<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
COMSTAR.NET, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
GEORGIA 7379 58-2235514
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
2812 SPRING ROAD
SUITE 210
ATLANTA, GEORGIA 30339
(770) 485-6000
(770) 485-6100 (FACSIMILE)
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
CHRISTOPHER K. MARTIN, C.P.A.
CHIEF FINANCIAL OFFICER
COMSTAR.NET, INC.
2812 SPRING ROAD
SUITE 210
ATLANTA, GEORGIA 30339
(770) 485-6000
(770) 485-6100 (FACSIMILE)
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
---------------------------
Copies to:
<TABLE>
<S> <C>
CHARLES D. VAUGHN, ESQ. M. HILL JEFFRIES, ESQ.
JENNIFER A. MCCOID, ESQ. MARC L. HARRISON, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P. ALSTON & BIRD LLP
FIRST UNION PLAZA, SUITE 1400 ONE ATLANTIC CENTER
999 PEACHTREE STREET, N.E. 1201 WEST PEACHTREE STREET
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30309-3424
(404) 817-6000 (404) 881-7000
(404) 817-6050 (FACSIMILE) (404) 881-4777 (FACSIMILE)
</TABLE>
---------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
---------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
AGGREGATE OFFERING AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, no par value.................................. $54,475,000 $15,150
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
---------------------------
THE 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 SEPTEMBER 10, 1999
(COMSTAR.NET, INC. LOGO)
SHARES
COMMON STOCK
comstar.net, inc. is offering shares of its common
stock, and the selling shareholders are offering an additional
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 $ and $ per share.
---------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- --------
<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 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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<S> <C>
Summary.......................... 1
Risk Factors..................... 6
Use of Proceeds.................. 25
Capitalization................... 26
Dividend Policy.................. 26
Dilution......................... 27
Selected Financial Data.......... 28
Management's Discussion and
Analysis of Financial Condition
and Results of Operations...... 30
Business......................... 44
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management....................... 64
Related Party Transactions....... 71
Principal and Selling
Shareholders................... 72
Description of Capital Stock..... 74
Shares Eligible for Future
Sale........................... 78
Underwriting..................... 80
Legal Matters.................... 83
Experts.......................... 84
Where You Can Find More
Information.................... 84
Index to Financial Statements.... F-1
</TABLE>
---------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
In this prospectus, "comstar.net," "we," "us" and "our" refer to
comstar.net, inc. and its subsidiaries unless the context otherwise requires.
<PAGE> 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 the price of our common stock to the public will
be $ per share, that the underwriters will not exercise their
over-allotment option and that all outstanding shares of common stock series A
and common stock series B will convert into shares of common stock immediately
on the closing 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.
Data center services include, among others, our co-location services and
our managed application hosting services. These 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
Atlanta, Georgia 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 communications services from a single source, is driving the convergence of
voice and data communications technologies toward providers capable of
delivering a broad range of communications 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 value-added data center
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 six months ended June 30, 1999 were $1,485,544, an
increase of 73.2% from our revenues of $857,786 for the six months ended June
30, 1998. For the six months ended June 30, 1999, we derived 61.3% of our
revenues from providing Internet access and 38.7% of our revenues from all our
other services. For the six months ended June 30, 1999, our average monthly
revenue per customer was approximately $517.
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 244 customers at the end of 1997, and to 472
customers at the end of 1998. We had 510 customers at September 1, 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
<TABLE>
<S> <C>
Common stock offered by
comstar.net........................ shares
Common stock offered by the selling
shareholders....................... shares
Over-allotment option................ Up to 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 $ ,
the total offering proceeds will be
$ , underwriting discounts will be
$ and proceeds to comstar.net will be
$ .
Common stock to be outstanding
immediately after the offering..... 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. (with logo
design)(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. The data "as adjusted for the offering" reflect the
sale by us of shares of common stock at an assumed initial
offering price of $ per share and our receipt and application of the
estimated net proceeds as described in "Use of Proceeds."
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION YEAR ENDED SIX MONTHS ENDED
(MARCH 5, 1996) DECEMBER 31, JUNE 30,
TO DECEMBER 31, ------------------------- -------------------------
1996 1997 1998 1998 1999
----------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 65,398 $ 675,569 $ 2,142,345 $ 857,786 $ 1,485,544
Operating loss........... (267,686) (487,585) (445,138) (25,834) (536,897)
Net loss................. (278,120) (547,244) (597,730) (96,387) (703,721)
Net loss per share (basic
and diluted)........... $ (.03) $ (.06) $ (.06) $ (.01) $ (.07)
=========== =========== =========== =========== ===========
Weighted average shares
outstanding............ 10,000,000 10,000,000 10,005,731 10,000,000 10,165,825
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------
AS ADJUSTED
FOR THE
ACTUAL OFFERING
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1,045,071 $
Working capital (deficit)................................... (1,038,135)
Total assets................................................ 2,567,834
Total debt, including current maturities.................... 2,048,917
Total shareholders' deficit................................. (4,071)
</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 or 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)
Six months ended June 30, 1999..................... (703,721) (645,268)
</TABLE>
As of June 30, 1999, we had an accumulated deficit of approximately $2.1
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 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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<PAGE> 14
- 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 customer base, 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 network
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.
BREACHES IN THE SECURITY OF OUR NETWORK COULD REQUIRE US TO PAY MONEY DAMAGES TO
OUR CUSTOMERS FOR LOSS OF INFORMATION AND COULD RESULT IN LOSS OF CUSTOMERS AND
NEGATIVE PUBLICITY.
To conduct electronic commerce and communications effectively, we must
ensure our customers that the information they transmit over our network will be
safe. We provide security for our customers' information by licensing encryption
and authentication technology from others. Despite our design and implementation
of a variety of network security measures, our network, our data center or our
POPs may be the victim of unauthorized access, computer viruses, accidental or
intentional acts and other disruptions of our business. We may be held
responsible and required to pay damages for the loss of any confidential
information stored in our computers or the equipment of our customers arising
from the inappropriate use of our network by others. We may also lose customers
if any of these disruptions occur.
Although we provide industry-standard security measures, these measures
have been defeated in the past, and we cannot guarantee that they will not be
defeated on our network or at our data center or POPs. Any security breach could
result in expensive litigation and harmful publicity. In addition, if many
enterprises choose not to use the Internet because of security concerns, the
growth of the Internet would be inhibited, which would have a material adverse
effect on our business.
IF WE CANNOT EXPAND OUR TELECOMMUNICATIONS NETWORK RAPIDLY OR BROADLY ENOUGH TO
MEET CUSTOMER DEMAND, THE QUALITY OF OUR SERVICE MAY SUFFER.
We must continue to expand and adapt our network infrastructure as the
number of customers and the amount of information they wish to transport
increases and their requirements evolve. A rapid and significant expansion of
our network will place additional stress upon our network hardware and traffic
management systems. The ability of our network to connect and manage a
substantially larger number of customers at high transmission speeds has not
been tested. Consequently, we face the risk that we cannot expand our network as
we intend. Even if we are able to do so, we face the risk that an expanded
network will not maintain the levels of performance our network currently
provides.
From time to time we must upgrade our infrastructure to increase bandwidth
capacity. This allows us to handle increases in information flow while
maintaining the speeds of data transfer our customers require. We believe that
further expansion and improvement of our network infrastructure will require
substantial financial, operational and management resources that may not be
available when we need them. We may not be able to acquire additional network
capacity from our suppliers when we need it, on reasonable terms or at all. In
addition, as we upgrade our infrastructure, we may need to use equipment or
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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 incumbent local
exchange carrier in the markets we serve. Although we believe that the federal
Telecommunications Act of 1996 will generally lead to increased competition in
the local telephone service market, we cannot predict when or to what extent
this will occur or the effect of increased competition on pricing or supply. In
addition, our telecommunica-tions carriers also sell or lease services to our
competitors and either are, or in the future may become, competitors themselves.
As a result, when capacity constraints and disruptions occur, our carriers may
allocate any remaining capacity to themselves or to our competitors.
IF OUR SUPPLIERS ARE UNABLE TO SUPPLY THE EQUIPMENT WE NEED TO MAINTAIN AND
IMPROVE OUR NETWORK AND DATA CENTER SERVICES, OUR SERVICE QUALITY MAY SUFFER AND
WE MAY LOSE CUSTOMERS.
We depend on a few suppliers of hardware components for which alternative
sources are not readily available. We purchase some of our parts from Cisco
Systems, Inc. and Lucent Technologies, Inc. under purchase orders we place from
time to time. We do not have a long-term contract or guaranteed supply
arrangement with these providers, and we do not carry significant inventories of
these parts. If we are unable to obtain these parts on a timely basis and at an
acceptable cost, we could be unable to upgrade or repair our
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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 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, WE COULD LOSE THE RIGHT TO USE
THOSE MARKS AND WOULD HAVE TO INCUR SUBSTANTIAL COSTS TO BUILD A NEW NAME.
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,
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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. If the
Patent and Trademark Office finds that the marks in these registration
applications are likely to be confused with the marks of another company, they
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 losing business to competitors.
In addition, 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 World Wide Web, which is
currently www.comstar.net.
Litigation or settlement of an infringement claim could also require us to 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 materially and adversely affect our business or 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.
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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, incur significant disruption in our
business, lose revenues, and incur substantial liabilities and expenses. In
addition, the Internet could face serious disruptions arising from year 2000
issues, which generally may have an adverse impact on traffic and commerce on
the Internet.
Even if year 2000 problems do not cause any of these failures or
disruptions, if our suppliers, current or prospective customers or others expect
that these failures or disruptions will occur, during the fourth quarter of 1999
it could:
- cause potential customers to delay purchases from us until the year 2000,
- reduce the growth of the Internet and electronic commerce,
- hamper existing Internet activity and electronic commerce, and
- reduce the demand for our services.
If this happens, it could materially and adversely affect our business,
particularly our results of operations. For more information about how year 2000
issues affect us, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
IF WE SUCCEED IN OUR GOAL OF BECOMING A COMPETITIVE LOCAL EXCHANGE CARRIER, WE
COULD BE SUBJECT TO NUMEROUS ADDITIONAL RISKS.
One of our goals is to become licensed as a competitive local exchange
carrier, or CLEC, within the state of Georgia and in other states in which we
operate. A CLEC provides local access lines as well as long-distance or other
telecommunications services. The approval process for becoming a CLEC can be
costly and lengthy, and obtaining this approval will divert important management
and capital resources from our business. We 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.
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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. 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 HAVE CONFLICTS OF INTEREST INVOLVING OTHER COMPANIES WITH
WHICH WE DO BUSINESS OR IN WHICH WE OWN A SUBSTANTIAL MINORITY INTEREST.
Dr. Samuel F. Dayton, our Chairman of the Board, and James L. Bruce, Jr.,
one of our directors, are substantial shareholders of both comstar.net and db
Telecom Technologies, Inc. Dr. Dayton and Mr. Bruce are also officers and
directors of db Telecom Technologies. Because db Telecom Technologies has in the
past and is expected in the future to perform services for us and engage in
other transactions with us, conflicts of interest may arise in connection with
those transactions. For example, we expect that from time to time we will retain
db Telecom Technologies to perform work for us as a subcontractor on
communications projects.
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In addition, we own 25% of the outstanding common stock of nschool
Communication Systems, Inc., a company involved in developing and licensing
software to link educators, parents and students. We also have a bilateral
license agreement with nschool governing our rights and the rights of nschool
relating to software we developed for nschool. Dr. Samuel F. Dayton, our
Chairman of the Board, is the chairman of the board of directors of nschool. As
a result, conflicts of interest may arise in connection with any transaction
between nschool and us.
We have a policy that requires any material transaction with our officers,
directors, or principal shareholders, or their affiliates, to be on terms no
less favorable to us than we reasonably could have obtained in arm's-length
transactions with independent parties. We believe that all current relationships
between either db Telecom Technologies or nschool on one hand and comstar.net on
the other hand comply with this policy. Nevertheless, transactions between us
and db Telecom Technologies or nschool could result in substantial benefits to
Dr. Dayton and/or Mr. Bruce at our expense.
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 and all shares of our common stock series A
and common stock series B are converted into shares of our common stock, our
present executive officers, directors and current holders of more than 5% of the
common stock will, in the aggregate, beneficially own approximately % 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.
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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 may grow more
slowly than anticipated.
OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT AND RELIABILITY OF THE INTERNET
INFRASTRUCTURE.
The recent growth of the Internet has caused periods of diminished
performance, requiring entities with links to the Internet to periodically
upgrade the links and components that form the infrastructure of the Internet to
alleviate congestion. Because the Internet access we provide is limited by the
speed and reliability of the networks of others, including the ISPs that provide
our connection to the Internet, the public perception of our services could be
undermined by any publicized or perceived downturn in the performance of the
Internet as a whole. Consequently, the emergence and growth of the market for
our services depends on improvements being made to the entire Internet
infrastructure to alleviate congestion.
THE TECHNOLOGY USED IN OUR INDUSTRY IS RAPIDLY CHANGING, AND OUR BUSINESS MAY
SUFFER IF WE DO NOT ADAPT TO THE CHANGING STANDARDS.
Our future success will depend, in part, on our ability to offer services
that:
- incorporate leading technology,
- address the increasingly sophisticated and varied needs of our current
and prospective customers, and
- respond to technological advances and emerging industry standards and
practices on a timely and cost-effective basis.
We may not be able to incorporate future technological advances into our
business on a cost-effective and timely basis or at all. Moreover, technological
advances may encourage our current or future customers to rely on in-house
personnel and equipment to provide the services we currently provide, which
would reduce those customers' need for our services. In addition, we may require
substantial expenditures and lead-time to keep pace and ensure compatibility
with technological advances in our industry.
We believe that our future success also depends upon the continued ability
of our services to work with the products, services and other technologies
offered by various vendors. New products may not be compatible with our network
and services or adequately address the changing needs of our customers. In
addition, industry standards may not be established, or we may not be able to
conform to new standards in a timely fashion to remain competitive. Our failure
to conform to prevailing technology standards, or the failure of common
technology standards to emerge, could limit our ability to compete and adversely
affect our business. In addition, the products, services or technologies
developed by others may make our services less competitive or obsolete.
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OUR INDUSTRY IS VERY COMPETITIVE, AND MANY OF OUR COMPETITORS HAVE GREATER
RESOURCES THAN WE DO.
The Internet services and technologies industries are highly competitive.
The tremendous growth and potential size of the market for Internet services has
attracted many new start-ups as well as existing businesses. It is relatively
easy for new entities to enter the industry, and we expect that competition will
continue to grow as use of the Internet increases. We may not have the resources
or expertise to compete successfully with existing or new competitors, which
include:
- national, regional and local ISPs, including the ISPs that provide our
connection to the Internet,
- national and regional long distance and local exchange telecommunications
carriers,
- cable operators and their affiliates,
- providers of co-location and other data center services, and
- wireless and satellite ISPs.
When compared to us, many of our competitors have substantially greater
financial, technical, marketing and personnel resources; a broader range of
services; larger customer bases; more extensive networks and facilities; longer
operating histories; greater name recognition and market presence; and more
established business relationships in the industry. As a result, some of our
competitors may be better able than we are to:
- develop and expand their network infrastructures and service offerings,
- adapt to new or emerging technologies and changes in customer
requirements,
- take advantage of acquisitions and other opportunities,
- devote resources to the marketing and sale of their services, and
- adopt aggressive pricing policies.
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. 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.
We also potentially face competition from companies that provide broadband
connections to businesses and other organizations, including local and long
distance telecommunications carriers, cable television operators and their
affiliates, and satellite and wireless communications companies. Broadband
technologies enable subscribers to transmit and receive print, video, voice and
data in digital form at significantly faster access speeds than existing dial-up
modems. Although we do not believe that we face competition in the near future
from broadband providers in the business-to-business ISP market, we could face
competition of that type in the future. In particular, the companies that own
these broadband networks could prevent us from delivering Internet access
through the wire and cable connections that they own. Cable television operators
are not currently required to
20
<PAGE> 25
allow ISPs to access their broadband facilities, and the availability and terms
of ISP access to broadband local telephone company networks are under regulatory
review. Our ability to gain access to these facilities and networks is uncertain
and depends in large part on future regulatory developments. If high-speed,
broadband facilities increasingly become the preferred mode by which businesses
access the Internet and we are unable to gain access to these facilities on
reasonable terms, our business could be materially and adversely affected.
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.
21
<PAGE> 26
In addition, any one of the numerous states where we provide Internet
services or where we facilitate sales by our customers to end users may require
us to qualify to do business as a foreign corporation in the state. We are
qualified to do business in only a limited number of states, and our failure to
qualify as a foreign corporation in a jurisdiction where we are required to
qualify could subject us to taxes and penalties for failing to qualify,
including the inability to enforce contracts in the jurisdictions. The
application of the laws or regulations of jurisdictions whose laws do not
currently apply to our business could adversely affect our business.
WE MAY BE LIABLE FOR THE MATERIAL OUR CUSTOMERS DISTRIBUTE OVER THE INTERNET.
The law relating to the liability of ISPs for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the Web sites we host. For
example, lawsuits may be brought 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
22
<PAGE> 27
- 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 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 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 and our directors and executive officers 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, 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 2,900,000 shares of common stock issuable on
exercise of stock options, of which approximately 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
$ 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.
23
<PAGE> 28
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 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 $ 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.
24
<PAGE> 29
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common
stock offered by us are estimated to be $ , assuming an initial
public offering price of $ 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,
- expand our sales and marketing staffs and our overall marketing and
advertising efforts to increase our access to and visibility in the
marketplace, and
- fund research and development of new and enhanced services.
We will use any remaining net proceeds from this offering for general corporate
purposes, including 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
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 us to fund our
purchase of Athens' ISP, Inc. in July 1998 and to provide working capital.
The amount of funds that we actually use for these purposes, other than
debt repayment, will depend on many factors, including revisions to our business
plan, material changes in our revenues or expenses, and other factors described
under "Risk Factors." Accordingly, our management will have significant
discretion over the use and investment of the net proceeds from the offering.
From time to time in the ordinary course of business, we evaluate the
acquisition of customer lists and related customer accounts, businesses,
products, services and technologies that may increase the size of our customer
base or complement our business. We may use a portion of the net proceeds for
any of these acquisitions. Currently, however, we do not have any
understandings, commitments or agreements with respect to any acquisitions, and
we may not be able to identify suitable acquisition candidates or complete any
acquisition.
Pending application of the net proceeds described above, we intend to
invest the net proceeds in investment-grade, interest-bearing securities.
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<PAGE> 30
CAPITALIZATION
The following table describes our capitalization at June 30, 1999 on a
historical basis and as adjusted to give effect to our sale of
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
577,250 shares of common stock that may be issued under outstanding options at
June 30, 1999 at an exercise price of $5.71 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>
JUNE 30, 1999
-------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Long-term debt, including current maturities......... $ 2,022,822 $ --
Obligations under capital leases, including current
portion............................................ 26,095 26,095
Shareholders' deficit:
Preferred stock, no par value:
Undesignated, 5,000,000 shares authorized, none
issued and outstanding........................ -- --
Common stock, no par value:
Undesignated, 80,000,000 shares authorized, none
issued and outstanding (actual), issued
and outstanding (as adjusted)................. --
Series A voting, 10,000,000 shares authorized,
5,371,762 shares issued and outstanding
(actual), none outstanding (as adjusted)........ 2,122,744 --
Series B voting, 10,000,000 shares authorized,
5,000,000 shares issued and outstanding
(actual), none outstanding (as adjusted)........ -- --
Accumulated deficit.................................. (2,126,815) (2,126,815)
----------- -----------
Total shareholders' deficit................... (4,071) ( )
----------- -----------
$ 2,044,846 $
=========== ===========
</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.
26
<PAGE> 31
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $(312,813) or
$(0.03) 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 shares of common stock at an assumed initial
public offering price of $ per share, our adjusted pro forma net
tangible book value as of June 30, 1999 would have been $ , or
$ per share. This amount represents an immediate increase in pro forma
net tangible book value of $ per share to existing shareholders and an
immediate dilution of $ per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $
Pro forma net tangible book value as of June 30, 1999..... $(0.03)
Increase in net tangible book value attributable to new
investors..............................................
------
Pro forma net tangible book value after the offering........
------
Dilution to new investors...................................
======
</TABLE>
The following table summarizes, on an as adjusted pro forma basis as of
June 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
$ 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........... 10,371,762 % $2,122,744 % $0.21
New investors...................
---------- ----- ---------- ------
Total........................... 100.0% $ 100.0%
========== ===== ========== ======
</TABLE>
Sales by the selling shareholders in this offering will reduce the number
of shares held by existing shareholders to , or % 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 , or
% 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 1,672,250 shares of common stock issuable
under options outstanding as of September 1, 1999 at a weighted average exercise
price of $5.71 per share. To the extent any of these options are exercised, new
investors will incur further dilution. We have reserved an additional 1,227,750
shares of common stock for issuance under our stock option plans. For more
information regarding our stock option plans, see "Management -- Option Plans."
27
<PAGE> 32
SELECTED FINANCIAL DATA
The following selected financial data of comstar.net for the period from
inception, March 5, 1996, to December 31, 1996, and for the years ended December
31, 1997 and 1998 and as of December 31, 1997 and 1998 are derived from our
audited financial statements. The selected statement of operations data for the
six month periods ended June 30, 1998 and 1999 and the selected balance sheet
data as of December 31, 1996 and June 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 six months ended June 30, 1999 are not necessarily indicative of the results
for a full year. For an explanation of the determination of the number of shares
used to compute basic and diluted net loss per share and weighted average shares
outstanding, see note 2 of the notes to our financial statements. The balance
sheet data "as adjusted" as of June 30, 1999 reflect our sale of
shares of common stock at an assumed initial offering price of $ per share
and our receipt and application of the estimated net proceeds as described in
"Use of Proceeds." 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.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996)
TO YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 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 $ 552,991 $ 910,540
Data center services..... 33,048 205,171 417,112 156,202 280,726
Circuit rebill........... 276 44,459 255,230 90,881 244,830
Other.................... 2,495 26,772 135,950 57,712 49,448
----------- ----------- ----------- ----------- -----------
Total...................... 65,398 675,569 2,142,345 857,786 1,485,544
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of network
services............... 73,963 528,835 1,235,862 423,292 917,980
Salaries and wages....... 150,448 370,145 521,570 222,923 508,568
General and
administrative......... 67,259 131,767 379,036 94,680 322,435
Rent..................... 21,792 33,152 106,417 42,931 61,339
Management fees.......... 8,000 42,000 60,000 30,000 30,000
Depreciation and
amortization........... 11,622 57,255 284,598 69,794 182,119
----------- ----------- ----------- ----------- -----------
Operating Loss............. (267,686) (487,585) (445,138) (25,834) (536,897)
----------- ----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Interest expense......... (10,434) (66,201) (150,605) (60,752) (102,593)
Other income (loss)...... -- 6,542 (1,987) (9,801) (18,513)
Equity in net loss of
investee............... -- -- -- -- (82,744)
=========== =========== =========== =========== ===========
NET LOSS................... $ (278,120) $ (547,244) $ (597,730) $ (96,387) $ (703,721)
=========== =========== =========== =========== ===========
NET LOSS PER SHARE (BASIC
AND DILUTED)............. (.03) (.06) (.06) (.01) (.07)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING.............. 10,000,000 10,000,000 10,005,731 10,000,000 10,165,825
=========== =========== =========== =========== ===========
</TABLE>
28
<PAGE> 33
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 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 $1,045,071 $
Working capital (deficit)..... (379,483) (883,047) (2,174,370) (1,038,135)
Total assets.................. 123,965 529,519 1,649,847 2,567,834
Total debt, including current
maturities.................. 328,924 1,128,845 2,214,232 2,048,917
Total shareholders' (deficit)
equity...................... (278,120) (825,364) (1,058,272) (4,071)
</TABLE>
29
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion in conjunction with our financial
statements and related notes and other financial information appearing elsewhere
in this prospectus. This discussion contains forward-looking statements relating
to our future financial performance, business strategy, financing plans and
other future events that involve risks and uncertainties. Our actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of many known and unknown factors, including those
factors described in "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
We are a rapidly growing ISP that targets middle market businesses,
educational institutions and governmental organizations. Our primary services
include Internet access, co-location services and managed application hosting
services.
We began operations in June 1996. From inception through December 31, 1996,
we had total revenues of $65,398, and at December 31, 1996 we had 27 customers.
During the year ended December 31, 1997, we expanded operations from one to
three POPs and purchased the business customers of one Atlanta-based ISP to end
the year with revenues totaling $675,569 and 244 customers, an approximate
ten-fold growth in revenues. During the year ended December 31, 1998, we
expanded our Atlanta data center, purchased the business customers 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, and
at December 31, 1998, we had 472 customers. For the six months ended June 30,
1999, we had revenues totaling $1,485,544, and at June 30, 1999, we had 487
customers. 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 June 30, 1999, we had an accumulated deficit of approximately $2.1 million.
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, value-added services, such as co-location, managed application
hosting and leased lines, to increase as a percentage of revenues in the future.
For example, monthly leased line revenues increased by 53.0% during the six
month period ended June 30, 1999. 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 six months ended June 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
30
<PAGE> 35
hosting. For the first six months of 1999, the average number of customers using
each of these services was 380 for ISDN, 31 for T1, 26 for frame relay, 28 for
co-location and 118 for Web hosting.
We generally provide our services under one-year, two-year or three-year
contracts. Of the 122 contracts signed during the six months ended June 30,
1999, 83 were one-year contracts, 36 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 1.9% for the six months ended June 30, 1999.
We charge non-refundable fees for the initial installation 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 non-refundable installation fees to recover our cost of installing and
setting up each customer for data center services. We charge monthly fees for
data center services according to the services we provide under our agreement
with the customer, recognizing all installation fees in the period of
installation. We recognize Internet access revenues and data center services
revenues in the period in which the services are provided.
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. 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.
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,
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<PAGE> 36
- 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.
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 and for the years ended December 31, 1997 and 1998, and for
the six months ended June 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)
TO YEAR ENDED SIX MONTHS
DECEMBER 31, DECEMBER 31, ENDED JUNE 30,
--------------- ----------------------- -----------------------
1996 1997 1998 1998 1999
--------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
REVENUES:............... $65,398 $675,569 $2,142,345 $857,786 $1,485,544
======= ======== ========== ======== ==========
Internet access......... 45.2% 59.1% 62.3% 64.5% 61.3%
Data center services.... 50.5 30.4 19.5 18.2 18.9
Circuit rebill.......... 0.5 6.5 11.9 10.6 16.5
Other................... 3.8 4.0 6.3 6.7 3.3
------- -------- ---------- -------- ----------
Total................... 100.0% 100.0% 100.0% 100.0% 100.0%
======= ======== ========== ======== ==========
COSTS AND EXPENSES:
Cost of network
services.............. 113.1% 78.3% 57.7% 49.3% 61.8%
Salaries and wages...... 230.0 54.8 24.3 26.0 34.2
General and
administrative........ 102.9 19.5 17.7 11.0 21.7
Rent.................... 33.3 4.9 5.0 5.0 4.1
Management fees......... 12.2 6.2 2.8 3.5 2.0
Depreciation and
amortization.......... 17.8 8.5 13.3 8.1 12.3
------- -------- ---------- -------- ----------
OPERATING LOSS.......... (409.3)% (72.2)% (20.8)% (3.0)% (36.1)%
======= ======== ========== ======== ==========
OTHER (EXPENSE) INCOME:
Interest expense........ (16.0)% (9.8)% (7.0)% (7.1)% (6.9)%
Other income (loss)..... 0.0 1.0 (0.1) (1.1) (4.3)
------- -------- ---------- -------- ----------
NET LOSS................ (425.3)% (81.0)% (27.9)% (11.2)% (47.4)%
======= ======== ========== ======== ==========
</TABLE>
32
<PAGE> 37
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Total revenues increased 73.2% to $1,485,544 for the six months ended June
30, 1999 from $857,786 for the six months ended June 30, 1998 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 and a higher amount of sales per customer. We had 487 customers at
June 30, 1999 with an average monthly billing of approximately $517 per customer
for the six months ended June 30, 1999 compared with 346 customers with an
average monthly billing of approximately $489 per customer for the six months
ended June 30, 1998. The increase in customers at June 30, 1999 was due in part
to our acquisition of Athens' ISP and our purchase of the business customer list
of another ISP in July 1998. The average monthly billing per customer for the
six months ended June 30, 1999 increased by approximately 5.7% over the average
monthly billing per customer for the six months ended June 30, 1998 due to
existing customers upgrading their level of service and new customers purchasing
our higher-priced data center services.
Internet access. Internet access revenues increased 64.7% to $910,540, or
61.3% of total revenues, for the six months ended June 30, 1999 from $552,991,
or 64.5% of total revenues, for the six months ended June 30, 1998 primarily due
to the overall increases in the customer base and average billing per customer
discussed above.
Data center services. Data center services revenues increased 79.7% to
$280,726, or 18.9% of total revenues, for the six months ended June 30, 1999
from $156,202, or 18.2% of total revenues, for the six months ended June 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 six months ended June 30, 1999, compared to only two of the six
months ended June 30, 1998.
Circuit rebill. Circuit rebill revenues increased to $244,830, or 16.5% of
total revenues, for the six months ended June 30, 1999 from $90,881, or 10.6% of
total revenues, for the six months ended June 30, 1998. 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 decreased to $49,448, or 3.3% of total revenues, for
the six months ended June 30, 1999 from $57,712, or 6.7% of total revenues, for
the six months ended June 30, 1998. The decrease is primarily attributable to a
$33,708 decrease in revenues from non-recurring hardware resales offset by a
$27,322 increase in revenues from transaction processing fees related to our
e-commerce software. We began offering our e-commerce software for customer use
in July 1998.
COSTS AND EXPENSES
Cost of network services. Cost of network services increased to $917,980,
or 61.8% of total revenues, for the six months ended June 30, 1999 from
$423,292, or 49.3% of total revenues, for the six months ended June 30, 1998.
The 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. As a percentage of revenues, the cost of
33
<PAGE> 38
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 $508,568, or 34.2% of
total revenues, for the six months ended June 30, 1999 from $222,923, or 26.0%
of total revenues, for the six months ended June 30, 1998. We had 27 employees
at June 30, 1999 compared to 15 employees at June 30, 1998.
General and administrative. General and administrative expenses increased
to $322,435, or 21.7% of total revenues, for the six months ended June 30, 1999
from $94,680, or 11.0% of total revenues, for the six months ended June 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, recruiting, utilities and equipment
installation and rentals. These costs increased as we added senior management
and other personnel to plan for future growth and to prepare for this offering.
Rent. As a percentage of total revenues, rent decreased to 4.1% for the
six months ended June 30, 1999 from 5.0% for the six months ended June 30, 1998.
Rent increased to $61,339 for the six months ended June 30, 1999 from $42,931
for the six months ended June 30, 1998. The increase in rent is primarily
attributed 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. The dollar amount of management fees remained constant at
$30,000 but decreased as a percentage of sales to 2.0% for the six months ended
June 30, 1999 from 3.5% for the six months ended June 30, 1998. As of July 1,
1999, we assumed the management functions provided by db Telecom Technologies,
and we will no longer pay management fees to db Telecom Technologies. 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."
Depreciation and amortization expense. Depreciation and amortization
increased to $182,119, or 12.3% of total revenues, for the six months ended June
30, 1999 from $69,794, or 8.1% of total revenues, for the six months ended June
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 $1,035,717 at June 30, 1999 and $640,750 at June 30, 1998. The
cost basis of customer lists and related customer accounts totaled $547,974 at
June 30, 1999 and $116,146 at June 30, 1998. Customer lists increased due to our
acquisition of Athens' ISP in July 1998 and our purchase of the business
customer list of another ISP in July 1998.
Interest expense. As a percentage of total revenues, interest expense
decreased to 6.9% for the six months ended June 30, 1999 from 7.1% for the six
months ended June 30, 1998. Interest expense increased to $102,593 for the six
months ended June 30, 1999 from $60,752 for the six months ended June 30, 1998
due to the additional debt we incurred to fund our capital purchases, the
Athens' ISP acquisition, the business customer list purchase and working capital
needs. Total debt and obligations under capital leases at June 30, 1999 was
$2,048,917 compared to $1,407,627 at June 30, 1998.
Other loss. Other loss increased to $64,231, or 4.3% of total revenues,
for the six months ended June 30, 1999 from $9,801, or 1.1% of total revenues,
for the six months ended June 30, 1998. Other loss increased primarily due to
our equity in the net losses of
34
<PAGE> 39
our investment in nschool Communication Systems, Inc. For more information about
our relationship with nschool, see "Management -- Compensation Committee
Interlocks and Insider Participation."
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 472
customers at December 31, 1998 and an average monthly billing of approximately
$493 per customer for the year ended December 31, 1998, as compared to 244
customers at December 31, 1997 and an average monthly billing of approximately
$537 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 8.2% over the average monthly
billing for the year ended December 31, 1997 because revenues from lower-priced
Internet access services increased at a higher rate than revenues from
higher-priced data center services.
Internet access. Internet access revenues increased to $1,334,053, or
62.3% of total revenues, for the year ended December 31, 1998 from $399,167, or
59.1% of total revenues, for the year ended December 31, 1997 primarily due to
the overall increase in the customer base, partially offset by a decrease in the
average monthly billing per customer. Internet access revenues increased 234.2%
for the year ended December 31, 1998 over the year ended December 31, 1997.
Data center services. Data center services revenues increased to $417,112,
or 19.5% of total revenues, for the year ended December 31, 1998 from $205,171,
or 30.4% of total revenues, for the year ended December 31, 1997 primarily due
to the overall increase in the customer base, partially offset by a decrease in
the average monthly billing per customer. We completed our expansion of the
Atlanta data center facilities in April 1998. This expanded facility allowed us
to offer our data center services to a broader market. Data center services
revenues increased 103.3% for the year ended December 31, 1998 over the year
ended December 31, 1997.
Circuit rebill. Circuit rebill revenues increased to $255,230, or 11.9% of
total revenues, for the year ended December 31, 1998 from $44,459, or 6.5% of
total revenues, for the year ended December 31, 1997. The increase is due to new
and existing customers purchasing or upgrading to higher-end, more expensive
services such as T1 and frame relay.
Other. Other revenues increased to $135,950, or 6.3% of total revenues,
for the year ended December 31, 1998 from $26,772, or 4.0% of total revenues,
for the year ended December 31, 1997. The increase is primarily due to a $42,846
increase in non-recurring hardware resales and $37,533 in transaction processing
fees associated with our e-commerce software. We began offering our e-commerce
software for customer use in July 1998.
35
<PAGE> 40
COSTS AND EXPENSES
Cost of network services. As a percentage of total revenues, cost of
network services decreased to 57.7% for the year ended December 31, 1998 from
78.3% for the year ended December 31, 1997. Cost of network services increased
to $1,235,862 for the year ended December 31, 1998 from $528,835 for the year
ended December 31, 1997. This increase in cost of network services is due
primarily to the increase in the amount of upstream and downstream access we
purchased to serve our growing customer base. The decrease as a percentage of
revenues is due to increased use of excess upstream capacity resulting from the
increase in our customer base.
Salaries and wages. As a percentage of total revenues, salaries and wages
decreased to 24.3% for the year ended December 31, 1998 from 54.8% for the year
ended December 31, 1997. Salaries and wages increased to $521,570 for the year
ended December 31, 1998 from $370,145 for the year ended December 31, 1997. The
increase in salaries and wages is primarily due to the increased workforce
needed to serve the expanding customer base. We had 18 employees at December 31,
1998 compared to nine employees at December 31, 1997.
General and administrative. As a percentage of total revenues, general and
administrative expenses decreased to 17.7% for the year ended December 31, 1998
from 19.5% for the year ended December 31, 1997. General and administrative
expenses increased to $379,036 for the year ended December 31, 1998 from
$131,767 for the year ended December 31, 1997. The increase in general and
administrative expenses is primarily attributable to increases in advertising
expenditures, additional insurance policies, professional fees, general office
equipment and computer supply costs as well as dues for our membership in
various industry trade organizations.
Rent. Rent increased to $106,417, or 5.0% of total revenues, for the year
ended December 31, 1998 from $33,152, or 4.9% of total revenues, for the year
ended December 31, 1997. This increase in rent is due primarily to additional
rent incurred with the expansion of our data center and our assumption of a
lease in our acquisition of Athens' ISP.
Management fees. As a percentage of total revenues, management fees
decreased to 2.8% for the year ended December 31, 1998 from 6.2% for the year
ended December 31, 1997. Management fees increased to $60,000 for the year ended
December 31, 1998 from $42,000 for the year ended December 31, 1997. The
increase is directly attributable to an increase in monthly management fees from
$2,000 to $5,000 that became effective on July 1, 1997.
Depreciation and amortization expense. Depreciation and amortization
increased to $284,598, or 13.3% of total revenues, for the year ended December
31, 1998 from $57,255, or 8.5% of total revenues, for the year ended December
31, 1997. The increase in depreciation expense is primarily due to an increase
in the capitalized costs of property and equipment acquired during the year. The
cost basis of property and equipment increased to $849,828 at December 31, 1998
from $384,300 at December 31, 1997. The increase in amortization expense is
directly attributed to the amortization of the customer lists and related
customer accounts purchased from two other ISPs in April and July 1998 and the
amortization of the customer list and related customer accounts acquired with
Athens' ISP in 1998. The cost basis of customer lists increased to $547,974 at
December 31, 1998 from $85,338 at December 31, 1997.
36
<PAGE> 41
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 19 at December 31, 1996 to 244 at December 31, 1997.
Internet access. Internet access revenues increased to $399,167, or 59.1%
of total revenues, for the year ended December 31, 1997 from $29,579, or 45.2%
of total revenues, for the period from inception to December 31, 1996. This
increase in access revenues resulted primarily from internal growth, from the
opening of the additional POPs and from the acquisition of a customer list
referred to above.
Data center services. Data center services revenues increased to $205,171,
or 30.4% of total revenues, for the year ended December 31, 1997 from $33,048,
or 50.5% of total revenues, for the period from inception to December 31, 1996.
The increase in data center services revenues was attributable to the increase
in the customer base for the reasons described above as well as expanded data
center service offerings.
Circuit rebill. Circuit rebill revenues increased to $44,459, or 6.5% of
total revenues, for the year ended December 31, 1997 from $276, or 0.5% of total
revenues, for the period from inception to December 31, 1996. During the year
ended December 31, 1997, we began offering our customers the option of a total
access package and consolidated billing to include the local circuit fees, which
we previously required our customers to pay directly to the telecommunications
carriers.
Other. Other revenues increased to $26,772, or 4.0% of total revenues, for
the year ended December 31, 1997 from $2,495, or 3.8% of total revenues, for the
period from inception to December 31, 1996. The increase is due primarily to the
increase in revenues from non-recurring hardware resales.
COSTS AND EXPENSES
Cost of network services. As a percentage of total revenues, cost of
network services decreased to 78.3% for the year ended December 31, 1997 from
113.1% for the period
37
<PAGE> 42
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.
38
<PAGE> 43
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.
At June 30, 1999, we had outstanding debt and accrued interest of $2,126,344, 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.............................................. 150,100 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 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
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 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 $26,000 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 371,762 shares of our
common stock in a private placement at a price of $5.71 per share. We are using
the $2,122,744 proceeds of this private placement for working capital.
Net cash used by operating activities was $645,268 for the six months ended
June 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 year ended December 31, 1996.
Net cash used in investing activities was $185,889 for the six months ended June
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 year ended 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 $1,592,607 for the six months ended June 30, 1999, $1,450,209 for
the year ended December 31, 1998, $799,921 for the year ended December 31, 1997
and $328,924 for the year ended 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 six months ended June 30, 1999.
39
<PAGE> 44
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
- 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.
40
<PAGE> 45
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 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.
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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 of 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 a back-up
generator powered by diesel fuel that will provide power for approximately 36-48
hours, and we have multiple connections to ISPs, allowing us to route traffic
away from any particular provider that may experience problems.
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.
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,
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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 June 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.
Data center services include, among others, our co-location services and
our managed application hosting services. These 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.
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
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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.
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.
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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 Value-Added Data Center
Services. We intend to generate a higher percentage of our revenues from our
value-added data center services, which typically provide higher margins than
our Internet access services. We believe that value-added 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 1, 1999 we had 23
co-location customers. We have offered our managed application hosting services
since June 1999, and, as of September 1, 1999, had six 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 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
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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 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
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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 value-added 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, value-added
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 time. Close proximity also
allows us to provide a greater range of services at lower costs to our
customers.
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The following diagram describes how our network is linked to very large
ISPs and how we can distribute our customers' traffic:
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.
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, email 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 61.3% of our revenues for
the six months ended June 30, 1999.
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Our Internet access options include:
<TABLE>
<CAPTION>
SERVICE DESCRIPTION BENEFITS
- ------- ----------- --------
<S> <C> <C>
Leased Lines Leased lines are a dedicated service Leased lines, which are priced
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>
Co-location. Through our co-location services, we provide secure space to
house customer-owned Internet equipment. Based upon their business and technical
requirements, customers may select from shared cabinet facilities, exclusive
cabinets or custom-built rooms with additional security features. All
co-location facilities include dedicated electrical power circuits to ensure
that we meet each customer's power requirements. Because the Internet operations
of our co-location customers frequently require hardware and software upgrades,
we give customers unlimited but secure access to their leased co-location space.
Additional space, electrical power and Internet services can be tailored to meet
our customers' needs. Our co-location services represented approximately 10.0%
of our revenues for the year ended December 31, 1998 and approximately 11.6% of
our revenues for the six months ended June 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
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- 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 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.
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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 1, 1999, we had 510 customers.
We provide service to a number of enterprises, including:
- - Atlanta Convention and Visitors Bureau
- - AGL Resources
- - Atlanta Historical Society
- - BellSouth Wireless Services
- - 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
- - America Online, through a contract with TeleHouse
- - Tom's Foods
- - WATL-TV Channel 36, Atlanta
Our customer nBank, a division of The First National Bank of Commerce,
provided 9.1% of our revenues for the year ended December 31, 1998 and 10.7% of
our revenues for the six months ended June 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.
