsidiary holds all licenses,
certificates, authorizations, consents, exemptions, qualifications, franchises,
permits and other approvals (each, an "Authorization") necessary for the conduct
of its business as described in the Registration Statement and the Prospectus.
(f) The Company has no subsidiaries and owns no equity interests
in any other person, except that the Company owns (i) one hundred percent (100%)
of the issued and outstanding shares of capital stock of the Subsidiary and (ii)
twenty-five percent (25%) of the issued and outstanding shares of capital stock
of nschool Communication Systems, Inc., a Georgia corporation ("nschool"). All
of the issued and outstanding shares of capital stock of nschool that are owned
by the Company and all of the issued and outstanding shares of capital stock of
the Subsidiary are duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company free and clear of all security
interests, claims, liens, defects, adverse interests and other encumbrances
(collectively, "Liens"). The Company has no significant subsidiaries (as defined
in Rule 1-02 of the Commission's Regulation S-X).
-3-
<PAGE> 4
(g) The authorized capital stock of the Company conforms to the
description thereof contained in the Registration Statement and the Prospectus;
all of the issued and outstanding shares of capital stock of the Company
(including, without limitation, the Securities to be sold by the Selling
Shareholders) have been duly authorized and validly issued, are fully paid and
nonassessable, and conform to the description of the capital stock of the
Company contained in the Registration Statement and the Prospectus; none of the
issued and outstanding shares of the Company's capital stock were issued in
violation of any preemptive rights of any shareholder of the Company or similar
rights; there are no preemptive rights of any shareholder of the Company or
similar rights to subscribe for or to purchase any securities of the Company;
and except as disclosed in the Registration Statement and the Prospectus, no
options or warrants or other rights to purchase or otherwise acquire from the
Company or the Subsidiary, no agreements or other obligations to issue and no
other rights to convert any security or obligation into shares of capital stock
or other ownership interests in the Company or the Subsidiary are outstanding.
(h) The Company has duly authorized the execution, delivery and
performance of this Agreement and has duly executed and delivered this
Agreement. The Company has duly authorized the execution, delivery and
performance of the Warrant and, when the Warrant is duly executed and delivered
by the Company, the Warrant will be enforceable against the Company, except to
the extent that (a) enforceability may be limited by applicable bankruptcy,
insolvency, liquidation, reorganization, moratorium and other laws relating to
or affecting the rights and remedies of creditors generally and (b) the remedy
of specific performance and other forms of equitable relief may be subject to
certain defenses and to the discretion of the court before which a proceeding
may be brought.
(i) The Securities to be issued and sold by the Company and the
shares of Common Stock to be issued pursuant to the Warrant (the "Warrant
Shares") have been duly authorized for issuance and sale pursuant to this
Agreement and the Warrant, respectively, and, when issued and delivered by the
Company against payment therefor as provided herein or in the Warrant,
respectively, will be validly issued, fully paid and nonassessable and will
conform to the description of the Securities contained in the Prospectus, and
the issuance thereof will not be subject to any preemptive rights of any
shareholder of the Company or similar rights. The Company has reserved for
issuance out of its authorized but unissued Common Stock, solely for issuance
and delivery upon exercise of the Warrant, the full number of shares of Common
Stock issuable upon exercise of the Warrant.
(j) The execution, delivery and performance of this Agreement by
or on behalf of the Sellers, the compliance by the Sellers with all of the
provisions hereof, the execution, delivery and performance of the Warrant by the
Company, the compliance by the Company with all of the provisions thereof
(including, without limitation, the issuance and delivery by the Company of the
Warrant Shares), the execution, delivery and performance by each Selling
Shareholder of such Selling Shareholder's Custody Agreement (as defined in
Section 2(b)), the compliance by such Selling Shareholder with all of the
provisions thereof and the consummation of the other transactions contemplated
hereby and thereby (including, without limitation, the Company's one-for-two
reverse stock split and the amendment and restatement of the Company's Articles
of Incorporation and Bylaws, each as described in the Registration Statement and
the Prospectus) (collectively, the "Transactions") will not (with or without the
giving of notice or the passage of time or both) (i) result in any violation of
the Articles of Incorporation or Bylaws of the Company or the Subsidiary, (ii)
result in any breach of or default under, or the creation or imposition of any
Lien (other than any Lien created pursuant to this Agreement) on or against the
Company, the Subsidiary or any of their respective properties or assets pursuant
to, any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company or the Subsidiary is a party or by
which the Company, the Subsidiary or any of their respective properties or
-4-
<PAGE> 5
assets is bound, (iii) violate any constitution, statute, regulation, rule,
order or law or any judicial or administrative decree, writ, judgment or order
to which the Company, the Subsidiary or any of their respective properties or
assets is subject or (iv) result in the suspension, termination or revocation of
any Authorization of the Company or the Subsidiary or any other impairment of
the rights of the Company or the Subsidiary with respect thereto; except, in the
case of clauses (ii), (iii) and (iv), for any default which would not, singly or
in the aggregate, have a Material Adverse Effect.
(k) No Authorization or other action by, or notice to or filing
with, any court, governmental authority or regulatory body is required for the
consummation of any of the Transactions, except (i) such as have been obtained
and (ii) such as may be required under state securities or Blue Sky laws in
connection with the offer, sale and distribution of the Securities by the
Underwriters.
(l) Neither the Company nor the Subsidiary is (i) in violation of
its Articles of Incorporation or Bylaws or (ii) in default in the performance of
any obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or instrument
to which the Company or the Subsidiary is a party or by which the Company, the
Subsidiary or their respective properties or assets is bound, except, in the
case of clause (ii), for any default which would not, singly or in the
aggregate, have a Material Adverse Effect.
(m) Each of the Company and the Subsidiary has good and marketable
title to all real and personal property reflected as owned by it in the
financial statements referred to in Section 1(s) below or which is otherwise
material to its business, in each case free and clear of all Liens, except as
disclosed in the Registration Statement and the Prospectus or such as do not
materially affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or the Subsidiary;
and any real property and buildings held under lease by the Company or the
Subsidiary are held by it under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the use made or
proposed to be made of such property and buildings by the Company or the
Subsidiary, except as disclosed in the Registration Statement and the
Prospectus.
(n) There are no (i) legal or governmental proceedings pending or,
to the knowledge of the Company or the Subsidiary, threatened to which the
Company or the Subsidiary is or, in the case of threatened proceedings, could be
a party or of which any of the properties or assets of the Company or the
Subsidiary is or, in the case of threatened proceedings, could be subject
(including, without limitation, any action, proceeding or investigation pending
or threatened by the Federal Communications Commission (the "FCC") or any state
or local public utility commission (each, a "PUC")) that are required to be
described in the Registration Statement or the Prospectus and are not so
described as required, (ii) constitutions, statutes, regulations, rules, orders,
laws, decrees, writs or judgments (including, without limitation, any
regulation, rule, order, law, decree, writ or judgment issued by the FCC or any
state or local PUC) that are required to be described in the Registration
Statement or the Prospectus and are not so described as required or (iii)
contracts, instruments or other documents or agreements which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement and are not so described or filed as
required. Without limiting the generality of the foregoing sentence, the Company
has no reason to believe that any legal or governmental proceedings will be
instituted against it or the Subsidiary and, to the best knowledge of the
Company, there exists no basis for any legal or governmental proceedings to be
instituted against it or the Subsidiary.
(o) Neither the Company nor the Subsidiary has violated any
federal, state, local or foreign constitution, statute, regulation, rule, order,
law, decree, writ or judgment (including, without limitation, any constitution,
statute, regulation, rule, order, law, decree, writ or judgment relating to the
protection of
-5-
<PAGE> 6
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("Environmental Laws"), the Employee
Retirement Income Security Act of 1974, as amended, and the rules and
regulations thereunder ("ERISA"), or the Foreign Corrupt Practices Act and the
rules and regulations thereunder), except for such violations which would not,
singly or in the aggregate, have a Material Adverse Effect. Neither the Company
nor the Subsidiary has any material liability (contingent or otherwise) in
connection with any Environmental Law or the release into the environment of any
substance regulated by any Environmental Law.
(p) Each of the Company and the Subsidiary has such Authorizations
of, and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other tribunals
as are necessary to own, lease, license and operate its assets and properties
and to conduct its business (including, without limitation, (i) all
Authorizations under any applicable Environmental Law, (ii) all Authorizations
of, filings with and notices to, the FCC and all applicable state and local
PUCs, and (iii) all other Authorizations under the Telecommunications Act of
1996 (the "1996 Act"), the Communications Act of 1934, as amended (the
"Communications Act"), the rules and regulations thereunder and similar
applicable law), except where the failure to have any such Authorization or make
any such filing or notice would not, singly or in the aggregate, have a Material
Adverse Effect. Each such Authorization is valid and in full force and effect
and the Company and the Subsidiary are in compliance, in all material respects,
with all the terms and conditions thereof and with the applicable rules and
regulations of the authorities and governing bodies having jurisdiction with
respect thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which (with or
without the giving of notice or the passage of time or both) allows revocation,
suspension or termination of any such Authorization or results in any other
impairment of the rights under any such Authorization; and no such Authorization
contains any restriction that is materially burdensome to the Company or the
Subsidiary.
(q) Arthur Andersen LLP, who have certified certain financial
statements of the Company and Athens' ISP, Inc., are independent public
accountants as required by the Act.
(r) The Company has previously disclosed and delivered or made
available to the Underwriters or their representatives copies of all pension,
retirement, profit-sharing, deferred compensation, stock option, employee stock
ownership, severance pay, vacation, bonus or other incentive plans, all other
written employee programs, arrangements or agreements, all medical, vision,
dental or other health plans, all life insurance plans and all other employee
benefit plans or fringe benefit plans, including, without limitation, "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, adopted,
maintained, sponsored in whole or in part, or contributed to by the Company, its
predecessors or any subsidiary of the Company or its predecessors for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors or other beneficiaries
are eligible to participate (collectively, the "Company Benefit Plans").
