<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 13, 2000
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
DURO COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
4813 DELAWARE 06-1539021
(Primary Standard Industrial (State or Other Jurisdiction (I.R.S. Employer
Classification Code Number of Incorporation or Identification No.)
Organization)
</TABLE>
------------------------
PETER B. HOPPER
CHIEF EXECUTIVE OFFICER
1211 SEMORAN BLVD., SUITE 217
CASSELBERRY, FL 32707
(407) 673-8500
(407) 673-8552 (FAX)
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
------------------------------
PETER B. HOPPER
CHIEF EXECUTIVE OFFICER
1211 SEMORAN BLVD., SUITE 217
CASSELBERRY, FL 32707
(407) 673-8500
(407) 673-8552 (FAX)
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID F. DIETZ, P.C. MARK L. JOHNSON, ESQ.
ANDREW F. VILES, ESQ. HALE AND DORR LLP
GOODWIN, PROCTER & HOAR LLP 60 State Street
Exchange Place Boston, Massachusetts 02109-1803
Boston, Massachusetts 02109-2881 (617) 526-6000
(617) 570-1000 (617) 526-5000 (fax)
(617) 523-1231 (fax)
</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 an 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,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM AGGREGATE AMOUNT OF REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) FEE
<S> <C> <C>
Common Stock, $.01 par value per share...................... $143,750,000 $37,950
</TABLE>
(1) Estimated solely for purposes 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 SEC, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: (a) one
prospectus to be used in connection with an offering in the United States and
Canada and (b) one prospectus to be used in connection with a concurrent
offering outside of the United States and Canada. The U.S. prospectus and the
international prospectus are identical in all respects except for the front
cover page and the "Underwriting" section. The front cover page and the
"Underwriting" section of the international prospectus are included immediately
before Part II of this registration statement.
<PAGE>
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 WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 13, 2000
[LOGO]
SHARES
COMMON STOCK
DURO Communications, Inc. is offering shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "DURO." We anticipate
that the initial public offering price will be between $ and $ per
share.
------------------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to DURO............................................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS
CIBC WORLD MARKETS
FIRST UNION SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
[Map of the southeastern region of the United States, consisting of the states
of Florida, Georgia, Alabama, Mississippi, Tennessee, Kentucky, Virginia, North
Carolina and South Carolina with a graphic depiction of our network
infrastructure, including our network backbone, and its location in these
states.]
<PAGE>
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 COMMON STOCK. IN THIS PROSPECTUS, "DURO," "WE,"
"US," AND "OUR" REFER TO DURO COMMUNICATIONS, INC. AND ITS WHOLLY-OWNED
SUBSIDIARIES, UNLESS THE CONTEXT REQUIRES OTHERWISE.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE 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 DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 3
Risk Factors................................................ 6
Special Note on Forward-Looking Statements and Industry
Data...................................................... 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 28
Management.................................................. 40
Related Party Transactions.................................. 46
Principal Stockholders...................................... 47
Description of Capital Stock................................ 48
Shares Eligible for Future Sale............................. 52
Underwriting................................................ 54
Validity of Common Stock.................................... 57
Experts..................................................... 57
Where You Can Find More Information......................... 57
Index to Financial Statements............................... F-1
</TABLE>
------------------------
We own or have rights to trademarks or trade names that we use in
conjunction with the sale of our products and services. We have applied for
federal registration of the trademark DURO. All other trademarks, service marks
and trade names referred to in this prospectus are the property of their
respective owners.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
We are a full service, facilities-based provider of Internet data and
broadband communications solutions to small and medium-sized businesses in tier
II and tier III markets in the southeastern United States. We offer a full suite
of Internet data and broadband communications solutions, including high-speed
digital subscriber lines, or DSL, Internet access, Internet hosting, web
development and network integration services. We are deploying a dedicated
enhanced broadband network, enabling us to expand our service offerings
throughout our markets. We believe that, by combining the regional scale of our
facilities-based network with our local market presence, we are well-positioned
to address the needs of small and medium-sized businesses.
We have utilized a "smart buy and build" strategy to gain Internet data
services market share, to establish local brands in our targeted region and to
finance the build-out of our broadband network. Beginning in March 1999, we
implemented this strategy by rapidly aggregating a substantial client base in
the southeastern United States through the acquisition of 44 Internet data
service providers and competitive local exchange carriers. We reinvested the
cash flow from this installed client base to deploy our enhanced broadband
network infrastructure. With this enhanced network largely in place, we have
rolled out broadband access and other enhanced Internet data solutions such as
DSL and Internet hosting.
To date, large businesses have moved most aggressively to take advantage of
Internet efficiencies. These businesses typically have the financial resources
and internal technical competencies required to deploy and support emerging
Internet technologies and applications. As a result, most providers of Internet
data and broadband services have targeted large businesses concentrated in tier
I markets, or metropolitan areas having populations in excess of two million.
These service providers have not focused on tier II and tier III markets, which
have populations less than two million and lower concentrations of large
business clients.
Small and medium-sized businesses increasingly require broadband Internet
access and enhanced services, but they frequently lack the internal technical
staff and capabilities necessary to implement and support the broadband Internet
data services used by large businesses. In recent years, new technologies such
as DSL and regulatory changes effected by the Telecommunications Act of 1996
have enabled affordable broadband data transmission over existing telephone
copper wires. Our solution capitalizes on these technological and regulatory
changes and helps small and medium-sized businesses to compete in today's
broadband economy. Key elements of our solution include providing:
- affordable broadband access;
- a full range of Internet data and broadband communications services;
- dependable service over our dedicated network;
- rapid deployment of new services; and
- superior client services.
Our goal is to be the leading full service provider of Internet and
broadband communications solutions to small and medium-sized businesses in tier
II and III markets in the southeastern United States. We believe we will
establish a differentiated market position based upon our ability to
aggressively expand broadband services to historically underserved markets,
along with our ability to migrate many of our existing business clients to DSL
and related services as our dedicated, broadband network becomes increasingly
available. We intend to continue to take advantage of our local presence,
3
<PAGE>
while exploiting the scalability and cost efficiencies of our regional enhanced
network. Finally, we plan to selectively pursue strategic acquisitions that
serve a significant business client base or that deliver complementary products,
services, facilities or network infrastructure.
DURO Communications, Inc. was incorporated in Delaware in December 1999. Our
predecessor wholly-owned subsidiary, DURO Communication Corporation, was
incorporated in Delaware in February 1999. The address of our principal
executive offices is 1211 Semoran Blvd., Suite 217, Casselberry, Florida 32707
and our telephone number is (407) 673-8500. Our website address is
WWW.DUROCOM.COM. The information on our website is not a part of this
prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by DURO............................... shares
Common stock to be outstanding after the offering.......... shares
Use of proceeds............................................ For capital expenditures and general
corporate purposes, including working
capital and potential acquisitions.
Proposed Nasdaq National Market symbol..................... DURO
</TABLE>
The number of shares of our common stock that will be outstanding after this
offering is based on shares of common stock outstanding as of
March 31, 2000. This number excludes:
- up to 1,757,382 shares of common stock to be issued in connection with
pending acquisitions;
- 1,606,700 shares of common stock issuable upon exercise of stock options
outstanding at March 31, 2000 at a weighted average exercise price of
$3.90 per share; and
- shares reserved for future grant under our stock option plan.
------------------------
EXCEPT WHERE WE STATE OTHERWISE, THE INFORMATION WE PRESENT IN THIS
PROSPECTUS REFLECTS:
- SHARES OF COMMON STOCK TO BE ISSUED UPON COMPLETION OF THIS
OFFERING IN EXCHANGE FOR ALL OF OUR OUTSTANDING PREFERRED STOCK AND
RELATED CUMULATIVE DIVIDENDS;
- THE AUTOMATIC CONVERSION OF ALL OF OUR OUTSTANDING CLASS B NON-VOTING
COMMON STOCK INTO COMMON STOCK UPON COMPLETION OF THIS OFFERING;
- AMENDMENTS TO OUR CERTIFICATE OF INCORPORATION AND BY-LAWS EFFECTIVE UPON
COMPLETION OF THIS OFFERING; AND
- NO EXERCISE OF THE UNDERWRITERS' OPTION TO PURCHASE ADDITIONAL SHARES IN
THIS OFFERING.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
You should read the following summary consolidated financial data along with
the sections entitled "Use of Proceeds," "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
the prospectus.
The data in the pro forma columns reflect our completed and anticipated
acquisitions of 54 entities. We closed 30 of these acquisitions prior to
December 31, 1999. We have acquired an additional 14 entities since that date
and have signed letters of intent to acquire an additional ten entities. The
data in these columns are derived from the unaudited pro forma condensed
combined financial statements and related notes included elsewhere in this
prospectus.
The consolidated balance sheet data in the pro forma as adjusted column also
reflect:
- the exchange of all outstanding preferred stock and related cumulative
dividends for a total of shares of common stock; and
- our sale of shares of common stock at an assumed public offering
price of $ per share and after deducting the estimated underwriting
discounts and commissions and the estimated offering expenses that we will
pay, and the application of the net proceeds as described under "Use of
Proceeds."
EBITDA in the other financial data represents earnings before interest,
taxes, depreciation, amortization, non-recurring and non-cash compensation
charges. EBITDA is provided because it is a measure commonly used by investors
to analyze and compare companies on the basis of operating performance. EBITDA
is not a measurement of financial performance under generally accepted
accounting principles and should not be construed as a substitute for operating
income, net income or cash flows from operating activities for purposes of
analyzing our operating performance, financial position and cash flows. EBITDA,
as presented below is not necessarily comparable with similarly titled measures
for other companies.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 19, 1999
(INCEPTION) TO
DECEMBER 31, 1999
----------------------
ACTUAL PRO FORMA
--------- ----------
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Internet services revenue................................... $ 22,545 $ 64,597
Operating expenses, excluding depreciation and
amortization.............................................. 19,236 58,390
Depreciation and amortization............................... 9,058 26,296
Net loss.................................................... (9,201) (27,102)
Net loss applicable to common stockholders.................. (11,879) (29,780)
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (0.37) $ (0.88)
Weighted average common shares outstanding.................. 32,089 33,932
OTHER FINANCIAL DATA:
EBITDA (as defined)......................................... $ 3,499 $ 6,398
Cash flow provided by operating activities.................. 3,664 5,666
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 34,188 $ 1,739
Working capital............................................. 24,077 (12,031)
Total assets................................................ 135,978 215,390
Long-term obligations, including current portion............ 33,848 77,848
Manditorily redeemable preferred stock...................... 45,835 45,835
Total stockholders' equity.................................. 45,347 72,236
</TABLE>
5
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER CAREFULLY
THE FOLLOWING FACTORS AND ALL OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE PURCHASING OUR COMMON STOCK. IF ANY OF THE EVENTS DESCRIBED IN THE RISK
FACTORS BELOW ACTUALLY OCCUR, OUR BUSINESS COULD BE ADVERSELY AFFECTED. IN THAT
CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE
ALL OR PART OF THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND MAY FACE DIFFICULTIES ENCOUNTERED BY
COMPANIES OPERATING IN NEW AND RAPIDLY EVOLVING MARKETS.
We were incorporated in February 1999 and began acquiring other providers of
Internet data and broadband communications services and offering Internet data
services to the public shortly thereafter. We have grown rapidly, primarily as a
result of our acquisition strategy. As a result, it may be difficult for
investors to evaluate our future prospects. When making your investment decision
and evaluating our business and prospects, you should consider the risks and
difficulties we may encounter in the new and rapidly evolving Internet data and
broadband communications services market, especially given our limited operating
history. These risks include our ability to:
- expand our subscriber base and increase subscriber revenues;
- compete favorably in a highly competitive market;
- attract and retain qualified employees;
- develop strategic relationships;
- introduce new products and services; and
- continue to develop and upgrade our network systems and infrastructure.
WE HAVE INCURRED SUBSTANTIAL LOSSES IN THE PAST AND MAY NOT BE PROFITABLE IN THE
FUTURE.
Since we began operations, we have incurred substantial net losses in every
fiscal period. We cannot predict when we will become profitable, if at all, and
if we do, we may not remain profitable for any substantial period of time. If we
fail to achieve profitability within the time frame expected by investors, the
market price of our common stock is likely to decline, perhaps substantially. We
had a net loss applicable to common stockholders of $11.9 million in 1999. We
expect to incur increasing operating expenses in all areas during future
periods, particularly in network development and sales and marketing.
DISAPPOINTING QUARTERLY RESULTS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL.
Our quarterly operating results are difficult to produce and may fluctuate
significantly from quarter to quarter. If our quarterly operating results fall
below the expectations of securities analysts or investors, the price of our
common stock could fall substantially. We expect to experience fluctuations in
our quarterly operating results due to a variety of factors, many of which are
outside of our control, including the other risks described below, as well as:
- demand for and market acceptance of our services;
- the rate of new subscriber acquisitions;
- the timing and magnitude of capital expenditures, including costs relating
to the expansion of operations and network infrastructure;
6
<PAGE>
- introductions of new services or enhancements by us and our competitors;
- growth of Internet use and establishment of Internet operations by
mainstream enterprises;
- changes in our and our competitors' pricing policies;
- our ability to protect our systems from any telecommunications failures,
power loss, or software-related system failures; and
- changes in operating expenses.
Most of our expenses, such as employee compensation, rent and costs related
to our network infrastructure, are relatively fixed. Moreover, our expense
levels are based, in part, on our expectations regarding future revenue
increases. As a result, any shortfall in revenues in relation to our
expectations could cause significant changes in our operating results from
quarter to quarter and could result in increases in our quarterly losses.
OUR RECENT AND PLANNED GROWTH COULD STRAIN OUR MANAGERIAL, OPERATIONAL AND
FINANCIAL RESOURCES.
We have expanded our operations rapidly since incorporating in
February 1999 and intend to continue to pursue strategic market opportunities.
Our growth has placed, and is expected to continue to place, a strain on our
managerial, operational and financial resources. In order to manage our growth,
we must improve our operational systems, procedures and controls on a timely
basis, retain key employees and maintain our customer relationships. Also, if
the demands placed on our network resources by our growing subscriber base
outpace our growth and operating plans, the quality and reliability of our
service may decline, our relationships with our clients may be harmed and, as a
result, our business may suffer.
OUR GROWTH STRATEGY AND ACQUISITIONS MAY NOT BE SUCCESSFUL.
Our growth strategy depends, in part, upon acquiring the businesses and
assets of Internet data and broadband communications service providers in the
southeastern United States. In making acquisitions, we face numerous risks,
including:
- the difficulty of identifying suitable acquisition candidates and
negotiating favorable terms;
- competition for acquisition opportunities with competitors that are larger
than us or have greater financial and other resources than we have;
- our need for additional debt or equity financings to complete any
acquisitions;
- disruption of our ongoing business;
- distraction of our management and diversion of our resources;
- our inability to maintain uniform standards, controls and procedures; and
- our inability to maintain good relationships with the clients and
suppliers of the acquired businesses.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE FAIL TO INTEGRATE OUR
ACQUISITIONS SUCCESSFULLY.
Our continued success as a provider of Internet data and broadband
communications services will depend in large part on our ability to successfully
integrate the operations and management of the Internet data and broadband
communications businesses that we have acquired and may acquire in the future.
Failure to integrate successfully the businesses we have acquired or will
acquire in the future may result in significant operating inefficiencies, which
would hurt our operating results. In addition, to integrate these acquired
businesses, we may have to expend substantially more managerial, operating,
7
<PAGE>
financial and other resources than we have planned, which would adversely affect
our business, financial condition and results of operations. Any future
acquisition could result in the use of significant amounts of cash, potentially
dilutive issuances of equity securities, or the incurrence of debt or
amortization expenses related to goodwill and other intangible assets, any of
which could adversely affect our business, operating results and financial
condition. In addition, acquisitions involve numerous risks, including:
- difficulties in the assimilation of the operations, technologies, products
and personnel of the acquired company;
- difficulties in integrating acquired businesses' information systems with
our own while maintaining our internal controls and procedures;
- the diversion of management's attention from other business concerns;
- risks of entering markets in which we have no or limited prior experience;
and
- the potential loss of key employees of the acquired company.
We cannot be certain that we will successfully address any of these risks.
If we fail to manage these early stage risks successfully, current evaluations
of our business and prospects may prove to be inaccurate.
WE MAY BE UNABLE TO RETAIN CLIENTS.
Our long-term success depends on our ability to retain our existing clients
while continuing to attract new clients. We continue to invest significant
resources in our network infrastructure and client and technical support
capabilities to provide high levels of client care. We cannot be certain that
these investments will maintain or improve our client retention rate. We believe
that intense competition from our competitors, some of which offer free hours of
service or other enticements for new clients, has caused, and may continue to
cause, some of our clients to switch to our competitors' services. We are also
susceptible to losing clients that we acquire through our acquisitions due to
the clients' lack of familiarity with us, and the billing and network
difficulties which sometimes occur after an acquisition. In addition, some new
subscribers do not become consistent users of Internet services and, therefore,
are more likely to discontinue their service. These factors may adversely affect
our subscriber retention rates, which would have an adverse effect on our
business and operating results.
IF WE ARE UNABLE TO OBTAIN THE ADDITIONAL CAPITAL REQUIRED TO CONTINUE TO GROW
OUR BUSINESS, WE MAY BE REQUIRED TO MODIFY OUR GROWTH AND OPERATING PLANS.
Our ability to grow our business depends on our ability to expand our
operations through internal growth and by acquiring other providers of Internet
data and broadband communications services, which requires significant capital
resources. We anticipate that our cash requirements for the foreseeable future
will include disbursements for:
- strategic acquisitions;
- expansion of our network infrastructure;
- development of enhanced services offerings; and
- interest expense and repayment of senior indebtedness.
The actual amount and timing of our future capital requirements may differ
materially from our expectations as a result of the demand for our services and
regulatory, technological and competitive developments. Our revenues and costs
depend upon factors outside our control, including regulatory changes, changes
in technology and increased competition. Due to the uncertainty of these
factors,
8
<PAGE>
actual revenues and costs may vary from expected amounts, possibly to a material
degree, and these variations may affect our future capital requirements. We may
need to seek additional capital from public or private equity and debt sources
to fund our growth and operating plans and respond to other contingencies. We
cannot be certain that we will be able to raise additional capital in the future
on terms acceptable to us or at all. If alternative sources of financing are
insufficient or unavailable, we may be required to modify our growth and
operating plans.
WE MAY BE UNABLE TO PROVIDE INTERNET DATA AND BROADBAND COMMUNICATIONS SERVICES
TO OUR CLIENTS IF OUR THIRD-PARTY SUPPLIERS AND TELECOMMUNICATIONS CARRIERS
DISCONTINUE DOING BUSINESS WITH US.
We depend on third-party suppliers of hardware components and
telecommunications carriers to provide equipment and telecommunications services
in a reliable and secure manner. We currently acquire hardware components used
in our network system from a few primary sources. 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 were unable to obtain these
parts on a timely basis and at an acceptable cost, we might not be able to
upgrade or repair our network as required to remain competitive. As a result we
could lose clients and our business could be significantly harmed.
We currently rely on several local telephone companies, such as BellSouth,
MCI WorldCom and Sprint, to lease to us data communications capacity via local
telecommunications lines and leased long-distance lines. Our telecommunications
carriers also sell or lease products and services to our competitors and may be,
or may become, our competitors. Expansion of our network infrastructure and
other competitors' needs will continue to place a significant demand on our
telecommunications carriers. We cannot be certain that our telecommunications
carriers will continue to sell or lease their products and services to us at
commercially reasonable prices or at all. Our financial results are highly
sensitive to variations in prices for these telecommunications services.
Difficulties in developing alternative sources of supply, if required, could
adversely affect our business, financial condition and operating results.
Moreover, failure of our telecommunications carriers to promptly provide the
data communications capacity required by us could interrupt our access services,
which may adversely affect our business, financial condition and operating
results.
WE MAY BE UNABLE TO CONTINUE TO UPGRADE OUR NETWORK INFRASTRUCTURE TO MEET
ADDITIONAL DEMAND AND CHANGING SUBSCRIBER REQUIREMENTS.
Our network infrastructure is composed of a complex system of routers,
switches, transmission lines and other hardware used to provide Internet access
and other services. The future success of our business will depend on the
capacity, reliability and security of this network infrastructure and our
ability to expand, adapt and upgrade our network infrastructure as the number of
clients and the amount of information they wish to transmit over the Internet
increases. This development of our network infrastructure will require
substantial financial, operational and managerial resources. 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 clients at high transmission
speeds has not been tested. Consequently, we may be unable to expand our network
as we intend. Even if we are able to do so, our expanded network may not
maintain the levels of performance our network currently provides or that our
clients expect. If we fail to upgrade our network infrastructure or adapt it to
an expanding client base, changing client requirements or evolving industry
standards on a timely basis or at a commercially reasonable cost, our business
could be adversely affected.
WE DEPEND ON PORTIONS OF THE ESTABLISHED TELEPHONE COMPANIES' NETWORKS FOR DSL
TECHNOLOGY.
To provide DSL services, we depend significantly on the quality of the
copper telephone lines we lease from established telephone companies providing
services in our target markets. We may not be
9
<PAGE>
able to obtain the copper telephone lines and the services we require from these
established telephone companies on a timely basis or at quality levels, prices,
terms and conditions satisfactory to us. These established telephone companies
may not maintain the lines in a satisfactory manner.
All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. This interference could degrade the performance of our services
or make us unable to provide services over particular lines. In addition,
incumbent carriers may claim that the potential for interference by DSL
technology permits them to restrict or delay our deployment of DSL services. The
telecommunications industry and regulatory agencies are still developing
procedures to resolve interference issues between competitive carriers and
incumbent carriers, and these procedures may not be effective. We may be unable
to successfully negotiate interference resolution procedures with incumbent
carriers. Interference, or claims of interference, if widespread, would
adversely affect our speed of deployment, reputation, brand image, service
quality and client retention and satisfaction.
DISRUPTIONS OF OUR SERVICES DUE TO SYSTEM FAILURES COULD RESULT IN SUBSCRIBER
CANCELLATIONS.
A significant portion of our computer equipment, including critical
equipment dedicated to our Internet data and broadband communications services,
is presently located at network operating centers located in Lexington,
Kentucky, Valdosta, Georgia and Orlando, Florida and central office switching
centers located in North Carolina. Despite precautions we take, we may
experience system failures or shut-downs at our data centers, particularly due
to natural disasters, vandalism, severed telecommunications lines resulting from
utility construction or repairs or other unanticipated problems at or near our
network operating centers. If disruptions occur, we may have no means of
replacing these services on a timely basis or at all. Extensive or multiple
interruptions in providing clients with Internet access and other services are
primary reasons for client decisions to switch to another Internet data service
provider or cancel their use of Internet data services. Accordingly, any
disruption of our services due to systems failure could cause us to lose
existing clients and damage our ability to gain new clients.
BREACHES IN THE SECURITY OF OUR NETWORK COULD REQUIRE US TO PAY MONEY DAMAGES TO
OUR CLIENTS FOR LOSS OF INFORMATION AND COULD RESULT IN LOSS OF CLIENTS AND
NEGATIVE PUBLICITY.
To conduct electronic commerce and communications effectively, we must
ensure that the information our clients transmit over our network will be safe.
We provide security for our clients' information by licensing encryption and
authentication technology from third parties. Despite our design and
implementation of a variety of network security measures, our network, data
centers or other equipment locations may be the subject of unauthorized access,
computer viruses, accidental or intentional acts and other disruptions of our
business. Our systems are also subject to telecommunications failures, power
loss, software-related system failures and various other events. Any of these
events, whether intentional or accidental, could lead to interruptions, delays
or cessation of service to our subscribers. This could cause some of our
subscribers to stop using our Internet services. Third parties could also
potentially jeopardize the security of confidential information stored in our
computer systems or our subscribers' computer systems through their
inappropriate use of the Internet, which could cause losses to us or our
subscribers or deter some people from subscribing to our services. We may also
be held responsible and required to pay damages for the loss of any confidential
information stored in our computers or the equipment of our clients arising from
the inappropriate use of our network by others.
We may have to interrupt, delay or cease service to our subscribers to
alleviate problems caused by computer viruses, security breaches or other
failures of network security. Any damage or failure that interrupts or delays
our operations could result in subscriber cancellations, harm our reputation and
affect our business and financial results. In addition, we expect that our
subscribers will increasingly use
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the Internet for commercial transactions in the future. Any network malfunction
or security breach could cause these transactions to be delayed, not completed
at all or completed with compromised security. Our subscribers or others may
assert claims of liability against us as a result of this type of failure.
Furthermore, until more comprehensive security technologies are developed, the
security and privacy concerns of existing and potential subscribers may inhibit
the growth of the Internet data and broadband communications services industry
in general and our subscriber base and revenue in particular.
OUR SUCCESS DEPENDS UPON OUR SENIOR MANAGEMENT TEAM.
Our success depends in large part on the abilities of our chief executive
officer, Peter B. Hopper, and the other members of our senior management team.
Our success also depends significantly on our ability to attract and retain
qualified management, technical, marketing and sales personnel and the continued
contributions of such management and personnel. Competition for qualified
employees and personnel in the telecommunications industry is intense and there
is a limited number of persons with knowledge of and expertise in the industry.
The loss of the services of any of the members of our senior management team
could have an adverse effect on our business, financial condition and results of
operations.
COVENANTS IN OUR LOAN AGREEMENTS MAY RESTRICT OUR BUSINESS.
Our existing bank loan agreements contain a number of significant covenants.
These covenants limit our ability to borrow additional money, create liens, make
some types of investments, issue additional equity securities, declare and pay
dividends and sell significant assets. They also require us to meet specified
financial tests. Our ability to meet those financial tests may be affected by
events beyond our control. If we are unable to meet our debt service obligations
or comply with these covenants, we will be in default under these agreements. A
default, if not waived, could result in acceleration of our repayment
obligations, which would have a significant adverse effect on our financial
condition.
RISKS RELATED TO OUR INDUSTRY
WE FACE INTENSE COMPETITION IN OUR BUSINESS FROM OTHER INTERNET DATA SERVICE
PROVIDERS AND
TELECOMMUNICATIONS PROVIDERS.
We face intense competition in conducting our business, and we expect the
competition to intensify as the Internet becomes more popular in the future. We
expect this competition to continue to increase because the markets in which we
operate face few substantial barriers to entry. Competition may also intensify
as a result of industry consolidation and the ability of some of our competitors
to bundle Internet services with other products and services. Our competitors
include national, regional and local Internet service providers,
telecommunications companies, competitive local exchange carriers, wireless and
satellite Internet service providers and cable television operators. Some of
these competitors have much larger subscriber bases than ours and in some cases
greater financial, technical and marketing and personnel resources. Some
competitors enjoy greater name recognition and market presence and more
established business relationships in the industry.
A number of our competitors offer a broader variety of access and data
services, including Internet access through high speed digital subscriber lines
and cable modems, and may have done so for longer periods of time. Many cable
television operators and other alternative service providers, such as companies
utilizing wireless and satellite-based service technologies, have begun
offering, or have announced their plans to offer, Internet access and related
services. In particular, cable television operators have sought to take
advantage of their existing cable infrastructure to offer Internet access
services. They could prevent us from delivering Internet access through their
wire and cable connections, and are not currently required to permit us to use
their facilities. We expect to experience increased competition from these cable
operators and other alternative service providers, especially if some of our
competitors are able, but we fail, to take advantage of the technological
synergies available through cross-media deals.
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We believe that tier II and tier III markets will support only a limited
number of competitors and that operations in these markets with multiple
competitive providers are likely to be unprofitable for one or more of them.
Some Internet service providers offer access to the Internet for free or at
substantial discounts from prevailing access fees. As a result of increased
competition in our industry, and the recent introduction of free Internet
access, we expect to encounter significant pricing pressure. We cannot be
certain that we will be able to offset the effects of any required price
reductions through an increase in the number of our subscribers, higher revenues
from our enhanced business services, cost reductions or otherwise, or that we
will have the resources to continue to compete successfully. In addition, we do
not currently compete internationally. If the ability to provide Internet data
services internationally becomes a competitive advantage in our markets and we
do not begin to provide services internationally, we will be at a disadvantage
relative to our competitors.
WE MUST ADAPT TO TECHNOLOGY TRENDS AND EVOLVING INDUSTRY STANDARDS TO REMAIN
COMPETITIVE.
The Internet services market is characterized by rapid changes due to
technological innovation, evolving industry standards, changes in client needs
and frequent new service and product introductions. New services and products
based on new technologies or new industry standards expose us to risks of
equipment obsolescence. We will need to use leading technologies effectively,
continue to develop our technical expertise and enhance our existing services on
a timely basis to compete successfully in the Internet data and broadband
communications services industry. We cannot be certain that we will be
successful in these efforts.
We are also at risk due to fundamental changes in the way that Internet
access may be delivered in the future. Currently, Internet access services are
accessed primarily by computers connected by telephone lines. Competitors are
increasingly offering continuous, high-speed Internet access through the use of
local cable television networks and cable modems. These cable modems have the
ability to transmit data at substantially faster speeds than the modems
currently used by our clients over phone lines. As the Internet becomes
accessible by broad segments of the U.S. population through these cable modems
and other consumer electronic devices, such as Web-TV, or as client requirements
change the means by which Internet access is provided, we will have to modify
our technologies to accommodate these developments and remain competitive. Our
continued development and implementation of these technological advances may
require substantial time and expense, and we cannot be certain that we will
succeed in adapting our Internet data services business to alternative access
devices and conduits. Our failure to respond in a timely and effective manner to
these and other new and evolving technologies could adversely affect our
business, financial condition and operating results.
THE BROADBAND COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES,
AND NEW
TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE.
The broadband communications industry is subject to rapid and significant
technological change, including continuing developments in DSL technology, which
does not presently have widely accepted standards, and alternative technologies
for providing broadband communications, such as cable modem technology. As a
consequence:
- we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology;
- our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
- we expect that new products and technologies will emerge that may be
superior to, or may not be compatible with, our products and technologies.
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<PAGE>
If we fail to adapt successfully to technological changes or to obtain
access to important new technologies, our business will suffer.
OUR STRATEGY DEPENDS ON GROWTH IN DEMAND FOR DSL-BASED SERVICES.
The demand for broadband Internet access is in the early stages of
development. As a result, we cannot predict the rate at which this demand will
grow, if at all, or whether new or increased competition will result in
satisfying all demand. Various providers of high-speed digital communications
services are testing products from various suppliers for various applications.
We do not know whether DSL will offer the same or more attractive
price-performance characteristics. Critical issues concerning commercial use of
DSL for Internet access, including security, reliability, ease and cost of
access and quality of service, remain unresolved and may impact the growth of
such services. If the demand for our services grows more slowly than we
anticipate or is satisfied by competitors, our ability to achieve revenue growth
and positive cash flow will be harmed.
OUR BUSINESS MODEL DEPENDS ON CONTINUED SIGNIFICANT GROWTH IN INTERNET USAGE.
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 in
the use of the Internet and the continued development of the Internet as a
viable commercial medium. 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.
We cannot be certain that Internet usage will continue to grow at or above
its historical rates or that extensive Internet content will continue to be
developed or accessible for free or at nominal cost to users. If the Internet as
a commercial or business medium fails to develop or develops more slowly than
expected, we will be unable to continue our growth or we may grow more slowly
than anticipated.
GOVERNMENT REGULATION COULD REQUIRE US TO CHANGE OUR BUSINESS.
Our networks and the provision of telecommunications services are subject to
significant regulation at the international, federal, state and local levels.
The costs of complying with these regulations and the delays in receiving
required regulatory approvals or the enactment of new adverse regulation or
regulatory requirements may have a material adverse effect upon our business,
financial condition and results of operations.
We cannot assure you that the Federal Communications Commission, or the FCC,
or state commissions will grant required authority or refrain from taking action
against us if we are found to have provided services without obtaining the
necessary authorizations. If we do not fully comply with the rules of the FCC or
state regulatory agencies, third parties or regulators could challenge our
authority to do business, causing us to incur substantial legal and
administrative expenses.
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The Telecommunications Act remains subject to judicial review and additional
FCC rulemaking, and it is difficult to predict what effect any legislation will
have on us and our operations. There are currently many regulatory actions
underway and being contemplated by federal and state authorities regarding
interconnection pricing and other issues that could result in significant
changes to the business conditions in the telecommunications industry. These
changes may have a material adverse effect on our business, financial condition
or results of operations.
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 with respect to the Internet are
becoming more prevalent. These laws and regulations have covered, or may cover
in the future, issues such as:
- user privacy;
- freedom of expression;
- advertising;
- pricing;
- intellectual property;
- international, federal, state and local taxation;
- distribution; and
- characteristics and quality of products and services.
We cannot predict what international, federal, state or local 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. Due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted or interpreted in the United States and
abroad with particular applicability to the Internet. It is possible that
governments will enact legislation that may be applicable to us in areas
including content, product distribution, network security, encryption, the use
of measures for data and privacy protection, electronic authentication or
"digital" signatures, illegal and harmful content, access charges and
re-transmission activities. Moreover, the applicability to the Internet of
existing laws governing issues like property ownership, content, taxation,
defamation and personal privacy, as well as the necessity for governmental
permits, labeling, certifications and the need to supply information to relevant
parties, is uncertain. Most of these laws were adopted before the widespread use
and commercialization of the Internet and, as a result, they do not contemplate
or address the unique issues of the Internet and related technologies. 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 or our clients to potential liability, which in turn could have a
material adverse effect on our business.
WE WILL BE SUBJECT TO ADDITIONAL GOVERNMENT REGULATION RELATING TO OUR
COMPETITIVE LOCAL EXCHANGE CARRIER STATUS.
We are authorized as a competitive local exchange carrier in the states of
Alabama, Florida, Georgia, Kentucky, North Carolina and South Carolina. We have
competitive local exchange carrier applications pending in the states of
Mississippi and Tennessee. To the extent we conduct business as a competitive
local exchange carrier, the telecommunications services that we provide will be
subject to federal, state and local regulation, which may include tariff and
price listing requirements and state certification proceedings. We could incur
substantial legal and administrative expenses if a third party
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<PAGE>
challenges our filed tariffs or our status as a competitive local exchange
carrier. In addition, some state statutes include provisions requiring
competitive local exchange carriers to obtain additional approval in the event
of certain changes in the ownership of the outstanding voting securities.
WE FACE POTENTIAL LIABILITY FOR MATERIAL TRANSMITTED THROUGH OUR NETWORK OR
RETRIEVED THROUGH OUR SERVICES.
The law relating to the liability of Internet data services providers for
information carried on or disseminated through their networks is unsettled. In
addition, the Telecommunications Act imposes fines on any entity that knowingly
permits any telecommunications facility under its control to be used to make
obscene or indecent material available to minors via an interactive computer
service. We cannot predict whether any claim under the federal statute, similar
state statutes or common law will be asserted against us, or if asserted,
whether it will be successful. Claims may be filed against us based on a variety
of theories, including defamation, obscenity, negligence, copyright or trademark
infringement, or other theories based on the nature, publication or distribution
of this information. These types of claims have been brought, sometimes
successfully, against providers of Internet data services in the past. These
claims would likely divert management time and attention and result in
significant costs to investigate and defend. As the law in this area develops,
we may be required to expend substantial resources or discontinue certain
services to reduce our exposure to the potential imposition of liability. Any
costs that we incur as a result of contesting any asserted claims or the
consequent imposition of liability could adversely affect our business and
operating results.
In addition, because our users may download materials and subsequently
distribute them to others, persons may potentially make claims against us for
defamation, negligence, copyright or trademark infringement, personal injury or
other claims based on the nature, content, publication and distribution of such
materials. We also could be exposed to liability with respect to the offering of
third-party content that may be accessible through our services. It is also
possible that if any third-party content provided through our services contains
errors, third parties who access this material could make claims against us for
losses incurred in reliance on this information. We also offer e-mail services,
which expose us to other potential risks, such as liabilities or claims
resulting from unsolicited e-mail, lost or misdirected messages, illegal or
fraudulent use of e-mail or interruptions or delays in e-mail service. These
claims, whether with or without merit, likely would divert management's time and
attention, may result in negative publicity and could result in significant
costs to investigate and defend.
RISKS RELATED TO THIS OFFERING
THE MARKET PRICE OF OUR SHARES OF COMMON STOCK MAY BE VOLATILE, WHICH COULD
RESULT IN SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING SHARES IN THIS OFFERING.
Before this offering, there has been no public market for our common stock.
We cannot assure you that an active trading market for these shares will develop
or continue following this offering, or that purchasers in this offering will be
able to resell their shares at prices equal to or greater than the initial
public offering price. The initial public offering price was determined through
negotiations between us and the underwriters and may not be indicative of the
market price for these shares following this offering. Many factors may
adversely affect the market price for our common stock following this offering,
including:
- investor perception of the Internet, the Internet industry generally and
the Internet service provider industry in particular;
- general technology or economic trends;
- revenues and operating results failing to meet or surpass the expectations
of securities analysts or investors in any quarter; and
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- changes in securities analysts' estimates or general market conditions.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
become the object of securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources
and have an adverse effect on our business, financial condition and results of
operations.
OUR EXISTING STOCKHOLDERS WILL HAVE SIGNIFICANT INFLUENCE ON ALL MATTERS
REQUIRING A STOCKHOLDER VOTE AND, AS A RESULT, COULD PREVENT OR DELAY A CHANGE
IN CONTROL.
Upon the closing of this offering, our existing directors, officers and
stockholders will beneficially own approximately % of our outstanding common
stock. In particular, Great Hill Equity Partners Limited Partnership and Great
Hill Investors, LLC will retain approximately % of our outstanding stock in
the aggregate. If all of these stockholders were to vote their shares of common
stock together as a group, these stockholders would have the ability to exert
significant influence over our board of directors and its policies. Control by
existing stockholders could have the effect of delaying, deferring or preventing
a change in control because these stockholders will be in a position to control
the outcome of all stockholder votes, including votes concerning director
elections, by-law amendments and possible mergers, corporate control contests
and other significant corporate transactions.
PROVISIONS OF DELAWARE LAW AND OF OUR CHARTER AND BY-LAWS MAY MAKE A TAKEOVER
MORE DIFFICULT.
Provisions in our certificate of incorporation and by-laws and in Delaware
corporate law may make it difficult and expensive for a third party to pursue a
tender offer, change in control or takeover attempt opposed by our management.
Stockholders who might desire to participate in such a transaction may not have
an opportunity to do so, and the ability of stockholders to change our
management could be substantially impeded by these anti-takeover provisions. We
also have a staggered board of directors that has the right under our charter
documents to issue preferred stock without further stockholder approval, which
could adversely affect the holders of our common stock and the potential for a
tender offer or change in control.
WE DO NOT HAVE SPECIFIC PLANS FOR THE USE OF APPROXIMATELY $ MILLION OF OUR
PROCEEDS FROM THIS OFFERING, AND WE MAY APPLY THOSE PROCEEDS IN WAYS WITH WHICH
YOU MAY NOT AGREE.
We have not identified specific uses for approximately $ million of our
proceeds from this offering, and our specific intentions regarding the allocated
proceeds are uncertain and subject to change. Therefore, we will have broad
discretion in how we use the proceeds of this offering. You will not have the
opportunity to evaluate the economic, financial or other information on which we
base our decisions on how to use our proceeds.
THE INITIAL PUBLIC OFFERING PRICE IS SIGNIFICANTLY HIGHER THAN THE BOOK VALUE OF
OUR COMMON STOCK AND YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN
THE VALUE OF YOUR INVESTMENT.
As a purchaser of our common stock in this offering, you will experience
immediate and substantial dilution of $ per share in the net tangible book
value of the common stock from the initial public offering price. To the extent
outstanding options to purchase common stock are exercised, you will experience
further dilution. You should read "Dilution" for a more complete description of
the dilution you will experience.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE THE MARKET PRICE OF OUR COMMON
STOCK TO FALL.
Substantial sales of our common stock in the public market following this
offering, or the perception by the market that such sales could occur, could
lower the market price of our common
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stock or make it difficult for us to raise additional equity capital in the
future. The shares of common stock being sold in this offering will
generally be freely tradeable without restriction, and:
- the remaining shares of common stock outstanding will be "restricted
securities" as defined in Rule 144 under the Securities Act, and may be
sold in the future without registration under the Securities Act subject
to compliance with the provisions of Rule 144 or any other applicable
exemption under the Securities Act; and
- existing stockholders have registration rights requiring us to register up
to 31,131,528 shares of common stock for sale under the Securities Act.
Upon expiration of lock-up agreements entered into with the underwriters,
180 days after the date of this prospectus, shares of common stock,
and 116,500 shares of common stock issuable as a result of the exercise of
vested options, will be eligible for resale in accordance with the provisions of
the Securities Act.
WE DO NOT INTEND TO PAY DIVIDENDS.
We have never declared nor paid any cash dividends on shares of our common
stock. We currently intend to retain our earnings for future growth and,
therefore, do not anticipate paying any dividends in the foreseeable future. In
addition, under the terms of our bank debt agreements, we are prohibited from
paying any cash dividends to our stockholders.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
Some of the statements under "Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus constitute forward-looking
statements. These statements relate to future events, other future financial
performance or business strategies, and may be identified by terminology such as
"may," "will," "should," "expects," "scheduled," "plans," "intends,"
"anticipates," "believes," "estimates," "aims," "potential," or "continue" or
the negative of such terms or other comparable terminology. These statements are
only predictions. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider the factors described
throughout this prospectus, including the risks outlined under "Risk Factors."
These factors may cause our actual results to differ materially from any
forward-looking statement. We cannot assure you that our future results, levels
of activity, performance or goals will be achieved.
This prospectus contains data concerning the Internet professional services
industry that we obtained from industry publications. These publications
generally indicate that they have obtained information from sources that they
believe are reliable, but that they do not guarantee the accuracy and
completeness of the information. Although we believe that these industry
publications are reliable, we have not independently verified their data. We
also have not sought the consent of any of these publications to refer to their
data in this prospectus.
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USE OF PROCEEDS
We expect that our net proceeds from the sale of shares of our
common stock will be approximately $ , or $ if the overallotment
option granted to the underwriters is exercised in full, assuming an initial
public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses. We
expect to use our net proceeds as follows:
- approximately $20.0 million in capital expenditures for facilities and
network expansion activities; and
- the remainder for general corporate purposes, including working capital
and potential acquisitions of complementary businesses.
We are currently party to ten letters of intent for acquisitions. These
acquisitions, if completed, will require cash payments of up to $61.9 million.
We intend to complete and fund substantially all of these acquisitions before
completion of this offering, primarily with proceeds from our credit facility.
For more information, see the pro forma condensed combined financial statements
included elsewhere in this prospectus. We are not currently a party to any
agreement or arrangement for any acquisitions other than those contemplated by
the ten letters of intent.
Pending such uses, we expect to invest our net proceeds in short-term,
interest-bearing investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our capital
stock. We currently intend to retain any future earnings to finance the future
growth and development of our business and do not expect to pay any cash
dividends in the foreseeable future. Our existing bank debt agreements limit our
ability to, among other things, pay dividends.
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CAPITALIZATION
The following table shows our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the acquisitions of 14 entities
that have been completed and ten entities for which letters of intent to
acquire had been signed as of April 13, 2000; and
- on a pro forma as adjusted basis to also give effect to (1) the exchange
of all of our outstanding preferred stock and related cumulative dividends
for a total of shares of common stock, (2) the automatic conversion
of all of our outstanding class B non-voting common stock into common
stock, (3) the amendment of our certificate of incorporation, and (4) our
sale of shares of common stock at an assumed initial public offering
price of $ per share, after deducting estimated underwriting
discounts and commissions and our estimated offering expenses, and the use
of our net proceeds as described in "Use of Proceeds."
You should read this table in conjunction with the sections entitled
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" and our
consolidated financial statements, pro forma condensed combined financial
statements and the related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations, including current portion............ $ 33,848 $ 77,848
-------- --------
Mandatorily redeemable preferred stock; 54,000 shares
authorized, issued and outstanding, actual and pro forma;
no shares authorized, issued or outstanding, pro forma as
adjusted.................................................. 45,835 45,835
-------- --------
Stockholders' equity:
Series A redeemable preferred stock, $0.01 par value;
50,000 shares authorized, 48,667 shares issued and
outstanding, actual and pro forma; no shares authorized,
issued or outstanding, pro forma as adjusted............ -- --
Undesignated preferred stock, $0.01 par value;
896,000 shares authorized, none issued or outstanding,
actual and pro forma; 5,000,000 shares authorized, no
shares issued or outstanding, pro forma as adjusted..... -- --
Common stock:
Common stock, $0.01 par value; 40,000,000 shares
authorized,
26,444,624 shares issued and outstanding, actual and
pro forma; 60,000,000 shares authorized,
shares issued and outstanding, pro forma as
adjusted.............................................. 264 264
Class B nonvoting common stock, $0.01 par value;
10,000,000 shares authorized, 5,644,040 shares issued
and outstanding, actual; 10,000,000 shares authorized,
7,486,974 shares issued and outstanding, pro forma; no
shares authorized, issued or outstanding, pro forma as
adjusted.............................................. 57 75
Additional paid-in capital................................ 54,227 81,098
Accumulated deficit....................................... (9,201) (9,201)
-------- --------
Total stockholders' equity............................ 45,347 72,236
-------- --------
Total capitalization.................................. $125,030 $195,919
======== ========
</TABLE>
The above table excludes 666,000 shares of common stock issuable upon
exercise of stock options outstanding as of December 31, 1999, and an additional
940,700 shares of common stock issuable upon exercise of stock options granted
subsequent to December 31, 1999. These options to purchase 1,606,700 shares of
common stock have a weighted average exercise price of $3.90 per share.
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DILUTION
As of December 31, 1999, we had a pro forma net tangible book value of $
million, or $ per share of common stock. Pro forma net tangible book value
per share is determined by dividing (a) the amount of our total tangible assets
less our total liabilities by (b) the pro forma number of shares of common stock
outstanding after giving effect to 14 completed acquisitions since December 31,
1999 and ten acquisitions for which we have signed letters of intent, and the
issuance of shares of our common stock in exchange for all of our
outstanding preferred stock and cumulative dividends upon completion of this
offering. After giving effect to our sale of the shares of common stock in this
offering at an assumed initial public offering price of $ per share, and
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, our adjusted pro forma net tangible book value
as of December 31, 1999 would have been $ million, or $ per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate
dilution of $ per share to new investors purchasing shares of common stock
in this offering. The following table illustrates this dilution on a per share
basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of December
31, 1999.................................................. $
Increase per share attributable to new investors............
------
Adjusted pro forma net tangible book value per share after
the offering..............................................
------
Dilution per share to new investors......................... $
======
</TABLE>
The following table summarizes, as of December 31, 1999, on a pro forma
basis as described above, the number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid by our
existing stockholders and to be paid by new investors in this offering, based
upon an assumed initial public offering price of $ per share, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ % $ % $
New investors........................
---------- ------ ------------ ------
Total.............................. 100.0% $ 100.0%
========== ====== ============ ======
</TABLE>
The discussion and table above exclude:
- 666,000 shares of common stock issuable upon exercise of stock options
outstanding at December 31, 1999 at a weighted average price of $1.50 per
share; and
- shares available for future grant under our stock option plan.
To the extent these options are exercised and the underlying shares are issued,
there will be further dilution to new investors.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial information
data together with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes, all of which appear elsewhere in this prospectus. The data in the actual
columns have been derived from our audited consolidated financial statements
which have been audited by KPMG LLP, included elsewhere in this prospectus. The
data in the pro forma columns have been derived from the unaudited pro forma
condensed combined financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM FEBRUARY 19,
1999 (INCEPTION) TO
DECEMBER 31, 1999
-------------------------
ACTUAL PRO FORMA
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Internet services revenue................................... $ 22,545 $ 64,597
--------- ---------
Operating expenses:
Direct Internet services costs............................ 7,713 25,955
Sales and marketing....................................... 1,902 1,902
General and administrative................................ 9,430 30,342
Compensation charge associated with common stock
issuance................................................ 191 191
Depreciation and amortization............................. 9,058 26,296
--------- ---------
Total operating expenses.............................. 28,294 84,686
--------- ---------
Net operating loss.......................................... (5,749) (20,089)
Interest expense, net....................................... 3,452 7,013
--------- ---------
Net loss.................................................... (9,201) (27,102)
Preferred stock dividends................................... 2,678 2,678
--------- ---------
Net loss applicable to common stockholders.................. $ (11,879) $ (29,780)
========= =========
Basic and diluted net loss per share applicable to common
stockholders.............................................. $ (0.37) $ (0.88)
========= =========
Weighted average common shares outstanding.................. 32,089 33,932
========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
--------------------------
ACTUAL PRO FORMA
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 34,188 $ 1,739
Working capital............................................. 24,077 (12,031)
Total assets................................................ 135,978 215,390
Long-term obligations, including current portion............ 33,848 77,848
Mandatorily redeemable preferred stock...................... 45,835 45,835
Total stockholders' equity.................................. 45,347 72,236
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION TOGETHER WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THE PROSPECTUS. THIS
PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS PROSPECTUS, THE WORDS "INTEND," "ANTICIPATE,"
"BELIEVE," "ESTIMATE," "PLAN" AND "EXPECT," AND SIMILAR EXPRESSIONS AS THEY
RELATE TO US ARE INCLUDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF NUMEROUS FACTORS, INCLUDING THOSE SET FORTH UNDER
"RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a full service, facilities-based provider of Internet data and
broadband communications solutions, including high-speed digital subscriber
lines, or DSL, Internet access, Internet hosting, web development and network
integration services to business and residential clients in tier II and III
markets in the southeastern United States. We have focused on building our
market presence primarily through targeted acquisitions and, increasingly, on
deploying our facilities-based network to provide broadband access and a full
suite of other Internet data services. Since our inception in February 1999, we
have completed 44 acquisitions and we currently have outstanding letters of
intent for an additional ten acquisitions. We have accounted for our
acquisitions under the purchase method of accounting. As a result, substantial
annual non-cash amortization charges for acquired intangibles have affected, and
will continue to affect, our results of operations.
INTERNET SERVICES REVENUE. We derive revenue from Internet access, Internet
hosting, web development and network integration services to small and
medium-sized businesses and residential clients.
- Internet access revenue consists of monthly, quarterly, semi-annual and
annual prepaid subscriptions. We record advance collections relating to
prepaid subscriptions for future access services as deferred revenue when
collected and we recognize revenue ratably over the term of the prepaid
subscription.
- Internet hosting revenue consists of monthly fees based upon the amount of
physical space occupied in our data centers and other services billed
either at a time-plus-materials basis or at fixed prices.
- Web development and network integration services revenue is billed on a
per project basis, including fixed rate as well as time-plus-materials. We
recognize revenue as services are provided. Revenue from hardware and
software sales is recognized upon shipment of the respective products.
DIRECT INTERNET SERVICES COSTS. Direct Internet services costs include the
direct telecommunications costs paid to third-party providers and the direct
costs of hardware related to network integration hardware and software sales.
Direct telecommunications costs consist of charges paid to telecommunications
providers for leased local access lines and to incumbent and competitive local
exchange carriers for high speed leased lines to transport services to our
switching centers and to our Internet backbone providers. We expect direct
Internet services costs to decrease as a percentage of Internet services revenue
in future periods due to our qualification as a competitive local exchange
carrier in the states in which we conduct business, the deployment of our
facilities-based enhanced network, the integration of acquired businesses and
efficiencies achieved from an increased client base.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
advertising costs, salaries and related personnel costs, travel expenses,
certain pre-sale support, trade shows and other marketing
22
<PAGE>
programs and events. We expect that sales and marketing expenses will increase
in the future, both on an absolute basis and as a percentage of Internet
services revenue, due to the significant expansion of our sales operations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
direct salaries, benefits and other direct costs associated with providing
customer service, technical support, billing, network maintenance, personnel and
corporate administration. With the growth in services and our tailored approach
to clients, we expect that the expenses related to customer service will remain
a significant part of our ongoing expenses. We also expect the cost to maintain,
enhance, and operate our network to grow and to continue to be a significant
part of our ongoing general and administrative expenses.
DEPRECIATION AND AMORTIZATION. We recognize depreciation expense over the
estimated useful lives of our property and equipment ranging from three to ten
years on a straight-line basis. Network equipment, including servers, switches
and various internal network components, represents a significant portion of our
capital investment. We depreciate equipment acquired under a capital lease over
the related lease term or the estimated productive useful life, depending upon
the criteria qualifying the lease as capital. Amortization expense generally
consists of the costs associated with acquired intangibles from business
acquisitions, which are amortized over lives ranging from three to ten years. We
expect that depreciation and amortization costs will increase on an absolute
dollar basis as well as on a percentage of Internet services revenue basis due
to acquisitions, DSL deployment and the increased investment in our network.
ACQUISITIONS
A key component of our overall "smart buy and build" strategy includes the
acquisition of complementary businesses and services and products. As of
December 31, 1999, we completed 30 business combinations, including 26 Internet
data service providers and four competitive local exchange carriers. We have
accounted for completed transactions under the purchase method of accounting.
Accordingly, the historical consolidated financial statements included in this
prospectus include operating results of the acquired companies only from the
effective date of each respective acquisition and are not necessarily indicative
of the future financial condition or results of our operations. Subsequent to
December 31, 1999, we closed an additional 14 acquisitions for a total purchase
price of $19.5 million, and have signed letters of intent for an additional ten
acquisitions for a total purchase price of up to $61.9 million in cash and up to
1,757,382 shares of common stock.
Our acquisitions have allowed us to rapidly build our base of clients, which
provides us with revenue-generating network traffic. We reinvested the cash flow
from this installed base to deploy an enhanced broadband network infrastructure.
With this enhanced network in place, we have rolled out broadband access and
other enhanced Internet data solutions, such as DSL and Internet hosting, to our
business clients. This initial "smart buy and build" strategy has allowed us to
gain Internet data services market share, to establish local brands in our
region and to finance the build-out of our broadband network.
We expect to achieve cost savings from acquired businesses by consolidating
management, back office operations and sharing network infrastructure. We are
focused on fully integrating these acquisitions, including networks, client
service and technical support, billing, accounting and finance.
23
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth our historical operating results as a
percentage of Internet services revenue represented by each item for
fiscal 1999, the period from February 19, 1999 through December 31, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 19, 1999
(INCEPTION) TO
DECEMBER 31, 1999
------------------
<S> <C>
Internet services revenue................................... 100.0%
-----
Operating expenses:
Direct Internet services costs............................ 34.2
Sales and marketing....................................... 8.4
General and administrative................................ 41.8
Compensation charge associated with common stock
issuance................................................ 0.9
Depreciation and amortization............................. 40.2
-----
Total operating expenses................................ 125.5
-----
Net operating loss.......................................... (25.5)
Interest expense, net....................................... 15.3
-----
Net loss.................................................... (40.8)
Preferred stock dividends................................... 11.9
-----
Net loss applicable to common stockholders.................. (52.7)%
=====
</TABLE>
PERIOD FROM INCEPTION ON FEBRUARY 19, 1999 THROUGH DECEMBER 31, 1999
INTERNET SERVICES REVENUE. We began to provide services to clients
effective with the closing of our first acquisition on March 16, 1999. Internet
services revenue for fiscal 1999 was $22.5 million. Of this revenue 92.0%, or
$20.7 million, consisted of revenue from Internet access and Internet hosting
services, and approximately 8.0%, or $1.8 million, generated from web
development services and network integration services.
DIRECT INTERNET SERVICES COSTS. Internet services costs for fiscal 1999
were $7.7 million, or 34.2% of Internet services revenue. Direct Internet
services costs decreased as a percentage of Internet services revenue during the
course of fiscal 1999 through the integration of acquired businesses,
efficiencies achieved from an increased client base, improved telecommunications
contracts and economies of scale, and the deployment of our facilities-based
network.
SALES AND MARKETING. Sales and marketing expenses for fiscal 1999 was
$1.9 million or 8.4% of Internet services revenue, consisting of employee
related costs of $739,000 and advertising costs of $1.2 million.
GENERAL AND ADMINISTRATIVE. General and administrative expenses for fiscal
1999 were $9.4 million, or 41.8%, of Internet services revenue. General and
administrative costs consist primarily of employee related costs of
$5.4 million, or 23.9% of Internet service revenue. The remaining costs of
$4.0 million include other infrastructure costs related to billing, customer
service and technical support, network operations and other infrastructure
related costs.
COMPENSATION CHARGE ASSOCIATED WITH COMMON STOCK ISSUANCE. We incurred a
charge of $191,000 in fiscal 1999 related to the sale of restricted stock to
management. We will record additional compensation expense related to these
sales of approximately $34,000 on a quarterly basis, and
24
<PAGE>
$504,000 in the aggregate, in periods subsequent to December 31, 1999 and ending
in the fourth quarter of 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for
fiscal 1999 were $9.1 million, or 40.2% of Internet services revenue.
Depreciation and amortization expenses were primarily attributable to the
amortization of intangible assets related to goodwill and client base from the
30 acquisitions in fiscal 1999, as well as the depreciation of fixed assets.
INTEREST EXPENSE, NET. Interest expense, net for fiscal 1999 represented an
expense of $3.5 million, or 15.3% of Internet services revenue, and consisted
principally of interest expense attributable to total debt incurred for the
funding of our 30 acquisitions in fiscal 1999.
PREFERRED STOCK DIVIDENDS. Series A and series B preferred stock accrue
dividends quarterly at an annual rate of 12%. For fiscal 1999, total dividends
paid in the form of additional preferred stock were $2.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have related to
funding acquisitions, developing and expanding our network infrastructure and
customer service and technical support operations. We have financed our capital
expenditures and acquisitions with the proceeds of $46.0 million from the sale
of redeemable preferred stock and $54.0 million from the sale of mandatorily
redeemable preferred stock, as well as with borrowings from our credit facility.
As of December 31, 1999, we had a $62.0 million credit facility, of which
$25.4 million was outstanding at an interest rate of 10.2%. Also, as of
December 31, 1999, we had cash and cash equivalents of $34.2 million and net
working capital of $24.1 million.
Net cash provided by operating activities in fiscal 1999 was $3.7 million.
Net cash from operating activities was positively affected by non-cash charges
of $9.9 million of depreciation and amortization, $191,000 of compensation from
the issuance of restricted stock and $4.1 million for timing of payments to
vendors and pre-payments from customers. Offsetting these sources were net
losses of $9.2 million and an increase in other working capital items of
$1.3 million. EBITDA, as defined, for fiscal 1999 was $3.5 million, or 15.6% of
Internet services revenue. As used in this prospectus, EBITDA represents
earnings before interest, taxes, depreciation, amortization, non-recurring and
non-cash compensation charges. EBITDA is provided because it is a measure
commonly used by investors to analyze and compare companies on the basis of
operating performance. EBITDA is not a measurement of financial performance
under generally accepted accounting principles, and should not be construed as a
substitute for operating income, net income or cash flows from operating
activities for purposes of analyzing our operating performance, financial
position and cash flows. EBITDA, as defined, is not necessarily comparable with
similarly titled measures for other companies.
Net cash used in investing activities in fiscal 1999 was $101.1 million and
consisted of activities related to capital expenditures of $6.2 million and 30
acquisitions for an aggregate cash purchase price of $94.9 million. We expect
that our capital expenditures will be substantially higher in future periods in
connection with the purchase of equipment necessary for the development and
expansion of our networks.
During 1999, we entered into an equity purchase agreement with Lucent
Technologies Inc. Lucent invested $10.0 million in the Company as part of the
series B mandatory redeemable preferred issuance. The investment required us to
provide Lucent with a purchase order of at least $10.0 million by December 17,
1999 as well as providing a purchase order for an additional $30.0 million by
January 31, 2000.
25
<PAGE>
Net cash provided by financing activities in fiscal 1999 was
$131.6 million, consisting of proceeds from the issuance of preferred and common
stock, and amounts borrowed under our credit facility. We have used, and intend
to continue using, the proceeds from these financing activities primarily to
implement our business plan, to acquire companies and for working capital. We
received net proceeds of $100.0 million from the sale of shares of series A and
series B preferred stock and class A and class B common stock. The series A
preferred stock of $46.0 million is redeemable at our option. The series B
preferred stock of $54.0 million is mandatorily redeemable in December 2006. In
connection with this offering, the preferred stock and related cumulative
dividends will be exchanged for shares of common stock, and the
class B common stock will convert to an equal number of shares of common stock.
Our existing credit facility is led by Canadian Imperial Bank of Commerce,
and consists of $47.0 million in revolving debt and $15.0 million in term debt.
We are negotiating with our lenders to increase our existing facility to
$120.0 million with terms and conditions similar to those of the existing
facility, extending the payment terms for payments to begin in 2001 and the
maturity term from 2004 to 2006. The credit facility contains a number of
financial and other covenants, including covenants requiring us to maintain
certain financial ratios and limitations or prohibitions relating to, among
other things, new indebtedness, interest coverage, capital expenditures, churn
rates, fixed charge coverage and debt to EBITDA coverage ratio. Interest is
payable quarterly on all amounts payable beginning on the date each specific
amount was borrowed. Under the credit facility, we may elect an interest rate as
of each borrowing date based on the applicable borrowing margin, which adjusts
quarterly, and as of December 31, 1999 was either (1) the lender's prime rate
plus 3.0% or (2) LIBOR plus 4.0%. Automatic and permanent reductions of the
maximum commitments begin June 30, 2000 at a rate of 6.25% of the outstanding
balance of the term loan and 6.25% of the first $5.0 million of the revolving
credit facility. At December 31, 1999, $18.7 million was outstanding under the
revolving credit facility and $15.0 million was outstanding under the term loan
commitment. We also pay a commitment fee on the unused portion of the revolving
credit facility of up to 1.0% per annum.
We believe that the net proceeds from this offering, together with our
existing cash and short-term investments, investments from our strategic
partners, amounts available under our credit facility, and cash generated from
operations, will be sufficient to fund our expanded operating needs for at least
the next twelve months, including capital expenditures and working capital
requirements, and to complete acquisitions we currently have under letters of
intent.
We expect our net losses and capital expenditures to increase as we expand
our network. We expect that we will require additional financing in the future,
in particular to complete future acquisitions. The timing of any such financing
will depend upon market conditions, among other things. We may obtain additional
financing through commercial bank borrowings, equipment financing or the private
or public sale of equity or debt securities. The actual amount and timing of our
future capital requirements may differ materially from our estimate as a result
of, among other things, the demand for our services and regulatory,
technological and competitive developments, including additional market
developments and new opportunities, in our industry. We may also need additional
financing if:
- we alter the schedule, targets or scope of our network rollout plan;
- our development plans or projections change or prove to be inaccurate;
- we acquire other companies or business; or
- demand for our services or our cash flow from operations is less than or
more than expected.
We cannot assure you that we will be able to raise sufficient debt or equity
capital on terms that we consider acceptable, if at all. If we are unable to
obtain adequate funds on acceptable terms, our ability to deploy and operate our
network, fund our expansion or respond to competitive pressures would be
significantly impaired.
26
<PAGE>
As of April 1, 1999, we had not entered into any financial instruments that
expose us to material market risk.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position, or SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 provides guidance for
determining whether computer software is internal-use software, and on
accounting for proceeds of computer software originally developed or obtained
for internal use and then subsequently sold to the public. It also provides
guidance on capitalization of the costs incurred for computer software developed
or obtained for internal use. The adoption of SOP 98-1 has not had a significant
impact on our financial statements.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
REPORTING ON THE COSTS OF START-UP ACTIVITIES, which provides guidance on the
financial reporting of start-up costs and organizational costs. It requires
costs of start-up activities and organizational costs to be expensed as
incurred. As we have not capitalized such costs to date, the adoption of SOP
98-5 does not have an impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, or SFAS, No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 supersedes SFAS 14,
FINANCIAL REPORTING FOR SEGMENTS OF BUSINESS ENTERPRISE, replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of our reportable
segments. We operate in one segment: high-speed data communication services.
SFAS No. 131 also requires disclosures about products and services, geographic
areas and major clients. The adoption of SFAS No. 131 had no impact on our
financial statements for the periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Company is
required to adopt SFAS No. 133, as amended by SFAS No. 137, in fiscal 2001. SFAS
No. 133 established methods of accounting for derivative financial instruments
and hedging activities related to those instruments as well as other hedging
activities. Management believes adoption of SFAS No. 133 will not have a
material impact on the financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
its Staff Accounting Bulletin, or SAB, No. 101, REVENUE RECOGNITION. SAB
No. 101 summarized certain views of the staff on applying generally accepted
accounting principles to revenue recognition in financial statements. The staff
believes that revenue is realized or realizable and earned when the seller's
price to the buyer is fixed or determinable, and collectibility is reasonably
assured. We believe that our current revenue recognition policy complies with
the Commission's guidelines.
27
<PAGE>
BUSINESS
OVERVIEW
We are a full service, facilities-based provider of Internet data and
broadband communications solutions to small and medium-sized businesses in tier
II and tier III markets in the southeastern United States. We offer a full suite
of Internet data and broadband communications solutions, including high-speed
digital subscriber lines, or DSL, Internet access, Internet hosting, web
development and network integration services. We are deploying a dedicated
broadband enhanced network, enabling us to expand our service offerings
throughout our markets. We believe that, by combining the regional scale of our
facilities-based network with our local market presence, we are well-positioned
to address the needs of small and medium-sized businesses.
We have utilized a "smart buy and build" strategy to gain Internet data
services market share, to establish local brands in our targeted region and to
finance the build-out of our broadband network. Beginning in March 1999, we
implemented this strategy by rapidly aggregating a substantial client base in
the southeastern United States through the acquisition of 44 Internet data
service providers and competitive local exchange carriers. We reinvested the
cash flow from this installed client base to deploy our enhanced broadband
network infrastructure. With this enhanced network largely in place, we have
rolled out broadband access and other enhanced Internet data solutions such as
DSL and Internet hosting.
INDUSTRY BACKGROUND
The Internet is fundamentally changing the way business is conducted.
Businesses of all sizes are increasingly taking advantage of the accessability,
enhanced functionality, cost efficiencies and time saving capabilities of the
Internet. Businesses use the Internet to market and sell their products and
services, and to communicate more efficiently with customers, suppliers and
employees. The fundamental benefits of the Internet are fueling a dramatic
increase not only in Internet usage, but also in the development and
availability of Internet-based applications that support key business processes.
There is currently significant demand for high speed, or broadband, Internet
access and related enhanced services that enable businesses to better leverage
the Internet, such as Internet hosting, web development and network integration.
Forrester Research, Inc. estimates that the United States business Internet data
services market will grow from approximately $7.7 billion in 1999 to
approximately $56.6 billion in 2003. As broadband access becomes increasingly
widespread, new classes of bandwidth-intensive applications will continue to
emerge. The increasing complexity of the applications will, in turn, drive
demand for even faster access speeds.
While substantially all businesses stand to benefit from Internet data and
broadband services, to date, large businesses have moved most aggressively to
take advantage of Internet efficiencies. These businesses typically have the
financial resources and information technology staff required to deploy and
support emerging Internet technologies and applications. As a result, most
providers of Internet data and broadband services have targeted large businesses
concentrated in metropolitan areas having populations in excess of two million,
or tier I markets. Small and medium-sized businesses also increasingly require
enhanced broadband communications services simply to remain competitive. Until
recently, broadband Internet access and enhanced services have been
prohibitively expensive and too labor-intensive for small and medium-sized
businesses. In addition, these businesses frequently lack the internal technical
staff and capabilities necessary for their other Internet data requirements such
as web development and network integration.
Technological innovations and regulatory changes have recently converged to
support the emergence of affordable broadband access and related applications.
DSL technology makes high-speed data transmission over existing copper telephone
wires more cost-effective. The Telecommunications Act of 1996 requires incumbent
carriers to unbundle their network elements, such as copper wires, and
28
<PAGE>
to lease these unbundled elements to competitive carriers at more favorable
prices. Incumbent carriers must also lease competitive carriers space in their
central offices, which are locations from which the incumbent carriers switch
customer traffic onto their networks.
Because providers of Internet data and broadband services have focused on
large businesses in major markets, and because implementation and use of
broadband services have typically required significant financial and internal
technical resources, small and medium-sized businesses in smaller markets have
largely been underserved. The emergence of affordable broadband services and the
changes effected by the Telecommunications Act present an opportunity for
service providers to address the particular needs of these businesses. To
capitalize on this opportunity, these providers must be able to efficiently and
cost-effectively offer a full range of Internet data and broadband communication
services to small and medium-sized businesses.
THE DURO SOLUTION
We are a full service, facilities-based provider of Internet data and
broadband communications solutions focusing on small and medium-sized businesses
in tier II and tier III markets in the southeastern United States. We define
tier II and tier III markets as areas having populations of less than 2,000,000.
We currently offer a full range of Internet data and broadband communication
services to approximately 250,000 clients in more than 200 markets. We have
deployed a dedicated broadband network that allows us to provide our products
and services efficiently. Key elements of our solution include:
- AFFORDABLE BROADBAND ACCESS. Our network delivers to clients a high-speed
solution to their Internet access and application needs. Our DSL-based
solutions are an affordable way for small and medium-sized businesses to
capitalize on the efficiencies of Internet-based applications.
- FULL RANGE OF SERVICES. We provide our clients with "one-stop shopping"
for a full suite of Internet data and broadband communications services.
These services include Internet access, Internet hosting, web development
and network integration services. We assist our clients in assessing their
needs and in selecting an appropriate mix of services tailored to meet
their demands.
- DEPENDABLE SERVICE OVER DEDICATED NETWORK. By deploying a dedicated,
rather than shared, enhanced network, we are better able to manage service
quality and network capacity. We continuously monitor our network elements
and, if a problem arises, we can devise and quickly implement a solution.
We have designed a redundant network to minimize downtime. Additionally,
because our network elements efficiently support multiple services, we can
ensure the reliability of the many services we offer.
- RAPID DEPLOYMENT OF NEW SERVICES. The regional scope of our operations
and the scalability of our network enable us to deploy new services
efficiently. Because we are locally based in each market, we believe we
are better able to identify the emerging needs of our clients. Once we
have developed a particular solution for a particular market, we are then
able to quickly deploy and integrate the service in our other markets.
- SUPERIOR CLIENT SERVICE. We provide clients with a local point of contact
for sales, installation and ongoing support. By organizing our local sales
representatives around our clients, we seek to attain a high level of
client satisfaction, achieve client loyalty and accelerate the adoption of
our services. In particular, our representatives are familiar with the
local business environment and specialize in tailored solutions for small
and medium-sized businesses.
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<PAGE>
STRATEGY
Our goal is to be the leading full service provider of Internet data and
broadband communications solutions to small and medium-sized businesses in tier
II and tier III markets in the southeastern United States.
During the first year of our operations, our strategy was to rapidly build a
substantial client base in the southeastern United States through a series of
acquisitions. We then reinvested the cash flow from this installed client base
to deploy our enhanced broadband network infrastructure. With significant
portions of this enhanced network in place, we have rolled out broadband access
and other enhanced Internet data solutions, such as DSL and Internet hosting, to
our business clients.
This initial "smart buy and build" strategy has allowed us to gain Internet
data services market share, to establish local brands in our targeted region and
to finance the development of our high-speed network. The following are key
elements of the current phase of our strategy:
- AGGRESSIVELY EXPAND BROADBAND SERVICES. We intend to aggressively expand
our DSL broadband offerings to small and medium-sized businesses in tier
II and tier III markets. We seek to be the first provider of broadband
solutions in these underserved markets. To gain market share, we initially
entered into agreements to resell DSL over the networks of third-party
providers. During the second quarter of 2000, we will begin offering our
facilities-based DSL services in markets in which we are the first
competitive broadband access provider to small and medium-sized
businesses. We are in the process of filing applications for more than 188
DSL co-locations within our markets and expect to have 100 of these DSL
co-locations operational by the end of 2000. We intend to continue to
migrate resale broadband clients onto our facilities-based network.
- RAPIDLY DEPLOY OUR NETWORK. We are in the process of deploying a
dedicated, broadband local-access network to provide Internet access and
broadband communications solutions using DSL and other high bandwidth
technologies. Our network includes three completed carrier-class data
centers, and more than 240 points of presence across the southeastern
United States. We will continue to invest in our regional carrier-class
network in order to lower our costs, to migrate substantially all of our
traffic onto our facilities-based network, and to efficiently and rapidly
deploy an increasing variety of enhanced services to our clients.
- DEPLOY NEW SERVICES ACROSS OUR NETWORK. We intend to expand our range of
offered services to serve our existing clients and to attract new clients.
For example, we plan to begin offering voice over DSL by the end of 2000.
We are currently authorized under state law to operate as a competitive
local exchange carrier in the states of Alabama, Florida, Georgia,
Kentucky, North Carolina and South Carolina, and we have applications
pending in Mississippi and Tennessee. We also intend to offer more complex
hosted applications, such as accounting and enterprise resource management
programs.
- PROVIDE ENHANCED SERVICES TO OUR EXISTING CLIENTS. We plan to expand
sales of additional, enhanced services to our existing clients as their
needs evolve. We intend to migrate many of our existing business clients
to DSL and related services as our dedicated, broadband network becomes
increasingly available. We expect that as our local sales and support
representatives educate clients as to the benefits and efficiencies of
broadband Internet access, clients will increasingly purchase related
communications services and applications.
- EMPHASIZE LOCAL PRESENCE. We will continue to emphasize our local
presence in order to expand our client base in our target markets. We
devote substantial resources to promoting our local brands in order to
increase brand recognition in each local market. Small and medium-sized
businesses purchase our services knowing that we are a locally based
provider who will visit their sites and provide ongoing, hands-on support.
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- PURSUE STRATEGIC ACQUISITIONS. We intend to selectively pursue strategic
acquisitions that serve a significant business client base or that deliver
complementary products, services, facilities or network infrastructure. We
will also focus on acquisitions that will enable us to expand our market
coverage into new areas or increase market penetration in our existing
markets.
SERVICES
The following table sets forth the services we provide, or intend to
provide, in the ten largest markets in each of our sales regions. In addition,
the table indicates the quarters during which we intend to introduce additional
services in these regions.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTERNET ACCESS SERVICES INTERNET HOSTING SERVICES
RESALE FACILITIES OTHER PORT
DSL BASED DSL DEDICATED DIAL-UP WHOLESALING SIMPLE DEDICATED CO-LOCATION
FLORIDA REGION
Orlando, FL X Q1/01 X X X X X X
Brevard County, FL Q4/00 X X X X X X
Tampa, FL X Q2/01 X X X X X X
Volusia County, FL Q2/00 Q1/01 X X X X X X
Port St. Lucie, FL X X X X X X
Pensacola, FL X Q4/00 X X X X X X
Panama City, FL Q4/00 X X X X X X
Albany, GA Q3/00 X X X X X X
Valdosta, GA Q3/00 X X X X X X
Tifton, GA Q3/00 X X X X X X
MID-SOUTH REGION
Lexington, KY Q2/00 Q2/01 X X X X X X
Louisville, KY Q2/00 Q2/01 X X X X X X
Knoxville, TN Q2/00 Q2/01 X X X X X X
Nashville, TN Q2/00 Q3/00 X X X X X X
Chattanooga, TN Q2/00 X X X X X X
Western N. Carolina Q3/00 X X X X X X
Frankfort, KY Q4/00 X X X X X X
Bowling Green, KY Q3/00 X X X X X X
Owensboro, KY Q3/00 X X X X X X
Paducah, KY Q3/00 X X X X X X
CAROLINA REGION
Wilmington, NC Q3/00 X X X X X X
New Bern, NC Q2/00 X X X X X X
Greenville, NC Q2/00 X X X X X X
Jacksonville, NC Q2/00 X X X X X X
Morehead City, NC Q2/00 X X X X X X
Rocky Mount, NC Q2/00 X X X X X X
Fayetteville, NC Q2/00 Q3/00 X X X X X
Goldsboro, NC Q3/00 X X X X X X
Washington, NC Q2/00 X X X X X X
Kinston, NC Q2/00 X X X X X X
<S> <C> <C>
WEB NETWORK
DEVELOPMENT INTEGRATION
FLORIDA REGION
Orlando, FL X X
Brevard County, FL X X
Tampa, FL X X
Volusia County, FL X X
Port St. Lucie, FL X
Pensacola, FL X X
Panama City, FL X X
Albany, GA X
Valdosta, GA X X
Tifton, GA X X
MID-SOUTH REGION
Lexington, KY X Q3/00
Louisville, KY X Q3/00
Knoxville, TN X Q3/00
Nashville, TN X Q3/00
Chattanooga, TN X Q3/00
Western N. Carolina X Q2/00
Frankfort, KY X Q3/00
Bowling Green, KY X Q3/00
Owensboro, KY X Q3/00
Paducah, KY X Q3/00
CAROLINA REGION
Wilmington, NC X X
New Bern, NC X X
Greenville, NC X X
Jacksonville, NC X X
Morehead City, NC X X
Rocky Mount, NC X X
Fayetteville, NC X X
Goldsboro, NC X X
Washington, NC X X
Kinston, NC X X
</TABLE>
INTERNET ACCESS SERVICES
Our Internet access services provide users with Internet access at varying
speeds, depending on the needs of the client. We offer a number of different
Internet access services, including:
DIGITAL SUBSCRIBER LINES. This broadband service allows clients to access
the Internet without having to dial into the network for each use and costs
between $1,999 and $45 per month, depending on the speed of the DSL connection.
OTHER DEDICATED ACCESS. We offer dedicated, point-to-point leased T1, T3
and OC3 lines and other types of dedicated access, such as frame relay,
delivering broadband access. These services cost between $30,000 and $200 per
month.
DIAL-UP SERVICES. These services provide Internet access over standard
telephone lines. These services are targeted at residential and small business
clients with low bandwidth requirements and cost between $28 and $15 per month.
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PORT WHOLESALING. This service provides dial-up infrastructure on a
wholesale basis to other providers, whose customers access the Internet over our
network. The service costs between $30,000 and $2,000 per month, and depends
principally on usage rates and number of customers served.
INTERNET HOSTING SERVICES
Our Internet hosting services enable our clients to establish and maintain a
site on the Internet. We house our hosting equipment in our carrier-class data
centers, secure facilities having redundant power and electrical systems. We
offer a broad range of hosting services, including:
SIMPLE DOMAIN HOSTING. A client's web site is stored with others on a
shared web server that we own and administer. This service costs approximately
$200 to $20 per month.
DEDICATED SERVER HOSTING. We supply, maintain and monitor a dedicated
server for each Internet hosting client. Monthly charges for this service range
from $3,000 to $200, depending on the level of services and space required.
CO-LOCATION SERVICES. Through our co-location services, we house
client-owned data communications equipment in our data centers. These services
cost between $1,550 and $100 per month, depending on the space and bandwidth
required.
WEB DEVELOPMENT SERVICES
We provide our clients with a customized solution for building a web
presence. Our internal creative services staff provides all web development
services and e-commerce solutions. These services complement our access and
hosting capabilities and cost between $50,000 and $500 per project, based on the
time and services required or on a fixed-price estimate.
NETWORK INTEGRATION SYSTEMS AND CONSULTING
We provide business clients with specialized local and wide area network
design and implementation. We provide initial network configuration, setup and
installation services as well as network hardware and continued support. Network
integration services projects cost between $150,000 and $10,000.
SALES AND MARKETING
We sell our services and solutions through a direct sales force, as well as
direct media and reseller programs tailored to our local markets. As of
March 31, 2000, our direct sales force consisted of 39 representatives. We plan
to continue to significantly increase our sales force during 2000.
CLIENT SERVICE AND TECHNICAL SUPPORT
We seek to distinguish ourselves from our competitors by offering strong and
dedicated client service and technical support. Our client service begins with
the sales process and any required equipment installation and continues
throughout the life of the client relationship. Our technical personnel support
our sales efforts by visiting a client's locations and, in conjunction with the
client, devising a strategy for installation. We locally manage the installation
of our services for each client.
We provide all of our client service and technical support through our
internal support staff, which totalled 160 employees as of March 31, 2000. We
provide ongoing client service 24 hours a day, seven days a week in most markets
by telephone and over the Internet from our four call centers. Our call centers
feature high-end call center telephone switches, including automatic call
distribution technology, skills-based routing, call overflow routing and robust
reporting tools. Our trouble ticket systems track client interaction along with
web-based client service tools that enable customer
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self-service and customer service at the local offices. We are implementing
technology that will enable each of our call centers to be fully integrated, so
that all centers can handle calls from subscribers located anywhere within our
region. Interaction between our technical support personnel and our clients
presents an opportunity for cross selling and upselling of our services.
TECHNOLOGY AND NETWORK INFRASTRUCTURE
Network design and infrastructure comprises a core component of our business
strategy and distinguishes us from many of our competitors. We have designed and
constructed substantial parts of an enhanced network that allows us to deliver a
full range of Internet data and broadband communications solutions. We have
designed our enhanced network to allow us to offer broadband access, to provide
reliable and scalable bandwidth solutions to our clients, to reliably host
client web pages and servers and to deliver bundled voice services over our
network. The main components of our network are:
CENTRAL OFFICE CO-LOCATIONS. Through our relationship with the incumbent
telephone companies, we co-locate our switching equipment, including DSL access
multiplexors, or DSLAMs, in local telephone company offices known as central
offices. DSLAM equipment aggregates data flowing from clients and passes it
along the network to our switching centers. We install, maintain and monitor all
of our equipment in our central office locations. This arrangement allows us to
deploy our central office equipment quickly and consistently across our network.
DSL MODEMS. We purchase DSL modems and arrange for on-site installation and
wiring using our own personnel and outside vendors.
LEASED LOCAL ACCESS LINES. We lease the copper lines running from our
central office equipment to the client. We lease these lines as unbundled
network elements from the incumbent telephone carrier and monitor these lines
with our own equipment to proactively ensure the quality of the connection. Our
network architecture allows us to remotely diagnose and temporarily correct
problems by re-routing client traffic, limiting service disruption.
NETWORK BACKBONE. We are constructing a broadband enhanced network that
will link most major locations in our network and will be fully redundant.
Connected to this backbone will be backhaul circuits which will connect our
smaller points of presence to the core network. We will connect via multiple
points on our network backbone to major Internet bandwidth providers.
LOCAL POINTS OF PRESENCE. We operate over 240 local points of presence
throughout the southeastern United States. Our clients access these points of
presence to locally connect to our network. Our local points of presence
typically contain remote access servers, routers, back-up power equipment and in
certain cases, advanced switching equipment.
DATA CENTERS. Our data centers are located strategically in Orlando,
Florida, Valdosta, Georgia, and Lexington, Kentucky. These data centers have
redundant power and environmental systems, as well as rack space and systems for
housing servers, routers, switches and other Internet data services equipment.
Our data centers house our equipment as well as client equipment.
INTERCONNECTION AGREEMENTS. We have entered into interconnection agreements
with traditional telephone companies that are critical to our business. These
agreements govern our relationship with a traditional telephone company and
control:
- the price paid to lease and access the telephone company's copper lines or
loops;
- the special conditioning the telephone company provides on some of these
lines to enable the transmission of DSL signals;
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- the price and terms for co-location of our equipment in the telephone
company's central offices and for transport facilities; and
- the operational support systems and interfaces that we can use to place
orders and monitor the telephone company's response to our request.
We have signed interconnection agreements with Bell South, GTE and Sprint.
These interconnection agreements generally have terms of one to three years. We
will need to negotiate interconnection agreements with other telephone companies
as we extend our network.
COMPETITION
The Internet data services industry is highly fragmented and very
competitive, and presents relatively insubstantial barriers to entry.
Additionally, the potential for growth in the industry, coupled with increased
client demand for advanced services, makes entry into the industry very
attractive for many types of competitors.
The primary competitive factors in our market include:
- availability of services, including broadband access;
- quality of service;
- brand recognition;
- client care and technical support; and
- price.
We believe that due to our established client base, our owned, enhanced,
broadband network and our local focus, we are well-positioned to successfully
compete with respect to these factors within the southeastern United States for
small and medium-size businesses in tier II and tier III markets.
As the market for Internet services grows, and as the variety of services we
offer expands, we face increasing competition from a diverse group of larger
providers, all of whom may have significant resources and greater established
brand recognition. These competitors include local and larger, national Internet
service providers, established on-line information service providers and cable
providers. As competition continues to strengthen, some service providers have
begun to offer Internet access for free or dramatically reduced rates when
bundled with hardware or other services.
Recently, growth in the broadband spectrum has brought select competitors to
the forefront. New companies building facilities infrastructure offer both
wholesale and retail DSL services, including national providers of Internet
access through DSL facilities, from companies such as Covad Communications,
NorthPoint and Rhythms, and regional tier II and tier III market providers such
as DSL.net.
Additionally, as we increasingly operate as a competitive local exchange
carrier in states where we are licensed to do so, we may face competition from
established telecommunications companies, including national long distance
carriers, regional Bell operating companies and local telephone companies.
GOVERNMENT REGULATION
OVERVIEW
Our telecommunications services are subject to a variety of federal
regulations. With respect to certain activities and for certain purposes, we
have submitted our telecommunications operations to the jurisdiction of state
and local authorities who may also assert extensive jurisdiction over our
facilities
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and services. The FCC has jurisdiction over our services and facilities to the
extent that we provide interstate and international telecommunications services.
To the extent we provide intrastate telecommunications services, our services
and facilities are subject to state regulation. In addition, local municipal
government authorities also assert jurisdiction over our facilities and
operations. The jurisdictional reach of the various federal, state and local
authorities is subject to ongoing controversy and judicial review, and we cannot
predict the outcome of such review.
FEDERAL REGULATION
We must comply with the requirements of the Communications Act of 1934, as
amended by the Telecommunications Act of 1996, as well as the FCC's orders,
rules and regulations under the statute. The Telecommunications Act eliminates
many of the pre-existing legal barriers to competition in the telecommunications
and video programming communications businesses, preempts many of the state
entry barriers to local telecommunications service competition that previously
existed in state and local laws and regulations and sets standards for
relationships between telecommunications providers. The law delegates to the FCC
and to the states broad regulatory and administrative authority to implement the
Telecommunications Act.
Among other things, the Telecommunications Act removes barriers to entry in
the local telecommunications market. It does this by preempting certain state
and local laws that are barriers to competition and by requiring traditional
telephone companies to provide nondiscriminatory access to unbundled network
elements and interconnection services to potential competitors, such as cable
operators, wireless telecommunications providers, interexchange carriers and
competitive telecommunications companies.
Regulations promulgated by the FCC under the Telecommunications Act specify
in greater detail the requirements imposed on the traditional telephone
companies to open their networks to competition by providing competitors
interconnection, central office space, access to unbundled network elements,
retail services at wholesale rates and nondiscriminatory access to telephone
poles, conduits and rights-of-way. The requirements enable companies such as us
to interconnect with the traditional telephone companies in order to provide
local telephone exchange and exchange access services and to use portions of the
traditional telephone companies' existing networks to offer new and innovative
services such as our DSL services. In January 1999, the U.S. Supreme Court ruled
on challenges to the FCC regulations. Although the U.S. Supreme Court upheld
most of the FCC's authority and its regulations, it required the FCC to
reexamine and redefine which unbundled network elements the traditional
telephone companies must offer. The FCC issued its revised list of unbundled
network elements in September 1999.
The Telecommunications Act also allows the regional Bell operating
companies, or RBOCs, which are the traditional telephone companies created by
AT&T's divestiture of its local exchange business, to enter the long distance
market within their own local service regions upon meeting certain requirements.
The timing of the various RBOCs' entry into their respective in-region long
distance service businesses is uncertain. In December 1999, Bell Atlantic's
application to provide in-region long distance services in New York state was
granted by the FCC. Given the precedent set by the FCC's grant of Bell
Atlantic's application, the FCC may be more likely to grant similar applications
by Bell Atlantic and the other RBOCs in other states. On January 10, 2000,
Southwestern Bell Telephone Company filed its application for FCC approval to
provide in-region long distance service in Texas. The FCC currently is expected
to act on the application before May 2000. The timing of the various RBOCs'
in-region long distance entry will likely affect the level of cooperation we
receive from each of the RBOCs. The approval of such entry is likely to
adversely affect the level of cooperation.
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In addition, the Telecommunications Act provides relief from the earnings
restrictions and price controls that have governed the local telephone business
for many years. Traditional telephone company tariff filings at the FCC have
been subjected to increasingly less regulatory review. However, precisely when
and to what extent the traditional telephone companies will secure pricing
flexibility or other regulatory freedom for their services is uncertain. For
example, under the Telecommunications Act, the FCC is considering eliminating
certain regulations that apply to the traditional telephone companies' provision
of services that are competitive with ours. The timing and the extent of
regulatory freedom and pricing flexibility granted to the traditional telephone
companies will affect the competition we face from the traditional telephone
companies' competitive services.
Further, the Telecommunications Act provides the FCC with the authority to
forbear from regulating entities such as us who are classified as "non-dominant"
carriers. The FCC has exercised its forbearance authority. We are not obligated
to obtain prior entry certification from the FCC to offer our interstate
services. However, at this time, we are still required to file tariffs for
certain of our interstate services. One of our subsidiaries has filed a tariff
with the FCC to provide certain interstate services. With respect to certain of
our other services, we provide interstate services to our customers on the basis
of contracts rather than tariffs.
On March 18, 1999, the FCC issued an order adopting certain co-location
rules to make it easier and less expensive for competitive telecommunications
companies to obtain space for equipment in RBOC central offices and to require
traditional telephone companies to make new alternative arrangements available
for obtaining central office space. The FCC's co-location rules have not been
uniformly implemented. Moreover, on March 17, 2000, the U.S. Court of Appeals
for the D.C. Circuit vacated certain portions of the FCC's order regarding
co-location, and remanded these portions of the order to the FCC for further
consideration. In the same March 18, 1999 order, the FCC provided a notice of
proposed rule-making to determine whether carriers should be able to provide
asymmetric DSL over the same line over which traditional telephone companies
provide voice service. The notice sought comments on the operational, pricing,
legal and policy ramifications of mandating such line sharing. On November 18,
1999, the FCC required the traditional local telephone companies to provide us
and other competitive local carriers with line sharing access. If implemented by
the traditional local telephone companies, these rules could lower the price we
pay to lease access to the traditional telephone company's wires. While we
believe that these rules are advantageous to us, the traditional telephone
companies may appeal, delay or thwart the implementation of such rules.
Any changes in applicable federal law and regulations, in particular,
changes affecting interconnection agreements with traditional telephone
companies, the prospective entry of the RBOCs into the in-region long distance
business and grant of regulatory freedom and pricing flexibility to the
traditional telephone companies, could harm our business.
STATE REGULATION
To the extent we provide intrastate telecommunications services or have
otherwise submitted ourselves to the jurisdiction of the relevant state
telecommunications regulatory commissions, we are subject to such jurisdiction.
In addition, certain states have required prior state certification as a
prerequisite for providing intrastate telecommunications services. As of
March 31, 2000, our subsidiaries were authorized under state law to operate as a
competitive local exchange carrier in the states of Alabama, Florida, Georgia,
Kentucky, North Carolina and South Carolina, and to operate as an interexchange
carrier and operator service provider in the states of Alabama, Georgia and
South Carolina. We intend that our subsidiaries will obtain authorization to
provide these competitive local exchange services, interexchange services and
operator services in the other states comprising our proposed service area. Our
subsidiaries also have filed tariffs in certain states for intrastate services
as required by state law or regulation. Our subsidiaries are also subject to
periodic financial and other reporting requirements with respect to their
intrastate telecommunications services. Our subsidiaries'
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ability to incur long-term indebtedness is subject to prior state regulatory
commission approval in some state jurisdictions. In addition, some state
regulatory commissions regulate the issuance of securities and the transfer of
control of entities subject to their jurisdiction. Currently, we are reviewing
whether and to what extent these regulatory compliance requirements attach to
our business operations.
The different state commissions have various proceedings underway to
determine the rates, charges, terms and conditions under which competitive local
carriers can obtain access to unbundled network elements (unbundled network
elements are the various portions of a traditional telephone company's network
that a competitive telecommunications company can lease for purposes of building
a facilities-based competitive network, including telephone wires, inter-office
transport, operational support systems and local switching), as well as the
wholesale discount at which we may purchase retail telecommunications services
for resale from the relevant traditional telephone companies. Some of the rates
for unbundled network elements set forth in our interconnection agreements are
interim rates and will be prospectively, and, in some cases, retroactively,
affected by the permanent rates set by the various state commissions for such
unbundled network elements as unbundled loops and interoffice transport. If any
state commission decides to increase unbundled network element rates, our
operating results could suffer.
LOCAL GOVERNMENT REGULATION
We may be required to obtain various permits and authorizations from
municipalities in which we or our subsidiaries operate or own facilities. The
issues of whether and to what extent local government regulation of the
activities of telecommunications carriers, including requiring payment of
franchise fees or other surcharges, pose barriers to entry for competitive
telecommunications companies (and thus may be preempted by the FCC) have been
the subject of much litigation and remain unsettled. Although we rely primarily
on the unbundled network elements of the traditional telephone companies, in
certain instances we deploy our own facilities and therefore may need to obtain
certain municipal permits or other authorizations. The actions of municipal
governments in imposing conditions on the grant of permits or other
authorizations or their failure to act in granting such permits or other
authorizations could harm our business.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation affecting the telecommunications
industry. Other existing federal regulations are currently the subject of
judicial proceedings, legislative hearings and administrative proposals, which
could change, in varying degrees, the manner in which communications companies
operate in the United States. The ultimate outcome of these proceedings, and the
ultimate impact of the Telecommunications Act or any final regulations adopted
pursuant to the Telecommunications Act on our business cannot be determined at
this time, but may well be adverse to our interests. We cannot predict the
impact, if any, that future regulation or regulatory changes may have on our
business and we can give you no assurance that such future regulation or
regulatory changes will not harm our business.
INTELLECTUAL PROPERTY
We have developed and acquired certain proprietary rights for which we have
sought and will continue to seek federal, state and local protection. We rely on
a combination of copyright, trademark and trade secret laws to protect our
proprietary rights, particularly related to our names and logos. We own a
federal trademark registration application, which is currently pending in the
United States Patent and Trademark Office, for the mark DURO. In addition, we
own numerous other names, marks and logos, and have additional registrations
pending for names and marks, under which we do business at local levels within
our region. We are party to one trademark license agreement for the use of the
mark "Gibralter" in the United States for an indefinite term. We also own one
copyright application. We cannot assure you that the steps taken by us to
protect our proprietary rights will be adequate to
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prevent misappropriation of our technology or that third parties, including
competitors, will not independently develop technologies that are substantially
equivalent or superior to our proprietary technology.
In connection with the delivery of our access and other services, we rely on
the use of products of software manufacturers that we bundle in our software for
users with personal computers operating on the Windows or Macintosh platforms.
While some of the applications included in our start-up kit for access services
subscribers are shareware that we have obtained permission to distribute or that
are otherwise in the public domain and freely distributable, certain other
applications included in the start-up kit have been licensed where necessary. We
currently intend to maintain or negotiate renewals of all existing software
licenses and authorizations as necessary, although we cannot be certain that
such renewals will be available to us on acceptable terms, if at all. We may
also enter into licensing arrangements in the future for other applications.
EMPLOYEES
As of March 31, 2000, we had 642 employees. We are not a party to any
collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current efforts
or plans to organize our employees. We consider our relationships with our
employees to be good.
FACILITIES
Our corporate headquarters consists of 5,100 square feet located in
Casselberry, Florida. The lease for this property expires in June 2004. In order
to meet the needs for growth, we intend to lease an additional 12,500 square
feet at the Casselberry location, including an extension of the existing lease
through 2005. We also lease additional office spaces in each of our regional
headquarters, including Maitland, Florida, consisting of 6,000 square feet; New
Bern, North Carolina, consisting of 4,600 square feet; and London, Kentucky,
consisting of 3,500 square feet. The leases for each of these locations expire
in January 2002, February 2001 and January 2004, respectively. We also have
approximately 41 remote office and sales locations located throughout the
southeastern United States, consisting of approximately 40,000 square feet in
the aggregate. Equipment for points of presence and co-locations are generally
located with and in space leased from other companies and central offices in the
particular areas, consisting of approximately 9,000 square feet. We believe that
we will occupy additional facilities in the future for call centers, data
centers, and other back office operations.
We also maintain call center and/or data center operations in the following
locations:
- New Bern, North Carolina. This facility consists of 5,300 square feet used
as a call center. The lease for this facility expires on August 1, 2004.
- Knoxville, Tennessee. This facility consists of 5,600 square feet used as
a call center. The lease for this facility expires in July 2004.
- Valdosta, Georgia. This facility consists of 6,000 square feet used as a
call center. The lease for this facility is on a month to month basis. The
Company is currently pursuing a purchase of the property.
- Maitland, Florida. This facility consists of 8,000 square feet used as a
call center and a data center. The lease for this facility expires in
April 2002.
- Lexington, Kentucky. This facility consists of 8,600 square feet used as a
data center. The lease for this facility expires in May 2009.
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- Valdosta, Georgia. This facility consists of 2,000 square feet used as a
data center. The lease for this facility is on a month to month basis. The
Company is currently pursuing a purchase of the property.
LEGAL PROCEEDINGS
We are the defendant in a lawsuit pending in the United States District
Court for the Eastern District of North Carolina. This lawsuit was filed by
Internet East, Inc., Stephen I. Cohen and Antonio Marie III, in the Superior
Court of the State of North Carolina on March 2, 2000. We removed the lawsuit to
the United States District Court for the Eastern District of North Carolina on
March 15, 2000. The lawsuit purports to state sixteen causes of action arising
primarily out of alleged breaches by us of a contract between Internet of New
Bern and Internet of Greenville, Inc. The plaintiffs allege that we assumed the
contract when we purchased Internet of Greenville's assets in April of 1999. The
lawsuit seeks $100 million in damages. We believe that the claims alleged in
this lawsuit are meritless, and intend to vigorously defend this action. There
can be no assurance, however, that there will not be an adverse result in the
lawsuit, or that if there is an adverse result, that it will not have a
materially adverse impact on us.
We have been, from time to time, involved in various other litigation
matters arising in the ordinary course of business. We are not involved
currently in any such litigation matters that either individually or taken as a
whole, will have a material adverse effect on our business, financial condition
and results of operations.
39
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their respective ages and
positions as of April 1, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Peter B. Hopper........................ 35 President, Chief Executive Officer, Assistant
Secretary and Director
Mark L. Heimbouch...................... 35 Chief Financial Officer and Treasurer
John G. Isaac.......................... 37 Chief Technical Officer
Rebecca J. Masisak..................... 42 Senior Vice President, Operations
G. Robert Joiner....................... 55 Senior Vice President, Corporate Development
Richard W. Gourley..................... 47 Vice President, CLEC Operations
Richard M. Lee, Jr..................... 35 Vice President, Florida Region
Carlos Carpenter....................... 38 Vice President, Mid-South Region
William C. Hanks....................... 33 Vice President, Carolinas Region
John G. Hayes (2)...................... 36 Chairman of the Board of Directors
John C Stanley IV (1)(2)............... 52 Director
Stephen F. Gormley..................... 50 Director
Pearce A. Landry (1)(2)................ 27 Director
Scott Perper........................... 44 Director
David F. Dietz (1)..................... 50 Director
</TABLE>
- ------------------------
(1) Member of audit committee.
(2) Member of compensation committee.
PETER B. HOPPER has been our President and Chief Executive Officer since our
incorporation in February 1999. From 1994 to 1998, Mr. Hopper served as Vice
President at Helicon Cable. While at Helicon, Mr. Hopper managed Helicon Online,
a facilities-based full service Internet provider. Mr. Hopper has a B.S. in
Finance from Lehigh University.
MARK L. HEIMBOUCH joined us in May 1999 as our Chief Financial Officer and
Treasurer. Prior to joining us, Mr. Heimbouch was Vice President, Mergers and
Acquisitions with First Data Corporation, where he had held a variety of
financial policy and planning positions since 1993. Mr. Heimbouch has an M.B.A.
from the Fuqua School of Business at Duke University.
JOHN G. ISAAC joined us in June 1999 as Chief Technical Officer, and is
responsible for planning, building and operating our data and telephony network.
From 1995 to June 1999, Mr. Isaac served as President and Chief Technical
Officer of ICX Online, Inc., which we acquired in June 1999. Mr. Isaac has a
B.S. and an M.S. in Computer Science from Bowling Green State University.
REBECCA J. MASISAK has been our Senior Vice President, Operations since
March 1999. From December 1998 to March 1999 Ms. Masisak operated two newly
integrated Internet service providers while acquiring and integrating a third
Internet service provider. From January 1996 to December 1998, Ms. Masisak was a
Senior Principal for American Management Systems, Inc., a consulting firm and
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<PAGE>
provider of client care and billing solutions for telecommunications companies
for which she led the client management practice. Ms. Masisak has an M.B.A. from
Columbia Business School.
G. ROBERT JOINER has been our Senior Vice President, Corporate Development
since our incorporation in February 1999. Mr. Joiner was on the board of
directors of and was an investor in Crossroads Access, a Mississippi
facilities-based full service Internet service provider formed in 1995 and
acquired by us in March 1999. From February 1996 to October 1998, Mr. Joiner was
Regional Vice President of Outdoor Communications, Inc., an outdoor advertising
venture formed from the roll-up of 33 billboard companies, where he directly
oversaw operations for three divisions. Mr. Joiner has a graduate degree from
Auburn University.
RICHARD W. GOURLEY joined us in January 2000 as Vice President, CLEC
Operations. From 1995 to January 2000, Mr. Gourley was a founder and the
President of Surf South, Inc. and Optilink Communications, Inc. From 1995 until
January 2000, Mr. Gourley was a Vice President of Plant Cellular RSA 14, Inc.,
Telcom Group, Inc. and Phoenix Wireless Group, Inc. Mr. Gourley has a B.S. in
Electrical Engineering and a B.S. in Physics from the University of Oklahoma.
RICHARD M. LEE, JR. joined us in April 1999 as Vice President of our Florida
sales region. From 1996 through April 1999, Mr. Lee was a founder of MPInet, an
Internet data services company based in Orlando, Florida. We acquired MPInet in
April 1999. Prior to founding MPInet, Mr. Lee was a systems integrator for Micro
Products, Inc., a systems integration service based in Washington D.C., from
1987 to 1996. Mr. Lee has a B.S. in Building Science from Auburn University.
CARLOS CARPENTER joined us in August 1999 as Vice President for our
Mid-South sales region. From 1995 through August 1999, Mr. Carpenter was a
founder of KIH Online, an Internet data service company, based in London,
Kentucky. We acquired KIH Online in August 1999. Prior to 1995 Mr. Carpenter was
a founder of College Cable Service, a cable television company based in London,
Kentucky.
WILLIAM C. HANKS joined us in October 1999 as Vice President for our
Carolina sales region. From 1995 to October 1999, Mr. Hanks served in various
capacities for Nortel Networks, most recently as Senior Data Sales Manager,
Emerging Markets. Mr. Hanks has a B.S. in Marketing/Management from the
University of North Carolina at Greensboro.
JOHN G. HAYES has served as one of our directors since March 1999.
Mr. Hayes is a managing partner of Great Hill Partners, L.L.C., a private equity
firm. Mr. Hayes has been associated with Media/Communications Partners, a
private equity firm, since 1989 and has served as a partner since 1993.
Mr. Hayes serves as Chairman of Horizon Telecom International, Inc., a
telecommunications company focused on developing broadband networks in Brazil;
American Broadband, Inc., a development stage company focused on implementing
broadband networks in the United States; and Amstar Entertainment, LLC, a movie
theater developer. Mr. Hayes also presently serves as a director of a number of
companies, including Voyager.net, Inc., a regional Internet service provider;
Edge Connections, Inc.; Language for Industry Worldwide, Inc., a consolidator of
business translation services companies; and Teltrust, Inc., a
telecommunications services provider.
JOHN C STANLEY IV has been one of our directors since our incorporation in
February 1999. Mr. Stanley was the Chief Executive Officer of Outdoor
Communications, Inc. from 1996 until it was sold in October 1998 and prior to
that, he served as vice president of that company. Mr. Stanley has a B.B.A.
degree from The University of Mississippi.
STEPHEN F. GORMLEY has served as one of our directors since March 1999.
Mr. Gormley is a managing partner of Great Hill Partners, L.L.C., a private
equity firm. Mr. Gormley has served as a general partner of Media/Communications
Partners, a private equity firm, since 1986. Mr. Gormley serves as Chairman of
Bloomington Broadcasting Holdings, Inc., a radio broadcaster; and General
Systems Solutions, Inc., a leading provider of on-line vehicle registration.
Mr. Gormley also serves as a
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<PAGE>
director to ManagedOps.com, Inc., a leading mid-market application software
services provider; Sunburst Media, L.P., a radio broadcaster; Adams Business
Media, Inc., a business-to-business publisher and information provider; Medical
World Communications, Inc., a healthcare publisher and information provider;
Haights Cross Communications, LLC, a professional information provider and
supplementary education publisher; Mergent, Inc., a financial database operator;
and Language for Industry Worldwide, Inc., a language translation provider.
PEARCE A. LANDRY has been one of our directors since December 1999.
Mr. Landry is a Principal of First Union Capital Partners, Inc., which he joined
in 1995. His investing efforts are focused in the telecommunications industry,
including wireline, wireless, data and Internet service businesses. Mr. Landry
graduated as a Morehead Scholar from the University of North Carolina in 1995.
SCOTT PERPER has been one of our directors since December 1999. Since
February 1995, Mr. Perper has been Managing Partner of First Union Capital
Partners, Inc. Mr. Perper is a Senior Vice President of First Union Corporation
and First Union National Bank of North Carolina. Mr. Perper received his B.A. in
government and legal studies from Bowdoin College and his M.B.A. from Harvard
Business School.
DAVID F. DIETZ has been one of our directors since April 2000. Mr. Dietz has
been a partner of Goodwin, Procter & Hoar LLP since 1984. Mr. Dietz has a B.A.
from Dartmouth College and a J.D. from Boston University.
BOARD COMPOSITION
The number of our directors is currently fixed at seven. Following the
closing of this offering, our board of directors will be divided into three
classes. Our board of directors will consist of two Class I directors, initially
David F. Dietz and Scott Perper, whose terms of office will continue until the
2001 annual meeting of stockholders, three Class II directors, initially
Stephen F. Gormley, Peter B. Hopper and Pearce A. Landry, whose terms of office
will continue until the 2002 annual meeting of stockholders, and two Class III
directors, initially John G. Hayes and John C Stanley IV, whose terms of office
will continue until the 2003 annual meeting of stockholders. At each annual
meeting of stockholders, a class of directors will be elected for a three-year
term to succeed the directors of the same class whose terms are then expiring.
BOARD COMMITTEES
AUDIT COMMITTEE. The members of the audit committee are responsible for
recommending to the board of directors the engagement of our outside auditors
and reviewing our accounting controls and the results and scope of audits and
other services provided by our auditors.
COMPENSATION COMMITTEE. The members of the compensation committee are
responsible for reviewing and recommending to the board of directors the amount
and type of consideration to be paid to senior management, administering our
stock plans and establishing and reviewing general policies relating to
compensation and benefits of employees.
