<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 15, 1999
REGISTRATION NO. 333-86877
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 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)
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<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)
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Copies to:
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<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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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 15, 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 applied to list the shares on the Nasdaq National Market 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.
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<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
INSIDE COVER GRAPHICS
A map of the United States and the comstar.net logo appears at the top of the
inside front cover page. The map shows comstar.net's (1) current data center in
Atlanta, GA; and (2) current points of presence in Athens, Columbus and Atlanta,
GA; Miami, FL, Raleigh, NC; and Birmingham, AL. It also shows (1) data centers
comstar.net plans to build or acquire using a portion of the net proceeds from
the offering in Chicago, IL; Washington, D.C.; Boston, MA; Phoenix, AZ; Miami,
FL; Dallas, TX; and San Francisco, CA; and (2) points of presence comstar.net
plans to build or acquire using a portion of the net proceeds from the offering
in New York, NY; Los Angeles, CA; Houston, TX; Pittsburgh, PA; New Orleans, LA;
Seattle, WA; Columbia, SC; Hartford, CT; Columbus and Cincinnati, OH; and
Charlotte, NC.
The following text appears in a key below the map of the United States:
- Existing Data Center.
- Existing Points of Presence.
- Planned Data Centers.
- Planned Points of Presence.
<PAGE> 4
TABLE OF CONTENTS
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PAGE
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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>
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PAGE
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Management....................... 67
Related Party Transactions....... 74
Principal and Selling
Shareholders................... 75
Description of Capital Stock..... 77
Shares Eligible for Future
Sale........................... 81
Underwriting..................... 83
Legal Matters.................... 86
Experts.......................... 87
Where You Can Find More
Information.................... 87
Index to Financial Statements.... F-1
</TABLE>
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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> 5
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> 6
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.
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<PAGE> 7
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 27 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> 8
THE OFFERING
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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> 9
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." We have never paid
cash dividends on our common stock and do not anticipate paying cash dividends
in the foreseeable future.
<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
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<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
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<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>
5
<PAGE> 10
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> 11
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> 12
- 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> 13
- 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 and T3 leased line Internet access options -- the eCommerce
Guarantee. 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. 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 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 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 30 days after the
claim is finally determined. If we incur significant free service obligations or
are required to pay significant amounts pursuant to the eCommerce Guarantee, 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 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.
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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 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
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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 telecommunications 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,
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
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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 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,
it will not grant our applications to register the marks. If the Patent and
Trademark Office does not grant our registrations, 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 may be unable to obtain approval as
a CLEC 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 regulation governing the United States
telecommunications industry remains subject to judicial review and rule-making
by the Federal Communications Commission. As a result, we cannot predict the
effect these laws and regulations will have on our future operations or results.
Federal, state and local authorities have initiated many regulatory actions
regarding important items that impact CLECs.
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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.
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
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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 62.5% 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 Internet increases. We may not have the resources
or expertise to compete successfully with existing or new competitors, which
include:
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<PAGE> 25
- 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, recent reforms in the federal regulation of the
telecommunications industry have created greater opportunities for local
exchange carriers, including incumbent local exchange carriers and competitive
local exchange carriers, 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> 26
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> 27
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
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<PAGE> 28
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, 5,031,952 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
536,697 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> 29
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> 30
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 11/1/99 prime + 1%
Premier Bank................................ 700,000 11/1/99 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> 31
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> 32
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% $0.21
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> 33
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> 34
<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> 35
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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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 1.3% for the year ended December 31, 1997, 2.4% 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> 37
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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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 $2,288,072 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
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<PAGE> 39
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 7.2% 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,
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<PAGE> 40
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.
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<PAGE> 41
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.
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<PAGE> 42
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.
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<PAGE> 43
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
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<PAGE> 44
from inception to December 31, 1996. Cost of network services increased to
$528,835 for the year ended December 31, 1997 from $73,963 for the period from
inception to December 31, 1996. This increase in cost of network services is due
primarily to the increase in the amount of upstream and downstream access we
purchased to serve our growing customer base. The decrease as a percentage of
total revenues is due to our increased use of excess upstream capacity resulting
from the increase in our customer base.
Salaries and wages. As a percentage of total revenues, salaries and wages
decreased to 54.8% for the year ended December 31, 1997 from 230.0% for the
period from inception to December 31, 1996. Salaries and wages increased to
$370,145 for the year ended December 31, 1997 from $150,448 for the period from
inception to December 31, 1996. We had nine employees at December 31, 1997
compared to seven employees at December 31, 1996.
General and administrative. As a percentage of total revenues, general and
administrative expenses decreased to 19.5% for the year ended December 31, 1997
from 102.9% for the period from inception to December 31, 1996. General and
administrative expenses increased to $131,767 for the year ended December 31,
1997 from $67,259 for the period from inception to December 31, 1996. The
increase in general and administrative expenses is attributed primarily to an
increase in advertising costs, travel and entertainment expenses relating to
potential customers and the new POPs in Miami, Raleigh and Athens; equipment and
software purchases and installation costs related to the expansion of the data
center facilities; and equipment rentals. The decrease as a percentage of
revenues is due to the economies of scale realized, as general and
administrative costs generally do not fluctuate with increases and decreases in
total revenues.
Rent. As a percentage of total revenues, rent decreased to 4.9% for the
year ended December 31, 1997 from 33.3% for the period from inception to
December 31, 1996. Rent increased to $33,152 for the year ended December 31,
1997 from $21,792 for the period from inception to December 31, 1996. This
increase in rent expense is due primarily to a full twelve months of rent in the
year ended December 31, 1997 compared to only seven months for the period from
inception to December 31, 1996.
Management fees. As a percentage of total revenues, management fees
decreased to 6.2% for the year ended December 31, 1997 from 12.2% for the period
from inception to December 31, 1996. Management fees increased to $42,000 for
the year ended December 31, 1997 from $8,000 for the period from inception to
December 31, 1996. We paid db Telecom Technologies $2,000 per month from January
1, 1997 through June 30, 1997 and $5,000 per month from July 1, 1997 through
December 31, 1997 compared to $1,000 per month for the period from inception to
December 31, 1996.
Depreciation and amortization. As a percentage of total revenues,
depreciation and amortization decreased to 8.5% for the year ended December 31,
1997 from 17.8% for the period from inception to December 31, 1996. Depreciation
and amortization increased to $57,255 for the year ended December 31, 1997 from
$11,622 for the period from inception to December 31, 1996. The increase is due
primarily to an increase in capitalized costs of property and equipment acquired
during the year ended December 31, 1997. The cost basis of property and
equipment increased to $384,300 at December 31, 1997 from $120,442 at December
31, 1996. The increase in amortization expense is directly attributed to the
amortization of the customer list and related customer accounts purchased in
July 1997. The cost basis of this customer list and related customer accounts
was $85,338.
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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 11/1/99 prime + 1%
Premier Bank.............................................. 700,000 11/1/99 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 70 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 operations generated approximately $2.9 billion of the $10.7 billion
aggregate 1998 ISP revenue. Moreover, IDC predicts revenues generated 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 32.5% 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 become a competitive local exchange carrier, or CLEC, which
would permit us to provide voice and other data services to complement our
current services. We believe that technology advancements and customer
preferences are driving the convergence of communications services toward
service providers who can offer multiple communication services through a single
network. We also believe that to remain competitive in the face of these
changes, we must eventually become a single-source provider of voice and data
communications services.
NETWORK DESIGN
To increase Internet access speed for our customers, we designed our
network to avoid congested areas on the Internet. Most Internet traffic moves
through central Internet exchanges. To avoid transporting all of our customers'
traffic through these central exchanges and the related network access points,
we have established direct links to very large ISPs, including UUNET, GTE
Internetworking, Sprint and Intermedia Internet. Through this network, we can
dynamically reroute traffic quickly and efficiently. Our network experts monitor
traffic patterns and congestion points throughout the network and reroute our
customers' traffic to a different Internet link when there is excessive
congestion. As a result, we can deliver most of our customers' Internet traffic
while bypassing congested points on the Internet.
Another important characteristic of our network is its high level of
reliability. We maintain multiple links with very large ISPs to protect against
a service outage should one or more links fail. Our equipment automatically
monitors Internet traffic and reroutes it to avoid breakdowns at Internet
exchanges and access points so that our customers' upstream transmissions are
not affected by failures in other systems. In addition, each data center and POP
we operate has multiple fiber or copper telecommunications lines into the
facility so that downstream transmissions operate reliably.
Our network provides optimal service to our customers who are
geographically located relatively close to either a data center or a POP. Close
proximity allows the transportation of our customers' traffic from their server
to its destination and back in a shorter period of
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time. Close proximity also allows us to provide a greater range of services at
lower costs to our customers.
The following diagram describes how our network is linked to very large
ISPs and how we can distribute our customers' traffic:
Central Internet Exchanges diagram
A chart appears here, illustrating the manner in which comstar.net is connected
to major Internet access providers and its customers, showing various ways in
which comstar.net is able to distribute its customers' traffic over the
Internet.
The chart has 3 columns. The first column has five circles, containing the
following text: (1) UUNET, (2) GTE/BBN, (3) Sprint, (4) Intermedia and (5)
Others. The second column has two circles, containing the following text: (1)
comstar.net and(2) other ISP. The third column contains five circles, each of
which contains the following text: business customer. At the far left of the
three columns, there is a bar with the caption ''Central Internet Exchanges'',
illustrating the position of the Central Internet Exchanges.
SERVICES
We create tailored solutions for our customers based on their business and
technical requirements, modifying these solutions as our customers' needs
evolve. Unlike many other ISPs that outsource their technical support to
independent call centers, our highly reliable services are supported by our
knowledgeable and responsive network experts, some of whom are the same
professionals that implemented our network. Our primary services include
dedicated Internet access, co-location services and managed application hosting.
We also offer Web hosting, e-mail services and domain name services.
Our customer contracts require us to provide our services for a one-year,
two-year or three-year term, and contain, among other things, a limited service
level warranty related to the continuous availability of service on a 24 hours
per day, seven days per week basis, except for scheduled maintenance periods.
This warranty provides a credit for free service for disruptions in our Internet
access services. At the end of the term of a contract, a customer may elect to
extend the contract's term on a month-to-month basis. Any change or upgrade in
service, however, typically requires a new contract for a new term.
Internet Access. Our Internet access services are designed to deliver the
ease of expansion, high availability and performance required by moderate to
high volume Internet operations that are central to a customer's business.
Revenues from our Internet access services represented approximately 62.3% of
our revenues for the year ended December 31, 1998 and 63.0% of our revenues for
the nine months ended September 30, 1999.
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Our Internet access options include:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ------- ----------- --------
<S> <C> <C>
T1, Fractional T1 and Leased lines are a dedicated service Leased lines, which are priced
T3 Leased Lines that delivers access speeds from on a per-mile basis, provide a
56Kbps to 44Mbps. customer with a truly private
network where no other entity's
data flows over the same
network. Leased lines are very
cost-effective when reasonably
close to one of our POPs or our
data center.
Frame Relay Frame relay is a dedicated service Gives customers connecting
that delivers access speeds from geographically dispersed
56Kbps to 44Mbps. offices an affordable
alternative with pricing that
is not based on mileage.
Symmetrical Digital SDSL is a dedicated service using Provides inexpensive Internet
Subscriber Line, or digital technology to deliver access access for customers with high
SDSL speeds from 160Kbps to 1.54Mbps. bandwidth requirements.
Integrated Services ISDN is a dial-up service utilizing Provides inexpensive Internet
Digital Network, or digital signaling technology to access for customers with low
ISDN deliver access speeds of either bandwidth requirements.
64Kbps or 128Kbps.
</TABLE>
We are completing the development of an important enhancement to our T1,
fractional T1 and T3 leased line Internet access options -- the eCommerce
Guarantee. 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. 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 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 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 30 days after the
claim is finally determined.
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
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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 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
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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 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
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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 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.
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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.
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,
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- 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.
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. The relatively recent sweeping reforms in the federal
regulation of the telecommunications industry brought about by the
Telecommunications Act of 1996 have created greater opportunities for local
exchange carriers, including the regional Bell operating companies, to enter the
Internet access market. 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
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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.
- 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
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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 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
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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 are in the beginning stages of obtaining 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
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
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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,
- 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
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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. As a nondominant carrier, we will be subject to relatively
limited FCC regulation. At the federal 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
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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 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 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 our access to municipally owned or
controlled easements and other rights of way. In addition, if a
telecommunications provider constructs
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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.
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.
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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
expired on September 30, 1999. We are currently negotiating a renewal of the
lease that will extend the term to September 30, 2000. The lease, as renewed,
covers approximately 4,200 square feet and the annual rent is approximately
$63,000. The lease relating to the data center at our Atlanta facility expires
on March 14, 2001 and has an annual rent of approximately $75,000. The data
center comprises approximately 3,500 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; 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. 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 November 1999. We intend to repay this loan and
the accrued interest with a portion of the net proceeds from this offering.
In December 1998, we entered into an agreement with nschool Communication
Systems, Inc., a developer and licensor of software that links educators,
parents and students. Under the agreement, we developed software applications
for nschool in exchange for 25% of the outstanding common stock of nschool. In
addition, we promised not to compete with nschool by utilizing the developed
technology, and nschool granted us the right to match any contract for Internet
access presented to nschool by any other ISP. We granted to nschool a license to
use both the combined software product and the separable components for limited
purposes, and nschool granted to us a license to use the components of the
software for any purpose and to use the combined software product for limited
purposes.