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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
value-added 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 1, 1999, we had
signed more than 80 VIP partners to the program.
Also, our comstar.net Affiliate Program, or CAP program, allows our
authorized partners to resell our services and maintain a direct relationship
with customers in their local markets. In markets we have not identified as a
high priority for our network expansion, we forward leads directly to our CAP
partners so they can arrange a visit to the customer. We provide service and
technical support 24 hours a day, every day of the year and invoice the partners
at a reduced rate, allowing them to profit from the resale of our services.
Internet Sales. We use the Internet as another source to generate sales.
Our tele-sales staff handles many inquiries regarding our services received via
e-mail, either closing the sale or passing the leads to our field sales force.
We are internally developing systems and applications that will allow us to
receive, accept and implement sales electronically via the Internet.
Telemarketing. We began a telemarketing campaign in May 1999 using an
outside telemarketing firm that we pay on an hourly basis. We also compensate
the firm with performance-based bonuses. We create a sales script used by the
telemarketers and train all telemarketing personnel. Our telemarketing program
seeks to generate leads from small to medium sized businesses that are
pre-qualified for our services in our market areas. We may establish an internal
telemarketing department to ensure the quality of our sales efforts.
Strategic Marketing and Reseller Alliances. We enter into strategic
marketing and reseller alliances with partners to bundle and sell our services
with those of the partners. For example, our agreement with NorthPoint
Communications, Inc. allows us to resell NorthPoint's SDSL service, bundled with
our Internet access service. In addition, NorthPoint jointly funds our marketing
efforts for SDSL services in geographic areas
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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,
- 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
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- 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 Services Providers. As we increasingly generate revenues from
our value-added data center services, competition from other value-added service
providers will become more intense. 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 WirelessCommunications
Companies. Many of the major cable television operators, such as MediaOne, have
begun to offer or have announced an intention to offer Internet access through
their existing cable infrastructure. Seeking to take advantage of this installed
cable infrastructure and the Internet access opportunities it affords, many
telecommunications providers have acquired cable companies, such as AT&T's
acquisition of TCI and @Home. While many cable companies are faced with
large-scale upgrades of their existing plant equipment and infrastructure to
support connections to the Internet and become competitive, we believe that some
smaller enterprise customers may be attracted by the combined services already
being offered by cable operators. Other alternative service communications
companies have also announced plans to enter the Internet access market with
various wireless and satellite services and technologies.
GOVERNMENT REGULATION
INTERNET REGULATION
Currently, only a small body of laws and regulations directly apply to
access to or commerce on the Internet. Due to the increasing popularity and use
of the Internet, however, laws and regulations may be adopted at the
international, federal, state and local levels with respect to the Internet,
covering issues such as user privacy, freedom of expression, pricing,
characteristics and quality of products and services, taxation, advertising,
intellectual property rights, information security and the convergence of
traditional telecommunications services with Internet communications. Moreover,
a
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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 assessable by minors. This law also requires Web
sites to obtain parental consent before collecting information from
children who are age 12 and younger.
- The Child Protection and Sexual Predator Punishment Act, which imposes
criminal penalties for using the Internet to solicit minors for sexual
purposes, and for sending obscene material to persons under the age of
16.
- The Internet Tax Freedom Act, which imposes a three-year moratorium on
taxes which are multiple or discriminatory, to give state and federal
lawmakers time to develop a more comprehensive approach to Internet
taxation.
In addition, there is substantial uncertainty as to the applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws were adopted before the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of the
Internet, impose taxes or other costly requirements, create uncertainty in the
market or in some other manner have an adverse effect on Internet commerce.
These developments could, in turn, have a material adverse effect on our
business.
While no one has ever filed a claim against us relating to information
carried on, stored on, or disseminated through our network, someone may file a
claim of that type in the future and may be successful in imposing liability on
us. If that happens, we may have to spend significant amounts of money to defend
ourselves against these claims and, if we are not successful in our defense, the
amount of damages that we will have to pay may be significant. Any costs that we
incur as a result of defending these claims or the amount of liability that we
may suffer if our defense is not successful could materially adversely affect
our business. If, as the law in this area develops, we become liable for
information carried on, stored on, or disseminated through our network, we may
decide to take actions to reduce our exposure to this type of liability. This
may require us to spend significant amounts for new equipment and discontinue
offering some of our services.
The United Kingdom and the European Union have adopted legislation and
directives that have a direct impact on business conducted over the Internet and
on the use of the Internet. For example, the United Kingdom Defamation Act of
1996 protects ISPs, under some circumstances, from liability for defamatory
materials stored on its servers. The European Directives on the Protection of
Consumers, Data Protection, and Distance
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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 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.
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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 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
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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 orders 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. As a
result, the FCC will likely seek to revise its rules on unbundled network
elements. We view the Supreme Court decision as a favorable development for the
CLEC industry, although we cannot predict the ultimate outcome of further FCC
and court proceedings resulting from the decision.
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
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nondominant interstate carriers file tariffs, but has been prevented from doing
so by a federal Court of Appeals. However, the court may permit the FCC to take
this action in the future.
The FCC has granted incumbent local exchange carriers significant
flexibility in pricing their interstate switched access and dedicated services.
In May 1997, the FCC adopted an order which makes various reforms to the
existing rate structure for interstate access that are designed to move access
charges, over time, to more cost based rate levels and structures. We expect
that these changes will reduce access charges and shift charges currently based
on minutes to flat-rate, monthly per line charges. As a result, the aggregate
amount of access charges paid by long distance carriers to local exchange
carriers in the United States may decrease. In August 1999, the FCC implemented
a market-based approach to further access charge reform. This approach will give
incumbent local exchange carriers progressively greater flexibility in setting
rates as competition develops, gradually replacing regulation with competition
as the primary means of setting prices. This series of access charge reforms
will likely have a significant impact on our telecommunications services.
In May 1997, the FCC issued an order to implement the provisions of the
Telecommunications Act which seek to advance universal telephone service.
Universal telephone service includes:
- broad access to advanced telecommunications services in rural and high
cost areas, schools, health care facilities and libraries,
- equitable, nondiscriminatory and predictable funding obligations under
the federal universal service fund, and
- affordable rates for telecommunications services.
All telecommunications carriers providing interstate telecommunications
services, which will include us if we 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
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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 a fiber optic network, it is often
required to obtain construction permits from local governments. In doing so,
however, municipalities may not prohibit or effectively prohibit any company
from providing any telecommunications services. In addition, the
Telecommunications Act requires that local governmental authorities treat
telecommunications carriers in a non-discriminatory and competitively neutral
manner. Many municipalities will require us to obtain franchises from them and
pay fees to them, often based on a percentage of gross revenues we receive from
providing telecommunications services.
PROPRIETARY RIGHTS
General. Although we believe that our success is more a function of our
technical expertise and customer service than our proprietary rights, our
success and ability to compete depend in part upon our technology. We rely on a
combination of contractual restrictions and copyright, trademark and trade
secret laws to establish and protect our technology. Our policy is to require
employees and consultants and, when possible, suppliers to execute
confidentiality agreements upon the commencement of their relationships with us.
The steps we have taken may not be adequate to prevent misappropriation of our
technology, or our competitors may independently develop technologies that are
substantially equivalent or superior to our technology.
Licenses. We developed some software for nschool Communication Systems,
Inc. and received rights to use the software in exchange for the development of
the software. Specifically, we have the right to use the separable components of
the software for any purpose and to use the combined software product for
limited purposes. We are specifically prohibited from using the software to
provide electronic communications, Internet applications and services to
organized, group-based educational entities.
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. The Patent and Trademark Office has not yet acted on these
applications. 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 1, 1999, we employed 28 people, including full-time and
part-time employees. We consider our employee relations to be good. All
employees have entered into non-disclosure, non-compete, and non-solicitation
agreements with us. None of our employees is covered by a collective bargaining
agreement.
FACILITIES
We lease our headquarters facilities in Atlanta, Georgia under a lease that
expires on September 30, 1999. The lease covers approximately 3,250 square feet
and the annual rent is approximately $44,000. The lease relating to the data
center at our Atlanta facility expires March 15, 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 5,800 and 6,200 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 200
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 1, 1999 are listed in the following table. Upon the
closing 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................. 51 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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<PAGE> 70
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 520,000
shares of our common stock to key employees of db Telecom Technologies at an
exercise price of $5.71 per share in connection with consulting services these
employees performed for us. All of these options were granted pursuant to our
1999 Option Plan and are currently exercisable.
In September 1999, the board granted each of Mr. Dayton and Mr. Bruce an
option to purchase 137,500 shares of common stock at an exercise price of $5.71
per share in
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consideration for their financial and management support of us since our
inception. These options were granted under our 1999 Option Plan and are
immediately exercisable.
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 100,000
shares of common stock at an exercise price of $5.71 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. 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 100,000 shares of common stock at
an exercise price of $5.71 per share concurrently with the commencement of their
employment. These options, which were granted under the comstar.net, inc. 1999
Stock Option and Incentive Plan, vest in three equal installments on the first
three anniversaries of the commencement of their employment. In addition, in
March 1999 we granted
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Michael A. Dayton, our Vice President of Network Operations, an option under the
1999 Stock Option and Incentive Plan to purchase 100,000 shares of common stock
at an exercise price of $5.71 per share. As of the date of this prospectus,
66,666 shares subject to the option are vested and the remaining shares vest in
June 2000.
COMSTAR.NET, INC. 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 1,700,000 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 2,300,000 shares. 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 1, 1999, we had
granted options to purchase 1,472,250 shares of common stock under the 1999
Option Plan at an exercise price of $5.71 per share.
COMSTAR.NET, INC. DIRECTOR STOCK OPTION PLAN
Our board of directors approved the Director Stock Option Plan in September
1999, subject to shareholder approval. 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 600,000 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
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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 1, 1999, options
to acquire 200,000 shares of common stock were outstanding under the Director
Option Plan at an exercise price of $5.71 per share.
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 it 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 8,757 shares of common stock series A at $5.71 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 , 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 shares of common stock
outstanding as of September , 1999 and 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 , 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)....................... 2,646,257 25.2% 2,646,257 %
J. Cary Howell............................ 2,482,490 23.9
Edward N. Landa(2)........................ 2,502,757 24.1
James L. Bruce, Jr.(3).................... 2,637,500 25.1 2,637,500
Glenn W. Sturm(4)......................... 33,333 * 33,333 *
Stephen R. Gross (4)...................... 33,333 * 33,333 *
All directors and executive officers as a
group (9 persons)(5).................... 10,353,184 96.6
</TABLE>
- -------------------------
* Less than 1% of the outstanding common stock.
(1) Includes 137,500 shares of common stock that may be issued on the exercise
of presently exercisable stock options. Also includes 8,757 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 8,757 shares, except to the extent of his
pecuniary interest in the shares.
(2) Includes 10,000 shares of common stock owned by Mr. Landa's wife and 12,257
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
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disclaims beneficial ownership of all of these 22,257 shares, except to the
extent of his pecuniary interest in the shares.
(3) Includes 137,500 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 33,333 shares of common stock that may be issued on the exercise
of presently exercisable stock options.
(5) Includes 66,666 shares of common stock that may be issued on the exercise of
presently exercisable stock options granted to our directors, 18,757 shares
of common stock held by affiliates of certain members of the group and
12,257 shares of common stock held by trusts for which members of the group
serve as trustee, which may be deemed to be beneficially owned by those
members.
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DESCRIPTION OF CAPITAL STOCK
The following summary is qualified in its entirety by the provisions of our
articles of incorporation and our bylaws, and by the applicable provisions of
Georgia law. We will amend and restate our articles of incorporation and our
bylaws on the closing date of this offering, and the discussion below assumes
that the amendment and restatement have occurred.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Our authorized capital stock currently consists of the following:
- 80,000,000 shares of common stock, without par value and without
designation as to series,
- 10,000,000 shares, without par value, designated as common stock series
A,
- 10,000,000 shares, without par value, designated as common stock series
B, 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 on the
closing date 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 1, 1999, 5,371,762
shares of common stock series A were outstanding and held of record by 44
shareholders; 5,000,000 shares of common stock series B were outstanding and
held of record by two 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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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.
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.
Shareholder Meetings; Actions by Written Consent of Shareholders. Our
bylaws provide that special meetings of shareholders or a class or series of
shareholders may be called at any time by the board of directors, the Chairman
of the Board or the Chief Executive Officer, and must be called on the written
request of the holders of shares representing at least 25% of the votes entitled
to be cast on each issue presented at the meeting, or a majority of the votes
entitled to be cast if we have more than 100 beneficial owners. The bylaws also
provide that shareholders seeking to bring business before an annual
shareholders' meeting or to nominate candidates for election as directors must
provide notice of their proposed action not less than 45 nor more than 90 days
before the first anniversary of the previous year's annual shareholder meeting,
and, in that notice, provide to us information concerning the proposal or
nominee. This provision may prevent
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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.
Georgia Anti-Takeover Statutes. Some provisions of Georgia law that may
apply to us if we so choose may be considered to have anti-takeover effects and
may hinder, delay, deter or prevent a tender offer, proxy contest or other
attempted takeover that a shareholder may deem to be in his or her best
interest.
Georgia law generally restricts a company from entering into business
combinations with an interested shareholder or an affiliate of an interested
shareholder for a period of five years after the date the shareholder became an
interested shareholder, unless one of the conditions summarized below is met. An
"interested shareholder" is any person or entity that is the beneficial owner of
at least 10% of the company's voting stock. The conditions are:
- before the shareholder became an interested shareholder, the company's
board of directors approved either the business combination or
transaction which resulted in the shareholder becoming an interested
shareholder,
- the interested shareholder acquires 90% of the company's voting stock in
the same transaction in which it exceeds 10%, or
- after becoming an interested shareholder, the shareholder acquires 90% of
the company's voting stock and the holders of a majority of the remaining
voting stock, not including voting stock held by the interested
shareholder, directors or officers of comstar.net or their affiliates,
approve the business combination.
Georgia law states that the above restrictions will not apply unless the
company's bylaws specifically provide that these restrictions are applicable to
the company. We have not elected to be covered by this statute, but we could do
so by action of the board of directors at any time.
Georgia law also imposes fair price and other procedural requirements on
some business combinations with any person who owns 10% or more of the common
stock. These statutory requirements restrict business combinations with, and
accumulations of shares of voting stock of, some Georgia corporations. The
statute will apply to a company only if it elects to be covered by the
restrictions imposed by these statutes. We have not elected to be covered by
this statute, but we could do so by action of our board of directors at any
time.
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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.
77
<PAGE> 82
SHARES ELIGIBLE FOR FUTURE SALE
When we complete this offering, we will have shares of
common stock outstanding, or shares if the underwriters exercise
their over-allotment option, assuming no exercise of options after
, 1999. Of this amount, the 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 10,371,762 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:
<TABLE>
<CAPTION>
APPROXIMATE
SHARES ELIGIBLE
DAYS AFTER THE DATE OF THIS PROSPECTUS FOR FUTURE SALE COMMENT
- -------------------------------------- --------------- -------
<S> <C> <C>
Upon effectiveness................. Freely tradeable shares sold in
offering and shares salable
under Rule 144(k) that are not
subject to 180-day lockup.
90 days............................ (1) Shares salable under Rule 144,
144(k) or 701 that are not
subject to 180-day lockup.
180 days........................... Lockup released; shares salable
under Rule 144, 144(k) or 701.
Over 180 days...................... Restricted shares held for one
year or less.
</TABLE>
- -------------------------
(1) If Scott & Stringfellow, Inc. waives the 180-day lockup agreements within
the first 90 days after the date of the prospectus, an additional
shares will be available for sale in the public market 90 days following the
date of this prospectus, subject in some cases to compliance with the volume
and other limitations of Rule 144.
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
78
<PAGE> 83
- 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 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 , 1999, the holders of options to
purchase approximately 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.
79
<PAGE> 84
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.....................................................
========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
offered by this prospectus are subject to approval by their counsel of certain
legal matters and to certain other conditions. The underwriters are committed to
purchase and accept delivery of all the shares of common stock offered by this
prospectus, other than the shares covered by the over-allotment option described
below, if they purchase any. If an underwriter fails to keep its purchase
commitment, the underwriting agreement provides that, in some circumstances, the
purchase commitments of the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated. The underwriters reserve the right to
withdraw, cancel or modify this offering and to reject orders in whole or in
part.
The underwriters propose initially to offer the common stock to the public
at the public offering price shown on the cover page of this prospectus, and to
specified dealers at that price less a concession of not more than
$ per share. The underwriters may allow, and the dealers may reallow, a
discount of not more than $ per share to other specified dealers. After
the initial public offering, the representatives may change the public offering
price and the other selling terms at any time without notice.
We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus, to purchase up to a maximum of
additional shares of common stock to cover over-allotments, if any, at
the same per share price as the initial shares to be purchased by the
underwriters. To the extent the underwriters exercise that option, each
underwriter will be committed, subject to certain conditions, to purchase
additional shares in approximately the same proportion as the number of shares
to be purchased initially by that underwriter bears to the total number of
shares to be purchased initially by all the underwriters.
80
<PAGE> 85
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 $ . 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 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 and each of our directors, executive officers and some of our
shareholders, who upon the completion of this offering will beneficially own
approximately shares ( %) of our common stock, have agreed
during the 180-day period following the date of this prospectus not to, without
the prior written consent of Scott & Stringfellow, Inc.:
- directly or indirectly make, agree to or cause any offer, sale (including
short sale), loan, pledge or other disposition of, or grant any options,
rights or warrants to purchase with respect to, or otherwise transfer or
reduce any risk of ownership of, directly or indirectly, any shares of
our common stock or any securities convertible into or exchangeable or
exercisable for our common stock,
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of the common
stock, or
- in the case of our directors, executive officers and shareholders, make
any demand for or exercise any right with respect to the registration of
shares of our common stock or any securities convertible into or
exchangeable or exercisable for our common stock.
This restriction is subject to some exceptions. In addition, during the 180-day
period, we have also agreed not to file any registration statement with respect
to the registration of any shares of our common stock or any securities
convertible into or exercisable for our common stock, except that we intend to
file a registration statement on Form S-8 under the Securities Act within 90
days after the completion of the offering to register
81
<PAGE> 86
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 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
82
<PAGE> 87
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 100,000 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.
83
<PAGE> 88
EXPERTS
The audited financial statements 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.
WHERE YOU CAN FIND MORE INFORMATION
comstar.net has 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 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 we will register our securities
under the Securities Exchange Act of 1934. 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.
84
<PAGE> 89
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 June
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 Six Months Ended
June 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 Six
Months Ended June 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 Six Months Ended
June 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> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To comstar.net, inc.:
We have audited the accompanying balance sheets of COMSTAR.NET, INC. (a
Georgia corporation) as of December 31, 1997 and 1998 and the related statements
of operations, shareholders' deficit, and cash flows for the period from
inception (March 5, 1996) to December 31, 1996 and for each of the two years
ended December 31, 1997 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of comstar.net, inc. as of
December 31, 1997 and 1998 and the results of its operations and its cash flows
for the period from inception (March 5, 1996) to December 31, 1996 and for each
of the two years ended December 31, 1997 and 1998 in conformity with generally
accepted accounting principles.
Atlanta, Georgia
June 30, 1999
(except with respect to Note 10,
as to which the date is
September 1, 1999)
F-2
<PAGE> 91
COMSTAR.NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------- -----------
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 54,676 $ 283,621 $1,045,071
Accounts receivable, net of allowance for doubtful
accounts of $19,426, $25,447, and $66,845 in 1997, 1998,
and 1999, respectively.................................. 74,082 234,390 312,052
Prepaid and other current assets.......................... 0 4,764 51,633
Deferred transaction costs................................ 0 0 110,980
---------- ---------- ----------
Total current assets.................................. 128,758 522,775 1,519,736
---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Computers and telecommunications equipment................ 376,597 689,350 865,782
Furniture and fixtures.................................... 3,628 11,613 21,070
Property under capital leases (Note 8).................... 0 46,886 46,886
Leasehold improvements.................................... 4,075 101,979 101,979
---------- ---------- ----------
384,300 849,828 1,035,717
Less accumulated depreciation............................. (61,765) (195,999) (296,361)
---------- ---------- ----------
Property and equipment, net........................... 322,535 653,829 739,356
---------- ---------- ----------
OTHER ASSETS:
Investment in nschool (Note 4)............................ 0 82,744 0
Acquired customer base, net of accumulated amortization of
$7,112, $157,475, and $239,232 in 1997, 1998, and 1999,
respectively (Note 2)................................... 78,226 390,499 308,742
---------- ---------- ----------
Total other assets.................................... 78,226 473,243 308,742
---------- ---------- ----------
Total assets.......................................... $ 529,519 $1,649,847 $2,567,834
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 5)............. $ 110,094 $ 902,469 $ 850,100
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 12,061
Accounts payable.......................................... 111,565 113,604 237,293
Accrued liabilities....................................... 34,986 169,729 113,034
Accrued interest.......................................... 60,940 135,501 77,427
Advance billings.......................................... 18,547 75,053 95,234
---------- ---------- ----------
Total current liabilities............................. 1,011,805 2,697,145 2,557,871
---------- ---------- ----------
LONG-TERM LIABILITIES:
Long-term debt, less current maturities (Note 5).......... 343,078 0 0
Obligations under capital leases (Note 8)................. 0 10,974 14,034
---------- ---------- ----------
Total long-term liabilities........................... 343,078 10,974 14,034
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
SHAREHOLDERS' DEFICIT (NOTE 6):
Preferred stock, $0 par value; undesignated, 5,000,000
shares authorized, 0 shares issued and outstanding in
1997, 1998, and 1999.................................... 0 0 0
Common stock, $0 par value:
Undesignated, 80,000,000 shares authorized, 1,000 shares
authorized, issued, and outstanding in 1997 and 0
shares issued and outstanding in 1998 and 1999........ 0 0 0
Series A voting, 10,000,000 shares authorized, 0 shares
authorized, issued, and outstanding in 1997 and
5,063,892 and 5,371,762 shares issued and outstanding
in 1998 and 1999, respectively........................ 0 364,822 2,122,744
Series B voting, 10,000,000 shares authorized, 0 shares
authorized, issued, and outstanding in 1997 and
5,000,000 shares issued and outstanding in 1998 and
1999.................................................. 0 0 0
Accumulated deficit....................................... (825,364) (1,423,094) (2,126,815)
---------- ---------- ----------
Total shareholders' deficit........................... (825,364) (1,058,272) (4,071)
---------- ---------- ----------
Total liabilities and shareholders' deficit........... $ 529,519 $1,649,847 $2,567,834
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 92
COMSTAR.NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 5, 1996) TO YEARS ENDED PERIODS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
--------------------- ------------------------- -------------------------
1996 1997 1998 1998 1999
--------------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Internet access....... $ 29,579 $ 399,167 $ 1,334,053 $ 552,991 $ 910,540
Data center
services............ 33,048 205,171 417,112 156,202 280,726
Circuit rebills....... 276 44,459 255,230 90,881 244,830
Other................. 2,495 26,772 135,950 57,712 49,448
----------- ----------- ----------- ----------- -----------
Total revenues...... 65,398 675,569 2,142,345 857,786 1,485,544
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of network
services............ 73,963 528,835 1,235,862 423,292 917,980
Salaries and wages.... 150,448 370,145 521,570 222,923 508,568
General and
administrative...... 67,259 131,767 379,036 94,680 322,435
Rent.................. 21,792 33,152 106,417 42,931 61,339
Management fees (Note
9).................. 8,000 42,000 60,000 30,000 30,000
Depreciation and
amortization........ 11,622 57,255 284,598 69,794 182,119
----------- ----------- ----------- ----------- -----------
Total costs and
expenses.......... 333,084 1,163,154 2,587,483 883,620 2,022,441
----------- ----------- ----------- ----------- -----------
OPERATING LOSS.......... (267,686) (487,585) (445,138) (25,834) (536,897)
----------- ----------- ----------- ----------- -----------
OTHER (EXPENSE) INCOME:
Interest expense...... (10,434) (66,201) (150,605) (60,752) (102,593)
Other income (loss)... 0 6,542 (1,987) (9,801) 18,513
Equity in net loss of
investee............ 0 0 0 0 (82,744)
----------- ----------- ----------- ----------- -----------
Total other
expenses.......... (10,434) (59,659) (152,592) (70,553) (166,824)
----------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME
TAXES................. (278,120) (547,244) (597,730) (96,387) (703,721)
INCOME TAX BENEFIT...... 0 0 0 0 0
----------- ----------- ----------- ----------- -----------
NET LOSS................ $ (278,120) $ (547,244) $ (597,730) $ (96,387) $ (703,721)
=========== =========== =========== =========== ===========
NET LOSS PER SHARE:
Basic and diluted..... $ (0.03) $ (0.06) $ (0.06) $ (0.01) $ (0.07)
=========== =========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING.... 10,000,000 10,000,000 10,005,731 10,000,000 10,165,825
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 93
COMSTAR.NET, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------------
UNDESIGNATED SERIES A SERIES B
--------------- ---------------------- ------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ ------ --------- ---------- --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
inception,
March 5, 1996......... 0 $ 0 0 $ 0 0 $ 0 $ 0 $ 0
Net loss.............. 0 0 0 0 0 0 (278,120) (278,120)
Issuance of common
stock............... 1,000 0 0 0 0 0 0 0
------ ------ --------- ---------- --------- ------ ----------- -----------
Balance,
December 31, 1996..... 1,000 0 0 0 0 0 (278,120) (278,120)
Net loss.............. 0 0 0 0 0 0 (547,244) (547,244)
------ ------ --------- ---------- --------- ------ ----------- -----------
Balance,
December 31, 1997..... 1,000 0 0 0 0 0 (825,364) (825,364)
Net loss.............. 0 0 0 0 0 0 (597,730) (597,730)
Exchange of common
stock............... (1,000) 0 5,000,000 0 5,000,000 0 0 0
Issuance of common
stock............... 0 0 63,892 364,822 0 0 0 364,822
------ ------ --------- ---------- --------- ------ ----------- -----------
Balance,
December 31, 1998..... 0 0 5,063,892 364,822 5,000,000 0 (1,423,094) (1,058,272)
Net loss
(unaudited)......... 0 0 0 0 0 0 (703,721) (703,721)
Issuance of common
stock (unaudited)... 0 0 307,870 1,757,922 0 0 0 1,757,922
------ ------ --------- ---------- --------- ------ ----------- -----------
Balance,
June 30, 1999
(unaudited)......... 0 $ 0 5,371,762 $2,122,744 5,000,000 $ 0 $(2,126,815) $ (4,071)
====== ====== ========= ========== ========= ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 94
COMSTAR.NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 5, 1996)
TO YEARS ENDED PERIODS ENDED
DECEMBER 31, DECEMBER 31, JUNE 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) $(96,387) $ (703,721)
--------- --------- ----------- -------- ----------
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 11,622 57,255 284,598 69,794 182,119
Equity in net loss of
investee................... 0 0 0 0 82,744
Changes in operating assets
and liabilities:
Accounts receivable, net... (8,743) (65,339) (160,308) (66,465) (77,662)
Prepaid and other current
assets................... 0 0 (4,764) (9,288) (46,869)
Deferred transaction
costs.................... 0 0 0 0 (110,980)
Accounts payable........... 0 111,565 2,039 (27,557) 123,689
Accrued liabilities........ 63,114 (28,128) 134,743 7,127 (56,695)
Accrued interest........... 10,047 50,893 74,561 34,874 (58,074)
Advance billings........... 0 18,547 56,506 41,704 20,181
--------- --------- ----------- -------- ----------
Total adjustments........ 76,040 144,793 387,375 50,189 58,453
--------- --------- ----------- -------- ----------
Net cash used in
operating activities... (202,080) (402,451) (210,355) (46,198) (645,268)
--------- --------- ----------- -------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of businesses and
customer base................ 0 (85,338) (513,836) (30,808) 0
Purchases of property and
equipment, net............... (120,442) (263,858) (414,329) (256,452) (185,889)
Investment in nschool.......... 0 0 (82,744) 0 0
--------- --------- ----------- -------- ----------
Net cash used in
investing activities... (120,442) (349,196) (1,010,909) (287,260) (185,889)
--------- --------- ----------- -------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of long-
term debt.................... 15,312 455,355 469,731 205,359 0
Proceeds from note payable to
related party................ 8,000 55,124 233,080 84,518 0
Proceeds from notes payable to
shareholders................. 306,643 313,250 409,095 0 0
Principal payments on long-term
debt......................... (1,031) (16,464) (20,434) (11,095) (52,369)
Repayments of note payable to
related party................ 0 (6,000) (20,016) 0 0
Repayments of notes payable to
shareholders................. 0 (1,344) (25,110) 0 (100,000)
Obligations under capital
leases....................... 0 0 39,041 0 (12,946)
Proceeds from issuance of
common stock................. 0 0 364,822 0 1,757,922
--------- --------- ----------- -------- ----------
Net cash provided by
financing activities... 328,924 799,921 1,450,209 278,782 1,592,607
--------- --------- ----------- -------- ----------
NET INCREASE (DECREASE) IN
CASH........................... 6,402 48,274 228,945 (54,676) 761,450
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 $1,045,071
========= ========= =========== ======== ==========
CASH PAID FOR INTEREST........... $ 387 $ 15,308 $ 76,044 $ 25,878 $ 160,667
========= ========= =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 95
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
AND JUNE 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 six months ended June 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 six months ended June 30, 1999 are not necessarily indicative of
the results to be obtained for a full year.
F-7
<PAGE> 96
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 six months ended June 30, 1999, sales to a different customer
were approximately $160,000, representing approximately 10.7% of the Company's
total revenues. Accounts receivable due from this customer as of June 30, 1999
totaled approximately $29,000. The loss of this customer could have a material
adverse effect on the Company's future operations.
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> 97
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> 98
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 six months ended June 30,
1999, 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 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 share is the same for basic
and diluted earnings per share; therefore, no reconciliation of the numerator is
presented.
F-10
<PAGE> 99
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-11
<PAGE> 100
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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................................. $ (.06) $ (.05)
</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> 101
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 June 30,
1999, 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> 102
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> 103
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
1,000 shares of zero par value common stock. Each of the Company's four founders
received 250 shares of the common stock.
On November 19, 1998, the Company's board of directors authorized the
creation of 105,000,000 shares of stock of all series. The authorization
included 10,000,000 shares of common stock designated as Series A, 10,000,000
shares of common stock designated as Series B, 80,000,000 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 250 shares each of the
previously issued common stock for 2,500,000 shares each of the Series A common
stock. The two remaining shareholders exchanged their previously issued shares
for 2,500,000 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.
SALE OF COMMON STOCK
In November and December 1998, the Company sold 63,892 shares of Series A
common stock for $5.71 per share to several private investors resulting in total
proceeds of $364,822, all of which was recorded as additional paid-in capital.
From January 1, 1999 to June 30, 1999, the Company sold 307,870 shares of
Series A common stock to several private investors for total proceeds of
$1,757,922, all of which was recorded as additional paid-in capital. All shares
were sold at $5.71 per share.
F-15
<PAGE> 104
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 1,700,000 shares of the Company's common stock;
405,250, 25,000, and 32,000 options were granted to employees of the Company
under the Plan on March 10, 1999, March 12, 1999, and March 30, 1999,
respectively, at $5.71 per share. On May 17, 1999 and June 1, 1999, 15,000 and
100,000 additional option grants were made to two additional employees at $5.71
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. The Plan
provides that the 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. At June 30, 1999,
577,250 options had been granted, 187,667 of which were fully vested. No options
had been forfeited and none had expired; 1,122,750 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 June 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................................................... 577,250 5.71
------- -----
Outstanding at June 30, 1999................................ 577,250 $5.71
======= =====
Exercisable at June 30, 1999................................ 187,667 $5.71
======= =====
</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.
The Company has computed for pro forma disclosure purposes the value of all
options granted during the period ended June 30, 1999 using the minimum value
method as prescribed by SFAS No. 123 using the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate..................................... 5.6% to 5.9%
Expected dividend yield..................................... 0
Expected lives.............................................. Five years
Expected volatility......................................... 84%
</TABLE>
F-16
<PAGE> 105
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30,
1999 would have increased to the following pro forma amount:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $ (703,721)
Pro forma................................................. (1,628,927)
Net loss per share:
Basic and diluted:
As reported............................................ $ (0.07)
Pro forma.............................................. (0.16)
</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.
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.
F-17
<PAGE> 106
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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.
F-18
<PAGE> 107
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-19
<PAGE> 108
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 8,757 shares each of common stock at $5.71 per share to two executives of
the Company.
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 each in March and July of 1999 on
its note payable to the lending institution.
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
F-20
<PAGE> 109
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
proposed initial public offering, was one of two directors appointed to the
board of directors of the Company. As of June 30, 1999, approximately $75,000
was due to this law firm for previously provided services. No professional fees
were paid to this law firm during the year ended December 31, 1998.
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, 100,000 option grants were made to an employee of the
Company under the Plan at $5.71 per share. 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 600,000 shares of the Company's common stock
to be available for grant, bringing the total amount of shares available from
1,700,000 (the original amount provided by the Plan) to 2,300,000.
On September 1, 1999, two of the Company's principal shareholders were
granted 137,500 options each under the Amended Plan at $5.71 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, 520,000 option grants were made to certain employees
of Teletech under the Amended Plan. These options vest immediately upon the date
of grant and expire ten years from the date of grant. Compensation expense of
approximately $3,204,000 was recorded in connection with these grants using the
fair value method of accounting as prescribed by SFAS No. 123.
DIRECTOR STOCK OPTION PLAN
On September 1, 1999, the Company's board of directors approved the
Director Stock Option Plan (the "Director Plan"). This Director Plan provides
for the issuance of options to purchase up to 600,000 shares of the Company's
common stock. On September 1, 1999, the Company granted 100,000 options each to
two of the Company's directors. 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
F-21
<PAGE> 110
COMSTAR.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-22
<PAGE> 111
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.
Atlanta, Georgia
May 28, 1999
F-23
<PAGE> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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> 118
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>
1999........................................................ $240,401
2000........................................................ 0
2001........................................................ 0
2002........................................................ 0
2003........................................................ 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> 119
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> 120
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> 121
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.................................................
Blue Sky fees and expenses..................................
Printing and engraving......................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Transfer agent fees.........................................
Miscellaneous expenses......................................
-------
Total..................................................... $
=======
</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> 122
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 1,000 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 1,000
shares of common stock previously outstanding to 5,000,000 shares of common
stock series A and 5,000,000 shares of common stock series B.
Between November 23, 1998 and June 30, 1999, we sold 371,762 shares of
common stock series A at a price per share of $5.71 to 25 investors in a private
financing for a total of $2,122,754 in cash.
II-2
<PAGE> 123
(b) Certain Grants of Options
As of September 1, 1999, we had issued options to purchase 1,472,250 shares
of common stock pursuant to the Amended and Restated 1999 Stock Option and
Incentive Plan and options to purchase 200,000 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, and First Amendment to lease dated August 26, 1996.
</TABLE>
II-3
<PAGE> 124
<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 Agreement between comstar.net and its customers for
network services.
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 Agreement between comstar.net and its customers for
special access services.
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.
23.1* -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in legal opinion to be filed as Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (included on signature pages hereto).
27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
- -------------------------
* To be filed by amendment.
+ We agree to furnish supplementally a copy of any omitted schedule or exhibit
to the SEC upon request, as provided in Item 601(b)(2) of Regulation S-K.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
We hereby undertake 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 us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE> 125
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> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on this 10th day of September, 1999.
comstar.net, inc.
By: /s/ SAMUEL F. DAYTON
-----------------------------------
Samuel F. Dayton
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each of the undersigned officers
and directors of comstar.net, inc., a Georgia corporation, for himself and not
for one another, does hereby constitute and appoint Samuel F. Dayton and
Christopher K. Martin, and each of them, his true and lawful attorney-in-fact
and agent with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign his name to any and all amendments,
including post-effective amendments, to this registration statement, and to sign
any registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Section 462(b) of the
Securities Act of 1933, and all post-effective amendments thereto, and to cause
the same (together with all Exhibits thereto and all documents in connection
therewith) to be filed with the SEC, granting unto said attorneys and each of
them full power and authority to do and perform each and every act and thing
necessary and proper to be done in and about the premises, as fully to all
intents and purposes as the undersigned could do if personally present, and each
of the undersigned for himself hereby ratifies and confirms all that said
attorneys-in-fact and agents or any one of them, or his or their substitute or
substitutes, shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities listed and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ J. CARY HOWELL Chief Executive Officer September 10, 1999
- --------------------------------------------- and Director (Principal
J. Cary Howell Executive Officer)
/s/ CHRISTOPHER K. MARTIN Chief Financial Officer September 10, 1999
- --------------------------------------------- and Treasurer
Christopher K. Martin (Principal Financial
and Accounting Officer)
</TABLE>
II-6
<PAGE> 127
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ SAMUEL F. DAYTON Chairman of the Board and September 10, 1999
- --------------------------------------------- President
Samuel F. Dayton
/s/ EDWARD N. LANDA Chief Technology Officer, September 10, 1999
- --------------------------------------------- Secretary and Director
Edward N. Landa
/s/ JAMES L. BRUCE, JR. Director September 10, 1999
- ---------------------------------------------
James L. Bruce, Jr.
/s/ GLENN W. STURM Director September 10, 1999
- ---------------------------------------------
Glenn W. Sturm
/s/ STEPHEN R. GROSS Director September 10, 1999
- ---------------------------------------------
Stephen R. Gross
</TABLE>
II-7
<PAGE> 128
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To comstar.net, inc.:
We have audited, in accordance with generally 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's management and presented for purposes 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.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Atlanta, Georgia
June 30, 1999
II-8
<PAGE> 129
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.
<PAGE> 1
Exhibit 2.1
STATE OF GEORGIA
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is entered into this 30th day of June,
1998, by and between Athens' ISP, Inc., a corporation chartered by the State of
Georgia with its principal office in Clarke County, Georgia (hereinafter
"Seller") and ComStar Communications, Inc., a corporation chartered by the
State of Georgia with its principal office in Cobb County, Georgia (hereinafter
"Buyer").
WITNESSETH:
Whereas, Seller owns certain property and leases certain equipment
involved in the Internet service provider business; and
Whereas, Buyer desires to purchase said property and to assume said
equipment leases as more particularly described herein under the terms and
conditions set forth in this document;
Now, therefore, for and in consideration of the premises and the mutual
promises, agreements, representations, warranties, and covenants hereinafter set
forth, the parties hereto agree as follows:
<PAGE> 2
1.
The property to be sold consists of the equipment listed in Exhibit
"A", attached hereto and made a part hereof, the E-Commerce account with Kali,
Inc., the "Real-time Software Sales System", and all of Sellers "Dedicated
Business Accounts" (as more specifically described in the next sentence) that
are actively in use and service as of 6:00 p.m. on June 30, 1998, including the
customer lists, contracts, licenses, rights, title, and interest in the
accounts, and the ability to transfer said accounts from Seller to Buyer. The
types of Dedicated Business Accounts to be sold include ISDN 128K dedicated,
ISDN 64K dedicated, dedicated telephone modem, collocation, and webhosting.
All of this will be referred to in this Agreement as "Property".
2.
The closing on the matters set out in this Asset Purchase Agreement
will take place at 10:30 a.m. on July 1, 1998, at the law offices of Blasingame,
Burch, Garrard, Bryant & Ashley, P.C., 440 College Avenue North, Athens-Clarke
County, Georgia.
3.
At the closing, Seller will sell, assign, transfer, convey, and deliver
the Property to Buyer free and clear of all liens and encumbrances whatsoever,
and Seller will warrant that the sale is made free and clear of all liabilities,
obligations, security interests, and encumbrances. Seller will warrant and
forever defend the right and title of the above described Property unto the said
Buyer, its successors and assigns, against the lawful claims of all persons
whomsoever, and Seller will indemnify Buyer fully from any and all said claims
of others. Buyer shall assume liability, if any, which arises from or as a
result
<PAGE> 3
of the transferring of accounts billed by credit cards resulting from the
existing account holders' credit cards numbers and information being divulged to
and transferred to Buyer.
4.
At the closing, Seller agrees to transfer unto Buyer all customer
records, lists, profiles, other written or recorded information, contracts, and
licenses having to do with the subject Property.
5.
Seller agrees to be responsible for and to pay any tax or similar
charge or assessment on the sale or transfer of the Property. Any personal
property taxes on the subject Property will be pro-rated between Seller and
Buyer as of July 1, 1998. Buyer will take possession of the subject Property as
of July 1, 1998.
6.
The purchase price to be paid by Buyer to Seller at closing for the
aforesaid Dedicated Business Accounts is set out as follows;
The purchase price is 8.5 times the monetary amount of those accounts
for which service is provided as of 6:00 p.m. on June 30, 1998, billed in June,
1998, for a full month's service for accounts billed on a monthly basis; and 8.5
times the monthly pro-rata monetary amount for those accounts for which service
is provided as of 6:00 p.m. on June 30, 1998, but for which accounts the
customer has paid on a quarterly, semi-annual or annual basis. Accounts
activated after June 1, 1998, and accounts activated after May 1, 1998, billed
on a pro-rated bill in June, which are active as of June 30, 1998, will be paid
at 8.5 times the minimum charge for such accounts. The accounts will be listed
as an exhibit to the Bill of
3
<PAGE> 4
Sale to be presented by Seller to Buyer at the closing. Buyer will pay cash at
the closing.
An "active" account is defined as an account which has two or fewer
open invoices and no unpaid invoices older than 60 days from the invoice date.
An amount subtracted from the above-stated purchase price for the
accounts is an amount representing the "prepays", being those customers who have
paid in advance for service, and the "prepays" having been received by Seller
before July 1, 1998.
All current payments on the accounts invoiced by Seller before July 1,
1998, will belong to Seller. All current payments invoiced by the Buyer on and
after July 1, 1998, on the accounts will belong to Buyer.
Buyer will pay to Seller, in cash at closing, the amount of $33,100.00
for the equipment set out in Exhibit "A".
Buyer will pay to Seller, in cash at closing, the amount of $245,490.00
in consideration for Seller's giving up its contract with Kali, Inc., for the
Kali program and assigning its rights to Buyer. Buyer will enter into a separate
contract with Kali, Inc., effective July 1, 1998. This amount of $245,490.00
will include the consideration paid by Buyer to Seller for the aforementioned
Real-time Software Sales System.