DIRECTOR COMPENSATION
Directors who are employees receive no additional compensation for their
services as directors. Non-employee directors do not currently receive a fee for
their service as directors, although the board of directors may in the future
decide to pay non-employee directors a fee for their services. We reimburse our
directors for reasonable out-of-pocket expenses incurred in attending meetings
of the board of directors. Non-employee directors are also eligible to
participate in our stock option plans. As of the date hereof, no options have
been granted to non-employee directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued in the
year ended December 31, 1999 to our Chief Executive Officer and each of our
other executive officers whose aggregate compensation exceeded $100,000 in the
period ended December 31, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- -------- -------- ------------
<S> <C> <C> <C>
Peter B. Hopper...................................... $113,684 $62,500 --
President, Chief Executive Officer and Assistant
Secretary
Mark L. Heimbouch.................................... 96,781 50,000 $83,100(1)
Chief Financial Officer and Treasurer
Rebecca J. Masisak................................... 102,704 56,250 --
Senior Vice President, Operations
G. Robert Joiner..................................... 93,269 56,250 --
Senior Vice President, Corporate Development
Richard M. Lee, Jr................................... $ 88,110 $33,500 --
Vice President, Florida Region
</TABLE>
- ------------------------
(1) Constitutes reimbursement for relocation and temporary living expenses.
1999 STOCK OPTION AND INCENTIVE PLAN
In December 1999, our board of directors adopted, and our stockholders
approved, our 1999 Stock Option and Incentive Plan. We intend to amend and
restate the 1999 Stock Option and Incentive Plan prior to completion of this
offering to allow for the issuance of up to shares of common stock plus
an additional amount equal to 15% of any net increase in the total number of
shares of common stock outstanding after this offering. The plan allows us to
grant:
- incentive stock options;
- non-qualified stock options;
- restricted stock awards; and
- unrestricted stock awards.
To date, all options granted under the plan have been incentive stock
options. As of April 1, 2000, options to purchase 1,606,700 shares of common
stock were outstanding under the plan and upon completion of this offering,
shares will be available for future grant under the plan.
Grants under the plan may be made to employees and non-employee directors,
officers and other of our key persons who contribute to our management, growth
and profitability of the business or that of our affiliates.
A committee of the board of directors or, if no such committee is formed,
the board of directors, administers the plan which includes determining the
participants in the plan and the number of shares of common stock to be covered
by each option or restricted stock award, amending the terms of any option or
restricted stock award, subject to certain limitations, and interpreting the
terms of the plan. The administrator of the plan may authorize our chief
executive officer to grant options under the plan
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<PAGE>
at fair market value to individuals who are not subject to the reporting and
other provisions of Section 16 of the Securities Exchange Act of 1934 or
"covered employees" within the meaning of Section 162(m) of the Internal Revenue
Code of 1986.
The exercise price of all other options granted under the plan is determined
by the board of directors or a committee of the board. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common stock
on the date of grant, or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power.
Non-qualified stock options granted under the plan may be granted at prices
which are less than the fair market value of the underlying shares on the date
granted. Under the plan, the options generally terminate on the tenth
anniversary of the grant date. In addition, vested options may be exercised for
specified periods after the termination of the optionee's employment or other
service relationship with us or our affiliates.
All awards issued under the plan will terminate upon a merger,
reorganization or consolidation, the sale of all or substantially all of our
assets or exchange of our stock or a liquidation or similar transaction, unless
we or the other parties to such transactions have agreed otherwise.
EMPLOYMENT AGREEMENTS
This table shows the employment agreements we have with our executive
officers.
<TABLE>
<CAPTION>
INITIAL
NAME ANNUAL SALARY BONUS TERM
- ---- ------------- ------------------- --------
<S> <C> <C> <C>
Peter B. Hopper.................................... $150,000 Up to 50% of salary 5 years
Mark L. Heimbouch.................................. 150,000 Up to 50% of salary 5 years
G. Robert Joiner................................... 100,000 Up to 50% of salary 5 years
Richard M. Lee, Jr................................. 125,000 Up to 40% of salary 4 years
</TABLE>
Each employment agreement's term automatically extends for additional one
year terms unless we or the named executive elect not to renew the agreement.
Each employment agreement can be terminated during its term by us or by the
employee. If the employee terminates the employment agreement with good reason
or if we terminate the employment agreement without cause, or if the employment
is terminated due to death or disability, the employee or the employee's estate
is entitled to receive certain severance benefits, including one year of salary.
If, however, the employment agreement is terminated because of the employee's
death or for any other reason then the employee receives only compensation and
earned but undistributed bonus and benefits prorated through the date of
termination.
Each employment agreement is further subject to certain non-competition,
non-solicitation and confidentiality provisions and certain customary provisions
with respect to benefits, reimbursement of expenses and non-exclusivity of
rights.
RESTRICTED STOCK AGREEMENTS
We have entered into restricted stock purchase agreements with each of
Messrs. Stanley, Hopper, Heimbouch and Joiner and Ms. Masisak, pursuant to which
such officers purchased a total of 4,133,320 shares of common stock. Pursuant to
these agreements, we have the right, but not the obligation, to repurchase all
or a portion of these shares at the initial purchase price per share upon the
bankruptcy of the purchaser or the termination for any reason of the employment
of the executive officer or, in Mr. Stanley's case, if Mr. Stanley shall cease
to be one of our directors. The repurchase rights with respect to these shares
lapse as to 25% of the shares for each of four years following the original
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<PAGE>
purchase date so long as the executive officer or director who purchased such
shares remains one of our executive officers or directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our board of directors reviewed salaries and executive compensation for our
officers and employees during 1999. Peter Hopper, our President, Chief Executive
Officer and Assistant Secretary, was elected a director effective December 30,
1999. From inception in February 1999 through December 1999, Mr. Hopper
participated in deliberations of the board of directors concerning executive
compensation.
In connection with this offering, we have elected Messrs. Hayes, Stanley and
Landry to our compensation committee. Members of our compensation committee have
participated in the transactions described in "Related Party Transactions."
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<PAGE>
RELATED PARTY TRANSACTIONS
In March and April of 1999 we issued promissory notes to Great Hill Equity
Partners Limited Partnership, a significant holder of our equity, in the
aggregate principal amount of approximately $23,800,000 and promissory notes to
John C Stanley IV, one of our directors, in the aggregate principal amount of
$1,000,000. We paid to Great Hill Equity Partners Limited Partnership fees of
$810,000 and to Mr. Stanley $50,000 in connection with these loans. We used the
proceeds of these notes to finance several of our initial acquisitions prior to
securing our credit facility with Canadian Imperial Bank of Commerce. The notes
bore interest at rates ranging from 8% to 12% per annum. We paid $133,000 in
interest to Great Hill and $7,000 in interest to Mr. Stanley. Great Hill
canceled an aggregate of $5,874,000 in principal amount of the notes as partial
consideration for 11,656.968 shares of series A preferred stock purchased on
April 8, 1999. We repaid the remaining balances on these notes in May and
June 1999.
At various times during fiscal 1999, we sold:
- an aggregate of 16,105,804 shares of common stock and an aggregate
37,259.658 shares of series A preferred stock to Great Hill Equity
Partners Limited Partnership and Great Hill Investors, LLC for aggregate
consideration of $37,269,000;
- 1,052,668 shares of common stock and 2,434,595 shares of series A
preferred stock to Mr. Stanley for aggregate consideration of $2,435,000;
- 1,091,240 shares of common stock and 365.573 shares of series A preferred
stock to G. Robert Joiner for aggregate consideration of $366,000;
- 52,634 shares of common stock and 121.858 shares of series A preferred
stock to Peter B. Hopper, our President and Chief Executive Officer, for
aggregate consideration of $122,000; and
- 50,840 shares of common stock and 106.660 shares of series A preferred
stock to Rebecca J. Masisak, our Senior Vice President, Operations for
aggregate consideration of $107,000.
The investors also received voting rights, registration rights and participation
rights. All of these rights, other than registration rights, will terminate upon
completion of this offering. The purchase price of the securities was the fair
market value as determined by the parties at the time of the sale, and the
transaction was accounted for on a cost basis.
In December 1999, we sold:
- 2,880,000 shares of common stock and 24,000 shares of Series B preferred
stock to First Union Capital Partners, Inc. for aggregate consideration of
$24,028,800 and
- 1,200,000 shares of common stock and 10,000 shares of Series B preferred
stock to CIBC WMC Inc. for aggregate consideration of $10,012,000.
The investors also received voting rights, registration rights and participation
rights. First Union Capital Partners, Inc. also received the right to nominate
two of our directors, currently Scott Perper and Pearce A. Landry. This right
will terminate upon the completion of this offering.
David F. Dietz has been one of our directors since April 2000. Mr. Dietz is
the sole stockholder of David F. Dietz, P.C. David F. Dietz, P.C., is a partner
of Goodwin, Procter & Hoar LLP, a law firm that has provided us legal services
since 1999.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock at April 1, 2000 as adjusted to reflect the sale
of the common stock offered hereby, by:
- each person known by us to own beneficially 5% or more of the common
stock;
- each of our directors;
- each of the executive officers named in the summary compensation table;
and
- all directors and executive officers as a group.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the SEC and includes voting or investment power with
respect to securities. Under these rules, beneficial ownership includes any
shares as to which the individual or entity has sole or shared voting power or
investment power and includes any shares as to which the individual or entity
has the right to acquire beneficial ownership within 60 days after April 1, 2000
through the exercise of any warrant, stock option or other right. The inclusion
in this prospectus of such shares, however, does not constitute an admission
that the named stockholder is a direct or indirect beneficial owner of such
shares. The applicable percentage of "beneficial ownership" after the offering
is based upon shares of common stock outstanding as of April 1,
2000. All shares included below under right to acquire represent shares subject
to outstanding stock options.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------------------- -------------------
OUTSTANDING RIGHT TO TOTAL BEFORE AFTER
NAME OF BENEFICIAL OWNER(1) SHARES ACQUIRE NUMBER OFFERING OFFERING
- --------------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Great Hill Equity Partners, LP.................
Landmark Co.-Investment Partners Limited
Partnership..................................
CIBC WMC Inc...................................
First Union Capital Partners, Inc..............
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John G. Hayes..................................
John C Stanley IV..............................
Stephen F. Gormley.............................
Pearce A. Landry...............................
Scott Perper...................................
Peter B. Hopper................................
Mark L. Heimbouch..............................
G. Robert Joiner...............................
Richard W. Gourley.............................
Rebecca J. Masisak.............................
Richard M. Lee, Jr.............................
All executive officers and directors, as a
group (15 persons)...........................
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares of common stock
(1) The address for Great Hill Equity Partners Limited Partnership, John G.
Hayes and Stephen F. Gormley, is 1 Liberty Square, Boston, MA 02109. The
address for Landmark Co.-Investment Partners, L.P. is 760 Hopmeadow,
Simsbury, CT 06070-2223. The address for CIBC WMC, Inc. is c/o CIBC Capital
Partners, 425 Lexington Ave., Ninth Floor, New York, NY 10017. The address
for First Union Capital Partners, Inc., Scott Perper and Pearce A. Landry is
1 First Union Center, 301 South College Street, Charlotte, NC 28288. The
address for John C Stanley IV is 100 5th Street, Corinth, MS 38834. The
address for Peter B. Hopper and Mark L. Heimbouch is 1211 Semoran Boulevard,
Suite 217, Casselberry, FL 32707.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Following the offering, our authorized capital stock will consist of
shares of common stock, par value $.01 per share, of which
shares will be issued and outstanding, and shares of
undesignated preferred stock, par value $.01 per share, issuable in one or more
series designated by our board of directors, of which shares will be
issued and outstanding.
COMMON STOCK
VOTING RIGHTS
The holders of our common stock have one vote per share. Holders of our
common stock are not entitled to vote cumulatively for the election of
directors. Generally, all matters to be voted on by stockholders must be
approved by a majority, or, in the case of election of directors, by a
plurality, of the votes cast at a meeting at which a quorum is present, voting
together as a single class, subject to any voting rights granted to holders of
any then outstanding preferred stock.
DIVIDENDS
Holders of common stock will share ratably in any dividends declared by our
board of directors, subject to the preferential rights of any preferred stock
then outstanding. Dividends consisting of shares of common stock may be paid to
holders of shares of common stock.
OTHER RIGHTS
Upon our liquidation, dissolution or winding up, all holders of common stock
are entitled to share ratably in any assets available for distribution to
holders of shares of common stock. No shares of common stock are subject to
redemption or have preemptive rights to purchase additional shares of common
stock.
PREFERRED STOCK
Our certificate of incorporation provides that shares of preferred stock may
be issued from time to time in one or more series. Our board of directors is
authorized to fix the voting rights, if any, designations, powers, preferences,
qualifications, limitations and restrictions thereof, applicable to the shares
of each series. Our board of directors may, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the
voting power and other rights of the holders of the common stock and could have
anti-takeover effects, including preferred stock or rights to acquire preferred
stock in connection with implementing a stockholder rights plan. The ability of
our board of directors to issue preferred stock without stockholder approval
could have the effect of delaying, deferring or preventing a change of control
of our company or the removal of existing management.
INDEMNIFICATION MATTERS
Prior to the offering, we will have entered into indemnification agreements
with each of our directors. The form of indemnification agreement provides that
we will indemnify our directors for expenses incurred because of their status as
a director, to the fullest extent permitted by Delaware law, our certificate of
incorporation and our bylaws.
Our certificate of incorporation contains a provision permitted by Delaware
law that generally eliminates the personal liability of directors for monetary
damages for breaches of their fiduciary duty, including breaches involving
negligence or gross negligence in business combinations, unless the
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<PAGE>
director has breached his or her duty of loyalty, failed to act in good faith,
engaged in intentional misconduct or a knowing violation of law, paid a dividend
or approved a stock repurchase in violation of the Delaware General Corporation
Law or obtained an improper personal benefit. This provision does not alter a
director's liability under the federal securities laws and does not affect the
availability of equitable remedies, such as an injunction or rescission, for
breach of fiduciary duty. Our by-laws provide that directors and officers shall
be, and in the discretion of our board of directors, non-officer employees may
be, indemnified by us to the fullest extent authorized by Delaware law, as it
now exists or may in the future be amended, against all expenses and liabilities
reasonably incurred in connection with service for us or on our behalf. The
by-laws also provide for the advancement of expenses to directors and, in the
discretion of our board of directors, officers and non-officer employees. In
addition, our by-laws provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right now possessed or hereafter acquired under any by-law, agreement,
vote of stockholders or otherwise. We also have directors' and officers'
insurance against certain liabilities.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling us as
described above, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS THAT MAY HAVE
ANTI-TAKEOVER EFFECT
A number of provisions of our certificate of incorporation and by-laws
described below, as well as the ability of our board of directors to issue
shares of preferred stock and to set the voting rights, preferences and other
terms of the preferred stock, may be deemed to have an anti-takeover effect and
may discourage takeover attempts not first approved by our board of directors,
including takeovers which stockholders may deem to be in their best interests.
These provisions also could have the effect of discouraging open market
purchases of our common stock because they may be considered disadvantageous by
a stockholder who desires subsequent to such purchases to participate in a
business combination transaction with us or elect a new director to our board.
CLASSIFIED BOARD OF DIRECTORS
Our board of directors is divided into three classes serving staggered
three-year terms, with approximately one-third of the board being elected each
year. Our classified board, together with certain other provisions of our
certificate of incorporation authorizing the board of directors to fill vacant
directorships or increase the size of the board, may prevent a stockholder from
removing, or delay the removal of incumbent directors and simultaneously gaining
control of the board of directors by filling vacancies created by such removal
with its own nominees.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders at an annual or special meeting of
stockholders must be effected at a duly called meeting and may not be taken or
effected by a written consent of stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS
Our certificate of incorporation and by-laws provide that a special meeting
of stockholders may be called only by our board of directors unless otherwise
required by law. Our by-laws provide that only those matters included in the
notice of the special meeting may be considered or acted upon at that special
meeting unless otherwise provided by law.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND STOCKHOLDER PROPOSALS
Our by-laws include advance notice and informational requirements and time
limitations on any director nomination or any new proposal which a stockholder
wishes to make at an annual meeting of stockholders. For the first annual
meeting following the completion of this offering, a stockholder's notice of a
director nomination or proposal will be timely if delivered to our Secretary at
our principal executive offices not later than the close of business on the
later of the ninetieth day prior to the scheduled date of such annual meeting or
the tenth day following the day on which public announcement of the date of such
annual meeting is made by us.
DIRECTOR VACANCIES AND REMOVAL
Our certificate of incorporation provides that vacancies on our board of
directors may be filled only by the affirmative vote of a majority of the
remaining directors. Our certificate of incorporation provides that directors
may be removed from office only with cause and only by the affirmative vote of
holders of at least 80% of the shares then entitled to vote at an election of
directors.
AMENDMENT OF THE CERTIFICATE OF INCORPORATION
As required by Delaware law, any amendment to our certificate of
incorporation must first be approved by a majority of our board of directors
and, if required by law, thereafter approved by a majority of the outstanding
shares entitled to vote with respect to such amendment, except that any
amendment to the provisions relating to stockholder action, directors,
limitation of liability and the amendment of our certificate of incorporation
must be approved by not less than 80% of the outstanding shares entitled to vote
with respect to such amendment.
AMENDMENT OF BY-LAWS
Our certificate of incorporation and by-laws provide that our by-laws may be
amended or repealed by our board of directors or by the stockholders. Such
action by the board of directors requires the affirmative vote of a majority of
the directors then in office. Such action by the stockholders requires the
affirmative vote of at least 75% of the shares present in person or represented
by proxy at an annual meeting of stockholders or a special meeting called for
such purpose unless our board of directors recommends that the stockholders
approve such amendment or repeal at such meeting, in which case such amendment
or repeal shall only require the affirmative vote of a majority of the shares
present in person or represented by proxy at the meeting.
STATUTORY BUSINESS COMBINATION PROVISION
Following the offering, we will be subject to Section 203 of the Delaware
General Corporation Law, which prohibits a publicly held Delaware corporation
from consummating a "business combination," except under certain circumstances,
with an "interested stockholder" for a period of three years after the date such
person became an "interested stockholder" unless:
- before such person became an interested stockholder, the board of
directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the
business combination;
- upon the closing of the transaction that resulted in the interested
stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares held
by directors who are also officers of the corporation and shares held by
employee stock plans; or
- following the transaction in which such person became an interested
stockholder, the business combination is approved by the board of
directors of the corporation and authorized at a
50
<PAGE>
meeting of stockholders by the affirmative vote of the holders of 66% of
the outstanding voting stock of the corporation not owned by the
interested stockholder. The term "interested stockholder" generally is
defined as a person who, together with affiliates and associates, owns,
or, within the prior three years, owned, 15% or more of a corporation's
outstanding voting stock.
The term "business combination" includes mergers, consolidations, asset
sales involving 10% or more of a corporation's assets and other similar
transactions resulting in a financial benefit to an interested stockholder.
Section 203 makes it more difficult for an "interested stockholder" to effect
various business combinations with a corporation for a three-year period. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or by-laws resulting from an amendment approved by
holders of a least a majority of the outstanding voting stock. Neither our
certificate of incorporation nor our by-laws contain any such exclusion.
TRADING ON THE NASDAQ NATIONAL MARKET SYSTEM
We have applied to have our common stock approved for quotation on the
Nasdaq National Market under the symbol DURO.
NO PREEMPTIVE RIGHTS
No holder of any class of our stock has any preemptive right to purchase any
of our securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for our common stock,
and no prediction can be made as to the effect, if any, that sales of common
stock or the availability of common stock for sale will have on the market price
of our common stock. Nonetheless, substantial sales of common stock in the
public market following this offering, or the perception that such sales could
occur, could lower the market price of our common stock or make it difficult for
us to raise additional equity capital in the future.
Following this offering, there will be shares of our common stock
outstanding on a fully diluted basis. Of these shares, the shares which
are being sold in this offering generally will be freely transferable without
restriction or further registration under the Securities Act, except that any
shares held by our "affiliates" as is defined in Rule 144 under the Securities
Act may be sold only in compliance with the limitations described below.
SALES OF RESTRICTED SECURITIES
The remaining shares of common stock which will be outstanding after
the offering will be "restricted securities" as defined in Rule 144, and may be
sold in the future without registration under the Securities Act subject to
compliance with the provisions of Rule 144 or any other applicable exemption
under the Securities Act.
In general, under Rule 144 a stockholder who has beneficially owned his or
her restricted securities for at least one year including the holding period of
any prior owner, except an affiliate from whom those shares were purchased 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 our common stock, which is expected
to be approximately shares immediately after this offering; and
- the average weekly trading volume in our common stock during the four
calendar weeks preceding the date on which notice of such sale was filed
under Rule 144, provided certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied.
In addition, a stockholder that is not one of our affiliates at any time
during the three months preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years including the holding period
of any prior owner, except an affiliate from whom those shares were purchased is
entitled to sell the shares immediately under Rule 144(k) without compliance
with the above described requirements under Rule 144.
Securities issued in reliance on Rule 701 (such as shares of our common
stock acquired pursuant to the exercise of certain options granted under our
stock plans) are also restricted securities and, beginning 90 days after the
date of this prospectus, may be sold by stockholders other than our affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year holding period requirement.
STOCK OPTIONS
We intend to file registration statements on Form S-8 with respect to the
aggregate of shares of common stock issuable under our stock option
and incentive plans ninety days following the consummation of this offering.
Shares issued upon the exercise of stock options after the effective date of the
Form S-8 registration statement will be eligible for resale in the public market
without restriction, except that affiliates must comply with Rule 144.
52
<PAGE>
LOCK-UP AGREEMENTS
Each of our executive offers, directors and other significant stockholders
of record has agreed with the representatives, for a period of 180 days after
the date of the final prospectus for this offering, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights
with respect to any shares of common stock, any options or warrants to purchase
any shares of common stock, or any securities convertible into or exchangeable
for shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements.
53
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., CIBC WorldMarkets Corp. and First Union
Securities, Inc., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the numbers of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase any and all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
FleetBoston Robertson Stephens Inc.........................
CIBC WorldMarkets Corp.....................................
First Union Securities, Inc................................
-----------
Total................................................
===========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No reduction in this price
will change the amount of proceeds to be received by us as indicated on the
cover of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock at the same price
per share as we will receive for the shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of additional shares that the number of shares
of common stock to be purchased by it shown in the above table represents as a
percentage of the shares offered by this prospectus. If purchased,
the additional shares will be sold by the underwriters on the same terms as
those on which the shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the shares of common stock offered by this prospectus.
UNDERWRITING DISCOUNTS AND COMMISSIONS. The underwriting discounts and
commissions equal the public offering price per share less the amount paid per
share by the underwriters to us. The underwriting discounts and commissions
equal 7% of the public offering price. The following table shows the per share
and total underwriting discounts and commissions to be paid by us to the
54
<PAGE>
underwriters. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Public Offering Price................................
Underwriting Discounts and Commissions...............
Proceeds to DURO.....................................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against civil liabilities, including liabilities under
the Securities Act and liabilities arising from breaches of representation and
warranties contained in the underwriting agreement.
FUTURE SALES. Each of our executive offers, directors and other significant
stockholders of record has agreed with the representatives, for a period of
180 days after the date of the final prospectus for this offering, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock, any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or acquired directly from us by these holders or with respect to which they have
or may acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, we have agreed that for a period of 180 days after the date of the
final prospectus for this offering we will not, without the prior written
consent of FleetBoston Robertson Stephens Inc., (1) consent to the disposition
of any shares held by stockholders subject to lock-up agreements prior to the
expiration of the lock-up period or (2) issue, sell, contract to sell, or
otherwise dispose of, any shares of common stock, any options to purchase any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than (a) our sale of shares in
this offering, (b) the issuance of common stock upon the exercise of outstanding
options and the issuance of options under existing stock option and incentive
plans, provided such common stock and the common stock issuable upon the
exercise of such options cannot be transferred prior to the expiration of the
lock-up period, and (c) the issuance of shares in connection with certain
acquisitions that cannot be sold on the public market during the lock-up period.
Please see "Shares Eligible for Future Sale."
DIRECTED SHARES. At our request, the underwriters have reserved up to %
of the shares of the common stock offered by this prospectus for sale to our
officers, directors, employees and their family members and to our business
associates at the public offering price set forth on the cover page of this
prospectus. These business associates are current and former clients, vendors,
suppliers and other individuals who, in the judgment of our management, have
contributed to our success. These persons must commit to purchase no later than
the close of business on the day following the date of this prospectus. The
number of shares available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus
55
<PAGE>
will be determined through negotiations between us and the representatives. The
material factors to be considered in these negotiations were prevailing market
conditions, our financial information, market valuations of other companies that
we and the representatives believe to be comparable to us, estimates of our
business potential and the present state of our development.
STABILIZATION. The representatives have advised us that, under
Regulation M under the Securities Exchange Act, some participants in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for the purchase of the common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
STOCK ACQUIRED BY AFFILIATES OF REPRESENTATIVES. As part of a private
placement in December 1999, we sold:
- 1,200,000 shares of common stock and 10,000 shares of series B preferred
stock to CIBC WMC Inc. for an aggregate price of $10,012,000; and
- 2,880,000 shares of common stock and 24,000 shares of series B preferred
stock to First Union Capital Partners, Inc. for an aggregate price of
$24,028,800.
These purchases were made at share prices and on other terms identical to those
given to the other purchasers in the private placement. Among other things, CIBC
WMC and First Union Capital Partners, Inc. received voting rights, registration
rights and participation rights in connection with their purchases. In addition,
First Union Capital Partners, Inc. was given the right to nominate two of our
directors, currently Scott Perper and Pearce A. Landry. Mr. Perper is a Managing
Partner of First Union Capital Partners, Inc. and Mr. Landry is a Principal of
First Union Capital Partners, Inc. For additional information, please see
"Related Party Transactions."
CIBC WMC is an affiliate of CIBC WorldMarkets Corp., one of the
representatives of the underwriters of this offering. First Union Capital
Partners, Inc. is an affiliate of First Union Securities, Inc., which is also a
representative of the underwriters of this offering. Under the rules of the
National Association of Securities Dealers, Inc., the purchases of our stock by
CIBC WMC and First Union Capital Partners, Inc. may be deemed to result in
underwriting compensation in connection with this offering. In accordance with
the rules of the National Association of Securities Dealers, Inc., the common
stock purchased by CIBC WMC and First Union Capital Partners, Inc., as well as
the common stock they will receive upon completion of this offering in exchange
for their holdings of series B preferred stock, will be restricted from sale or
other transfer until six months after the date of this prospectus, except as
permitted by those rules.
56
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Goodwin, Procter & Hoar LLP, Boston, Massachusetts. David F.
Dietz, one of our directors, is the sole owner of David F. Dietz, P.C., a
partner of Goodwin, Procter & Hoar LLP and its predecessor firm. Legal matters
in connection with this offering will be passed upon for the underwriters by
Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of DURO Communications, Inc. as of
December 31, 1999 and for the period from February 19, 1999 (inception) to
December 31, 1999, have been included herein and in the registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The historical financial statements of acquired entities included in this
prospectus have been audited by various independent accountants. The companies
and periods covered by these audits are indicated in the individual accountants'
reports. Such financial statements have been so included in reliance on the
reports of the various independent accountants.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC for the
common stock we are offering by this prospectus. This prospectus does not
include all of the information contained in the registration statement. You
should refer to the registration statement and its exhibits for additional
information. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. When we complete this offering, we will also be
required to file annual, quarterly and special reports, proxy statements and
other information with the SEC. We intend to furnish to our stockholders annual
reports containing audited financial statements for each fiscal year.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at HTTP://WWW.SEC.GOV. You may also read and copy
any document we file with the SEC at its public reference facilities at 450
Fifth Street, NW, Washington, DC 20549; 7 World Trade Center, Suite 1300, New
York, New York 10048; and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. You may also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities.
57
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
DURO COMMUNICATIONS, INC.--CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Independent Accountants....................... F-7
Consolidated Balance Sheet as of December 31, 1999...... F-8
Consolidated Statement of Operations for the period from
February 19, 1999 through December 31, 1999............ F-9
Consolidated Statement of Stockholders' Equity for the
period from February 19, 1999 through December 31,
1999................................................... F-10
Consolidated Statement of Cash Flows for the period from
February 19, 1999 through December 31, 1999............ F-11
Notes to Consolidated Financial Statements.............. F-12
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED):
Pro Forma Condensed Consolidated Balance Sheet as of
December 31, 1999 (Unaudited).......................... F-27
Pro Forma Condensed Consolidated Statements of
Operations for the nine month period ended
December 31, 1999 (Unaudited).......................... F-28
Notes to Pro Forma Condensed Consolidated Financial
Statements (Unaudited)................................. F-29
CROSSROADS ACCESS CORPORATION--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-31
Balance Sheets as of December 31, 1998 and March 16,
1999................................................... F-32
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 16, 1999................. F-33
Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 16, 1999................. F-34
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 16, 1999................. F-35
Notes to Financial Statements........................... F-36
DIGITAL.NET, LLC--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-42
Balance Sheets as of December 31, 1998 and March 25,
1999................................................... F-43
Statements of Operations for the periods from
September 1, 1998 through December 31, 1998 and
January 1, 1999 through March 25, 1999................. F-44
Statements of Members' Equity for the periods from
September 1, 1998 through December 31, 1998 and
January 1, 1999 through March 25, 1999................. F-45
Statements of Cash Flows for the periods from
September 1, 1998 through December 31, 1998 and
January 1, 1999 through March 25, 1999................. F-46
Notes to Financial Statements........................... F-47
</TABLE>
F-1
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
GLOBAL INFORMATION EXCHANGE CORPORATION--FINANCIAL
STATEMENTS:
Report of Independent Accountants....................... F-52
Consolidated Balance Sheets as of December 31, 1998 and
April 7, 1999.......................................... F-53
Consolidated Statements of Operations for the Year Ended
December 31, 1998 and the period from January 1, 1999
through April 7, 1999.................................. F-54
Consolidated Statements of Stockholders' Equity
(Deficit) for the Year Ended December 31, 1998 and the
period from January 1, 1999 through April 7, 1999...... F-55
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1998 and the period from January 1, 1999
through April 7, 1999.................................. F-56
Notes to Consolidated Financial Statements.............. F-57
VOYAGER ONLINE, LLC--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-61
Balance Sheets as of December 31, 1998 and April 19,
1999................................................... F-62
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through April 19, 1999................. F-63
Statements of Stockholders' Deficit for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through April 19, 1999................. F-64
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through April 19, 1999................. F-65
Notes to Financial Statements........................... F-66
EDGENET NETWORK SERVICES (A DIVISION OF EDGENET MEDIA, LLC)
-FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-71
Balance Sheet as of April 23, 1999...................... F-72
Statement of Operations for the period from January 1,
1999 through April 23, 1999............................ F-73
Statement of Changes in Members' Equity for the period
from January 1, 1999 through April 23, 1999............ F-74
Statement of Cash Flows for the period from January 1,
1999 through April 23, 1999............................ F-75
Notes to Financial Statements........................... F-76
MPINET (A DIVISION OF MICRO PRODUCTS INC.)--FINANCIAL
STATEMENTS:
Report of Independent Accountants....................... F-82
Balance Sheets as of December 31, 1998 and March 31,
1999................................................... F-83
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 31, 1999................. F-84
Statements of Divisional Interest for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 31, 1999................. F-85
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through March 31, 1999................. F-86
Notes to Financial Statements........................... F-87
</TABLE>
F-2
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
ICX ONLINE, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-91
Balance Sheets as of December 31, 1998 and June 7,
1999................................................... F-92
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through June 7, 1999................... F-93
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1997 and 1998 and the period
from January 1, 1999 through June 7, 1999.............. F-94
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through June 7, 1999................... F-95
Notes to Financial Statements........................... F-96
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET
SERVICES OF PORT ST. LUCIE, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-100
Combined Balance Sheet as of June 13, 1999.............. F-101
Combined Statement of Operations for the period from
January 1, 1999 through June 13, 1999.................. F-102
Combined Statement of Accumulated Deficit for the period
from January 1, 1999 through June 13, 1999............. F-103
Combined Statement of Cash Flows for the period from
January 1, 1999 through June 13, 1999.................. F-104
Notes to Consolidated Financial Statements.............. F-105
GLOBAL DATALINK, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-108
Balance Sheets as of December 31, 1998 and July 7,
1999................................................... F-109
Statements of Operations for the Year Ended December 31,
1998 and the period from January 1, 1999 through July
7, 1999................................................ F-110
Statements of Stockholders' Deficit for the Year Ended
December 31, 1998 and the period from January 1, 1999
through July 7, 1999................................... F-111
Statements of Cash Flows for the Year Ended December 31,
1998 and the period from January 1, 1999 through July
7, 1999................................................ F-112
Notes to Financial Statements........................... F-113
SOUTHERN KENTUCKY NETWORK, INC. AND TOUCHTONE
COMMUNICATIONS, INC.--COMBINED FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-118
Combined Balance Sheets as of December 31, 1998 and
August 26, 1999........................................ F-119
Combined Statements of Operations and Accumulated
Deficit for the Years Ended December 31, 1997 and 1998
and the period from January 1, 1999 through August 26,
1999................................................... F-120
Combined Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through August 26, 1999................ F-121
Notes to Combined Financial Statements.................. F-122
</TABLE>
F-3
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
GIBRALTER DATA SERVICES (A DIVISION OF GIBRALTER PUBLISHING,
INC.)--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-128
Balance Sheets as of December 31, 1998 and September 22,
1999................................................... F-129
Statements of Operations and Owner's Deficit for the
Years Ended December 31, 1998 and the period from
January 1, 1999 through September 22, 1999............. F-130
Statements of Cash Flows for the Years Ended
December 31, 1998 and the period from January 1, 1999
through September 22, 1999............................. F-131
Notes to Financial Statements........................... F-132
BITSTORM, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-138
Balance Sheets as of December 31, 1998 and October 14,
1999................................................... F-139
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through October 14, 1999............... F-140
Statements of Shareholders' Capital for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through October 14, 1999............... F-141
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through October 14, 1999............... F-142
Notes to Financial Statements........................... F-143
INTERNET OF WESTERN NORTH CAROLINA, INC.--FINANCIAL
STATEMENTS:
Report of Independent Accountants....................... F-146
Balance Sheets as of December 31, 1998 and October 26,
1999................................................... F-147
Statements of Operations for the period from May 13,
1998 through December 31, 1998 and the period from
January 1, 1999 through October 26, 1999............... F-148
Statements of Stockholders' Deficit for the periods May
13, 1998 through December 31, 1998 and the period from
January 1, 1999 through October 26, 1999............... F-149
Statements of Cash Flows for the period from May 13,
1998 through December 31, 1998 and the period from
January 1, 1999 through October 26, 1999............... F-150
Notes to Financial Statements........................... F-151
THE NASHVILLE EXCHANGE, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-157
Balance Sheet as of December 10, 1999................... F-158
Statement of Operations for the period from January 1,
1999 through December 10, 1999......................... F-159
Statement of Stockholders' Deficit for the period from
January 1, 1999 through December 10, 1999.............. F-160
Statement of Cash Flows for the period from January 1,
1999 through December 10, 1999......................... F-161
Notes to Financial Statements........................... F-162
</TABLE>
F-4
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
OPTI-LINK COMMUNICATIONS, INC. (A WHOLLY OWNED SUBSIDIARY OF
TELCOM GROUP, INC.)--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-167
Balance Sheets as of December 31, 1998 and December 22,
1999................................................... F-168
Statements of Operations for the period from April 22,
1998 (inception) through December 31, 1998 and the
period from January 1, 1999 through December 22,
1999................................................... F-169
Statements of Stockholders' Equity for the period from
April 22, 1998 (inception) through December 31, 1998
and the period from January 1, 1999 through
December 22, 1999...................................... F-170
Statements of Cash Flows for the period from April 22,
1998 (inception) through December 31, 1998 and the
period from January 1, 1999 through December 22,
1999................................................... F-171
Notes to Financial Statements........................... F-172
SURF SOUTH, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-179
Balance Sheets as of December 31, 1997 and 1998 and
December 29, 1999...................................... F-180
Statements of Operations for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through December 29, 1999.............. F-181
Statements of Stockholders' Equity for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through December 29, 1999.............. F-182
Statements of Cash Flows for the Years Ended
December 31, 1997 and 1998 and the period from
January 1, 1999 through December 29, 1999.............. F-183
Notes to Financial Statements........................... F-184
DIGITAL EXPRESS INTERNET SERVICES, INC.--FINANCIAL
STATEMENTS:
Report of Independent Accountants....................... F-194
Balance Sheets as of December 31, 1998 and 1999......... F-195
Statements of Operations for the Years Ended
December 31, 1998 and 1999............................. F-196
Statements of Stockholders' Deficit for the Years Ended
December 31, 1998 and 1999............................. F-197
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999............................. F-198
Notes to Financial Statements........................... F-199
GULF COAST INTERNET CORPORATION, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-204
Balance Sheet as of December 31, 1999................... F-205
Statement of Operations for the Year Ended December 31,
1999................................................... F-206
Statement of Stockholders' Equity for the Year Ended
December 31, 1999...................................... F-207
Statement of Cash Flows for the Year Ended December 31,
1999................................................... F-208
Notes to Financial Statements........................... F-209
DSS ONLINE, LLC--FINANCIAL STATEMENTS:
Report of Independent Accountants....................... F-215
Balance Sheets as of December 31, 1998 and 1999......... F-216
Statements of Operations for the Years Ended
December 31, 1998 and 1999............................. F-217
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998 and 1999................. F-218
Statements of Cash Flows for the Years Ended
December 31, 1998 and 1999............................. F-219
Notes to Financial Statements........................... F-220
</TABLE>
F-5
<PAGE>
DURO COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C>
ITHINK, INC.--FINANCIAL STATEMENTS:
Report of Independent Accountants.......................
Balance Sheets as of December 31, 1998 and 1999.........
Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................
Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1997, 1998 and 1999...........
Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................
Notes to Financial Statements...........................
</TABLE>
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying consolidated balance sheet of DURO
Communications Inc. and subsidiaries as of December 31, 1999 and the related
consolidated statement of operations, stockholders' equity, and cash flows for
the period from February 19, 1999 (inception) through December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DURO
Communications, Inc. and subsidiaries as of December 31, 1999, and the results
of their operations and their cash flows for period from February 19, 1999
through December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Orlando, Florida
March 23, 2000
F-7
<PAGE>
DURO COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 34,188,096
Receivables:
Trade, net of allowance for doubtful accounts of
$482,218............................................... 2,999,247
Other receivables....................................... 223,208
Prepaid expenses............................................ 494,419
Other assets................................................ 292,374
------------
Total current assets.................................. 38,197,344
Property and equipment, net................................. 16,206,901
Other assets:
Intangible assets, net.................................... 78,974,500
Financing costs, net...................................... 2,598,952
------------
Total assets.......................................... $135,977,697
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,863,294
Accrued expenses.......................................... 1,470,885
Lines of credit, notes payable and current portion of
long-term debt.......................................... 4,515,381
Current portion of capital lease obligations.............. 77,626
Deferred revenue.......................................... 3,639,387
Other current liabilities................................. 554,084
------------
Total current liabilities............................. 14,120,657
Long-term debt, less current portion........................ 29,138,761
Capital lease obligations, less current portion............. 116,229
Other liabilities........................................... 1,420,711
------------
Total liabilities..................................... 44,796,358
------------
Commitments and contingencies
Mandatorily redeemable preferred stock, Series B, $0.01 par
value; 54,000 shares authorized, issued and outstanding
(redeemable at $1,000 per share).......................... 45,834,800
------------
Stockholders' equity:
Preferred stock:
Series A, $0.01 par value; 50,000 shares authorized;
48,667 shares issued and outstanding (liquidation value
of $1,000 per share)................................... 487
Undesignated, $0.01 par value; 896,000 shares
authorized.............................................
Common stock:
Class A, $0.01 par value; 40,000,000 shares authorized,
26,444,624 issued and outstanding including 1,133,300
which are restricted................................... 264,446
Class B, nonvoting, $0.01 par value; 10,000,000 shares
authorized; 5,644,040 shares issued and outstanding
including 3,866,680 which are restricted............... 56,441
Additional paid-in capital................................ 54,225,739
Accumulated deficit....................................... (9,200,574)
------------
Total stockholders' equity............................ 45,346,539
------------
Total liabilities and stockholders' equity............ $135,977,697
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
DURO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM FEBRUARY 19, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Internet services revenue................................... $ 22,544,955
Operating expenses:
Direct Internet services costs............................ 7,712,877
Sales and marketing....................................... 1,902,229
General and administrative................................ 9,430,438
Compensation charge associated with common stock
issuance................................................ 190,906
Depreciation and amortization............................. 9,057,713
------------
Total operating expenses.............................. 28,294,163
------------
Net operating loss.................................... (5,749,208)
------------
Other income (expense):
Interest expense.......................................... (3,480,067)
Interest income........................................... 28,701
------------
Total other expense................................... (3,451,366)
------------
Loss before income taxes.............................. (9,200,574)
Income tax provision........................................ --
------------
Net loss.............................................. (9,200,574)
Preferred stock dividends................................... 2,678,540
------------
Net loss applicable to common stockholders............ $(11,879,114)
============
Per share data:
Basic and diluted net loss per share applicable to common
stockholders............................................ $ (0.37)
============
Weighted average common shares outstanding.................. 32,088,664
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
DURO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 19, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
CLASS A CLASS B ADDITIONAL TOTAL
PREFERRED COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDERS'
STOCK STOCK STOCK CAPITAL DEFICIT EQUITY
--------- -------- -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 19, 1999........................ $ -- -- -- -- -- --
Issuance of capital stock for cash.................. 460 263,541 56,441 54,090,957 -- 54,411,399
Conversion of preferred dividends to preferred
stock............................................. 27 -- -- (27) -- --
Issuance of common stock as a part of purchase
consideration of acquired company................. -- 905 -- 134,809 -- 135,714
Net loss............................................ -- -- -- -- (9,200,574) (9,200,574)
---- -------- ------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1999........................ $487 264,446 56,441 54,225,739 (9,200,574) 45,346,539
==== ======== ======= =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
DURO COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM FEBRUARY 19, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (9,200,574)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 9,952,381
Compensation expense associated with common stock
issuance.............................................. 190,906
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables........................................... (640,938)
Prepaid expenses and other current assets............. (705,684)
Accounts payable...................................... 1,207,687
Accrued expenses and other current liabilities........ 1,867,458
Deferred revenue...................................... 992,928
-------------
Net cash provided by operating activities........... 3,664,164
-------------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (6,187,488)
Purchase of acquired companies, net of cash received...... (94,904,585)
-------------
Net cash used by investing activities............... (101,092,073)
-------------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and current
portion of long-term debt............................... 33,654,142
Payments of deferred financing costs...................... (2,523,161)
Repayments of capital lease obligations................... 193,855
Proceeds from issuance of capital stock, net of issuance
costs................................................... 54,511,169
Proceeds from issuance of mandatorily redeemable preferred
stock................................................... 45,780,000
-------------
Net cash provided by financing activities........... 131,616,005
-------------
Net increase in cash and cash equivalents........... 34,188,096
Cash and cash equivalents:
Beginning period.......................................... --
-------------
End of period............................................. $ 34,188,096
=============
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 3,288,066
=============
Non-cash financing activities:
The Company entered into various capital leases for
computer equipment.
These capital lease obligations resulted in non-cash
financing activities aggregating $221,068 for the period
ended December 31, 1999
In accordance with the terms of the Series A preferred
stock, cumulative dividends were paid through the
issuance of additional shares of preferred stock
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
DURO Communications, Inc. was incorporated as DURO Holding Corp. in Delaware
in December 1999 and changed its name to DURO Communications, Inc. shortly
thereafter. Its predecessor, the wholly-owned subsidiary formerly known as DURO
Communications, Inc., and now known as DURO Communication Corporation, was
incorporated on February 19, 1999. DURO Communications, Inc. is a full service,
facilities-based provider of Internet data and broadband communications
solutions, including high-speed digital subscriber line, or DSL, access,
Internet hosting, web development and network integration services, for small
and medium-sized businesses in tier II and III markets in the southeastern
United States. DURO Communication Corporation completed its first acquisition
and commenced operations on March 16, 1999.
On December 23, 1999, DURO Communications, Inc. entered into a stock
exchange agreement with DURO Communication Corporation whereby the shareholders
of DURO Communication Corporation became the shareholders of DURO
Communications, Inc. This transaction was accounted for as a combination of
entities under common control. The consolidated financial statements include the
activity of DURO Communications, Inc. and DURO Communication Corporation,
collectively referred to as "DURO" or the "Company".
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, and the
limited history of the need for Internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive broadband and Internet data services, the
continued acceptance of the Internet and the Company's ability to develop and
provide new services that meet customers changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
The consolidated financial statements include the activity of the Company
for the period from February 19, 1999 (inception) through December 31, 1999 and
its wholly-owned subsidiaries and acquired businesses since the respective dates
of their acquisition. All significant intercompany balances and transactions
have been eliminated in consolidation.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1999 were approximately $34 million.
F-12
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, and furniture and fixtures, all of which are
stated at cost or fair market value at the date of acquisition. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
related assets, generally ranging from three to ten years.
Property and equipment under capital leases are stated at the present value
of minimum lease payments and are amortized using the straight-line method over
the shorter of the lease term or the estimated useful lives of the assets.
(E) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 10-year period. Also,
included in intangible assets are the customer databases, which consist of
customer lists purchased from various acquisitions. The cost of the customer
lists is being amortized on a straight-line basis over three years. Other
intangibles consisting of costs associated with unfavorable contracts and
covenants not-to-compete are being amortized over the term of the various
agreements.
(F) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of 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). SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. In addition, the recoverability of goodwill is further evaluated under
the provisions of APB Opinion No. 17, INTANGIBLE ASSETS, based upon estimated
fair value. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less costs to sell.
(G) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(H) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES (SFAS 109). SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or
F-13
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
(I) REVENUE RECOGNITION
Revenue from dial-up, other Internet connectivity, web hosting, and other
value-added Internet services is recognized as the services are provided and
deferred and amortized to operations for amounts billed relating to future
periods. Revenue from set-up fees to provide dial-up services is recognized over
the 36-month expected period of customer retention.
Revenue from network integration services, including network consulting and
implementation services is recognized as the services are provided. Revenue from
hardware and software sales is recognized upon shipment of the respective
products.
(J) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing expenses and totaled
approximately $1.2 million for the period ended December 31, 1999.
(K) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of December 31, 1999, the Company had concentrations of credit
risk in two financial institutions in the form of money market accounts in the
approximate amount of $34 million. Concentrations of credit risk with respect to
trade receivables are limited due to the large number of customers comprising
the Company's customer base and the relatively minor balances of each individual
account. At December 31, 1999, the fair value of the Company's financial
instruments approximate their carrying value based on their terms and interest
rates.
For the period ended December 31, 1999, three vendors represented
approximately 28% of the Company's total purchases. The Company's reliance on
certain vendors can be shifted to alternative sources of supply for products it
sells should such changes be necessary.
(L) EARNINGS PER SHARE
The Company reports its earnings per share (EPS) in accordance with SFAS
No. 128, EARNINGS PER SHARE, which requires Basic EPS to be computed by dividing
income (loss) available to common shareholders by the weighted-average number of
common shares outstanding for the period. The computation of diluted EPS is
similar to Basic EPS, except that the denominator is increased to include the
number of additional common shares that would have been outstanding if
potentially dilutive common shares had been issued. In this, its initial year,
the Company has assumed and considered, in
F-14
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accordance with rules and regulations of the Securities and Exchange Commission,
that all of its common stock was outstanding for the entire period.
(M) STOCK BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of Accounting Principles Board
("APB") Opinion No. 25 and provide pro forma net earnings (loss) disclosures for
employee stock option grants as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(N) SEGMENT INFORMATION
The Company adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 requires that a
public business enterprise report financial and descriptive information about
its reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments. The Company currently operates in one industry segment, that being the
satisfaction of the demand for Internet data services by consumers and business
users.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there was no
impact, of adopting SOP 98-1, during the period ending December 31, 1999.
In June 1998, SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This
statement is not expected to materially affect the Company as the Company
currently does not have any derivative instruments or material hedging
activities other than its interest rate cap agreement.
In June 1999, SFAS No. 137, was issued to amend the implementation date for
SFAS No. 133 to be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000.
F-15
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(2) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases stated at
cost, at December 31, 1999:
<TABLE>
<S> <C>
Communications equipment.................................... $ 8,337,607
Furniture, fixtures and equipment........................... 896,512
Leasehold improvements...................................... 423,725
Computer equipment.......................................... 7,373,374
Software.................................................... 539,145
-----------
17,570,363
Less accumulated depreciation and amortization.............. (1,363,462)
-----------
Property and equipment, net............................. $16,206,901
===========
</TABLE>
(3) INTANGIBLE ASSETS
Intangible assets at December 31, 1999, were comprised of:
<TABLE>
<S> <C>
Goodwill.................................................... $59,943,373
Customer lists.............................................. 23,909,768
Other....................................................... 2,815,610
-----------
86,668,751
Less accumulated amortization........................... (7,694,251)
-----------
Intangible assets, net...................................... $78,974,500
===========
</TABLE>
(4) DEBT
In May 1999, DURO entered into a $35 million revolving credit facility and a
$15 million term loan commitment (collectively referred as the "Loans") with a
bank group, led by Canadian Imperial Bank of Commerce, which matures March 31,
2004. On December 10, 1999, certain provisions of the agreements governing the
loans were amended and the revolving credit facility was increased to
$47 million. Interest is payable quarterly on all amounts borrowed. The loan
agreements allow DURO to elect an interest rate as of each borrowing date based
on either the (1) bank's prime rate plus 3% ("fixed rate") or (2) LIBOR plus 4%
("variable rate") as of December 31, 1999. The margins adjust on a quarterly
basis depending on the Company's leverage ratio, as defined. The effective rate
as of December 31, 1999 is approximately 10.21%. The Company also pays a
commitment fee on the unused portion of the revolving credit facility of 1%.
Automatic and permanent quarterly reductions of the maximum commitments begin
June 30, 2000 at a rate of 6.25% of the outstanding balance of the term loan and
6.25% of the first $5 million of the revolving credit facility, with the balance
due at maturity on March 21, 2004. The weighted-average interest rate on these
loans as of December 31, 1999 was %.
F-16
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(4) DEBT (CONTINUED)
Based on the outstanding balances as of December 31, 1999, the scheduled
permanent reductions of long term debt are as follows:
<TABLE>
<CAPTION>
TERM LOAN REVOLVING
DECEMBER 31, COMMITMENT CREDIT FACILITY TOTAL
- ------------ ----------- --------------- ----------
<S> <C> <C> <C>
2000................................... $ 2,640,381 1,875,000 4,515,381
2001................................... 2,812,108 2,500,000 5,312,108
2002................................... 2,172,286 2,500,000 4,672,286
2003................................... 1,678,039 2,500,000 4,178,039
March 31, 2004......................... 5,697,186 9,279,142 14,976,328
----------- ---------- ----------
15,000,000 18,654,142 33,654,142
Less current portion................... (2,640,381) (1,875,000) (4,515,381)
----------- ---------- ----------
Long-term debt, less current
portion.......................... $12,359,619 16,779,142 29,138,761
=========== ========== ==========
</TABLE>
In accordance with the terms of the Loans, the Company entered into an
interest rate cap agreement for a principal amount of $30,000,000 at 7.5% plus
the applicable borrowing margin (11.50% at December 31, 1999). The agreement
expires July 15, 2001.
In addition, the Company must make additional principal payments equal to
50% of excess cash flow, as defined by the agreement.
The Loans are collateralized by all of DURO's tangible and intangible
personal property and fixtures as well as, substantially all of the issued and
outstanding equity securities of DURO.
The Loans are subject to an agreement that contains, among other provisions,
certain financial covenants. These financial covenants include, among others, a
leverage ratio, a fixed charge coverage ratio, an interest coverage ratio, and
capital expenditure limitations. As of December 31, 1999, the Company was in
compliance with these covenants.
The Company obtained bridge financing from certain stockholders. A portion
of the proceeds from the Loans were used to repay the bridge loan and related
fees including interest of $140,000 and commitment fees of $860,000.
(5) LEASES
The Company is obligated under capital leases for various equipment that
expire over the next five years and are included in property and equipment.
The Company has several noncancelable operating leases for office space,
computer equipment, and points of presence that expire over the next five years.
The Company is required to pay all executory costs, such as property taxes,
maintenance, and insurance. Rental expense for operating leases during the
period from February 19, 1999 through December 31, 1999 totaled $578,000.
F-17
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(5) LEASES (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
2000............................................. $ 91,786 688,316
2001............................................. 82,651 491,704
2002............................................. 19,644 283,890
2003............................................. 19,644 203,566
2004............................................. 7,343 67,669
-------- ---------
Total minimum payments....................... 221,068 1,735,145
=========
Less amounts representing interest............... 27,213
--------
Present value of net minimum lease
payments................................... 193,855
Less current portion............................. 77,626
--------
Capital lease obligations, less current portion $116,229
========
</TABLE>
(6) MANDATORILY REDEEMABLE PREFERRED STOCK
On December 30, 1999, the Company issued 54,000 shares of Series B, $0.01,
Preferred Stock (with a redemption price of $1,000 per share) and 5,480,000
shares of common stock valued at $1.50 per share for total cash consideration of
$54,054,800.
The Series B Preferred Stock shall, with respect to the payment of
dividends, redemption rights, and the distribution of assets upon liquidation or
any other payments or distributions rank senior to the Series A Preferred Stock,
the Class A and B Common Stocks and all shares of each other class or series of
capital stock of the Company hereafter created, unless expressly noted.
The holders of the Company's Class B Preferred Stock are entitled to receive
dividends at an annual rate of 12% and payable on the last day of March, June,
September, and December of each year commencing December 31, 1999. Such
dividends shall be calculated on the basis of a 360-day year, shall be
cumulative and shall accrue, whether or not earned or declared, each day that
any shares of the Series B Preferred Stock are outstanding.
On December 31, 2006, the Company must redeem all of the issued and
outstanding shares of Series B Preferred Stock at a cash price per share equal
to the Series B redemption price ($1,000 per share) plus all accrued and unpaid
dividends thereon at the date of redemption. The Company also has the right to
redeem said shares at any time prior to that date.
In the case of default by the Company, the Series B Coupon Rate with respect
to dividends accruing from and after the date of such default shall be increased
to an annual rate of 18%. Such increase shall continue in effect until the
Company cures such default.
The difference between the carrying value and redemption value of the
Mandatorily Redeemable Preferred Stock will be accreted using the interest
method over the period of time prior to the redemption date.
F-18
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(7) STOCKHOLDERS' EQUITY
In connection with the continued company expansion, the Company issued
capital shares of stock throughout the period ended December 31, 1999.
In September, 1999 and December, 1999, the Company's Board of Directors
declared a ten-for-one and a two-for-one split of the Company's common and
preferred stock, respectively. All references in the financial statements to
common and preferred shares and related prices, weighted average number of
shares, and per share amounts have been adjusted to reflect the splits.
(A) COMMON STOCK
Class A Common Stock shareholders are entitled to one vote per share at all
shareholder meetings. Class B Common Stock shareholders are not entitled to vote
in any matters whatsoever, and shall not be entitled to notice of or
participation in shareholder meetings, except as it relates to a merger or
consolidation of the Company with or into another entity or entities, or any
recapitalization or reorganization in which said shares would be treated
differently than Class A shares. Dividends on shares of Class A and B Common
Stock may be declared and paid from funds available subject to any preferential
dividend rights of any then outstanding Preferred Stock.
The Company has sold 1,133,300 shares of Class A common stock and 3,866,680
shares of Class B common stock under Restricted Stock Purchase Agreements
(Restricted Stock Agreements). Under the terms of these Restricted Stock
Agreements, officers and/or full-time employees of the Company purchased such
shares at par value. Upon the occurrence of a termination event, as defined, the
Company has the option, but not the obligation, to repurchase all or any portion
of such shares that have not yet vested. The purchase price is the amount
initially paid for such shares.
Further, as of the occurrence of a termination event, as defined, the
Company has the option, but not the obligation, to repurchase all or any portion
of the vested shares. The purchase price for such vested shares is the greater
of the fair market value, as determined in good faith by the Company's Board of
Directors, or the amount initially paid for the stock.
A termination event is defined as the termination of services by the
employee or officer whether by death, disability, retirement, removal or
resignation. Shares become vested at a rate of 25% per year commencing on the
one year anniversary of the restricted stock purchase date.
The restricted stock also bears certain restrictions regarding
transferability. The Company has recorded compensation expense related to the
sale of certain restricted shares in the amount of $190,906.
(B) PREFERRED STOCK
The holders of the Company's Class A Preferred Stock are entitled to
receive, if and when declared, preferential cash dividends at the annual rate of
12% per share. Dividends will be paid in arrears on the first day of each
January, April, July, and October. In the even the dividends are not paid as of
any such date, such dividends shall thereafter compound and accrue additional
cumulative dividends at the same rate. Dividends in the amount of $2,678,540
were paid in December, 1999 through the issuance of additional shares of
preferred stock.
F-19
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The holders of each share of both Series A and B Preferred Stock shall not
be entitled to vote on any matters whatsoever, and shall not be entitled to
notice of or participation in shareholder meetings.
(C) STOCK OPTIONS
During the period ended December 31, 1999, one million shares of Class A
Common Stock were reserved and authorized for stock options under the Company's
Stock Option and Incentive Plan (the "Plan").
On various dates, the Company's Board of Directors granted stock options to
certain employees under the Plan. The stock option agreements with the employees
consisted of the right to purchase an aggregate of 666,000 newly issued shares
at an exercise price of $1.50 per share, the fair value of the underlying stock
on the dates of grant. The options are exercisable as they vest. The options
vest on the anniversary date of the grant at a rate of 25% per year. The
expiration date of the options is ten years from the grant date.
For disclosure purposes under SFAS No. 123, the fair value of each stock
option granted is estimated on the date of the grant using the minimum value
method. The assumptions used in the minimum value method are as follows:
<TABLE>
<S> <C>
Fair value of underlying stock on date of grant............. $1.50
Risk free interest rate..................................... 6%
Expected life............................................... 5 years
Dividend yield.............................................. 0%
</TABLE>
Under the above method, the total value of the stock options granted to the
employees is $11,588, which would be recognized upon grant. Had stock
compensation been recognized in accordance with SFAS 123, pro forma net loss
would have been $9,212,162.
Following is a summary of the Company's stock option activity as of
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE
-------- ----------------
<S> <C> <C>
Options outstanding at beginning of period.......... --
Options granted..................................... 666,000 $1.50
------- -----
Options outstanding at end of period................ 666,000 $1.50
======= =====
Options exercisable at period end................... --
Weighted average fair value of options granted
during the period................................. $1.50
</TABLE>
F-20
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(7) STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
or exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISEABLE
------------------------- -------------------------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- -------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.50 666,000 9.5 years $ -- -- --
</TABLE>
(8) ACQUIRED BUSINESSES
As of December 31, 1999, DURO had completed the following acquisitions
(amounts in millions):
<TABLE>
<CAPTION>
PURCHASE GOODWILL
NAME OF COMPANY LOCATION PURCHASE DATE PRICE ALLOCATION
- --------------- ---------------------------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
CrossRoads Access
Corporation.............. Corinth, Mississippi March 16, 1999 $ 1.0 0.3
digital.net LLC............ Rockledge, Florida March 26, 1999 4.7 2.3
Global Information Exchange
Corporation and its
wholly-owned CLEC,
Gietel, Inc.............. New Bern, North Carolina April 8, 1999 7.3 5.2
Net America................ Shelby, North Carolina April 20, 1999 1.8 0.7
Voyager Online, LLC........ Chattanooga, Tennessee April 20, 1999 3.0 1.9
EdgeNet Network Services
(a division of EdgeNet
Media, LLC).............. Brentwood, Tennessee April 23, 1999 4.1 2.5
MPInet (a division of Micro
Products, Inc.).......... Orlando, Florida April 23, 1999 9.7 8.2
Internet of Greenville,
Inc...................... Greenville, North Carolina May 5, 1999 1.6 0.8
ICX Online, LLC............ Oak Ridge, North Carolina June 7, 1999 4.2 2.5
Metrolink Internet
Services, Inc............ Melbourne, Florida June 14, 1999 1.1 --
Metrolink Internet Services
of Port St. Lucie,
Inc...................... Port St. Lucie, Florida June 14, 1999 -- --
Internet South, Inc........ Spindale, North Carolina June 17, 1999 0.2 0.1
Internet of Albermarle,
Inc. and Internet of
Roanoke, Inc............. Bell Haven, North Carolina June 25, 1999 0.8 0.6
Global Datalink, Inc....... Orlando, Florida July 7, 1999 6.1 4.6
Computer Grid USA, Inc..... New Bern, North Carolina July 27, 1999 1.1 0.4
</TABLE>
F-21
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(8) ACQUIRED BUSINESSES (CONTINUED)
<TABLE>
<CAPTION>
PURCHASE GOODWILL
NAME OF COMPANY LOCATION PURCHASE DATE PRICE ALLOCATION
- --------------- ---------------------------- ------------------ -------- ----------
<S> <C> <C> <C> <C>
Sundial Internet Services
(a division of Micro
Mainframe Technology,
Inc.).................... Orlando, Florida July 30, 1999 0.4 0.1
Wilmington Internet
Services Enterprises,
Inc...................... Wilmington, North Carolina August 9, 1999 1.8 1.0
Southern Kentucky Network,
Inc...................... London, Kentucky August 27, 1999 15.5 11.9
Touchtone Communications,
Inc...................... London, Kentucky August 27, 1999 1.6 --
Internet Services of West
Tennessee, Inc........... Rutherford, Tennessee August 31, 1999 1.1 0.3
Gibralter Data Services
(a division of Gibralter
Publishing, Inc.)........ Jacksonville, North Carolina September 20, 1999 4.0 3.6
Craig's Data Exchange,
Inc...................... Orlando, Florida October 7, 1999 -- --
Bitstorm, Inc.............. Deltona, Florida October 13, 1999 1.7 1.1
Creative Computing, Inc.... Lynchfield, Kentucky October 25, 1999 0.8 0.5
Internet of Western North
Carolina, Inc............ Asheville, North Carolina October 26, 1999 4.0 2.9
Weblink Support Group,
Inc...................... Jacksonville, North Carolina November 19, 1999 0.3 --
The Nashville Exchange,
Inc...................... Nashville, Tennessee December 10, 1999 1.7 1.1
Opti-Link Communications,
Inc...................... Tifton, Georgia December 23, 1999 2.3 0.3
Surf South, Inc............ Tifton, Georgia December 29, 1999 8.3 5.2
------ ------
Total.............. $ 90.2 $ 58.1
====== ======
</TABLE>
F-22
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(8) ACQUIRED BUSINESSES (CONTINUED)
The above acquisitions were accounted for as purchases and, accordingly, the
purchase prices were allocated to assets acquired and liabilities assumed based
on their estimated fair values at the dates of acquisition. The results of
operations for those businesses acquired as of December 31, 1999, are included
in DURO's consolidated statement of operations and cash flows from the dates of
acquisition.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisitions had all taken place on
April 1, 1999. The Company's operations for the period from February 19, 1999
through March 31, 1999 were insignificant.
For the period ended December 31, 1999:
<TABLE>
<S> <C>
Pro Forma Revenues.......................................... $ 36,597,000
============
Pro Forma Net loss.......................................... $ (9,613,000)
============
Pro Forma Net Loss Applicable to Common Shareholders........ $(12,291,000)
============
Pro Forma Basic and diluted Earnings per share.............. $ (0.38)
============
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition occurred on the date
indicated, or which may result in the future.
Subsequent to year end, DURO has acquired the following companies:
Excellence Online; Digital Express Internet Services, Inc.; Gulf Coast Internet
Corporation, Inc.; Powerhouse Communications, Inc.; dotSTAR
Communications, Inc.; Todd Alan Communications, Inc.; Cape Information
Technology; DSS Online LLC; NC Nets, Inc.; NC Nets of Morehead City, LLP; PC
Solutions of Coastal North Carolina; Pin Digital Corporation; and Wave
Communications, Inc. Further, the Company has issued non-binding letter of
intent for 11 other companies.
(9) INCOME TAXES
Income tax expense (benefit) differs from the amounts that would result from
applying the federal statutory rate of 34% to the Company's net loss for the
period ended December 31, 1999 as follows:
<TABLE>
<S> <C>
Expected federal tax benefit................................ $(3,128,000)
Non-deductible..............................................
Goodwill.................................................... 332,000
Other....................................................... 76,000
Valuation allowance for deferred tax assets allocated to
federal income tax expense................................ 2,720,000
-----------
$ --
===========
</TABLE>
F-23
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(9) INCOME TAXES (CONTINUED)
Temporary differences that give rise to the significant components of
deferred tax assets, and deferred tax liabilities at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 1,926,000
Goodwill amortization..................................... 2,037,000
Other..................................................... 202,000
-----------
Total loss deferred tax assets.......................... 4,165,000
Less valuation allowance.................................... (3,193,000)
-----------
Net deferred tax assets................................. 972,000
-----------
Deferred tax liabilities:
Depreciation.............................................. (696,000)
Accrued liabilities....................................... (276,000)
-----------
Gross deferred tax liability............................ (972,000)
-----------
Net deferred tax asset.................................. $ --
===========
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $4,800,000, all of which is
available to offset future federal taxable income, if any, through 2019. The
valuation allowance noted above is provided based on management's estimation of
the recoverability of the deferred tax asset in future periods.
(10) COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company is the defendant in a lawsuit pending in the United States
District Court for the Eastern District of North Carolina. The lawsuit purports
to state sixteen causes of action arising primarily out of alleged breaches by
the Company related to the acquisition of two entities. The plaintiffs allege
that we assumed a contract when we consummated an acquisition in April of 1999.
The lawsuit seeks $100 million in damages. The Company believes that the claims
alleged in this lawsuit are meritless, and intends to vigorously defend this
action. There can be no assurance, however, that there will not be an adverse
result in the lawsuit, or that if there is an adverse result, that it will not
have a materially adverse impact on the Company.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
PURCHASE AGREEMENT WITH RELATED PARTY
The Company entered into an equity purchase agreement with Ascend
Communications, Inc., a wholly owned subsidiary of Lucent Technologies Inc. On
December 30, 1999, Lucent invested $10 million in the Company's Mandatorily
Redeemable Series "B" Preferred Stock. The investment
F-24
<PAGE>
DURO COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(10) COMMITMENTS AND CONTINGENCIES (CONTINUED)
required DURO to provide Lucent with a purchase order of least $10.0 million and
a commitment to provide an additional purchase order for an additional
$30.0 million.
REAL ESTATE
The Company has acknowledged its intent to enter into agreements to purchase
certain leased premises in amounts not to exceed $550,000. These purchases are
subject to the negotiation of purchase and sale agreements containing standard
representations and warranties and on terms and conditions reasonably
satisfactory to each party.
F-25
<PAGE>
DURO COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
During the period beginning February 19, 1999 through March 31, 2000, DURO
Communications, Inc. and its predecessor (the "Company") completed 43 business
combinations, whereby the Company acquired the outstanding capital stock, or
certain net assets, of companies providing Internet solutions and Competitive
Local Exchange Carrier (CLEC) service in the Southeastern United States (the
"Completed Acquisitions"). Additionally, the Company has entered into 11
agreements to acquire additional providers of Internet data and broadband
communications services in the Southeastern United States (the "Pending
Acquisitions"). All of the Completed and Pending Acquisitions have been or will
be accounted for using the purchase method of accounting. The Completed and
Pending Acquisitions are described in Note 1--Basis of Presentation to the
accompanying unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined balance sheet as of
December 31,1999 gives effect to the post December 31, 1999 Completed and
Pending Acquisitions as if they occurred on December 31, 1999. The unaudited pro
forma condensed combined statements of operations for the nine-month period
ended December 31, 1999 give effect to these acquisitions as though they had
occurred on April 1, 1999.
The unaudited pro forma condensed combined statements of operations are not
necessarily indicative of the financial position or the results of operations
that would actually have occurred if the transactions had been consummated as of
April 1, 1999 and is not intended to indicate the financial position or expected
results for any future period. These statements should be read in conjunction
with the historical consolidated financial statements and related notes thereto
of the Company, and the financial statements of certain of the Completed and
Pending acquisitions, included herein.
The allocations of the purchase price to the acquired tangible and
intangible assets of the Pending Acquisitions have not been finalized pending an
analysis of the amount of tangible and intangible assets and liabilities
acquired. The actual purchase accounting adjustments may be revised, and the
Company may allocate a revised portion of the purchase price to intangible
assets such as goodwill and customer list. Any such adjustments would not be
expected to have a material impact on the pro forma condensed combined
statements of operations.
F-26
<PAGE>
DURO COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMPLETED PENDING
ACQUISITIONS OR COMPLETED
DURO JANUARY 1, 2000 ACQUISITIONS PRO FORMA
COMMUNICATIONS, THROUGH SUBSEQUENT TO ADJUSTMENTS
INC. MARCH 31, 2000 MARCH 31, 2000 (SEE NOTE 2) PRO FORMA
---------------- ----------------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 34,188 231 1,653 (34,333)(a) 1,739
Receivables:
Trade, net.................. 2,999 601 3,802 -- 7,402
Other receivables........... 223 52 -- -- 275
Prepaid expenses.............. 494 10 118 -- 622
Other assets.................. 293 29 252 -- 574
-------- ------ ------- -------- --------
Total current assets...... 38,197 923 5,825 (34,333) 10,612
Property and equipment, net..... 16,207 654 6,595 -- 23,456
Other Assets:
Intangible assets, net........ 78,975 -- -- 99,748 (b) 178,723
Financing costs, net.......... 2,599 -- -- -- 2,599
-------- ------ ------- -------- --------
Total assets............ $135,978 1,577 12,420 65,415 215,390
======== ====== ======= ======== ========
LIABILITIES & STOCKHOLDERS'
EQUITY
Current Liabilities
Accounts payable.............. $ 3,863 925 3,078 -- 7,866
Accrued expenses.............. 1,471 232 1,927 -- 3,630
Lines of credit, notes payable
and current portion of
long-term debt.............. 4,515 717 1,107 (1,824)(c) 4,515
Current portion of capital
lease obligations........... 78 400 582 (982)(c) 78
Deferred revenue.............. 3,639 732 1,298 -- 5,669
Other current liabilities..... 554 224 107 -- 885
-------- ------ ------- -------- --------
Total current
liabilities............. 14,120 3,230 8,099 (2,806) 22,643
Long-term debt, less current
portion..................... 29,139 1,015 1,185 41,800 (c) 73,139
Capital lease obligations,
less current portion........ 116 400 267 (667)(c) 116
Other liabilities............. 1,421 -- -- -- 1,421
-------- ------ ------- -------- --------
Total liabilities......... 44,796 4,645 9,551 38,327 97,319
-------- ------ ------- -------- --------
Mandatorily redeemable preferred
stock......................... 45,835 -- -- -- 45,835
-------- ------ ------- -------- --------
Stockholders' equity:
Preferred Stock............... -- -- -- -- --
Common stock:
Class A..................... 264 99 168 (267)(e) 264
Class B, non-voting......... 57 -- -- 18 (d) 75
Additional paid-in capital.... 54,227 382 9,204 17,285 (d) 81,098
Accumulated deficit........... (9,201) (3,549) (6,503) 10,052 (e) (9,201)
-------- ------ ------- -------- --------
Total stockholders'
equity.................. 45,347 (3,068) 2,869 27,088 72,236
-------- ------ ------- -------- --------
Total liabilities &
stockholders' equity.... $135,978 1,577 12,420 65,415 215,390
======== ====== ======= ======== ========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-27
<PAGE>
DURO COMMUNICATIONS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
COMPLETED PENDING
COMPLETED ACQUISITIONS OR COMPLETED
DURO ACQUISITIONS JANUARY 1, 2000 ACQUISITIONS PRO FORMA
COMMUNICATIONS, THROUGH THROUGH SUBSEQUENT TO ADJUSTMENTS
CORP. DECEMBER 31, 1999 MARCH 31, 2000 MARCH 31, 2000 (SEE NOTE 2) PRO FORMA
---------------- ----------------- --------------- -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Internet services
revenue.............. $ 22,545 14,052 6,910 21,090 -- 64,597
Operating Expenses:
Direct Internet
services costs..... 7,713 6,090 3,152 7,543 (655)(f) 23,843
Sales and
marketing.......... 1,902 421 187 1,504 -- 4,014
General and
administrative..... 9,430 6,972 3,711 10,465 (236)(g) 30,342
Compensation charge
associated with
common stock
issuance........... 191 -- -- -- -- 191
Depreciation and
amortization....... 9,058 756 358 1,853 14,271 (h) 26,296
----------- ------ ----- ------ --------- ----------
Total operating
expenses............. 28,294 14,239 7,408 21,365 13,380 84,686
----------- ------ ----- ------ --------- ----------
Net operating loss..... (5,749) (187) (498) (275) (13,380) (20,089)
Interest expense,
net.................. (3,452) (294) (69) (435) (2,763)(i) (7,013)
----------- ------ ----- ------ --------- ----------
Loss before income
taxes.............. (9,201) (481) (567) (710) (16,143) (27,102)
Income tax provision... -- 69 (2) (59) (8)(j) --
----------- ------ ----- ------ --------- ----------
Net loss......... (9,201) (412) (569) (769) (16,151) (27,102)
Preferred stock
dividends............ 2,678 -- -- -- -- 2,678
----------- ------ ----- ------ --------- ----------
Net loss applicable to
common stockholders.. (11,879) (412) (569) (769) (16,151) (29,780)
----------- ------ ----- ------ --------- ----------
Loss per share:
Basic and diluted.... $ (0.37) (0.88)
=========== ==========
Weighted Average Common
Shares Outstanding... 32,088,664 1,842,934 (k) 33,931,598
=========== ========= ==========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-28
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(1) BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of operations are
presented for the period beginning April 1, 1999, the approximate date at which
DURO Communications, Inc. or its predecessor, began completing its acquisitions.
Through March 31, 2000, the Company has completed or anticipates completing 54
acquisitions. All of the Completed and Pending Acquisitions have been or will be
accounted for using the purchase method of accounting. Under the purchase method
of accounting the purchase price is allocated to assets acquired, including
intangible assets, and liabilities assumed based on their respective fair values
on the acquisition date. Intangible assets consist principally of goodwill and
customer lists.
The total consideration, including acquisition costs, for the Completed and
Pending Acquisitions has been allocated as follows:
<TABLE>
<S> <C>
Total consideration, including acquisition costs............ $193,829
========
Allocated as follows:
Property and equipment and other assets................... $ 31,036
Intangibles............................................... 183,295
Net current liabilities................................... (20,502)
--------
Total purchase price.................................... $193,829
========
</TABLE>
(2) PRO FORMA ADJUSTMENTS
Pro Forma Condensed Combined Balance Sheet
(a) To reflect cash and acquisition costs paid for the Completed and Pending
Acquisitions subsequent to December 31, 1999.
(b) To reflect the allocation of the purchase price in excess of the fair
value of the acquired assets of the companies that were acquired or are
anticipated to be acquired after December 31, 1999. Based on preliminary
estimates, in the opinion of management, the historical balances of all other
assets acquired and liabilities assumed have been determined to approximate fair
value. The excess purchase price has been allocated to goodwill, customer lists
and other intangibles.
(c) To reflect $44,000 in additional borrowings required to finance
Completed and Pending Acquisitions subsequent to December 31, 1999, net of the
extinguishment of $2,199 of debt and $1,649 of capital lease obligations of
pending acquisitions. This pro forma adjustment is based on DURO completing
negotiations to have its credit facility increased from $62,000 to $120,000.
Management is currently involved in these negotiations, and believes it is
probable that the credit facility will be increased to $120,000.
(d) To reflect the issuance of 1,842,934 shares of common stock in
connection with pending or completed acquisitions subsequent to December 31,
1999.
(e) To eliminate the historical deficits of the Completed and Pending
Acquisitions subsequent to December 31, 1999.
F-29
<PAGE>
DURO COMMUNICATIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
(2) PRO FORMA ADJUSTMENTS (CONTINUED)
(f) To reflect the change in telecommunications expense experienced
subsequent to the acquisitions.
(g) To reflect the change in salary and employee benefits experienced
subsequent to the acquisitions.
(h) To reflect amortization expense of goodwill based on an estimated life
of ten years, and customer lists and other intangibles based on the estimated
average length of future service of three years.
(i) To reflect the impact of interest expense arising from debt incurred in
conjunction with funding the Completed and Pending Acquisitions as though the
transactions occurred on April 1, 1999, net of interest expense related to
extinguishments of debt and capital lease obligations associated with these
acquisitions.
(j) To reflect a deferred tax asset valuation allowance equal to any income
tax benefits.
(k) To reflect the impact on earnings per share of an additional 1,842,934
shares of common stock issued in conjunction with pending or completed
acquisitions subsequent to December 31, 1999.
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of CrossRoads Access
Corporation (the Company) as of December 31, 1998 and March 16, 1999 and the
related statements of operations, stockholders' equity, and cash flows for each
of the years ended December 31, 1997 and 1998 and the period from January 1,
1999 through March 16, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CrossRoads Access
Corporation as of December 31, 1998 and March 16, 1999, and the results of its
operations and its cash flows for each of the years ended December 31, 1997 and
1998 and the period from January 1, 1999 through March 16, 1999 in conformity
with generally accepted accounting principles.
KPMG LLP
Memphis, Tennessee
February 18, 2000
F-31
<PAGE>
CROSSROADS ACCESS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 16,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 83,979 144,684
Receivables:
Trade, net of allowance for doubtful accounts of $5,492
in 1999................................................ 76,518 45,057
Affiliates.............................................. 41,122 41,122
Prepaid expenses and other................................ 587 521
--------- --------
Total current assets.................................. 202,206 231,384
Furniture, fixtures and equipment, net...................... 98,727 87,467
Customer list, net of accumulated amortization of $45,745
and $49,902, respectively................................. 37,425 33,268
--------- --------
Total assets.......................................... $ 338,358 352,119
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 37,333 55,153
Accrued expenses.......................................... 9,950 10,664
Deferred revenue.......................................... 8,224 8,224
Notes payable, current.................................... 36,767 38,137
--------- --------
Total current liabilities............................. 92,274 112,178
Notes payable, less current portion......................... 37,052 26,660
--------- --------
Total liabilities..................................... 129,326 138,838
--------- --------
Stockholders' equity:
Common stock, no par value, 10,000 shares authorized,
issued and outstanding................................... 410,000 410,000
Accumulated deficit....................................... (200,968) (196,719)
--------- --------
Total stockholder's equity............................ 209,032 213,281
--------- --------
Commitments................................................. -- --
--------- --------
Total liabilities and stockholders' equity............ $ 338,358 352,119
========= ========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
CROSSROADS ACCESS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
------------------------- THROUGH
1997 1998 MARCH 16, 1999
--------- --------- ---------------
<S> <C> <C> <C>
Internet services revenue.............................. $442,298 763,217 184,596
Direct Internet services costs......................... 263,612 360,411 86,519
-------- ------- -------
Gross profit..................................... 178,686 402,806 98,077
Selling, general and administrative
Salaries and employee benefits....................... 115,632 145,242 41,391
Sales and marketing expense.......................... 22,815 19,746 4,199
Rent and occupancy................................... 5,400 7,200 2,100
Repairs and maintenance.............................. 337 1,326 --
Travel and entertainment............................. 2,758 434 43
Insurance............................................ 9,174 11,700 3,814
Provision for doubtful accounts...................... 18,002 30,866 5,492
Other................................................ 19,997 34,567 20,819
-------- ------- -------
Total selling, general and administrative........ 194,115 251,081 77,858
-------- ------- -------
Other income........................................... 4,364 17,710 2,775
Interest income........................................ 1,450 1,315 389
Impairment of equipment................................ (23,141) -- --
Interest expense....................................... (4,786) (11,516) (2,342)
Depreciation expense................................... (38,924) (61,759) (12,635)
Amortization expense................................... (16,635) (16,635) (4,157)
-------- ------- -------
Net income....................................... $(93,101) 80,840 4,249
======== ======= =======
Proforma income taxes.................................. $ -- -- --
======== ======= =======
Proforma net income (loss)............................. $(93,101) 80,840 4,249
======== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
CROSSROADS ACCESS CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996.......................... 10,000 $350,000 (188,707) 161,293
Additional capital contributions...................... -- 60,000 -- 60,000
Net loss.............................................. -- -- (93,101) (93,101)
------ -------- -------- -------
BALANCE AT DECEMBER 31, 1997.......................... 10,000 410,000 (281,808) 128,192
Net income............................................ -- -- 80,840 80,840
------ -------- -------- -------
BALANCE AT DECEMBER 31, 1998.......................... 10,000 410,000 (200,968) 209,032
Net income............................................ -- -- 4,249 4,249
------ -------- -------- -------
BALANCE AT MARCH 16, 1999............................. 10,000 $410,000 (196,719) 213,281
====== ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-34
<PAGE>
CROSSROADS ACCESS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
------------------------ THROUGH
1997 1998 MARCH 16, 1999
---------- ----------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $ (93,101) 80,840 4,249
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization..................... 55,559 78,394 16,792
Provision for uncollectible accounts.............. 18,002 30,866 5,492
Loss on impairment................................ 23,141 -- --
Gain on sale of equipment......................... -- (1,190) --
Changes in operating assets and liabilities:
Receivables..................................... (44,021) (99,548) 25,969
Prepaid expenses and other current assets....... 261 259 65
Accounts payable................................ (676) 7,785 17,820
Accrued expenses................................ 2,091 2,794 714
Deferred revenue................................ 5,426 2,798 --
--------- ------- -------
Net cash (used in) provided by operating
activities................................... (33,318) 102,998 71,101
--------- ------- -------
Cash flows from investing activities:
Acquisition of furniture, fixtures and equipment...... (105,500) (43,088) (1,374)
Proceeds from sale of furniture, fixtures and
equipment............................................ -- 1,190 --
--------- ------- -------
Net cash used in investing activities......... (105,500) (41,898) (1,374)
--------- ------- -------
Cash flows from financing activities:
Proceeds from notes payable advances.................. 81,055 30,020 --
Repayments of notes payable........................... (6,669) (30,587) (9,022)
Proceeds from capital contributions................... 60,000 -- --
--------- ------- -------
Net cash provided by (used in) financing
activities................................... 134,386 (567) (9,022)
--------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. (4,432) 60,533 60,705
Cash and cash equivalents:
Beginning period...................................... 27,878 23,446 83,979
--------- ------- -------
End of period......................................... $ 23,446 83,979 144,684
========= ======= =======
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997 and 1998, and during the period ended March 16, 1999, the
Company paid approximately $4,800, $11,500, and $2,300, respectively, for interest.
</TABLE>
See accompanying notes to financial statements.
F-35
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
CrossRoads Access Corporation (the Company) was incorporated in April 1996,
to capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through integration and growth of existing
independent Internet service providers in targeted geographic regions. The
Company is a regional provider of Internet access for northeast Mississippi. The
Company's target customers are individual consumers and small businesses. The
goal of the Company is to continue to increase its subscriber base and
geographic coverage. The Company commenced operations in October of 1996.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents.
(D) FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment is stated at cost or fair market value at
date of acquisition. Depreciation is calculated using the straight-line method
over the estimated useful lives of the related assets, as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES (YEARS)
----------------
<S> <C>
Equipment, software, and network communications............. 3
Furniture and fixtures...................................... 7
</TABLE>
F-36
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) CUSTOMER LIST
Customer list consists of a subscriber list which was contributed at
inception in exchange for shares. At that date, the customer list was recorded
at its estimated fair value. The cost of the customer list is amortized straight
line over 5 years, commencing at the date of contribution.
(F) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
(G) INCOME TAXES
The Company has elected to be taxed and has operated as an S-Corp and
therefore was exempt from taxation under the provisions of the Internal Revenue
Code (the Code) and applicable state tax regulations. Under the provisions of
the Code, the stockholders include their prorata share of the Company's income
or loss on their personal income tax returns.
The unaudited pro forma income tax information included in statements of
operations and Note 6 is presented in accordance with Statement of Financial
Accounting Financial Standards No. 109 (Statement No. 109), Accounting for
Income Taxes, as if the Company had been subject to Federal and state income
taxes during the years ended December 31, 1997 and 1998 and for the period from
January 1, 1999 to March 16, 1999.
(H) REVENUE RECOGNITION
The Company earns revenue by providing Internet access to the consumer over
a period of time. Revenue related to Internet access services is recognized as
the services are provided. Revenue is deferred and amortized to operations for
amounts billed relating to future periods.
Revenue from consulting services is recognized as the services are provided.
Revenue from hardware sales is recognized upon shipment of the respective
products.
(I) INTERNET CONNECTIVITY OPERATING COSTS
Internet connectivity operating costs primarily consist of
telecommunications costs inherent in providing Internet services.
The Company utilizes one communication service provider to provide access to
the Internet. If the Company is unable to continue its relationship with this
communication service provider, management believes that it could shift to
alternative providers without adversely affecting its operations.
F-37
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) SALES AND MARKETING COSTS
Sales and marketing expense includes the costs to acquire and retain
subscribers, advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $22,815, $19,746 and $4,199 for the years ended December 31, 1997
and 1998 and for the period from January 1, 1999 through March 16, 1999,
respectively.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires the Company to report in its financial statements, in addition to its
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. There were no
differences between the Company's comprehensive income (loss) and its net income
(loss) as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137, which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-38
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE
BEGINNING CHARGED TO DEDUCTIONS AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful accounts.................... $ -- 18,002 -- 18,002
======= ====== ====== ======
For the year ended December 31, 1998:
Allowance for doubtful accounts.................... $18,002 30,866 48,868 --
======= ====== ====== ======
For the period ended March 16, 1999:
Allowance for doubtful accounts.................. $ -- 5,492 -- 5,492
======= ====== ====== ======
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company shares common ownership with ThinkSystems, Inc., a web site
design firm. ThinkSystems, Inc. pays the Company a management fee, recorded in
other income, for management services provided by the Company. In addition to
the management fee, the Company has a non-interest bearing receivable from
ThinkSystems for Internet access and equipment provided to ThinkSystems by the
Company.
(4) FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment, net of depreciation consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 16,
1998 1999
------------ ---------
<S> <C> <C>
Office equipment, software and network
communications...................................... $ 200,069 201,443
Furniture and fixtures................................ 8,149 8,149
--------- --------
208,218 209,592
Less accumulated depreciation......................... (109,491) (122,125)
--------- --------
Total........................................... $ 98,727 87,467
========= ========
</TABLE>
During 1997 the Company abandoned certain of its computer equipment and
recorded a $23,141 impairment loss to write off the assets' carrying cost.
Subsequent to recording the impairment loss no significant sales of the
equipment have occurred.
F-39
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(5) NOTES PAYABLE
Notes payable consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 16,
1998 1999
------------ ---------
<S> <C> <C>
Bank note payable, secured by equipment, bearing
interest at 8.7%, maturing in September 2000........ $ 41,505 35,945
Bank note payable, secured by equipment, bearing
interest at 9.25%, maturing in July 2000............ 7,562 6,440
-------- -------
Bank note payable, secured by equipment, bearing
interest at 8.7%, maturing May 2001................. 24,752 22,412
-------- -------
73,819 64,797
Less current portion.................................. (36,767) (38,137)
-------- -------
Notes payable, less current portion................. $ 37,052 26,660
======== =======
</TABLE>
Maturities of notes payable subsequent to March 16, 1999 are as follows:
1999, $28,282; 2000, $31,974 and 2001, $4,541.
(6) STOCKHOLDERS' EQUITY
In connection with the initial capitalization of the Company, each
stockholder contributed cash or assets (customer list, see note 1(e)) equal to
$22 per share, with an agreement to contribute up to an additional $30 per
share. Prior to January 1, 1997, the stockholders had contributed an additional
$20 per share under this agreement. During 1997, the stockholders contributed an
additional $60,000, or $10 per share under this agreement.
(7) PRO FORMA INCOME TAXES (UNAUDITED)
Pro forma income tax (benefit) differs from the amounts that would result
from applying the federal statutory rate of 34% to the Company's net income
(loss) for the respective periods ended, as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 16,
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Expected tax (benefit) expense.................. $(31,654) 27,486 1,445
State income taxes, net of federal benefit...... (3,687) 3,201 168
Change in valuation allowance................... 35,341 (30,687) (1,613)
-------- ------- ------
$ -- -- --
======== ======= ======
</TABLE>
F-40
<PAGE>
CROSSROADS ACCESS CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 16, 1999
(7) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
Temporary differences that give rise to the components of pro forma deferred
tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 16,
1998 1999
------------ ---------
<S> <C> <C>
Net operating loss carryforward....................... $ 62,695 58,997
Other, net............................................ 1,758 3,843
-------- -------
Gross deferred tax assets......................... 64,453 62,840
Valuation allowance................................... (64,453) (62,840)
-------- -------
Pro forma net deferred tax asset.................. $ -- --
======== =======
</TABLE>
At March 16, 1999, the Company had incurred cumulative net operating losses
for federal income tax purposes of approximately $150,000, which were available
to the stockholders as an S-corp. Had the Company been structured as a C-corp
for federal income tax purposes, the amount would have been available to offset
future federal taxable income, if any, through 2014. Accordingly, the
utilization of a portion of the net operating loss carryforward may have been
limited. Due to this limitation, and the uncertainty regarding the ultimate
utilization of the net operating loss carryforward, no tax benefit for losses
has been provided by the Company and a valuation allowance has been recorded for
the entire amount of the deferred tax asset for purposes of calculating pro
forma tax expense.
(8) SUBSEQUENT EVENT (UNAUDITED)
On March 16, 1999 DURO Communications, Inc. purchased certain assets and
assumed certain liabilities of the Company. The accompanying financial
statements do not include the effect of any adjustments which resulted from the
acquisition transaction.
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of digital.net, LLC (d/b/a
Florida Online) as of December 31, 1998 and March 25, 1999, and the related
statements of operations, members' equity, and cash flows from the inception
date of September 1, 1998 through December 31, 1998 and January 1, 1999 through
March 25, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of digital.net, LLC as of
December 31, 1998 and March 25, 1999, and the results of its operations and its
cash flows from the inception date of September 1, 1998 through December 31,
1998 and January 1, 1999 through March 25, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Orlando, Florida
March 13, 2000
F-42
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 25,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 269,565 257,591
Trade receivables......................................... 52,302 109,538
Other receivables......................................... 85,670 73,572
Prepaid expenses and other current assets................. 15,777 5,556
---------- ---------
Total current assets.................................. 423,314 446,257
Property and equipment, net................................. 702,998 734,275
Intangible assets:
Customer data base, less accumulated amortization of
$96,000 and $183,638 at December 31, 1998 and March 25,
1999, respectively....................................... 1,344,000 1,694,329
Goodwill, less accumulated amortization of $27,947 and
$51,495 at December 31, 1998 and March 25, 1999,
respectively............................................. 810,475 896,419
---------- ---------
Total assets.......................................... $3,280,787 3,771,280
========== =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 51,501 94,730
Accrued liabilities....................................... 92,586 20,053
Current portion of notes payable.......................... 755,119 906,535
Current portion of capital lease obligations.............. 108,544 94,651
Deferred revenue.......................................... 298,273 316,255
Due to member............................................. -- 477,164
---------- ---------
Total current liabilities............................. 1,306,023 1,909,388
Notes payable, less current portion......................... 26,899 19,955
Capital lease obligations, less current portion............. 25,023 12,285
---------- ---------
Total liabilities..................................... 1,357,945 1,941,628
---------- ---------
Members' contributions...................................... 2,181,100 2,181,100
Accumulated deficit......................................... (258,258) (351,448)
---------- ---------
Total members' equity................................. 1,922,842 1,829,652
---------- ---------
Total liabilities and members' equity................. $3,280,787 3,771,280
========== =========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
INCEPTION DATE OF PERIOD FROM
SEPTEMBER 1, 1998 JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 MARCH 25, 1999
----------------- ---------------
<S> <C> <C>
Internet services revenue................................... $ 838,717 764,804
Direct Internet services costs.............................. 434,358 324,065
--------- -------
Gross profit.......................................... 404,359 440,739
Selling, general, and administrative........................ 645,802 523,168
--------- -------
Loss from operations.................................. (241,443) (82,429)
Interest expense............................................ (26,105) (22,406)
Other income................................................ 9,290 11,645
--------- -------
Net loss.............................................. $(258,258) (93,190)
========= =======
Pro forma income taxes...................................... $ -- --
========= =======
Pro forma net loss.......................................... $(258,258) (93,190)
========= =======
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
STATEMENTS OF MEMBERS' EQUITY
<TABLE>
<CAPTION>
MEMBERS' ACCUMULATED
CONTRIBUTIONS DEFICIT TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Contributions by members.................................. $2,181,100 -- 2,181,100
Net loss.................................................. -- (258,258) (258,258)
---------- -------- ---------
BALANCES AT DECEMBER 31, 1998............................. 2,181,100 (258,258) 1,922,842
Net loss.................................................. -- (93,190) (93,190)
---------- -------- ---------
BALANCES AT MARCH 25, 1999................................ $2,181,100 (351,448) 1,829,652
========== ======== =========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
DIGITAL.NET LLC
(D/B/A FLORIDA ONLINE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
INCEPTION DATE OF PERIOD FROM
SEPTEMBER 1, 1998 JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 MARCH 25, 1999
------------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (258,258) (93,190)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization......................... 209,620 174,743
Loss on sale of equipment............................. -- 4,385
Changes in operating assets and liabilities, excluding
effects of business combinations:
Trade receivables................................. (52,302) (57,236)
Other receivables................................. (85,670) 12,098
Prepaid expenses and other current assets......... (15,777) 10,221
Accounts payable.................................. 51,501 43,229
Accrued liabilities............................... 92,586 (72,533)
Deferred revenue.................................. 298,273 17,982
Due to member..................................... -- 477,164
---------- --------
Net cash provided by operating activities......... 239,973 516,863
---------- --------
Cash flows from investing activities:
Acquisition of capital equipment.......................... (28,744) (76,927)
Proceeds from sale of equipment........................... -- 2,749
Payments for purchases of net assets of internal service
providers............................................... (2,080,000) (372,125)
---------- --------
Net cash used in investing activities............. (2,108,744) (446,303)
---------- --------
Cash flows from financing activities:
Repayments of notes payable and capital lease
obligations............................................. (42,764) (82,534)
Contributions by members.................................. 2,181,100 --
---------- --------
Net cash provided by (used in) financing
activities...................................... 2,138,336 (82,534)
---------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 269,565 (11,974)
Cash and cash equivalents:
Beginning period.......................................... -- 269,565
---------- --------
End of period............................................. $ 269,565 257,591
========== ========
Supplemental disclosure of cash flow information:
From the inception date of September 1, 1998 through
December 31, 1998 and January 1, 1999 through March 25,
1999, the Company paid approximately $21,000 and
$22,000, respectively, for interest
Supplemental disclosure of noncash investing and financing
activities: Notes payable of $730,000 were incurred
September 1, 1998 when the company purchased the net
assets of Florida Online and InternetU. Notes payable of
$200,375 were incurred January 8, 1999 when the Company
purchased the net assets of SuNet Direct Corporation
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 25, 1999
(1) DESCRIPTION OF THE BUSINESS
digital.net LLC (Doing Business as Florida Online) (the Company), a Florida
limited liability company, was formed on September 1, 1998 through the purchase
of the assets of Florida Online and InternetU. In addition to the assets of
these two companies, the Company also acquired the rights to each respective
trade name and customer base.
The Company is an Internet service provider (ISP) offering a variety of
Internet connectivity and web hosting services to its customer base.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, furniture and fixtures, and vehicles, all of
which are stated at cost or fair market value at date of acquisition. Property
and equipment under capital leases are stated at the present value of minimum
lease payments.
Depreciation on property and equipment is computed using the straight-line
method over their estimated useful lives.
(B) GOODWILL
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally ten years.
(C) CUSTOMER DATA BASE
Customer data base consists of customer lists purchased from Florida Online
and InternetU. The cost of the customer data base is amortized straight-line
over five years based on the estimated churn rate.
(D) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Deferred revenue represents the unearned portion of customer
payments.
(E) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. SFAS
No. 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
F-47
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 25, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In tax years prior to March 25, 1999, digital.net operated as a limited
liability company (LLC), which, for federal income tax purposes, is treated for
all purposes of the Internal Revenue Code (Code) as a partnership and,
therefore, was exempt from taxation. Under the partnership provisions of the
Code, members of the partnership include their share of the partnership's income
on their personal income tax returns. Accordingly, digital.net was not subject
to federal and state corporate income taxes during the period in which it was a
LLC. The Company converted to a corporation on March 26, 1999, and became
subject to federal and state corporate income taxes.
For periods prior to the revocation of its LLC status, the unaudited pro
forma income tax information included in statements of operations and note 9 was
presented in accordance with SFAS No. 109 as if the Company had been subject to
federal and state income taxes from September 1, 1998 through December 31, 1998
and January 1, 1999 through March 25, 1999.
(F) USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the assets. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value, less
costs to sell.
F-48
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 25, 1999
(3) PROPERTY AND EQUIPMENT
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT
COST
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, MARCH 25,
(YEARS) 1998 1999
------------ ------------ ---------
<S> <C> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $168,824 at December 31, 1998
and March 25, 1999........................................ 3-4 $739,796 832,596
Furniture and fixtures...................................... 7 30,271 31,371
Leasehold improvement....................................... 5 18,604 18,604
-------- --------
788,671 882,571
Less accumulated depreciation and amortization, including
amounts related to capital leases of $36,144 and $61,269
at December 31, 1998 and March 25, 1999, respectively..... (85,673) (148,296)
-------- --------
Total..................................................... $702,998 734,275
======== ========
</TABLE>
(4) LEASES
The Company also has several noncancelable operating leases for office
space, computer equipment, and points of presence (POPs) that expire over the
next three years. The Company is required to pay all executory costs, such as
property taxes, maintenance, and insurance. Rental expense for operating leases
from September 1, 1998 through December 31, 1998 and January 1, 1999 through
March 25, 1999 was approximately $33,000 and $23,000, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of March 25, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
Years ending December 31:
Remaining 1999.............................................. $84,568 49,587
2000........................................................ 25,456 55,968
2001........................................................ -- 37,312
------- -------
Total minimum payments.................................... 110,024 142,867
=======
Less amount representing interest........................... (3,088)
-------
Present value of net minimum lease payments............... 106,936
Less current portion........................................ (94,651)
-------
$12,285
=======
</TABLE>
F-49
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 25, 1999
(5) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
AMOUNTS
--------
<S> <C>
Unsecured note payable; interest payable quarterly at 8.5%
of the outstanding balance. Principal is due is full on
August 31, 1999........................................... $630,000
Note payable; secured by various assets, with interest
payable quarterly at 8.5% of the outstanding balance.
Principal is due in full on September 1, 1999............. 50,000
Bank note payable bearing interest at 16%; secured by
property and equipment, with principal and interest
payments of $2,650 due monthly............................ 46,115
Note payable; secured by various assets, with interest
payable quarterly at 8.25% on the outstanding balance.
Principal is due in full on January 8, 2000............... 200,375
--------
Total notes payable....................................... 926,490
Less current portion........................................ (906,535)
--------
Notes Payable, less current portion....................... $ 19,955
========
</TABLE>
The above notes payable were repaid in connection with the sale of the Company
(see note 8).
(6) RELATED PARTY TRANSACTION
At March 25, 1999, the Company owed a member $477,164. These funds were
advanced to the Company to finance operations and the purchase of SuNet Direct
Corporation.
(7) ACQUISITIONS
On September 1, 1998, the Company was formed through the purchase of the net
assets and the rights to each of the respective trade names and customer bases
of Florida Online and InternetU for $2,100,000 and $710,000, respectively. The
acquisitions were made with cash deposits of $2,080,000 and note payable
obligations of $730,000. The acquisition was accounted for as a purchase
transaction. The total purchase cost of $2,810,000 has been allocated to the
assets acquired based on their estimated fair market value at the acquisition
date. The excess of the purchase price over assets acquired (goodwill)
approximated $838,422.
On January 8, 1999, the Company purchased the assets, customer list, and
trade name of SuNet Direct Corporation, a Florida ISP. The purchase price was
$572,500, of which $372,125 was paid up front. The Company issued a promissory
note for the remaining $200,375, payable on January 8, 2000. The transaction was
accounted for as a purchase and the purchase price was allocated as follows:
assets of $25,041; goodwill of $109,492; and customer list of $437,967.
(8) SUBSEQUENT EVENTS
On March 26, 1999, all of the Company's assets were sold to DURO
Communications, Inc. for approximately $4.9 million. In connection with the sale
of assets, all notes payable, capital lease, and operating lease obligations
were paid in full at closing.
F-50
<PAGE>
DIGITAL.NET, LLC
(D/B/A FLORIDA ONLINE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 25, 1999
(9) PRO FORMA INCOME TAXES (UNAUDITED)
Pro forma income tax benefit differs from the amounts that would result
applying the federal statutory rate of 34% to the Company's net loss for the
respective periods ended, as follows:
<TABLE>
<CAPTION>
INCEPTION DATE OF PERIOD FROM
SEPTEMBER 1, 1998 JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 MARCH 25, 1999
----------------- ---------------
<S> <C> <C>
Expected pro forma tax benefit.............................. $(87,808) (31,685)
State income taxes, net of federal benefit.................. (9,375) (3,383)
Change in valuation allowance............................... 100,774 35,874
Other....................................................... (3,591) (806)
-------- --------
$ -- --
======== ========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 25, 1999
----------------- --------------
<S> <C> <C>
Deferred revenue............................................ $115,222 122,257
Property, plant, and equipment.............................. 15,121 23,678
Amortization of intangibles................................. 51,952 94,680
Other....................................................... 2,040 2,729
-------- --------
Gross deferred tax assets................................. 184,335 243,344
Valuation allowance......................................... (100,774) (136,648)
-------- --------
Net deferred tax assets................................... $ 83,561 106,696
======== ========
</TABLE>
F-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Global
Information Exchange Corporation and subsidiary (d/b/a CoastalNet) as of
December 31, 1998 and April 7, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the years ending
December 31, 1997 and 1998 and the period from January 1, 1999 to April 7, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Global
Information Exchange Corporation and subsidiary as of December 31, 1998 and
April 7, 1999, and the results of their operations and their cash flows for the
years ended December 31, 1997 and 1998 and the period from January 1, 1999 to
April 7, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
March 3, 2000
F-52
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 7,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Cash........................................................ $ 53,274 52,815
Trade receivables (net of allowance for losses of $41,859
and $52,101 at December 31, 1998 and April 7, 1999,
respectively)............................................. 148,125 118,473
Prepaid expenses and other current assets................... 7,443 899
--------- --------
Total current assets.................................... 208,842 172,187
Property and equipment, net................................. 240,331 215,763
Other assets................................................ 9,495 11,704
--------- --------
Total assets............................................ $ 458,668 399,654
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current portion of notes payable............................ $ 173,329 189,010
Accounts payable............................................ 121,128 139,498
Accrued salaries............................................ 58,566 37,705
Accrued vacation............................................ 33,217 23,741
Other accrued liabilities................................... 6,634 9,885
Deferred revenue............................................ 157,172 176,901
--------- --------
Total current liabilities............................... 550,046 576,740
--------- --------
Notes payable, less current portion......................... 33,693 21,883
--------- --------
Stockholders' deficit:
Common stock, no par value, 500,000 shares authorized,
issued and outstanding at December 31, 1998 and April 7,
1999.................................................... 350,000 350,000
Accumulated deficit....................................... (475,071) (548,969)
--------- --------
Total stockholders' deficit............................. (125,071) (198,969)
--------- --------
Total liabilities and stockholders' deficit............. $ 458,668 399,654
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-53
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
-------------------------- JANUARY 1, 1999
1997 1998 THROUGH APRIL 7, 1999
------------ ----------- ---------------------
<S> <C> <C> <C>
Internet services revenue........................... $2,539,242 3,373,080 1,092,274
Direct Internet services costs...................... 984,961 1,379,575 464,095
---------- --------- ---------
Gross profit...................................... 1,554,281 1,993,505 628,179
Operating expenses
Selling, general, and administrative expenses..... 1,275,663 2,108,084 668,705
Depreciation and amortization..................... 107,879 153,907 28,336
---------- --------- ---------
Income (loss) from operations................... 170,739 (268,486) (68,862)
Other income (expense):
Interest income................................... 2,779 1,350 --
Interest expense.................................. (15,798) (13,741) (5,036)
Other income...................................... 13,786 7,276 --
---------- --------- ---------
Net income (loss)............................... $ 171,506 (273,601) (73,898)
========== ========= =========
Pro forma income taxes............................ $ -- -- --
========== ========= =========
Pro forma net income (loss)....................... $ 171,506 (273,601) (73,898)
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-54
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT EQUITY (DEFICIT)
-------- ----------- ----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............................. $350,000 (332,976) 17,024
Dividends Paid........................................... -- (40,000) (40,000)
Net Income............................................... -- 171,506 171,506
-------- -------- --------
BALANCE AT DECEMBER 31, 1997............................. 350,000 (201,470) 148,530
Net Loss................................................. -- (273,601) (273,601)
-------- -------- --------
BALANCE AT DECEMBER 31, 1998............................. 350,000 (475,071) (125,071)
Net Loss................................................. -- (73,898) (73,898)
-------- -------- --------
BALANCE AT APRIL 7, 1999................................. $350,000 (548,969) (198,969)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-55
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD FROM
---------------------------- JANUARY 1, 1999
1997 1998 THROUGH APRIL 7, 1999
----------------- -------- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $171,506 (273,601) (73,898)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities:
Depreciation and amortization.................. 107,879 153,907 28,336
Provision for losses on trade receivables...... 34,240 7,619 10,242
Changes in operating assets and liabilities:
Trade receivables............................ (91,996) (95,629) 19,410
Prepaid expenses and other current assets.... (10,335) 10,877 6,544
Other assets................................. (1,655) (3,367) (2,209)
Accounts payable............................. (43,301) 40,796 18,370
Accrued salaries............................. 19,223 26,352 (20,861)
Accrued vacation............................. 28,973 4,244 (9,476)
Other accrued liabilities.................... (8,072) 1,736 3,251
Deferred revenue............................. 39,863 39,852 19,729
-------- -------- -------
Net cash provided by (used in) operating
activities............................... 246,325 (87,214) (562)
-------- -------- -------
Cash flows from investing activities--capital
expenditures..................................... (155,278) (72,571) (3,768)
-------- -------- -------
Cash flows from financing activities:
Proceeds from notes payable borrowings........... 49,500 250,000 25,000
Repayments on notes payable...................... (62,437) (183,457) (21,129)
Dividends paid................................... (40,000) -- --
-------- -------- -------
Net cash (used in) provided by financing
activities............................... (52,937) 66,543 3,871
-------- -------- -------
Net increase (decrease) in cash............ 38,110 (93,242) (459)
-------- -------- -------
Cash, beginning of period.......................... 108,406 146,516 53,274
-------- -------- -------
Cash, end of period................................ $146,516 53,274 52,815
======== ======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest........................... $ 16,701 13,781 5,036
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-56
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 7, 1999
(1) DESCRIPTION OF THE BUSINESS
Global Information Exchange Corporation (d/b/a CoastalNet) (the "Company")
is an internet service provider serving approximately 17,000 customers
throughout Eastern North Carolina. Since inception in 1994, the Company has
provided a variety of Internet connectivity and web services to its subscriber
base.
In 1998, the Company formed a wholly-owned subsidiary, GIETEL, Inc.
("GIETEL"), to provide local exchange and long distance telephone service.
GIETEL has obtained regulatory approval from the North Carolina Utility
Commission to provide telephone services in the State of North Carolina.