In September 1999, we granted options to purchase an aggregate of 260,000
shares of our common stock to key employees of db Telecom Technologies at an
exercise price of $11.42 per share in connection with consulting services these
employees performed for us. All of these options were granted pursuant to our
Amended and Restated 1999 Stock Option and Incentive Plan and are currently
exercisable. In September 1999, 500 of the options were forfeited.
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In September 1999, the board granted each of Mr. Dayton and Mr. Bruce an
option to purchase 68,750 shares of common stock at an exercise price of $11.42
per share in consideration for their financial and management support of us
since our inception. These options were granted under our Amended and Restated
1999 Stock Option and Incentive Plan, are immediately exercisable and have a
term of ten years from the date of grant.
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
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
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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)........................... 5,245,348 97.9% 77,000 5,168,348 62.5%
</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 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 5,185,893 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............................ 31,947 Shares salable under Rule 144,
144(k) or 701 that are not
subject to 180-day lockup.
180 days........................... 5,031,952 Lockup released; shares salable
under Rule 144, 144(k) or 701.
Over 180 days...................... 76,941 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 530,666 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.
Certain members of the selling group may facilitate the distribution of the
shares sold in this offering through the Internet. The underwriters have agreed
to allocate a limited number of shares to these members of the selling group for
sale to brokerage account holders. These members of the selling group will
receive the same selling concession that other dealers will receive in
connection with sales of shares in the offering.
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
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<PAGE> 88
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.
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 5,008,763 shares of
our common stock, or approximately 60.4% 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.
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<PAGE> 89
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 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 shares of common stock 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 applied to have the common stock approved for quotation on the
Nasdaq National Market 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
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<PAGE> 90
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 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.
87
<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. 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 the 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 Emerson Center Company dated May
2, 1996, Addendum B to lease dated June 14, 1996 and First
Amendment to lease dated August 26, 1996.
</TABLE>
II-3
<PAGE> 127
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.5** -- Lease of office space from Emerson Center Company dated
February 5, 1998, First Amendment to Lease dated September
17, 1998 and Second Amendment to lease dated January 7,
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.
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 registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 14th 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
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 14, 1999
- --------------------------------------------- Director (Principal
J. Cary Howell Executive Officer)
/s/ CHRISTOPHER K. MARTIN Chief Financial Officer and October 14, 1999
- --------------------------------------------- Treasurer (Principal
Christopher K. Martin Financial and Accounting
Officer)
/s/ SAMUEL F. DAYTON Chairman of the Board and October 14, 1999
- --------------------------------------------- President
Samuel F. Dayton
* Chief Technology Officer, October 14, 1999
- --------------------------------------------- Secretary and Director
Edward N. Landa
* Director October 14, 1999
- ---------------------------------------------
James L. Bruce, Jr.
* Director October 14, 1999
- ---------------------------------------------
Glenn W. Sturm
* Director October 14, 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 Emerson Center Company dated May
2, 1996, Addendum B to lease dated June 14, 1996 and First
Amendment to lease dated August 26, 1996.
10.5** -- Lease of office space from Emerson Center Company dated
February 5, 1998, First Amendment to Lease dated September
17, 1998 and Second Amendment to lease dated January 7,
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.
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 3.2
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
COMSTAR.NET, INC.
ARTICLE ONE
NAME
The name of the Corporation is comstar.net, inc.
ARTICLE TWO
CAPITALIZATION
The total number of shares of all classes which the Corporation has
the authority to issue is 55,000,000, of which: (i) 50,000,000 shares of stock
are designated as Common Stock (without designation as to series), without par
value per share and (ii) 5,000,000 shares are designated as Preferred Stock,
without par value per share. The designations, voting powers, preferences,
relative rights, qualifications, limitations and restrictions of or on each
class and series of stock are as follows:
A. COMMON STOCK
The Corporation is authorized to issue 50,000,000 shares of Common
Stock, without par value per share. Each share of Common Stock shall be
entitled to one vote.
Holders of Common Stock shall be entitled to receive the net assets of
the Corporation upon dissolution, except as may be provided in one or more
Preferred Stock Designations (as such term is defined below).
Prior to the filing of these Amended and Restated Articles of
Incorporation, the Corporation had authority to issue 105,000,000 shares of
capital stock of which: (i) 80,000,000 shares were designated as Common Stock
(without designation as to series), without par value per share; (ii)
10,000,000 shares of stock were designated as Common Stock Series A, without
par value per share; (iii) 10,000,000 shares were designated as Common Stock
Series B, without par value per share; and (iv) 5,000,000 shares were
designated as Preferred Stock, without par value per share. Upon the filing of
these Amended and Restated Articles of Incorporation, all outstanding shares of
Common Stock Series A and Common Stock Series B shall automatically be
converted into shares of Common Stock, without designation as to series, on a
two-for-one basis. Therefore, upon the filing of these Amended and Restated
Articles of Incorporation, a holder of Common Stock Series A or Common Stock
Series B shall receive one share of Common Stock, without designation as to
series, for every two shares of Common Stock Series A or Common Stock Series B
such holder holds. For simplicity and ease of administration, no fractional
shares shall be issued; instead, all fractional shares shall be rounded up to
the nearest whole number.
<PAGE> 2
B. PREFERRED STOCK
In addition to the Common Stock, the Corporation shall have the
authority, exercisable by its Board of Directors, to issue up to 5,000,000
shares of Preferred Stock, any part or all of which shares of Preferred Stock
may be established and designated from time to time by the Board of Directors
by filing an amendment (a "Preferred Stock Designation") to these Amended and
Restated Articles of Incorporation, which shall be effective without
shareholder action, in accordance with the appropriate provisions of the
Georgia Business Corporation Code (the "Code"), and any amendment or supplement
thereto, in such series and with such preferences, limitations and relative
rights as may be determined by the Board of Directors. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of a
majority of the votes of the Common Stock, without a vote of the holders of the
shares of Preferred Stock, or of any series thereof, unless a vote of any such
holders is required by law or pursuant to the Preferred Stock Designation or
Preferred Stock Designations establishing the Series of Preferred Stock.
ARTICLE THREE
LIMITATION ON DIRECTOR LIABILITY
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of the duty of
care or any other duty as a director, except that such liability shall not be
eliminated for:
(a) any appropriation, in violation of the director's duties, of any
business opportunity of the Corporation;
(b) acts or omissions that involve intentional misconduct or a
knowing violation of law;
(c) liability under Section 14-2-832 (or any successor provision or
redesignation thereof) of the Code; and
(d) any transaction from which the director derived an improper
personal benefit.
If at any time the Code shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Code, as so amended, without further action
by the shareholders, unless the provisions of the Code, as amended, require
further action by the shareholders.
Any repeal or modification of the foregoing provisions of this Article
Three shall not adversely affect the elimination or limitation of liability or
alleged liability pursuant hereto of any
2
<PAGE> 3
director of the Corporation for or with respect to any alleged act or omission
of the director occurring prior to such a repeal or modification.
ARTICLE FOUR
BOARD AND SHAREHOLDER ACTION
REQUIRED FOR CERTAIN TRANSACTIONS
The affirmative vote of at least 66 2/3% of the directors is required
for the following actions by the Corporation to be submitted to a vote of the
shareholders:
(a) a sale of all or substantially all of the assets of the
Corporation;
(b) a liquidation or dissolution of the Corporation;
(c) the merger, consolidation or reorganization of the
Corporation, unless the shareholders of the Corporation
immediately prior to such transaction own at least a majority
of the combined voting power of the Corporation resulting
from such merger, consolidation or reorganization; or
(d) any increase in the number of directors above 15 directors;
provided, further, that the affirmative vote of the holders of 66 2/3% of the
outstanding shares of Common Stock is required for shareholder approval of any
action outlined in the clauses above.
ARTICLE FIVE
DIRECTORS
The Corporation shall have not more than 15 directors, and the number
of directors shall be set by the Board of Directors as provided in the
Corporation's bylaws. The Board of Directors shall be divided into three
classes to be known as Class I, Class II, and Class III, which shall be as
nearly equal in number as possible. Except in the case of death, resignation,
disqualification, or removal for cause, each director shall serve for a term
ending on the date of the third annual meeting of shareholders following the
annual meeting at which the director was elected; provided, however, that each
initial director in Class I shall hold office until the first annual meeting of
shareholders after his election; each initial director in Class II shall hold
office until the second annual meeting of shareholders after his election; and
each initial director in Class III shall hold office until the third annual
meeting of shareholders after his election. Despite the expiration of a
director's term, such director shall continue to serve until his or her
successor, if there is to be any, has been elected and has qualified. In the
event of any increase or decrease in the authorized number of directors, the
newly created or eliminated directorships resulting from such an increase or
decrease shall be apportioned among the three classes of directors so that the
three classes remain as nearly equal in size as possible; provided, however,
that there shall be no classification of additional directors elected by the
Board of Directors until the next meeting of shareholders called for the
purposes of electing directors, at which meeting the terms of all such
additional directors shall expire, and such additional directors positions, if
they are to be
3
<PAGE> 4
continued, shall be apportioned among the classes of directors and nominees
therefor shall be submitted to the shareholders for their vote.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation,
the Board of Directors, committees of the Board of Directors, and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors such directors consider
pertinent. This provision solely grants discretionary authority to the
directors and shall not be deemed to provide to any other constituency any
right to be considered.
These Amended and Restated Articles of Incorporation were duly
approved by the Board of Directors, on September 17, 1999 and were duly
approved and adopted by the shareholders on October 14, 1999 in accordance with
Section 14-2-1003 of the Georgia Business Corporation Code.
IN WITNESS WHEREOF, the Corporation has caused these Amended and
Restated Articles of Incorporation to be executed and attested by its duly
authorized officer on ______________, ______.
---------------------------------------
J. Cary Howell
Chief Executive Officer
4
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
(formerly ComStar Communications, Inc.)
<PAGE> 2
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE ONE OFFICE........................................................................................... 1
1.1 REGISTERED OFFICE AND AGENT................................................................... 1
1.2 PRINCIPAL OFFICE.............................................................................. 1
1.3 OTHER OFFICES................................................................................. 1
ARTICLE TWO SHAREHOLDER'S MEETINGS........................................................................... 1
2.1 PLACE OF MEETINGS............................................................................. 1
2.2 ANNUAL MEETINGS............................................................................... 2
2.3 SPECIAL MEETINGS.............................................................................. 2
2.4 NOTICE OF MEETINGS............................................................................ 2
2.5 WAIVER OF NOTICE.............................................................................. 2
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT.................................................... 3
2.7 VOTING OF SHARES.............................................................................. 3
2.8 PROXIES....................................................................................... 3
2.9 PRESIDING OFFICER............................................................................. 3
2.10 ADJOURNMENTS.................................................................................. 4
2.11 CONDUCT OF THE MEETING........................................................................ 4
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING...................................................... 4
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS......................................................... 4
ARTICLE THREE BOARD OF DIRECTORS............................................................................. 5
3.1 GENERAL POWERS................................................................................ 5
3.2 NUMBER, ELECTION AND TERM OF OFFICE........................................................... 5
3.3 REMOVAL OF DIRECTORS.......................................................................... 6
3.4 VACANCIES..................................................................................... 6
3.5 COMPENSATION.................................................................................. 6
3.6 COMMITTEES OF THE BOARD OF DIRECTORS.......................................................... 7
3.7 QUALIFICATION OF DIRECTORS.................................................................... 7
3.8 CERTAIN NOMINATION REQUIREMENTS............................................................... 7
ARTICLE FOUR MEETINGS OF THE BOARD OF DIRECTORS.............................................................. 8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
4.1 REGULAR MEETINGS.............................................................................. 8
4.2 SPECIAL MEETINGS.............................................................................. 8
4.3 PLACE OF MEETINGS............................................................................. 8
4.4 NOTICE OF MEETINGS............................................................................ 8
4.5 QUORUM........................................................................................ 8
4.6 VOTE REQUIRED FOR ACTION...................................................................... 8
4.7 PARTICIPATION BY CONFERENCE TELEPHONE......................................................... 9
4.8 ACTION BY DIRECTORS WITHOUT A MEETING......................................................... 9
4.9 ADJOURNMENTS.................................................................................. 9
4.10 WAIVER OF NOTICE.............................................................................. 9
ARTICLE FIVE OFFICERS........................................................................................ 10
5.1 OFFICES....................................................................................... 10
5.2 TERM.......................................................................................... 10
5.3 COMPENSATION.................................................................................. 10
5.4 REMOVAL....................................................................................... 10
5.5 CHAIRMAN OF THE BOARD......................................................................... 10
5.6 CHIEF EXECUTIVE OFFICER....................................................................... 10
5.7 PRESIDENT..................................................................................... 11
5.8 VICE PRESIDENT................................................................................ 11
5.9 SECRETARY..................................................................................... 11
5.10 TREASURER..................................................................................... 11
ARTICLE SIX DISTRIBUTION AND DIVIDENDS....................................................................... 11
ARTICLE SEVEN SHARES......................................................................................... 12
7.1 SHARE CERTIFICATES............................................................................ 12
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS....................................... 12
7.3 TRANSFERS OF SHARES........................................................................... 12
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER...................................................... 12
7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES....................................................... 13
7.6 FIXING OF RECORD DATE......................................................................... 13
7.7 RECORD DATE IF NONE FIXED..................................................................... 13
ARTICLE EIGHT INDEMNIFICATION................................................................................ 13
8.1 INDEMNIFICATION OF DIRECTORS.................................................................. 13
8.2 INDEMNIFICATION OF OTHERS..................................................................... 14
8.3 OTHER ORGANIZATIONS........................................................................... 14
8.4 DETERMINATION................................................................................. 14
8.5 ADVANCES...................................................................................... 14
</TABLE>
<PAGE> 4
<TABLE>
<S> <C> <C>
8.6 NON-EXCLUSIVITY............................................................................... 15
8.7 INSURANCE..................................................................................... 15
8.8 NOTICE........................................................................................ 15
8.9 SECURITY...................................................................................... 15
8.10 AMENDMENT..................................................................................... 16
8.11 AGREEMENTS.................................................................................... 16
8.12 CONTINUING BENEFITS........................................................................... 16
8.13 SUCCESSORS.................................................................................... 16
8.14 SEVERABILITY.................................................................................. 16
8.15 ADDITIONAL INDEMNIFICATION.................................................................... 16
ARTICLE NINE MISCELLANEOUS................................................................................... 17
9.1 INSPECTION OF BOOKS AND RECORDS............................................................... 17
9.2 FISCAL YEAR................................................................................... 17
9.3 CORPORATE SEAL................................................................................ 17
9.4 ANNUAL STATEMENTS............................................................................. 17
9.5 NOTICE........................................................................................ 17
ARTICLE TEN AMENDMENTS....................................................................................... 18
</TABLE>
<PAGE> 5
AMENDED AND RESTATED BYLAWS
OF
COMSTAR.NET, INC.