7.
The transition period is that period of time between the date of
signing this Agreement and the closing on July 1, 1998. During said transition
period, Seller will perform all normal billing for the accounts being sold;
Seller will use its best efforts to preserve intact the business, organization,
and management of Seller's business; Seller will keep available the services of
its present officers and employees and conduct business
4
<PAGE> 5
in a normal and ordinary manner; Seller will not incur any indebtedness or enter
into any material contracts or make any capital expenditure or other commitments
which would encumber the Property which is the subject of this Asset Purchase
Agreement; Buyer and its auditors will have immediate access to the books and
records of Seller.
8.
At the closing, Seller will assign and Buyer will assume the leases on
the equipment more fully described in Exhibit "B" attached hereto and made a
part hereof, with the terms and conditions of the leases set out, and the two
leases for the space in the Butler Building located at 337 South Milledge
Avenue, Athens, Georgia, with the Butler Corporation of Athens, Inc., as the
Lessor, copies of said leases shown as Exhibit "C", attached hereto and made a
part hereof. Seller represents and warrants to Buyer that it has the authority
to assign the leases and has the approval of the lessors to so assign these
leases. Buyer shall indemnify and hold Seller harmless from any and all claims,
costs, liabilities or damages arising from or related to the assumed leases
after July 1, 1998, which result from any act, or failure to act by Buyer under
the terms and conditions of the assumed leases.
9.
Buyer will assume, for no monetary consideration, all of Seller's
accounts receivable for the Dedicated Business Accounts being purchased by Buyer
as of July 1, 1998. Seller will have no interest in or responsibility for the
accounts receivable after July 1, 1998. Buyer is responsible for all legal
actions resulting from future efforts at collecting the
5
<PAGE> 6
accounts receivable. Buyer Will keep all amounts received after July 1, 1998,
from the accounts receivable. This accounts receivable provision becomes
effective at the closing.
10.
Buyer agrees to freeze all pricing on all purchased accounts for a
period of three months beginning on July 1, 1998.
11.
Seller and Buyer represent and warrant, each to the other, that they
have the capacity and authority to execute and deliver this Agreement, to
perform hereunder and to consummate the transactions contemplated hereby without
the necessity of any act or consent of any other person whomsoever. This
Agreement constitutes the valid and legally binding obligations of Seller and
Buyer, enforceable against them in accordance with their respective terms.
Seller has good title to the Property, assets, and rights transferred
herein, and represents and warrants to Buyer that it will have good title at the
closing.
Seller agrees to obtain approval of its shareholders and its board of
directors of this Agreement and all transactions set out herein, and Seller
will present to Buyer evidence of such approval at the closing.
12.
At the closing, Seller and James M. Freeman II will sign a Covenant Not
to Compete, with Buyer as the beneficiary of said Covenant, in which Covenant
Seller and Freeman will agree that neither will for a period of three years,
beginning July 1, 1998, directly or indirectly deal with or be engaged with the
sale, servicing, or handling of
6
<PAGE> 7
Dedicated Business Accounts, commercial accounts, or E-Commerce accounts in any
Internet service provider business within the geographical areas of the State of
Georgia serviced by and covered by the telephone area codes of 706, 770, 404,
and 678. Seller and Buyer agree and understand that Freeman will become an
employee of Buyer beginning on July 1, 1998, and an exception will be made to
this provision during the time that Freeman is such an employee of Buyer. Should
Freeman end his employment with Buyer for a reason other than being terminated
for cause or for a voluntary resignation, Freeman can be involved in the
Internet service provider business within the aforementioned geographical areas
but cannot be involved as a principal in any business in the capacity as a
shareholder, officer, or otherwise, and Freeman will not be involved with a
customer or prospective customer of Buyer existing at the time of Freeman's
departure from Buyer's employment. Under no circumstance will Freeman use any
trade secrets, business methods, or proprietary information gained from Buyer
while being an employee of Buyer. Seller and Freeman will agree that they shall
not be involved with or provide E-Commerce services for Kali, Inc., in any
geographical location.
13.
All notices, requests, demands, and other communications hereunder
shall be in writing and shall be delivered by hand during regular business hours
or mailed by
7
<PAGE> 8
registered or certified mail, return receipt requested, first class postage
prepaid, addressed as follows:
To Seller: Athens' ISP, Inc.
c/o Mr. James M. Freeman II
337 South Milledge Avenue
Athens, Georgia 30605
To Buyer: ComStar Communications, Inc.
c/o Mr. Michael A. Dayton
419 Bradford Street
Suite A-2
Gainesville, Georgia 30501
14.
Any failure on the part of Seller, on one hand, and Buyer, on the other
hand, to comply with any of their or its obligations, agreements, or conditions
hereunder may be waived by the other party to whom such compliance is owed. No
waiver of any provision of this Agreement shall be deemed, or shall constitute,
a waiver of any other provision, whether or not similar, nor shall any waiver
constitute a continuing waiver.
15.
All expenses incurred by the parties hereto in connection with or
related to the authorization, preparation, and execution of this Agreement and
the closing of the transactions contemplated hereby, including, without
limitation of the generality of the foregoing, all fees and expenses of agents,
representatives, counsel and accountants employed by any such party, shall be
borne solely and entirely by the party that has incurred the same.
8
<PAGE> 9
16.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives, successors, and
assigns.
17.
This Agreement constitutes the entire agreement among the parties
hereto and supersedes and cancels any prior agreements, representations,
warranties, or communications, whether oral or written among the parties hereto
relating to the transactions contemplated hereby or the subject matter herein.
Neither this Agreement nor any provision hereof may be changed, waived,
discharged, or terminated orally, but only by an agreement in writing signed by
the party against whom or which the enforcement of such change, waiver,
discharge, or termination is sought.
18.
The terms of this Agreement shall be governed by and construed in
accordance with the laws of the State of Georgia.
19.
This Agreement will be executed in two counterparts, each of which shall
be deemed an original, but both of which together shall constitute one and the
same instrument.
20.
Buyer will take possession of the subject property and assume the
aforesaid leases effective at the closing set out herein.
9
<PAGE> 10
21.
Buyer agrees to waive Seller's compliance with the applicable bulk
sale provisions of the Bulk Sales Law of the Uniform Commercial Code as enacted
and enforced in the State of Georgia.
22.
All representations, warranties, agreements, covenants, and obligations
made or undertaken by Seller in this Agreement or in any document or instrument
executed and delivered pursuant hereto are material, have been relied upon by
Buyer, shall survive the closing hereunder, and shall not merge in the
performance of any obligation by any party hereto. Seller agrees to indemnify
and hold Buyer harmless from and against all liability, loss, damages, or injury
and all reasonable costs and expenses, including reasonable attorney fees and
cost of any suit related thereto, suffered or incurred by Buyer arising from any
misrepresentation by or breach of any covenant or warranty of Seller contained
in this Agreement.
23.
All of the obligations of Buyer to consummate the transactions
contemplated by this Agreement shall be contingent upon and subject to the
satisfaction, on or before the closing date, of each and every one of the
following conditions:
The representations and warranties made by Seller to Buyer in this
Agreement shall be true and correct in all material respects on the closing date
with the same force and effect as though such representations and warranties had
been made on and as of such time.
10
<PAGE> 11
Seller shall have duly performed all of the covenants, acts, and
undertakings to be performed by it on or prior to the closing date in all
material respects.
At the closing, Seller shall have effected the deliveries required of
it pursuant to paragraph 24 below.
No action, proceeding, investigation, regulation or legislation shall
have been instituted, threatened, or proposed before any court, governmental
agency or legislative body to enjoin, restrain, prohibit, or obtain substantial
damages in respect of, or that is related to, or arises out of, this Agreement
or the consummation of the transactions contemplated hereby, or that is related
to or arises out of the assets or the business of Seller, if such action,
proceeding, investigation, regulation or legislation would have a material
adverse effect on the Seller's business.
The equipment listed in Exhibits "A" and "B" shall be in the same
condition as on the date of the signing of this Agreement, ordinary wear and
tear excepted.
Seller's account with Buyer shall have a zero dollar account balance.
Seller will expect to be released from all obligations under the present
existing agreements between Seller and Buyer. In the event there is an account
balance after this release from future performance, at closing, the same should
be paid at closing to zero the account.
The cancellation of the Agreement between Seller and Kali, Inc., and
the transfer of all of Seller's rights with Kali, Inc. to Buyer.
That Buyer and Kali, Inc. shall have entered into an Agreement
effective July 1, 1998.
11
<PAGE> 12
24.
At the closing on July 1, 1998, Seller shall deliver to Buyer the
following:
(a) Certificate of good standing of Seller, as of the most recent
practicable date, from the Secretary of State of Georgia;
(b) Certified resolutions of Seller's shareholders and board of
directors approving this Agreement and all matters set out
herein;
(c) Bills of sale for the Property set out herein;
(d) Assignments of the leases set out herein and evidence of
approval of said assignments of the leases by the lessors
thereto;
(e) Covenant Not to Compete executed by Seller and James M.
Freeman II;
(f) All documents, books, and records concerning the accounts and
equipment being sold;
(g) Evidence of the cancellation of the Agreement between Seller
and Kali, Inc., effective July 1, 1998, so that Buyer may
effect its own agreement with Kali, Inc., as hereinbefore set
out.
25.
Seller agrees to transfer to Buyer and Buyer agrees to assume all
obligations and liabilities thereunder, Seller's contracts with Sprint and
BellSouth.
12
<PAGE> 13
26.
As has been set out in paragraph 1 of this Agreement, at the closing
Seller will transfer to Buyer all of its rights and title in and to its software
program designed and written by Seller known as "Real-time Software Sales
System", along with all rights, copyrights, and ownership of the software. The
software will include the code, code comments, working notes, documentation,
test versions, and compiled software. After the transfer of the software on July
1, 1998, Buyer will have the right to use, change, or sell said software. Seller
will make no warranty about the software's properties, abilities, or future
performance, and will have no liability for any problems resulting from use of
the software. Buyer will agree, if the software is ever made available for
public sale in the future, that the creative efforts of Seller would be
recognized in the "credits" for the software; however, this recognition will not
imply any ownership or right to the software by Seller.
IN WITNESS WHEREOF, each party hereto has executed or caused this
Agreement to be executed on its behalf, all on the day and year first above
written.
ATHENS' ISP, INC.
By: /s/ James M. Freeman
-----------------------------------------
President
Attest: /s/ A. Fetahagic-Freeman
-----------------------------------------
Secretary
13
<PAGE> 14
COMSTAR COMMUNICATIONS, INC.
By: /s/ Michael A. Dayton
-----------------------------------------
Executive Vice President
Attest: /s/ Naen Lawson
-----------------------------------------
BUYER
14
<PAGE> 15
EXHIBIT "A"
SGI R5000 Indy 96MB RAM, 2GB harddrive, CDROM,
w/Maya 1.0 and PowerAnimator 8.1
SGI R5000 Indy 96MB RAM, 6GB harddrive, DAT,
w/ MIPSpro compiler 7.2
SGI 4xR4400 Challenge L, 256MB RAM, 7GB harddrive, CDROM, DAT,
w/ IRIX IDO, Wyse terminal
APC Smart-UPS 2200XLNET
w/SGI IRIX Powerchute Pro and cables
(2) Adtran TSU routers, 1 new, 1 used
Ether switch, (2) Ethernet hubs, (1) rack, (7) desks, (2) bookshelves, (6)
chairs
Informix Dynamic Online Server, version 7.24.UCI-1 IRIX 6.2, 10 user lic.
Informix Dynamic Server OpenLine (priority support), 10 user lic, ends May 11/99
<PAGE> 16
EXHIBIT "B"
Cisco 3600 4-slot Modular Router-AC, w/Cisco 3640 IP feature set, network
module, cards and cables, and maintenance agreement. Balboa Capital
Corporation Lease #003-12212-01, monthly payment of $303.99 (29% of
total monthly amount $1048.26)
<PAGE> 17
EXHIBIT C
[Copy of lease dated August 8, 1995 between The Butler Corporation of Athens,
Inc. and Athens ISP, Inc./James M. Freeman II.]
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COMSTAR COMMUNICATIONS, INC.
ARTICLE 1
The name of the Corporation is ComStar Communications, Inc.
ARTICLE 2
The total number of shares of all classes which the Corporation has the
authority to issue is 105,000,000, of which: (i) 80,000,000 shares of stock are
designated as Common Stock (without designation as to series), without par
value per share; (ii) 10,000,000 shares of stock are designated as Common Stock
Series A, without par value per share; (iii) 10,000,000 shares are designated
as Common Stock Series B, without par value per value; and (iv) 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's authorized and issued shares of common class stock are
hereby renamed "Common Stock," without designation as to series. The
Corporation is authorized to issue 80,000,000 shares of Common Stock, without
par value per share. Each share of Common Stock shall be entitled to one vote.
The Corporation is authorized to issue 10,000,000 shares of Common Stock
Series A, without par value per share. The Common Stock Series A shall have
rights that are identical to that of the Common Stock.
The Corporation is authorized to issue 10,000,000 shares of Common Stock
Series B, without par value per share. The Common Stock Series B shall have
rights that are identical to that of the Common Stock Series A, except that
each share of Common Stock Series B shall be entitled to ten (10) votes.
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).
Immediately prior to the closing of an Initial Public Offering (as such
term is defined below), each issued and outstanding share of Common Stock
Series A and Common Stock Series B will become and be, without further act by
the holders of any Common Stock of the Corporation, automatically converted
into one share of Common Stock, without designation as to series, and the Board
of Directors of the Corporation may thereafter at its election file Articles of
Amendment to the Articles of Incorporation without further vote or action by
the holders of any Common Stock of the Corporation, whether with or without
designation as to series, confirming the elimination of the series designations
of Common Stock, which amendment shall amend and restate the first sentence of
Article 2 of the
<PAGE> 2
Corporation's Amended and Restated Articles of Incorporation to read in full as
follows:
"The total number of shares of stock of all classes which the Corporation
has the authority to issue is 105,000,00, of which 100,000,000 shares are
designated as Common Stock and of which 5,000,00 shares are designated as
Preferred Stock."
and shall amend and restate Section A of Article 2 of the Corporation's
Articles of Incorporation to read in full as follows:
"The Corporation is authorized to issue 100,000,000 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)."
The term "Initial Public Offering" means the offer and sale by the
Corporation of its equity securities in a transaction underwritten by an
investment banking firm following the completion of which (i) such equity
securities will be listed for trading on any national securities exchange or
(ii) there will be at least two market makers who are making a market in such
equity securities through the Nasdaq National Market System.
B. 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 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 "GBCC"),
and any amendment or supplement thereto (a "Preferred Stock Designation"), 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 3
The corporation shall have not more than 15 directors, and the number of
directors shall be fixed by the Board of Directors.
ARTICLE 4
No director of the Corporation shall be personally liable for monetary
damages to the Corporation or its shareholders for breach of the duty of care
or any other duty as a director, except that such liability shall not be
eliminated for:
(i) any appropriation, in violation of the director's duties, of any
business opportunity of the corporation;
(ii) acts or omissions which involve intentional misconduct or a
knowing
2
<PAGE> 3
violation of law;
(iii) liability under Section 14-2-832 (or any successor provision or
redesignation thereof) of the GNCC; and
(iv) any transaction from which the director received an improper
personal benefit.
If at any time the GBCC 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 GBCC, as so amended, without further action by the
shareholders, unless the provisions of the GBCC, as amended, require further
action by the shareholders. Any repeal or modification of the foregoing
provisions of this Article 4 shall not adversely affect the elimination or
limitation of liability or alleged liability pursuant hereto of any director of
the Corporation for or with respect to any alleged act or omission of the
director occurring prior to such repeal or modification.
ARTICLE 5
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; provided,
however, that any such provision shall be deemed solely to grant discretionary
authority to directors and shall not be deemed to provide to any constituency
any right to be considered.
ARTICLE 6
The recapitalization contemplated herein shall be implemented as described
in this Article 6. The Corporation presently has outstanding a total of 1,000
shares of its authorized and issued shares of common class stock held by four
shareholders, each of whom holds 250 shares. Two of those four shareholders
shall exchange a total of 500 shares (250 shares each) of such common capital
stock for a total of 5,000,000 shares of Common Stock Series A (or 10,000 shares
of Common Stock Series A for each such share of common capital stock). The
remaining two shareholders shall exchange a total of 500 shares (250 shares
each) of such common capital stock for a total of 5,000,000 shares of Common
Stock Series B (or 10,000 shares of Common Stock Series B for each such share of
common capital stock). The names of such exchanging shareholders and the series
of Common Stock to be issued to them shall be as specified in the resolutions of
the Corporation's Board of Directors and shareholders adopting and approving
these Amended and Restated Articles of Incorporation.
ARTICLE 7
The mailing address of the principal office of the Corporation is 419
Bradford Street, Suite A-2, Gainesville, Georgia 30501.
All amendments contained herein were duly adopted and approved by the
Board of Directors of the Corporation and were duly approved by the
shareholders of the Corporation in accordance with the
3
<PAGE> 4
provisions of Section 14-2-1003 of the GBCC on November 19, 1998.
IN WITNESS WHEREOF, the Corporation has caused these Amended and Restated
Articles of Incorporation to be executed by its duly authorized officer as of
the 19th day of November, 1998.
COMSTAR COMMUNICATIONS, INC.
By: /s/ Sam F. Dayton
---------------------------
Sam F. Dayton, President
4
<PAGE> 5
ARTICLES OF AMENDMENT
TO THE
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
COMSTAR COMMUNICATIONS, INC.
I.
The name of the corporation is ComStar Communications, Inc.
II.
Effective the date hereof, Article One of the Amended and Restated
Articles of Incorporation of ComStar Communications, Inc. is amended to read as
follows:
"ARTICLE ONE"
"The name of the Corporation is comstar.net, inc."
All other Articles and provisions of the Amended and Restated Articles
of Incorporation shall remain in full force and effect.
III.
This amendment was duly approved by the Board of Directors without
shareholder action, which was not required, in accordance with Section
14-2-1002 of the Georgia Business Corporation Code on 29th day of July, 1999.
IN WITNESS WHEREOF, the Corporation has caused these Articles of
Amendment to be executed by its duly authorized officer as of the 29th day of
July, 1999.
COMSTAR COMMUNICATIONS, INC.
/s/ Sam F. Dayton
-------------------------------------
By: Sam F. Dayton
Title: President
<PAGE> 1
EXHIBIT 3.3
By-laws of ComStar Communications, Inc.
Incorporated Under the Laws of the State of Georgia
Registered Agent: Dr. Sam F. Dayton
Registered Office Address: 419 Bradford ST NW A-2
Gainesville, Georgia 30501
ARTICLE I - REGISTERED AGENT AND REGISTERED OFFICE. The name and
address of the registered agent, which is the same address as the registered
office, is stated at the beginning of these by-laws. The corporation may have
other offices or branches as determined by the board of directors.
ARTICLE II - FISCAL YEAR. The fiscal year of the corporation may be
established by the board of directors and changed from time to time as business
needs dictate. The initial fiscal year of the corporation shall run from 12:01
a.m. on the first day of January each year until midnight on the last day of
December.
ARTICLE III - MEETINGS OF SHAREHOLDERS.
1. PLACE - Shareholders' meetings shall be held at the registered office
of the corporation or at another location determined by the board of directors
and stated in the notice of the meeting.
2. DATE - The date of the annual meeting of shareholders shall be on the
first Tuesday after April 15th of each year, unless changed by a vote of the
board of directors.
3. PURPOSE - The purpose of the annual meeting shall be to elect a board
of directors and transact other business as may come before the meeting.
4. SPECIAL MEETINGS - Special meetings of the shareholders may be called
by the president, two directors or by the holders of at least 25% of the shares
entitled to vote at a meeting. A special meeting may be called anytime for any
business reason, unless otherwise prohibited by statute. Such meetings shall be
held at the registered office of the corporation.
5. NOTICE - Written notice stating the place, day and time of the meeting
and, in case of a special meeting, the purpose or purposes for which the
meeting is called shall be delivered not less than 10 nor more than 50 days
before the date of the meeting. If mailed, such notice shall be considered to
be delivered when deposited in the United States Postal Service, addressed to
the shareholder at his/her address as it appears on the stock transfer books of
the corporation, with the correct amount of first class postage on it.
6. FIXING RECORD DATE - For the purpose of determining the shareholders
entitled to notice of or to vote at any meeting of shareholders or for the
purpose of any other action, the board of directors shall fix in advance a date
as a record date. The date shall not be more than 50 nor less than 10 days
before the meeting, nor more than 50 days prior to any other action.
<PAGE> 2
Page 2. Bylaws of ComStar Communications, Inc. Article III continued.
7. QUORUM - At any meeting of shareholders a majority of the outstanding
shares of the corporation entitled to vote, represented in person or by proxy,
shall constitute a quorum. The shareholders present in person or by proxy at
such meeting may continue to do business until adjournment even if this means
the withdrawal of enough shareholders to leave less than a quorum. If a quorum
is not present, the shareholders present in person or by proxy may adjourn to a
date they agree upon,
8. PROXIES - At all meetings of shareholders, a shareholder may vote by
proxy executed in writing by the shareholder or his/her duly authorized
attorney in fact. A proxy is not valid after the expiration of 11 months from
its date unless otherwise provided in the proxy. A proxy is not invalidated by
the death or incompetency of the shareholder, unless, before the authority is
exercised, written notice of such an adjudication is received by the corporate
office responsible for maintaining the list of shareholders.
9. VOTING - Each outstanding share is entitled to one vote on each matter
submitted to a vote. A vote may be cast either orally or in writing in person
or by proxy. All elections for directors shall be decided by plurality vote;
all other matters shall be decided by majority vote.
10. WAIVER OF NOTICE - Notice of meeting need not be given to any
shareholder who signs a waiver of notice, in person or by proxy, whether before
or after the meeting. The attendance of any shareholder at a meeting, in person
or in proxy, without protesting prior to the conclusion of the meeting the lack
of notice of such meeting, shall constitute a waiver of notice by the
shareholder.
11. WRITTEN CONSENT OF SHAREHOLDERS - Any action may be taken without a
meeting, without prior notice and without a vote if a consent in writing,
setting forth the action taken, is singed by the holders of all the outstanding
shares entitled to vote on the matter.
12. PARTICIPATION BY TELECOMMUNICATIONS - Participation in a shareholders'
meeting may be by means of conference telephone, or similar communications
equipment. All persons participating in the meeting must be able to hear each
other, be advised of the use of such equipment, and be provided with the names
of individuals using such equipment.
13. ORDER OF BUSINESS - The order of business at all meetings of the
shareholders, shall be as follows: a) Roll call; (b) Proof of notice of meeting
or waiver of notice; (c) Reading minutes of the preceding meeting; (d) Reports
of officers; (e) Report of committees; (f) Election of directors; (g)
Unfinished business; (h) New business; (i) Adjournment.
ARTICLE IV - DIRECTORS.
1. GENERAL POWERS - The corporation shall be managed by the board of
directors.
<PAGE> 3
Page 3. Bylaws of ComStar Communications, Inc. Article IV continued.
2. NUMBER AND TENURE OF DIRECTORS - The number of directors shall be at
least one. Each director shall hold office until the next annual meeting of
shareholders and until his/her successor shall have been elected and qualified.
3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. A vacancy occurring on the
board of directors may be filled by the affirmative vote of a majority of the
board of directors even if there is less than a quorum of the board of
directors. The board of directors so chosen shall hold office until the next
annual election of the board of directors by shareholders.
4. REGULAR AND SPECIAL MEETINGS. (a) Regular meetings may be held without
notice as determined by the board of directors and must be held at least
annually. (b) Special meetings may be called by the president or at least 2
directors on 2 day's notice by mail or 24 hours notice by a telephone or
facsimile communication. A brief indication of the nature of the business to be
transacted shall be made part of the notice. If mailed, the notice shall be
considered delivered when deposited in the United States mail. The notice must
be properly addressed and have the correct amount of postage on it. If the
notice is by telephone or facsimile, it shall be considered delivered when
placed. Records of such notice shall be maintained until the subsequent meeting
of the board of directors. (c) Participation in a regular or special meeting may
be by means of conference telephone or similar electronic communications
equipment. All persons participating in the meeting must be able to hear each
other, be advised of the use of such equipment, and be provided with the names
of individuals using the equipment.
5. QUORUM. A quorum shall consist of a majority of the board of directors.
6. ACTION BY BOARD WITHOUT A MEETING. Any action required or permitted to
be taken pursuant to authorization voted at a meeting of the board of directors
or a committee of the board, may be taken without a meeting if before or after
the action all member of the board of directors or committee consent to it in
writing. The written consents shall be filed with the minutes of the
proceedings of the board of directors or committee.
7. WAIVER OF NOTICE. Attendance of a director at a meeting constitutes a
waiver of notice of the meeting except where a director attends a meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
8. REMOVAL. Any director may be removed with or without cause by a
majority vote of the shareholders.
9. EXECUTIVE AND OTHER COMMITTEES. The board of directors, by resolution,
may designate from among its members, to the extent allowable by statute, an
executive committee and other committees, each consisting of one or more
directors. Each committee shall serve at the pleasure of the board of
directors.
<PAGE> 4
Page 4. Bylaws of ComStar Communications, Inc.
ARTICLE V - OFFICERS.
1. NUMBER. The officers of the corporation shall be a president, a chief
executive officer, vice presidents in any number determined by the board
including an executive vice president, a secretary and a treasurer. From time
to time, the board of directors may elect or appoint other officers as needed
for the efficient operation of the company.
2. SALARIES. Consistent with applicable laws, the salaries and benefits of
the officers shall be established by the board of directors.
3. REMOVAL. (a) Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever, in its judgment,
the best interests of the corporation will be served. (b) An officer or agent
elected by the shareholders may be removed only by vote of the shareholders,
unless the shareholders shall have authorized the board of directors to remove
such officer or agent, but the authority of such officer or agent to act for
the corporation may be suspended by the board for cause.
4. PRESIDENT. The president shall be the principal officer of the company
and shall be charged with the overall management of company affairs of all
types. Subject to the control of the board of directors, the president shall
supervise and control all of the business of the corporation. The president
shall, when present, preside at all meetings of the shareholders and of the
board of directors. The president shall have authority to institute or defend
legal proceedings when the directors are deadlocked. All agreements, bank
accounts, and contracts must have the approval of and bear the signature of the
president in order to be valid.
5. CHIEF EXECUTIVE OFFICER. The chief executive officer shall manage the
operational affairs of the company to include sales, engineering, network
operations, and other areas directly related to the development and delivery of
the technical products and services of the company.
6. VICE-PRESIDENT. In the absence of the president or in the event of the
president's death, inability, or refusal to act, the vice-president shall have
all the powers and functions of the president and shall perform such other
duties as the board of directors shall determine. If there is more than one
vice-president, then the executive vice-president, in the event of the above
listed disabilities, shall have all the powers and functions of the president
and shall perform, under the guidance of the board of directors, such other
duties as the board of directors shall determine.
7. SECRETARY. The secretary shall: (a) Attend all meetings of the board of
directors and of the shareholders; (b) Record all votes and minutes of all
proceedings in a book to be kept for that purpose; (c) Give notice of all
meetings of shareholders and of special meetings of the board of directors; (d)
Keep in safe custody the seal of the corporation and affix it to any instrument
when authorized by the board of directors; (e) When required, prepare and make
available at each meeting of shareholders a certified list in alphabetical
order of the names of shareholders entitled to vote, indicating the number of
shares of each respective class held by each; (f) Keep all the documents and
records of the corporation as required by law or otherwise in a proper and safe
manner; and (g)
<PAGE> 5
Page 5. Bylaws of ComStar Communications, Inc. Article V, Item 6. continued.
Perform such other duties as may be assigned by the board of directors or
president.
7. TREASURER. The treasurer shall: (a) Have the custody of the corporate
funds and securities; (b) Keep full and accurate accounts of receipts and
disbursements in the corporate books; (c) Deposit all money and other valuables
in the name and to the credit of the corporation in such depositories as may be
designated by the board of directors; (d) Disburse the funds of the corporation
as may be ordered or authorized by the board of directors and keep vouchers for
such disbursements', (e) Give to the president and board of directors at the
regular meetings of the board of directors, or whenever they require it, an
account of all his/her transactions as treasurer and of the financial condition
of the company; (f) Give a full financial report at the annual meeting of the
shareholders, if so requested; (g) Perform other duties assigned by the board
of directors or president; and (h) If required by the board of directors, give
a bond for the faithful discharge of his/her duties in an amount and with such
surety or sureties as the board of directors shall determine.
ARTICLE VI - CERTIFICATES FOR SHARES.
1. CERTIFICATES FOR SHARES. Certificates representing shares of the
company shall be in the form determined by the board of directors. Such
certificates shall be signed by the president and by the secretary or by such
other officers authorized by law and by the board of directors. All
certificates for shares and date of issue shall be entered on the stock
transfer books of the company. All certificates surrendered to the company for
transfer shall be canceled and no new certificate shall be issued until the
former certificate for a like number of shares is surrendered and canceled,
except that in the case of a lost, destroyed or mutilated certificate, a new
one may be issued upon such terms and indemnity to the corporation as the board
of directors may determine.
2. TRANSFER OF SHARES. (a) Upon surrender to the company or the transfer
agent of the company of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignment or authority to transfer, it shall
be the duty of the company to issue a new certificate to the person entitled to
it, and cancel the old certificate; every transfer shall be entered on the
transfer books of the company which shall be kept at its principal office. (b)
The company shall be entitled to treat the holder of record of any share as the
holder in fact of it, shall not be bound to recognize any equitable or other
claim to, or interest in, such share on the part of any person whether or not
it shall have express or other notice thereof, except as expressly provided by
the laws of this state.
ARTICLE VII - INDEMNIFICATION.
The company shall indemnify to the extent allowed by the corporation
statutes of the State of Georgia any 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 by
reason of the fact that the person is or was a director, officer, employee or
agent of the company or served any other enterprise at the request of the
company. The person to be indemnified must have acted in good faith and in a
manner he/she reasonably believed to be in or not
<PAGE> 6
Page 6. Article VII - Indemnification continued.
opposed to the best interests of the company or its shareholders, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his/her conduct was unlawful.
ARTICLE VII - DIVIDENDS.
The board of directors may declare and pay dividends or make other
distributions in cash, its bonds or its property, including the shares or bonds
of other companies, on its outstanding shares.
ARTICLE IX - AMENDMENTS.
These by-laws may be altered, amended or repealed and new by-laws may
be adopted by a vote of the shareholders representing a majority of all the
shares issued and outstanding at any annual shareholders' meeting or at any
special shareholders' meeting when the proposed amendment has been stated in
the notice of such meeting.
<PAGE> 1
EXHIBIT 4.3
STATE OF GEORGIA
COUNTY OF HALL
AMENDED AND RESTATED
SHAREHOLDER AGREEMENT
THIS AMENDED AND RESTATED AGREEMENT, effective as of the first day of
December 1998, is made by and among Sam F. Dayton, James Cary Howell, Edward N.
Landa, and James L. Bruce, Jr., (hereinafter referred to as the
"Shareholders"), and ComStar Communications, Inc., a Georgia corporation (the
"Corporation"). The Shareholders hold all of the issued and outstanding shares
of Common Stock (including all outstanding shares of both series of Common
Stock; the "Shares"). The Shareholders wish to further their mutual interests
in the Corporation, as well as the interests of the Corporation, by imposing
certain restrictions and obligations on the transfer of their Shares, and on
other aspects of their mutual agreements.
NOW, THEREFORE, in consideration of the mutual promises contained herein
and the sum of One Dollar ($1.00) paid by each party to the other, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto do hereby
agree as follows:
ARTICLE I. RESTRICTIONS ON TRANSFERS
No Shareholder may sell, transfer, assign, hypothecate, or otherwise
alienate any of his Shares, now or hereafter owned by him, without the written
consent of all other Shareholders, except by giving notice to all other
Shareholders at least thirty (30) days prior to the date of the proposed
transfer. Such notice must be made by certified mail, return receipt requested
and shall set forth the exact provisions of the proposed transfer. The receipt
by the Shareholders of such notice will create an option in each of the other
Shareholders to purchase the Shares proposed to be transferred by such
Shareholder. The Secretary, or any other officer, shall, within five (5) days
of receipt of such notice, give notice of such proposed transfer to all of the
other Shareholders, and they shall have the opportunity to exercise their
options in the manner provided herein. Any sale or transfer or purported sale
or transfer of such Shares shall be null and void unless the terms, conditions,
and provisions of this agreement are strictly observed and followed.
<PAGE> 2
ARTICLE II. DEATH; INVOLUNTARY TRANSFER
Each Shareholder agrees that upon his death or upon an involuntary
transfer by operation of law, of all or a portion of his Shares, the other
Shareholders shall have an option to purchase all of the Shares transferred,
whether by his death or otherwise. Upon the death of a Shareholder, the
executor or administrator, or upon a transfer, the person acquiring such Shares
(in any such case, the "Transferor") shall promptly notify the Secretary of the
Corporation of such death or transfer. The Secretary shall, within five (5)
days of receipt of such notification, give notice of such death or transfer to
all of the other Shareholders, and they shall have the opportunity to exercise
their options in the manner provided herein. In the event that Shareholders
elect to purchase such Shares, the Transferor shall sell such Shares to those
Shareholders purchasing same.
ARTICLE III. TERMINATION OF OPTION
The option to purchase Shares pursuant to Article I hereof shall
terminate on the date set for the proposed transfer; provided, however, that if
notice of the proposed transfer is delivered to the Shareholders and the
Corporation less than thirty (30) days from the date of such delivery, the
option to purchase Shares pursuant to Article II above shall terminate thirty
(30) days after the delivery of notice to the Corporation of the death of a
Shareholder or of a transfer of Shares. If options to purchase shares are not
exercised in accordance with the procedure outlined in the agreement, the
Shares (a) may be transferred to the proposed transferee as provided in Article
I, or (b) transferred in due course in either case described in Article II
without further restriction on such transfer (but only in the same manner and
on the same terms and conditions as set forth in the notice of proposed
transfer), and said transfer shall be valid and binding; provided, however,
that the transferee, in any case, executes, and agrees to become subject to,
this agreement; and provided, further, that such stock cannot be further
transferred except in accordance with the terms and conditions of this
agreement.
2
<PAGE> 3
ARTICLE IV. EXERCISE OF OPTION
Each Shareholder may exercise his option to purchase all or any portion
of the Shares transferred or proposed to be transferred by delivering written
notice, by certified mail, return receipt requested, or by hand delivery, to
the Secretary of the Corporation of his election to purchase, not less than
five (5) days prior to the expiration of the option period, indicating the
number of Shares he elects to purchase. If the total number of Shares which
such Shareholder elects to purchase exceeds the number of Shares available for
purchase, the number of available shares shall be allocated by the Corporation
among the electing Shareholders on the basis of the number of Shares held by
each such electing Shareholder; provided, however, that the options may be
partially exercised by the other Shareholders with the remainder available for
sale by the Shareholder electing to sell his shares. If the Shareholders elect
to purchase any Shares, the Corporation shall immediately deliver written
notice of such election, by certified mail, return receipt requested, to the
Shareholder proposing such transfer or the Transferor, setting forth the names
of each of the Shareholders who have elected to purchase Shares and the number
of Shares purchased by each of such Shareholders. Upon such notification, the
Shareholder proposing the transfer of such Shares or the Transferor shall sell
such Shares to the Shareholders electing to purchase such Shares, on the terms
and conditions provided herein.
ARTICLE V. PURCHASE PRICE
A. If there is a bonafide offer for the purchase of the Shares proposed
to be transferred, the purchase price per Share shall be the total purchase
price offered by the prospective purchaser divided by the number of Shares
proposed to be transferred.
B. If there is no such bona fide offer or if the Shares have been
transferred involuntarily or by operation of law, or by the death of the
Shareholder, the purchase price per Share shall be the fair market value of
such Shares as determined by agreement of the Transferor, or the Shareholder
proposing to transfer such Shares, and those Shareholders electing to purchase
such Shares.
3
<PAGE> 4
C. If the parties are unable to agree upon a value as provided in
subsection B the provisions of this subsection shall control the valuation of
the Shares rather than the preceding subsection. The electing Shareholders, as
a group, shall nominate an appraiser, and either the Transferor or the
Shareholder proposing such transfer, as applicable, shall nominate an appraiser
to determine the value of such Shares. If the two appraisers are unable to
agree upon the value of such Shares, both appraisers shall agree upon and
appoint a third appraiser to value such Shares. The opinion of the majority of
the three appraisers shall be conclusively binding on all of the parties
concerned.
ARTICLE VI. METHOD OF PAYMENT
The purchase price of the Shares purchased shall be paid in cash. The
certificates for the shares shall be endorsed by the Shareholder proposing the
transfer, or by the Transferor, and delivered to the purchasing Shareholder(s)
or surrendered directly to the Corporation for issuance of a new certificate to
the purchasing Shareholder(s).
ARTICLE VII. DELIVERY OF SHARES
The Shareholder proposing the transfer or the Transferor shall endorse
and deliver the certificates evidencing the transferred Shares to the
Shareholder(s) or the Corporation at the time the payment of the purchase price
is made as set forth herein. From the time of such transfer, the persons
purchasing such Shares shall be treated as the full owners of such Shares and
will be so registered on the books of the Corporation, and will have full
rights otherwise incident to such Shares.
ARTICLE VIII. INSURANCE
[Intentionally omitted.]
ARTICLE IX. LEGAL REMEDIES ON DEFAULT
In the event a default by a Shareholder (a "defaulting Shareholder") in
any payment on the purchase of Shares hereunder continues for a period of more
than 60 days after notice to the defaulting Shareholder(s), the person required
to sell such Shares hereunder ("Seller") may, at his option, elect to sell such
Shares elsewhere. The Seller may also
4
<PAGE> 5
agree with the defaulting Shareholder(s) to alter the terms for the payment of
the purchase price; provided, however, that the Seller may only rescind the
sale if all other Shareholders agree to the rescission.
ARTICLE X. SPECIFIC PERFORMANCE
The Shareholders agree that the Shares of the Corporation cannot be
readily purchased, sold, or evaluated in the open market, that they have a
unique and special value, and the Shareholders would be irreparably damaged if
the terms of this agreement were not capable of being specifically enforced,
and for this reason the Shareholders agree that the purchase of the Shares in
accordance with terms of this agreement shall be specifically enforceable. The
Shareholders further agree that any sale or disposition which does not strictly
comply with the terms and conditions of this agreement may be specifically
restrained, and that such equitable relief provided herein shall not in any way
limit or deny any other remedy at law which a Shareholder might otherwise have.
ARTICLE XI. RESTRICTIONS ON CERTIFICATES
The Shareholders agree that all Share certificates now or hereafter held
by them will be stamped with the following legend prominently on the front of
the certificate, reading as follows:
"THIS SHARE CERTIFICATE IS SUBJECT TO RESTRICTIONS ON TRANSFER. SEE
BACK."
The back side of the certificate is to carry the following endorsement:
"THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS
AND OPTIONS IN REGARD TO ITS PURCHASE AND TRANSFER BY THE PROVISIONS OF A
SHAREHOLDERS AGREEMENT DATED AS OF DECEMBER 1, 1998, A COPY OF WHICH IS ON FILE
IN THE OFFICE OF THE SECRETARY OF THE CORPORATION."
ARTICLE XII. NOTICE
All notices under this agreement shall be mailed to the parties at the
addresses provided under their signatures, provided that any party may change
his mailing address by delivering written notice of such new address to the
Corporation.
5
<PAGE> 6
ARTICLE XIII. TERM
A. This agreement shall terminate and the certificates representing
the shares subject to this Agreement shall be released from the terms of this
Agreement on the occurrence of the earliest to occur of the following events:
(i) the consummation of a Qualified Initial Public Offering (as
defined below) of the Common Stock of the Company.
(ii) written agreement of the Company and the parties whose vote
is sufficient to amend this agreement as provided below; or
(iii) dissolution of the Company.
"Qualified Initial Public Offering" shall mean the offer and sale by the
Corporation of its equity securities in a transaction underwritten by an
investment banking firm following the completion of which (i) such equity
securities will be listed for trading on any national securities exchange or
(ii) there will be at least two market makers who are making a market in such
equity securities through the Nasdaq National Market System.
B. Notwithstanding anything to the contrary contained in this
agreement, it shall terminate 20 years from the effective date unless it is
renewed within the 20-year period provided in O.C.G.A. Section 14-2-731.
Amendments to this agreement shall be deemed renewals of this Agreement unless
the amendment states to the contrary. If not sooner terminated, this agreement
shall terminate 21 years after the death of the last to die of any individual
Shareholder of the Company living at the date of this Agreement.
C. Upon the termination of this agreement as provided above, the share
certificates held by each Shareholder shall be surrendered to the Company and
the Company shall issue new certificates for the same number of shares but
without the legend required by this agreement.
6
<PAGE> 7
ARTICLE XIV. INUREMENT
Subject to the restrictions against the transfer or assignment as herein
contained, the provisions of this agreement shall inure to the benefit of and
shall be binding upon the assigns, successors in interest, personal
representatives, estates, heirs, and legatees of each of the parties hereto.
Each of the Shareholders agrees that he will not hypothecate or otherwise
create or suffer to exist any lien, claim, or encumbrance upon any of his
shares at any time subject hereto, other than the encumbrance created by this
agreement.
ARTICLE XV. AMENDMENT
Neither this agreement nor any provision hereof may be waived, modified,
terminated or amended except by a written agreement signed by the Company and
the Shareholders holding at least two thirds (2/3) of the Common Stock
(including shares of all series of Common Stock then outstanding, voting as one
voting group) issued and outstanding and entitled to vote then held by all
Shareholders. Any waiver by any party of a breach of any provision of this
agreement shall not operate or be construed as a waiver of any subsequent
breach of that provision or of any other provision hereof. Each of the parties
hereto agrees to execute all such further instruments and documents and to take
all such further action as any other party may reasonably require in order to
effectuate the terms and purposes of this agreement.
ARTICLE XVI. MISCELLANEOUS PROVISIONS
A. This agreement may be executed in any number of counterparts and
each such counterpart shall be deemed to be an original instrument.