GIETEL's operations to date have consisted primarily of incurring expenses
associated with obtaining regulatory approval.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly-owned subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
(B) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, furniture and fixtures, and leasehold improvements, all of which are
stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years. Amortization on leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful life of the
asset or the term of the lease.
(C) REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
(D) INCOME TAXES
No provision for income taxes has been provided for by the Company since, by
election of the stockholders, the Company has elected to be treated under
Subchapter S of the Internal Revenue Code, and therefore tax losses and taxable
income will be allocated to the individual stockholders.
The unaudited pro forma income tax information included in statements of
operations and note 6 was presented in accordance with SFAS No. 109 as if the
Company had been subject to federal and state income taxes for the year ended
December 31, 1998 and for the period from January 1, 1999 to April 7, 1999.
F-57
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 7, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(F) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions
of 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.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31, APRIL 7,
LIFE (YEARS) 1998 1999
---------------- -------------- ----------
<S> <C> <C> <C>
Property and equipment consist of the following:
Network communications equipment................ 3-4 $ 624,548 627,595
Furniture and fixtures.......................... 7 20,589 20,589
Leasehold improvements.......................... 1-3 32,631 32,631
Office equipment................................ 5 3,588 4,309
--------- --------
681,356 685,124
Less accumulated depreciation and
amortization.................................. (441,025) (469,361)
--------- --------
Property and equipment, net................... $ 240,331 215,763
========= ========
</TABLE>
(4) LEASES
The Company also has several noncancelable operating leases for buildings
and equipment that expire over the next four years. The Company is required to
pay all executory costs, such as maintenance and insurance. Rental expense for
operating leases during the years ended December 31, 1997 and 1998, and for the
period from January 1, 1999 through April 7, 1999, totaled $144,534, $267,975,
and $88,637, respectively.
F-58
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 7, 1999
(4) LEASES (CONTINUED)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of April 7, 1999 are:
<TABLE>
<CAPTION>
YEARS ENDING AMOUNT
- ------------ --------
<S> <C>
2000...................................................... $216,584
2001...................................................... 59,812
2002...................................................... 7,324
2003...................................................... 5,019
--------
Total future minimum lease payments..................... $288,739
========
</TABLE>
(5) NOTES PAYABLE
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 7,
1998 1999
------------ --------
<S> <C> <C>
Notes payable consist of the following:
Bank note payable; secured by property and equipment with
interest payable monthly, calculated at the bank's prime
rate plus 1.0% (8.75% at April 7, 1999). The note is
payable in full in June 1999.............................. $ 94,375 119,375
Bank note payable; secured by property and equipment, with
principal and interest payments of $2,500 due monthly.
Interest is calculated at the bank's prime rate plus 1.0%
(8.75% at April 7, 1999). The note is payable in full in
March 2000................................................ 22,424 15,371
Bank note payable; secured by property and equipment, with
principal and interest payments of $2,235 due monthly.
Interest is calculated at the bank's prime rate plus 1.0%
adjusted daily (8.75% at April 7, 1999). The note is
payable in full in July 2000.............................. 37,957 32,039
Bank note payable; secured by property and equipment, with
principal and interest payments of $2,287 due monthly.
Interest is calculated at the bank's prime rate plus 1.0%
adjusted daily (8.75% at April 7, 1999). The note is
payable in full in December 2000.......................... 50,000 44,108
Other....................................................... 2,266 --
--------- --------
Total notes payable..................................... 207,022 210,893
Less current portion........................................ (173,329) (189,010)
--------- --------
Notes payable, less current portion..................... $ 33,693 21,883
========= ========
</TABLE>
The aggregate annual required repayments under the notes payable for the
years ended in 2000 and 2001 are $189,010 and $21,883, respectively.
F-59
<PAGE>
GLOBAL INFORMATION EXCHANGE CORPORATION AND SUBSIDIARY
(D/B/A COASTALNET)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 7, 1999
(6) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 2(d), the Company is not subject to Federal and State
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
Company was subject to Federal and State income taxes. Pro forma tax expense
(benefit) differs from the amounts that would result from applying the federal
statutory rate of 34% to the Company's net loss for the years ended
December 31, 1997, December 31, 1998, and for the period from January 1, 1999
through April 7, 1999.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
------------------- JANUARY 1, 1999
1997 1998 TO APRIL 7, 1999
-------- -------- ----------------
<S> <C> <C> <C>
Expected pro forma tax expense (benefit).... $ 44,700 (93,000) (25,100)
Increase (decrease) in valuation
allowance................................. (44,700) 93,000 25,100
-------- ------- -------
$ -- -- --
======== ======= =======
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31, 1998 and April 19, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 APRIL 7, 1999
------------ -------------
<S> <C> <C>
Net operating loss carryforward..................... $ 192,200 222,600
Other............................................... 5,000 7,300
--------- --------
Gross deferred tax assets......................... 197,200 229,900
--------- --------
Depreciation........................................ -- --
Other............................................... -- (2,100)
Gross deferred tax liabilities.................... -- (2,100)
Valuation allowance............................... (197,200) (227,800)
--------- --------
Net deferred tax asset.............................. $ -- --
========= ========
</TABLE>
The pro forma net income information assumes that distributions, if any, to
shareholders are considered compensation expense. Distributions in the amount of
$40,000 were recorded as described above for the year ended December 31, 1997.
The valuation allowance noted above is provided based on management's estimation
of the recoverability of the deferred tax asset in future periods.
(7) RELATED PARTY TRANSACTIONS
The Company leases its administrative headquarters building in New Bern,
North Carolina from the Company's president and chief executive officer. This
lease was approved by the Company's board of directors. Terms call for monthly
payments of $2,667 through February 28, 2001. Payments made under this lease
were $29,100 and $31,525 for and the years ended December 31, 1997 and 1998,
respectively, and $8,616 for the period from January 1, 1999 through April 7,
1999.
(8) SUBSEQUENT EVENT
On April 8, 1999, all of the Company's assets were sold to DURO
Communications, Inc. In connection with the sale of the assets, the Company's
notes payable and operating lease obligations were settled.
F-60
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of directors of
DURO Communications, Inc.:
We have audited the accompanying balance sheet of Voyager Online, LLC as of
December 31, 1998, and April 19, 1999 and the related statements of operations,
members' deficit, and cash flows for the years ended December 31, 1997 and 1998
and the period from January 1, 1999 through April 19, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
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 provides 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 Voyager Online, LLC as of
December 31, 1998 and April 19, 1999 and the results of its operations and its
cash flows for the periods then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Orlando, Florida
February 16, 2000
F-61
<PAGE>
VOYAGER ONLINE, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 19,
1998 1999
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,660 13,323
Trade receivables, net of allowance of $6,503 in 1998 and
$13,670 in 1999......................................... 82,160 60,490
Prepaid expenses and other current assets................. 4,623 4,623
--------- --------
Total current assets.................................... 90,443 78,436
Property and equipment, net................................. 236,134 245,130
--------- --------
Total assets............................................ $ 326,577 323,566
========= ========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Current portion of capital lease obligations.............. $ 53,659 66,904
Current portion of notes payable.......................... 23,209 37,704
Accounts payable.......................................... 273,136 349,771
Accrued interest.......................................... 38,601 44,023
Accrued liabilities....................................... 37,847 22,193
Deferred revenue.......................................... 61,988 36,874
--------- --------
Total current liabilities............................... 488,440 557,469
Capital lease obligations, less current portion............. 93,072 64,776
Notes payable, less current portion......................... 339,885 314,561
--------- --------
Total liabilities....................................... 921,397 936,806
Members' deficit............................................ (594,820) (613,240)
--------- --------
Total liabilities and members' deficit.................. $ 326,577 323,566
========= ========
</TABLE>
See accompanying notes to financial statements
F-62
<PAGE>
VOYAGER ONLINE, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999
---------------------- THROUGH
1997 1998 APRIL 19, 1999
---------- --------- ---------------
<S> <C> <C> <C>
Internet services revenue............................... $1,123,530 1,583,095 574,461
Direct Internet services costs.......................... 677,543 907,044 266,160
---------- --------- --------
Gross profit...................................... 445,987 676,051 308,301
Selling, general and administrative expenses............ 867,771 645,849 306,919
---------- --------- --------
Income from operations............................ (421,784) 30,202 1,382
Interest expense........................................ 57,306 44,973 19,207
---------- --------- --------
Net loss.......................................... $ (479,090) (14,771) (17,825)
========== ========= ========
Pro forma income taxes.................................. $ -- -- --
========== ========= ========
Pro forma net loss...................................... $ (479,090) (14,771) (17,825)
========== ========= ========
</TABLE>
See accompanying notes to financial statements.
F-63
<PAGE>
VOYAGER ONLINE, LLC
STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
CONTRIBUTED ACCUMULATED MEMBERS'
CAPITAL DEFICIT DEFICIT
----------- ----------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996................................ $123,000 (243,959) (120,959)
Member contributions........................................ 20,000 -- 20,000
Net loss.................................................... -- (479,090) (479,090)
-------- -------- --------
BALANCE AT DECEMBER 31, 1997................................ 143,000 (723,049) (580,049)
Net loss.................................................... -- (14,771) (14,771)
-------- -------- --------
BALANCE AT DECEMBER 31, 1998................................ 143,000 (737,820) (594,820)
Member draws................................................ (595) -- (595)
Net loss.................................................... -- (17,825) (17,825)
-------- -------- --------
BALANCE AT APRIL 19, 1999................................... $142,405 (755,645) (613,240)
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-64
<PAGE>
VOYAGER ONLINE, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999
-------------------- THROUGH
1997 1998 APRIL 19, 1999
--------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(479,090) (14,771) (17,825)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation......................................... 42,514 59,123 24,349
Loss on disposal of assets........................... 18,367 802 --
Increase (decrease) from changes in:
Trade receivables.................................. 19,625 (32,622) 21,670
Prepaid expenses and other current assets.......... 18,423 (4,624) --
Accounts payable................................... 256,155 (2,157) 76,635
Accrued interest................................... 25,584 13,017 5,422
Accrued liabilities................................ (4,334) 8,252 (15,654)
Deferred revenue................................... 41,048 20,940 (25,114)
--------- ------- --------
Net cash provided by (used in) operating
activities..................................... (61,708) 47,960 69,483
--------- ------- --------
Cash flows from investing activities:
Proceeds from disposals of property and equipment........ 43,849 -- --
Purchases of property and equipment...................... (38,307) (10,451) (33,345)
--------- ------- --------
Net cash provided by (used in) investing
activities..................................... 5,542 (10,451) (33,345)
--------- ------- --------
Cash flows from financing activities:
Proceeds (payments) on notes payable..................... 24,714 (24,106) (10,829)
Member contributions (draws)............................. 20,000 -- (595)
Payments on capital lease obligations.................... -- (27,334) (15,051)
--------- ------- --------
Net cash provided by (used in) financing
activities..................................... 44,714 (51,440) (26,475)
--------- ------- --------
Net increase (decrease) in cash.................. (11,452) (13,931) 9,663
Cash, beginning of period.................................. 29,043 17,591 3,660
--------- ------- --------
Cash, end of period........................................ $ 17,591 3,660 13,323
========= ======= ========
Supplemental disclosure of cash flow information
Cash paid for interest................................... $ 49,021 31,956 8,036
========= ======= ========
Supplemental disclosure of noncash investing and financing
activities:
Computer equipment leases resulted in capital lease
obligations............................................ $ 64,938 109,127 --
========= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-65
<PAGE>
VOYAGER ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 19, 1999
(1) DESCRIPTION OF THE BUSINESS
Voyager Online, LLC (the Company), a Tennessee corporation, was formed in
1996 to develop and operate a national packet-based data network and to provide
a broad range of telecommunications services. At April 19, 1999, the Company had
constructed a network that serves 50 markets in the southeastern region of the
United States. The Company provides a variety of internet connection and web
hosting services to its customer base.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of computer equipment and software,
and furniture and fixtures, all of which are stated at cost. Property and
equipment under capital leases are stated at the present value of minimum lease
payments at the inception of the lease.
Depreciation and amortization on property and equipment is computed using
the straight-line method over the shorter of their estimated useful lives or the
lease term.
(B) REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
(C) INCOME TAXES
No provision for income taxes has been provided for the Company since the
Company has been formed as a Limited Liability Company, which, for federal
income tax purposes is treated for all purposes of the Internal Revenue Code as
a partnership. Accordingly, the Company's taxable income or loss is allocated to
the Company's members.
The unaudited pro forma income tax information included in statements of
operations and note 7 was presented in accordance with SFAS No. 109 as if the
Company had been subject to federal and state income taxes for the years ended
December 31, 1997 and 1998 and for the period from January 1, 1999 through
April 19, 1999.
(D) USE OF ESTIMATES
The presentation 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 reported
period. Actual results can differ from those estimates.
(3) LIQUIDITY AND SUBSEQUENT EVENT
The Company has experienced negative working capital and has a member's
deficit as a result of significant recurring losses from operations. As a
result, management has worked on developing an action plan to ensure that
current obligations are met. After consideration of the alternatives, effective
April 20, 1999, the Members of the Company authorized management to enter into
an asset sale
F-66
<PAGE>
VOYAGER ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 19, 1999
(3) LIQUIDITY AND SUBSEQUENT EVENT (CONTINUED)
agreement with Duro Communications, Inc. (Duro), whereby substantially all of
the Company's assets and liabilities were sold for approximately $2.8 million.
At the completion of this transaction, all notes payable, capital and operating
lease obligations were settled.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 31, APRIL 19,
(YEARS) 1998 1999
----------- ------------ ---------
<S> <C> <C> <C>
Computer equipment.......................................... 5 $ 154,316 187,661
Leased computer equipment................................... 2-5 186,223 186,223
Computer software........................................... 3 23,021 23,021
Furniture and fixtures...................................... 7 5,423 5,423
--------- --------
368,983 402,327
Less accumulated depreciation and amortization.............. (132,849) (157,198)
--------- --------
Net property and equipment.................................. $ 236,134 245,130
========= ========
</TABLE>
(5) LEASES
The Company is obligated under various capital leases for computer equipment
that expire over the next four years. The equipment is included in property and
equipment (see note 4).
The Company also has several noncancelable operating leases for computer and
office equipment and office space that expire over the next three years. Rental
expense for operating leases during the period from January 1, 1999 through
April 19, 1999 totaled approximately $22,212.
F-67
<PAGE>
VOYAGER ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 19, 1999
(5) LEASES (CONTINUED)
Future minimum lease payments under capital lease and noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of April 19, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Period ending December 31:
1999...................................................... $ 47,189 33,651
2000...................................................... 63,942 31,914
2001...................................................... 44,358 5,869
2002...................................................... 16,089 --
2003...................................................... 11,586 --
Thereafter................................................ -- --
-------- -------
Total minimum lease payments............................ 183,164 71,434
=======
Less amount representing interest (at rate ranging from
10.5% to 19.1%)........................................... (51,484)
--------
Present value of net minimum capital lease payments..... 131,680
Less current portion of capital lease obligations........... (66,904)
--------
Capital lease obligations less current installments..... $ 64,776
========
</TABLE>
(6) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 19,
1998 1999
------------ ---------
<S> <C> <C>
Related party notes payable; unsecured, interest at 9%,
settled by Duro subsequent to closing (see note 3)........ $200,899 195,387
Bank note payable; secured by cash, fixed assets, and
accounts receivable, interest at the bank's prime rate
plus 2.75%, settled by Duro subsequent to closing (see
note 3)................................................... 162,195 156,878
-------- --------
Total notes payable....................................... 363,094 352,265
Less current portion........................................ (23,209) (37,704)
-------- --------
Notes payable, less current portion....................... $339,885 314,561
======== ========
</TABLE>
F-68
<PAGE>
VOYAGER ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 19, 1999
(6) NOTES PAYABLE (CONTINUED)
The aggregate maturities of notes payable are as follows:
<TABLE>
<S> <C>
Period ending December 31:
1999...................................................... $ 18,104
2000...................................................... 24,279
2001...................................................... 26,955
2002...................................................... 29,925
2003 and thereafter....................................... 253,002
--------
$352,265
========
</TABLE>
(7) PRO FORMA INCOME TAXES
As stated in Footnote 2(c), the Company is not subject to Federal and State
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
company was subject to Federal and State income taxes. Pro forma tax expense
(benefit) differs from the amounts that would result from applying the Federal
statutory rate of 34% to the Company's net loss for the years ended
December 31, 1997, December 31, 1998 and the period from January 1, 1999 through
April 19, 1999, as a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------- APRIL 19,
1997 1998 1999
--------- -------- ---------
<S> <C> <C> <C>
Expected pro forma tax expense (benefit).................... $(169,700) (5,000) (6,100)
Increase in valuation allowance............................. 169,700 4,900 5,900
Other....................................................... -- 100 200
--------- ------ ------
$ -- -- --
========= ====== ======
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets and liabilities, as of December 31, 1998, and April 19, 1999 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 19,
1998 1999
------------ ---------
<S> <C> <C>
Net operating loss carryforward............................. $ 323,100 324,300
Other....................................................... 3,000 5,800
--------- --------
Gross deferred tax assets................................. 326,100 330,100
Depreciation................................................ (18,700) (16,100)
Other....................................................... (700) (600)
--------- --------
Gross deferred tax liabilities............................ (19,400) (16,700)
Valuation allowance....................................... (306,700) (313,400)
--------- --------
Net deferred tax asset...................................... $ -- --
========= ========
</TABLE>
F-69
<PAGE>
VOYAGER ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND APRIL 19, 1999
(7) PRO FORMA INCOME TAXES (CONTINUED)
The pro forma net loss used in the calculation of the pro forma tax benefits
above assumes that distributions, if any, to members are considered compensation
expense. The valuation allowance noted above is provided based on management's
estimation of the recoverability of the deferred tax asset in future periods.
(8) SUBSEQUENT EVENT
On March 19, 1999, all of the Company's assets were sold to DURO
Communications, Inc. In connection with the sale of assets, all notes payable,
capital lease, and operating lease obligations were paid in full at closing.
F-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheet of EdgeNet Network Services,
(a division of EdgeNet Media, LLC) as of April 23, 1999, and the related
statements of operations, members' equity and cash flows for the period from
January 1, 1999 through April 23, 1999. These financial statements are the
responsibility of the Division's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 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 audit provides 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 EdgeNet Network Services, (a
division of EdgeNet Media, LLC) as of April 23, 1999, and the results of its
operations and its cash flows for the period from January 1, 1999 through
April 23, 1999, in conformity with generally accepted accounting principles.
Lattimore, Black, Morgan, and Cain, P.C.
Brentwood, Tennessee
March 10, 2000
F-71
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
BALANCE SHEET
APRIL 23, 1999
<TABLE>
ASSETS
Current assets:
<S> <C> <C>
Trade accounts receivable................................. $ 86,964
Property and equipment, net................................. 412,706
Other assets:
Customer list, net of accumulated amortization of
$1,901.................................................. $7,874
Deposits.................................................. 3,063
------
Total other assets.................................... 10,937
--------
Total assets.......................................... $510,607
========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 41,407
Accrued expenses.......................................... 33,267
Current installments of long-term debt and line of
credit.................................................. 143,519
Current installments of capital lease obligations......... 131,622
Deferred revenue.......................................... 37,178
--------
Total current liabilities............................. 386,993
Long-term debt, excluding current installments.............. 2,013
Capital lease obligations, excluding current installments... 112,398
--------
Total liabilities..................................... 501,404
Members' equity............................................. 9,203
--------
Total liabilities and members' equity................. $510,607
========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
<TABLE>
<S> <C> <C>
Revenue:
Internet services......................................... $587,393
Enhanced services and other............................... 34,618
--------
Total revenue......................................... 622,011
Direct Internet services costs:
Internet services......................................... $241,233
Enhanced services and other............................... 31,287
--------
Total operating costs................................. 272,520
--------
Gross profit.......................................... 349,491
Selling, general and administrative expenses:
Salaries and employee benefits............................ 101,941
Advertising expense....................................... 6,761
Rent and occupancy........................................ 16,876
Repairs and maintenance................................... 1,264
Travel and entertainment.................................. 878
Insurance................................................. 453
Other..................................................... 3,210
--------
Total selling, general and administrative expenses.... 131,383
--------
Income before interest, depreciation, amortization and loss
on disposal of equipment.................................. 218,108
Other income (expenses):
Interest expense.......................................... (17,684)
Depreciation expense...................................... (63,828)
Amortization expense...................................... (217)
Loss on disposal of equipment............................. (43,312)
--------
Net income............................................ $ 93,067
========
Pro forma income taxes (unaudited).......................... $ 34,500
========
Pro forma net income (unaudited)............................ $ 58,567
========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
STATEMENT OF MEMBERS' EQUITY
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1998................................ $ 183,990
Net income.................................................. 93,067
Intracompany divisional transfers........................... (267,854)
---------
BALANCE AT APRIL 23, 1999................................... $ 9,203
=========
</TABLE>
See accompanying notes to financial statements.
F-74
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET, MEDIA, LLC)
STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
<TABLE>
<S> <C> <C>
Net income.................................................. $ 93,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. $ 64,045
Loss on disposal of equipment............................. 43,312
Change in operating assets and liabilities:
Trade accounts receivable............................... 47,174
Accounts payable........................................ (8,825)
Accrued expenses........................................ 18,443
Deferred revenue........................................ 13,591
--------
Total adjustments..................................... 177,740
--------
Net cash provided by operating activities............. 270,807
Cash flows from investing activities:
Purchase of equipment..................................... (12,665)
Proceeds from the sale of equipment....................... 60,569
--------
Net cash provided by investing activities............. 47,904
Cash flows from financing activities:
Principal payments on long-term debt........................ (16,493)
Principal payments on capital lease obligations............. (34,364)
Intracompany divisional transfers........................... (267,854)
--------
Net cash used by financing activities................. (318,711)
--------
Net change in cash.................................... --
Cash at beginning of period................................. --
--------
Cash at end of period....................................... $ --
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid............................................... $ 17,684
========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the period ended April 23, 1999, the Division purchased equipment by
incurring capital lease obligations of approximately $61,000.
See accompanying notes to financial statements.
F-75
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF ACCOUNTING
EdgeNet Media, LLC (the "Parent") is a Tennessee limited liability company
incorporated on June 6, 1995 to capitalize on the growing demand for internet
access and enhanced services by consumers and business users. The Parent shall
terminate on December 31, 2030, unless sooner terminated in accordance with the
provisions of the operating agreement.
EdgeNet Network Services (the "Division") is a division of the Parent and
provides internet access and web hosting services for customers located
primarily in the Middle Tennessee area. The accompanying financial statements
assume the Division had been operated separately for the period January 1, 1999
through April 23, 1999.
Inherent in the Division's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Division's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the internet and the Division's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance 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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(D) OTHER ASSETS
The customer list is amortized on a straight-line basis over 15 years.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Division evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF ("SFAS 121"). SFAS 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
F-76
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) INCOME TAXES
During the period January 1, 1999 through April 23, 1999, the Parent
operated as a partnership for federal tax purposes, and therefore was exempt
from taxation under the partnership provisions of the Internal Revenue Code (the
"Code"). Under the partnership provisions of the Code, the members of the
partnership include their share of the partnership's income or loss on their
personal income tax returns. Accordingly, the Parent was not subject to federal
and state income taxes during the period.
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES ("SFAS 109"), requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The unaudited pro forma income tax information included in the statement of
earnings and Note 5 is presented in accordance with SFAS 109, as if the Division
had been subject to federal and state income taxes on a stand-alone basis for
the period January 1, 1999 through April 23, 1999.
(G) REVENUE RECOGNITION
Revenue related to internet services is recognized as services are provided
and deferred and amortized to operations for amounts billed relating to future
periods. Installation and customer setup fees are recognized upon completion of
the services.
Revenue from consulting services is recognized as the services are provided.
Revenue from hardware and software sales is recognized upon shipment of the
respective products.
(H) ALLOCATION OF CORPORATE EXPENSES TO THE DIVISION
Expenses are generally allocated to the Division by the Parent based upon
revenues or number of employees of the Division. During the period January 1,
1999 through April 23, 1999, the Parent did not allocate certain corporate
administrative and marketing expenses to the Division. If the Parent had
allocated such expenses, the Division's share of the corporate expenses would
have been approximately $116,000.
(I) SALES AND MARKETING COSTS
Marketing and advertising costs include the costs to acquire and retain
subscribers, advertising and other general sales and marketing costs.
The Division expenses the costs of advertising and promoting its services as
incurred. Such costs are included in advertising expense and totaled $6,761 for
the Division for the period from January 1, 1999 through April 23, 1999.
F-77
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(j) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Division to
concentrations of credit risk consists primarily of trade accounts receivable.
Concentrations of credit risk with respect to trade accounts receivables are
limited due to the large number of customers comprising the Division's customer
base and the relatively minor balances of each individual account.
At April 23, 1999, the fair value of the Division's financial instruments
approximate their carrying value based on their terms and interest rates.
The Division's trade accounts receivable consist primarily of balances with
customers located in Middle Tennessee. The Division generally has no specific
collateral to secure collection of these receivables.
The Division's access to communication lines is purchased primarily from
four providers under arrangements that amounted to approximately $159,000 for
the period January 1, 1999 through April 23, 1999. This expenditure has been
classified as an operating cost in the accompanying financial statements.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Division adopted the provisions of Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130"). SFAS 130
requires the Division to report in its financial statements, in addition to its
net income, comprehensive income, which includes all changes in equity during a
period from non-owner sources including, as applicable, foreign currency items,
minimum pension liability adjustments and unrealized gains and losses on certain
investments in debt and equity securities. There were no differences between the
Division's comprehensive income and its net income as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Division has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Division's
financial statements for the period January 1, 1999 through April 23, 1999.
F-78
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(2) PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT
COST
A summary of property and equipment at April 23, 1999 is as follows:
<TABLE>
<S> <C>
Internet access and computer equipment, including amounts
related to capital leases of $318,419..................... $711,371
Software.................................................... 26,186
Furniture and fixtures...................................... 10,721
--------
748,278
Less accumulated depreciation and amortization, including
amounts related to capital leases of $145,023............. 335,572
--------
$412,706
========
</TABLE>
(3) DEBT
Line of credit and notes payable consist of the following as of April 23,
1999:
<TABLE>
<S> <C>
Line of credit, bearing interest at 9.25%, due August 1999;
secured by substantially all assets of the Parent. The
Divison's share of the borrowings are based upon the
drawdowns needed for the Division's operations.............. $ 46,755
Note payable due in monthly installments of $1,247,
including interest at 10.75%, through June 2000; secured by
certain equipment........................................... 15,791
Note payable due in monthly installments of $7,636,
including interest at 9.75%, through February, 2000; secured
by substantially all assets of the Parent................... 82,986
--------
Total debt............................................ 145,532
Less current installments................................... 143,519
--------
Long-term debt, excluding current installments........ $ 2,013
========
</TABLE>
A summary of future maturities of long-term debt at April 23, 1999 is as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
ENDING APRIL 23, 1999 AMOUNT
- --------------------- ----------
<S> <C>
2000.................................................... $143,519
2001.................................................... 2,013
--------
$145,532
========
</TABLE>
(4) LEASING ARRANGEMENTS
The Division leases its office facilities and various equipment under
operating lease arrangements. It is expected that in the normal course of
business, leases that expire will be renewed or replaced by
F-79
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(4) LEASING ARRANGEMENTS (CONTINUED)
leases on other facilities and equipment; thus, it is anticipated that future
minimum lease payments will not be less than the expense shown in 1999.
The Division has entered into capital lease agreements for certain
equipment. The economic substance of the leases is that the Division is
financing the acquisition of this equipment through the lease, and accordingly,
the equipment and related obligations are reflected in the Division's assets and
liabilities.
The following is a schedule by year of the future minimum lease payments
required under the capital leases, together with the present value of the
minimum lease payments, and operating leases as of April 23, 1999:
<TABLE>
<CAPTION>
TWELVE MONTHS CAPITAL OPERATING
ENDING APRIL 23, LEASES LEASES
- ---------------- -------- ---------
<S> <C> <C>
2000................................................ $164,907 53,381
2001................................................ 97,059 21,272
2002................................................ 31,405 14,040
-------- -------
Total minimum lease payments............................ 293,371 88,693
-------- =======
Less amount representing interest....................... 49,351
--------
Present value of minimum lease payments................. 244,020
Less current installments............................... 131,622
--------
Capital lease obligations, excluding current
installments.......................................... $112,398
========
</TABLE>
The Division's share of office facilities' rent expense, which is based on
the number of employees, amounted to $16,876 for the period from January 1, 1999
through April 23, 1999. Rent expense for various equipment is charged to the
Division based upon ownership of the various equipment. Direct costs of the
Division for various equipment rental was $7,761 for the period from January 1,
1999 through April 23, 1999.
(5) PRO FORMA INCOME TAXES (UNAUDITED)
The Parent is not subject to federal and state income taxes. However, a
proforma summary of the provision for income taxes for the period from
January 1, 1999 through April 23, 1999 has been
F-80
<PAGE>
EDGENET NETWORK SERVICES
(A DIVISION OF EDGENET MEDIA, LLC)
NOTES TO FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1, 1999 THROUGH APRIL 23, 1999
(5) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
prepared as if the Division had been subject to federal and state income taxes.
The calculation, based on the reported revenues and expenses as presented on the
statement of earnings, is as follows:
<TABLE>
<S> <C>
Current tax expense:
Federal................................................. $29,900
State................................................... 5,700
-------
Total current tax expense............................. 35,600
-------
Deferred tax benefit:
Federal................................................. (1,000)
State................................................... (100)
-------
Total deferred tax benefit............................ (1,100)
-------
Total income taxes.................................... $34,500
=======
</TABLE>
A pro forma presentation of deferred income tax liabilities as of April 23,
1999 is as follows:
<TABLE>
<S> <C>
Deferred income tax liabilities............................. $51,500
=======
</TABLE>
Deferred income taxes would be provided for the temporary differences
between the financial reporting basis and the tax basis of the Division's assets
and liabilities. The deferred income tax liabilities would result primarily from
using the straight-line and declining balance methods for computing financial
reporting depreciation and accelerated methods for computing tax depreciation,
and from recognizing deferred revenue for financial reporting purposes.
(6) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS/ AT END
OF PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
For the period ended April 23, 1999: Allowance for
doubtful accounts................................ $9,600 -- 9,600 --
====== ===== ===== =====
</TABLE>
(7) RETIREMENT PLAN
The Parent has a SIMPLE IRA retirement plan for its employees. The plan
provides for the Parent to match, on a percentage basis, a portion of the
contributions made by participants, up to 3% of base salaries paid. Total
contributions made to the plan, which were allocated to the Division based on
number of employees, amounted to $369 for the period January 1, 1999 through
April 23, 1999.
(8) SUBSEQUENT EVENT
In March 1999, the Parent signed a letter of intent to sell the Division to
an unrelated entity. The Internet access and web hosting services of the
Division represent approximately 62 percent of revenues of the Parent. The sale
was finalized subsequent to April 23, 1999.
F-81
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of MPInet (a division of
Micro Products, Inc.) as of December 31, 1998 and March 31, 1999, and the
related statements of operations, divisional interest, and cash flows for the
period from July 7, 1997 (inception) through December 31, 1997, for the year
ended December 31, 1998 and for the three months ended March 31, 1999. These
financial statements are the responsibility of the Division'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 of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in those financial
statements. An audit of financial statements 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 MPInet as of December 31,
1998 and March 31, 1999 and the results of its operations and its cash flows the
period from July 7, 1997 (inception) through December 31, 1997, for the year
ended December 31, 1998 and for the three months ended March 31, 1999 in
conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
March 24, 2000
F-82
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 135,552 167,083
Trade receivables........................................... 362,391 330,340
Inventory................................................... 76,163 126,006
---------- ----------
Total current assets.................................... 574,106 623,429
Property and equipment, net................................. 558,560 624,482
Other assets................................................ 21,429 21,429
---------- ----------
Total assets............................................ $1,154,095 1,269,340
========== ==========
LIABILITIES AND DIVISIONAL DEFICIT
Current portion of obligations under capital leases......... $ 166,796 177,633
Accounts payable............................................ 563,628 545,490
Accrued expenses............................................ 103,298 27,670
Accrued payroll............................................. 15,976 29,637
Deferred revenue............................................ 184,452 302,523
---------- ----------
Total current liabilities............................... 1,034,150 1,082,953
Obligations under capital leases, less current portion...... 179,595 219,312
---------- ----------
Total liabilities....................................... 1,213,745 1,302,265
---------- ----------
Divisional deficit:
Allocated funds........................................... 705,134 706,134
Divisional interest (deficit)............................. (764,784) (739,059)
---------- ----------
Total divisional deficit................................ (59,650) (32,925)
---------- ----------
Total liabilities and divisional deficit................ $1,154,095 1,269,340
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
FROM
JULY 1, 1997 THREE
(INCEPTION) MONTHS
THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
------------- ------------- ----------
<S> <C> <C> <C>
Internet services revenue................................. $1,251,461 4,474,303 1,602,307
Direct Internet services costs............................ 1,083,446 2,989,260 825,644
---------- --------- ---------
Gross profit.......................................... 168,015 1,485,043 776,663
Selling, general, and administrative expenses............. 626,172 1,404,494 663,508
Depreciation and amortization............................. 114,862 194,455 73,955
---------- --------- ---------
Operating expenses.................................... 741,034 1,598,949 737,463
---------- --------- ---------
Income (loss) from operations......................... (573,019) (113,906) 39,200
Interest expense.......................................... 30,550 47,309 13,475
---------- --------- ---------
Net income (loss)..................................... $ (603,569) (161,215) 25,725
========== ========= =========
Pro forma income tax...................................... $ -- -- --
========== ========= =========
Pro forma net income (loss)............................... $ (603,569) (161,215) 25,725
========== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
STATEMENTS OF DIVISIONAL INTEREST
<TABLE>
<CAPTION>
TOTAL
DIVISIONAL
ALLOCATED DIVISIONAL INTEREST
FUNDS DEFICIT (DEFICIT)
--------- ---------- ----------
<S> <C> <C> <C>
BALANCE AT JULY 1, 1997 (INCEPTION)......................... $ -- -- --
Allocations credited........................................ 728,440 -- 728,440
Net loss.................................................... -- (603,569) (603,569)
--------- -------- --------
BALANCE AT DECEMBER 31, 1997................................ 728,440 (603,569) 124,871
Allocations credited........................................ 226,520 -- 226,520
Allocations returned........................................ (249,826) -- (249,826)
Net loss.................................................... -- (161,215) (161,215)
--------- -------- --------
BALANCE AT DECEMBER 31, 1998................................ 705,134 (764,784) (59,650)
Allocations credited........................................ 1,000 -- 1,000
Net income.................................................. -- 25,725 25,725
--------- -------- --------
BALANCE AT MARCH 31, 1999................................... $ 706,134 (739,059) (32,925)
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-85
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM JULY 1,
1997 THREE MONTHS
(INCEPTION) THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1999
-------------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(603,569) (161,215) 25,725
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization................... 114,862 194,455 73,955
Changes in operating assets and liabilities:
Trade receivables............................. (159,775) (202,616) 32,051
Inventory..................................... (30,000) (46,163) (49,843)
Prepaid expenses.............................. (2,453) 2,453 --
Other assets.................................. (21,429) -- --
Accounts payable.............................. 206,863 356,765 (18,138)
Accrued expenses.............................. 14,613 88,685 (75,628)
Accrued payroll............................... 7,555 8,421 13,661
Deferred revenue.............................. 24,082 160,370 118,071
--------- -------- -------
Net cash (used in) provided by operating
activities................................ (449,251) 401,155 119,854
--------- -------- -------
Cash flows from investing activities--capital
expenditures...................................... (112,726) (149,774) (35,461)
--------- -------- -------
Cash flows from financing activities:
Expenses paid directly by Micro Products, Inc..... 728,440 226,520 --
Micro Products, Inc. expenses paid by MPInet...... -- (249,826) --
Capital contribution.............................. -- -- 1,000
Payments on capital lease obligation.............. (114,208) (144,778) (53,862)
--------- -------- -------
Net cash (used in) provided by financing
activities................................ 614,232 (168,084) (52,862)
--------- -------- -------
Net increase in cash........................ 52,255 83,297 31,531
Cash, beginning of period........................... -- 52,255 135,552
--------- -------- -------
Cash, end of period................................. $ 52,255 135,552 167,083
========= ======== =======
Supplemental disclosure of cash flow information
cash paid for interest............................ $ 30,550 16,759 44,005
========= ======== =======
Supplemental disclosure of noncash investing and
financing activities:
Computer equipment leases resulted in additional
capital lease obligations of $45,806, $309,310
and $104,416 in 1997, 1998 and 1999,
respectively.
</TABLE>
See accompanying notes to financial statements
F-86
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(1) DESCRIPTION OF THE BUSINESS
MPInet (the Division) is a division of Micro Products, Inc., a
Virginia-based systems integration and hardware reseller established in 1984.
Micro Products, Inc. was authorized to transact business in the State of Florida
as of August 22, 1996 and began operations in July 1997 as MPInet. The Division
provides a variety of Internet connection and web hosting services to customers
in Central Florida.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, and furniture and fixtures, all of which are
stated at cost or historical cost for those assets transferred to the division
by Micro Products, Inc. Property and equipment under capital leases are stated
at the present value of minimum lease payments at the lease inception date.
Depreciation and amortization on property and equipment is computed using
the straight-line method over the shorter of their estimated useful lives or the
lease term.
(B) REVENUE RECOGNITION AND DEFERRED REVENUE
Customers generally pay for service in advance. Revenue is recognized
ratably over the service period, with the unearned portion being reported as
deferred revenue.
(C) ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense of
approximately $91,000, $190,000 and $71,000 and was charged to operations for
the period from July 7, 1997 (inception) to December 31, 1997, for the year
ended December 31, 1998 and for the three months ended March 31, 1999,
respectively.
(D) INCOME TAXES
Micro Products, Inc., and therefore the Division, is not subject to
corporate income taxes based on the election of Micro Products, Inc.'s
shareholders to be taxed under Subchapter S of the Internal Revenue Code.
Accordingly, allocated income or losses are included directly in the individual
income tax returns of the stockholders.
The unaudited pro forma income tax information included in statements of
operations and note 8 was presented in accordance with SFAS No. 109 as if the
Company had been subject to federal and state income taxes for the period from
July 7, 1997 (inception) through December 31, 1997, for the year ended
December 31, 1998, and for the three month period ended March 31, 1999.
F-87
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) USE OF ESTIMATES
The presentation 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 reported
period. Actual results may differ from those estimates.
(3) LIQUIDITY AND SUBSEQUENT EVENT
The Division has experienced negative working capital and has a negative
divisional interest as a result of recurring losses from operations. As a
result, management has worked on developing an action plan to ensure that
current obligations are met. After consideration of the alternatives, effective
April 23, 1999, the board of directors of Micro Products, Inc. authorized
management to enter into a sale agreement with Duro Communications, Inc.,
whereby substantially all of the Division's assets and liabilities were sold for
approximately $9.6 million.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
(YEARS) 1998 1999
----------- --------- ---------
<S> <C> <C> <C>
Computer equipment........................... 5 $ 56,499 253,455
Software..................................... 3 23,699 23,699
Furniture and fixtures....................... 7 43,592 43,592
Leased computer equipment.................... 5 766,917 709,838
Vehicles..................................... 5 2,500 2,500
Leasehold improvements....................... 10 15,000 15,000
--------- ---------
908,207 1,048,084
Less accumulated depreciation and
amortization............................... (349,647) (423,602)
--------- ---------
Net property and equipment................. $ 558,560 624,482
========= =========
</TABLE>
(5) LEASES
The Division is obligated under various capital leases for computer
equipment that expire over the next three to five years. The equipment is
included in property and equipment (see note 4).
The Division also has several noncancelable operating leases for computer
equipment that expire over the next three years. Rental expense for operating
leases totaled approximately $66,633, $57,471 and $24,000 and in 1997, 1998 and
1999, respectively.
F-88
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(5) LEASES (CONTINUED)
Future minimum lease payments under capital leases and noncancelable
operating leases (with initial or remaining lease terms in excess of one year)
as of March 31, 1999 are:
<TABLE>
<CAPTION>
OPERATING
CAPITAL LEASES LEASES
-------------- ---------
<S> <C> <C>
Year ending December 31:
2000................................................ $ 223,519 75,883
2001................................................ 168,391 64,656
2002................................................ 71,755 64,656
--------- -------
Total minimum lease payments...................... 463,665 205,195
=======
Less amount representing interest (at rates ranging
from 12.986% to 14.118%)............................ (66,720)
---------
Present value of net minimum capital lease
obligations..................................... 396,945
Less current portion under capital lease
obligations......................................... (177,633)
---------
Obligations under capital leases, less current
portion......................................... $ 219,312
=========
</TABLE>
(6) COMMITMENTS AND CONTINGENCIES
Micro Products, Inc. is involved in certain litigation which occurs in the
normal course of business. In the opinion of management, the ultimate results of
these matters will not have a material impact on the financial position of the
Division.
(7) RELATED PARTY TRANSACTIONS
Operating expenses of the Division totaling $667,964 and $226,520 in 1997
and 1998, respectively, have been directly paid on behalf of the Division
through a cash contribution by Micro Products, Inc. The contributions have been
recorded as allocated funds in the Statements of Divisional Interest.
Certain operating expenses of Micro Products, Inc. totaling $249,826 in 1998
have been paid for directly by the Division and have been recorded as a return
of allocated funds in the Statements of Divisional Interest.
Fixed assets totaling $60,476 were transferred to the Division by Micro
Products, Inc. in 1997, and have been recorded at their historical net book
value and as allocated funds in the Statements of Divisional Interest.
(8) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 2(d), the company is not subject to Federal and State
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
company was subject to Federal and State income taxes. Pro forma tax expense
(benefit) differs from the amounts that would result from applying the Federal
statutory rate
F-89
<PAGE>
MPINET
(A DIVISION OF MICRO PRODUCTS, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND MARCH 31, 1999
(8) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
of 35% to the Company's net loss for the years ended December 31, 1997 and 1998
and for the three month period ended March 31, 1999, as a result of the
following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, PERIOD ENDING
------------------------- MARCH 31,
1997 1998 1999
----------- ----------- -------------
<S> <C> <C> <C>
Expected pro forma tax expense (benefit).................. $(211,249) (56,425) 9,004
State income taxes, net of federal benefit................ -- -- --
Increase in Federal valuation allowance................... 211,249 56,425 (9,004)
--------- ------- ------
$ -- -- --
========= ======= ======
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Net operating loss carryforward............................. $ 309,737 244,445
Valuation allowance......................................... (309,737) (244,445)
--------- ---------
Net deferred tax asset...................................... $ -- --
========= =========
</TABLE>
The pro forma net income information assumes that distributions, if any, to
shareholders are considered compensation expense. The valuation allowance noted
above is provide based on management's estimation of the recoverability of the
deferred tax asset in future periods.
F-90
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of ICX Online, Inc. as of
December 31, 1998 and June 7, 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
two-year period ended December 31, 1998 and for the period from January 1, 1999
through June 7, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ICX Online, Inc. as of
December 31, 1998 and June 7, 1999, and the results of its operations and its
cash flows for each of the years in the two-year period ended December 31, 1998
and for the period from January 1, 1999 through June 7, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Detroit, Michigan
February 17, 2000
F-91
<PAGE>
ICX ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 7,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- 93,474
Receivables:
Trade, net of allowance for doubtful accounts of $18,000
in 1999............................................... 84,885 113,025
Affiliates.............................................. 15,487 --
Other................................................... 2,813 --
Prepaid expenses and other................................ 9,846 --
--------- --------
Total current assets.................................. 113,031 206,499
Property and equipment, net................................. 176,378 147,840
--------- --------
Total assets.......................................... $ 289,409 354,339
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank overdraft............................................ $ 38,657 --
Accounts payable.......................................... 65,017 76,501
Accrued expenses.......................................... 41,694 40,864
Notes payable to related party............................ 27,500 --
Current portion of capital lease obligations.............. 86,502 83,829
Deferred revenue.......................................... 73,426 218,582
--------- --------
Total current liabilities............................. 332,796 419,776
Capital lease obligations, less current portion............. 74,105 37,467
--------- --------
Total liabilities..................................... 406,901 457,243
--------- --------
Stockholders' deficit:
Common stock, no par value, 2,000 shares authorized, 1,400
shares issued and outstanding........................... 1,000 1,000
Accumulated deficit....................................... (118,492) (103,904)
--------- --------
Total stockholder's deficit........................... (117,492) (102,904)
--------- --------
Total liabilities and stockholders' deficit........... $ 289,409 354,339
========= ========
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE>
ICX ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
------------------------- THROUGH
1997 1998 JUNE 7, 1999
--------- ---------- ---------------
<S> <C> <C> <C>
Internet services revenue............................... $643,388 1,242,194 756,396
-------- --------- -------
Direct Internet services costs.......................... 277,683 507,442 255,065
-------- --------- -------
Gross profit...................................... 365,705 734,752 501,331
Selling, general and administrative expenses:
Salaries and employee benefits........................ 158,865 293,758 176,687
Marketing and advertising expense..................... 8,664 57,491 2,059
Rent and occupancy.................................... 3,398 38,256 15,670
Repairs and maintenance............................... 1,590 11,582 1,705
Travel and entertainment.............................. 6,796 8,850 6,454
Insurance............................................. 9,906 29,099 13,466
Other................................................. 168,681 263,494 212,580
-------- --------- -------
Total selling, general, and administrative
expenses........................................ 357,900 702,530 428,621
-------- --------- -------
Income before interest expense, depreciation, and
amortization expense.................................. 7,805 32,222 72,710
Other expense:
Interest expense, net................................. 13,630 19,004 9,502
Depreciation and amortization expense................. 51,520 87,284 48,620
-------- --------- -------
Total other expense............................... 65,150 106,288 58,122
-------- --------- -------
Net income (loss)................................. $(57,345) (74,066) 14,588
======== ========= =======
Pro forma income taxes.................................. $ -- -- --
======== ========= =======
Pro forma net loss...................................... $(57,345) (74,066) 14,588
======== ========= =======
</TABLE>
See accompanying notes to financial statements.
F-93
<PAGE>
ICX ONLINE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
COMMON ACCUMULATED EQUITY
STOCK DEFICIT (DEFICIT)
-------- ----------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996 (UNAUDITED).................... $1,000 12,919 13,919
Net (loss).................................................. -- (57,345) (57,345)
------ -------- --------
BALANCE AT DECEMBER 31, 1997................................ 1,000 (44,426) (43,426)
Net (loss).................................................. -- (74,066) (74,066)
------ -------- --------
BALANCE AT DECEMBER 31, 1998................................ 1,000 (118,492) (117,492)
Net income.................................................. -- 14,588 14,588
------ -------- --------
BALANCE AT JUNE 7, 1999..................................... $1,000 (103,904) (102,904)
====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-94
<PAGE>
ICX ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
------------------------- THROUGH
1997 1998 JUNE 7, 1999
-------- -------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................... $(57,345) (74,066) 14,588
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization..................... 51,520 87,284 48,620
Changes in operating assets and liabilities:
Trade receivables............................... (28,569) (38,142) (28,140)
Affiliate and other receivables................. (2,813) (15,487) 18,300
Prepaid expenses and other...................... (9,351) (495) 9,846
Accounts payable................................ 46,602 16,824 11,484
Accrued expenses................................ 4,730 29,298 (830)
Deferred revenue................................ 31,529 33,399 145,156
-------- ------- --------
Net cash provided by operating activities..... 36,303 38,615 219,024
-------- ------- --------
Cash flows from investing activities:
Capital expenditures.................................. -- (7,865) (38,790)
Proceeds from disposal of fixed assets................ -- -- 18,708
-------- ------- --------
Net cash used in investing activities......... -- (7,865) (20,082)
-------- ------- --------
Cash flows from financing activities:
Bank overdrafts....................................... 6,551 19,567 (38,657)
Proceeds from (payments on) notes payable to related
party............................................... 27,500 (27,500)
Payments on capital lease obligations................. (42,854) (77,817) (39,311)
-------- ------- --------
Net cash used in financing activities......... (36,303) (30,750) (105,468)
-------- ------- --------
Net (decrease) increase in cash and cash
equivalents................................. -- -- 93,474
Cash and cash equivalents:
Beginning period...................................... -- -- --
-------- ------- --------
End of period......................................... $ -- -- 93,474
======== ======= ========
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997 and 1998 and the period January 1,
1999 through June 7, 1999 the Company paid approximately $13,630, $19,000
and $9,500, respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating $103,205, $150,800, and $0 for the years ended December 31,
1997, and 1998, and for the period January 1, 1999 through June 7, 1999,
respectively.
See accompanying notes to financial statements.
F-95
<PAGE>
ICX ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 7, 1999
(1) ORGANIZATION AND DESCRIPTION OF BUSINESS
ICX Online, Inc. (the Company), formerly known as Internet Design
Group, Inc. was formed in 1995 to provide Internet access services and other
related services. The Company maintains its headquarters in Oak Ridge,
Tennessee, with points of presence (POP's) serving the greater Knoxville
area and surrounding counties.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses,
dependence upon strategic alliances, and the limited history of the need for
internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
internet services, the continued acceptance of the Internet and the
Company's ability to develop and provide new services that meet customers
changing requirements, including the effective use of leading technologies,
to continue to enhance its current services, and to influence and respond to
emerging industry standards and other technological changes on a timely and
cost-effective basis.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(B) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original
maturities of three months or less when acquired to be cash equivalents.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist primarily of
network communications equipment, computer equipment, and furniture and
fixtures. Depreciation is calculated using the straight-line method over
the estimated useful lives of the related assets, generally ranging from
three to five years. Property and equipment under capital leases are
stated at the present value of minimum lease payments and are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets.
(D) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets
under the provisions of Statement of Financial Accounting Standards
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
F-96
<PAGE>
ICX ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 7, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (Statement
No. 121). Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash
flows estimated to be generated by those assets are less than the
assets' carrying amount.
(E) INCOME TAXES
The company is not subject to corporate income taxes, based on the
election of the company's shareholders to be taxed under Subchapter S of
the Internal Revenue Code. Accordingly, allocated income or losses are
included directly in the individual income tax returns of the
stockholders.
(F) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue related to services is recognized as the services are
provided and deferred and amortized to operations for amounts billed
relating to future periods. The Company's customers generally pay in
advance. Deferred revenue represents the unearned portion of customer
payments.
(G) MARKETING AND ADVERTISING EXPENSE
Marketing expense includes the costs to acquire and retain
subscribers, advertising and other general sales and marketing costs.
Advertising costs are expensed as incurred.
(H) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, and accounts
receivable. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising
the Company's customer base and the relatively minor balances of each
individual account.
(3) BALANCE SHEET COMPONENTS
Property and equipment, consist of:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 7,
1998 1999
------------ --------
<S> <C> <C>
Computer equipment including amounts related to capital
leases of $291,385........................................ $329,494 349,091
Furniture and fixtures...................................... 1,787 2,272
-------- --------
331,281 351,363
Less accumulated depreciation and amortization, including
amounts related to capital leases of $80,728, and
$171,809, respectively.................................... (154,903) (203,523)
-------- --------
Property and equipment, net....................... $176,378 147,840
======== ========
</TABLE>
F-97
<PAGE>
ICX ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 7, 1999
(3) BALANCE SHEET COMPONENTS (CONTINUED)
Accrued expenses:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 7,
1998 1999
------------ --------
<S> <C> <C>
Employee related....................................... $22,694 30,402
Other accruals......................................... 19,000 10,462
------- -------
$41,694 40,864
======= =======
</TABLE>
(4) LIQUIDITY AND SUBSEQUENT EVENT
The company has experienced negative working capital and has an
accumulated stockholders' deficit as a result of significant recurring
losses from operations. Consequently, management has worked on developing an
action plan to ensure that current obligations are met. After consideration
of the alternatives, effective June 7, 1999 the board of directors
authorized management to enter into a sale agreement with DURO
Communications, Inc., whereby substantially all of the Company's assets and
liabilities and ongoing customer service contracts were sold for
approximately $4.3 million.
(5) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
Year ending December 31:
1999.................................................... $102,901 83,988
2000.................................................... 61,365 83,988
2001.................................................... 20,000 36,090
2002.................................................... -- 10,079
-------- -------
Total minimum lease payments...................... 184,346 214,145
=======
Less amount representing interest..................... (23,739)
--------
Net present value of minimum capital lease
payments........................................ 160,607
Less current portion.................................. 86,502
--------
Capital lease obligations, less current portion......... $ 74,105
========
</TABLE>
Rent expense for operating leases totaled $15,670, $34,062, and $2,812
for the period from January 1, 1999 through June 7, 1999, and the years
ended December 31, 1998 and 1997, respectively.
F-98
<PAGE>
ICX ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JUNE 7, 1999
(6) RELATED PARTY TRANSACTIONS
At December 31, 1998, the company had an interest free unsecured note
payable to a related party in the amount of $27,500. The note was paid in
connection with the sale of the Company's assets and liabilities as
described in note 4.
Additionally the company had a receivable due from a related party in
the amount of $15,487, which was paid in full during June 1999.
The Company's capital and operating leases include leases through a
related party. Payments under these related party leases totaled $32,000 and
$29,000 in 1998 and 1999, respectively. In addition this related party
provided consulting services in the amount of $45,000 in 1998 and $15,000 in
1999.
(7) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 2(e), the company is not subject to Federal and
State income taxes. Pro forma income tax information is provided below to
illustrate the tax impact on the financial statements of providing for taxes
as if the company was subject to Federal and State income taxes. Pro forma
tax expense (benefit) differs from the amounts that would result from
applying the federal statutory rate of 34% to the Company's net loss for the
periods ended December 31, 1997, December 31, 1998 and June 7, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
---------------------------- THROUGH
1997 1998 JUNE 7, 1999
------------- ------------ ---------------
<S> <C> <C> <C>
Expected pro forma tax expense (benefit).................. $ (19,500) (25,200) 5,000
Increase (decrease) in valuation allowance................ 18,300 23,700 (6,900)
Other..................................................... 1,200 1,500 1,900
--------- -------- -------
$ -- -- --
========= ======== =======
</TABLE>
Temporary differences that give rise to the components of pro forma
deferred tax assets, as of December 31, 1998 and June 7, 1999 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 7,
1998 1999
------------ --------
<S> <C> <C>
Net operating loss carryforward....................... $ 49,200 35,400
Other................................................. 300 7,200
-------- --------
Gross deferred tax assets........................... 49,500 42,600
Valuation Allowance................................. (49,500) (42,600)
-------- --------
Net deferred tax asset................................ $ -- --
======== ========
</TABLE>
The pro forma net income information assumes that distributions, if any,
to shareholders are considered compensation expense. The valuation allowance
noted above is provided based on management's estimation of the
recoverability of the deferred tax asset in future periods.
The stated franchise tax from January 1, 1999 through June 7, 1999 is
expected to be paid in full by the previous stockholders. This was
established in the purchase agreement with Duro Communications, Inc.
F-99
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Duro Communications, Inc.:
We have audited the accompanying combined balance sheets of Metrolink
Internet Services, Inc. and Metrolink Internet Services of Port St. Lucie, Inc.
(collectively, the "Company") as of June 13, 1999 and the related combined
statements of operations, accumulated deficit, and cash flows for the period
from January 1, 1999 through June 13, 1999. These combined 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 audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
June 13, 1999 and the results of its operations and its cash flows for the from
January 1, 1999 through June 13, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Orlando, Florida
March 8, 2000
F-100
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
COMBINED BALANCE SHEET
JUNE 13, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 15,430
Trade accounts receivable, net of $6,012 allowance for
doubtful accounts................................... 23,093
---------
Total current assets................................ 38,523
Property and equipment, net of accumulated depreciation of
$53,094................................................... 124,729
Other assets................................................ 6,611
---------
Total assets........................................ $ 169,863
=========
LIABILITIES AND ACCUMULATED DEFICIT
Current liabilities:
Accounts payable and accrued expense...................... $ 84,082
Accrued interest expense.................................. 27,912
Deferred revenues......................................... 29,385
Current maturities of long term debt...................... 165,989
---------
Total current liabilities........................... 307,368
Accumulated deficit:
Share capital $1 par value, 1,000 shares authorized issued
and outstanding......................................... 1,000
Accumulated deficit....................................... (138,505)
---------
Total accumulated deficit......................... (137,505)
---------
Total liabilities and accumulated deficit......... $ 169,863
=========
</TABLE>
See accompanying notes to combined financial statements.
F-101
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
COMBINED STATEMENT OF OPERATIONS
PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 13, 1999
<TABLE>
<S> <C>
Internet services revenue................................... $ 271,545
Direct Internet services costs.............................. 104,243
---------
Gross profit.......................................... 167,302
Selling, general and administrative
Salaries and wage expense................................. 89,233
Administrative expense.................................... 7,233
Advertising expense....................................... 843
Lease expense............................................. 41,342
Utilities................................................. 1,778
Insurance................................................. 2,847
Bad debt expense.......................................... 6,012
Other..................................................... 20,815
---------
Total selling, general and administrative............. 170,103
---------
Loss from operations, excluding depreciation.......... (2,801)
Other expenses:
Interest expense, net..................................... (2,880)
Depreciation.............................................. (14,110)
Other..................................................... (20,873)
---------
Net loss.............................................. $ (40,664)
=========
Proforma income taxes....................................... $ --
=========
Proforma net loss........................................... $ (40,664)
=========
</TABLE>
See accompanying notes to combined financial statements.
F-102
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
COMBINED STATEMENT OF ACCUMULATED DEFICIT
PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 13, 1999
<TABLE>
<CAPTION>
SHARE CAPITAL
------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998............................ 1,000 $1,000 (97,841) (96,841)
Net loss................................................ -- -- (40,664) (40,664)
----- ------ -------- --------
BALANCE AT JUNE 13, 1999................................ 1,000 $1,000 (138,505) (137,505)
===== ====== ======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-103
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
COMBINED STATEMENT OF CASH FLOW
PERIOD FROM JANUARY 1, 1999 THROUGH JUNE 13, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss.................................................. $ (40,664)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation............................................ 14,110
Provision for doubtful accounts......................... 6,012
Changes in operating assets and liabilities:
Accounts receivable................................... (1,545)
Due from related parties.............................. 7,996
Other assets.......................................... 64
Accrued interest expense.............................. 2,915
Deferred revenue...................................... 3,556
------------
Net cash used in operating activities............... (7,556)
------------
Cash flows from investing activities
Purchases of property and equipment....................... (28,368)
------------
Cash flows from financing activities:
Proceeds from long-term debt.............................. 26,503
Repayments of long-term debt.............................. (6,655)
------------
Net cash provided by financing activities........... 19,848
------------
Net decrease in cash and cash equivalents........... (16,076)
Cash and cash equivalents at beginning of period............ 31,506
------------
Cash and cash equivalents at end of period.................. $ 15,430
============
</TABLE>
See accompanying notes to combined financial statements.
F-104
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 13, 1999
(1) GENERAL INFORMATION
Metrolink Internet Services, Inc. (the "Company") provides internet access
and enhanced services to consumers and business users, primarily in the
Central Florida area. The Company was formed as a Florida corporation in
1995. Metrolink Internet Services of Port St. Lucie, Inc. was formed in 1997
to provide Internet access to the Port St. Lucie area.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF COMBINATION
The accompanying financial statements reflect the combined presentation
of Metrolink Internet Services, Inc. and Metrolink Internet Services of
Port St. Lucie, Inc. (collectively, the "Company") as entities operating
under common control and ownership. All inter-entity balances and
transactions have been eliminated in combination.
(B) PROPERTY AND EQUIPMENT
Property and equipment consists primarily of computer equipment and
furniture and fixtures, all of which are stated at cost. Depreciation,
is recorded, for financial statement reporting purposes, using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and Fixtures..................................... 8 years
Equipment.................................................. 5 years
</TABLE>
(C) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed
relating to future periods.
(D) USE OF ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles which 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 amount of revenue and
expenses during the reporting period. Actual results may differ from
those estimates.
(E) INCOME TAXES
The Company has elected, with the consent of the shareholders, to be
taxed as a Subchapter S corporation. Therefore, the Company is not
directly subject to federal or state income taxes and its taxable income
is included as taxable income of its shareholders. Therefore, no
provision for income taxes has been included in the accompanying
financial statements.
F-105
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 13, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) ECONOMIC CONCENTRATIONS
The Company provides internet services in only one central location,
Melbourne, Florida and it surrounding cities. Future operations could be
affected by changes in economic or other conditions in that geographical
area or by changes in the demand for such services.
(G) ADVERTISING EXPENSE
Advertising expense includes the costs to acquire and retain
subscribers, advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services
as incurred. For the period from January 1, 1999 through June 13, 1999,
advertising expense totaled $843.
(3) LEASES
The Company leases equipment and office space under noncancelable operating
leases expiring at various dates through 2004. Rental expense for operating
leases for the period from January 1, 1999 through June 13, 1999 totaled
$41,432.
Future minimum annual lease payments under noncancelable operating leases as
of June 13, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 41,035
2001........................................................ 26,290
2002........................................................ 26,290
2003........................................................ 26,290
2004........................................................ 26,290
--------
Total minimum lease payments...................... $146,195
========
</TABLE>
(4) NOTES PAYABLE
Notes payable consist of unsecured loans from individuals that are payable
on demand and accrue interest at 12%. Total borrowings under these
arrangements were $165,989 as of June 13, 1999.
(5) PRO FORMA INCOME TAXES (UNAUDITED)
Pro forma income taxes are provided to illustrate the impact of providing
income taxes based on FASB 109. Pro forma income tax benefit differs from
the amounts that would result from applying the federal statutory rate of
34% to the Company's net loss after the deduction of distributions to
F-106
<PAGE>
METROLINK INTERNET SERVICES, INC. AND METROLINK INTERNET SERVICES OF PORT ST.
LUCIE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
JUNE 13, 1999
(5) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
shareholders as compensation for the period from January 1, 1999 through
June 13, 1999, as follows:
<TABLE>
<S> <C>
Expected pro forma tax benefit............................ $(13,800)
Increase in valuation allowance........................... 13,800
--------
$ --
========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of June 13, 1999, are as follows:
<TABLE>
<S> <C>
Net operating loss carryforward............................ $50,000
Other...................................................... 3,000
-------
Gross deferred tax assets.................................. 53,000
Valuation allowance........................................ (53,000)
-------
Net deferred tax asset..................................... $ --
=======
</TABLE>
The pro forma net income information assumes that distributions to
shareholders, if any, are considered compensation expense. The valuation
allowance noted above is management's estimation of the recoverability of
the deferred tax asset in future periods.
(6) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the
Company's financial position, results of operation or liquidity.
F-107
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Global Datalink, Inc. as
of December 31, 1998 and July 7, 1999 and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1998 and
the period from January 1, 1999 through July 7, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Datalink, Inc as of
December 31, 1998 and July 7, 1999 and the results of its operations and its
cash flows for the year ended December 31, 1998 and the period from January 1,
1999 through July 7, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Orlando, Florida
March 24, 2000
F-108
<PAGE>
GLOBAL DATALINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JULY 7,
1998 1999
------------ --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 17,904 --
Receivables:
Trade, net of allowance for doubtful accounts of $11,342
and $61,559, respectively............................. 40,207 131,470
--------- --------
Total current assets.................................. 58,111 131,470
Property and equipment, net................................. 213,586 269,598
Total assets.......................................... $ 271,697 401,068
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 156,028 116,884
Accrued expenses.......................................... 39,485 116,703
Affiliate note payable.................................... 60,000 60,000
Current portion of capital lease obligations.............. 10,396 40,259
Deferred revenue.......................................... 306,413 372,737
--------- --------
Total current liabilities............................. 572,322 706,583
Capital lease obligations, less current portion............. 9,555 49,641
--------- --------
Total liabilities..................................... 581,877 756,224
Stockholders' deficit:
Common stock, $.001 par value. Outstanding 1,000,000
shares.................................................. 10,000 10,000
Accumulated deficit....................................... (320,180) (365,156)
--------- --------
Total stockholder's deficit........................... (310,180) (355,156)
--------- --------
Total liabilities and stockholders' deficit........... $ 271,697 401,068
========= ========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE>
GLOBAL DATALINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, 1998 THROUGH JULY 7, 1999
----------------- --------------------
<S> <C> <C>
Revenue:
Internet services revenue................................ $1,442,166 1,228,692
Enhanced services and other.............................. 162,945 100,965
---------- -----------
Total revenue........................................ 1,605,111 1,329,657
Direct Internet services costs............................. 934,768 605,179
---------- -----------
Gross profit........................................... 670,343 724,478
Selling, general and administrative
Salaries and employee benefits........................... 468,799 304,750
Other.................................................... 133,842 205,152
Depreciation expense..................................... 71,537 73,730
Advertising expense...................................... 165,492 62,297
Rent and occupancy....................................... 62,194 62,032
Travel and entertainment................................. 18,900 12,822
Insurance................................................ 6,644 6,765
Repairs and maintenance.................................. 455 264
---------- -----------
Total selling, general and administrative.............. 927,863 727,812
---------- -----------
Operating loss........................................... (257,520) (3,334)
Other income (expense)................................... (24,215) 4,447
Interest expense......................................... (29,142) (16,439)
Loss on sale of equipment................................ 45,527 (29,650)
---------- -----------
Loss before income tax benefit....................... (265,350) (44,976)
Income tax benefit....................................... -- --
---------- -----------
Net loss............................................. $ (265,350) (44,976)
========== ===========
Pro forma income tax benefit............................. $ -- --
========== ===========
Pro forma net loss....................................... $ (265,350) (44,976)
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE>
GLOBAL DATALINK, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
--------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997....................... 1,000,000 $10,000 (54,830) (44,830)
Net loss........................................... -- -- (265,350) (265,350)
--------- ------- -------- --------
BALANCE AT DECEMBER 31, 1998....................... 1,000,000 10,000 (320,180) (310,180)
Net loss........................................... -- -- (44,976) (44,976)
--------- ------- -------- --------
BALANCE AT JULY 7, 1999............................ 1,000,000 $10,000 (365,156) (355,156)
========= ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE>
GLOBAL DATALINK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, 1998 THROUGH JULY 7, 1999
----------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. $(244,716) (53,251)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization....................... 71,537 73,730
Loss on sale of fixed assets........................ 87,354 105,429
Changes in operating assets and liabilities,
excluding effects of business combinations:
Receivables....................................... 14,649 (91,263)
Prepaid expenses and other current assets......... 20 --
Accounts payable.................................. 43,732 (39,144)
Accrued expenses.................................. 34,611 77,218
Deferred revenue.................................. 162,303 54,777
--------- --------
Net cash provided by operating activities....... 178,630 127,496
--------- --------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements... (89,729) (128,742)
--------- --------
Net cash used in investing activities........... (89,729) (128,742)
--------- --------
Cash flows from financing activities:
Repayments of capitalized lease obligation............ (9,127) (16,658)
Repayments of notes payable........................... (42,607) --
--------- --------
Stockholder distribution................................ (31,923) --
Supplemental disclosure of cash flow information:
During the year ended December 31, 1998; and the
period from January 1, 1999 to July 7, 1999, the
Company paid approximately $0 and $8,285 for
interest.
Supplemental disclosure of non-cash financing and
investing activity:
During the period from January 1, 1999 to July 7,
1999, the Company incurred a capital lease
obligation and recorded the related equipment....... 6,942 95,464
========= ========
Net cash used in financing activities........... (83,657) --
--------- --------
Net increase (decrease) in cash and cash
equivalents................................... 5,244 (16,658)
Cash and cash equivalents:
Beginning period...................................... 12,660 17,904
--------- --------
End of period......................................... $ 17,904 --
========= ========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE>
GLOBAL DATALINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JULY 7, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Global Datalink, Inc. (or the Company) was incorporated on January 10, 1995
to capitalize on the growing demand for Internet access and enhanced services by
consumers and business users in Central Florida.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount.
F-113
<PAGE>
GLOBAL DATALINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JULY 7, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(G) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(H) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Revenue from consulting services is recognized as the services
are provided. Revenue from hardware and software sales is recognized upon
shipment of the respective products.
(I) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $165,492 and $62,297 for the year ended December 31, 1998 and for
the period from January 1, 1999 through July 7, 1999, respectively.
(J) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and the relatively minor balances of each individual account. At
December 31, 1998 and July 7, 1999, the fair value of the Company's financial
instruments approximate their carrying value based on their terms and interest
rates.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires the Company to report in its
F-114
<PAGE>
GLOBAL DATALINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JULY 7, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements, in addition to its net income (loss), comprehensive income
(loss), which includes all changes in equity during a period from non-owner
sources including, as applicable, foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain investments in
debt and equity securities. There were no differences between the Company's
comprehensive loss and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company, as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137, which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-115
<PAGE>
GLOBAL DATALINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JULY 7, 1999
(2) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases stated at
cost, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 7,
1998 1999
------------ --------
<S> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $23,877 and
$126,380............................................ $ 136,261 263,580
Furniture and fixtures................................ 8,591 10,377
Leasehold improvements................................ 170,312 171,000
--------- --------
315,164 444,957
Less accumulated depreciation and amortization,
including amounts related to capital leases of
$9,887 and $38,740.................................. (101,578) (175,309)
--------- --------
Total............................................. $ 213,586 269,598
========= ========
</TABLE>
(3) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2001. Rent expense associated with operating leases for
the year ended December 31, 1998 and the period from January 1, 1999 through
July 7, 1999 was $62,194 and $62,032, respectively.
Future minimum annual lease payments under capital and noncancelable
operating leases as of July 7, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
1999.................................................... $ 39,518 9,348
2000.................................................... 45,858 828
2001.................................................... 36,750 --
2002.................................................... 3,033 --
-------- ------
Total minimum payments.............................. 125,159 10,176
======
Less amount representing interest....................... (16,361)
--------
Present value of net minimum lease payments......... 108,798
Less current portion.................................... (40,259)
--------
$ 49,641
========
</TABLE>
F-116
<PAGE>
GLOBAL DATALINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND JULY 7, 1999
(4) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% to the Company's net loss as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
DECEMBER 31, THROUGH
1998 JULY 7, 1999
------------ ---------------
<S> <C> <C>
Expected income tax benefit....................... $(83,203) (18,105)
State income taxes, net of federal benefit........ -- --
Increase in valuation allowance................... 79,990 15,926
Other............................................. 3,213 2,180
-------- -------
$ -- --
======== =======
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JULY 7,
1998 1999
------------ --------
<S> <C> <C>
Net operating loss carryforward....................... $ 115,617 114,558
Allowance for doubtful accounts....................... 4,480 24,316
--------- --------
Gross deferred tax assets........................... 120,097 138,874
Valuation allowance................................. (120,097) (138,874)
--------- --------
Net deferred tax asset................................ $ -- --
========= ========
</TABLE>
The valuation allowance noted above is provided based on management's
estimation of the recoverability of the deferred tax asset in future periods.
(5) RELATED PARTY TRANSACTION
A shareholder and officer of the Company loaned $60,000 to the Company to
fund operations. In conjunction with the acquisition of the Company by DURO
Communications, Inc. as described in note (6) below, the loan was repaid.
(6) SUBSEQUENT EVENT
On July 7, 1999, DURO Communications, Inc. acquired all of the outstanding
capital stock of the Company. The accompanying financial statements do not
include the effect of any of adjustments resulting from the transaction.
F-117
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Duro Communications Inc.
We have audited the accompanying combined balance sheets of Southern
Kentucky Network, Inc. (d/b/a KIH Online) and Touchtone Communications, Inc.
(collectively, the "Company") as of December 31, 1998 and August 26, 1999, and
the related combined statements of operations and accumulated deficit, and cash
flows for the years ended December 31, 1997 and December 31, 1998 and for the
period from January 1, 1999 through August 26, 1999. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
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 combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and August 26, 1999 and the results of their operations and
cash flows for the years ended December 31, 1997 and 1998 and for the period
from January 1, 1999 through August 26, 1999, in conformity with generally
accepted accounting principles.
KPMG LLP
Detroit, Michigan
March 3, 2000
F-118
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 26,
1998 1999
------------ ----------
<S> <C> <C>
ASSETS
Cash........................................................ $ 24,949 20,760
Trade receivables........................................... 117,974 411,355
Prepaid expenses and other current assets................... 42,579 438,413
----------- ----------
Total current assets...................................... 185,502 870,528
Property and equipment, net................................. 759,498 390,925
Customer database........................................... 353,252 1,638,946
Other noncurrent assets..................................... -- 22,284
----------- ----------
Total assets............................................ $ 1,298,252 2,922,683
=========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Accounts payable............................................ $ 1,197,786 907,027
Current portion of notes payable............................ 3,044,991 3,681,594
Current portion of capital lease obligations................ 1,625 6,588
Accrued interest............................................ 56,844 96,815
Other accrued liabilities................................... 57,109 911,194
Deferred revenue............................................ 568,942 847,057
----------- ----------
Total current liabilities................................. 4,927,297 6,450,275
----------- ----------
Capital lease obligations, less current portion............. 13,213 2,594
Notes payable, less current portion......................... 1,126,161 1,665,006
----------- ----------
Total liabilities....................................... 6,066,671 8,117,875
----------- ----------
Stockholder's deficit
Common stock, no par value.................................. 24,000 24,000
Accumulated deficit......................................... (4,792,419) (5,219,192)
----------- ----------
Total stockholder's deficit............................... (4,768,419) (5,195,192)
----------- ----------
Total liabilities and stockholder's equity................ $ 1,298,252 2,922,683
=========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-119
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
COMBINED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999
------------------------ THROUGH
1997 1998 AUGUST 26, 1999
----------- ---------- ---------------
<S> <C> <C> <C>
Internet services revenue.............................. $ 1,635,095 3,407,542 3,239,392
Direct Internet services costs......................... 2,700,365 2,078,374 1,551,398
----------- ---------- ----------
Gross profit (loss)................................ (1,065,270) 1,329,168 1,687,994
Selling, general, and administrative expenses.......... 1,788,362 1,968,535 1,892,506
----------- ---------- ----------
Loss from operations............................... (2,853,632) (639,367) (204,512)
Other income (expense):
Other income (expense)............................... (85) 77,133 --
Interest expense..................................... (232,662) (342,802) (222,261)
----------- ---------- ----------
Net loss........................................... (3,086,379) (905,036) (426,773)
Accumulated deficit at beginning of period........... (801,004) (3,887,383) (4,792,419)
----------- ---------- ----------
Accumulated deficit at end of period................. $(3,887,383) (4,792,419) (5,219,192)
=========== ========== ==========
Pro forma income taxes............................... $ -- -- --
=========== ========== ==========
Pro forma net loss................................... $(3,086,379) (905,036) (426,773)
=========== ========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-120
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, PERIOD FROM
---------------------- JANUARY 1, 1999
1997 1998 THROUGH AUGUST 26, 1999
----------- -------- -----------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ $(3,086,379) (905,036) (426,773)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization............... 714,944 816,878 580,716
Loss on disposal of property and
equipment................................. -- 77,744 --
Changes in operating assets and liabilities:
Trade receivables......................... 6,458 (96,727) (293,381)
Prepaid expenses and other current
assets.................................. (3,283) (39,296) (418,118)
Accounts payable.......................... 335,180 (58,886) (290,759)
Other accrued liabilities................. 66,732 (12,574) 854,085
Accrued interest.......................... 97,564 (42,467) 39,971
Deferred revenue.......................... 248,975 280,952 278,115
----------- -------- ----------
Net cash (used in) provided by operating
activities.............................. (1,619,809) 20,588 323,856
----------- -------- ----------
Cash flows from investing activities:
Purchase of property and equipment.......... (416,659) (101,924) (92,014)
Acquisition of customer database............ (1,672) (376,356) (1,405,823)
----------- -------- ----------
Net cash used in investing activities..... (418,331) (478,280) (1,497,837)
----------- -------- ----------
Cash flows from financing activities:
Proceeds from notes payable from banks and
others.................................... 2,134,133 335,025 149,000
Payments on notes payable to banks and
others.................................... (60,789) (99,840) (175,997)
Proceeds from notes payable to related
parties................................... 21,780 213,872 1,375,000
Payments on notes payable to related
parties................................... -- (34,126) (172,555)
Payments on capital lease obligations....... -- (6,942) (5,656)
----------- -------- ----------
Net cash provided by financing
activities.............................. 2,095,124 407,989 1,169,792
----------- -------- ----------
Net increase (decrease) in cash........... 56,984 (49,703) (4,189)
Cash, beginning of period......................... 17,668 74,652 24,949
----------- -------- ----------
Cash, end of period............................... $ 74,652 24,949 20,760
=========== ======== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest.......................... $ 135,098 385,269 182,290
=========== ======== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-121
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(1) ORGANIZATION AND BASIS OF PRESENTATION
Southern Kentucky Network, Inc. (d/b/a KIH Online) is an Internet service
provider (ISP) providing Internet connectivity and web hosting services
throughout the state of Kentucky since its inception in 1995. Touchtone
Communications, Inc. ("Touchtone") was formed in 1998 to provide local exchange
and long distance telephone service in the State of Kentucky. Touchtone's
operations to date have consisted primarily of procuring telephone equipment and
operating licenses to support future operations.
The accompanying financial statements reflect the combined presentation of
Southern Kentucky Network, Inc. and Touchtone Communications, Inc.
(collectively, the "Company") as entities operating under common control and
ownership. The goal of the Company is to become a strong regional provider of
full service Internet connectivity, enhanced Internet and telephony services.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, computer equipment, furniture and fixtures, all of which are stated
at cost. Equipment under capital lease is stated at the present value of minimum
lease payments at the inception of the lease.
Depreciation on property and equipment is computed using the straight-line
method over their estimated useful lives or lease term.
(B) CUSTOMER DATA BASE
Customer data base consists of customer lists purchased from various
companies. The cost of the customer data base is amortized straight line over
the estimated useful life of five years, based on the estimated churn rate.
(C) REVENUE RECOGNITION AND DEFERRED REVENUE
The Company's customers generally pay for service in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
(D) INCOME TAXES
No provision for income taxes has been provided for the Company since, by
election of the stockholders, the Company is treated under Subchapter S of the
Internal Revenue Code. Therefore, tax losses and taxable income are allocated to
the individual stockholders.
(E) USE OF ESTIMATES
Management of the Company has made estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial
F-122
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
(F) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions
of 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.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE DECEMBER 31, AUGUST 26,
(YEARS) 1998 1999
----------- ------------ ----------
<S> <C> <C> <C>
Computer equipment....................................... 3 $ 2,150,814 2,200,314
Furniture and fixtures................................... 7 13,958 56,471
Leasehold improvements................................... 8 54,896 54,896
----------- ----------
2,219,668 2,311,681
Less accumulated depreciation and amortization........... (1,460,170) (1,920,756)
----------- ----------
Net property and equipment............................. $ 759,498 390,925
=========== ==========
</TABLE>
Depreciation expense for the periods ended December 31, 1997 and 1998, and
the period from January 1, 1999 through August 26, 1999 was $717,944, $792,101
and $460,587, respectively.
(4) INTANGIBLE ASSETS
Intangible assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 26,
1998 1999
------------ ----------
<S> <C> <C>
Customer base........................................ $ 378,056 1,783,879
Accumulated amortization............................. (24,804) (144,933)
--------- ----------
$ 353,252 1,638,946
========= ==========
</TABLE>
Intangible assets are amortized using the straight-line method over their
estimated useful lives.
F-123
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(5) LEASES
The Company has a capital lease for equipment, which will expire in two
years.
The Company also has a noncancelable operating lease for office space at its
London, Kentucky location that began January 1, 1999 for a five year term at a
base rate of $48,000 per year. The Company is required to pay all executory
costs, such as property taxes, maintenance, and insurance. Rental expense for
all operating leases during 1999 totaled $376,258.
Future minimum lease payments under noncancelable operating leases and
future minimum capital lease payments as of August 26, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Period ending August 26:
2000...................................................... $ 6,588 44,355
2001...................................................... 2,594 53,226
2002...................................................... -- 54,557
2003...................................................... -- 55,887
2004...................................................... -- 55,887
Thereafter.............................................. -- 263,912
------- --------
Total minimum lease payments.......................... 9,182 527,824
========
Less current portion of capital lease obligations........... (6,588)
-------
Capital lease obligations, less current portion............. $ 2,594
=======
</TABLE>
F-124
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(6) NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 26,
1998 1999
------------ ----------
<S> <C> <C>
Bank note payable, secured by equipment, with principal and
interest payments of $2,573 due monthly. Interest is
calculated at 10%. The note matures on August 10, 2001.... $ -- 67,032
Bank note payable, secured by equipment, with principal and
interest payable at maturity. Interest is calculated at
8%........................................................ 1,600,000 1,585,739
Bank term note; secured by equipment, with principal and
interest payable on demand. Interest is calculated at
9.5%...................................................... 250,032 250,032
Unsecured installment note; with principal of $9,000 for the
first 20 months paid monthly and $8,000 for the last
payment. The note matures on November 15, 2000 with no
interest due.............................................. 206,000 134,000
Bank note payable, with principle and interest payments of
$3,582 due monthly. Interest is calculated at 10%. The
note matures on May 27, 2003.............................. -- 135,507
Note payable to related party; with principal and interest
payments of $10,074 due monthly. Interest is calculated at
7.75%. The note matures in October 2012................... 1,031,000 1,015,980
Related party interest bearing advances at 10.5% per year,
due on demand............................................. 924,945 2,150,310
Other....................................................... 159,175 8,000
---------- ---------
Total notes payable....................................... 4,171,152 5,346,600
Less current portion........................................ 3,044,991 3,681,594
---------- ---------
Notes payable, less current portion..................... $1,126,161 1,665,006
========== =========
</TABLE>
The aggregate annual required repayments under the notes payable for the
periods ending August 26 2000, 2001, 2002, and thereafter are $3,681,594,
$328,538, $300,668, and $1,035,799, respectively.
(7) RELATED PARTIES TRANSACTIONS
The Company had the following transactions with related parties (exclusive
of long-term debt items disclosed in note 6):
The Company leases its London, Kentucky office space from one of its major
stockholders. The lease expires in January, 2004 at a base rate of $48,000 per
year. The Company is required to pay all executory costs, such as real estate
taxes, maintenance, and insurance.
The Company also received a $870,000 advance from Duro Communications, Inc.
This advance is included in the client's other accrued liabilities.
F-125
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(8) ACQUISITIONS
During 1999, the Company purchased the rights to customer data bases from
various companies. The acquisitions totaled $1,405,823, which were made with
cash and were accounted for as purchase transactions. The purchase price for
each was allocated solely to customer database.
(9) SUBSEQUENT EVENTS
On April 27, 1999, a Letter of Intent was signed confirming the intention of
the Company to sell all assets to DURO Communications, Inc. for approximately
$17 million. In connection with the sale of assets, all notes payable and
operating lease obligations will be settled. This sale was closed on August 27,
1999 in accordance with the Letter of Intent.
(10) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 1(d), the Company is not subject to federal and state
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
Company was subject to federal and state income taxes. Pro forma tax benefit
differs from the amounts that would result from applying the federal statutory
rate of 34% to the Company's net loss for the years ended December 31, 1997 and
1998 and the period from January 1, 1999 through August 26, 1999.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- AUGUST 26,
1997 1998 1999
----------- -------- ----------
<S> <C> <C> <C>
Expected pro forma tax benefit.............................. $(1,044,800) (325,600) (145,100)
State income taxes, net of federal benefit.................. -- -- --
Increase in valuation allowance............................. 1,044,800 325,600 145,100
----------- -------- --------
$ -- -- --
=========== ======== ========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31, 1998 and August 26, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 26,
1998 1999
------------ ----------
<S> <C> <C>
Net operating loss carryforward............................. $1,973,700 2,103,300
Deferred revenue............................................ 45,600 64,900
Other....................................................... 5,200 5,200
Gross deferred tax assets................................. 2,024,500 2,173,400
Valuation allowance....................................... (2,024,500) (2,173,400)
---------- ----------
Net deferred tax asset...................................... $ -- --
========== ==========
</TABLE>
F-126
<PAGE>
SOUTHERN KENTUCKY NETWORK, INC. (D/B/A KIH ONLINE)
AND TOUCHTONE COMMUNICATIONS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND AUGUST 26, 1999
(10) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
The pro forma net income information assumes that distributions, if any, to
shareholders are considered compensation expense. The valuation allowance noted
above is provided based on management's estimation of the recoverability of the
deferred tax asset in future periods.
F-127
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Gibralter Data Services
(A Division of Gibralter Publishing, Inc.) as of December 31, 1998 and
September 22, 1999, and the related statements of operations and owner's
deficit, and cash flows for the year ended December 31, 1998 and the period from
January 1, 1999 through September 22, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gibralter Data
Services, Inc. as of December 31, 1998 and September 22, 1999, and the results
of its operations and its cash flows for the year ended December 31, 1998 and
period from January 1, 1999 through September 22, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Memphis, Tennessee
March 10, 2000
F-128
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 22,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Trade receivables, net of allowance for doubtful accounts
of $3,500 and $3,740, respectively...................... $ 490 4,425
Prepaid expenses and other................................ 6,526 --
Due from affiliate, net................................... -- 101,659
--------- --------
Total current assets.................................... 7,016 106,084
Property and equipment, net................................. 322,198 392,619
--------- --------
Total assets............................................ $ 329,214 498,703
========= ========
LIABILITIES AND OWNER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 91,323 230,497
Accrued expenses.......................................... 20,798 30,659
Due to affiliate, net..................................... 214,038 --
Current portion of capital lease obligations.............. 54,282 99,208
Deferred revenue.......................................... 96,731 181,585
--------- --------
Total current liabilities............................... 477,172 541,949
Capital lease obligations, less current portion............. 82,381 101,295
--------- --------
Total liabilities....................................... 559,553 643,244
Owner's deficit............................................. (230,339) (144,541)
--------- --------
Total liabilities and owner's deficit................... $ 329,214 498,703
========= ========
</TABLE>
See accompanying notes to financial statements.
F-129
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
STATEMENTS OF OPERATIONS AND OWNER'S DEFICIT
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 SEPTEMBER 22, 1999
----------------- ------------------
<S> <C> <C>
Internet services revenue................................... $ 698,874 1,215,808
Internet services costs..................................... 393,054 570,172
--------- ---------
Gross profit............................................ 305,820 645,636
Selling, general and administrative:
Salaries and employee benefits............................ 153,425 197,172
Marketing expense......................................... 99,078 36,089
Bad debt expense.......................................... 3,500 240
Management fee expense.................................... 210,049 228,543
--------- ---------
Total selling, general and administrative............... 466,052 462,044
Interest expense............................................ 20,648 27,075
Depreciation expense........................................ 49,459 70,719
--------- ---------
Net income (loss)....................................... (230,339) 85,798
--------- ---------
Owner's deficit at beginning of period.................... -- (230,339)
--------- ---------
Owner's deficit at end of period.......................... $(230,339) (144,541)
========= =========
Proforma income tax benefit................................. $ -- --
========= =========
Proforma net income (loss).................................. $(230,339) 85,798
========= =========
</TABLE>
See accompanying notes to financial statements.
F-130
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
YEAR ENDED THROUGH
DECEMBER 31, 1998 SEPTEMBER 22, 1999
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(230,339) 85,798
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 49,459 70,719
Bad debt expense........................................ 3,500 240
Changes in operating assets and liabilities:
Trade receivables..................................... (3,990) (4,175)
Prepaid expenses and other current assets............. (6,526) 6,526
Accounts payable...................................... 91,323 139,174
Accrued expenses...................................... 20,798 9,861
Deferred revenue...................................... 96,731 84,854
--------- --------
Net cash provided by operating activities........... 20,956 392,997
--------- --------
Cash flows used in investing activities--acquisition of
property and equipment.................................... (200,357) (17,500)
--------- --------
Cash flows from financing activities:
Advances (repayments) under due from affiliate, net....... 214,038 (315,697)
Repayments of capital lease obligations................... (34,637) (59,800)
--------- --------
Net cash provided by (used in) financing
activities........................................ 179,401 (375,497)
--------- --------
Cash and cash equivalents at end of period.......... $ -- --
========= ========
</TABLE>
Supplemental disclosure of cash flow information:
During the year ended December 31, 1998, and during the period ended
September 22, 1999, the Company paid approximately $20,600 and $27,100,
respectively, for interest.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating approximately $171,300 and $123,600 for the year ended December
31, 1998 and for the period from January 1, 1999 through September 22, 1999,
respectively.
See accompanying notes to financial statements.
F-131
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Gibralter Data Services, (the "Company"), a division of Gibralter
Publishing, Inc. ("Gibralter"), is a regional provider of Internet access for
southeastern North Carolina and commenced operations on January 1, 1998 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through integration and growth of existing
independent Internet service providers in targeted geographic regions.
The accompanying financial statements include the accounts of Gibralter Data
Services as a division of Gibralter, assuming it had been operated separately as
of January 1, 1998 and thereafter.
The financial statements include expenses which have been allocated to the
Company by Gibralter on a specific identification basis plus its allocated share
of the costs associated with resources it shares with Gibralter. Allocations
from Gibralter for such shared resources have been made primarily on a
proportional cost method based on related revenues. Management of the Company
believes these allocations are reasonable. The financial statements of the
Company do not necessarily reflect the results of operations or financial
position that would have existed had the Company been an independent company.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence on strategic alliances, and
the limited history of the need for Internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis. The competitive conditions could result in
additional pricing programs, an increase in marketing costs, limited ability to
expand its subscriber base and result in increased attrition in the existing
subscriber base. There can be no assurance that growth in the Company's revenues
or subscriber base will continue or that the Company will be able to achieve or
sustain profitability or positive cash flow.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the estimated useful lives of the
assets.
F-132
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Assets to be disposed of are reported at the lower of the carrying value
or fair value, less costs to sell.
(E) INCOME TAXES
The Company has elected to be taxed and has operated as an S-Corp and
therefore was exempt from taxation under the provisions of the Internal Revenue
Code (the Code) and applicable state tax regulations. Under the provisions of
the Code, the stockholders include their prorata share of the Company's income
or loss on their personal income tax returns.
The unaudited pro forma income tax information included in statements of
operations and Note 6 is presented in accordance with Statement of Financial
Accounting Financial Standards No. 109 (Statement No. 109), Accounting for
Income Taxes, as if the Company had been subject to Federal and state income
taxes during the year ended December 31, 1998 and for the period from
January 1, 1999 through September 22, 1999.
(F) REVENUE RECOGNITION
The Company earns revenue by providing Internet access to the consumer over
a period of time. Revenue related to Internet services is recognized as the
services are provided. Revenue is deferred and amortized to operations for
amounts billed relating to future periods. Installation and customer set up fees
are recognized over the estimated life of the customer's contract, generally one
year.
(G) ADVERTISING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $99,000 and $36,000 for the year ended December 31, 1998 and for
the period from January 1, 1999 through September 22, 1999, respectively.
(H) INTERNET SERVICES OPERATING COSTS
Internet services operating costs primarily consist of telecommunications
expenses inherent in providing the Internet services.
The Company primarily utilized two communication service providers to
provide access to the Internet. If the Company is unable to continue its
relationship with these communication service
F-133
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
providers, management believes that it could shift to alternative providers
without adversely affecting it operations.
(I) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires the Company to report in its financial statements, in addition to its
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. There were no
differences between the Company's comprehensive income (loss) and its net income
(loss) as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137, which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-134
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AT END
OF PERIOD AND EXPENSES OF PERIOD
---------- ------------ ---------
<S> <C> <C> <C>
For the year ended December 31, 1998:
Allowance for doubtful accounts............. $ -- 3,500 3,500
====== ===== =====
For the period from January 1, 1999 through
September 22, 1999:
Allowance for doubtful accounts............. $3,500 240 3,740
====== ===== =====
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, stated at
cost, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 22,
1998 1999
------------ -------------
<S> <C> <C>
Internet access connection equipment, including
amounts related to capital leases of $171,300 and
$294,940, respectively............................ $365,155 500,095
Computer equipment and software..................... 6,502 12,702
-------- -------
371,657 512,797
Less accumulated depreciation and amortization...... (49,459) (120,178)
-------- -------
Total............................................. $322,198 392,619
======== =======
</TABLE>
(4) RELATED PARTY TRANSACTIONS
Operating as a division of Gibralter, the Company does not maintain a
segregated bank account. As such, net cash receipts (payments) are recorded
through "due to affiliate". Interest expense (income) is recorded on the average
outstanding payable to (receivable from) affiliate and is reflected in the
accompanying financial statements. Interest is recorded at the average borrowing
rate of Gibralter, 10.5% in both 1998 and 1999.
Management fee expense is recorded to reflect allocated indirect costs
associated with shared resources with Gibralter. These costs include, but are
not limited to, management salaries, insurance, rent, utilities, accounting and
office supplies. The expense allocation is based on relative revenues of the
companies.
(5) LEASES
The Company leases certain Internet access connection equipment under
capital leases expiring at various dates through 2002.
F-135
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(5) LEASES (CONTINUED)
Future minimum annual lease payments under capital leases, by calendar year,
as of September 22, 1999 are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 38,192
2000........................................................ 116,291
2001........................................................ 69,115
2002........................................................ 1,074
--------
Total minimum payments.................................... 224,672
Less amount representing interest (average rate 11.25%)..... (24,249)
--------
Present value of net minimum lease payments............... 200,503
Less current portion........................................ (99,208)
--------
$101,295
========
</TABLE>
(6) PRO FORMA INCOME TAXES (UNAUDITED)
Pro Forma income tax (benefit) differs from the amounts that would result
from applying the federal statutory rate of 34% to the Company's net income
(loss) are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
1999
YEAR END THROUGH
DECEMBER 31, SEPTEMBER 22,
1998 1999
------------ -------------
<S> <C> <C>
Expected tax (benefit) expense...................... $(78,315) 29,171
State income taxes, net of federal benefit.......... (10,642) 3,964
Change in valuation allowance....................... 88,957 (33,135)
-------- -------
$ -- --
======== =======
</TABLE>
F-136
<PAGE>
GIBRALTER DATA SERVICES
(A DIVISION OF GIBRALTER PUBLISHING, INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 22, 1999
(6) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
Temporary differences that give rise to the components of pro forma deferred
tax assets as of December 31, 1998 and September 22, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 22,
1998 1999
----------- -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward................... $59,853 34,859
Deferred liabilities, principally due to income
recognition..................................... 37,358 70,128
Other............................................. 1,352 1,444
------- -------
Gross deferred tax assets....................... 98,563 106,431
Less valuation allowance........................ (88,957) (55,822)
------- -------
Deferred tax assets............................. 9,606 50,609
Deferred tax liabilities--principally due to
differences in depreciation....................... 9,606 50,609
------- -------
Pro forma net deferred tax liability............ $ -- --
======= =======
</TABLE>
At September 22, 1999, the Company had incurred cumulative net operating
losses for federal income tax purposes of approximately $90,300, which were
available to the stockholders as an S-corp. Had the Company been structured as a
C-corp for federal income tax purposes, the amount would have been available to
offset future federal taxable income, if any, through 2014. Accordingly, the
utilization of a portion of the net operating loss carryforward may have been
limited. Due to this limitation, and the uncertainty regarding the ultimate
utilization of the net operating loss carryforward, no tax benefit for losses
has been provided by the Company and a valuation allowance has been recorded for
the entire amount of the deferred tax asset for purposes of calculating pro
forma tax expense.
(7) SUBSEQUENT EVENT (UNAUDITED)
On September 22, 1999 DURO Communications, Inc. purchased certain assets and
assumed certain liabilities of the Company. The accompanying financial
statements do not include the effect of any adjustments which resulted from the
acquisition transaction.
F-137
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors:
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Bitstorm, Inc. as of
December 31, 1998 and October 14, 1999, and the related statements of
operations, shareholders' capital, and cash flows for the year ended
December 31, 1998 and the period January 1, 1999 through October 14, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bitstorm, Inc. as of
December 31, 1998 and October 14, 1999, and the results of its operations and
its cash flows for the year ended December 31, 1998 and the period from
January 1, 1999 through October 14, 1999 in conformity with generally accepted
accounting principles.
KPMG LLP
Detroit, Michigan
February 21, 2000
F-138
<PAGE>
BITSTORM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 14,
1998 1999
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 71,513 15,425
Trade accounts receivable................................. 20,300 28,197
-------- --------
Total current assets.................................... 91,813 43,622
Property and equipment, net of accumulated depreciation
of $43,912 and $88,518, respectively...................... 138,078 193,054
Other assets................................................ 4,257 4,110
-------- --------
Total assets............................................ $234,148 240,876
======== ========
LIABILITIES AND SHAREHOLDERS' CAPITAL
Current liabilities:
Accounts payable and accrued expenses..................... $ 54,569 33,968
Deferred revenues......................................... 74,978 108,537
Note payable to related party............................. 24,221 24,221
-------- --------
Total current liabilities............................... 153,768 166,726
-------- --------
Shareholders' capital:
Share capital $1 par value, authorized 100,000 shares,
21,500 issued and outstanding........................... 21,500 21,500
Retained earnings......................................... 58,880 52,560
-------- --------
Total shareholders' capital............................. 80,380 74,060
-------- --------
Total liabilities and stockholders' capital............. $234,148 240,786
======== ========
</TABLE>
See accompanying notes to financial statements.
F-139
<PAGE>
BITSTORM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, THROUGH
1998 OCTOBER 14, 1999
------------- -----------------
<S> <C> <C>
Internet services revenue................................... $514,800 652,199
Direct Internet services costs.............................. 223,316 293,371
-------- -------
Gross profit.............................................. 291,484 358,828
Selling, general and administrative expenses
Salaries and wage expense................................. 92,004 124,993
Administrative expense.................................... 40,468 62,002
Advertising expense....................................... 7,464 37,620
Professional fees......................................... 15,551 12,363
Lease expense............................................. 20,545 14,565
Repairs and Maintenance................................... 7,474 10,203
Utilities................................................. 3,002 3,863
Insurance................................................. 5,195 6,819
Other..................................................... 6,000 5,756
-------- -------
Total selling, general and administrative expenses...... 197,703 278,188
-------- -------
Income before depreciation expense...................... 93,781 80,640
Depreciation expense...................................... (31,623) (36,960)
-------- -------
Net Income.............................................. $ 62,158 43,680
======== =======
Pro forma income taxes...................................... $ 5,500 (1,200)
======== =======
Pro forma net income........................................ $ 56,658 44,880
======== =======
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
BITSTORM, INC.
STATEMENTS OF SHAREHOLDERS' CAPTIAL
<TABLE>
<CAPTION>
SHARE CAPITAL
------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997............................ 21,500 $21,500 31,296 52,796
Distributions to shareholders........................... -- -- (34,574) (34,574)
Net income.............................................. -- -- 62,158 62,158
------ ------- -------- --------
BALANCES AT DECEMBER 31, 1998........................... 21,500 21,500 58,880 80,380
Distributions to shareholders........................... -- -- (50,000) (50,000)
Net income.............................................. -- -- 43,680 43,680
------ ------- -------- --------
BALANCE AT OCTOBER 14, 1999............................. 21,500 $21,500 52,560 74,060
====== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
BITSTORM, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1999
DECEMBER 31, THROUGH
1998 OCTOBER 14, 1999
------------ ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 62,158 43,680
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 31,623 36,960
Changes in operating assets and liabilities:
Trade accounts receivable............................. 17,412 (7,897)
Other assets.......................................... (2) 147
Accounts payable and accrued expenses................. 5,580 (20,601)
Deferred revenues..................................... 74,978 33,559
-------- -------
Net cash provided by operating activities............. 191,749 85,848
-------- -------
Cash flows from investing activities--capital
expenditures.............................................. (75,325) (91,936)
Cash flows from financing activities:
Proceeds from notes payable borrowings.................... 24,221 --
Repayments of notes payable............................... (56,101) --
Distributions to shareholders............................. (34,574) (50,000)
-------- -------
Net cash used in financing activities................. (66,454) (50,000)
-------- -------
Net increase (decrease) in cash....................... 49,970 (56,088)
Cash at beginning of period................................. 21,543 71,513
-------- -------
Cash at end of period....................................... $ 71,513 15,425
======== =======
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
BITSTORM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 14, 1999
1. GENERAL INFORMATION
Bitstorm, Inc. (the "Company"), a Florida corporation, was established to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through the phased acquisition, integration, and
growth of existing independent Internet service providers in targeted geographic
regions. The Company commenced operations in December 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Company prepares its financial statements on the accrual basis of
accounting.
(B) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of computer equipment and furniture
and fixtures, all of which is stated at cost. Depreciation, is recorded, for
financial statement reporting purposes, using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Furniture and Fixtures...................................... 8 years
Equipment................................................... 5 years
</TABLE>
(C) REVENUE RECOGNITION AND DEFERRED REVENUE
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
(D) USE OF ESTIMATES
The financial statements have been prepared in accordance with generally
accepted accounting principles which 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 amount of revenue and expenses during the reporting
period. Actual results may differ from those estimates.
(E) INCOME TAXES
Under the provisions of the IRC and applicable state laws, the Company's
shareholders have elected to be treated under provisions of subchapter S and,
accordingly, the results of the company's operations are includable in the tax
returns of the shareholders. Therefore, no provision for income taxes has been
included in the accompanying financial statements.
(F) ECONOMIC CONCENTRATIONS
The Company provides internet services in only one geographic location,
Orlando, Florida and it surrounding suburbs. Future operations could be affected
by changes in economic or other conditions in that geographical area or by
changes in the demand for such services.
F-143
<PAGE>
BITSTORM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND OCTOBER 14, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) ADVERTISING EXPENSE
Advertising expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs. The Company expenses
the cost of advertising and promoting its services as incurred. For year ended
December 31, 1998 and the period from January 1, 1999 through October 14, 1999
advertising expense totaled $37,621 and $7,464, respectively.
(3) LEASES
The Company leases equipment and office space under noncancelable operating
leases expiring at various dates through 2002.
Future minimum annual lease payments under noncancelable operating leases
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 14,
1998 1999
------------ -----------
<S> <C> <C>
1999................................................. $ 9,600 5,500
2000................................................. 5,600 22,867
2001................................................. -- 17,967
2002................................................. -- 6,067
------- -------
Total minimum lease payments................... $15,200 52,401
======= =======
</TABLE>
(4) NOTE PAYABLE
The Company has a non-interest bearing unsecured note payable with a related
party for $24,221 that is due on demand.
(5) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operation or liquidity.
(6) SUBSEQUENT EVENTS
On October 14, 1999, the Company's assets were sold to DURO
Communications, Inc. for approximately $1.76 million. In connection with this
sale of assets, all notes payable and operating lease obligations were paid in
full at closing.
(7) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 2(e), the company is not subject to Federal and State
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
company was subject to Federal and State income taxes. Pro forma tax expense
(benefit) differs from the amounts that would result from applying the federal
statutory rate of
F-144
<PAGE>
BITSTORM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND OCTOBER 14, 1999
(7) PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
34% to the Company's net income for the year ended December 31, 1998 and the
period from January 1, 1999 through October 14, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
YEAR ENDING THROUGH
DECEMBER 31, 1998 OCTOBER 14, 1999
------------------ -----------------
<S> <C> <C>
Expected pro forma tax expense (benefit).................... $9,700 (2,200)
State income taxes, net of federal benefit.................. 1,000 (200)
Effect of graduated rates................................... (5,200) 1,200
------ ------
$5,500 (1,200)
====== ======
</TABLE>
The pro forma net income information assumes that distributions, if any, to
shareholders are considered compensation expense.
There are no significant temporary differences that would give rise to
components of pro forma deferred tax assets and liabilities as of December 31,
1998 and October 14, 1999.
F-145
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Internet of Western North
Carolina, Inc. (d/b/a Internet of Asheville) as of December 31, 1998 and
October 26, 1999, and the related statements of operations, stockholders'
deficit, and cash flows for the period from May 13, 1998 (inception) through
December 31, 1998 and for the period from January 1, 1999 through October 26,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Internet of Western North
Carolina, Inc. (d/b/a Internet of Asheville) as of December 31, 1998 and
October 26, 1999, and the results of its operations and its cash flows for the
period from May 13, 1998 (inception) through December 31, 1998 and for the
period from January 1, 1999 through October 26, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Orlando, Florida
March 24, 2000
F-146
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 26,
1998 1999
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 36,739 13,115
Trade receivables, net of allowance for doubtful accounts
of $26,587 and $70,006, respectively.................... 38,912 30,064
Prepaid expenses.......................................... 1,893 --
---------- ----------
Total current assets.................................... 77,544 43,179
Deposits.................................................... -- 7,000
Due from stockholder........................................ -- 15,464
Property and equipment, net................................. 196,483 210,556
Goodwill, net of accumulated amortization of $107,369 and
$270,583, respectively.................................... 871,912 1,643,698
---------- ----------
Total assets............................................ $1,145,939 1,919,897
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable.......................................... $ 204,106 457,594
Accrued expenses.......................................... 53,444 87,845
Lines of credit, notes payable and current portion of
long-term debt.......................................... 292,163 331,986
Current portion of capital lease obligations.............. 62,381 89,477
Due to sellers of Primeline Internet Services, Inc........ -- 991,817
Deferred revenue.......................................... 103,747 28,760
---------- ----------
Total current liabilities............................... 715,841 1,987,479
Long-term debt, less current portion........................ 569,299 389,010
Capital lease obligations, less current portion............. 41,266 9,525
Due to stockholder.......................................... 10,067 --
---------- ----------
Total liabilities....................................... 1,336,473 2,386,014
Stockholder's deficit:
Common stock, $1.00 par value. Authorized 100,000 shares,
issued and outstanding 100 shares....................... 100 100
Additional paid-in capital................................ 124,900 159,768
Accumulated deficit....................................... (315,534) (625,985)
---------- ----------
Total stockholder's deficit............................. (190,534) (466,117)
---------- ----------
Total liabilities and stockholder's deficit............. $1,145,939 1,919,897
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-147
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 13, 1998 JANUARY 1, 1999
(INCEPTION) THROUGH THROUGH
DECEMBER 31, 1998 OCTOBER 26, 1999
------------------- ----------------
<S> <C> <C>
Internet services revenue................................... $ 558,362 1,088,753
Direct Internet services costs.............................. 367,182 514,859
--------- ----------
Gross profit.......................................... 191,180 573,894
Operating expenses:
Selling, general, and administrative expenses............. 298,074 584,335
Depreciation and amortiation.............................. 164,787 238,044
--------- ----------
Loss from operations.................................... (271,681) (248,485)
Other expense:
Interest expense.......................................... (43,853) (61,966)
--------- ----------
Net loss.............................................. $(315,534) (310,451)
========= ==========
Pro forma income taxes...................................... -- --
--------- ----------
Pro forma net income........................................ $(315,534) $ (310,451)
========= ==========
</TABLE>
See accompanying notes to financial statements.