The Company and each predecessor of the Company or a subsidiary of the
Company that adopted or contributed to a Company Benefit Plan have maintained
all Company Benefit Plans (including, without limitation, filing all reports and
returns required to be filed with respect thereto) in accordance with their
terms and in compliance with the applicable terms of ERISA and the Internal
Revenue Code of 1986, as amended, and the rules and regulations thereunder (the
"Code"), except where the failure to do so would not, singly or in the
aggregate, have a Material Adverse Effect. Each Company Benefit Plan which is
intended to be qualified under Section 401(a) of the Code has either received a
favorable determination letter from the Internal Revenue Service or timely
requested such a letter and has at all times been
-6-
<PAGE> 7
maintained in accordance with Section 401 of the Code, except where any failure
to receive or seek such a favorable determination letter or so maintain such
Company Benefit Plan would not, singly or in the aggregate, have a Material
Adverse Effect. Neither the Company nor the Subsidiary has engaged in any
transaction with respect to any Company Benefit Plan that would subject the
Company or the Subsidiary to a tax or penalty imposed by either Section 4975 of
the Code or Section 502(i) of ERISA, except for any such transaction, tax or
penalty which would not, singly or in the aggregate, have a Material Adverse
Effect.
Neither the Company nor the Subsidiary is obligated to provide
post-retirement medical benefits or any other unfunded post-retirement welfare
benefits, except for the provisions of any such benefits which would not, singly
or in the aggregate, have a Material Adverse Effect. None of the Company, the
Subsidiary or any member of a group of trades or businesses under common control
(as defined in ERISA Sections 4001(a)(14) and 4001(b)(1)) with the Company or
the Subsidiary has at any time within the last six years sponsored, contributed
to or been obligated under Title I or IV of ERISA to contribute to a "defined
benefit plan" (as defined in ERISA Section 3(35)). Within the last six years,
none of the Company, the Subsidiary or any member of a group of trades or
businesses under common control (as defined in ERISA Sections 4001(a)(14) and
4001(b)(1)) with the Company or the Subsidiary has had an "obligation to
contribute" (as defined in ERISA Section 4212) to a "multiemployer plan" (as
defined in ERISA Sections 4001(a)(3) and 3(37)(A)).
(s) The financial statements of the Company and Athens' ISP, Inc.,
together with related notes and schedules, as set forth in the Registration
Statement and Prospectus (and any amendment or supplement thereto), present
fairly the financial position, results of operations and changes in financial
position of the Company and Athens' ISP, Inc., respectively, on the bases stated
therein and at the indicated dates and for the indicated periods, all in
accordance with generally accepted accounting principles consistently applied
throughout the periods presented, except as noted therein; all adjustments
necessary for a fair presentation of results for such periods have been made;
the selected financial information included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) present fairly the
information shown therein and have been compiled on a basis consistent with the
financial statements presented therein; the supporting schedules, if any,
included in the Registration Statement present fairly in accordance with
generally accepted accounting principles the information required to be stated
therein; and the other financial and statistical information and data respecting
the Company and Athens' ISP, Inc. set forth in the Registration Statement and
the Prospectus (and any amendment or supplement thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and Athens' ISP,
Inc. No other financial statements, supporting schedules or other financial
information (whether pro forma financial statements or otherwise) are required
to be included in the Registration Statement or the Prospectus. As of the date
of the Prospectus, the Company is not engaged in substantive discussions with
any third party with respect to, or obligated to complete, any acquisitions for
which disclosure of pro forma financial information in the Prospectus is
required by the Act.
(t) The Company and the Subsidiary have (i) filed all federal,
state, local and foreign income, franchise tax and other tax returns which have
been required to be filed, other than those filings being contested in good
faith, and (ii) paid all taxes (including, without limitation, withholding
taxes), assessments, fees and other charges (including, without limitation, all
penalties and interest) due pursuant to such returns or pursuant to any other
assessment received by the Company or the Subsidiary, other than those being
contested in good faith and for which adequate reserves have been established.
All material consequences, if any, resulting from the Company's conversion from
a Subchapter S corporation
-7-
<PAGE> 8
to a Subchapter C corporation under the Code are described in the Registration
Statement and the Prospectus.
(u) The Company and the Subsidiary are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged. Neither the Company nor the Subsidiary has received notice from any
insurer or agent of such insurer that substantial capital improvements or other
material expenditures will have to be made in order to continue such insurance.
Neither the Company nor the Subsidiary has any reason to believe that it will be
unable to (i) renew its existing insurance coverage as and when such coverage
expires or (ii) obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost which is not materially different
from its current cost.
(v) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company or
the Subsidiary before the National Labor Relations Board or any state or local
labor relations board, (ii) strike, labor dispute, slowdown or stoppage pending
or threatened against the Company or the Subsidiary or (iii) union
representation question existing with respect to the employees of the Company or
the Subsidiary, except for such actions specified in clause (i), (ii) or (iii)
above which would not, singly or in the aggregate, have a Material Adverse
Effect. To the best knowledge of the Company, no collective bargaining
organizing activities are taking place with respect to the Company or the
Subsidiary.
(w) The Company and the Subsidiary maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; (iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences; and (v) such controls would prevent or detect errors
or irregularities in amounts that would be material to the Company and the
Subsidiary, taken as a whole.
(x) No relationship, direct or indirect, exists between or among
the Company and the Subsidiary, on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or the Subsidiary, on the
other hand, which is required by the Act to be described in the Registration
Statement or the Prospectus and is not so described as required.
(y) The Company and the Subsidiary own or possess all patents,
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade names
(collectively, "Intellectual Property") currently employed by the Company or the
Subsidiary in connection with the business now operated by them except (i) as
disclosed in the Registration Statement and the Prospectus or (ii) where the
failure to own or possess or otherwise be able to acquire such Intellectual
Property would not, singly or in the aggregate, have a Material Adverse Effect.
Except as disclosed in the Registration Statement and the Prospectus, (i)
neither the Company nor the Subsidiary has received any notice of infringement
of or conflict with asserted rights of others with respect to any Intellectual
Property, (ii) neither the Company nor the Subsidiary is infringing or otherwise
violating any Intellectual Property of others and (iii) there are no legal or
governmental proceedings pending or, to the knowledge of the Company or the
Subsidiary, threatened relating to any Intellectual Property to which the
Company or
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the Subsidiary is or, in the case of threatened proceedings, could be a party,
or of which any of the properties or assets of the Company or the Subsidiary is
or, in the case of threatened proceedings, could be subject. There are no
contracts or other documents relating to any Intellectual Property required to
be filed as an exhibit to the Registration Statement or required to be described
in the Registration Statement or the Prospectus that are not so filed or
described as required.
(z) The Company has reviewed its operations and made reasonable
investigations regarding the operations of any third parties with which the
Company or the Subsidiary has a material relationship to evaluate the extent to
which the business or operations of the Company and the Subsidiary will be
affected by the Year 2000 Problem (as defined below). As a result of such
review, except as disclosed in the Registration Statement and the Prospectus,
the Company has no reason to believe, and does not believe, that any Year 2000
Problem will have a Material Adverse Effect. The "Year 2000 Problem" as used
herein means any risk that the computer hardware or software, the internal
operating systems or the telephone or network communications connections used in
the receipt, transmission, storage, retrieval, retransmission or other
utilization of data or in the operation of mechanical or electrical systems of
any kind will not, in the case of dates or time periods occurring after December
31, 1999, function at least as effectively as in the case of dates or time
periods occurring prior to January 1, 2000.
(aa) The Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof as
described in the Prospectus, will not be, and does not intend to conduct its
business in a manner that would cause it to become, an "investment company" or a
company controlled by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(bb) All sales of the Company's securities prior to the date hereof
were at all relevant times duly registered under the Act and applicable state
securities or Blue Sky laws or were exempt from the registration requirements of
the Act and applicable state securities laws, or if such securities were not
registered or exempt in compliance with the Act and applicable state securities
laws, any private rights of action for rescission or damages arising from the
failure to register any such securities are time barred by applicable statutes
of limitations or equitable principles, including laches.
(cc) There are no contracts, agreements or understandings between
the Company and any person granting such person the right to require the Company
to file a registration statement under the Act with respect to any securities of
the Company or to include any securities of the Company in any registration
statement of the Company. Neither the filing of the Registration Statement nor
the offering or sale of the Securities as contemplated by this Agreement gives
rise to any rights for or relating to the registration of any securities of the
Company.
(dd) Neither the Company nor the Subsidiary has taken, and neither
the Company nor the Subsidiary will take, directly or indirectly, any action
that is designed to or that has constituted or that might reasonably be expected
to cause or result in stabilization or manipulation of the price of any security
of the Company to facilitate the sale or resale of the Securities.
(ee) The Securities have been approved for listing on the Nasdaq
National Market, subject to notice of issuance. The form of the certificate
evidencing the Securities complies in all material respects with all applicable
requirements of law, the Company's Articles of Incorporation and Bylaws and the
Nasdaq National Market.
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<PAGE> 10
(ff) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters on any Delivery
Date (as defined in Section 5) shall be deemed to be a representation and
warranty by the Company to the Underwriters as to the matters covered thereby.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder severally and not jointly represents and
warrants to and agrees with each Underwriter that:
(a) Such Selling Shareholder is the lawful owner of the Securities
to be sold by such Selling Shareholder pursuant to this Agreement and has, and
on the First Delivery Date will have, good and clear title to such Securities,
free of all restrictions on transfer and other Liens.
(b) Such Selling Shareholder has, and on the First Delivery Date
will have, full legal right, power and authority, and all Authorizations
required by law, to (i) enter into (A) this Agreement and (B) the Custody
Agreement and Power of Attorney signed by such Selling Shareholder and SunTrust
Bank, Atlanta, as Custodian (the "Custody Agreement"), relating to (1) the
deposit of the Securities to be sold by such Selling Shareholder and (2) the
appointment by such Selling Shareholder of certain individuals as such Selling
Shareholder's attorneys-in-fact (the "Attorneys"), to the extent set forth
therein, relating to the transactions contemplated hereby, thereby and by the
Registration Statement, (ii) sell, assign, transfer and deliver the Securities
to be sold by such Selling Shareholder in the manner provided herein and therein
and (iii) perform such Selling Shareholder's obligations hereunder and
thereunder. Pursuant to such Custody Agreement, such Selling Shareholder has,
among other things, authorized the Attorneys, or any one of them, to execute and
deliver on such Selling Shareholder's behalf this Agreement and any other
document that they, or any one of them, may deem necessary or desirable in
connection with the transactions contemplated hereby and thereby and to deliver
the Securities to be sold by such Selling Shareholder pursuant to this
Agreement.
(c) This Agreement has been duly executed and delivered by or on
behalf of such Selling Shareholder.