References in these Amended and Restated Bylaws to "Articles of
Incorporation" are to the Amended and Restated Articles of Incorporation of
comstar.net, inc., a Georgia corporation (the "Corporation"), as amended and
restated from time to time (the "Articles"). These Amended and Restated Bylaws
are intended to become effective upon the closing of the Corporation's initial
public offering.
All of these Bylaws are subject to contrary provisions, if any, of the
Articles (including provisions designating the preferences, limitations, and
relative rights of any class or series of shares), the Georgia Business
Corporation Code (the "Code"), and other applicable law, as in effect on and
after the effective date of these Bylaws. References in these Bylaws to
"Sections" shall refer to sections of the Bylaws, unless otherwise indicated.
ARTICLE ONE
OFFICE
1.1 REGISTERED OFFICE AND AGENT. The Corporation shall maintain a
registered office and shall have a registered agent whose business office is
the same as the registered office.
1.2 PRINCIPAL OFFICE. The principal office of the Corporation shall
be at the place designated in the Corporation's annual registration with the
Georgia Secretary of State.
1.3 OTHER OFFICES. In addition to its registered office and
principal office, the Corporation may have offices at other locations either in
or outside the State of Georgia.
ARTICLE TWO
SHAREHOLDERS' MEETINGS
2.1 PLACE OF MEETINGS. Meetings of the Corporation's shareholders
may be held at any location inside or outside the State of Georgia designated
by the Board of Directors or any other person or persons who properly call the
meeting, or if the Board of Directors or such other person or persons do not
specify a location, at the Corporation's principal office.
<PAGE> 6
2.2 ANNUAL MEETINGS. The Corporation shall hold an annual meeting of
shareholders, at a date and time determined by the Board of Directors, to elect
directors and to transact any business that properly may come before the
meeting. The annual meeting may be combined with any other meeting of
shareholders, whether annual or special.
2.3 SPECIAL MEETINGS. Special meetings of shareholders of one or
more classes or series of the Corporation's shares may be called at any time by
the Board of Directors, the Chairman of the Board, or the Chief Executive
Officer, and shall be called by the Corporation upon the written request (in
compliance with applicable requirements of the Code) of the holders of shares
representing twenty-five percent (25%) or more of the votes entitled to be cast
on each issue proposed to be considered at the special meeting; provided,
however, that at any time the Corporation has more than 100 beneficial owners
(as defined in Section 14-2-110 of the Code) of its shares, such written
request must be made by the holders of a majority of such votes. The business
that may be transacted at any special meeting of shareholders shall be limited
to that proposed in the notice of the special meeting given in accordance with
Section 2.4 (including related or incidental matters that may be necessary or
appropriate to effectuate the proposed business).
2.4 NOTICE OF MEETINGS. In accordance with Section 9.5 and subject
to waiver by a shareholder pursuant to Section 2.5, the Corporation shall give
written notice of the date, time, and place of each annual and special
shareholders' meeting no fewer than 10 days nor more than 60 days before the
meeting date to each shareholder of record entitled to vote at the meeting. The
notice of an annual meeting need not state the purpose of the meeting unless
these Bylaws require otherwise. The notice of a special meeting shall state the
purpose for which the meeting is called. If an annual or special shareholders'
meeting is adjourned to a different date, time, or location, the Corporation
shall give shareholders notice of the new date, time, or location of the
adjourned meeting, unless a quorum of shareholders was present at the meeting
and information regarding the adjournment was announced before the meeting was
adjourned; provided, however, that if a new record date is or must be fixed in
accordance with Section 7.6, the Corporation must give notice of the adjourned
meeting to all shareholders of record as of the new record date who are
entitled to vote at the adjourned meeting.
2.5 WAIVER OF NOTICE. A shareholder may waive any notice required by
the Code, the Articles, or these Bylaws, before or after the date and time of
the matter to which the notice relates, by delivering to the Corporation a
written waiver of notice signed by the shareholder entitled to the notice. In
addition, a shareholder's attendance at a meeting shall be (a) a waiver of
objection to lack of notice or defective notice of the meeting unless the
shareholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting, and (b) a waiver of objection to
consideration of a particular matter at the meeting that is not within the
purpose stated in the meeting notice, unless the shareholder objects to
considering the matter when it is presented. Except as otherwise required by
the Code, neither the purpose of nor the business transacted at the meeting
need be specified in any waiver.
2
<PAGE> 7
2.6 VOTING GROUP; QUORUM; VOTE REQUIRED TO ACT. (a) Unless otherwise
required by the Code or the Articles, all classes or series of the
Corporation's shares entitled to vote generally on a matter shall for that
purpose be considered a single voting group (a "Voting Group"). If either the
Articles or the Code requires separate voting by two or more Voting Groups on a
matter, action on that matter is taken only when voted upon by each such Voting
Group separately. At all meetings of shareholders, any Voting Group entitled to
vote on a matter may take action on the matter only if a quorum of that Voting
Group exists at the meeting, and if a quorum exists, the Voting Group may take
action on the matter notwithstanding the absence of a quorum of any other
Voting Group that may be entitled to vote separately on the matter. Unless the
Articles, these Bylaws, or the Code provides otherwise, the presence (in person
or by proxy) of shares representing a majority of votes entitled to be cast on
a matter by a Voting Group shall constitute a quorum of that Voting Group with
regard to that matter. Once a share is present at any meeting other than solely
to object to holding the meeting or transacting business at the meeting, the
share shall be deemed present for quorum purposes for the remainder of the
meeting and for any adjournments of that meeting, unless a new record date for
the adjourned meeting is or must be set pursuant to Section 7.6 of these
Bylaws.
(b) Except as provided in Section 3.4, if a quorum exists, action on
a matter by a Voting Group is approved by that Voting Group if the votes cast
within the Voting Group favoring the action exceed the votes cast opposing the
action, unless the Articles, a provision of these Bylaws that has been adopted
pursuant to Section 14-2-1021 of the Code (or any successor provision), or the
Code requires a greater number of affirmative votes.
2.7 VOTING OF SHARES. Unless otherwise required by the Code or the
Articles, each outstanding share of any class or series having voting rights
shall be entitled to one vote on each matter that is submitted to a vote of
shareholders.
2.8 PROXIES. A shareholder entitled to vote on a matter may vote in
person or by proxy pursuant to an appointment executed in writing by the
shareholder or by his attorney-in-fact. An appointment of a proxy shall be
valid for 11 months from the date of its execution, unless a longer or shorter
period is expressly stated in the proxy. A proxy is not invalidated by the
death or incompetency of a shareholder unless, before the authority is
exercised pursuant to the proxy, notice of such death or incompetency is
received by the corporate officer responsible for maintaining the list of
shareholders.
2.9 PRESIDING OFFICER. Except as otherwise provided in this Section
2.9, the Chairman of the Board, and in his absence or disability the Chief
Executive Officer, shall preside at every shareholders' meeting (and any
adjournment thereof) as its chairman, if either of them is present and willing
to serve. If neither the Chairman of the Board nor the Chief Executive Officer
is present and willing to serve as chairman of the meeting, and if the Chairman
of the Board has not designated another person who is present and willing to
serve, then a majority of the Corporation's directors present at the meeting
shall be entitled to designate a person to serve as chairman. If no director of
the Corporation is present at the meeting or if a majority of the directors who
are present cannot be established, then a chairman
3
<PAGE> 8
of the meeting shall be selected by a majority vote of (a) the shares present
at the meeting that would be entitled to vote in an election of directors, or
(b) if no such shares are present at the meeting, then the shares present at
the meeting comprising the Voting Group with the largest number of shares
present at the meeting and entitled to vote on a matter properly proposed to be
considered at the meeting. The chairman of the meeting may designate other
persons to assist with the meeting.
2.10 ADJOURNMENTS. At any meeting of shareholders (including an
adjourned meeting), a majority of shares of any Voting Group present and
entitled to vote at the meeting (whether or not those shares constitute a
quorum) may adjourn the meeting, but only with respect to that Voting Group, to
reconvene at a specific time and place. If more than one Voting Group is
present and entitled to vote on a matter at the meeting, then the meeting may
be continued with respect to any such Voting Group that does not vote to
adjourn as provided above, and such Voting Group may proceed to vote on any
matter to which it is otherwise entitled; provided, however, that if (a) more
than one Voting Group is required to take action on a matter at the meeting and
(b) any one of those Voting Groups votes to adjourn the meeting (in accordance
with the preceding sentence), then the action shall not be deemed to have been
taken until the requisite vote of any adjourned Voting Group is obtained at its
reconvened meeting. The only business that may be transacted at any reconvened
meeting is business that could have been transacted at the meeting that was
adjourned, unless further notice of the adjourned meeting has been given in
compliance with the requirements for a special meeting that specifies the
additional purpose or purposes for which the meeting is called. Nothing
contained in this Section 2.10 shall be deemed or otherwise construed to limit
any lawful authority of the chairman of a meeting to adjourn the meeting.
2.11 CONDUCT OF THE MEETING. At any meeting of shareholders, the
chairman of the meeting shall be entitled to establish the rules of order
governing the conduct of business at the meeting.
2.12 ACTION OF SHAREHOLDERS WITHOUT A MEETING. Action required or
permitted to be taken at a meeting of shareholders may be taken without a
meeting if the action is taken by all shareholders entitled to vote on the
action or, if permitted by the Articles, by persons who would be entitled to
vote at a meeting shares having voting power to cast the requisite number of
votes (or numbers, in the case of voting by groups) that would be necessary to
authorize or take the action at a meeting at which all shareholders entitled to
vote were present and voted. The action must be evidenced by one or more
written consents describing the action taken, signed by shareholders entitled
to take action without a meeting, and delivered to the Corporation for
inclusion in the minutes or filing with the corporate records. Where required
by Section 14-2-704 or other applicable provision of the Code, the Corporation
shall provide shareholders with written notice of actions taken without a
meeting.
2.13 MATTERS CONSIDERED AT ANNUAL MEETINGS. Notwithstanding anything
to the contrary in these Bylaws, the only business that may be conducted at an
annual meeting of shareholders shall be business brought before the meeting (a)
by or at the direction of the Board of Directors prior to the meeting, (b) by
or at the direction of the Chairman of the Board or the
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Chief Financial Officer, or (c) by a shareholder of the Corporation who is
entitled to vote with respect to the business and who complies with the notice
procedures set forth in this Section 2.13. For business to be brought properly
before an annual meeting by a shareholder, the shareholder must have given
timely notice of the business in writing to the Secretary of the Corporation.
To be timely, a shareholder's notice must be delivered or mailed to and
received at the principal office of the Corporation, as applicable: (a) if the
Corporation is at such time subject to Regulation 14A promulgated by the
Securities and Exchange Commission - not less than forty-five (45) nor more
than ninety (90) days prior to the first anniversary of the date on which the
Corporation first mailed its proxy materials for the prior year's annual
meeting; or (b) if the Corporation is at such time not subject to Regulation
14A - not less than sixty (60) nor more than ninety (90) days prior to the
first anniversary of the prior year's annual meeting; provided, in any such
event, that if during the prior year the Corporation did not hold an annual
meeting, or if the date of the meeting has changed more than 30 days from the
prior year, the notice to be timely must be delivered or mailed to and received
at the principal office of the Corporation a reasonable time before the
Corporation mails its proxy materials for the current year. A shareholder's
notice to the Secretary shall set forth a brief description of each matter of
business the shareholder proposes to bring before the meeting and the reasons
for conducting that business at the meeting; the name, as it appears on the
Corporation's books, and address of the shareholder proposing the business; the
series or class and number of shares of the Corporation's capital stock that
are beneficially owned by the shareholder; and any material interest of the
shareholder in the proposed business. The chairman of the meeting shall have
the discretion to declare to the meeting that any business proposed by a
shareholder to be considered at the meeting is out of order and that such
business shall not be transacted at the meeting if (i) the chairman concludes
that the matter has been proposed in a manner inconsistent with this Section
2.13 or (ii) the chairman concludes that the subject matter of the proposed
business is inappropriate for consideration by the shareholders at the meeting.
ARTICLE THREE
BOARD OF DIRECTORS
3.1 GENERAL POWERS. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the Corporation shall
be managed by, the Board of Directors, subject to any limitation set forth in
the Articles, in bylaws approved by the shareholders, or in agreements among
all the shareholders that are otherwise lawful.