F-148
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
-------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock.................... 100 $100 124,900 -- 125,000
Net loss.................................... -- -- -- (315,534) (315,534)
--- ---- ------- -------- --------
BALANCE AT DECEMBER 31, 1998................ 100 100 124,900 (315,534) (190,534)
Capital contribution........................ -- -- 34,868 -- 34,868
Net loss.................................... -- -- -- (310,451) (310,451)
--- ---- ------- -------- --------
BALANCE AT OCTOBER 26, 1999................. 100 $100 159,768 (625,985) (466,117)
=== ==== ======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-149
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 13, 1998 JANUARY 1, 1999
(INCEPTION) THROUGH THROUGH
DECEMBER 31, 1998 OCTOBER 26, 1999
------------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (315,534) (310,451)
Adjustments to reconcile net loss to net cash provided by
operating activities
Depreciation and amortization......................... 164,787 238,044
Provision for losses on trade receivables............. 26,587 43,419
Changes in operating working capital:
Trade receivables................................. (65,499) (34,571)
Prepaid expenses.................................. (1,893) 1,893
Deposits.......................................... -- (7,000)
Accounts payable.................................. 204,106 253,488
Accrued expenses.................................. 53,444 34,401
Deferred revenue.................................. 103,747 (74,987)
---------- --------
Net cash provided by operating activities..... 169,745 144,236
---------- --------
Cash flows from investing activities:
Purchases of acquired businesses.......................... (592,000) (8,183)
Purchases of property and equipment....................... (17,654) (23,903)
---------- --------
Net cash used in investing activities........... (609,654) (32,086)
---------- --------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and and
current portion of long-term debt....................... 475,000 10,000
Repayments of notes payable............................... (93,538) (150,466)
Proceeds from shareholder................................. 10,067 (25,531)
Repayments of capital lease obligations................... (39,881) (4,645)
Proceeds from issuance of common stock.................... 125,000 --
Proceeds from capital contribution........................ -- 34,868
---------- --------
Net cash provided by (used in) financing
activities.................................... 476,648 (135,774)
---------- --------
Net increase (decrease) in cash................. 36,739 (23,624)
Cash and cash equivalents:
Beginning of period....................................... -- 36,739
---------- --------
End of period............................................. $ 36,739 13,115
========== ========
Supplemental disclosure of cash flow information:
During the periods from May 13, 1998 through December 31, 1998 and January 1, 1999 through October
26, 1999, the Company paid approximately $36,229 and $69,591, respectively, for interest.
Non-cash investing and financing activities:
The Company entered into various capital leases for computer equipment. These capital lease
obligations resulted in non-cash financing activities aggregating $143,528 for the period ended
December 31, 1998.
During the period from May 13, 1998 through December 31, 1998, the Company acquired assets
amounting to $92,719 for a total consideration of $1,072,000 resulting in goodwill of $979,281.
The Company incurred $480,000 of debt as a result of this transaction.
During 1999, the Company acquired certain assets and assumed certain liabilities of Primeline
Internet Services, Inc. for total consideration of $1,000,000 resulting in goodwill of $935,000.
At October 26, 1999 the Company had outstanding a $991,817 promissory note due to the sellers of
Primeline.
</TABLE>
See accompanying notes to financial statements.
F-150
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Internet of Western North Carolina, Inc. (d/b/a Internet of Asheville)
("Internet of Asheville" or the "Company") was incorporated on May 13, 1998 to
capitalize on the growing demand for Internet data services by consumers and
business users through the phased acquisition and growth of existing independent
Internet service providers in western North Carolina. The goal of the Company is
to provide Internet connectivity and services, including dedicated Internet
access, web hosting, e-commerce, network integration and other services.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, and the
limited history of the need for internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(B) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(C) PROPERTY AND EQUIPMENT
Property and equipment consist primarily of network communications
equipment, furniture and fixtures, and leasehold improvements, all of which are
stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, generally ranging from
three to seven years. Property and equipment under capital leases are stated at
the present value of minimum lease payments and are amortized using the
straight-line method over the shorter of the lease term or the estimated useful
lives of the assets. Amortization on leasehold improvements is computed using
the straight-line method over the shorter of the estimated useful life of the
asset or the term of the lease.
(D) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a 5-year period.
F-151
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(F) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(G) REVENUE RECOGNITION
The Company's customers generally pay for services in advance. Revenue is
recognized ratably over the service period. Deferred revenue represents the
unearned portion of customer payments.
(H) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company acounts for long-lived assets in accordance with the provisions
of 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.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(2) ACQUIRED BUSINESSES
During May and July of 1998, the Company acquired certain assets and assumed
certain liabilities of three Internet service providers which operated within
western North Carolina. Net assets of the acquired businesses amounted to
approximately $93,000 and the total consideration for the three transactions of
$1,072,000 resulted in goodwill of approximately $979,000.
On October 26, 1999, the Company acquired certain assets and assumed certain
liabilities of Primeline Internet Services, Inc. ("Primeline"). Net assets of
Primeline amounted to approximately $65,000 and the total purchase price was
approximately $1,000,000 resulting in additional goodwill at
F-152
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(2) ACQUIRED BUSINESSES (CONTINUED)
October 26, 1999 of approximately $935,000. As of October 26, 1999, $991,817 was
due to the sellers of Primeline.
Each of the above acquisitions was accounted for using the purchase method
of accounting and the accompanying statements of operations include the
activities of the acquired businesses since their respective acquisition dates.
The following unaudited pro forma information presents the results of
operations of the Company as if the acquisition had taken place on May 13, 1998.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
MAY 13, 1998 JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 OCTOBER 26, 1999
------------------ -----------------
<S> <C> <C>
Pro forma revenues.......................................... 745,306 1,447,127
Pro forma net loss.......................................... (405,913) (347,790)
</TABLE>
These pro forma results of operations have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that actually would have resulted had the acquisition occurred on the date
indicated, or that may result in the future.
(3) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 26,
1998 1999
------------ -----------
<S> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $143,528 and
$143,528, respectively............................. $245,181 337,149
Furniture and fixtures............................... 6,021 2,956
Leasehold improvement................................ 2,699 2,699
-------- --------
253,901 342,804
Less accumulated depreciation and amortization,
including amounts related to capital leases of
$37,098 and $76,545, respectively.................. (57,418) (132,248)
-------- --------
$196,483 210,556
======== ========
</TABLE>
F-153
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(4) DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 26,
1998 1999
------------ -----------
<S> <C> <C>
Bank note payable; secured by property and equipment,
interest payable monthly, calculated at the bank's
prime rate plus 1.75% (8.25% at October 26, 1999).
The note is payable in full on May 14, 2003........ $246,724 209,771
Note payable; secured by property and equipment, with
equal monthly installments of $3,844 and interest
rate of 8%. The note is payable in full on July 1,
2000............................................... 75,101 50,042
Line of credit; secured by property and equipment
with interest payable monthly, and an 8% interest
rate (8% at October 26, 1999). The line of credit
is payable in full on May 15, 2000................. 25,000 25,000
Line of credit; secured by property and equipment,
with interest payable monthly, and an 8% interest
rate (9% at October 26, 1999). The note is payable
in full on May 15, 2000............................ -- 10,000
Note payable; secured by property and equipment, with
equal monthly installments of $2,003 and an
interest rate of 8%. The note is payable in full on
January 1, 2004.................................... 95,000 91,118
Bank note payable; secured by property and equipment,
with interest payable monthly, and an 8% interest
rate (8.75% at October 26, 1999). The note is
payable in full on August 15, 2003................. 96,481 96,721
Bank note payable; secured by property and equipment,
with interest payable monthly, calculated at the
Wall Street Journal's prime rate (8.25% at October
26, 1999). The note is payable in full on July 15,
2003............................................... 162,234 150,152
Note payable; secured by property and equipment, with
equal monthly installments of $9,045 and an
interest rate of 8%. The note is payable in full on
August 17, 2000.................................... 160,922 88,192
-------- ---------
Total debt........................................... 861,462 720,996
Less current portion................................. (292,163) (331,986)
-------- ---------
Long-term debt, less current portion................. $569,299 $ 389,010
======== =========
</TABLE>
F-154
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(4) DEBT (CONTINUED)
The aggregate annual required debt repayments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 26, AMOUNT
- ----------------------- --------
<S> <C>
2000...................................................... $331,986
2001...................................................... 124,188
2002...................................................... 134,252
2003...................................................... 129,766
2004...................................................... 804
--------
$720,996
========
</TABLE>
(5) LEASES
The Company leases certain computer and office equipment under capital
leases and office space and automobiles under noncancelable operating leases
expiring at various dates through 2001.
Future minimum annual lease payments under capital and noncancelable
operating leases as of October 26, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING OCTOBER 26, LEASES LEASES
- ----------------------- -------- ---------
<S> <C> <C>
2000..................................................... $92,526 19,174
2001..................................................... 9,900 6,118
------- ------
Total minimum payments................................. 102,426 25,292
======
Less amount representing interest........................ (3,424)
-------
Present value of net minimum lease payments............ 99,002
Less current portion..................................... 89,477
-------
$ 9,525
=======
</TABLE>
Rent expense for the period from May 13, 1998 through December 31, 1998 and
the period from January 1, 1999 through October 26, 1999 was approximately
$9,400 and $16,000, respectively.
F-155
<PAGE>
INTERNET OF WESTERN NORTH CAROLINA, INC.
(D/B/A INTERNET OF ASHEVILLE)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND OCTOBER 26, 1999
(6) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
DECEMBER 31, THROUGH
1998 OCTOBER 26, 1999
------------ ----------------
<S> <C> <C>
Expected income tax benefit....................... $(107,282) (105,553)
Increase in valuation allowance................... 107,282 105,515
Other............................................. -- 38
--------- --------
$ -- --
========= ========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31, 1998 and October 26, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 26,
1998 1999
------------ -----------
<S> <C> <C>
Net operating loss carryforward...................... $ 89,885 157,238
Allowance for doubtful accounts...................... 10,968 28,877
Goodwill............................................. 29,306 71,946
Other................................................ -- 112
--------- --------
Gross deferred tax assets.......................... 130,159 258,173
Valuation allowance................................ (130,159) (258,173)
--------- --------
Net deferred tax asset............................... $ -- --
========= ========
</TABLE>
The valuation allowance noted above is provided based on management's
estimation of the recoverability of the deferred tax asset in future periods.
(7) SUBSEQUENT EVENTS
On October 27, 1999, all of the Company's assets were sold to DURO
Communications, Inc. In connection with the sale of the assets, the Company's
debt and capital lease obligations were settled.
F-156
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheet of The Nashville
Exchange, Inc. as of December 10, 1999 and the related statement of operations,
stockholders' deficit, and cash flows for the period from January 1, 1999
through December 10, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 The Nashville
Exchange, Inc. as of December 10, 1999 and the results of its operations and its
cash flows for the period from January 1, 1999 through December 10, 1999 in
conformity with generally accepted accounting principles.
KPMG LLP
Orlando, Florida
March 10, 2000
F-157
<PAGE>
THE NASHVILLE EXCHANGE, INC.
BALANCE SHEET
DECEMBER 10, 1999
<TABLE>
<S> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $151,378
Prepaid expenses.......................................... 8,046
Trade receivables, net of allowance for doubtful accounts
of $24,000.............................................. 60,939
--------
Total current assets.................................... 220,363
Property and equipment, net................................. 157,640
--------
Total assets............................................ $378,003
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accrued expenses.......................................... $ 27,863
--------
Total current liabilities............................... 27,863
Note payable to owner....................................... 84,490
Deferred revenue............................................ 280,000
--------
Total liabilities....................................... 392,353
Stockholder's equity:
Common stock, no par value. Authorized 100 shares, issued
and outstanding 10 shares............................... 1,000
Accumulated deficit....................................... (15,350)
--------
Total stockholder's deficit............................. (14,350)
--------
Commitments
Total liabilities and stockholder's deficit............. $378,003
========
</TABLE>
See accompanying notes to financial statements.
F-158
<PAGE>
THE NASHVILLE EXCHANGE, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH DECEMBER 10, 1999
<TABLE>
<S> <C>
Revenue:
Internet services revenue................................. $729,915
Enhanced services and other............................... 44,327
--------
Total revenue........................................... 774,242
Internet services operating costs:
Direct Internet services costs............................ 135,143
Enhanced services and other............................... 55,763
--------
Total internet services operating costs................. 190,906
Gross profit............................................ 583,336
Selling, general and administrative
Salaries and employee benefits............................ 301,328
Credit card fees.......................................... 15,833
Advertising expense....................................... 81,429
Rent and occupancy........................................ 15,376
Bad debt expense.......................................... 8,000
Repairs and maintenance................................... 437
Supplies.................................................. 28,061
Travel and entertainment.................................. 1,362
Insurance................................................. 2,724
Other..................................................... 17,795
--------
Total selling, general and administrative............... 472,345
--------
Income before other income, interest, and depreciation...... 110,991
Interest and other income................................... 11,625
Interest expense............................................ (229)
Depreciation expense........................................ (40,785)
--------
Net income.............................................. $ 81,602
========
Proforma income taxes....................................... $ 31,000
========
Proforma net income......................................... $ 50,602
========
</TABLE>
See accompanying notes to financial statements.
F-159
<PAGE>
THE NASHVILLE EXCHANGE, INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999............................... 10 $1,000 (96,952) (95,952)
Net income............................................... -- -- 81,602 81,602
-- ------ ------- -------
BALANCE AT DECEMBER 10, 1999............................. 10 $1,000 (15,350) (14,350)
== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-160
<PAGE>
THE NASHVILLE EXCHANGE, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1999 THROUGH DECEMBER 10, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 81,602
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 40,785
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables........................................... (13,271)
Prepaid expenses and other current assets............. 76
Accrued expenses...................................... 18,260
Deferred revenue...................................... 69,000
--------
Net cash provided by operating activities........... 196,452
--------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (69,386)
--------
Net cash used by investing activities............... (69,386)
--------
Net increase in cash and cash equivalents........... 127,066
Cash and cash equivalents:
Beginning period.......................................... 24,312
--------
End of period............................................. $151,378
========
Supplemental disclosure of cash flow information:
During the period ended December 10, 1999, the Company
paid approximately $229 for interest.
</TABLE>
See accompanying notes to financial statements.
F-161
<PAGE>
THE NASHVILLE EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
The Nashville Exchange, Inc. (the Company) began operations on February 15,
1989 as a local electronic bulletin board service provider. Over the years, the
Company has evolved to capitalize on the growing demand for Internet access and
enhanced services by consumers and business users in Central Tennessee.
Effective December 10, 1999, DURO Communications, Inc. ("DURO") acquired the
assets and assumed certain liabilities of The Nashville Exchange, Inc. in
exchange for $1,600,000. This transaction resulted in a gain to the Company upon
disposal of its assets and certain liabilities of approximately $1,514,000.
Excluded from the sale were the note payable to shareholder and the common stock
of the Company.
The accompanying financial statements reflect the financial position and
results of operations and cash flows of the Company as of and for the period
ended December 10, 1999 (immediately prior to the acquisition of the Company's
assets and assumption of its liabilities by DURO).
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, and the
limited history of the need for internet access and enhanced services. The
Company's future success will be dependent upon its ability to create and
provide effective and competitive internet services, the continued acceptance of
the Internet and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 10, 1999 were approximately $151,378.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years.
F-162
<PAGE>
THE NASHVILLE EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. In addition, the recoverability of goodwill is further evaluated under
the provisions of APB Opinion No. 17, INTANGIBLE ASSETS, based upon estimated
fair value. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less costs to sell.
(F) INCOME TAXES
The Company operated as an S-Corp, and therefore, the owner of the Company
included his share of the Company's income in his personal income tax returns.
The unaudited pro forma income tax information, included in Note 7, is
presented as if the Company had been subject to Federal and state income taxes
as a C-Corp.
(G) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services. Revenue from consulting services is recognized as
the services are provided.
(H) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $81,429 for the period from January 1, 1999 through December 10,
1999.
(I) RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact of adopting SOP 98-1.
F-163
<PAGE>
THE NASHVILLE EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities. In June 1999,
the FASB issued SFAS No. 137, which amended the implementation date for SFAS
No. 133 to be effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000.
(2) BALANCE SHEET COMPONENTS
The following is a summary of property and equipment, prepaid expenses and
accrued expenses at December 10, 1999:
Property and equipment
<TABLE>
<S> <C>
Internet access and computer equipment...................... $225,642
Furniture and fixtures and other equipment.................. 12,662
Computer software........................................... 8,664
--------
246,968
Less accumulated depreciation............................... (89,328)
--------
Total................................................... $157,640
========
</TABLE>
Prepaid expenses
<TABLE>
<S> <C>
Rent........................................................ $ 919
Insurance................................................... 561
Internet connectivity....................................... 6,566
------
$8,046
======
</TABLE>
Accrued expenses
<TABLE>
<S> <C>
Sales tax payable........................................... $15,766
Salaries and employee benefits.............................. 12,097
-------
Total................................................... $27,863
=======
</TABLE>
F-164
<PAGE>
THE NASHVILLE EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1999
(3) NOTE PAYABLE TO OWNER
Note payable consists of an $84,490 note representing accrued bonus payments
due to the owner. The note bears no interest and has no set maturity date.
(4) LEASES
The Company rents its office space for approximately $1,358 per month. A
lease contract is currently not in effect for office space, and payments are
made on a month-to-month basis.
Co-location space for certain computer equipment owned by the Company is
leased under the terms of a non-cancelable two year operating lease which
commenced on September 9, 1999 for $525 per month.
Future minimum annual lease payments under the co-location operating lease
as of December 10, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
2000........................................................ $ 6,300
2001........................................................ 4,882
-------
Total minimum payments.................................. $11,182
=======
</TABLE>
Rent expense for the period from January 1, 1999 through December 10, 1999
was $15,376.
(5) COMMITMENTS
The Company has the following commitments at December 10, 1999:
INBOUND PRI PHONE LINES
On September 9, 1999, the Company entered into a contract with ICG
Communications for dial-in and ISDN connectivity with one DS3 circuit. The
contract term is for thirty-six (36) months and is payable in equal installments
of $3,950 per month.
INTERNET BANDWIDTH
On July 31, 1999, the Company entered into a contract with ISDN-Net for
internet bandwidth. The contract expires in one year and has a cost of $3,000
per month.
(6) CAPITAL STOCK
At December 10, 1999, the Company has 100 authorized shares with no par
value. Ten shares are issued and outstanding, and all are owned by Ben
Cunningham.
F-165
<PAGE>
THE NASHVILLE EXCHANGE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 10, 1999
(7) PRO FORMA INCOME TAXES
As stated in Footnote 1(f), the Company is not subject to federal and state
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
Company was subject to federal and state income taxes. Pro forma tax expense
differs from the amounts that would result from applying the federal statutory
rate of 34% to the Company's net loss for the period from January 1, 1999
through December 10, 1999 as follows:
<TABLE>
<S> <C>
Expected pro forma tax expense.............................. $ 27,745
State income taxes, net of federal benefit.................. 3,258
Decrease in valuation allowance............................. (5,280)
Effect of graduated rates................................... (11,072)
Other....................................................... 232
--------
$ 14,883
========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 10, 1999 are as follows:
<TABLE>
<S> <C>
Allowance for doubtful accounts............................. 2,278
</TABLE>
(8) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED
BALANCE AT TO COSTS BALANCE
BEGINNING AND DEDUCTIONS AT END
OF PERIOD EXPENSES WRITE-OFFS OF PERIOD
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
For the period from January 1, 1999
through December 10, 1999:
Allowance for doubtful accounts..... $16,000 8,000 -- 24,000
======= ===== === ======
</TABLE>
F-166
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Opti-Link
Communications, Inc. (a wholly owned subsidiary of Telcom Group, Inc.), as of
December 31, 1998 and December 22, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the period from April 22,
1998 (inception) through December 31, 1998 and for the period from January 1,
1999 through December 22, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Opti-Link
Communications, Inc. as of December 31, 1998 and December 22, 1999, and the
results of its operations and its cash flows for the period from April 22, 1998
(inception) through December 31, 1998 and for the period from January 1, 1999
through December 22, 1999, in conformity with generally accepted accounting
principles.
Bowen, Phillips and Carmichael, LLP
Tifton, Georgia
February 29, 2000
F-167
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 22,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 87,699 1,717
Receivables:
Related party........................................... 68,969 160,764
Other................................................... -- 8,521
Prepaid expenses.......................................... 18,649 146,513
---------- ---------
Total current assets.................................. 175,317 317,515
Property and equipment, net of accumulated depreciation of
$61,527 and $334,112, respectively........................ 932,283 1,906,756
Other assets, net........................................... 827 56,462
---------- ---------
Total assets.......................................... $1,108,427 2,280,733
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 66,489 252,437
Current portion of long term debt......................... -- 162,214
---------- ---------
Total current liabilities............................. 66,489 414,651
---------- ---------
Deferred income taxes....................................... -- 69,000
---------- ---------
Total liabilities..................................... 66,489 483,651
---------- ---------
Commitment and contingencies
Stockholders' equity:
Common stock, no par value. Authorized 100,000 shares,
issued and outstanding 47,000 shares.................... 470,000 470,000
Additional paid-in capital................................ 590,485 1,662,870
Accumulated deficit....................................... (18,547) (335,788)
---------- ---------
Total stockholders' equity............................ 1,041,938 1,797,082
---------- ---------
Total liabilities and stockholders' equity............ $1,108,427 2,280,733
========== =========
</TABLE>
See accompanying notes to financial statements.
F-168
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1998 PERIOD FROM
(INCEPTION) JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 DECEMBER 22, 1999
----------------- -----------------
<S> <C> <C>
Revenue:
Data communications services.............................. $371,880 1,765,285
Enhanced services and other............................... -- 13,040
-------- ---------
Total revenue........................................... 371,880 1,778,325
Data communications access fees........................... 227,196 1,184,724
-------- ---------
Gross profit............................................ 144,684 593,601
Selling, general and administrative:
Salaries and employee benefits............................ 32,376 537,994
Advertising expense....................................... 2,159 1,117
Rent and occupancy........................................ 5,065 26,069
Repairs and maintenance................................... 6,091 16,039
Travel and entertainment.................................. 2,114 38,674
Insurance................................................. 601 48,224
Other..................................................... 64,290 163,617
-------- ---------
Total selling, general and administrative............... 112,696 831,734
-------- ---------
Income (loss) before income taxes, interest, depreciation
and amortization.......................................... 31,988 (238,133)
Interest expense.......................................... -- 6,840
Depreciation and amortization expense..................... 61,654 272,771
-------- ---------
Loss before income taxes................................ (29,666) (517,744)
Income tax (benefit)...................................... (11,119) (200,503)
-------- ---------
Net loss................................................ $(18,547) (317,241)
======== =========
</TABLE>
See accompanying notes to financial statements.
F-169
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 22, 1998................. -- $ -- -- -- --
Issuance of common stock for cash......... 47,000 470,000 -- -- 470,000
Capital contribution...................... -- -- 590,485 -- 590,485
Net loss.................................. -- -- -- (18,547) (18,547)
------ -------- --------- -------- ---------
BALANCE (DEFICIT) AT DECEMBER 31, 1998.... 47,000 470,000 590,485 (18,547) 1,041,938
Capital contribution...................... -- -- 1,072,385 -- 1,072,385
Net loss.................................. -- -- -- (317,241) (317,241)
------ -------- --------- -------- ---------
BALANCE (DEFICIT) AT DECEMBER 22, 1999.... 47,000 $470,000 1,662,870 (335,788) 1,797,082
====== ======== ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-170
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1998 PERIOD FROM
(INCEPTION) JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 DECEMBER 22, 1999
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (18,547) (317,241)
Adjustments to reconcile net loss to net cash (used by)
provided by operating activities:
Depreciation and amortization........................... 61,654 272,771
Deferred taxes.......................................... -- 69,000
Changes in operating assets and liabilities:
Receivables........................................... (68,969) (100,316)
Prepaid expenses...................................... (18,649) (127,864)
Accounts payable...................................... 66,489 185,948
--------- ----------
Net cash (used by) provided by operating
activities........................................ 21,978 (17,702)
--------- ----------
Cash flows from investing activities:
Acquisition of equipment.................................. (993,810) (1,247,244)
Other..................................................... (954) (55,635)
--------- ----------
Net cash used by investing activities............... (994,764) (1,302,879)
--------- ----------
Cash flows from financing activities:
Proceeds from long-term debt.............................. -- 164,100
Payments of long-term debt................................ -- (1,886)
Capital contributions..................................... 590,485 1,072,385
Proceeds from issuance of common stock, net of issuance
costs................................................... 470,000 --
--------- ----------
Net cash provided by financing activities........... 1,060,485 1,234,599
--------- ----------
Net increase in cash and cash equivalents........... 87,699 (85,982)
Cash and cash equivalents:
Beginning period.......................................... -- 87,699
--------- ----------
End of period............................................. $ 87,699 1,717
========= ==========
</TABLE>
Supplemental disclosure of cash flow information:
During the period from January 1, 1999 through December 22, 1999, the
Company paid $6,840 for interest.
See accompanying notes to financial statements.
F-171
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Opti-Link Communications, Inc. (the "Company") is a wholly owned subsidiary
of Telcom Group, Inc. and was incorporated on April 22, 1998 to capitalize on
the growing demand in South Georgia for alternative telephone service options
for consumers and business users through the function of a Competitive Local
Exchange Carrier (CLEC). The goal of the Company is to provide lower cost and
better customer service for local and regional Internet Service Providers (ISPs)
as well as offering alternative telephone services for consumers.
Inherent in the Company's business are various risks and uncertainties
including its limited operating history, historical operating losses and need
for additional capital contributions, dependence upon strategic alliances,
regulatory trends and the limited history of the need for internet access and
alternative telephone services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers' changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1998 and December 22, 1999, were approximately $87,699 and
$1,717, respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets.
The range of estimated useful lives used in computing depreciation were as
follows:
<TABLE>
<S> <C>
Equipment................................................... 3-7 years
Buildings................................................... 40 years
</TABLE>
F-172
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of 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 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
(F) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
"ACCOUNTING FOR INCOME TAXES." SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(G) REVENUE RECOGNITION
Revenue is recognized as services are provided and deferred and amortized to
operations for amounts billed relating to future periods.
(H) SALES AND MARKETING COSTS
Marketing expense includes advertising and other general sales and marketing
costs. The Company expenses the cost of advertising and promoting its services
as incurred. Such costs totaled approximately $2,159 and $1,117 for the period
from April 22, 1998 (inception) through December 31, 1998 and for the period
from January 1, 1999 through December 22, 1999, respectively.
(I) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents. The Company's
cash and cash equivalents are deposited with local banks in South Georgia. At
times, such deposits may be in excess of the amount of insurance provided on
such deposits. The Company has not experienced any losses on its deposits of
cash and cash equivalents.
At December 31, 1998 and December 22, 1999, the carrying value of the
Company's financial instruments, including trade receivables, payables and
borrowings, approximated their fair value based on their terms and interest
rates.
The Company relies on third-party networks, local telephone companies and
other companies to provide data communications capacity. For the period from
April 22, 1998 (inception) through December 31, 1998 and for the period from
January 1, 1999 through December 22, 1999, the Company paid access fees of
$137,478 and $880,145, respectively, to two telephone companies. Although
management feels alternative telecommunications facilities could be found in a
timely manner, any disruption of these services could have an adverse effect on
operating results.
F-173
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) ORGANIZATIONAL COSTS
The Company elected to expense the one-time costs associated with the
start-up and organization of the Company as incurred.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME". SFAS No. 130 requires the Company to report in its financial
statements, in addition to its net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. For the period from April 22, 1998 (inception) through
December 31, 1998 and for the period from January 1, 1999 through December 22,
1999, there were no differences between the Company's comprehensive loss and its
net loss as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE" ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there was no
impact, of adopting SOP 98-1, which was effective for the Company's period ended
December 22, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION."
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic area and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company has determined that it does not have any
separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137 which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-174
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(2) BALANCE SHEET COMPONENTS
Property and equipment
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 22,
1998 1999
------------ ------------
<S> <C> <C>
Internet access and computer equipment.............. $993,810 1,943,508
Buildings........................................... -- 267,360
Land................................................ -- 30,000
-------- ---------
Total......................................... 993,810 2,240,868
Less: accumulated depreciation...................... (61,527) (334,112)
-------- ---------
Total......................................... $932,283 1,906,756
======== =========
</TABLE>
Prepaid Expenses
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 22,
1998 1999
------------ ------------
<S> <C> <C>
Prepaid access services............................. $17,479 139,213
Other prepaid expenses.............................. 1,170 7,300
------- -------
Total......................................... $18,649 146,513
======= =======
</TABLE>
(3) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 22,
1998 1999
------------ ------------
<S> <C> <C>
Note payable to a bank, bearing interest at prime
(8.50% at December 22, 1999) plus 0.50%, payable
in monthly installments of $1,593, collateralized
by real estate.................................... $ -- 162,214
Less current portion................................ -- (162,214)
-------- --------
Long-term debt, less current portion.......... $ -- --
======== ========
</TABLE>
All interest incurred on long-term debt for the period from April 22, 1998
(inception) through December 31, 1998 and for the period from January 1, 1999
through December 22, 1999 was expensed.
(4) LEASES
The Company leases office space under noncancelable operating leases
expiring at various dates through April 2000.
F-175
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(4) LEASES (CONTINUED)
Future minimum annual lease payments under noncancelable operating leases as
of December 22, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASE
---------
<S> <C>
2000........................................................ $1,000
2001........................................................ --
2002........................................................ --
2003........................................................ --
2004........................................................ --
------
Total minimum payments................................ $1,000
======
</TABLE>
Rent expense for the period from April 22, 1998 (inception) through
December 31, 1998 and for the period from January 1, 1999 through December 22,
1999 were $5,605 and $26,069, respectively.
(5) RELATED PARTY TRANSACTIONS
The Company receives all of its revenues from access to data communications
provided to one customer, a related party through common ownership and control
under the terms of a service agreement. These revenues totaled $371,880 and
$1,765,285 for the period from April 22, 1998 (inception) through December 31,
1998 and for the period from January 1, 1999 through December 22, 1999,
respectively.
During the period from April 22, 1998 (inception) through December 31, 1998
and the period from January 1, 1999 through December 22, 1999, the Company
received capital contributions of $590,485 and $1,072,385, respectively, from
its parent company for certain operating costs, paid on its behalf, net of
current tax benefits accruing to the parent as a result of the Company's net
operating losses.
In December 1999, the Company entered an agreement with a related party,
through common ownership and control, to enter a "purchase and sale agreement"
for certain property. The terms of the agreement are that for $162,213, the
Company will sell to and subsequently repurchase from the related party certain
property with a net book value of $293,960. At December 22, 1999, the property
had been sold to the related party. The Company believes it will execute the
repurchase of the property in 2000 under the terms of the agreement. The sole
purpose and economic substance of this transaction was to facilitate certain
negotiations involving the Company and its shareholders. The Company does not
believe an economic transfer of the property has occurred. Accordingly, the
Company has not recorded the sale of the property to the related party in the
accompanying financial statements.
In September 1998, the Company purchased certain equipment from a related
party, through common ownership and control, for its book value of $530,746.
(6) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) which covers all eligible employees
meeting certain age, salary and service requirements. The Company may make
discretionary contributions to the Plan
F-176
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(6) EMPLOYEE BENEFIT PLAN (CONTINUED)
on behalf of employees that meet certain contribution eligibility requirements
defined under the terms of the Plan. The Company contributed $2,149 and $15,748
to the Plan for the period from April 22, 1998 (inception) through December 31,
1998 and for the period from January 1, 1999 through December 22, 1999,
respectively.
(7) INCOME TAXES
The components of the provision for income taxes for the period from
April 22, 1998 (inception) through December 31, 1998 and for the period from
January 1, 1999 through December 22, 1999 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1998 PERIOD FROM
(INCEPTION) JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 DECEMBER 22, 1999
----------------- -----------------
<S> <C> <C>
Current
Federal................................... $ (9,413) (226,905)
State..................................... (1,706) (42,598)
-------- --------
(11,119) (269,503)
-------- --------
Deferred
Federal................................... -- 58,000
State..................................... -- 11,000
-------- --------
-- 69,000
-------- --------
$(11,119) (200,503)
======== ========
</TABLE>
The Company has elected to file consolidated income tax returns with its
parent company. The current tax benefits for the period from April 22, 1998
through December 31, 1998 and for the period from January 1, 1999 through
December 22, 1999 were netted against certain operating costs paid by the parent
on the Company's behalf and recorded as capital contributions. See Note (5).
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1998 PERIOD FROM
(INCEPTION) JANUARY 1, 1999
THROUGH THROUGH
DECEMBER 31, 1998 DECEMBER 22, 1999
----------------- -----------------
<S> <C> <C>
Expected tax benefit........................ $(10,086) (176,033)
State income tax benefit.................... (1,679) (31,065)
Other....................................... 646 6,595
-------- --------
$(11,119) (200,503)
======== ========
</TABLE>
F-177
<PAGE>
OPTI-LINK COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND DECEMBER 22, 1999
(7) INCOME TAXES (CONTINUED)
Temporary differences that give rise to the components of the deferred tax
liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 22,
1998 1999
------------ ------------
<S> <C> <C>
Deferred liability:
Depreciation...................................... $ -- (69,000)
-------- -------
======== =======
</TABLE>
(8) COMMITMENT AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
(9) SUBSEQUENT EVENTS
On December 23, 1999 the Company's shareholders closed on a transaction in
which they sold all of the Company's stock to DURO Communications, Inc.
F-178
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Surf South, Inc., as of
December 31, 1997 and 1998 and as of December 29, 1999, and the related
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1997 and 1998, and for the period from January 1, 1999
through December 29, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Surf South, Inc. as of
December 31, 1997 and 1998 and as of December 29, 1999, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 and
for the period from January 1, 1999 through December 29, 1999, in conformity
with generally accepted accounting principles.
Bowen, Phillips and Carmichael, LLP
Tifton, Georgia
February 19, 2000
F-179
<PAGE>
SURF SOUTH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- DECEMBER 29,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $110,205 117,186 288,691
Receivables:
Trade, net of allowance for doubtful accounts of
$7,000, $14,000 and $79,585, respectively............. 28,337 127,915 321,276
Prepaid expenses and other................................ 10,251 30,664 84,723
Deferred income taxes..................................... -- -- 21,000
-------- ------- ---------
Total current assets.................................. 148,793 275,765 715,690
Property and equipment, net................................. 608,769 697,937 1,050,666
-------- ------- ---------
Total assets.......................................... $757,562 973,702 1,766,356
======== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 65,528 53,874 207,079
Accounts payable--related parties......................... -- 68,969 160,764
Accrued expenses.......................................... 83,860 86,685 353,631
Line of credit............................................ -- -- 384,374
Notes payable............................................. 125,814 84,124 --
Current portion of long-term debt......................... 57,964 7,641 --
Current portion of long-term debt--related parties -- 186,463 90,646
Current portion of capital lease obligations.............. 4,070 4,689 16,023
Deferred revenue.......................................... -- -- 223,223
-------- ------- ---------
Total current liabilities............................. 337,236 492,445 1,435,740
Long-term debt, less current portion........................ 89,134 206,963 --
Long-term debt--related parties, less current portion....... 186,463 -- --
Capital lease obligations, less current portion............. 20,724 16,035 --
Deferred income taxes....................................... -- -- 56,000
-------- ------- ---------
Total liabilities..................................... 633,557 715,443 1,491,740
-------- ------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $1 par value. Authorized 200,000 shares,
issued and outstanding 111,110 shares................... 111,110 111,110 111,110
Retained earnings......................................... 12,895 147,149 163,506
-------- ------- ---------
Total stockholders' equity............................ 124,005 258,259 274,616
-------- ------- ---------
Total liabilities and stockholders' equity............ $757,562 973,702 1,766,356
======== ======= =========
</TABLE>
See accompanying notes to financial statements.
F-180
<PAGE>
SURF SOUTH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED DECEMBER 31, JANUARY 1, 1999
------------------------- THROUGH
1997 1998 DECEMBER 29, 1999
---------- --------- -----------------
<S> <C> <C> <C>
Revenue:
Internet services revenue.......................... $1,399,370 2,818,113 4,556,988
Enhanced services and other........................ 57,629 123,100 106,638
---------- --------- ---------
Total revenue.................................... 1,456,999 2,941,213 4,663,626
Internet services operating costs:
Direct Internet services costs..................... 558,436 1,140,149 2,217,456
Enhanced services and other........................ 10,410 17,248 2,695
---------- --------- ---------
Total operating costs............................ 568,846 1,157,397 2,220,151
---------- --------- ---------
Gross profit..................................... 888,153 1,783,816 2,443,475
---------- --------- ---------
Selling, general and administrative:
Salaries and employee benefits..................... 386,192 909,632 1,529,571
Advertising expense................................ 22,906 96,928 197,874
Rent and occupancy................................. 29,509 42,457 21,357
Repairs and maintenance............................ 844 2,855 3,093
Travel and entertainment........................... 8,021 16,612 14,897
Insurance.......................................... 4,581 8,825 35,425
Bad debts.......................................... 7,000 53,041 120,944
Other.............................................. 103,604 147,273 259,678
---------- --------- ---------
Total selling, general and administrative........ 562,657 1,277,623 2,182,839
---------- --------- ---------
Income before income taxes, interest, depreciation
and amortization................................... 325,496 506,193 260,636
Interest expense................................... 41,296 42,169 50,092
Depreciation and amortization expense.............. 172,063 169,770 118,586
---------- --------- ---------
Income before income taxes....................... 112,137 294,254 91,958
Income tax provision............................... -- -- 75,601
---------- --------- ---------
Net income....................................... $ 112,137 294,254 16,357
========== ========= =========
Unaudited proforma income tax provision.............. $ 44,595 110,061
========== =========
Unaudited proforma net income........................ $ 67,542 184,193
========== =========
</TABLE>
See accompanying notes to financial statements.
F-181
<PAGE>
SURF SOUTH, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS/
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996....................... 100,000 $100,000 (99,242) 758
Issuance of common stock for cash.................. 11,110 11,110 -- 11,110
Net income......................................... -- -- 112,137 112,137
-------- -------- -------- --------
BALANCE AT DECEMBER 31, 1997....................... 111,110 111,110 12,895 124,005
Dividend distribution.............................. -- -- (160,000) (160,000)
Net income......................................... -- -- 294,254 294,254
-------- -------- -------- --------
BALANCE AT DECEMBER 31, 1998....................... 111,110 111,110 147,149 258,259
Net income......................................... -- -- 16,357 16,357
-------- -------- -------- --------
BALANCE AT DECEMBER 29, 1999....................... 111,110 $111,110 163,506 274,616
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-182
<PAGE>
SURF SOUTH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999
-------------------- THROUGH
1997 1998 DECEMBER 29, 1999
--------- -------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 112,137 294,254 16,357
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 172,063 169,770 118,586
Deferred tax............................................ -- -- 35,000
Gain on sale of fixed assets............................ (399) (438) --
Changes in operating assets and liabilities:
Receivables........................................... (28,337) (99,578) (193,361)
Prepaid expenses and other current assets............. (6,597) (20,413) (54,059)
Accounts payable...................................... 23,730 57,315 245,000
Accrued expenses...................................... 70,788 2,825 266,946
Deferred revenue...................................... -- -- 223,223
--------- -------- --------
Net cash provided by operating activities........... 343,385 403,735 657,692
--------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment..................... (460,249) (453,230) (781,487)
Proceeds from sale of fixed assets........................ -- 493,957 --
--------- -------- --------
Net cash (used by) provided by investing
activities........................................ (460,249) 40,727 (781,487)
--------- -------- --------
Cash flows from financing activities:
Net proceeds from line of credit and notes payable........ 65,055 -- 300,000
Proceeds from long-term debt.............................. 101,684 -- --
Proceeds from long-term debt--related parties............. 25,000 -- --
Repayments of notes payable............................... (4,320) (125,814) --
Repayments of long-term debt.............................. (32,898) (146,978) --
Repayments of capital lease obligations................... (1,815) (4,689) (4,700)
Dividends paid............................................ -- (160,000) --
Proceeds from issuance of common stock, net of issuance
costs................................................... 11,110 -- --
--------- -------- --------
Net cash (used by) provided by financing
activities........................................ 163,816 (437,481) 295,300
--------- -------- --------
Net increase in cash and cash equivalents........... 46,952 6,981 171,505
Cash and cash equivalents:
Beginning period.......................................... 63,253 110,205 117,186
--------- -------- --------
End of period............................................. $ 110,205 117,186 288,691
========= ======== ========
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997 and 1998, and the period from January 1, 1999 through
December 29,1999, the Company paid approximately $19,306, $24,553 and $49,819, respectively, for
interest. During the period from January 1, 1999 through December 29, 1999, the Company paid
$98,400 for income taxes.
Non-cash financing activities:
The Company retired long-term debt through the sale of various property and equipment. The sale of
the various property and equipment resulted in non-cash investing activities aggregating $310,421
for the period from January 1, 1999 through December 29, 1999.
The Company entered into various notes payable and long-term debt for the acquisition of real estate
and the refinancing of existing debt. These notes payable and long-term debt obligations resulted
in non-cash financing activites aggregating $298,728 and $84,374, for the year ended December 31,
1998, and the period from January 1, 1999 through December 29, 1999, respectively.
</TABLE>
See accompanying notes to financial statements.
F-183
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Surf South, Inc. (the "Company"), was incorporated on December 1, 1995 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users. The Company is a regional provider of Internet
access for South Georgia. The goal of the Company is to continue to increase its
subscriber base and geographic coverage.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
regulatory trends and the limited history of the need for Internet access and
enhanced services. The Company's future success will be dependent upon its
ability to create and provide effective and competitive Internet services, the
continued acceptance of the Internet and the Company's ability to develop and
provide new services that meet customers changing requirements, including the
effective use of leading technologies, to continue to enhance its current
services, and to influence and respond to emerging industry standards and other
technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1997 and 1998 and December 29, 1999, were approximately
$110,205, $117,186 and $288,691, respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property and equipment under
capital leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets. The
range of estimated useful lives used in computing depreciation was as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-7 years
Buildings................................................... 40 years
</TABLE>
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of 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 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted future cash flows estimated to be generated by those assets
are less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying value or fair value, less costs to
sell.
F-184
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(G) INCOME TAXES
From its inception through December 31, 1998, the Company elected to be
taxed as an S Corporation, whereby the income tax effect of the Company's
activities accrued directly to its shareholders. Accordingly, no provision for
income taxes is included in the accompanying financial statements through
December 31, 1998. Effective January 1, 1999 the Company, through unanimous
consent of its shareholders, terminated its S Corporation election and adopted
the provisions of SFAS No. 109, "ACCOUNTING FOR INCOME TAXES." SFAS No. 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
For periods prior to the termination of its S Corporation election, the
unaudited pro forma income tax information included in statements of operations
and Note (9) is presented in accordance with SFAS No. 109 as if the Company had
been subject to Federal and State income taxes for the years ended December 31,
1997 and 1998.
(H) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods.
Revenue from consulting services is recognized as the services are provided.
Revenue from hardware and software sales is recognized upon shipment of the
respective products.
(I) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled $22,906,
$96,928 and $197,874 for the years ended December 31, 1997 and 1998 and for the
period from January 1, 1999 through December 29, 1999, respectively.
F-185
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company's cash and cash equivalents are deposited with local
banks in South Georgia. At times, such deposits may be in excess of the amount
of insurance provided on such deposits. The Company has not experienced any
losses on its deposits of cash and cash equivalents. Concentrations of credit
risk with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base and the relatively minor
balances of each individual account.
At December 31, 1997 and 1998 and December 29, 1999, the carrying value of
the Company's financial instruments, including trade receivables and payables
and borrowings, approximated their fair value based on their terms and interest
rates.
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 130, "REPORTING COMPREHENSIVE
INCOME". SFAS No. 130 requires the Company to report in its financial
statements, in addition to its net income (loss), comprehensive income (loss),
which includes all changes in equity during a period from non-owner sources
including, as applicable, foreign currency items, minimum pension liability
adjustments and unrealized gains and losses on certain investments in debt and
equity securities. There were no differences between the Company's comprehensive
income and its net income as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE" ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there was no
impact of adopting SOP 98-1, which was effective for the Company's period ending
December 29, 1999.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION."
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic area and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company has determined that it does not have any
separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137 which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-186
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) RECLASSIFICATIONS
Certain amount in the December 31, 1997 and 1998 financial statements have
been reclassified with no effect on previously reported net income on
stockholders' equity to conform with the December 29, 1999 financial statement
presentation.
(2) BALANCE SHEET COMPONENTS
Property and equipment including equipment under capital leases stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- DECEMBER 29,
1997 1998 1999
--------- -------- ------------
<S> <C> <C> <C>
Internet access and computer equipment
including amounts related to capital
leases of $26,609, $26,609 and $26,609,
respectively.............................. $ 846,556 384,296 682,880
Building.................................. -- 277,441 420,111
Land...................................... -- 144,000 120,000
--------- -------- ---------
846,556 805,737 1,222,991
Less accumulated depreciation and
amortization, including amounts related to
capital leases of $950, $4,752 and $8,553,
respectively.............................. (237,787) (107,800) (172,325)
--------- -------- ---------
Total................................... $ 608,769 697,937 1,050,666
========= ======== =========
</TABLE>
Accrued Expenses
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- DECEMBER 29,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Director's fees.............................. $ 31,327 9,549 --
Employee commissions and expenses............ 20,806 27,793 340,652
Interest:
Related party.............................. 27,439 47,760 10,440
Other...................................... 4,288 1,583 2,539
-------- ------- ---------
$ 83,860 86,685 353,631
======== ======= =========
</TABLE>
(3) LINE OF CREDIT AND NOTES PAYABLE
At December 29, 1999, the Company had a $384,374 revolving line of credit
with a bank. The revolving line of credit was secured by real estate and expires
May 31, 2000. Borrowings bear interest at prime (8.75% at December 29, 1999)
plus .50%. At December 29, 1999, $384,374 was outstanding under the line of
credit.
F-187
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(3) LINE OF CREDIT AND NOTES PAYABLE (CONTINUED)
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- DECEMBER 29,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Note payable to a bank, due January 1998,
with interest at 9.75%, collateralized by equipment....... $ 60,759 -- --
Note payable to a bank, due May 1998, with interest at prime
plus 1%, collateralized by equipment...................... 65,055 -- --
Note payable to a bank, due February 1999, with interest at
prime plus .50%, collateralized by real estate............ -- 84,124 --
-------- ------ -----
$125,814 84,124 --
======== ====== =====
</TABLE>
All interest incurred on the line of credit and notes payable during the
years ended December 31, 1997 and 1998 and for the period from January 1, 1999
through December 29, 1999 was expensed.
(4) LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- DECEMBER 29,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Note payable to a bank, bearing interest at prime plus 1%,
payable in monthly installments of $3,366, collateralized
by equipment.............................................. $ 73,614 -- --
Note payable to a bank, bearing interest at prime plus 1%,
payable in monthly installments of $2,411, collateralized
by equipment.............................................. 73,484 -- --
Note payable to a bank, bearing interest at 8.25%, payable
in monthly installments of $2,100, collateralized by real
estate.................................................... -- 214,604 --
-------- ------- ------
147,098 214,604 --
Less current portion........................................ (57,964) (7,641) --
-------- ------- ------
Long-term debt, less current portion.................... $ 89,134 206,963 --
======== ======= ======
</TABLE>
All interest incurred on long-term debt during the years ended December 31,
1997 and 1998 and for the period from January 1, 1999 through December 29, 1999
was expensed.
F-188
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(5) LONG-TERM DEBT--RELATED PARTIES
Long-term debt--related parties consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- DECEMBER 29,
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Note payable to shareholder, unsecured, including interest
at 9.5%................................................... $ 47,764 47,764 --
Note payable to shareholder, unsecured, including interest
at 9.5%................................................... 138,699 138,699 90,646
-------- -------- -------
186,463 186,463 90,646
Less current portion........................................ -- (186,463) (90,646)
-------- -------- -------
Long-term debt--related parties, less current portion... $186,463 -- --
======== ======== =======
</TABLE>
All interest incurred on long-term debt--related parties during the years
ended December 31, 1997 and 1998 and for the period from January 1, 1999 through
December 29, 1999 was expensed.
(6) LEASES
The Company leases certain computer and office equipment under capital
leases and office space under noncancelable operating leases expiring at various
dates through 2000.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 29, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
2000..................................................... $18,977 56,000
2001..................................................... -- --
2002..................................................... -- --
2003..................................................... -- --
2004..................................................... -- --
------- ------
Total minimum payments................................. 18,977 56,000
======
Less amount representing interest........................ (2,954)
-------
Present value of net minimum lease payments............ 16,023
Less current portion..................................... (16,023)
-------
$ --
=======
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 and for the
period from January 1, 1999 through December 29, 1999 was $2,294, $3,321 and
$4,146, respectively.
(7) RELATED PARTY TRANSACTIONS
The Company obtains substantially all of its access to data communications
from a related party, through common ownership and control, under the terms of a
service agreement. For the year ended December 31, 1998 and for the period from
January 1, 1999 through December 29, 1999, the Company paid access fees to the
related party of $371,880 and $1,765,285, respectively. The related party relies
F-189
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
on third-party networks, local telephone companies and other companies to
provide data communications capacity. Although management feels alternative
telecommunications facilities could be found in a timely manner, any disruption
of these services could have an adverse effect on operating results.
In December 1999, the Company sold certain property and equipment to its
shareholders for its book value of $303,067.
In December 1999, the Company entered an agreement with a related party,
through common ownership and control, to enter a "purchase and sale agreement"
for certain property. The terms of the agreement are that for $384,374, the
Company will sell to and subsequently repurchase from the related party certain
property with a net book value of $529,000. At December 29, 1999, the property
had been sold to the related party. The Company believes it will execute the
repurchase of the property in 2000 under the terms of the agreement. The sole
purpose and economic substance of this transaction was to facilitate certain
negotiations involving the Company and its shareholders. The Company does not
believe an economic transfer of the property has occurred. Accordingly, the
Company has not recorded the sale of the property to the related party in the
accompanying financial statements.
In September 1998, the Company sold certain equipment to a related party,
through common ownership and control, for its book value of $530,746.
(8) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) which covers all eligible employees
meeting certain age, salary and service requirements. The Company may make
discretionary contributions to the Plan on behalf of employees that meet certain
contribution eligibility requirements defined under the terms of the Plan. The
Company contributed $1,672, $7,855 and $14,377 to the Plan during the years
ended December 31, 1997 and 1998 and for the period from January 1, 1999 through
December 29, 1999, respectively.
(9) INCOME TAXES
The company adopted SFAS No. 109 effective January 1, 1999. The effect of
adopting SFAS No. 109 did not have a material effect on the Company's financial
position or results of operations.
F-190
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(9) INCOME TAXES (CONTINUED)
The components of the provision for income taxes for the period from
January 1, 1999 through December 29, 1999 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
THROUGH
DECEMBER 29, 1999
-----------------
<S> <C>
Current
Federal................................................... $34,184
State..................................................... 6,417
-------
40,601
-------
Deferred
Federal................................................... 29,000
State..................................................... 6,000
-------
35,000
-------
$75,601
=======
</TABLE>
The income tax provision differs from the amounts that would result from
applying the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1999
THROUGH
DECEMBER 29, 1999
-----------------
<S> <C>
Expected tax provision...................................... $31,266
State income taxes, net of federal benefit.................. 5,517
Effect of adopting SFAS No. 109............................. 34,000
Other....................................................... 4,818
-------
$75,601
=======
</TABLE>
Temporary differences that give rise to the components of the net deferred
tax liability as of December 29, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 29,
1999
------------
<S> <C>
Deferred assets:
Deferred revenue.......................................... $ 21,000
--------
Deferred liabilities:
Depreciation.............................................. (56,000)
--------
Net deferred tax liability................................ $(35,000)
========
</TABLE>
From its inception through December 31, 1998, the Company elected to be an S
Corporation under the Internal Revenue Code. Accordingly, taxable income or loss
passed directly to the
F-191
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(9) INCOME TAXES (CONTINUED)
shareholders, and the Company did not provide for income taxes. For information
purposes, the statement of operations includes unaudited pro forma adjustments
for income taxes which would have been recorded had the Company not been an S
Corporation based on the tax laws in effect during the periods presented.
Unaudited pro forma income taxes for those periods are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Current
Federal............................................ $63,646 86,771
State.............................................. 11,949 16,290
------- --------
75,595 103,061
------- --------
Deferred
Federal............................................ (26,000) 6,000
State.............................................. (5,000) 1,000
------- --------
(31,000) 7,000
------- --------
$44,595 110,061
======= ========
</TABLE>
The differences between unaudited pro forma income taxes at the statutory
federal income tax rate of 34 percent and unaudited pro forma income taxes
reported in the statement of operations are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
----------- -----------
<S> <C> <C>
Tax at federal statutory rate........................ $ 38,127 100,046
State income taxes, net of federal benefit........... 6,728 17,655
Other................................................ (260) (7,640)
-------- --------
4$4,595... 110,061
======== ========
</TABLE>
(10) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation or liquidity.
F-192
<PAGE>
SURF SOUTH, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998 AND DECEMBER 29, 1999
(11) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF PERIOD AND EXPENSES WRITE-OFFS OF PERIOD
---------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful
accounts....................... $ -- 7,000 -- 7,000
======= ======= ======= =======
For the year ended December 31, 1998:
Allowance for doubtful
accounts....................... $ 7,000 53,041 (46,041) 14,000
======= ======= ======= =======
For the period from January 1, 1999
through December 29, 1999:
Allowance for doubtful
accounts....................... $14,000 120,944 (55,359) 79,585
======= ======= ======= =======
</TABLE>
(12) SUBSEQUENT EVENTS
On January 4, 2000 the Company's shareholders closed on a transaction dated
December 29, 1999 in which they sold all of the Company's stock to DURO
Communications, Inc.
F-193
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Digital Express Internet
Services, Inc. as of December 31, 1998 and 1999 and the related statements of
operations, stockholders' deficit, and cash flows for the years then ended.
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 Digital Express Internet
Services, Inc. as of December 31, 1998 and 1999 and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Kansas City, Missouri
February 18, 2000
F-194
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 69,335 --
Prepaid expenses and other................................ 2,360 29,738
--------- ------------
Total current assets.................................. 71,695 29,738
Property and equipment, net................................. 139,616 137,424
Other assets:
Goodwill, net of accumulated amortization of $1,066 and
$1,558.................................................. 6,318 5,826
Security deposits......................................... 5,285 5,960
--------- ------------
Total assets.......................................... $ 222,914 178,948
========= ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 123,789 291,158
Accrued expenses.......................................... 79,770 74,858
Outstanding checks in excess of cash deposits............. -- 6,021
Current portion of notes payable.......................... 47,773 62,220
Dividends payable......................................... 51,484 160,145
Deferred revenue.......................................... 206,828 321,344
--------- ------------
Total current liabilities............................. 509,644 915,746
Notes payable, less current portion......................... 41,156 --
--------- ------------
Total liabilities..................................... 550,800 915,746
--------- ------------
Stockholders' equity (deficit):
Common stock, $1 par value; 589 shares issued and
outstanding............................................. 589 589
Preferred stock, $1 par value; 25,000 shares issued and
outstanding............................................. 25,000 25,000
Additional paid-in capital................................ 88,911 88,911
Accumulated deficit....................................... (442,386) (851,298)
--------- ------------
Total stockholder's deficit........................... (327,886) (736,798)
Commitments
--------- ------------
Total liabilities and stockholders' deficit........... $ 222,914 178,948
========= ============
</TABLE>
See accompanying notes to financial statements.
F-195
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Internet services revenue................................... $ 732,778 1,426,786
Direct Internet services costs.............................. 725,665 1,164,286
--------- ---------
Gross profit............................................ 7,113 262,500
Selling, general, and administrative expenses............... 355,234 555,690
--------- ---------
Net loss from operations................................ (348,121) (293,190)
Other income (expense):
Interest expense.......................................... (7,219) (7,061)
Gain on sale of equipment................................. 61,353 --
--------- ---------
Loss before income taxes................................ (293,987) (300,251)
Income tax provision........................................ -- --
--------- ---------
Net loss................................................ $(293,987) (300,251)
========= =========
</TABLE>
See accompanying notes to financial statements.
F-196
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PREFERRED PAID-IN ACCUMULATED
SHARES STOCK STOCK CAPITAL DEFICIT TOTAL
-------- -------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997............... 25,500 $500 25,000 -- (88,779) (63,279)
Issuance of common stock for cash.......... 89 89 -- 88,911 -- 89,000
Dividends declared......................... -- -- -- -- (59,620) (59,620)
Net loss................................... -- -- -- -- (293,987) (293,987)
------ ---- ------ ------ -------- --------
BALANCE AT DECEMBER 31, 1998............... 25,589 589 25,000 88,911 (442,386) (327,886)
Dividends declared......................... -- -- -- -- (108,661) (108,661)
Net loss................................... -- -- -- -- (300,251) (300,251)
------ ---- ------ ------ -------- --------
BALANCE AT DECEMBER 31, 1999............... 25,589 $589 25,000 88,911 (851,298) (736,798)
====== ==== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-197
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(293,987) (300,251)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Depreciation and amortization........................... 23,262 37,453
Changes in operating assets and liabilities:
Receivables........................................... -- --
Prepaid expenses and other current assets............. (4,981) (28,053)
Accounts payable...................................... 100,697 167,369
Accrued expenses...................................... 63,260 (4,912)
Outstanding checks in excess of cash deposits......... -- 6,021
Deferred revenue...................................... 137,789 114,516
--------- ---------
Net cash provided (used) by operating activities.... 26,040 (7,857)
--------- ---------
Cash flows from investing activities -- acquisition of
equipment and leasehold improvements...................... (108,820) (34,769)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable............................... 104,806 25,389
Repayments of notes payable............................... (33,426) (52,098)
Repayments of capital lease obligations
Dividends paid............................................ (8,136) --
Proceeds from issuance of common stock, net of issuance
costs................................................... 89,000 --
--------- ---------
Net cash provided (used) by financing
activities...................................... 152,244 (26,709)
--------- ---------
Net increase (decrease) in cash and cash
equivalents..................................... 69,464 (69,335)
Cash and cash equivalents:
Beginning of year......................................... (129) 69,335
--------- ---------
End of year............................................... $ 69,335 --
========= =========
</TABLE>
Supplemental disclosure of cash flow information:
For each of the years in the two-year period ended December 31, 1999, the
Company paid approximately $7,000 for interest.
See accompanying notes to financial statements.
F-198
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Digital Express Internet Services, Inc. (the Company) was incorporated on
October 21, 1996 to capitalize on the growing demand for Internet access and
enhanced services by consumers and business users through the phased
acquisition, integration, and growth of existing independent Internet service
providers in targeted geographic regions. The goal of the Company is to become a
national provider of full service Internet connectivity and enhanced Internet
services, including hosting web sites. The Company commenced operations in
October 27, 1996.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive Internet
services, the continued acceptance of the Internet, and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1998 and 1999 were approximately $69,000 and $0, respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to seven years. Property and equipment under
capital leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(E) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a fifteen-year period.
F-199
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of 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 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of APB Opinion No. 17, INTANGIBLE ASSETS, based upon estimated fair
value. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
(G) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(H) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(I) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set-up fees are recognized over twenty
months, which represent the industry's average customer turnover rate. Revenue
from hardware and software sales is recognized upon shipment of the respective
products.
(J) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising, and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in selling, general, and administrative
expenses and totaled approximately $8,000 and $10,000 for the years ended
December 31, 1998 and 1999, respectively.
F-200
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires the Company to report in its financial statements,
in addition to its net income (loss), comprehensive income (loss), which
includes all changes in equity during a period from nonowner sources including,
as applicable, foreign currency items, minimum pension liability adjustments,
and unrealized gains and losses on certain investments in debt and equity
securities. There were no differences between the Company's comprehensive loss
and its net loss as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 provides guidance
for determining whether computer software is internal-use software, and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company adopted SOP 98-1 in 1999.
The impact of adoption was not material in 1999.
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Internet access and computer equipment.................. $ 79,884 113,153
Furniture and fixtures.................................. 17,146 17,146
Automobiles............................................. 64,656 66,156
Leasehold improvement................................... 10,469 10,469
-------- --------
172,155 206,924
Less accumulated depreciation........................... (32,539) (69,500)
-------- --------
Total................................................. $139,616 137,424
======== ========
</TABLE>
Prepaid expenses and other current assets:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Prepaid rent and other...................................... $2,360 --
Employee advances........................................... -- 29,738
------ ------
Total..................................................... $2,360 29,738
------ ------
</TABLE>
Accrued expenses:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Payroll taxes.............................................. $79,770 67,905
Penalties and interest..................................... -- 6,953
------- ------
Total.................................................... $79,770 74,858
======= ======
</TABLE>
F-201
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(3) DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Note payable; interest at 7.2%, principal and interest
payable monthly through 1999, collateralized by a
certificate of deposit.................................... $ 40,192 --
Note payable; interest at 11.5%, principal and interest
payable monthly through 2001, collateralized by an
automobile with a carrying value of approximately $15,000
at December 31, 1999...................................... 16,375 11,258
Note payable; interest at 11.5%, principal and interest
payable monthly through 2001, collateralized by an
automobile with a carrying value of approximately $31,000
at December 31, 1999...................................... 32,362 29,847
Note payable; interest at 11.0%, principal and interest
payable monthly through 2000, collateralized by various
pieces of computer equipment.............................. -- 21,115
-------- -------
Total notes payable................................... 88,929 62,220
Less current portion........................................ (47,773) (62,220)
-------- -------
Notes Payable, less current portion..................... $ 41,156 --
======== =======
</TABLE>
The above notes payable were repaid in February 2000.
(4) LEASES
The Company leases certain computer equipment and office space under
noncancelable operating leases expiring at various dates through 2001.
Future minimum annual lease payments under noncancelable operating leases as
of December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $42,680
2001........................................................ 7,256
-------
Total....................................................... $49,936
=======
</TABLE>
Rental expense for the years ended December 31, 1998 and 1999 was
approximately $86,000 and $132,000, respectively.
(5) INCOME TAXES
Income tax benefit differs from the amounts that would result from applying
the federal statutory rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Expected tax benefit........................................ $ (99,956) (102,085)
State income taxes, net of federal benefit.................. (10,017) (10,889)
Change in valuation allowance............................... 103,826 110,414
Other....................................................... 6,147 2,560
--------- --------
$ -- --
========= ========
</TABLE>
F-202
<PAGE>
DIGITAL EXPRESS INTERNET SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(5) INCOME TAXES (CONTINUED)
Temporary differences that give rise to the components of deferred tax
assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
--------- --------
<S> <C> <C>
Net operating loss carryforward............................. $ 77,487 147,672
Deferred revenue............................................ 81,196 126,198
Depreciation................................................ (10,089) (14,752)
Other, net.................................................. 807 697
--------- --------
Gross deferred tax assets............................. 149,401 259,815
Valuation allowance......................................... (149,401) (259,815)
--------- --------
Net deferred tax asset................................ $ -- --
--------- --------
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward for
federal income tax purposes of approximately $402,000, all of which is available
to offset future federal taxable income, if any, through 2019. Due to the
uncertainty regarding the ultimate utilization of the net operating loss
carryforward, no tax benefit for losses has been provided by the Company in 1998
and 1999, and a valuation allowance has been recorded for the entire amount of
the deferred tax asset.
(6) SETTLEMENT WITH INTERNAL REVENUE SERVICE
During 1999, the Company reached a settlement with the Internal Revenue
Service regarding outstanding payroll taxes that had not been submitted. As part
of the settlement, the Company agreed to make installment payments of $5,000 a
month until all outstanding payroll taxes are paid in full, including penalties
and interest. The outstanding payroll tax liability is included with accrued
expenses in the accompanying balance sheets.
(7) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material effect on the Company's
financial position, results of operation, or liquidity.
(8) SUBSEQUENT EVENT
In February 2000, all of the Company's assets were sold to DURO
Communications, Inc. for $2,250,000. In connection with the sale of assets, all
notes payable, capital leases, and operating leases obligations were paid in
full at closing.
F-203
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheet of Gulf Coast Internet
Corporation, Inc. as of December 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the year ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 Gulf Coast Internet
Corporation, Inc. as of December 31, 1999, and the results of its operations and
its cash flows for the year ended December 31, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Kansas City, Missouri
April 10, 2000
F-204
<PAGE>
GULF COAST INTERNET CORPORATION, INC
BALANCE SHEET
DECEMBER 31, 1999
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 26,019
Receivables, net of allowance for doubtful accounts of
$13,802................................................. 83,292
Deferred taxes............................................ 5,194
Inventory................................................. 14,849
Prepaid expenses and other assets......................... 9,484
--------
Total current assets.................................... 138,838
Property and equipment, net................................. 357,317
Other assets:
Goodwill, net of accumulated amortization of $10,584...... 52,230
Deferred income taxes..................................... 1,374
--------
Total assets............................................ $549,759
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $122,402
Accrued expenses.......................................... 107,991
Current portion notes payable............................. 142,736
Current portion of capital lease obligations.............. 11,904
Other liabilities......................................... 11,203
--------
Total current liabilities............................... 396,236
Capital lease obligations, less current portion............. 5,181
--------
Total liabilities....................................... 401,417
Stockholders' equity:
Common stock, $.10 par value. Authorized 10,000 shares,
issued and outstanding 2,000 shares..................... 200
Additional paid-in capital................................ 46,800
Retained earnings......................................... 101,342
--------
Total stockholder's equity.............................. 148,342
--------
Commitments............................................... --
--------
Total liabilities and stockholders' equity.............. $549,759
========
</TABLE>
See accompanying notes to financial statements.
F-205
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Internet services revenue................................... $2,569,657
Direct Internet services costs.............................. 1,027,250
----------
Gross profit.............................................. 1,542,407
Selling, general and administrative expenses................ 1,493,034
----------
Operating profit.......................................... 49,373
Interest expense............................................ 25,087
----------
Income before income taxes................................ 24,286
Income tax provision........................................ 5,350
----------
Net income................................................ $ 18,936
==========
</TABLE>
See accompanying notes to financial statements.
F-206
<PAGE>
GULF COAST INTERNET CORPORATION, INC
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
-------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998..................... 2,000 $200 46,800 82,406 129,406
Net income....................................... -- -- -- 18,936 18,936
----- ---- ------ ------- -------
BALANCE AT DECEMBER 31, 1999..................... 2,000 $200 46,800 101,342 148,342
===== ==== ====== ======= =======
</TABLE>
See accompanying notes to financial statements.
F-207
<PAGE>
GULF COAST INTERNET CORPORATION, INC
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 18,936
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 146,638
Changes in operating assets and liabilities:
Receivables......................................... (52,196)
Deferred taxes...................................... (1,636)
Inventories......................................... (2,027)
Prepaid expenses and other current assets........... 6,041
Accounts payable and accrued expenses............... 78,985
---------
Net cash provided by operating activities......... 194,741
---------
Cash flows from investing activities:
Acquisition of equipment and leasehold improvements....... (60,288)
Purchase of intangible assets............................. (6,681)
---------
Net cash used in investing activities............. (66,969)
---------
Cash flows from financing activities:
Repayments of notes payable............................... (135,108)
Repayments of capital lease obligations................... (8,266)
---------
Net cash used in financing activities............. (143,374)
---------
Net decrease in cash and cash equivalents......... (15,602)
Cash and cash equivalents:
Beginning of year......................................... 41,621
---------
End of year............................................... $ 26,019
=========
Supplemental disclosure of cash flow information:
During the year ended December 31, 1999, the Company paid
approximately $25,000, for interest.
</TABLE>
See accompanying notes to financial statements.
F-208
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Gulf Coast Internet Corporation, Inc. (Gulf Coast Internet or the Company)
was incorporated in April 1994 to capitalize on the growing demand for Internet
access and enhanced services by consumers and business users through the phased
acquisition, integration, and growth of existing independent Internet service
providers in targeted geographic regions. The goal of the Company is to provide
full service solutions for Internet and network connectivity and enhanced
Internet services, including hosting web-sites, in the southeast region of the
United States. The Company commenced operations in May 1994.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, dependence upon strategic alliances,
and the limited history of the need for Internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective and competitive Internet services, the continued acceptance of
the Internet, and the Company's ability to develop and provide new services that
meet customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to ten years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(D) INTANGIBLE ASSETS
The excess of cost over the fair value of net assets acquired, or goodwill,
is amortized using the straight-line method over a ten-year period.
F-209
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of 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 requires impairment losses to be recorded on
long-lived assets used in operations, including goodwill, when indicators of
impairment are present and the undiscounted future cash flows estimated to be
generated by those assets are less than the assets' carrying amount. In
addition, the recoverability of goodwill is further evaluated under the
provisions of APB Opinion No. 17, INTANGIBLE ASSETS, based upon estimated fair
value. If such assets are impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the fair value
of the assets. Assets to be disposed of are reported at the lower of the
carrying value or fair value, less costs to sell.
(F) PEERING RELATIONSHIPS
The Company does not pay any fees in connection with its peering
relationships with other companies and does not record revenue or expense in
connection with those arrangements. The nature of these relationships is that
the parties share the responsibility for communications that occur between their
respective local networks. These peering relationships are essentially exchanges
of similar productive assets rather than a culmination of an earnings process.
Accordingly, these arrangements are appropriately not reflected in the
operations of the Company.
(G) INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No. 109,
ACCOUNTING FOR INCOME TAXES (SFAS 109). SFAS No. 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(H) REVENUE RECOGNITION
Revenue from Internet and consulting services is recognized as the services
are provided. Revenue from hardware and software sales is recognized upon
shipment of the respective products.
(I) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and accounts receivable. As of
December 31, 1999, the Company had concentrations of credit risk in one
financial institution in the form of a money market account in the approximate
amount of $26,000. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base and the relatively minor balances of each individual
account. At December 31, 1999, the fair value of the Company's financial
instruments approximate their carrying value based on their terms and interest
rates.
No sales to individual customers totaled over 1% of all sales in the year
ended December 31, 1999.
F-210
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 130, REPORTING COMPREHENSIVE
INCOME. SFAS No. 130 requires the Company to report in its financial statements,
in addition to its net income, comprehensive income, which includes all changes
in equity during a period from non-owner sources including, as applicable,
foreign currency items, minimum pension liability adjustments and unrealized
gains and losses on certain investments in debt and equity securities. There
were no differences between the Company's comprehensive income and its net
income as reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 provides guidance for
determining whether computer software is internal-use software and on accounting
for the proceeds of computer software originally developed or obtained for
internal use and then subsequently sold to the public. It also provides guidance
on capitalization of the costs incurred for computer software developed or
obtained for internal use. The Company has determined there is no impact from
the adoption of SOP 98-1.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic area, and major
customers. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The Company has determined that it does not have any
separately reportable business segments.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement is not expected to affect the Company as the Company currently
does not have any derivative instruments or hedging activities.
In June 1999, the FASB issued SFAS No. 137, which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
F-211
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost at December 31, 1999:
<TABLE>
<S> <C>
Internet access and computer equipment including amounts
related to capital leases of $28,300...................... $ 757,623
Furniture and fixtures...................................... 11,267
Leasehold improvement....................................... 5,696
---------
774,586
Less accumulated depreciation and amortization, including
amounts related to capital leases of $12,697.............. (417,269)
---------
Total................................................... $ 357,317
=========
</TABLE>
Accrued Expenses
<TABLE>
<S> <C>
Employee commissions and expenses........................... $ 6,882
Accrued vacation pay........................................ 26,277
Other....................................................... 74,832
---------
$ 107,991
=========
</TABLE>
(3) NOTES PAYABLE
The Company had a note payable with a bank totaling $142,736 at
December 31, 1999. This note carries an interest rate of 8.75% and is payable in
equal monthly installments through December 2000. The Company has pledged cash
and property and assignment as collateral.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
F-212
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(4) LEASES (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
2000.................................................... $ 11,904 137,497
2001.................................................... 7,786 72,625
2002.................................................... -- 17,581
-------- --------
Total minimum payments................................ 19,690 227,703
========
Less amount representing interest....................... (2,605)
--------
Present value of net minimum lease payments........... 17,085
Less current portion.................................... (11,904)
--------
$ 5,181
========
</TABLE>
Rent expense for the year ended December 31, 1999 was $117,978 and is
included in selling, general, and administrative expenses.
(5) EMPLOYEE BENEFIT PLAN
The Company has a 401(k) Plan (the Plan) for all full time employees of the
Company. The Company may make discretionary contributions to the Plan on behalf
of employees that meet certain contribution eligibility requirements defined
under the terms of the Plan. The Company did not make any contributions to the
Plan during the year ended December 31, 1999.
(6) INCOME TAXES
Income tax expense differs from the amounts that would result from applying
the federal statutory rate of 34% for the year ended December 31, 1999 is as
follows:
<TABLE>
<S> <C>
Expected tax expense........................................ $8,257
State income taxes, net of federal benefit.................. 1,131
Graduated rates and other................................... (4,038)
------
Income tax expense.................................... $5,350
------
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets as of December 31 are as follows:
<TABLE>
<S> <C>
Reserve for bad debts....................................... $5,194
Goodwill.................................................... 1,374
------
Gross deferred tax assets............................. $6,568
======
</TABLE>
F-213
<PAGE>
GULF COAST INTERNET CORPORATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(6) INCOME TAXES (CONTINUED)
At December 31, 1999 a valuation allowance for deferred tax assets was not
considered by management to be necessary to reduce such asset to an amount that
will more likely than not be realized.
(7) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS DEDUCTIONS AT END
OF YEAR AND EXPENSES WRITE-OFFS OF YEAR
---------- ------------ ---------- --------
<S> <C> <C> <C> <C>
For the year ended December 31, 1999:
Allowance for doubtful accounts.................. $11,385 23,868 (21,451) 13,802
======= ====== ======= ======
</TABLE>
(8) SUBSEQUENT EVENT
On February 4, 2000, all of Gulf Coast Internet Corporation, Inc.'s assets
were sold to DURO Communications, Inc. for approximately $4.9 million in cash.
In connection with the sale of assets, all notes payable, capital leases, and
operating lease obligations were paid in full at closing.
F-214
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of DSS Online LLC as of
December 31, 1998 and 1999, and the related statements of operations, changes in
members' equity (deficit), and cash flows and for the years then ended. 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 DSS Online, LLC as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
KPMG LLP
Detroit, Michigan
February 25, 2000
F-215
<PAGE>
DSS ONLINE, LLC
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- 2,478
Receivables:
Trade................................................... 48,144 143,715
Due from related party.................................. 97,367 146,375
Note receivable--related party, plus accrued interest..... 10,600 11,200
Inventory................................................. -- 12,831
Other current assets...................................... 220 --
--------- --------
Total current assets.................................... 156,331 316,599
Property, plant and equipment, net.......................... 268,456 304,483
Intangible:
Intangible assets, net of accumulated amortization
of $0 and $417, respectively............................ -- 4,583
Organization costs, net of accumulated amortization
of $115 and $230, respectively.......................... 230 115
--------- --------
Total assets............................................ $ 425,017 625,780
========= ========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Line of credit borrowings................................. $ 23,115 454,458
Mortgage payable, current portion......................... 4,544 4,744
Current portion, note payable obligation.................. 8,950 --
Current portion, capital leases obligations............... 23,181 29,696
Bank overdraft............................................ 8,509 --
Trade payables............................................ 94,828 165,829
Due to related party...................................... 76,739 --
Accrued expenses.......................................... 23,871 19,464
Deferred revenue.......................................... 44,230 58,400
--------- --------
Total current liabilities............................... 307,967 732,591
Mortgage payable, less current portion...................... 107,599 102,855
Capital lease obligations, less current portion............. 14,209 30,586
--------- --------
Total liabilities....................................... 429,775 866,032
Members' deficit:
Contributed capital....................................... 149,942 164,242
Accumulated deficit....................................... (154,700) (404,494)
--------- --------
Total members' deficit.................................. (4,758) (240,252)
--------- --------
Total liabilities and members' deficit.................. $ 425,017 625,780
========= ========
</TABLE>
See accompanying notes to financial statements.
F-216
<PAGE>
DSS ONLINE, LLC
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Internet services revenue................................... $697,565 1,030,622
Direct Internet services costs.............................. 460,297 823,788
-------- ---------
Gross profit............................................ 237,268 206,834
Selling, general and administrative:
Salaries and wages........................................ 81,428 155,535
Advertising expense....................................... 15,795 18,837
Office and supplies....................................... 13,427 24,215
Repairs and maintenance................................... 6,204 4,445
Meals, travel and entertainment........................... 3,365 4,750
Insurance................................................. 7,842 7,790
Legal and accounting...................................... 1,683 5,849
Equipment expense......................................... 23,761 39,256
Bad Debt.................................................. 27,464 46,130
Other..................................................... 17,328 30,180
-------- ---------
Total selling, general and administrative............... 198,297 336,987
Income/(loss) before interest, loss on sale of assets,
depreciation and amortization expense..................... 38,971 (130,153)
Interest expense, net..................................... (13,655) (12,727)
Loss on disposal of assets................................ -- (1,515)
Depreciation expense...................................... (94,057) (104,867)
Amortization expense...................................... (115) (532)
-------- ---------
Net loss................................................ $(68,856) (249,798)
======== =========
Proforma income tax benefit............................... $ -- --
======== =========
Proforma net loss......................................... $(68,856) (249,798)
======== =========
</TABLE>
See accompanying notes to financial statements.
F-217
<PAGE>
DSS ONLINE, LLC
STATEMENTS OF CHANGES IN MEMBERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
CONTRIBUTED ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- --------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997................................ $ 94,942 (85,844) 9,098
Member capital contribution................................. 60,000 -- 60,000
Non-cash member capital contributions....................... 10,000 -- 10,000
Cash distributions to members............................... (15,000) -- (15,000)
Net loss.................................................... -- (68,856) (68,856)
--------- -------- --------
BALANCE AT DECEMBER 31, 1998................................ 149,942 (154,700) (4,758)
Member capital contribution................................. 82,000 -- 82,000
Non-cash member capital contribution........................ 10,000 -- 10,000
Cash distributions to members............................... (101,000) -- (101,000)
Sale of member interest..................................... 23,300 -- 23,300
Net loss.................................................... -- (249,794) (249,794)
--------- -------- --------
BALANCE AT DECEMBER 31, 1999................................ $ 164,242 (404,494) (240,252)
========= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-218
<PAGE>
DSS ONLINE, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (68,856) (249,794)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization........................... 94,172 105,399
Loss on disposal of assets.............................. -- 1,515
Changes in operating assets and liabilities, excluding
effects of business combinations:
Trade receivables..................................... (48,144) (95,571)
Due from related party................................ (42,448) (49,008)
Note receivable--related party........................ 660 (600)
Inventory............................................. -- (7,832)
Other current assets.................................. (220) 220
Trade payables........................................ 40,208 71,001
Due to related party.................................. 38,173 (76,739)
Accrued expenses...................................... 23,871 (4,407)
Deferred revenue...................................... 19,481 14,170
--------- --------
Net cash provided by (used in) operating
activities........................................ 56,897 (291,646)
--------- --------
Cash flows from investing activities--fixed asset
additions................................................. (108,747) (79,891)
--------- --------
Cash flows from financing activities:
Proceeds from lines of credit borrowings................ 163,115 638,343
Payments on line of credit.............................. (140,000) (207,000)
Repayment on mortgage payable........................... (3,234) (4,544)
Repayment on notes payable.............................. (10,874) (8,950)
Repayments of capital lease obligations................. (2,343) (39,625)
Sale of member interest................................. -- 23,300
Member capital contributions............................ 60,000 82,000
Cash distributions to members........................... (15,000) (101,000)
--------- --------
Net cash provided by financing activities........... 51,664 382,524
--------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (186) 10,987
Net overdraft--beginning of year............................ (8,323) (8,509)
--------- --------
Net cash (overdraft)--end of year........................... $ (8,509) 2,478
========= ========
Supplemental disclosure of cash flow information: Cash
payments for interest expense............................. $ 20,638 23,169
========= ========
</TABLE>
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital leases obligations resulted in non-cash financing activities
aggregating $14,907 and $62,516 for the years ended December 31, 1998 and
1999.
In 1998, a member contributed a note receivable bearing interest at 6% in
exchange for an increased member interest.
In 1999, a member contributed $5,000 of inventory and $5,000 of intangible
assets in exchange for an increased member interest.
See accompanying notes to financial statements.
F-219
<PAGE>
DSS ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
DSS Online LLC (the "Company") is a Georgia limited liability corporation
that was formed on December 18, 1995 to capitalize on the growing demand for
Internet access and enhanced services by consumers and business users through
the phased acquisition, integration, and growth of existing independent Internet
service providers in targeted geographic regions. The goal of the Company is to
become a premier provider of full service Internet connectivity and enhanced
Internet services, including hosting web-sites. The Company has three
divisions--Commerce Engine, Integration and ISP.
The Company's members share earnings and losses in proportion to their
percentage of ownership interest in the Company. However, should a sale or
liquidation occur, the liquidating distributions will be made first to the
members in proportion to their respective cash contributions and next in
proportion to their remaining respective capital accounts.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Property and equipment are
stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets, generally ranging from three to
seven years. Property and equipment under capital leases are stated at the fair
market value and are amortized using the straight-line method over the shorter
of the lease term or the estimated useful lives of the assets. Building and
improvements are amortized using the straight-line method over thirty-nine
years.
(D) INVENTORY
The Company maintains an inventory of materials and supplies valued at cost.
(E) INCOME TAXES
The Company operates as a limited liability corporation, and therefore, the
income or losses of the Company are allocated and taxable to its members
directly. Accordingly, no provision for Federal income taxes has been made.
F-220
<PAGE>
DSS ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The unaudited pro forma income tax information included in statements of
operations and note 8 was presented in accordance with SFAS No. 109 as if the
Company had been subject to federal and state income taxes for the years ended
December 31, 1998 and 1999.
(F) ORGANIZATION COST
Organization costs have been capitalized and are being amortized on a
straight-line basis over a five-year period.
(G) REVENUE RECOGNITION
Revenue related to Internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon
completion of the services.
Revenue from consulting services is recognized as the services are provided.
Revenue from hardware and software sales is recognized upon shipment of the
respective products.
(H) SALES AND MARKETING COSTS
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in advertising expense and totaled
approximately $15,700 and $18,900 for the years ended December 31, 1998 and
1999, respectively.
(I) BARTER TRANSACTIONS
The Company barters Internet connectivity in exchange for advertising and
repair and maintenance on its building in a limited way. Because of the
insignificant amount incurred during 1998 and 1999, the financial statements do
not reflect these amounts.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires the Company to report in its financial statements, in addition to its
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. There were no
differences between the Company's comprehensive loss and its net loss as
reported.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1). SOP 98-1 provides guidance
for determining whether computer software is internal-use software and on
accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has determined there is no
impact, of adopting SOP 98-1, which will be effective for the Company's year
ending December 31, 1999 and 1998.
F-221
<PAGE>
DSS ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
its activity is all within one business segment.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment, including equipment under capital leases
stated at cost
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
--------- --------
<S> <C> <C>
Land................................................... $ 10,000 10,000
Building and improvements.............................. 131,084 131,084
Equipment including amounts related to capital leases
of $66,830 and $129,346, respectively................ 299,372 440,337
Furniture and fixtures................................. 4,066 4,990
--------- --------
444,522 586,411
Less accumulated depreciation including amounts related
to capital leases of $31,357 and $64,439,
respectively......................................... (176,066) (281,928)
--------- --------
Total.............................................. $ 268,456 304,483
========= ========
</TABLE>
(3) RELATED PARTY TRANSACTIONS
The Company has a note receivable of $97,367 and $146,375 at December 31,
1998 and 1999, respectively, from a related entity which bears interest at prime
plus 1% and is payable to the Company on demand. The prime lending rate was
7.75% and 8.50% at December 31, 1998 and 1999, respectively.
Additionally, during 1998, the Company utilized a related party line of
credit agreement to borrow funds. At December 31, 1998 and 1999, this Due to
related party liability was $76,739 and $0, respectively.
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
On June 18, 1999, the Company sold a 10% equity interest to an existing
member for $53,785.
On August 1, 1999, the Company sold a 10% member interest to a new member
for $10,000. The member contributed inventory and a customer list each valued at
$5,000. The customer list is recorded as an intangible asset and amortized using
the straight-line method over five years and the inventory was recorded at fair
market value.
(5) LINE OF CREDIT
In 1999, the Company was granted a line of credit in the amount of $150,095
and which bears interest at 1% above prime, and is payable on February 28, 2000.
The line of credit is collateralized by
F-222
<PAGE>
DSS ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(5) LINE OF CREDIT (CONTINUED)
substantially all assets of the Company. At December 31, 1999, line of credit
borrowings totaled $454,458.
In 1998, the Company was granted a line of credit in the amount of $60,115
and which bears interest at .5% above prime, and is payable on December 22,
1999. The line of credit was collateralized by substantially all assets of the
Company. At December 31, 1998, line of credit borrowings totaled $23,115.
(6) NOTE AND MORTGAGE PAYABLE
On October 6, 1997, the Company entered into a mortgage for $116,000 to
purchase the building that the Company resides. The mortgage bears an interest
rate of 9.25% and is payable over five years in equal monthly installments of
$1,204, including interest, with a balloon payment of $94,737 due on
November 10, 2002.
On September 3, 1996, the Company entered into a note for $32,020 to
purchase equipment. The note bears an interest rate of 10% and is payable over
three years in equal monthly installments of $1,037, including interest.
(7) SUBSEQUENT EVENT
On February 24, 2000, all of DSS Online, LLC's assets were sold to DURO
Communications, Inc. for approximately $1.5 million in cash and 11,048 shares of
DURO Communications, Inc. Common Stock. In connection with the sale of assets,
all notes payable, capital leases, and operating lease obligations were paid in
full at closing.
(8) LEASES
The Company leases certain computer and office equipment under capital
leases and under noncancelable operating leases expiring at various dates
through 2003. Total rental expense under operating leases were approximately
$1,300 and $28,000 for the years ended December 31, 1998 and 1999, respectively.
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
2000..................................................... $ 34,246 43,008
2001..................................................... 29,498 20,964
2002..................................................... 2,906 5,769
2003..................................................... -- 481
-------- ------
Total minimum payments............................... 66,650 70,222
======
Less amount representing interest........................ (6,368)
--------
Present value of net minimum lease payments............ 60,282
Less current portion..................................... (29,696)
--------
Obligation under capital leases, net of current
portion................................................ $ 30,586
========
</TABLE>
F-223
<PAGE>
DSS ONLINE, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(9) PRO FORMA INCOME TAXES (UNAUDITED)
As stated in Footnote 2(d), the company is not subject to Federal and State
income taxes. Pro forma income tax information is provided below to illustrate
the tax impact on the financial statements of providing for taxes as if the
company was subject to Federal and State income taxes. Pro forma expense
(benefit) differs from the amounts that would result from applying the federal
statutory rate of 35% to the Company's net loss for the period ended
December 31, 1998 and 1999.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1999
---------- -----------
<S> <C> <C>
Expected pro forma tax benefit....................... $(29,350) (123,845)
State income taxes, net of federal benefit........... -- --
Increase in valuation allowance...................... 29,350 123,845
-------- --------
$ -- --
======== ========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1998
-------- --------
<S> <C> <C>
Net operating loss carryforward......................... $ 34,381 179,457
Valuation allowance..................................... (34,381) (179,457)
-------- --------
Net deferred tax asset.................................. $ -- --
======== ========
</TABLE>
The pro forma net income information assumes that distributions to members
of $15,000 and $101,000 for the years ended December 31, 1998 and 1999,
respectively, are considered compensation expense. The valuation allowance noted
above is provided based on management's estimation of the recoverability of the
deferred tax asset in future periods.
F-224
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications Inc.:
We have audited the accompanying consolidated balance sheets of Wave
Communications, Inc. and Subsidiary (formerly Greer Educational
Resources, Inc.) as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wave
Communications, Inc. and Subsidiary as of December 31, 1998 and 1999, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Detroit, Michigan
February 18, 2000, except for Note 8
which is as of March 21, 2000
F-225
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY GREER EDUCATIONAL RESOURCES, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $129,079 187,039
Receivables:
Trade, net of allowance for doubtful accounts of $12,000
in 1999............................................... 20,458 308,668
Related parties......................................... 11,173 44,288
-------- ---------
Total current assets.................................. 160,710 539,995
Property and equipment, net................................. 269,620 781,825
Intagible assets, net of accumulated amortization of
$1,042.................................................... -- 50,000
Other assets, net........................................... 1,501 1,501
-------- ---------
Total assets.......................................... $431,831 1,373,321
======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 39,796 326,160
Accrued expenses.......................................... 24,537 20,586
Current portion of notes payable and lines of credit...... 6,413 114,781
Current portion of capital lease obligations.............. 78,484 295,734
Deferred revenue.......................................... 154,597 352,965
-------- ---------
Total current liabilities............................. 303,827 1,110,226
Notes payable and lines of credit, less current portion..... 2,260 231,252
Capital lease obligations, less current portion............. 133,828 354,111
-------- ---------
Total liabilities..................................... 439,915 1,695,589
Stockholders' deficit:
Common stock, $.01 par value; 10,000 shares authorized,
issued and outstanding.................................. 100 100
Additional paid-in capital................................ 1,650 1,650
Accumulated deficit....................................... (9,834) (324,018)
-------- ---------
Total stockholders' deficit........................... (8,084) (322,268)
-------- ---------
Commitments and Contingencies
Total liabilities and stockholders' deficit........... $431,831 1,373,321
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-226
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY GREER EDUCATIONAL RESOURCES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Revenue:
Internet services revenue................................. $652,459 996,042 2,150,451
Gain on sale of equipment................................. 13,655 737 --
Enhanced services and other............................... 269 481 341,001
-------- -------- ---------
Total revenue......................................... 666,383 997,260 2,491,452
Internet services costs:
Direct Internet services.................................. 193,176 265,054 662,952
Enhanced services and other............................... -- 28,586 28,196
-------- -------- ---------
Total direct Internet services costs.................. 193,176 293,640 691,148
-------- -------- ---------
Gross profit.......................................... 473,207 703,620 1,800,304
Selling, general and administrative:
Salaries and employee benefits............................ 189,407 353,643 990,948
Advertising expense....................................... 25,841 61,132 86,310
Rent and occupancy........................................ 53,034 38,903 54,862
Repairs and maintenance................................... 3,262 20,292 120,388
Consulting fees........................................... 2,440 7,366 175,860
Travel and entertainment.................................. 1,281 4,200 17,368
Insurance................................................. 4,793 3,774 10,789
Other..................................................... 77,410 160,668 307,720
-------- -------- ---------
Total selling, general and administrative............... 357,468 649,978 1,764,245
-------- -------- ---------
Income before income taxes, interest, depreciation and
amortization.............................................. 115,739 53,642 36,059
Interest expense.......................................... 3,943 9,984 31,317
Depreciation and amortization expense..................... 42,274 82,571 217,907
-------- -------- ---------
Income (loss) before income taxes..................... 69,522 (38,913) (213,165)
Income tax provision...................................... 18,800 (11,546) 1,289
-------- -------- ---------
Net income (loss)..................................... $ 50,722 (27,367) (214,454)
======== ======== =========
Proforma income tax benefit................................. (13,700) --
======== =========
Proforma net loss........................................... (13,667) (214,454)
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-227
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY GREER EDUCATIONAL RESOURCES, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS/
PAID-IN ACCUMULATED
AMOUNT CAPITAL DEFICIT TOTAL
-------- ---------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996......................... $100 1,650 26,698 28,448
Net income........................................... -- -- 50,722 50,722
---- ----- -------- --------
BALANCE AT DECEMBER 31, 1997......................... 100 1,650 77,420 79,170
Stockholders' distributions.......................... -- -- (59,887) (59,887)
Net loss............................................. -- -- (27,367) (27,367)
---- ----- -------- --------
BALANCE AT DECEMBER 31, 1998......................... 100 1,650 (9,834) (8,084)
Stockholders' distributions.......................... -- -- (99,730) (99,730)
Net loss............................................. -- -- (214,454) (214,454)
---- ----- -------- --------
BALANCE AT DECEMBER 31, 1999......................... $100 1,650 (324,018) (322,268)
==== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-228
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARY
(FORMERLY GREER EDUCATIONAL RESOURCES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 50,722 (27,367) (214,454)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 42,274 82,571 217,907
Gain on sale of equipment............................... (13,655) (737) --
Changes in operating assets and liabilities, excluding
effects of business combinations:
Receivables........................................... (136,618) 109,228 (175,640)
Prepaid expenses...................................... 180 300 --
Other assets.......................................... 10,000 -- --
Accounts payable...................................... 1,749 30,990 63,464
Accrued expenses...................................... 26,111 (4,785) (3,951)
Deferred revenue...................................... 91,211 52,861 198,368
-------- -------- --------
Net cash provided by operating activities........... 71,974 243,061 85,694
-------- -------- --------
Cash flows from investing activities:
Acquisition of equipment.................................. (18,376) (39,919) (64,945)
Payment for purchase of net assets of ABTS Industries,
Inc., net of cash acquired.............................. -- -- 7,689
Proceeds from sale of equipment........................... 33,270 5,968 --
-------- -------- --------
Net cash provided by (used in) investing
activities........................................ 14,894 (33,951) (57,256)
-------- -------- --------
Cash flows from financing activities:
Proceeds from lines of credit, notes payable and and
current portion of long-term debt....................... -- 1,990 285,715
Payments on notes payable and lines of credit............. (32,430) (4,295) (13,202)
Payments on capital lease obligations..................... (15,779) (57,506) (143,261)
Stockholders' distributions............................... -- (59,887) (99,730)
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ (48,209) (119,698) 29,522
-------- -------- --------
Net increase in cash................................ 38,659 89,412 57,960
Cash, beginning period.................................... 1,008 39,667 129,079
-------- -------- --------
Cash, end of period....................................... $ 39,667 129,079 187,039
======== ======== ========
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997, 1998, and 1999,
the Company paid approximately $4,000, $10,000, and
$31,000 for interest, respectively.
Non-cash financing activities:
The Company entered into various capital leases for
computer equipment and other assets. These capital lease
obligations resulted in non-cash financing activities
aggregating $56,798, $220,854, and $190,154 for the
years ended December 31, 1997, 1998, and 1999,
respectively.
</TABLE>
See accompanying notes to consolidated financial statements.
F-229
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DURO Communications, Inc.:
We have audited the accompanying balance sheets of Boone Online, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boone Online, Inc. as of
December 31, 1998 and 1999, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Detroit, Michigan
February 18, 2000
F-236
<PAGE>
BOONE ONLINE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,338 2,888
Accounts receivable....................................... 7,914 15,527
-------- --------
Total current assets.................................. 24,252 18,415
Property and equipment, net................................. 173,238 247,997
-------- --------
Total assets.......................................... $197,490 266,412
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expense...................... $ 43,699 134,749
Deferred revenue.......................................... 43,048 93,767
Current portion of capital lease obligations.............. 35,830 89,213
-------- --------
Total current liabilities............................. 122,577 317,729
Capital lease obligations, less current portion............. 67,519 66,512
-------- --------
Total liabilities..................................... 190,096 384,241
-------- --------
Stockholders' equity (deficit):
Common stock, $.001 par value. Authorized 100,000 shares,
issued and outstanding 100 shares....................... 7,000 7,000
Retained earnings (accumulated deficit)................... 394 (124,829)
-------- --------
Total stockholders' equity (deficit).................. 7,394 (117,829)
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................... $197,490 266,412
======== ========
</TABLE>
See accompanying notes to financial statements.
F-237
<PAGE>
BOONE ONLINE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Internet services revenue................................... $262,328 704,969 1,125,957
Direct internet services costs.............................. 127,200 446,441 755,244
-------- ------- ---------
Gross profit............................................ 135,128 258,528 370,713
Selling, general and administrative:
Salaries and employee benefits............................ 65,196 179,141 309,703
Advertising and marketing expense......................... 1,272 6,622 22,373
Rent and occupancy........................................ 4,817 12,807 20,161
Repairs and maintenance................................... -- 3,330 165
Travel and entertainment.................................. 602 4,692 5,066
Insurance................................................. 853 2,531 13,274
Other..................................................... 30,795 34,046 48,811
-------- ------- ---------
Total selling, general and administrative............... 103,535 243,162 419,552
-------- ------- ---------
Income (loss) before income taxes, interest, depreciation
and amortization.......................................... 31,593 15,366 (48,839)
Interest expense............................................ 3,877 6,878 15,406
Depreciation expense........................................ 3,568 22,944 59,243
-------- ------- ---------
Income (loss) before income taxes....................... 24,148 (14,456) (123,488)
Income tax provision........................................ 2,113 -- --
-------- ------- ---------
Net income (loss)....................................... $ 26,261 (14,456) (123,488)
======== ======= =========
Proforma income taxes....................................... $ -- -- --
======== ======= =========
Proforma net income (loss).................................. $ 26,261 (14,456) (123,488)
======== ======= =========
</TABLE>
See accompanying notes to financial statements.
F-238
<PAGE>
BOONE ONLINE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
EARNINGS/
ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............................ 100 $7,000 (11,411) (4,411)
Dividend distribution................................... -- -- -- --
Net income.............................................. -- -- 26,261 26,261
--- ------ -------- --------
BALANCE AT DECEMBER 31, 1997............................ 100 7,000 14,850 21,850
Dividend distribution................................... -- -- -- --
Net loss................................................ -- -- (14,456) (14,456)
--- ------ -------- --------
BALANCE AT DECEMBER 31, 1998............................ 100 7,000 (394) 7,394
Dividend distribution................................... -- -- -- --
Net loss................................................ -- -- (125,223) (125,223)
--- ------ -------- --------
BALANCE AT DECEMBER 31, 1999............................ 100 $7,000 (124,829) (117,829)
=== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-239
<PAGE>
BOONE ONLINE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 26,261 (14,456) (125,223)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 3,568 22,944 59,243
Changes in operating assets and liabilities, excluding
effects of business combinations:
Accounts receivable............................... (16,275) 15,201 (7,613)
Accounts payable and accrued expenses............. 8,516 21,703 91,050
Income taxes payable.............................. (2,113) -- --
Deferred revenue.................................. 19,184 22,666 50,719
-------- -------- --------
Net cash provided by operating activities......... 39,141 68,058 68,176
-------- -------- --------
Cash flows from investing activities--Acquisition of
equipment and leasehold improvements...................... (61,767) (137,985) (134,002)
-------- -------- --------
Cash flows from financing activities--Repayments of capital
lease obligations......................................... 30,751 72,598 52,376
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 8,125 2,671 (13,450)
Cash and cash equivalents:
Beginning period.......................................... 5,543 13,668 16,338
-------- -------- --------
End of period............................................. $ 13,668 16,338 2,888
======== ======== ========
</TABLE>
Supplemental disclosure of cash flow information:
During the years ended December 31, 1997, 1998 and 1999, the Company paid
approximately $3,900, $7,500 and $18,000, respectively, for interest. The
Company paid $1,700 for income taxes in 1999.
Non-cash financing activities:
The Company entered into various capital leases for computer equipment.
These capital lease obligations resulted in non-cash financing activities
aggregating $342, $66,845 and $106,726 for the years ended December 31,
1997, 1998, and 1999, respectively.
See accompanying notes to financial statements.
F-240
<PAGE>
BOONE ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Boone Online, Inc. (BOL or the Company) was incorporated on June 17, 1996 to
capitalize on the growing demand for Internet access and enhanced services by
consumers and business users through the phased acquisition, integration, and
growth of existing independent Internet service providers in targeted geographic
regions. The Company is a joint venture between Wave Communications, Inc. (Wava)
and Highland Services, Inc. (Highland). The goal of the Company is to become the
premier area provider of full service Internet connectivity and enhanced
Internet services, including hosting web-sites. The Company commenced operations
in August, 1996.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, historical operating losses, dependence
upon strategic alliances, and the limited history of the need for Internet
access and enhanced services. The Company's future success will be dependent
upon its ability to create and provide effective and competitive internet
services, the continued acceptance of the Internet and the Company's ability to
develop and provide new services that meet customers changing requirements,
including the effective use of leading technologies, to continue to enhance its
current services, and to influence and respond to emerging industry standards
and other technological changes on a timely and cost-effective basis.
(B) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(C) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid securities with original maturities
of three months or less when acquired to be cash equivalents. Cash equivalents
at December 31, 1998 and 1999, were approximately $16,338 and $2,888,
respectively.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets. Leasehold improvements are amortized
using the straight-line method over the estimated useful lives of the assets or
the term of the lease, whichever is shorter.
(E) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED
F-241
<PAGE>
BOONE ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (Statement No. 121).
Statement No. 121 requires impairment losses to be recorded on long-lived assets
used in operations, including goodwill, when indicators of impairment are
present and the undiscounted future cash flows estimated to be generated by
those assets are less than the assets' carrying amount. In addition, the
recoverability of goodwill is further evaluated under the provisions of APB
Opinion No. 17, INTANGIBLE ASSETS, based upon estimated fair value. If such
assets are impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying value or fair
value, less costs to sell.
(F) INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS 109).
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse.
(G) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized over the
average expected contract duration.
(H) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled
approximately $1,272, $6,622 and $22,373 for the years ended December 31, 1997,
1998 and 1999, respectively.
(I) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
For each of the years ended December 1997, 1998 and 1999, three vendors
represented approximately 72% of the Company's total of telephone access
services. The Company's reliance on certain vendors can be shifted to
alternative sources of supply for products it sells should such changes be
necessary.
(J) RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires the Company to report in its financial statements, in addition to its
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in
F-242
<PAGE>
BOONE ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
debt and equity securities. There were no differences between the Company's
comprehensive loss and its net loss as reported.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic area and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In June 1999, the FASB issued SFAS No. 137, which amended the implementation
date for SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
(2) BALANCE SHEET COMPONENTS
PROPERTY AND EQUIPMENT, INCLUDING EQUIPMENT UNDER CAPITAL LEASES STATED AT
COST
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Internet access and computer equipment including amounts
related to capital leases of $127,187 and $233,913,
respectively.............................................. $199,750 333,752
Less accumulated depreciation and amortization, including
amounts related to capital leases of $16,389 and $47,571,
respectively.............................................. (26,512) (85,755)
-------- --------
Total................................................... $173,238 247,997
======== ========
</TABLE>
ACCRUED EXPENSES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Professional fees......................................... $ -- --
Employee commissions and expenses......................... 9,139 14,607
Other..................................................... 34,560 120,142
------- -------
$43,699 134,749
======= =======
</TABLE>
(3) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2002.
F-243
<PAGE>
BOONE ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(3) LEASES (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
-------- ---------
<S> <C> <C>
2000........................................................ $ 89,213 25,248
2001........................................................ 68,400 21,848
2002........................................................ 18,947 12,453
-------- -------
Total minimum payments.................................. 176,560 59,459
=======
Less amount representing interest........................... (20,835)
--------
Present value of net minimum lease payments............. 155,725
Less current portion........................................ (89,213)
--------
$ 66,512
========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 were
$3,550, $9,363 and $15,489, respectively.
(4) CAPITAL STOCK
(A) COMMON STOCK
Boone Online has 100,000 shares of common stock authorized, 100 shares
issued and outstanding.
(5) RELATED PARTY TRANSACTIONS
The Company purchased goods and services from both Wave and Highland in the
normal course of business. Equipment purchased from Highland during 1997, 1998,
and 1999 totaled $35,400, $57,900, and $22,100, respectively. Payments for
services provided by Highland during 1997, 1998, and 1999 totaled $56,800,
$69,760, and $3,700, respectively. Payment to Wave for services provided during
1997, 1998, and 1999 totaled $96,800, $18,000, and $7,500, respectively. Rent
paid to Highland during 1997, 1998, and 1999 totaled $6,750, $4,600, and $2,000,
respectively.
F-244
<PAGE>
BOONE ONLINE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(6) INCOME TAXES
Income tax expense (benefit) differs from the amounts that would result from
applying the federal statutory rate of 34% to the Company's net income/loss for
the periods ended December 31, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected income tax expense (benefit)....................... $ 8,210 (4,915) (42,576)
State income taxes, net of federal benefit.................. 1,163 -- --
Increase (decrease) in valuation allowance.................. (3,131) 2,430 50,757
Impact of graduated rates and other......................... (4,129) 2,485 (8,181)
------- ------ -------
$ 2,113 -- --
======= ====== =======
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets, as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforward........................... $ 1,496 51,161
Allowance for Doubtful Accounts........................... 892 1,971
Other..................................................... 42 55
------- -------
Gross deferred tax assets............................... 2,430 53,187
Valuation Allowance..................................... (2,430) (53,187)
------- -------
Net deferred tax asset.................................... $ -- --
======= =======
</TABLE>
At December 31, 1999, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $120,000, all of which is available
to offset future federal taxable income, if any, through 2019. Due to the
uncertainty regarding the ultimate utilization of the deferred tax asset, no tax
benefit has been provided by the Company in 1999 and 1998, and a valuation
allowance of $53,187 and $2,430, respectively, has been recorded.
(7) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND DEDUCTIONS AT END
OF YEAR EXPENSES WRITE-OFFS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
For the year ended December 31, 1997:
Allowance for doubtful accounts.................... $ -- 8,526 -- 8,526
====== ===== ===== =====
For the year ended December 31, 1998:
Allowance for doubtful accounts.................... $8,526 -- 6,376 2,150
====== ===== ===== =====
For the year ended December 31, 1999:
Allowance for doubtful accounts.................... $2,150 2,601 -- 4,752
====== ===== ===== =====
</TABLE>
F-245
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION AND BASIS OF PRESENTATION
Wave Communications Inc. and Subsidiary (formerly Greer Educational
Resources, Inc.) (the "Company") is an internet service provider (ISP) serving
approximately 6,000 customers throughout North Carolina. Since inception in
1993, the Company has provided a variety of internet connectivity and web
services to its subscriber base.
During 1999, the Company formed a wholly owned Subsidiary called Wave
Acquisition Subsidiary, Inc. (WASI). WASI was formed to acquire other ISP's to
increase the Companies market share.
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, and the limited history of the need for
internet access and enhanced services. The Company's future success will be
dependent upon its ability to create and provide effective and competitive
internet services, the continued acceptance of the Internet and the Company's
ability to develop and provide new services that meet customers changing
requirements, including the effective use of leading technologies, to continue
to enhance its current services, and to influence and respond to emerging
industry standards and other technological changes on a timely and
cost-effective basis.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the Company and its wholly owned Subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
(C) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(D) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the related assets,
generally ranging from three to five years. Property and equipment under capital
leases are stated at the present value of minimum lease payments and are
amortized using the straight-line method over the shorter of the lease term or
the estimated useful lives of the assets.
(E) INTANGIBLE ASSETS
Intangible assets represents the excess of the current market rental over
the contractual lease payments of internet backbone operating leases assumed
through acquisition. This is being amortized on a straight-line basis over six
months.
F-230
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF (Statement No. 121). Statement No. 121 requires impairment losses to be
recorded on long-lived assets used in operations, including goodwill, when
indicators of impairment are present and the undiscounted future cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. In addition, the recoverability of goodwill is further evaluated under
the provisions of APB Opinion No. 17, INTANGIBLE ASSETS, based upon estimated
fair value. If such assets are impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying value or fair value, less costs to sell.
(G) INCOME TAXES
Since the election of the Company's shareholders on January 1, 1998, the
Company is treated under Subchapter S of the Internal Revenue Code, and
therefore tax losses and taxable income is allocated to the individual
stockholders. No provision for income taxes has been provided since the date of
election.
Prior to the Subchapter S election, the Company accounted for income taxes
under the provisions of Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES (SFAS 109). SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
(H) REVENUE RECOGNITION
Revenue related to internet services is recognized as the services are
provided and deferred and amortized to operations for amounts billed relating to
future periods. Installation and customer set up fees are recognized upon the
average customer service rate.
(I) SALES AND MARKETING COSTS
Marketing expense includes the costs to acquire and retain subscribers,
advertising and other general sales and marketing costs.
The Company expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing and totaled $25,841,
$61,132, and $86,310 for the years ended December 31, 1997, 1998, and 1999,
respectively.