B. The parties acknowledge that they are entering into this agreement
freely and voluntarily; that they have ascertained and weighed all the facts
and circumstances likely to influence their judgment herein; that they have
sought and obtained legal advice independently of each other; that they have
been duly apprised of their respective legal rights; that all the provisions
hereof, as well as all questions pertaining thereto, have been fully and
satisfactorily explained to them; that they have given due consideration to
such
7
<PAGE> 8
provisions and questions and that they clearly understand and assent to all the
provisions hereof.
C. Each party shall, at the other party's request at any time
hereafter, take any and all steps and execute, acknowledge and deliver any and
all further instruments and assurances that the other party may reasonably
require for the purpose of carrying out the provisions of this agreement.
D. This agreement is and shall be deemed to be a Georgia agreement,
and shall be governed and construed in all respects by and in accordance with
the laws of the State of Georgia.
E. Time is of the essence of this agreement and all of its terms,
conditions and provisions.
F. This agreement supersedes any and all other agreements, whether
oral or in writing, between the parties with respect to this agreement, and
this agreement contains all of the covenants and agreements between the parties
with respect to the subject matter of this agreement in any manner whatsoever.
Each party to this agreement acknowledges that no representations, inducements,
promises, or agreements, orally or otherwise, have been made by any party, or
anyone acting on behalf of any party, that are not embodied in this agreement,
and that no other agreement, statement, or promise not contained in this
agreement shall be valid or binding.
G. If any paragraph, subparagraph, sentence, clause, phrase, or any
portion of this agreement be declared invalid or unconstitutional by any Court
of competent jurisdiction, or if the provisions of any part of this agreement
as applied to any particular situation or set of circumstances shall be
declared invalid or unconstitutional, such invalidity shall not be construed to
affect the portions of this agreement not so held to be invalid, or the
application of this agreement to other circumstances not so held to be invalid.
It is hereby declared to be the intent of the parties to this agreement to
provide for separable and divisible parts, and to hereby adopt any and all
parts hereof as may not be held invalid for any reason.
8
<PAGE> 9
H. In the event of a breach or threatened breach by either party of
the obligations under this agreement, the parties acknowledge that the
non-breaching party will not have an adequate remedy at law and shall be
entitled to such equitable and injunctive relief as may be available to
restrain the breaching party from the violation of the provisions of this
agreement. Nothing in this paragraph shall be construed as prohibiting the
other party from pursuing any other remedies available for breach or threatened
breach of this agreement, including the recovery of damages from the breaching
party.
I. If any action at law or in equity is necessary to enforce or
interpret the terms of this agreement, the prevailing party shall be entitled
to reasonable attorneys' fees, costs, and necessary disbursements in addition
to any other relief to which that party may be entitled.
J. The duties and obligations imposed by this agreement and the rights
and remedies available hereunder shall be in addition to, and not in limitation
of, any duties, obligations, rights and remedies otherwise imposed or available
at law.
K. No action or failure to act or to insist in any one or more
instances upon the strict performance of any one or more of the provisions of
this agreement, or to exercise any right herein contained or provided by law by
any party hereto, shall constitute a waiver of any right or duty afforded him
under this agreement, nor shall any such action or failure to act constitute an
approval of or acquiescence in any breach hereunder, nor shall it be construed
as a waiver of the right to subsequently demand strict performance or exercise
such rights, and the rights shall continue unchanged and remain in full force
and effect, except as may be specifically agreed in writing.
L. Additional holders of Shares may join into this Agreement by
executing an agreement to be bound by all of the terms and conditions hereof,
which may be evidenced by the signing of a signature page in the form attached
hereto. Such additional shareholders shall be bound by all of the terms and
shall receive all of the benefits of this agreement on par with the original
signatory shareholders.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed this agreement
under seal on the dates indicated by their signatures, to be effective as of
the first day of December, 1998.
[Signatures begin on following page.]
10
<PAGE> 11
SHAREHOLDERS
Date:
------------------
/s/ Sam F. Dayton
--------------------------------(SEAL)
Sam F. Dayton
Address:
--------------------------------
--------------------------------
Date:
------------------
/s/ James C. Howell
--------------------------------(SEAL)
James Cary Howell
Address:
--------------------------------
--------------------------------
Date:
------------------
/s/ Edward N. Landa
--------------------------------(SEAL)
Edward N. Landa
Address:
------------------------------------
------------------------------------
Date:
------------------
/s/ James L. Bruce
--------------------------------(SEAL)
James L. Bruce, Jr.
Address:
------------------------------------
------------------------------------
11
<PAGE> 12
COMSTAR COMMUNICATIONS, INC.
BY: /s/ Sam F. Dayton
----------------------------------
Dr. Sam F Dayton, President
(Corporate Seal)
/s/ Edward N. Landa ATTEST:
----------------------------
Secretary
12
<PAGE> 13
COMSTAR COMMUNICATIONS, INC. SHAREHOLDER AGREEMENT
SIGNATURE PAGE FOR ADDITIONAL SHAREHOLDERS
Date:
------------------
-------------------------------------
Signature
-------------------------------------
Please print name
Address:
-------------------------------------
-------------------------------------
13
<PAGE> 14
AMENDMENT NO. 1 TO
AMENDED AND RESTATED SHAREHOLDER AGREEMENT
AMENDMENT NO. 1 dated this 31st day of August, 1999 by and among
comstar.net, inc. (the "Corporation") and the Shareholders that are parties to
the Amended and Restated Shareholder Agreement, dated as of December 1, 1998,
by and among the Corporation and the Shareholders (the "Original Agreement").
WHEREAS, the Shareholders wish to further their mutual interests in
the Corporation, as well as the interests of the Corporation, by amending the
Original Agreement to permit certain transfers of stock, and
WHEREAS, Article XV of the Original Agreement permits amendment of the
Original Agreement by written agreement signed by certain of the Shareholders,
NOW THEREFORE, in consideration of the mutual premises contained
herein, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto do hereby agree as follows:
1. Article I of the Original Agreement is hereby amended and
restated in its entirety to read as follows:
"(a) No Shareholder may sell, transfer, assign, hypothecate, or
otherwise alienate any of his Shares, now or hereafter owned by him,
without the written consent of all other Shareholders, except by
giving notice to all other Shareholders at least thirty (30) days
prior to the date of the proposed transfer. Such notice must be made
by certified mail, return receipt requested and shall set forth the
exact provisions of the proposed transfer. The receipt by the
Shareholders of such notice will create an option in each of the other
Shareholders to purchase the Shares proposed to be transferred by such
Shareholder. The Secretary, or any other officer, shall, within five
(5) days of receipt of such notice, give notice of such proposed
transfer to all of the other Shareholders, and they shall have the
opportunity to exercise their options in the manner provided herein.
Any sale or transfer or purported sale or transfer of such Shares
shall be null and void unless the terms, conditions, and provisions of
this agreement are strictly observed and followed.
(b) Notwithstanding the foregoing, a Shareholder may freely transfer
any of his Shares at any time to Family Members whether or not for
adequate consideration, by gift, assignment, sale, will, joint tenancy
with right of survivorship, bequest, devise, intestacy or otherwise.
Such transfers may be made outright or in trust, in fee or lesser
estate, or held under a guardianship, conservatorship, or custodian
arrangement. The Shareholders hereby consent to any such transfer
without compliance with the prior notice and approval
<PAGE> 15
provisions of section (a) above and without creating for other
Shareholders the option to purchase the transferred Shares described
in paragraph (a) above. Solely for purposes of this Article I, "Family
Member" shall mean the spouse, issue (including, step-children and
their issue), siblings, parents, siblings-in-law and parents-in-law of
the Shareholder; any trust created for the exclusive benefit of one or
more of such persons; and any entity owned entirely by the Shareholder
and/or one or more of the Shareholder's Family Members."
2. All other provisions and agreements of the Original Agreement
shall remain unchanged.
[Signatures appear on the following page.]
2
<PAGE> 16
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1
under seal, to be effective as of the date on which holders of two thirds of
the outstanding Common Stock have signed this Amendment No. 1.
CORPORATION:
comstar.net, inc.
By: /s/ Sam F. Dayton
--------------------
Name: Sam F. Dayton
Title: Chairman/President
SHAREHOLDERS:
date: 08-31-99 /s/ Sam F. Dayton
--------------- --------------------------
Samuel F. Dayton
date: 27-Aug-99 /s/ James Cary Howell
--------------- --------------------------
James Cary Howell
date: 8/27/1999 /s/ Edward N. Landa
--------------- --------------------------
Edward N. Landa
date: 8/28/99 /s/ James L. Bruce
--------------- --------------------------
James L. Bruce, Jr.
date:
--------------- --------------------------
Alan Crumley
date:
--------------- --------------------------
Frank Wiegend
3
<PAGE> 17
date:
--------------- --------------------------
T. Graham Hood
date:
--------------- --------------------------
David Thompson
date:
--------------- --------------------------
Donald Thompson
date:
--------------- --------------------------
E. Davison Burch
date:
--------------- --------------------------
Don Waldrip
date:
--------------- --------------------------
L.G. Hardman, III
date:
--------------- --------------------------
Jesse A. Carter
date:
--------------- --------------------------
Pierpont F. Brown
date:
--------------- --------------------------
Steve Wadley
date:
--------------- --------------------------
Charles W. Blair Jr.
date:
--------------- --------------------------
Edward Klein, III
date:
--------------- --------------------------
John David Boonstra
date:
--------------- --------------------------
Richard Hoving, Jr.
date:
--------------- --------------------------
Vince Dooley
date:
--------------- --------------------------
Barbara Dooley
4
<PAGE> 18
Mauney Family Trust
date: By:
--------------- -----------------------
date:
--------------- --------------------------
George D. Jones
date:
--------------- --------------------------
James M. Intoccio
date:
--------------- --------------------------
James Atherton
date:
--------------- --------------------------
Kay S. Swanson
date:
--------------- --------------------------
Steven J. Edwards
date:
--------------- --------------------------
Samuel D. Holmes
date: 8/27/99 /s/ Chris K. Martin
--------------- --------------------------
Christopher K. Martin
date:
--------------- --------------------------
Arie A. Buurman
5
<PAGE> 1
EXHIBIT 10.1
COMSTAR.NET, INC.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE> 2
COMSTAR.NET, INC.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 DEFINITIONS.............................................................................. 1
ARTICLE 2 THE PLAN................................................................................. 5
2.1 NAME......................................................................................... 5
2.2 PURPOSE...................................................................................... 5
2.3 EFFECTIVE DATE............................................................................... 5
ARTICLE 3 PARTICIPANTS............................................................................. 5
ARTICLE 4 ADMINISTRATION........................................................................... 6
4.1 DUTIES AND POWERS OF THE COMMITTEE........................................................... 6
4.2 INTERPRETATION; RULES........................................................................ 6
4.3 NO LIABILITY................................................................................. 6
4.4 MAJORITY RULE................................................................................ 6
4.5 COMPANY ASSISTANCE........................................................................... 6
ARTICLE 5 SHARES OF STOCK SUBJECT TO PLAN.......................................................... 7
5.1 LIMITATIONS.................................................................................. 7
5.2 ANTIDILUTION................................................................................. 7
ARTICLE 6 OPTIONS.................................................................................. 9
6.1 TYPES OF OPTIONS GRANTED..................................................................... 9
6.2 OPTION GRANT AND AGREEMENT................................................................... 9
6.3 OPTIONEE LIMITATIONS......................................................................... 9
6.4 $100,000 AND SECTION 162(M) LIMITATIONS...................................................... 10
6.5 EXERCISE PRICE............................................................................... 10
6.6 EXERCISE PERIOD.............................................................................. 10
6.7 OPTION EXERCISE.............................................................................. 10
6.8 RELOAD OPTIONS............................................................................... 12
6.9 NONTRANSFERABILITY OF OPTION................................................................. 12
6.10 TERMINATION OF EMPLOYMENT OR SERVICE......................................................... 12
6.11 EMPLOYMENT RIGHTS............................................................................ 13
6.12 CERTAIN SUCCESSOR OPTIONS.................................................................... 13
6.13 EFFECT OF A CORPORATE TRANSACTION............................................................ 13
ARTICLE 7 RESTRICTED STOCK......................................................................... 13
7.1 AWARDS OF RESTRICTED STOCK................................................................... 13
7.2 NON-TRANSFERABILITY.......................................................................... 13
7.3 LAPSE OF RESTRICTIONS........................................................................ 14
7.4 TERMINATION OF EMPLOYMENT.................................................................... 14
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
7.5 TREATMENT OF DIVIDENDS....................................................................... 14
7.6 DELIVERY OF SHARES........................................................................... 14
ARTICLE 8 STOCK APPRECIATION RIGHTS................................................................ 14
8.1 SAR GRANTS................................................................................... 14
8.2 DETERMINATION OF PRICE....................................................................... 14
8.3 EXERCISE OF A SAR............................................................................ 14
8.4 PAYMENT FOR A SAR............................................................................ 15
8.5 STATUS OF A SAR UNDER THE PLAN............................................................... 15
8.6 TERMINATION OF SARS.......................................................................... 15
8.7 NO SHAREHOLDER RIGHTS........................................................................ 15
ARTICLE 9 STOCK CERTIFICATES....................................................................... 16
ARTICLE 10 TERMINATION AND AMENDMENT................................................................ 16
10.1 TERMINATION AND AMENDMENT.................................................................... 16
10.2 EFFECT ON GRANTEE'S RIGHTS................................................................... 17
ARTICLE 11 RELATIONSHIP TO OTHER COMPENSATION PLANS................................................. 17
ARTICLE 12 MISCELLANEOUS............................................................................ 17
12.1 REPLACEMENT OR AMENDED GRANTS................................................................ 17
12.2 FORFEITURE FOR COMPETITION................................................................... 17
12.3 LEAVE OF ABSENCE............................................................................. 17
12.4 PLAN BINDING ON SUCCESSORS................................................................... 18
12.5 SINGULAR, PLURAL; GENDER..................................................................... 18
12.6 HEADINGS, ETC................................................................................ 18
12.7 SECTION 16 COMPLIANCE........................................................................ 18
</TABLE>
<PAGE> 4
comstar.net, inc.
AMENDED AND RESTATED 1999 STOCK OPTION AND INCENTIVE PLAN
ARTICLE 1
DEFINITIONS
As used in this Plan, the following terms have the following meanings
unless the context clearly indicates to the contrary:
"Award" means a grant of Restricted Stock or an SAR.
"Board" means the Board of Directors of the Company.
"Cause" means (i) the commission of an act of fraud, embezzlement,
theft or proven dishonesty, or any other illegal act or practice (whether or
not resulting in criminal prosecution or conviction), including theft or
destruction of property of the Company, a Parent, or a Subsidiary, or any other
act or practice which the Committee shall, in good faith, deem to have resulted
in the recipient's becoming unbondable under the Company's, a Parent's or any
Subsidiary's fidelity bond; (ii) the willful engaging in misconduct which is
deemed by the Committee, in good faith, to be materially injurious to the
Company, a Parent or any Subsidiary, monetarily or otherwise, including, but
not limited, improperly disclosing trade secrets or other confidential or
sensitive business information and data about the Company, a Parent or any
Subsidiaries and competing with the Company, a Parent or any Subsidiaries, or
soliciting employees, consultants or customers of the Company, a Parent or any
Subsidiaries in violation of law or any employment or other agreement to which
the recipient is a party; (iii) the willful and continued failure or habitual
neglect by a person who is an Employee to perform his or her duties with the
Company, a Parent or any Subsidiary substantially in accordance with the
operating and personnel policies and procedures of the Company, Parent or the
Subsidiary generally applicable to all their employees; or (iv) other disregard
of rules or policies of the Company, a Parent or any Subsidiary, or conduct
evincing willful or wanton disregard of the interests of the Company, a Parent
or any Subsidiary. For purposes of this Plan, no act or failure to act by the
recipient shall be deemed be "willful" unless done or omitted to be done by
recipient not in good faith and without reasonable belief that the recipient's
action or omission was in the best interest of the Company and/or the
subsidiary. Notwithstanding the foregoing, if the recipient has entered into an
employment agreement that is binding as of the date of employment termination,
and if such employment agreement defines "Cause," then the definition of
"Cause" in such agreement shall apply to the recipient in this Plan. "Cause"
shall be determined by the Committee based upon information presented by the
Company and the Employee and shall be final and binding on all parties hereto.
"Code" means the United States Internal Revenue Code of 1986,
including effective date and transition rules (whether or not codified). Any
reference herein to a specific section of the Code shall be deemed to include a
reference to any corresponding provision of future law.
<PAGE> 5
"Committee" means a committee of at least two Directors appointed from
time to time by the Board, having the duties and authority set forth herein in
addition to any other authority granted by the Board; provided, however, that
with respect to any Options or Awards granted to an individual who is also a
Section 16 Insider, the Committee shall consist of either the entire Board of
Directors or a committee of at least two Directors (who need not be members of
the Committee with respect to Options or Awards granted to any other
individuals) who are Non-Employee Directors, and all authority and discretion
shall be exercised by such Non-Employee Directors, and references herein to the
"Committee" means such Non-Employee Directors insofar as any actions or
determinations of the Committee shall relate to or affect Options or Awards
made to or held by any Section 16 Insider. In selecting the Committee, the
Board shall also consider the benefits under Section 162(m) of the Code of
having a Committee composed of "outside directors" (as that term is defined in
the Code) for certain grants of Options to highly compensated executives. At
any time that the Board shall not have appointed a committee as described
above, any reference herein to the Committee means a reference to the Board.
"Company" means comstar.net, inc., a Georgia corporation.
"Corporate Transaction" means any of the following transactions to
which the Company is a party:
(i) a merger, consolidation, share exchange, combination
or other transaction or series of transactions
(other than a public offering by the Company for
cash of the Company's capital stock, debt or other
securities) in which securities possessing more than
50% of the total combined voting power of the
Company's outstanding securities are transferred to
a person or persons different from the persons
holding those securities immediately prior to such
transaction;
(ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets;
(iii) the liquidation or dissolution of the Company; or
(iv) A change in the composition of the Board as a result
of which fewer than one-half of the incumbent
directors are directors who either:
(a) Had been directors of the Company 24 months
prior to such change; or
(b) Were elected, or nominated for election, to
the Board with the affirmative votes of at
least a majority of the directors who had
been directors of the Company 24 months
prior to such change and who were still in
office at the time of the election or
nomination.
"Director" means a member of the Board and any person who is an
advisory or honorary director of the Company if such person is considered a
director for the purposes of Section 16 of
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the Exchange Act, as determined by reference to such Section 16 and to the
rules, regulations, judicial decisions, and interpretative or "no-action"
positions with respect thereto of the SEC, as the same may be in effect or set
forth from time to time.
"Employee" means an employee of the Employer.
"Employer" means the corporation that employs a Grantee.
"Exchange Act" means the Securities Exchange Act of 1934. Any
reference herein to a specific section of the Exchange Act shall be deemed to
include a reference to any corresponding provision of future law.
"Exercise Price" means the price at which an Optionee may purchase a
share of Stock under a Stock Option Agreement.
"Fair Market Value" on any date means (i) the closing sales price of
the Stock, regular way, on such date on the national securities exchange having
the greatest volume of trading in the Stock during the thirty-day period
preceding the day the value is to be determined or, if such exchange was not
open for trading on such date, the next preceding date on which it was open;
(ii) if the Stock is not traded on any national securities exchange, the
average of the closing high bid and low asked prices of the Stock on the
over-the-counter market on the day such value is to be determined, or in the
absence of closing bids on such day, the closing bids on the next preceding day
on which there were bids; or (iii) if the Stock also is not traded on the
over-the-counter market, the fair market value as determined in good faith by
the Board or the Committee based on such relevant facts as may be available to
the Board, which may include opinions of independent experts, the price at
which recent sales have been made, the book value of the Stock, and the
Company's current and anticipated future earnings.
"Grantee" means a person who is an Optionee or a person who has
received an Award of Restricted Stock or an SAR.
"Incentive Stock Option" means an option to purchase any stock of the
Company, which complies with and is subject to the terms, limitations and
conditions of Section 422 of the Code and any regulations promulgated with
respect thereto.
"Non-Employee Director" shall have the meaning set forth in Rule 16b-3
under the Exchange Act, as the same may be in effect from time to time, or in
any successor rule thereto, and shall be determined for all purposes under the
Plan according to interpretative or "no-action" positions with respect thereto
issued by the SEC.
"Officer" means a person who constitutes an officer of the Company for
the purposes of Section 16 of the Exchange Act, as determined by reference to
such Section 16 and to the rules, regulations, judicial decisions, and
interpretative or "no-action" positions with respect to such rule of the SEC,
as the same may be in effect or set forth from time to time.
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"Option" means an option, whether or not an Incentive Stock Option, to
purchase Stock granted pursuant to the provisions of Article 6 of this Plan.
"Optionee" means a person to whom an Option has been granted under
this Plan.
"Parent" means any corporation (other than the Employer) in an
unbroken chain of corporations ending with the Employer if, at the time of the
grant (or modification) of the Option, each of the corporations other than the
Employer owns stock possessing 50 percent or more of the total combined voting
power of the classes of stock in one of the other corporations in such chain.
"Permanent and Total Disability" has the same meaning as given to that
term by Code Section 22(e)(3) and any regulations or rulings promulgated
thereunder.
"Plan" means the comstar.net, inc. Amended and Restated 1999 Stock
Option and Incentive Plan, the terms of which are set forth herein.
"Purchasable" refers to Stock which may be purchased by an Optionee
under the terms of this Plan on or after a certain date specified in the
applicable Stock Option Agreement.
"Qualified Domestic Relations Order" has the meaning set forth in the
Code or in the Employee Retirement Income Security Act of 1974, or the rules
and regulations promulgated under the Code or such Act.
"Reload Option" has the meaning set forth in Section 6.8 of the Plan.
"Restricted Stock" means Stock issued, subject to restrictions, to a
Grantee pursuant to Article 6 of this Plan.
"Restriction Agreement" means the agreement setting forth the terms of
an Award, and executed by a Grantee as provided in Section 7.1 of this Plan.
"SAR" means a stock appreciation right, which is the right to receive
an amount equal to the appreciation, if any, in the Fair Market Value of a
share of Stock from the date of the grant of the right to the date of its
payment, all as provided in Article 8 of this Plan.
"SAR Price" means the base value established by the Committee for a
SAR on the date the SAR is granted and which is used in determining the amount
of benefit, if any, paid to a Grantee.
"SEC" means the United States Securities and Exchange Commission.
"Section 16 Insider" means any person who is subject to the provisions
of Section 16 of the Exchange Act, as provided in Rule 16a-2 promulgated
pursuant to the Exchange Act.
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"Stock" means the Common Stock, no par value per share, of the Company
or, in the event that the outstanding shares of Stock are hereafter changed
into or exchanged for shares of a different stock or securities of the Company
or some other entity, such other stock or securities.
"Stock Option Agreement" means an agreement between the Company and an
Optionee under which the Optionee may purchase Stock under this Plan, a sample
form of which is attached hereto as Exhibit A (which form may be varied by the
Committee in granting an Option).
"Subsidiary" means any corporation (other than the Employer) in an
unbroken chain of corporations beginning with the Employer if, at the time of
the grant (or modification) of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50 percent or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
ARTICLE 2
THE PLAN
2.1 Name. This Plan shall be known as the "comstar.net, inc.
Amended and Restated 1999 Stock Option and Incentive Plan."
2.2 Purpose. The purpose of the Plan is to advance the interests
of the Company, its Subsidiaries and its shareholders by affording certain
employees and Directors of the Company and its Subsidiaries, as well as key
consultants and advisors to the Company or any Subsidiary, an opportunity to
acquire or increase their proprietary interests in the Company. The objective
of the issuance of the Options and Awards is to promote the growth and
profitability of the Company and its Subsidiaries because the Grantees will be
provided with an additional incentive to achieve the Company's objectives
through participation in its success and growth and by encouraging their
continued association with or service to the Company.
2.3 Effective Date. The Plan was adopted by the Board on March 1,
1999 and was amended by the Board on September 1, 1999. If the Company's
shareholders have not approved the Plan on or prior to the first anniversary of
such effective date, then all options granted under the Plan shall be
non-Incentive Stock Options.
ARTICLE 3
PARTICIPANTS
The class of persons eligible to participate in the Plan shall consist
of all persons whose participation in the Plan the Committee determines to be
in the best interests of the Company, which shall include, but not be limited
to, all Directors and employees of the Company or any Subsidiary, as well as
key consultants and advisors to the Company or any Subsidiary.
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ARTICLE 4
ADMINISTRATION
4.1 Duties and Powers of the Committee. The Plan shall be
administered by the Committee. The Committee shall select one of its members as
its Chairman and shall hold its meetings at such times and places as it may
determine. The Committee shall keep minutes of its meetings and shall make such
rules and regulations for the conduct of its business as it may deem necessary.
The Committee shall have the power to act by unanimous written consent in lieu
of a meeting, and to meet telephonically. In administering the Plan, the
Committee's actions and determinations shall be binding on all interested
parties. The Committee shall have the power to grant Options or Awards in
accordance with the provisions of the Plan and may grant Options and Awards
singly, in combination, or in tandem. Subject to the provisions of the Plan,
the Committee shall have the discretion and authority to determine those
individuals to whom Options or Awards will be granted and whether such Options
shall be accompanied by the right to receive Reload Options, the number of
shares of Stock subject to each Option or Award, such other matters as are
specified herein, and any other terms and conditions of a Stock Option
Agreement or Restriction Agreement. The Committee shall also have the
discretion and authority to delegate to any Officer its powers to grant Options
or Awards under the Plan to any person who is an employee of the Company but
not an Officer or Director. To the extent not inconsistent with the provisions
of the Plan, the Committee may give a Grantee an election to surrender an
Option or Award in exchange for the grant of a new Option or Award, and shall
have the authority to amend or modify an outstanding Stock Option Agreement or
Restriction Agreement, or to waive any provision thereof, provided that the
Grantee consents to such action.
4.2 Interpretation; Rules. Subject to the express provisions of
the Plan, the Committee also shall have complete authority to interpret the
Plan, to prescribe, amend, and rescind rules and regulations relating to it, to
determine the details and provisions of each Stock Option Agreement, and to
make all other determinations necessary or advisable for the administration of
the Plan, including, without limitation, the amending or altering of the Plan
and any Options or Awards granted under the Plan as may be required to comply
with or to conform to any federal, state, or local laws or regulations.
4.3 No Liability. Neither any member of the Board nor any member
of the Committee shall be liable to any person for any act or determination
made in good faith with respect to the Plan or any Option or Award granted
hereunder.
4.4 Majority Rule. A majority of the members of the Committee
shall constitute a quorum, and any action taken by a majority at a meeting at
which a quorum is present, or any action taken without a meeting evidenced by a
writing executed by all the members of the Committee, shall constitute the
action of the Committee.
4.5 Company Assistance. The Company shall supply full and timely
information to the Committee on all matters relating to eligible persons, their
employment, death, retirement, disability, or other termination of employment,
and such other pertinent facts as the Committee
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may require. The Company shall furnish the Committee with such clerical and
other assistance as is necessary in the performance of its duties.
ARTICLE 5
SHARES OF STOCK SUBJECT TO PLAN
5.1 Limitations. Subject to any antidilution adjustment pursuant
to the provisions of Section 5.2 of this Plan, the maximum number of shares of
Stock that may be issued hereunder shall be 2,300,000. The number of shares of
Stock available for issuance hereunder shall automatically increase on January
1 of each year beginning January 1, 2000, to an amount equal to equal to
fifteen percent (15%) (the "Fifteen Percent Amount") of the fully-diluted
shares of Stock (assuming the conversion of all outstanding options and
warrants) outstanding on December 31 of the previous year (subject to
adjustment under Section 5.2), provided that the foregoing automatic increase
shall apply only if the Fifteen Percent Amount is greater than the maximum
number theretofore in effect. Any or all shares of Stock subject to the Plan
may be issued in any combination of Incentive Stock Options, non-Incentive
Stock Options, Restricted Stock, or SARs, and the amount of Stock subject to
the Plan may be increased from time to time in accordance with Article 10,
provided that the total number of shares of Stock issuable pursuant to
Incentive Stock Options may not be increased to more than 2,300,000 (other than
pursuant to anti-dilution adjustments and the annual increase provided above)
without shareholder approval. Shares subject to an Option or issued as an Award
may be either authorized and unissued shares or shares issued and later
acquired by the Company. The shares covered by any unexercised portion of an
Option that has terminated for any reason (except as set forth in the following
paragraph), or any forfeited portion of an Award, may again be optioned or
awarded under the Plan, and such shares shall not be considered as having been
optioned or issued in computing the number of shares of Stock remaining
available for option or award hereunder.
If Options are issued in respect of options to acquire stock of any
entity acquired, by merger or otherwise, by the Company (or any Subsidiary of
the Company), to the extent that such issuance shall not be inconsistent with
the terms, limitations and conditions of Code section 422 or Rule 16b-3 under
the Exchange Act, the aggregate number of shares of Stock for which Options may
be granted hereunder shall automatically be increased by the number of shares
subject to the Options so issued; provided, however, that the aggregate number
of shares of Stock for which Options may be granted hereunder shall
automatically be decreased by the number of shares covered by any unexercised
portion of an Option so issued that has terminated for any reason, and the
shares subject to any such unexercised portion may not be optioned to any other
person.
5.2 Antidilution.
a. If (x) the outstanding shares of Stock are changed into
or exchanged for a different number or kind of shares or other
securities of the Company by reason of merger, consolidation,
reorganization, recapitalization, reclassification, combination or
exchange of shares, or stock split or stock dividend, (y) any
spin-off, spin-out or other distribution of assets materially affects
the price of the Company's stock, or (z) there is
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any assumption and conversion to the Plan by the Company of an
acquired company's outstanding option grants, then:
(i) the aggregate number and kind of shares of Stock for
which Options or Awards may be granted hereunder
shall be adjusted proportionately by the Committee;
and
(ii) the rights of Optionees (concerning the number of
shares subject to Options and the Exercise Price)
under outstanding Options and the rights of the
holders of Awards (concerning the terms and
conditions of the lapse of any then-remaining
restrictions), shall be adjusted proportionately by
the Committee.
b. If the Company shall be a party to any reorganization
in which it does not survive, involving merger, consolidation, or
acquisition of the stock or substantially all the assets of the
Company, the Committee, in its discretion, may:
(i) notwithstanding other provisions of this Plan,
declare that all Options granted under the Plan
shall become exercisable immediately notwithstanding
the provisions of the respective Stock Option
Agreements regarding exercisability, that all such
Options shall terminate 30 days after the Committee
gives written notice of the immediate right to
exercise all such Options and of the decision to
terminate all Options not exercised within such
30-day period, and that all then-remaining
restrictions pertaining to Awards under the Plan
shall immediately lapse; and/or
(ii) notify all Grantees that all Options or Awards
granted under the Plan shall be assumed by the
successor corporation or substituted on an equitable
basis with options or restricted stock issued by
such successor corporation.
c. If the Company is to be liquidated or dissolved in
connection with a reorganization described in Section 5.2(b), the
provisions of such Section shall apply. In all other instances, the
adoption of a plan of dissolution or liquidation of the Company shall,
notwithstanding other provisions hereof, cause all then-remaining
restrictions pertaining to Awards under the Plan to lapse, and shall
cause every Option outstanding under the Plan to terminate to the
extent not exercised prior to the adoption of the plan of dissolution
or liquidation by the shareholders, provided that, notwithstanding
other provisions hereof, the Committee may declare all Options granted
under the Plan to be exercisable at any time on or before the fifth
business day following such adoption notwithstanding the provisions of
the respective Stock Option Agreements regarding exercisability.
d. The adjustments described in paragraphs (a) through (c)
of this Section 5.2, and the manner of their application, shall be
determined solely by the Committee, and any such adjustment may
provide for the elimination of fractional share interests; provided,
however, that any adjustment made by the Board or the Committee shall
be made in a
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manner that will not cause an Incentive Stock Option to be other than
an Incentive Stock Option under applicable statutory and regulatory
provisions. The adjustments required under this Article V shall apply
to any successors of the Company and shall be made regardless of the
number or type of successive events requiring such adjustments.
ARTICLE 6
OPTIONS
6.1 Types of Options Granted. The Committee may, under this Plan,
grant either Incentive Stock Options or Options which do not qualify as
Incentive Stock Options. Within the limitations provided in this Plan, both
types of Options may be granted to the same person at the same time, or at
different times, under different terms and conditions, as long as the terms and
conditions of each Option are consistent with the provisions of the Plan.
Without limitation of the foregoing, Options may be granted subject to
conditions based on the financial performance of the Company or any other
factor the Committee deems relevant.
6.2 Option Grant and Agreement. Each Option granted hereunder
shall be evidenced by minutes of a meeting or the written consent of the
Committee and by a written Stock Option Agreement executed by the Company and
the Optionee. The terms of the Option, including the Option's duration, time or
times of exercise, exercise price, whether the Option is intended to be an
Incentive Stock Option, and whether the Option is to be accompanied by the right
to receive a Reload Option, shall be stated in the Stock Option Agreement. No
Incentive Stock Option may be granted more than ten years after the earlier to
occur of the effective date of the Plan or the date the Plan is approved by the
Company's shareholders.
Separate Stock Option Agreements may be used for Options intended to
be Incentive Stock Options and those not so intended, but any failure to use
such separate agreements shall not invalidate, or otherwise adversely affect
the Optionee's interest in, the Options evidenced thereby.
6.3 Optionee Limitations. The Committee shall not grant an
Incentive Stock Option to any person who, at the time the Incentive Stock Option
is granted:
a. is not an Employee of the Company or any of its
Subsidiaries; or
b. owns or is considered to own stock possessing at least
10% of the total combined voting power of all classes of stock of the
Company or any of its Parent or Subsidiary corporations; provided,
however, that this limitation shall not apply if at the time an
Incentive Stock Option is granted the Exercise Price is at least 110%
of the Fair Market Value of the Stock subject to such Option and such
Option by its terms would not be exercisable after five years from the
date on which the Option is granted. For the purpose of this
subsection (b), a person shall be considered to own: (i) the stock
owned, directly or indirectly, by or for his or her brothers and
sisters (whether by whole or half blood), spouse, ancestors and lineal
descendants; (ii) the stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust in proportion to such
person's stock interest, partnership interest or beneficial interest
therein; and (iii) the stock
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which such person may purchase under any outstanding options of the
Employer or of any Parent or Subsidiary of the Employer.
6.4 $100,000 and Section 162(m) Limitations. Except as provided
below, the Committee shall not grant an Incentive Stock Option to, or modify
the exercise provisions of outstanding Incentive Stock Options held by any
person who, at the time the Incentive Stock Option is granted (or modified),
would thereby receive or hold any Incentive Stock Options of the Employer and
any Parent or Subsidiary of the Employer, such that the aggregate Fair Market
Value (determined as of the respective dates of grant or modification of each
option) of the stock with respect to which such Incentive Stock Options are
exercisable for the first time during any calendar year is in excess of
$100,000 (or such other limit as may be prescribed by the Code from time to
time); provided that the foregoing restriction on modification of outstanding
Incentive Stock Options shall not preclude the Committee from modifying an
outstanding Incentive Stock Option if, as a result of such modification and
with the consent of the Optionee, such Option no longer constitutes an
Incentive Stock Option; and provided that, if the $100,000 limitation (or such
other limitation prescribed by the Code) described in this Section 6.4 is
exceeded, the Incentive Stock Option, the granting or modification of which
resulted in the exceeding of such limit, shall be treated as an Incentive Stock
Option up to the limitation and the excess shall be treated as an Option not
qualifying as an Incentive Stock Option. Furthermore, not more than 425,000
shares of Stock may be made subject to Options to any individual in the
aggregate in any one fiscal year of the Company, such limitation to be applied
in a manner consistent with the requirements of, and only to the extent
required for compliance with, the exclusion from the limitation on
deductibility of compensation under Section 162(m) of the Code.
6.5 Exercise Price. The Exercise Price of the Stock subject to
each Option shall be determined by the Committee. Subject to the provisions of
Section 6.3(b) hereof, the Exercise Price of an Incentive Stock Option shall
not be less than the Fair Market Value of the Stock as of the date the Option
is granted (or in the case of an Incentive Stock Option that is subsequently
modified, on the date of such modification).
6.6 Exercise Period. The period for the exercise of each Option
granted hereunder shall be determined by the Committee, but the Stock Option
Agreement with respect to each Option intended to be an Incentive Stock Option
shall provide that such Option shall not be exercisable after the expiration of
ten years from the date of grant (or modification) of the Option.
6.7 Option Exercise.
a. Unless otherwise provided in the Stock Option Agreement
or Section 6.6 of this Plan, an Option may be exercised at any time or
from time to time during the term of the Option as to any or all full
shares which have become Purchasable under the provisions of the
Option, but not at any time as to fewer than 100 shares unless the
remaining shares that have become so Purchasable are fewer than 100
shares. The Committee shall have the authority to prescribe in any
Stock Option Agreement that the Option may be exercised only in
accordance with a vesting schedule during the term of the Option.
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b. An Option shall be exercised by (i) delivery to the
Company at its principal office a written notice of exercise with
respect to a specified number of shares of Stock and (ii) payment to
the Company at that office of the full amount of the Exercise Price
for such number of shares in accordance with Section 6.7(c). If
requested by an Optionee, an Option may be exercised with the
involvement of a stockbroker in accordance with the federal margin
rules set forth in Regulation T (in which case the certificates
representing the underlying shares will be delivered by the Company
directly to the stockbroker).
c. The Exercise Price is to be paid in full in cash upon
the exercise of the Option, and the Company shall not be required to
deliver certificates for the shares purchased until such payment has
been made; provided, however, that in lieu of cash, in the Company's
discretion all or any portion of the Exercise Price may be paid by
tendering to the Company shares of Stock duly endorsed for transfer
and owned by the Optionee, or by authorization to the Company to
withhold shares of Stock otherwise issuable upon exercise of the
Option, in each case to be credited against the Exercise Price at the
Fair Market Value of such shares on the date of exercise (however, no
fractional shares may be so transferred, and the Company shall not be
obligated to make any cash payments in consideration of any excess of
the aggregate Fair Market Value of shares transferred over the
aggregate Exercise Price); provided further, that the Board may
provide in a Stock Option Agreement (or may otherwise determine in its
sole discretion at the time of exercise) that, in lieu of cash or
shares, all or a portion of the Exercise Price may be paid by the
Optionee's execution of a recourse note equal to the Exercise Price or
relevant portion thereof, subject to compliance with applicable state
and federal laws, rules and regulations. Notwithstanding the above,
the Company shall not be obligated to accept tender of shares of Stock
as payment of the Exercise Price if doing so would result in a charge
to the Company's earnings for financial reporting purposes.
d. In addition to and at the time of payment of the
Exercise Price, the Optionee shall pay to the Company in cash the full
amount of any federal, state, and local income, employment, or other
withholding taxes applicable to the taxable income of such Optionee
resulting from such exercise; provided, however, that in the
discretion of the Committee any Stock Option Agreement may provide
that all or any portion of such tax obligations, together with
additional taxes not exceeding the actual additional taxes to be owed
by the Optionee as a result of such exercise, may, upon the
irrevocable election of the Optionee, be paid by tendering to the
Company whole shares of Stock duly endorsed for transfer and owned by
the Optionee, or by authorization to the Company to withhold shares of
Stock otherwise issuable upon exercise of the Option, in either case
in that number of shares having a Fair Market Value on the date of
exercise equal to the amount of such taxes thereby being paid, and
subject to such restrictions as to the approval and timing of any such
election as the Committee may from time to time determine to be
necessary or appropriate to satisfy the conditions of the exemption
set forth in Rule 16b-3 under the Exchange Act, if such rule is
applicable.
e. The holder of an Option shall not have any of the
rights of a shareholder with respect to the shares of Stock subject to
the Option until such shares have been issued and transferred to the
Optionee upon the exercise of the Option.
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6.8 Reload Options.
a. The Committee may specify in a Stock Option Agreement
(or may otherwise determine in its sole discretion) that a Reload
Option shall be granted, without further action of the Committee, (i)
to an Optionee who exercises an Option (including a Reload Option) by
surrendering shares of Stock in payment of amounts specified in
Sections 6.7(c) or 6.7(d) of this Plan; (ii) for the same number of
shares as are surrendered to pay such amounts; (iii) as of the date of
such payment and at an Exercise Price equal to the Fair Market Value
of the Stock on such date; and (iv) otherwise on the same terms and
conditions as the Option whose exercise has occasioned such payment,
except as provided below and subject to such other contingencies,
conditions, or other terms as the Committee shall specify at the time
such exercised Option is granted; provided, however, that the
Committee may require that the shares surrendered in payment as
provided above must have been held by the Optionee for at least six
months prior to such surrender.
b. Unless provided otherwise in the Stock Option
Agreement, a Reload Option may not be exercised by an Optionee (i)
prior to the end of a one-year period from the date that the Reload
Option is granted, and (ii) unless the Optionee retains beneficial
ownership of the shares of Stock issued to such Optionee upon exercise
of the Option referred to above in Section 6.8(a)(i) for a period of
one year from the date of such exercise.
6.9 Nontransferability of Option. Other than as provided below,
no Option shall be transferable by an Optionee other than by will or the laws
of descent and distribution or, in the case of non-Incentive Stock Options,
pursuant to a Qualified Domestic Relations Order, and, during the lifetime of
an Optionee, Options shall be exercisable only by such Optionee (or by such
Optionee's guardian or legal representative, should one be appointed). However,
a Non-Incentive Stock Option may, in connection with the Optionee's estate
plan, be assigned in whole or in part during Optionee's lifetime to one or more
members of the Optionee's immediate family or to a trust established for the
exclusive benefit of one or more such family members. The assigned portion
shall be exercisable only by the person or persons who acquire a proprietary
interest in the Option pursuant to such assignment. The terms applicable to the
assigned portion shall be the same as those in effect for this Option
immediately prior to such assignment and shall be set forth in such documents
issued to the assignee as the Committee may deem appropriate.