(d) The Custody Agreement of such Selling Shareholder has been
duly executed and delivered by such Selling Shareholder and is enforceable
against such Selling Shareholder, except to the extent that (i) enforceability
may be limited by applicable bankruptcy, insolvency, liquidation,
reorganization, moratorium and other laws relating to or affecting the rights
and remedies of creditors generally and (ii) the remedy of specific performance
and other forms of equitable relief may be subject to certain defenses and to
the discretion of the court before which a proceeding may be brought.
(e) Upon delivery of and payment for the Securities to be sold by
such Selling Shareholder pursuant to this Agreement, good and clear title to
such Securities will pass to the Underwriters, free of all restrictions on
transfer and other Liens.
(f) Neither the execution, delivery and performance of this
Agreement nor the consummation of any of the other Transactions will (with or
without the giving of notice of the lapse of time or both) (i) result in any
breach of or default under, or the creation or imposition of any Lien (other
than any Lien created pursuant to this Agreement) on or against such Selling
Shareholder or any of such Selling Shareholder's properties or assets pursuant
to, any indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which such Selling Shareholder is a party or by which
such
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<PAGE> 11
Selling Shareholder or any of such Selling Shareholder's properties or
assets is bound, (ii) violate any constitution, statute, regulation, rule, order
or law or any judicial or administrative decree, writ, judgment or order to
which such Selling Shareholder or any of such Selling Shareholder's properties
or assets is subject or (iii) result in the suspension, termination or
revocation of any Authorization of such Selling Shareholder or any other
impairment of such Selling Shareholder's rights with respect thereto.
(g) No Authorization or other action by, or notice to or filing
with, any court, governmental authority or regulatory body is required on the
part of such Selling Shareholder for the consummation of any of the
Transactions, except (i) such as have been obtained and (ii) such as may be
required under state securities or Blue Sky laws in connection with the offer,
sale and distribution of the Securities by the Underwriters.
(h) To the knowledge of such Selling Shareholder, (i) the
Registration Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement), when it became
effective, did not contain and, as amended, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading and
(ii) the Prospectus does not contain and each Preliminary Prospectus, at the
time of filing thereof, did not contain, any untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading,
except that the representations and warranties set forth in this Section 2(h) do
not apply to statements or omissions in the Registration Statement, the
Prospectus or any such Preliminary Prospectus made in reliance upon and in
conformity with information relating to any Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use therein.
(i) At any time during the period described in Section 6(d), if
there is any change in the information referred to in Section 2(h), such Selling
Shareholder will immediately notify you of such change.
(j) Each certificate signed by or on behalf of such Selling
Shareholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Shareholder
to the Underwriters as to the matters covered thereby.
3. PURCHASE AND SALE OF THE SECURITIES AND LOCK-UP AGREEMENTS.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell _______ Firm Securities to the Underwriters, (ii) each Selling
Shareholder agrees, severally and not jointly, to sell the number of Firm
Securities set forth opposite such Selling Shareholder's name in Schedule II
hereto to the Underwriters and (iii) each Underwriter agrees, severally and not
jointly, to purchase from each Seller, at a price per share of $_____ (the
"Purchase Price"), a number of Firm Securities (subject to such adjustments to
eliminate fractional shares as you may determine) determined by multiplying the
number of Firm Securities to be sold by such Seller by a fraction, the numerator
of which is the aggregate number of Firm Securities to be
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<PAGE> 12
purchased by such Underwriter as set forth opposite the name of such Underwriter
in Schedule I hereto, and the denominator of which is the aggregate number of
Firm Securities to be purchased by all the Underwriters as set forth in Schedule
I hereto. If and to the extent the Underwriters exercise the option to purchase
Optional Securities provided below, (i) the Company agrees to issue and sell to
the Underwriters the number of Optional Securities as to which such option shall
have been exercised and (ii) each Underwriter agrees, severally and not jointly,
to purchase from the Company at the Purchase Price a number of Optional
Securities (subject to such adjustments to eliminate fractional shares as you
may determine) determined by multiplying the number of Optional Securities as to
which such option shall have been exercised by a fraction, the numerator of
which is the aggregate number of Firm Securities to be purchased by such
Underwriter as set forth opposite the name of such Underwriter in Schedule I
hereto, and the denominator of which is the aggregate number of Firm Securities
to be purchased by all the Underwriters as set forth in Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company grants the
Underwriters the right to purchase at their election up to ______ Optional
Securities at the Purchase Price, for the sole purpose of covering
overallotments made in connection with the offering of the Firm Securities. The
Underwriters may exercise this option to purchase Optional Securities in whole
or in part at any time (but only one time) by giving written notice thereof to
the Company within 30 days after the date of this Agreement. You shall give any
such notice on behalf of the Underwriters, and such notice shall specify the
aggregate number of Optional Securities to be purchased pursuant to such
exercise and the date for payment and delivery thereof, which date shall be a
business day (i) no earlier than two business days after such notice has been
given (i.e., on a "T+3" basis in accordance with the Act and the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Exchange Act")), (ii) no earlier than
the First Delivery Date and (iii) no later than ten business days after such
notice has been given.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of S&S. Notwithstanding the immediately preceding sentence, during such
period (a) the Company may (i) grant stock options pursuant to the Company's
Amended and Restated 1999 Stock Option and Incentive Plan and Director Stock
Option Plan, as in effect on the date hereof, and may issue shares of Common
Stock upon the exercise of such options, (ii) issue shares of Common Stock upon
the exercise of any option outstanding on the date hereof that was granted under
either such plan and (iii) issue shares of Common Stock to be used as the
purchase price for any acquisition of another business and (b) each Selling
Shareholder may transfer shares of Common Stock pursuant to a bona fide gift;
provided that any recipient of Common Stock in any acquisition referred to in
clause (a)(iii) above and any recipient of Common Stock pursuant to any gift
referred to in clause (b) above shall, prior to such recipient's receipt
thereof, agree in writing to be bound by all of the restrictions applicable to
the Sellers in the immediately preceding sentence and all of the restrictions
applicable to the Selling Shareholders in the second sentence of the next
paragraph until 180 days after the date of the Prospectus.
The Company also agrees not to file any registration statement with
respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of the Prospectus without the prior written consent of S&S, other than a
registration statement on Form S-8 under the Act with respect to up to (i)
1,150,000 shares of Common
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<PAGE> 13
Stock under the Company's Amended and Restated 1999 Stock Option and Incentive
Plan and (ii) 300,000 shares of Common Stock under the Company's Director Stock
Option Plan. In addition, each Selling Shareholder agrees that, for a period of
180 days after the date of the Prospectus, without the prior written consent of
S&S, such Selling Shareholder will not make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
The Company shall, prior to or concurrently with the execution of this
Agreement, deliver an agreement (each, a "Lock-Up Agreement") executed by (i)
each Selling Shareholder, (ii) each of the directors and officers of the Company
who is not a Selling Shareholder and (iii) each Shareholder listed on Annex II
hereto (each, an "Executing Shareholder") to the effect that such person will
not, during the period commencing on the date such person signs such agreement
and ending 180 days after the date of the Prospectus, without the prior written
consent of S&S, (A) engage in any of the transactions described in the first
sentence of the third paragraph of this Section 3 or (B) make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock. Notwithstanding the immediately preceding sentence, during such
period, each Executing Shareholder may transfer shares of Common Stock pursuant
to a bona fide gift; provided that any recipient of Common Stock pursuant to any
such gift shall, prior to such recipient's receipt thereof, agree in writing to
be bound by all of the restrictions contained in such Executing Shareholder's
Lock-Up Agreement until 180 days after the date of the Prospectus.
4. OFFERING BY THE UNDERWRITERS.
Upon authorization by you of the release of the Securities, the
Underwriters propose to publicly offer the Securities for sale as soon after the
execution and delivery of this Agreement as in your judgment is advisable and
initially to publicly offer the Securities upon the terms and conditions set
forth in the Prospectus.
5. DELIVERY AND PAYMENT.
Certificates in definitive form for the Securities to be purchased by
each Underwriter hereunder, and in such denominations and registered in such
names as you may request upon notice to the Company given at least two business
days prior to the First Delivery Date or the Second Delivery Date (as defined
below), as the case may be, shall be delivered by or on behalf of the Sellers,
with any transfer taxes thereon duly paid by the respective Sellers, to S&S
through the facilities of the Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment of the Purchase
Price therefor by wire transfer of immediately available funds. The certificates
representing the Securities shall be made available for inspection and packaging
not later than 9:00 a.m., Richmond, Virginia time, on the business day prior to
the First Delivery Date or the Second Delivery Date, as the case may be, at the
office of DTC or its designated custodian, or at such other location which is
designated by S&S to the Sellers (the "Designated Office"). The time and date of
such delivery and payment shall be, with respect to the Firm Securities, 9:00
a.m., Richmond, Virginia time, on __________, 1999, or at such other time and
date as you, the Company and the Attorneys may agree upon in writing and, with
respect to the Optional Securities, 9:00 a.m., Richmond, Virginia time, on the
date specified by you in the applicable written notice of the Underwriters'
election to purchase such Optional Securities in accordance with the provisions
of Section 3, or at such other time and date as you and the Company may agree
upon in writing. Such time and date for delivery of the Firm Securities is
herein called the "First Delivery Date," and the time and date for delivery of
any Optional Securities, if not the First Delivery Date, is herein called a
"Second Delivery Date," and each such time and date for
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<PAGE> 14
delivery is herein called a "Delivery Date." The documents to be delivered on
each Delivery Date on behalf of the parties hereto pursuant to Section 8 shall
be delivered at the offices of Alston & Bird LLP, 1201 West Peachtree Street,
Atlanta, Georgia 30309-3424, and the Securities shall be delivered at the
Designated Office, all on the applicable Delivery Date.
6. AGREEMENTS OF THE COMPANY.
The Company agrees with the Underwriters:
(a) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) of any request by the Commission for amendments to
the Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Securities for offering or sale in any jurisdiction, or
the initiation of any proceeding for such purposes, (iii) when any amendment to
the Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 6(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time any stop order suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or suspending
any such qualification shall have been issued, the Company will use its best
efforts to obtain the withdrawal or lifting of such order at the earliest
possible time.
(b) To furnish to you three signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which
shall be satisfactory to you, and to file the Prospectus in such form with the
Commission within the applicable period specified in Rule 424(b) under the Act;
during the period specified in Section 6(d) below, not to file any further
amendment to the Registration Statement and not to make any amendment or
supplement to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and, during such
period, to prepare and file with the Commission, promptly upon your request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Securities, to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective and to
furnish to each Underwriter and to any dealer as many copies thereof as such
Underwriter or dealer may reasonably request.