F-231
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(2) BALANCE SHEET COMPONENTS
Property and equipment, including equipment under capital leases stated at
cost
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1999
--------- -----------
<S> <C> <C>
Internet access and computer equipment including
amounts related to capital leases of $287,986 and
$771,302, respectively............................. $ 363,860 884,438
Vehicles including amounts related to capital leases
of $58,815 for the year ended December 31, 1999.... 19,919 116,234
Furniture and fixtures including amounts related to
capital leases of $38,662 for the year ended
December 31, 1999.................................. 10,613 71,364
Office equipment..................................... 4,973 32,442
--------- -----------
399,365 1,104,478
Less accumulated depreciation including amounts
related to capital leases of $73,819 and $232,988,
respectively....................................... (129,745) (322,653)
--------- -----------
Property and equipment, net...................... $ 269,620 781,825
========= ===========
</TABLE>
Accrued expenses
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued payroll........................................... $21,727 20,301
Other..................................................... 2,810 285
------- -------
$24,537 20,586
======= =======
</TABLE>
F-232
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(3) LONG-TERM DEBT
Notes payable and lines of credit consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
Bank note payable; secured by accounts receivable, with
the first three monthly payments as interest only
followed by monthly principle and interest payments of
$8,065 with the balance due at maturity. Interest is
calculated at Prime plus 1%........................... $ -- 249,330
Bank note payable; with principal and interest payments
of $1,927 due monthly. Interest is calculated at
8.75%. The note matures on November 1, 2002........... -- 58,058
Bank note payable; secured by equipment, with principle
and interest payments of $380 due monthly. Interest is
calculated at 2.9%. The note matures on June 17,
2000.................................................. 6,683 2,260
Line of credit in the amount of $100,000, with interest
payable monthly, calculated at the bank's prime rate
plus 1%. Principle is due on October 13, 2000......... 1,990 36,385
------- ---------
Total long-term debt................................ 8,673 346,033
Less current portion.................................... (6,413) (114,781)
------- ---------
Long-term debt, less current portion................ $ 2,260 231,252
======= =========
</TABLE>
The aggregate annual required repayments under the notes payable and line of
credit for of the years 2000, 2001, and 2002 are $114,781, $103,256, and
$127,996, respectively.
(4) LEASES
The Company leases certain computer and office equipment under capital
leases, and office space under noncancelable operating leases expiring at
various dates through 2003.
F-233
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(4) LEASES (CONTINUED)
Future minimum annual lease payments under capital and noncancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASE LEASE
--------- ---------
<S> <C> <C>
Year ending December 31:
2000................................................. $ 341,626 83,184
2001................................................. 259,751 80,185
2002................................................. 101,748 68,400
2003................................................. 20,168 --
--------- --------
Total minimum lease payments....................... 723,293 231,769
========
Less amount representing interest...................... (73,448)
---------
Present value of net minimum lease payments........ 649,845
Less current portion of capital lease obligation....... (295,734)
---------
Capital lease obligation, less current portion....... $ 354,111
=========
</TABLE>
Rent expense for the years ended December 31, 1997, 1998 and 1999 were
$53,000, $39,000 and $168,820, respectively.
(5) RELATED PARTY TRANSACTIONS
The Company leases office space from one of its major stockholders for
$2,500 per month. Lease expense for the years ended December 31, 1998 and 1999
were $17,500 and $30,000, respectively.
The Company has several loan receivables outstanding from employees and
stockholders. No formal terms are documented. Loan receivables at December 31,
1998 and 1999 were $11,173 and $10,291, respectively.
The Company has receivables from two related companies for funds advanced to
finance operations and purchase assets. Receivables at December 31, 1999 were
$33,997.
(6) PRO FORMA INCOME TAXES
Actual tax expense incurred in the year ended December 31, 1997 as well as
the elimination of the residual impact of changing to a Subchapter S corporation
as of January 1, 1998 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal and state income taxes.............................. $18,800 (11,546) 1,289
======= ======= =====
</TABLE>
As stated in Footnote 1(g), the Company was not subject to Federal and State
income taxes for the years ended December 31, 1998 and December 31, 1999. Pro
forma income tax information is provided below to illustrate the tax impact on
the financial statements of providing for taxes as if the Company was subject to
Federal and State income taxes. Actual tax expense for the year ended
F-234
<PAGE>
WAVE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(6) PRO FORMA INCOME TAXES (CONTINUED)
December 31, 1997, as well as pro forma tax expense (benefit) for the years
ended December 31, 1998 and 1999, differs from the amounts that would result
from applying the federal statutory rate of 34% to the Company's net loss for
the periods as follows:
<TABLE>
<CAPTION>
PRO FORMA
-------------------
ACTUAL DECEMBER 31,
----------------- -------------------
DECEMBER 31, 1997 1998 1999
----------------- -------- --------
<S> <C> <C> <C>
Expected pro forma tax expense (benefit).................. $23,600 (33,600) (110,500)
State income taxes, net of federal benefit................ 3,500 -- --
Increase in valuation allowance........................... -- 12,500 109,500
Effect of graduated rates................................. (8,300) 6,800 --
Other..................................................... -- 600 1,000
------- ------- --------
$18,800 (13,700) --
======= ======= ========
</TABLE>
Temporary differences that give rise to the components of pro forma deferred
tax assets, as of December 31, 1998 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforward............................. $ 12,300 140,000
Other....................................................... 200 6,000
-------- --------
Gross deferred tax assets................................. 12,500 146,000
Valuation Allowance....................................... (12,500) (146,000)
-------- --------
Net deferred tax asset...................................... $ -- --
======== ========
</TABLE>
The pro forma net income information assumes that distributions, if any, to
shareholders are considered compensation expense. The valuation allowance noted
above is provided based on management's estimation of the recoverability of the
deferred tax asset in future periods.
(7) ACQUISITIONS
On October 22, 1999, the Company purchased the assets and assumed all
liabilities of ABTS Industries, Inc. for approximately $50,000. The transaction
was accounted for as a purchase and the purchase price was allocated as follows:
assets of $331,592; other intangibles of $75,000; and liabilities of $356,592.
(8) SUBSEQUENT EVENT
On March 21, 2000, all of Wave Communications, Inc. and Subsidiaries' assets
were sold to DURO Communications, Inc. for approximately $8 million in cash and
74,504 shares of DURO Communications, Inc. Common Stock. In connection with the
sale of assets, all notes payable, capital leases, and operating lease
obligations were paid in full at closing.
F-235
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
DURO Communications, Inc.:
We have audited the balance sheets of iThink, Inc. as of December 31, 1998
and 1999, and the related statements of operations, shareholders' equity
(deficit), and cash flows for each of the years in the three-year period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of iThink, Inc. as of
December 31, 1998 and 1999, and the related statements of operations and cash
flows for each of the years in the three year period ended December 31, 1999 in
conformity with generally accepted accounting principles.
Cordovano and Harvey, P.C.
Denver, Colorado
January 22, 2000
F-246
<PAGE>
ITHINK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 36,122 16,740
Receivables:
Trade, net of allowance for doubtful accounts of $3,591
and $7,978, respectively.............................. 22,371 41,225
Affiliate............................................... 7,231 --
Shareholder............................................. 23,759 --
Prepaid advertising....................................... 12,436 27,386
-------- --------
Total current assets.................................. 101,919 85,351
-------- --------
Property and equipment:
Computers and telecomunications equipment............... 123,870 179,900
Other................................................... 62,118 63,091
-------- --------
185,988 242,991
Less accumulated depreciation........................... (30,139) (61,124)
-------- --------
Property and equipment, net........................... 155,849 181,867
Intangible assets:
Internally developed software, net of accumulated
amortization of $293 and $4,731, respectively........... 1,403 38,492
Deferred advertising costs, net of accumulated
amortization of $1,756 and $26,627, respectively........ 15,275 36,667
-------- --------
$274,446 342,377
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts and notes payable:
Accounts payable, trade................................. $ 35,000 98,504
Short-term debt:
Commercial lines of credit............................ 38,137 74,326
Due to related parties................................ -- 51,000
Other................................................. 15,000 15,000
Other current liabilities:
Current maturities of long-term debt.................... 23,236 23,084
Unearned revenue........................................ 27,385 56,289
Accrued expenses........................................ 13,273 24,998
-------- --------
Total current liabilities............................. 152,031 343,201
Long-term debt, net of current maturities................... 100,927 77,843
Deferred income tax liability............................... 1,289 --
-------- --------
Total liabilities..................................... 254,247 421,044
-------- --------
Shareholders' equity (deficit):
Common stock, $1 par value, 1,000 shares authorized, 900
and 1,000 shares issued and outstanding, respectively... 900 1,000
Additional paid-in capital................................ 3,300 54,400
Retained earnings (loss).................................. 15,999 (134,067)
-------- --------
Total shareholders' equity (deficit).................. 20,199 (78,667)
-------- --------
Commitments and contingencies............................... -- --
-------- --------
$274,446 342,377
======== ========
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE>
ITHINK, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Internet services revenue................................... $192,431 362,710 797,806
Direct Internet services costs.............................. 44,232 119,884 380,818
-------- ------- --------
Gross profit.............................................. 148,199 242,826 416,988
Selling, general and administrative......................... 151,322 204,776 426,030
Provision for doubtful accounts............................. 1,905 3,591 7,978
Research and development.................................... -- -- 51,890
-------- ------- --------
Income (loss) before interest, depreciation, amortization
and income taxes........................................ (5,028) 34,459 (68,910)
Interest expense............................................ 3,822 6,767 21,154
Depreciation................................................ 8,036 18,148 30,986
Amortization................................................ -- 2,049 29,016
-------- ------- --------
Income (loss) before income taxes......................... (16,886) 7,495 (150,066)
Provision (benefit) for income taxes:
Current................................................... 4,430 (2,005) 47,181
Deferred.................................................. (1,737) (1,977) (47,181)
-------- ------- --------
Net income (loss)........................................... $(14,193) 3,513 (150,066)
======== ======= ========
Income (loss) per common share.............................. $ (14.19) 3.51 (150.07)
======== ======= ========
Basic weighted average common shares outstanding............ 1,000 1,000 1,000
======== ======= ========
</TABLE>
See accompanying notes to financial statements.
F-248
<PAGE>
ITHINK, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS/
SHARES AMOUNT CAPITAL (LOSS) TOTAL
-------- -------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997........................ 900 $ 900 2,100 26,679 29,679
Net loss........................................ -- -- -- (14,193) (14,193)
----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1997...................... 900 900 2,100 12,486 15,486
Office space contributed by shareholder......... -- -- 1,200 -- 1,200
Net income...................................... -- -- -- 3,513 3,513
----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1998...................... 900 900 3,300 15,999 20,199
Sale of common stock............................ 100 100 49,900 -- 50,000
Office space contributed by shareholder......... -- -- 1,200 -- 1,200
Net loss........................................ -- -- -- (150,066) (150,066)
----- ------ ------ -------- --------
BALANCE, DECEMBER 31, 1999...................... 1,000 $1,000 54,400 (134,067) (78,667)
===== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-249
<PAGE>
ITHINK, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income (loss)......................................... $(14,193) 3,513 (150,066)
Transactions not requiring cash:
Depreciation and amortization......................... 6,216 20,197 55,858
Provision for uncollectible accounts receivable....... 1,905 3,591 7,978
Changes in operating assets and liabilities:
Trade receivables..................................... (7,852) (17,217) (18,854)
Related party advances................................ -- (4,921) 14,981
Deferred revenue...................................... -- 27,385 28,904
Accounts payable...................................... -- 31,919 67,708
Accrued interest, shareholders........................ 650 (162) (338)
Accrued interest, others.............................. 1,308 1,861 1,609
Other accrued expenses................................ 26,387 10,885 1,186
-------- -------- --------
Net cash provided by operating activities........... 14,421 77,051 8,966
-------- -------- --------
Investing activities:
Capital expenditures.................................. (15,591) (138,772) (94,091)
Cash payments for direct response advertising......... -- (29,467) (61,213)
-------- -------- --------
Net cash used in investing activities............... (15,591) (168,239) (155,304)
-------- -------- --------
Financing activities:
Proceeds from sale of common stock.................... -- 1,200 51,200
Net proceeds from short-term borrowings............... (924) 41,048 31,983
Proceeds from shareholder loans....................... 35,303 -- 45,000
Repayment of shareholder loans........................ -- (3,368) (6,650)
Shareholder advances made............................. (19,106) (21,310) --
Repayment of shareholder advances..................... -- -- 23,759
Repayment of notes payable............................ -- 92,228 (18,336)
-------- -------- --------
Net cash provided by financing activities........... 15,273 109,798 126,956
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 14,103 18,610 (19,382)
Cash at beginning of year................................... 3,409 17,512 36,122
-------- -------- --------
Cash at end of year......................................... $ 17,512 36,122 16,740
======== ======== ========
Supplemental cash flow information:
Cash paid for interest...................................... $ 1,934 3,744 12,685
======== ======== ========
Cash paid for income taxes.................................. $ -- -- --
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-250
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF ORGANIZATION AND BASIS OF PRESENTATION
iThink, Inc. (the "Company") was incorporated in Florida on April 14, 1994.
The Company is a regional provider of Internet access services (ISP) to
consumers and small businesses. The Company's business services consist of Web
development and Web hosting.
Inherent in the Company's business are various risks and uncertainties,
including its historical operating losses, dependence upon strategic alliances,
and the limited history of the need for internet access and enhanced services.
The Company's future success will be dependent upon its ability to create and
provide effective competitive internet services, the continued acceptance of the
internet and the Company's ability to develop and provide new services that meet
customers changing requirements, including the effective use of leading
technologies, to continue to enhance its current services, and to influence and
respond to emerging industry standards and other technological changes on a
timely basis and cost-effective basis.
ESTIMATES AND ASSUMPTIONS
The preparation of the financial statements in conformity with generally
accepted accounting principals requires management to make estimates and
assumptions that affect certain reported amounts of assets and liabilities;
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. Accordingly, actual results could differ from those estimates.
SOURCES OF SUPPLIES
The Company relies on third-party networks, local telephone companies, and
other companies to provide data communications capacity. Although management
believes alternative telecommunications facilities could be found in a timely
manner, any disruption of these services could have an adverse effect on
operating results.
FINANCIAL INSTRUMENTS AND CASH EQUIVALENTS
The Company's financial instruments consist of cash, receivables, accounts
payable, accrued liabilities, capital and operating leases and notes payable.
The carrying value of these financial instruments approximates fair value
because of their short-term nature or because they bear interest at rates which
approximate market rates. For financial accounting purposes and the statement of
cash flows, cash equivalents include all highly liquid debt instruments
purchased with an original maturity of three months or less.
CREDIT RISK
The Company's accounts receivable potentially subject the Company to credit
risk, as collateral is generally not required. The Company's risk of loss is
limited due to advance billings to customers for services, the use of
pre-approved charges to customer credit cards, the ability to terminate access
on delinquent accounts.
F-251
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets, consisting of internally developed software and deferred
advertising costs, are amortized using the straight-line method over a
three-year period.
IMPAIRMENT OF LONG-LIVED ASSETS AND CERTAIN IDENTIFIABLE INTANGIBLES
The Company evaluates the carrying value of its long-lived assets under the
provisions of Statement of Financial Accounting Standards No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted future cash flows estimated to be generated by those assets are
less than the assets' carrying amount. If such assets are impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed fair value of the assets. Assets to be disposed of
are reported at the lower of the carrying value or fair value, less costs to
sell.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment is recorded at cost. Expenditures that extend the
useful lives of assets are capitalized. Repairs, maintenance and renewals that
do not extend the useful lives of the assets are expensed as incurred.
Depreciation and amortization is provided principally on the straight-line
method over the following estimated useful lives: furniture, 10 years; equipment
3 years; and software (third party and internally developed), 3 to 5 years.
Depreciation expense was $8,036, $18,138 and $30,139 respectively, for the
years ended December 31, 1997, 1998 and 1999.
REVENUE RECOGNITION
The Company recognizes revenue when services are provided. Services are
generally billed one month in advance. Advance billings including prepaid
services and collections relating to future access services are recorded as
deferred revenue and recognized as revenue when earned.
INCOME TAXES
The Company reports income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes", which requires the liability method in accounting
for income taxes. Deferred tax assets and liabilities arise from the difference
between the tax basis of an asset or liability and its reported amount on the
financial statements. Deferred tax amounts are determined by using the tax rates
expected to be in effect when the taxes will actually be paid or refunds
received, as provided under currently enacted law. Valuation allowances are
established when necessary to reduce the deferred tax assets to the amounts
expected to be realized. Income tax expense or benefit is the tax payable or
refundable, respectively, for the period plus or minus the change during the
period in the deferred tax assets and liabilities.
F-252
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
ADVERTISING COSTS
Advertising costs include costs of billboard, television, radio, and print
media advertising and other marketing activities. Advertising costs not deferred
at year-end are charged to expense ratably in relation to sales over the year in
which incurred. Advertising costs deferred at year-end, which are classified as
prepaid expenses in the balance sheet, consists of direct response advertising
and production costs. These costs are deferred and charged to operations over a
three-year period. The Company deferred advertising costs totaling $61,212,
$29,468 and $--0-, respectively, during the years ended December 31, 1999 and
1998. Amortization expense was $24,870, and $1,756, respectively, for the years
ended December 31, 1999, 1998 and 1997.
SOFTWARE DEVELOPMENT COSTS
The cost of developing and implementing its Web site and certain proprietary
software is expensed until the Company has determined that the Web site and
proprietary software will result in probable future economic benefits and
management has committed to funding the project. Thereafter, all direct external
implementation costs and purchased software costs are capitalized and amortized
using the straight-line method over the remaining estimated useful lives, not
exceeding 3 years. The Company capitalized $--0-, $1,696, and $21,164 in Web
site costs, consisting principally of software and salaries and related expense,
during the years ended December 31, 1997, 1998 and 1999, respectively. Beginning
in 1999, the Company developed internally software used to track customer
contacts that has been capitalized in the accompanying financial statements. The
Company capitalized $20,362, consisting principally of salaries and related
expense, during the year ended December 31, 1999. Advertising expense was $--0-,
$2,049 and $29,016, respectively, for the years ended December 31, 1997, 1998
and 1999.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130 "REPORTING COMPREHENSIVE INCOME". SFAS No. 130
requires the Company to report in its financial statements, in addition to its
net income (loss), comprehensive income (loss), which includes all changes in
equity during a period from non-owner sources including, as applicable, foreign
currency items, minimum liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. There were no differences
between the Company's comprehensive income (loss) and net income (loss) as
reported.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION".
SFAS No. 131 is based on the "management" approach for reporting segments. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosure about the Company's products, the geographic areas in which it earns
revenue and holds long-lived assets, and its
F-253
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
major customers. The Company has determined that it does not have any separately
reportable business segments.
In June 1998, the FASB issued SFAS No. 132, "EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POST-RETIREMENT BENEFITS," which requires additional
disclosures about pension and other post-retirement benefit plans, but does not
change the measurement or recognition of those plans. The Company does not have
a pension plan. The Company does not provide post-retirement benefits to
employees.
In June 1998, the FASB issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
imbedded in other contracts, and for hedging activities. SFAS is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. This standard
is not expected to affect the Company, as the Company currently does not have
any derivative instruments or hedging activities. In June 1999, the FASB issued
SFAS No. 137, which amended the implementation date for SFAS No. 133 to be
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
(2) RELATED PARTY TRANSACTIONS
Certain shareholders have provided working capital loans, from time-to-time,
to the Company. Interest on the loans accrues at from 8 to 10 percent. In
addition, the Company pays a shareholder an override of 3 percent of certain
access accounts in consideration for loans made. The override is included in
interest expense in the accompanying financial statements. The Company borrowed
$45,000 from shareholders and repaid $6,650 during the year ended December 31,
1999. The Company borrowed $--0- from shareholders and repaid $3,368 during the
year ended December 31, 1998. The Company borrowed $38,364 from shareholders and
repaid $3,061 during the year ended December 31, 1997. Related interest expense
totaled $2,484, $4,354 and $4,365 for the years ended December 31, 1997, 1998,
and 1999, respectively. As of December 31, 1999, the Company was indebted to
shareholders in the amount of $70,285. See Notes C and D.
A shareholder provided an office (valued by the board of directors at $100
per month) at no charge to the Company for the years ended December 31, 1998 and
1999. The Company provided Internet access to key employees and directors in
exchange for their services, for all periods presented. In addition, the Company
provided an affiliate with office space and related services in exchange for Web
site-consulting services during the year ended December 31, 1998. The Company
has accrued an expense equal to the fair value of the office space provided by a
shareholder and a corresponding credit to additional paid-in capital in the
accompanying financial statements. However, no amounts are reflected in the
accompanying financial statements for barter transactions as the board of
directors could not reliably estimate their fair value.
Additionally, the Company borrowed $7,750 from the affiliate during 1999.
This amount is outstanding at December 31, 1999. The affiliate is wholly owned
by the president of the Company.
F-254
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(3) SHORT-TERM DEBT
UNRELATED THIRD-PARTY LOAN
The Company is indebted to an unrelated third party in the amount of $15,000
at December 31, 1999. The loan is unsecured and the Company is accruing interest
at $8 percent. Accrued interest on the loan is $4,022 at December 31, 1999.
LINES OF CREDIT
The Company has a revolving line of credit with a commercial bank that
allows for borrowings up to $14,000. The line bears interest at 9.9 percent over
prime and is payable monthly. The line is guaranteed by a shareholder. The
balance due at December 31, 1999 is $8,526.
The Company has an additional revolving line of credit with a commercial
bank, which allows for borrowings up to $50,000. The line bears interest at
2 percent over prime and is payable monthly. The line is renewable June 20,
2000. The line is unsecured. The balance due at December 31, 1999 is $55,334.
The Company has a revolving line of credit with American Express in the
amount of $10,000. The line bears annual interest at 10.2 percent and is payable
monthly. The line is unsecured. The balance due at December 31, 1999 is $8,092.
SHAREHOLDER LOAN
On July 28, 1999, a shareholder loaned the Company $30,000. The loan is
unsecured, bears interest at 10 percent and is due on demand. Prior to year-end
the Company made principal payments totaling $1,750. As of December 31, 1999,
the Company is indebted to the shareholder in the amount of $28,250. Related
interest expense totaled $1,250 for the year ended December 31, 1999.
(4) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Bank note collateralized by principal assets of the Company,
at 10% interest, due
November 11, 2001, guaranteed by shareholders of the
Company................................................... $30,110 20,514
Bank note collateralized by principal assets of the Company,
at 10% interest, due December 29,2003, guaranteed by
shareholders of the Company............................... 62,118 53,378
------- ------
92,228 73,892
Less current maturities................................... 18,336 21,279
------- ------
$73,892 52,613
======= ======
</TABLE>
F-255
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(4) LONG-TERM DEBT (CONTINUED)
SHAREHOLDER LOANS AT DECEMBER 31, 1999 AND 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Unsecured loan, at 10 percent interest, due March 1, 2004,
with a balloon payment, including interest, due on
March 1, 2004............................................. $16,935 12,035
Interest only loan, at 8 percent interest, unsecured, with
interest payments of $237.65 per month, with a balloon
payment due May 15, 2002.................................. 15,000 15,000
------- ------
31,935 27,035
Less current maturities................................... 4,900 1,805
------- ------
$27,035 25,230
======= ======
</TABLE>
Aggregate maturities required on long-term debt at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
2000........................................................ $ 23,084
2001........................................................ 25,096
2002........................................................ 31,608
2003........................................................ 20,335
2004........................................................ 804
--------
$100,927
========
</TABLE>
(5) INCOME TAXES
A reconciliation of U.S. statutory federal income tax rate to the effective
rate follows for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory federal rate................................. 15.00% 15.00% 28.52%
Book to tax depreciation.................................... 7.76% 10.67% 3.04%
Accrual to cash conversion.................................. 3.47% (11.45)% (8.00)%
Capitalized advertising costs............................... 0.00% 12.53% 6.56%
Net operating loss for which no tax
benefit is currently available............................ (26.23)% (26.75)% (30.12)%
------ ------ ------
0.00% 0.00% 0.00%
====== ====== ======
</TABLE>
The benefit for income taxes from operations consisted of the following
components at December 31, 1999: current tax benefit of $47,181 resulting from a
net loss before income taxes, the book to tax depreciation adjustment and the
accrual to cash conversion; and deferred tax expense of $47,181 resulting from
the valuation allowance recorded against the deferred tax asset. The change in
F-256
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(5) INCOME TAXES (CONTINUED)
the valuation allowance for the years ended December 31, 1997, 1998 and 1999 was
$-0-, $-0- and $47,181. Net operating loss carryforwards at December 31, 1999
will begin expire in 2019. The valuation allowance will be evaluated at the end
of each year, considering positive and negative evidence about whether the asset
will be realized. At that time, the allowance will either be increased or
reduced; reduction could result in the complete elimination of the allowance if
positive evidence indicates that the value of the deferred tax asset is no
longer impaired and the allowance is no longer required.
Should the Company undergo an ownership change, as defined in Section 382 of
the Internal Revenue Code, the Company's tax net operating loss carryforwards
generated prior to the ownership change will be subject to an annual limitation
which could reduce or defer the utilization of those losses.
(6) OPERATING LEASE COMMITMENTS
The Company leases its facilities under operating leases with unrelated
third parties:
<TABLE>
<CAPTION>
MONTHLY
LOCATION FROM TO RENT
- -------- -------- -------- --------
<S> <C> <C> <C>
Corporate headquarters............................. 2/1/99 1/31/02 $2,621
Blue room.......................................... 4/1/99 3/31/02 500
------
$3,121
======
</TABLE>
The Company also leases computer and telecommunications equipment:
<TABLE>
<CAPTION>
MONTHLY
EQUIPMENT FROM TO RENT
- --------- -------- -------- --------
<S> <C> <C> <C>
PMT server with modem............................. 7/1/98 7/1/01 $ 419
PMT server with modem............................. 2/1/98 2/1/01 479
PMT server with modem............................. 7/1/98 7/1/01 446
PMT server with modem............................. 2/19/99 2/19/02 1,460
Cisco router port #1.............................. 5/6/99 5/6/04 870
Cisco router port #2.............................. 5/6/99 5/6/04 715
Mailing machine................................... 3/30/99 9/30/03 500
------
$4,889
======
</TABLE>
Rent expense under the operating leases was $--0-, $17,614 and $82,119,
respectively in 1997, 1998 and 1999.
F-257
<PAGE>
ITHINK, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
(6) OPERATING LEASE COMMITMENTS (CONTINUED)
Minimum lease payments, by year and in aggregate, at December 31, 1999 are:
<TABLE>
<CAPTION>
YEAR
- ----
<S> <C>
2000........................................................ $ 90,829
2001........................................................ 80,370
2002........................................................ 25,311
2003........................................................ 18,380
2004........................................................ 4,777
--------
$219,667
========
</TABLE>
(7) SUBSEQUENT EVENT-CHANGE IN CONTROL
On January 22, 2000, the shareholders signed a Letter of Intent whereby they
agreed to sell all of the outstanding shares of the Company's common stock for
$1,920,000, consisting of cash and an irrevocable letter of credit, to DURO
Communications, Inc. (DURO). The purchase price is subject to a right of set-off
in case of contingent liabilities and the purchase price will be reduced,
dollar-for-dollar, by the amount of debt assumed by DURO. The closing of the
proposed transaction is subject to the completion of a due diligence review by
DURO. The transaction is expected to close on or about March 31, 2000.
F-258
<PAGE>
[LOGO]
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., CIBC WorldMarkets Corp. and First Union
Securities, Inc., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the numbers of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase any and all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
FleetBoston Robertson Stephens Inc.........................
CIBC WorldMarkets Corp.....................................
First Union Securities, Inc................................
INTERNATIONAL UNDERWRITER
-----------------------------------------------------------
FleetBoston Robertson Stephens International Limited.......
-----------
Total..................................................
===========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No reduction in this price
will change the amount of proceeds to be received by us as indicated on the
cover of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock at the same price
per share as we will receive for the shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of additional shares that the number of shares
of common stock to be purchased by it shown in the above table represents as a
percentage of the shares offered by this prospectus. If purchased,
the additional shares will be sold by the underwriters on the same terms as
those on which the shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the shares of common stock offered by this prospectus.
UNDERWRITING DISCOUNTS AND COMMISSIONS. The underwriting discounts and
commissions equal the public offering price per share less the amount paid per
share by the underwriters to us. The underwriting discounts and commissions
equal 7% of the public offering price. The following table shows the per share
and total underwriting discounts and commissions to be paid by us to the
54
<PAGE>
underwriters. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Public Offering Price................................
Underwriting Discounts and Commissions...............
Proceeds to DURO.....................................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against civil liabilities, including liabilities under
the Securities Act and liabilities arising from breaches of representation and
warranties contained in the underwriting agreement.
FUTURE SALES. Each of our executive offers, directors and other significant
stockholders of record has agreed with the representatives, for a period of
180 days after the date of the final prospectus for this offering, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock, any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or acquired directly from us by these holders or with respect to which they have
or may acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, we have agreed that for a period of 180 days after the date of the
final prospectus for this offering we will not, without the prior written
consent of FleetBoston Robertson Stephens Inc., (1) consent to the disposition
of any shares held by stockholders subject to lock-up agreements prior to the
expiration of the lock-up period or (2) issue, sell, contract to sell, or
otherwise dispose of, any shares of common stock, any options to purchase any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than (a) our sale of shares in
this offering, (b) the issuance of common stock upon the exercise of outstanding
options and the issuance of options under existing stock option and incentive
plans, provided such common stock and the common stock issuable upon the
exercise of such options cannot be transferred prior to the expiration of the
lock-up period, and (c) the issuance of shares in connection with certain
acquisitions that cannot be sold on the public market during the lock-up period.
Please see "Shares Eligible for Future Sale."
DIRECTED SHARES. At our request, the underwriters have reserved up to %
of the shares of the common stock offered by this prospectus for sale to our
officers, directors, employees and their family members and to our business
associates at the public offering price set forth on the cover page of this
prospectus. These business associates are current and former clients, vendors,
suppliers and other individuals who, in the judgment of our management, have
contributed to our success. These persons must commit to purchase no later than
the close of business on the day following the date of this prospectus. The
number of shares available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. The material factors to be
55
<PAGE>
considered in these negotiations were prevailing market conditions, our
financial information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
STABILIZATION. The representatives have advised us that, under
Regulation M under the Securities Exchange Act, some participants in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for the purchase of the common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
STOCK ACQUIRED BY AFFILIATES OF REPRESENTATIVES. As part of a private
placement in December 1999, we sold:
- 1,200,000 shares of common stock and 10,000 shares of series B preferred
stock to CIBC WMC Inc. for an aggregate price of $10,012,000; and
- 2,880,000 shares of common stock and 24,000 shares of series B preferred
stock to First Union Capital Partners, Inc. for an aggregate price of
$24,028,800.
These purchases were made at share prices and on other terms identical to those
given to the other purchasers in the private placement. Among other things, CIBC
WMC and First Union Capital Partners, Inc. received voting rights, registration
rights and participation rights in connection with their purchases. In addition,
First Union Capital Partners, Inc. was given the right to nominate two of our
directors, currently Scott Perper and Pearce A. Landry. Mr. Perper is a Managing
Partner of First Union Capital Partners, Inc. and Mr. Landry is a Principal of
First Union Capital Partners, Inc. For additional information, please see
"Related Party Transactions."
CIBC WMC is an affiliate of CIBC WorldMarkets Corp., one of the
representatives of the underwriters of this offering. First Union Capital
Partners, Inc. is an affiliate of First Union Securities, Inc., which is also a
representative of the underwriters of this offering. Under the rules of the
National Association of Securities Dealers, Inc., the purchases of our stock by
CIBC WMC and First Union Capital Partners, Inc. may be deemed to result in
underwriting compensation in connection with this offering. In accordance with
the rules of the National Association of Securities Dealers, Inc., the common
stock purchased by CIBC WMC and First Union Capital Partners, Inc., as well as
the common stock they will receive upon completion of this offering in exchange
for their holdings of series B preferred stock, will be restricted from sale or
other transfer until six months after the date of this prospectus, except as
permitted by those rules.
56
<PAGE>
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 WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 13, 2000
[LOGO]
SHARES
COMMON STOCK
DURO Communications, Inc. is offering shares of its common stock. This
is our initial public offering and no public market currently exists for our
shares. We have applied to have the shares we are offering approved for
quotation on the Nasdaq National Market under the symbol "DURO." We anticipate
that the initial public offering price will be between $ and $ per
share.
------------------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 6.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -----------
<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to DURO............................................ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments.
------------------------
ROBERTSON STEPHENS INTERNATIONAL
CIBC WORLD MARKETS
FIRST UNION SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., CIBC WorldMarkets Corp. and First Union
Securities, Inc., have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the numbers of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase any and all of the shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- -----------
<S> <C>
FleetBoston Robertson Stephens Inc.........................
CIBC WorldMarkets Corp.....................................
First Union Securities, Inc................................
INTERNATIONAL UNDERWRITER
-----------------------------------------------------------
FleetBoston Robertson Stephens International Limited.......
-----------
Total..................................................
===========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the public offering price located on the cover
page of this prospectus and to dealers at that price less a concession of not in
excess of $ per share, of which $ may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowance
to dealers may be reduced by the representatives. No reduction in this price
will change the amount of proceeds to be received by us as indicated on the
cover of this prospectus.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to additional shares of common stock at the same price
per share as we will receive for the shares that the underwriters
have agreed to purchase. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of additional shares that the number of shares
of common stock to be purchased by it shown in the above table represents as a
percentage of the shares offered by this prospectus. If purchased,
the additional shares will be sold by the underwriters on the same terms as
those on which the shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the shares of common stock offered by this prospectus.
UNDERWRITING DISCOUNTS AND COMMISSIONS. The underwriting discounts and
commissions equal the public offering price per share less the amount paid per
share by the underwriters to us. The underwriting discounts and commissions
equal 7% of the public offering price. The following table shows the per share
and total underwriting discounts and commissions to be paid by us to the
54
<PAGE>
underwriters. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- -------------- --------------
<S> <C> <C> <C>
Public Offering Price................................
Underwriting Discounts and Commissions...............
Proceeds to DURO.....................................
</TABLE>
The expenses of the offering payable by us are estimated at $1,500,000.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on , 2000.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against civil liabilities, including liabilities under
the Securities Act and liabilities arising from breaches of representation and
warranties contained in the underwriting agreement.
FUTURE SALES. Each of our executive offers, directors and other significant
stockholders of record has agreed with the representatives, for a period of
180 days after the date of the final prospectus for this offering, not to offer
to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant
any rights with respect to any shares of common stock, any options or warrants
to purchase any shares of common stock, or any securities convertible into or
exchangeable for shares of common stock owned as of the date of this prospectus
or acquired directly from us by these holders or with respect to which they have
or may acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson
Stephens Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to lock-up agreements. In
addition, we have agreed that for a period of 180 days after the date of the
final prospectus for this offering we will not, without the prior written
consent of FleetBoston Robertson Stephens Inc., (1) consent to the disposition
of any shares held by stockholders subject to lock-up agreements prior to the
expiration of the lock-up period or (2) issue, sell, contract to sell, or
otherwise dispose of, any shares of common stock, any options to purchase any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than (a) our sale of shares in
this offering, (b) the issuance of common stock upon the exercise of outstanding
options and the issuance of options under existing stock option and incentive
plans, provided such common stock and the common stock issuable upon the
exercise of such options cannot be transferred prior to the expiration of the
lock-up period, and (c) the issuance of shares in connection with certain
acquisitions that cannot be sold on the public market during the lock-up period.
Please see "Shares Eligible for Future Sale."
DIRECTED SHARES. At our request, the underwriters have reserved up to %
of the shares of the common stock offered by this prospectus for sale to our
officers, directors, employees and their family members and to our business
associates at the public offering price set forth on the cover page of this
prospectus. These business associates are current and former clients, vendors,
suppliers and other individuals who, in the judgment of our management, have
contributed to our success. These persons must commit to purchase no later than
the close of business on the day following the date of this prospectus. The
number of shares available for sale to the general public will be reduced to the
extent these persons purchase the reserved shares.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price for
the common stock offered by this prospectus will be determined through
negotiations between us and the representatives. The material factors to be
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considered in these negotiations were prevailing market conditions, our
financial information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
STABILIZATION. The representatives have advised us that, under
Regulation M under the Securities Exchange Act, some participants in the
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for the purchase of the common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with the
offering if the common stock originally sold by the underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member. The representatives have advised us that these transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
STOCK ACQUIRED BY AFFILIATES OF REPRESENTATIVES. As part of a private
placement in December 1999, we sold:
- 1,200,000 shares of common stock and 10,000 shares of series B preferred
stock to CIBC WMC Inc. for an aggregate price of $10,012,000; and
- 2,880,000 shares of common stock and 24,000 shares of series B preferred
stock to First Union Capital Partners, Inc. for an aggregate price of
$24,028,800.
These purchases were made at share prices and on other terms identical to those
given to the other purchasers in the private placement. Among other things, CIBC
WMC and First Union Capital Partners, Inc. received voting rights, registration
rights and participation rights in connection with their purchases. In addition,
First Union Capital Partners, Inc. was given the right to nominate two of our
directors, currently Scott Perper and Pearce A. Landry. Mr. Perper is a Managing
Partner of First Union Capital Partners, Inc. and Mr. Landry is a Principal of
First Union Capital Partners, Inc. For additional information, please see
"Related Party Transactions."
CIBC WMC is an affiliate of CIBC WorldMarkets Corp., one of the
representatives of the underwriters of this offering. First Union Capital
Partners, Inc. is an affiliate of First Union Securities, Inc., which is also a
representative of the underwriters of this offering. Under the rules of the
National Association of Securities Dealers, Inc., the purchases of our stock by
CIBC WMC and First Union Capital Partners, Inc. may be deemed to result in
underwriting compensation in connection with this offering. In accordance with
the rules of the National Association of Securities Dealers, Inc., the common
stock purchased by CIBC WMC and First Union Capital Partners, Inc., as well as
the common stock they will receive upon completion of this offering in exchange
for their holdings of series B preferred stock, will be restricted from sale or
other transfer until six months after the date of this prospectus, except as
permitted by those rules.
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 12. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses payable by us in
connection with the offering and distribution (excluding underwriting discounts
and commissions):
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
- ----------------- ----------
<S> <C>
SEC Registration Fee........................................ $ 37,950
NASD Filing Fee............................................. 14,875
Nasdaq National Market Listing Fee.......................... *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses..................................... *
Printing Expenses........................................... *
Blue Sky Qualification Fees and Expenses.................... 10,000
Transfer Agent's Fee........................................ *
Miscellaneous............................................... *
----------
TOTAL................................................... $1,500,000
==========
</TABLE>
- ------------------------
* To be completed by amendment.
The amounts set forth above, except for the Securities and Exchange
Commission, National Association of Securities Dealers, Inc. and Nasdaq National
Market fees, are in each case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
In accordance with Section 145 of the Delaware General Corporation Law,
Article of our certificate of incorporation provides that no director of
DURO be personally liable to DURO or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to DURO or its stockholders, (2) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (3) in respect of unlawful dividend payments or stock
redemptions or repurchases, or (4) for any transaction from which the director
derived an improper personal benefit. In addition, our certificate of
incorporation provides that if the Delaware General Corporation Law is amended
to authorize the further elimination or limitation of the liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Article of our by-laws provides for indemnification by DURO of its
officers and certain non-officer employees under certain circumstances against
expenses, including attorneys fees, judgments, fines and amounts paid in
settlement, reasonably incurred in connection with the defense or settlement of
any threatened, pending or completed legal proceeding in which any such person
is involved by reason of the fact that such person is or was an officer or
employee of the registrant if such person acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of
DURO, and, with respect to criminal actions or proceedings, if such person had
no reasonable cause to believe his or her conduct was unlawful.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of capital stock issued by DURO since our formation. Also included is
the consideration, if any, received by
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DURO for such shares. There was no public offering in any such transaction and
we believe that each transaction was exempt from the requirements of the
Securities Act of 1933, as amended, by reason of Section 4(2) thereof, based on
the private nature of the transactions and the financial sophistication of the
purchasers, all of whom had access to complete information concerning DURO and
acquired the securities for investment and not with a view to the distribution
thereof. In addition, we believe that the transactions described below with
respect to issuances and option grants to our employees were exempt from the
registration requirements of the Act or Rule 701 promulgated thereunder.
1. On April 8, 1999, DURO Communication Corporation issued: 14,487,500
shares of its Class A voting common stock, including 12,935,820 shares to
Great Hill Equity Partners Limited Partnership, 331,680 shares to Great
Hill Investors, LLC, 813,320 shares to John C Stanley IV, 50,840 shares
to each of Douglas W. Ferris, Jr., Rebecca J. Masisak and Peter B.
Hopper, 152,500 shares to G. Robert Joiner and 101,660 shares to Jacob E.
Roquet, for aggregate consideration of $7,244; 1,112,500 shares of its
Class B non-voting common stock, including 508,340 shares to Digicom USA,
LLC and 604,160 shares to Rampart Equities I, LLC, for aggregate
consideration of $556; and 13,742.375 shares of its Series A preferred
stock, including 11,656.968 shares to Great Hill Equity Partners Limited
Partnership, 298.897 shares to Great Hill Investors, LLC, 732.927 shares
to Mr. Stanley, 45.808 shares to Mr. Ferris, 137.424 shares to
Mr. Joiner, 45.808 shares to Mr. Hopper, 45.808 shares to Ms. Masisak,
91.616 shares to Mr. Roquet, 458.079 shares to Digicom USA, LLC, and
229.040 shares to Rampart Equities I, LLC, for aggregate consideration of
$13,742,375.
2. On April 8, 1999, pursuant to restricted stock agreements, Messrs.
Hopper, Joiner and Stanley purchased 1,500,000, 700,000 and
700,000 shares of class A common stock, respectively, for aggregate
consideration of $1,450.
3. On April 21, 1999, DURO Communication Corporation issued 1,599.999
shares of its series A preferred stock, including 1,357.2 shares to Great
Hill Equity Partners Limited Partnership, 34.8 shares to Great Hill
Investors, LLC, 85.333 shares to Mr. Stanley, 5.333 shares to
Mr. Ferris, 16 shares to Mr. Joiner, 5.333 shares to each of Mr. Hopper
and Ms. Masisak, 10.667 shares to Mr. Roquet, 53.333 shares to Digicom
USA, LLC, and 26.667 shares to Rampart Equities I, LLC, for aggregate
consideration of $1,599,999.
4. On May 13, 1999, DURO Communication Corporation issued: 5,083,340 shares
of its Class A voting common stock, including 50,840 shares to Richard
Burrows, an employee of DURO, 203,340 shares to Mr. Stanley, 508,340
shares to CIBC WMC Inc., 2,033,320 shares to Landmark Co-Investment
Partners L.P., 92,220 shares to Great Hill Investors, LLC and 2,195,280
shares to Great Hill Equity Partners Limited Partnership for aggregate
consideration of $2,542; 116,600 shares of its Class B non-voting common
stock to Rampart Equities I, LLC for aggregate consideration of $58; and
9,657.626 shares of its series A preferred stock, including 5,589.645
shares to Great Hill Equity Partners Limited Partnership, 187.49 shares
to Great Hill Investors, LLC, 431.74 shares to Mr. Stanley, 56.793 shares
to Rampart Equities I, LLC, 113.588 shares to Digicom USA, LLC, 34.076
shares to Mr. Joiner, 11.359 shares to Mr. Hopper, 11.359 shares to
Mr. Ferris, 11.359 shares to Ms. Masisak, 22.717 shares to Mr. Roquet,
62.5 shares to Mr. Burrows, 2,500 shares to Landmark Co-Investment
Partners, L.P., and 625 shares to CIBC WMC, Inc., for aggregate
consideration of $9,657,626.
5. On May 13, 1999, in consideration for the agreement by Messrs. Hopper,
Joiner and Stanley to exchange 1,500,000, 700,000 and 700,000 shares,
respectively, of their class A common stock for class B common stock and
aggregate cash payments of $483, DURO Communication Corporation issued to
Messrs. Hopper, Joiner and Stanley an aggregate of 2,000,000, 933,340 and
933,340 shares of class B common stock, respectively.
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6. On July 16, 1999, DURO Communication Corporation issued 3,000 shares of
Series A preferred stock, including 2,233.265 shares to Great Hill Equity
Partners Limited Partnership, 61.735 shares to Great Hill Investors, LLC,
300 shares to Landmark Co-Investment Partners, L.P., 150 shares to
Mr. Stanley, 75 shares to Digicom USA, LLC, 75 shares to CIBC WMC, Inc.,
37.5 shares to Rampart Equities I, LLC, 22.5 shares to Mr. Joiner, 15
shares to Mr. Roquet, and 7.5 shares to each of Mr. Ferris, Mr. Hopper,
Ms. Masisak and Mr. Burrows, for aggregate consideration of $3,000,000.
7. On July 27, 1999, DURO Communication Corporation issued 7,000 shares of
Series A Preferred Stock, including 5,210.951 shares to Great Hill Equity
Partners Limited Partnership, 144.049 shares to Great Hill Investors,
LLC, 700 shares to Landmark Co-Investment Partners, L.P., 350 shares to
Mr. Stanley, 175 shares to Digicom USA, LLC, 175 shares to CIBC
WMC, Inc., 87.5 shares to Rampart Equities I, LLC, 52.5 shares to
Mr. Joiner, 35 shares to Mr. Roquet, and 17.5 shares to each of
Mr. Ferris, Mr. Hopper, Ms. Masisak and Mr. Burrows, for aggregate
consideration of $7,000,000.
8. On August 20, 1999, DURO Communication Corporation issued 666,640 shares
of its Class A voting common stock, including 400,000 shares to Richard
M. Lee, Jr., 133,320 shares to Ms. Masisak, and 133,320 shares to Mark L.
Heimbouch, for aggregate consideration of $333.
9. On August 27, 1999, DURO Communication Corporation issued 400,000 shares
of its Class A voting common stock to Carlos Carpenter, an employee of
DURO, for aggregate consideration of $200.
10. On September 20, 1999, DURO Communication Corporation granted options to
purchase an aggregate 418,000 shares of Class A voting common stock as
follows: 94,000 shares to Jeff Bosworth, 17,000 shares to Johnson
Cauthen, 17,000 shares to Jim Taylor, 80,000 shares to Chris Hanks,
40,000 shares to John Morris, 45,000 shares to Jackey Wall, 45,000 to
Fred Reiselt, 80,000 shares to Dan Webb and 80,000 shares to John Isaac.
11. On September 29, 1999, DURO Communication Corporation issued 2,000
shares of Series A preferred stock, including 1,488.84 shares to Great
Hill Equity Partners Limited Partnership, 41.16 shares to Great Hill
Investors, LLC, 200 shares to Landmark Co-Investment Partners, L.P., 100
shares to Mr. Stanley, 50 shares to each of Digicom USA, LLC and CIBC
WMC, Inc., 25 shares to Rampart Equities I, LLC, 15 shares to
Mr. Joiner, 10 shares to Mr. Roquet and 5 shares to each of Mr. Ferris,
Mr. Hopper, Ms. Masisak and Mr. Burrows, for aggregate consideration of
$2,000,000.
12. On October 15, 1999, DURO Communication Corporation issued 66,660 shares
of its Class A voting common stock to John Isaac, an employee of DURO,
for aggregate consideration of $333.
13. On October 15, 1999, DURO Communication Corporation issued options to
purchase up to 248,000 shares of Class A voting common stock as follows:
10,000 shares to Larry Aichler, 4,000 shares to Chris Videll, 14,000
shares to Steve Sapp and 220,000 shares to Charles Young.
14. October 21, 1999, DURO Communication Corporation issued 3,000 shares of
its Series A Preferred Stock, including 2,233.26 shares to Great Hill
Equity Partners Limited Partnership, 61.74 shares to Great Hill
Investors, LLC, 300 shares to Landmark Co-Investment Partners, L.P., 150
shares to Mr. Stanley, 75 shares to each of Digicom USA, LLC and CIBC
WMC, Inc., 37.5 shares to Rampart Equities I, LLC, 22.5 shares to
Mr. Joiner, 15 shares to Mr. Roquet, and 7.5 shares to each of
Mr. Ferris, Mr. Hopper, Ms. Masisak and Mr. Burrows, for aggregate
consideration of $3,000,000.
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<PAGE>
15. On November 12, 1999, DURO Communication Corporation issued: 687,602
shares of its Class A voting common stock, including 535,978 shares to
Great Hill Equity Partners Limited Partnership, 14,826 shares to Great
Hill Investors, LLC, 36,008 shares to Mr. Stanley, 5,400 shares to
Mr. Joiner, 1,794 shares to Mr. Ferris, 1,794 shares to Mr. Hopper,
72,014 shares to Landmark Co-Investment Partners, L.P., 17,994 shares to
CIBC WMC Inc. and 1,794 shares to Mr. Burrows, for aggregate
consideration of $3,438; 27,000 shares of its Class B non-voting common
stock, including 9,006 shares to Rampart Equities I, LLC and 17,994
shares to Digicom USA, LLC, for aggregate consideration of $135; and
5,955 shares of its Series A preferred stock, including 4,466.530 shares
to Great Hill Equity Partners Limited Partnership, 123.47 shares to Great
Hill Investors, LLC, 300 shares to Mr. Stanley, 45 shares to Mr. Joiner,
15 shares to each of Mr. Ferris, Mr. Hopper and Mr. Burrows, 600 shares
to Landmark Co-Investment Partners, L.P., 150 shares to CIBC WMC Inc., 75
shares to Rampart Equities I, LLC, and 150 shares to Digicom USA, LLC,
for aggregate consideration of $5,955,000.
16. On December 23, 1999, immediately prior to the exchange transaction,
DURO Communications Inc. issued an aggregate of 2,678.57 shares of
series A preferred stock as a dividend to the holders of the series A
preferred stock.
17. On December 23, 1999, in connection with the exchange transaction, DURO
Communications, Inc. issued to former stockholders of DURO Communication
Corporation an aggregate of: 21,391,642 shares of its Class A voting
common stock, 5,122,720 shares of its Class B non-voting common stock and
48,633.537 shares of its Series A preferred stock in exchange for the
surrender by the stockholders of their shares of DURO Communications
Corporation.
18. On December 23, 1999, as part of the exchange transaction, DURO
Communications, Inc. issued an aggregate of: 45,955 shares of its
Class A voting common stock, 2,562,420 shares of its Class B non-voting
common stock and 45,955 shares of its Series A preferred stock to DURO
Holding.
19. On December 23, 1999, in connection with the exchange transaction, DURO
Communications, Inc. issued options to purchase up to 666,000 shares of
its Class A voting common stock to the former optionees of DURO
Communication Corporation.
20. On December 30, 1999, DURO Communications, Inc. issued: 5,049,276 shares
of its Class A voting common stock, including 2,880,000 shares to First
Union Capital Partners, Inc., 600,000 shares to each of Bridge East
Capital, L.P. and BV-D Holdings, LLC, 769,276 shares to CIBC WMC Inc. and
200,000 shares to Lucent Technologies, Inc., for aggregate consideration
of $50,493; 430,724 shares of its Class B non-voting common stock to CIBC
WMC Inc. for aggregate consideration of $4,307; and 54,000 shares of its
Series B preferred stock, including 24,000 shares to First Union Capital
Partners, Inc., 5,000 shares to each of Bridge East Capital, L.P. and
BV-D Holdings, LLC and 10,000 shares to each of CIBC WMC Inc. and Lucent
Technologies, Inc., for aggregate consideration of $54,000,000.
21. On January 4, 2000 DURO Communications, Inc. issued: 3,606 shares of its
Class A voting common stock to Mr. Roquet for aggregate consideration of
$36; 90,476 shares of its Class B non-voting common stock, including
45,238 shares to each of Karen K. Goes and Richard W. Gourley as partial
consideration for the sale by Ms. Goes and Mr. Gourley of their shares of
Surf South, Inc. to DURO Communication Corporation; and 30 shares of its
Series A preferred stock to Mr. Roquet, for aggregate consideration of
$30,000.
22. On February 16, 2000, DURO Communications, Inc. issued 897 shares of its
class A common stock to each of Fred Reiselt and Jackey Wall for
aggregate consideration of $18 and 7.5 shares of its series A preferred
stock to each of Messrs. Wall and Reiselt for aggregate consideration of
$15,000.
23. On March 21, 2000, DURO Communications, Inc. issued 74,504 shares of its
Class B nonvoting common stock to Wave Communications, Inc. as partial
consideration for the sale by Wave Communications, Inc. of substantially
all of its assets to DURO Communication Corporation.
24. As of April 1, 2000, DURO Communications, Inc. has issued options to
purchase 1,606,700 shares of common stock under its 1999 Stock Option and
Incentive Plan, none of which are exercisable within 60 days of such
date. None of the outstanding options have been exercised. All such
options were granted between December 1999 and April 1, 2000 to our
officers, directors and employees.
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ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S> <C>
1.1* Form of Underwriting Agreement
2.1 Asset Purchase Agreement, dated as of March 16, 1999, by and
between DURO Communication Corporation, CrossRoads Access
Corporation, and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.2 Asset Purchase Agreement, dated as of March 26, 1999, by and
between DURO Communication Corporation, digital.net, l.l.c.
and Digicom USA, LLC.
2.3 Asset Purchase Agreement, dated as of April 8, 1999, by and
between DURO Communication Corporation, Global Information
Exchange Corporation, and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.4 Asset Purchase Agreement, dated as of April 20, 1999, by and
between DURO Communication Corporation, Voyager Online, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.5* Asset Purchase Agreement, dated as of April 23, 1999, by and
between DURO Communication Corporation, EdgeNet Media, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.6* Asset Purchase Agreement, dated as of April 23, 1999, by and
between DURO Communication Corporation, Micro
Products, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.7* Asset Purchase Agreement, dated as of June 7, 1999, by and
between DURO Communication Corporation, ICX Online Inc. and
the other parties identified therein (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.8 Asset Purchase Agreement, dated as of June 14, 1999, by and
between DURO Communication Corporation, MetroLink Internet
Services, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.9* Asset Purchase Agreement, dated as of July 7, 1999, by and
between DURO Communication Corporation, Global Datalink,
Inc. and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.10* Asset Purchase Agreement, dated as of August 27, 1999, by
and between DURO Communication Corporation, Southern
Kentucky Network, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
</TABLE>
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<TABLE>
<C> <S> <C>
2.11 Asset Purchase Agreement, dated as of September 22, 1999 by
and between DURO Communication Corporation, Gibralter Data
Services, Gibralter Publishing, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.12 Asset Purchase Agreement, dated as of October 15, 1999, by
and between DURO Communication Corporation, Bitstorm, Inc.
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.13 Asset Purchase Agreement, dated as of October 27, 1999, by
and between DURO Communication Corporation, Internet of
Western North Carolina, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.14 Asset Purchase Agreement, dated as of December 10, 1999 by
and between DURO Communication Corporation, The Nashville
Exchange, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.15* Stock Purchase Agreement, dated as of December 23, 1999, by
and between DURO Communication Corporation, OptiLink and the
other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.16* Stock Purchase Agreement, dated as of December 29, 1999, by
and between DURO Communication Corporation, Surf South, Inc.
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.17* Stock Purchase Agreement, dated as of February 3, 2000, by
and between DURO Communication Corporation, Digital Express
Internet Services, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.18* Stock Purchase Agreement, dated as of February 4, 2000, by
and between DURO Communication Corporation, Gulf Coast
Internet Corporation, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.19* Stock Purchase Agreement, dated as of February 24, 2000, by
and between DURO Communication Corporation, DSS Online, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.20 Asset Purchase Agreement, dated as of March 21, 2000 by and
among the Registrant, DURO Communication Corporation, Wave
Communications, Inc., Wave Communications Acquisition
Subsidiary, Inc., Wave Training Subsidiary, Inc. and the
other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.21* Asset Purchase Agreement, dated as of , 2000 by and among
the Registrant, DURO Communication Corporation, Boone
Online, Inc., each of G2, Inc., The Siege Group, Inc. d/b/a
Highland Information Systems, and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
</TABLE>
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<PAGE>
<TABLE>
<C> <S> <C>
2.22* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation, iThink and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.23* Asset Purchase Agreement, dated as of , 2000, by and among
the Registrant, DURO Communication Corporation, Hitter
Communications and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.24* Stock Purchase Agreement, dated as of , 2000, by and
between the Registrant, DURO Communication Corporation, Apex
Internet Services, Inc., ALEC, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.25* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation, Homenet
Communications, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.26* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation and Cape Lookout Internet and
the other parties identified therein (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
3.1* Second Amended and Restated Certificate of Incorporation of
the Registrant
3.2* Amended and Restated By-Laws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant
4.2* Amended and Restated Stockholders Agreement, dated as of
December 30, 1999, among the Registrant and the Investors
Party Thereto.
4.3* Registration Rights Agreement, dated as of December 30,
1999, by and among the Registrant and the Investors who are
or may become a Party Thereto.
5.1* Opinion of Goodwin, Procter & Hoar LLP as to the legality of
the securities offered
10.1* Credit Agreement, dated as of May 13, 1999, among DURO
Communication Corporation, various Financial Institutions
and Canadian Imperial Bank of Commerce (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request)
10.2* First Amendment to Credit Agreement, dated as of June 11,
1999, by and among DURO Communication Corporation, various
Financial Institutions and Canadian Imperial Bank of
Commerce
10.3* Second Amendment to Credit Agreement, dated as of
December 10, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
10.4* Third Amendment to Credit Agreement, dated as of
December 17, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
</TABLE>
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<TABLE>
<C> <S> <C>
10.5* Fourth Amendment to Credit Agreement, dated as of
December 21, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
10.6* Stock Exchange Agreement dated as of December 23, 1999
10.7* Securities Purchase Agreement, dated as of December 30, 1999
by and among the Registrant and the Investors Party Thereto
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
10.8* Second Amended and Restated Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and John C Stanley IV.
10.9* First Amendment to Amended and Restated Restricted Stock
Purchase Agreement dated as of May 13, 1999 by and between
DURO Communication Corporation and John C Stanley IV.
10.10* Lease Agreement, dated as of November 26, 1996, by and
between Richard T. Davis, Trustee, and Micro Products
Incorporated.
10.11* Lease Agreement, dated as of March 1, 1998, by and between
Carol C. Roquet of "The OffiCenter at Stanley Hall" and
Global Information Exchange Corporation.
10.12* Office Lease, dated as of February 1, 1999, by and between
Carlos Carpenter and Karen Carpenter and Southern Kentucky
Network, Inc.
10.13* Contract and Lease, dated as of August 3, 1999, by and
between Owen G. Dunn Company and DURO Communication
Corporation.
10.15* Lease Agreement, dated as of October 22, 1997, by and
between BGK Tennessee Office Associates, LP, and Internet
Design Group II, Inc.
10.16* Lease Modification Agreement #1, dated as of June 8, 1999,
by and between BGK Tennessee Office Associates, LP, and ICX
Online, Inc.
10.17* Lease Agreement, dated as of January 4, 2000, by and between
Blackberry, LLC, and DURO Communication, Inc.
10.19* Second Addendum to Business Lease, dated as of November 26,
1996, by and between Richard T. Davis, Trustee, and DURO
Communication Corporation D/B/A MPI Net, Inc.
10.20* Lease Agreement, dated as of November 10, 1999, by and
between Lexington Financial Center, Ltd. and DURO
Communication Corporation.
10.21* Lease Agreement, dated as of April 12, 1999, by and between
Lexington Financial Center, Ltd. and Southern Kentucky
Network, Inc.
10.22* Lease Agreement, dated as of January 4, 2000, by and between
Gourley & Goes, LLP, and DURO Communication Corporation.
10.23*+ Amended and Restated Employment/Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and Peter B. Hopper.
10.24*+ First Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and Peter B. Hopper.
</TABLE>
II-8
<PAGE>
<TABLE>
<C> <S> <C>
10.25*+ Second Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and Peter B. Hopper.
10.26*+ Amended and Restated Employment/Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and G. Robert Joiner.
10.27*+ First Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and G. Robert Joiner.
10.28*+ Second Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and G. Robert Joiner.
10.29*+ Employment Agreement, dated as of May 10, 1999, by and
between DURO Communication Corporation and Mark L. Heimbouch
10.30* 1999 Stock Option and Incentive Plan
10.31* Form of Incentive Stock Option Agreement
10.32* Form of Non-Qualified Stock Option Agreement
10.33* Form of Director Indemnification Agreement to be entered
into between the Registrant and each non-employee director
10.34* Parent Guaranty, dated as of December 30, 1999, by the
Registrant in connection with the Credit Agreement dated as
of May 13, 1999 by and among DURO Communication Corporation,
various financial institutions and Canadian Imperial Bank of
Commerce, as amended.
21.1* Schedule of Subsidiaries of the Registrant
23.1* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto)
23.2 Consent of KPMG LLP
23.3 Consent of Lattimore, Black, Morgan and Cain, P.C.
23.4 Consent of Bowen, Phillips and Carmichael, LLP
23.5 Consent of Cordovano and Harvey, P.C.
</TABLE>
- ------------------------
* To be filed by amendment to the registration statement.
+ Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required or
because the required information is given in the Financial Statements or Notes
to those statements.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-9
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Casselberry, State of
Florida, on April 13, 2000.
<TABLE>
<S> <C> <C>
DURO COMMUNICATIONS, INC.
By: /s/ PETER B. HOPPER
-----------------------------------------
Name: Peter B. Hopper
Title: President and Chief Executive
Officer
</TABLE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of John G. Hayes, Peter B. Hopper and Mark
L. Heimbouch such person's true and lawful attorney-in-fact and agent with full
power of substitution and resubstitution, for such person and in such person's
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (or to any
other registration statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act), and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto each said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that any said attorney-in-fact and agent, or any
substitute or substitutes of any of them, may 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 below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
President, Chief Executive
/s/ PETER B. HOPPER Officer, and Assistant
------------------------------------------- Secretary (Principal April 13, 2000
Peter B. Hopper Executive Officer) and
Director
Treasurer and Chief Financial
/s/ MARK L. HEIMBOUCH Officer (Principal Financial
------------------------------------------- Officer and Principal April 13, 2000
Mark L. Heimbouch Accounting Officer)
/s/ JOHN G. HAYES Chairman of the Board of
------------------------------------------- Directors April 13, 2000
John G. Hayes
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JOHN C STANLEY IV Director
------------------------------------------- April 13, 2000
John C Stanley IV
/s/ STEPHEN F. GORMLEY Director
------------------------------------------- April 13, 2000
Stephen F. Gormley
/s/ PEARCE LANDRY Director
------------------------------------------- April 13, 2000
Pearce Landry
/s/ SCOTT PERPER Director
------------------------------------------- April 13, 2000
Scott Perper
/s/ DAVID F. DIETZ Director
------------------------------------------- April 13, 2000
David F. Dietz
</TABLE>
II-12
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S> <C>
1.1* Form of Underwriting Agreement
2.1 Asset Purchase Agreement, dated as of March 16, 1999, by and
between DURO Communication Corporation, CrossRoads Access
Corporation, and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.2 Asset Purchase Agreement, dated as of March 26, 1999, by and
between DURO Communication Corporation, digital.net, l.l.c.
and Digicom USA, LLC.
2.3 Asset Purchase Agreement, dated as of April 8, 1999, by and
between DURO Communication Corporation, Global Information
Exchange Corporation, and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.4 Asset Purchase Agreement, dated as of April 20, 1999, by and
between DURO Communication Corporation, Voyager Online, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.5* Asset Purchase Agreement, dated as of April 23, 1999, by and
between DURO Communication Corporation, EdgeNet Media, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.6* Asset Purchase Agreement, dated as of April 23, 1999, by and
between DURO Communication Corporation, Micro
Products, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.7* Asset Purchase Agreement, dated as of June 7, 1999, by and
between DURO Communication Corporation, ICX Online Inc. and
the other parties identified therein (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.8 Asset Purchase Agreement, dated as of June 14, 1999, by and
between DURO Communication Corporation, MetroLink Internet
Services, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.9* Asset Purchase Agreement, dated as of July 7, 1999, by and
between DURO Communication Corporation, Global Datalink,
Inc. and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.10* Asset Purchase Agreement, dated as of August 27, 1999, by
and between DURO Communication Corporation, Southern
Kentucky Network, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.11 Asset Purchase Agreement, dated as of September 22, 1999 by
and between DURO Communication Corporation, Gibralter Data
Services, Gibralter Publishing, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
2.12 Asset Purchase Agreement, dated as of October 15, 1999, by
and between DURO Communication Corporation, Bitstorm, Inc.
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.13 Asset Purchase Agreement, dated as of October 27, 1999, by
and between DURO Communication Corporation, Internet of
Western North Carolina, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.14 Asset Purchase Agreement, dated as of December 10, 1999 by
and between DURO Communication Corporation, The Nashville
Exchange, Inc. and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.15* Stock Purchase Agreement, dated as of December 23, 1999, by
and between DURO Communication Corporation, OptiLink and the
other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.16* Stock Purchase Agreement, dated as of December 29, 1999, by
and between DURO Communication Corporation, Surf South, Inc.
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.17* Stock Purchase Agreement, dated as of February 3, 2000, by
and between DURO Communication Corporation, Digital Express
Internet Services, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.18* Stock Purchase Agreement, dated as of February 4, 2000, by
and between DURO Communication Corporation, Gulf Coast
Internet Corporation, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.19* Stock Purchase Agreement, dated as of February 24, 2000, by
and between DURO Communication Corporation, DSS Online, LLC
and the other parties identified therein (excluding
schedules and exhibits, which the Registrant agrees to
furnish supplementally to the Commission upon request).
2.20 Asset Purchase Agreement, dated as of March 21, 2000 by and
among the Registrant, DURO Communication Corporation, Wave
Communications, Inc., Wave Communications Acquisition
Subsidiary, Inc., Wave Training Subsidiary, Inc. and the
other parties identified therein (excluding schedules and
exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
2.21* Asset Purchase Agreement, dated as of , 2000 by and among
the Registrant, DURO Communication Corporation, Boone
Online, Inc., each of G2, Inc., The Siege Group, Inc. d/b/a
Highland Information Systems, and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.22* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation, iThink and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
2.23* Asset Purchase Agreement, dated as of , 2000, by and among
the Registrant, DURO Communication Corporation, Hitter
Communications and the other parties identified therein
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
2.24* Stock Purchase Agreement, dated as of , 2000, by and
between the Registrant, DURO Communication Corporation, Apex
Internet Services, Inc., ALEC, Inc. and the other parties
identified therein (excluding schedules and exhibits, which
the Registrant agrees to furnish supplementally to the
Commission upon request).
2.25* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation, Homenet
Communications, Inc. and the other parties identified
therein (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the
Commission upon request).
2.26* Asset Purchase Agreement, dated as of , 2000, by and among
DURO Communication Corporation and Cape Lookout Internet and
the other parties identified therein (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request).
3.1* Second Amended and Restated Certificate of Incorporation of
the Registrant
3.2* Amended and Restated By-Laws of the Registrant
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant
4.2* Amended and Restated Stockholders Agreement, dated as of
December 30, 1999, among the Registrant and the Investors
Party Thereto.
4.3* Registration Rights Agreement, dated as of December 30,
1999, by and among the Registrant and the Investors who are
or may become a Party Thereto.
5.1* Opinion of Goodwin, Procter & Hoar LLP as to the legality of
the securities offered
10.1* Credit Agreement, dated as of May 13, 1999, among DURO
Communication Corporation, various Financial Institutions
and Canadian Imperial Bank of Commerce (excluding schedules
and exhibits, which the Registrant agrees to furnish
supplementally to the Commission upon request)
10.2* First Amendment to Credit Agreement, dated as of June 11,
1999, by and among DURO Communication Corporation, various
Financial Institutions and Canadian Imperial Bank of
Commerce
10.3* Second Amendment to Credit Agreement, dated as of
December 10, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
10.4* Third Amendment to Credit Agreement, dated as of
December 17, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
10.5* Fourth Amendment to Credit Agreement, dated as of
December 21, 1999, by and among DURO Communication
Corporation, various Financial Institutions and Canadian
Imperial Bank of Commerce
10.6* Stock Exchange Agreement dated as of December 23, 1999
10.7* Securities Purchase Agreement, dated as of December 30, 1999
by and among the Registrant and the Investors Party Thereto
(excluding schedules and exhibits, which the Registrant
agrees to furnish supplementally to the Commission upon
request).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.8* Second Amended and Restated Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and John C Stanley IV.
10.9* First Amendment to Amended and Restated Restricted Stock
Purchase Agreement dated as of May 13, 1999 by and between
DURO Communication Corporation and John C Stanley IV.
10.10* Lease Agreement, dated as of November 26, 1996, by and
between Richard T. Davis, Trustee, and Micro Products
Incorporated.
10.11* Lease Agreement, dated as of March 1, 1998, by and between
Carol C. Roquet of "The OffiCenter at Stanley Hall" and
Global Information Exchange Corporation.
10.12* Office Lease, dated as of February 1, 1999, by and between
Carlos Carpenter and Karen Carpenter and Southern Kentucky
Network, Inc.
10.13* Contract and Lease, dated as of August 3, 1999, by and
between Owen G. Dunn Company and DURO Communication
Corporation.
10.15* Lease Agreement, dated as of October 22, 1997, by and
between BGK Tennessee Office Associates, LP, and Internet
Design Group II, Inc.
10.16* Lease Modification Agreement #1, dated as of June 8, 1999,
by and between BGK Tennessee Office Associates, LP, and ICX
Online, Inc.
10.17* Lease Agreement, dated as of January 4, 2000, by and between
Blackberry, LLC, and DURO Communications, Inc.
10.19* Second Addendum to Business Lease, dated as of November 26,
1996, by and between Richard T. Davis, Trustee, and DURO
Communication Corporation D/B/A MPI Net, Inc.
10.20* Lease Agreement, dated as of November 10, 1999, by and
between Lexington Financial Center, Ltd. and DURO
Communication Corporation.
10.21* Lease Agreement, dated as of April 12, 1999, by and between
Lexington Financial Center, Ltd. and Southern Kentucky
Network, Inc.
10.22* Lease Agreement, dated as of January 4, 2000, by and between
Gourley & Goes, LLP, and DURO Communication Corporation.
10.23*+ Amended and Restated Employment/Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and Peter B. Hopper.
10.24*+ First Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and Peter B. Hopper.
10.25*+ Second Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and Peter B. Hopper.
10.26*+ Amended and Restated Employment/Restricted Stock Purchase
Agreement dated as of May 13, 1999 by and between DURO
Communication Corporation and G. Robert Joiner.
10.27*+ First Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and G. Robert Joiner.
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10.28*+ Second Amendment, dated , to Amended and Restated
Employment/Restricted Stock Purchase Agreement dated as of
May 13, 1999 by and between DURO Communication Corporation
and G. Robert Joiner.
10.29*+ Employment Agreement, dated as of May 10, 1999, by and
between DURO Communication Corporation and Mark L. Heimbouch
10.30* 1999 Stock Option and Incentive Plan
10.31* Form of Incentive Stock Option Agreement
10.32* Form of Non-Qualified Stock Option Agreement
10.33* Form of Director Indemnification Agreement to be entered
into between the Registrant and each non-employee director
10.34* Parent Guaranty, dated as of December 30, 1999, by the
Registrant in connection with the Credit Agreement dated as
of May 13, 1999 by and among DURO Communication Corporation,
various financial institutions and Canadian Imperial Bank of
Commerce, as amended.
21.1* Schedule of Subsidiaries of the Registrant
23.1* Consent of Goodwin, Procter & Hoar LLP (included in Exhibit
5.1 hereto)
23.2 Consent of KPMG LLP
23.3 Consent of Lattimore, Black, Morgan and Cain, P.C.
23.4 Consent of Bowen, Phillips and Carmichael, LLP
23.5 Consent of Cordovano and Harvey, P.C.
</TABLE>
- ------------------------
* To be filed by amendment to the registration statement.
+ Indicates a management contract or any compensatory plan, contract or
arrangement.
<PAGE>
Exhibit 2.1
ASSET PURCHASE AGREEMENT
Agreement made as of March 16, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), CrossRoads Access Corporation, a
Mississippi corporation ("Seller"), and Jackey G. Wall and Frederick Reiselt, as
management shareholders of the Seller (collectively the "Management
Shareholders").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with the
Internet service business of Seller (the "Business").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined below)), including, without limitation, original contracts
for the provision of Internet connectivity, dedicated service, web-hosting,
web-domain, dial-up services, web-development and Internet commerce, all of
Seller's insurance contracts, all leases with respect to real property and all
co-location agreements, a true, correct and complete list of which contracts is
attached hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
<PAGE>
(d) Licenses and Authorizations. All rights associated with the
licenses, permits, easements, registrations, domains and authorizations issued
or granted to Seller by any governmental authority with respect to the operation
of the Business, including, without limitation, those licenses and
authorizations listed on Schedule 1.1(d) attached hereto, and all applications
therefor, together with any renewals, extensions, or modifications thereof and
additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller, excluding cash, and all accounts receivable of Seller incurred in the
ordinary course of business and such accounts receivable as are included on
Seller's balance sheet, as determined in accordance with generally accepted
accounting principles ("GAAP"), consistently applied (collectively, the "Assumed
Current Assets"). A complete list of such accounts receivable is attached hereto
as Schedule 1.1(e) ("Accounts Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business;
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business; and
(h) Bank Accounts. All of Seller's bank accounts as set forth in
Schedule 2.19 ("Banking Relations").
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets." Buyer warrants that Buyer is not relying upon any statement or
communication (whether same be promise, guaranty, representation, warranty or
otherwise) in consummating this transaction other than as specifically contained
in writing herein.
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. The cash surrender value of Seller's contracts of
insurance and all insurance proceeds of settlement and insurance claims made by
Seller on or before the Closing Date as set forth on Schedule 1.2(c) attached
hereto;
2
<PAGE>
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined below) for periods prior to the
Closing Date as set forth on Schedule 1.2(d) attached hereto;
(e) Corporate Records. All of Seller's corporate and other
organizational records; and
(f) Cash. All of Seller's cash on hand or in bank accounts.
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date; (ii) those current liabilities and accrued expenses of Seller as of the
Closing Date consisting of (A) accounts payable arising in the ordinary course
of business and (B) unearned revenues (the "Assumed Current Liabilities and
Accrued Expenses" and (iii) all obligations and liabilities of Seller which are
to be performed after the Closing Date arising under the Contracts, including,
without limitation, Seller's obligations to Subscribers (as defined in Section
2.16) under such Contracts for (A) Subscriber deposits held by Seller as of the
Closing Date in the amount for which Buyer receives a credit pursuant to Section
1.6(a) below, (B) Subscriber advance payments held by Seller as of the Closing
Date for services to be rendered in connection with the Business in the amount
for which Buyer receives a credit pursuant to Section 1.6(a) below, and (C) the
delivery of Internet connectivity service to Subscribers (whether pursuant to a
Contract or otherwise) after the Closing Date ((i), (ii) and (iii) together, the
"Assumed Liabilities"). The assumption of the Assumed Liabilities by Buyer
hereunder shall not enlarge any rights of third parties under contracts or
arrangements with Buyer or Seller or any of their respective affiliates or
subsidiaries. No parties other than Buyer and Seller shall have any rights under
this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The
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liabilities which are not assumed by Buyer under this Agreement are hereinafter
sometimes referred to as the "Excluded Liabilities."
(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the Closing Date and Buyer shall not assume or have any obligations or
liabilities with respect to such employees or such terminations except as
provided in Section 7.3 with respect to the Management Shareholders,
including, without limitation, any severance obligation. Seller
acknowledges and agrees that Buyer has the right to interview and discuss
employment terms and issues with such employees prior to and after the
Closing.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the Closing. Except as set forth in Section 7.3, nothing in
this Agreement shall be construed as a commitment or obligation of Buyer
to accept for employment, or otherwise continue the employment of, any of
Seller's employees, and no employee shall be a third-party beneficiary of
this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any benefit plans maintained
by, or for the benefit of any employees of Seller prior to the Closing
Date, including, without limitation, obligations for severance or vacation
accrued but not taken as of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date of this Agreement or at
such other time and place as shall be mutually agreed upon in writing by Buyer
and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, Buyer shall pay at the Closing
an amount (as adjusted in accordance with Section 1.6 below, the "Purchase
Price") equal to $1,000,000 as follows:
(a) Buyer shall deliver the sum of $900,000 minus the sum of the
Debt Repayment Amount as set forth in Schedule 1.5(a) (the "Debt Repayment
Amount") and the
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Estimated Adjustment (as such term is hereinafter defined) to Seller by bank
cashier's check or bank wire transfer pursuant to payment instructions delivered
by Seller to Buyer at the Closing; and
(b) Buyer shall deposit the sum of $100,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow
Agreement in the form attached hereto as Exhibit A (the "Escrow Agreement"). The
Escrow Deposit shall be held, administered and distributed in accordance with
the terms of the Escrow Agreement, and shall be Buyer's remedy for any
Disconnects (as defined in the Escrow Agreement) post-Closing and for any
indemnification claims made pursuant to Section 10 hereof.
(c) Buyer shall deliver the Debt Repayment Amount to Deposit
Guaranty National Bank by bank wire transfer pursuant to payment instructions
delivered by Seller to Buyer at the Closing.
1.6 Adjustments to Purchase Price.
(a) The Purchase Price shall be adjusted dollar for dollar by the
amount, if any, by which the Working Capital of the Seller as of the Closing
Date (the "Closing Working Capital") differs from the Seller's Working Capital
as of October 31, 1998 (the "Working Capital Adjustment Amount"). If the
Seller's Working Capital as of the Closing Date exceeds the Seller's Working
Capital as of October 31, 1998 the Aggregate Purchase Price shall be increased
by an amount (an "Excess") equal to the Working Capital Adjustment Amount. If
the Seller's Working Capital as of the Closing Date is less than the Seller's
Working Capital as of October 31, 1998, the Aggregate Purchase Price shall be
decreased by an amount (a "Deficiency") equal to the Working Capital Adjustment
Amount. For purposes of this Agreement, "Working Capital" shall mean the
Seller's Assumed Current Assets minus its Assumed Current Liabilities and
Accrued Expenses.
(b) The Purchase Price shall be decreased, on a dollar for dollar
basis, by the Revenues Adjustment Amount in the event Recurring Revenues for the
month ending February 28, 1999 are less than $70,000 (the "Target Revenues").
For purposes hereof, the term "Revenues Adjustment Amount" shall equal the
product obtained by multiplying (i) $1,100 by (ii) the quotient obtained by
dividing (X) the Annualized Recurring Revenues Deficiency, by (Y) one thousand
dollars ($1,000). For purposes hereof, "Recurring Revenues" shall mean revenues
of Seller from recurring sources, calculated by multiplying the number of
Subscribers as of February 28, 1999 by the average monthly rate in effect for
such Subscribers, by type, excluding one-time set-up fees and other ancillary
charges. For purposes hereof, the term "Annualized Recurring Revenues
Deficiency" shall equal the product of (i) the difference between (A) the Target
Revenues and (B) Recurring Revenues, multiplied by (ii) twelve (12).
(c) (i) Buyer and Seller shall prepare a statement to be attached
hereto as Schedule 1.6(c) (the "Estimated Adjustment Statement") which
sets forth (x)
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the Company's estimated Working Capital and the amount of any estimated
Deficiency or Excess, as the case may be, as of the Closing Date (the
"Estimated Working Capital Adjustment") and (y) the estimated Revenues
Adjustment Amount (the "Estimated Revenues Adjustment"). The sum of the
Estimated Working Capital Adjustment and the Estimated Revenues Adjustment
shall be hereinafter referred to as the "Estimated Adjustment." The
Purchase Price payable at the Closing shall be increased on a
dollar-for-dollar basis to the extent of any positive Estimated Adjustment
or decreased on a dollar-for-dollar basis to the extent of any negative
Estimated Adjustment, as the case may be, set forth on such Estimated
Adjustment Statement.
(ii) No later than sixty (60) days following the Closing,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Working Capital and the
amount of any actual Deficiency or Excess, as the case may be, as well as
any other changes to the Estimated Adjustment, as of the Closing Date.
Subject to Section 1.6(b)(iii) below, within ten (10) days following the
delivery of such Final Adjustment Statement to Seller, Buyer or Seller, as
the case may be, shall pay to the other party, by wire transfer of
immediately available funds, the difference between the Estimated
Adjustment, as shown on the Estimated Adjustment Statement, and the actual
adjustment, as shown on the Final Adjustment Statement.
(iii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Working Capital at the Closing. Upon
receipt by Buyer of such written objection, the parties shall attempt to
resolve the disagreement concerning the Final Adjustment Statement through
negotiation. Notwithstanding any other dispute resolution procedure
provided for in this Agreement, if Buyer and Seller cannot resolve such
disagreement concerning the Final Adjustment Statement within thirty (30)
days following the end of the foregoing 10-day period, the parties shall
submit the matter for resolution to a nationally recognized firm of
independent certified public accountants not affiliated with either party,
with the costs thereof to be shared equally by the parties. Such
accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such according firm to the parties.
1.7 Purchase Price Allocation. At the Closing, Buyer and Seller shall
agree on the allocation of the Purchase Price as set forth on Schedule 1.7
attached hereto. Such allocation shall be binding upon Buyer and Seller for all
purposes (including financial accounting purposes, financial and regulatory
reporting purposes and tax purposes). Buyer and Seller each further agrees to
file its Federal income tax returns and its other tax returns reflecting such
allocation, Form 8594 and any other reports required by Section 1060 of the
Code.
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1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, Seller shall deliver to Buyer all of the Contracts, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
of the full benefit of the same. Seller shall also deliver to Buyer at the
Closing all of Seller's files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes, fees and duties
(including any real estate transfer taxes) under applicable law incurred in
connection with this Agreement or the transactions contemplated thereby will be
borne and paid by Seller, and Seller shall promptly reimburse Buyer for the
payment of any such tax, fee or duty which Buyer is required to make under
applicable law. Ad valorem personal property taxes on the Subject Assets for
calendar year 1999 shall be pro rated at and as of the Closing Date.
1.10 Transfer of Subject Assets. At the Closing, Seller shall deliver or
cause to be delivered to Buyer good and sufficient instruments of transfer
transferring to Buyer title to all of the Assets, together with all required
consents. Such instruments of transfer (a) shall contain appropriate warranties
and covenants which are usual and customary for transferring the type of
property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance reasonably satisfactory to Buyer
and its counsel, (c) shall effectively vest in Buyer good and marketable title
to all of the Assets free and clear of all Liens (as defined in Section 2.8),
and (d) where applicable, shall be accompanied by evidence of the discharge of
all Liens against the Assets.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND
MANAGEMENT SHAREHOLDERS.
In order to induce Buyer to enter into this Agreement, Seller and each of
the Management Shareholders, jointly and severally, hereby represent and warrant
to Buyer as follows:
2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Mississippi. Seller has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of Seller's certificate of incorporation and bylaws each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. Seller is not in violation of any term of the certificate of
incorporation and bylaws Seller is duly qualified to do business in the state of
its incorporation, and is not required to be licensed or qualified to conduct
its business or own its property in any other jurisdiction.
(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority, except U.S.
Government securities,
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bank certificates of deposit and money market accounts acquired as short-term
investments in the ordinary course of its business. Seller does not own or have
any direct or indirect interest in or control over any corporation, partnership,
joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken, and this Agreement and each
other agreement, document and instrument to be executed and delivered by or on
behalf of Seller pursuant to, or as contemplated by, this Agreement
(collectively, the "Seller Documents") has been duly and validly authorized,
executed and delivered by Seller and no other action on the part of Seller or
its officers, directors or shareholders is required in connection therewith.
Each of Seller and the Management Shareholders have full right, authority, power
and capacity to execute and deliver this Agreement and each other Seller
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of each of
Seller and the Management Shareholders enforceable in accordance with its
respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the certificate of incorporation and bylaws of Seller, in each case
as amended to date, (ii) constitute a violation of, or conflict with or result
in any breach of, acceleration of any obligation under, right of termination
under, or default under, any agreement or instrument to which Seller is a party
or by which Seller or the Assets is bound, (iii) violate any judgment, decree,
order, statute, rule or regulation applicable to Seller or the Assets, (iv)
require Seller to obtain any approval, consent or waiver of, or to make any
filing with, any person or entity (governmental or otherwise) that has not been
obtained or made or (v) result in the creation or imposition of any Lien on any
of the Assets.
(b) The execution, delivery and performance by each of the
Management Shareholders of this Agreement and each other Seller Document does
not and will not (i) constitute a violation of, or conflict with or result in
any breach of, acceleration of any obligation under, right of termination under,
or default under, any agreement or instrument to which any or all of the
Management Shareholders are a party or by which any or all of the Management
Shareholders are bound, (ii) violate any judgment, decree, order, statute, rule
or regulation applicable to the Management Shareholders, (iii) require the
Management Shareholders to obtain any approval, consent or waiver of, or to make
any filing with, any person or entity (governmental or otherwise) that has not
been obtained or made, or (iv) result in the creation or imposition of any Lien
on any of the Assets.
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2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not, provided that all ad valorem personal property taxes on the Subject Assets
for calendar year 1999 shall be pro rated between Buyer and Seller at and as of
the Closing Date.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal, state, local
and foreign income tax returns filed with respect to Seller for taxable periods
ended on or after December 31, 1993, is set forth in Schedule 2.4 attached
hereto. Seller has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by Seller with respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Management
Shareholders, threatening to assert against Seller any deficiency or claim for
additional Taxes. To the knowledge of Seller and the Management Shareholders, no
claim has ever been made by an authority in a jurisdiction where Seller does not
file reports and returns that Seller is or may be subject to taxation by that
jurisdiction. There are no security interests on any of the Assets of Seller
that arose in connection with any failure (or alleged failure) to pay any Taxes.
Seller has never entered into a closing agreement pursuant to Section 7121 of
the Internal Revenue Code of 1986, as amended (the "Code")
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
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(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state,
municipal or other governmental authority (including the Federal Communications
Commission), and Seller has not received notice of a violation or alleged
violation of any such statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets are insured to
the extent disclosed in Schedule 2.6 attached hereto, and all insurance policies
and arrangements of Seller in effect as of the date hereof are disclosed in said
Schedule. Said insurance policies and arrangements are in full force and effect,
all premiums with respect thereto are currently paid, and Seller is in
compliance in all material respects with the terms thereof. Said insurance is
customary for the business engaged in by Seller and is sufficient for compliance
by Seller with all requirements of law and all agreements and leases to which
Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate to the Business or Assets. Schedule 1.1(b)
attached hereto contains a true, correct and complete list of all Contracts.
With respect to each oral agreement or understanding involving the Business,
Seller has provided a written summary of the material terms of each such
agreement or understanding on Schedule 1.1(b). Each Contract is valid, in full
force and effect and binding upon Seller and the other parties thereto in
accordance with its terms. Neither Seller nor, to the knowledge of Seller and
the Management Shareholders, any other party is in default under or in arrears
in the performance, payment or satisfaction of any agreement or condition on its
part to be performed or satisfied under any Contract, nor does any condition
exist that with notice or lapse of time or both would constitute such a default,
and no waiver or indulgence has been granted by any party under any Contract.
Seller has not received notice of, and each of Seller and the Management
Shareholders have no knowledge of, any fact which would result in a termination,
repudiation or breach of any Contract. Seller has provided Buyer with true and
complete copies of all of such Contracts, other than with respect to the oral
agreements or understandings described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens") whatsoever.
Upon the sale, assignment, transfer and delivery of the Assets to Buyer
hereunder and under the Seller Documents, there will be vested in Buyer good,
marketable and indefeasible title to the Assets, free and clear of all Liens.
The Assets include all of the assets and properties (i) held for use by Seller
to conduct the Business as
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presently conducted and (ii) necessary or useful for Buyer to operate the
Business in the same manner as such business is currently operated by Seller.
All of the tangible Assets are in reasonably good repair, have been well
maintained and are in good operating condition and will not require any material
modifications or repairs to allow Buyer to operate the business of Seller after
the Closing, ordinary wear and tear excepted. Seller has delivered complete and
true copies of all real property leases (the "Leases") set forth on Schedule
1.1(b). Seller holds good, clear, marketable, valid and enforceable leasehold
interest in the real property subject to the Leases (the "Leased Real
Property"), subject only to the right of reversion of the landlord or lessor
under the Leases, free and clear of all other prior or subordinate interests,
including, without limitation, mortgages, deeds of trust, ground leases, leases,
subleases, assessments, tenancies, claims, covenants, conditions, restrictions,
easements, judgments or other encumbrances or matters affecting title, and free
of encroachments onto or off of the leased real property. There are no material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property, including, without limitation, structural elements,
mechanical systems, roofs or parking and loading areas, and all of such
improvements are in good operating condition and repair, have been well
maintained. All water, sewer, gas, electric, telephone, drainage and other
utilities required by law or necessary for the current or planned operation of
the Leased Real Property have been installed and connected pursuant to valid
permits, and are sufficient to service the Leased Real Property. Seller does not
hold or own a fee interest in any real property.
2.9 No Litigation. Seller is not now involved in nor, to the knowledge of
Seller and the Management Shareholders, is Seller threatened to be involved in
any litigation or legal or other proceedings related to or affecting the
Business or any Asset (including any Intellectual Property) or which would
prevent or hinder the consummation of the transactions contemplated by this
Agreement. Seller has not been operating the Business under, and the Business is
not subject to, any order, injunction or decree of any court of federal, state,
municipal or other governmental department, commission, board, agency or
instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately five (5)
full-time employees and three (3) part-time employees and generally enjoys good
employer-employee relationships. Seller shall provide to Buyer a list of the
employees of Seller in connection with the Business at the Closing, including
the name, date of hire and wages of such employees. Seller is not delinquent in
payments to any of its employees for any wages, salaries, commissions, bonuses
or other direct compensation for any services performed for it to the date
hereof or amounts required to be reimbursed to such employees. Upon termination
of the employment of any of said employees, neither Seller nor Buyer will by
reason of the transactions contemplated hereby or anything done prior to the
Closing be liable to any of said employees for so-called "severance pay" or any
other payments, except as set forth in Schedule 2.10 attached hereto. Seller
does not have any policy, practice, plan or program of paying severance pay or
any form of severance compensation in connection with the termination of
employment, except as set forth in said Schedule. Seller is in compliance in all
material respects with all applicable laws and regulations respecting labor,
employment, fair employment practices, work place safety and health, terms and
conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor
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practices, nor are there any strikes, slowdowns, stoppages of work, or any other
concerted interference with normal operations existing, pending or, to the
knowledge of Seller and the Management Shareholders, threatened against or
involving Seller. No question concerning representation exists respecting any
group of employees of Seller. No collective bargaining agreement is in effect or
is currently being or is about to be negotiated by Seller. Seller has received
no information to indicate that any of its employment policies or practices is
currently being audited or investigated by any federal, state or local
government agency. Seller is, and at all times since November 6, 1986 has been,
in compliance with the requirements of the Immigration Reform Control Act of
1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at October 31, 1998 (the "Base Balance Sheet")
and the statements of income and expense of Seller for the ten months ended
October 31, 1998 (collectively the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied consistently during the periods covered thereby (except for
the absence of footnotes with respect to unaudited financials), are complete and
correct and present fairly and accurately the financial condition of the
Business at the dates of said statements and the results of operations of the
Business for the periods covered thereby. As of the date of the Base Balance
Sheet (the "Base Balance Sheet Date"), Seller had no material liabilities or
obligations of any kind with respect to the Business, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet. As of the date hereof and at the Closing, Seller had
and will have no material liabilities or obligations of any kind with respect to
the Business, whether accrued, contingent or otherwise, that are not disclosed
and adequately reserved against on the Base Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
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(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated. All
of the Authorizations are in full force and effect and no licenses, permits or
authorizations of any governmental department or agency are required for the
operation of the Business which have not been duly obtained. As of the date
hereof, there is not pending or, to the knowledge of Seller and the Management
Shareholders, threatened any action by or before any governmental agency to
revoke, cancel, rescind or modify any of the Authorizations, and there is not
now issued or outstanding or, to the knowledge of Seller and the Management
Shareholders, pending or threatened any order to show cause, notice of
violation, notice of apparent liability, or notice of forfeiture or complaint
against Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller in connection with the execution and delivery of this Agreement
and the Seller Documents and the consummation of the transactions contemplated
hereby and thereby. Except as set forth in Schedule 2.14, all of the approvals,
consents and authorizations listed on Schedule 2.14 shall be obtained by Seller
at or prior to the Closing.
2.15 Customers and Suppliers. To Seller's knowledge, there are no
threatened claims or controversies with any customer or suppliers material to
the Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the subscribers of the Business as listed by class, type and
billing plan. For purposes of this Agreement, the terms "Subscriber" shall mean
any active subscriber to Internet services offered by Seller in the Business who
has subscribed to a service for at least one month and has paid at least one
bill, including, without limitation, any person who receives dial-up Internet
access through the Business (a "Dial-up Subscriber"), any person who receives
dedicated Internet access from Seller offering higher data transmission rates
than available
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from dial-up access (a "Dedicated Subscriber"), and any person with a web page
or domain name on Seller's server and to whom Seller provides Internet access (a
"Web-hosting/Domain-hosting Subscriber"); provided, however, that "Subscriber"
shall not include any person who is (i) more than thirty (30) days delinquent in
payment of such person's bill for such services provided by the Business and
(ii) any person receiving complimentary Internet services or Internet services
at a promotional discounted rate. Set forth on Schedule 2.16(b) attached hereto
is a listing of all such accounts which receive complimentary Internet services
or Internet services at a promotional discounted rate. Set forth on Schedule
2.16(c) attached hereto is Seller's policy and practice with respect to the
disconnection of Subscribers, with which Seller has, except as set forth on
Schedule on Schedule 2.16(c), at all times since its inception, complied in all
material respects.
2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller are or will be as of the Closing Date bona fide, valid and enforceable
claims, subject to no setoff or counterclaim and Seller has no actual notice
that any of the accounts receivable are uncollectible in accordance with their
terms. Seller has no accounts or loans receivable from any person, firm or
corporation which is affiliated with Seller or from any director, officer or
employee of Seller, or from any of their respective spouses or family members.
2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution and which will be assigned to Buyer under Section 1.1(h) are
completely and accurately described in Schedule 2.19 attached hereto, indicating
with respect to each of such arrangements the type of arrangement maintained
(such as checking account, borrowing arrangements, safe deposit box, etc.) and
the person or persons authorized in respect thereof.
2.20 Intellectual Property.
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(a) Set forth on Schedule 2.20 attached hereto are all computer
programs and related documentation sold, marketed, licensed and distributed by
Seller (the "Products"). All of the Intellectual Property of Seller is set forth
on Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) all patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names "CrossRoads
Access," "www.tsixroads.com," "www2.tsixroads.com" and
"http//sevenof.tsixroads.com," all trade names, trade dress, logos, packaging
design, slogans, any and all Internet domain names used or useful in the
business of Seller, registered and unregistered trademarks and service marks and
applications (collectively, "Marks"); (iii) all copyrights in both published and
unpublished works, including, without limitation, all compilations, databases
and computer programs, and all copyright registrations and applications, and all
derivatives, translations, adaptations and combinations of the above
(collectively, "Copyrights"), (iv) all know-how, trade secrets, confidential or
proprietary information, customer lists, IP addresses, research in progress,
algorithms, data, designs, processes, formulae, drawings, schematics,
blueprints, flow charts, models, prototypes, techniques, Beta testing procedures
and Beta testing results (collectively, "Trade Secrets"); (v) Seller's web-sites
(including the domain names "www.tsixroads.com," "www2.tsixroads.com,"
"http//sevenof.tsixroads.com" and any other similar domain names); (vi) all
goodwill, franchises, licenses, permits, consents, approvals, technical
information, telephone numbers, and claims of infringement against third parties
(the "Rights"); and (vii) all contracts relating to the Products and the
Intellectual Property to which Seller is a party or is bound, including, without
limitation, all nondisclosure and/or confidentiality agreements entered into by
persons in connection with disclosures by Seller (collectively,"Assigned
Contracts").
(b) Except as described in Schedule 2.20, Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller and the Management
Shareholders, threatened of any other person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of Seller and the Management Shareholders, threatened
against Seller and/or its officers, employees and consultants which challenge
the validity and enforceability of Seller's rights in respect of the
Intellectual Property. The Intellectual Property constitutes all of the assets
of Seller used in designing, creating and developing the Products, and represent
all of such Intellectual Property necessary for the operation of Seller's
Business as currently conducted.
All former and current employees, consultants and contractors of Seller
have executed written instruments with Seller that assign to Seller all rights
to any inventions, improvements, discoveries, or information relating to the
business of Seller. No employee, consultant or contractor of Seller has entered
into any agreement that restricts or limits in any way the scope or type of work
in which the employee, consultant or contractor may be engaged or requires the
employee, consultant or contractor to transfer, assign, or disclose information
concerning his work to anyone other than Seller.
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(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Patents. All of the issued Patents are
currently in compliance with formal legal requirements (including without
limitation payment of filing, examination and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Patent is held by Seller by assignment,
the assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re- examination or opposition proceeding.
To the knowledge of Seller and the Management Shareholders, there is no
potentially interfering Patent of any third party. All products made, used or
sold under the Patents have been marked with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the United States Patent and Trademark Office and/or any other
jurisdiction are currently in compliance with formal legal requirements
(including, without limitation, the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety (90) days after the Closing Date. In each case where a
Trademark is held by Seller by assignment, the assignment has been duly recorded
with the U.S. Patent and Trademark Office and all other jurisdictions of
registration. No Mark has been or is now involved in any opposition,
invalidation or cancellation proceeding and, to the knowledge of Seller and the
Management Shareholders, no such action is threatened with respect to any of the
Marks. All products and materials containing a Mark bear the proper notice where
permitted by law.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Copyrights. All the Copyrights have been
registered with the United States Copyright Office and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any fees or taxes or actions falling due within ninety (90) days
after the Closing Date. In each case where a Copyright is held by Seller by
assignment, the assignment has been duly recorded with the U.S. Copyright Office
and all other jurisdictions of registration. None of the source or object code,
algorithms, or structure included in the Products is copied from, based upon, or
derived from any other source or object code, algorithm or structure in
violation of the rights of any third party. Any substantial similarity of the
Products to any computer program owned by any third party did not result from
the Products being copied from, based upon, or derived from any such computer
software program in violation of the rights of any third party. All copies of
works encompassed by the Copyrights have been marked with the proper copyright
notice.
(f) Seller has taken all reasonable security measures (including,
without limitation, entering into appropriate confidentiality and non-disclosure
agreements with all officers, directors, employees, consultants and contractors
of Seller and any other persons with access to the Trade Secrets) to protect the
secrecy, confidentiality and value of all Trade Secrets. To the knowledge of
Seller and the Management Shareholders, there has not been
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any breach by any party to any such confidentiality or non-disclosure agreement.
The Trade Secrets have not been disclosed by Seller to any person or entity
other than employees or contractors of Seller who had a need to know and use the
Trade Secrets in the course of their employment or contract performance. Except
as set forth on Schedule 2.20, (i) Seller has not directly or indirectly granted
any rights or interests in the source code of the Products, and (ii) since
Seller developed the source code of the Products, Seller has not provided,
licensed or disclosed the source code of the Products to any person or entity.
Seller has the right to use, free and clear of claims of third parties, all
Trade Secrets. To the knowledge of Seller and the Management Shareholders, there
is not any assertion that the use by Seller of any Trade Secret violates the
rights of any third party.
(g) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Seller has not licensed or granted to anyone rights of any nature to
use any of its Intellectual Property and is not obligated to and does not pay
royalties or other fees to anyone for its ownership, use, license or transfer of
any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed in Schedule 2.20. All such
licenses or other agreements are in full force and effect, to the knowledge of
Seller and the Management Shareholders there is no material default by any party
thereto, and all of the rights of Seller thereunder are freely assignable. True
and complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to Buyer, and Seller has no reason to believe that
the licensors under the licenses and other agreements under which Seller is
granted rights and has granted rights to others do not have and did not have all
requisite power and authority to grant the rights purported to be conferred
thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed in Schedule 2.20. All such
licenses or other agreements are in full force and effect, and to the knowledge
of Seller and the Management Shareholders there is no material default by any
party thereto. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to Buyer.
(j) The Products perform in accordance with their published
specifications and documentation and as Seller has warranted to its customers.
Seller has reviewed the areas within its businesses and operations which could
be adversely affected by, and has developed a program to address on a timely
basis, the "Year 2000 Problem" (i.e., the risk that applications used by Seller
or its suppliers and/or providers may be unable to recognize and properly
perform date-sensitive functions involving certain dates prior to and any date
after December 31, 1999). Seller and the Management Shareholders reasonably
believe that the "Year 2000 Problem" will not have any material adverse effect
on the business or operations of Seller.
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2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth in Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of Seller or, to the knowledge of Seller or the Management
Shareholders, any of their respective spouses or family members owns directly or
indirectly on an individual or joint basis any material interest in, or serves
as an officer or director or in another similar capacity of, any competitor or
supplier of Seller, or any organization which has a material contract or
arrangement with Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program that
has been maintained by the Seller or an Affiliate at any time during the
six-year period ending on the Closing Date. Each Employee Program which has ever
been maintained by the Seller or an Affiliate and which has been intended to
qualify under Section 401(a) or 501(c)(9) of the Internal Revenue Code of 1986,
as amended (the "Code") has received a favorable determination or approval
letter from the Internal Revenue Service ("IRS") regarding its qualification
under such section and has, in fact, been qualified under the applicable section
of the Code from the effective date of such Employee Program through and
including the Closing Date (or, if earlier, the date that all of such Employee
Program's assets were distributed). No event or omission has occurred which
would cause any such Employee Program to lose its qualification or otherwise
fail to satisfy the relevant requirements to provide tax-favored benefits under
the applicable Code Section (including without limitation Code Sections 105,
125, 401(a) and 501(c)(9)). With respect to any Employee Program ever maintained
by the Seller or any Affiliate, there has been no (i) "prohibited transaction,"
as defined in Section 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Code Section 4975, or (ii) failure to comply with
any provision of ERISA, other applicable law, or any agreement which, in the
case of either of (i) or (ii), could subject the Seller or any Affiliate to
liability either directly or indirectly (including, without limitation, through
any obligation of indemnification or contribution) for any damages, penalties,
or taxes, or any other loss or expense. All payments and/or contributions
required to have been made (under the provisions of any agreements or other
governing documents or applicable law) with respect to all Employee Programs
ever maintained by the Seller or any Affiliate, for all periods prior to the
Closing Date, either have been made or have been accrued (and all such unpaid
but accrued amounts are described on Schedule 2.23). Each Employee Program ever
maintained by the Seller or an Affiliate has complied with the applicable
notification and other applicable requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985.
(b) Neither the Seller nor any Affiliate (A) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multiemployer Plan (as defined in
Section 3(37) of ERISA)
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or (B) has ever provided health care or any other non-pension benefits to any
employees after their employment is terminated (other than as required by part 6
of subtitle B of title I of ERISA) or has ever promised to provide such
post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) Seller has not
generated, transported, used, stored, treated, disposed of, or managed any
Hazardous Waste (as defined below) at any time; (ii) no Hazardous Material (as
defined below) has ever been or is threatened to be spilled, released, or
disposed of at any site associated with a structure presently or formerly owned,
operated, leased, or used by Seller, or has ever been located in the soil or
groundwater at any such site; (iii) no Hazardous Material has ever been
transported from any site associated with a structure presently or formerly
owned, operated, leased, or used by Seller for treatment, storage, or disposal
at any other place; (iv) Seller does not presently own, operate, lease, or use,
and has not previously owned, operated, leased, or used any site associated with
a structure on which underground storage tanks are or were located; and (v) no
lien has ever been imposed by any governmental agency on any property, facility,
machinery, or equipment owned, operated, leased, or used by either Seller in
connection with the presence of any Hazardous Material.
(b) Except as set forth in Schedule 2.24, (i) Seller does not have
any liability under, nor has it ever violated, any Environmental Law (as defined
below); (ii) Seller, nor any property associated with a structure owned,
operated, leased, or used by Seller, nor facilities or operations thereon are
presently not in compliance with all applicable Environmental Laws; (iii) Seller
has not entered into or been subject to any judgment, consent decree, compliance
order, or administrative order with respect to any environmental or health and
safety matter or received any request for information, notice, demand letter,
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administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor any Management Stockholder has
any knowledge or reason to know that any of the items enumerated in clause (iii)
of this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
By-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Management Shareholders to Buyer pursuant to this Agreement do
not contain any untrue statement of a material fact, and, when taken together,
do not omit to state a material fact required to be stated therein or necessary
in order to make such representations, warranties or statements not misleading
in light of the circumstances under which they were made. There are no facts
known to Seller or the Management Shareholders which presently or may in the
future have a material adverse affect on the Business, properties, Assets,
prospects, operations or (financial or other) condition of Seller which has not
been specifically disclosed herein or in a Schedule furnished herewith, other
than general economic conditions affecting the Internet services industry
generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action; Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power
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and capacity to execute and deliver this Agreement and each other Buyer Document
and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or bylaws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a party or by which it is
bound, (c) violate any judgment, decree, order, statute, rule or regulation
applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver
of, or to make any filing with, any person or entity (governmental or otherwise)
that has not been obtained or made. The officers who execute this Agreement and
the other Buyer Documents contemplated hereby on behalf of Buyer have and shall
have all requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Buyer has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the Closing, Seller shall:
4.1 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction.
4.2 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
names "CrossRoads Access," "tsixroads.com," "www2.tsixroads.com,"
"http//sevenof.tsixroads.com," or any other Internet domain name used or useful
in the business of Seller, or any other or (b) use or
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disclose any trade secrets, confidential information, know-how, proprietary
information or other intellectual property of Seller transferred pursuant to
this Agreement.
4.3 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer,
such assistance as is reasonably requested by Buyer in order to effect an
orderly transition in the ownership and operation of the Assets; provided,
however, such post-Closing assistance shall not, in any event, exceed ten (10)
hours per week.
4.4 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder and to endorse with the name of Seller any
checks received on account of such receivables or other items, and Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any cash
or other property that such Seller may receive with respect to any claims,
contracts, licenses, leases, commitments, sales orders, purchase orders,
receivables of any character or any other items included in the Subject Assets.
4.5 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.6 Further Assurances. Seller, from time to time after the Closing at the
request of Buyer and without further consideration, shall execute and deliver
further instruments of transfer and assignment and take such other action as
Buyer may reasonably require to more effectively transfer and assign to, and
vest in, Buyer the Assets free and clear of all Liens (as defined in Section
2.8). Any such documents must be acceptable to Seller's counsel and not seek to
enlarge any responsibility, obligation, or otherwise, of Seller arising
hereunder.
4.7 Change of Name Filing. Seller shall file, within five (5) business
days after the Closing Date, an amendment to its certificate of incorporation
and any other required documentation necessary to effect a change of Seller's
name.