3.2 NUMBER, ELECTION AND TERM OF OFFICE. Except as otherwise
provided in the Articles of Incorporation, the Board of Directors shall consist
of a maximum of fifteen members. The Board of Directors shall have the
authority to change the number of directors from time to time by resolution so
long as the number of directors does not exceed fifteen; provided, however,
that no decrease in the number of directors (if more than one director is
elected by a resolution of the Board of Directors or the shareholders) shall
have the effect of shortening the term of an incumbent director. The Board of
Directors shall be divided into three classes to be known as Class I, Class II,
and Class III, which shall be as nearly equal in number as possible. Except in
the case of death, resignation, disqualification, or removal for cause, each
director shall serve
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for a term ending on the date of the third annual meeting of shareholders
following the annual meeting at which the director was elected; provided,
however, that each initial director in Class I shall hold office until the
first annual meeting of shareholders after his election; each initial director
in Class II shall hold office until the second annual meeting of shareholders
after his election; and each initial director in Class III shall hold office
until the third annual meeting of shareholders after his election. Despite the
expiration of a director's term, such director shall continue to serve until
his or her successor, if there is to be any, has been elected and has
qualified. In the event of any increase or decrease in the authorized number of
directors, the newly created or eliminated directorships resulting from such an
increase or decrease shall be apportioned among the three classes of directors
so that the three classes remain as nearly equal in size as possible; provided,
however, that there shall be no classification of additional directors elected
by the Board of Directors until the next meeting of shareholders called for the
purposes of electing directors, at which meeting the terms of all such
additional directors shall expire, and such additional directors positions, if
they are to be continued, shall be apportioned among the classes of directors
and nominees therefor shall be submitted to the shareholders for their vote.
3.3 REMOVAL OF DIRECTORS. The entire Board of Directors or any
individual director may be removed with cause by the shareholders, provided
that directors elected by a particular Voting Group may be removed only by the
shareholders in that Voting Group. Removal action may be taken only at a
shareholders' meeting for which notice of the removal action has been given,
and a director may be removed only by the holders of a majority of the votes
entitled to be cast. If any removed director is a member of any committee of
the Board of Directors, he shall cease to be a member of that committee when he
ceases to be a director. A removed director's successor, if any, may be elected
at the same meeting to serve the unexpired term.
3.4 VACANCIES. A vacancy occurring in the Board of Directors may be
filled for the unexpired term, unless the shareholders have elected a
successor, by the affirmative vote of a majority of the remaining directors,
whether or not the remaining directors constitute a quorum; provided, however,
that if the vacant office was held by a director elected by a particular Voting
Group, only the holders of shares of that Voting Group or the remaining
directors elected by that Voting Group shall be entitled to fill the vacancy;
provided further, however, that if the vacant office was held by a director
elected by a particular Voting Group and there is no remaining director elected
by that Voting Group, the other remaining directors or director (elected by
another Voting Group or Groups) may fill the vacancy during an interim period
before the shareholders of the vacated director's Voting Group act to fill the
vacancy. A vacancy or vacancies in the Board of Directors may result from the
death, resignation, disqualification, or removal of any director, or from an
increase in the number of directors.
3.5 COMPENSATION. Directors may receive such compensation for their
services as directors as may be fixed by the Board of Directors from time to
time. A director may also serve the Corporation in one or more capacities other
than that of director and receive compensation for services rendered in those
other capacities.
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3.6 COMMITTEES OF THE BOARD OF DIRECTORS. The Board of Directors may
designate from among its members an executive committee or one or more other
standing or ad hoc committees, each consisting of one or more directors, who
serve at the pleasure of the Board of Directors. Subject to the limitations
imposed by the Code, each committee shall have the authority set forth in the
resolution establishing the committee or in any other resolution of the Board
of Directors specifying, enlarging, or limiting the authority of the committee.
Any such committee, to the extent provided by resolution, shall have and may
exercise all of the authority of the Board of Directors in the management of
the business and affairs of the Corporation, except that a committee shall have
no authority with respect to (1) amending the Articles or these Bylaws; (2)
adopting a plan of merger or consolidation; (3) the sale, lease, exchange or
other disposition of all or substantially all of the property and assets of the
Corporation; and (4) a voluntary dissolution of the Corporation or a revocation
thereof. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors. A
majority of each committee may determine its action and may fix the time and
places of its meetings, unless otherwise provided by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same
to the Board of Directors when required.
3.7 QUALIFICATION OF DIRECTORS. No person elected to serve as a
director of the Corporation shall assume office and begin serving unless and
until duly qualified to serve, as determined by reference to the Code, the
Articles, and any further eligibility requirements established in these Bylaws.
3.8 CERTAIN NOMINATION REQUIREMENTS. No person may be nominated for
election as a director at any annual or special meeting of shareholders unless
(a) the nomination has been or is being made pursuant to a recommendation or
approval of the Board of Directors of the Corporation or a properly constituted
committee of the Board of Directors previously delegated authority to recommend
or approve nominees for director; (b) the person is nominated by a shareholder
of the Corporation who is entitled to vote for the election of the nominee at
the subject meeting, and the nominating shareholder has furnished timely
written notice to the Secretary of the Corporation, at the Corporation's
principal office, provided, however, that to be timely, a shareholder's notice
must be delivered or mailed to and received at the principal office of the
Corporation, as applicable: (A) if the Corporation is at such time subject to
Regulation 14A promulgated by the Securities and Exchange Commission - not less
than forty-five (45) nor more than ninety (90) days prior to the first
anniversary of the date on which the Corporation first mailed its proxy
materials for the prior year's annual meeting; or (B) if the Corporation is at
such time not subject to Regulation 14A - not less than sixty (60) nor more
than ninety (90) days prior to the first anniversary of the prior year's annual
meeting; provided, in any such event, that if during the prior year the
Corporation did not hold an annual meeting, or if the date of the meeting has
changed more than 30 days from the prior year, the notice to be timely must be
delivered or mailed to and received at the principal office of the Corporation
a reasonable time before the Corporation mails its proxy materials for the
current year, and such notice shall (i) set forth with respect to the person to
be nominated his or her name, age, business and residence addresses, principal
business or occupation during the past five years, any affiliation with or
material interest in the Corporation or any transaction involving the
Corporation, and any affiliation with or
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material interest in any person or entity having an interest materially adverse
to the Corporation, and (ii) shall be accompanied by the sworn or certified
statement of the shareholder that the nominee has consented to being nominated
and that the shareholder believes the nominee will stand for election and will
serve if elected; or (c) (i) the person is nominated to replace a person
previously identified as a proposed nominee (in accordance with the provisions
of subpart (b) of this Section 3.8) who has since become unable or unwilling to
be nominated or to serve if elected, (ii) the shareholder who furnished such
previous identification makes the replacement nomination and delivers to the
Secretary of the Corporation (at the time of or prior to making the replacement
nomination) an affidavit or other sworn statement affirming that the
shareholder had no reason to believe the original nominee would be so unable or
unwilling, and (iii) such shareholder also furnishes in writing to the
Secretary of the Corporation (at the time of or prior to making the replacement
nomination) the same type of information about the replacement nominee as
required by subpart (b) of this Section 3.8 to have been furnished about the
original nominee. The chairman of any meeting of shareholders at which one or
more directors are to be elected, for good cause shown and with proper regard
for the orderly conduct of business at the meeting, may waive in whole or in
part the operation of this Section 3.8.
ARTICLE FOUR
MEETINGS OF THE BOARD OF DIRECTORS
4.1 REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held in conjunction with each annual meeting of shareholders. In
addition, the Board of Directors may, by prior resolution, hold regular
meetings at other times.
4.2 SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by or at the request of the Chairman of the Board, the President, or
any director in office at that time.
4.3 PLACE OF MEETINGS. Directors may hold their meetings at any
place in or outside the State of Georgia that the Board of Directors may
establish from time to time.
4.4 NOTICE OF MEETINGS. Directors need not be provided with notice
of any regular meeting of the Board of Directors. Unless waived in accordance
with Section 4.10, the Corporation shall give notice of at least one day to
each director of the date, time, and place of each special meeting. Notice of a
meeting shall be deemed to have been given to any director in attendance at any
prior meeting at which the date, time, and place of the subsequent meeting was
announced.
4.5 QUORUM. At meetings of the Board of Directors, a majority of the
directors then in office shall constitute a quorum for the transaction of
business.
4.6 VOTE REQUIRED FOR ACTION. If a quorum is present when a vote is
taken, the vote of a majority of the directors present at the time of the vote
will be the act of the Board of Directors, unless the vote of a greater number
is required by the Code, the Articles, or these
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Bylaws. A director who is present at a meeting of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(a) he objects at the beginning of the meeting (or promptly upon his arrival)
to holding the meeting or transacting business at such meeting; (b) his dissent
or abstention from the action taken is entered in the minutes of the meeting;
or (c) he delivers written notice of his dissent or abstention to the presiding
officer of the meeting before its adjournment or to the Corporation immediately
after adjournment of the meeting. The right of dissent or abstention is not
available to a director who votes in favor of the action taken.
4.7 PARTICIPATION BY TELEPHONE CONFERENCE. Members of the Board of
Directors may participate in a meeting of the Board by means of telephone
conference or similar communications equipment through which all persons
participating may hear and speak to each other. Participation in a meeting
pursuant to this Section 4.7 shall constitute presence in person at the
meeting.
4.8 ACTION BY DIRECTORS WITHOUT A MEETING. Any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if a written consent, describing the action taken, is signed
by each director and delivered to the Corporation for inclusion in the minutes
or filing with the corporate records. The consent may be executed in
counterparts, and shall have the same force and effect as a unanimous vote of
the Board of Directors at a duly convened meeting.
4.9 ADJOURNMENTS. A meeting of the Board of Directors, whether or
not a quorum is present, may be adjourned by a majority of the directors
present to reconvene at a specific time and place. It shall not be necessary to
give notice to the directors of the reconvened meeting or of the business to be
transacted, other than by announcement at the meeting that was adjourned,
unless a quorum was not present at the meeting that was adjourned, in which
case notice shall be given to directors in the same manner as for a special
meeting. At any such reconvened meeting at which a quorum is present, any
business may be transacted that could have been transacted at the meeting that
was adjourned.
4.10 WAIVER OF NOTICE. A director may waive any notice required by
the Code, the Articles, or these Bylaws before or after the date and time of
the matter to which the notice relates, by a written waiver signed by the
director and delivered to the Corporation for inclusion in the minutes or
filing with the corporate records. Attendance by a director at a meeting shall
constitute waiver of notice of the meeting, except where a director at the
beginning of the meeting (or promptly upon his arrival) objects to holding the
meeting or to transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
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ARTICLE FIVE
OFFICERS
5.1 OFFICERS. The officers of the Corporation shall consist of a
Chief Executive Officer, a President, a Secretary, and a Treasurer, each of
whom shall be elected or appointed by the Board of Directors. The Board of
Directors may also elect a Chairman of the Board from among its members. The
Board of Directors from time to time may create and establish the duties of
other offices and may elect or appoint, or authorize specific senior officers
to appoint, the persons who shall hold such other offices, including a Chief
Operating Officer, a Chief Technology Officer, one or more Vice Presidents
(including Executive Vice Presidents, Senior Vice Presidents, Assistant Vice
Presidents, and the like), one or more Assistant Secretaries, and one or more
Assistant Treasurers. Whether or not so provided by the Board of Directors, the
Chairman of the Board may appoint one or more Assistant Secretaries and one or
more Assistant Treasurers. Any two or more offices may be held by the same
person.
5.2 TERM. Each officer shall serve at the pleasure of the Board of
Directors (or, if appointed by a senior officer pursuant to this Article Five,
at the pleasure of the Board of Directors or any senior officer authorized to
have appointed the officer) until his death, resignation, or removal, or until
his replacement is elected or appointed in accordance with this Article Five.
5.3 COMPENSATION. The compensation of all officers of the
Corporation shall be fixed by the Board of Directors or by a committee or
officer appointed by the Board of Directors. Officers may serve without
compensation.
5.4 REMOVAL. All officers (regardless of how elected or appointed)
may be removed, with or without cause, by the Board of Directors, and any
officer appointed by another officer may also be removed, with or without
cause, by any senior officer authorized to have appointed the officer to be
removed. Removal will be without prejudice to the contract rights, if any, of
the person removed, but shall be effective notwithstanding any damage claim
that may result from infringement of such contract rights.
5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board (if there be
one) shall preside at and serve as chairman of meetings of the shareholders and
of the Board of Directors (unless another person is selected under Section 2.9
to act as chairman). The Chairman of the Board shall perform other duties and
have other authority as may from time to time be delegated by the Board of
Directors.
5.6 CHIEF EXECUTIVE OFFICER. Unless otherwise provided in these
Bylaws or by resolution of the Board of Directors, the Chief Executive Officer
shall be the principal officer of the Corporation and shall be charged with the
general and active management of the Corporation's affairs of all types.
Subject to the control of the Board of Directors, the Chief Executive Officer
shall supervise and control all of the business of the Corporation. The Chief
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Executive Officer shall have authority to institute or defend legal proceedings
when the directors are deadlocked.
5.7 PRESIDENT. The President (if there be one) shall, in the absence
or disability of the Chief Executive Officer, or at the direction of the Chief
Executive Officer, perform the duties and exercise the powers of the Chief
Executive Officer, whether the duties and powers are specified in these Bylaws
or otherwise.