(d) Prior to 10:00 a.m., Richmond, Virginia time, on the first
business day after the date of this Agreement and from time to time thereafter
for such period as in the opinion of counsel for the Underwriters a prospectus
is required by law to be delivered in connection with sales by an Underwriter or
a dealer, to furnish in Richmond, Virginia to each Underwriter and any dealer as
many copies of the Prospectus (and of any amendment or supplement to the
Prospectus) as such Underwriter or dealer may reasonably request.
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<PAGE> 15
(e) Prior to the public offering of the Securities and promptly
from time to time thereafter, to take such actions as you or your counsel may
reasonably request to qualify, and otherwise to cooperate with you and your
counsel in connection with the qualification of, the Securities for offering and
sale under the securities laws of such jurisdictions as you may request, and to
comply with such laws so as to permit offers, sales and dealings with respect to
the Securities in such jurisdictions for as long as may be necessary to complete
the distribution of the Securities; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any Preliminary Prospectus or the offering or sale of the Securities,
in any jurisdiction in which it is not now so subject.
(f) To mail and make generally available to its shareholders as
soon as practicable an earnings statement covering the twelve-month period
ending __________, 2000 [ONE YEAR AFTER THE END OF THE COMPANY'S FISCAL QUARTER
IN WHICH THE CLOSING WILL OCCUR] that shall satisfy the provisions of Section
11(a) of the Act, and to advise you in writing when such statement has been so
made available.
(g) During the period of three years after the date of this
Agreement, to furnish to you as soon as available copies of all reports or other
communications furnished (whether financial or other) to the record holders of
Common Stock or furnished to or filed with the Commission, the Nasdaq National
Market or any national securities exchange on which any class of securities of
the Company is listed and such other information concerning the Company and its
subsidiaries as you may reasonably request from time to time, other than any
report or other communication which has been filed with the Commission under its
EDGAR system and is publicly available.
(h) Whether or not the transactions contemplated in this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including the following: (i) the fees, disbursements and expenses of
the Company's counsel, the Company's accountants and any Selling Shareholder's
counsel (in addition to the Company's counsel) in connection with the
registration and delivery of the Securities under the Act and all other fees and
expenses in connection with the preparation, printing, filing and distribution
of the Registration Statement (including financial statements and exhibits), any
Preliminary Prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Securities to be issued and
sold by the Company, including, without limitation, any transfer or other taxes
payable in connection therewith, (iii) all costs of printing or reproducing this
Agreement and any other agreements or documents in connection with the offering,
purchase, sale or delivery of the Securities, (iv) all expenses in connection
with the registration or qualification of the Securities for offer and sale
under the securities or Blue Sky laws of the several states and any other
jurisdiction required under Section 6(e) and all costs of printing or producing
any Preliminary and Supplemental Blue Sky Memoranda in connection therewith
(including, without limitation, the filing fees and fees and disbursements of
counsel for the Underwriters in connection with such registration or
qualification and memoranda relating thereto), (v) the filing fees and
disbursements of counsel for the Underwriters in connection with the review and
clearance of the offering of the Securities by the National Association of
Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the
Securities on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Securities, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance
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<PAGE> 16
of the obligations of the Company and the Selling Shareholders hereunder for
which provision is not otherwise made in this Section 6(h) or in Section 7
(including, without limitation, the costs and expenses of any "road show"
undertaken in connection with the offering or sale of the Securities). In
addition, all out-of-pocket expenses (including, without limitation, counsel
fees, disbursements and expenses) incurred by the Underwriters in connection
with investigating, preparing to market and marketing the Securities and
proposing to purchase and purchasing the Securities under this Agreement will be
borne and paid by the Company if the sale of the Securities provided for herein
is not consummated by reason of the termination of this Agreement pursuant to
Section 11 or 13(b)(i)(A) or by reason of the failure of any Seller to satisfy
any of the conditions in Section 8 required to be satisfied by such Seller. The
provisions of this Section shall not supersede or otherwise affect any agreement
that the Company and the Selling Shareholders may otherwise have for allocation
of such expenses among themselves.
(i) To use its best efforts to list the Securities for quotation
on the Nasdaq National Market and to maintain the listing of the Securities on
the Nasdaq National Market for a period of one year after the date of this
Agreement.
(j) To use its best efforts to do and perform all things required
or necessary to be done and performed under this Agreement by the Company prior
to each Delivery Date, as applicable, and to satisfy all conditions precedent to
the delivery of the Securities.
(k) If the Registration Statement at the time of the effectiveness
of this Agreement does not cover all of the Securities, to file a Rule 462(b)
Registration Statement with the Commission registering the Securities not so
covered in compliance with Rule 462(b) by 10:00 p.m., Richmond, Virginia time,
on the date of this Agreement and to pay to the Commission the filing fee for
such Rule 462(b) Registration Statement at the time of the filing thereof or to
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act.
(l) If, during the time a prospectus relating to the Securities is
required to be delivered by any Underwriter or its affiliates under the Act, the
Exchange Act or other applicable law, to (i) periodically amend the Registration
Statement so that the information contained in the Registration Statement
complies with the requirements of Section 10(a) of the Act, (ii) amend the
Registration Statement or amend or supplement the Prospectus when necessary to
reflect any material changes in the information provided therein and promptly
file such amendment or supplement with the Commission, (iii) provide such
Underwriter with copies of each amendment or supplement so filed and such other
documents, including opinions of counsel and "comfort" letters, as such
Underwriter may reasonably request and (iv) indemnify such Underwriter and, if
applicable, contribute to any amount paid or payable by such Underwriter in a
manner substantially identical to that specified in Section 9 (with appropriate
modifications).
(m) To file with the Commission, from time to time after the
effective date of the Registration Statement, such reports as are required by
the Act and the Exchange Act, and to also file with the securities commissions
in jurisdictions where the Securities have been sold by any Underwriter (as you
shall have advised us in writing) any such reports as are required to be filed
by the securities acts and the regulations of those jurisdictions.
(n) If at any time during the 25-day period after the Registration
Statement is declared effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which, in your opinion, the
market price for the Common Stock has been or is likely to be materially
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<PAGE> 17
affected (regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), to, after written notice from you
advising the Company do so, prepare, consult with you concerning the substance
of, and disseminate a press release or other public statement, reasonably
satisfactory to you, responding to or commenting on such rumor, publication or
event.
(o) To take no action directly or indirectly through any of its
subsidiaries, officers, directors or affiliates or otherwise, that is designed
to cause or result in, or which might constitute or be expected to constitute,
stabilization or manipulation of the price of the Common Stock.
(p) To not invest or otherwise use the proceeds received by the
Company from its sale of Securities in such a manner as would require the
Company to register as an investment company under the Investment Company Act of
1940, as amended.
(q) To maintain a transfer agent and, if necessary under the laws
of the State of Georgia, a registrar for the Securities.
(r) On the First Delivery Date, to duly issue and sell the Warrant
to S&S in accordance with the terms hereof and thereof.
(s) During the period within which the Warrant may be exercised,
to at all times have reserved for issuance out of its authorized but unissued
Common Stock, solely for issuance and delivery upon exercise of the Warrant, the
full number of shares of Common Stock issuable upon exercise of the Warrant.
(t) To file timely and accurate reports with the Commission
regarding the use of the offering proceeds in accordance with Rule 463 under the
Act or any successor provision.
7. AGREEMENTS OF THE SELLING SHAREHOLDERS.
Each Selling Shareholder agrees with you and the Company:
(a) To pay or to cause to be paid all costs and expenses related
to the transfer and delivery of the Securities to be sold by such Selling
Shareholder, including, without limitation, any transfer or other taxes payable
in connection therewith.
(b) To do and perform all things to be done and performed by such
Selling Shareholder under this Agreement prior to the First Delivery Date and to
satisfy all conditions precedent to the delivery of the Securities to be sold by
such Selling Shareholder pursuant to this Agreement.
8. CONDITIONS TO OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm
Securities under this Agreement are subject to the satisfaction of each of the
following conditions:
(a) All representations and warranties and other statements of the
Company and the Selling Shareholders herein shall be true and correct on the
First Delivery Date with the same force and effect as if made on and as of the
First Delivery Date, and the Company and each Selling Shareholder shall have
complied with all of the agreements and satisfied all of the conditions herein
contained and required to be
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<PAGE> 18
complied with or satisfied by the Company or such Selling Shareholder, as the
case may be, on or prior to the First Delivery Date.
(b) All filings required by Rule 424, Rule 430A, Rule 434 or Rule
462(b) under the Act, if applicable, shall have been duly made; if the Company
is required to file a Rule 462(b) Registration Statement after the effectiveness
of this Agreement, such Rule 462(b) Registration Statement shall have become
effective by 10:00 p.m., Richmond, Virginia time, on the date of this Agreement;
no stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission; all requests for additional information on the
part of the Commission shall have been complied with to your reasonable
satisfaction; and no Underwriter shall have advised the Company that the
Registration Statement or any amendment thereto contains an untrue statement of
fact which, in your good faith judgment, is material or omits to state a fact
which, in your good faith judgment, is material and is required to be stated
therein or necessary to make the statements therein not misleading, or that any
Preliminary Prospectus, the Prospectus or any supplement thereto contains an
untrue statement of fact which, in your good faith judgment, is material, or
omits to state a fact which, in your good faith judgment, is material and is
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(c) You shall have received on the First Delivery Date a
certificate dated the First Delivery Date, signed by J. Cary Howell, the
Company's Chief Executive Officer, and Christopher K. Martin, the Company's
Chief Financial Officer and Treasurer, confirming, among other things, the
matters set forth in Sections 1(d) and 8(b) and to the effect that (i) all
representations and warranties and other statements of the Company in this
Agreement are true and correct on the First Delivery Date with the same force
and effect as if made on and as of the First Delivery Date and (ii) the Company
has complied with all of the agreements and satisfied all of the conditions
herein contained and required to be complied with or satisfied by the Company on
or prior to the First Delivery Date.