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the Closing, Buyer shall:
5.1 Confidentiality. Buyer agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Seller with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Seller's industry or which has been disclosed to Buyer by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Buyer will return, and cause its respective
officers, directors, agents and representatives to return, to
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Seller (or certify that they have destroyed) all copies of such data and
information made available to Buyer (and its officers, directors, agents and
representatives) in connection with the transaction.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 6.1, 6.2 and 6.7
have been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the certificate of incorporation, bylaws, authority and the incumbency of
all officers executing the Seller Documents on behalf of Seller;
(c) A certified copy of Seller's certificate of incorporation from
the Secretary of State of the State of Mississippi;
(d) A certificate of good standing from the Secretary of State of
the State of Mississippi; and
(e) Such other certificates and instruments reasonably requested by
Buyer and acceptable to Seller's counsel
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit D; and
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(d) Such other instruments of transfer reasonably requested by Buyer
and acceptable to Seller's counsel.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
and approvals required in connection with the consummation of the transactions
contemplated hereby under any Contract or Authorization or otherwise shall have
been obtained in form and substance satisfactory to Buyer and without conditions
materially and adversely affecting Buyer and which do not require Buyer to pay
money to any party to any such Contract or Authorization in excess of amounts
required to be so paid pursuant to the terms and conditions thereof. All such
Contracts and Authorizations shall remain in full force and effect and shall not
have been amended, modified or repudiated in any material respect by either
party thereto. Neither Seller nor, to the knowledge of Seller and the Management
Shareholders, the other party thereto, shall have breached or defaulted under
any Contract or Authorization. Seller shall not have received notice of or have
knowledge of any fact which could result in the termination, repudiation or
breach of any Contract or Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-competition Agreement. Seller and the Management Shareholders
shall have executed and delivered to Buyer a Non-competition Agreement in
substantially the form attached hereto as Exhibit E.
6.6 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the Closing instruments (including payoff letters, bills of sale and
UCC-3 termination statements) releasing any and all Liens on the Assets.
6.7 Subscribers. Seller shall have delivered to Buyer at least 3950
Dial-up Subscribers, one (1) Dedicated Subscriber and fifteen (15)
Web-hosting/Domain-hosting Subscribers, and Seller shall have furnished Buyer
with a certificate, dated as of the Closing Date, to that effect.
6.8 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Mitchell, McNutt, Threadgill, Smith & Sams, P.A., counsel for
Seller, dated the Closing Date, substantially in the form of Exhibit F attached
hereto.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, unless waived by Seller in writing:
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7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, bylaws, authority and the incumbency of all
officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A certificate of good standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Employment Agreements. Buyer and each of the Management Shareholders
shall have entered into an Employment Agreement in substantially the form of
Exhibit G attached hereto.
SECTION 8. SURVIVAL.
8.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto.
SECTION 9. INDEMNIFICATION.
9.1 Indemnification by Seller and the Management Shareholders.
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(a) Seller and each of the Management Shareholders hereby agrees,
jointly and severally, to indemnify and hold harmless Buyer, its affiliates and
its and their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Management
Shareholders in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller or the Management
Shareholders in this Agreement or in any schedule, exhibit, certificate,
financial statement, agreement or other instrument delivered pursuant to this
Agreement; (iii) any claim made by any person or entity which relates to the
operation of the Assets or the Business which arises in connection with or on
the basis of events, acts, omissions, conditions or any other state of facts
occurring on or existing before the Closing Date; and (iv) any claim which
arises in connection with any liability or obligation of Seller other than the
Assumed Liabilities.
9.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees, disbursements and expenses of attorneys and consultants), of
any kind or nature whatsoever, to the extent sustained, suffered or incurred by
or made against any Seller Indemnified Party, to the extent based upon, arising
out of or in connection with: (A) any breach of any representation or warranty
made by Buyer in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (B) any
breach of any covenant or agreement made by Buyer in this Agreement or in any
schedule, exhibit, certificate, agreement or other instrument delivered pursuant
to this Agreement; (C) any claim made against Seller which relates to, results
from or arises out of Buyer's operation of the Assets or the Business from and
after the Closing Date; and (D) the Assumed Liabilities.
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9.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right, with the
consent of the indemnified party, which consent shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled provided the indemnifying parties'
obligation to indemnify the indemnified party therefor will be fully satisfied.
The indemnifying party shall keep the indemnified party apprised of the status
of the claim, liability or expense and any resulting suit, proceeding or
enforcement action, shall furnish the indemnified party with all documents and
information that the indemnified party shall reasonably request and shall
consult with the indemnified party prior to acting on major matters, including
settlement discussions. Notwithstanding anything herein stated, the indemnified
party shall at all times have the right to fully participate in such defense at
its own expense directly or through counsel; provided, however, if the named
parties to the action or proceeding include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate under applicable standards of professional conduct, the expense
of separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by the
indemnified party), and shall have the right to compromise or settle (exercising
reasonable business judgment), such claim, liability or expense. If such claim,
liability or expense is one
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that by its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 11.10
hereof.
9.4 Claims Against Escrow Deposit. In the event that any Buyer Indemnified
Party sustains or incurs damages, liabilities, losses, taxes, fines, penalties,
costs or expenses, including, without limitation, attorneys fees, for which it
is entitled to indemnification from Seller or the Management Shareholders under
this Agreement, in addition to all other rights or remedies that Buyer may have
(including the right to collect directly from Seller or the Management
Shareholders), such Buyer Indemnified Party shall be entitled to receive in cash
from the Escrow Deposit an amount equal to the damages, liabilities, losses,
taxes, fines, penalties, costs and expenses, including, without limitation,
attorneys fees, sustained or incurred by such Buyer Indemnified Party. In order
to receive payment from the Escrow Deposit such Buyer Indemnified Party shall
first deliver to Seller a written claim for damages arising under or by virtue
of this Agreement specifying the nature of the claim and the type and amount of
damages, liabilities, losses, taxes, fines, penalties, costs and expenses
sustained or incurred by such Buyer Indemnified Party. Within thirty (30)
calendar days of receiving a claim against the Escrow Deposit from or on behalf
of any Buyer Indemnified Party, Seller shall provide a written response to such
Buyer Indemnified Party with a copy to the Escrow Agent, which either accepts or
rejects all or any portion of such Buyer Indemnified Party's claim, the amount
accepted by Seller shall be paid to such Buyer Indemnified Party from the Escrow
Deposit by the Escrow Agent within ten (10) calendar days of the Escrow Agent's
receipt of Seller's acceptance of such Buyer Indemnified Party's claim. If
Seller rejects any portion of such Buyer Indemnified Party's claim, Seller's
written response shall specify the specific reason(s) for the rejection and the
amount, if any, of such Buyer Indemnified Party's claim which is accepted. The
amount of any claim rejected by Seller shall be retained in escrow and
distributed by the Escrow Agent only as directed by a written settlement
agreement signed by both Seller and such Buyer Indemnified Party or in
accordance with an award rendered by an arbitrator(s) in accordance with Section
11.11 of this Agreement.
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SECTION 10. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
If to Seller: CrossRoads Access Corporation
------------ 411 Fillmore Street
Corinth, MS 38834
Attn: Mr. Frederick Reiselt
With a copy to: Mitchell, McNutt, Threadgill, Smith &
Sams, P.A.
508 Waldron Street
P.O. Box 1200
Corinth, MS 38835
Attn: Wendell H. Trapp, Jr.
If to Buyer: DURO Communications, Inc.
----------- 100 Fifth Street
Corinth, MS 38834
Attn: John C Stanley IV
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: David F. Dietz, P.C.
SECTION 11. MISCELLANEOUS.
11.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors, and assigns.
11.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
11.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing
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duly and validly executed by Buyer and Seller or, in the case of a waiver, the
party waiving compliance. No delay on the part of any party in exercising any
right, power or privilege hereunder shall operate as a waiver thereof, nor shall
any waiver on the part of any party of any such right, power or privilege, or
any single or partial exercise of any such right, power or privilege, preclude
any further exercise thereof or the exercise of any other such right, power or
privilege.
11.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
11.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
11.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
11.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of Mississippi, without regard to conflict of laws principles.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
11.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
11.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
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11.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution
shall appoint a neutral advisor from its National CPR Panel. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss.1-16, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Boston,
Massachusetts.
Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of Massachusetts for the purpose of enforcing
the award or decision in any such proceeding and (b) hereby waives, and agrees
not to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter hereof may not be enforced
in or by such court, and (c) hereby waives and agrees not to seek any review by
any court of any other jurisdiction which may be called upon to grant an
enforcement of the judgment of any such court. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its submission
to jurisdiction and its consent to service of process by mail is made for the
express benefit of the other parties hereto. Final judgment against any party
hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets, may be found.
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Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 11.10.
11.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Management Shareholders and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
CROSSROADS ACCESS CORPORATION
By: /s/ Frederick Reiselt
----------------------------
Name: Frederick Reiselt
Title: Vice President
MANAGEMENT SHAREHOLDERS:
/s/ Jackey G. Wall
-------------------------------
Jackey G. Wall
/s/ Frederick Reiselt
-------------------------------
Frederick Reiselt
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
----------------------------
Name: Peter B. Hopper
Title: President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Internet Domain Name
Exhibit E - Form of Non-competition Agreement
Exhibit F - Form of Opinion of Seller's Counsel
Exhibit G - Form of Employment Agreement
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Insurance Exclusions
Schedule 1.2(d) Excluded Tax Items
Schedule 1.5(a) Debt Repayment Amount
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Allocation of Purchase Price
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a)Subscribers
Schedule 2.16(b)Complimentary Accounts
Schedule 2.16(c)Disconnection Policy
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.22 Affiliated Transactions
Schedule 2.23 Employee Benefits
Schedule 2.24 Environmental Matters
<PAGE>
Exhibit 2.2
ASSET PURCHASE AGREEMENT
Agreement made as of March 26, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), digital.net, l.l.c., a Florida limited
liability company ("Seller"), and Digicom USA, LLC, a West Virginia limited
liability company and the manager and sole member of Seller ("Digicom").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with the
Internet service provider and related businesses of Seller, all as hereinafter
described (the "Business").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, including but not limited to that equipment
identified on Schedule 1.1(a) attached hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined below)), including, without limitation, original contracts
for the provision of Internet connectivity, dedicated service, web-hosting,
web-domain, dial-up services, web-development and Internet commerce, all leases
with respect to real property and all co-location agreements, a true, correct
and complete list of which contracts is attached hereto as Schedule 1.1(b)
(collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), including but not limited to that Intellectual
Property identified on Schedule 1.1(c) attached hereto;
<PAGE>
(d) Licenses and Authorizations. All transferable rights associated
with the licenses, permits, easements, registrations and authorizations issued
or granted to Seller by any governmental authority with respect to the operation
of the Business, including, without limitation, any license to operate as a
Competitive Local Exchange Carrier, those licenses and authorizations listed on
Schedule 1.1(d) attached hereto, and all applications therefor, together with
any renewals, extensions, or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets
("Current Assets") of Seller including cash on hand and in bank accounts, all
accounts receivable of Seller incurred in the ordinary course of business and
such accounts receivable are included on Seller's balance sheet, as determined
in accordance with reasonable and commercially acceptable accounting principles,
consistently applied, that reflect in all material respects the actual financial
condition and results of operations of Seller ("Accounting Principles") a
complete list of such accounts receivable is attached hereto as Schedule 1.1(e)
("Accounts Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the
following assets (the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Licenses and Authorizations. All of Seller's right, title and
interest in non-transferable rights associated with the licenses, permits,
easements, registrations and authorizations issued, or granted to Seller by any
governmental authority with respect to the operation of the Business, and all
applications therefor, together with any renewals, extensions, or modifications
thereof and additions thereto. A true and complete list of such licenses is
attached hereto as Schedule 1.2(c).
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(d) Insurance. The cash surrender value of Seller's contracts of
insurance and all insurance proceeds of settlement and insurance claims made by
Seller on or before the Closing Date as set forth on Schedule 1.2(d) attached
hereto;
(e) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined below) for periods prior to the
Closing Date as set forth on Schedule 1.2(e) attached hereto;
(f) Intellectual Property. The company name "Digicom;" and
(g) Corporate Records. All of Seller's corporate and other
organizational records.
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business on and after the
Closing; (ii) those current liabilities and accrued expenses of Seller as of the
Closing Date consisting of (A) accounts payable arising in the ordinary course
of business and (B) unearned revenues (the "Assumed Current Liabilities and
Accrued Expenses") and (iii) all obligations and liabilities of Seller which are
to be performed after the Closing Date arising under the Contracts and the
Authorizations (as defined in Section 2.13), including, without limitation,
Seller's obligations to Subscribers (as defined in Section 2.16) under such
Contracts for (A) Subscriber deposits held by Seller as of the Closing Date in
the amount for which Buyer receives a credit pursuant to Section 1.6(a) below,
(B) Subscriber advance payments held by Seller as of the Closing Date for
services to be rendered in connection with the Business in the amount for which
Buyer receives a credit pursuant to Section 1.6(a) below, and (C) the delivery
of Internet connectivity service to Subscribers (whether pursuant to a Contract
or otherwise) after the Closing Date ((i), (ii) and (iii) together, the "Assumed
Liabilities"). The assumption of the Assumed Liabilities by Buyer hereunder
shall not enlarge any rights of third parties under contracts or arrangements
with Buyer or Seller or any of their respective affiliates or subsidiaries. No
parties other than Buyer and Seller shall have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein or granted by Buyer, including, without limitation,
any liability or obligation relating to, resulting from or arising out of (i)
the Excluded Assets, including, without limitation, the Excluded Contracts, (ii)
the employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to
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vacation or other similar employee benefits, or arising as a result of the
transactions contemplated hereby, except any obligation created by Buyer's
express actions, or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees (excluding
Seller's officers: E.F. Taylor, Thomas E. Loehr and Josh Mondry) effective
as of the Closing Date and Buyer shall not assume or have any obligations
or liabilities with respect to such employees or such terminations,
including, without limitation, any severance obligation, except any
obligation created by Buyer's express actions. Seller acknowledges and
agrees that Buyer has the right to interview and discuss employment terms
and issues with such employees prior to and after the Closing.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the Closing. Nothing in this Agreement shall be construed as
a commitment or obligation of Buyer to accept for employment any of
Seller's employees, and no employee shall be a third-party beneficiary of
this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any benefit plans maintained
by, or for the benefit of any employees of Seller prior to the Closing
Date, including, without limitation, obligations for severance or vacation
accrued but not taken as of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date of this Agreement or at
such other time and place as shall be mutually agreed upon in writing by Buyer
and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, Buyer shall pay at the Closing
an amount (as adjusted in accordance with Section 1.6 below, the "Purchase
Price") equal to $4,700,000 as follows:
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(a) Buyer shall deliver to Kataro, Inc., f/k/a SuNet Direct
Corporation ("Kataro") cash in an amount equal to the outstanding indebtedness,
including all accrued interest fees and penalties, of Seller under that certain
promissory note dated as of January 8, 1999 (the "Kataro Amount"), such amount
to be set forth in a payoff letter to be delivered by Seller to the Buyer prior
to the Closing;
(b) Buyer shall deliver to XIU, Inc., f/k/a InternetU, Inc. ("XIU")
cash in an amount equal to the outstanding indebtedness, including all accrued
interest fees and penalties, of Seller under that certain promissory note dated
as of September 1, 1998 (the "XIU Amount"), such amount to be set forth in a
payoff letter to be delivered by Seller to the Buyer prior to the Closing;
(c) Buyer shall deliver to GE Capital Colonial Pacific Leasing
("Colonial") cash in an amount equal to the outstanding indebtedness, including
all accrued interest fees and penalties, of Seller under that certain promissory
note dated as of October 16, 1997 (the "Colonial Amount"), such amount to be set
forth in a payoff letter to be delivered by Seller to the Buyer prior to the
Closing;
(d) (intentionally omitted);
(e) Buyer shall deposit the sum of $470,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow
Agreement in the form attached hereto and incorporated by reference herein as
Exhibit A (the "Escrow Agreement"), to be held, administered and distributed in
accordance with the terms of the Escrow Agreement, which, subject to the terms
and conditions thereof, shall have a term of twelve (12) months commencing on
the Closing Date; and
(f) Buyer shall deliver the sum of $4,230,000 less (i) the Kataro
Amount, (ii) the XIU Amount, (iii) the Colonial Amount, (iv) $80,688.20 owing to
Ascend Communication, Inc. under that certain lease dated August 6, 1996, (v)
$12,490.66 owing to Solunet under that certain lease dated October 20, 1997, and
(vi) the Estimated Adjustment (as defined below) if such number is a positive
number to Seller by bank cashier's check or bank wire transfer pursuant to
payment instructions delivered by Seller to Buyer at the Closing; provided that
if the Estimated Adjustment is a negative number, the amount payable to Seller
at Closing shall be increased by the absolute value of such number.
1.6 Adjustments to Purchase Price.
(a) The Purchase Price shall be reduced dollar for dollar by the
amount of Seller's Net Working Capital (as defined herein) if such amount
is negative, or increased dollar for dollar by the amount of Seller's Net
Working Capital if such amount is positive. "Net Working Capital" means an
amount equal to Current Assets as of the Closing Date minus the sum of
Assumed Current Liabilities and Accrued Expenses as of the Closing Date
that are assumed by Buyer.
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(b) The Purchase Price shall be decreased, on a dollar for dollar
basis, by the Revenues Adjustment Amount in the event Recurring Revenues
for the month ending February 28, 1999 are less than $253,000 (the "Target
Revenues"). For purposes hereof, the term "Revenues Adjustment Amount"
shall equal the product obtained by multiplying (i) $1,700 by (ii) the
quotient obtained by dividing (X) the Annualized Recurring Revenues
Deficiency, by (Y) one thousand dollars ($1,000). For purposes hereof,
"Recurring Revenues" shall mean revenues of Seller from recurring sources,
calculated by multiplying the number of Subscribers as of February 28,
1999 by the average monthly rate in effect for such Subscribers, by type,
excluding one-time set-up fees and other ancillary charges. For purposes
hereof, the term "Annualized Recurring Revenues Deficiency" shall equal
the product of (i) the difference between (A) the Target Revenues and (B)
Recurring Revenues, multiplied by (ii) twelve (12).
(c) (i) Buyer and Seller shall prepare a statement to be attached
hereto as Schedule 1.6(c) (the "Estimated Adjustment Statement") which
sets forth (x) the estimated amount of the Net Working Capital as of the
Closing Date (the "Estimated Net Working Capital") and (y) the estimated
Revenues Adjustment Amount (the "Estimated Revenues Adjustment Amount").
The Purchase Price payable at the Closing shall be decreased on a
dollar-for-dollar basis to the extent of the Estimated Adjustment (as
herein defined), set forth on the Estimated Adjustment Statement, if such
number is a positive number, or increased on a dollar-for-dollar basis by
the absolute value of the Estimated Adjustment set forth on such Estimated
Adjustment Statement, if such number is a positive number. "Estimated
Adjustment" means (a) if Estimated Net Working Capital is a negative
number, the sum of the absolute value of Estimate Net Working Capital and
the Estimated Revenues Adjustment Amount, or (b) if Estimated Net Working
Capital is a positive number, the amount equal to the Estimated Revenues
Adjustment Amount minus Estimated Net Working Capital.
(ii) No later than sixty (60) days following the Closing,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital.
Subject to Section 1.6(c)(iii) below, within ten (10) days following the
delivery of such Final Adjustment Statement to Seller, Buyer or Seller, as
the case may be, shall pay to the other party, by wire transfer of
immediately available funds, the difference between the Estimated Net
Working Capital, as shown on the Estimated Adjustment Statement, and the
actual Net Working Capital, as shown on the Final Adjustment Statement.
(iii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital at the Closing. Upon
receipt by Buyer of such written objection, the parties shall attempt to
resolve the disagreement concerning the Final Adjustment Statement through
negotiation. Notwithstanding any other dispute resolution procedure
provided for in this Agreement,
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if Buyer and Seller cannot resolve such disagreement concerning the Final
Adjustment Statement within thirty (30) days following the end of the
foregoing 10-day period, the parties shall submit the matter for
resolution to a nationally recognized firm of independent certified public
accountants not affiliated with either party, with the costs thereof to be
shared equally by the parties. Such accounting firm shall deliver a
statement setting forth its own calculation of the final adjustment to the
parties within thirty (30) days of the submission of the matter to such
firm. Any payment shown to be due by a party on the statement of such
accounting firm shall be paid to the other party promptly but in no event
later than five (5) days following the delivery of such statement by such
accounting firm to the parties.
1.7 Purchase Price Allocation. At the Closing, Buyer and Seller shall
agree on the allocation of the Purchase Price as set forth on Schedule 1.7
attached hereto. Such allocation shall be binding upon Buyer and Seller for all
purposes (including financial accounting purposes, financial and regulatory
reporting purposes and tax purposes). Buyer and Seller each further agrees to
file its Federal income tax returns and its other tax returns reflecting such
allocation, Form 8594 and any other reports required by Section 1060 of the
Code.
1.8 Records and Contracts. To the extent not previously provided to Buyer
and except as set forth in Section 4.5 hereof, at the Closing, Seller shall
deliver to Buyer all of the Contracts, with such assignments thereof and
consents to assignments as are necessary to assure Buyer of the full benefit of
the same. Seller shall also deliver to Buyer at the Closing all of Seller's
files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes, fees and duties
(including any real estate transfer taxes) under applicable law incurred in
connection with this Agreement or the transactions contemplated hereby will be
borne and paid by Seller, and Seller shall promptly reimburse Buyer for the
payment of any such tax, fee or duty which Buyer is required to make under
applicable law.
1.10 Transfer of Subject Assets. Except as set forth in Section 4.5
hereof, at the Closing, Seller shall deliver or cause to be delivered to Buyer
good and sufficient instruments of transfer transferring to Buyer title to all
of the Assets, together with all required consents. Such instruments of transfer
(a) shall be in form and substance reasonably satisfactory to the parties and
their respective counsel, (b) shall effectively vest in Buyer good and
marketable title to all of the Assets free and clear of all Liens (as defined in
Section 2.8), and (c) where applicable, shall be accompanied by evidence of the
discharge of all Liens against the Assets.
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SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND DIGICOM.
In order to induce Buyer to enter into this Agreement, Seller and Digicom,
jointly and severally, hereby represent and warrant to Buyer as follows:
2.1 Organization; Subsidiaries.
(a) Seller is a limited liability company duly formed, validly
existing and in good standing under the laws of the State of Florida, with all
requisite limited liability company power and authority to own or lease its
properties and to conduct its business in the manner and in the places where
such properties are owned or leased or such business is currently conducted or
proposed to be conducted. The copies of Seller's certificate of formation and
limited liability company operating agreement, each as amended to date,
heretofore delivered to Buyer's counsel are complete and correct. Seller is not
in violation of any term of certificate of formation and limited liability
company operating agreement. Seller is duly qualified to do business in the
State of Florida, and is not required to be licensed or qualified to conduct its
business or own its property in any other jurisdiction.
(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority, except U.S.
Government securities, bank certificates of deposit and money market accounts
acquired as short-term investments in the ordinary course of its business.
Seller does not own or have any direct or indirect interest in or control over
any corporation, partnership, joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken, and this Agreement and each
other agreement, document and instrument to be executed and delivered by or on
behalf of Seller pursuant to, or as contemplated by, this Agreement
(collectively, the "Seller Documents") has been duly and validly authorized,
executed and delivered by Seller and no other action on the part of Seller or
Digicom is required in connection therewith. Each of Seller and Digicom have
full right, authority, power and capacity to execute and deliver this Agreement
and each other Seller Document and to carry out the transactions contemplated
hereby and thereby. This Agreement and each other Seller Document constitutes,
or when executed and delivered will constitute, the legal, valid and binding
obligation of each of Seller and Digicom enforceable in accordance with its
respective terms.
2.3 No Conflicts.
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(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the certificate of formation and limited liability company
operating agreement of Seller, in each case as amended to date, (ii) constitute
a material violation of, or materially conflict with or result in any material
breach of, acceleration of any obligation under, right of termination under, or
default under, any agreement or instrument to which Seller is a party or by
which Seller or the Assets is bound, (iii) violate any judgment, decree, order,
statute, rule or regulation applicable to Seller or the Assets, (iv) except as
set forth on Schedule 4.5 require Seller to obtain any approval, consent or
waiver of, or to make any filing with, any person or entity (governmental or
otherwise) that has not been obtained or made or undertaken or (v) result in the
creation or imposition of any Lien on any of the Assets.
(b) The execution, delivery and performance by Digicom of this
Agreement and each other Seller Document does not and will not (i) constitute a
material violation of, or materially conflict with or result in any material
breach of, acceleration of any obligation under, right of termination under, or
default under, any agreement or instrument to which Digicom is a party or by
which Digicom is bound, (ii) violate any judgment, decree, order, statute, rule
or regulation applicable to Digicom, (iii) require Digicom to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made or undertaken, or
(iv) result in the creation or imposition of any Lien on any of the Assets.
2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal and state
income tax returns filed with respect to Seller for taxable periods ended on or
after August 31, 1998, is set forth in Schedule 2.4 attached hereto. Seller has
delivered to Buyer correct and complete copies of all federal and state income
tax returns listed on said schedule, and of all examination reports and
statements of deficiencies assessed against or agreed to by Seller with respect
to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or Digicom,
threatening to assert against Seller
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any deficiency or claim for additional Taxes. To the knowledge of Seller and
Digicom, no claim has ever been made by an authority in a jurisdiction where
Seller does not file reports and returns that Seller is or may be subject to
taxation by that jurisdiction. There are no security interests on any of the
Assets of Seller that arose in connection with any failure (or alleged failure)
to pay any Taxes. Seller has never entered into a closing agreement pursuant to
Section 7121 of the Internal Revenue Code of 1986, as amended (the "Code")
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state,
municipal or other governmental authority (including the Federal Communications
Commission), and Seller has not received notice of a material violation or
alleged violation of any such statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets are insured to
the extent disclosed in Schedule 2.6 attached hereto, and all insurance policies
and arrangements of Seller in effect as of the date hereof are disclosed in said
Schedule. Said insurance policies and arrangements are in full force and effect,
all premiums with respect thereto are currently paid, and Seller is in
compliance in all material respects with the terms thereof. Said insurance is
adequate and customary for the business engaged in by Seller and is sufficient
for material compliance by Seller with all requirements of law and all
agreements and leases to which Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate to
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the Business or Assets. Schedule 1.1(b) attached hereto contains a true, correct
and complete list of all Contracts. With respect to each material oral agreement
or understanding involving the Business, Seller has provided a written summary
of the material terms of each such agreement or understanding on Schedule
1.1(b). Each Contract is valid, in full force and effect and binding upon Seller
and the other parties thereto in accordance with its terms. Neither Seller nor,
to the knowledge of Seller and Digicom, any other party is in material default
under or in arrears in the performance, payment or satisfaction of any agreement
or condition on its part to be performed or satisfied under any Contract, nor
does any condition exist that with notice or lapse of time or both would
constitute such a material default, and no material waiver or indulgence has
been granted by any party under any Contract. Seller has not received notice of,
and each of Seller and Digicom have no knowledge of, any fact which would result
in a termination, repudiation or breach of any Contract. Seller has provided
Buyer with true and complete copies of all of such Contracts, other than with
respect to the oral agreements or understandings described on Schedule 1.1(b).
2.8 Title. Except as set forth on Schedule 2.8, Seller has good and
marketable title to all of the Assets free and clear of all mortgages, pledges,
security interests, charges, liens, restrictions and encumbrances of any kind
(collectively, "Liens") whatsoever. Subject to Section 4.5 hereof, upon the
sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good, marketable and
indefeasible title to the Assets, free and clear of all Liens. Except for the
Excluded Assets, the Assets include all of the assets and properties (i) held
for use by Seller to conduct the Business as presently conducted and (ii)
necessary or useful for Buyer to operate the Business in the same manner as such
business is currently operated by Seller. All of the tangible Assets are in good
repair, have been well maintained and are in good operating condition, do not
require any material modifications or repairs, and comply in all material
respects with applicable laws, ordinances and regulations, ordinary wear and
tear excepted. Seller has delivered complete and true copies of all real
property leases (the "Leases") set forth on Schedule 1.1(b). To our knowledge,
seller holds good, clear, marketable, valid and enforceable leasehold interest
in the real property subject to the Leases (the "Leased Real Property"), subject
only to the right of reversion of the landlord or lessor under the Leases, free
and clear of all other prior or subordinate interests, including, without
limitation, mortgages, deeds of trust, ground leases, leases, subleases,
assessments, tenancies, claims, covenants, conditions, restrictions, easements,
judgments or other encumbrances or matters affecting title, and free of
encroachments onto or off of the leased real property. To our knowledge, and
without further investigation, there are no material defects in the physical
condition of any improvements constituting a part of the Leased Real Property,
including, without limitation, structural elements, mechanical systems, roofs or
parking and loading areas, and all of such improvements are in good operating
condition and repair and have been adequately maintained. Seller does not hold
or own a fee interest in any real property.
2.9 No Litigation. Seller is not now involved in nor, to the knowledge of
Seller and Digicom, is Seller threatened to be involved in any material adverse
litigation or legal or other proceedings related to or affecting the Business or
any Asset (including any Intellectual
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Property) or any litigation or legal or other proceedings which would prevent or
hinder the consummation of the transactions contemplated by this Agreement.
Seller has not been operating the Business under, and the Business is not
subject to, any order, injunction or decree of any court of federal, state,
municipal or other governmental department, commission, board, agency or
instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately 23 full-time
employees and 1 part-time employee and generally enjoys good employer-employee
relationships. Seller shall provide to Buyer a list of the employees of Seller
in connection with the Business at the Closing, including the name, date of hire
and wages of such employees. Seller is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees. Upon termination of the employment
of any of said employees, neither Seller nor Buyer will by reason of the
transactions contemplated hereby or anything done prior to the Closing be liable
to any of said employees for so-called "severance pay" or any other payments,
except as set forth in Schedule 2.10 attached hereto. Seller does not have any
policy, practice, plan or program of paying severance pay or any form of
severance compensation in connection with the termination of employment, except
as set forth in said Schedule. Seller is in compliance in all material respects
with all applicable laws and regulations respecting labor, employment, fair
employment practices, work place safety and health, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending or, to the knowledge of Seller and Digicom, threatened against
or involving Seller. No question concerning representation exists respecting any
group of employees of Seller. No collective bargaining agreement is in effect or
is currently being or is about to be negotiated by Seller. Seller has received
no information to indicate that any of its employment policies or practices is
currently being audited or investigated by any federal, state or local
government agency. Seller is, and at all times since August 31, 1998 has been,
in compliance with the requirements of the Immigration Reform Control Act of
1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at December 31, 1998 (the "Base Balance Sheet")
and the statements of income and expense of Seller for the year then ended
(collectively the "Financial Statements"). The Financial Statements have been
prepared in accordance with Accounting Principles applied consistently during
the periods covered thereby (except for the absence of footnotes with respect to
unaudited financials), are complete and correct and present fairly and
substantially accurately in all material respects the financial condition of the
Business at the dates of said statements and the results of operations of the
Business for the periods covered thereby. As of the date of the Base Balance
Sheet (the "Base Balance Sheet Date"), Seller had no material liabilities or
obligations of any kind with respect to the Business, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet. Except as set forth on Schedule 2.11, as of the date
hereof and at the Closing, Seller had and will have no material liabilities or
obligations of any kind with respect to the Business, whether accrued,
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contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Except as set forth on
Schedule 2.12, since the Base Balance Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all of the licenses, permits and authorizations required for operation of the
Business as now operated (the "Authorizations"). All of the Authorizations are
in full force and effect and no material licenses, permits or authorizations of
any governmental department or agency are required for the operation of the
Business which have not been duly obtained. As of the date hereof, there is not
pending or, to the knowledge of Seller and Digicom, threatened any material
action by or before any governmental agency to revoke, cancel, rescind or modify
any of the Authorizations, and there is not now issued or outstanding or, to the
knowledge of Seller and Digicom, pending
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or threatened any order to show cause, notice of violation, notice of apparent
liability, or notice of forfeiture or complaint against Seller with respect to
the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no material approval, consent, authorization or exemption from or filing
with any person or entity not a party to this Agreement is required to be
obtained or made by Seller in connection with the execution and delivery of this
Agreement and the Seller Documents and the consummation of the transactions
contemplated hereby and thereby. Except as set forth in Section 4.5 hereof, all
of the approvals, consents and authorizations listed on Schedule 2.14 shall be
obtained by Seller at or prior to the Closing.
2.15 Customers and Suppliers. Seller's relations with its customers and
suppliers, including its Subscribers, are good and there are not pending or, to
Seller's knowledge, threatened claims or controversies with any customer or
suppliers that is material to the Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers of the Business as listed by class, type and
billing plan. For purposes of this Agreement, the terms "Subscriber" shall mean
any active subscriber to Internet services offered by Seller in the Business who
has subscribed to a service for at least one month and has paid at least one
bill, including, without limitation, any person who receives dial-up Internet
access through the Business (a "Dial-up Subscriber"), any person who receives
dedicated Internet access from Seller offering higher data transmission rates
than available from dial-up access (a "Dedicated Subscriber"), and any person
with a web page or domain name on Seller's server and to whom Seller provides
Internet access (a "Web-hosting/Domain-hosting Subscriber"); provided, however,
that "Subscriber" shall not include any person who is (i) more than thirty (30)
days delinquent in payment of such person's bill for such services provided by
the Business and (ii) any person receiving complimentary Internet services or
Internet services at a promotional discounted rate. Set forth on Schedule
2.16(b) attached hereto is a listing of all such accounts which receive
complimentary Internet services or Internet services at a promotional discounted
rate.
2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller are or will be as of the Closing Date bona fide, valid and enforceable
claims, subject to no setoff or counterclaim and to Seller's knowledge are
collectible in accordance with their terms. Seller has no accounts or loans
receivable from any person, firm or corporation which is affiliated with Seller
or from any director, officer or employee of Seller, or from any of their
respective spouses or family members.
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2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are described in Schedule 2.19 attached hereto, indicating
with respect to each of such arrangements the type of arrangement maintained
(such as checking account, borrowing arrangements, safe deposit box, etc.) and
the person or persons authorized in respect thereof.
2.20 Intellectual Property.
(a) Set forth on Schedule 2.20 attached hereto are all computer
programs and related documentation sold, marketed, licensed and distributed by
Seller (the "Products"). All of the Intellectual Property of Seller is set forth
on Schedule 2.20 attached hereto (except for Trade Secrets and Copyrights (each
as hereinafter defined)). For purposes hereof, the term "Intellectual Property"
includes: (i) all patents, patent applications, patent rights, and inventions
and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names "Florida Online"
"SuNet" "digital.net" and "InternetU", and any and all other Internet domain
names, trade names, trade dress, logos, packaging design, slogans, registered
and unregistered trademarks and service marks and applications used or useful in
the business of Seller (expressly excluding the name "Digicom") (collectively,
"Marks"); (iii) all copyrights in both published and unpublished works,
including, without limitation, all compilations, databases and computer
programs, and all copyright registrations and applications, and all derivatives,
translations, adaptations and combinations of the above (collectively,
"Copyrights"), (iv) all know-how, trade secrets, confidential or proprietary
information, customer lists, IP addresses, research in progress, algorithms,
data, designs, processes, formulae, drawings, schematics, blueprints, flow
charts, models, prototypes, techniques, Beta testing procedures and Beta testing
results (collectively, "Trade Secrets"); (v) Seller's web-sites (including but
not limited to the domain name "digital.net"); (vi) all goodwill, franchises,
licenses, permits, consents, approvals, technical information, telephone
numbers, and claims of infringement against third parties (the "Rights"); and
(vii) all contracts relating to the Products and the Intellectual Property to
which Seller is a party or is bound, including, without limitation, all
nondisclosure and/or confidentiality agreements entered into by persons in
connection with disclosures by Seller (collectively,"Assigned Contracts").
(b) Except as described in Schedule 2.20, Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and to its knowledge has the
right to use all of the Intellectual Property without payment to any third
party. Seller's rights in all of such Intellectual Property are freely
transferable. There are no claims or demands pending or, to the knowledge of
Seller and Digicom, threatened of any other person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of Seller and Digicom, threatened against Seller and/or its
officers, employees and consultants which challenge the validity and
enforceability of Seller's rights in respect of the Intellectual Property. The
Intellectual Property constitutes all of the assets of Seller used in designing,
creating and developing the Products, and represent all of such Intellectual
Property necessary for the operation of Seller's Business as currently
conducted.
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To Seller's knowledge after inquiry, no employee, consultant or contractor
of Seller has entered into any agreement that restricts or limits in any way the
scope or type of work in which the employee, consultant or contractor may be
engaged or requires the employee, consultant or contractor to transfer, assign,
or disclose information concerning his work to anyone other than Seller.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Patents. All of the issued Patents are
currently in compliance with formal legal requirements (including without
limitation payment of filing, examination and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Patent is held by Seller by assignment,
the assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re-examination or opposition proceeding.
To the knowledge of Seller and Digicom, there is no potentially interfering
Patent of any third party. All products made, used or sold under the Patents
have been marked with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the United States Patent and Trademark Office and/or any other
jurisdiction are currently in compliance with formal legal requirements
(including, without limitation, the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are to
Seller's knowledge valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety (90) days after the Closing
Date. Except as set forth on Schedule 2.20 in each case where a Trademark is
held by Seller by assignment, the assignment has been duly recorded with the
U.S. Patent and Trademark Office and all other jurisdictions of registration. No
Mark has been or is now involved in any opposition, invalidation or cancellation
proceeding and, to the knowledge of Seller and Digicom, no such action is
threatened with respect to any of the Marks.
(e) Seller holds no registered Copyrights. To Seller's knowledge,
none of the source or object code, algorithms, or structure included in the
Products is copied from, based upon, or derived from any other source or object
code, algorithm or structure in violation of the rights of any third party. To
Seller's knowledge, any substantial similarity of the Products to any computer
program owned by any third party did not result from the Products being copied
from, based upon, or derived from any such computer software program in
violation of the rights of any third party.
(f) Seller has taken all reasonable security measures to protect the
secrecy, confidentiality and value of all Trade Secrets. The Trade Secrets have
not been disclosed by Seller to any person or entity other than employees or
contractors of Seller who had a need to know and use the Trade Secrets in the
course of their employment or contract performance. Except as set forth on
Schedule 2.20, (i) Seller has not directly or indirectly granted any rights or
interests in the source code of the Products, and (ii) since Seller developed
the source code of
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the Products, Seller has not provided, licensed or disclosed the source code of
the Products to any person or entity. Seller has the right to use, free and
clear of claims of third parties, all Trade Secrets. To the knowledge of Seller
and Digicom, there is not any assertion that the use by Seller of any Trade
Secret violates the rights of any third party.
(g) Except as set forth on Schedule 2.20, Seller has the exclusive
right to use, license, distribute, transfer and bring infringement actions with
respect to the Intellectual Property. Except as set forth on Schedule 2.20,
Seller (i) has not licensed or granted to anyone rights of any nature to use any
of its Intellectual Property and (ii) is not contractually obligated to and does
not pay royalties or other fees to anyone for its ownership, use, license or
transfer of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed in Schedule 2.20. Except as
set forth on Schedule 2.20, all such licenses or other agreements are in full
force and effect, to the knowledge of Seller and Digicom there is no material
default by any party thereto, and all of the rights of Seller thereunder are
freely assignable. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to Buyer, and Seller
has no reason to believe that the licensors under the licenses and other
agreements under which Seller is granted rights and has granted rights to others
do not have and did not have all requisite power and authority to grant the
rights purported to be conferred thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed in Schedule 2.20. All such
licenses or other agreements are in full force and effect, and to the knowledge
of Seller and Digicom there is no material default by any party thereto. True
and complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to Buyer.
(j) The Products perform in accordance with their published
specifications and documentation and as Seller has warranted to its customers.
To Seller's and Digicom's knowledge the "Year 2000 Problem" (i.e., the risk that
applications used by Seller or its suppliers and/or providers may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any date after December 31, 1999) will not have any material
adverse effect on the business or operations of Seller.
2.21 Absence of Restrictions. Except as set forth on Schedule 2.21 hereto,
Seller has not entered into any other agreement or arrangement with any other
party with respect to the sale, transfer or any other disposition or encumbrance
of the Business or the Assets, in whole or in part.
2.22 Transactions with Interested Persons. Except as set forth in Schedule
2.22 hereto, neither Seller, nor any manager, member, officer, supervisory
employee or director of Seller or, to the knowledge of Seller or Digicom, any of
their respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or
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serves as an officer or director or in another similar capacity of, any
competitor or supplier of Seller, or any organization which has a material
contract or arrangement with Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program that
has been maintained by Seller or an Affiliate at any time during the six-year
period ending on the Closing Date. Each Employee Program which has ever been
maintained by Seller or an Affiliate and which has been intended to qualify
under Section 401(a) or 501(c)(9) of the Internal Revenue Code of 1986, as
amended (the "Code") has received a favorable determination or approval letter
from the Internal Revenue Service ("IRS") regarding its qualification under such
section and has, in fact, been qualified under the applicable section of the
Code from the effective date of such Employee Program through and including the
Closing Date (or, if earlier, the date that all of such Employee Program's
assets were distributed). No event or omission has occurred which would cause
any such Employee Program to lose its qualification or otherwise fail to satisfy
the relevant requirements to provide tax-favored benefits under the applicable
Code Section (including without limitation Code Sections 105, 125, 401(a) and
501(c)(9)). With respect to any Employee Program ever maintained by Seller or
any Affiliate, there has been no (i) "prohibited transaction," as defined in
Section 406 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or Code Section 4975, or (ii) failure to comply with any provision of
ERISA, other applicable law, or any agreement which, in the case of either of
(i) or (ii), could subject Seller or any Affiliate to liability either directly
or indirectly (including, without limitation, through any obligation of
indemnification or contribution) for any damages, penalties, or taxes, or any
other loss or expense. All payments and/or contributions required to have been
made (under the provisions of any agreements or other governing documents or
applicable law) with respect to all Employee Programs ever maintained by Seller
or any Affiliate, for all periods prior to the Closing Date, either have been
made or have been accrued (and all such unpaid but accrued amounts are described
on Schedule 2.23). Each Employee Program ever maintained by Seller or an
Affiliate has complied with the applicable notification and other applicable
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985.
(b) Neither Seller nor any Affiliate (A) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multiemployer Plan (as defined in
Section 3(37) of ERISA) or (B) has ever provided health care or any other
non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
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(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, to Seller's knowledge (i)
Seller has not generated, transported, used, stored, treated, disposed of, or
managed any Hazardous Waste (as defined below) at any time; (ii) no Hazardous
Material (as defined below) has ever been or is threatened to be spilled,
released, or disposed of at any site associated with a structure presently or
formerly owned, operated, leased, or used by Seller, or has ever been located in
the soil or groundwater at any such site; (iii) no Hazardous Material has ever
been transported from any site associated with a structure presently or formerly
owned, operated, leased, or used by Seller for treatment, storage, or disposal
at any other place; (iv) Seller does not presently own, operate, lease, or use,
and has not previously owned, operated, leased, or used any site associated with
a structure on which underground storage tanks are or were located; and (v) no
lien has ever been imposed by any governmental agency on any property, facility,
machinery, or equipment owned, operated, leased, or used by either Seller in
connection with the presence of any Hazardous Material.
(b) Except as set forth in Schedule 2.24, to Seller's knowledge (i)
Seller does not have any liability under, nor has it ever violated, any
Environmental Law (as defined below); (ii) neither Seller, nor any property
associated with a structure owned, operated, leased, or used by Seller, nor
facilities or operations thereon are presently not in compliance with all
applicable Environmental Laws; (iii) Seller has not entered into or been subject
to any judgment, consent decree, compliance order, or administrative order with
respect to any environmental or health and safety matter or received any request
for information, notice, demand letter, administrative inquiry, or formal or
informal complaint or claim with respect to any environmental or health and
safety matter or the enforcement of any Environmental Law; and (iv) neither
Seller nor Digicom has any knowledge or reason to know that any of the items
enumerated in clause (iii) of this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental
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Law; (ii) "Hazardous Waste" shall mean and include any hazardous waste as
defined or regulated under any Environmental Law; and (iii) "Environmental Law"
shall mean any environmental or health and safety-related law, regulation, rule,
ordinance, or By-law at the foreign, federal, state, or local level, whether
existing as of the date hereof or previously enforced.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and Digicom to Buyer pursuant to this Agreement do not contain any untrue
statement of a material fact, and, when taken together, do not omit to state a
material fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. There are no facts known to Seller or
Digicom which presently or may in the future have a material adverse affect on
the Business, properties, Assets, prospects, operations or (financial or other)
condition of Seller which has not been specifically disclosed herein or in a
Schedule furnished herewith, other than general economic conditions affecting
the Internet services industry generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller and Digicom entering into this
Agreement, Buyer hereby represents and warrants to Seller and Digicom as
follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action; Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer and no other action on the part of
Buyer or its shareholders or directors is required in connection therewith.
Buyer has full right, authority, power and capacity to execute and deliver this
Agreement and each other Buyer Document and to carry out the transactions
contemplated hereby and thereby. This Agreement and each other Buyer Document
constitutes, or when executed and delivered will constitute, the legal, valid
and binding obligations of Buyer enforceable in accordance with its respective
terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or bylaws of Buyer, in each case,
as amended to date, (b) constitute a violation of, or conflict with or result in
any breach of, acceleration of any obligation under,
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right of termination under, or default under, any agreement or instrument to
which Buyer is a party or by which it is bound, (c) violate any judgment,
decree, order, statute, rule or regulation applicable to Buyer, (d) require
Buyer to obtain any approval, consent or waiver of, or to make any filing with,
any person or entity (governmental or otherwise) that has not been obtained or
made. The officers who execute this Agreement and the other Buyer Documents
contemplated hereby on behalf of Buyer have and shall have all requisite power
to do so in the name of and on behalf of Buyer.
3.4 No Litigation. Buyer is not now involved in and, to its knowledge is
not threatened to be involved in any litigation or legal or other proceedings
which would prevent or hinder the consummation of the transactions contemplated
by this Agreement.
3.5 Approvals; Consents. No material approval, consent, authorization or
exemption from or filing with any person or entity not a party to this Agreement
is required to be obtained or made by Buyer in connection with the execution and
delivery of this Agreement and the Buyer Documents and the consummation of the
transactions contemplated hereby and thereby.
3.6 Brokers. Except for Rampart Associates, LLC, whose fees will be paid
by Buyer at or prior to the Closing, Buyer has not retained any broker or finder
or other person who would have any valid claim against any of the parties to
this Agreement for a commission or brokerage fee in connection with this
Agreement or the transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that Seller shall:
4.1 Confidentiality. Unless otherwise agreed by the parties, from the date
hereof, Seller agrees that it and its representatives will hold in strict
confidence, and will not use, any confidential or proprietary data or
information obtained from Buyer with respect to its business or financial
condition except for the purpose of evaluating, negotiating and completing the
transactions contemplated hereby. Information generally known in Buyer's
industry or which has been disclosed to Seller by third parties which have a
right to do so shall not be deemed confidential or proprietary information for
purposes of this Agreement.
4.2 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
names "Florida Online" "SuNet" "digital.net" and "InternetU" and any and all
other Internet domain names or trade names used or useful in the Business, or
(b) use or disclose any trade secrets, confidential information, proprietary
information or other intellectual property of Seller transferred pursuant to
this Agreement.
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4.3 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer,
such assistance as is reasonably requested by Buyer and which Seller is
reasonably capable of providing in order to effect an orderly transition in the
ownership and operation of the Assets; provided, however, such post- Closing
assistance shall not, in any event, exceed ten (10) hours per week.
4.4 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items to the extent
transferred and assigned to Buyer by Seller hereunder and to endorse with the
name of Seller any checks received on account of such receivables or other
items, and Seller agrees that it will promptly transfer or deliver to Buyer from
time to time, any cash or other property that Seller may receive with respect to
any claims, contracts, licenses, leases, commitments, sales orders, purchase
orders, receivables of any character or any other items included in the Assets.
4.5 Removal of Liens; Transfer of Contracts and Authorizations. Schedule
4.5 attached hereto identifies (i) all Liens on the Assets which will not be
released prior to or as of the Closing (the "Remaining Liens"); and (ii) all
Contracts and Authorizations, the assignment and transfer of which will not be
approved or consented to by the governmental authority issuing the Authorization
or the other party to the Contract prior to or as of the Closing (the "Remaining
Contracts and Authorizations"). Subsequent to the Closing, Seller shall promptly
obtain the release of the Remaining Liens and obtain third party and
governmental approvals and consents for the Remaining Contracts and
Authorizations.
4.6 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.7 Further Assurances. Seller, from time to time after the Closing at the
request of Buyer and without further consideration, shall execute and deliver
further instruments of transfer and assignment and take such other action as
Buyer may reasonably require to more effectively transfer and assign to, and
vest in, Buyer the Assets free and clear of all Liens (as defined in Section
2.8).
SECTION 5. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
5.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
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(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 5.1 and 5.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the certificate of formation, limited liability company operating
agreement, authority and the incumbency of all officers executing the Seller
Documents on behalf of Seller;
(c) A certified copy of Seller's certificate of formation from the
Secretary of State of the State of Florida;
(d) An Amendment to the certificate of formation and any other
required documentation, which effect a change of Seller's name;
(e) A certificate of good standing from the Secretary of State of
the State of Florida; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
5.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) An Assignment of Patents and Trademarks in the form attached
hereto as Exhibit D;
(d) Assignments of Internet Domain Names in the forms attached
hereto as Exhibit E; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
5.3 Assignment of Contracts and Authorizations; Approvals. Except as set
forth on Schedule 4.5 attached hereto, all Contracts shall have been duly and
validly assigned to Buyer by Seller, and all consents and approvals required in
connection with the consummation of the transactions contemplated hereby under
any Contract or Authorization or otherwise shall have been obtained in form and
substance satisfactory to Buyer and without conditions materially and adversely
affecting Buyer and which do not require Buyer to pay money to any party to any
such Contract or Authorization in excess of amounts required to be so paid
pursuant to the terms and conditions thereof. Neither Seller nor, to the
knowledge of Seller and Digicom, the other party thereto, shall have breached or
defaulted under any material Contract or Authorization.
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5.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
5.5 Non-competition Agreements. Seller, Digicom, E.F. Taylor, Thomas E.
Loehr and Josh Mondry (the officers of Digicom) shall have executed and
delivered to Buyer the Non-competition Agreements in substantially the form
attached hereto as Exhibit F.
5.6 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the Closing instruments (including payoff letters, bills of sale and
UCC-3 termination statements) releasing any and all Liens on the Assets.
5.7 Subscribers. Seller shall have delivered to Buyer at least 12,200
Internet access accounts, and Seller shall have furnished Buyer with a
certificate, dated as of the Closing Date, to that effect.
5.8 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Jackson & Kelly PLLC, counsel for Seller and Digicom, dated the
Closing Date, substantially in the form of Exhibit G attached hereto.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER AND DIGICOM.
The obligation of Seller and Digicom to consummate the transactions
contemplated by this Agreement is subject to the satisfaction, on or prior to
the Closing Date, of the following conditions, unless waived by Seller and
Digicom in writing:
6.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, bylaws, authority and the incumbency of all
officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A certificate of good standing from the Secretary of State of
the State of Delaware.
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6.2 Assumed Liabilities. Buyer shall have delivered to Seller an
Assignment and Assumption Agreement in the form attached hereto as Exhibit C.
6.3 Opinion of Buyer's Counsel. Seller shall have received the opinion of
Goodwin, Procter & Hoar LLP, counsel for Buyer, dated the Closing Date,
substantially in the form of Exhibit H attached hereto.
6.4 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
SECTION 7. SURVIVAL.
7.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing for a
period of one (1) year immediately following the Closing regardless of any
investigation and shall not merge in the performance of any obligation by either
party hereto; provided, however, that Seller shall not be so released after such
period as to Excluded Liabilities or obligations of indemnification and any
other liability resulting from representations and warranties made in Sections
2.1, 2.2 and 2.3 of this Agreement.
SECTION 8. INDEMNIFICATION.
8.1 Indemnification by Seller and Digicom. Seller and Digicom hereby
agree, jointly and severally, to indemnify and hold harmless Buyer, its
affiliates and its and their respective directors, officers, stockholders,
partners, members, employees, and agents (individually, a "Buyer Indemnified
Party" and collectively, "Buyer Indemnified Parties"), against and in respect of
all losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever ("Damages"), but net of the
proceeds from any insurance policies or other third party reimbursement for such
loss, to the extent sustained, suffered or incurred by or made against any Buyer
Indemnified Party, to the extent based upon, arising out of or in connection
with: (i) any breach of any representation or warranty made by Seller and
Digicom in this Agreement or in any schedule, exhibit, certificate, agreement or
other instrument delivered pursuant to this Agreement; (ii) any breach of any
covenant or agreement made by Seller or Digicom in this Agreement or in any
schedule, exhibit, certificate, financial statement, agreement or other
instrument delivered pursuant to this Agreement; (iii) any claim made by any
person or entity which relates to the operation of the Assets or the Business
which arises in connection with or on the basis of events, acts, omissions,
conditions or any other state of facts occurring on or existing before the
Closing Date; and (iv) any claim which arises in connection with any liability
or obligation of Seller other than the Assumed Liabilities.
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8.2 Indemnification by Buyer. Buyer hereby agrees to indemnify and hold
harmless Seller, Digicom and their officers, directors, managers, members,
employees and agents (individually, a "Seller Indemnified Party" and
collectively, "Seller Indemnified Parties") at all times against and in respect
of all losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants), of any kind or nature whatsoever, to the extent sustained,
suffered or incurred by or made against any Seller Indemnified Party, to the
extent based upon, arising out of or in connection with: (A) any breach of any
representation or warranty made by Buyer in this Agreement or in any schedule,
exhibit, certificate, agreement or other instrument delivered pursuant to this
Agreement; (B) any breach of any covenant or agreement made by Buyer in this
Agreement or in any schedule, exhibit, certificate, agreement or other
instrument delivered pursuant to this Agreement; (C) any claim made against a
Seller Indemnified Party which relates to, results from or arises out of Buyer's
operation of the Assets or the Business which arises in connection with or on
the basis of events, acts, omissions, conditions or any other state of facts
occurring from and after the Closing Date; and (D) the Assumed Liabilities.
8.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right, with the
consent of the indemnified party, which consent shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which
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are susceptible to being settled provided the indemnifying party's obligation to
indemnify the indemnified party therefor will be fully satisfied. The
indemnifying party shall keep the indemnified party apprised of the status of
the claim, liability or expense and any resulting suit, proceeding or
enforcement action, shall furnish the indemnified party with all documents and
information that the indemnified party shall reasonably request and shall
consult with the indemnified party prior to acting on major matters, including
settlement discussions. Notwithstanding anything herein stated, the indemnified
party shall at all times have the right to fully participate in such defense at
its own expense directly or through counsel; provided, however, if the named
parties to the action or proceeding include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate under applicable standards of professional conduct, the expense
of separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by the
indemnified party), and shall have the right to compromise or settle (exercising
reasonable business judgment), such claim, liability or expense with the prior
written consent of the indemnifying party, which consent shall not be
unreasonably withheld. If such claim, liability or expense is one that by its
nature cannot be defended solely by the indemnifying party, then the indemnified
party shall make available all information and assistance that the indemnifying
party may reasonably request and shall cooperate with the indemnifying party in
such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 10.10
hereof.
8.4 Claims Against Escrow Deposit. In the event that any Buyer Indemnified
Party sustains or incurs damages, liabilities, losses, taxes, fines, penalties,
costs or expenses, including, without limitation, attorneys fees, for which it
is entitled to indemnification from Seller or Digicom under this Agreement, in
addition to all other rights or remedies that Buyer may have (including the
right to collect directly from Seller or Digicom), such Buyer Indemnified Party
shall be entitled to receive in cash from the Escrow Deposit an amount equal to
the damages, liabilities, losses, taxes, fines, penalties, costs and expenses,
including, without limitation, attorneys fees, sustained or incurred by such
Buyer Indemnified Party. In order to receive payment from the Escrow Deposit
such Buyer Indemnified Party shall first deliver to Seller, with a copy to the
Escrow Agent, a written claim for damages arising under or by virtue of this
Agreement specifying the nature of the claim and the type and amount of damages,
liabilities, losses, taxes, fines, penalties, costs and expenses sustained or
incurred by such Buyer
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Indemnified Party. Within thirty (30) calendar days of receiving a claim against
the Escrow Deposit from or on behalf of any Buyer Indemnified Party, Seller
shall provide a written response to such Buyer Indemnified Party with a copy to
the Escrow Agent, which either accepts or rejects all or any portion of such
Buyer Indemnified Party's claim, the amount accepted by Seller shall be paid to
such Buyer Indemnified Party from the Escrow Deposit by the Escrow Agent within
ten (10) calendar days of the Escrow Agent's receipt of Seller's acceptance of
such Buyer Indemnified Party's claim. If Seller rejects any portion of such
Buyer Indemnified Party's claim, Seller's written response shall specify the
specific reason(s) for the rejection and the amount, if any, of such Buyer
Indemnified Party's claim which is accepted. The amount of any claim rejected by
Seller shall be retained in escrow and distributed by the Escrow Agent only as
directed by a written settlement agreement signed by both Seller and such Buyer
Indemnified Party or in accordance with an award rendered by an arbitrator(s) in
accordance with Section 10.11 of this Agreement.
8.5 Time Limitations. The parties hereto will be released from all
obligations of indemnification and any other liability under this Agreement and
the Buyer and Seller Documents on March 26, 2000, unless a notice in the form
required hereunder is received by the indemnifying party before March 26, 2000;
provided, however, that Seller shall not be so released as to Excluded
Liabilities or obligations of indemnification and any other liability resulting
from representations and warranties made in Sections 2.1, 2.2 and 2.3 of this
Agreement.
8.6 Limitations on Amount. (a) Neither party hereto will have any
liability (for indemnification or otherwise) until the total Damages claimed by
the other party exceed $5,000.00, and then only for the amount by which such
damages exceed $5,000.00.
(b) Except with respect to Damages arising from breach of the
representations and warranties set forth in Sections 2.1 and 2.2 or arising in
connection with any Excluded Liabilities, the aggregate amount of Damages
recoverable pursuant to the provisions of this Section 10 by all the Buyer
Indemnified Parties in the aggregate shall be limited to $1,000,000.
SECTION 9. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
If to Seller: digital.net, l.l.c.
------------ c/o Digicom USA, LLC
1250 S. Lincoln
Bldg. J, Suite 9
Steamboat Springs, CO 80477
Attn: Mr. Ted Taylor
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With a copy to: David Allen Barnette
Jackson & Kelly
1600 Laidley Tower
P.O. Box 553
Charleston, West Virginia 25322
If to Digicom: Digicom USA, LLC
------------- 1250 S. Lincoln
Bldg. J, Suite 9
Steamboat Springs, CO 80477
Attn: Mr. Ted Taylor
With a copy to: David Allen Barnette
Jackson & Kelly
1600 Laidley Tower
P.O. Box 553
Charleston, West Virginia 25322
If to Buyer: Duro Communications, Inc.
----------- 100 Fifth Street
Corinth, MS 38834
Attn: John C Stanley IV
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: David F. Dietz, P.C.
SECTION 10. MISCELLANEOUS.
10.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners or (b) as a result of any merger, reorganization or other
consolidation. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors, and assigns.
10.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
10.3 Amendments; Waivers. Except as otherwise expressly provided herein,
this Agreement may not be amended or modified, nor may compliance with any
condition or covenant set forth herein be waived, except by a writing duly and
validly executed by Buyer and
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Seller or, in the case of a waiver, the party waiving compliance. Except as
otherwise expressly provided herein, no delay on the part of any party in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof, nor shall any waiver on the part of any party of any such right, power
or privilege, or any single or partial exercise of any such right, power or
privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
10.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of
Seller's non-compliance with such laws.
10.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
10.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
10.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of The Commonwealth of Massachusetts, without regard to conflict of laws
principles.
10.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
10.9 Expenses. Except as otherwise provided herein, each party shall pay
its own expenses incident to the negotiation, preparation and performance of
this Agreement and the transactions contemplated hereby, including all fees and
expenses of its counsel and accountants for all activities of such counsel and
accountants undertaken pursuant to this Agreement, whether or not the
transactions contemplated hereby are consummated.
10.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
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10.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the Commercial Arbitration Rules (the "AAA Rules") of the American Arbitration
Association (the "AAA"), as amended and in effect on the date that the demand
for arbitration is filed with the AAA. The American Arbitration Association
shall appoint a neutral advisor from its National Panel of Commercial
Arbitrators. The arbitration shall be governed by the United States Arbitration
Act, 9 U.S.C. ss.1-16, and judgment upon the award rendered by the arbitrators
may be entered by any court having jurisdiction thereof. The place of
arbitration shall be Boston, Massachusetts.
Such proceedings shall be administered by the neutral advisor in
accordance with the AAA Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of Massachusetts for the purpose of enforcing
the award or decision in any such proceeding and (b) hereby waives, and agrees
not to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter hereof may not be enforced
in or by such court, and (c) hereby waives and agrees not to seek any review by
any court of any other jurisdiction which may be called upon to grant an
enforcement of the judgment of any such court. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its submission
to jurisdiction and its consent to service of process by mail is made for the
express benefit of the other parties hereto. Final judgment against any party
hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets, may be found.
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Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 10.10.
10.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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<PAGE>
IN WITNESS WHEREOF, Seller, Digicom and Buyer have caused this Asset
Purchase Agreement to be executed as of the date first above written.
SELLER:
digital.net, l.l.c.
By: /s/ E.F. (Ted) Taylor
----------------------------
Name: E.F. (Ted) Taylor
Title: President
DIGICOM:
DIGICOM USA, LLC
By: /s/ E.F. (Ted) Taylor
----------------------------
Name: E.F. (Ted) Taylor
Title: President
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
----------------------------
Name: Peter B. Hopper
Title: President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Patents and Trademarks
Exhibit E - Forms of Assignments of Internet Domain Names
Exhibit F - Forms of Non-competition Agreements
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Form of Opinion of Buyer's Counsel
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Non-Transferable Licenses
Schedule 1.2(d) Insurance Exclusions
Schedule 1.2(e) Excluded Tax Items
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Allocation of Purchase Price
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.8 Title to Assets
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.12 Post-Balance Sheet Business
Schedule 2.14 Approvals; Consents
Schedule 2.16(a)Subscribers
Schedule 2.16(b)Complimentary Accounts
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.21 Restrictions on Transfer
Schedule 2.22 Affiliated Transactions
Schedule 2.23 Employee Benefits
Schedule 2.24 Environmental Matters
Schedule 4.5 Remaining Liens, Contracts and Assignments
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Exhibit 2.3
ASSET PURCHASE AGREEMENT
Agreement made as of April 8, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), Global Information Exchange Corporation,
a North Carolina corporation ("Seller"), and Jacob Roquet, as management
shareholder of the Seller (the "Management Shareholder").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with the
Internet service business of Seller (the "Business").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined below)), including, without limitation, original contracts
for the provision of Internet connectivity, dedicated service, web-hosting,
web-domain, dial-up services, web-development and Internet commerce, all of
Seller's insurance contracts, all leases with respect to real property and all
co-location agreements, a true, correct and complete list of which contracts is
attached hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
(d) Licenses and Authorizations. All rights associated with the
licenses, permits, easements, registrations, domains and authorizations issued
or granted to Seller by any governmental authority with respect to the operation
of the Business, including, without
<PAGE>
limitation, any license to operate as a Competitive Local Exchange Carrier (a
"CLEC") owned by Seller or its wholly-owned subsidiary, GIETEL, Inc. ("the
Subsidiary"), those licenses and authorizations listed on Schedule 1.1(d)
attached hereto, and all applications therefor, together with any renewals,
extensions, or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller (the "Current Assets"), excluding cash on hand and in checking and
savings accounts and bank card accounts, but including all security deposits and
accounts receivable of Seller incurred in the ordinary course of business and
such accounts receivable as are included on Seller's balance sheet, as
determined in accordance with reasonable and commercially acceptable accounting
principles, consistently applied, that reflect in all material respects the
actual financial condition and results of operations of Seller, consistently
applied; a complete list of such accounts receivable is attached hereto as
Schedule 1.1(e) ("Accounts Receivable");
(f) Subsidiary Stock. All of the outstanding capital stock of
Subsidiary owned beneficially and of record by Seller;
(g) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(h) Records. All of Seller's customer logs, location files and
records, employee records (except where delivery of such records would be a
violation of state or federal law), and other business files and records, in
each case relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the First Closing Date or the Second
Closing Date (each as defined below), the following assets (the "Excluded
Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the First Closing Date and which are set
forth on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the contracts as set forth on Schedule 1.2(b) attached hereto
(the "Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
Second Closing Date as set forth on Schedule 1.2(c) attached hereto;
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(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined below) for periods prior to the
Second Closing Date as set forth on Schedule 1.2(d) attached hereto;
(e) Corporate Records. All of Seller's corporate and other
organizational records;
(f) Cash. All cash on hand and in checking and savings accounts and
bank card accounts; and
(g) Corporate Names. The names "Global Information Exchange" and
"GIEX", as well as other Intellectual Property identified in Schedule 2.20, may
be used by Seller until the Second Closing.
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities.
(i) Buyer shall, on and as of the First Closing Date, accept
and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further
liability or responsibility for or with respect to, (A) liabilities and
obligations arising out of events occurring on and after the First Closing
Date related to Buyer's ownership of the Assets and Buyer's operation of
the Business after the First Closing Date, excluding those liabilities and
obligations related to Subsidiary; (B) those current liabilities and
accrued expenses of Seller as of the First Closing Date consisting of (1)
accounts payable arising in the ordinary course of business (the "Assumed
Current Liabilities") and (2) unearned revenues; (C) all obligations and
liabilities, excluding those related to Subsidiary, which are to be
performed after the First Closing Date arising under the Contracts,
including, without limitation, Seller's obligations to subscribers under
such Contracts for (1) subscriber deposits held by Seller as of the First
Closing Date in the amount for which Buyer receives a credit pursuant to
Section 1.6(a) below, (2) up to $48,000 of subscriber advance payments
held by Seller as of the First Closing Date for services to be rendered in
connection with the Business in the amount for which Buyer receives a
credit pursuant to Section 1.6(a) below, and (3) the delivery of Internet
connectivity service to subscribers, whether pursuant to a Contract or
otherwise, after the First Closing Date; (D) fifty percent (50%) of the
investment banking fees owed by the Seller to PricewaterhouseCoopers
Securities LLC on account of the transactions contemplated herein up to a
maximum amount of one hundred thousand dollars ($100,000); and (E) the
superPOP liability identified in Schedule 1.3(a)(i) ((A), (B), (C), (D)
and (E) together, the "Assumed Liabilities").
(ii) Buyer shall, on and as of the Second Closing Date, accept
and assume, and shall become and be fully liable and responsible for, and
other than as
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expressly set forth herein Seller shall have no further liability or
responsibility for or with respect to, (A) liabilities and obligations
arising out of events occurring on and after the Second Closing Date
related to Buyer's ownership of the Subsidiary Stock and Buyer's operation
of the Subsidiary after the Second Closing Date; and (B) up to fifty
thousand dollars ($50,000) of liabilities incurred by Seller prior to the
Second Closing Date in connection with the Subsidiary's Competitive Local
Exchange Carrier business (the "CLEC Liabilities"), which liabilities are
itemized on Schedule 1.3(a)(ii) hereto; and (c) Seller's actual costs up
to an aggregate limit of $20,000 (the "License Costs Maximum") incurred in
connection with obtaining approval of the Public Utilities Commission of
the State of North Carolina to the transfer of the license to operate as a
CLEC to Buyer (the "CLEC License Transfer").
(iii) The assumption of the Assumed Liabilities and the CLEC
Liabilities by Buyer hereunder shall not enlarge any rights of third
parties under contracts or arrangements with Buyer or Seller or any of
their respective affiliates or subsidiaries. No parties other than Buyer
and Seller shall have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities and CLEC Liabilities, Buyer shall not assume, pay or
be liable for any liability or obligation of Seller of any kind or nature at any
time existing or asserted, whether, known, unknown, fixed, contingent or
otherwise, not specifically assumed herein by Buyer, including, without
limitation, any liability or obligation relating to, resulting from or arising
out of (i) the Excluded Assets, including, without limitation, the Excluded
Contracts, (ii) employee benefit programs of the Business, including, without
limitation, any obligation to provide any amounts due to the employees under any
pension, profit sharing or similar plan, any bonus or other compensation plan,
or related to vacation or other similar employee benefits, or arising as a
result of the transactions contemplated hereby (except for up to one week
vacation and fifteen days sick leave per employee, previously accrued), (iii)
any liabilities prior to the Second Closing Date in connection with the
Subsidiary's CLEC business exceeding in the aggregate fifty thousand dollars
($50,000) (the "Excluded CLEC Liabilities"), (iv) any liabilities arising in
connection with the CLEC License Transfer in excess of the License Costs
Maximum, or (v) any fact existing or event occurring prior to the First Closing
Date or, with respect to the Subsidiary, prior to the Second Closing Date, or
relating to the operation of the Business prior to the First Closing Date or,
with respect to the Subsidiary, the Second Closing Date. The liabilities which
are not assumed by Buyer under this Agreement are hereinafter sometimes referred
to as the "Excluded Liabilities."
(c) Employees, Wages and Benefits.
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(i) Seller shall terminate all of its employees effective as
of the First Closing Date and Buyer shall not assume or have any
obligations or liabilities with respect to such employees or such
terminations except as provided in Section 7.3, including, without
limitation, any severance obligation. Seller acknowledges and
agrees that Buyer has the right to interview and discuss employment
continuation, compensation and other terms and any related issues with
such employees prior to and after the First Closing.
(ii) Buyer specifically agrees, on the First Closing Date, to
employ all of Seller's employees identified on a list provided by Seller
to Buyer at the First Closing, a copy of which is attached hereto as
Schedule 1.3(c)(ii). Buyer agrees to provide up to one week vacation and
fifteen days sick leave to each employee previously accrued and shall
maintain current seniority levels of such employees.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees shown on
Schedule 1.3(c)(ii) which shall have become due for work performed as of
and through the day preceding the First Closing Date, and Seller shall
collect and pay all Taxes in respect of such wages, salaries, commissions
and benefits.
(iv) At the first Closing, Buyer hereby agrees to participate
in the employee benefit plans and programs identified on Schedule
1.3(c)(iv); notwithstanding the foregoing and except as otherwise
expressly provided herein, Buyer shall not otherwise acquire any rights or
interests of Seller in, or assume or have any obligations or liabilities
of Seller under, any benefit plans maintained by, or for the benefit of
any employees of Seller prior to the First Closing Date, including,
without limitation, obligations for severance or vacation accrued but not
taken as of the First Closing Date, nor shall Buyer be restricted in its
ability to terminate or amend the terms of such plans and programs.
1.4 The Closings. The transactions contemplated by this Agreement in
connection with the purchase and sale of the Business, but excluding the
purchase of the stock of Subsidiary, shall take place at a closing (the "First
Closing") to be held at 10:00 a.m., local time, at the offices of Goodwin,
Procter & Hoar LLP, on the date of this Agreement or at such other time and
place as shall be mutually agreed upon in writing by Buyer and Seller (the
"First Closing Date"). The transactions contemplated by this Agreement in
connection with the purchase of the stock of Subsidiary shall take place at a
closing (the "Second Closing") to be held at 10:00 a.m., local time, at the
offices of Goodwin, Procter & Hoar LLP, on the earliest date following
satisfaction of the conditions set forth in Section 6.1A or such other time and
place as shall be mutually agreed upon in writing by Buyer and Seller (the
"Second Closing Date"). Either or both closings may be performed by facsimile,
with originals to follow as soon as commercially reasonable.
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1.5 First Closing Purchase Price. In consideration of the sale by Seller
to Buyer of the Assets, and subject to the assumption by Buyer of the Assumed
Liabilities and satisfaction of the conditions contained herein, Buyer shall pay
at the First Closing an amount (as adjusted in accordance with Section 1.6
below, the "First Closing Purchase Price") equal to $7,150,000 as follows:
(a) Buyer shall deliver the sum of $6,800,000 minus the sum of the
Debt Repayment amount as set forth in Schedule 1.5(a) (the "Debt Repayment
Amount") and the Estimated Adjustment (as such term is hereinafter defined) to
Seller by bank cashier's check or bank wire transfer pursuant to payment
instructions delivered by Seller to Buyer at the First Closing; and
(b) Buyer shall deposit the sum of $350,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow
Agreement in the form attached hereto as Exhibit A (the "Escrow Agreement"). The
Escrow Deposit shall be held, administered and distributed in accordance with
the terms of the Escrow Agreement, and shall be Buyer's remedy for any
indemnification claims made pursuant to Section 10 hereof.
(c) Buyer shall deliver the Debt Repayment Amount to Branch Banking
& Trust by bank wire transfer pursuant to payment instructions delivered by
Seller to Buyer at the First Closing.
1.5A Second Closing Purchase Price. In consideration of the sale by Seller
to Buyer of the Subsidiary Stock, and subject to the assumption by Buyer of the
CLEC Liabilities and satisfaction of the conditions contained herein, Buyer
shall pay at the Second Closing an amount (as adjusted in accordance with
Section 1.6A below, the "Second Closing Purchase Price") equal to $100,000 minus
assumed CLEC liabilities in excess of the Estimated Excluded CLEC Liabilities
Amount (as defined in Section 1.6A below).
1.6 Adjustments to First Closing Purchase Price.
(a) The First Closing Purchase Price shall be reduced
dollar-for-dollar by the amount of Seller's Net Working Capital (as defined
herein) if such amount is negative, or increased dollar for dollar by the amount
of Seller's Net Working Capital if such amount is positive. "Net Working
Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the First Closing Date.
(b) The First Closing Purchase Price shall be decreased, on a
dollar-for- dollar basis, by the Revenues Adjustment Amount in the event Actual
Revenues for the month ending March 31, 1999 are less than $360,000 ("Target
Revenues"). For purposes hereof, the term "Revenues Adjustment Amount" shall
equal the product obtained by multiplying (i) $1,750 by (ii) the quotient
obtained by dividing (X) the Annualized Actual Revenues Deficiency, by (Y) one
thousand dollars ($1,000). For purposes hereof, "Actual Revenues" shall mean
gross monthly revenues, without adjustment for deferred revenues, of Seller as
of March 31, 1999; provided, however, that "Actual Revenues" shall exclude (x)
revenue
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attributable to any customer of the Company who has not paid for more
than two months of service as of March 31, 1999 and (y) revenue attributable to
any period other than the current month's service. For purposes hereof, the term
"Annualized Actual Revenues Deficiency" shall equal the product of (i) the
difference between (A) the Target Revenues and (B) Actual Revenues, multiplied
by (ii) twelve (12).
(c) Buyer and Seller shall prepare a statement to be attached hereto
as Schedule 1.6(c) (the "Estimated Adjustment Statement") which sets forth (i)
the estimated amount of the Net Working Capital as of the First Closing Date
(the "Estimated Net Working Capital") and (ii) the estimated Revenues Adjustment
Amount (the "Estimated Revenues Adjustment"). The sum of the Estimated Net
Working Capital and the Estimated Revenues Adjustment shall be hereinafter
referred to as the "Estimated Adjustment." The First Closing Purchase Price
payable at the First Closing shall be decreased on a dollar-for-dollar basis to
the extent of the Estimated Adjustment, if such number is a positive number, set
forth on such Estimated Adjustment Statement. If the Estimated Adjustment is a
negative number, the First Closing Purchase Price payable at the First Closing
shall be increased on a dollar-for-dollar basis to the extent of the absolute
value of the Estimated Adjustment set forth on such Estimated Adjustment
Statement.
(d) (i) No later than sixty (60) days following the First Closing,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital.
Subject to subsection (ii) below, within ten (10) days following the
delivery of such Final Adjustment Statement to Seller, Buyer or Seller, as
the case may be, shall pay to the other party, by wire transfer of
immediately available funds, the difference between the Estimated Net
Working Capital, as shown on the Estimated Adjustment Statement, and the
actual Net Working Capital, as shown on the Final Adjustment Statement.
(ii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital at the First Closing.
Upon receipt by Buyer of such written objection, the parties shall attempt
to resolve the disagreement concerning the Final Adjustment Statement
through negotiation. Notwithstanding any other dispute resolution
procedure provided for in this Agreement, if Buyer and Seller cannot
resolve such disagreement concerning the Final Adjustment Statement within
thirty (30) days following the end of the foregoing 10-day period, the
parties shall submit the matter for resolution to a nationally recognized
firm of independent certified public accountants not affiliated with
either party, with the costs thereof to be shared equally by the parties.
Such accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such according firm to the parties.
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1.6A Adjustment to Second Closing Purchase Price.
(a) The Second Closing Purchase Price shall be reduced
dollar-for-dollar by the amount of CLEC Liabilities in excess of $50,000.
(b) Buyer and Seller shall prepare a statement (the "Estimated
Second Closing Adjustment Schedule"), to be attached to the Second Closing
Certificate (defined in Section 6.1A below) which sets forth the estimated
amount of the Excluded CLEC Liabilities (the "Estimated Excluded CLEC
Liabilities Amount").
(c) (i) No later than ninety (90) days following the Second Closing,
Buyer shall prepare and deliver to Seller a statement (the "Final Excluded
CLEC Liabilities Statement") setting forth the actual amount of the
Excluded CLEC Liabilities. Subject to subsection (ii) below, within ten
(10) days following the delivery of such Final Excluded CLEC Liabilities
Statement to Seller, Buyer or Seller, as the case may be, shall pay to the
other party, by wire transfer of immediately available funds, the
difference between the Estimated Excluded CLEC Liabilities, as shown on
the Estimated Second Closing Adjustment Schedule, and the actual Excluded
CLEC Liabilities, as shown on the Final Excluded CLEC Liabilities
Statement.
(b) In the event Seller objects to the Final Excluded CLEC
Liabilities Statement, Seller shall notify Buyer in writing of such
objection within the ten (10) day period following the delivery thereof,
stating in such written objection the reasons therefor and setting forth
the Seller's calculation of Seller's actual Excluded CLEC Liabilities at
the Second Closing. Upon receipt by Buyer of such written objection, the
parties shall attempt to resolve the disagreement concerning the Final
Excluded CLEC Liabilities Statement through negotiation. Notwithstanding
any other dispute resolution procedure provided for in this Agreement, if
Buyer and Seller cannot resolve such disagreement concerning the Final
Excluded CLEC Liabilities Statement within thirty (30) days following the
end of the foregoing 10-day period, the parties shall submit the matter
for resolution to a nationally recognized firm of independent certified
public accountants not affiliated with either party, with the costs
thereof to be shared equally by the parties. Such accounting firm shall
deliver a statement setting forth its own calculation of the final
adjustment to the parties within thirty (30) days of the submission of the
matter to such firm. Any payment shown to be due by a party on the
statement of such accounting firm shall be paid to the other party
promptly but in no event later than five (5) days following the delivery
of such statement by such according firm to the parties.
1.7 Purchase Price Allocation. At the First Closing, Buyer and Seller
shall agree on the allocation of the combined First Closing Purchase Price and
Second Closing Purchase Price (the "Purchase Price") as set forth on Schedule
1.7 attached hereto. Such allocation shall be binding upon Buyer and Seller for
all purposes (including financial accounting
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purposes, financial and regulatory reporting purposes and tax purposes). Buyer
and Seller each further agrees to file its Federal income tax returns and its
other tax returns reflecting such allocation, Form 8594 and any other reports
required by Section 1060 of the Code.
1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the First Closing, Seller shall deliver to Buyer all of the Contracts, with
such assignments thereof and consents to assignments as are necessary to assure
Buyer of the full benefit of the same except as disclosed in Schedule 1.8.
Seller shall also deliver to Buyer at the First Closing all of Seller's files
and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes, fees and duties
(including any real estate transfer taxes) under applicable law incurred in
connection with this Agreement or the transactions contemplated thereby will be
borne and paid by Seller, and Seller shall promptly reimburse Buyer for the
payment of any such tax, fee or duty which Buyer is required to make under
applicable law.
1.10 Transfer of Subject Assets. At the First Closing, Seller shall
deliver or cause to be delivered to Buyer good and sufficient instruments of
transfer transferring to Buyer title to all of the Assets, together with all
required consents. Such instruments of transfer (a) shall contain appropriate
warranties and covenants which are usual and customary for transferring the type
of property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance reasonably satisfactory to Buyer
and its counsel, (c) shall effectively vest in Buyer good and marketable title
to all of the Assets free and clear of all Liens (as defined in Section 2.8),
and (d) where applicable, shall be accompanied by evidence of the discharge of
all Liens against the Assets. At the Second Closing, Seller shall deliver to
Buyer one or more stock certificates, together with stock powers executed in
blank with a signature guarantee, representing Seller's ownership of the Stock
of the Subsidiary.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND
MANAGEMENT SHAREHOLDER.
In order to induce Buyer to enter into this Agreement, Seller and the
Management Shareholder, jointly and severally, hereby represent and warrant to
Buyer as follows:
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2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. Seller has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of Seller's certificate of incorporation and bylaws each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. Seller is not in violation of any term of the certificate of
incorporation and bylaws Seller is duly qualified to do business in the state of
its incorporation, and is not required to be licensed or qualified to conduct
its business or own its property in any other jurisdiction.
(b) Subsidiary is the only subsidiary of Seller. Schedule 2.1(b)
sets forth (i) the Subsidiary's name and jurisdiction of incorporation, (ii) the
number of authorized shares of each class of its capital stock and (iii) the
number of issued and outstanding shares of each class of its capital stock, the
names of the holders thereof, and the number of shares held by each such holder.
Seller holds of record and owns beneficially all of the outstanding shares of
capital stock of Subsidiary, free and clear of any liens, restrictions or
encumbrances. There are no outstanding warrants, options or other rights to
purchase or acquire any of the shares of capital stock of Subsidiary, or any
outstanding securities convertible into such shares or outstanding warrants,
options or other rights to acquire any such convertible securities. Seller does
not own any securities issued by any other business organization or governmental
authority, except U.S. Government securities, bank certificates of deposit and
money market accounts acquired as short-term investments in the ordinary course
of its business and does not own or have any direct or indirect interest in or
control over any corporation, partnership, joint venture or entity of any kind,
other than Subsidiary.
(c) Subsidiary is a corporation duly organized, validly existing and
in good standing under the laws of the State of North Carolina. Subsidiary has
all requisite power and authority to conduct its business as it is now conducted
or proposed to be conducted and to own, lease and operate its properties and
assets. The copies of Subsidiary's certificate of incorporation and bylaws each
as amended to date, heretofore delivered to Buyer's counsel are complete and
correct. Subsidiary is not in violation of any term of the certificate of
incorporation and bylaws Subsidiary is duly qualified to do business in the
state of its incorporation, and is not required to be licensed or qualified to
conduct its business or own its property in any other jurisdiction.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken, and this Agreement and each
other agreement, document and instrument to be executed and delivered by or on
behalf of Seller pursuant to, or as contemplated by, this Agreement
(collectively, the "Seller Documents") has been duly and validly authorized,
executed and delivered by Seller and no other action on the part of Seller or
its officers, directors or shareholders is required in connection therewith.
Each of Seller and
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the Management Shareholder have full right, authority, power and capacity to
execute and deliver this Agreement and each other Seller Document and to carry
out the transactions contemplated hereby and thereby. This Agreement and each
other Seller Document constitutes, or when executed and delivered will
constitute, the legal, valid and binding obligation of each of Seller and the
Management Shareholder enforceable in accordance with its respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the certificate of incorporation and bylaws of Seller or
Subsidiary, in each case as amended to date, (ii) constitute a violation of, or
conflict with or result in any breach of, acceleration of any obligation under,
right of termination under, or default under, any agreement or instrument to
which Seller or Subsidiary is a party or by which Seller, Subsidiary or the
Assets are bound, (iii) violate any judgment, decree, order, statute, rule or
regulation applicable to Seller, Subsidiary or the Assets, (iv) require Seller
or Subsidiary to obtain any approval, consent or waiver of, or to make any
filing with, any person or entity (governmental or otherwise) that has not been
obtained or made or (v) result in the creation or imposition of any Lien on any
of the Assets.
(b) The execution, delivery and performance by the Management
Shareholder of this Agreement and each other Seller Document does not and will
not (i) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which the Management Shareholder is a
party or by which the Management Shareholder is bound, (ii) violate any
judgment, decree, order, statute, rule or regulation applicable to the
Management Shareholder, (iii) require the Management Shareholder to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made, or (iv) result
in the creation or imposition of any Lien on any of the Assets.
2.4 Taxes.
(a) Seller and Subsidiary have paid or caused to be paid all
federal, state, local, foreign and other taxes, including, without limitation,
income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales
taxes, use taxes, value-added taxes, gross receipts taxes, franchise taxes,
capital stock taxes, employment and payroll-related taxes, withholding taxes,
stamp taxes, transfer taxes, windfall profit taxes, environmental taxes and
property taxes, whether or not measured in whole or in part by net income, and
all deficiencies, or other additions to tax, interest, fines and penalties owed
by it (collectively, "Taxes"), required to be paid by it through the date hereof
whether disputed or not.
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(b) Seller and Subsidiary have in accordance with applicable law
filed all federal, state, local and foreign tax returns required to be filed by
them through the date hereof, and all such returns correctly and accurately set
forth the amount of any Taxes relating to the applicable period. A list of all
federal, state, local and foreign income tax returns filed with respect to
Seller and Subsidiary for taxable periods ended on or after December 31, 1993,
is set forth in Schedule 2.4 attached hereto. Seller has delivered to Buyer
correct and complete copies of all federal, state, local and foreign income tax
returns listed on said schedule, and of all examination reports and statements
of deficiencies assessed against or agreed to by Seller or Subsidiary with
respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Management
Shareholder, threatening to assert against Seller or Subsidiary any deficiency
or claim for additional Taxes. To the knowledge of Seller and the Management
Shareholder, no claim has ever been made by an authority in a jurisdiction where
either Seller or Subsidiary do not file reports and returns that Seller or
Subsidiary are or may be subject to taxation by that jurisdiction. There are no
security interests on any of the Assets of Seller or Subsidiary that arose in
connection with any failure (or alleged failure) to pay any Taxes. Neither
Seller nor Subsidiary have ever entered into a closing agreement pursuant to
Section 7121 of the Internal Revenue Code of 1986, as amended (the "Code")
(d) There has not been any audit of any tax return filed by Seller
or Subsidiary, no audit of any tax return of Seller or Subsidiary is in
progress, and neither Seller nor Subsidiary have been notified by any tax
authority that any such audit is contemplated or pending. No extension of time
with respect to any date on which a tax return was or is to be filed by Seller
or subsidiary is in force, and no waiver or agreement by Seller or Subsidiary is
in force for the extension of time for the assessment or payment of any Taxes.
(e) Neither Seller nor Subsidiary have ever been (and have never had
any liability for unpaid Taxes because it once was) a member of an "affiliated
group" (as defined in Section 1504(a) of the Code). Neither Seller nor
Subsidiary have ever filed, or have ever been required to file, a consolidated,
combined or unitary tax return with any other entity except as disclosed in
Schedule 2.4. Seller does not own and has never owned a direct or indirect
interest in any trust, partnership, corporation or other entity other than
Subsidiary and therefore Buyer is not acquiring from Seller an interest in any
entity other than Subsidiary. Seller is not a party to any tax sharing
agreement.
(f) Neither Seller nor Subsidiary are "foreign persons" within the
meaning of Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
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2.5 Compliance with Laws. Each of Seller's and Subsidiary's operations of
the Business and the Assets are in compliance in all material respects with all
applicable statutes, ordinances, orders, rules and regulations promulgated by
any federal, state, municipal or other governmental authority (including the
Federal Communications Commission), and neither Seller nor Subsidiary have
received notice of a violation or alleged violation of any such statute,
ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets are insured to
the extent disclosed in Schedule 2.6 attached hereto, and all insurance policies
and arrangements of Seller and Subsidiary in effect as of the date hereof are
disclosed in said Schedule. Said insurance policies and arrangements are in full
force and effect, all premiums with respect thereto are currently paid, and
Seller and Subsidiary are in compliance in all material respects with the terms
thereof. Said insurance is adequate and customary for the business engaged in by
Seller and Subsidiary and is sufficient for compliance by Seller and Subsidiary
with all requirements of law and all agreements and leases to which Seller or
Subsidiary are parties.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which either Seller or Subsidiary
are bound or to which Seller or Subsidiary are parties which relate to the
Business or Assets. Schedule 1.1(b) attached hereto contains a true, correct and
complete list of all Contracts. With respect to each oral agreement or
understanding involving the Business, Seller has provided a written summary of
the material terms of each such agreement or understanding on Schedule 1.1(b).
Each Contract is valid, in full force and effect and binding upon Seller or
Subsidiary and the other parties thereto in accordance with its terms. Neither
Seller, Subsidiary nor, to the knowledge of Seller and the Management
Shareholder, any other party is in default under or in arrears in the
performance, payment or satisfaction of any agreement or condition on its part
to be performed or satisfied under any Contract, nor does any condition exist
that with notice or lapse of time or both would constitute such a default, and
no waiver or indulgence has been granted by any party under any Contract.
Neither Seller nor Subsidiary has received notice of, and the Seller and
Management Shareholder have no knowledge of, any fact which would result in a
termination, repudiation or breach of any Contract. Seller has provided Buyer
with true and complete copies of all of such Contracts, other than with respect
to the oral agreements or understandings described on Schedule 1.1(b).
2.8 Title. As of each closing, Seller has good and marketable title to all
of the Assets free and clear of all mortgages, pledges, security interests,
charges, liens, restrictions and encumbrances of any kind (collectively,
"Liens") whatsoever. Upon the sale, assignment, transfer and delivery of the
Assets to Buyer hereunder and under the Seller Documents, there will be vested
in Buyer good, marketable and indefeasible title to the Assets, free and clear
of all Liens. The Assets include all of the assets and properties (i) held for
use by Seller or Subsidiary to conduct the Business as presently conducted and
(ii) necessary or useful for Buyer to operate the Business in the same manner as
such business is currently operated by Seller or Subsidiary. All of the tangible
Assets are in good repair, have been well maintained and are in good operating
condition, do not require any material modifications or repairs, and
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comply in all material respects with applicable laws, ordinances and
regulations, ordinary wear and tear excepted. Seller has delivered complete and
true copies of all real property leases (the "Leases") set forth on Schedule
1.1(b). Seller or Subsidiary hold good, clear, marketable, valid and enforceable
leasehold interest in the real property subject to the Leases (the "Leased Real
Property"), subject only to the right of reversion of the landlord or lessor
under the Leases, free and clear of all other prior or subordinate interests,
including, without limitation, mortgages, deeds of trust, ground leases, leases,
subleases, assessments, tenancies, claims, covenants, conditions, restrictions,
easements, judgments or other encumbrances or matters affecting title, and free
of encroachments onto or off of the leased real property. There are no material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property, including, without limitation, structural elements,
mechanical systems, roofs or parking and loading areas, and all of such
improvements are in good operating condition and repair, have been well
maintained. All water, sewer, gas, electric, telephone, drainage and other
utilities required by law or necessary for the current or planned operation of
the Leased Real Property have been installed and connected pursuant to valid
permits, and are sufficient to service the Leased Real Property. Seller does not
hold or own a fee interest in any real property.
2.9 No Litigation. Neither Seller nor Subsidiary are now involved in nor,
to the knowledge of Seller and the Management Shareholder, are Seller or
Subsidiary threatened to be involved in any litigation or legal or other
proceedings related to or affecting the Business or any Asset (including any
Intellectual Property) or which would prevent or hinder the consummation of the
transactions contemplated by this Agreement. Neither Seller nor Subsidiary have
been operating the Business under, and the Business is not subject to, any
order, injunction or decree of any court of federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately 34 full-time
employees and 42 part-time employees and Subsidiary employs zero full-time
employees and zero part-time employees, and each of Seller and Subsidiary
generally enjoys good employer-employee relationships. Seller shall provide to
Buyer a list of the employees of Seller and Subsidiary in connection with the
Business at the First Closing, including the name, date of hire and wages of
such employees. Neither Seller nor Subsidiary are delinquent in payments to any
of their employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees. Upon termination of the employment
of any of said employees, none of Seller, Subsidiary or Buyer will by reason of
the transactions contemplated hereby or anything done prior to the First Closing
or, with respect to the Subsidiary, the Second Closing, be liable to any of said
employees for so-called "severance pay" or any other payments, except as
otherwise set forth herein or as set forth in Schedule 2.10 attached hereto.
Neither Seller nor Subsidiary have any policy, practice, plan or program of
paying severance pay or any form of severance compensation in connection with
the termination of employment, except as set forth in Schedule 2.10. Each of
Seller and Subsidiary is in compliance in all material respects with all
applicable laws and regulations
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respecting labor, employment, fair employment practices, work place safety and
health, terms and conditions of employment, and wages and hours. There are no
charges of employment discrimination or unfair labor practices, nor are there
any strikes, slowdowns, stoppages of work, or any other concerted interference
with normal operations existing, pending or, to the knowledge of Seller and the
Management Shareholder, threatened against or involving Seller or Subsidiary. No
question concerning representation exists respecting any group of employees of
Seller or Subsidiary. No collective bargaining agreement is in effect or is
currently being or is about to be negotiated by Seller or Subsidiary. Neither
Seller nor Subsidiary have received any information to indicate that any of
their employment policies or practices are currently being audited or
investigated by any federal, state or local government agency. Seller and
Subsidiary are, and at all times since November 6, 1986 have been, in compliance
with the requirements of the Immigration Reform Control Act of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the consolidated balance sheets of Seller and Subsidiary as at December 31, 1998
(the "Base Balance Sheet") and the consolidated statements of income and expense
of Seller and Subsidiary for the twelve (12) months ended December 31, 1998
(collectively the "Financial Statements"). The Financial Statements have been
prepared in accordance with reasonable and commercially acceptable accounting
principles, consistently applied, that reflect in all material respects the
actual financial condition and results of operations of Seller during the
periods covered thereby (except for the absence of footnotes with respect to
unaudited financials), are complete and correct and present fairly and
accurately the financial condition of the Business at the dates of said
statements and the results of operations of the Business for the periods covered
thereby. As of the date of the Base Balance Sheet (the "Base Balance Sheet
Date"), neither Seller nor Subsidiary had any liabilities or obligations of any
kind with respect to the Business, whether accrued, contingent or otherwise,
that are not disclosed and adequately reserved against on the Base Balance
Sheet. As of the date hereof and at the First Closing, neither Seller nor
Subsidiary had and will have no liabilities or obligations of any kind with
respect to the Business, whether accrued, contingent or otherwise, that are not
disclosed and adequately reserved against on the Base Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller or Subsidiary with respect to the
Business, whether or not incurred in the ordinary course of business;
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(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller or Subsidiary which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, adversely affecting the Business or Assets;
(g) there has not been any change in Seller's or Subsidiary's
pricing, marketing, customer service, billing, operational or promotional
activities in any material way from that which Seller and Subsidiary were
providing these activities directly prior to the Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller or Subsidiary to take any of the actions
specified above.
2.13 Licenses. As of the date of this Agreement, Seller or Subsidiary are
the holders of all licenses, permits and authorizations with respect to the
Business (the "Authorizations"). The Authorizations constitute all of the
licenses, permits and authorizations required for operation of the Business as
now operated. All of the Authorizations are in full force and effect and no
licenses, permits or authorizations of any governmental department or agency are
required for the operation of the Business which have not been duly obtained. As
of the date hereof, there is not pending or, to the knowledge of Seller and the
Management Shareholder, threatened any action by or before any governmental
agency to revoke, cancel, rescind or modify any of the Authorizations, and there
is not now issued or outstanding or, to the knowledge of Seller and the
Management Shareholder, pending or threatened any order to show cause, notice of
violation, notice of apparent liability, or notice of forfeiture or complaint
against Seller or Subsidiary with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller or Subsidiary in connection with the execution and delivery of
this Agreement and the Seller Documents and the consummation of the transactions
contemplated hereby and thereby. All of the approvals, consents and
authorizations listed on Schedule 2.14 shall be obtained by Seller or Subsidiary
at or prior to the First Closing or, with respect to the Subsidiary, at or prior
to the Second Closing.
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2.15 Customers and Suppliers. Seller's and Subsidiary's relations with
their customers and suppliers, including their subscribers, are good and there
are not pending or, to Seller's knowledge, threatened claims or controversies
with any customer or suppliers that are material to the Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the subscribers of the Business as listed by class, type and
billing plan as provided separately in electronic format.
2.17 Brokers. Except for fees payable to PricewaterhouseCoopers Securities
LLC, neither Seller nor Subsidiary have retained any broker or finder or other
person who would have any valid claim against any of the parties to this
Agreement for a commission or brokerage fee in connection with this Agreement or
the transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller and Subsidiary are or will be as of the First Closing Date bona fide,
valid and enforceable claims, subject to no setoff or counterclaim and to
Seller's knowledge are collectible in accordance with their terms. Neither
Seller nor Subsidiary have any accounts or loans receivable from any person,
firm or corporation which is affiliated with Seller or Subsidiary or from any
director, officer or employee of Seller or Subsidiary, or from any of their
respective spouses or family members.
2.19 Banking Relations. All of the arrangements which Seller and
subsidiary have with any banking institution are completely and accurately
described in Schedule 2.19 attached hereto, indicating with respect to each of
such arrangements the type of arrangement maintained (such as checking account,
borrowing arrangements, safe deposit box, etc.) and the person or persons
authorized in respect thereof.
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2.20 Intellectual Property.
(a) Set forth on Schedule 2.20 attached hereto are all computer
programs and related documentation sold, marketed, licensed and distributed by
Seller and Subsidiary (the "Products"). All of the Intellectual Property of
Seller and Subsidiary is set forth on Schedule 2.20 attached hereto. For
purposes hereof, the term "Intellectual Property" includes: (i) all patents,
patent applications, patent rights, and inventions and discoveries and invention
disclosures (whether or not patented) (collectively, "Patents"); (ii) Seller's
rights to the names "Global Information Exchange," "GIEX," "GIETEL, Inc.," and
"Coastalnet.com," all trade names, trade dress, logos, packaging design,
slogans, any and all Internet domain names used or useful in the business of
Seller and Subsidiary, registered and unregistered trademarks and service marks
and applications (collectively, "Marks"); (iii) all copyrights in both published
and unpublished works, including, without limitation, all compilations,
databases and computer programs, and all copyright registrations and
applications, and all derivatives, translations, adaptations and combinations of
the above (collectively, "Copyrights"), (iv) all know-how, trade secrets,
confidential or proprietary information, customer lists, IP addresses, research
in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, prototypes, techniques, Beta
testing procedures and Beta testing results (collectively, "Trade Secrets"); (v)
Seller's and Subsidiary's web-sites (including the domain name
"www.coastalnet.com" and any other similar domain name); (vi) all goodwill,
franchises, licenses, permits, consents, approvals, technical information,
telephone numbers, and claims of infringement against third parties (the
"Rights"); and (vii) all contracts relating to the Products and the Intellectual
Property to which Seller or Subsidiary is a party or is bound, including,
without limitation, all nondisclosure and/or confidentiality agreements entered
into by persons in connection with disclosures by Seller and Subsidiary
(collectively,"Assigned Contracts").
(b) Except as described in Schedule 2.20, Seller or Subsidiary have
exclusive ownership of, and have good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's and
Subsidiary's rights in all of such Intellectual Property are freely
transferable. There are no claims or demands pending or, to the knowledge of
Seller and the Management Shareholder, threatened of any other person pertaining
to any of such Intellectual Property and no proceedings have been instituted, or
are pending or, to the knowledge of Seller and the Management Shareholder,
threatened against Seller or Subsidiary and/or their officers, employees and
consultants which challenge the validity and enforceability of Seller's or
Subsidiary's rights in respect of the Intellectual Property. The Intellectual
Property constitutes all of the assets of Seller and Subsidiary used in
designing, creating and developing the Products, and represent all of such
Intellectual Property necessary for the operation of Seller's Business as
currently conducted.
To the knowledge of the Company and the Management Shareholder, no
employee, consultant or contractor of Seller or Subsidiary has entered into any
agreement that restricts or limits in any way the scope or type of work in which
the employee, consultant or contractor
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may be engaged or requires the employee, consultant or contractor to transfer,
assign, or disclose information concerning his work to anyone other than Seller
or Subsidiary.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's and Subsidiary's Patents. All of the
issued Patents are currently in compliance with formal legal requirements
(including without limitation payment of filing, examination and maintenance
fees and proofs of working or use), are valid and enforceable, and are not
subject to any maintenance fees or taxes or actions falling due within ninety
(90) days after the First Closing Date. In each case where a Patent is held by
Seller or Subsidiary by assignment, the assignment has been duly recorded with
the U.S. Patent and Trademark Office and all other jurisdictions of
registration. No Patent has been or is now involved in any interference,
reissue, re-examination or opposition proceeding. To the knowledge of Seller and
the Management Shareholder, there is no potentially interfering Patent of any
third party. All products made, used or sold under the Patents have been marked
with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's and Subsidiary's Marks. All Marks that
have been registered with the United States Patent and Trademark Office and/or
any other jurisdiction are currently in compliance with formal legal
requirements (including, without limitation, the timely post- registration
filing of affidavits of use and incontestability and renewal applications), are
valid and enforceable, and are not subject to any maintenance fees or taxes or
actions falling due within ninety (90) days after the First Closing Date. In
each case where a Trademark is held by Seller or Subsidiary by assignment, the
assignment has been duly recorded with the U.S. Patent and Trademark Office and
all other jurisdictions of registration. No Mark has been or is now involved in
any opposition, invalidation or cancellation proceeding and, to the knowledge of
Seller and the Management Shareholder, no such action is threatened with respect
to any of the Marks. All products and materials containing a Mark bear the
proper notice where permitted by law.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's and Subsidiary's Copyrights. All the
Copyrights have been registered with the United States Copyright Office and are
currently in compliance with formal legal requirements, are valid and
enforceable, and are not subject to any fees or taxes or actions falling due
within ninety (90) days after the First Closing Date. In each case where a
Copyright is held by Seller or Subsidiary by assignment, the assignment has been
duly recorded with the U.S. Copyright Office and all other jurisdictions of
registration. None of the source or object code, algorithms, or structure
included in the Products is copied from, based upon, or derived from any other
source or object code, algorithm or structure in violation of the rights of any
third party. Any substantial similarity of the Products to any computer program
owned by any third party did not result from the Products being copied from,
based upon, or derived from any such computer software program in violation of
the rights of any third party. All copies of works encompassed by the Copyrights
have been marked with the proper copyright notice.
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(f) Seller and Subsidiary have taken reasonable security measures
(including, without limitation, entering into appropriate confidentiality and
non-disclosure agreements with all officers, directors, employees, consultants
and contractors of Seller, Subsidiary and any other persons with access to the
Trade Secrets) to protect the secrecy, confidentiality and value of all Trade
Secrets. To the knowledge of Seller and the Management Shareholder, there has
not been any breach by any party to any such confidentiality or non- disclosure
agreement. The Trade Secrets have not been disclosed by Seller or Subsidiary to
any person or entity other than employees or contractors of Seller or Subsidiary
who had a need to know and use the Trade Secrets in the course of their
employment or contract performance. Except as set forth on Schedule 2.20, (i)
neither Seller nor Subsidiary have directly or indirectly granted any rights or
interests in the source code of the Products, and (ii) since Seller developed
the source code of the Products, neither Seller nor Subsidiary have provided,
licensed or disclosed the source code of the Products to any person or entity.
Seller or Subsidiary have the right to use, free and clear of claims of third
parties, all Trade Secrets. To the knowledge of Seller and the Management
Shareholder, there is not any assertion that the use by Seller or Subsidiary of
any Trade Secret violates the rights of any third party.
(g) Seller or Subsidiary have the exclusive right to use, license,
distribute, transfer and bring infringement actions with respect to the
Intellectual Property. Except as set forth on Schedule 2.20, neither Seller nor
Subsidiary (i) have licensed or granted to anyone rights of any nature to use
any of their Intellectual Property and (ii) are not obligated to and do not pay
royalties or other fees to anyone for their ownership, use, license or transfer
of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller or
Subsidiary are granted rights by others in Intellectual Property are listed in
Schedule 2.20. All such licenses or other agreements are in full force and
effect, to the knowledge of Seller and the Management Shareholder there is no
material default by any party thereto, and all of the rights of Seller and
Subsidiary thereunder are freely assignable. True and complete copies of all
such licenses or other agreements, and any amendments thereto, have been
provided to Buyer, and neither Seller nor Subsidiary have reason to believe that
the licensors under the licenses and other agreements under which Seller or
Subsidiary are granted rights and have granted rights to others do not have and
did not have all requisite power and authority to grant the rights purported to
be conferred thereby.
(i) All licenses or other agreements under which Seller or
Subsidiary have granted rights to others in Intellectual Property are listed in
Schedule 2.20. All such licenses or other agreements are in full force and
effect, and to the knowledge of Seller and the Management Shareholder there is
no material default by any party thereto. True and complete copies of all such
licenses or other agreements, and any amendments thereto, have been provided to
Buyer.
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(j) The Products perform in accordance with their published
specifications and documentation and as Seller or Subsidiary have warranted to
their customers. Seller and Subsidiary have reviewed the areas within their
businesses and operations which could be adversely affected by, and have
developed programs to address on a timely basis, the "Year 2000 Problem" (i.e.,
the risk that applications used by Seller, Subsidiary or their suppliers and/or
providers may be unable to recognize and properly perform date-sensitive
functions involving certain dates prior to and any date after December 31,
1999). Seller and the Management Shareholder reasonably believe that the "Year
2000 Problem" will not have any material adverse effect on the business or
operations of Seller or Subsidiary.
2.21 Absence of Restrictions. Neither Seller nor Subsidiary has entered
into any other agreement or arrangement with any other party with respect to the
sale, transfer or any other disposition or encumbrance of the Business or the
Assets, in whole or in part.
2.22 Transactions with Interested Persons. Except as set forth in Schedule
2.22 hereto, neither Seller nor Subsidiary, nor any shareholder, officer,
supervisory employee or director of Seller or Subsidiary or, to the knowledge of
Seller or the Management Shareholder, any of their respective spouses or family
members owns directly or indirectly on an individual or joint basis any material
interest in, or serves as an officer or director or in another similar capacity
of, any competitor or supplier of Seller or Subsidiary, or any organization
which has a material contract or arrangement with Seller or Subsidiary.
2.23 Employee Benefit Programs.
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(a) Schedule 2.23 sets forth a list of every Employee Program that
has been maintained by the Seller, Subsidiary or an Affiliate at any time during
the six-year period ending on the First Closing Date. Each Employee Program
which has ever been maintained by the Seller, the Subsidiary or an Affiliate and
which has been intended to qualify under Section 401(a) or 501(c)(9) of the
Internal Revenue Code of 1986, as amended (the "Code") has received a favorable
determination or approval letter from the Internal Revenue Service ("IRS")
regarding its qualification under such section and has, in fact, been qualified
under the applicable section of the Code from the effective date of such
Employee Program through and including the First Closing Date (or, if earlier,
the date that all of such Employee Program's assets were distributed). No event
or omission has occurred which would cause any such Employee Program to lose its
qualification or otherwise fail to satisfy the relevant requirements to provide
tax-favored benefits under the applicable Code Section (including without
limitation Code Sections 105, 125, 401(a) and 501(c)(9)). With respect to any
Employee Program ever maintained by the Seller, the Subsidiary or any Affiliate,
there has been no (i) "prohibited transaction," as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Code
Section 4975, or (ii) failure to comply with any provision of ERISA, other
applicable law, or any agreement which, in the case of either of (i) or (ii),
could subject the Seller, Subsidiary or any Affiliate to liability either
directly or indirectly (including, without limitation, through any obligation of
indemnification or contribution) for any damages, penalties, or taxes, or any
other loss or expense. All payments and/or contributions required to have been
made (under the provisions of any agreements or other governing documents or
applicable law) with respect to all Employee Programs ever maintained by the
Seller, Subsidiary or any Affiliate, for all periods prior to the First Closing
Date, either have been made or have been accrued (and all such unpaid but
accrued amounts are described on Schedule 2.23). Each Employee Program ever
maintained by the Seller, Subsidiary or an Affiliate has complied with the
applicable notification and other applicable requirements of the Consolidated
Omnibus Budget Reconciliation Act of 1985.