5.8 VICE PRESIDENT. The Vice President (if there be one) shall, in
the absence or disability of the President, or at the direction of the
President or Chief Executive Officer, perform the duties and exercise the
powers of the President, whether the duties and powers are specified in these
Bylaws or otherwise. If the Corporation has more than one Vice President, the
one designated by the Board of Directors or the President (in that order of
precedence) shall act in the event of the absence or disability of the
President. Vice Presidents shall perform any other duties and have any other
authority as from time to time may be delegated by the Board of Directors or
the President.
5.9 SECRETARY. The Secretary shall be responsible for preparing
minutes of the meetings of shareholders, directors, and committees of directors
and for authenticating records of the Corporation. The Secretary or any
Assistant Secretary shall have authority to give all notices required by law or
these Bylaws. The Secretary shall be responsible for the custody of the
corporate books, records, contracts, and other documents. The Secretary or any
Assistant Secretary may affix the corporate seal to any lawfully executed
documents requiring it, may attest to the signature of any officer of the
Corporation, and shall sign any instrument that requires the Secretary's
signature. The Secretary or any Assistant Secretary shall perform any other
duties and have any other authority as from time to time may be delegated by
the Board of Directors or the President.
5.10 TREASURER. Unless otherwise provided in these Bylaws or by
resolution of the Board of Directors, the Treasurer shall be the Chief
Financial Officer of the Corporation and shall be responsible for the custody
of all funds and securities belonging to the Corporation and for the receipt,
deposit, or disbursement of these funds and securities under the direction of
the Board of Directors. The Treasurer shall cause full and true accounts of all
receipts and disbursements to be maintained and shall make reports of these
receipts and disbursements to the Board of Directors and Chief Executive
Officer upon request. The Treasurer or Assistant Treasurer shall perform any
other duties and have any other authority as from time to time may be delegated
by the Board of Directors or the Chief Executive Officer.
ARTICLE SIX
DISTRIBUTIONS AND DIVIDENDS
Unless the Articles provide otherwise, the Board of Directors, from
time to time in its discretion, may authorize or declare distributions or share
dividends in accordance with the Code.
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ARTICLE SEVEN
SHARES
7.1 SHARE CERTIFICATES. The interest of each shareholder in the
Corporation shall be evidenced by a certificate or certificates representing
shares of the Corporation, which shall be in such form as the Board of
Directors from time to time may adopt in accordance with the Code. Share
certificates shall be in registered form and shall indicate the date of issue,
the name of the Corporation, that the Corporation is organized under the laws
of the State of Georgia, the name of the shareholder, and the number and class
of shares and designation of the series, if any, represented by the
certificate. Each certificate shall be signed by the Chief Executive Officer,
the President, or a Vice President (or in lieu thereof, by the Chairman of the
Board, if there be one) and may be signed by the Secretary or an Assistant
Secretary; provided, however, that where the certificate is signed (either
manually or by facsimile) by a transfer agent, or registered by a registrar,
the signatures of those officers may be facsimiles.
7.2 RIGHTS OF CORPORATION WITH RESPECT TO REGISTERED OWNERS. Prior
to due presentation for transfer of registration of its shares, the Corporation
may treat the registered owner of the shares (or the beneficial owner of the
shares to the extent of any rights granted by a nominee certificate on file
with the Corporation pursuant to any procedure that may be established by the
Corporation in accordance with the Code) as the person exclusively entitled to
vote the shares, to receive any dividend or other distribution with respect to
the shares, and for all other purposes; and the Corporation shall not be bound
to recognize any equitable or other claim to or interest in the shares on the
part of any other person, whether or not it has express or other notice of such
a claim or interest, except as otherwise provided by law.
7.3 TRANSFERS OF SHARES. Transfers of shares shall be made upon the
books of the Corporation kept by the Corporation or by the transfer agent
designated to transfer the shares, only upon direction of the person named in
the certificate or by an attorney lawfully constituted in writing. Before a new
certificate is issued, the old certificate shall be surrendered for
cancellation or, in the case of a certificate alleged to have been lost,
stolen, or destroyed, the provisions of Section 7.5 of these Bylaws shall have
been complied with.
7.4 DUTY OF CORPORATION TO REGISTER TRANSFER. Notwithstanding any of
the provisions of Section 7.3 of these Bylaws, the Corporation is under a duty
to register the transfer of its shares only if: (a) the share certificate is
endorsed by the appropriate person or persons; (b) reasonable assurance is
given that each required endorsement is genuine and effective; (c) the
Corporation has no duty to inquire into adverse claims or has discharged any
such duty; (d) any applicable law relating to the collection of taxes has been
complied with; (e) the transfer is in fact rightful or is to a bona fide
purchaser; and (f) the transfer is in compliance with applicable provisions of
any transfer restrictions of which the Corporation shall have notice.
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7.5 LOST, STOLEN, OR DESTROYED CERTIFICATES. Any person claiming a
share certificate to be lost, stolen, or destroyed shall make an affidavit or
affirmation of this claim in such a manner as the Corporation may require and
shall, if the Corporation requires, give the Corporation a bond of indemnity in
form and amount, and with one or more sureties satisfactory to the Corporation,
as the Corporation may require, whereupon an appropriate new certificate may be
issued in lieu of the one alleged to have been lost, stolen or destroyed.
7.6 FIXING OF RECORD DATE. For the purpose of determining
shareholders (a) entitled to notice of or to vote at any meeting of
shareholders or, if necessary, any adjournment thereof, (b) entitled to receive
payment of any distribution or dividend, or (c) for any other proper purpose,
the Board of Directors may fix in advance a date as the record date. The record
date may not be more than 70 days (and, in the case of a notice to shareholders
of a shareholders' meeting, not less than 10 days) prior to the date on which
the particular action, requiring the determination of shareholders, is to be
taken. A separate record date may be established for each Voting Group entitled
to vote separately on a matter at a meeting. A determination of shareholders of
record entitled to notice of or to vote at a meeting of shareholders shall
apply to any adjournment of the meeting, unless the Board of Directors shall
fix a new record date for the reconvened meeting, which it must do if the
meeting is adjourned to a date more than 120 days after the date fixed for the
original meeting.
7.7 RECORD DATE IF NONE FIXED. If no record date is fixed as
provided in Section 7.6, then the record date for any determination of
shareholders that may be proper or required by law shall be, as appropriate,
the date on which notice of a shareholders' meeting is mailed, the date on
which the Board of Directors adopts a resolution declaring a dividend or
authorizing a distribution, or the date on which any other action is taken that
requires a determination of shareholders.
ARTICLE EIGHT
INDEMNIFICATION
8.1 INDEMNIFICATION OF DIRECTORS. The Corporation shall indemnify
and hold harmless any person (an "Indemnified Person") who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, whether formal or informal, including any action or suit by or
in the right of the Corporation (for purposes of this Article Eight,
collectively, a "Proceeding") because he is or was a director of the
Corporation, against any judgment, settlement, penalty, fine, or reasonable
expenses (including, but not limited to, attorneys' fees and disbursements,
court costs, and expert witness fees) incurred with respect to the Proceeding
(for purposes of this Article Eight, a "Liability"), if he acted in a manner he
believed in good faith to be in or not opposed to the best interests of the
Corporation, and, in the case of any criminal proceeding, had no reasonable
cause to believe his conduct was unlawful; provided, however, that no
indemnification shall be made for any Liability for which, under the Code,
indemnification may not be authorized by action of the Board of Directors, the
shareholders, or otherwise, including, but not limited to, any Liability of a
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director to the Corporation for: (a) any appropriation by a director, in
violation of the director's duties, of any business opportunity of the
corporation; (b) any acts or omissions of a director that involve intentional
misconduct or a knowing violation of law; (c) the types of liability set forth
in Code Section 14-2-832; or (d) any transaction from which the director
received an improper personal benefit. Indemnification in connection with a
Proceeding brought by or in the right of the Corporation is limited to
reasonable expenses incurred in connection with the Proceeding.
8.2 INDEMNIFICATION OF OTHERS. The Board of Directors shall have the
power to cause the Corporation to provide to officers, employees, and agents of
the Corporation all or any part of the right to indemnification and other
rights of the type provided under Sections 8.1, 8.5, and 8.11 of this Article
Eight (subject to the conditions, limitations, and obligations specified in
those sections) upon a resolution to that effect identifying officers,
employees, or agents (by position or name) to be indemnified and specifying the
particular rights provided, which may be different for each of the persons
identified. Each officer, employee, or agent of the Corporation so identified
shall be an "Indemnified Person" for purposes of the provisions of this Article
Eight.
8.3 OTHER ORGANIZATIONS. The Board of Directors shall provide to
each director, and the Board of Directors shall have the power to cause the
Corporation to provide to any director, officer, employee, or agent of the
Corporation who is or was serving at the Corporation's request as a director,
officer, partner, trustee, employee, or agent of another corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise
all or any part of the right to indemnification and other rights of the type
provided under Sections 8.1, 8.5, and 8.11 of this Article Eight (subject to
the conditions, limitations, and obligations specified in those sections) upon
a resolution to that effect identifying the persons to be identified and
specifying the particular rights provided, which may be different for each of
the persons identified. Each person so identified shall be an "Indemnified
Person" for purposes of the provisions of this Article Eight.
8.4 DETERMINATION. Notwithstanding any judgment, order, settlement,
conviction, or plea in any Proceeding, an Indemnified Person shall be entitled
to indemnification as provided in Section 8.1 if a determination that such
Indemnified Person is entitled to such indemnification shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
are not at the time parties to the Proceeding; (b) if a quorum cannot be
obtained under (a) above, by majority vote of a committee duly designated by
the Board of Directors (in which designation directors who are parties may
participate), consisting solely of two or more directors who are not at the
time parties to the Proceeding; (c) in a written opinion by special legal
counsel selected as required by the Code; or (d) by the shareholders; provided,
however, that shares owned by or voted under the control of directors who are
at the time parties to the Proceeding may not be voted on the determination.
8.5 ADVANCES. To the extent the Corporation has funds reasonably
available to be used for this purpose, expenses (including, but not limited to,
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by the Indemnified Person in defending any Proceeding of the kind
described in Section 8.1 (or in Sections 8.2 or 8.3, if the
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Board of Directors has specified that advancement of expenses be made available
to such Indemnified Person) shall be paid by the Corporation in advance of the
final disposition of such Proceeding as set forth herein. The Corporation shall
promptly pay the amount of such expenses to the Indemnified Person, but in no
event later than 10 days following the Indemnified Person's delivery to the
Corporation of a written request for an advance pursuant to this Section 8.5,
together with a reasonable accounting of such expenses; provided, however, that
the Indemnified Person shall furnish the Corporation a written affirmation of
his good faith belief that he has met the standard of conduct set forth in the
Code and a written undertaking and agreement to repay to the Corporation any
advances made pursuant to this Section 8.5 if it shall be determined that the
Indemnified Person is not entitled to be indemnified by the Corporation for
such amounts. The Corporation may make the advances contemplated by this
Section 8.5 regardless of the Indemnified Person's financial ability to make
repayment. Any advances and undertakings to repay pursuant to this Section 8.5
may be unsecured and interest-free.
8.6 NON-EXCLUSIVITY. Subject to any applicable limitation imposed by
the Code or the Articles, the indemnification and advancement of expenses
provided by or granted pursuant to this Article Eight shall not be deemed
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any provision of the Articles, or
any Bylaw, resolution, or agreement specifically or in general terms approved
or ratified by the affirmative vote of holders of a majority of the shares
entitled to be voted thereon.
8.7 INSURANCE. The Corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation, or who, while serving in such a
capacity, is also or was also serving at the request of the Corporation as a
director, officer, trustee, partner, employee, or agent of any corporation,
partnership, joint venture, trust, employee benefit plan, or other enterprise,
against any Liability that may be asserted against him or incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article Eight.
8.8 NOTICE. If the Corporation indemnifies or advances expenses to a
director under any of Sections 14-2-851 through 14-2-854 of the Code (or any
equivalent provision of these Bylaws) in connection with a Proceeding by or in
the right of the Corporation, the Corporation shall, to the extent required by
Section 14-2-1621 or any other applicable provision of the Code, report the
indemnification or advance in writing to the shareholders with or before the
notice of the next shareholders' meeting.
8.9 SECURITY. The Corporation may designate certain of its assets as
collateral, provide self-insurance, establish one or more indemnification
trusts, or otherwise secure or facilitate its ability to meet its obligations
under this Article Eight, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article Eight, as the Board of Directors deems appropriate.
15
<PAGE> 20
8.10 AMENDMENT. Any amendment to this Article Eight that limits or
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to Proceedings based on actions, events, or
omissions occurring after such amendment and after delivery of notice of such
amendment to the Indemnified Person so affected (collectively, "Post Amendment
Events"). Any Indemnified Person shall, as to any Proceeding based on actions,
events, or omissions occurring prior to the date of receipt of such notice, be
entitled to the right of indemnification, advancement of expenses, and other
rights under this Article Eight to the same extent as if such provisions had
continued as part of the Bylaws of the Corporation without such amendment. This
Section 8.10 cannot be altered, amended, or repealed in a manner effective as
to any Indemnified Person (except as to Post Amendment Events) without the
prior written consent of such Indemnified Person.
8.11 AGREEMENTS. The provisions of this Article Eight shall be deemed
to constitute an agreement between the Corporation and each Indemnified Person
hereunder. In addition to the rights provided in this Article Eight, the
Corporation shall have the power, upon authorization by the Board of Directors,
to enter into an agreement or agreements providing to any Indemnified Person
indemnification rights substantially similar to those provided in this Article
Eight.
8.12 CONTINUING BENEFITS. The rights of indemnification and
advancement of expenses permitted or authorized by this Article Eight shall,
unless otherwise provided when such rights are granted or conferred, continue
as to a person who has ceased to be a director, officer, employee, or agent and
shall inure to the benefit of the heirs, executors, and administrators of such
person.