6.10 Termination of Employment or Service. The Committee shall
have the power to specify, with respect to the Options granted to a particular
Optionee, the effect upon such Optionee's right to exercise an Option of
termination of such Optionee's employment or service under various
circumstances, which effect may include immediate or deferred termination of
such Optionee's rights under an Option, or acceleration of the date at which an
Option may be exercised in full; provided, however, that in no event may an
Incentive Stock Option be exercised after the expiration of ten years from the
date of its grant.
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6.11 Employment Rights. Nothing in the Plan or in any Stock Option
Agreement shall confer on any person any right to continue in the employ of the
Company or any of its Subsidiaries, or shall interfere in any way with the
right of the Company or any of its Subsidiaries to terminate such person's
employment at any time.
6.12 Certain Successor Options. To the extent not inconsistent
with the terms, limitations and conditions of Code section 422 and any
regulations promulgated with respect thereto, an Option issued in respect of an
option held by an employee to acquire stock of any entity acquired, by merger
or otherwise, by the Company (or any Subsidiary of the Company) may contain
terms that differ from those stated in this Article 6, but solely to the extent
necessary to preserve for any such employee the rights and benefits contained
in such predecessor option, or to satisfy the requirements of Code section
424(a).
6.13 Effect of a Corporate Transaction. Unless otherwise decided
by the Board or the Committee at least 10 days prior to the effective time of a
Corporate Transaction, all Options, to the extent outstanding at the time of a
Corporate Transaction but not otherwise fully exercisable, shall automatically
accelerate so that the Options shall, immediately prior to the effective date
of the Corporate Transaction, become exercisable for all shares at the time
subject to such Options and may be exercised for any or all of those shares as
fully vested shares of Stock.
ARTICLE 7
RESTRICTED STOCK
7.1 Awards of Restricted Stock. The Committee may grant Awards of
Restricted Stock, which shall be governed by a Restriction Agreement between
the Company and the Grantee. Each Restriction Agreement shall contain such
restrictions, terms, and conditions as the Committee may, in its discretion,
determine, and may require that an appropriate legend be placed on the
certificates evidencing the subject Restricted Stock. Shares of Restricted
Stock granted pursuant to an Award hereunder shall be issued in the name of the
Grantee as soon as reasonably practicable after the Award is granted, provided
that the Grantee has executed the Restriction Agreement governing the Award,
the appropriate blank stock powers and, in the discretion of the Committee, an
escrow agreement and any other documents which the Committee may require as a
condition to the issuance of such Shares. If a Grantee shall fail to execute
the foregoing documents within any time period prescribed by the Committee, the
Award shall be void. At the discretion of the Committee, Shares issued in
connection with an Award shall be deposited together with the stock powers with
an escrow agent designated by the Committee. Unless the Committee determines
otherwise and as set forth in the Restriction Agreement, upon delivery of the
Shares to the escrow agent, the Grantee shall have all of the rights of a
shareholder with respect to such Shares, including the right to vote the Shares
and to receive all dividends or other distributions paid or made with respect
to the Shares.
7.2 Non-Transferability. Until any restrictions upon Restricted
Stock awarded to a Grantee shall have lapsed in a manner set forth in Section
7.3, such shares of Restricted Stock shall not be transferable other than by
will or the laws of descent and distribution, or pursuant to a Qualified
Domestic Relations Order, nor shall they be delivered to the Grantee.
13
<PAGE> 17
7.3 Lapse of Restrictions. Restrictions upon Restricted Stock
awarded hereunder shall lapse at such time or times (but, with respect to any
award to a Grantee who is also a Section 16 Insider, not less than six months
after the date of the Award) and on such terms and conditions as the Committee
may, in its discretion, determine at the time the Award is granted or
thereafter.
7.4 Termination of Employment. The Committee shall have the power
to specify, with respect to each Award granted to any particular Grantee, the
effect upon such Grantee's rights with respect to such Restricted Stock of the
termination of such Grantee's employment under various circumstances, which
effect may include immediate or deferred forfeiture of such Restricted Stock or
acceleration of the date at which any then-remaining restrictions shall lapse.
7.5 Treatment of Dividends. At the time an Award of Restricted
Stock is made, the Committee may, in its discretion, determine that the payment
to the Grantee of any dividends, or a specified portion thereof, declared or
paid on such Restricted Stock shall be (i) deferred until the lapsing of the
relevant restrictions and (ii) held by the Company for the account of the
Grantee until such lapsing. In the event of such deferral, there shall be
credited at the end of each year (or portion thereof) interest on the amount of
the account at the beginning of the year at a rate per annum determined by the
Committee. Payment of deferred dividends, together with interest thereon, shall
be made upon the lapsing of restrictions imposed on such Restricted Stock, and
any dividends deferred (together with any interest thereon) in respect of
Restricted Stock shall be forfeited upon any forfeiture of such Restricted
Stock.
7.6 Delivery of Shares. Except as provided otherwise in Article 9
below, within a reasonable period of time following the lapse of the
restrictions on shares of Restricted Stock, the Committee shall cause a stock
certificate to be delivered to the Grantee with respect to such shares and such
shares shall be free of all restrictions hereunder.
ARTICLE 8
STOCK APPRECIATION RIGHTS
8.1 SAR Grants. The Committee, in its sole discretion, may grant
to any Grantee a SAR. The Committee may impose such conditions or restrictions
on the exercise of any SAR as it may deem appropriate, including, without
limitation, restricting the time of exercise of the SAR to specified periods as
may be necessary to satisfy the requirements of Rule 16b-3.
8.2 Determination of Price. The SAR Price shall be established by
the Committee in its sole discretion. The SAR Price shall not be less than 100%
of Fair Market Value of the Stock on the date the SAR is granted for a SAR
issued in tandem with an Incentive Stock Option.
8.3 Exercise of a SAR. Upon exercise of a SAR, the Grantee shall
be entitled, subject to the terms and conditions of this Plan and the
Agreement, to receive the excess for each share of Stock being exercised under
the SAR of (i) the Fair Market Value of such share of Stock on the date of
exercise over (ii) the SAR Price for such share of Stock.
14
<PAGE> 18
8.4 Payment for a SAR. At the sole discretion of the Committee,
the payment of such excess shall be made in (i) cash, (ii) shares of Stock, or
(iii) a combination of both. Shares of Stock used for this payment shall be
valued at their Fair Market Value on the date of exercise of the applicable
SAR.
8.5 Status of a SAR under the Plan. Shares of Stock subject to an
Award of a SAR shall be considered shares of Stock which may be issued under
the Plan for purposes of Section 5.1 of this Plan, unless the Agreement making
the Award of the SAR provides that the exercise of such SAR results in the
termination of an unexercised Option for the same number of shares of Stock.
8.6 Termination of SARs. A SAR may be terminated as follows:
a. During the period of continuous employment with the
Company, Parent or Subsidiary, a SAR will be terminated only if it has
been fully exercised or it has expired by its terms.
b. Upon termination of employment, the SAR will terminate
upon the earliest of (i) the full exercise of the SAR; (ii) the
expiration of the SAR by its terms; and (iii) not more than three
months following the date of employment termination; provided,
however, should termination of employment (A) result from the death or
Permanent and Total Disability of the Grantee, the period referenced
in clause (iii) hereof shall be one year or (B) be for Cause, the SAR
will terminate on the date of employment termination. For purposes of
the Plan, a leave of absence approved by the Company shall not be
deemed to be termination of employment unless otherwise provided in
the Agreement or by the Company on the date of the leave of absence.
c. Subject to the terms of the Agreement with the Grantee,
if a Grantee shall die or become subject to a Permanent and Total
Disability prior to the termination of employment with the Company,
Parent or Subsidiary and prior to the termination of a SAR, such SAR
may be exercised to the extent that the Grantee shall have been
entitled to exercise it at the time of death or disability, as the
case may be, by the Grantee, the estate of the Grantee or the person
or persons to whom the SAR may have been transferred by will or by the
laws of descent and distribution.
d. Except as otherwise expressly provided in the Agreement
with the Grantee, in no event will the continuation of the term of a
SAR beyond the date of termination of employment allow the Employee,
or the Employee's beneficiaries or heirs, to accrue additional rights
under the Plan, have additional SARs available for exercise, or
receive a higher benefit than the benefit payable as if the SAR had
been exercised on the date of employment termination.
8.7 No Shareholder Rights. The Grantee shall have no rights as a
shareholder with respect to a SAR. In addition, no adjustment shall be made for
dividends (ordinary or
15
<PAGE> 19
extraordinary, whether in cash, securities or other property) or distributions
or rights except as provided in Section 5.2 of this Plan.
ARTICLE 9
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate
for shares of Stock purchased upon the exercise of any Option granted hereunder
or any portion thereof, or deliver any certificate for shares of Restricted
Stock granted hereunder, prior to fulfillment of all of the following
conditions:
a. The admission of such shares to listing on all stock
exchanges on which the Stock is then listed;
b. The completion of any registration or other
qualification of such shares which the Committee shall deem necessary
or advisable under any federal or state law or under the rulings or
regulations of the SEC or any other governmental regulatory body;
c. The obtaining of any approval or other clearance from
any federal or state governmental agency or body which the Committee
shall determine to be necessary or advisable; and
d. The lapse of such reasonable period of time following
the exercise of the Option as the Board from time to time may
establish for reasons of administrative convenience.
Stock certificates issued and delivered to Grantees shall bear such
restrictive legends as the Company shall deem necessary or advisable pursuant
to applicable federal and state securities laws. The inability of the Company
to obtain approval from any regulatory body having authority deemed by the
Company to be necessary to the lawful issuance and sale of any Stock pursuant
to Options shall relieve the Company of any liability with respect to the
non-issuance or sale of the Stock as to which such approval shall not have been
obtained. The Company shall, however, use its best efforts to obtain all such
approvals.
ARTICLE 10
TERMINATION AND AMENDMENT
10.1 Termination and Amendment. The Board may at any time terminate
the Plan; provided, however, that the Board (unless its actions are approved or
ratified by the shareholders of the Company within twelve months of the date
that the Board amends the Plan) may not amend the Plan to:
a. Increase the total number of shares of Stock issuable
pursuant to Incentive Stock Options under the Plan, except as
contemplated in Section 5.2; or
16
<PAGE> 20
b. Change the class of employees eligible to receive
Incentive Stock Options that may participate in the Plan.
10.2 Effect on Grantee's Rights. No termination, amendment, or
modification of the Plan shall affect adversely a Grantee's rights under a
Stock Option Agreement or Restriction Agreement without the consent of the
Grantee or his legal representative.
ARTICLE 11
RELATIONSHIP TO OTHER COMPENSATION PLANS
The adoption of the Plan shall not affect any other stock option,
incentive, or other compensation plans in effect for the Company or any of its
Subsidiaries; nor shall the adoption of the Plan preclude the Company or any of
its Subsidiaries from establishing any other form of incentive or other
compensation plan for employees or Directors of the Company or any of its
Subsidiaries.
ARTICLE 12
MISCELLANEOUS
12.1 Replacement or Amended Grants. At the sole discretion of the
Committee, and subject to the terms of the Plan, the Committee may modify
outstanding Options or Awards or accept the surrender of outstanding Options or
Awards and grant new Options or Awards in substitution for them, provided that
no modification of an Option or Award shall adversely affect a Grantee's rights
under a Stock Option Agreement or Restriction Agreement without the consent of
the Grantee or his legal representative.
12.2 Forfeiture for Competition. If a Grantee provides services to
a competitor of the Company, a Parent or any Subsidiaries, whether as an
employee, officer, director, independent contractor, consultant, agent, or
otherwise, such services being of a nature that can reasonably be expected to
involve the skills and experience used or developed by the Grantee while an
Employee, then that Grantee's rights under any Options outstanding hereunder
shall be forfeited and terminated, and any shares of Restricted Stock held by
such Grantee subject to remaining restrictions shall be forfeited, subject in
each case to a determination to the contrary by the Committee.
12.3 Leave of Absence. Unless provided otherwise in a particular
Stock Option Agreement, the following provisions shall apply upon an Optionee's
commencement of an authorized leave of absence:
a. The exercise schedule in effect for such Option shall
be frozen as of the first day of the authorized leave, and the Option
shall not become exercisable for any additional installments of shares
of Stock during the period Optionee remains on such leave.
17
<PAGE> 21
b. Should Optionee resume active Employee status within 60
days after the start date of the authorized leave, Optionee shall, for
purposes of the applicable exercise schedule, receive service credit
for the entire period of such leave. If Optionee does not resume
active Employee status within such 60-day period, then no credit shall
be given for the entire period of such leave.
c. If the Option is an Incentive Stock Option, then the
following shall also apply:
If the leave of absence continues for more than three
months, then the Option shall automatically convert to a Non-Incentive
Stock Option under the Federal tax laws upon the expiration of such
three-month period, unless the Optionee's reemployment rights are
guaranteed by statute or written agreement. Following any such
conversion of the Option, all subsequent exercises of the Option,
whether effected before or after Optionee's return to active Employee
status, shall result in an immediate taxable event, and the Company
shall be required to collect from Optionee the Federal, state and
local income and employment withholding taxes applicable to such
exercise.
d. In no event shall the Option become exercisable for any
additional shares or otherwise remain outstanding if the Optionee does
not resume Employee status prior to the Expiration Date of the option
term.
12.4 Plan Binding on Successors. The Plan shall be binding upon
the successors and assigns of the Company.
12.5 Singular, Plural; Gender. Whenever used in this Plan, nouns
in the singular shall include the plural, and the masculine pronoun shall
include the feminine gender.
12.6 Headings, etc., No Part of Plan. Headings of Articles and
Sections of this Plan are inserted for convenience and reference; they do not
constitute part of the Plan.
12.7 Section 16 Compliance. With respect to Section 16 Insiders
and "highly-compensated" persons under Section 162(m) of the Code, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act and with Section 162(m) of the
Code. To the extent any provision of the Plan or action by the Committee fails
to so comply, it shall be deemed void to the extent permitted by law and deemed
advisable by the Committee. In addition, if necessary to comply with Rule 16b-3
with respect to any grant of an Option hereunder, and in addition to any other
vesting or holding period specified hereunder or in an applicable Stock Option
Agreement, any Section 16 Insider acquiring an Option shall be required to hold
either the Option or the underlying shares of Stock obtained upon exercise of
the Option for a minimum of six months.
18
<PAGE> 22
[COMSTAR LOGO] STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT (this "Agreement"), entered into as of this the
___ day of ___, 1999, by and between comstar.net, inc., a Georgia corporation
(the "Company"), and ___ (the "Optionee").
WHEREAS, effective as of March 1, 1999, the Board of Directors of the
Company adopted a stock option plan that was subsequently amended by the Board
on September 1, 1999, known as the "comstar.net, inc. Amended and Restated 1999
Stock Option and Incentive Plan" (the "Plan"), and recommended that the Plan be
approved by the Company's shareholders; and
WHEREAS, the Committee has granted the Optionee the right and option (the
"Option") to purchase the number of shares of the Company's common stock (the
"Stock") as set forth below, and in consideration of the granting of that
Option the Optionee intends to continue to perform services as a director,
consultant, advisor, officer or employee of the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan.
NOW, THEREFORE, in consideration of the above and the covenants contained
herein, the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the provisions
of the Plan and the terms and definitions of the Plan are incorporated
herein by reference and made a part hereof. A copy of the Plan has been
delivered to, and receipt is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions, limitations and
conditions stated herein, the Company hereby evidences its grant to the
Optionee of the Option to purchase all or any part of the number of shares
of Stock, set forth on Schedule A attached hereto and incorporated herein
by reference. The Option shall be exercisable in the amounts and at the
time specified on Schedule A. The Option shall expire and shall not be
exercisable on the date specified on Schedule A or on such earlier date as
determined pursuant to Section 8, 9, or 10 hereof. Schedule A states
whether the Option is intended to be an Incentive Stock Option.
3. Purchase Price. The price per share to be paid by the Optionee for the
shares subject to this Option (the "Exercise Price") shall be as specified
on Schedule A, which price shall be an amount not less than the Fair
Market Value of a share of Stock as of the Date of Grant (as defined in
Section 11 below) if the Option is an Incentive Stock Option.
4. Exercise Terms. The Optionee must exercise the Option for at least the
lesser of 100 shares or the number of shares of Stock that the Optionee is
eligible to purchase in accordance with the terms hereof and the Plan as
to which the Option remains unexercised (such shares being called
"Purchasable" herein). In the event this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to
its expiration, the shares of Stock with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No portion of this Option shall be transferable
by any Optionee other than by will or the laws of descent and distribution
or, in the case of non-Incentive Stock Options, pursuant to a Qualified
Domestic Relations Order, and no Option shall be transferable by an
Optionee who is an officer, director or holder of 10% or more of any class
of the Company's securities who is or would be required to file reports
pursuant to Section 16 of the Securities Exchange Act of 1934 (a "Section
16 Insider") prior to shareholder approval of the Plan. During the
lifetime of an Optionee, Options shall be exercisable only by such
Optionee (or by such Optionee's guardian or legal representative, should
one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the
Notice of Exercise attached hereto as Schedule B) signed by the Optionee,
or by the such administrators, executors or personal representatives, and
delivered or mailed to the Company as specified is Section 14 hereof to
the attention of the President or such other officer as the Company may
designate. Any such notice shall (a) specify the number of shares of Stock
which the Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, then elects to purchase hereunder;
(b) contain such information as may be reasonably required pursuant to
Section 12 hereof; and (c) be accompanied by (i) a certified or cashier's
check payable to the Company in payment of the total Exercise Price (as
defined on Schedule A hereto) applicable to such shares as provided
herein; (ii) shares of Stock owned by the Optionee and duly endorsed or
accompanied by stock transfer powers having a Fair Market Value equal to
the total Exercise Price applicable to such shares purchased hereunder; or
(iii) a certified or cashier's check accompanied by the number of shares
of
<PAGE> 23
Stock whose Fair Market Value when added to the amount of the check equals
the total Exercise Price applicable to such shares purchased hereunder.
Upon receipt of any such notice and accompanying payment, and subject to
the terms hereof, the Company agrees to issue to the Optionee or the
Optionee's administrators, executors or personal representatives, as the
case may be, stock certificates for the number of shares specified in such
notice registered in the name of the person exercising this Option.
7. Adjustment in Option. The number of shares subject to this Option, the
Exercise Price and other matters are subject to adjustment during the term
of this Option in accordance with the Plan.
8. Termination of Employment or Other Relationship.
(a) Except as otherwise specified in Schedule A hereto, in the event of
the termination of the Optionee's employment or other relationship
with the Company or any of its subsidiaries, other than a termination
that is either (i) for cause; (ii) voluntary on the part of the
Optionee and without written consent of the Company; or (iii) for
reasons of death or disability or retirement, the Optionee may
exercise this Option at any time within 90 days after such
termination to the extent of the number of shares which are
Purchasable hereunder at the date of such termination.
(b) Except as specified in Schedule A attached hereto, in the event of a
termination of the Optionee's employment or other relationship with
the Company that is either (i) for cause or (ii) voluntary on the
part of the Optionee and without the written consent of the Company,
this Option, to the extent not previously exercised, shall terminate
immediately and shall not thereafter be or become exercisable.
(c) Unless and to the extent otherwise provided in Schedule A hereto, in
the event of the retirement of the Optionee at the normal retirement
date as prescribed from time to time by the Company or any
subsidiary, the Optionee shall continue to have the right to exercise
any Options for shares which were Purchasable at the date of the
Optionee's retirement (provided that, on the date which is three
months after the date of retirement, the Options will become void and
unexercisable). This Option does not represent an employment contract
and does not confer upon the Optionee any right with respect to the
status or continuance of employment or other relationship by the
Company or by any of its subsidiaries either during or after the term
hereof. This Option shall not be affected by any change of employment
so long as the Optionee continues to be an employee of the Company or
one of its subsidiaries.
9. Disabled Optionee. In the event of termination of employment or other
relationship with the Company because of the Optionee's becoming subject
to a Permanent or Total Disability, the Optionee (or his or her personal
representative) may exercise this Option, within a period ending on the
earlier of (a) the last day of the one year period following the
Optionee's death or (b) the expiration date of this Option, to the extent
of the number of shares which were Purchasable hereunder at the date of
such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A with
respect to the rights of the Optionee upon termination of employment or
other relationship with the Company under Section 8(a) above, in the event
of the Optionee's death while employed by or performing services for the
Company or any of its subsidiaries or within three months after a
termination of such employment or relationship (if such termination was
neither (i) for cause or (ii) voluntary on the part of the Optionee and
without the written consent of the Company), the appropriate portion of
this Option is transferred in accordance with Section 5 hereof many
exercise this Option at any time within a period ending on the earlier of
(a) the last day of the one year period following the Optionee's death or
(b) the expiration date of this Option. If the Optionee was an employee of
or was providing services to the Company at the time of death, this Option
may be so exercised to the extent of the number of shares that were
Purchasable hereunder at the date of death. If the Optionee's employment
or other relationship with the Company terminated prior to his or her
death, this Option may be exercised only to the extent of the number of
shares covered by this Option which were Purchasable hereunder at the date
of such termination.
11. Date of Grant. This Option was granted by the Board of Directors of the
Company on the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges that the
issuance of capital stock of the Company is subject to limitations imposed
by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this
Option that would cause the Company to violate the law or any rule,
regulation, order
<PAGE> 24
or consent decree of any regulatory authority (including without
limitation to the Securities and Exchange Commission) having jurisdiction
over the affairs of the Company. The Optionee agrees that he or she will
provide the Company with such information as is reasonably requested by
the Company or its counsel to determine whether the issuance of Stock
complies with the provisions described by this Section 12.
13. Restriction on Disposition of Shares. The shares purchased pursuant to the
exercise of an Incentive Stock Option shall not be transferred by the
Optionee except pursuant to the Optionee's will, or the laws of descent
and distribution, until such date which is the later of two years after
the grant of such Incentive Stock Option or one year after the transfer of
the shares to the Optionee pursuant to the exercise of such Incentive
Stock Option. The shares of Stock purchased pursuant to the exercise of
this Option shall not be sold, conveyed or otherwise transferred except
pursuant to and in compliance with an effective registration statement
applicable to such shares or a valid exemption from registration (with
proof of such registration or exemption being delivered to and
satisfactory to the Company, in its sole discretion).
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and their
representatives (including in bankruptcy), heirs, successors and
assigns.
(b) This Agreement is executed and delivered in, and shall be governed by
the laws of the State of Georgia.
(c) Any requests or notices to be given hereunder shall be deemed given,
and any elections or exercises to be made or accomplished shall be
deemed made or accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit thereof in the
United States mail, registered, return receipt requested and postage
prepaid, addressed, if to the Optionee, at the address set forth
below and, if to the Company, to the executive offices of the Company
at 2812 Spring Street, Suite 210, Atlanta, GA 30339.
(d) This Agreement may not be modified except in writing executed by each
of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Stock
Option Agreement under seal, all as of the day and year first above written.
comstar.net, inc.
Accepted By:
- ------------------------------------------------------------------------------
Signature
James C. Howell
- ------------------------------------------------------------------------------
Name
CEO
- ------------------------------------------------------------------------------
Title
OPTIONEE
Accepted By:
- ------------------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City, State Zip
ATTEST:
- ------------------------------------------------------------------------------
Secretary or Assistant Secretary
Edward N. Landa
- ------------------------------------------------------------------------------
Name
[SEAL]
<PAGE> 25
[COMSTAR LOGO] SCHEDULE A TO THE
STOCK OPTION AGREEMENT
This Schedule A to the Stock Option Agreement (this "Agreement") is entered
into as of this ____ day of _____ , 1999, by and between comstar.net, inc.,
and ____.
1. Number of Shares Subject to Option: ___ shares.
2. This Option (check one) [ ] is [ ] is not an Incentive Stock Option.
3. Option Exercise Price: $____ per share.
4. Date of Grant: ____.
5. Option Vesting Schedule:
Check One:
[ ] Options are exercisable with respect to all shares on or after
the date hereof
[ ] Options are exercisable with respect to the number of shares
indicated below on or after the date indicated next to the number
of shares.
Number of Shares Vesting Date
6. Option Exercise Period:
Check One:
[ ] All options expire and are void unless exercised on or before ___.
[ ] Options expire and are void unless exercised on or before the
date indicated next to the number of shares:
Number of Shares Expiration Date
7. Effect of Termination of Employment on Optionee (if different from
that set forth in Sections 8, 9 and 10 of the Stock Option
Agreement).
Not Applicable.
<PAGE> 26
[COMSTAR LOGO] SCHEDULE B TO THE
STOCK OPTION AGREEMENT
NOTICE OF EXERCISE
The undersigned hereby notifies comstar.net, inc., (the "Company") of
this election to exercise the undersigned's stock option to
purchase ____ shares of the Company's common stock (the "Common
Stock"), pursuant to the Stock Option Agreement (the "Agreement")
between the undersigned and the Company dated ____ . Accompanying this
Notice is (1) certified or cashier's check in the amount of $____
payable to the Company, and/or (2)____ shares of the Company's Common
Stock presently owned by the undersigned and duly endorsed or
accompanied by stock transfer powers, having an aggregate Fair Market
Value (as defined in the Plan referenced in the Agreement) as of the
date hereof of $ , such amounts being equal, in the aggregate, to the
purchase price per share set forth in Section 3 of the Agreement
multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to the Plan).
IN WITNESS WHEREOF, the undersigned has set his hand and seal, this
____ day of ___,___.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
---------------------------------------
Signature
---------------------------------------
Name
---------------------------------------
Position (if other than Optionee)
<PAGE> 1
EXHIBIT 10.2
DIRECTOR STOCK OPTION PLAN
OF
COMSTAR.NET, INC.
ADOPTED: September 1, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. PURPOSE............................................................................................... 1
2. DEFINITIONS........................................................................................... 1
3. TOTAL AGGREGATE SHARES................................................................................ 2
4. RULE 16B-3 PLAN AND SHAREHOLDER APPROVAL.............................................................. 3
5. TYPE OF OPTIONS....................................................................................... 3
6. GRANTS OF OPTIONS..................................................................................... 3
7. EXERCISE PRICE, VESTING SCHEDULE AND TERM OF OPTION................................................... 3
8. EXERCISE OF OPTION.................................................................................... 4
9. TERMINATION OF OPTION PERIOD.............................................................................5
10. ASSIGNABILITY OF OPTIONS.................................................................................5
11. ADJUSTMENTS..............................................................................................5
12. PURCHASE FOR INVESTMENT............................................................................... 6
13. AMENDMENTS, MODIFICATIONS, SUSPENSION OR DISCONTINUANCE OF THIS PLAN.................................. 6
14. GOVERNMENTAL REGULATION............................................................................... 6
15. MISCELLANEOUS......................................................................................... 7
16. EFFECTIVE DATE AND TERMINATION DATE................................................................... 7
</TABLE>
i
<PAGE> 3
DIRECTOR STOCK OPTION PLAN
OF
COMSTAR.NET, INC.
1. PURPOSE. The Director Stock Option Plan of comstar.net, inc.
(the "Company") is intended as an incentive to retain, as directors of the
Company, persons of training, experience and ability, to encourage the sense of
proprietorship of such persons and to stimulate the active interest of such
persons in the development and financial success of the Company.
2. DEFINITIONS. As used herein, the following terms shall have the
meanings indicated:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company,
without par value per share, for so long as such Series of Common Stock remains
outstanding or, if all Common Stock of the Company has been converted into or
exchanged for another class or series of securities, "Common Stock" shall mean
such class or series of securities.
(d) "Date of Grant" shall mean the date on which an Option is
granted to an Eligible Person pursuant to Section 6(c) hereof.
(e) "Director" shall mean a member of the Board.
(f) "Eligible Person(s)" shall mean those persons who are, as of
a specified date, non-employee Directors of the Company.
(g) "ERISA" shall mean the Employee Retirement Income Security
Act, as amended.
(h) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(i) "Fair Market Value" of a Share on any date of reference
shall be the Closing Price on the business day preceding such date. For this
purpose, the "Closing Price" of the Shares on any business day shall be: (i) if
the Shares are listed or admitted for trading on any United States national
securities exchange, the last reported sale price of Shares on such exchange,
as reported in any newspaper of general circulation; (ii) if Shares are quoted
on Nasdaq, or any similar system of automated dissemination of quotations of
securities prices in common use, the average of the closing high bid and low
asked quotations for such day of Shares on such system; (iii) if neither clause
(i) nor (ii) is applicable, the average of the high
<PAGE> 4
bid and low asked quotations for Shares as reported by the National Quotation
Bureau, Incorporated if at least two securities dealers have inserted both bid
and asked quotations for Shares on at least five of the ten preceding days;
(iv) in lieu of the above, if actual transactions in the Shares are reported on
a consolidated transaction reporting system, the last sale price of the Shares
for such day and on such system; or (v) prior to an Initial Public Offering,
the fair market value of such Shares as determined by the Board which, in
making such determination, shall consider and rely upon the prices at which
securities of the Company have previously been sold in transactions between:
(x) the Company and parties who were not, at the time of such sale, affiliated
with the Company; and (y) parties who are were not, at the time of such sale,
affiliated with the Company.
(j) "Initial Grant Date" shall mean the date upon which this
Plan is approved by the Board.
(k) "Initial Public Offering" shall mean the offer and sale by
the Company of its equity securities in a transaction underwritten by an
investment banking firm following the completion of which (i) such equity
securities are listed for trading on any national securities exchange or (ii)
there are at least two market makers who are making a market in such equity
securities through the Nasdaq National Market System.
(l) "Nonqualified Stock Option" shall mean a stock option that
is not an incentive stock option, as defined in Section 422 of the Code.
(m) "Option" shall mean any option granted under this Plan.
(n) "Option Agreement" shall mean an option agreement between
the Company and an Optionee.
(o) "Optionee" shall mean a person to whom an Option is granted
under this Plan or any person who succeeds to the rights of such person under
this Plan by reason of the death or disability of such person.
(p) "Plan" shall mean this Director Stock Option Plan of
comstar.net, inc.
(q) "Share(s)" shall mean a share or shares of the Common Stock.
(r) "Subsidiary" shall mean any corporation (other than the
Company) in any unbroken chain of corporations beginning with the Company if,
at the time of the granting of the Option, each of the corporations other than
the last corporation in the unbroken chain owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chains.
3. TOTAL AGGREGATE SHARES. Subject to the adjustments set forth in
Section 11 hereof, a total of 600,000 Shares shall be subject to the Plan. The
Shares subject to the Plan shall consist of unissued Shares or previously
issued Shares reacquired and held by the
2
<PAGE> 5
Company, or any Subsidiary, and such number of Shares shall be and hereby
is reserved for sale for such purpose. Any of such Shares that may remain
unsold and that are not subject to outstanding Options at the termination of
the Plan shall cease to be reserved for the purpose of the Plan, but until
termination of the Plan, the Company shall at all times reserve a sufficient
number of Shares to meet the requirements of the Plan. Should any Option expire
or be canceled prior to its exercise in full, the Shares theretofore subject to
such Option may again be the subject of any Option under the Plan.
4. RULE 16B-3 PLAN AND SHAREHOLDER APPROVAL. The Company intends for
this Plan to comply with the requirements of Rule 16b-3 promulgated by the
Securities and Exchange Commission pursuant to the Exchange Act. Accordingly,
this Plan will be subject to approval by shareholders of the Company owning a
majority of the issued and outstanding shares of Common Stock present or
represented and entitled to vote at a meeting duly held in accordance with
applicable law.
5. TYPE OF OPTIONS. An Option granted hereunder shall be a
Nonqualified Stock Option.
6. GRANTS OF OPTIONS.
(a) Options shall be granted only to Eligible Persons. Each
Option shall be evidenced by an Option Agreement, which shall contain terms
that are not inconsistent with this Plan or applicable laws.
(b) The Options granted to Directors under this Plan shall be in
addition to regular director's fees, if any, or other benefits, if any, with
respect to the Director's position with the Company or its Subsidiaries.
Neither the Plan nor any Options granted under the Plan shall confer upon any
person any right to continue to serve as a Director.
(c) Each Eligible Person who becomes an Eligible Person by
reason of being elected as a Director after the Initial Grant Date shall be
granted on the date of his initial election an Option to acquire the number of
shares of Common Stock determined in the discretion of the Board for his
service as a Director.
(d) No Options shall otherwise be granted hereunder, and the
Board shall not have any discretion with respect to the grant of Options within
the meaning of Rule 16b-3 promulgated under the Exchange Act, or any successor
rule.
7. EXERCISE PRICE, VESTING SCHEDULE AND TERM OF OPTION.
(a) The exercise price of each Share placed under an Option
pursuant to this Plan shall be the Fair Market Value of such Share on the Date
of Grant.
3
<PAGE> 6
(b) Vesting of each Option shall be at the discretion of the
Board and shall be based on the date the Director commences service to the
Company. Options shall vest only if the Optionee is serving as a Director of
the Company on the vesting date.
(c) Each Option granted under this Plan shall have a term of
five years from the Date of Grant of such Option.
8. EXERCISE OF OPTION.
(a) After the six-month anniversary of the Date of Grant of an
Option, such Option may be exercised at any time and from time to time during
the term of such Option, in whole or in part.
(b) Options may be exercised: (i) during the Optionee's
lifetime, solely by the Optionee; (ii) if an Option has been assigned pursuant
to Section 10 hereof, by the successor Optionee; or (iii) after Optionee's
death, by the personal representative of the Optionee's estate or the person or
persons entitled thereto under his will or under the laws of descent and
distribution.
(c) An Option shall be deemed exercised when: (i) the Company
has received written notice of such exercise delivered to the Company in
accordance with the notice provisions of the applicable Option Agreement; (ii)
full payment of the aggregate exercise price of the Shares as to which the
Option is exercised has been tendered to the Company; and (iii) arrangements
that are satisfactory to the Board in its sole discretion have been made for
the Optionee's payment to the Company of the amount, if any, that the Company
determines to be necessary for the Company to withhold in accordance with the
applicable federal or state income tax withholding requirements.
(d) The exercise price of any Shares purchased shall be paid, at
the option of the Optionee (i) solely in cash by certified check, cashier's
check, money order or personal check (if approved by the Board); (ii) in Common
Stock of any series theretofore owned by such Optionee; or (iii) without the
exchange of any funds, by the Optionee electing to receive the full number of
Shares purchasable under the Option then being exercised less that number of
Shares that have a value (i.e., the Fair Market Value of the Shares less the
Exercise Price with respect to such Shares) being equal to the Exercise Price
(or by a combination of the above); provided, however, that, in the case of the
preceding clause (ii), if the Optionee acquired such stock to be surrendered
directly or indirectly from the Company, he shall have owned such stock for six
months prior to using such stock to exercise an Option; provided, further,
however, that such exercise transaction shall not result in a violation of
Section 16 of the Exchange Act. For purposes of determining the amount, if any,
of the exercise price satisfied by payment in Common Stock, such Common Stock
shall be valued at its Fair Market Value on the date of exercise. Any Common
Stock delivered in satisfaction of all or a portion of the exercise price shall
be appropriately endorsed for transfer and assignment to the Company.
4
<PAGE> 7
(e) The Optionee shall not be, nor have any of the rights or
privileges of, a shareholder of the Company with respect to any Shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such Shares shall have been issued by the Company to
the Optionee.
9. TERMINATION OF OPTION PERIOD. The unexercised portion of an
Option shall automatically and without notice terminate and become null and
void and be forfeited upon the earliest to occur of the following:
(a) other than by reason of such Optionee's death or disability
180 days after the date that the Optionee's position as a Director of the
Company terminates;
(b) one year after the death of Optionee;
(c) one year after the date on which the Optionee's position as
Director is terminated by reason of a mental or physical disability determined
by a medical doctor satisfactory to the Company; or
(d) five years after the Date of Grant of such Option.
10. ASSIGNABILITY OF OPTIONS. No Option shall be assignable or
otherwise transferable, except to members of the Optionee's immediate family or
by will, or the laws of descent and distribution, and no Option shall be
transferrable by an Optionee in violation of Section 16 of the Exchange Act.
11. ADJUSTMENTS.
(a) If at any time there shall be an increase or decrease in the
number of issued and outstanding Shares, through the declaration of a stock
dividend or through any recapitalization resulting in a stock split,
combination or exchange of Shares, then appropriate proportional adjustment
shall be made in the number of Shares (and, with respect to Options, the
exercise price per Share): (i) subject to outstanding Options; (ii) reserved
under the Plan; and (iii) granted as subsequent Options.
(b) In the event of a merger, consolidation or other
reorganization of the Company under the terms of which the Company is not the
surviving corporation, but the surviving corporation elects to assume an
Option, each Optionee shall be entitled to receive, upon the exercise of such
Option, with respect to each Share: (i) the number of shares of stock of the
surviving corporation (or equity interest in any other entity); and (ii) any
other notes, evidences of indebtedness or other property, that the Optionee
would have received in connection with such merger, consolidation or other
reorganization had he exercised the Option with respect to such Shares
immediately prior to such merger, consolidation or other reorganization.
5
<PAGE> 8
(c) Except as otherwise expressly provided herein, the issuance
by the Company of shares of its capital stock of any class or securities
convertible into shares of capital stock of any class, either in connection
with direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect and no
adjustment by reason thereof shall be made with respect to, the number of or
exercise price of Shares then subject to outstanding Options granted under the
Plan.
(d) Without limiting the generality of the foregoing, the
existence of outstanding Options granted under the Plan shall not affect in any
manner the right or power of the Company to make, authorize or consummate: (i)
any or all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business; (ii) any merger or
consolidation of the Company; (iii) any issuance by the Company of debt
securities or preferred stock that would rank above the Shares subject to
outstanding Options; (iv) the dissolution or liquidation of the Company; (v)
any sale, transfer or assignment of all or any part of the assets or business
of the Company; or (vi) any other corporate act or proceeding, whether of a
similar character or otherwise.
12. PURCHASE FOR INVESTMENT. As a condition of any issuance of a stock
certificate for Shares, the Board may obtain such agreements or undertakings,
if any, as it may deem necessary or advisable to assure compliance with any
provision of this Plan or any law or regulation, including, but not limited to,
the following:
(a) a representation and warranty by the Optionee to the
Company, at the time his Option is exercised, that he is acquiring the Shares
to be issued to him for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares; and
(b) a representation, warranty or agreement to be bound by any
legends that are, in the opinion of the Board, necessary or appropriate to
comply with the provisions of any securities law deemed by the Board to be
applicable to the issuance of the Shares and are endorsed upon the certificates
representing the Shares.
13. AMENDMENTS, MODIFICATIONS, SUSPENSION OR DISCONTINUANCE OF THIS
PLAN. For the purpose of complying with changes in the Code or ERISA, the Board
may amend, modify, suspend or terminate the Plan at any time. For the purpose
of meeting or addressing any other changes in legal requirements or any other
purpose, the Board may amend, modify, suspend or terminate the Plan only once
every six months.
14. GOVERNMENTAL REGULATION. This Plan and the granting of Options
and the exercise of Options hereunder, and the obligation of the Company to
sell and deliver shares under such Options, shall be subject to all applicable
laws, rules, and regulations and to such approvals by any governmental agencies
or national securities exchanges as may be required.
6
<PAGE> 9
15. MISCELLANEOUS.
(a) If any provision of this Plan is held invalid for any
reason, such holding shall not affect the remaining provisions hereof, but
instead this Plan shall be construed and enforced as if such provision had
never been included in this Plan.
(b) This Plan shall be governed by the laws of the State of
Georgia.
(c) Headings contained in this Plan are for convenience only and
shall in no manner be construed as part of this Plan.
(d) Any reference to the masculine, feminine or neuter gender
shall be a reference to such other gender as is appropriate.
16. EFFECTIVE DATE AND TERMINATION DATE. The effective date of this
Plan is September 1, 1999, the date on which the Board adopted this Plan, but is
subject to the approval of the holders of a majority of the common stock,
without series designation, present either in person or by proxy and entitled
to vote at a duly held meeting of the shareholders of the Company at which a
quorum is present representing a majority of all outstanding voting common
stock, without series designation. In the event that such shareholder approval
is not obtained, all options granted pursuant to the Plan shall be null and
void. This Plan shall terminate on the tenth anniversary of the effective date.
7
<PAGE> 10
[COMSTAR LOGO] STOCK OPTION AGREEMENT
THIS DIRECTOR STOCK OPTION AGREEMENT (this "Agreement"), entered into as
of this the___ day of__ , 1999, by and between comstar.net, inc., a Georgia
corporation (the "Company"), and___ (the "Optionee").
WHEREAS, effective as of September 1, 1999, the Board of Directors of the
Company adopted a stock option plan known as the "Director Stock Option Plan of
comstar.net, inc." (the "Plan"), and recommended that the Plan be approved by
the Company's shareholders; and
WHEREAS, the Committee has granted the Optionee the right and option
(the "Option") to purchase the number of shares of the Company's common stock
(the "Stock") as set forth below, and in consideration of the granting of that
Option the Optionee intends to continue to perform services as a director of
the Company; and
WHEREAS, the Company and the Optionee desire to enter into a written
agreement with respect to the Option in accordance with the Plan.
NOW, THEREFORE, in consideration of the above and the covenants
contained herein, the parties hereto agree as follows.
1. Incorporation of Plan. This Option is granted pursuant to the provisions
of the Plan and the terms and definitions of the Plan are incorporated
herein by reference and made a part hereof. A copy of the Plan has been
delivered to, and receipt is hereby acknowledged by, the Optionee.
2. Grant of Option. Subject to the terms, restrictions, limitations and
conditions stated herein, the Company hereby evidences its grant to the
Optionee of the Option to purchase all or any part of the number of shares
of Stock, set forth on Schedule A attached hereto and incorporated herein
by reference. The Option shall be exercisable in the amounts and at the
time specified on Schedule A. The Option shall expire and shall not be
exercisable on the date specified on Schedule A or on such earlier date as
determined pursuant to Section 8, 9, or 10 hereof. This Option is not an
Incentive Stock Option.
3. Purchase Price. The price per share to be paid by the Optionee for the
shares subject to this Option (the "Exercise Price") shall be as specified
on Schedule A, which price shall be an amount not less than the Fair
Market Value of a share of Stock as of the Date of Grant (as defined in
Section 11 below).