(d) You shall have received on the First Delivery Date a
certificate dated the First Delivery Date from each Selling Shareholder to the
effect that (i) all representations and warranties and other statements of such
Selling Shareholder in this Agreement are true and correct on the First Delivery
Date with the same force and effect as if made on and as of the First Delivery
Date and (ii) such Selling Shareholder has complied with all of the agreements
and satisfied all of the conditions herein contained and required to be complied
with or satisfied by such Selling Shareholder on or prior to the First Delivery
Date.
(e) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus (exclusive of any amendment or
supplement thereto subsequent to the date of this Agreement), (i) there shall
not have been any change in the capital stock or long term debt of the Company
or the Subsidiary or any issuance of options, warrants or rights to purchase
capital stock of the Company or the Subsidiary (except options to purchase up to
[___________] shares of Common Stock granted to new employees of the Company
under the Company's Amended and Restated 1999 Stock Option and Incentive Plan),
(ii) there shall not have been any change or any development involving a
prospective change in or affecting the business, general affairs, condition
(financial or otherwise) or results of operations of the Company and the
Subsidiary, taken as a whole, and (iii) neither the Company nor the Subsidiary
shall have entered into any transaction or incurred any liability or obligation,
direct or contingent, the effect of which, in any such case described in clause
(i), (ii) or (iii), in your judgment is material and adverse and, in your
judgment, makes it impracticable or inadvisable to proceed with the
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<PAGE> 19
public offering or the delivery of the Securities on the terms and in the manner
contemplated by the Prospectus.
(f) On or prior to the First Delivery Date there shall not have
occurred any of the following: (i) the suspension of trading of any securities
of the Company or, since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse change in
the prospects, business, general affairs, condition (financial or otherwise) or
results of operations of the Company and the Subsidiary, taken as a whole, or
any material adverse events or conditions in the industry of the Company or the
Subsidiary or involving their competitors or comparable companies generally,
(ii) the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the declaration of a banking moratorium by federal authorities or
authorities of the States of Georgia, New York, North Carolina or Virginia, (iv)
the outbreak or escalation of hostilities or other national or international
calamity or crisis that, in your good faith judgment, makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated by the Prospectus, (v)
the enactment, publication, decree or other promulgation of any constitution,
statute, regulation, rule, order, law, decree, writ or judgment of any court or
other governmental authority which in your good faith opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and the
Subsidiary, taken as a whole, (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your good faith opinion has a material adverse effect on the financial
markets in the United States or (vii) any adverse change in general economic,
political, financial or international conditions which has an adverse impact on
trading prices of securities that, in your good faith judgment, makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities on the terms and in the manner contemplated by the Prospectus.
(g) The Company shall have furnished or caused to be furnished to
you the agreements provided for in the last paragraph of Section 3, which
agreements shall be in full force and effect on the First Delivery Date.
(h) The Securities shall have been duly listed for quotation on
the Nasdaq National Market.
(i) You shall have received, on each of the date hereof and the
First Delivery Date, a letter dated the date hereof or the First Delivery Date,
as the case may be, in form and substance satisfactory to you, from Arthur
Andersen LLP, independent public accountants, containing the information and
statements of the type ordinarily included in accountants' "comfort letters" to
Underwriters with respect to the financial statements and certain information
contained in the Registration Statement and the Prospectus.
(j) You shall have received on the First Delivery Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the First Delivery
Date, of Nelson, Mullins, Riley & Scarborough, L.L.P., counsel for the Company
and the Selling Shareholders, to the effect set forth in Annex III.
(k) You shall have received on the First Delivery Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the First Delivery
Date, of Arnall, Golden & Gregory LLP, special communications counsel for the
Company, to the effect set forth in Annex IV.
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<PAGE> 20
(l) You shall have received on the First Delivery Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the First Delivery
Date, of Jones & Askew, L.L.P., special intellectual property counsel for the
Company, to the effect set forth in Annex V.
(m) You shall have received on the First Delivery Date an opinion
(satisfactory to you), dated the First Delivery Date, of Alston & Bird LLP,
counsel for the Underwriters, with respect to the incorporation of the Company,
the validity of the Securities being issued on the First Delivery Date, the
Registration Statement, the Prospectus and such other related matters as you may
request, and such counsel shall have received such agreements, instruments,
documents and other information as they may request to enable them to pass upon
such matters.
(n) The Company and the Selling Shareholders shall not have failed
on or prior to the First Delivery Date to perform or comply with any of the
agreements herein contained and required to be performed or complied with by the
Company or the Selling Shareholders on or prior to the First Delivery Date.
(o) The Company shall have duly issued and sold the Warrant to
S&S on the First Delivery Date in accordance with the terms hereof and
thereof, and, upon such issuance and sale, the Warrant shall be
exercisable in accordance with and subject to its terms.
(p) You shall have received on the First Delivery Date such
additional documents (including, without limitation, opinions of counsel,
certificates and agreements) as you may reasonably request.
The several obligations of the Underwriters to purchase any Optional
Securities hereunder are subject to (A) the delivery to you on the Second
Delivery Date of such documents (including, without limitation, opinions of
counsel, certificates and agreements) as you may reasonably request with respect
to the Company and the issuance of the Optional Securities and (B) the
satisfaction of such conditions as you shall reasonably determine in connection
therewith.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) Each Seller agrees, severally and not jointly, to indemnify
and hold harmless each Underwriter, its directors, its officers and each person,
if any, who controls any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and judgments, whether joint, several or otherwise, and
whether under the Act or otherwise, caused by, arising out of or based upon (i)
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto) or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus (or any amendment or supplement thereto) or the
Prospectus (or any amendment or supplement thereto) or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and the Sellers severally and not
jointly agree to reimburse each Underwriter, its directors, its officers and
each such control person for any legal or other expenses (including, without
limitation, the reasonable fees and expenses of counsel) actually incurred in
connection with investigating, preparing to defend or defending, or appearing as
a third party witness in connection with, any such action, claim or other
matter, promptly as such expenses are incurred; provided, however, that no
Seller shall be liable in any such case to the extent that any such loss, claim,
damage, liability or judgment is caused by, arises out of or is based upon any
such untrue
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<PAGE> 21
statement or omission or based upon information relating to any Underwriter
furnished in writing to the Company by such Underwriter through you expressly
for use therein; provided, further, that the foregoing indemnity agreement with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter who failed to deliver the Prospectus, as then amended or
supplemented (so long as the Prospectus and any amendment or supplement thereto
was provided by the Company to the several Underwriters in the requisite
quantity and on a timely basis to permit proper delivery on or prior to the
First Delivery Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in such Preliminary Prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person. Notwithstanding the foregoing, the
aggregate liability of any Selling Shareholder pursuant to this Section 9(a) and
Section 9(e) shall be limited to an amount equal to the net proceeds (before
deducting expenses) received by such Selling Shareholder from the Underwriters
for the sale of the Securities sold by such Selling Shareholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify, hold harmless and reimburse (i) the Company, each of its directors
and officers who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act to the same extent as the foregoing indemnity from the
Company to such Underwriter and (ii) each Selling Shareholder and each person,
if any, who controls such Selling Shareholder within the meaning of Section 15
of the Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from such Selling Shareholder to such Underwriter, but in the case of
Sections 9(b)(i) and 9(b)(ii) only with reference to information relating to
such Underwriter furnished in writing to the Company by such Underwriter through
you expressly for use in the Registration Statement (or any amendment thereto),
any Preliminary Prospectus (or any amendment or supplement thereto) or the
Prospectus (or any amendment or supplement thereto).
(c) Promptly after receipt by any person that may seek indemnity
under Section 9(a) or 9(b) (an "indemnified party") of notice of the
commencement of any action, such indemnified party shall, if a claim in respect
thereof is to be made against a person against whom such indemnity may be sought
under Section 9(a) or 9(b) (an "indemnifying party"), notify the indemnifying
party in writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party. In case any such action shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall elect, jointly with any other indemnifying party
similarly notified, by written notice delivered to the indemnified party
promptly after receiving the aforesaid notice from such indemnified party, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that any indemnified party shall have the
right to employ separate counsel in any such action and participate therein, but
the fees and expenses of such counsel shall be at the expense of the indemnified
party unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties in
any such action (including, without limitation, any impleaded parties) include
both the indemnified party and the indemnifying party, and the indemnified party
shall have been advised by counsel that representation of such indemnified party
and the indemnifying party would present such counsel with a conflict of
interest under applicable standards of professional conduct due to actual or
potential differing interests between them or that there
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<PAGE> 22
may be legal defenses available to it and/or other indemnified parties which are
different from or in addition to those available to the indemnifying party (in
which case the indemnifying party shall not have the right to assume the defense
of such action on behalf of the indemnified party). It is understood that the
indemnifying party shall not be liable, in connection with any such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, for (i) the fees
and expenses of more than one separate firm of attorneys (in addition to any
local counsel) for all Underwriters, their officers and directors and all
persons, if any, who control any Underwriter within the meaning of either
Section 15 of the Act or Section 20 of the Exchange Act and (ii) the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for the Sellers, the Company's directors and officers who sign the
Registration Statement and all persons, if any, who control any Seller within
the meaning of either such section. In the case of any such separate firm for
the Underwriters, their officers and directors and such control persons of any
Underwriter, such firm shall be designated in writing by S&S. In the case of any
such separate firm for the Sellers, the Company's directors or officers who sign
the Registration Statement or such control persons of any Seller, such firm
shall be designated in writing by the Company. The indemnifying party shall
indemnify and hold harmless the indemnified party from and against any and all
losses, claims, damages, liabilities and judgments by reason of settlement of
any action (i) effected with its written consent or (ii) effected without its
written consent if (A) such settlement is entered into more than 30 days after
the indemnifying party shall have received a request from the indemnified party
for reimbursement for legal or other expenses (including, without limitation,
the fees and expenses of counsel), in any case where such fees and expenses are
at the expense of the indemnifying party, and (B) such indemnifying party shall
not have complied with such reimbursement request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in
this Section 9 is unavailable to or insufficient to hold harmless an indemnified
party under Section 9(a) or 9(b) in respect of any losses, claims, damages,
liabilities or judgments (or actions in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages, liabilities
or judgments (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Sellers on the one
hand and the Underwriters on the other hand from the offering of the Securities.