8.13 SUCCESSORS. For purposes of this Article Eight, the term
"Corporation" shall include any corporation, joint venture, trust, partnership,
or unincorporated business association that is the successor to all or
substantially all of the business or assets of this Corporation, as a result of
merger, consolidation, sale, liquidation, or otherwise, and any such successor
shall be liable to the persons indemnified under this Article Eight on the same
terms and conditions and to the same extent as this Corporation.
8.14 SEVERABILITY. Each of the Sections of this Article Eight, and
each of the clauses set forth herein, shall be deemed separate and independent,
and should any part of any such Section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any separate Section or clause of this Article Eight that is not
declared invalid or unenforceable.
8.15 ADDITIONAL INDEMNIFICATION. In addition to the specific
indemnification rights set forth herein, the Corporation shall indemnify each
of its directors and officers as have been designated by the Board of Directors
to the full extent permitted by action of the Board of Directors without
shareholder approval under the Code or other laws of the State of Georgia as in
effect from time to time.
16
<PAGE> 21
ARTICLE NINE
MISCELLANEOUS
9.1 INSPECTION OF BOOKS AND RECORDS. The Board of Directors shall
have the power to determine which accounts, books, and records of the
Corporation shall be available for shareholders to inspect or copy, except for
those books and records required by the Code to be made available upon
compliance by a shareholder with applicable requirements, and shall have the
power to fix reasonable rules and regulations (including confidentiality
restrictions and procedures) not in conflict with applicable law for the
inspection and copying of accounts, books, and records that by law or by
determination of the Board of Directors are made available. Unless required by
the Code or otherwise provided by the Board of Directors, a shareholder of the
Corporation holding less than two percent of the total shares of the
Corporation then outstanding shall have no right to inspect the books and
records of the Corporation.
9.2 FISCAL YEAR. The Board of Directors is authorized to fix the
fiscal year of the Corporation and to change the fiscal year from time to time
as it deems appropriate. Unless otherwise provided by resolution of the Board
of Directors, the fiscal year of the Corporation shall be the calendar year and
shall end on December 31 of each calendar year.
9.3 CORPORATE SEAL. The corporate seal will be in such form as the
Board of Directors may from time to time determine. The Board of Directors may
authorize the use of one or more facsimile forms of the corporate seal. The
corporate seal need not be used unless its use is required by law, by these
Bylaws, or by the Articles.
9.4 ANNUAL STATEMENTS. Not later than four months after the close of
each fiscal year, and in any case prior to the next annual meeting of
shareholders, the Corporation shall prepare (a) a balance sheet showing in
reasonable detail the financial condition of the Corporation as of the close of
its fiscal year, and (b) a profit and loss statement showing the results of its
operations during its fiscal year. Upon receipt of written request, the
Corporation promptly shall mail to any shareholder of record a copy of the most
recent such balance sheet and profit and loss statement, in such form and with
such information as the Code may require.
9.5 NOTICE. (a) Whenever these Bylaws require notice to be given to
any shareholder or to any director, the notice may be given by mail, in person,
by courier delivery, by telephone, or by telecopier, telegraph, or similar
electronic means. Notice may be given to any director by electronic mail,
provided that the director has approved the use of such means of transmission
as an acceptable form of service of notice to such director. Electronic mail
shall be deemed an acceptable form of notice upon receipt by a director unless
such director indicates otherwise. Whenever notice is given to a shareholder or
director by mail, the notice shall be sent by depositing the notice in a post
office or letter box in a postage-prepaid, sealed envelope addressed to the
shareholder or director at his or her address as it appears on the books of the
17
<PAGE> 22
Corporation. Any such written notice given by mail shall be effective: (i) if
given to shareholders, at the time the same is deposited in the United States
mail; and (ii) in all other cases, at the earliest of (x) when received or when
delivered, properly addressed, to the addressee's last known principal place of
business or residence, (y) five days after its deposit in the mail, as
evidenced by the postmark, if mailed with first-class postage prepaid and
correctly addressed, or (z) on the date shown on the return receipt, if sent by
registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the addressee. Whenever notice is given to a
shareholder or director by any means other than mail, the notice shall be
deemed given when received.
(b) In calculating time periods for notice, when a period of time
measured in days, weeks, months, years, or other measurement of time is
prescribed for the exercise of any privilege or the discharge of any duty, the
first day shall not be counted but the last day shall be counted.
ARTICLE TEN
AMENDMENTS
Except as otherwise provided under the Code, the Board of Directors
shall have the power to alter, amend, or repeal these Bylaws or adopt new
Bylaws. Any Bylaws adopted by the Board of Directors may be altered, amended,
or repealed, and new Bylaws adopted, by the shareholders. The shareholders may
prescribe in adopting any Bylaw or Bylaws that the Bylaw or Bylaws so adopted
shall not be altered, amended, or repealed by the Board of Directors.
18
<PAGE> 1
EXHIBIT 10.4
OFFICE LEASE
BUILDING: EMERSON CENTER
LANDLORD: THE EMERSON CENTER COMPANY
NATIONAL INCOME REALTY TRUST
MANAGING GENERAL PARTNER
TENANT: COMSTAR COMMUNICATIONS, INC.
DBA: SAME
1
<PAGE> 2
TABLE OF CONTENTS
Page
TABLE OF CONTENTS..................................................... 2
1. CERTAIN LEASE PROVISIONS.............................................. 4
2. PREMISES.............................................................. 5
2.1 Definition....................................................... 5
2.2 Public Areas..................................................... 5
3. TERM.................................................................. 5
3.1 Term............................................................. 5
3.2 Delay in Commencement............................................ 5
3.3 Early Possession................................................. 5
3.4 Delivery of Possession........................................... 5
3.5 Holding Over..................................................... 5
4. RENT.................................................................. 5
4.1 Base Rent........................................................ 6
4.2 Additional Rent.................................................. 6
4.3 Parking and Storage.............................................. 6
4.4 Acceptance of Rental Payments.................................... 6
5. ESCALATIONS OF RENT................................................... 6
5.1 Determination.................................................... 6
5.2 Indexing......................................................... 6
6. SHARED EXPENSES....................................................... 7
6.1 Determination.................................................... 7
6.2 Escalations...................................................... 7
6.3 Statements....................................................... 8
7. SECURITY DEPOSIT...................................................... 8
8. USE................................................................... 8
8.1 Use.............................................................. 8
8.2 Compliance With Law.............................................. 8
8.3 Waste and Nuisance............................................... 9
8.4 Conditions of Premises........................................... 8
8.5 Insurance Cancellation........................................... 8
8.6 Landlord's Rules and Regulations................................. 9
9. LANDLORD'S SERVICES................................................... 9
9.1 Basic Service.................................................... 9
9.2 Initial Consideration............................................ 9
9.3 Interruption of Service.......................................... 10
10. MAINTENANCE, REPAIRS AND ALTERATIONS.................................. 10
10.1 Landlord's Obligations........................................... 10
10.2 Tenant's Obligations............................................. 10
10.3 Surrender........................................................ 10
10.4 Alterations and Additions........................................ 10
11. TENANTS USE OF PUBLIC AREAS........................................... 11
12. TAXES AND TELEPHONE................................................... 11
12.1 Personal Property Taxes.......................................... 11
12.2 Evidence of Payment.............................................. 11
12.3 Telephone........................................................ 11
13. INSURANCE AND INDEMNITY............................................... 12
13.1 Liability Insurance.............................................. 12
13.2 Property Insurance............................................... 12
13.3 Insurance Policies............................................... 12
13.4 Waiver of Subrogation............................................ 12
13.5 Hold Harmless.................................................... 12
13.6 Exemption of Landlord from Liability............................. 13
2
<PAGE> 3
TABLE OF CONTENTS (CONTINUED)
Page
14. DAMAGE OR DESTRUCTION................................................. 13
14.1 Option to Terminate Lease....................................... 13
14.2 Obligation to Repair or Restore................................. 13
14.3 Fault of Tenant................................................. 13
14.4 Obligations of Tenant........................................... 13
14.5 Termination by Tenant........................................... 13
15. CONDEMNATION.......................................................... 13
16. ASSIGNMENT AND SUBLETTING............................................. 14
16.1 Landlord's Comment Required..................................... 14
16.2 No Release of Tenant............................................ 14
16.3 Attorney's Fees and Administrative Fees......................... 14
16.4 Right to Collect Rent........................................... 14
17. DEFAULTS; REMEDIES................................................... 15
17.1 Defaults....................................................... 15
17.2 Remedies in Default............................................ 15
17.3 Default by Landlord............................................ 16
17.4 Late Charges................................................... 16
18. RIGHTS OF MORTGAGEES................................................. 16
18.1 Subordination.................................................. 16
18.2 Mortgagee's Consent to Amendments.............................. 17
18.2 Mortgagee's Right to Cure...................................... 17
19. NOTICES.............................................................. 17
20. RELOCATION........................................................... 17
21. QUIET POSSESSION..................................................... 17
22. OPTIONS.............................................................. 17
23. LANDLORD'S LIEN...................................................... 17
24. HAZARDOUS MATERIALS.................................................. 18
25. GENERAL PROVISIONS................................................... 18
25.1 Estoppel Certificate........................................... 18
25.2 Landlord's Interests........................................... 18
25.3 Severability................................................... 18
25.4 Interest on Past Due Obligations; Certified Funds.............. 18
25.5 Time of the Essence............................................ 18
25.6 Captions....................................................... 19
25.7 Entire Agreement............................................... 19
25.8 Waivers........................................................ 19
25.9 Recording...................................................... 19
25.10 Determinations by Landlord..................................... 19
25.11 Cumulative Remedies............................................ 19
25.12 Covenants and Conditions....................................... 19
25.13 Binding Effect; Choice of Law.................................. 19
25.14 Attorneys Fees................................................. 19
25.15 Landlord's Access.............................................. 19
25.16 Auctions....................................................... 19
25.17 Merger......................................................... 19
25.18 Corporate Authority............................................ 19
25.19 Signs.......................................................... 20
25.20 Brokers........................................................ 20
25.21 Guarantor...................................................... 20
25.22 Governing Law.................................................. 20
25.23 Joint and Several Liability.................................... 20
25.24 No Joint Venture............................................... 20
EXHIBITS
Exhibit A - Legal Description
Exhibit B - Premises Site Plan
Exhibit C - Parking Addendum
Exhibit D - Rules and Regulations
Exhibit E - Guaranty
Exhibit F - Storage Space Addendum
Exhibit G - Work Letter Addendum
3
<PAGE> 4
OFFICE LEASE
This Lease, dated for reference purposes only MAY 2, 1996, is made by and
between THE EMERSON CENTER COMPANY, (the "Landlord"), and COMSTAR
COMMUNICATIONS, INC. (the "Tenant").
1. CERTAIN LEASE PROVISIONS
The descriptions 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 COMMUNICATIONS, INC.
Doing Business As (DBA): COMSTAR COMMUNICATIONS, INC.
Address: 419 BRADFORD STREET, NW, SUITE A-2, GAINESVILLE, GEORGIA
30501
Telephone: (770) 718-9600
1.2 Premises: (Section 2.1):
Building Name: EMERSON CENTER Suite No: 210
Address: 2812 NEW SPRING ROAD, ATLANTA, GEORGIA 30339
1.3 Lease Area. (Section 2.1): 1,264 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): .0099%
1.6 Lease Term. (Section 3.1): THREE (3) YEARS
1.7 Commencement Date: (Section 3.1): JUNE 1, 1996
1.8 Expiration Date. (Section 3.1, 3.2): MAY 31, 1999
1.9 Base Rent for Lease Term. (Section 4.1): Total FORTY-SEVEN THOUSAND
THREE HUNDRED FORTY-
NINE AND 48/100
DOLLARS ($47,349.48)
1.10 Base Rent, Monthly Installments. (Section 4.1, 5.2): ONE THOUSAND TWO
HUNDRED SIXTY-
FOUR AND NO/100
DOLLARS
($1,264.00)
1.11 (a) Address of Landlord for rent payments (Section 4.1, 4.2):
THE EMERSON CENTER COMPANY
C/O THE FRANK M. DARBY COMPANY, INC.
2814 NEW SPRING ROAD, SUITE 110
ATLANTA, GEORGIA 30339
(b) Address of Landlord for notices. (Sections 6.3, 19):
c/o TARRAGON REALTY ADVISORS, INC.
3878 OAK LAWN, SUITE 300
DALLAS, TEXAS 75219
ATTN: CHRIS W. CLINTON
(c) Address of Tenant for notices (Sections 6.3, 19):
2812 NEW SPRING ROAD, SUITE 210
ATLANTA, GEORGIA 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): $4.45 PSFY per
rentable square foot
1.15 Landlord's Share of Real Estate Taxes. (Section 6.2): $0.59 per
rentable square foot
1.16 Security Deposit (Section 7): TWO THOUSAND FIVE HUNDRED DOLLARS
($2,500.00)
1.17 Use. (Section 8.1): GENERAL OFFICE
1.18 Brokers (Section 25.20): THE FRANK M. DARBY COMPANY
3384 PEACHTREE ROAD, SUITE 400
ATLANTA, GEORGIA 30326
1.19 Addendum(s). (Sections 3.2, 4.3, 9.2, 22): The following addendum(s)
are attached to this Lease: A & B
This Lease consists of 25 articles on 28 pages, plus Exhibits A, B, C, D, E and
- -2- additional page(s) of Addendum(s).