4. Exercise Terms. The Optionee must exercise the Option for at least the
lesser of 100 shares or the number of shares of Stock that the Optionee is
eligible to purchase in accordance with the terms hereof and the Plan as
to which the Option remains unexercised (such shares being called
"Purchasable" herein). In the event this Option is not exercised with
respect to all or any part of the shares subject to this Option prior to
its expiration, the shares of Stock with respect to which this Option was
not exercised shall no longer be subject to this Option.
5. Option Non-Transferable. No portion of this Option shall be transferable
by an Optionee other than by will or the laws of descent and distribution
or, pursuant to a Qualified Domestic Relations Order, and no Option shall
be transferable by an Optionee who is an officer, director or holder of
10% or more of any class of the Company's securities who is or would be
required to file reports pursuant to Section 16 of the Securities Exchange
Act of 1934 (a "Section 16 Insider") prior to shareholder approval of the
Plan. During the lifetime of an Optionee, Options shall be exercisable
only by such Optionee (or by such Optionee's guardian or legal
representative, should one be appointed).
6. Notice of Exercise of Option. This Option may be exercised by the
Optionee, or by the Optionee's administrators, executors or personal
representatives, by a written notice (in substantially the form of the
Notice of Exercise attached hereto as Schedule B) signed by the Optionee,
or by such administrators, executors or personal representatives, and
delivered or mailed to the Company as specified in Section 14 hereof to
the attention of the Chief Financial Officer or such other officer as the
Company may designate. Any such notice shall (a) specify the number of
shares of Stock which the Optionee or the Optionee's administrators,
executors or personal representatives, as the case may be, then elects to
purchase hereunder; (b) contain such information as may be reasonably
required pursuant to Section 12 hereof; and (c) be accompanied by (i) a
certified or cashier's check payable to the Company in payment of the
total Exercise Price (as defined on Schedule A hereto) applicable to such
shares as provided herein; (ii) shares of Stock owned by the Optionee and
duly endorsed or accompanied by stock transfer powers having a Fair Market
Value equal to the total Exercise Price applicable to such shares
purchased hereunder; or (iii) a certified or cashier's check accompanied
by the number of shares of Stock whose Fair Market Value when added to the
amount of the check equals the total Exercise Price applicable to such
shares purchased hereunder. Upon receipt of any such notice and
accompanying payment,
<PAGE> 11
and subject to the terms hereof, the Company agrees to issue to the
Optionee or the Optionee's administrators, executors or personal
representatives, as the case may be, stock certificates for the number of
shares specified in such notice registered in the name of the person
exercising this Option.
7. Adjustment in Option. The number of shares subject to this Option, the
Exercise Price and other matters are subject to adjustment during the term
of this Option in accordance with the Plan.
8. Termination of Directorship.
(a) Except as otherwise specified in Schedule A hereto, in the event of
the termination of the Optionee's directorship with the Company or
any of its subsidiaries, other than a termination that is either (i)
for Cause; (ii) voluntary on the part of the Optionee and without
written consent of the Company; or (iii) for reasons of death or
disability or retirement, the Optionee may exercise this Option at
any time within 90 days after such termination to the extent of the
number of shares which were Purchasable hereunder at the date of such
termination.
(b) Except as specified in Schedule A attached hereto, in the event of a
termination of the Optionee's directorship with the Company that is
either (i) for Cause or (ii) voluntary on the part of the Optionee
and without the written consent of the Company, this Option, to the
extent not previously exercised, shall terminate immediately and
shall not thereafter be or become exercisable.
(c) Unless and to the extent otherwise provided in Schedule A hereto, in
the event that the Optionee is not elected to the board for another
term as prescribed by the Company or any subsidiary, the Optionee
shall continue to have the right to exercise any Options for shares
which were Purchasable at the date of expiration of the Optionee's
term (provided that, on the date which is three months after the date
of expiration of the Optionee's term, where the Optionee is not
reelected, the Options will become void and unexercisable). This
Option does not represent an employment contract and does not confer
upon the Optionee any right with respect to the status or continuance
of a directorship or other relationship by the Company or by any of
its subsidiaries either during or after the term hereof.
9. Disabled Optionee. In the event of termination of a directorship with the
Company because of the Optionee's becoming subject to a Permanent and
Total Disability, the Optionee (or his or her personal representative) may
exercise this Option, within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death or (b) the
expiration date of this Option, to the extent of the number of shares
which were Purchasable hereunder at the date of such termination.
10. Death of Optionee. Except as otherwise set forth in Schedule A with
respect to the rights of the Optionee upon termination of directorship
with the Company under Section 8(a) above, in the event of the Optionee's
death while a director of the Company or any of its subsidiaries or within
three months after a termination of directorship (if such termination was
neither (i) for cause nor (ii) voluntary on the part of the Optionee and
without the written consent of the Company), the appropriate persons
described in Section 6 hereof or persons to whom all or a portion of this
Option is transferred in accordance with Section 5 hereof may exercise
this Option at any time within a period ending on the earlier of (a) the
last day of the one year period following the Optionee's death or (b) the
expiration date of this Option. If the Optionee was a director of the
Company at the time of death, this Option may be so exercised to the
extent of the number of shares that were Purchasable hereunder at the date
of death. If the Optionee's directorship with the Company terminated prior
to his or her death, this Option may be exercised only to the extent of
the number of shares covered by this Option which were Purchasable
hereunder at the date of such termination.
11. Date of Grant. This Option was granted by the Board of Directors of the
Company on the date set forth in Schedule A (the "Date of Grant").
12. Compliance with Regulatory Matters. The Optionee acknowledges that the
issuance of capital stock of the Company is subject to limitations imposed
by federal and state law and the Optionee hereby agrees that the Company
shall not be obligated to issue any shares of Stock upon exercise of this
Option that would cause the Company to violate the law or any rule,
regulation, order or consent decree of any regulatory authority (including
without limitation the Securities and Exchange Commission) having
jurisdiction over the affairs of the Company. The Optionee agrees that he
or she will provide the Company with such information as is reasonably
requested by the Company or its counsel to determine whether the issuance
of Stock complies with the provisions described by this Section 12.
<PAGE> 12
13. Restriction on Disposition of Shares. The shares purchased pursuant to the
exercise of a Stock Option shall not be transferred by the Optionee except
pursuant to the Optionee's will, or the laws of descent and distribution,
until such date which is the later of two years after the grant of such
Stock Option or one year after the transfer of the shares to the Optionee
pursuant to the exercise of such Stock Option. The shares of Stock
purchased pursuant to the exercise of this Option shall not be sold,
conveyed or otherwise transferred except pursuant to and in compliance
with an effective registration statement applicable to such shares or a
valid exemption from registration (with proof of such registration or
exemption being delivered to and satisfactory to the Company, in its sole
discretion).
14. Miscellaneous.
(a) This Agreement shall be binding upon the parties hereto and their
representatives (including in bankruptcy), heirs, successors and
assigns.
(b) This Agreement is executed and delivered in, and shall be governed by
the laws of, the State of Georgia.
(c) Any requests or notices to be given hereunder shall be deemed given,
and any elections or exercises to be made or accomplished shall be
deemed made or accomplished, upon actual delivery thereof to the
designated recipient, or three days after deposit thereof in the
United States mail, registered, return receipt requested and postage
prepaid, addressed, if to the Optionee, at the address set forth
below and, if to the Company, to the executive offices of the Company
at 2812 Spring Street, Suite 210, Atlanta, Georgia 30339.
(d) This Agreement may not be modified except in writing executed by each
of the parties hereto.
IN WITNESS WHEREOF, the Board of Directors of the Company has caused this
Director Stock Option Agreement to be executed on behalf of the Company and the
Company's seal to be affixed hereto and attested by the Secretary or an
Assistant Secretary of the Company, and the Optionee has executed this Director
Stock Option Agreement under seal, all as of the day and year first above
written.
comstar.net, inc.
Accepted By:
- ------------------------------------------------------------------------------
Signature
James C. Howell
- ------------------------------------------------------------------------------
Name
CEO
- ------------------------------------------------------------------------------
Title
OPTIONEE
Accepted By:
- ------------------------------------------------------------------------------
Signature
- ------------------------------------------------------------------------------
Name
- ------------------------------------------------------------------------------
Address
- ------------------------------------------------------------------------------
City, State Zip
ATTEST:
- ------------------------------------------------------------------------------
Secretary or Assistant Secretary
Edward N. Landa
- ------------------------------------------------------------------------------
Name
[SEAL]
<PAGE> 13
[COMSTAR LOGO] SCHEDULE A TO THE
STOCK OPTION AGREEMENT
This Schedule A to the Stock Option Agreement (this "Agreement") is entered
into as of this___ day of___ , 1999, by and between comstar.net. inc., and____.
1. Number of Shares Subject to Option: ___ shares.
2. Option Exercise Price: $____ per share.
3. Date of Grant: ____.
4. Option Vesting Schedule:
Check One:
[ ] Options are exercisable with respect to all shares on or after
the date hereof
[ ] Options are exercisable with respect to the number of shares
indicated below on or after the date indicated next to the number
of shares.
Number of Shares Vesting Date
---------------- ------------
5. Option Exercise Period:
Check One:
[ ] All options expire and are void unless exercised on or before___.
[ ] Options expire and are void unless exercised on or before the
date indicated next to the number of shares:
Number of Shares Expiration Date
---------------- ---------------
6. Effect of Termination of Employment on Optionee (if different from
that set forth in Sections 8, 9 and 10 of the Stock Option
Agreement).
Not Applicable.
<PAGE> 14
[COMSTAR LOGO] SCHEDULE B TO THE
STOCK OPTION AGREEMENT
NOTICE OF EXERCISE
The undersigned hereby notifies comstar.net, inc. (the
"Company") of this election to exercise the undersigned's stock option to
purchase_____ shares of the Company's common stock (the "Common Stock"),
pursuant to the Director Stock Option Agreement (the "Agreement") between the
undersigned and the Company dated_____ . Accompanying this Notice is (1) a
certified or a cashier's check in the amount of $_____ payable to the Company,
and/or (2)____ shares of the Company's Common Stock presently owned by the
undersigned and duly endorsed or accompanied by stock transfer powers, having
an aggregate Fair Market Value (as defined in the Plan referenced in the
Agreement) as of the date hereof of $ , such amounts being equal, in the
aggregate, to the purchase price per share set forth in Section 3 of the
Agreement multiplied by the number of shares being purchased hereby (in each
instance subject to appropriate adjustment pursuant to the Plan).
IN WITNESS WHEREOF, the undersigned has set his hand and
seal, this____ day of ___,___.
OPTIONEE [OR OPTIONEE'S ADMINISTRATOR,
EXECUTOR OR PERSONAL REPRESENTATIVE]
-----------------------------------------
Signature
-----------------------------------------
Name
-----------------------------------------
Position (if other than Optionee)
<PAGE> 1
EXHIBIT 10.3
COMSTAR.NET, INC.
DIRECTOR'S AND OFFICER'S
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made as of _______________________ 1999, between
comstar.net, inc., a Georgia corporation (the "Corporation"), and the member of
the Board of Directors and/or the officer of the Corporation named on the
signature page hereof (the "Executive").
WHEREAS, the Executive is a member of the Board of Directors and/or an
officer of the Corporation and in such capacity is performing a valuable
service to the Corporation; and
WHEREAS, the Corporation's Bylaws (the "Bylaws") and Sections 14-2-850
through 14-2-859 of the Georgia Business Corporation Code, as amended to date
(the "State Statute") provide for the indemnification of the directors and
officers of the Corporation; and
WHEREAS, the Bylaws and State Statute specifically contemplate that
contracts may be entered into between the Corporation and the members of its
Board of Directors and officers with respect to indemnification of such
directors and officers; and
WHEREAS, in order to provide to the Executive assurances with respect
to the protection provided against liabilities that he may incur in the
performance of his duties to the Corporation, and to thereby induce the
Executive to serve as a member of its Board of Directors and/or as an officer
of the Corporation, the Corporation has determined and agreed to enter into
this contract with the Executive.
NOW, THEREFORE, in consideration of the premises and the Executive's
continued service as a director and/or an officer after the date hereof, the
parties agree as follows:
1. INDEMNIFICATION. Subject only to the exclusions set forth in
Section 2 hereof, and in addition to any other indemnity to which the Executive
may be entitled under the State Statute or any bylaw, resolution or agreement
(but without duplication of payments with respect to indemnified amounts), the
Corporation hereby further agrees to hold harmless and indemnify the Executive,
to the fullest extent permitted by law, including, but not limited to, holding
harmless and indemnifying the Executive against any and all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the Executive in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation), to which the Executive is, was, or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that the Executive
is, was, or at any time becomes a director, officer, employee or agent of the
Corporation, or a predecessor corporation, or is or was serving or at any time
serves at the request of the Corporation as a director, officer, partner,
trustee, employee, or agent of another corporation, partnership, employee
benefit plan, joint
<PAGE> 2
venture, trust, or other enterprise.
2. LIMITATIONS ON INDEMNITY. No indemnity pursuant to Section 1
hereof shall be paid by the Corporation:
(a) with respect to any proceeding in which the Executive is
adjudged, by final judgment not subject to further appeal, liable
to the Corporation or is subjected to injunctive relief in favor
of the Corporation:
(i) for any appropriation, in violation of his duties, of
any business opportunity of the Corporation;
(ii) for acts or omissions which involve intentional
misconduct or a knowing violation of law;
(iii) for the types of liability set forth in Section
14-2-832 of the Georgia Business Corporation Code; or
(iv) for any transaction from which the Executive received
an improper personal benefit;
(b) with respect to any suit in which final judgment is
rendered against the Executive for an accounting of profits, made
from the purchase or sale by the Executive of securities of the
Corporation, pursuant to the provisions of Section 16(b) of the
Securities Exchange Act of 1934 or similar provisions of any
federal, state, or local statutory law, or on account of any
payment by the Executive to the Corporation in respect of any
claim for such an accounting; or
(c) if a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
3. CONTRIBUTION. If the indemnification provided in Section 1 is
unavailable, then in respect of any threatened, pending, or completed action,
suit, or proceeding in which the Corporation is jointly liable with the
Executive (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute, to the extent it is not lawfully prevented from
doing so, to the amount of expenses, judgments, fines, and settlements paid or
payable by the Executive in such proportion as is appropriate to reflect (i)
the relative benefits received by the Corporation on the one hand and the
Executive on the other hand from the transaction from which such action, suit,
or proceeding arose, and (ii) the relative fault of the Corporation on the one
hand and of the Executive on the other in connection with the events which
resulted in such expenses, judgments, fines, or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the
Corporation on the one hand and of the Executive on the other shall be
determined by reference to, among other things, the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent the
circumstances resulting in such expenses, judgments, fines, or settlement
amounts. The Corporation agrees that it would not be just and equitable if
<PAGE> 3
contribution pursuant to this Section 3 were determined by pro rata allocation
or any other method of allocation that does not take account of the foregoing
equitable considerations.
4. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period the Executive is
a director, officer, employee, or agent of the Corporation (or is serving at
the request of the Corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, or other enterprise)
and shall continue thereafter for so long as the Executive shall be subject to
any possible claim or threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, or investigative, by reason of the fact
that the Executive was a director of the Corporation or serving in any other
capacity referred to herein.
5. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Executive of notice of the commencement of any action, suit, or proceeding, the
Executive will, if a claim in respect thereof is to be made against the
Corporation under this Agreement, notify the Corporation in writing of the
commencement thereof, but the omission to so notify the Corporation will not
relieve the Corporation from any liability which it may have to the Executive
otherwise than under this Agreement. With respect to any such action, suit, or
proceeding as to which the Executive so notifies the Corporation:
(a) the Corporation will be entitled to participate therein at
its own expense; and
(b) subject to Section 6 hereof, and if the Executive shall
have provided his written affirmation of his good faith belief
that his conduct did not constitute behavior of the kind described
in paragraph 2(a) hereof and that he is entitled to
indemnification hereunder, the Corporation may assume the defense
thereof.
After notice from the Corporation to the Executive of its election so
to assume such defense, the Corporation will not be liable to the Executive
under this Agreement for any legal or other expenses subsequently incurred by
the Executive in connection with the defense thereof, other than reasonable
costs of investigation or as otherwise provided below. The Executive shall have
the right to employ his separate counsel in such action, suit, or proceeding,
but the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the expense of
the Executive unless (i) the employment of counsel by the Executive has been
authorized by the Corporation, (ii) counsel designated by the Corporation to
conduct such defense shall not be reasonably satisfactory to the Executive, or
(iii) the Corporation shall not in fact have employed counsel to assume the
defense of such action, in each of which cases the fees and expenses of such
counsel shall be at the expense of the Corporation. For the purposes of clause
(ii) above, the Executive shall be entitled to determine that counsel
designated by the Corporation is not reasonably satisfactory if, among other
reasons, the Executive shall have been advised by qualified counsel that,
because of actual or potential conflicts of interest in the matter between the
Executive, other officers or directors similarly indemnified by the
Corporation, and/or the Corporation, representation of the Executive by counsel
designated by the Corporation is likely to materially and adversely affect the
Executive's
<PAGE> 4
interest or would not be permissible under applicable canons of legal ethics.
The Corporation shall not be liable to indemnify the Executive under
this Agreement for any amounts paid in settlement of any action or claim
effected without the Corporation's written consent. The Corporation shall not
settle any action or claim in any manner which would impose any penalty or
limitation on the Executive without the Executive's written consent. Neither
the Corporation nor the Executive will unreasonably withhold consent to any
proposed settlement.
6. ADVANCEMENT AND REPAYMENT OF EXPENSES. Upon request therefor
accompanied by reasonably itemized evidence of expenses incurred, and by the
Executive's written affirmation of his good faith belief that his conduct met
the standard applicable to indemnification pursuant to Section 1 hereof and did
not constitute behavior of the kind described in Section 2(a) hereof and that
he is entitled to indemnification hereunder, the Corporation shall advance to
the Executive the reasonable expenses (including attorneys' fees and costs of
investigation and defense (including the fees of expert witnesses, other
professional advisors, and private investigators)) incurred by him in defending
any civil or criminal suit, action, or proceeding for which the Executive is
entitled (assuming an applicable standard of conduct is met) to indemnification
pursuant to this Agreement. The Executive agrees to reimburse the Corporation
for all reasonable expenses paid by the Corporation, whether pursuant to this
Section or Section 5 hereof, in defending any action, suit, or proceeding
against the Executive in the event and to the extent that it shall ultimately
be determined that the Executive is not entitled to be indemnified by the
Corporation for such expenses under this Agreement. Any advances and the
Executive's agreement to repay shall be unsecured and interest-free.
7. ENFORCEMENT.
(a) The Corporation expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed on
it hereby in order to induce the Executive to serve as a director
and/or officer of the Corporation and acknowledges that the
Executive will in the future be relying upon this Agreement in
continuing to serve in such capacity.
(b) In the event the Executive is required to bring any action
to enforce rights or to collect moneys due under this Agreement
and is successful in such action, the Corporation shall reimburse
the Executive for all of the Executive's reasonable fees and
expenses in bringing and pursuing such action.
8. SEPARABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable in whole or in
part for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof.
<PAGE> 5
9. GOVERNING LAW; SUCCESSORS; AMENDMENT AND TERMINATION.
(a) This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Georgia, without
regard to its conflict of law principles.
(b) This Agreement shall be binding upon the Executive and
the Corporation and its successors and assigns (including any
transferee of all or substantially all of its assets and any
successor by merger or otherwise by operation of law), and
shall inure to the benefit of the Executive, his heirs,
personal representatives, and assigns and to the benefit of
the Corporation and its successors and assigns.
(c) No amendment, modification, termination, or cancellation
of this Agreement shall be effective unless in writing signed
by both parties hereto.
(d) References to the male gender shall include the female
gender, and vice versa.
[Signatures appear on following page.]
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement,
in counterparts or otherwise, as of the day and year first above written.
EXECUTIVE COMSTAR.NET, INC.
By:
- --------------------------------------- --------------------------------
Name: Name (Print):
---------------------------------- ----------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 10.4
OFFICE LEASE
BUILDING: EMERSON CENTER
LANDLORD: THE EMERSON CENTER COMPANY
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 - Generator Site Map
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.
-------------/----------------
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.
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Tenant / Landlord
19
<PAGE> 20
ADDENDUM A
20
<PAGE> 21
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> 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 parking spaces which
service the Building in consideration for Tenant's payment of $ 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 . 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.
-------------/-------------
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
- -------------------------
---------------------------------------
- ------------------------- Social Security Number
ADDRESS ADDRESS
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
BY: BY:
- ------------------------- ----------------------------------------
DATE: DATE:
- ------------------------- ----------------------------------------
WITNESS GUARANTOR
- -------------------------
---------------------------------------
- ------------------------- Social Security Number
ADDRESS ADDRESS
- ------------------------- ----------------------------------------
- ------------------------- ----------------------------------------
BY: BY:
- ------------------------ ----------------------------------------
DATE: DATE:
- ------------------------- ----------------------------------------
<PAGE> 27
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> 28
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 10.5
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 - Generator Site Map
3
<PAGE> 4
OFFICE LEASE
This Lease, dated for reference purposes only February 5, 1998, 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 1.9):
Tenant Name: COMSTAR COMMUNICATIONS, INC.
Doing Business As (DBA): COMSTAR COMMUNICATIONS, INC.
Address: 2812 Spring Road, Suite 210, Atlanta, GA 30339
Telephone: (770) 333-8779
1.2 Premises: (Section 2.1):
Building Name: EMERSON CENTER Suite No.: 240
Address: 2812 Spring Road, Atlanta, GA 30339
1.3 Lease Area. (Section 2.1): 3,500 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): 2.75%
1.6 Lease Term. (Section 3.1): THREE (3) years, ZERO (0) months.
1.7 Commencement Date. (Section 3.1): MARCH 15, 1998
1.8 Expiration Date. (Section 3.1, 3.2): MARCH 14, 2001
1.9 Base Rent for Lease Term. (Section 4.1): Total One Hundred Forty Seven
Thousand, Eight Hundred
Seventy-Five and no/100
Dollars. ($147,875.00)
1.10 Base Rent, Monthly Installments. (Section 4.1, 5.2): Three Thousand,
Nine Hundred
Thirty-Seven and
50/100 Dollars
($3,937.50)
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 Spring Road, Suite 110, Atlanta,
Georgia 30339
(b) Address of Landlord for notices. (Sections 6.3, 19):
c/o Tarragon Realty Advisors, Inc., 3100 Monticello
Avenue, Suite 200, Dallas, Texas 75205,
ATTN: Chris W. Clinton
(c) Address of Tenant for notices (Sections 6.3, 19):
P.O. BOX 267,
GAINESVILLE, GA 30503-0267
ATTN: Sam F. Dayton
1.12 Geographic Area for CPI Calculation. (Section 5.2): N/A
1.13 Base Month for CPI Calculation. (Section 5.2): N/A
1.14 Landlord's Share of Operating Expenses. (Section 6.2): BASE YEAR 1998
per rentable
square foot
1.15 Landlord's Share of Real Estate Taxes. (Section 6.2): BASE YEAR 1998
per rentable
square foot
1.16 Security Deposit (Section 7): THREE THOUSAND, NINE HUNDRED THIRTY-SEVEN
AND 50/100 DOLLARS ($3,937.50)
1.17 Use. (Section 8.1): GENERAL OFFICE
1.18 Brokers (Section 25.20): THE FRANK M. DARBY COMPANY
1.19 Addendum(s). (Sections 3.2, 4.3, 9.2, 22): The following addendum(s)
are attached to this Lease:
A & B
This Lease consists of 25 articles on 19 pages, plus Exhibits A, B, C, D, E, F,
G and 2 additional page(s) of Addendum(s).
LANDLORD: THE EMERSON CENTER COMPANY TENANT: COMSTAR COMMUNICATIONS, INC.
National Income Realty Trust, Managing
General Partner
By: /s/ CHRIS W. CLINTON, VP By: /s/ SAM F. DAYTON
---------------------------------- -------------------------------
Date: 3/11/98 Date: 2/18/98
---------------------------------- -------------------------------
SFD CC
-------------/-------------
Tenant / Landlord
4
<PAGE> 5
2. PREMISES
2.1 Definition. Landlord hereby leases to Tenant and Tenant leases from
Landlord for the term, at the rental, and upon all of the conditions set forth
herein, that certain real property known by suite number and address specified
in Section 1.2 hereof, consisting of the approximate amount of rentable square
feet specified in Section 1.3 hereof, and which is referred to herein as the
Premises. The Premises are located in an office building presently consisting
of the total number of rentable square feet specified in Section 1.4 hereof,
which office building, the real property on which it is situated (the legal
description of which is attached hereto as Exhibit A), and any parking
facilities or structures appurtenant thereto are hereinafter collectively
referred to as the "Building". The Premises are depicted in Exhibit B attached
hereto and incorporated herein by this reference, but the depiction of possible
uses, tenants or locations on Exhibit B shall not be construed to be a warranty
or representation by Landlord that any such uses, tenants or locations
presently exist or will continue to exist. Tenant's share of the total amount
of square feet of the Building is equal to the pro-rata share specified in
Section 1.5 hereof, and said percentage shall hereinafter be referred to as the
Tenant's "Pro-Rata Share".
2.2 Public Areas. As long as this Lease remains in effect and Tenant is
not in default hereunder, Tenant shall have the nonexclusive right, in common
with the Landlord, other tenants, subtenants and invitees, to use the public
areas of the Building which consist of the entrance foyer and lobby of the
Building, the common corridors on the floor of the Building on which the
Premises are situated and other areas appurtenant to or servicing the
elevators, shipping and receiving areas and lavatories in the Building,
provided that Landlord shall have the right at any time and from time to time
to exclude therefrom such areas as Landlord may determine so long as access to
the Premises is not unreasonably denied.
3. TERM
3.1 Term. The term of this Lease shall be the term specified in Section
1.6 hereof, commencing on the Commencement Date specified in Section 1.7 hereof
and ending on the Expiration Date specified in Section 1.8 hereof unless sooner
terminated pursuant to any provision of this Lease.
3.2 Delay in Commencement. Notwithstanding said Commencement Date, if for
any reason Landlord cannot deliver possession of the Premises to Tenant on said
date, Landlord shall not be subject to any liability therefor, nor shall such
failure affect the validity of this Lease or the obligations of Tenant
hereunder. However, in such case Tenant shall not be obligated to pay rent until
possession of the Premises is tendered to Tenant, which date shall be the new
commencement Date, and the Expiration Date shall remain unchanged. Upon
Landlord's request, the parties agree to execute in writing an Addendum to
certify the Commencement Date and Expiration Date hereof, but this Lease shall
not be affected in any manner if either party fails or refuses to execute such
Addendum.
3.3 Early Possession. In the event that Landlord shall permit Tenant to
occupy the Premises prior to the Commencement Date, such occupancy shall be
subject to all of the provisions of this Lease and Tenant shall be obligated to
pay rental and all other charges incurred under this Lease in addition to any
obligations which commence on the Commencement Date. Said early possession
shall not advance the Expiration Date of this Lease.
3.4 Delivery of Possession. Tenant shall be deemed to have taken
possession of the Premises when the earliest of any of the following occur: (a)
five business days after Landlord or Landlord's agent, architect or contractor
notifies Tenant that the Premises are ready for occupancy; or (b) Tenant
commences to occupy or otherwise make use of the Premises. If Tenant is
notified pursuant to Section 3.4(a), Tenant agrees to occupy the Premises
within twenty business days thereafter. As used in this Lease, "business days"
shall mean Mondays through Fridays. Tenant agrees that, upon the request of
Landlord, Tenant will execute a document certifying the date on which Tenant
took possession of the premises.
3.5 Holding Over. If Tenant remains in possession of the Premises or any
part thereof after the expiration of the term hereof, such occupancy shall be a
tenancy from month to month at a monthly rental equal to 150% of the Base Rent
and Additional Rent payable hereunder. The foregoing provisions of this Section
3.5 shall neither be construed to give the Tenant any right to remain in
possession of the Premises or any part thereof after the expiration of the term
hereof nor to waive any of the Landlord's rights under this Lease to collect
any damages to which it may be entitled, whether direct or consequential.
4. RENT.
4.1 Base Rent. The Base Rent for the Premises for the entire term of this
Lease shall be as specified in Section 1.9, subject to adjustment pursuant to
the application of Section 3.2 relative to postponement of the installments
specified in Section 1.10, in advance, on the first day of each month of the
term hereof. Tenant shall pay Landlord upon the execution of this Lease the sum
specified in Section 1.10 as the installment of Base Rent for the first full
calendar month of the term of the Lease. Provided, however, that if the
Commencement Date does not occur on the first day of a month, the aforesaid
payment shall be for the initial thirty days of the Lease and the next monthly
installment of Base Rent shall be due on the first day of the first full
calendar month of the term but shall be prorated to cover only those days of
said calendar month not previously paid by the Tenant by its initial payment.
Base Rent for any period during the term hereof which is less than one calendar
month shall be a pro-rata portion of the monthly installment based upon the
actual number of days the Lease is in effect during said calendar month. All
rents shall be payable in lawful money of the United States of America without
notice or demand and without any deduction, offset or abatement, and shall be
payable to Landlord at the address stated in Section 1.11(a) or to such other
persons or at such other places as Landlord may designate in writing. The
payment of Base Rent hereunder shall be an independent covenant.
SFD CC
-------------/----------------
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. SEE ADDENDUM A.
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 expend as it share of Operating
Expenses paid for and sustained by the Landlord during any calender 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 Tenant's Pro-Rata Share thereof for the calendar year in which the
Landlord's Statement is given. Landlord's failure to render a Landlord's
Statement with respect to any period shall not eliminate or reduce Tenant's
obligation to pay Shared Expenses and shall not prejudice Landlord's right to
render a Landlord's Statement with respect to any subsequent period. The
obligations of Tenant under the provisions of this paragraph with respect to
any increase in rent shall survive the expiration or any sooner termination of
the term of the Lease. Within 15 days next following the notification by
Landlord of the contents of its Landlord's Statement, Tenant shall pay to
Landlord the entire amount of Tenant's Pro-Rata Share of actual Shared Expenses
for the prior period covered by the Landlord's Statement less the amount of
Shared Expenses actually paid by Tenant for said period, plus Tenant shall also
then pay to Landlord such amount as is necessary to assure 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 calender year preceding the date on which
the Tenant is given notice of the Landlord's Statement exceed the Tenant's
Pro-Rata Share of actual Shared Expenses for such calendar year, then should
the Tenant not be otherwise in default hereunder, the amount of such excess
shall be applied by the Landlord to the next succeeding installments of monthly
estimated payments of Shared Expenses.
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.
SFD CC
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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.
SFD CC
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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 Section 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.
SFD CC
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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 that 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 Rent
installment is due. Landlord may, at its option and without waiving any of its
rights set forth in the immediately preceding sentence, permit Tenant to contest
the validity of any such lien or claim, provided that in such circumstances the
Tenant shall at its expense defend itself and Landlord against the same and
shall pay and satisfy any such adverse judgment that may be rendered
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 ten (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
Rent 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 to 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 the Landlord's making such request.
12.3 Telephone. Tenant shall separately arrange and pay for the
furnishing of and use of all telephone services as Tenant may deem necessary
for its use of the Premises, and Landlord shall have no liability in connection
therewith.
13. INSURANCE AND INDEMNITY
13.1 Liability Insurance. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of bodily injury and
property damage insurance, insuring Landlord and Tenant against any liability
arising out of the ownership, use, occupancy or maintenance of the Premises and
all areas appurtenant thereto. Such insurance shall be in an amount not less
than $500,000 per person, $500,000 per occurrence for bodily injury, and
$500,000 for property damage, or $1,500,000 combined single limit for said
items. The limits of said insurance shall not, however, limit the liability of
Tenant hereunder. Tenant shall also obtain and keep in force during the term of
this Lease, at Tenant's expense, "all risk" or "special coverage form" insurance
upon the property of every description and kind owned by the Tenant and located
in the Building or for which Tenant is legally liable or installed by or on
behalf of the Tenant, including without limitation, furniture, fittings,
installations, 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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If Tenant shall fail to procure and maintain the insurance required hereunder,
Landlord may but shall not be required to procure and maintain the same, and
any amount so paid by Landlord for such insurance shall be Additional Rent
which, together with interest thereon from the date paid, shall be due and
payable by Tenant on the next succeeding date on which a Base Rental
installment is due. If in the opinion of Landlord the amount of liability
insurance required hereunder is not adequate, then not more frequently than
once during each option, extension or renewal term of this Lease, if any,
Tenant shall increase said insurance coverage as required by Landlord.
Provided, however, that in no event shall the amount of the liability insurance
increase by more than fifty percent of the amount of the insurance during the
preceding term of this Lease. However, the failure of Landlord to require any
additional insurance coverage shall not be deemed to relieve Tenant from any
obligations under this Lease.
13.2 Property Insurance. Landlord shall obtain and keep in force during
the term of this Lease fire and extended coverage on the building (including
Building standard leasehold improvements). Landlord may also, but shall not be
required to, procure any other insurance policies respecting the Premises or
Building which Landlord deems necessary.
13.3 Insurance Policies. Insurance required by Tenant hereunder shall be
in companies rated A+, AAA or better in "Best's Insurance Guide". Tenant shall
deliver to Landlord prior to taking possession of the Premises copies of
policies of such insurance or certificates evidencing the existence and amounts
of such insurance with loss payable clauses reasonably satisfactory to
Landlord. No such policy shall be cancelable or subject to reduction of
coverage or other modification except after ten (10) days' prior written notice
to Landlord. Tenant shall, within ten (10) days prior to the expiration of such
policies, furnish Landlord with renewals thereof, or Landlord may order such
insurance and charge the cost thereof to Tenant, which amount, together with
interest thereon, shall be Additional Rent and shall be payable by Tenant on
the next succeeding date on which a Base Rental payment is due. Tenant shall
not do or permit to be done anything which shall invalidate the insurance
policies referred to in Section 13.1. Tenant shall forthwith, upon Landlord's
demand, reimburse Landlord for any additional premiums attributable to any act
or omission or operation of Tenant causing an increase in the cost of insurance.
13.4 Waiver of Subrogation. As long as their respective insurers so
permit, Tenant and Landlord each waives any and all rights of recovery against
the other, or against the officers, employees, agents and representatives of
the other for loss or damage to such waiving party or its property or the
property of others under its control, where such loss or damage is insured
against under any insurance policy in force at the time of such loss or damage.
Tenant and Landlord shall, upon obtaining the policies of insurance required
hereunder, give notice to the insurance carriers that the foregoing mutual
waiver of subrogation is contained in this Lease and obtain policies of
insurance, if obtainable, which shall include a waiver by the insurer of all
right of subrogation against Landlord or Tenant in connection with any loss or
damage thereby insured against.
13.5 Hold Harmless. Tenant shall indemnify, defend and hold Landlord
harmless from any and all claims, liabilities, damages and costs, including
attorneys fees, incurred by Landlord which arise from Tenant's use of the
Premises or the Building or from the conduct of its business or from any
activity, work or things which may be permitted or suffered by Tenant in, on or
about the Premises or the Building, and shall further indemnify, defend and hold
Landlord harmless from and against any and all claims, liabilities, damages and
costs, including attorneys fees, incurred by Landlord which arise from any
breach or default in the performance of any obligation on Tenant's part to be
performed under any provision of this Lease or which arise from any negligence
of Tenant or any of its agents, representatives, customers, employees or
invitees.
13.6 Exemption of Landlord from Liability. Tenant hereby agrees that
Landlord shall not be liable for injury to Tenant's business or any loss of
income therefrom, including without limitation from any relocation by Landlord
of Tenant within the Building (except as expressly provided otherwise in
Section 20), or for damage to the goods, wares, merchandise or other property
of Tenant, Tenant's employees, representatives, agents, invitees, customers or
any other person in, on or about the Premises or Building, nor shall Landlord
be liable for injury to the person of Tenant, Tenant's employees,
representatives, agents, customers, or invitees, whether any such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures,
or from any other cause, and whether the said damage or injury results from
conditions arising upon the Premises or any other cause, and whether the said
damage or injury results from conditions arising upon the Premises or Building,
or from other sources or places, and regardless of whether the cause of such
injury or the means of repairing the same in inaccessible to Landlord or Tenant
unless such injury, loss of income or damage is caused by the Landlord's gross
negligence. Landlord shall not be liable for any damages arising from any act
or neglect of any other tenant, if any, of the Building. Tenant hereby assumes
all risk of damage to property or injury to persons in, on or about the
Premises or the Building from any cause and Tenant hereby waives all claims in
respect thereof against Landlord, excepting where said damage arises out of the
gross negligence of Landlord.
14. DAMAGE OR DESTRUCTION
14.1 Option to Terminate Lease. If the Premises or any part thereof shall
be damaged or destroyed by fire or other casualty, the Landlord may, at its
option and subject to Section 14.2 hereinbelow, elect to terminate this Lease
by giving notice to the Tenant within ninety (90) days after Landlord receives
actual notice of the fire or other casualty, and thereupon the term of this
Lease shall expire by lapse of time upon the tenth day after such notice is
given. Instead of exercising said option, landlord may elect to repair or
restore the Premises to the same condition as existed before such damage or
destruction. Upon electing to repair or restore, Landlord may proceed with
reasonable dispatch to perform the necessary work, and the Base Rent to be paid
until such work is completed shall be abated in proportion of the Premises
being unusable for a period equal to one day or less, but Landlord shall not be
liable to Tenant for any delay which arises by reason of labor strikes,
adjustments of insurance or any other cause beyond Landlord's control, and in
no event shall Landlord be liable for any loss of profits or income.
Notwithstanding the foregoing, there shall be no abatement, apportionment or
reduction in the rental obligations of Tenant if the damage or destruction is
caused by the Tenant or Tenant's agents, representatives, employees, customers
or invitees.
14.2 Obligation to Repair or Restore. If and only if all of the following
circumstances exist with respect to damage or destruction to the Premises,
Landlord may not elect to terminate the Lease as provided in Section 14.1
hereof but rather must elect to repair or restore the Premises:
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(a) There is no fault or neglect on the part of the Tenant, Tenant's
agents, representatives, employees, customers or invitees which contributed to
the damage or destruction;
(b) The damage or destruction to the Premises is less than fifty
percent (50%) of the replacement cost thereof as determined by Landlord;
(c) The Landlord is fully insured for the casualty which causes the
damage or destruction and the insurance proceeds have been made available
therefor by the holder or holders of any mortgages or deeds of trust covering
the Premises;
(d) The date of the damage or destruction is greater than one year
prior to the Expiration Date of this Lease or any renewal, modification or
extension thereof, and
(e) Less than sixty percent (60%) of the rentable square feet of the
Building is so damaged or destroyed, as determined by Landlord, regardless of
the percentage of rentable square feet of the Premises which may be damaged or
destroyed.
14.3 Fault of Tenant. Landlord may exercise its option to repair or
restore as described in Section 14.1 even if such damage or destruction is due
to the fault or neglect of Tenant, Tenant's agents, representatives, employees,
customers or invitees, but in such event Landlord's election to repair or
restore shall be without prejudice to any other rights and remedies of Landlord
under this Lease, and there shall be no apportionment or abatement of any rent
of any kind and Landlord shall not be liable for any other loss to Tenant of
any nature whatsoever.
14.4 Obligations of Tenant. Except as provided in this Section 14, none
of Tenant's obligations under this Lease shall be affected by any damage or
destruction of the Premises by any cause whatsoever. Tenant hereby expressly
waives any and all rights it might otherwise have under any law, regulation or
statute which would act to modify the provisions of the immediately preceding
sentence.
14.5 Termination by Tenant. In the event that more than sixty percent
(60%) of rentable square feet of the Premises shall be damaged or destroyed by
fire or other casualty not caused by the Tenant or Tenant's agents,
representatives, employees, customers 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 not later than
thirty (30) days after said date, but should Landlord elect not to so terminate
this Lease, the Lease shall remain in full force and effect as to the portion
of the Premises not so taken, and Tenant's rental obligations shall be reduced
proportionately to reflect the number of rentable square feet remaining in the
Premises, and such rental reduction, if any, shall take effect as of the date
which is thirty (30) days after the date of which the condemning authority
takes title or possession, whichever first occurs. If repairs or restorations
to that portion of the Premises not so taken are deemed necessary by Landlord
to render such portion reasonably suitable for the purposes for which 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 or subtenant, the terms and
provisions of the proposed transaction, and such information as to the nature
of the proposed assignee's or subtenant's business and its financial
responsibility and standing as Landlord may reasonably require, together with
the effective date of the proposed transfer which shall be at least sixty (60)
days after the date of submission of such information to Landlord. Landlord's
failure to consent to any proposed transfer under this Section shall not be
deemed unreasonably withheld if (a) the occupancy resulting from such transfer
will not be consistent with the general character of the business carried on by
the tenants of the Building or violates any rights or options held by any other
tenant of the building; or (b) the proposed occupant pursuant
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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 an 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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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 attorneys fees, and including
the worth at the time of such termination of the excess, if any, of the amount
of rent and such other charges as are required to be paid by Tenant under the
terms of this Lease for the remainder of this stated term over the then
reasonable rental value of the Premises for the remainder of the stated term,
all of which amounts shall be immediately due and payable from Tenant to
Landlord; provided, however, that if the then reasonable rental value of the
Premises exceeds the value of the rent and other charges required to be paid by
Tenant under this Lease as aforesaid, Tenant shall have no right to claim any
interest in all or any portion of such excess. In determining the rent which
would be payable by Tenant hereunder, subsequent to default, the annual rent for
each year of the unexpired term shall be equal to the average annual Base Rent
and Additional Rent paid or payable by Tenant from the Commencement Date of this
Lease to the time of default, or during the preceding three (3) full calendar
years, whichever is shorter; and
(e) Each of the remedies set forth hereinabove in this Section 17
shall not be exclusive, but rather shall be considered cumulative with any other
legal or equitable remedy now or hereafter available to Landlord under the laws
or judicial decisions of the state in which the Premises are located. To the
extent such waiver is permitted by law, the parties waive trial by jury in any
action or proceeding brought in connection with this Lease. Suit or suits for
the recovery of the amount of damages set forth hereinabove may be brought by
Landlord, from time to time, at Landlord's election, and nothing herein shall be
deemed to require Landlord to await the date whereon this Lease or the term
hereof would have expired had there been no event of default. Nothing contained
in this Lease shall limit or prejudice the right of Landlord to prove and obtain
as liquidated damages in any bankruptcy, insolvency, receivership,
reorganization or dissolution proceeding an amount equal to the maximum allowed
by any statute or rule of law governing such proceeding and in effect at the
time when such damages are to be proved, whether or not such amount be greater,
equal to or less than the amounts recoverable, either as damages or rent,
referred to in any of the preceding provisions of this Section.