If, however, the allocation provided by the immediately preceding sentence is
not permitted by applicable law, then each indemnifying party shall contribute
to such amount paid or payable by such indemnified party in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Sellers on the one hand and the Underwriters on the other hand in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments (or actions in respect thereof), as
well as any other relevant equitable considerations. The relative benefits
received by the Sellers on the one hand and the Underwriters on the other hand
in connection with the offering of the Securities pursuant to this Agreement,
shall be deemed to be in the same proportion as the total net proceeds from the
offering (after deducting the underwriting discounts and commissions, but before
deducting expenses) received by the Sellers, and the total underwriting
discounts and commissions received by the Underwriters, bear to the total price
to the public of the Securities, in each case as set forth on the cover page of
the Prospectus. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be
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<PAGE> 23
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by any Seller on the one
hand or the Underwriters on the other hand and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
Each Seller and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 9(d) were determined by pro
rata allocation or by any other method of allocation which does not take into
account the equitable considerations referred to above in this Section 9(d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments (or actions in respect thereof)
referred to above in this Section 9(d) shall be deemed to include any legal or
other expenses incurred by such indemnified party in connection with
investigating, preparing to defend or defending, or appearing as a third party
witness in connection with, any such action, claim or other matter.
Notwithstanding the provisions of this Section 9(d), (i) the provisions of the
Agreement Among Underwriters entered into among the Underwriters in connection
herewith shall govern contribution among the Underwriters and (ii) no
Underwriter (except as provided in such Agreement Among Underwriters) shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. Notwithstanding the
provisions of this Section 9(d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations under this Section 9(d) are
several in proportion to the respective number of Securities purchased by each
of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 9 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity. Each Seller agrees,
severally and not jointly, to reimburse the several Underwriters, their
directors and officers, and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing any of
their rights hereunder (including, without limitation, pursuant to this
Section 9).
(f) Each Selling Shareholder hereby designates
comstar.net, inc., 2812 Spring Road, Suite 210, Atlanta, Georgia 30339, as its
authorized agent, upon which process may be served in any action which may be
instituted in any state or federal court by any Underwriter, any director or
officer of any Underwriter or any person controlling any Underwriter asserting a
claim for indemnification or contribution under or pursuant to this Section 9,
and each Selling Shareholder will accept the jurisdiction of such court in such
action and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to such Selling Shareholder at the address for
notices specified in Section 14.
10. SUBSTITUTION OF UNDERWRITERS.
(a) If one or more of the Underwriters fails or refuses
to purchase on any Delivery Date the Securities agreed hereunder to be purchased
on such Delivery Date by such Underwriter or Underwriters, and the aggregate
number of Securities which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase does not exceed 10% of the aggregate number of
the Securities to be purchased on such date by all Underwriters, the
non-defaulting Underwriters shall be obligated, severally, in the proportions
that the number of Firm Securities set forth opposite their respective names on
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<PAGE> 24
Schedule I hereto bears to the aggregate number of Firm Securities set forth
opposite the names of all such non-defaulting Underwriters, or in such other
proportions as you may specify with the consent of the non-defaulting
Underwriters, to purchase the Securities which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; provided
that in no event shall the number of Securities (whether Firm Securities or
Optional Securities) which any Underwriter has agreed to purchase on a Delivery
Date pursuant to Section 3 be increased pursuant to this Section 10 by an amount
in excess of one-ninth of the Securities such Underwriter has agreed to purchase
on such Delivery Date, without the written consent of such Underwriter.
(b) If (i) one or more of the Underwriters fails or
refuses to purchase the Firm Securities on the First Delivery Date, and the
aggregate number of Firm Securities which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase exceeds 10% of the
aggregate number of Firm Securities to be purchased on such date by all
Underwriters and (ii) arrangements satisfactory to you, the Company and the
Selling Shareholders for purchase of such Firm Securities are not made within 48
hours after such default, this Agreement will terminate without liability on
your part or on the part of any non-defaulting Underwriter or any Seller, except
as provided in Section 12. In any such case which does not result in termination
of this Agreement, either you or the Sellers shall have the right to postpone
the First Delivery Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If one or
more of the Underwriters fails or refuses to purchase Optional Securities on the
Second Delivery Date, and the aggregate number of Optional Securities with
respect to which such default occurs exceeds 10% of the aggregate number of
Optional Securities to be purchased on such date by all Underwriters, the
non-defaulting Underwriters shall have the option to (i) terminate their
obligation hereunder to purchase such Optional Securities (without liability on
your part or on the part of any non-defaulting Underwriter or any Seller, except
as provided in Section 12) or (ii) purchase not less than the number of Optional
Securities that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default.
This Section 10 will not affect the liability of the defaulting
Underwriters to the Sellers or the non-defaulting Underwriters arising out of
such default. A substitute Underwriter under this Section 10 will be deemed an
Underwriter for all purposes of this Agreement.
11. DEFAULT BY THE SELLERS.
If any Selling Shareholder shall fail to sell the number of Securities
that such Selling Shareholder is obligated to sell hereunder, you may, at your
option, by notice to the Company, either (i) require the Company to issue and
sell in the offering of Securities contemplated hereby a number of shares of
Common Stock equal to the number of Securities as to which such Selling
Shareholder has defaulted or such lesser number of shares of Common Stock as you
may request (whereupon such shares of Common Stock shall be treated as
Securities for all purposes hereof), or (ii) terminate this Agreement without
liability on your part or on the part of the Underwriters.
If the Company shall fail to issue and sell the number of Securities
that it is obligated to issue and sell hereunder, you may, at your option, by
notice to the Company terminate this Agreement without any liability on your
part or on the part of the Underwriters.
In any such case under this Section 11 which does not result in the
termination of this Agreement, either you or the non-defaulting Sellers shall
have the right to postpone the applicable Delivery Date, but
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in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, the Selling Shareholders and the several
Underwriters, as set forth in this Agreement or made by them, respectively,
pursuant to this Agreement, shall remain in full force and effect regardless of
any investigation (or any statement as to the results thereof) made by or on
behalf of any Underwriter, the officers or directors of any Underwriter, any
controlling person of any Underwriter, the Company, the officers or directors of
the Company, any controlling person of the Company, any Selling Shareholder or
any controlling person of any Selling Shareholder, and will survive delivery of
and payment for the Securities. In addition, the agreements of the Company in
Section 6(h) and the agreements of the parties hereto in Section 9 and this
Section 12 shall survive any termination or cancellation of this Agreement.
13. EFFECTIVENESS; TERMINATION.
(a) This Agreement shall become effective upon the
execution and delivery hereof by the parties hereto.
(b) This Agreement shall be subject to termination in
your absolute discretion, by notice given to the Company prior to the delivery
of any payment for the Securities, if prior to the First Delivery Date there
shall have occurred any of the following: (i) (A) the suspension of trading of
any securities of the Company or, since the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change in the prospects, business, general affairs, condition
(financial or otherwise) or results of operations of the Company and the
Subsidiary, taken as a whole, or (B) since the respective dates as of which
information is given in the Registration Statement and the Prospectus any
material adverse events or conditions in the industry of the Company or the
Subsidiary or involving their competitors or comparable companies generally,
(ii) the suspension or material limitation of trading in securities or other
instruments on the New York Stock Exchange, the American Stock Exchange, the
Chicago Board of Trade or the Nasdaq National Market or limitation on prices for
securities or other instruments on any such exchange or the Nasdaq National
Market, (iii) the declaration of a banking moratorium by federal authorities or
authorities of the States of Georgia, New York, North Carolina or Virginia, (iv)
the outbreak or escalation of hostilities or other national or international
calamity or crisis that, in your good faith judgment, makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the
Securities on the terms and in the manner contemplated by the Prospectus, (v)
the enactment, publication, decree or other promulgation of any constitution,
statute, regulation, rule, order, law, decree, writ or judgment of any court or
other governmental authority which in your good faith opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and the
Subsidiary, taken as a whole, (vi) the taking of any action by any federal,
state or local government or agency in respect of its monetary or fiscal affairs
which in your good faith opinion has a material adverse effect on the financial
markets in the United States or (vii) any adverse change in general economic,
political, financial or international conditions which has an adverse impact on
trading prices of securities in general that, in your good faith judgment, makes
it impracticable or inadvisable to proceed with the public offering or the
delivery of the Securities on the terms and in the manner contemplated by the
Prospectus. Any termination pursuant to this Section 13(b) shall not give rise
to any liability on the part of any party hereto, except as provided in Sections
6(h) and 12.
-25-
<PAGE> 26
14. NOTICES.
In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you. All statements, requests, notices and agreements hereunder shall
be in writing or by facsimile if promptly confirmed in writing, and if to the
Underwriters shall be sufficient in all respects if delivered or sent by mail,
hand delivery, overnight courier or facsimile transmission to: Scott &
Stringfellow, Inc., 909 East Main Street, Richmond, Virginia 23219, Attention:
Corporate Finance Department, Facsimile: (804) 649-0990, with a copy (which
shall not constitute notice) to Alston & Bird LLP, 1201 West Peachtree Street,
Atlanta, Georgia 30309-3424, Attention: M. Hill Jeffries, Esq., Facsimile: (404)
881-4777; and if to the Company or the Selling Shareholders shall be sufficient
in all respects if delivered or sent by mail, hand delivery, overnight courier
or facsimile transmission to the address of the Company set forth on the cover
page of the Registration Statement, Attention: J. Cary Howell, Chief Executive
Officer, with a copy (which shall not constitute notice) to Nelson Mullins Riley
& Scarborough, L.L.P., First Union Plaza, Suite 1400, 999 Peachtree Street,
N.E., Atlanta, Georgia 30309, Attention: Charles D. Vaughn, Esq., Facsimile:
(404) 817-6050. Any such statements, requests, notices or agreements shall take
effect upon receipt thereof.
15. SUCCESSORS.
This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and the Selling Shareholders and, to the
extent expressly provided herein, the officers and directors of the Company, the
officers and directors of each Underwriter and each person who controls the
Company, any Selling Shareholder or any Underwriter, and their respective heirs,
executors, administrators, successors and assigns, and no other person shall
acquire or have any right under or by virtue of this Agreement. No purchaser of
any of the Securities from any Underwriter shall be deemed a successor or assign
by reason merely of such purchase.
16. TIME OF THE ESSENCE.
Time shall be of the essence in the performance under this Agreement.
17. BUSINESS DAY.
As used herein, the term "business day" shall mean any day when the
Commission's office in Washington, D.C. is open for business.
18. APPLICABLE LAW.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
19. CAPTIONS.
The captions included in this Agreement are included solely for
convenience of reference and shall not be deemed to be a part of this Agreement.