(b) Neither the Seller, Subsidiary nor any Affiliate (A) has ever
maintained any Employee Program which has been subject to title IV of ERISA or
Code Section 412, including, but not limited to, any Multiemployer Plan (as
defined in Section 3(37) of ERISA) or (B) has ever provided health care or any
other non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee
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Program, or has any obligation (by agreement or under applicable law) to
contribute to or provide benefits under or through such Employee Program,
or if such Employee Program provides benefits to or otherwise covers
employees of such entity (or their spouses, dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of the Seller or Subsidiary
if it would have ever been considered a single employer with the Seller or
Subsidiary under ERISA Section 4001(b) or part of the same "controlled
group" as the Seller or Subsidiary for purposes of ERISA Section
302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, to the knowledge of Seller
or the Management Shareholder (i) neither Seller nor Subsidiary has generated,
transported, used, stored, treated, disposed of, or managed any Hazardous Waste
(as defined below) at any time; (ii) no Hazardous Material (as defined below)
has ever been or is threatened to be spilled, released, or disposed of at any
site associated with a structure presently or formerly owned, operated, leased,
or used by Seller or Subsidiary, or has ever been located in the soil or
groundwater at any such site; (iii) no Hazardous Material has ever been
transported from any site associated with a structure presently or formerly
owned, operated, leased, or used by Seller or Subsidiary for treatment, storage,
or disposal at any other place; (iv) neither Seller nor Subsidiary presently
owns, operates, leases, or uses, and has not previously owned, operated, leased,
or used any site associated with a structure on which underground storage tanks
are or were located; and (v) no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used by either Seller or Subsidiary in connection with the presence
of any Hazardous Material.
(b) Except as set forth in Schedule 2.24, to the knowledge of Seller
or the Management Shareholder (i) neither Seller nor Subsidiary has any
liability under, nor has it ever violated, any Environmental Law (as defined
below); (ii) none of Seller, Subsidiary nor any property associated with a
structure owned, operated, leased, or used by Seller or Subsidiary, nor
facilities or operations thereon are presently not in compliance with all
applicable Environmental Laws; (iii) neither Seller nor Subsidiary has entered
into or been subject to any judgment, consent decree, compliance order, or
administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor the Management Stockholder has
any knowledge or reason to know that any of the items enumerated in clause (iii)
of this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the
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environment or to human health or safety, as defined or regulated under any
Environmental Law; (ii) "Hazardous Waste" shall mean and include any hazardous
waste as defined or regulated under any Environmental Law; and (iii)
"Environmental Law" shall mean any environmental or health and safety-related
law, regulation, rule, ordinance, or By-law at the foreign, federal, state, or
local level, whether existing as of the date hereof, previously enforced, or
subsequently enacted.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Management Shareholder to Buyer pursuant to this Agreement do not
contain any untrue statement of a material fact, and, when taken together, do
not omit to state a material fact required to be stated therein or necessary in
order to make such representations, warranties or statements not misleading in
light of the circumstances under which they were made. There are no facts known
to Seller or the Management Shareholder which presently or may in the future
have a material adverse affect on the Business, properties, Assets, prospects,
operations or (financial or other) condition of Seller which has not been
specifically disclosed herein or in a Schedule furnished herewith, other than
general economic conditions affecting the Internet services industry generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action; Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or bylaws of Buyer, as amended to
date, (b) constitute a
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violation of, or conflict with or result in any breach of, acceleration of any
obligation under, right of termination under, or default under, any agreement or
instrument to which Buyer is a party or by which it is bound, (c) violate any
judgment, decree, order, statute, rule or regulation applicable to Buyer, (d)
require Buyer to obtain any approval, consent or waiver of, or to make any
filing with, any person or entity (governmental or otherwise) that has not been
obtained or made. The officers who execute this Agreement and the other Buyer
Documents contemplated hereby on behalf of Buyer have and shall have all
requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Buyer has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the First Closing, Seller shall:
4.1 Confidentiality. Seller agrees that Seller, Subsidiary and their
representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Buyer with respect
to its business or financial condition except for the purpose of evaluating,
negotiating and completing the transactions contemplated hereby. Information
generally known in Buyer's industry or which has been disclosed to Seller or
Subsidiary by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transactions contemplated by this Agreement are not consummated, Seller will
return, and cause its respective officers, directors, agents and representatives
to return, to Buyer (or certify that they have destroyed) all copies of such
data and information made available to Seller (and its officers, directors,
agents and representatives) in connection with the transaction.
4.2 Use of Trade Names. After the Second Closing Date, neither Seller,
Subsidiary nor any person controlling, controlled by or under common control
with Seller or Subsidiary will for any reason, directly or indirectly, for
itself or any other person, (a) use the names "Global Information Exchange,"
"GIEX, " "GIETEL, Inc.," "Coastalnet.com" or any other Internet domain name used
or useful in the business of Seller or Subsidiary, or (b) use or disclose any
trade secrets, confidential information, know-how, proprietary information or
other intellectual property of Seller or Subsidiary transferred pursuant to this
Agreement.
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4.3 Post-Closing Transitional Matters. For a period of ninety (90) days
following the First Closing, and with respect to the Subsidiary for a period of
ninety (90) days following the Second Closing, Seller shall provide, without
additional cost to Buyer, such assistance as is reasonably requested by Buyer in
order to effect an orderly transition in the ownership and operation of the
Assets; provided, however, such post-closing assistance shall not, in any event,
exceed ten (10) hours per week and that Buyer shall pay reasonable out-of-pocket
expenses incurred by the Management Shareholder in connection therewith.
4.4 Collection of Assets. Subsequent to the First Closing and Second
Closing, Buyer shall have the right and authority to collect all receivables and
other items transferred and assigned to Buyer by Seller hereunder as of the
First Closing and Second Closing, respectively, and to endorse with the name of
Seller any checks received on account of such receivables or other items, and
Seller agrees that it will promptly transfer or deliver to Buyer from time to
time, any cash or other property that such Seller may receive with respect to
any claims, contracts, licenses, leases, commitments, sales orders, purchase
orders, receivables of any character or any other items included in the Subject
Assets.
4.5 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.6 Further Assurances. Seller, from time to time after the First Closing
at the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens (as defined in
Section 2.8).
4.7 CLEC License Transfer. Seller hereby covenants and agrees to take all
commercially reasonably steps as may be necessary to effect the CLEC License
Transfer.
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the First Closing, Buyer shall:
5.1 Confidentiality. Buyer agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Seller or Subsidiary with respect to their
business or financial condition except for the purpose of evaluating,
negotiating and completing the transactions contemplated hereby. Information
generally known in Seller's and Subsidiary's industry or which has been
disclosed to Buyer by third parties which have a right to do so shall not be
deemed confidential or proprietary information for purposes of this Agreement.
If the transactions contemplated by this Agreement are not consummated, Buyer
will return, and cause its respective officers, directors, agents and
representatives to return, to Seller or Subsidiary (or certify that they have
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destroyed) all copies of such data and information made available to Buyer (and
its officers, directors, agents and representatives) in connection with the
transaction.
5.2 Foreign Qualification. Prior to the Second Closing, Buyer shall take
such steps as are necessary for Buyer to become qualified to do business as a
foreign corporation in the State of North Carolina.
5.3 CLEC License Transfer. Buyer hereby covenants and agrees to take all
commercially reasonably steps as may be necessary to effect the CLEC License
Transfer. Regardless of whether actual approval to the CLEC License Transfer has
been granted, or actual transfer of the CLEC license ever occurs, Buyer shall
pay to Seller the purchase price identified in Section 1.5A within sixty days of
the First Closing Date.
5.4 Consummation of Agreement. Buyer shall use its reasonable efforts to
perform and fulfill all conditions and obligations on its part to be performed
and fulfilled under this Agreement. Buyer will use reasonable efforts to obtain
all authorizations/covenants and permits required to or permit the consummation
by Buyer of the transactions contemplated by this Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER AT THE
FIRST CLOSING.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the First Closing Date,
of each of the following conditions, unless otherwise waived by Buyer in
writing:
6.1 Performance of Agreements and Deliveries on the First Closing. Seller
shall have performed in all material respects all of its covenants, agreements
and obligations under this Agreement which are to be performed or complied with
by Seller prior to or upon the First Closing Date and shall have delivered all
documents and items required to be delivered at or prior to the First Closing,
including, without limitation:
(a) A certificate, dated the First Closing Date (the "First Closing
Certificate"), from the President of Seller to the effect that the conditions
set forth in Sections 6.1 and 6.2 have been satisfied;
(b) A certificate, dated the First Closing Date, from Seller's
Secretary as to Seller's and Subsidiary's certificates of incorporation and
bylaws, authority and the incumbency of all officers executing the Seller
Documents on behalf of Seller;
(c) A certified copy of Seller's and Subsidiary's certificate of
incorporation from the Secretary of State of the State of North Carolina;
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(d) A certificate of good standing from the Secretary of State of
the State of North Carolina; and
(e) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) An Assignment of Patents and Trademarks in the form attached
hereto as Exhibit D;
(d) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit E; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
except the Excluded Contracts set forth in Schedule 1.2(b) shall have been duly
and validly assigned to Buyer by Seller, and all consents and approvals required
in connection with the consummation of the transactions contemplated hereby
under any Contract or Authorization or otherwise shall have been obtained in
form and substance satisfactory to Buyer and without conditions materially and
adversely affecting Buyer and which do not require Buyer to pay money to any
party to any such Contract or Authorization in excess of amounts required to be
so paid pursuant to the terms and conditions thereof. All such Contracts and
Authorizations shall remain in full force and effect and shall not have been
amended, modified or repudiated in any material respect by either party thereto.
None of Seller, Subsidiary nor, to the knowledge of Seller and the Management
Shareholder, the other party thereto, shall have breached or defaulted under any
Contract or Authorization. Neither Seller nor Subsidiary shall have received
notice of or have knowledge of any fact which could result in the termination,
repudiation or breach of any Contract or Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-competition Agreement. Seller, the Management Shareholder, Richard
Burrows and John Morris shall have executed and delivered to Buyer a
Non-competition Agreement in substantially the form attached hereto as Exhibit
F.
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6.6 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the First Closing instruments (including payoff letters, bills of
sale and UCC-3 termination statements) releasing any and all Liens on the
Assets.
6.7 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Sumrell, Sugg, Carmichael, Hicks & Hart, P.A., counsel for Seller,
dated the First Closing Date, substantially in the form of Exhibit G attached
hereto.
SECTION 6A. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER AT THE
SECOND CLOSING
6A.1 Performance of Agreements and Deliveries on the Second Closing.
Seller shall have performed in all material respects all of its covenants,
agreements and obligations under this Agreement which are to be performed or
complied with by Seller prior to or upon the Second Closing Date and shall have
delivered all documents and items required to be delivered at or prior to the
Second Closing, including, without limitation:
(a) A certificate, dated the Second Closing Date (the "Second
Closing Certificate"), from the President of Seller to the effect that: (i)
Seller and Subsidiary have obtained all necessary regulatory approvals
pertaining to the purchase and sale of Subsidiary's business; (ii) the
representations and warranties made by Seller and the Managing Stockholder in
the Asset Purchase Agreement are true and correct in all material respects on
the Second Closing Date with the same force and effect as if they had been made
on and as of that date; and (iii) there has been no material adverse change in
the financial condition of Subsidiary on or prior to the Second Closing Date;
(b) A certificate of good standing from the Secretary of State of
the State of North Carolina; and
(c) Such other certificates and instruments reasonably requested by
Buyer.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER AT THE
FIRST CLOSING.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the First Closing
Date, of the following conditions, unless waived by Seller in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the First Closing Date and
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shall have delivered all documents and items required to be delivered at or
prior to the First Closing, including, without limitation:
(a) A certificate, dated the Second Closing Date (the "Second
Closing Certificate"), from the President of Buyer to the effect that: (i) the
representations and warranties made by Buyer in the Asset Purchase Agreement are
true and correct in all material respects on the Second Closing Date with the
same force and effect as if they had been made on and as of that date; and (ii)
there has been no material adverse change in the financial condition of Buyer on
or prior to the Second Closing Date;
(b) A certificate, dated the First Closing Date, from Buyer's
Secretary as to the Certificate of Incorporation, bylaws, authority and the
incumbency of all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A certificate of good standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Employment Agreements. Buyer and each of Jacob Roquet, Richard Burrows
and John Morris shall have entered into an Employment Agreement in substantially
the form of Exhibit H attached hereto.
SECTION 7A. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER AT THE
SECOND CLOSING
7A.1 Performance of Agreement and Deliveries on the Second Closing. Buyer
shall have performed in all material respects all of its covenants, agreements
and obligations under this Agreement which are to be performed or complied with
by Buyer prior to or upon the Second Closing Date and shall have delivered all
documents and items required to be delivered at or prior to the Second Closing,
including, without limitation:
(a) A certificate, dated the Second Closing Date, from the President
of Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2
have been satisfied and that the Buyer is licensed and authorized to do business
in the state of North Carolina;
(b) A certificate of good standing from the Secretary of State of
the State of Delaware.
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SECTION 8. SURVIVAL.
8.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closings for a
period of one year regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto; provided, however, that
notwithstanding anything to the contrary in the foregoing clause, the
representations, warranties and/or covenants set forth in Sections 2.1, 2.3,
3.1, 3.3, 4.5 and 5.3 shall survive until expiration of the applicable statute
of limitations.
SECTION 9. INDEMNIFICATION.
9.1 Indemnification by Seller and the Management Shareholder.
(a) Seller and the Management Shareholder hereby agree, jointly and
severally, to indemnify and hold harmless Buyer, its affiliates and its and
their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Management
Shareholder in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller or the Management Shareholder
in this Agreement or in any schedule, exhibit, certificate, financial statement,
agreement or other instrument delivered pursuant to this Agreement; (iii) any
claim made by any person or entity which relates to the operation of the Assets
or the Business which arises in connection with or on the basis of events, acts,
omissions, conditions or any other state of facts occurring on or existing
before the First Closing Date or, with respect to the Subsidiary, the Second
Closing Date; and (iv) any claim which arises in connection with any liability
or obligation of Seller or Subsidiary other than the Assumed Liabilities.
9.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees,
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disbursements and expenses of attorneys and consultants), of any kind or nature
whatsoever, to the extent sustained, suffered or incurred by or made against any
Seller Indemnified Party, to the extent based upon, arising out of or in
connection with: (A) any breach of any representation or warranty made by Buyer
in this Agreement or in any schedule, exhibit, certificate, agreement or other
instrument delivered pursuant to this Agreement; (B) any breach of any covenant
or agreement made by Buyer in this Agreement or in any schedule, exhibit,
certificate, agreement or other instrument delivered pursuant to this Agreement;
(C) any claim made against Seller which relates to, results from or arises out
of Buyer's operation of the Assets or the Business from and after the First
Closing Date; and (D) the Assumed Liabilities.
9.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right, with the
consent of the indemnified party, which consent shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled provided the indemnifying parties'
obligation to indemnify the indemnified party therefor will be fully satisfied.
The indemnifying party shall keep the indemnified party apprised of the status
of the claim, liability or expense and any resulting suit, proceeding or
enforcement action, shall furnish the indemnified party with all documents and
information that the indemnified party shall reasonably request and shall
consult with the indemnified party prior to acting on major matters, including
settlement
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discussions. Notwithstanding anything herein stated, the indemnified party shall
at all times have the right to fully participate in such defense at its own
expense directly or through counsel; provided, however, if the named parties to
the action or proceeding include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate under applicable standards of professional conduct, the expense of
separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by the
indemnified party), and shall have the right to compromise or settle (exercising
reasonable business judgment), such claim, liability or expense. If such claim,
liability or expense is one that by its nature cannot be defended solely by the
indemnifying party, then the indemnified party shall make available all
information and assistance that the indemnifying party may reasonably request
and shall cooperate with the indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 11.10
hereof.
9.4 Claims Against Escrow Deposit. In the event that any Buyer Indemnified
Party sustains or incurs damages, liabilities, losses, taxes, fines, penalties,
costs or expenses, including, without limitation, attorneys fees, for which it
is entitled to indemnification from Seller or the Management Shareholder under
this Agreement, in addition to all other rights or remedies that Buyer may have
(including the right to collect directly from Seller or the Management
Shareholder), such Buyer Indemnified Party shall be entitled to receive in cash
from the Escrow Deposit an amount equal to the damages, liabilities, losses,
taxes, fines, penalties, costs and expenses, including, without limitation,
attorneys fees, sustained or incurred by such Buyer Indemnified Party. In order
to receive payment from the Escrow Deposit such Buyer Indemnified Party shall
first deliver to Seller a written claim for damages arising under or by virtue
of this Agreement specifying the nature of the claim and the type and amount of
damages, liabilities, losses, taxes, fines, penalties, costs and expenses
sustained or incurred by such Buyer Indemnified Party. Within thirty (30)
calendar days of receiving a claim against the Escrow Deposit from or on behalf
of any Buyer Indemnified Party, Seller shall provide a written response to such
Buyer Indemnified Party with a copy to the Escrow Agent, which either accepts or
rejects all or any portion of such Buyer Indemnified Party's claim, the amount
accepted by Seller shall be paid to such Buyer Indemnified Party from the Escrow
Deposit by the Escrow Agent within ten (10) calendar days of the Escrow Agent's
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receipt of Seller's acceptance of such Buyer Indemnified Party's claim. If
Seller rejects any portion of such Buyer Indemnified Party's claim, Seller's
written response shall specify the specific reason(s) for the rejection and the
amount, if any, of such Buyer Indemnified Party's claim which is accepted. The
amount of any claim rejected by Seller shall be retained in escrow and
distributed by the Escrow Agent only as directed by a written settlement
agreement signed by both Seller and such Buyer Indemnified Party or in
accordance with an award rendered by an arbitrator(s) in accordance with Section
11.11 of this Agreement.
9.5 Certain Limitations.
(a) Time. Twelve (12) months after the First Closing Date, or the
expiration of the applicable statute of limitations with respect to Excluded
Liabilities and the representations and warranties in Sections 2.1, 2.3, 3.1 and
3.5, no party shall have any further obligations under this Section 9 or this
Agreement, except for claims with respect to which a Buyer Indemnified Party or
Seller Indemnified Party, as the case may be, has given Seller, the Management
Shareholder or Buyer, as applicable, written notice prior to such date.
(b) Management Shareholder Liability. In no event shall the
Management Shareholder be liable for claims exceeding in the aggregate thirty
percent (30%) of the sum of the First Closing Purchase Price and the Second
Closing Purchase Price.
SECTION 10. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
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If to Seller: Global Information Exchange Corporation
249 Craven Street
New Bern, NC
Attn: Jacob E. Roquet
With a copy to: Sumrell, Sugg, Carmichael, Hicks & Hart,
P.A.
310 Broad Street
P.O. Drawer 889
New Bern, North Carolina 28563
Attn: James Hicks
If to Buyer: DURO Communications, Inc.
100 Fifth Street
Corinth, MS 38834
Attn: John C Stanley IV
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: David F. Dietz, P.C.
SECTION 11. MISCELLANEOUS.
11.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors, and assigns.
11.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
11.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
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11.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
11.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
11.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
11.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of North Carolina, without regard to conflict of laws
principles.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
11.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
11.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
11.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution
shall appoint a neutral advisor from its National
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CPR Panel. The arbitration shall be governed by the United States Arbitration
Act, 9 U.S.C. ss.1-16, and judgment upon the award rendered by the arbitrators
may be entered by any court having jurisdiction thereof. The place of
arbitration shall be Boston, Massachusetts.
Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the Commonwealth of Massachusetts for the purpose of
enforcing the award or decision in any such proceeding and (b) hereby waives,
and agrees not to assert in any civil action to enforce the award, any claim
that it is not subject personally to the jurisdiction of the above-named court,
that its property is exempt or immune from attachment or execution, that the
civil action is brought in an inconvenient forum, that the venue of the civil
action is improper or that this Agreement or the subject matter hereof may not
be enforced in or by such court, and (c) hereby waives and agrees not to seek
any review by any court of any other jurisdiction which may be called upon to
grant an enforcement of the judgment of any such court. Each of the parties
hereto hereby consents to service of process by registered mail at the address
to which notices are to be given. Each of the parties hereto agrees that its
submission to jurisdiction and its consent to service of process by mail is made
for the express benefit of the other parties hereto. Final judgment against any
party hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets, may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 11.10.
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11.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Management Shareholder and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
GLOBAL INFORMATION EXCHANGE
CORPORATION
By: /s/ Jacob E. Roquet
--------------------------------------------
Name: Jacob E. Roquet
Title: President and Chief Executive Officer
MANAGEMENT SHAREHOLDER:
/s/ Jacob E. Roquet
-----------------------------------------------
Jacob E. Roquet
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
--------------------------------------------
Name: Peter B. Hopper
Title: President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Patents and Trademarks
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Form of Non-competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Form of Employment Agreement
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Insurance Exclusions
Schedule 1.2(d) Excluded Tax Items
Schedule 1.3(a)(i) superPOP Liability
Schedule 1.3(a)(ii) Competitive Local Exchange Carrier Liabilities Incurred
Prior to Second Closing
Schedule 1.3(c)(ii) Anticipated Employment Offers
Schedule 1.3(c)(iv) Employee Benefit Plans and Contracts
Schedule 1.5(a) Debt Repayment Amount
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Allocation of Purchase Price
Schedule 1.8 Contracts Requiring Consent
Schedule 2.1(b) Subsidiary
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.22 Affiliated Transactions
Schedule 2.23 Employee Benefits
Schedule 2.24 Environmental Matters
<PAGE>
Exhibit 2.4
ASSET PURCHASE AGREEMENT
Agreement made as of April 20, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), Voyager Online, LLC, a Tennessee limited
liability company ("Seller"), and Jon Logue, Chris Edwards and Jere Edwards, as
principals of the Seller (collectively the "Principals").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with the
Internet service business of Seller (the "Business").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined below)), including, without limitation, original contracts
for the provision of Internet connectivity, dedicated service, web-hosting,
web-domain, dial-up services, web-development and Internet commerce, all leases
with respect to real property and all co-location agreements, a true, correct
and complete list of which contracts is attached hereto as Schedule 1.1(b)
(collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
<PAGE>
(d) Licenses and Authorizations. All rights associated with the
licenses, permits, easements, registrations, domains and authorizations issued
or granted to Seller by any governmental authority with respect to the operation
of the Business, including, without limitation, those licenses and
authorizations listed on Schedule 1.1(d) attached hereto, and all applications
therefor, together with any renewals, extensions, or modifications thereof and
additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller, including cash, and all accounts receivable of Seller incurred in the
ordinary course of business and such accounts receivable as are included on
Seller's balance sheet, as determined in accordance with generally accepted
accounting principles ("GAAP"), consistently applied ("Accounts Receivable"); a
complete list of such accounts receivable is attached hereto as Schedule 1.1(e)
(such current assets, cash and Accounts Receivable collectively referred to as
the "Current Assets");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All contracts of insurance of Seller;
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined below) for periods prior to the
Closing Date; and
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(e) Corporate Records. All of Seller's corporate and other
organizational records.
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date including, without limitation utility charges, rent under assumed leases
and similar obligations to third parties, which shall be prorated between Seller
and Buyer as of the Closing Date; (ii) those current liabilities and accrued
expenses of Seller as of the Closing Date consisting of (A) accounts payable
arising in the ordinary course of business and (B) unearned revenues (the
"Assumed Current Liabilities and Accrued Expenses") and (iii) all obligations
and liabilities of Seller which are to be performed after the Closing Date
arising under the Contracts, including, without limitation, Seller's obligations
to Subscribers (as defined in Section 2.16) under such Contracts for (A)
Subscriber deposits held by Seller as of the Closing Date, (B) Subscriber
advance payments held by Seller as of the Closing Date for services to be
rendered in connection with the Business ((A) and (B) are collectively referred
to as the "Subscriber Obligations"), and (C) the delivery of Internet
connectivity service to Subscribers (whether pursuant to a Contract or
otherwise) after the Closing Date ((i), (ii) and (iii) together, the "Assumed
Liabilities"). The assumption of the Assumed Liabilities by Buyer hereunder
shall not enlarge any rights of third parties under contracts or arrangements
with Buyer or Seller or any of their respective affiliates or subsidiaries. No
parties other than Buyer and Seller shall have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
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(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the Closing Date and Buyer shall not assume or have any obligations or
liabilities with respect to such employees or such terminations except as
provided in Section 7.4 with respect to the Principals, including, without
limitation, any severance obligation. Seller acknowledges and agrees that
Buyer has the right to interview and discuss employment terms and issues
with such employees prior to and after the Closing Date.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the Closing Date. Except as set forth in Section 7.4,
nothing in this Agreement shall be construed as a commitment or obligation
of Buyer to accept for employment, or otherwise continue the employment
of, any of Seller's employees, and no employee shall be a third-party
beneficiary of this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any benefit plans maintained
by, or for the benefit of any employees of Seller prior to the Closing
Date, including, without limitation, obligations for severance or vacation
accrued but not taken as of the Closing Date.
1.4 The Closing Date. The transactions contemplated by this Agreement
shall take place at a closing (the "Closing") to be held at 10:00 a.m., local
time, at the Chattanooga, Tennessee office of Miller & Martin LLP, or by phone
and facsimile, on the date on which all of the conditions to Closing set forth
in Sections 6 and 7 of this Agreement have been satisfied or waived pursuant to
the terms of this Agreement, or at such other time and place as shall be
mutually agreed upon in writing by Buyer and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, Buyer shall pay at the Closing
Date an amount (as adjusted in accordance with Section 1.6 below, the "Purchase
Price") equal to Two Million Eight Hundred Forty Thousand Dollars ($2,840,000)
as follows:
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(a) Buyer shall deliver the sum of Two Million Five Hundred Fifty
Six Thousand Dollars ($2,556,000) minus the Estimated Adjustment (as such term
is hereinafter defined) to Seller by bank cashier's check or bank wire transfer
pursuant to payment instructions delivered by Seller to Buyer at the Closing
Date; and
(b) Buyer shall deposit the sum of Two Hundred Eighty Four Thousand
Dollars ($284,000) (the "Escrow Deposit") with Boston Safe Deposit and Trust
Company as Escrow Agent under the Escrow Agreement in the form attached hereto
as Exhibit A (the "Escrow Agreement"). The Escrow Deposit shall be held,
administered and distributed in accordance with the terms of the Escrow
Agreement, and shall be Buyer's remedy for any indemnification claims made
pursuant to Section 10 hereof.
1.6 Adjustments to Purchase Price.
(a) The Purchase Price shall be reduced dollar for dollar by the
amount of Seller's Net Working Capital (as defined herein) if such amount
is negative, or increased dollar for dollar by the amount of Seller's Net
Working Capital if such amount is positive. "Net Working Capital" means an
amount equal to Current Assets minus the sum of (i) Assumed Current
Liabilities and Accrued Expenses as of the Closing Date and (ii)
Subscriber Obligations as of the Closing Date.
(b) The Purchase Price shall be decreased, on a dollar for dollar
basis, by the Revenues Adjustment Amount in the event Recurring Revenues
for the month ending March 31, 1999 are less than One Hundred Forty Three
Thousand Dollars ($143,000) (the "Target Revenues"). For purposes hereof,
the term "Revenues Adjustment Amount" shall equal the product obtained by
multiplying (i) One Thousand Six Hundred Fifty Five Dollars ($1,655) by
(ii) the quotient obtained by dividing (X) the Annualized Recurring
Revenues Deficiency, by (Y) One Thousand Dollars ($1,000). For purposes
hereof, "Recurring Revenues" shall mean revenues of Seller from recurring
sources, calculated by multiplying the number of Subscribers as of March
31, 1999 by the average monthly rate in effect for such Subscribers, by
type, excluding one-time set-up fees and other ancillary charges. For
purposes hereof, the term "Annualized Recurring Revenues Deficiency" shall
equal the product of (i) the difference between (A) the Target Revenues
and (B) Recurring Revenues, multiplied by (ii) twelve (12).
(c) (i) Buyer and Seller shall prepare a statement to be attached
hereto as Schedule 1.6(c) (the "Estimated Adjustment Statement") which
sets forth (x) the estimated amount of the Net Working Capital as of the
Closing Date (the "Estimated Net Working Capital") and (y) the estimated
Revenues Adjustment Amount (the "Estimated Revenues Adjustment"). The
Purchase Price payable at the Closing Date shall be decreased on a
dollar-for-dollar basis to the extent of the Estimated Revenues
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Adjustment and increased or decreased, as the case may be, on a
dollar-for-dollar basis to the extent Estimated Net Working Capital is
more or less than zero dollars ($0) (the "Estimated Adjustment").
(ii) No later than sixty (60) days following the Closing Date,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital as of
the Closing Date and the actual Revenues Adjustment (the "Actual
Adjustment") which shall be prepared in the same manner as the Estimated
Adjustment Statement. Subject to Section 1.6(b)(iii) below, within twenty
(20) days following the delivery of such Final Adjustment Statement to
Seller, Buyer or Seller, as the case may be, shall pay to the other party,
by wire transfer of immediately available funds, the difference between
the Estimated Adjustment, as shown on the Estimated Adjustment Statement,
and the Actual Adjustment, as shown on the Final Adjustment Statement.
(iii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the twenty (20) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital as of the Closing Date
and the actual Revenues Adjustment. Upon receipt by Buyer of such written
objection, the parties shall attempt to resolve the disagreement
concerning the Final Adjustment Statement through negotiation.
Notwithstanding any other dispute resolution procedure provided for in
this Agreement, if Buyer and Seller cannot resolve such disagreement
concerning the Final Adjustment Statement within thirty (30) days
following the end of the foregoing twenty (20) day period, the parties
shall submit the matter for resolution to a nationally recognized firm of
independent certified public accountants not affiliated with either party,
with the costs thereof to be shared equally by the parties. Such
accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such according firm to the parties.
1.7 Purchase Price Allocation. At the Closing Date, Buyer and Seller shall
agree on the allocation of the Purchase Price as set forth on Schedule 1.7
attached hereto. Such allocation shall be binding upon Buyer and Seller for all
purposes (including financial accounting purposes, financial and regulatory
reporting purposes and tax purposes). Buyer and Seller each further agrees to
file its Federal income tax returns and its other tax returns reflecting such
allocation, Form 8594 and any other reports required by Section 1060 of the
Code.
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1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing Date, Seller shall deliver to Buyer all of the Contracts, with
such assignments thereof and consents to assignments as are necessary to assure
Buyer the full benefit of the same. Seller shall also deliver to Buyer at the
Closing Date all of Seller's files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes, fees and duties
(including any real estate transfer taxes) under applicable law incurred in
connection with this Agreement or the transactions contemplated thereby will be
borne and paid by Seller, and Seller shall promptly reimburse Buyer for the
payment of any such tax, fee or duty which Buyer is required to make under
applicable law.
1.10 Transfer of Subject Assets. At the Closing Date, Seller shall deliver
or cause to be delivered to Buyer good and sufficient instruments of transfer
transferring to Buyer title to all of the Assets, together with all required
consents. Such instruments of transfer (a) shall contain appropriate warranties
and covenants which are usual and customary for transferring the type of
property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance reasonably satisfactory to Buyer
and its counsel, (c) shall effectively vest in Buyer good and marketable title
to all of the Assets free and clear of all Liens (as defined in Section 2.8),
and (d) where applicable, shall be accompanied by evidence of the discharge of
all Liens against the Assets.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPALS.
In order to induce Buyer to enter into this Agreement, Seller and each of
the Principals, jointly and severally, hereby represent and warrant to Buyer as
follows:
2.1 Organization; Subsidiaries.
(a) Seller is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Tennessee. Seller
has all requisite power and authority to conduct its business as it is now
conducted or proposed to be conducted and to own, lease and operate its
properties and assets. The copies of Seller's certificate of organization and
limited liability company operating agreement, each as amended to date,
heretofore delivered to Buyer's counsel are complete and correct. Seller is not
in violation of any term of the certificate of organization and limited
liability company operating agreement. Seller is duly qualified to do business
in the state of its organization, and is not required to be licensed or
qualified to conduct its business or own its property in any other jurisdiction.
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(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority, except U.S.
Government securities, bank certificates of deposit and money market accounts
acquired as short-term investments in the ordinary course of its business.
Seller does not own or have any direct or indirect interest in or control over
any corporation, partnership, joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken, and this Agreement and each
other agreement, document and instrument to be executed and delivered by or on
behalf of Seller pursuant to, or as contemplated by, this Agreement
(collectively, the "Seller Documents") has been duly and validly authorized,
executed and delivered by Seller and no other action on the part of Seller or
its officers or members is required in connection therewith. Each of Seller and
the Principals have full right, authority, power and capacity to execute and
deliver this Agreement and each other Seller Document and to carry out the
transactions contemplated hereby and thereby. This Agreement and each other
Seller Document constitutes, or when executed and delivered will constitute, the
legal, valid and binding obligation of each of Seller and the Principals
enforceable in accordance with its respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the certificate of organization and limited liability company
operating agreement of Seller, in each case as amended to date, (ii) constitute
a violation of, or conflict with or result in any breach of, acceleration of any
obligation under, right of termination under, or default under, any agreement or
instrument to which Seller is a party or by which Seller or the Assets is bound,
(iii) violate any judgment, decree, order, statute, rule or regulation
applicable to Seller or the Assets, (iv) except for the consents and approvals
set forth on Schedule 2.14, require Seller to obtain any approval, consent or
waiver of, or to make any filing with, any person or entity (governmental or
otherwise) that has not been obtained or made or (v) result in the creation or
imposition of any Lien on any of the Assets.
(b) The execution, delivery and performance by each of the
Principals of this Agreement and each other Seller Document does not and will
not (i) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which any or all of the Principals are a
party or by which any or all of the Principals are bound, (ii) violate any
judgment, decree, order, statute, rule or regulation applicable to the
Principals, (iii) require the Principals to obtain any approval, consent or
waiver of, or to make any filing with, any person or entity (governmental or
otherwise) that has not been obtained or made, or (iv) result in the creation or
imposition of any Lien on any of the Assets.
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2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal, state, local
and foreign income tax returns filed with respect to Seller for taxable periods
ended on or after December 31, 1993, is set forth in Schedule 2.4 attached
hereto. Seller has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by Seller with respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Principals,
threatening to assert against Seller any deficiency or claim for additional
Taxes. To the knowledge of Seller and the Principals, no claim has ever been
made by an authority in a jurisdiction where Seller does not file reports and
returns that Seller is or may be subject to taxation by that jurisdiction. There
are no security interests on any of the Assets of Seller that arose in
connection with any failure (or alleged failure) to pay any Taxes. Seller has
never entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code of 1986, as amended (the "Code")
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
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(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state,
municipal or other governmental authority (including the Federal Communications
Commission), and Seller has not received notice of a violation or alleged
violation of any such statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets are insured to
the extent disclosed in Schedule 2.6 attached hereto, and all insurance policies
and arrangements of Seller in effect as of the date hereof are disclosed in said
Schedule. Said insurance policies and arrangements are in full force and effect,
all premiums with respect thereto are currently paid, and Seller is in
compliance in all material respects with the terms thereof. Said insurance is
adequate and customary for the business engaged in by Seller and is sufficient
for compliance by Seller with all requirements of law and all agreements and
leases to which Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate to the Business or Assets. Schedule 1.1(b)
attached hereto contains a true, correct and complete list of all Contracts.
With respect to each oral agreement or understanding involving the Business,
Seller has provided a written summary of the material terms of each such
agreement or understanding on Schedule 1.1(b). Each Contract is valid, in full
force and effect and binding upon Seller and the other parties thereto in
accordance with its terms. Neither Seller nor, to the knowledge of Seller and
the Principals, any other party is in default under or in arrears in the
performance, payment or satisfaction of any agreement or condition on its part
to be performed or satisfied under any Contract, nor does any condition exist
that with notice or lapse of time or both would constitute such a default, and
no waiver or indulgence has been granted by any party under any Contract. Seller
has not received notice of, and each of Seller and the Principals have no
knowledge of, any fact which would result in a termination, repudiation or
breach of any Contract. Seller has provided Buyer with true and complete copies
of all of such Contracts, other than with respect to the oral agreements or
understandings described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens") whatsoever.
Upon the sale, assignment, transfer and delivery of the Assets to Buyer
hereunder and under the Seller Documents, there will be vested in Buyer
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good, marketable and indefeasible title to the Assets, free and clear of all
Liens. The Assets include all of the assets and properties (i) held for use by
Seller to conduct the Business as presently conducted and (ii) necessary or
useful for Buyer to operate the Business in the same manner as such business is
currently operated by Seller. All of the tangible Assets are in good repair,
have been well maintained and are in good operating condition, do not require
any material modifications or repairs, and comply in all material respects with
applicable laws, ordinances and regulations, ordinary wear and tear excepted.
Seller has delivered complete and true copies of all real property leases (the
"Leases") set forth on Schedule 1.1(b). Seller holds good, clear, marketable,
valid and enforceable leasehold interest in the real property subject to the
Leases (the "Leased Real Property"), subject only to the right of reversion of
the landlord or lessor under the Leases, free and clear, to the knowledge of
Seller and the Principals, of all other prior or subordinate interests,
including, without limitation, mortgages, deeds of trust, ground leases, leases,
subleases, assessments, tenancies, claims, covenants, conditions, restrictions,
easements, judgments or other encumbrances or matters affecting title, and free
of encroachments onto or off of the leased real property. To the knowledge of
the Seller and the Principals, there are no material defects in the physical
condition of any improvements constituting a part of the Leased Real Property,
including, without limitation, structural elements, mechanical systems, roofs or
parking and loading areas, and all of such improvements are in good operating
condition and repair, have been well maintained. All water, sewer, gas,
electric, telephone, drainage and other utilities required by law or necessary
for the current or planned operation of the Leased Real Property have been
installed and connected pursuant to valid permits, and are sufficient to service
the Leased Real Property. Seller does not hold or own a fee interest in any real
property.
2.9 No Litigation. Seller is not now involved in nor, to the knowledge of
Seller and the Principals, is Seller threatened to be involved in any litigation
or legal or other proceedings related to or affecting the Business or any Asset
(including any Intellectual Property) or which would prevent or hinder the
consummation of the transactions contemplated by this Agreement. Seller has not
been operating the Business under, and the Business is not subject to, any
order, injunction or decree of any court of federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately fifteen (15)
full-time employees and five (5) part-time employees and there are no existing
disputes with such employees. Seller shall provide to Buyer a list of the
employees of Seller in connection with the Business at the Closing Date,
including the name, date of hire and wages of such employees. Seller is not
delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it to the date hereof or amounts required to be reimbursed to such employees.
Upon termination of the employment of any of said employees, neither Seller nor
Buyer will by reason of the transactions contemplated hereby or anything done
prior to the Closing Date be liable to any of said employees for so-called
"severance pay" or any other payments, except as set forth in
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Schedule 2.10 attached hereto. Seller does not have any policy, practice, plan
or program of paying severance pay or any form of severance compensation in
connection with the termination of employment, except as set forth in said
Schedule. Seller is in compliance in all material respects with all applicable
laws and regulations respecting labor, employment, fair employment practices,
work place safety and health, terms and conditions of employment, and wages and
hours. There are no charges of employment discrimination or unfair labor
practices, nor are there any strikes, slowdowns, stoppages of work, or any other
concerted interference with normal operations existing, pending or, to the
knowledge of Seller and the Principals, threatened against or involving Seller.
No question concerning representation exists respecting any group of employees
of Seller. No collective bargaining agreement is in effect or is currently being
or is about to be negotiated by Seller. Seller has received no information to
indicate that any of its employment policies or practices is currently being
audited or investigated by any federal, state or local government agency. Seller
is, and at all times since November 6, 1986 has been, in compliance with the
requirements of the Immigration Reform Control Act of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at January 31, 1999 (the "Base Balance Sheet")
and the statements of income and expense of Seller for January 31, 1999
(collectively the "Financial Statements"). The Financial Statements have been
prepared in accordance with generally accepted accounting principles applied
consistently ("GAAP") during the periods covered thereby (except for the absence
of footnotes and normal year-end adjustments which will not be material
individually or in the aggregate) and present fairly and accurately the
financial condition of the Business at the dates of said statements and the
results of operations of the Business for the periods covered thereby. As of the
date of the Base Balance Sheet (the "Base Balance Sheet Date"), Seller had no
liabilities or obligations of any kind with respect to the Business which are
required to be disclosed in accordance with GAAP, whether accrued, contingent or
otherwise, that are not disclosed and adequately reserved against on the Base
Balance Sheet. As of the date hereof and at the Closing Date, Seller had and
will have no liabilities or obligations of any kind with respect to the Business
which are required to be disclosed in accordance with GAAP, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
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(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated. All
of the Authorizations are in full force and effect and no licenses, permits or
authorizations of any governmental department or agency are required for the
operation of the Business which have not been duly obtained. As of the date
hereof, there is not pending or, to the knowledge of Seller and the Principals,
threatened any action by or before any governmental agency to revoke, cancel,
rescind or modify any of the Authorizations, and there is not now issued or
outstanding or, to the knowledge of Seller and the Principals, pending or
threatened any order to show cause, notice of violation, notice of apparent
liability, or notice of forfeiture or complaint against Seller with respect to
the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller in connection with the execution and delivery of this Agreement
and the Seller Documents and the consummation of the transactions contemplated
hereby and thereby.
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2.15 Customers and Suppliers. There are not pending or, to Seller's
knowledge, threatened claims or controversies with any customer or suppliers,
including its Subscribers (as defined in Section 2.16 below) that are material
to the Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the subscribers of the Business as listed by class, type and
billing plan. For purposes of this Agreement, the terms "Subscriber" shall mean
any active subscriber to Internet services offered by Seller in the Business who
has subscribed to a service for at least two months and has paid at least two
bills, including, without limitation, any person who receives dial-up Internet
access through the Business (a "Dial-up Subscriber"), any person who receives
dedicated Internet access from Seller offering higher data transmission rates
than available from dial-up access (a "Dedicated Subscriber"), any person with a
web page or domain name on Seller's server and to whom Seller provides Internet
access (a "Web-hosting/Domain-hosting Subscriber"), and any person who receives
on a recurring basis other Internet services from the Seller; provided, however,
that "Subscriber" shall not include any person who is (i) more than thirty (30)
days, or sixty (60) days for customers who are businesses, delinquent in payment
of such person's bill for such services provided by the Business and (ii) any
person receiving complimentary Internet services or Internet services at a
promotional discounted rate. Set forth on Schedule 2.16(b) attached hereto is a
listing of all such accounts which receive complimentary Internet services or
Internet services at a promotional discounted rate. Set forth on Schedule
2.16(c) attached hereto is Seller's policy and practice with respect to the
disconnection of Subscribers, with which Seller has, except as set forth on
Schedule on Schedule 2.16(c), at all times since its inception, complied in all
material respects.
2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller are or will be as of the Closing Date bona fide, valid and enforceable
claims, subject to no setoff or counterclaim and to Seller's knowledge are
collectible in accordance with their terms. Seller has no accounts or loans
receivable from any person, firm or corporation which is affiliated with Seller
or from any director, officer or employee of Seller, or from any of their
respective spouses or family members.
2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are completely and accurately described in Schedule 2.19
attached hereto, indicating with respect to each of such arrangements the type
of arrangement maintained (such as checking account, borrowing arrangements,
safe deposit box, etc.) and the person or persons authorized in respect thereof.
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2.20 Intellectual Property.
(a) Seller does not market, license or distribute computer programs
or related documentation. All of the Intellectual Property of Seller is set
forth on Schedule 1.1(c) attached hereto. For purposes hereof, the term
"Intellectual Property" includes: (i) all patents, patent applications, patent
rights, and inventions and discoveries and invention disclosures (whether or not
patented) (collectively, "Patents"); (ii) Seller's rights to the name Voyager
Online, all trade names, trade dress, logos, packaging design, slogans, any and
all Internet domain names used or useful in the business of Seller, registered
and unregistered trademarks and service marks and applications (collectively,
"Marks"); (iii) all copyrights in both published and unpublished works,
including, without limitation, all compilations, databases and computer
programs, and all copyright registrations and applications, and all derivatives,
translations, adaptations and combinations of the above (collectively,
"Copyrights"), (iv) all know-how, trade secrets, confidential or proprietary
information, customer lists, IP addresses, research in progress, algorithms,
data, designs, processes, formulae, drawings, schematics, blueprints, flow
charts, models, prototypes, techniques, Beta testing procedures and Beta testing
results (collectively, "Trade Secrets"); (v) Seller's web-sites (including the
domain names "www.vol.com," "www.voyageronline.com," "www.voyageronline.net" and
"voy.net" and any other similar domain name); (vi) all goodwill, franchises,
licenses, permits, consents, approvals, technical information, telephone
numbers, and claims of infringement against third parties (the "Rights"); and
(vii) all contracts relating to the Intellectual Property to which Seller is a
party or is bound, including, without limitation, all nondisclosure and/or
confidentiality agreements entered into by persons in connection with
disclosures by Seller (collectively,"Assigned Contracts").
(b) Except as described in Schedule 1.1(c), Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller and the Principals,
threatened of any other person pertaining to any of such Intellectual Property
and no proceedings have been instituted, or are pending or, to the knowledge of
Seller and the Principals, threatened against Seller and/or its officers,
employees and consultants which challenge the validity and enforceability of
Seller's rights in respect of the Intellectual Property. The Intellectual
Property constitutes all of the Intellectual Property necessary for the
operation of Seller's Business as currently conducted.
All former and current employees, consultants and contractors of Seller
have executed written instruments with Seller that assign to Seller all rights
to any inventions, improvements, discoveries, or information relating to the
business of Seller. No employee, consultant or contractor of Seller has entered
into any agreement that restricts or limits in any way the scope or type of work
in which the employee, consultant or contractor may be engaged or requires
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the employee, consultant or contractor to transfer, assign, or disclose
information concerning his work to anyone other than Seller.
(c) Seller owns no Patents.
(d) Schedule 1.1(c) sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the United States Patent and Trademark Office and/or any other
jurisdiction are currently in compliance with formal legal requirements
(including, without limitation, the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety (90) days after the Closing Date. In each case where a
Trademark or Service Mark is held by Seller by assignment, the assignment has
been duly recorded with the U.S. Patent and Trademark Office and all other
jurisdictions of registration. No Mark has been or is now involved in any
opposition, invalidation or cancellation proceeding and, to the knowledge of
Seller and the Principals, no such action is threatened with respect to any of
the Marks. All products and materials containing a Mark bear the proper notice
where permitted by law.
(e) Seller owns no Copyrights.
(f) Seller has taken all reasonable security measures (including,
without limitation, entering into appropriate confidentiality and non-disclosure
agreements with all officers, directors, employees, consultants and contractors
of Seller and any other persons with access to the Trade Secrets) to protect the
secrecy, confidentiality and value of all Trade Secrets. To the knowledge of
Seller and the Principals, there has not been any breach by any party to any
such confidentiality or non-disclosure agreement. The Trade Secrets have not
been disclosed by Seller to any person or entity other than employees or
contractors of Seller who had a need to know and use the Trade Secrets in the
course of their employment or contract performance. Seller has the right to use,
free and clear of claims of third parties, all Trade Secrets. To the knowledge
of Seller and the Principals, there is not any assertion that the use by Seller
of any Trade Secret violates the rights of any third party.
(g) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Except as set forth on Schedule 1.1(c), Seller (i) has not licensed or
granted to anyone rights of any nature to use any of its Intellectual Property
and (ii) is not obligated to and does not pay royalties or other fees to anyone
for its ownership, use, license or transfer of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed in Schedule 1.1(c). All
such licenses or other agreements are in full force and effect, to the knowledge
of Seller and the Principals there is no material default by any party thereto,
and all of the rights of Seller thereunder are freely
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assignable. True and complete copies of all such licenses or other agreements,
and any amendments thereto, have been provided to Buyer, and Seller has no
reason to believe that the licensors under the licenses and other agreements
under which Seller is granted rights and has granted rights to others do not
have and did not have all requisite power and authority to grant the rights
purported to be conferred thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed in Schedule 1.1(c). All
such licenses or other agreements are in full force and effect, and to the
knowledge of Seller and the Principals there is no material default by any party
thereto. True and complete copies of all such licenses or other agreements, and
any amendments thereto, have been provided to Buyer.
(j) Seller has reviewed the areas within its businesses and
operations which could be adversely affected by the "Year 2000 Problem" (i.e.,
the risk that applications used by Seller or its suppliers and/or providers may
be unable to recognize and properly perform date-sensitive functions involving
certain dates prior to and any date after December 31, 1999). Seller and the
Principals reasonably believe that the "Year 2000 Problem" will not have any
material adverse effect on the business or operations of Seller.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth in Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of Seller or, to the knowledge of Seller or the Principals, any of
their respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director or in another similar capacity of, any competitor or supplier of
Seller, or any organization which has a material contract or arrangement with
Seller.
2.23 Employee Benefit Programs.
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(a) Schedule 2.23 sets forth a list of every Employee Program that
has been maintained by the Seller or an Affiliate at any time during the
six-year period ending on the Closing Date. Each Employee Program which has ever
been maintained by the Seller or an Affiliate and which has been intended to
qualify under Section 401(a) or 501(c)(9) of the Internal Revenue Code of 1986,
as amended (the "Code") has received a favorable determination or approval
letter from the Internal Revenue Service ("IRS") regarding its qualification
under such section and has, in fact, been qualified under the applicable section
of the Code from the effective date of such Employee Program through and
including the Closing Date (or, if earlier, the date that all of such Employee
Program's assets were distributed). No event or omission has occurred which
would cause any such Employee Program to lose its qualification or otherwise
fail to satisfy the relevant requirements to provide tax-favored benefits under
the applicable Code Section (including without limitation Code Sections 105,
125, 401(a) and 501(c)(9)). With respect to any Employee Program ever maintained
by the Seller or any Affiliate, there has been no (i) "prohibited transaction,"
as defined in Section 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Code Section 4975, or (ii) failure to comply with
any provision of ERISA, other applicable law, or any agreement which, in the
case of either of (i) or (ii), could subject the Seller or any Affiliate to
liability either directly or indirectly (including, without limitation, through
any obligation of indemnification or contribution) for any damages, penalties,
or taxes, or any other loss or expense. All payments and/or contributions
required to have been made (under the provisions of any agreements or other
governing documents or applicable law) with respect to all Employee Programs
ever maintained by the Seller or any Affiliate, for all periods prior to the
Closing Date, either have been made or have been accrued (and all such unpaid
but accrued amounts are described on Schedule 2.23). Each Employee Program ever
maintained by the Seller or an Affiliate has complied with the applicable
notification and other applicable requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985.
(b) Neither the Seller nor any Affiliate (A) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multiemployer Plan (as defined in
Section 3(37) of ERISA) or (B) has ever provided health care or any other
non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee
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Program, or has any obligation (by agreement or under applicable law) to
contribute to or provide benefits under or through such Employee Program,
or if such Employee Program provides benefits to or otherwise covers
employees of such entity (or their spouses, dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) Seller has not
generated, transported, used, stored, treated, disposed of, or managed any
Hazardous Waste (as defined below) at any time; (ii) to the knowledge of Seller
and the Principals, no Hazardous Material (as defined below) has ever been or is
threatened to be spilled, released, or disposed of at any site associated with a
structure presently or formerly owned, operated, leased, or used by Seller, or
has ever been located in the soil or groundwater at any such site; (iii) to the
knowledge of Seller and the Principals, no Hazardous Material has ever been
transported from any site associated with a structure presently or formerly
owned, operated, leased, or used by Seller for treatment, storage, or disposal
at any other place; (iv) to the knowledge of Seller and the Principals, Seller
does not presently own, operate, lease, or use, and has not previously owned,
operated, leased, or used any site associated with a structure on which
underground storage tanks are or were located; and (v) to the knowledge of
Seller and the Principals, no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used by Seller in connection with the presence of any Hazardous
Material.
(b) Except as set forth in Schedule 2.24, (i) Seller does not have
any liability under, nor has it ever violated, any Environmental Law (as defined
below); (ii) neither Seller, nor to the knowledge of Seller and the Principals,
any property associated with a structure owned, operated, leased, or used by
Seller, nor facilities or operations thereon are presently not in compliance
with all applicable Environmental Laws; (iii) Seller has not entered into or
been subject to any judgment, consent decree, compliance order, or
administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor Principal has any knowledge or
reason to know that any of the items enumerated in clause (iii) of this
subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product,
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oil, toxic substance, pollutant, contaminant, or other substance which may pose
a threat to the environment or to human health or safety, as defined or
regulated under any Environmental Law; (ii) "Hazardous Waste" shall mean and
include any hazardous waste as defined or regulated under any Environmental Law;
and (iii) "Environmental Law" shall mean any environmental or health and
safety-related law, regulation, rule, ordinance, or By-law at the foreign,
federal, state, or local level, whether existing as of the date hereof or
previously enforced.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Principals to Buyer pursuant to this Agreement do not contain any
untrue statement of a material fact, and, when taken together, do not omit to
state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances under which they were made. There are no facts known to Seller
or the Principals which presently or are reasonably likely to have a material
adverse affect on the Business, properties, Assets, prospects, operations or
(financial or other) condition of Seller which has not been specifically
disclosed herein or in a Schedule furnished herewith, other than general
economic conditions affecting the Internet services industry generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action; Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
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3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or bylaws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a party or by which it is
bound, (c) violate any judgment, decree, order, statute, rule or regulation
applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver
of, or to make any filing with, any person or entity (governmental or otherwise)
that has not been obtained or made. The officers who execute this Agreement and
the other Buyer Documents contemplated hereby on behalf of Buyer have and shall
have all requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Except for Rampart Associates, LLC, whose fees will be paid
by Buyer at or prior to the Closing Date, Buyer has not retained any broker or
finder or other person who would have any valid claim against any of the parties
to this Agreement for a commission or brokerage fee in connection with this
Agreement or the transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the Closing Date, Seller shall:
4.1 Access to Premises and Records. Seller shall give Buyer and its
representatives, at reasonable times and with reasonable prior notice, free
access to the properties, books and records of the Business and to the Assets
and will furnish to Buyer and its representatives such information regarding the
Business and the Assets as Buyer or its representatives may from time to time
reasonably request in order that Buyer may have full opportunity to make a
diligent investigation consistent with this Agreement. In addition to, and not
in limitation of the foregoing, Seller shall provide Buyer with access to and
copies of the records of all: (a) Accounts Receivable, (b) Subscriber billings,
(c) pre-paid accounts, (d) accounts for which no remuneration is received by
Seller and (e) general reports with respect to each category of service provided
by the Business.
4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions which Buyer has been advised and to which Buyer has consented to in
writing, and except as specifically permitted or required by this Agreement,
Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable efforts to preserve any beneficial business
relationships with Subscribers, customers, suppliers and others having business
dealings with Seller relating to the Business;
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(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain adequate inventories of spare Equipment consistent with
past practices;
(d) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
(e) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(f) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those in effect on the date of this Agreement;
(g) Perform and comply in all material respects with the terms of
the Contracts and use its commercially reasonable efforts to keep such Contracts
in full force and effect; and
(h) Use its reasonable best efforts to preserve the goodwill of the
Business.
4.3 Negative Covenants. Seller shall not, without the prior written
consent of Buyer:
(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business (other than in the ordinary course of
business) or which otherwise obligates Seller to perform in full or in part
beyond the Closing Date;
(c) Hire any new employees or enter into any employment arrangements
or otherwise increase the salary or compensation of any existing employees;
(d) Renegotiate, modify, amend or terminate any Contract;
(e) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
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(f) Make any modifications or changes to the existing rate schedules
or product offerings in effect with respect to the Business;
(g) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions outside the
ordinary course of business and not consistent with Seller's past practices;
(h) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement; and
(i) Cause or permit the provision for any new and material pension,
retirement or other employment benefits for employees who perform services in
connection with the conduct of the Business or any material increase in any
existing benefits (other than as required by law).
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract, in the forms attached hereto as Exhibit
B; provided, however, that "reasonable best efforts" for this purpose shall not
require Seller to undertake extraordinary or unreasonable measures to obtain
such approvals and consents, including, without limitation, the initiation or
prosecution of legal proceedings or the payment of fees in excess of customary
filing and processing fees.
4.5 Notification of Certain Matters. Seller shall promptly notify Buyer of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Seller's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Seller shall promptly
notify Buyer in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any
materially adverse developments affecting the Assets or the Business which
become known to Seller, including, without limitation, (i) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii) any material notice
of violation, forfeiture or complaint under any material Contract, or (iii)
anything which, if not corrected prior to the Closing Date, would prevent Seller
from fulfilling any condition to Closing described in Section 6 hereof.
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4.7 No Solicitation. Seller shall not, and Seller shall cause its
officers, employees, stockholders, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by
Seller) and all other employees who perform services with respect to the
operation of the Business not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal with respect to the
Assets or the Business, or engage in any negotiations concerning, or provide to
any other person any information or data relating to, the Business, the Assets
or Seller for the purpose of, or have any discussions with, any person relating
to, or otherwise cooperate in any way with or assist or participate in,
facilitate or encourage, any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any effort or attempt by
any other person to seek or effect a transaction, or enter into a transaction
with any person or persons, other than Buyer, concerning the possible sale of
the Assets or Business, or the capital stock of Seller. Seller shall promptly
inform Buyer of any such inquiries or proposals and provide all pertinent
documentation related thereto.
4.8 Cooperation. Seller shall use its best efforts to take all steps
within its power and will cooperate with Buyer to cause to be fulfilled those of
the conditions to Buyer's obligations to consummate the transactions
contemplated by this Agreement that are dependent upon its actions, and to
execute and deliver such instruments and take such other reasonable actions as
may be necessary or appropriate in order to carry out the intent of this
Agreement and consummate the transactions contemplated hereby. Without limiting
the foregoing, Seller shall cooperate with all reasonable requests of Buyer and
its counsel in connection with Buyer's due diligence investigation of the
Business and Assets.
4.9 Expenses. Seller shall bear its own expenses incurred in connection
with the negotiation and preparation of this Agreement and in connection with
all obligations required to be performed by it under this Agreement.
4.10 Financial Information. Seller shall, as promptly as practical after
such information become available, deliver to Buyer copies of Seller's monthly
unaudited financial statements, prepared in accordance with GAAP, consistently
applied, and in form and presentation as is reasonably acceptable to Buyer.
4.11 Consummation of Agreement. Subject to the provisions of Section 8 of
this Agreement: (a) Seller shall use its best efforts to fulfill and perform all
conditions and obligations on its part to be fulfilled and performed under this
Agreement, and to cause the transactions contemplated by this Agreement to be
fully carried out on or before April 15, 1999; and (b) Seller shall not take any
action or omit to take any action that would or could reasonably be expected to
(i) result in any of the representations and warranties of Seller being or
becoming untrue in any respect that would cause Section 6.1 of this Agreement
not to be satisfied, (ii) result in any conditions to Closing set forth in
Section 6 of this Agreement not to be satisfied including, without limitation,
the release of any and all Liens on the Assets
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pursuant to Section 6.8 of the Agreement, or (iii) result in a material
violation of any provision of this Agreement.
4.12 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction.
4.13 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
name Voyager Online or the domain names "www.vol.com," "www.voyageronline.com,"
"www.voyageronline.net" or "voy.net" or any other Internet domain name used or
useful in the business of Seller, or any other or (b) use or disclose any trade
secrets, confidential information, know-how, proprietary information or other
intellectual property of Seller transferred pursuant to this Agreement.
4.14 Collection of Assets. Subsequent to the Closing Date, Buyer shall
have the right and authority to collect all receivables and other items
transferred and assigned to Buyer by Seller hereunder and to endorse with the
name of Seller any checks received on account of such receivables or other
items, and Seller agrees that it will promptly transfer or deliver to Buyer from
time to time, any cash or other property that such Seller may receive with
respect to any claims, contracts, licenses, leases, commitments, sales orders,
purchase orders, receivables of any character or any other items included in the
Assets.
4.15 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.16 Further Assurances. Seller, from time to time after the Closing Date
at the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens (as defined in
Section 2.8).
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SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that, from the date hereof until consummation
of the transactions contemplated hereby at the Closing Date, Buyer shall:
5.1 Consummation of Agreement. Subject to the provisions of Section 8 of
this Agreement:
(a) Buyer shall use its best efforts to fulfill and perform all
conditions and obligations on its part to be fulfilled and performed under this
Agreement; and to cause the transactions contemplated by this Agreement to be
fully carried out on or before April 15, 1999; and (b) Buyer shall not take any
action or omit to take any action that would or could reasonably be expected to
(i) result in any representations and warranties of Buyer being or becoming
untrue in any respect that would cause Section 7.1 of this Agreement not to be
satisfied; (ii) result in any conditions to Closing set forth in Section 7 of
this Agreement not to be satisfied; or (iii) result in a material violation of
any provision of this Agreement.
5.2 Confidentiality. Buyer agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Seller with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Seller's industry or which has been disclosed to Buyer by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Buyer will return, and cause its respective
officers, directors, agents and representatives to return, to Seller (or certify
that they have destroyed) all copies of such data and information made available
to Buyer (and its officers, directors, agents and representatives) in connection
with the transaction.
5.2 Expenses. Buyer shall bear its own expenses incurred in connection
with the negotiation and preparation of this Agreement and in connection with
all obligations required to be performed by it under this Agreement.
5.3 Payment of Obligations. From and after the Closing Date, Buyer shall
pay all of the Assumed Liabilities in the ordinary course of business as they
become due.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
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6.1 Accuracy of Representations and Warranties. The representations and
warranties of Seller contained in this Agreement shall be true and correct in
all material respects at the Closing Date with the same effect as though made at
such time and the representations and warranties of Seller contained in this
Agreement which are qualified by materiality shall be true and correct in all
respects as of the Closing Date with the same effect as though made at such
time.
6.2 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing Date, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 6.1, 6.2, 6.8,
6.9 and 6.12 have been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the certificate of organization, limited liability company operating
agreement, authority and the incumbency of all officers executing the Seller
Documents on behalf of Seller;
(c) A certified copy of Seller's certificate of organization from
the Secretary of State of the State of Tennessee;
(d) An Amendment to the certificate of organization and any other
required documentation, which effect a change of Seller's name;
(e) A certificate of good standing from the Secretary of State of
the State of Tennessee; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
6.3 No Material Adverse Effect. None of the schedules, documents or other
information to be furnished by Seller to Buyer pursuant to this Agreement, shall
disclose any fact, circumstance or matter, or any change in or development in
connection with any matter disclosed in the original schedules or documents
previously delivered by Seller to Buyer, which has, or could reasonably be
expected to have, a material adverse effect on the Assets or on the Business;
and there shall have been no other changes or developments affecting either the
Assets or the Business since the Base Balance Sheet Date which have, or could
reasonably be expected to have, a material adverse effect on the Assets or
Business.
6.4 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
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(a) A Bill of Sale in the form attached hereto as Exhibit C;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit D;
(c) An Assignment of Patents and Trademarks in the form attached
hereto as Exhibit E;
(d) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit F; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
6.5 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
and approvals required in connection with the consummation of the transactions
contemplated hereby under any Contract or Authorization or otherwise shall have
been obtained in form and substance satisfactory to Buyer and without conditions
materially and adversely affecting Buyer and which do not require Buyer to pay
money to any party to any such Contract or Authorization in excess of amounts
required to be so paid pursuant to the terms and conditions thereof. All such
Contracts and Authorizations shall remain in full force and effect and shall not
have been amended, modified or repudiated in any material respect by either
party thereto. Neither Seller nor, to the knowledge of Seller and the
Principals, the other party thereto, shall have breached or defaulted under any
Contract or Authorization. Seller shall not have received notice of or have
knowledge of any fact which could result in the termination, repudiation or
breach of any Contract or Authorization.
6.6 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.7 Non-competition Agreement. Seller and the Principals shall have
executed and delivered to Buyer a Non-competition Agreement in substantially the
form attached hereto as Exhibit G.
6.8 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the Closing Date instruments (including payoff letters, bills of
sale and UCC-3 termination statements) releasing any and all Liens on the
Assets.
6.9 Revenues. Seller shall have delivered to Buyer total monthly Recurring
Revenues equal to or greater than One Hundred Forty Three Thousand Dollars
($143,000) as
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of the Closing Date, and Seller shall have furnished Buyer with a certificate,
dated as of the Closing Date, to that effect.
6.10 Subscribers. Seller shall have delivered to Buyer at least 5,970
Subscribers who contribute to monthly Recurring Revenues (unless total monthly
Recurring Revenues are less than One Hundred Forty Three Thousand Dollars
($143,000), in which case Seller shall have delivered to Buyer at least 6,100
Subscribers) and Seller shall have furnished Buyer with a certificate, dated as
of the Closing Date, to that effect.
6.11 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Miller & Martin LLP, counsel for Seller, dated the Closing Date,
substantially in the form of Exhibit H attached hereto.
6.12 US LEC and ICG.
(a) The installation and hook-up of new equipment by US LEC for
services to be provided in the Chattanooga area and by ICG in the Nashville area
shall be complete; and
(b) The migration of Seller's subscribers to the US LEC and ICG
services, as applicable, shall be complete.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, unless waived by Seller in writing:
7.1 Accuracy of Representations and Warranties. The representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects at the Closing Date with the same effect as though made at
such time, and the representations and warranties of Buyer contained in this
Agreement which are qualified by materiality shall be true and correct in all
respects as of the Closing Date with the same effect as though made at such
time.
7.2 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing Date, including, without limitation:
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(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, bylaws, authority and the incumbency of all
officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A certificate of good standing from the Secretary of State of
the State of Delaware.
7.3 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.4 Employment Agreements. Buyer and each of the Principals shall have
entered into an Employment Agreement in substantially the form of Exhibit I
attached hereto.
7.5 Seller shall have received the opinion or opinions of Goodwin, Procter
& Hoar LLP, counsel for Buyer, dated the Closing Date, substantially in the form
of Exhibit J attached hereto.
SECTION 8. TERMINATION.
8.1 Events of Termination. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing Date:
(a) By the mutual written consent of Buyer and Seller.
(b) By Seller, if it is not in breach or default hereunder:
(i) if any representation or warranty of Buyer made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Buyer's receipt of a notice from Seller that
such breach exists or has occurred;
(ii) if Buyer shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Buyer's receipt
of a notice from Seller that such default exists or has occurred;
(iii) subject to Section 8.4 below, if the conditions to
Seller's obligations to consummate the Closing Date as set forth in
Section 7 cannot
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reasonably be satisfied or performed on or before May 7, 1999
(unless such failure of satisfaction, non-compliance or
non-performance is the result, directly or indirectly, of any action
or failure to act on the part of Seller); or
(iv) if the Closing Date has not occurred prior to June 30,
1999.
(c) By Buyer, if it is not in breach or default hereunder:
(i) if any representation or warranty of Seller made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Seller's receipt of a notice from Buyer that
such breach exists or has occurred;
(ii) if Seller shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Seller's receipt
of a notice from Buyer that such default exists or has occurred; or
(iii) subject to Section 8.4 below, if the conditions to
Buyer's obligations to consummate the Closing Date as set forth in
Section 6 cannot reasonably be satisfied or performed on or before
May 7, 1999 (unless such failure of satisfaction, non-compliance or
non-performance is the result directly or indirectly of any action
or failure to act on the part of Buyer); or
(iv) if the Closing Date has not occurred prior to June 30,
1999.
8.2 Manner of Exercise. In the event of the termination of this Agreement
by either Buyer or Seller pursuant to Section 8.1 notice thereof shall forthwith
be given to the other party in accordance with the provisions set forth in
Section 11 hereto and this Agreement shall terminate and the transactions
contemplated hereunder shall be abandoned without further action by Buyer or
Seller.
8.3 Effect of Termination; Liabilities. In the event of the termination of
this Agreement pursuant to Section 8.1 and prior to the Closing Date, all
obligations of the parties hereunder (other than pursuant to Sections 4.12 and
5.2 hereof) shall terminate, and neither Seller nor Buyer shall have any further
liability hereunder, including for losses, liabilities, obligations, damages,
deficiencies, actions, suits, proceedings, demands, assessments, orders,
judgments, costs and expenses (including attorneys' fees) of any kind
whatsoever; except upon termination of this Agreement pursuant to Sections
8.1(c)(i) and 8.1(c)(ii), Buyer shall be entitled to any remedy which it may
have, whether at law or in equity.
8.4 Waiver; Extension of Time for Performance. Seller may extend the time
for the performance of any of the obligations or other acts of Buyer hereunder,
waive any
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inaccuracies in the representations and warranties of Buyer contained herein or
in any document delivered pursuant hereto, or waive compliance by Buyer with any
of the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by Seller. Buyer
may extend the time for the performance of any of the obligations or other acts
of Seller or the Principals hereunder, waive any inaccuracies in the
representations and warranties of Seller or the Principals contained herein or
in any document delivered pursuant hereto, or waive compliance by Seller or the
Principals with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by Buyer.
SECTION 9. SURVIVAL.
9.1 Survival of Warranties. Subject to Sections 10.2 and 10.3 hereof, each
of the representations, warranties, agreements, covenants and obligations herein
or in any schedule, exhibit or certificate delivered by any party to the other
party incident to the transactions contemplated hereby are material, shall be
deemed to have been relied upon by the other party and shall survive the Closing
Date regardless of any investigation and shall not merge in the performance of
any obligation by either party hereto.
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Seller and the Principals. Seller and each of the
Principals hereby agrees, jointly and severally, to indemnify and hold harmless
Buyer, its affiliates and its and their respective directors, officers,
stockholders, partners, members, employees, and agents (individually, a "Buyer
Indemnified Party" and collectively, "Buyer Indemnified Parties"), against and
in respect of all losses, liabilities, obligations, damages, deficiencies,
actions, suits, proceedings, demands, assessments, orders, judgments, costs and
expenses (including the reasonable fees, disbursements and expenses of attorneys
and consultants) of any kind or nature whatsoever, but net of the proceeds from
any insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Principals in
this Agreement or in any schedule, exhibit, certificate, agreement or other
instrument delivered pursuant to this Agreement; (ii) any breach of any covenant
or agreement made by Seller or the Principals in this Agreement or in any
schedule, exhibit, certificate, agreement or other instrument delivered pursuant
to this Agreement; (iii) any claim made by any person or entity which relates to
the operation of the Assets or the Business which arises in connection with or
on the basis of events, acts, omissions, conditions or any other state of facts
occurring on or existing before the Closing Date other than the Assumed
Liabilities; and (iv) any claim which arises in connection with any liability or
obligation of Seller other than the Assumed Liabilities.
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10.2 Limitations of Indemnity Obligations of Seller and the Principals.
The indemnity obligations of the Seller and each of the Principals under this
Agreement shall be subject to the following limitations:
(a) The indemnity obligations of the Seller and the Principals shall
expire on the eighteen month anniversary of the Closing Date; provided, however,
that such obligations with respect to (i) the representations and warranties
contained in Sections 2.1, 2.2 and 2.24 and the obligations contained in Section
4.15 shall continue in effect for the full period of any applicable statute of
limitations, and (ii) the representations and warranties regarding taxes, which
are contained in Section 2.4, shall remain in effect until all claims for taxes
due by or on account of the Seller for any period up to and including the
Closing Date have been settled and any statute of limitations period with
respect to such taxes has expired; and provided further that the indemnity
obligations of the Seller and the Principals for claims timely asserted by a
Buyer Indemnified Party in the manner provided in this Agreement shall continue
until such claims are fully resolved and discharged.
(b) The aggregate indemnity obligations of the Seller and the
Principals for any damages shall not in any event exceed Two Million Dollars
($2,000,000).
(c) The Buyer Indemnified Parties shall be entitled to
indemnification only if the aggregate and collective damages incurred or
suffered by them exceed Fifty Thousand Dollars ($50,000), in which event they
shall be entitled to indemnification for the full amount of such damages.
10.3 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees, disbursements and expenses of attorneys and consultants), of
any kind or nature whatsoever, to the extent sustained, suffered or incurred by
or made against any Seller Indemnified Party, to the extent based upon, arising
out of or in connection with: (A) any breach of any representation or warranty
made by Buyer in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (B) any
breach of any covenant or agreement made by Buyer in this Agreement or in any
schedule, exhibit, certificate, agreement or other instrument delivered pursuant
to this Agreement; (C) any claim made against Seller which relates to, results
from or arises out of Buyer's operation of the Assets or the Business from and
after the Closing Date; and (D) the Assumed Liabilities. The indemnity
obligations of the Buyer hereunder shall expire on the eighteen month
anniversary of the Closing Date, and the Seller Indemnified Parties shall be
entitled to indemnification only if the aggregate and collective damages
incurred or suffered by them
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exceed Fifty Thousand Dollars ($50,000) in which case they shall be entitled to
indemnification of the full amount of such damages.
10.4 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice, and
provided that such notice is given within the time limitations set forth in
Sections 10.2(a) and 10.3. Such notice shall state the information then
available regarding the amount and nature of such claim, liability or expense
and shall specify the provision or provisions of this Agreement under which the
liability or obligation is asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right to settle all
indemnifiable matters related to claims by third parties which are susceptible
to being settled; provided, however, that (i) the indemnifying parties'
obligation to indemnify the indemnified party therefor will be fully satisfied,
and (ii) the indemnified party will be fully released from any liability or
obligation with respect to such claim. The indemnifying party shall keep the
indemnified party apprised of the status of the claim, liability or expense and
any resulting suit, proceeding or enforcement action, shall furnish the
indemnified party with all documents and information that the indemnified party
shall reasonably request and shall consult with the indemnified party prior to
acting on major matters, including settlement discussions. Notwithstanding
anything herein stated, the indemnified party shall at all times have the right
to fully participate in such defense at its own expense directly or through
counsel; provided, however, if the named parties to the action or proceeding
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate under applicable
standards of
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professional conduct, the expense of separate counsel for the indemnified party
shall be paid by the indemnifying party. If no such notice of intent to dispute
and defend is given by the indemnifying party, or if such diligent good faith
defense is not being or ceases to be conducted, the indemnified party shall, at
the expense of the indemnifying party, undertake the defense of (with counsel
selected by the indemnified party), and shall have the right to compromise or
settle (exercising reasonable business judgment), such claim, liability or
expense. If such claim, liability or expense is one that by its nature cannot be
defended solely by the indemnifying party, then the indemnified party shall make
available all information and assistance that the indemnifying party may
reasonably request and shall cooperate with the indemnifying party in such
defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.5 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party sustains or incurs damages, liabilities, losses, taxes, fines,
penalties, costs or expenses, including, without limitation, attorneys fees, for
which it is entitled to indemnification from Seller or the Principals under this
Agreement, subject to Section 10.6 hereof, such Buyer Indemnified Party shall
first be paid in cash from the Escrow Deposit an amount equal to the damages,
liabilities, losses, taxes, fines, penalties, costs and expenses, including,
without limitation, attorneys fees, sustained or incurred by such Buyer
Indemnified Party. To the extent the Escrow Deposit is unavailable or
insufficient to satisfy such claim(s) in full, Buyer Indemnified Party shall
have the right to collect directly from the Seller or the Principals. In order
to receive payment from the Escrow Deposit such Buyer Indemnified Party shall
first deliver to Seller a written claim for damages arising under or by virtue
of this Agreement specifying the nature of the claim and the type and amount of
damages, liabilities, losses, taxes, fines, penalties, costs and expenses
sustained or incurred by such Buyer Indemnified Party. Within thirty (30)
calendar days of receiving a claim against the Escrow Deposit from or on behalf
of any Buyer Indemnified Party, Seller shall provide a written response to such
Buyer Indemnified Party with a copy to the Escrow Agent, which either accepts or
rejects all or any portion of such Buyer Indemnified Party's claim, the amount
accepted by Seller shall be paid to such Buyer Indemnified Party from the Escrow
Deposit by the Escrow Agent within ten (10) calendar days of the Escrow Agent's
receipt of Seller's acceptance of such Buyer Indemnified Party's claim. If
Seller rejects any portion of such Buyer Indemnified Party's
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claim, Seller's written response shall specify the specific reason(s) for the
rejection and the amount, if any, of such Buyer Indemnified Party's claim which
is accepted. The amount of any claim rejected by Seller shall be retained in
escrow and distributed by the Escrow Agent only as directed by a written
settlement agreement signed by both Seller and such Buyer Indemnified Party or
in accordance with an award rendered by an arbitrator(s) in accordance with
Section 12.11 of this Agreement.
10.6 Certain Remedies. It is specifically understood and agreed that (a)
fraud, intentional misrepresentation or a deliberate or willful breach by the
Seller or any Principal or Buyer of any of their representations or warranties
under this Agreement or in any certificate, schedule or exhibit delivered
pursuant hereto or (b) breach by the Seller or any Principal of the covenant
contained in Section 4.15 hereof or breach by Buyer of the covenant contained in
Section 5.3 hereof will result in irreparable injury to the parties hereto, that
the remedies available to the parties at law alone will be an inadequate remedy
for such breach, and that, in addition to any other legal or equitable remedies
which the parties may have, a party may enforce its rights by an action for
specific performance and the parties expressly waive the defense that a remedy
in damages will be adequate. Except for the items set forth in Sections 10.6(a)
and (b) above, the sole and exclusive remedy of Buyer, Seller and the Principals
for a breach of this Agreement shall be restricted to the remedies set forth in
this Section 10.
SECTION 11. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or three
(3) days after mailing if mailed, postage prepaid, by first class United States
mail, certified return receipt requested as follows:
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If to Seller: Voyager Online, LLC
401 Chestnut Street, Suite 203
Chattanooga, TN 37402
Attn: Chris Edwards
With a copy to: Miller & Martin LLP
Volunteer Building, Suite 1000
832 Georgia Avenue
Chattanooga, TN 37402-2289
Attn: Theodore K. Whitfield, Jr. Esq.
If to Buyer: DURO Communications, Inc.
100 Fifth Street
Corinth, MS 38834
Attn: John C Stanley IV
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn: David F. Dietz, P.C.
SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors, and assigns.
12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
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12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of Tennessee, without regard to conflict of laws principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
12.10 [Intentionally Deleted]
12.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution
shall appoint a neutral advisor from its National CPR Panel. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss.1-16, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Atlanta, Georgia.
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Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the Commonwealth of Massachusetts for the purpose of
enforcing the award or decision in any such proceeding and (b) hereby waives,
and agrees not to assert in any civil action to enforce the award, any claim
that it is not subject personally to the jurisdiction of the above-named court,
that its property is exempt or immune from attachment or execution, that the
civil action is brought in an inconvenient forum, that the venue of the civil
action is improper or that this Agreement or the subject matter hereof may not
be enforced in or by such court, and (c) hereby waives and agrees not to seek
any review by any court of any other jurisdiction which may be called upon to
grant an enforcement of the judgment of any such court. Each of the parties
hereto hereby consents to service of process by registered mail at the address
to which notices are to be given. Each of the parties hereto agrees that its
submission to jurisdiction and its consent to service of process by mail is made
for the express benefit of the other parties hereto. Final judgment against any
party hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets, may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.11.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Principals and Buyer have caused this Asset
Purchase Agreement to be executed as of the date first above written.
SELLER:
VOYAGER ONLINE, LLC
By: /s/ Chris Edwards
---------------------------
Name: Chris Edwards
Title: President
PRINCIPALS:
/s/ Jon Logue
------------------------------
Jon Logue
/s/ Chris Edwards
------------------------------
Chris Edwards
/s/ Jere Edwards
------------------------------
Jere Edwards
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
---------------------------
Name: Peter B. Hopper
Title: President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Consent
Exhibit C - Form of Bill of Sale
Exhibit D - Form of Assignment and Assumption Agreement
Exhibit E-1- Form of Assignment of Trademarks
Exhibit E-2- Form of Assignment (to be filed with US PTO on Closing Date)
Exhibit F - Form of Assignment of Internet Domain Name
Exhibit G - Form of Non-competition Agreement
Exhibit H - Form of Opinion of Seller's Counsel
Exhibit I-1- Form of Employment Agreement
Exhibit I-2- Form of Employment Agreement
Form of Opinion of Buyer's Counsel
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(d) Excluded Tax Items
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Allocation of Purchase Price
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a)Subscribers
Schedule 2.16(b)Complimentary Accounts
Schedule 2.16(c)Disconnection Policy
Schedule 2.19 Banking Relations
Schedule 2.22 Affiliated Transactions
Schedule 2.23 Employee Benefits
Schedule 2.24 Environmental Matters
<PAGE>
Exhibit 2.8
ASSET AND STOCK PURCHASE AGREEMENT
Agreement made as of June 14, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), MetroLink Internet Services, Inc. a
Florida corporation ("Seller"), and James Taylor, Jr. and Thomas M. Batchellor
(collectively the "Principal Shareholders"), as the sole shareholders of the
Seller and MetroLink Internet Services of Port St. Lucie, Inc., a Florida
corporation ("Port St. Lucie").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with
Seller's Internet service business (the "Business"), and
WHEREAS, subject to the terms and conditions hereof, the Principal
Shareholders desire to sell, transfer, assign and deliver to Buyer, and Buyer
desires to purchase from the Principal Shareholders, all of the outstanding
capital stock, shares or other equity ownership interest in Port St. Lucie (the
"Capital Stock").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS AND STOCK.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller at the First Closing (as defined
in Section 1.4 below), all of Seller's right, title and interest in and to all
of the properties, assets and business of the Business of every kind and
description, tangible and intangible, real, personal or mixed, and wherever
located, but excluding the Excluded Assets (as defined in Section 1.2 below),
including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. Subject to Buyer's obligations to indemnify Seller,
all of the rights of Seller under and interest of Seller in and to all contracts
relating to the Business (other than the Excluded Contracts (as defined in
Section 1.2(b) below)), including, without limitation, original contracts for
the provision of telecommunications services, Internet connectivity, subscriber
services, corporate subscriber services, dedicated subscriber services,
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web-hosting, web-domain, dial-up services, web-development and Internet
commerce, all leases with respect to real property, if any, and all co-location
agreements, a true, correct and complete list of which contracts is attached
hereto as Schedule 1.1(b) (collectively, the "Contracts"). All rights of Seller
in the Contracts accruing prior to the First Closing Date (as defined in Section
1.4 below) shall be retained by and be the property of Seller and all payments
becoming due under the Contracts shall be prorated based upon the First Closing
Date with all payments becoming due thereafter being the obligation and
liability of Buyer;
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
(d) Licenses and Authorizations. All rights associated with the
licenses, licensing agreements, permits, easements, registrations, domains, IP
addresses and authorizations issued or granted to Seller by any governmental
authority with respect to the operation of the Business, including, without
limitation, those licenses and authorizations listed on Schedule 1.1(d) attached
hereto, and all applications therefor, together with any renewals, extensions,
or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller except cash (the "Current Assets"), including security deposits, prepaid
expenses, and all accounts receivable incurred in the ordinary course of
business and included on Seller's balance sheet as of the First Closing Date, as
determined in accordance with generally accepted accounting principles ("GAAP"),
consistently applied; a complete list of such Current Assets and the values
attributable thereto as of the First Closing Date is attached hereto as Schedule
1.1(e) ("Current Assets");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records and other business files and records relating to the Business, provided,
however, that Seller shall retain all of its financial, accounting and employee
records relating to the Business, subject to Buyer's right to obtain copies of
the same as necessary for the operation of the Business following the First
Closing.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the First Closing Date, the following
assets (the "Excluded Assets"):
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(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the First Closing Date and which are set
forth on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
First Closing Date;
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined in Section 2.4(a) below) for
periods prior to the First Closing Date;
(e) Corporate Records. All of Seller's corporate and other
organizational records; and
(f) Bank Accounts. All of Seller's bank accounts.
(g) Cash. All of Seller's cash on hand as of the First Closing Date.
(h) Reimbursements. All reimbursements, credits or payments due to
Seller under the Contracts which became due and owing prior to the First Closing
Date.
1.3 Seller's Liabilities; Equipment Lease Liabilities; Employees.
(a) Seller's Liabilities. It is expressly understood that, except
for any liabilities or obligations arising under the Contracts after the First
Closing Date, Buyer shall not assume, pay or be liable for any liability or
obligation of Seller of any kind or nature at any time existing or asserted,
whether, known, unknown, fixed, contingent or otherwise, and including, without
limitation, any liability or obligation relating to, resulting from or arising
out of (i) the Excluded Assets, including, without limitation, the Excluded
Contracts, (ii) the employees of the Business, including, without limitation,
any obligation to provide any amounts due to the employees under any pension,
profit sharing or similar plan, any bonus or other compensation plan, or related
to vacation or other similar employee benefits, or arising as a result of the
transactions contemplated hereby, (iii) any fact existing or event occurring
prior to the First Closing Date or relating to the operation of the Business
prior to the First Closing Date, (iv) any federal income, social security
withholding, payroll, sales or other tax, license or fee obligations of Seller
and/or its agents and (v) any amounts payable to BellSouth Telecommunications,
Inc. ("BellSouth") in respect of accounts 407-M15-5035 and 954-V70- 3037. The
liabilities which are not assumed by Buyer under this Agreement are hereinafter
sometimes referred to as the "Excluded Liabilities."
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(b) Equipment Lease Liabilities. At the First Closing, all of
Seller's obligations under the equipment lease agreements or other secured
obligations/liabilities of Seller specifically identified on Schedule 1.3(b)
("Secured Liabilities") shall be satisfied in full by Buyer (as a debit to the
Purchase Price), and Buyer shall be provided with sufficient proof of the
amounts necessary to satisfy such obligations in the form of payoff letters and,
in the case of amounts owed to Colonial Pacific Leasing in respect of the ASCR
MXHP-2T1-48/NA phone system, confirmation that Colonial Pacific Leasing will
deliver to counsel to Buyer, or file with the appropriate filings offices, a
UCC-3 termination statement within two business days of the First Closing Date.
Liabilities of Seller that do not affect Seller's right to convey title to the
Assets to Buyer shall be satisfied, disputed or litigated by Seller as it deems
necessary and proper and subject to Seller's obligations to indemnify Buyer from
same hereunder.
(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the First Closing Date and Buyer shall not assume or have any
obligations or liabilities with respect to such employees or such
terminations except as provided in Section 7.3 with respect to the
Principal Shareholders, including, without limitation, any severance
obligation. Seller acknowledges and agrees that Buyer has the right to
interview and discuss employment terms and issues with such employees
prior to and after the First Closing.
(ii) Buyer specifically reserves the right, on or after the
First Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the First Closing. Except as set forth in Section 7.3,
nothing in this Agreement shall be construed as a commitment or obligation
of Buyer to accept for employment, or otherwise continue the employment
of, any of Seller's employees, and no employee shall be a third-party
beneficiary of this Agreement. If Buyer, in its absolute discretion,
decides to and does hire any employee of Seller, Buyer shall indemnify and
hold Seller harmless from and against any and all claims or liability,
including reasonable costs, expenses and attorney fees arising out of such
employee's work for or employment with Buyer after the First Closing.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees, if any, which
shall have become due for work performed as of and through the day
preceding the First Closing Date, and Seller shall collect and pay all
Taxes in respect of such wages, salaries, commissions and benefits.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller
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under, any benefit plans maintained by, or for the benefit of any
employees of Seller prior to the First Closing Date, including, without
limitation, obligations for severance or vacation accrued but not taken as
of the First Closing Date. If Buyer, in its absolute discretion, decides
to and does hire any employee of Seller, Buyer shall indemnify and hold
Seller harmless from and against any and all claims or liability arising
out of such employee's work for or employment with Buyer after the First
Closing.
1.3A Port St. Lucie Stock. Upon the terms and subject to the conditions
set forth in this Agreement, and the performance by the parties hereto of their
respective obligations hereunder, each of the Principal Shareholders agrees to
sell, transfer, assign and deliver to Buyer, and Buyer agrees to purchase from
each of the Principal Shareholders, all of the shares of Capital Stock of Port
St. Lucie owned by such Principal Shareholder at the Second Closing (as defined
in Section 1.4 below).
1.4 The Closings. The transactions contemplated by this Agreement in
connection with the purchase and sale of the Business, but excluding the
purchase of the Capital Stock of Port St. Lucie, shall take place at a closing
(the "First Closing") to be held at 10:00 a.m., local time, at the offices of
Fallace & Associates, P.A., on the date of this Agreement, or at such other time
and place as shall be mutually agreed upon in writing by Buyer, Seller and the
Principal Shareholders (the "First Closing Date"). The transactions contemplated
by this Agreement in connection with the purchase of the Capital Stock of Port
St. Lucie shall take place at a closing (the "Second Closing") to be held at
10:00 a.m., local time, at the offices of Fallace & Associates, P.A., on the
earliest date following satisfaction of the conditions to the Second Closing,
but in no event later than sixty (60) days after the First Closing, or at such
other time and place as shall be mutually agreed upon in writing by Buyer,
Seller and the Principal Shareholders (the "Second Closing Date"). Either or
both closings may be performed by facsimile, with originals to follow as soon as
commercially reasonable.
1.5 Purchase Price.
(a) At the First Closing, in consideration of the sale by Seller to
Buyer of the Assets, in consideration of the agreement by each of the Principal
Shareholders to sell to Buyer their respective shares of Capital Stock held by
such Principal Shareholder, and subject to the assumption by Buyer of all
liabilities and obligations of Seller under the Contracts arising after the
First Closing Date and satisfaction of the conditions contained herein, Buyer
shall pay to Seller, in U.S. dollars, an amount (as adjusted in accordance with
this Section 1.5 below, the "Purchase Price") equal to $1,000,000 PLUS (i)
$12,172.14, the dollar value of all accounts receivable of Seller relating to or
arising from subscriber accounts that are less than thirty (30) days past due as
of the First Closing, (ii) $3,005.82, the dollar value of fifty percent (50%),
but in no event more than $7,500, of the accounts receivable of Seller relating
to or arising from subscriber accounts that are greater than thirty (30) past
due as of the First Closing, (iii) $4,998.50, the dollar value of any credits
due to Seller under any of the Contracts, leases, service agreements, payments
or overpayments made by Seller prior to the First Closing Date and (iv)
$8,410.55, the dollar value of all security deposits of Seller, which
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are identified on Schedule 1.1(e); and MINUS the sum of (v) $15,000, the amount
allocable to the Capital Stock to be delivered to counsel for Seller acting in
the capacity of escrow agent (the "Port St. Lucie Escrow Agent") pending the
Second Closing as contemplated by a second Escrow Agreement by and between Buyer
and each of the Principal Shareholders (the "Port St. Lucie Escrow Agreement")
in the form attached hereto as Exhibit A, (w) $102,473.49, the aggregate amount
of the Secured Liabilities owed in connection with the equipment leases as set
forth on Schedule 1.3(b) and (y) $0.00, the revenue adjustment, if any,
calculated pursuant to Section 6.8 of this Agreement for a total Purchase Price
of $911,113.52.
(b) The Purchase Price of $1,013,587.01 (prior to subtraction of the
Secured Liabilities) shall be paid by Buyer to Seller and/or applied to the
payment of the Secured Liabilities at the First Closing as follows:
(i) Buyer shall deliver the sum of $842,780.01 to Seller or
its designated agent or attorney by bank cashier's check or bank wire
transfer pursuant to payment instructions delivered by Seller to Buyer at
the First Closing; and
(ii) Buyer shall deposit the sum of $68,333.51 (the "Escrow
Deposit") with Boston Safe Deposit and Trust Company as Escrow Agent under
the Escrow Agreement in the form attached hereto as Exhibit B (the "Escrow
Agreement") on behalf of Buyer and Seller. The Escrow Deposit shall at all
times be deemed the property of Seller as part of the Purchase Price paid
herein, but shall be held, administered and distributed in accordance with
the terms of the Escrow Agreement and can be a remedy of Buyer for any
indemnification claims made pursuant to Section 10 hereof; and
(iii) Buyer shall deliver the sum of $4,702.08 to AT&T Capital
Corp. by bank cashier's check or bank wire transfer pursuant to payment
instructions provided by AT&T Capital Corp. prior to the First Closing;
and
(iv) Buyer shall deliver the sum of $49,294.90 to Balboa
Capital by bank cashier's check or bank wire transfer pursuant to payment
instructions provided by Balboa Capital prior to the First Closing; and
(v) Buyer shall deliver the sum of $16,249.00 to Colonial
Pacific Leasing by bank cashier's check or bank wire transfer pursuant to
payment instructions provided by Colonial Pacific Leasing prior to the
First Closing; and
(vi) Buyer shall deliver the sum of $13,239.39 to Financial
Pacific Leasing by bank cashier's check or bank wire transfer pursuant to
payment instructions provided by Financial Pacific Leasing prior to the
First Closing; and
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(vii) Buyer shall deliver the sum of $5,360.57 to Inter-Tel
Leasing by bank cashier's check or bank wire transfer pursuant to payment
instructions provided by Inter-Tel Leasing prior to the First Closing; and
(viii) Buyer shall deliver the sum of $13,627.55 to Sunrise
Leasing by bank cashier's check or bank wire transfer pursuant to payment
instructions provided by Sunrise Leasing prior to the First Closing; and
(ix) Buyer shall deliver the sum of $15,000.00 to counsel for
Seller, as escrow agent (the "Port St. Lucie Escrow Agent") as the
contemplated Purchase Price for the Capital Stock of Port St. Lucie.
(c) At the Second Closing, upon satisfaction or waiver of all of the
conditions to the Second Closing, the Port St. Lucie Escrow Agent shall pay to
each Principal Shareholder such Principal Shareholder's pro rata share (based on
his percentage ownership of the Capital Stock) of $15,000.00 by bank cashier's
check or bank wire transfer pursuant to payment instructions provided by such
Principal Shareholder to the Port St. Lucie Escrow Agent prior to the Second
Closing.
1.6 [INTENTIONALLY OMITTED]
1.7 Purchase Price Allocation. The Purchase Price shall be allocated
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), and
Treasury Regulation 1.1060-1T and all subparagraphs thereof, such allocation
shall be calculated promptly following the First Closing, and $275,000 shall be
allocated to the fixed Assets.
Buyer and Seller agree to report the transactions provided for in this
Agreement for feral income tax purposes in a manner consistent with the
allocations of the Purchase Price as provided in this Agreement, and shall file
any and all Internal Revenue Service ("IRS") forms necessary to report this sale
as stated herein. Buyer and Seller each further agrees to file its Federal
income tax returns and its other tax returns reflecting such allocation.
1.8 Records and Contracts. To the extent not previously provided to Buyer,
at or before the First Closing, Seller shall deliver to Buyer all of the
Contracts, with such assignments thereof and consents to assignments as are
necessary to assure Buyer of the full benefit of the same. Seller shall also
deliver to Buyer at the First Closing all of Seller's files and records relating
to the Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes (prorated through the
First Closing), fees and duties, under the laws of the United States and the
State of Florida, incurred in connection with this Agreement or the transactions
contemplated thereby will be borne and paid by Seller, and Seller shall promptly
reimburse Buyer for the payment of any such tax, fee or duty which Buyer is
required to make under applicable law.
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1.10 Transfer of Assets. At the First Closing, and upon payment of the
Purchase Price, Seller shall deliver or cause to be delivered to Buyer a Bill of
Sale and any other instruments or other documents required under Florida law to
fully transfer and assign to Buyer title to all of the Assets, together with all
required consents. Such instruments of transfer (a) shall contain appropriate
warranties and covenants which are usual and customary for transferring the type
of property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall effectively vest in Buyer good and marketable title to all
of the Assets free and clear of all Liens (as defined in Section 2.8 below), and
(c) where applicable, shall be accompanied by evidence of the discharge of all
Liens against the Assets. At the Second Closing, each of the Principal
Shareholders shall deliver to Buyer one or more stock certificates, together
with stock powers executed in blank, representing such Principal Shareholder's
ownership of his shares of Capital Stock of Port St. Lucie.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPAL SHAREHOLDERS.
In order to induce Buyer to enter into this Agreement, Seller and each of
the Principal Shareholders, jointly and severally, hereby represent and warrant
to Buyer as follows:
2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Seller has all requisite
power and authority to conduct its business as it is now conducted or proposed
to be conducted and to own, lease and operate its properties and assets. The
copies of Seller's Certificate of Incorporation and By- Laws each as amended to
date, heretofore delivered to Buyer's counsel are complete and correct. Seller
is not in violation of any term of the Certificate of Incorporation and By-Laws.
Seller is duly qualified to do business in the state of its incorporation, and
does not conduct its business in any other jurisdiction.
(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken or will have been duly and
validly taken prior to First Closing, and this Agreement and each other
agreement, document and instrument to be executed and delivered by or on behalf
of Seller pursuant to, or as contemplated by, this Agreement (collectively, the
"Seller Documents") has been or shall be duly and validly authorized, executed
and delivered by Seller and no other action on the part of Seller or its
officers, directors or shareholders shall be required in connection therewith.
Each of Seller and the Principal Shareholders have full right, authority, power
and capacity to execute and deliver this Agreement and each other Seller
Document and to carry out the transactions contemplated
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hereby and thereby. To the knowledge of Seller and the Principal Shareholders,
this Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of each of
Seller and the Principal Shareholders enforceable in accordance with its
respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the Certificate of Incorporation and By-Laws of Seller, in each
case as amended to date, (ii) constitute a violation of, or conflict with or
result in any breach of, acceleration of any obligation under, right of
termination under, or default under, any agreement or instrument to which Seller
is a party or by which Seller or the Assets is bound, (iii) violate any
judgment, decree or order, or, to Seller's knowledge, any statute, rule or
regulation applicable to Seller or the Assets, (iv) require Seller to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made or (v) result in
the creation or imposition of any Lien (as defined in Section 2.8 below) on any
of the Assets.
(b) The execution, delivery and performance by each of the Principal
Shareholders of this Agreement and each other Seller Document does not and will
not (i) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which any or all of the Principal
Shareholders are a party or by which any or all of the Principal Shareholders
are bound, (ii) violate any judgment, decree or order, or, to each Principal
Shareholder's knowledge, any statute, rule or regulation applicable to the
Principal Shareholders, (iii) require the Principal Shareholders to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made or (iv) result in
the creation or imposition of any Lien (as defined in Section 2.8 below) on any
of the Assets.
2.4 Taxes.
(a) Seller has paid, caused to be paid or shall cause to be paid all
federal, state, local, foreign and other taxes, including, without limitation,
income taxes, estimated taxes, alternative minimum taxes, excise taxes, sales
taxes, use taxes, value-added taxes and property taxes, whether or not measured
in whole or in part by net income, and all deficiencies, or other additions to
tax, interest, fines and penalties owed by it (collectively, "Taxes"), required
to be paid by it through the date hereof whether disputed or not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof. To Seller's knowledge, all such returns correctly and accurately set
forth the amount of any Taxes relating to the applicable period. Seller has
delivered to Buyer correct and complete copies of all
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federal, state, local and foreign income tax returns requested by Buyer, and of
all examination reports and statements of deficiencies assessed against or
agreed to by Seller with respect to said returns.
(c) Neither the IRS nor any other governmental authority is now
asserting or, to the knowledge of Seller or the Principal Shareholders,
threatening to assert against Seller any deficiency or claim for additional
Taxes. No claim has ever been made by an authority in a jurisdiction where
Seller does not file reports and returns that Seller is or may be subject to
taxation by that jurisdiction. There are no security interests on any of the
Assets of Seller that arose in connection with any failure (or alleged failure)
to pay any Taxes. Seller has never entered into a First Closing agreement
pursuant to Section 7121 of the Code.
(d) Seller has not been notified by any tax authority that any audit
of any tax return filed by Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall refer to the Code currently in force.
2.5 Compliance with Laws. To Seller's knowledge, Seller's operation of the
Business and the Assets is in compliance in all material respects with all
applicable statutes, ordinances, orders, rules and regulations promulgated by
any federal, state, municipal or other governmental authority (including the
Federal Communications Commission), and Seller has not received notice of a
violation or alleged violation of any such statute, ordinance, order, rule or
regulation.
2.6 Insurance. The physical properties and tangible Assets of Seller are
adequately insured as of the First Closing Date.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral, if any, or written, under which Seller is
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currently bound or to which Seller is currently a party, which relate to the
Business or Assets, which are not being satisfied and paid by Seller through
Buyer from the Purchase Price. Schedule 1.1(b) attached hereto contains a true,
correct and complete list of all Contracts. With respect to any oral agreement
or understanding involving the Business, and which may affect the operations of
the Business after First Closing, Seller has provided a written summary of the
material terms of each such agreement or understanding on Schedule 1.1(b). To
Seller's knowledge, each Contract identified on Schedule 1.1(b) is valid, in
full force and effect and binding upon Seller and the other parties thereto in
accordance with its terms and Seller has not been notified by any party to a
Contract that such party contests or disputes the validity of such Contract
which will not be paid off or brought current as of the First Closing. Seller is
not in default under or in arrears in the performance, payment or satisfaction
of any agreement or condition on its part to be performed or satisfied under any
Contract. Seller has not received notice of, and each of Seller and the
Principal Shareholders have no knowledge of, any fact which would result in a
termination, repudiation or breach of any Contract. Seller has provided Buyer
with true and complete copies of all of such Contracts, other than with respect
to the oral agreements or understandings described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets,
which as of the First Closing Date or immediately thereafter (upon Buyer's
payment from the Purchase Price), shall be free and clear of all mortgages,
pledges, security interests, charges, liens, restrictions and encumbrances of
any kind (collectively, "Liens"). Upon the sale, assignment, transfer and
delivery of the Assets to Buyer hereunder or as reasonably practicable
thereafter (subject to the provisions of Section 1.3(b)) and under the Seller
Documents, there will be vested in Buyer good, marketable and indefeasible title
to the Assets, free and clear of all Liens. The Assets include all of the assets
and properties (i) held for use by Seller to conduct the Business as presently
conducted and (ii) necessary or useful for Buyer to operate the Business in the
same manner as such Business is currently operated by Seller as of the First
Closing Date. As of the First Closing Date, all of the tangible Assets are in
good repair, have been maintained and are in operating condition, ordinary wear
and tear excepted, and to Seller's knowledge do not require any material
modifications or repairs as of the date hereof, and, to Seller's knowledge,
comply in all material respects with applicable laws, ordinances and
regulations. It is understood and agreed that Seller currently has a
month-to-month lease to its only place of Business (the "Leased Real Property")
and makes no representations or warranties to Buyer as to its continued right to
lease or remain in possession of such premises. The current lease is not
assignable and set forth on Schedule 1.1(b) are the lease payment terms for the
Leased Real Property. Seller does not hold or own a fee interest in any real
property and makes no representations or warranties with regard thereto. To
Seller's knowledge, there are no material defects in the physical condition of
any improvements constituting a part of the Leased Real Property, including,
without limitation, structural elements, mechanical systems, roofs or parking
and loading areas, and, to Seller's knowledge, all of such improvements are in
operating condition and have been maintained. To Seller's knowledge, all water,
sewer, gas, electric, telephone, drainage and other utilities required by law or
necessary for the current or planned operation of the Leased Real Property have
been installed and connected pursuant to valid permits, and are sufficient to
service the Leased Real Property.
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2.9 Litigation. Except as set forth on Schedule 2.9, Seller is not now
involved in nor, to the knowledge of Seller and the Principal Shareholders, is
Seller threatened to be involved in (not including disputed non-secured debts)
any litigation or legal or other proceedings related to or affecting the
Business or any Asset (including any Intellectual Property) or which would
prevent or hinder the consummation of the transactions contemplated by this
Agreement or Seller's ability to convey title to the Assets, free and clear of
all Liens, to Buyer or to otherwise perform its obligations herein. Seller has
not been operating the Business under, and the Business is not subject to, any
order, injunction or decree of any court of federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately seven (7)
full-time employees and two (2) part-time employees and generally enjoys good
employer-employee relationships. Seller has provided to Buyer a list of the
employees of Seller in connection with the Business at the First Closing,
including the name of such employees, their date of hire, wages and the general
benefits, such as vacation and bonuses, to be paid to such employees. There is
no written or oral contract between Seller and any employee which would impose
any liability upon Buyer with regard to any of its employees or which would
prevent Seller from terminating its relationship with such employees without
being required to pay any form of "severance pay" or any other like payment. To
the knowledge of Seller and the Principal Shareholders, it has complied with all
federal, state, and local laws, rules, regulations and ordinances with regard to
its employees and is not aware of any threatened or pending action relating to
its employees or any compensation or other benefits paid or due to such
employees.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as of March 31, 1999 (the "Base Balance Sheet") and
the statements of income and expense of Seller for the three months ended March
31, 1999 (collectively the "Financial Statements"). The Financial Statements
were prepared in accordance with generally accepted accounting principles
applied consistently during the periods covered thereby (except for the absence
of footnotes with respect to unaudited financial statements), and to Seller's
knowledge were complete and correct and present fairly and accurately the
financial condition of the Business at the dates of said statements and the
results of operations of the Business for the periods covered thereby. As of the
date on the Base Balance Sheet contained in the Financial Statements (the "Base
Balance Sheet Date"), Seller had no liabilities or obligations of any kind with
respect to the Business, whether accrued, contingent or otherwise, that are not
disclosed and adequately reserved against on the Base Balance Sheet and which
would otherwise prevent Seller from performing its obligations herein. As of the
date hereof and at the First Closing, Seller had and will have no liabilities or
obligations of any kind with respect to the Business, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet and which would materially affect the value of the
Business or calculations utilized by Buyer in formulating the Purchase Price
utilizing the GAAP principles or prevent Seller from performing his
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obligations herein. Buyer was provided with an opportunity to review Seller's
Financial Statements and has upon its own or its accountants' inspection and
analysis of such Financial Statements decided to proceed with the First Closing
under this Agreement based, in part, upon its own review and inspection of the
Business, the Assets and Seller's Financial Statements and upon Seller's
representations and warranties as to their preparation, validity and
truthfulness.
2.12 Business Since the Base Balance Sheet Date (March 31, 1999). Since
the Base Balance Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). To the knowledge of Seller, the Authorizations are in full
force and effect and constitute all of the licenses, permits and authorizations
required for operation of the Business as it is now
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operated. As of the date hereof, there is not pending or, to the knowledge of
Seller and the Principal Shareholders, threatened any action by or before any
governmental agency to revoke, cancel, rescind or modify any of the
Authorizations, and there is not now issued, outstanding, pending or, to the
knowledge of Seller and the Principal Shareholders, threatened any order to show
cause, notice of violation, notice of apparent liability, or notice of
forfeiture or complaint against Seller with respect to the Business.
2.14 Approvals; Consents. No approval, consent, authorization or exemption
from or filing with any person or entity not a party to this Agreement is
required to be obtained or made by Seller in connection with the execution and
delivery of this Agreement and the Seller Documents and the consummation of the
transactions contemplated hereby and thereby.