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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 mortgage 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 of record, if any, specifying the act
or failure to act on the part of Landlord which could or would give basis to
Tenant's rights; and (b) such mortgagees, after receipt of such notice, have
failed or refused to correct or cure the condition complained of within a
reasonable time thereafter, provided that nothing contained in this Section
shall be deemed to impose any obligation on any such mortgagees to correct or
cure any condition. As used herein, a "reasonable time" includes a reasonable
time to obtain title to the mortgaged premises if the mortgagee elects to do so
and a reasonable time to correct or cure the condition if such condition is
determined to exist, but in no event less than 120 days from the date of the
mortgagees' receipt of the above described notice.
19. NOTICES.
Except as provided in Section 17.1(b) and 22, whenever under this lease
provision demand is made for any notice or declaration of any kind, or where it
is deemed desirable or necessary by either party to give or serve any such
notice, demand or declaration to the other party, it shall be in writing and
served either personally or sent by certified United States mail, return receipt
requested, postage prepaid, addressed either to the address set forth in
Section 1.1 or 1.11(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.
SFD CC
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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 that faithful performance of all of the other
obligations of this Lease required to be performed by Tenant, said lien to be
prior to any other lien on such property except a lien in favor of the seller
or lessor of such property to secure the unpaid purchase price or lease
payments thereof. All exemption laws are hereby expressly waived by Tenant.
This lien and security interest may be foreclosed in the same manner as a
Financing Statement under the version of the Uniform Commercial Code enacted
in the state in which the Premises are situated, or pursuant to any similar law
so enacted if a version of the Uniform Commercial Code is not in effect, and
the filing of this Lease in accordance with said law shall constitute full
lawful notice of this lien. In lieu of filing this Lease or in addition
thereto, Landlord may require Tenant at any time to execute a Financing
Statement, Security Agreement or any other similar documents required by the
laws of the state in which the Premises are situated to perfect this lien and
security interest, and Tenant shall immediately execute the same upon the
demand of Landlord. In the event Tenant fails or refuses to do so within ten
(10) days after written demand, Tenant does hereby make, constitute and
irrevocably appoint Landlord as Tenant's attorney-in-fact in Tenant's name,
place and stead, to do so, and/or Landlord may declare this Lease to be in
default.
24. HAZARDOUS MATERIALS.
Tenant covenants not to introduce any hazardous or toxic materials onto
the Building, the Premises, or the grounds surrounding the Building, without
(a) first obtaining Landlord's written consent and (b) complying with all
applicable federal, state and local laws or ordinances pertaining to the
transportation, storage, use or disposal of such materials, including but not
limited to obtaining proper permits.
If Tenant's transportation, storage, use or disposal of hazardous or toxic
materials on the Building, the Premises, or the grounds surrounding the
Building results in (1) contamination of the soil or the surface or ground
water (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,
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, loss or damage. This
provision shall survive the termination of this Lease.
SFD CC
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Tenant/Landlord
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25. GENERAL PROVISIONS.
25.1 Estoppel Certificate. (a) Tenant shall at any time upon not less
than ten (10) days prior written notice from Landlord, execute, acknowledge and
deliver to Landlord a statement in writing: (i) certifying that this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification, identifying the instruments of modification and certifying
that this Lease, as so modified, is in full force and effect), and the date to
which the Base Rent, security deposit, Additional Rent and other charges are
paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or
specifying such defaults, if any, which are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser, encumbrancer or other
transferee of the Premises.
(b) Tenant's failure to deliver such statement within such time shall
be conclusive upon Tenant: (i) that this Lease is in full force and effect,
without modification except as may be represented by Landlord, (ii) that there
are no uncured defaults in Landlord's performance, and (iii) that no rent has
been paid in advance; and
(c) If Landlord desires to finance or refinance the Premises or the
Building, or any part thereof, Tenant hereby agrees to deliver to Landlord
and/or to any lender designated by Landlord such financial records of Tenant as
may be reasonably required by such lender. Such statements may include but not
be limited to the past three (3) years' financial statements of Tenant. All
such financial statements shall be received by Landlord in confidence and shall
be used only for the purposes herein set forth.
25.2 Landlord's Interest and Liability. The term "Landlord" as used herein
shall mean only the owner or owners at the time in question of the fee title or
a tenant's interest in a ground lease of the real property on which the
improvements comprising the Building are situated. In the event of any transfer
of such title or interest, Landlord herein named (and in case of any subsequent
transfers the then grantor), shall be relieved from and after the date of such
transfer of all liability as respects Landlord's obligations thereafter to be
performed, provided that any funds in the hands of Landlord or the then grantor
at the time of such transfer in which Tenant has an interest shall be delivered
to the grantee. The obligations contained in this Lease to be performed by
Landlord shall, except as aforesaid, be binding on Landlord's successors and
assigns only during their respective periods of ownership. Anything to the
contrary elsewhere in this Lease notwithstanding, Tenant shall look solely to
the estate and property of the Landlord in the Building for the satisfaction of
the Tenant's remedies for the collection of a judgment (or other judicial
process) requiring the payment of money by the Landlord in the event of any
default or breach by the Landlord with respect to any of the terms, covenants
and conditions of the Lease to be observed and/or performed by the Landlord,
and no other property or assets of the Landlord shall be subject to levy,
execution or other enforcement procedure for the satisfaction of the Tenant's
remedies.
25.3 Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
25.4 Interest on Past Due Obligations; Certified Funds. Except as may
expressly be provided in this Lease to the contrary, any amount due to Landlord
not paid when due shall bear interest at the rate of 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 the date on which the payment is paid in full, provided, however,
that the payment of such interest shall in no event exceed the highest rate
allowed under applicable law. Payment of such interest shall not excuse or cure
any default by Tenant under this Lease. In the event that either Tenant is more
than ten (10) days late in making any payment due under the Lease, or any
payment from Tenant to Landlord does not clear the bank or is returned for
insufficient funds, and either such condition occurs on two or more occasions,
or each occurs once, Landlord shall have the right at any time thereafter to
require that all succeeding monthly installments of Base Rent and all
succeeding payments of Additional Rent be paid to the Landlord in certified
funds drawn on a bank located in the metropolitan area in which the Premises
are located. Said right may be exercised by landlord by giving notice of such
requirements to Tenant, but the giving of such notice and the exercise of this
right by Landlord shall not be construed to be a waiver of any default by
Tenant or any other right which Landlord may exercise under this Lease.
25.5 Time of The Essence. Time is of the essence in the performance by
Tenant of its obligations hereunder.
25.6 Captions. Any captions contained in this Lease are not a part hereof,
are for convenience only, and are not 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 any such representations were made prior to the
execution of this Lease, Tenant acknowledges that it has not relied on the
same, and that Landlord shall have no liability with respect to any such
representations.
25.8 Waivers. No failure by either party to insist upon the strict
performance of any agreement, term, covenant or condition hereof or to exercise
any right or remedy consequent upon a breach thereof, and no acceptance of full
or partial rent or the continuance of any such breach, shall constitute a
waiver of any such breach of such agreement, term, covenant or condition or a
relinquishment of the right to exercise such right or remedy. No agreement,
term, covenant or condition hereof to be performed or complied with by either
party, and no breach thereof, shall be waived, altered or modified except by a
written instrument executed by the other party. No waiver of any breach shall
affect or alter this Lease, but each and every agreement, term, covenant or
condition hereof shall continue in full force and effect with respect to any
other then existing or subsequent breach thereof. Notwithstanding any
termination of this Lease, the same shall continue in force and effect as to
any provisions of the Lease, including remedies, which require or permit
observance or performance of Landlord or Tenant subsequent to termination.
SFD CC
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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.
SFD CC
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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 FEBRUARY 5, 1998
THIS ADDENDUM is made this 5TH day of FEBRUARY, 1998 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 SHALL ESCALATE ACCORDING TO THE FOLLOWING SCHEDULE OF RENT:
TERM PER S.F. MONTHLY YEARLY
----- ------- --------- ----------
01-12 13.50 $3,937.50 $47,250.00
13-24 14.00 $4,083.33 $49,000.00
25-36 14.75 $4,302.08 $51,625.00
2) TENANT IMPROVEMENTS:
Tenant has inspected the Demises Premises and accepts the space "as is"
except that LANDLORD shall patch holes in the drywall, if any, and touch up
the paint as may be required in Landlord's sole discretion.
3) CONDITION PRECEDENT:
This Lease is specifically conditioned upon Landlord's possession and
availability for lease of Suite 240 located in Building 2812 at Emerson
Center.
4) OPTION TO INCORPORATE EXISTING SPACE INTO THIS LEASE:
Tenant shall have a one time option to expand its Demised Premises as
defined in this Lease by incorporating the total rentable area contained in
Suite 210 located in Building 2812 at Emerson Center, consisting of
approximately 3,243 square feet, by providing Landlord with written notice
of Tenant's desire to exercise such option on or before March 30, 1999. If
exercised, such expansion shall become effective October 1, 1999 and, at
that time, the entire Demised Premises, including the expansion space,
shall be governed according to the terms and conditions of this Lease
except that the total square footage shall become 6,743 square feet.
5) TERMINATION OF FIRST RIGHT OF REFUSAL:
Tenant hereby acknowledges and agrees that, upon execution of this Lease,
Tenant has exercised its First Right of Refusal according to the First
Amendment to Lease, Paragraph 8, dated August 26, 1996 (refer to Lease for
Suite 210 in building 2812 at Emerson Center) and that Tenant shall have no
additional first rights of refusal.
6) BROKER DISCLOSURE:
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.
7) RESTORATION OF PREMISES:
No later than the last day of the Term, TENANT shall, at TENANT's sole cost
and expense, remove all Tenant's personal property and, if requested to do
so by Landlord, remove any fixtures, cables and wires and repair all injury
done by or in connection with the installation and/or removal of said
property within the Demised Premises, on or above the roof, and within the
parking lot and surrender the Demised Premises, and any areas of the roof
and parking lot used exclusively by Tenant in as good a condition as they
were at the beginning of the Term, reasonable wear and tear excepted.
8) SPECIAL EQUIPMENT:
a) TENANT may place a fenced in generator in the rear parking lot of Emerson
Center to be located near the dumpsters behind Building 2812 as shown in
EXHIBIT "G", which is attached to this Lease and incorporated herein by
reference. Such area shall not encompass more than three parking spaces and
shall be the sole responsibility of TENANT. LANDLORD'S review of detailed
specifications and written consent shall be required PRIOR to the placement
of this generator.
b) While LANDLORD agrees that Tenant may install a satellite dish or other
antenna on the roof, such shall be subject to the additional rent and other
stipulation as contained in the License Agreement attached as Exhibit "H."
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, Ph.D.
-------------------------------- -------------------------------
CHRIS CLINTON SAM F. DAYTON, Ph.D.
Date: 3/11/98 Date: 2/27/98
------------------------------- ------------------------------
SFD CC
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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
LANDLORD: The Emerson Center Company TENANT:COMSTAR COMMUNICATIONS, INC.
---------------------------- ----------------------------
National Income Realty Trust,
- -------------------------------------
Managing General Partner
- -------------------------------------
By: /s/ CHRIS CLINTON, V.P. By: /s/ SAM F. DAYTON, Ph.D.
---------------------------------- --------------------------------
CHRIS CLINTON SAM F. DAYTON, Ph.D.
Date: 3/11/98 Date: 02-18-98
-------------------------------- ------------------------------
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
21
<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 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.
SFD CC
-------------/----------------
Tenant / Landlord
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
[CHART]
SFD CC
-------------/----------------
Tenant / Landlord
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 11 parking spaces which
service the Building in consideration for Tenant's payment of $N/A 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 MARCH 14, 2001. 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 provided 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 sold 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 of which 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, its
agents or employees, shall be paid for 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.
SFD CC
-----------------/------------------
Tenant / Landlord
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/ Michael A. Dayton /s/ SAM F. DAYTON, PH.D
- ---------------------- -----------------------------
Sam F. Dayton ###-##-####
- ---------------------- -----------------------------
Social Security Number
ADDRESS ADDRESS
P.O. Box 267 P.O. Box 1099
- ---------------------- -----------------------------
Gainesville, GA 30503 Gainesville, GA 30503 1099
- ---------------------- -----------------------------
By: Michael A. Dayton By: Sam F. Dayton
------------------- --------------------------
Date: 02-18-98 Date: 02-18-98
----------------- ------------------------
WITNESS GUARANTOR
/s/ Elizabeth Ferregton /s/ JAMES C. HOWELL
- ----------------------- ------------------------------
James C. Howell ###-##-####
- ----------------------- ------------------------------
Social Security Number
ADDRESS ADDRESS
2812 Spring Rd.
- ----------------------- ------------------------------
Suite 210, Atlanta, GA 30339
- ----------------------- ------------------------------
By: By: James C. Howell
-------------------- --------------------------
Date: Date: 02-19-98
------------------ ------------------------
SFD CC
-------------/----------------
Tenant / Landlord
26
<PAGE> 27
EXHIBIT F, STORAGE SPACE ADDENDUM
TO OFFICE BUILDING LEASE
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC., TENANT
SFD CC
---------- / ----------
Tenant / Landlord
27
<PAGE> 28
EXHIBIT "G"
BETWEEN THE EMERSON CENTER COMPANY, NATIONAL INCOME REALTY TRUST, MANAGING
GENERAL PARTNER, LANDLORD,
AND COMSTAR COMMUNICATIONS, INC. TENANT
[CHART]
SFD CC
-------------/-------------
Tenant / Landlord
28
<PAGE> 29
EMERSON CENTER
FIRST AMENDMENT TO LEASE
STATE OF GEORGIA
COUNTY OF COBB
THIS AMENDMENT made and entered in this 17TH day of SEPTEMBER, 1998, 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");
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated FEBRUARY 5,
1998 for certain premises located at 2812 SPRING ROAD, SUITE 240, ATLANTA,
GEORGIA, 30339, (hereinafter referred to as "Lease").
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. Effective Date: Effective date of this First Amendment is
hereby dated as October 01, 1998.
2. Section 1.3 Leased Area: Is hereby amended to be 4,558 square feet of
leased premises. An addition of 1,058 square
feet to the current 3,500 square feet.
3. Section 1.5 Tenant's Shall be changed from 2.75% to 3.59% of
Pro-Rata Share: building area.
4. Section 1.10 Base Rent, Rent for the additional space only shall be
Monthly Installments: paid according to the following schedule:
<TABLE>
<CAPTION>
DATE PER S.F. MONTHLY ANNUALLY
---- -------- ------- --------
<S> <C> <C> <C>
10/01/98 - 03/31/99 12.75 1,124.13 7,868.91
04/01/99 - 03/31/00 13.25 1,168.21 14,018.52
04/01/00 - 03/14/01 13.75 1,212.29 14,547.50
</TABLE>
5. Tenant shall accept the "Premises" on an "AS IS" basis.
6. Except as amended hereby, the Lease shall remain in full force and
effect and same is hereby ratified and confirmed.
<PAGE> 30
Page 2
FIRST AMENDMENT TO LEASE
COMSTAR COMMUNICATIONS, INC.
7. This amendment shall be binding upon and inure to the benefit of Landlord,
Tenant and their respected transfer, successors and assigns.
8. This Amendment shall be governed in all respects by the laws of the State
of Georgia.
9. 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 which is
incorporated herein and made a part hereof by reference. The Tenant was
not represented by any broker or agency in its negotiations of this
Amendment.
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: 10/13/98
----------------------------------- -------------------
ITS: Senior V.P.
----------------------------------
TENANT: COMSTAR COMMUNICATIONS, INC.
BY: /s/ James C. Howell DATE: 09/18/98
----------------------------------- -------------------
ITS: CEO
----------------------------------
<PAGE> 31
EMERSON CENTER
SECOND AMENDMENT TO LEASE
STATE OF GEORGIA
COUNTY OF COBB
THIS AMENDMENT made and entered in this 7TH day of JANUARY, 1999, 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");
WITNESSETH:
WHEREAS, Landlord and Tenant entered into a Lease Agreement dated FEBRUARY 5,
1998 for certain premises located at 2812 SPRING ROAD, SUITE 240, ATLANTA,
GEORGIA, 30339, (hereinafter referred to as "Lease"), which was amended by the
FIRST AMENDMENT to LEASE dated SEPTEMBER 17, 1998, 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. EFFECTIVE DATE: Effective date of this Second Amendment is
hereby dated as February 01, 1999.
2. SECTION 1.3 LEASE AREA: Is hereby amended to be 5,534 rentable sq.
(Section 2.1) ft. of leased premised. An addition of 976
r.s.f. to the current 4,558 r.s.f.
3. SECTION 1.5 TENANT'S Shall hereby be amended from 3.59% to 4.358%.
PRO-RATA SHARE OF
BUILDING AREA.
(Section 2.1)
4. SECTION 1.10 BASE RENT, Rent for the additional space only shall be
MONTHLY INSTALLMENTS: paid according to the following schedule:
(Section 4.1, 5.2)
<TABLE>
<CAPTION>
DATE PER S.F. MONTHLY ANNUALLY
---- -------- ------- --------
<S> <C> <C> <C>
02/01/99 - 03/31/99 13.50 1,098.00
04/01/99 - 03/31/00 14.00 1,138.66 13,664.00
04/01/00 - 03/31/01 14.75 1,199.67 14,396.00
</TABLE>
5. Tenant shall accept the "Premises" on an "AS IS" basis.
<PAGE> 32
PAGE 2
SECOND AMENDMENT TO LEASE
COMSTAR COMMUNICATIONS, INC.
6. Except as amended hereby, the Lease shall remain in full force and
effect and same is hereby ratified and confirmed.
7. This amendment shall be binding upon and inure to the benefit of
Landlord, Tenant and their respected transfer, successors and assigns.
8. This Amendment shall be governed in all respects by the laws of the
State of Georgia.
9. 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 which is incorporated herein and made a part hereof by
reference.
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: DATE:
------------------------ ------------------------
ITS:
------------------------
TENANT: COMSTAR COMMUNICATIONS, INC.
BY: /s/ SAM F. DAYTON DATE: 01/07/99
------------------------ ------------------------
ITS: President
------------------------
<PAGE> 1
EXHIBIT 10.6
NETWORK SERVICES
COMSTAR-------------------------------------------------------------------------
AGREEMENT
Thank you for doing business with Comstar Communications, Inc. (us or we). We
are committed to providing you with the highest quality Network Services
(Services). If, at any time, you have questions or problems, or are not
completely satisfied, please let us know. Our goal is to do our very best for
you.
This Comstar Network Services Agreement (Agreement) covers the following major
Service we may provide to you:
(a) Internet Access;
(b) Connectivity Services;
(c) Equipment Rental;
(d) Standard Colocation; and
(e) Dedicated Server Colocation.
ACCEPTANCE
By signing below, you acknowledge your review and acceptance of the terms and
conditions contained in this document or any applicable Service Addenda. This
Agreement can only be modified in a written document executed by both parties.
Any attempts to make modifications to these terms and conditions are void, and
will not be enforceable. Our entire agreement consists of this Agreement, an
accepted Service Quote, our corporate Acceptable Use Policy, and any applicable
Service Addenda. In the event of a conflict between any of these documents, the
terms and conditions of the applicable Addendum shall prevail.
Accepted By:
- --------------------------------------------------------------------------------
Customer Signature
- --------------------------------------------------------------------------------
Date
- --------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Company
RATES
The rates that we charge for Services are as specified in the accepted Sales
Quote. That document also specifies the length of the term of the Agreement
between us.
If you terminate a contract before the end of the agreed upon term, you will be
required to pay seventy-five percent (75%) of the remaining value of this
Agreement. In addition, if we provide Services via a third-party, you will be
charged all costs we incur for such early termination with our service provider.
UPGRADES
If you upgrade your current Services before the end of the agreed upon term, no
early termination penalty will be charged. You will be required to purchase the
upgrade under a new term commitment with a minimum of twelve (12) months and
early termination penalties apply to the upgraded Services as stated in the
Rates section of this Agreement.
PAYMENT
You will be billed on a cycle billing period. Your first bill will include all
non-recurring charges, charges for the first full month of Service, and the
pro-rated amount for Services provided during the month of installation. You
agree to pay all charges within thirty (30) days of the date of our invoice to
you. You shall pay us interest on overdue payments at the rate of one and
one-half percent (1-1/2%) or the maximum-rate allowable by law, whichever is
greater. If you do not pay an invoice within thirty (30) days, we reserve the
right to disconnect Services. If your check is returned by your bank, you will
be billed a twenty-five dollar ($25) return check fee.
We reserve the right to bill you retroactively for any Services for which we
previously had not billed, provided such retroactive billing occurs within one
year after the Service is provided.
You also agree to pay all applicable taxes resulting from any transaction under
this Agreement. This does not include taxes based on our net income.
USE OF FACILITIES AND EQUIPMENT
Along with the Services, we may rent to you Standard Comstar-provided Customer
Premise Equipment (Standard CPE). The Standard CPE will either be located at our
facility or directly on your premises.
1
<PAGE> 2
Standard CPE only includes equipment manufactured by Comstar-approved vendors.
All equipment that you rent from us will be our property, and will be made
available for your use only for the term of this Agreement. You have no property
rights in the rented equipment. We reserve the right to replace any rented
equipment at our expense and with minimal interruption to Services.
If you purchase Colocation services from us, such Services will be provided to
you under the terms and conditions of the Colocation Addendum which is hereby
incorporated herein.
You agree to: (1) refrain from modifying rented equipment, or authorizing others
to do the same; (2) obtain authorization from your landlord, as we may request,
in order to protect our rights in the rented equipment; and (3) provide us with
sufficient, free, and safe access to your facilities for us to fulfill our
obligations including retrieval of rented equipment upon termination or
expiration of this Agreement.
USE OF SERVICES
You agree to fully comply with our corporate Acceptable Use Policy ("AUP"),
which is attached hereto and hereby made a part of this Agreement. Violation of
our corporate AUP by you or any of your customers may result in immediate
termination of Services. You agree to independently assess your need for the
Services. You also agree to indemnify us and to hold us harmless for any and all
claims resulting from any use of the Services that cause damage to us, our other
customers, or any third party. This indemnification also extends to any utility
company that we may use to provide Services.
LETTERS OF AGENCY
In cases in which you ask us to act as your authorized agent for ordering and
coordinating local and long distance access circuits for services outside of
this Agreement, you will execute a Letter of Agency.
BANDWIDTH
We do not guarantee bandwidth or port speed for circuits and connections outside
of our network.
PATENTS & COPYRIGHT
If a third party claims that equipment we provide to you infringes that party's
patent or copyright, we will defend you against that claim at our expense and
pay all costs, damages, and attorney's fees that a court finally awards,
provided that you: (1) promptly notify us in writing of the claim; and (2) allow
us to control, and cooperate with us in, the defense and any related settlement
negotiations.
If such a claim is made or appears likely to be made, you agree to permit us to
enable you to continue to use the equipment, or to modify it, or replace it with
equipment that is at least functionally equivalent.
This is our entire obligation to you regarding any claim of intellectual
property right infringement.
TERM RENEWAL
At the end of the Term of this Agreement, this Agreement will automatically
continue on a month-to-month basis, at the then current Comstar Service List
Price, until the Agreement is terminated by either party giving the other at
least 30 days prior written notice of its intent to terminate.
LIMITS ON LIABILITY
Your sole remedy for any failure or non-performance of the Services shall be
outlined in the Comstar Service Level Agreement, attached and made part of this
Agreement. For any other claim for damages concerning our performance, we are
liable only for: (1) payments referred to in our patent and copyright terms
described herein; (2) bodily injury, including death, and damage to real
property and tangible personal property; and (3) the amount of any other actual
loss or damage, up to the lesser of $100,000 or the actual charges (if monthly
recurring, 12 months' charges apply) for the Service that is the subject of the
claim.
This limit also applies to any of our subcontractors. It is the maximum for
which we are collectively responsible.
Under no circumstances are we, the utility companies we use to provide Service,
or our subcontractors, liable for any of the following: (1) the content of the
information passing over our network; (2) unauthorized access to your
transmission facilities or to equipment you own; (3) unauthorized access or
damage to, alteration, theft, destruction or loss of, your records or data; (4)
economic consequential damages (including lost profits or savings) or incidental
damages, even if we are informed of their possibility; (5) claims for damages
caused by you, through fault, negligence or failure to perform your
responsibilities; (6) claims against you by any other party; or (7) any act or
omission of any other party furnishing services and/or products, or the
installation and/or removal of any and all equipment supplies by any other
service provider.
WARRANTIES
For each Service, we warrant that we perform it in a competent manner.
WE DO NOT WARRANT UNINTERRUPTED OPERATION OF THE SERVICE AND SPECIFICALLY
DISCLAIM ANY OTHER WARRANTIES, EITHER EXPRESSED OR IMPLIED, INCLUDING THE
WARRANTIES OF TITLE, MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
WE WILL NOT BE LIABLE TO EACH OTHER FOR ANY CONSEQUENTIAL, INDIRECT OR SPECIAL
DAMAGES WITH RESPECT TO ANY CLAIMS REGARDING THE SERVICES TO BE PROVIDED
HEREUNDER.
2
<PAGE> 3
CREDIT
Your execution of this Agreement signifies your acceptance of our initial and
continuing credit approval procedures and policies. We reserve the right to
withhold initiation or full implementation of Service until we are satisfied
with our initial credit review and approval. We may require a security deposit
before Services are provided.
If there is a material adverse change in your creditworthiness we may: (1)
interrupt Service; (2) deny requests for additional Services; or (3) require a
deposit.
TRANSFER AND ASSIGNMENT
You may not sell, assign or transfer any of your rights or obligations under
this Agreement without our prior written consent. We reserve the right to
transfer Services we provide to you via a third-party network to Comstar-based
facilities at any time during the term of this Agreement.
FORCE MAJEURE
We are not responsible for performing our obligations when they are delayed or
hindered by war, riots, embargoes, strikes or Acts of God.
GOVERNING LAW
This Agreement shall be governed by the laws of the State of Georgia.
SEVERABILITY
If any terms of this Agreement are held to be invalid, illegal, or
unenforceable, the validity, legality, and enforceability of the remaining terms
will not be in any way affected.
NOTICES
Notice to either party shall be delivered by first-class, pre-paid US mail to
the respective address.
For Comstar:
Comstar Communications, Inc.
2812 Spring Road
Suite 200
Atlanta, GA 30339
- --------------------------------------------------------------------------------
Attention
For Customer:
- --------------------------------------------------------------------------------
Company Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
City, State, Zip
- --------------------------------------------------------------------------------
Attention
3
<PAGE> 1
EXHIBIT 10.7
[COMSTAR LOGO] INTERNET ACCESS SERVICE ADDENDUM TO THE
-----------------------------------------------------------------
NETWORK SERVICES AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote, and our corporate Acceptable Use Policy
represent the entire agreement between us for the Services described in this
Addendum.
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- -------------------------------------------------------------------------------
Title
- -------------------------------------------------------------------------------
Company
SERVICE DESCRIPTION
Our Internet Access Service (Service) provides high-speed dedicated Internet
connectivity. There are five (5) Internet Access service types: Leased Line,
Digital Subscriber Line (DSL), Integrated Services Digital Network (ISDN),
Dedicated Server Colocation and Standard Colocation.
Colocation service allows you to colocate your Customer Premise Equipment (CPE)
in our facility.
Due to the overhead requirements associated with the Ethernet protocol, if you
purchase a 10Mbps Ethernet connection to the Internet you will receive
effective throughput limited to 4-6Mbps.
If you purchase Frame Relay Internet Access service you understand that we will
provision as a minimal requirement, a Committed Information Rate (CIR) equal to
twenty-five percent (25%) of the purchased Internet Access port speed. We will
guarantee the provisioned CIR at all times under normal network conditions,
from the CPE to our Internet backbone. You may have additional bandwidth
available above the CIR, which is not guaranteed by us, but is available based
on the network utilization at the time of data transmission.
SERVICE DEMARCATION
We will be responsible for the on-going management, and troubleshooting of all
components up to the demarcation point. The demarcation point of Internet
Access Services is determined by the purchased service type.
The demarcation point for Leased Line service is the established demarcation
point at your site for the telecommunications access circuit.
The demarcation point for ISDN is the established demarcation point at your
site for the telecommunications access circuit.
The demarcation point for DSL is the established demarcation point at your site
for the telecommunications access circuit.
There is no demarcation point for the Dedicated Server Colocation. Comstar is
responsible for maintaining network connectivity to the server under this
service.
The demarcation point for Standard Colocation service is at the cable, and
including the connecting cable, that interconnects the CPE and our backbone
equipment.
OUR RESPONSIBILITIES
Access Circuit - We will provision a telecommunications circuit for Leased Line
Internet Access service, from your premise to our nearest Internet Point of
Presence (POP). We will order the circuit to be terminated at the established
telecommunications demarcation point at your site unless otherwise instructed.
You will be responsible for any fees charged by the LEC for the extension of
the circuit to another location. We will be responsible for the on-going
management and troubleshooting of the telecommunications circuit up to the
demarcation point.
Customer Premise Equipment - If you rent CPE from us, the initial configuration
of the equipment will be performed by our Engineering during the activation
process. The initial setup will be a standard configuration, establishing
routing between the CPE and our Internet Backbone. The installation of the CPE
will be done via a tele-install between one of our Engineers and a contact at
your site. Our Engineers on a time and materials basis will provide additional
configuration. We will provide monitoring of CPE and the access circuit.
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<PAGE> 2
All Standard CPE will come with one of the following maintenance features:
- - Registered access to the manufacturers on-line support services, 24
hours a day, 7 days a week.
- - Software updates via the on-line support service.
- - Next business-day delivery of advance replacement parts, provided the
request is received by our Network Operations Center (NOC) prior to
3:00pm Eastern Time.
IP Address Allocation - We adhere to the American Registry of Internet Numbers
(ARIN) recommended guidelines for allocation of Internet IP address space to
its customers. Under ARIN recommendations, we do not permit the portability of
our IP address space. We allocate address space to you for the duration of this
Agreement. Upon Service termination, you will be required to forfeit any
allocated address space to us. We will allocate address space during the
installation process. It is required that documented justification be submitted
to us prior to the allocation of address space. You may request up to a /20
CIDR allocation (equivalent to 16 Class C size networks) from us. You agree to
accept Service regardless of the number of IP addresses justified according to
ARIN guidelines. If you require larger blocks of address space you must
petition ARIN directly. We will assist you in preparing your petition to ARIN
on a time and materials basis.
We will route IP address networks attained directly from ARIN, however, we will
not route IP address networks that you were assigned from another Internet
Service Provider (ISP), except when you are dually homed between that ISP and
us.
Domain Name Service (DNS) - Secondary DNS is provided standard with the
Service. You may also elect to have us provide primary DNS for an additional
monthly fee. In this instance, we will be responsible for the administration of
your DNS tables on our Domain Name Server.
Primary DNS includes the initial set up of your DNS records, as well as the
ongoing management and support of the tables.
If you wish to make modifications to DNS records you will need to engage us to
administer the change. You will be permitted two requests per week.
If you provide access and/or hosting services to your customers, we will
provide secondary DNS for your domains only. We will not provide DNS services
for your end-users.
Newsfeed - We offer you a newsfeed for an additional monthly fee.
We provision newsfeeds in a server-to-server architecture. We will allow your
end-users to direct their newsreaders to our servers for news service for a
fee.
We offer full newsfeeds only. You will not have the ability to restrict
specific newsgroups or hierarchies from being fed to your server.
Activation Services - Following the installation of the access circuit and CPE,
one of our Engineers will activate the Service. Once routing is established
between the CPE and our Internet Backbone, the Engineer will run a series of
tests from the CPE to points on the Global Internet.
Service implementation will be complete and billing will begin when the
following criteria have been met:
1 any Comstar-supplied CPE is installed and operational;
2 IP connectivity to the Internet (including routing outside our
network) exists;
3 In cases when the CPE configuration supports it, our Network
Operations will verify IP routing through a traceroute test;
4 Comstar-supplied Primary and/or Secondary DNS services are operational
for your domain;
5 Comstar-supplied Newsfeed is established; and
6 You order is turned over to our Network Operations Center for
management.
Billing will not be delayed nor any credits issued if any of the above criteria
is not met due to any of the following circumstances.
- - A News server on your LAN is not operational;
- - You fail to provide hostname and IP address allocations to enable us
to set up Primary DNS service;
- - Delays in the availability of CPE you provide; or
- - Delays in the configuration of your LAN components or applications.
Management - Our Network Operations Center will manage all components up to the
Service demarcation point, 24 hours a day, 7 days a week.
YOUR RESPONSIBILITIES
- - Initiate maintenance calls for the Comstar-rented CPE and the access
lines by contacting us;
- - Ongoing configuration of all rented CPE following the initial
configuration by us;
- - Additional wiring and cabling required for CPE; and
- - Managing the LAN environment, defined as equipment located on the LAN
side of the router. If we isolate a problem beyond the demarcation
point, you are responsible for fault resolution and we assume no
responsibility. You have no remedy or claim for service credit for
Service outages or Service degradations caused by problems beyond the
demarcation point
2
<PAGE> 1
EXHIBIT 10.8
[COMSTAR LOGO] COLOCATION SERVICE ADDENDUM TO THE
-----------------------------------------------------------------
NETWORK SERVICES AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote, and our corporate Acceptable Use Policy
represent the entire agreement between us for the Services described in this
Addendum.
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- -------------------------------------------------------------------------------
Title
- -------------------------------------------------------------------------------
Company
LICENSE TO OCCUPY
We grant to you a license to occupy the portion of the Premises depicted in
each Colocation Schedule (the "Space"). The Space is accepted "As-Is" by you.
You may use the Space only for the purposes of installing, maintaining and
operating certain computing, cabling and telecommunications equipment.
You may not use the Space to interconnect with telecommunications services
provided to you by third parties, without the express written consent of us. If
you should interconnect the Equipment with equipment or services of any entity
other than us, without our written consent, you shall be in breach of this
Agreement.
This grant of License to you shall in no way limit our right to maintain and
operate our facilities in such a manner as will best enable us to fulfill our
service requirements.
CHARGES
All fees associated with this Agreement are specified in the attached
Colocation Schedule ("Exhibit 1").
MAINTENANCE AND INSPECTIONS.
You shall provide us with 24-hour notification prior to any maintenance,
repair, or installation of the Equipment. Routine maintenance by you shall be
scheduled during normal business hours of the facility in which you are
Colocated unless prior approval is received from the facility manager.
Your employees, agents or contractor(s) shall be permitted to enter or work in
the Space only when accompanied by an authorized Comstar employee or agent.
Comstar's authorized employee or agent shall have the authority, without
subjecting us to any liability, to suspend your work operations in and around
the Space, if in the discretion of the said employee or agent, any hazardous
conditions arise. The presence of our personnel shall not relieve you of your
responsibility to conduct your work operations in a safe and workmanlike
manner.
You shall pay a fee of $125.00 per hour, or portion thereof, with a
minimum charge of three (3) hours, for each Comstar employee or contractor that
is dispatched during non-business hours. This fee shall be subject to change
upon thirty (30) days advance written notification to you.
In the event of an emergency, our work shall take precedence over any and all
of your operations, and we may rearrange the Equipment without any liability.
If you experience an emergency, you shall immediately notify us prior to
performing any repair or maintenance necessary to correct the emergency
situation.
REMOVAL AND RELOCATION
We shall not arbitrarily or capriciously require you to relocate the Equipment;
however, upon ninety (90) days' prior written notice or, in the event of an
emergency, such time as may be reasonable, we may require you to relocate the
Equipment; provided, however, the site of relocation shall afford comparable
environmental conditions for the Equipment, shall be no further than ten (10)
air-miles from the original location and comparable accessibility to the
Equipment.
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<PAGE> 2
If Equipment causes unacceptable interference to existing or future Comstar
circuits or equipment, you may be required to remove or relocate the offending
Equipment. The cost of relocating the Equipment and cabling will be your
responsibility.
If you cease to use services purchased from us, you shall immediately remove
the Equipment in the Space unless agreed upon by both parties as an addendum to
this Agreement. If you fail to remove said Equipment following ten-(10) days
notice from us, we may, at our option, terminate the License or remove said
Equipment. You shall be responsible for all costs and expenses associated with
removal and storage of the Equipment.
INSURANCE
You shall obtain and keep in full force and effect at all times for the
duration of this Agreement, with a carrier or carriers satisfactory to us,
insurance policies of the following kinds and in the following amounts:
(i) Worker's Compensation complying with the law of the State or States
of operation, whether or not such coverage is required by law; and
Employer's Liability insurance with limits of $500,000 per incident,
$500,000 disease policy limit and $500,000 per employee.
(ii) Commercial General Liability insurance with a combined single limit
for bodily injury and property damage of $1,000,000 each occurrence
and General and Products Liability aggregates of $2,000,000, each
covering all your obligations or your operations.
The policy shall include no modifications that reduce the standard coverage
provided under a Commercial General Liability Insurance policy form.
You shall furnish us with certificates of such insurance upon request by us.
Each policy shall provide that no change or cancellation shall become effective
except upon thirty (30) days prior written notice to us of such change or
cancellation. In the event of any change or cancellation not acceptable to us,
we may demand that you obtain replacement coverage. If you fail to obtain
replacement coverage within ten (10) days after such demand by us, you will be
in default of this Agreement.
You waive your right, and your underwriters right, of subrogation against us,
our officers, directors, agents, and employees thereof, and corporate
shareholders and their officers, directors, agents and employees thereof,
providing that such waiver in writing, prior to loss does not void or alter
coverage.
We, and our affiliates, shall not insure or be responsible for any loss or
damage to property of any kind owned or leased by you or your employees,
servants and agents. Any policy of insurance covering the property owned or
leased by you against loss by physical damage shall provide that the
underwriters have given their permission to waive their rights of subrogation
against us, our affiliates and their directors, officers and employees, as well
as their subsidiaries, including the directors, officers and employees thereof.
If you utilize contractor(s) per this Agreement, then you shall require such
contractor(s) to comply with these insurance requirements and supply
certificates of insurance upon our request.
INDEMNIFICATION AND LIABILITY.
You shall defend, hold harmless, and indemnify us from all claims, demands,
actions, damages, judgements, expenses and costs (including attorney's fees),
and liabilities for injury, death on the premises or property damage arising
out of your access to or use of the Premises.
We shall not be liable for any damages to the Equipment colocated on our
Premises, except to the extent that such damage is caused by gross negligence
or intentional acts by us, our agents or employees.
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<PAGE> 1
EXHIBIT 10.9
[COMSTAR LOGO] CORPORATE ACCEPTABLE USE POLICY ADDENDUM TO THE
------------------------------------------------------------------
NETWORK SERVICES
AGREEMENT
This document, when executed by you, is incorporated into the Comstar Network
Services Agreement. In the event of any conflict between the terms of this
Addendum, and the terms of the Comstar Network Services Agreement, the terms of
this Addendum shall control. This Addendum, the Comstar Network Services
Agreement, an accepted Sales Quote represent the entire agreement between us
for the Services described in the Service Addendum(s).
Accepted By:
- -------------------------------------------------------------------------------
Customer Signature
- -------------------------------------------------------------------------------
Date
- -------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Company
INTRODUCTION
Our Internet Access Service (Service) provides high-speed dedicated Internet
connectivity. We have certain legal and ethical responsibilities regarding the
use of its computer network and equipment involved in these services.
System abuse is strictly prohibited. We may terminate your Service immediately
and may bill you for any resulting charges if you, your employees or
contractor(s) engage in system abuse.
This Acceptable Use Policy Addendum was created to help you understand our
definition of system abuse. The examples listed here is not exclusive of all
possible actions that may be deemed as abuse. You are asked only to use your
best judgement.
ABUSE OF SERVICE
Actions which constitute system abuse include, but are not limited to:
Utilizing any service in the commission of a crime;
Attempting to circumvent user authentication of any host, network, or account on
our systems or the Internet at large ("cracking");
Attempting in any way to interfere with or deny service to any user or any host
on the Internet;
Forging Email or USENET header information to conceal your identity as the
author, conceal the origination address of the Email, or conceal the host from
which the Email was originated;
Sending of unsolicited mail messages, either commercial or non-commercial
("junk mail");
Forwarding or multiple posting of chain letters of any type;
Posting of inappropriate messages to USENET newsgroups e.g., posting large
numbers of unsolicited Email indiscriminately ("spamming");
Attempt to cancel, supersede, or otherwise interfere with Email or USENET posts
other than one's own; and
Engaging in harassment whether through language, frequency, or size of
messages.
This Acceptable Use Policy is subject to revision at anytime that we determine
a change is necessary. We will inform you of those changes by whatever means we
deem most effective. It is your responsibility to ensure that the use of our
network conforms to the policies currently in effect.
COOPERATION WITH LAW ENFORCEMENT
We will cooperate with Law Enforcement officials by providing whatever
information they require, so long as they present authorization from a United
States Court that has jurisdiction over the territory and subject matter that
they are seeking.
1
<PAGE> 1
EXHIBIT 10.10
[COMSTAR LOGO] SPECIAL ACCESS SERVICES
-----------------------------------------------------------------
AGREEMENT
Thank you for doing business with Comstar Communications, Inc. We are committed
to providing you with the highest quality of telecommunications services. If,
at any time, you have questions or problems, or are not completely satisfied,
please let us know. Our goal is to do our best for you.
ACCEPTANCE By signing below, you acknowledge your review and acceptance of the
terms and conditions contained in this Agreement. This Agreement can only be
modified in a written document executed by both parties. Any attempts to make
modifications to these terms and conditions are void, and will not be
enforceable.
We provide the Special Access Services to you under the terms of our, or third
party, applicable state and federal tariffs (Tariffs). Our entire agreement
consists of this Agreement and its Attachments, and the applicable Tariffs.