-26-
<PAGE> 27
20. COUNTERPARTS; EXECUTION BY FACSIMILE.
This Agreement may be executed by any one or more of the parties in any
number of counterparts, each of which shall be deemed to be an original, but all
such counterparts shall together constitute one and the same agreement. Delivery
of an executed counterpart hereof by facsimile shall be effective as manual
delivery thereof.
-27-
<PAGE> 28
If the foregoing is in accordance with your understanding, please sign
and return to us two counterparts hereof, and upon the acceptance hereof by you,
this letter Agreement such acceptance hereof shall constitute a binding
agreement among each of the Underwriters, the Company and the Selling
Shareholders. It is understood that your acceptance of this Agreement on behalf
of each of the Underwriters is pursuant to the authority set forth in a form of
Agreement Among Underwriters, the form of which will be submitted to the Company
for examination, upon request, but without warranty on your part as to the
authority of the signers thereof.
Very truly yours,
COMSTAR.NET, INC.
By:
------------------------------------
Name: J. Cary Howell
Title: Chief Executive Officer
SELLING SHAREHOLDERS NAMED IN
SCHEDULE II HERETO
By:
------------------------------------
Name:
Title: Attorney-in-Fact
-28-
<PAGE> 29
Accepted and agreed:
SCOTT & STRINGFELLOW, INC.
SUNTRUST EQUITABLE SECURITIES
Acting severally on their behalf and
on behalf of the several Underwriters
named in Schedule I hereto
By: SCOTT & STRINGFELLOW, INC.
By:
--------------------------------------
Name:
Title:
-29-
<PAGE> 30
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Securities
Underwriters To Be Purchased
------------ ---------------
<S> <C>
Scott & Stringfellow, Inc..............................................
SunTrust Equitable Securities Corporation..............................
Total...................
</TABLE>
<PAGE> 31
SCHEDULE II
SELLING SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Firm Securities
Names Being Sold
----- ----------
<S> <C>
J. Cary Howell.........................................................
Edward N. Landa........................................................
</TABLE>
<PAGE> 1
EXHIBIT 4.2
<TABLE>
<S> <C>
Number Shares
CST
COMMON STOCK NO PAR VALUE
</TABLE>
[COMSTAR.NET LOGO]
comstar.net, inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF GEORGIA
CUSIP 205663 10 7
This Certifies that
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
comstar.net, inc.
transferable on the books of the Corporation in person or by duly authorized
attorney, upon the surrender of this certificate properly endorsed. This
certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/ Edward N. Landa /s/ James C. Howell
- ----------------------------- -----------------------
SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED: [SEAL]
SUNTRUST BANK, ATLANTA
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
comstar.net, inc.
The Corporation will furnish without charge to each shareholder who so
requests a statement or summary of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof which the Corporation is authorized to issue and of the
qualifications, limitations or restrictions of such preferences and/or rights.
Such request may be made to the office of the Secretary of the Corporation or
the Transfer Agent named on the face of this Certificate.
The following abbreviations, when used in the inscription on the face
of this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-______ Custodian ______________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act __________________________
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________________
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _________________
____________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
<PAGE> 1
EXHIBIT 5.1
[NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. LETTERHEAD]
October 26, 1999
comstar.net, inc.
2812 Spring Road
Suite 210
Atlanta, Georgia 30339
We have acted as counsel to comstar.net, inc. (the "Company") in
connection with the filing of a Registration Statement on Form S-1 (Reg. No.
333-86877) (the "Registration Statement") under the Securities Act of 1933,
covering the offering of up to 3,653,550 shares (the "Shares") of the Company's
Common Stock, no par value per share. In connection therewith, we have examined
such corporate records, certificates of public officials and other documents and
records as we have considered necessary or proper for the purpose of this
opinion.
This opinion is limited by and is in accordance with, the January 1,
1992, edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion Committee
of the Corporate and Banking Law Section of the State Bar of Georgia.
Based on the foregoing, and having regard to legal considerations which
we deem relevant, we are of the opinion that the Shares, when issued and
delivered as described in the Registration Statement, will be legally issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Prospectus contained in the Registration Statement.
Very truly yours,
/s/ Nelson Mullins Riley & Scarborough, L.L.P.
<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,
Page 4
Tenant's Initials JCH
-----------
Landlord's Initials CC
-----------
<PAGE> 6
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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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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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
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<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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<PAGE> 8
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 10.15
WARRANT AGREEMENT
THIS WARRANT AND ANY SHARES ACQUIRED FROM THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT IS NON-TRANSFERABLE AND MAY NOT
BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF, EXCEPT AS PERMITTED IN
PARAGRAPH 8(A) HEREOF, UNLESS PREVIOUSLY CONSENTED TO BY COMSTAR.NET, INC.
No. ____ Right to Purchase
______ Shares of
Common Stock
STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, in consideration of $10.00 paid in cash this date
by Scott & Stringfellow, Inc. ("Purchaser") to comstar.net, inc., a Georgia
corporation (the "Company"), Purchaser is entitled to purchase from the
Company, at any time during the period specified in Paragraph 2 hereof, up to
_________ (_______) fully paid and non-assessable shares of the Company's
common stock, no par value per share (the "Common Stock"), at an exercise price
per share of $_______ (the "Exercise Price"). The term "Warrant Shares", as
used herein, refers to the shares of Common Stock purchasable hereunder. The
Warrant Shares and the Exercise Price are subject to adjustment as provided in
Paragraphs 4 and 5 hereof.
This Warrant is subject to the following terms, provisions and
conditions:
1. Manner and Exercise; Issuance of Certificates; Payment for
Shares.
(a) Subject to the provisions hereof, this Warrant may be
exercised by the holder hereof, in whole or in part (any partial exercise to be
in increments of not less than one thousand (1,000) shares or any lesser
remaining number of shares subject to the Warrant), within the time period
specified in Paragraph 2 hereof by the surrender of this Warrant, together with
a completed Exercise Agreement in the form attached hereto, to the Company
during normal business hours on any business day at the Company's principal
office in Atlanta, Georgia (or such other office or agency of the Company as it
may designate by notice to the holder hereof), and payment to the Company in
cash, by certified or official bank check or immediately available federal
funds of the Exercise Price for the Warrant Shares specified in said Exercise
Agreement. Notwithstanding the preceding sentence, the holder, at its sole
option, may elect (upon delivery to the Company of satisfactory documentation
of such election, including an opinion of counsel if reasonably required), in
lieu of the payment of the Exercise Price in cash, check or federal funds, to
(i) receive from the Company a lesser number of Warrant Shares having a fair
market value on the date of exercise equal to the difference between (A) the
fair market value on the date of exercise of the full number of Warrant Shares
as to which exercise is being made and (B) the aggregate Exercise Price of the
full number of Warrant Shares as to which exercise is being made (such lesser
number of Warrant Shares so issuable to the holder shall be considered as and
included within the meaning of the
<PAGE> 2
term "Warrant Shares" for all remaining purposes hereof), or (ii) pay the
Exercise Price in shares of Common Stock of the Company having a fair market
value on the date of exercise equal to the aggregate Exercise Price of the
Warrant Shares as to which exercise is being made.
(b) Warrant Shares purchased by the holder hereof shall be
deemed to be issued to the holder as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been
surrendered, the completed Exercise Agreement (and other documentation
reasonably request by the Company) delivered, and payment made for such shares
as aforesaid. Certificates for the Warrant Shares so purchased, representing
the aggregate number of shares specified in said Exercise Agreement, shall be
delivered to the holder hereof within a reasonable time after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of said holder unless otherwise specified by the holder in the
Exercise Agreement. In case of an exercise in part only, the Company will
deliver to the holder a new Warrant of like tenor in the name of the holder
evidencing the right to purchase the number of Warrant Shares as to which this
Warrant has not been exercised.
2. Period of Exercise. This Warrant is exercisable at any time on
or after one (1) year from the date of issuance, and before 5:00 p.m. Atlanta,
Georgia, local time on the fifth (5th) anniversary of the date of issuance.
3. Certain Agreements of the Company. The Company hereby covenants
and agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon
issuance, be validly issued, fully paid and non-assessable and free from all
taxes, liens and charges created or through the Company with respect to the
issue thereof.
(b) Reservation of Shares. During the period within which
this Warrant may be exercised, the Company will at all times have reserved for
issuance out of its authorized but unissued Common Stock, solely for issuance
and delivery upon exercise of the Warrant, the full number of shares of Common
Stock issuable upon exercise of the Warrant.
4. Protection Against Dilution. The number of shares of Common
Stock purchasable pursuant to the exercise of the rights under this Warrant and
the Exercise Price shall be adjusted as hereinafter set forth
(a) Stock Dividends, Subdivisions, Reclassifications, Etc.
In case at any time or from time to time after the date hereof the Company
shall:
(i) take a record of the holders of its issued
and outstanding Common Stock for the
purpose of entitling them to receive a
dividend payable in, or other distribution
of, Common Stock, or
(ii) subdivide its outstanding shares of Common
Stock into a larger number of shares of
Common Stock, or
(iii) combine its outstanding shares of Common
Stock into a smaller number of shares of
Common Stock;
- 2 -
<PAGE> 3
then, and in each such case, the Exercise Price shall be adjusted to that price
determined by multiplying the Exercise Price in effect immediately prior to
such event by a fraction (i) the numerator of which shall be the total number
of outstanding shares of Common Stock immediately prior to such event, and (ii)
the denominator of which shall be the total number of outstanding shares of
Common Stock immediately after such event.
(b) Adjustment of Number of Shares Purchasable. Upon each
adjustment in the Exercise Price pursuant to Paragraph 4(a) above, such number
of shares of Common Stock purchasable hereunder shall be adjusted by
multiplying the number of shares of Common Stock by a fraction, (i) the
numerator of which shall be the Exercise Price immediately prior to such
adjustment and (ii) the denominator of which shall be the Exercise Price in
effect upon such adjustment.
(c) Other Reclassifications. In case the Company
reclassifies its capital structure in a manner not covered by Paragraph 4(a)
and (b) hereof, an appropriate adjustment shall be made by the Company in its
reasonable discretion to the Exercise Price and number of Warrant Shares.