LANDLORD: THE EMERSON CENTER COMPANY TENANT:
-------------------------- ----------------------------
NATIONAL INCOME REALTY TRUST, COMSTAR COMMUNICATIONS, INC.
MANAGING GENERAL PARTNER
By: /s/ Chris Clinton, VP By: /s/ Sam F. Dayton, President
-------------------------------- --------------------------------
Sam. F. Dayton, Ph.D.
Date: 5/8/96 Date: 05-03-96
------------------------------ --------------------------
4 SFD / CC
---------------
Tenant/Landlord
<PAGE> 5
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.
-------------------/--------------------
Tenant / Landlord
5
<PAGE> 6
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,
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.
5. ESCALATIONS OF RENT.
5.1 Determination. The monthly obligations for rental payments described
in Sections 4.1 and 4.3 shall be increased annually in accordance with the
provisions of. See Addendum A.
5.2 [Intentionally omitted]
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.
SFD cc
-------------/-------------
Tenant / Landlord
6
<PAGE> 7
6.2 ESCALATIONS: (a) Landlord agrees to expand 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
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 Tenants' 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 that, 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 Share Expenses.
SFD CC
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Tenant / Landlord
7
<PAGE> 8
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.
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.
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 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.
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Tenant / Landlord
8
<PAGE> 9
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, from 8 a.m. to
6 p.m., Monday through Friday and 8 a.m. through 1 p.m. on Saturday, excluding
legal holidays;
(b) Hot and cold water for lavatory purposes and electric current
for lighting the Premises and for ordinary 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 systems, 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, operating 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 selection, 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 case 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.
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Tenant / Landlord
9
<PAGE> 10
9.3 Interruption of Services. Landlord reserves the right from time to
time to install, use, maintain, repair, replace and relocate for service to 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 rainstorm.
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 demised Premises and every part thereof including, without limiting the
generality of the foregoing, all plumbing, electrical and lighting facilities
and equipment within the demised Premises, fixtures, interior walls and interior
surfaces of exterior walls, ceilings, windows, doors, plate glass and skylights
located within the demised 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 demised 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 demised 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 demised 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 demised 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.
-------------/---------------
Tenant / Landlord
10
<PAGE> 11
(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 within 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 date. Landlord may, at its option and
without waiving and 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 thereinbefore 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 Rent
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 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 and 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, alterations, 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.
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Tenant / Landlord
11
<PAGE> 12
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 reasonable 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 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 invites, 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 any 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:
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Tenant / Landlord
12
<PAGE> 13
(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 right 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 or other casualty, and upon such termination the rental
obligations of the Tenant shall be duly apportioned as of the date of such fire
and 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 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 no 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 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 mortgage 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 and 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
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Tenant / Landlord
13
<PAGE> 14
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 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
to 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 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 attorney 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 on 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 purposes 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.
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Tenant/Landlord
14
<PAGE> 15
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 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 should 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 attorney 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, organization 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.
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Tenant / Landlord
15
<PAGE> 16
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 deeded 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. 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 or failure to act to Landlord's mortgagees or 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 wither 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) of 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.
-------------/-------------
Tenant / Landlord
16
<PAGE> 17
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 in 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 1.3, 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's 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 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 material 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.
-------------------/-------------------
Tenant / Landlord
17
<PAGE> 18
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 the Landlord hereunder, or
specifying such defaults, if any, which are claimed. Any such statement may
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 judgement (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 four percent (4%) per
annum greater than the prime rate of the First City Bank of Dallas, Texas as
the same may fluctuate from and after the date on which the payment was first
due through 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 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 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 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 modifications 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 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.
---------------/---------------
Tenant/Landlord
18
<PAGE> 19
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 placed on the outside of the doors leading to their
respective premises, and other than such identification signs, Tenant shall not
install, paint, display, inscribe, place or affix, or otherwise attache, 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.
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
the 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.
-------------/----------------
Tenant / Landlord
19
<PAGE> 20
ADDENDUM A
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
TO LEASE DATED MAY 2, 1996
THIS ADDENDUM is made this 2ND day of MAY, 1996 by and BETWEEN THE EMERSON
CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING GENERAL PARTNER, LANDLORD
AND COMSTAR COMMUNICATIONS, INC., TENANT
WHEREAS, Landlord and Tenant are the parties to the above-described Lease for
the 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) BASE RENT
<TABLE>
<CAPTION>
Year Per Sq. Ft. Monthly Annually
---- ----------- --------- ----------
<S> <C> <C> <C>
1 $12.00 $1,264.00 $15,168.00
2 $12.48 $1,314.56 $15,774.72
3 $12.98 $1,367.23 $16,406.76
</TABLE>
2) RENTAL ESCALATIONS
Rent shall escalate four percent (4%) per annum according to the rent
schedule shown in Special Stipulation #1 above.
3) COMMISSIONS
The Frank M. Darby Company has represented the Landlord in this
transaction. In the event a lease is consummated, The Frank M. Darby
Company will be paid a commission by the Landlord.
4) IMPROVEMENTS
Prior to Tenant's occupancy of the Premises, Landlord shall, at Landlord's
sole expense, recarpet and repaint the Premises using building standard
materials also to include installation of two (2) 240 VOLT @ 50 AMP
electrical circuits. Tenant shall select the color of paint and carpet
from a group of samples to be provided by Landlord. Such improvements
shall not exceed Six Thousand Three Hundred Twenty Dollars ($6,320.00).
5) RESTORATION OF PREMISES
No later than the last day of the Term, Tenant agrees, at Tenant's sole
expense, to remove all Tenant's personal property, fixtures, cables and
wires and repair all injury done by or in connection with installation or
removal of said property and surrender the Leased Premises in as good a
condition as they were at the beginning of the Term, reasonable wear and
tear excepted.
EXCEPT AS HEREBY AMENDED, all other provisions of said Lease are hereby
confirmed and ratified.
IN WITNESS WHEREOF, the parties hereto have executed this Addendum on the date
first above written.
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR COMMUNICATIONS, INC.
---------------------------- ----------------------------
National Income Realty Trust, Managing
General Partner
By: /s/ Chris Clinton, VP By: /s/ Sam F. Dayton, President
----------------------------------- ---------------------------------
Sam F. Dayton, Ph.D.
Date: 5/8/96 Date: 05/03/96
--------------------------------- -------------------------------
SFD CC
-----------/-----------
Tenant / Landlord
20
<PAGE> 21
ADDENDUM B TO LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
TRUST EXCULPATION -- The Landlord under this Lease is The Emerson Center
Company, National Income Realty Trust, Managing General Partner ("Trust"). The
Declaration(s) of Trust provide that (a) the Trustee shall conduct the Trust's
activities in the name of the Trust, (b) the name of the Trust refers to the
Trustees collectively as trustees, but not individually or personally, (c) no
trustee, shareholder, officer, employee, or agent shall have any personal
liability, jointly or severally, for any obligation of or claim against the
Trust, and (d) all persons dealing with the Trust, in any way, must look solely
to the assets of the Trust for the payment of any claims against the Trust.
Accordingly, Tenant agrees to look solely to the respective assets of the Trust
for the enforcement of any claims against Landlord.
AMERICANS WITH DISABILITIES ACT OF 1990 -- Tenant shall be responsible for, and
shall bear all costs and expenses associated with, any and all alterations to
the Leased Premises which may be required by the Americans With Disabilities
Act of 1990 (the "ADA"), for the accommodation of disable individuals who may
be employed from time to time by Tenant, or any disabled customers, clients,
guests, or invitees or sublessees. Tenant shall indemnify and hold Landlord
harmless from and against any and all liability incurred arising from the
failure of the Leased Premises to conform with the ADA, including the cost of
making any alterations, renovations or accommodations required by the ADA, or
any government enforcement agency, or any courts, any and all fines, civil
penalties, and damages awarded against Landlord (or those awarded against
Tenant which could become a lien upon the property upon which the Leased
Premises are located) resulting from a violation or violations of the ADA, and
all reasonable legal expenses and court costs incurred in defending claims made
under the ADA, including without limitation reasonable consultants', attorneys'
and paralegals' fees, expenses and court costs.
HAZARDOUS WASTE -- The term "Hazardous Waste", as used in this Lease, shall
mean pollutants, contaminants, toxic or hazardous wastes, or any other
substances, the use and/or the removal of which is required or the use of which
is restricted, prohibited or penalized by an "Environmental Law", which term
shall mean any federal, state or local law, ordinance or other statute of a
governmental or quasi-governmental authority relating to pollution or
protection of the environment. Tenant hereby agrees that (i) no activity will
be conducted on the premises that will produce any Hazardous Materials, except
for such activities that are part of the ordinary course for Tenant's business
activities (the "Permitted Activities") provided said Permitted Activities are
conducted in accordance with all Environmental Laws and have been approved in
advance in writing by Landlord; Tenant shall be responsible for obtaining any
required permits and paying any fees and providing any testing required by any
governmental agency; (ii) the premises will not be used in any manner for the
storage of any Hazardous Materials except for the storage of such materials
that are used in the ordinary course of Tenant's business ("Permitted
Materials") provided such Permitted Materials are properly stored in a manner
and location meeting all Environmental Laws and approved in advance in writing
by Landlord; Tenant shall be responsible for obtaining any required permits and
paying any fees and providing any testing required by any governmental agency;
(iii) no portion of the premises will be used as a landfill or a dump; (iv)
Tenant will not install any underground tanks of any type; (v) Tenant will not
allow any surface or subsurface conditions to exist or come into existence as a
result of Tenant's actions or the conduct of Tenant's business on the Leased
Premises that constitute or with the passage of time may constitute a public or
private nuisance; (vi) Tenant will not permit any Hazardous Materials to be
brought onto the premises, except for the Permitted Materials described below,
or hereafter approved in writing by Landlord and if so brought or found located
thereon, the same shall be immediately removed, with proper disposal, and all
required cleanup procedures shall be diligently undertaken pursuant to all
Environmental Laws. Landlord or Landlord's representative shall have the right
but not the obligation to enter the premises for the purposes of inspecting the
storage, use and disposal of Permitted Materials to ensure compliance with all
Environmental Laws. Should it be determined, in Landlord's sole opinion, that
said Permitted Materials are being improperly stored, used or disposed of, then
Tenant shall immediately take corrective action within 24 hours, Landlord shall
have the right to perform such work and Tenant shall promptly reimburse
Landlord for any and all costs associated with said work. If any time during or
after the term of the Lease, the Leased Premises are found to be so
contaminated or subject to said conditions, Tenant shall diligently institute
proper and thorough cleanup procedures at Tenant's sole cost, and Tenant agrees
to indemnify, save and hold Landlord harmless from all and against claims,
demands, actions, liabilities, costs, expenses, damages and obligations of any
nature arising from or as a result of the use of the premises by Tenant, and
regardless of whether or not Landlord is found to be solely, concurrently, or
jointly negligent with Tenant. The foregoing indemnification and the
responsibilities of Tenant shall survive the termination or expiration of this
Lease. Anything contained herein to the contrary notwithstanding, Landlord
shall not unreasonably withhold its consent with respect to the use, storage,
generation or manufacturing of Hazardous Materials on or about the Leased
Premises provided same is done in the ordinary course of Tenant's business, and
in compliance with all environmental laws.
PERMITTED MATERIALS:
1. NONE
2. NONE
3. NONE
4. NONE
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR COMMUNICATIONS, INC.
--------------------------- -------------------------------
NATIONAL INCOME REALTY TRUST,
- ------------------------------------
MANAGING GENERAL PARTNER
- ------------------------------------
By: /s/ Chris Clinton, VP By: /s/ Sam F. Dayton, President
--------------------------------- ------------------------------------
Sam F. Dayton, Ph.D.
Date: 5/8/96 Date: 05-03-96
------------------------------- ----------------------------------
This instrument is executed and made on behalf of the Trust by a Trustee or
officer of the Trust, not individually but solely as a Trustee under the
Declaration of Trust or as an officer, and the obligations under this Agreement
are not binding upon, nor shall resort be had to the private property of, any
of the Trustees, Shareholders, officers, employees, or agents for the Trust
personally, but bind only the Trust property.
SFD /CC
------ --------
Tenant/Landlord
<PAGE> 22
EXHIBIT "A" LEGAL DESCRIPTION
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, 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.
22
<PAGE> 23
EXHIBIT B, PREMISES SITE PLAN
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD
AND COMSTAR COMMUNICATION, INC. TENANT
[MAP]
23
<PAGE> 24
EXHIBIT C, PARKING ADDENDUM
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
So long as this Lease remains in effect and Tenant is not in default hereunder,
Tenant shall have a nonexclusive license to use up to five (50 parking spaces
which service the Building in consideration for Tenant's payment of $ -0- per
month which shall be due and payable as Additional Rent at the same time as are
Tenant's monthly installments of Base Rent. This nonexclusive license shall
commence on the date on which Tenant's rental obligation under the Lease
commences, and shall terminate on May 31, 1999. Provided, however, that upon no
less than 30 days notice from Landlord to Tenant, Landlord shall have the right
to increase the monthly payment hereunder to the prevailing rate for parking as
then determined by Landlord, but upon the giving of any such notice, Tenant
shall have the right to terminate this parking agreement commencing on the date
on which the increase in payment is to occur. If Tenant does not give notice to
Landlord at least 15 days prior to the date on which the increase in the amount
of the payment hereunder is to occur, then it shall be conclusively presumed
that Tenant agrees to such increase and Tenant shall have waived its right to
terminate this parking agreement as a result of such increase in the payment.