This Agreement supersedes any prior or contemporaneous proposals, discussions
or agreements, written or oral, concerning Comstar services.
With the exception of any special pricing and term commitments contained
herein, in the event of any conflict between the terms of this Agreement and
its Attachments, and the terms of our, or third party, Tariffs.
Accepted By:
- --------------------------------------------------------------------------------
Company
- --------------------------------------------------------------------------------
Customer Name
- --------------------------------------------------------------------------------
Title
- --------------------------------------------------------------------------------
Customer Signature
- --------------------------------------------------------------------------------
Date
SPECIAL ACCESS SERVICES (Services) are defined as digital or analog
transmission channels connecting two locations that either originate or
terminate on Comstar-owned or leased telecommunications facilities. You will be
charged for all of the following service elements: channel termination, channel
mileage, multiplexing, and any special line conditioning required to prepare
the channels to transmit signals.
TERM COMMITMENT You agree to purchase the Services for the Term specified in
Attachment A. Based on this Term, you will receive the Services at the rates
specified in Attachment A. This Agreement will automatically renew for an
additional Term of equal length with the initial Term unless Comstar receives
advance written notice from you at least thirty (30) days prior to the end of
the initial Term of your desire not to renew the Agreement.
EARLY TERMINATION PENALTY If you decide to terminate the Services prior to the
end of the Term, you will be subject to early termination charges equal to one
hundred percent (100%) of the number of months remaining in the Term multiplied
by the monthly rate for the Services. You shall be obligated to pay such charges
within thirty (30) days of termination. If we provide the Services via a third
party, you will be charged all costs we incur for such early termination with
our service provider.
PAYMENT You will be billed at the beginning of each month. Your first bill will
include all non-recurring charges, charges for the first full month of Service,
and the pro-rated amount for Services provided during the month of
installation. You agree to pay all charges within thirty (30) days of the date
of our invoice to you ("Due Date"). You shall pay us interest on overdue
payments at the rate of one and a half percent (1.5%) or the maximum rate
allowable by law. If you do not pay all undisputed amounts by the Due Date we
reserve the right to disconnect Services. You will have up to ninety (90) days
(commencing five (5) days after remittance of the bill) to initiate a dispute
over charges or to receive credits, if applicable. We reserve the right to bill
you retroactively for any Services for which we previously had not billed. If
your check is returned by your bank, you will be billed a twenty-five dollar
($25) return check fee. You also agree to pay all applicable taxes resulting
from any transaction under this Agreement. This does not include taxes based on
our net income.
LETTERS OF AUTHORIZATION In cases in which you and Comstar agree to have
Comstar act as your authorized agent for ordering and coordinating local and
long distance access circuits for services outside of this Agreement, you will
execute a Letter of Authorization.
CREDIT Your execution of this Agreement signifies your acceptance of our
initial and continuing credit approval procedures and policies. We reserve the
right to withhold initiation or full implementation of the Services until we
are satisfied with our initial credit review and approval. We may require a
security deposit before Services are provided.
If there is a material adverse change in your creditworthiness we may: (1)
interrupt Service; (2) deny requests for additional Services or (3) require a
deposit.
TRANSFER AND ASSIGNMENT You may not sell, assign or transfer any of your rights
or obligations under this Agreement without our prior written consent. We
reserve the right to transfer Services we provide to you via a third-party
network to Comstar-based facilities at any time during the term of this
Agreement.
FORCE MAJEURE We are not responsible for performing our obligations when they
are delayed or hindered by war, riots, embargoes, strikes, or other Acts of
God.
<PAGE> 1
EXHIBIT 10.11
NON-SOLICITATION, CONFIDENTIALITY AND ASSIGNMENT AGREEMENT
EMPLOYEE:____________________________________ DATE:______________________
THIS AGREEMENT ("Agreement") is made and entered into on the date set
forth below, by and between comstar.net, inc. ("Company") and the undersigned
employee ("Employee").
In the course of Employee's employment by Company, Employee may have
access to Company's most sensitive and most valuable trade secrets and
confidential information, the use, application or disclosure of which may cause
substantial and possible irreparable damage to the business and asset value of
Company. Accordingly, Employee accepts and agrees to be bound by the following
provisions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, of the employment or continued employment of Employee by
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree as follows:
1. For purposes of this Agreement, the following definitions shall
apply:
(a) "TRADE SECRETS" shall mean any information of Company,
without regard to form, including, but not limited to, technical or
nontechnical data, a formula, a pattern, a compilation, a program, a device, a
method, a technique, a drawing, a process, financial data, financial plans,
product plans, or a list of actual or potential customers or suppliers, which
is not commonly known by or available to the public and which information (i)
derives economic value, actual or potential, from not being generally known to
and not being readily ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and (ii) is the subject of
efforts that are reasonable under the circumstances to maintain its secrecy.
Trade Secrets also include any information described in this paragraph (a)
which Company obtains from another party which Company treats as proprietary or
designates as trade secrets, whether or not owned or developed by Company.
(b) "CONFIDENTIAL INFORMATION" shall mean any data or
information, other than Trade Secrets, that is of value to Company and is not
generally known to competitors of Company. To the extent consistent with the
foregoing, Confidential Information includes, but is not limited to, lists of
any information about Company's executives and employees, marketing techniques,
price lists, pricing policies, Company's business methods, and contracts and
contractual relations with Company's customers and suppliers. Confidential
Information also includes any information described in this paragraph (b) which
Company obtains from another party which Company treats as proprietary or
designates as confidential information, whether or not owned or developed by
Company.
<PAGE> 2
(c) "EMPLOYEE WORKS" shall mean any and all works of
authorship, code, inventions, discoveries, and work product, whether or not
patentable or eligible for copyright, and in whatever form, which are, have
been or will be created, made, or developed by Employee in the course of
employment with Company, during Employee's regular business hours with Company,
on the Company's premises, or using the Company's resources or equipment.
(d) The terms "TRADE SECRETS" and "CONFIDENTIAL INFORMATION"
shall not include any materials or information of the types specified above to
the extent that such materials or information (i) are or become publicly known
or generally utilized by others engaged in the same business or activities in
which Company utilized, developed, or otherwise acquired such information; or
(ii) are known to Employee prior to employment, having been lawfully received
from parties other than Company; or (iii) are furnished to others by Company
with no restriction on disclosure. Failure to mark any of the Trade Secrets or
Confidential Information as confidential shall not affect their status as Trade
Secrets or Confidential Information under this Agreement.
2. Employee recognizes and acknowledges that Company is engaged in
activities which involve, and continue to involve, the use of skilled experts
and the expenditure of substantial amounts of time and money. As a result of
such investments of skill, time, and money, Company has developed certain Trade
Secrets and Confidential Information which give Company significant advantages
over its competitors. Due to the nature of Employee's employment by Company,
Employee may have frequent direct and indirect contact with various customers
of Company and may be presented with, have access to, and/or participate in the
development of proprietary software, Trade Secrets, and Confidential
Information. These constitute valuable, special and unique assets of Company,
and any use or disclosure thereof contrary to the terms of this Agreement may
cause substantial loss of competitive advantage and other serious injury to
Company.
3. For the reasons recited above, Employee covenants and agrees to
all of the following:
(a) During the term of employment by Company and after the
termination thereof, whether such termination is at the instance of Employee or
Company, Employee will not, except as expressly authorized or directed by
Company, use, copy, duplicate, transfer, transmit, disclose, or permit any
unauthorized person access to, any Trade Secrets belonging to Company, any of
Company's customers, any of Customer's business partners or subcontractors, or
any related third party so long as they remain Trade Secrets. Employee will
abide by Company's policies and regulations, as established from time to time,
for the protection of its Confidential Information.
(b) During the term of employment by Company and for a period
of two (2) years after termination, whether such termination is at the instance
of Employee or Company, Employee will not, except as expressly authorized or
directed by Company, use, copy, duplicate, transfer, transmit, disclose, or
permit any unauthorized person access to, any Confidential
2
<PAGE> 3
Information belonging to Company, any of Company's customers, any of Customer's
business partners or subcontractors, or any related third party.
(c) Upon request of Company and in any event upon the
termination of employment with Company, Employee will deliver to Company all
memoranda, notes, records, tapes, documentation, disks, manuals, files or other
documents, and all copies thereof in any form, concerning or containing Trade
Secrets, Confidential Information, or Employee Works that are in Employee's
possession, whether made or compiled by Employee, furnished to Employee or
otherwise obtained by Employee.
(d) All Employee Works shall be the property of Company.
Employee will promptly disclose to Company any such Employee Works and shall
execute and deliver such confirmatory assignments, instruments, or documents as
Company deems necessary or desirable without requiring Company to provide any
further consideration therefor. Employee agrees to and hereby does assign to
Company all right, title, and interest in and to any and all Employee Works,
including all worldwide copyrights, patent rights, and all trade secret and all
confidential information embodied therein. Employee waives any and all moral
rights Employee may have in any Employee Works, including but not limited to
the right to acknowledgement as author.
(e) During the term of employment by Company and for a period
of one (1) year after termination, whether such termination is at the instance
of Employee or Company, Employee shall not directly or indirectly, through one
or more intermediaries or otherwise, solicit or attempt to solicit Customers,
to induce or encourage them to acquire or obtain from anyone other than
Company, service competitive with or substitute for any Company Service. For
purposes of this Section, a "Customer" refers to any person or group of persons
with whom Employee has or had direct material contact with regard to selling,
delivery or support of Company Services, including servicing such person's or
group's account, during the period of two (2) years preceding the date hereof;
and "Company Services" refers to the services that Company offered or sold
within six (6) months prior to the date hereof.
(f) During the term of employment by Company and for a period
of one (1) year after termination, whether such termination is at the instance
of Employee or Company, Employee shall not, directly or indirectly, through one
or more intermediaries or otherwise, employ, induce, solicit for employment, or
assist others in employing, inducing or soliciting for employment any
individual who is at any time during such period an employee of Company for the
purpose of providing services that are the same or similar to the Company
Services.
4. Employee is not subject to any employment, non-disclosure,
confidentiality, non-compete, or other agreement with any third party which
would prevent or prohibit Employee from fulfilling his duties for Company. If
Employee is the subject of any such agreement, and has any doubt as to its
applicability to Employee's position with Company, Employee will provide a copy
of such agreement to Company so that Company can make a determination as to its
effect on Employee's ability to work for Company.
3
<PAGE> 4
5. Employee agrees not to use or include in Employee Works any
copyrighted, restricted or protected code, specifications, concepts, trade
secrets, or confidential information of any third party or any other
information which Employee would be prohibited from using by any
confidentiality, non-disclosure or other agreement with any third party.
6. The restrictions contained in this Agreement are considered by
the parties hereto to be fair and reasonable and necessary for the protection
of the legitimate business interests of Company. It is recognized that damages
in the event of breach of the provisions of this Agreement by Employee would be
difficult, if not impossible, to ascertain, and it is therefore agreed that
Company, in addition to and without limiting any other remedy or right it may
have, shall have the right to an injunction or other equitable relief in any
court of competent jurisdiction, enjoining any such breach. The existence of
this right shall not preclude any other rights and remedies at law or in equity
which Company may have.
7. If any provision or any part of any provision of this Agreement
shall not be valid for any reason, such provision shall be entirely severable
from, and shall have no effect upon, the remainder of this Agreement. Any such
invalid provision shall be subject to partial enforcement to the extent
necessary to protect the interests of the Company.
8. This Agreement shall be binding upon the parties to this
Agreement and their respective heirs, administrators, executors, successors and
assigns.
9. This Agreement and the rights and liabilities of the parties to
the Agreement will be determined in accordance with the laws of the State of
Georgia, excluding choice of law principles. Company and Employee irrevocably
consent to the exclusive jurisdiction and venue of the courts of any county in
the State of Georgia and the district courts of Georgia, in any judicial
proceeding brought to enforce this Agreement. The parties agree that any forum
other than the State of Georgia is an inconvenient forum and that a lawsuit (or
non-compulsory counterclaim) brought by one party against another party, in a
court of any jurisdiction other than the State of Georgia should be forthwith
dismissed or transferred to a court located in the State of Georgia.
10. The intent of this Agreement is to provide Company with all
remedies afforded to it under applicable law, including but not limited to
those remedies under the Georgia Trade Secrets Act, O.C.G.A.
10-1-760 et seq., as amended.
11. This Agreement shall be deemed effective at the earlier to occur
of the commencement of the employment relationship between Company and Employee
or Employee's initial possession, knowledge or acquisition of Company's Trade
Secrets or Confidential Information. The protection afforded hereunder is in
addition to and does not replace any prior confidentiality or non-disclosure
obligation of Employee to Company.
12. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in a
writing signed by Company and Employee.
4
<PAGE> 5
13. This Agreement may be executed in one or more counterparts, each
of which will constitute an original but all of which together constitute a
single document.
IN WITNESS WHEREOF, the parties have executed this Agreement.
COMPANY:
comstar.net, inc. EMPLOYEE:
By: Signature:
---------------------------------------- ----------------------
Name (Print): Name (Print):
------------------------------ -------------------
Title:
-------------------------------------
5
<PAGE> 1
EXHIBIT 10.12
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMSTAR COMMUNICATIONS INC PREMIER BANK GAINESVILLE OFFICE ACCOUNT #: TX582235514
P O BOX 267 311 GREEN STREET Loan Number 60051710
GAINESVILLE, GA 30503 GAINESVILLE, GA 30501 Date JULY 21, 1999
Maturity Date NOV. 1, 1999
Loan Amount $100,100.00
Renewal Of 3
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS SOC SEC #: GDH/JCS/15
"I" includes each borrower above, "You" means the lender, its successors
joint and severally and assigns.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of ONE HUNDRED THOUSAND ONE HUNDRED AND NO/100
************************** Dollars $100,100.00
[XX] SINGLE ADVANCE: I will receive all of this principal sum on
________________. No additional advances are contemplated under this note.
[ ] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On _____________ I will receive the
amount of $_________ and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are ________________________
___________________________________________________________________________
___________________________________________________________________________
[ ] OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on ______________.
[ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from JULY
21, 1999 at the rate of 9.000% per year until FIRST CHANGE DATE.
[XX] VARIABLE RATE: This rate may then change as stated below.
[XX] INDEX RATE: The future rate will be 1.000% OVER the following index
rate: PREMIER BANK'S PRIME RATE.
___________________________________________________________________________
___________________________________________________________________________
[ ] NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
[XX] FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY. A change in the interest rate will take effect ON THE SAME DAY.
[XX] LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than 99.990% or less than 1.000%. The
rate may not change more than ____________% each
____________________________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments.
[XX] The amount of each scheduled payment will change.
[XX] The amount of the final payment will change.
[ ] ______________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[XX] on the same fixed or variable rate basis in effect before maturity
(as indicated above).
[ ] at a rate equal to _____________________________________________________.
[XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 5.000% OF THE LATE PAYMENT WITH A MINIMUM OF
$25.00 AND A MAXIMUM OF $100.00.
[XX] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which [XX] are [ ] are not included in the principal amount above :
$100.00 LOAN FEE.
PAYMENTS: I agree to pay this note as follows:
[XX] INTEREST: I agree to pay accrued interest ON THE 1ST DAY OF EACH MONTH
BEGINNING SEPTEMBER 1, 1999.
[XX] PRINCIPAL: I agree to pay the principal NOVEMBER 1, 1999.
[ ] INSTALLMENTS: I agree to pay this note in _____ payments. The first
payment will be in the amount of $ ____________________________________________
and will be due ___________________________________. A payment of $ ___________
will be due _______________________________________________________ thereafter.
The final payment of the entire unpaid balance of principal and interest will
be due _____________________________________________________________________.
[ ] If checked, and this loan is secured by a first lien on real estate, then
any accrued interest not paid when due (whether due by reason of a schedule of
payments or due because of lenders demand) will become part of the principal
thereafter, and will bear interest at the interest rate in effect from time to
time as provided for in this agreement.
ADDITIONAL TERMS:
ALL COLLATERAL IS ALSO SECURING LOAN OF EVEN NAME BEING LOAN NUMBER 60046455
<TABLE>
<S> <C>
[XX] SECURITY: This note is separately secured by PURPOSE: The purpose of this loan is BUSINESS:
(describe separate document by type and date): RENEWAL 60051710
SECURITY AGREEMENT OF EVEN NAME AND DATE SIGNATURES AND SEALS: IN WITNESS WHEREOF, I HAVE
SIGNED MY NAME AND AFFIXED MY SEAL ON THIS 21ST
(This section is for your internal use. Failure to DAY OF JULY, 1999. BY DOING SO, I AGREE
list a separate security document does not mean the TO THE TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE
agreement will not secure this note.) 2). I HAVE RECEIVED A COPY ON TODAY'S DATE.
COMSTAR COMMUNICATIONS INC
Signature for Lender ___________________________________________ (Seal)
BY:
X_________________________________________________ ___________________________________________ (Seal)
GEORGE D HENDERSON DR SAM F DAYTON, PRESIDENT
__________________________________________________ ___________________________________________ (Seal)
___________________________________________ (Seal)
(page 1 of 2)
</TABLE>
<PAGE> 2
DEFINITIONS: As used on page 1, "[X]" means the terms that apply to this loan.
"I," "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW: The law of the state of Georgia will govern this note. Any term
of this note which is contrary to applicable law will not be effective, unless
the law permits you and me to agree to such variation. If any provision of this
agreement cannot be enforced according to its terms, this fact will not affect
the enforceability of the remainder of this agreement. No modification of this
agreement may be made without your express written consent. Time is of the
essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal advanced at that time. You and I may provide in this agreement for
accrued interest not paid when due to be added to principal. Notwithstanding
anything to the contrary, I do not agree to pay and you do not intend to
charge any rate of interest that is higher than the maximum rate of interest
you could charge under applicable law for the extension of credit that is
agreed to here (either before or after maturity). If any notice of interest
accrual is sent and is in error, we mutually agree to correct it, and if you
actually collect more interest than allowed by law and this agreement, you agree
to refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on this
note. You do not guarantee by selecting this index, or the margin, that the
rate on this note will be the same rate you charge on any other loans or class
of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of this
note. For the purpose of interest calculation, the accrual method will determine
the number of days in a "year." If no accrual method is stated, then you may
use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the "PAYMENTS BY
LENDER" paragraph below, or if we have agreed that accrued interest not paid
when due may be added to principal.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you and I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and add them to the unpaid principal
under this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession
for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to an account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to hold
you harmless from any such claims arising as a result of your exercise of your
right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a
residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the terms
of any separate instrument creating the security interest and, to the extent not
prohibited by law and not contrary to the term of the separate security
instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1)
I fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) any collateral securing this
note is used in a manner or for a purpose which threatens confiscation by a
legal authority; (9) I change my name or assume an additional name without first
notifying you before making such a change; (10) I fail to plant, cultivate and
harvest crops in due season; (11) any loan proceeds are used for a purpose
that will contribute to excessive erosion of highly erodible land or to the
conversion of wetlands to produce an agricultural commodity, as further
explained in 7 C.F.R. Part 1940, Subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-Off" paragraph
herein.
(3) You may demand security, additional security, or additional parties
to be obligated to pay this note as a condition for not using any
other remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right to
later use any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to later consider the event as a default
if it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all costs of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee, not
to exceed 15 percent of the principal and interest then owed, you incur with
such attorney plus court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay the
reasonable attorney's fees and costs you incur to collect this debt as awarded
by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amounts due (presentment);
(2) obtain official certification of nonpayment (protest);
(3) give notice that amounts due have not been paid (notice of dishonor);
or
(4) give me notice prior to seizure of my personal property when you are
seeking to foreclose a secured interest in any of my personal
property used to secure a commercial transaction.
I waive any defenses I have based on suretyship or impairment of
collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a
separate guarantee or endorsement). You may sue me alone, or anyone else who is
obligated on this note, or any number of us together, to collect this note. You
may do so without any notice that it has not been paid (notice of dishonor).
You may without notice release any party to this agreement without releasing
any other party. If you give up any of your rights, with or without notice, it
will not affect my duty to pay this note. Any extension of new credit to any of
us, or renewal of this note by all or less than all of us will not release me
from my duty to pay it. (Of course, you are entitled to only one payment in
full.) I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my liability for
payment of the note. I will not assign my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any change in my address. I will give any notice to you by mailing
it first class to your address stated on page 1 of this agreement, or to any
other address that you have designated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(not required) THROUGH:
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(page 2 of 2)
<PAGE> 1
EXHIBIT 10.13
MODIFICATION NOTE
NOTE: 60046455
COMSTAR COMMUNICATIONS, INC.
WHEREAS, the undersigned "Borrower" heretofore became indebted to Premier Bank
(hereinafter "Holder") under the terms of a certain Note attached hereto,
including all prior modifications applicable thereto and attached hereto, and
WHEREAS, Borrower, pursuant to the prior written consent of Holder, as evidenced
by a written authorization of commitment from Holder, desires to modify certain
terms of said Note as set forth hereinbelow, and
WHEREAS, Holder is willing to accept such modification terms:
NOW, THEREFORE, the Note, including all prior modifications thereto, is hereby
modified as follows:
EXTEND MATURITY DATE FROM OCTOBER 1, 1999 TO NOVEMBER 1, 1999.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Borrower affirms all terms and conditions of the Note, and all prior
modifications, except as otherwise modified herein.
Witness the hand and seal of the undersigned this 21st day of July, 1999.
ComStar Communications, Inc.
/s/ H. Cooper Elsy /s/ Sam F. Dayton
- ------------------------------------ -------------------------------------
Witness Dr. Sam F. Dayton, President
/s/ Joy Irwin
- ------------------------------------
Notary
Officer: GDH/jcs
-------------
<PAGE> 2
<TABLE>
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMSTAR COMMUNICATIONS INC PREMIER BANK GAINESVILLE OFFICE ACCOUNT #: GDH/JCS/15
P O BOX 267 311 GREEN STREET Loan Number 60046455
GAINESVILLE, GA 30503 GAINESVILLE, GA 30501 Date JUNE 22, 1999
Maturity Date OCTOBER 1, 1999
Loan Amount $700,100.00
Renewal Of 1
BORROWER'S NAME AND ADDRESS LENDER'S NAME AND ADDRESS SOC SEC #: 582235514
"I" includes each borrower above, "You" means the lender, its successors
joint and severally. and assigns.
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
For value received, I promise to pay to you, or your order, at your address
listed above the PRINCIPAL sum of SEVEN HUNDRED THOUSAND ONE HUNDRED AND NO/100
************************** Dollars $700,100.00
[ ] SINGLE ADVANCE: I will receive all of this principal sum on
________________. No additional advances are contemplated under this note.
[XX] MULTIPLE ADVANCE: The principal sum shown above is the maximum amount of
principal I can borrow under this note. On JUNE 22, 1999 I will receive the
amount of $700,000.00 and future principal advances are contemplated.
CONDITIONS: The conditions for future advances are AT THE LENDERS
DISCRETION
___________________________________________________________________________
___________________________________________________________________________
[XX] OPEN END CREDIT: You and I agree that I may borrow up to the maximum
amount of principal more than one time. This feature is subject to all
other conditions and expires on OCTOBER 1, 1999.
[ ] CLOSED END CREDIT: You and I agree that I may borrow up to the maximum
only one time (and subject to all other conditions).
INTEREST: I agree to pay interest on the outstanding principal balance from
JUNE 22, 1999 at the rate of 8.750% per year until FIRST CHANGE DATE.
[XX] VARIABLE RATE: This rate may then change as stated below.
[XX] INDEX RATE: The future rate will be 1.000% OVER the following index
rate: PREMIER BANK'S PRIME RATE.
___________________________________________________________________________
___________________________________________________________________________
[ ] NO INDEX: The future rate will not be subject to any internal or
external index. It will be entirely in your control.
[XX] FREQUENCY AND TIMING: The rate on this note may change as often as
DAILY. A change in the interest rate will take effect ON THE SAME DAY.
[XX] LIMITATIONS: During the term of this loan, the applicable annual
interest rate will not be more than 99.990% or less than 1.000%. The
rate may not change more than ____________% each ____________________.
EFFECT OF VARIABLE RATE: A change in the interest rate will have the
following effect on the payments.
[XX] The amount of each scheduled payment will change. [XX] The amount of
the final payment will change.
[ ] ______________________________________________________________________
ACCRUAL METHOD: Interest will be calculated on a ACTUAL/360 basis.
POST MATURITY RATE: I agree to pay interest on the unpaid balance of this note
owing after maturity, and until paid in full, as stated below:
[XX] on the same fixed or variable rate basis in effect before maturity
(as indicated above).
[ ] at the rate equal to ________________________________________________.
[XX] LATE CHARGE: If a payment is made more than 10 days after it is due, I
agree to pay a late charge of 5.000% OF THE LATE PAYMENT WITH A MINIMUM OF
$25.00 AND A MAXIMUM OF $100.00.
[XX] ADDITIONAL CHARGES: In addition to interest, I agree to pay the following
charges which [XX] are [ ] are not included in the principal amount above:
LOAN FEE $100.00.
PAYMENTS: I agree to pay this note as follows:
[XX] INTEREST: I agree to pay accrued interest ON THE 1ST DAY OF EACH MONTH
BEGINNING AUGUST 1, 1999 _______________________________________________________
_______________________________________________________________________________.
[XX] PRINCIPAL: I agree to pay the principal OCTOBER 1, 1999 ___________________
_______________________________________________________________________________.
[ ] INSTALLMENTS: I agree to pay this note in _____ payments. The first
payment will be in the amount of $ ____________________________________________
and will be due ___________________________________. A payment of $ ___________
will be due _______________________________________________________ thereafter.
The final payment of the entire unpaid balance of principal and interest will
be due _____________________________________________________________________.
[ ] If checked, and this loan is secured by a first lien on real estate, then
any accrued interest not paid when due (whether due by reason of a schedule of
payments or due because of lenders demand) will become part of the principal
thereafter, and will bear interest at the interest rate in effect from time to
time as provided for in this agreement.
ADDITIONAL TERMS:
FOR COMPLETE DESCRIPTION OF COLLATERAL REFER TO SECURITY AGREEMENT OF EVEN NAME
DATED 6-22-99
<TABLE>
<CAPTION>
- ---------------------------------------------------
<S> <C>
[XX] SECURITY: This note is separately secured by PURPOSE: The purpose of this loan is BUSINESS:
(describe separate document by type and date): RENEWAL _________________________________________.
SECURITY AGREEMENT DATED 6-22-99; VARIOUS SIGNATURES AND SEALS: IN WITNESS WHEREOF, I HAVE
RECORDED UCC-1'S SIGNED MY NAME AND AFFIXED MY SEAL ON THIS 22ND
DAY OF JUNE, 1999. BY DOING SO, I AGREE TO THE
(This section is for your internal use. Failure to TERMS OF THIS NOTE (INCLUDING THOSE ON PAGE 2).
list a separate security document does not mean the I HAVE RECEIVED A COPY ON TODAY'S DATE.
agreement will not secure this note.)
- --------------------------------------------------- COMSTAR COMMUNICATIONS INC
Signature for Lender ___________________________________________ (Seal)
/S/ GEORGE HENDERSON BY: /S/ SAM F. DAYTON
__________________________________________________ ___________________________________________ (Seal)
GEORGE HENDERSON DR. SAM F. DAYTON, PRESIDENT
__________________________________________________ ___________________________________________ (Seal)
___________________________________________ (Seal)
(page 1 of 2)
</TABLE>
<PAGE> 3
DEFINITIONS: As used on page 1, "[X]" means the terms that apply to this loan.
"I," "me" or "my" means each Borrower who signs this note and each other person
or legal entity (including guarantors, endorsers, and sureties) who agrees to
pay this note (together referred to as "us"). "You" or "your" means the Lender
and its successors and assigns.
APPLICABLE LAW: The law of the state of Georgia will govern this note. Any term
of this note which is contrary to applicable law will not be effective, unless
the law permits you and me to agree to such variation. If any provision of this
agreement cannot be enforced according to its terms, this fact will not affect
the enforceability of the remainder of this agreement. No modification of this
agreement may be made without your express written consent. Time is of the
essence in this agreement.
PAYMENTS: Each payment I make on this note will first reduce the amount I owe
you for charges which are neither interest nor principal. The remainder of each
payment will then reduce accrued unpaid interest, and then unpaid principal. If
you and I agree to different application of payments, we will describe our
agreement on this note. I may prepay a part of, or the entire balance of this
loan without penalty, unless we specify to the contrary on this note. Any
partial prepayment will not excuse or reduce any later scheduled payment until
this note is paid in full (unless, when I make the prepayment, you and I agree
in writing to the contrary).
INTEREST: Interest accrues on the principal remaining unpaid from time to time,
until paid in full. If I receive the principal in more than one advance, each
advance will start to earn interest only when I receive the advance. The
interest rate in effect on this note at any given time will apply to the entire
principal advanced at that time. You and I may provide in this agreement for
accrued interest not paid when due to be added to principal. Notwithstanding
anything to the contrary, I do not agree to pay and you do not intend to
charge any rate of interest that is higher than the maximum rate of interest
you could charge under applicable law for the extension of credit that is
agreed to here (either before or after maturity). If any notice of interest
accrual is sent and is in error, we mutually agree to correct it, and if you
actually collect more interest than allowed by law and this agreement, you agree
to refund it to me.
INDEX RATE: The index will serve only as a device for setting the rate on this
note. You do not guarantee by selecting this index, or the margin, that the
rate on this note will be the same rate you charge on any other loans or class
of loans to me or other borrowers.
ACCRUAL METHOD: The amount of interest that I will pay on this loan will be
calculated using the interest rate and accrual method stated on page 1 of this
note. For the purpose of interest calculation, the accrual method will determine
the number of days in a "year." If no accrual method is stated, then you may
use any reasonable accrual method for calculating interest.
POST MATURITY RATE: For purposes of deciding when the "Post Maturity Rate"
(shown on page 1) applies, the term "maturity" means the date of the last
scheduled payment indicated on page 1 of this note or the date you accelerate
payment on the note, whichever is earlier.
SINGLE ADVANCE LOANS: If this is a single advance loan, you and I expect that
you will make only one advance of principal. However, you may add other
amounts to the principal if you make any payments described in the "PAYMENTS BY
LENDER" paragraph below, or if we have agreed that accrued interest not paid
when due may be added to principal.
MULTIPLE ADVANCE LOANS: If this is a multiple advance loan, you ad I expect
that you will make more than one advance of principal. If this is closed end
credit, repaying a part of the principal will not entitle me to additional
credit.
PAYMENTS BY LENDER: If you are authorized to pay, on my behalf, charges I am
obligated to pay (such as property insurance premiums), then you may treat
those payments made by you as advances and add them to the unpaid principal
under this note, or you may demand immediate payment of the charges.
SET-OFF: I agree that you may set off any amount due and payable under this
note against any right I have to receive money from you.
"Right to receive money from you" means:
(1) any deposit account balance I have with you;
(2) any money owed to me on an item presented to you or in your possession
for collection or exchange; and
(3) any repurchase agreement or other nondeposit obligation.
"Any amount due and payable under this note" means the total amount of
which you are entitled to demand payment under the terms of this note at the
time you set off. This total includes any balance the due date for which you
properly accelerate under this note.
If my right to receive money from you is also owned by someone who has not
agreed to pay this note, your right of set-off will apply to my interest in the
obligation and to any other amounts I could withdraw on my sole request or
endorsement. Your right of set-off does not apply to any account or other
obligation where my rights are only as a representative. It also does not apply
to any Individual Retirement Account or other tax-deferred retirement account.
You will not be liable for the dishonor of any check when the dishonor
occurs because you set off this debt against any of my accounts. I agree to hold
you harmless from any such claims arising as a result of your exercise of your
right of set-off.
REAL ESTATE OR RESIDENCE SECURITY: If this note is secured by real estate or a
residence that is personal property, the existence of a default and your
remedies for such a default will be determined by applicable law, by the terms
of any separate instrument creating the security interest and, to the extent not
prohibited by law and not contrary to the terms of the separate security
instrument, by the "Default" and "Remedies" paragraphs herein.
DEFAULT: I will be in default if any one or more of the following occur: (1) I
fail to make a payment on time or in the amount due; (2) I fail to keep the
property insured, if required; (3) I fail to pay, or keep any promise, on any
debt or agreement I have with you; (4) any other creditor of mine attempts to
collect any debt I owe him through court proceedings; (5) I die, am declared
incompetent, make an assignment for the benefit of creditors, or become
insolvent (either because my liabilities exceed my assets or I am unable to pay
my debts as they become due); (6) I make any written statement or provide any
financial information that is untrue or inaccurate at the time it was provided;
(7) I do or fail to do something which causes you to believe that you will have
difficulty collecting the amount I owe you; (8) any collateral securing this
note is used in a manner or for a purpose which threatens confiscation by a
legal authority; (9) I change my name or assume an additional name without first
notifying you before making such a change; (10) I fail to plant, cultivate and
harvest crops in due season; (11) any loan proceeds are used for the purpose
that will contribute to excessive erosion of highly erodible land or to the
conversion of wetlands to produce an agricultural commodity, as further
explained in 7 C.F.R. Part 1940, subpart G, Exhibit M.
REMEDIES: If I am in default on this note you have, but are not limited to, the
following remedies:
(1) You may demand immediate payment of all I owe you under this note
(principal, accrued unpaid interest and other accrued charges).
(2) You may set off this debt against any right I have to the payment of
money from you, subject to the terms of the "Set-Off" paragraph
herein.
(3) You may demand security, additional security, or additional parties
to be obligated to pay this note as a condition for not using any
other remedy.
(4) You may refuse to make advances to me or allow purchases on credit by
me.
(5) You may use any remedy you have under state or federal law.
By selecting any one or more of these remedies you do not give up your right to
later use any other remedy. By waiving your right to declare an event to be a
default, you do not waive your right to later consider the event as a default
if it continues or happens again.
COLLECTION COSTS AND ATTORNEY'S FEES: I agree to pay all cost of collection,
replevin or any other or similar type of cost if I am in default. In addition,
if you hire an attorney to collect this note, I also agree to pay any fee, not
to exceed 15 percent of the principal and interest then owed, you incur with
such attorney plus court costs (except where prohibited by law). To the extent
permitted by the United States Bankruptcy Code, I also agree to pay the
reasonable attorney's fees and costs you incur to collect this debt as awarded
by any court exercising jurisdiction under the Bankruptcy Code.
WAIVER: I give up my rights to require you to do certain things. I will not
require you to:
(1) demand payment of amount due (presentment);
(2) obtain official certification of nonpayment (protest);
(3) give notice that amounts due have not been paid (notice of dishonor);
or
(4) give me notice prior to seizure of my personal property when you are
seeking to foreclose a secured interest in any of my personal
property used to secure a commercial transaction.
I waive any defenses I have based on suretyship or impairment of
collateral.
OBLIGATIONS INDEPENDENT: I understand that I must pay this note even if someone
else has also agreed to pay it (by, for example, signing this form or a
separate guarantee or endorsement). You may sue me alone, or anyone else who is
obligated on this note, or any number of us together, to collect this note. You
may do so without any notice that it has not been paid (notice or dishonor).
You may without notice release any party to this agreement without releasing
any other party. If you give up any of your rights, with or without notice, it
will not affect my duty to pay this note. Any extension of new credit to any of
us, or renewal of this note by all or less than all of us will not release me
from my duty to pay it. (Of course, you are entitled to only one payment in
full.) I agree that you may at your option extend this note or the debt
represented by this note, or any portion of the note or debt, from time to time
without limit or notice and for any term without affecting my liability for
payment of the note. I will not assign my obligation under this agreement
without your prior written approval.
CREDIT INFORMATION: I agree and authorize you to obtain credit information
about me from time to time (for example, by requesting a credit report) and to
report to others your credit experience with me (such as a credit reporting
agency). I agree to provide you, upon request, any financial statement or
information you may deem necessary. I warrant that the financial statements and
information I provide to you are or will be accurate, correct and complete.
NOTICE: Unless otherwise required by law, any notice to me shall be given by
delivering it or by mailing it by first class mail addressed to me at my last
known address. My current address is on page 1. I agree to inform you in
writing of any change in my address. I will give any notice to you by mailing
it first class to your address stated on page 1 of this agreement, or to any
other address that you have designated.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DATE OF PRINCIPAL BORROWER'S PRINCIPAL PRINCIPAL INTEREST INTEREST INTEREST
TRANSACTION ADVANCE INITIALS PAYMENTS BALANCE RATE PAYMENTS PAID
(not required) THROUGH:
<S> <C> <C> <C> <C> <C> <C> <C>
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
/ / $ $ $ % $ / /
- ------------------------------------------------------------------------------------------------------------------
(page 2 of 2)
</TABLE>
<PAGE> 1
EXHIBIT 10.14
[ComStar Logo]
July 1, 1998
James Cary Howell
Edward N. Landa
ComStar Communications, Inc.
2812 Spring Road, Suite 210
Atlanta, GA 30339
Re: Letter Agreement
Dear Cary and Ed:
As we have discussed, banking officials at the First National Bank of
Commerce ("First National") have refused to grant a loan to ComStar
Communications, Inc. ("ComStar") which would permit it to purchase the assets of
Athens, Georgia ISP. It was explained to us that the bank does not provide loans
to "Start-up", that is, new businesses that are still losing money.
It was further suggested to us that First National would make a loan to
myself and James L. Bruce, Jr. personally with the understanding that the
proceeds of the loan would be for the purpose of purchasing the assets of the
Athens, Georgia ISP. Since such a loan would still be linked to ComStar, Jim
Bruce and I will still have to provide substantial collateral to guarantee the
loan.
You two have verbally approved such a plan, and the purpose of this
Letter Agreement is to provide a written record of the transaction. Jim Bruce
and I will borrow the sum of Three Hundred Eighty-three thousand nine hundred
ten dollars ($383,910.00) from First National and provide the necessary personal
guarantees of repayment as well as substantial collateral to secure the loan.
The money will be placed in ComStar's bank account for the purpose of issuing
appropriate checks to the owners of the Athens, Georgia ISP.
By this Letter Agreement, all stockholders of ComStar agree that the
amount of $383,910.00 will be placed on the books of account of ComStar as a
loan made to the corporation by Sam F. Dayton, James L. Bruce, Jr., and dB
Telecom Technologies, Inc. (the latter if suggested by the financial advisors
of Sam F. Dayton, James L. Bruce, Jr. and dB Telecom Technologies, Inc.).
By this Letter Agreement, all stockholders further ratify previous loans
made to ComStar by Sam F. Dayton, James L. Bruce, Jr. and dB Telecom
Technologies, Inc. and direct that the current amount of $383,910.00 be added to
the overall debts which are payable to Sam F. Dayton, James L. Bruce, Jr., and
dB Telecom Technologies, Inc. Debts owned by ComStar to Sam F. Dayton and James
L., Bruce, Jr. shall, in the aggregate be equal. All provisions of previous loan
agreements which have been agreed to by the stockholders are incorporated into
this Letter Agreement by reference and shall be construed as being integral to
its construction.
<TABLE>
<S> <C> <C> <C> <C>
2812 Spring Road * Suite 210 * Atlanta, Georgia 30339 USA * Phone: 770.333.8779 * Fax: 770.333.8578
</TABLE>
<PAGE> 2
Page 2. Letter Agreement dated July 1, 1998. ComStar/Dayton, Bruce, dB Telecom
Technologies.
It is further agreed among the parties to this Letter Agreement that
debt service including principal, interest, fees and taxes on this loan shall be
paid promptly by ComStar to First National and that Sam F. Dayton, James L.
Bruce, Jr., and dB Telecom Technologies, Inc. shall be indemnified and held
harmless, including the provision by ComStar of any legal expenses incurred by
Sam F. Dayton, James L. Bruce, Jr. and dB Telecom Technologies, Inc., as a
result of any adverse consequences should the loan not be serviced in a timely
manner. It is understood by all parties to this Letter Agreement that the
actions of Sam F. Dayton, James L. Bruce, Jr., and dB Telecom Technologies, Inc.
are gratuitous in nature, and are not required by any ComStar policy or Bylaw.
Sincerely,
/s/ Sam F. Dayton
For Sam F. Dayton and James L. Bruce, Jr.
Same F. Dayton, Ph.D.
President and Stockholder
ComStar Communications, Inc.
Agreed to and accepted this 1st day of July, 1998.
/s/ James C. Howell /s/ Edward N. Landa
- ---------------------------------- ---------------------------------------------
James Cary Howell, CEO/Stockholder Edward N. Landa, VP and Secretary/Stockholder
<PAGE> 1
Exhibit 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.
Arthur Andersen LLP /s/ Arthur Andersen LLP
Atlanta, Georgia
September 9, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 JUN-30-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 JUN-30-1999
<EXCHANGE-RATE> 1 1 1
<CASH> 54,676 283,621 1,045,071
<SECURITIES> 0 0 0
<RECEIVABLES> 93,508 259,837 378,897
<ALLOWANCES> (19,426) (25,447) (66,845)
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 128,758 522,775 1,519,736
<PP&E> 384,300 849,828 1,035,717
<DEPRECIATION> (61,765) (195,199) (296,361)
<TOTAL-ASSETS> 529,519 1,649,847 2,567,834
<CURRENT-LIABILITIES> 1,011,805 (2,697,145) 2,557,871
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 364,822 2,122,744
<OTHER-SE> (825,364) (1,423,094) (2,126,815)
<TOTAL-LIABILITY-AND-EQUITY> 529,519 1,649,847 2,567,834
<SALES> 675,569 2,142,345 1,485,544
<TOTAL-REVENUES> 675,569 2,142,345 1,485,544
<CGS> 528,835 1,235,862 917,980
<TOTAL-COSTS> 1,163,154 2,587,483 2,022,441
<OTHER-EXPENSES> 59,659 152,592 166,824
<LOSS-PROVISION> 19,426 24,039 41,928
<INTEREST-EXPENSE> (66,201) (150,605) (102,593)
<INCOME-PRETAX> (547,244) (597,730) (703,721)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (547,244) (597,730) (703,721)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (547,244) (597,730) (703,721)
<EPS-BASIC> (.06) (.06) (.07)
<EPS-DILUTED> (.06) (.06) (.07)
</TABLE>