5. Adjustment for Reorganization, Consolidation, Merger, Etc.
(a) Prior to the expiration date of this Warrant, the
Company shall not consolidate with or merge into another corporation, person,
general partnership, limited partnership, limited liability company, trust or
other entity (collectively, a "Person"), or convey all or substantially all of
its assets to any other Person or Persons, whether affiliated or unaffiliated
(any such Person being included within the meaning of the term "Successor
Person"), or agree to so consolidate, merge or convey assets unless and until,
prior to consummation of such consolidation, merger or conveyance, the
Successor Person thereto shall assume, by written instrument executed and
mailed to the holder of this Warrant, at such time, the obligation to issue and
deliver to such holder such shares of stock, securities or property as, in
accordance with the provisions of paragraph 5(b) below, such holder shall be
entitled to purchase or receive upon its exercise of this Warrant and payment
of the Exercise Price.
(b) In case any capital reorganization or reclassification
of the Common Stock of the Company (or any other Person the stock or other
securities of which are at the time receivable on the exercise of this Warrant)
after the date of execution of this Warrant or in case, after such date, the
Company (or any such other Person) shall consolidate with or merge into another
Person, then and in each such case the holder of this Warrant, upon its
exercise of this Warrant and payment of the Exercise Price, at any time after
the consummation of such reorganization, consolidation, merger or conveyance,
shall be entitled to receive, in lieu of the Common Stock of the Company (or
the stock or other securities of such other Person) the proportionate share of
all stock, securities or other property issued, paid or delivered for or on all
of the Common Stock of the Company (or the stock or other securities of such
other Person) as is allocable to the shares of Common Stock then called for by
this Warrant, as if such holder had exercised this Warrant immediately prior
thereto, all subject to further adjustment as provided in Paragraph 4 and 5
hereof.
6. Issue Tax. The issuance of certificates for Warrant Shares upon
the exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof.
7. No Rights or Liabilities as a Shareholder. This Warrant shall
not entitle the holder hereof to any voting rights or other rights as a
shareholder of the Company. No provision of this Warrant, in the absence of
affirmative action by the holder hereof to purchase Warrant Shares, and no mere
enumeration
- 3 -
<PAGE> 4
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
8. Transfer, Exchange and Replacement of Warrant; Transfer of
Warrant Shares.
(a) Warrant Transfer Provisions. PRIOR TO ONE (1) YEAR
FROM DATE OF ISSUANCE, THIS WARRANT MAY NOT BE SOLD, TRANSFERRED, ASSIGNED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, UNLESS PREVIOUSLY REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR EXEMPT FROM REGISTRATION, AND CONSENTED
TO IN WRITING BY THE COMPANY AFTER CONSULTATION WITH COUNSEL, AND NO OTHER
SALE, TRANSFER, ASSIGNMENT, HYPOTHECATION OR OTHER DISPOSITION OF THIS WARRANT
PRIOR TO SUCH DATE, SHALL BE VALID OR EFFECTIVE. NOTWITHSTANDING THE FOREGOING,
PURCHASER MAY TRANSFER OR ASSIGN THIS WARRANT TO AFFILIATES OF PURCHASER
FOLLOWING PURCHASER'S DELIVERY TO THE COMPANY OF A WRITTEN OPINION OF COUNSEL,
WHICH OPINION AND COUNSEL SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY, THAT
SUCH TRANSFER OR ASSIGNMENT WILL NOT VIOLATE THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT OF 1933, AS AMENDED. For purposes hereof, "Affiliates" shall
mean any officers, employees or partners, as applicable, of the holder or any
entity or person owning 100% of the capital stock or other ownership interest
of the holder or of which the holder owns 100% of the capital stock or other
ownership interest. Any transfer of this Warrant, if previously consented to by
the Company, is registrable at the office or agency of the Company referred to
in Paragraph 8(d) below by the holder hereof in person or by his duly
authorized attorney, upon surrender of this Warrant properly endorsed.
(b) Replacement of Warrant. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or
destruction, upon delivery of an indemnity agreement reasonably satisfactory in
form and amount to the Company, or, in the case of any such mutilation, upon
surrender and cancellation of this Warrant, the Company, at its expense, will
execute and deliver, in lieu thereof, a new Warrant of like tenor.
(c) Cancellation; Payment of Expenses. Upon the surrender
of this Warrant in connection with any permitted transfer or any replacement as
provided in this Section 8, this Warrant shall be promptly canceled by the
Company. The Company shall pay all taxes (other than securities transfer taxes)
and all other expenses and charges payable in connection with the preparation,
execution and delivery of a Warrant pursuant to this Paragraph 8(c).
(d) Register. The Company shall maintain at its principal
office in Atlanta, Georgia (or such other office or agency of the Company as it
may designate by notice to the holder hereof), a register for this Warrant, in
which the Company shall record the name and address of the Person in whose name
this Warrant has been issued, as well as the name and address of each permitted
transferee, if any, and each prior owner of this Warrant, if any.
(e) Exercise, Exchange or Transfer Without Registration.
Anything in this Warrant to the contrary notwithstanding, (i) if, at the time
of the surrender of this Warrant in connection with any exercise of this
Warrant, the Warrant Shares issuable upon such exercise shall not be registered
under the Securities Act of 1933, as amended, and under applicable state
securities or blue sky laws, such Warrant Shares shall contain a legend in form
and content satisfactory to the Company, and the Company may require, as a
condition of allowing such exercise, that
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<PAGE> 5
(A) the holder of this Warrant furnish to the Company a written opinion of
counsel, which opinion and counsel shall be reasonably acceptable to the
Company, to the effect that such exercise may be made without registration
under said Act and under applicable state securities or blue sky laws and (B)
the holder execute and deliver to the Company an investment letter in form and
substance reasonably acceptable to the Company and (ii) prior to one (1) year
from the date of the issuance of Warrant Shares, if any transfer or assignment
of such Warrant Shares shall not be registered under said Act and under
applicable state securities or blue sky laws, the Company may require, as a
condition to such transfer or assignment, that (A) the transferee or assignee
furnish to the Company a written opinion of counsel, which opinion and counsel
shall be reasonably acceptable to the Company, to the effect that such transfer
or assignment may be made without registration under said Act and under
applicable state securities or blue sky laws and (B) the transferee or assignee
execute and deliver to the Company an investment letter in form and substance
reasonably acceptable to the Company.
(f) Representation of Investment Intent. The holder of
this Warrant, by taking and holding the same, represents to the Company that
such holder is acquiring this Warrant for investment and not with a view to the
distribution thereof.
9. Notices. All notices, requests and other communications required
or permitted to be given or delivered hereunder to the holder of this Warrant
shall be in writing, and shall be personally delivered, or shall be sent by
certified or registered mail, postage prepaid and addressed, to such holder at
the address shown for such holder on the books of the Company, or at such other
address as shall have been furnished to the Company by notice from such holder.
All notices, requests and other communications required or permitted to be
given or delivered hereunder to the Company shall be in writing and shall be
personally delivered, or shall be sent by certified or registered mail, postage
prepaid and addressed, to the office of the Company at 2812 Spring Road, Suite
210, Atlanta, Georgia 30339, or at such other address as shall have been
furnished to the holder of this Warrant by notice from the Company. Any such
notice, request or other communication may be sent by facsimile but shall in
such case be subsequently confirmed by a writing personally delivered or sent
by certified or registered mail as provided above. All notices, requests and
other communications shall be deemed to have been given either at the time of
the delivery thereof to (or the receipt by, in the case of a facsimile) the
person entitled to receive such notice at the address of such person for
purposes of this Paragraph 9, or, if mailed, at the completion of the fifth
full day following the date of such mailing thereof to such address, as the
case may be.
10. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA.
11. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may
not be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party (or any predecessor in interest
thereof) against which enforcement of the same is sought.
(b) Descriptive Headings. The descriptive headings of the
several Paragraphs of this Warrant are inserted for purposes of reference only
and shall not affect the meaning or construction of any of the provisions
hereof.
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<PAGE> 6
(c) Successors and Assigns. This Warrant shall be binding
upon any Person succeeding to the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and issued by its duly authorized undersigned officer as of ___________, 1999.
COMSTAR.NET, INC.
By:
--------------------------------
J. Cary Howell
Chief Executive Officer
Attest:
By:
---------------------------
Name:
Title:
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<PAGE> 7
FORM OF EXERCISE AGREEMENT
Dated:________________________
To: comstar.net, inc.
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby exercises said Warrant with regard to _________ of the shares
of Common Stock covered by such Warrant, and makes payment herewith in full
therefor at the price per share provided by such Warrant (i) in cash or by
certified or official bank check or by immediately available federal funds in
the amount of $________________ as provided in the first sentence of Paragraph
1(a) of the Warrant, (ii) by acceptance of a lesser number of shares of Common
Stock as provided in the second sentence of Paragraph 1(a) of the Warrant or
(iii) by delivery of shares of Common Stock of the Company having a fair market
value on the date of exercise equal to the aggregate exercise price of
$___________ as provided in the second sentence of Paragraph 1(a) of the
Warrant. Please issue a certificate or certificates for the Common Stock in the
name of the undersigned and pay any cash for any fractional share to the
undersigned. If this is an exercise of the Warrant in part only, please deliver
to the undersigned a new Warrant of like tenor in the name of the undersigned
evidencing the right to purchase the number of shares of Common Stock as to
which the within Warrant is not being exercised.
If the name(s) in which the shares of Common Stock are to be issued
differ from the name of the holder set forth on the within Warrant, or if the
address to which the certificate(s) representing such shares is to be forwarded
is different from the address of the holder of the Warrant as shown on the
records of the Company, or if more than one stock certificate is to be issued
with regard to such shares, the name(s) and denominations in which the stock
certificate(s) should be issued and/or the address to which the stock
certificate(s) should be forwarded is set forth below.
Name:
--------------------------------------
Signature:
---------------------------------
Title of Signing Officer or Agent (if any):
-------------------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant
or with the name of the assignee
appearing in the assignment form.
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<PAGE> 8
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers all the rights of the undersigned under the within Warrant to:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
---------------- ------- -------------
<S> <C> <C>
</TABLE>
The undersigned hereby irrevocably constitutes and appoints
______________________ as agent and attorney-in-fact to transfer said Warrant
on the books of the within-named corporation, with full power of substitution
in the premises.
Dated:
------------------------
In the presence of:
- ------------------------------
Name:
--------------------------------------
Signature:
---------------------------------
Title of Signing Officer or Agent (if any):
-------------------------------------------
Address:
-----------------------------------
-----------------------------------
Note: The above signature should
correspond exactly with the name
on the face of the within Warrant.
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<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
October 26, 1999