Upon not less than 30 days notice from Landlord to Tenant, Landlord may alter
the number of parking spaces which Tenant shall have the right to use, provided
that the number of spaces provide to Tenant shall not be diminished below that
number of parking spaces set forth above. Landlord reserves the right to
specifically assign and reassign from time to time any or all of said parking
spaces among the tenants of the Building in any manner in which Landlord
determines in its sole discretion and Tenant shall, upon not less than 10 days
notice from Landlord, furnish Landlord with the state automobile license number
assigned to its automobile or automobiles and the automobiles of all of its
employees and representatives employed or working in the premises, and Tenant
agrees to comply with such requests as Landlord may make in Landlord's
enforcement of any parking control program. Notwithstanding the existence of
any such control, Landlord shall not be responsible to Tenant, its employees,
agents, representatives, customers, or invitees for any violation of any
parking control program implemented by the Landlord.
The provisions of this Addendum supplement and are specifically subject to all
provisions of the Lease.
SFD CC
-------------/-------------
Tenant / Landlord
24
<PAGE> 25
EXHIBIT D, RULES AND REGULATIONS
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
It is agreed that the following rules and regulations shall be and are hereby
made a part of this Lease, and the Tenant agrees that its employees and agents
or any other persons permitted by the Tenant to occupy or enter the Demised
Premises will at all times abide by these rules and regulations. It is further
agreed that a default in the performance and observation of these rules and
regulations shall operate the same as any other default under this Lease.
1. The sidewalks, entries, passages, and stairways shall not be obstructed by
the Tenant or its agents, or used by them for any purpose other than ingress
and egress to and from their offices.
2. a. Furniture, equipment, or supplies shall be moved in or out of the
Building only during such hours and in such manner as may be prescribed by the
Landlord.
b. No safe or article, the weight may constitute a hazard or danger to the
Building or its equipment, shall be moved into the Premises. Safes and other
equipment, the weight of which is not excessive, shall be moved into, from or
about the Building during such hours and in such manner as shall be prescribed
by the Landlord, and the Landlord shall have the right to designate the
location of such articles in the space hereby demised.
3. The name of the Tenant and/or signs of the Tenant shall not be placed upon
any part of the Premises except as provided by the Landlord.
4. Water closets and other water fixtures shall not be used for any purpose
other than that for which the same are intended, and any damage resulting to the
same from misuse on the part of the Tenant, its agents or employees, shall be
paid for by the Tenant. No person shall waste water by tying back or wedging the
faucets or in any other manner.
5. No animals shall be allowed in the office, halls, or corridors of the
Building.
6. Bicycles or other vehicles shall not be permitted in the offices, halls,
or corridors of the Buildings, nor shall any obstruction of sidewalks of
entrances of the Building by such be permitted.
7. No person shall disturb the occupants of the Building or adjoining
buildings or premises by the use of any television, radio, or musical
instrument or equipment, or by the making of loud or improper noises.
8. No additional lock or locks shall be placed by the Tenant on any door in
the Building unless written consent of the Landlord shall first be obtained.
9. The use of oil, gas or inflammable liquids for heating, lighting, or any
other purpose is expressly prohibited. Explosives or other articles deemed
extra hazardous shall not be brought into the Building.
10. The Tenant shall exercise due care and within reasonable limits shall not
mark upon, paint or affix upon, cut, drill into, drive nails or screws into, or
in any way deface the walls, ceiling, partitions, or floors of the Premises or
of the Building, and any defacement, damage, or injury caused by the Tenant.
11. The Landlord shall at all times have the right by its officers or agents
to enter the Demised Premises to inspect and examine the same and to show the
same to persons wishing to lease, purchase, or mortgage them.
12. The Tenant agrees to use chair pads to be furnished by the Tenant under
all rolling and ordinary desk chairs in the carpeted areas of the Demised
Premises throughout the term of this Lease.
13. The Landlord reserves the right to make such other and further reasonable
rules and regulations as in its judgment may from time to time be necessary and
desirable for the safety, care, and cleanliness of the Demised Premises and for
the preservation of good order therein. Such rules and regulations shall be
effective upon receipt of changes and/or additions as provided by the provision
of Notice, Section 19 of said Lease.
14. Tenant acknowledges that the building has been declared a non-smoking
facility and agrees to restrict smoking to smoking designated areas outside of
the Premises.
25
<PAGE> 26
EXHIBIT E, GUARANTY
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST,
MANAGING GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
FOR VALUE RECEIVED, and in consideration for and as an inducement to Landlord
entering into this Lease with Tenant, the undersigned (jointly and severally, if
more than one) personally and unconditionally guarantees to Landlord, its
successors and assigns, the full performance and observance of all the
covenants, terms and conditions here above contained to be performed and
observed by Tenant, without requiring any notice of non-payment,
non-performance or non-observance, or proof, notice or demand whereby to charge
the undersigned therefor, all of which the undersigned hereby expressly waives,
and expressly agrees that the validity of this continuing and unconditional
guaranty agreement and the obligations of the guarantor hereunder shall in no
way be terminated, affected or impaired by reason of the assertion by Landlord
against Tenant of any of the rights or remedies reserved to Landlord pursuant
to the provisions of this Lease, or by Landlord granting any indulgence or
waiver or giving of additional time to Tenant for the performance of any of the
obligations of this Lease. This Guaranty shall remain in full force and effect
as to any renewal, modification, extension or holdover term of this Lease.
Landlord need not pursue any remedies against Tenant before enforcing this
Guaranty.
WITNESS GUARANTOR
/s/ Nance S. Donaldson
- ------------------------- /s/ Sam F. Dayton
---------------------------------------
- -------------------------
ADDRESS ADDRESS
3639 Creekstone Way 419 Bradford Street, NW
- ------------------------- ----------------------------------------
Marietta, Ga 30068 Suite A-2, Gainesville, GA 30501
- ------------------------- ----------------------------------------
BY: BY:
- ------------------------- ----------------------------------------
DATE: 5/3/96 DATE:
- ------------------------- ----------------------------------------
WITNESS GUARANTOR
/s/ Nance S. Donaldson
- ------------------------- /s/ James C. Howell
---------------------------------------
- -------------------------
ADDRESS ADDRESS
3639 Creekstone Way 1613-B Walker St.
- ------------------------- ----------------------------------------
Marietta, Ga 30068 Smyrna, GA 30080
- ------------------------- ----------------------------------------
BY: BY:
- ------------------------ ----------------------------------------
DATE: 5/3/96 DATE:
- ------------------------- ----------------------------------------
WITNESS GUARANTOR
- ------------------------- EDWARD L. LANDA
---------------------------------------
- -------------------------
ADDRESS ADDRESS
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
BY: BY:
- ------------------------- ----------------------------------------
DATE: DATE:
- ------------------------- ----------------------------------------
SFD / CC
---------------
Tenant/Landlord
<PAGE> 27
ADDENDUM B
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST,
MANAGING GENERAL PARTNER
LANDLORD,
AND COMSTAR COMMUNICATIONS, INC. TENANT
TO LEASE DATED MAY 2, 1996
THIS ADDENDUM is made this 14th day of JUNE 1996 by and BETWEEN THE EMERSON
CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING GENERAL PARTNER, LANDLORD
AND COMSTAR COMMUNICATIONS, INC., TENANT
WHEREAS, Landlord and Tenant are the parties to the above-described Lease for
the 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 here acknowledged,
Landlord and tenant contract and agree as follows:
1) Tenant will install a overhead 1 1/2 ton A/C unit above the leased space.
The condenser unit will be mounted on the roof, but all other equipment
will be located inside the suite. The tenant will use a landlord
approved contractor and be responsible for the cost of the unit and
installation. The unit must be sub-metered and the landlord will read
the meter each month and bill the tenant for additional usage.
Tenant will be responsible for the unit, its' maintenance, and all cost
incurred. Landlord will have the option of requesting the removal of the
unit and full restoration of the property upon expiration/termination of
the lease.
EXCEPT AS HEREBY AMENDED, all other provisions of said Lease are hereby
confirmed and ratified.
IN WITNESS WHEREOF, the parties hereto have executed this addendum on
the date first above written.
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR COMMUNICATIONS, INC.
National Income Realty Trust, Managing
General Partner
By: /s/ Chris Clinton By: /s/ Sam F. Dayton, Pres.
---------------------------------- -----------------------------------
Sam F. Dayton, Ph.d.
Date: 7/15/96 Date: 06/26/96
-------------------------------- ---------------------------------
<PAGE> 28
EMERSON CENTER
FIRST AMENDMENT TO LEASE
STATE OF GEORGIA
COUNTY OF COBB
THIS AMENDMENT made and entered in this 26th day of August, 1996, by and
between THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST MANAGING
GENERAL PARTNER, (hereinafter referred to as "Landlord") and COMSTAR
COMMUNICATIONS, INC., (hereinafter referred to as "Tenant");
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated May 2, 1996
for certain premises located at 2812 NEW SPRING ROAD, SUITE 210, ATLANTA,
GEORGIA 30339 AT THE EMERSON CENTER OFFICE PARK (hereinafter referred to as
"Lease"); and
WHEREAS, Landlord and Tenant desire to further amend the Lease in certain
respects to ratify and confirm all of the provisions of the Lease Agreement;
NOW THEREFORE, in consideration of the premises, the sum of TEN DOLLARS
($10.00) in hand paid by Tenant to Landlord, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Tenant shall expand into the adjacent 1,979 rentable square foot
space, currently identified as Suite 214. Total lease area shall now
equal 3,243 rentable square feet.
2. Tenant's pro-rata share of building area shall be .025%.
3. Commencement date for the expansion space shall be October 1, 1996.
4. Expiration date shall be extended to September 30, 1999.
5. Base rent, monthly installments shall escalate according to the
following schedule of rent:
<TABLE>
<CAPTION>
Date Per Sq. Ft. Monthly Year
---- ----------- --------- ----------
<S> <C> <C> <C>
10/01/96 - 05/31/97 $12.00 $3,243.00 $25,944.00
06/01/97 - 05/31/98 12.48 3,372.72 40,472.64
06/01/98 - 05/31/99 12.98 3,507.84 42,094.14
06/01/99 - 09/30/99 13.49 3,645.67 14,582.69
</TABLE>
6. Tenant improvements to the premises are described in Exhibit A, Work
Letter Addendum, which is attached hereto and incorporated herein by
reference. All improvements to the space shall be completed prior to
the commencement date for the expansion space.
7. Address of Tenant for notices shall be changed to: Sam F. Dayton,
P.O. Box 267, Gainesville, Georgia 30503-0267.
8. First Right of Refusal - Tenant shall have the First Right of Refusal
on the 1,089 rentable square feet located immediately adjacent to the
expansion space. Upon notice from Landlord, Tenant shall have five
(5) business days to notify Landlord of its desire to lease the
space. Tenant agrees to lease space at the then going market rate to
be determined by Landlord.
9. Except as amended hereby, the Lease shall remain in full force and
effect and same is hereby ratified and confirmed.
<PAGE> 29
10. This Amendment shall be binding upon and inure to the benefit of
Landlord, Tenant and their respective transfer, successors and assigns.
11. This Amendment shall be governed in all respects by the laws of the
State of Georgia.
12. The Frank M. Darby Company represented the Landlord in the
negotiations for this Lease Amendment, not the Tenant, and shall be
compensated for its services by Landlord as evidenced by separate
agreement.
IN WITNESS WHEREOF, the parties hereto have set their bonds and seals the day
and year first above written.
LANDLORD: THE EMERSON CENTER COMPANY
NATIONAL INCOME REALTY TRUST
MANAGING GENERAL PARTNER
BY: /s/ Chris Clinton DATE: 9/23/96
------------------------- -----------
ITS: SR VP
-------------------------
TENANT: COMSTAR COMMUNICATIONS, INC.
BY: /s/ Sam F. Dayton DATE: 9/13/96
------------------------- -----------
ITS: President
-------------------------
<PAGE> 1
EXHIBIT 21.1
Subsidiaries
Comstar Telecom & Wireless, Inc.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made part of this
Registration Statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
October 15, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF COMSTAR.NET FOR THE YEAR ENDED DECEMBER 31,1997,
DECEMBER 31, 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<EXCHANGE-RATE> 1 1 1
<CASH> 54,676 283,621 355,689
<SECURITIES> 0 0 0
<RECEIVABLES> 93,508 259,837 465,959
<ALLOWANCES> (19,426) (25,447) (103,107)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 128,758 522,775 1,300,480
<PP&E> 384,300 849,828 1,154,606
<DEPRECIATION> (61,765) (195,199) (350,552)
<TOTAL-ASSETS> 529,519 1,649,847 2,358,037
<CURRENT-LIABILITIES> 1,011,805 (2,697,145) 3,011,889
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 364,822 2,122,744
<OTHER-SE> (825,364) (1,423,094) (6,201,832)
<TOTAL-LIABILITY-AND-EQUITY> 529,519 1,649,847 2,358,037
<SALES> 675,569 2,142,345 2,288,073
<TOTAL-REVENUES> 675,569 2,142,345 2,288,073
<CGS> 528,835 1,235,862 1,461,932
<TOTAL-COSTS> 1,163,154 2,587,483 6,850,467
<OTHER-EXPENSES> 59,659 152,592 216,344
<LOSS-PROVISION> 19,426 24,039 82,408
<INTEREST-EXPENSE> (66,201) (150,605) (146,046)
<INCOME-PRETAX> (547,244) (597,730) (4,778,738)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (547,244) (597,730) (4,778,738)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (547,244) (597,730) (4,778,738)
<EPS-BASIC> (.11) (.12) (.93)
<EPS-DILUTED> (.11) (.12) (.93)
</TABLE>