2.15 Customers and Suppliers. To Seller's knowledge, its relations with
its customers and suppliers, including its Subscribers (as defined in Section
2.16 below), are good.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers (as defined herein) of the Business as listed by
class, type and billing plan. For purposes of this Agreement, the terms
"Subscriber" shall mean any active (service not terminated more than thirty (30)
days prior to the date hereof) subscriber to Internet services offered by Seller
in the Business who has subscribed to a service for at least two months and has
paid at least two bills at any given time, including, without limitation, any
person or corporation who receives dial-up Internet access through the Business
(a "Dial-up Subscriber"), any person who receives dedicated Internet access from
Seller offering higher data transmission rates than available from dial-up
access (a "Dedicated Subscriber"), and any person with a web page or domain name
on Seller's server and to whom Seller provides Internet access (a "Web-hosting /
Domain-hosting Subscriber"); provided, however, that "Subscriber" shall not
include any person or entity receiving complimentary Internet services or
Internet services at a promotional discounted rate. Set forth on Schedule
2.16(b) attached hereto is a listing of all such accounts which receive
complimentary Internet services or Internet services at a promotional discounted
rate. Set forth on Schedule 2.16(c) attached hereto is Seller's policy and
practice with respect to the disconnection of Subscribers, with which Seller
has, except as set forth on Schedule 2.16(c), at all times since its inception,
complied in all material respects. It is understood and agreed that Schedule
2.16(a) may contain some Subscribers of Seller with outstanding balances due or
for which service has been temporarily terminated by Seller, but due to past
actions of such Subscribers, Seller believes that they will continue to use
Seller for their Internet access and therefore remain a Subscriber transferred
to Buyer under this Agreement. As of the date hereof, Buyer expressly assumes
all obligations and liability of Seller under a Subscriber Contract or to such
Subscribers and shall indemnify and hold harmless Seller from any claims, causes
of action or demands arising from or related to the Subscriber.
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2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. As of the First Closing, all
of the accounts receivable of Seller identified on the Schedules attached
hereto, are or will be as of the First Closing Date bona fide and, to Seller's
knowledge, valid and enforceable claims, subject to no set off or counterclaim
and are collectible in accordance with their terms. Seller has not been notified
by any party that such party contests or disputes the validity of such accounts
receivable. Seller has no accounts or loans receivable from any person, firm or
corporation which is affiliated with Seller or from any director, officer or
employee of Seller, or from any of their respective spouses or family members.
2.19 [INTENTIONALLY OMITTED].
2.20 Intellectual Property.
(a) All of the Intellectual Property of Seller, if any, is set forth
on Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) Seller's rights to the name "MetroLink Internet
Services", all trade names, trade dress, logos, packaging design, slogans, any
and all Internet domain names used or useful in the business of Seller,
registered and unregistered trademarks and service marks and applications
(collectively, "Marks"); (ii) all know-how, trade secrets, confidential or
proprietary information, customer lists, IP addresses, research in progress,
algorithms, data, designs, processes, formulae, drawings, schematics,
blueprints, flow charts, models, prototypes, techniques, Beta testing procedures
and Beta testing results (collectively, "Trade Secrets"); (iii) Seller's
web-sites (including the domain name "www.metrolink.net" and any other similar
domain name); (iv) all goodwill, franchises, licenses, permits, consents,
approvals, technical information, telephone numbers, and claims of infringement
against third parties (the "Rights"); and (v) all contracts relating to the
Intellectual Property to which Seller is a party or is bound, including, without
limitation, all nondisclosure and/or confidentiality agreements entered into by
persons in connection with disclosures by Seller (collectively,"Assigned
Contracts").
(b) To Seller's knowledge it has ownership of, and has good, valid
and marketable title to, all of the Intellectual Property, free and clear of any
Liens, and has the right to use all of the Intellectual Property without payment
to any third party. Seller's rights in all of such Intellectual Property are
freely transferable. There are no claims or demands pending or, to the knowledge
of Seller and the Principal Shareholders, threatened of any other person
pertaining to any of such Intellectual Property and no proceedings have been
instituted, or are pending or, to the knowledge of Seller and the Principal
Shareholders, threatened against Seller and/or its officers, employees and
consultants which challenge the validity and enforceability of Seller's rights
in respect of the Intellectual Property. The Intellectual Property represents
all of the assets of Seller of such class or type necessary for the operation of
Seller's Business as currently conducted.
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To Seller's knowledge, no employee, consultant or contractor of Seller has
entered into any agreement that restricts or limits in any way the scope or type
of work in which the employee, consultant or contractor may be engaged or
requires the employee, consultant or contractor to transfer, assign, or disclose
information concerning his work to anyone other than Seller.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. It is understood that, with the
exception of common law rights, the name "MetroLink" and /or "MetroLink Internet
Services, Inc." are not federally registered or protected trademarks or service
marks and that MetroLink does not have exclusive legal right to their use.
(d) Seller has no patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents").
(e) Seller has no copyrights in either published or unpublished
works.
(f) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Except for websites created by Seller for its customers, Seller (i)
has not licensed or granted to anyone rights of any nature to use any of its
Intellectual Property and (ii) is not obligated to and does not pay royalties or
other fees to anyone for its ownership, use, license (other than software
utilized by Seller and transferred hereunder as set forth in Schedule 2.20) or
transfer of any of its Intellectual Property.
(g) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed on Schedule 2.20. Except as
set forth on such Schedule, all such licenses or other agreements are in full
force and effect, there is no material default by any party thereto, and all of
the rights of Seller thereunder are freely assignable. True and complete copies
of all such licenses or other agreements, and any amendments thereto, have been
provided to Buyer, and Seller has no reason to believe that the licensors under
the licenses and other agreements under which Seller is granted rights and has
granted rights to others do not have and did not have all requisite power and
authority to grant the rights purported to be conferred thereby.
(h) Except for websites created by Seller for its customers, Seller
has granted no rights to others in its Intellectual Property.
(i) With the exception of the I.E.A./Emerald Radius Software
utilized by Seller in the operation of its Business, Seller and the Principal
Shareholders reasonably believe that the "Year 2000 Problem" (i.e., the risk
that applications used by Seller or its suppliers and/or providers may be unable
to recognize and properly perform date-sensitive functions involving certain
dates prior to and any date after December 31, 1999) will not have any
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material adverse effect on the business or operations of Seller. To Seller's
knowledge, the I.E.A./Emerald Radius Software is not Year 2000 compliant.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except for Seller's use, rental
and/or lease of lines from MetroLink Internet Services of Port St. Lucie, Inc.
(a C-LEC company owned by the Principal Shareholders), neither Seller, nor any
shareholder, officer, supervisory employee or director of Seller or, any of
their respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director or in another similar capacity of, any competitor or supplier of
Seller, or any organization which has a material contract or arrangement with
Seller.
2.23 Employee Benefit Programs. Seller has never provided, offered,
maintained, supervised, managed or operated any deferred compensation benefit or
Employee Retirement Income Security Act of 1974, as amended ("ERISA") plan and
Seller does not have any employee benefits, retirement or other deferred
compensation plans in effect which would impose any obligations, duties,
responsibilities or liabilities upon Buyer.
2.24 Environmental Matters.
(a) To Seller's knowledge, (i) Seller has not generated,
transported, used, stored, treated, disposed of, or managed any Hazardous Waste
(as defined in Section 2.24(c) below) at any time; (ii) Seller has never
spilled, released, or disposed of any Hazardous Material (as defined in Section
2.24(c) below) at any site associated with a structure presently or formerly
owned, operated, leased, or used by Seller, nor has any such Hazardous Material
ever been located in the soil or groundwater at any such site; (iii) Seller has
never transported any Hazardous Material from any site associated with a
structure presently or formerly owned, operated, leased, or used by Seller for
treatment, storage, or disposal at any other place; (iv) Seller does not
presently own, operate, lease, or use, and has not previously owned, operated,
leased, or used any site associated with a structure on which underground
storage tanks are or were located; and (v) no lien has ever been imposed by any
governmental agency on any property, facility, machinery, or equipment owned,
operated, leased, or used by Seller in connection with the presence of any
Hazardous Material.
(b) To Seller's knowledge, (i) Seller does not have any liability
under, nor has it ever violated, any Environmental Law (as defined in Section
2.24(c) below); (ii) Seller has not entered into or been subject to any
judgment, consent decree, compliance order, or administrative order with respect
to any environmental or health and safety matter or received any request for
information, notice, demand letter, administrative inquiry, or formal or
informal complaint or claim with respect to any environmental or health and
safety matter or the enforcement of any Environmental Law; and (iii) neither
Seller nor any Principal
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Shareholder has any knowledge or reason to know that any of the items enumerated
in clause (ii) of this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
By-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Port St. Lucie.
(a) Organization and Qualifications of Port St. Lucie. Port St.
Lucie is a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida with full corporate power and authority
to own or lease its properties and to conduct its business in the manner and in
the places where such properties are owned or leased or such business is
currently conducted. Port St. Lucie is duly qualified to do business as a
foreign corporation in each jurisdiction in which such qualification is
necessary, except where the failure to be so qualified would not have a material
adverse effect.
(b) Capital Stock of Port St. Lucie. The authorized Capital Stock of
Port St. Lucie consists of 1,000 shares of common stock, par value $1.00 per
share, of which 1,000 shares are duly and validly issued, outstanding, fully
paid and non-assessable. Each Principal Shareholder owns 500 shares of the
Capital Stock. There are no outstanding options, warrants, rights, commitments,
preemptive rights or agreements of any kind for the issuance or sale of, or
outstanding securities convertible into, any additional shares of common stock
of Port St. Lucie.
(c) Beneficial Ownership of the Capital Stock. Each of the Principal
Shareholders owns beneficially and of record the Capital Stock set forth
opposite such Shareholder's name on Schedule 2.25(c) hereto. Such Capital Stock
is, and when delivered by such Principal Shareholders to Buyer pursuant to this
Agreement will be, free and clear of any and all liens, encumbrances,
restrictions, charges or claims and upon payment for such Capital Stock pursuant
to Section 1.5 hereof at the Second Closing in accordance with the terms of this
Agreement and the Port St. Lucie Escrow Agreement, Buyer will acquire good and
valid title to the Capital Stock being sold by such Principal Shareholders at
the Second Closing.
(d) Corporate Records; Copies of Documents. The copies of the
corporate records of Port St. Lucie, as made available to Buyer for review, are
true and complete copies of the originals of such documents.
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(e) The representations made with respect to the Seller in Sections
2.4, 2.5, 2.6, 2.9, 2.12, 2.14, 2.21, 2.23 and 2.24 are hereby made by each of
the Principal Shareholders with respect to Port St. Lucie.
(f) Port St. Lucie has no employees. Port St. Lucie does not hold or
own a fee interest in any real property.
2.26 Disclosure. The representations, warranties and statements contained
in this Agreement and in the Seller Documents delivered by Seller and the
Principal Shareholders to Buyer pursuant to this Agreement do not contain any
untrue statement of a material fact, and, when taken together, do not omit to
state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances under which they were made. It is expressly acknowledged and
agreed that Buyer was provided sufficient time to inspect the Financial
Statements, the Assets, and the Business of Seller prior to the date hereof and
that it is entering into this Agreement and purchasing the Assets, Contracts,
Capital Stock and other property of Seller and the Principal Shareholders
hereunder based upon its own inspection and due diligence.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business in the State of Florida as
it is now conducted and to own, lease and operate its properties and assets.
3.2 Required Action; Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or By-Laws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a
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party or by which it is bound, (c) violate any judgment, decree, order, statute,
rule or regulation applicable to Buyer, (d) require Buyer to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made. The officers who
execute this Agreement and the other Buyer Documents contemplated hereby on
behalf of Buyer have and shall have all requisite power to do so in the name of
and on behalf of Buyer.
3.4 Brokers. Except for fees payable to Rampart Associates, LLC
("Broker"), Buyer has not retained any broker or finder or other person who
would have any valid claim against any of the parties to this Agreement for a
commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby. Buyer assumes all liability for any
commissions, fees or other payments which Broker may be entitled to herein, and
any such commissions, fees or other amounts shall not be paid from or by Seller
from the Purchase Price. Buyer expressly indemnifies and shall hold harmless
Seller from and against any claims by Broker.
3.5 Full and Complete Inspection. Buyer has made a full and complete
inspection of the Assets and Financial Statements of the Business, has been
provided copies of all records of Seller Buyer reasonably believes are necessary
and relevant to the Business, the Assets and a determination of the valuation,
worth and Purchase Price of the Business.
3.6 Management and Operation of an Internet Service Company. As of the
date hereof, Buyer has been engaged in the operation and management of an
Internet service company or related business and is familiar with the risks
associated with the ownership and operation of such a company. Buyer is assuming
any and all risks associated with and which may arise in the operation of the
Business after the First Closing Date which do not arise from events or
circumstances that constitute a breach of this Agreement or representations made
herein. Except for claims arising from Seller's breach of this Agreement, the
representations hereunder or any of the Seller Documents, Buyer waives any right
to bring a claim against Seller or the Principal Shareholders as a result of
such known and understood risks which are associated with operating such a
Business or in the management of the Assets or performance of the obligations
assumed by Buyer under the Contracts.
3.7 Disclosure. The representations, warranties and statements contained
in this Agreement and the Seller Documents do not contain any untrue statement
of material fact, and, when taken together, do not omit to state a material fact
required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that:
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4.1 Use of Trade Names. After the First Closing Date, neither Seller, nor
any person controlling, controlled by or under common control with Seller will
for any reason, directly or indirectly, for itself or any other person, (a) use
the names "MetroLink" or "MetroLink Internet Services" or (b) use or disclose
any trade secrets, confidential information, know-how, proprietary information
or other Intellectual Property of Seller transferred pursuant to this Agreement.
4.2 Post-First Closing Transitional Matters. For a period of ninety (90)
days following the First Closing, Seller shall provide, without additional cost
to Buyer (except for amounts due under the Employment Agreement), such
assistance as is reasonably requested by Buyer in order to effect an orderly
transition in the ownership and operation of the Assets and the Capital Stock;
provided, however, such post-First Closing assistance shall not, in any event,
exceed ten (10) hours per week. Such assistance by Seller or the Principal
Stockholders shall not constitute a default under such Employment Agreements
with Buyer.
4.3 Collection of Assets. Subsequent to the First Closing, Buyer shall
have the right and authority to collect all receivables (except as provided
herein) and other items transferred and assigned to Buyer by Seller hereunder
and to endorse with the name of Seller any checks received on account of such
receivables, and Seller agrees that it will promptly transfer or deliver to
Buyer from time to time, any cash or other property that such Seller may receive
with respect to any contracts, licenses, commitments, sales orders, purchase
orders, accounts receivable of any character or any other items included in the
Assets.
4.4 Payment of Obligations. Seller shall take appropriate action to
defend, pay or settle any Seller Liabilities to insure that no claims are
asserted against Buyer for such amounts and shall pay all of Seller's
Liabilities not otherwise disputed, denied or litigated, from the Purchase
Price.
4.5 Further Assurances. Seller, from time to time after the First Closing
at the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment to more effectively
transfer and assign to, and vest in, Buyer the Assets free and clear of all
Liens.
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Payment of Post-First Closing Liabilities. From and after the First
Closing Date, Buyer shall take appropriate action to defend, pay or settle any
obligations or liabilities arising under the Contracts or with regard to the
Assets or Business to insure that no claims are asserted against Seller for such
amounts.
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5.2 Contractual Obligations. After the execution hereof, Buyer shall
perform all obligations of Seller arising under the Contracts with regard to the
Contracts purchased and assigned to Buyer under this Agreement.
5.3 Further Assurances. Should an error or omission be discovered in this
Agreement or the Financial Statements after the First Closing, Buyer agrees to
cooperate with Seller to rectify such error or omission without further
consideration. Buyer agrees to execute and deliver further instruments necessary
to carry out the intent of this Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER AT THE FIRST CLOSING.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the First Closing Date,
of each of the following conditions, unless otherwise waived by Buyer in
writing:
6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the First Closing Date and shall have delivered all documents and items
required to be delivered at or prior to the First Closing, including, without
limitation:
(a) A certificate, dated the First Closing Date, from the President
of Seller to the effect that the conditions set forth in Sections 6.1, 6.8 and
6.9 have been satisfied and that the representations and warranties of Seller
set forth in Section 2 are true and correct;
(b) A certificate, dated the First Closing Date, from Seller's
Secretary certifying as to the Certificate of Incorporation, By-Laws, authority
and the incumbency of all officers executing this Agreement and the Seller
Documents on behalf of Seller;
(c) A copy of Seller's Certificate of Incorporation from the
Secretary of State of the State of Florida;
(d) An Amendment to the Articles of Incorporation and any other
required documentation, which effect a change of Seller's name, which name
change shall take effect not more than five (5) days following the date of First
Closing; and
(e) A Certificate of Good Standing from the Secretary of State of
the State of Florida.
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6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit C;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit D; and
(c) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit E.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
assumed by Buyer shall have been duly and validly assigned to Buyer by Seller,
and all consents and approvals required in connection with the consummation of
the transactions contemplated hereby under any Contract or Authorization or
otherwise shall have been obtained by Buyer in form and substance satisfactory
to Buyer. All such Contracts and Authorizations shall remain in full force and
effect and shall not have been amended, modified or repudiated in any material
respect by either party thereto. Neither Seller nor, to the knowledge of Seller
and the Principal Shareholders, the other party thereto, shall have breached or
defaulted under any Contract or Authorization. Seller shall not have received
notice of or have knowledge of any fact which could result in the termination,
repudiation or breach of any Contract or Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-Competition Agreement. Seller shall have executed and delivered to
Buyer a Non-Competition Agreement in substantially the form attached hereto as
Exhibit F.
6.6 Release of Liens. Seller and Buyer shall reasonably cooperate and
assist Seller in obtaining and delivering to Buyer at, prior to or immediately
following the First Closing instruments (including payoff letters, bills of sale
and UCC-3 termination statements) releasing any and all Liens on the Assets.
6.7 Opinion of Seller's Counsel. Buyer shall have received the opinion of
Fallace & Associates, P.A., counsel for Seller, dated the First Closing Date,
substantially in the form of Exhibit G attached hereto.
6.8 Minimum Number of Subscribers. Seller must submit proof, through the
Subscriber List attached hereto, that it is delivering to Buyer at the First
Closing documentation establishing the assignment and transfer of a minimum of:
(a) 2,400 Subscriber Services Agreements;
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(b) 140 Corporate Subscriber Services Agreements;
(c) 28 Dedicated Subscriber Services Agreements including 33.6 to
full T-1; and
(d) 100 Web-hosting/Domain-hosting Subscribers.
Prior to First Closing, Buyer shall review the Subscriber List to
determine that the requisite number of Subscribers are being delivered to Buyer.
Buyer shall notify Seller prior to First Closing if the requisite number are not
being delivered, and the Purchase Price shall be mutually adjusted prior to the
First Closing to reflect the proper number of actual Subscribers being
transferred.
SECTION 6A. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER AT THE SECOND CLOSING.
6A.1 Performance of Agreements and Deliveries on the Second Closing. The
Principal Shareholders shall have performed in all material respects all of its
covenants, agreements and obligations under this Agreement which are to be
performed or complied with by such Principal Shareholders prior to or upon the
Second Closing Date and shall have delivered all documents and items required to
be delivered at or prior to the Second Closing, including, without limitation:
(a) A certificate, dated the Second Closing Date (the "Second
Closing Certificate"), from the Principal Shareholders to the effect that: (i)
they have obtained all necessary regulatory approvals pertaining to the purchase
and sale of the Capital Stock and business of Port St. Lucie; (ii) the
representations and warranties made by such Principal Shareholders with respect
to Port St. Lucie and the Capital Stock in this Agreement are true and correct
in all material respects on the Second Closing Date with the same force and
effect as if they had been made on and as of that date; and (iii) there has been
no material adverse change in the financial condition of Port St. Lucie on or
prior to the Second Closing Date;
(b) A certificate, dated the Second Closing Date, from Port St.
Lucie's Secretary certifying as to the Certificate of Incorporation, By-Laws,
authority and the incumbency of all officers executing this Agreement and the
Seller Documents on behalf of Port St. Lucie;
(c) A copy of Port St. Lucie's Certificate of Incorporation from the
Secretary of State of the State of Florida; and
(d) A certificate of good standing for Port St. Lucie from the
Secretary of State of the State of Florida.
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6A2. Opinion of Principal Shareholders' Counsel. Buyer shall have received
the opinion of Fallace & Associates, P.A., counsel for the Principal
Shareholders, dated the Second Closing Date, substantially in the form of
Exhibit H attached hereto.
6A3. Consent of Senior Lender. Buyer shall have received the consent of
its senior lender to purchase the shares of Capital Stock.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER AT THE FIRST CLOSING.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the First Closing
Date, of the following conditions, unless waived by Seller in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the First Closing Date and shall have delivered all documents and items
required to be delivered at or prior to the First Closing, including, without
limitation:
(a) A certificate, dated the First Closing Date, from the President
of Buyer to the effect that the conditions set forth in Section 7.1 have been
satisfied and that the representations and warranties of Buyer set forth in
Section 3 are true and correct;
(b) A certificate, dated the First Closing Date, from Buyer's
Secretary as to the Certificate of Incorporation, By-Laws, authority and the
incumbency of all officers executing the Buyer Documents on behalf of Buyer;
(c) A copy of Buyer's Certificate of Incorporation from the
Secretary of State of the State of Delaware;
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware;
(e) A Certificate from the State of Florida certifying that Buyer
has properly registered to do Business in the State of Florida.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Employment Agreements. Buyer agrees to enter into a one-year
employment agreement with each of James Taylor and Tom Batchellor, dated the
First Closing Date, substantially in the form of Exhibit I attached hereto.
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7.4 Opinion of Buyer's Counsel. Seller shall have received an opinion of
Goodwin, Procter & Hoar LLP, counsel for Buyer, dated the First Closing Date,
substantially in the form of Exhibit J attached hereto.
SECTION 7A. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER AND THE PRINCIPAL
SHAREHOLDERS AT THE SECOND CLOSING.
7A. Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Second Closing Date and shall have delivered all documents and items
required to be delivered at or prior to the Second Closing, including, without
limitation:
(a) A certificate, dated the Second Closing Date, from the President
of Buyer to the effect that the conditions set forth in Section 7A have been
satisfied and that the representations and warranties of Buyer set forth in
Section 3 are true and correct;
(b) A certificate, dated the Second Closing Date, from Buyer's
Secretary as to the Certificate of Incorporation, By-Laws, authority and the
incumbency of all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware;
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware;
(e) A Certificate from the State of Florida certifying that Buyer
has properly registered to do Business in the State of Florida.
SECTION 8. SURVIVAL.
Each of the representations, warranties, agreements, covenants and
obligations herein or in any schedule, exhibit, certificate or financial
statement delivered by any party to the other party incident to the transactions
contemplated hereby are material, shall be deemed to have been relied upon by
the other party and shall survive the First Closing and shall not merge in the
performance of any obligation by either party hereto.
SECTION 9. INDEMNIFICATION.
9.1 Indemnification by Seller and the Principal Shareholders.
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(a) Seller and each of the Principal Shareholders hereby agrees,
jointly and severally, to indemnify and hold harmless Buyer, its affiliates and
its and their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Principal
Shareholders in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller or the Principal Shareholders
in this Agreement or in any schedule, exhibit, certificate, financial statement,
agreement or other instrument delivered pursuant to this Agreement; (iii) any
claim made by any person or entity which relates to the operation of the Assets
or the Business which arises in connection with or on the basis of events, acts,
omissions, conditions or any other state of facts occurring on or existing
before the First Closing Date; (iv) any claim which arises in connection with
any Excluded Liabilities; (v) any claim made by any person or entity which
relates to the operation of Port St. Lucie which arises in connection with, or
on the basis of events, acts, omissions, conditions or any other state of facts
occurring on or existing before the Second Closing and (vi) any claim arising
from Seller's or the Principal Shareholders' failure to perform all of its or
his obligations under the Bill of Sale, Assignment of Internet Domain Name, and
Assignment and Assumption Agreement.
9.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents,
including the Principal Shareholders (individually, a "Seller Indemnified Party"
and collectively, "Seller Indemnified Parties") at all times against and in
respect of all losses, liabilities, obligations, damages, deficiencies, actions,
suits, proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants), of any kind or nature whatsoever, to the extent sustained,
suffered or incurred by or made against any Seller Indemnified Party, to the
extent based upon, arising out of or in connection with: (i) any breach of any
representation or warranty made by Buyer in this Agreement or in any schedule,
exhibit or certificate delivered pursuant to this Agreement; (ii) any breach of
any covenant or agreement made by Buyer in this Agreement or in any schedule,
exhibit or certificate delivered pursuant to this Agreement; (iii) any claim
made against Seller which relates to, results from or arises out of Buyer's
operation of the Assets or the Business from and after the First Closing Date;
(iv) any claim asserted against Seller Indemnified Parties by Buyer's broker for
any claims or commissions due; (v) any claim asserted against Seller Indemnified
Parties away from or relating to any of the Contracts; (vi) any claim asserted
against Seller Indemnified Parties arising from or relating to the operation of
Port St. Lucie after the Second Closing and (vii) any claim arising from Buyer's
improper
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exercise of any right under the Bill of Sale, Assignment of Internet Domain
Name, and Assignment and Assumption Agreement.
9.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
(a party against whom a claim for indemnification is asserted) of notice of any
claim, liability or expense to which either Seller or Buyer believes the
indemnification obligations hereunder would apply ("Indemnifiable Claims"), and
in any event within thirty (30) days of becoming aware of such claim the
indemnified party shall give notice thereof in writing to the indemnifying
party. Such notice shall state the information then available regarding the
amount and nature of such claim, the person or entity asserting the claim, the
liability or expense and shall specify the provision or provisions of this
Agreement under which the liability or obligation is asserted. Failure to
provide notice within such thirty-day period shall constitute a waiver of any
right to assert a claim against the Escrow Fund for such claim, but shall not
waive any other right that either Seller or Buyer may have under this Agreement.
(b) Third Party Claims. With respect to a claim for indemnification
arising from a claim asserted by any persons or entities (other than Buyer or
Seller directly under the Agreement) against either party ("Third Party
Claims"), if within twenty (20) days after receiving the notice described in
clause (a) above the indemnifying party gives (i) written notice to the
indemnified party stating that (A) it would be liable under the provisions
hereof for indemnity in the amount of such claim if such claim were successful
and (B) that it disputes and intends to defend against such claim, liability or
expense at its own cost and expense and (ii) provides reasonable assurance to
the indemnified party that such claim will be promptly paid in full if required,
then counsel for the defense shall be selected by the indemnifying party
(subject to the consent of the indemnified party which consent shall not be
unreasonably withheld) and the indemnified party shall not be required to make
any payment with respect to such claim, liability or expense as long as the
indemnifying party is conducting a good faith and diligent defense at its own
expense; provided, however, that the assumption of defense of any such matters
by the indemnifying party shall relate solely to the claim, liability or expense
that is subject or potentially subject to indemnification. The indemnified party
shall reasonably cooperate with the indemnifying party and its counsel in the
defense of such claim and shall not make any admission or take any actions which
impair, hinder or obstruct the ability to defend against a Third Party Claim or
which admit, concede or settle the claim without the consent of the indemnifying
party. The indemnifying party shall have the right, with the consent of the
indemnified party, which consent shall not be unreasonably withheld, to settle
all indemnifiable matters related to claims by third parties which are
susceptible to being settled provided the indemnifying parties' obligation to
indemnify the indemnified party therefor will be fully satisfied. The
indemnifying party shall keep the indemnified party apprised of the status of
the claim, liability and any resulting suit, proceeding or enforcement action,
shall furnish the indemnified party with all documents and information that the
indemnified party shall reasonably request (except for documents protected by
the attorney/client or work product privileges) and shall consult with the
indemnified party prior
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to acting on major matters, including settlement discussions, however only to
the extent such actions may impose restrictions, obligations or liability upon
the indemnified party. Notwithstanding anything herein stated, the indemnified
party shall at all times have the right to fully participate in such defense at
its own expense directly or through counsel (with the cost of such participation
not constituting an indemnifiable claim hereunder) provided such participation
does not impair, hinder, interfere with or obstruct the indemnifying party's
defenses and settlement of any claims and ; provided, however, if the named
parties to the action or proceeding include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate under applicable standards of professional conduct, the expense
of separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by the
indemnified party), and shall have the right to reasonably compromise or settle
(exercising reasonable business judgment), such claim, liability or expense. If
such claim, liability or expense is one that by its nature cannot be defended
solely by the indemnifying party, then the indemnified party shall make
available all information and assistance that the indemnifying party may
reasonably request and shall cooperate with the indemnifying party in such
defense.
(c) Non-Third Party Claims. With respect to non-third party claims
(those asserted by Buyer or Seller directly under this Agreement for
Indemnifiable Claims), if within twenty (20) days after receiving the notice
described in clause (a) above the indemnifying party does not give written
notice to the indemnified party that it contests such indemnity, the amount of
indemnity payable for such claim shall be as set forth in the indemnified
party's notice. If the indemnifying party provides written notice to the
indemnified party within such 20-day period that it contests such indemnity in
whole or in part, the parties shall attempt in good faith to reach an agreement
with regard thereto within thirty (30) days of delivery of the indemnifying
party's notice.
9.4 Claims Against Escrow Deposit. In the event that any Buyer Indemnified
Party sustains or incurs actual damages, liabilities, losses, taxes, fines,
penalties, costs or expenses, including, without limitation, attorneys fees, for
which it believes it is entitled to indemnification from Seller or the Principal
Shareholders under this Agreement and on the condition that Buyer has otherwise
complied with the provisions for asserting claims for indemnification herein
(including the right to collect directly from Seller or the Principal
Shareholders), such Buyer Indemnified Party shall be entitled to make a claim
against and receive in cash from the Escrow Deposit an amount equal to the
damages, liabilities, losses, taxes, fines, penalties, costs and expenses,
including, without limitation, attorneys fees, sustained or incurred by such
Buyer Indemnified Party. In order to assert a claim against the Escrow Fund and
potentially receive payment, in addition to the notice provisions herein, Buyer
must comply with the terms and provisions contained in the Escrow Agreement (as
defined herein).
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SECTION 10. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
If to Seller: MetroLink Internet Services, Inc.
3556 Long Leaf Drive
Melbourne, Florida 32940
Attn.: James Taylor, President
With a copy to: Fallace & Associates, P.A.
1900 S. Hickory Street
Melbourne, Florida 32901
Attn.: David G. Larkin
Fax No.: (407) 724-6002
If to Buyer: DURO Communications, Inc.
1800 Pembroke Drive
Suite 300
Orlando, Florida 32810
Attn.: Peter B. Hopper, President
Fax No.: (407) 660-0012
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn.: David F. Dietz, P.C.
Fax No.: (617) 523-1231
SECTION 11. MISCELLANEOUS.
11.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors and assigns.
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11.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
11.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
11.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
11.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
11.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
11.7 Governing Law / Exclusive Venue. This Agreement and the transactions
contemplated hereby shall be construed in accordance with and governed by the
laws of the State of Florida, without regard to conflict of laws principles. The
exclusive venue for any action arising out of or relating to this Agreement
shall be Orlando, Florida.
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
11.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
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11.10 Dispute Resolution. In the event of a dispute or breach of or
arising under this Agreement, both parties agree to attempt to amicably resolve
the dispute between themselves. Prior to either party initiating any action in a
court of competent jurisdiction for an alleged breach of this Agreement, both
parties agree to submit the dispute and/or alleged breach to non- binding
mediation before a mediator agreed to by both parties, and both parties agreed
to participate in good faith in such mediation to resolve all matters arising
under this Agreement. The cost of the mediation shall be born equally by both
parties and the mediation shall take place at an agreed location in Orlando,
Florida or other place mutually agreed upon by the parties. Only upon the
mediator determining that an impasse has been reached shall either party be
entitled to bring an action in a court of competent jurisdiction. In any action
or proceeding arising out of or relating to this Agreement or a dispute herein,
the prevailing party in such action or proceeding shall be entitled to recover
its reasonable costs, expenses and attorney fees (through the appellate levels).
11.11 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, Seller, Principal Shareholders and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
METROLINK INTERNET SERVICES, INC.
By: /s/ James Taylor
----------------------------------------
James Taylor, President
PRINCIPAL SHAREHOLDERS:
/s/ James Taylor
-------------------------------------------
James Taylor
/s/ Tom Batchellor
-------------------------------------------
Tom Batchellor
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
----------------------------------------
Peter B. Hopper, President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A - Form of Port St. Lucie Escrow Agreement
Exhibit B - Form of Escrow Agreement
Exhibit C - Form of Bill of Sale
Exhibit D - Form of Assignment and Assumption Agreement
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Form of Non-Competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Form of Opinion of Principal Shareholders' Counsel
Exhibit I - Form of Employment Agreement
Exhibit J - Form of Opinion of Buyer's Counsel
SCHEDULES
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Current Assets
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.3(b) Equipment Lease Liabilities
Schedule 2.9 Litigation
Schedule 2.11 Financial Statements
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Subscriber Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.20 Intellectual Property
Schedule 2.25(c) Beneficial Ownership of Capital Stock
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Exhibit 2.11
ASSET PURCHASE AGREEMENT
Agreement made as of September 22, 1999 by and between DURO
Communications, Inc., a Delaware corporation ("Buyer"), Gibralter Data Services,
Inc. a North Carolina corporation ("GDS") and Gibralter Publishing, Inc., a
North Carolina corporation and the sole shareholder of GDS ("GPI") (GDS and GPI
are hereinafter sometimes collectively referred to as the "Seller" or the
"Sellers").
WHEREAS, subject to the terms and conditions hereof, each Seller desires
to sell, transfer and assign to Buyer, and Buyer desires to purchase from each
Seller, all of the properties, rights and assets used or useful in connection
with such Seller's Internet connectivity service business (the "Business"), as
more fully described herein.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, each Seller agrees to sell, assign, transfer and deliver
to Buyer, and Buyer agrees to purchase from such Seller, all of such Seller's
right, title and interest in and to all of the following properties, assets and
business of the Business of every kind and description, tangible and intangible,
real, personal or mixed, and wherever located, but excluding the Excluded Assets
(as defined in Section 1.2 below):
(a) Equipment. The servers, routers, modems, computers, electronic
devices, test equipment and all other fixed assets, equipment, parts and
accessories owned by each Seller and used or held for use in connection with the
Business and which are set forth on Schedule 1.1(a) attached hereto
(collectively, "Equipment");
(b) Contracts. All of the rights of each Seller under, and interest
of such Seller in and to, all contracts relating to the Business (other than the
Excluded Contracts (as defined in Section 1.2(b) below)), including, without
limitation, original contracts for the provision of Internet connectivity,
dedicated service, web-hosting, web-domain, dial-up services, web-development
and Internet commerce, all leases with respect to real property and all
co-location agreements, a true, correct and complete list of which contracts is
attached hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. Each Seller's Intellectual Property (as
defined in Section 2.20) relating to the Business, as set forth on Schedule
1.1(c) attached hereto;
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(d) Licenses and Authorizations. Except as set forth on Schedule
1.1(d), all rights associated with the licenses, licensing agreements, permits,
easements, registrations, domains, IP addresses and authorizations issued or
granted to each Seller by any governmental authority with respect to the
operation of the Business, including, without limitation, those licenses and
authorizations listed on Schedule 1.1(d) attached hereto, and all applications
therefor, together with any renewals, extensions, or modifications thereof and
additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of each
Seller relating to the Business (the "Current Assets"), including cash,
inventory, expenses prepaid by such Seller, security deposits made by such
Seller, advance payments paid by such Seller and all accounts receivable of such
Seller incurred in the ordinary course of business and included on such Seller's
balance sheet as of the Closing Date, as determined in accordance with generally
accepted accounting principles ("GAAP"), consistently applied; a complete list
of such accounts receivable is attached hereto as Schedule 1.1(e) ("Accounts
Receivable");
(f) Goodwill. All of the goodwill of each Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of each Seller's customer logs, location files and
records and other business files and records, in each case relating to the
Business, but not including any such logs, files and records to the extent they
relate to the Excluded Assets and not to the Business.
The assets, properties and business of each Seller being sold to and
purchased by Buyer under this Section 1.1 are referred to herein collectively as
the "Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by each Seller, to the extent in existence on the Closing Date, the following
assets (the "Excluded Assets"):
(a) Other Assets. All other assets of such Seller which are not used
or held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date;
(b) Excluded Contracts. All of such Seller's right, title and
interest in, to and under the Contracts listed on Schedule 1.2(b) attached
hereto (the "Excluded Contracts");
(c) Insurance. All of such Seller's insurance contracts and all
insurance proceeds of settlement and insurance claims made by such Seller on or
before the Closing Date
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as set forth on Schedule 1.2(c) attached hereto;
(d) Tax Items. All of such Seller's claims, rights and interest in
and to any refunds for federal, state or local Taxes (as defined in Section
2.4(a) below);
(e) Corporate Records. All of such Seller's corporate and other
organizational records; and
(f) Bank Accounts. All of such Seller's bank accounts;
(g) Employees. All of such Seller's rights, claims and interests
with respect to its employees; and
(h) Trademarks and Tradenames. All of such Seller's rights, title
and interest in any tradenames or trademarks with respect to the name
"Gibralter" except as set forth on Schedule 1.1(c) hereto and in the License
Agreement.
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein neither Seller shall have any further
liability or responsibility for or with respect to, (i) liabilities and
obligations arising out of events occurring on and after the Closing Date
related to Buyer's ownership of the Assets and Buyer's operation of the Business
after the Closing Date; (ii) accounts payable, accrued expenses, all deferred
revenues and any other current liability of such Seller as of the Closing Date
(except the current portion of any bank debt or line of credit to be paid
pursuant to Section 1.5) relating to the Business and included on such Seller's
balance sheet, or incurred in the ordinary course since the date of such balance
sheet, as determined in accordance with GAAP consistently applied (the "Assumed
Current Liabilities"); and (iii) all obligations and liabilities of such Seller
relating to the Business which are to be performed after the Closing Date
arising under the Contracts, including, without limitation, such Seller's
obligations arising under the Sprint telecommunications contracts as set forth
on Schedule 1.1(b) as items 1(a) and 1(b) and such Seller's obligations to
Subscribers (as defined in Section 2.16) under such Contracts for (A) Subscriber
deposits held by such Seller as of the Closing Date in the amount for which
Buyer receives a credit pursuant to Section 1.6(a) below, (B) Subscriber advance
payments held by such Seller as of the Closing Date for services to be rendered
in connection with the Business in the amount for which Buyer receives a credit
pursuant to Section 1.6(a) below, and (C) the delivery of Internet connectivity
service to Subscribers (whether pursuant to a Contract or otherwise) after the
Closing Date ((i), (ii) and (iii) together, the "Assumed Liabilities"). The
assumption of the Assumed Liabilities by Buyer hereunder shall not enlarge any
rights of third parties under contracts or arrangements with Buyer or either
Seller or any of their respective
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affiliates or subsidiaries. No parties other than Buyer and each Seller shall
have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of either Seller of any kind or nature at any time
existing or asserted, whether, known, unknown, fixed, contingent or otherwise,
not specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date on which all of the
conditions to closing set forth in Sections 6 and 7 of this Agreement have been
satisfied or waived, or at such other time and place as shall be mutually agreed
upon in writing by Buyer and Sellers, but in no event later than October 1, 1999
(the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Sellers to Buyer of
the Assets, and subject to the assumption by Buyer of the Assumed Liabilities
and satisfaction of the conditions contained herein, Buyer shall pay at the
Closing an amount (as adjusted in accordance with Section 1.6 below, the
"Purchase Price") equal to $4,106,000 as follows:
(a) Buyer shall deliver to Sellers by bank cashier's check or bank
wire transfer pursuant to the instructions attached hereto as Schedule 1.5(b)
$3,701,000 plus or minus, as applicable, the Estimated Adjustment (as defined in
Section 1.6(c) below); and
(b) Buyer shall deposit the sum of $405,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow
Agreement in the form attached hereto as Exhibit A (the "Escrow Agreement"). The
Escrow Deposit shall be held, administered and distributed in accordance with
the terms of the Escrow Agreement, and shall be a remedy of Buyer for any
indemnification claims made pursuant to Section 10 hereof.
1.6 Adjustments to Purchase Price.
(a) Net Working Capital. The Purchase Price shall be decreased, on a
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dollar-for-dollar basis, by the amount of Sellers' Net Working Capital (as
defined herein) if such amount is negative, or increased dollar for dollar by
the amount of Sellers' Net Working Capital if such amount is positive. "Net
Working Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the Closing Date.
(b) Revenues Adjustment Amount. The Purchase Price shall be
decreased, on a dollar-for-dollar basis, by (i) the Revenues Adjustment Amount
(as defined herein) in the event Recurring Revenues (as defined herein) for the
31 calendar days prior to the Closing are less than $157,000 (annualized at
$1,884,000) (the "Target Revenues"). For purposes hereof, the term "Revenues
Adjustment Amount" shall equal the product obtained by multiplying (i) $2,000 by
(ii) the quotient obtained by dividing (X) the Annualized Recurring Revenues
Deficiency (as defined herein), by (Y) one thousand dollars ($1,000). For
purposes hereof, "Recurring Revenues" shall mean revenues of Sellers from
Subscribers (determined on an accrual basis), calculated by multiplying the
number of Subscribers as of the Closing Date by the average monthly rate in
effect as of the Closing Date for such Subscribers, by type, excluding one-time
set-up fees and other ancillary charges. For purposes hereof, the term
"Annualized Recurring Revenues Deficiency" shall equal the product of the
difference between (A) the Target Revenues and (B) Recurring Revenues (or
Average Recurring Revenues (as defined herein), as the case may be) multiplied
by twelve (12). Notwithstanding anything to the contrary in this Section 1.6(b),
(1) in the event that Recurring Revenues for the 31 calendar days prior to the
Closing are less than $155,000, Recurring Revenues shall mean revenues of
Sellers from Subscribers (determined on an accrual basis), calculated by
multiplying the average number of Subscribers for during the 90-calendar day
period immediately preceding the Closing by the average monthly rate in effect
for such Subscribers during such period, by type, excluding one-time set-up fees
and other ancillary charges (as calculated, the "Average Recurring Revenues"),
and (2) in the event that Average Recurring Revenues are equal to or greater
than $157,000, the Revenues Adjustment Amount shall be deemed to be zero ($0).
(c) Estimated Adjustment Statement. To facilitate the determination
of the Purchase Price payable at the Closing pursuant to Sections 1.6(a) and
1.6(b) above, prior to the Closing, Buyer and Sellers shall prepare a statement
to be attached hereto as Schedule 1.6(c) (the "Estimated Adjustment Statement")
which sets forth (x) the estimated amount of the Net Working Capital as of the
Closing Date (the "Estimated Net Working Capital") and (y) the estimated
Revenues Adjustment Amount (the "Estimated Revenues Adjustment Amount"). The
Purchase Price payable at the Closing Date shall be decreased on a
dollar-for-dollar basis by the amount of the Estimated Revenues Adjustment
Amount. The Purchase Price payable at Closing shall be further reduced on a
dollar-for-dollar basis by the amount of the Estimated Net Working Capital if
such number is negative. The Purchase Price payable at Closing shall be
increased on a dollar-for-dollar basis by the amount of the Estimated Net
Working Capital if such number is positive. The net adjustment to the Purchase
Price calculated under this subsection (c) shall be referred to as the
"Estimated Adjustment."
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(d) Final Adjustment Statement.
(i) No later than sixty (60) days following the Closing Date,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital and
the actual Revenues Adjustment Amount, together with a copy of Buyer's
work papers showing in reasonable detail the calculation of the actual Net
Working Capital and the actual Revenues Adjustment Amount on the Final
Adjustment Statement. Subject to Section 1.6(d)(ii) below, within ten (10)
days following the delivery of such Final Adjustment Statement to Sellers,
Buyer or Sellers, as the case may be, shall pay to the other party, by
wire transfer of immediately available funds, the difference between the
Estimated Net Working Capital and the Estimated Revenues Adjustment
Amount, as shown on the Estimated Adjustment Statement, and the actual Net
Working Capital and the actual Revenues Adjustment Amount, as shown on the
Final Adjustment Statement.
(ii) In the event Sellers object to the Final Adjustment
Statement and/or the calculation by Buyer of the actual Net Working
Capital or the actual Revenues Adjustment Amount, Sellers shall notify
Buyer in writing of such objection within the ten (10) day period
following the delivery thereof, stating in such written objection the
reasons therefor and setting forth the Sellers' calculation of Sellers'
actual Net Working Capital and the actual Revenues Adjustment Amount at
the Closing Date. Upon receipt by Buyer of such written objection, the
parties shall attempt to resolve the disagreement concerning the Final
Adjustment Statement through negotiation. Notwithstanding any other
dispute resolution procedure provided for in this Agreement, if Buyer and
Sellers cannot resolve such disagreement concerning the Final Adjustment
Statement within thirty (30) days following the end of the foregoing
10-day period, the parties shall submit the matter for resolution to a
nationally recognized firm of independent certified public accountants not
affiliated with either party and mutually selected by the parties (the
"Dispute Accountant"), with the costs thereof to be shared equally by the
parties. In the event that the parties cannot agree on the Dispute
Accountant, a nominee of each party shall agree on a third nominee, which
nominee shall finally serve as the Dispute Account. Such Dispute
Accountant shall deliver a statement setting forth its own calculation of
the Final Adjustment Statement to the parties within thirty (30) days of
the submission of the matter to such firm. Any payment shown to be due by
a party on the statement prepared by such Dispute Accountant shall be paid
to the other party promptly but in no event later than five (5) days
following the delivery of such statement by such accounting firm to the
parties.
1.7 Purchase Price Allocation. At or prior to the Closing, or as soon as
possible thereafter, and in any event no later than sixty (60) days following
the Closing, Sellers shall determine the allocation of the Purchase Price,
subject to Buyer's prior approval. Such allocation shall be binding upon Buyer
and Sellers for all purposes (including financial
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accounting purposes, financial and regulatory reporting purposes and tax
purposes). Buyer and Sellers each further agree to file their respective Federal
income tax returns and their respective other tax returns reflecting such
allocation, Form 8594 and any other reports required by Section 1060 of the
Internal Revenue Code of 1986, as amended (the "Code").
1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, each Seller shall deliver to Buyer all of the Contracts, with
such assignments thereof and consents to assignments as are necessary to assure
Buyer of the full benefit of the same. Each Seller shall also deliver to Buyer
at the Closing or as soon as reasonably possible all of such Seller's files and
records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, fees and duties under applicable law incurred
in connection with the sale, transfer and assignment of the Assets to the Buyer
will be borne and paid by Sellers, and Sellers shall promptly reimburse Buyer
for the payment of any such tax, fee or duty which Buyer is required to make
under applicable law.
1.10 Transfer of Assets. At the Closing, each Seller shall deliver or
cause to be delivered to Buyer a bill of sale and an assignment transferring to
Buyer title to all of the Assets and assigning to Buyer all of the Contracts,
together with all required consents. Such assignment and bill of sale (a) shall
be in form and substance reasonably satisfactory to Buyer and its counsel, (b)
shall effectively vest in Buyer good and marketable title to all of the Assets
free and clear of all Liens (as defined in Section 2.8 below), and (c) where
applicable, shall be accompanied by evidence of the discharge of all Liens
against the Assets. At the Closing, Buyer shall deliver to the Seller the
Assignment and Assumption Agreement in the form attached hereto as Exhibit C
(the "Assignment and Assumption Agreement").
1.11 Post-Closing Audits. Sellers hereby agree to provide such assistance
as Buyer reasonably requests to enable Buyer and its accountant to complete an
audit of the pre-Closing financial statement of Buyer, including, without
limitation, providing access to books and records and executing management
representation letters.
1.12 Closing Date Balance Sheet. No later than thirty (30) days following
the Closing, each Seller shall provide to Buyer a balance sheet dated as of the
Closing Date, which sets forth Buyer's accounts receivable, accounts payable,
and deferred or unearned revenue with respect to the Business, in each case as
determined in accordance with GAAP and consistent with such Seller's prior
practices.
1.13 Prorations and Adjustments. At the Closing, all real and personal
property taxes, assessments, rents and utilities shall be prorated between Buyer
and Seller, as appropriate, as of the Closing Date so as to allocate
responsibility for such items applicable to
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any period prior to the Closing to Seller and responsibility for such items
applicable to any period on or after the Closing to Buyer.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER.
In order to induce Buyer to enter into this Agreement, each Seller,
jointly and severally, hereby represents and warrants to Buyer as follows:
2.1 Organization; Subsidiaries.
(a) GPI is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. GPI has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of GPI's Certificate of Incorporation and By-Laws, each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. GPI is not in violation of any term of the Certificate of Incorporation
and By-Laws. GPI is duly qualified to do business in the state of its
incorporation, and is not required to be licensed or qualified to conduct its
business or own its property in any other jurisdiction, except where the failure
to be so licensed or qualified would not have a material adverse effect on the
operation of the Business or the value of the Assets.
(b) GDS is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. GDS has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of GDS's Certificate of Incorporation and By-Laws each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. GDS is not in violation of any term of the Certificate of Incorporation
and By-Laws. GDS is duly qualified to do business in the state of its
incorporation, and is not required to be licensed or qualified to conduct its
business or own its property in any other jurisdiction, except where the failure
to be so licensed or qualified would not have a material adverse effect on the
operation of the Business or the value of the Assets.
(c) Except as set forth on Schedule 2.1(c) hereto, neither Seller
has any subsidiaries or owns any securities issued by any other business
organization or governmental authority, except U.S. Government securities, bank
certificates of deposit and money market accounts acquired as short-term
investments in the ordinary course of its business. Other than GPI's 100%
ownership interest in GDS, neither Seller owns or has any direct or indirect
interest in or control over any corporation, partnership, joint venture or
entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of each Seller in connection with the transactions contemplated
by this Agreement
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have been duly and validly taken or will have been duly and validly taken prior
to Closing, and this Agreement and each other agreement, document and instrument
to be executed and delivered by or on behalf of each Seller pursuant to, or as
contemplated by, this Agreement (collectively, the "Seller Documents") has been
or shall be duly and validly authorized, executed and delivered by each such
Seller and no other action on the part of either Seller or their officers,
directors or shareholders shall be required in connection therewith. Each Seller
has full right, authority, power and capacity to execute and deliver this
Agreement and each other Seller Document and to carry out the transactions
contemplated hereby and thereby. This Agreement and each other Seller Document
constitutes, or when executed and delivered will constitute, the legal, valid
and binding obligation of each Seller enforceable in accordance with its
respective terms, subject to the effect upon enforceability of applicable
bankruptcy, insolvency, reorganization, moratorium and other laws affecting the
right of creditors generally and the exercise of judicial discretion in
accordance with general principles of equity.
2.3 No Conflicts. Except as set forth on Schedule 2.3, the execution,
delivery and performance by each Seller of this Agreement and each other Seller
Document does not and will not (i) violate any provision of the Certificate of
Incorporation and By-Laws of such Seller, in each case as amended to date, (ii)
constitute a material violation of, or conflict with or result in any material
breach of, acceleration of any obligation under, right of termination under, or
default under, any agreement or instrument to which such Seller is a party or by
which such Seller or the Assets are bound, (iii) violate any judgment, decree,
order, statute, rule or regulation applicable to such Seller or the Assets,
except where such violation would not have a material adverse effect on the
operation of the Business or the value of the Assets, (iv) require such Seller
to obtain any approval, consent or waiver of, or to make any filing with, any
person or entity (governmental or otherwise) that has not been obtained or made,
except for any such consent or waiver which if not obtained would not have a
material adverse effect on the Business or the value of the Assets, or (v)
result in the creation or imposition of any Lien (as defined in Section 2.8
below) on any of the Assets.
2.4 Taxes.
(a) To Sellers' knowledge, each Seller has paid or caused to be paid
or made adequate provision for all federal, state, local, foreign and other
taxes, including, without limitation, income taxes, estimated taxes, alternative
minimum taxes, excise taxes, sales taxes, use taxes, value-added taxes, gross
receipts taxes, franchise taxes, capital stock taxes, employment and
payroll-related taxes, withholding taxes, stamp taxes, transfer taxes, windfall
profit taxes, environmental taxes and property taxes, whether or not measured in
whole or in part by net income, and all deficiencies, or other additions to tax,
interest, fines and penalties owed by it (collectively, "Taxes"), required to be
paid by it through the date hereof with respect to the Business, whether
disputed or not.
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(b) Each Seller has in accordance with applicable law filed all
federal, state, local and foreign tax returns required to be filed by it through
the date hereof, and to Sellers' knowledge, all such returns correctly and
accurately set forth the amount of any Taxes relating to the applicable period.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of either Seller threatening to
assert against such Seller any deficiency or claim for additional Taxes. No
claim has ever been made by an authority in a jurisdiction where such Seller
does not file reports and returns that Seller is or may be subject to taxation
by that jurisdiction. There are no security interests on any of the Assets of
either Seller that arose in connection with any failure (or alleged failure) to
pay any Taxes. Neither Seller has ever entered into a closing agreement pursuant
to Section 7121 of the Code.
(d) Neither Seller is a "foreign person" within the meaning of
Section 1445 of the Code and Treasury Regulations Section 1.1445-2.
(e) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Each Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state,
municipal or other governmental authority (including the Federal Communications
Commission), and neither Seller has received notice of a violation or alleged
violation of any such statute, ordinance, order, rule or regulation.
2.6 Insurance. The Assets are insured to the extent disclosed on Schedule
2.6 attached hereto, and all such insurance policies and arrangements of each
Seller in effect as of the date hereof and relating to the Assets are disclosed
on said Schedule. Said insurance policies and arrangements are in full force and
effect, all premiums with respect thereto are currently paid, and each Seller is
in compliance in all material respects with the terms thereof.
2.7 Contracts. The Contracts, together with the Excluded Contracts,
constitute all material leases, material contracts and material arrangements,
whether oral or written, under which either Seller is bound or to which either
Seller is a party and which relate to the Business or Assets. Schedule 1.1(b)
attached hereto contains a true, correct and complete list of all Contracts.
With respect to each oral agreement or understanding involving the Business or
with respect to any electronic agreement with a Subscriber which was
acknowledged by such Subscriber automatically, each Seller has provided a
written summary of the material terms of each such agreement or understanding on
Schedule 1.1(b). Each Contract is valid, in full force and effect and binding
upon such Seller and to Seller's knowledge the other parties
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thereto in accordance with its terms. Except as set forth on Schedule 2.7
attached hereto, neither Seller nor, to the knowledge of either Seller, any
other party is in material default under or in material arrears in the
performance, payment or satisfaction of any agreement or condition on its part
to be performed or satisfied under any Contract, nor does any condition exist
that with notice or lapse of time or both would constitute such a material
default, and no waiver or indulgence has been granted by any party under any
Contract. Neither Seller has received notice of, and neither Seller has any
knowledge of, any fact which would result in a termination, repudiation or
breach of any Contract except as set forth on Schedule 2.7 attached hereto. Each
Seller has provided Buyer with true and complete copies of all of such
Contracts, other than with respect to the oral agreements or understandings
described on Schedule 1.1(b) or with respect to agreements with Subscribers
which were acknowledged by such subscribers electronically.
2.8 Title. Each Seller has good and marketable title to all of the Assets
owned by such Seller free and clear of all mortgages, pledges, security
interests, charges, liens, restrictions and encumbrances of any kind
(collectively, "Liens") except for any such liens, set forth on Schedule 2.8
attached hereto, which will be released on or prior to the Closing Date. Upon
the sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good and marketable
title to the Assets, free and clear of all Liens. The Assets include all of the
assets and properties (i) held for use by Sellers to conduct the Business as
presently conducted and (ii) necessary or useful for Buyer to operate the
Business in the same manner as such business is currently operated by Sellers,
except in each case for (a) the portmasters set forth on Schedule 2.8 which are
not part of the Assets and (b) the use of Seller's leasehold interests set forth
on Schedule 2.8 for the operation of the Business. All of the tangible Assets
are in good repair, have been well maintained and are in good operating
condition, ordinary wear and tear excepted, do not require any material
modifications or repairs, and comply in all material respects with applicable
laws, ordinances and regulations.
2.9 No Litigation. Neither Seller is now involved in nor, to the knowledge
of either Seller, is either Seller threatened to be involved in any litigation
or legal or other proceedings related to or affecting the Business or any Asset
(including any Intellectual Property) or which would prevent or hinder the
consummation of the transactions contemplated by this Agreement. Neither Seller
has been operating the Business under, and the Business is not subject to, any
order, injunction or decree of any court of federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
2.10 Employees; Labor Matters. GDS has never had any employees. A list of
employees of GPI who are instrumental to the conduct and operation of the
Business (collectively, the "Key Employees") is set forth on Schedule 2.10. GPI
enjoys generally good relations with the Key Employees. GPI will use
commercially reasonable efforts to provide the services of the Key Employees, or
if the Key Employees are no longer employed by GPI,
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other persons of comparable expertise and experience, to assist in the Buyer's
operation of the Business, subject to the terms of the Transition Services
Agreement.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of each Seller relating to the Business as of June 30, 1999
(collectively, the "Base Balance Sheets") and the statements of income and
expense of each Seller for the twelve (12) months ended June 30, 1999
(collectively, the "Financial Statements"). The Financial Statements are
complete and correct in all material respects and present fairly and accurately
the financial condition of the Business at the dates of said statements and the
results of operations of the Business for the periods covered thereby. As of the
date of the Base Balance Sheets (the "Base Balance Sheet Date"), neither Seller
had any material liabilities or obligations of any kind with respect to the
Business, whether accrued, contingent or otherwise, that are not disclosed and
adequately reserved against on the Base Balance Sheets. As of the date hereof
and at the Closing, neither Seller had and neither Seller will have any material
liabilities or obligations of any kind with respect to the Business, whether
accrued, contingent or otherwise, that are not disclosed and adequately reserved
against on the Base Balance Sheets.
2.12 Business Since the Base Balance Sheet Date. Except as set forth on
Schedule 2.12 attached hereto, since the Base Balance Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by either Seller with respect to the Business,
whether or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business, except as contemplated by this
Agreement;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of either Seller which was not reflected on the Base Balance Sheets;
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(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in either Seller's pricing,
marketing, customer service, billing, operational or promotional activities in
any material way from that which such Seller was providing these activities
directly prior to the Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for either Seller to take any of the actions specified
above.
2.13 Licenses. As of the date of this Agreement, Sellers are the holders
of all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated,
except for such Authorizations the failure to obtain which would not have a
material adverse effect on the Business or value of the Assets. All of the
Authorizations are in full force and effect and no licenses, permits or
authorizations of any governmental department or agency are required for the
operation of the Business which have not been duly obtained, except for such
Authorizations the failure to obtain which would not have a material adverse
effect on the Business or value of the Assets. As of the date hereof, there is
not pending or, to the knowledge of Sellers, threatened any action by or before
any governmental agency to revoke, cancel, rescind or modify any of the
Authorizations, and there is not now issued, outstanding, pending or, to the
knowledge of either Seller, threatened any order to show cause, notice of
violation, notice of apparent liability, or notice of forfeiture or complaint
against either Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by either Seller in connection with the execution and delivery of this
Agreement and the Seller Documents and the consummation of the transactions
contemplated hereby and thereby. All of the approvals, consents and
authorizations set forth on Schedule 2.14 shall be obtained by Sellers at or
prior to the Closing; provided, that in the event Sellers have not obtained all
of the approvals, consents and authorizations set forth on Schedule 2.14 at or
prior to the Closing, Seller shall so indicate on Schedule 2.14 the consents not
obtained, and shall use its best efforts to obtain such consents by not later
than 60 days after the Closing.
2.15 Customers and Suppliers. To the knowledge of Sellers, each Seller's
relations with its customers and suppliers relating to the Business, including
its Subscribers (as defined in Section 2.16 below), are good and there are not
pending or, to each such Seller's knowledge, threatened claims or controversies
with any customer, supplier or Subscriber that would have a material adverse
effect on the Assets or the Business.
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2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, all subscribers of the Business as listed by class, type and
billing plan. For purposes of this Agreement, the term "Subscriber" shall mean
any active subscriber as of the Closing Date to Internet services offered by
either Seller in the Business who has subscribed to a service for at least two
months and has paid at least two bills (except in the case of active subscribers
who began receiving Internet services in the 31 days prior to the Closing Date
as set forth on Schedule 2.16(a), who shall have subscribed to a service for at
least two months and have paid at least two bills as of the thirtieth (30th)
calendar day after the Closing Date), including, without limitation, any person
or corporation who receives dial-up Internet access through the Business (a
"Dial-up Subscriber"), any person who receives dedicated Internet access from
either Seller offering higher data transmission rates than available from
dial-up access (a "Dedicated Subscriber"), and any person with a web page or
domain name on either Seller's servers and to whom either Seller provide
Internet access (a "Web-hosting/Domain-hosting Subscriber"); provided, however,
that "Subscriber" shall not include any person who is (i) more than thirty (30)
days delinquent in payment of such person's bill for such services provided by
the Business and (ii) any person receiving complimentary Internet services. Set
forth on Schedule 2.16(b) attached hereto is a listing of all such accounts
which receive complimentary Internet services or Internet services at a
promotional discounted rate. Set forth on Schedule 2.16(c) attached hereto is
each Seller's policy and practice with respect to the disconnection of
Subscribers, with which such Seller has, except as set forth on Schedule on
Schedule 2.16(c), at all times since its inception, complied in all material
respects.
2.17 Brokers. Neither Seller has retained any broker or finder or other
person who would have any valid claim against any of the parties to this
Agreement for a commission or brokerage fee in connection with this Agreement or
the transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. Except as set forth on
Schedule 2.18 attached hereto, all of the Accounts Receivable of each Seller are
or will be as of the Closing Date bona fide, valid and enforceable claims,
subject to no set off or counterclaim and are collectible in accordance with
their terms subject to applicable bad debt reserves. With respect to the
Business, neither Seller has any accounts or loans receivable from any person,
firm or corporation which is affiliated with such Seller or from any director,
officer or employee of such Seller, or from any of their respective spouses or
family members.
2.19 [Intentionally deleted.]
2.20 Intellectual Property.
(a) All of the Intellectual Property of Sellers relating to the
Business is set forth on Schedule 2.20 attached hereto. For purposes hereof, the
term "Intellectual Property" shall mean: (i) all patents, patent applications,
patent rights, and inventions and discoveries and invention disclosures (whether
or not patented) (collectively, "Patents"); (ii) each Seller's
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rights to the names "Gibralter", trade names, trade dress, logos, packaging
design, slogans, any and all Internet domain names used or useful in the
business of Sellers, registered and unregistered trademarks and service marks
and applications (collectively, "Marks"); (iii) all copyrights in both published
and unpublished works, including, without limitation, all compilations,
databases and computer programs, and all copyright registrations and
applications, and all derivatives, translations, adaptations and combinations of
the above (collectively, "Copyrights"), (iv) all know-how, trade secrets,
confidential or proprietary information, customer lists, IP addresses, research
in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, prototypes, techniques, Beta
testing procedures and Beta testing results (collectively, "Trade Secrets"); (v)
the web-site known as gibralter.net (including the domain name
"www.gibralter.net"; and any other similar domain name); (vi) all goodwill,
franchises, licenses, permits, consents, approvals, technical information,
telephone numbers, and claims of infringement against third parties (the
"Rights"); and (vii) all contracts relating to the Intellectual Property to
which either Seller is a party or is bound, including, without limitation, all
nondisclosure and/or confidentiality agreements entered into by persons in
connection with disclosures by either Seller (collectively,"Assigned
Contracts"); provided, however, that items (i) through (vii) of this Section
2.20(a) shall include only items that are used or useful in connection with the
Business.
(b) Except as described on Schedule 2.20, each Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property used by it, free and clear of any Liens, and has the right
to use all of the Intellectual Property used by it without payment to any third
party. Except as described on Schedule 2.20, each Seller's rights in all of such
Intellectual Property are freely transferable. There are no claims or demands
pending or, to the knowledge of either Seller, threatened of any other person
pertaining to any of such Intellectual Property and no proceedings have been
instituted, or are pending or, to the knowledge of either Seller, threatened
against either Seller and/or its officers, employees and consultants which
challenge the validity and enforceability of such Seller's rights in respect of
the Intellectual Property. The Intellectual Property represents all of the
assets of Sellers of such class or type necessary for the operation of Seller's
Business as currently conducted.
Except as set forth on Schedule 2.20, all former and current employees,
consultants and contractors of each Seller have executed written instruments
with such Seller that assign to such Seller all rights to any inventions,
improvements, discoveries, or information relating to the business of such
Seller. To the best knowledge of each Seller after inquiry, no employee,
consultant or contractor of such Seller has entered into any agreement that
restricts or limits in any way the scope or type of work in which the employee,
consultant or contractor may be engaged or requires the employee, consultant or
contractor to transfer, assign, or disclose information concerning his work to
anyone other than such Seller.
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(c) Neither Seller owns any Patents.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Sellers' Marks used in the Business.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Copyrights used in the Business. Except
as set forth on Schedule 2.20, all of the Copyrights have been registered with
the United States Copyright Office and are currently in compliance with formal
legal requirements, are valid and enforceable, and are not subject to any fees
or taxes or actions falling due within ninety (90) days after the Closing Date.
In each case where a Copyright is held by Seller by assignment, the assignment
has been duly recorded with the U.S. Copyright Office and all other
jurisdictions of registration. All copies of works encompassed by the Copyrights
have been marked with the proper copyright notice.
(f) To the knowledge of Sellers, there has not been any breach by
any party of any confidentiality or non-disclosure agreement by any officer,
director, employee, consultant or contract of any Seller with respect to the
Business. The Trade Secrets have not been disclosed by either Seller to any
person or entity other than employees or contractors of such Seller who had a
need to know and use the Trade Secrets in the course of their employment or
contract performance. Each Seller has the right to use, free and clear of claims
of third parties, all Trade Secrets used by it. To the knowledge of each Seller,
there is not any assertion that the use by either Seller of any Trade Secret
violates the rights of any third party.
(g) Except as set forth on Schedule 2.20, Sellers have the exclusive
right to use, license, distribute, transfer and bring infringement actions with
respect to the Intellectual Property. Except as set forth on Schedule 2.20,
neither Seller (i) has licensed or granted to anyone rights of any nature to use
any of its Intellectual Property and (ii) is obligated to and does pay royalties
or other fees to anyone for its ownership, use, license or transfer of any of
its Intellectual Property.
(h) All licenses or other agreements under which either Seller is
granted rights by others in Intellectual Property are listed on Schedule 2.20.
All such licenses or other agreements are in full force and effect, to the
knowledge of each Seller there is no material default by any party thereto, and
except as set forth on Schedule 2.20, all of the rights of each Seller
thereunder are freely assignable. True and complete copies of all such licenses
or other agreements, and any amendments thereto, have been provided to Buyer,
and neither Seller has any reason to believe that the licensors under the
licenses and other agreements under which each Seller is granted rights and has
granted rights to others do not have and did not have all requisite power and
authority to grant the rights purported to be conferred thereby.
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(i) All licenses or other agreements under which either Seller has
granted rights to others in Intellectual Property are listed on Schedule 2.20.
All such licenses or other agreements are in full force and effect, and to the
knowledge of each Seller there is no material default by any party thereto. True
and complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to Buyer.
(j) Each Seller has reviewed the areas within its operations with
respect to the Business which could be adversely affected by, and has developed
a plan or program to address on a timely basis, the "Year 2000 Problem" (i.e.,
the risk that applications used by such Seller or its suppliers and/or providers
in connection with the operation of the Business may be unable to recognize and
properly perform date-sensitive functions involving certain dates prior to and
any date after December 31, 1999). Each of the Sellers reasonably believes that,
to the extent Sellers can reasonably anticipate and prepare for the "Year 2000
Problem," the "Year 2000 Problem" will not have any material adverse effect on
the operations of Seller with respect to the Business.
2.21 Absence of Restrictions. Neither Seller has entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth on Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of either Seller or, to the knowledge of either Seller, any of their
respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director or in another similar capacity of, any competitor or supplier of
Seller, or any organization which has a material contract or arrangement with
either Seller.
2.23 [Intentionally deleted.]
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, with respect to Seller's
operation of the Business on or from 1650A Gum Branch Road, Jacksonville, NC
28540 (the "Premises"), (i) neither Seller has generated, transported, used,
stored, treated, disposed of, or managed any Hazardous Waste (as defined in
Section 2.24(c) below) at any time; (ii) to the knowledge of each Seller, no
Hazardous Material (as defined in Section 2.24(c) below) has ever been or is
threatened to be spilled, released, or disposed of at any site associated with a
structure presently or formerly owned, operated, leased, or used by such Seller,
or has ever been located in the soil or groundwater at any such site; (iii) to
the knowledge of such Seller, no Hazardous Material has ever been transported
from any site associated with a structure presently or formerly owned, operated,
leased, or used by such Seller for treatment, storage, or disposal at any other
place; (iv) to Seller's knowledge, neither Seller presently owns,
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operates, leases, or uses, or has ever previously owned, operated, leased, or
used any site associated with a structure on which underground storage tanks are
or were located; and (v) no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used by either Seller in connection with the presence of any
Hazardous Material.
(b) Except as set forth on Schedule 2.24, with respect to Seller's
operation of the Business on or from the Premises, (i) neither Seller has any
liability under, nor has it ever violated, any Environmental Law (as defined in
Section 2.24(c) below); (ii) neither Seller, nor, to such Seller's knowledge,
any property associated with a structure owned, operated, leased, or used by
such Seller, nor facilities or operations thereon is presently not in compliance
with all applicable Environmental Laws; (iii) neither Seller has entered into or
been subject to any judgment, consent decree, compliance order, or
administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller has any knowledge or reason to know
that any of the items enumerated in clause (iii) of this subsection will be
forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety (other than ordinary cleaning supplies), as defined or regulated under
any Environmental Law; (ii) "Hazardous Waste" shall mean and include any
hazardous waste as defined or regulated under any Environmental Law; and (iii)
"Environmental Law" shall mean any environmental or health and safety-related
law, regulation, rule, ordinance, or By-law at the foreign, federal, state, or
local level, whether existing as of the date hereof, previously enforced, or
subsequently enacted, the violation of which could have a material adverse
effect on the Business or the value of the Assets.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
each Seller to Buyer pursuant to this Agreement do not contain any untrue
statement of a material fact, and, when taken together, do not omit to state a
material fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. There are no facts known to either
Seller which relate to Sellers' operation of the Business and which presently or
may, in Seller's reasonable business judgment, in the future have a material
adverse affect on the Business, properties, Assets, operations or (financial or
other) condition of either Seller with respect to the Business which has not
been specifically disclosed herein or in a Schedule furnished herewith, other
than general economic or market conditions or developments affecting the
Internet services industry generally.
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SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Sellers entering into this Agreement, Buyer
hereby represents and warrants to Sellers as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets. Buyer is qualified to do
business as a foreign corporation in the State of North Carolina.
3.2 Required Action: Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or By-Laws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a party or by which it is
bound, (c) violate any judgment, decree, order, statute, rule or regulation
applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver
of, or to make any filing with, any person or entity (governmental or otherwise)
that has not been obtained or made. The officers who execute this Agreement and
the other Buyer Documents contemplated hereby on behalf of Buyer have and shall
have all requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Except for fees payable to Rampart Associates, LLC, for which
Buyer is solely responsible, Buyer has not retained any broker or finder or
other person who would have any valid claim against any of the parties to this
Agreement for a commission or brokerage fee in connection with this Agreement or
the transactions contemplated hereby.
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3.5 Litigation. Buyer is not now involved in or, to Buyer's knowledge,
threatened to be involved in any litigation or legal or other proceedings which
would prevent or hinder the consummation of the transaction contemplated by this
Agreement.
3.6 Approvals; Consents. No approval, consent, authorization or exemption
from or filing with any person or entity not a party to this Agreement is
required to be obtained or made by Buyer in connection with the execution and
delivery of this Agreement and the Buyer Documents and the consummation of the
transactions contemplated hereby and thereby.
3.7 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Buyer to Sellers pursuant to this agreement do not contain any untrue statement
of a material fact, and, when taken together, do not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made.
SECTION 4. COVENANTS OF SELLER.
Each Seller covenants and agrees that:
4.1 Access to Premises and Records. From the date hereof until
consummation of the transactions contemplated hereby at the Closing, Seller
shall give Buyer and its representatives, at reasonable times and with
reasonable prior notice, free access to the properties, books and records of the
Business and to the Assets and will furnish to Buyer and its representatives
such information regarding the Business and the Assets as Buyer or its
representatives may from time to time reasonably request in order that Buyer may
have full opportunity to make a diligent investigation consistent with this
Agreement. In addition to, and not in limitation of the foregoing, Seller shall
provide Buyer with access to and copies of the records of all: (a) Accounts
Receivable, (b) Subscriber billings, (c) pre-paid accounts, (d) accounts for
which no remuneration is received by Seller and (e) general reports with respect
to each category of service provided by the Business.
4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions of which Buyer has been advised and to which Buyer has consented to in
writing, and except as specifically permitted or required by this Agreement,
from the date of this Agreement until the Closing, Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable
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efforts to preserve any beneficial business relationships with Subscribers,
customers, suppliers and others having business dealings with Seller relating to
the Business;
(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain adequate inventories of spare Equipment consistent with
past practices;
(d) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
(e) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(f) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those in effect on the date of this Agreement;
(g) Perform and comply in all material respects with the terms of
the Contracts and keep such Contracts in full force and effect; and
(h) Use its reasonable best efforts to preserve the goodwill of the
Business.
4.3 Negative Covenants. From the date of this Agreement until the Closing,
Seller shall not, without the prior written consent of Buyer:
(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets outside the
ordinary course of business;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business (other than in the ordinary course of
business) or which otherwise obligates Seller to perform in full or in part
beyond the Closing Date with respect to the Business;
(c) Renegotiate, modify, amend or terminate any Contract;
(d) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
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(e) Make any modifications or changes to the existing rate schedules
or product offerings in effect with respect to the Business;
(f) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions with respect to
the Business outside the ordinary course of business and not consistent with
Seller's past practices; or
(g) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement.
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract; provided, however, that "reasonable best
effort" for this purpose shall not require Seller to undertake extraordinary or
unreasonable measures to obtain such approvals and consents, including, without
limitation, the initiation or prosecution of legal proceedings or the payment of
fees in excess of customary filing and processing fees.
4.5 Notification of Certain Matters. Prior to Closing, Seller shall
promptly notify Buyer of (i) any fact, event, circumstances or action of which
Seller becomes aware, the existence or occurrence of which would cause any of
Seller's representations or warranties under this Agreement, or the disclosures
in any schedules or exhibits attached hereto, not to be true in any material
respect and (ii) any failure on its part to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. Seller shall promptly notify Buyer in
writing of the assertion, commencement or threat of any claim, litigation,
proceeding or investigation in which Seller is a party or in which the Assets or
Business may be affected and which could reasonably be expected to be material
or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Prior to Closing, Seller shall promptly notify Buyer
in writing of any materially adverse developments affecting the Assets or the
Business which become known to Seller, including, without limitation, (i) any
damage, destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii) any material notice
of violation, forfeiture or complaint under any material Contract, or (iii)
anything which, if not corrected prior to the Closing Date, would prevent Seller
from fulfilling any condition to Closing described in Section 6 hereof.
4.7 No Solicitation. Prior to the Closing, Seller shall not, and Seller
shall cause its officers, employees, stockholders, agents and representatives
(including, without limitation, any investment banker, attorney or accountant
retained by Seller) and all other employees who perform services with respect to
the operation of the Business not to, initiate, solicit or
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encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to the Assets or the Business, or engage in any negotiations
concerning, or provide to any other person any information or data relating to,
the Business, the Assets or Seller for the purpose of, or have any discussions
with, any person relating to, or otherwise cooperate in any way with or assist
or participate in, facilitate or encourage, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to, any effort
or attempt by any other person to seek or effect a transaction, or enter into a
transaction with any person or persons, other than Buyer, concerning the
possible sale of the Assets or Business, or the capital stock of Seller. Seller
shall promptly inform Buyer of any such inquiries or proposals and provide all
pertinent documentation related thereto.
4.8 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which becomes generally known in Buyer's industry without
breach by Seller of its confidentiality obligations hereunder, or which has been
disclosed to Seller by third parties which have a right to do so, shall not be
deemed confidential or proprietary information for purposes of this Agreement.
If the transactions contemplated by this Agreement are not consummated, Seller
will return, and cause its respective officers, directors, agents and
representatives to return, to Buyer (or certify that they have destroyed) all
copies of such data and information made available to Seller (and its officers,
directors, agents and representatives) in connection with the transaction.
4.9 Use of Trade Names. After the Closing Date, and subject to the terms
of the License Agreement, neither Seller, nor any person controlling, controlled
by or under common control with Seller will for any reason, directly or
indirectly, for itself or any other person, (a) use the names "Gibralter",
"Gibralter Data Services", "gibralter.net" or any other Internet domain name
used or useful in the business of Seller, or any other or (b) use or disclose
any trade secrets, confidential information, know-how, proprietary information
or other intellectual property of Seller transferred pursuant to this Agreement.
4.10 Delivery of Vehicle. Sellers covenant to deliver to Buyer on or
before October 10, 1999 (a) one 1998 Jeep Wrangler, vehicle identification
number 1J4FY29P7WP765389 (the "Jeep") and (b) good and marketable title to such
Jeep, free and clear of all mortgages, pledges, security interests, charges,
liens, restrictions and encumbrances of any kind.
4.11 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder as part of the Assets and to endorse with
the name of Seller any checks received on account of such receivables or other
items, and Seller agrees that it will promptly transfer or deliver to Buyer from
time to time, any cash or other property that such Seller may receive
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with respect to any claims, contracts, licenses, leases, commitments, sales
orders, purchase orders, receivables of any character or any other items
included in the Assets.
4.12 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due, subject to
the right to contest any such Excluded Liability with any third party.
4.13 Further Assurances. Seller, from time to time after the Closing at
the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens (as defined in
Section 2.8).
4.14 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due (subject to
the right of Seller to contest any such Excluded Liability in good faith).
4.15 Business Access Agreement. GPI shall negotiate in good faith with
Buyer the terms of a Business Access Agreement, or similar agreement, for the
purchase of Internet services from Buyer, the terms of which shall include, but
shall not be limited to, consideration of $5000 per month and a term of 24
months beginning as of the Closing Date.
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Confidentiality. Buyer agrees that, from the date hereof, Buyer and
its representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Seller with
respect to its business or financial condition except in connection with the
Business. Information generally known in Sellers' industry or which becomes
generally known in Seller's industry without breach by Buyer of its
confidentiality obligation hereunder, or which has been disclosed to Buyer by
third parties which have a right to do so shall not be deemed confidential or
proprietary information for purposes of this Agreement. If the transactions
contemplated by this Agreement are not consummated, Buyer will return, and cause
its respective officers, directors, agents and representatives to return, to
Seller (or certify that they have destroyed) all copies of such data and
information made available to Buyer (and its officers, directors, agents and
representatives) in connection with the transaction.
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5.2 Assumed Liabilities. From and after the Closing Date, Buyer shall pay
and/or perform the Assumed Liabilities in the ordinary course as they become
due, subject to the right to contest any such Assumed Liability with any third
party.
5.3 Notification of Certain Matters. Prior to Closing, Buyer shall
promptly notify Sellers of (i) any fact, event, circumstances or action of which
Buyer becomes aware, the existence or occurrence of which would cause any of
Buyer's representations or warranties under this Agreement, or the disclosures
in any schedules or exhibits attached hereto, not to be true in any material
respect and (ii) any failure on its part to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. Buyer shall promptly notify Sellers in
writing of the assertion, commencement or threat of any claim, litigation,
proceeding or investigation in which Buyer is a party or in which the Assets or
Business may be affected and which could reasonably be expected to be material
or which relates to the transactions contemplated hereby.
5.4 Business Access Agreement. Buyer shall negotiate in good faith with
GPI the terms of a Business Access Agreement, or similar agreement, for the
purchase of Internet services from Buyer, the terms of which shall include, but
shall not be limited to, consideration of $5000 per month and a term of 24
months, beginning as of the Closing Date.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
6.1 Performance of Agreements and Deliveries. Each Seller shall have
performed in all material respects all of its covenants, agreements and
obligations under this Agreement which are to be performed or complied with by
such Seller prior to or upon the Closing Date and shall have delivered all
documents and items required to be delivered at or prior to the Closing,
including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
such Seller to the effect that the conditions set forth in Sections 6.1, 6.2 and
6.9 have been satisfied;
(b) A certificate, dated the Closing Date, from such Seller's
Secretary as to the Certificate of Incorporation, By-Laws, authority and the
incumbency of all officers executing the Seller Documents on behalf of such
Seller;
(c) A certified copy of such Seller's Certificate of Incorporation
from the Secretary of State of the State of North Carolina;
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(d) With respect to GDS, an Amendment to the Certificate of
Incorporation and any other required documentation, which effect a change of
Seller's name, which name change shall take effect not more than five (5) days
following the date of Closing;
(e) A Certificate of Existence from the Secretary of State of the
State of North Carolina; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Each Seller shall have delivered to Buyer the
following instruments of transfer and assignment in accordance with the
provisions hereof, transferring to Buyer all of such Seller's right, title and
interest in and to the Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement;
(c) An Assignment of Copyright and Trademarks in the form attached
hereto as Exhibit D;
(d) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit E;
(e) a Transition Services Agreement in the form attached hereto as
Exhibit H (the "Transition Services Agreement");
(f) a License Agreement for tradenames and Marks in the form
attached hereto as Exhibit I (the "License Agreement"); and
(g) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by each Seller, and all
consents and approvals required in connection with the consummation of the
transactions contemplated hereby under any Contract or Authorization or
otherwise required to be obtained by such Seller shall have been obtained in
form and substance reasonably satisfactory to Buyer and without conditions
materially and adversely affecting Buyer and which do not require Buyer to pay
money to any party to any such Contract or Authorization in excess of amounts
required to be so paid pursuant to the terms and conditions thereof.
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6.4 Escrow Agreement. Each Seller shall have executed and delivered to
Buyer the Escrow Agreement.
6.5 Non-competition Agreement. Each Seller and Terence Leifheit shall have
executed and delivered to Buyer a Non-competition Agreement in substantially the
form attached hereto as Exhibit F (the "Non-competition Agreement").
6.6 Release of Liens. Each Seller shall have obtained and delivered to
Buyer at or prior to the Closing instruments (including payoff letters, bills of
sale and UCC-3 termination statements) releasing any and all Liens on the
Assets.
6.7 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Smith Helms Mulliss & Moore, L.L.P., special North Carolina counsel
for Sellers, dated the Closing Date, substantially in the form of Exhibit G
attached hereto.
6.8 Board of Directors Approval. Buyer shall have received at or prior to
the Closing the approval of its Board of Directors for this transaction and all
related documents.
6.9 Accuracy of Representations and Warranties. The representations and
warranties of each Seller contained in this Agreement shall be true and correct
in all material respects at the Closing Date with the same effect as though made
at such time and the representations and warranties of such Seller contained in
this Agreement which are qualified by materiality shall be true and correct in
all respects as of the Closing Date with the same effect as though made at such
time.
6.10 No Material Adverse Effect. None of the schedules, documents or other
information to be furnished by either Seller to Buyer pursuant to this
Agreement, shall disclose any fact, circumstance or matter, or any change in or
development in connection with any matter disclosed in the original schedules or
documents previously delivered by such Seller to Buyer, which has, or could
reasonably be expected to have, a material adverse effect on the Assets or on
the Business; and there shall have been no other changes or developments
affecting either the Assets or the Business since the Base Balance Sheet Date
which have, or could reasonably be expected to have, a material adverse effect
on the Assets or Business.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of each Seller to consummate the transactions contemplated
by this Agreement is subject to the satisfaction, on or prior to the Closing
Date, of the following conditions, unless waived by such Seller in writing:
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7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Section 7.1 have been
satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, By-Laws, authority and the incumbency of
all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Sellers
the Escrow Agreement.
7.3 Other Agreements, etc. Buyer shall have executed and delivered to
Sellers the following:
(a) the Assignment and Assumption Agreement;
(b) the Transition Services Agreement; and
(c) the License Agreement.
7.4 Board of Directors and Stockholder Approval. Sellers shall have
received at or prior to the Closing the approval of its Board of Directors and
stockholders for this transaction and all related documents.
7.5 Accuracy of Representations and Warranties. The representations and
warranties of Buyer contained in this Agreement shall be true and correct in all
material respects at the Closing Date with the same effect as though made at
such time and the representations and warranties of Buyer contained in this
Agreement which are qualified by materiality shall be true and correct in all
respects as of the Closing Date with the same effect as though made at such
time.
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7.6 Consents; Approvals. Buyer shall have obtained all consents and
approvals required to be obtained by Buyer in connection with the consummation
of the transactions contemplated hereby.
SECTION 8. TERMINATION.
8.1 Events of Termination. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing:
(a) By the mutual written consent of Buyer and each Seller.
(b) Subject to Section 8.4 below, by either Seller, if it is not in
breach or default hereunder:
(i) if any representation or warranty of Buyer made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Buyer's receipt of a notice from Sellers that
such breach exists or has occurred;
(ii) if Buyer shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Buyer's receipt
of a notice from Sellers that such default exists or has occurred;
(iii) if the conditions to either Seller's obligations to
consummate the Closing as set forth in Section 7 cannot reasonably
be satisfied or performed on or before October 31, 1999 (unless such
failure of satisfaction, non-compliance or non-performance is the
result, directly or indirectly, of any action or failure to act on
the part of such Seller); or
(iv) if the Closing has not occurred prior to September 27,
1999.
(c) Subject to Section 8.4 below, by Buyer, if it is not in breach
or default hereunder:
(i) if any representation or warranty of either Seller made
herein is untrue in any material respect and such breach is not
cured within thirty (30) days of such Seller's receipt of a notice
from Buyer that such breach exists or has occurred;
(ii) if either Seller shall have defaulted in any material
respect in the performance of any material obligation under this
Agreement and such breach is
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not cured within thirty (30) days of such Seller's receipt of a
notice from Buyer that such default exists or has occurred; or
(iii) if the conditions to Buyer's obligations to consummate
the Closing as set forth in Section 6 cannot reasonably be satisfied
or performed on or before October 31, 1999 (unless such failure of
satisfaction, non-compliance or non-performance is the result
directly or indirectly of any action or failure to act on the part
of Buyer); or
(iv) if the Closing has not occurred prior to September 27,
1999.
8.2 Manner of Exercise. In the event of the termination of this Agreement
by either Buyer or a Seller pursuant to Section 8.1 notice thereof shall
forthwith be given to the other party in accordance with the provisions set
forth in Section 11 hereto and this Agreement shall terminate and the
transactions contemplated hereunder shall be abandoned without further action by
Buyer or such Seller.
8.3 Effect of Termination; Liabilities. In the event of the termination of
this Agreement pursuant to Section 8.1 or Section 8.4 and prior to the Closing,
all covenants, agreements and other obligations of the parties hereunder (other
than pursuant to Sections 4.8 and 5.1 hereof) shall terminate, and neither
Sellers nor Buyer shall have any further liability hereunder, including for
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including attorneys' fees) of any kind whatsoever; except upon termination of
this Agreement pursuant to Sections 8.1(c)(i) and 8.1(c)(ii), Buyer shall be
entitled to any remedy which it may have, whether at law or in equity, and
except upon termination of this Agreement pursuant to Sections 8.1(b)(i) and
8.1(b)(ii), Sellers shall be entitled to any remedy which they have, whether at
law or in equity.
8.4 Waiver; Extension of Time for Performance. Either Seller may extend
the time for the performance of any of the obligations or other acts of Buyer
hereunder, waive any inaccuracies in the representations and warranties of Buyer
contained herein or in any document delivered pursuant hereto, or waive
compliance by Buyer with any of the agreements or conditions contained herein.
Any such extension or waiver shall be valid if set forth in an instrument in
writing signed by such Seller. Buyer may extend the time for the performance of
any of the obligations or other acts of either Seller or the Principals
hereunder, waive any inaccuracies in the representations and warranties of
either Seller or the Principals contained herein or in any document delivered
pursuant hereto, or waive compliance by either Seller or the Principals with any
of the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by Buyer.
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SECTION 9. SURVIVAL.
9.1 Survival of Warranties. Subject to Section 10.5 hereof, each of the
representations, warranties, agreements, covenants and obligations herein or in
any schedule, exhibit, certificate or financial statement delivered by any party
to the other party incident to the transactions contemplated hereby are
material, shall be deemed to have been relied upon by the other party and shall
survive the Closing regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto.
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Sellers. Each Seller hereby agrees, jointly and
severally, to indemnify and hold harmless Buyer, its affiliates and its and
their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever (collectively, "Losses"), but net
of the proceeds from any insurance policies or other third party reimbursement
for such Losses, to the extent actually sustained, suffered or incurred by or
made against any Buyer Indemnified Party, to the extent based upon, arising out
of or in connection with: (i) any breach of any representation or warranty made
by either Seller in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by either Seller in this Agreement or
in any schedule, exhibit, certificate, financial statement, agreement or other
instrument delivered pursuant to this Agreement; (iii) any claim made by any
person or entity which relates to the operation of the Assets or the Business
which arises in connection with or on the basis of events, acts, omissions,
conditions or any other state of facts occurring on or existing before the
Closing Date; and (iv) any claim which arises in connection with any liability
or obligation of Seller other than the Assumed Liabilities. In no event shall
Losses with respect to the indemnification obligations of the Sellers include
any damages for lost profits, consequential damages, punitive damages or any
special damages.
10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
each Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all Losses, to the
extent actually sustained, suffered or incurred by or made against any Seller
Indemnified Party, to the extent based upon, arising out of or in connection
with: (i) any breach of any representation or warranty made by Buyer in this
Agreement or in any schedule, exhibit, certificate, agreement or other
instrument delivered pursuant to this Agreement; (ii) any breach of any covenant
or agreement made by Buyer in this Agreement or
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in any schedule, exhibit, certificate, agreement or other instrument delivered
pursuant to this Agreement; (iii) any claim made against a Seller which relates
to, results from or arises out of Buyer's operation of the Assets or the
Business from and after the Closing Date; and (iv) the Assumed Liabilities. In
no event shall Losses with respect to the indemnification obligations of the
Buyer include any damages for lost profits, consequential damages, punitive
damages or any special damages.
10.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) agrees that such claim will be promptly paid in full if
required, then (x) counsel for the defense shall be selected by the indemnifying
party (subject to the consent of the indemnified party which consent shall not
be unreasonably withheld); (y) the indemnified party shall not be required to
make any payment with respect to such claim, liability or expense as long as the
indemnifying party is conducting a good faith and diligent defense at its own
expense; provided, however, that the assumption of defense of any such matters
by the indemnifying party shall relate solely to the claim, liability or expense
that is subject or potentially subject to indemnification; and (z) the
indemnified party shall have the right to fully participate in such defense at
its own expense directly or through counsel; provided, however, that the
indemnifying party shall control and direct such defense. The indemnifying party
shall have the right, with the consent of the indemnified party, which consent
shall not be unreasonably withheld, to settle all indemnifiable matters related
to claims by third parties which are susceptible to being settled provided the
indemnifying parties' obligation to indemnify the indemnified party therefor
will be fully satisfied. The indemnifying party shall keep the indemnified party
apprised of the status of the claim, liability or expense and any resulting
suit, proceeding or enforcement action, shall furnish the indemnified party with
all documents and information that the indemnified party shall reasonably
request and shall consult with the indemnified party prior to acting on major
matters, including settlement
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discussions. The indemnified party shall cooperate fully in the defense by the
indemnifying party. Notwithstanding anything herein stated, if the named parties
to the action or proceeding include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be a conflict of interest or otherwise inappropriate under applicable standards
of professional conduct, the expense of separate counsel for the indemnified
party shall be paid by the indemnifying party. If no such notice of intent to
dispute and defend is given by the indemnifying party, or if such diligent good
faith defense is not being or ceases to be conducted, the indemnified party
shall, at the expense of the indemnifying party, undertake the defense of (with
counsel selected by the indemnified party), and shall have the right, with the
consent of the indemnifying party, which consent shall not be unreasonably
withheld, to compromise or settle (exercising reasonable business judgment),
such claim, liability or expense. If such claim, liability or expense is one
that by its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.4 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party sustains or incurs Losses, taxes, fines or penalties for which
it is entitled to indemnification from either Seller under this Agreement, in
addition to all other rights or remedies that Buyer may have (including the
right to collect directly from such Seller), such Buyer Indemnified Party shall
be entitled to receive in cash from the Escrow Deposit an amount equal to the
Losses, taxes or fines actually sustained or incurred by such Buyer Indemnified
Party. In order to receive payment from the Escrow Deposit such Buyer
Indemnified Party shall first deliver to such Seller a written claim for Losses
arising under or by virtue of this Agreement specifying the nature of the claim
and the type and amount of Losses, taxes or fines actually sustained or incurred
by such Buyer Indemnified Party. Within thirty (30) calendar days of receiving a
claim against the Escrow Deposit from or on behalf of any Buyer Indemnified
Party, such Seller shall provide a written response to such Buyer Indemnified
Party with a copy to the Escrow Agent, which either accepts or rejects all or
any portion of such Buyer Indemnified Party's claim, the amount accepted by such
Seller shall be paid to such Buyer Indemnified Party from the Escrow Deposit by
the Escrow Agent within ten (10) calendar days
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of the Escrow Agent's receipt of Seller's acceptance of such Buyer Indemnified
Party's claim. If such Seller rejects any portion of such Buyer Indemnified
Party's claim, such Seller's written response shall specify the specific
reason(s) for the rejection and the amount, if any, of such Buyer Indemnified
Party's claim which is accepted. The amount of any claim rejected by such Seller
shall be retained in escrow and distributed by the Escrow Agent only as directed
by a written settlement agreement signed by both such Seller and such Buyer
Indemnified Party or in accordance with an award rendered by an arbitrator(s) in
accordance with Section 12.11 of this Agreement.
10.5 Limitations of Indemnity Obligations of Sellers and the Buyer. The
indemnity obligations of the Sellers and the Buyer under this Agreement shall be
subject to the following limitations:
(a) The indemnity obligations of the Sellers shall expire on the six
(6) month anniversary of the Closing Date; provided, however, that such
obligations with respect to (i) the representations and warranties contained in
Sections 2.1, 2.2, 2.3 and 2.24 and the obligations contained in Section 4.14
shall continue in effect for the full period of any applicable statute of
limitations, and (ii) the representations and warranties regarding taxes, which
are contained in Section 2.4, shall remain in effect until all claims for taxes
due by or on account of the Seller for any period up to and including the
Closing Date have been settled and any statute of limitations period with
respect to such taxes has expired; and provided further that the indemnity
obligations of the Seller for claims timely asserted by a Buyer Indemnified
Party in the manner provided in this Agreement shall continue until such claims
are fully resolved and discharged.
(b) The aggregate indemnity obligations of the Sellers for any
Losses shall not in any event exceed Four Million Fifty Thousand Dollars
($4,050,000).
(c) The aggregate indemnity obligations of the Buyer for any Losses
shall not in any event exceed Four Million Fifty Thousand Dollars ($4,050,000),
except to the extent that such losses arise from or result from Buyer's
operation of the Business from and after the Closing Date or in connection with
the Assumed Liabilities.
(d) The Buyer Indemnified Parties and the Seller Indemnified
Parties, as applicable, shall be entitled to indemnification with respect to any
breach of representation or warranty made by the Buyer or Sellers, as the case
may be in (i) this Agreement or (ii) in any Schedule, Exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement only if the
aggregate and collective damages incurred or suffered by them exceed Twenty-Five
Thousand Dollars ($25,000), in which event they shall be entitled to
indemnification for the full amount of such damages.
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10.6 Remedy for Breaches. The indemnification provided in this Section 10
shall be the exclusive remedy of the Buyer or the Seller, as the case may be,
for any breach of a representation or warranty made by such party under (a) this
Agreement or (b) any exhibit, schedule, certificate, agreement or other
instrument, delivered pursuant to this Agreement, and shall be in lieu of any
statutory, other contractual, equitable or common law remedy any party may have
for such breach other than any non-monetary remedy pursuant to Section 12.10
except for recision or similar remedies.
SECTION 11. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
If to Seller: Gibralter Data Services, Inc.
1650A Gum Branch Road
Jacksonville, NC 28540
Attn.: Terence Leifheit
With a copy to: Venable Attorney at Law
Venable, Baetjer, Howard and Civiletti, LLP
Suite 1000
1201 New York Avenue, N.W.
Washington, D.C. 20005-3917
Attn: Barbara L. Waite, Esq.
If to Buyer: DURO Communications, Inc.
1211 Semoran Blvd., Suite 217
Casselberry, FL 32707
Attn.: Peter B. Hopper, President
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn.: David F. Dietz, P.C.
SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or either Seller except with the written consent of the other, except
that Buyer may assign its
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rights hereunder either (a) to any affiliate of Buyer or its owners, (b) as a
result of any merger, reorganization or other consolidation, or (c) in
connection with the granting of a security interest to its senior lender. This
Agreement shall be binding upon and shall inure to the benefit of, the parties
hereto and their respective successors and assigns.
12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and each Seller or, in
the case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
12.4 Bulk Sales Law. Buyer hereby waives compliance by Sellers of any
applicable bulk sales law and Seller agree, to make full and timely payment when
due of all amounts owed by it to its creditors. Seller agrees to indemnify and
hold Buyer harmless from, and reimburse Buyer for, any loss, cost, expense,
liability or damage (including reasonable counsel fees and disbursements and
expenses) which Buyer may suffer or incur by virtue of the non-compliance by
such Seller with such laws.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of North Carolina, without regard to conflict of laws
principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
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12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
12.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
12.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute for Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute for Dispute Resolution
shall appoint a neutral advisor from its National CPR Panel. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss.1-16, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Charlotte, North
Carolina.
Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Notwithstanding anything to the contrary contained herein, the provisions
of this Section 12.11 shall not apply with regard to any equitable remedies to
which any party may be entitled hereunder.
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Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of North Carolina for the purpose of enforcing
the award or decision in any such proceeding, (b) hereby waives, and agrees not
to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter hereof may not be enforced
in or by such court, and (c) hereby waives and agrees not to seek any review by
any court of any other jurisdiction which may be called upon to grant an
enforcement of the judgment of any such court. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its submission
to jurisdiction and its consent to service of process by mail is made for the
express benefit of the other parties hereto. Final judgment against any party
hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets, may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.10.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
SECTION 13. DEFINITIONS.
"Accounts Receivable" shall have the meaning set forth in Section 1.1(e).
"Annualized Recurring Revenues Deficiency" shall have the meaning set
forth in Section 1.6(b).
"Assets" shall have the meaning set forth in Section 1.1.
"Assigned Contracts" shall have the meaning set forth in Section 2.20(a).
"Assignment and Assumption Agreement" shall have the meaning set forth in
Section 1.10.
"Assumed Current Liabilities" shall have the meaning set forth in Section
1.3(a).
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"Assumed Liabilities" shall have the meaning set forth in Section 1.3(a).
"Atel Payment" shall have the meaning set forth in Section 1.5(a).
"Authorizations" shall have the meaning set forth in Section 2.13.
"Base Balance Sheets" shall have the meaning set forth in Section 2.11.
"Base Balance Sheet Date" shall have the meaning set forth in Section
2.11.
"Business" shall have the meaning set forth in the preamble hereto.
"Buyer" shall have the meaning set forth in the preamble hereto.
"Buyer Documents" shall have the meaning set forth in Section 3.2
"Buyer Indemnified Parties" shall have the meaning set forth in Section
10.1(a).
"Buyer Indemnified Party"shall have the meaning set forth in Section
10.1(a).
"Closing" shall have the meaning set forth in Section 1.4.
"Closing Date" shall have the meaning set forth in Section 1.4.
"Code" shall have the meaning set forth in Section 1.7.
"Contracts" shall have the meaning set forth in Section 1.1(b).
"Copyrights" shall have the meaning set forth in Section 2.20(a).
"CPR Rules" shall have the meaning set forth in Section 12.11.
"Current Assets" shall have the meaning set forth in Section 1.1(e).
"Dedicated Subscriber" shall have the meaning set forth in Section 2.16.
"Dial-up Subscriber" shall have the meaning set forth in Section 2.16.
"Dispute Accountant" shall have the meaning set forth in Section 1.16(d)
"Employee Program" shall have the meaning set forth in Section 2.23(c)(i).
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"Environmental Law" shall have the meaning set forth in Section 2.24(c).
"Equipment" shall have the meaning as set forth in Section 1.1(a).
"ERISA" shall have the meaning set forth in Section 2.23(a).
"Escrow Agreement" shall have the meaning set forth in Section 1.5(c).
"Escrow Deposit" shall have the meaning set forth in Section 1.5(c).
"Estimated Adjustment" shall have the meaning set forth in Section 1.6(c).
"Estimated Adjustment Statement" shall have the meaning set forth in
Section 1.6(c).
"Estimated Net Working Capital" shall have the meaning set forth in
Section 1.6(c).
"Estimated Revenues Adjustment Amount" shall have the meaning set forth in
Section 1.6(c).
"Excluded Assets" shall have the meaning set forth in Section 2.16.
"Excluded Contracts" shall have the meaning set forth in Section 1.2(b).
"Excluded Liabilities" shall have the meaning set forth in Section 1.3(b).
"Final Adjustment Statement" shall have the meaning set forth in Section
1.6(d)(i).
"Financial Statements" shall have the meaning set forth in Section 2.11.
"GAAP" shall have the meaning set forth in Section 1.1(e).
"GDS" shall have the meaning set forth in the preamble hereto.
"GPI" shall have the meaning set forth in the preamble hereto.
"Hazardous Material" shall have the meaning set forth in Section 2.24(c).
"Hazardous Waste" shall have the meaning set forth in Section 2.24(c).
"Intellectual Property" shall have the meaning set forth in Section
2.20(a).
"IRS" shall have the meaning set forth in Section 2.23(a).
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"Jeep" shall have the meaning set forth in Section 4.10.
"License Agreement" shall have the meaning set forth in Section 6.2(f).
"Liens" shall have the meaning set forth in Section 2.8.
"Marks" shall have the meaning set forth in Section 2.20(a).
"Net Working Capital" shall have the meaning set forth in Section 1.6(a).
"Non-competition Agreement" shall have the meaning set forth in Section
6.5.
"Patents" shall have the meaning set forth in Section 2.20(a).
"Purchase Price" shall have the meaning set forth in Section 1.5.
"Recurring Revenues" shall have the meaning set forth in Section 1.6(b).
"Revenues Adjustment Amount" shall have the meaning set forth in Section
1.6(b).
"Rights" shall have the meaning set forth in Section 2.20(a).
"Seller" shall have the meaning set forth in the preamble hereto.
"Seller Documents" shall have the meaning set forth in Section 2.2.
"Seller Indemnified Parties"shall have the meaning set forth in Section
10.2.
"Seller Indemnified Party" shall have the meaning set forth in Section
10.2.
"Subscriber" shall have the meaning set forth in Section 2.16.
"Target Revenues" shall have the meaning set forth in Section 1.6(b).
"Taxes" shall have the meaning set forth in Section 2.4(a).
"Trade Secrets" shall have the meaning set forth in Section 2.20(a).
"Transition Services Agreement" shall have the meaning set forth in
Section 6.2(e).
"Web-hosting/Domain-hosting Subscriber" shall have the meaning set forth
in Section 2.16.
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IN WITNESS WHEREOF, Sellers and Buyer have caused this Asset Purchase
Agreement to be executed as of the date first above written.
SELLER:
GIBRALTER DATA SERVICES, INC.
By: /s/ Terrence J. Leifheit
--------------------------------------
Terrence J. Leifheit, President
GIBRALTER PUBLISHING, INC.
By: /s/ Terrence J. Leifheit
--------------------------------------
Terrence J. Leifheit, President
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
--------------------------------------
Peter B. Hopper, President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Patents and Trademarks
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Form of Non-Competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Transition Services Agreement
Exhibit I - Form of License Agreement
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Insurance
Schedule 1.5(b) Wire Instructions
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.6(e) Additional Equipment
Schedule 1.7 Allocation of Purchase Price
Schedule 2.1(c) Subsidiaries
Schedule 2.3 Conflicts
Schedule 2.6 Insurance
Schedule 2.7 Contracts
Schedule 2.8 Portmasters Not Part of the Assets
Schedule 2.10 Key Employees
Schedule 2.11 Financial Statements
Schedule 2.12 Business since the Base Balance Sheet Date
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.18 Uncollectible Accounts Receivable
Schedule 2.20 Intellectual Property
Schedule 2.22 Transactions with Interested Persons
Schedule 2.24 Environmental Matters
<PAGE>
Exhibit 2.12
ASSET PURCHASE AGREEMENT
Agreement made as of October 15, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), Bitstorm, Inc., a Florida corporation,
(formerly known as Bitstorm Internet Services, Inc.) ("Seller"), and each of Dan
Frana and Jason Rowley as the principal shareholders of the Seller (collectively
the "Principal Shareholders").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with
Seller's Internet service business (the "Business"),
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under, and interest of
Seller in and to, all contracts relating to the Business (other than the
Excluded Contracts (as defined in Section 1.2(b) below)), including, without
limitation, original contracts for the provision of Internet connectivity,
dedicated service, web-hosting, web-domain, dial-up services, web- development
and Internet commerce, all leases with respect to real property and all
co-location agreements, a true, correct and complete list of which contracts is
attached hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
(d) Licenses and Authorizations. All rights associated with the
licenses, licensing agreements, permits, easements, registrations, domains, IP
addresses and authorizations issued or granted to Seller by any governmental
authority with respect to the operation of the Business, including, without
limitation, those licenses and authorizations listed
<PAGE>
on Schedule 1.1(d) attached hereto, and all applications therefor, together with
any renewals, extensions, or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller (the "Current Assets"), including all cash, prepaid expenses, security
deposits, advance payments, inventory and all accounts receivable of Seller
incurred in the ordinary course of business and included on Seller's balance
sheet as of the Closing Date, as determined in accordance with generally
accepted accounting principles ("GAAP"), consistently applied; a complete list
of such accounts receivable is attached hereto as Schedule 1.1(e) ("Accounts
Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
Closing Date as set forth on Schedule 1.2(c) attached hereto;
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined in Section 2.4(a) below) for
periods prior to the Closing Date;
(e) Corporate Records. All of Seller's corporate and other
organizational records; and
(f) Bank Accounts. All of Seller's bank accounts.
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1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein, Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date; (ii) accounts payable, advance payments by Subscribers, accrued expenses,
all deferred revenues, ordinary recurring operating expenses, and any other
current liability of Seller as of the Closing Date (except the current portion
of any bank debt or line of credit to be paid pursuant to Section 1.5) included
on Seller's balance sheet, as determined in accordance with GAAP consistently
applied and de minimis ordinary recurring operating expenses that are not
included on Seller's balance sheet (the "Assumed Current Liabilities"); and
(iii) all obligations and liabilities of Seller which are to be performed after
the Closing Date arising under the Contracts, including, without limitation,
Seller's obligations to Subscribers (as defined in Section 2.16) under such
Contracts for (A) Subscriber deposits held by Seller as of the Closing Date in
the amount for which Buyer receives a credit pursuant to Section 1.6(a) below,
(B) Subscriber advance payments held by Seller as of the Closing Date for
services to be rendered in connection with the Business in the amount for which
Buyer receives a credit pursuant to Section 1.6(a) below, and (C) the delivery
of Internet connectivity service to Subscribers (whether pursuant to a Contract
or otherwise) after the Closing Date ((i), (ii) and (iii) together, the "Assumed
Liabilities"). The assumption of the Assumed Liabilities by Buyer hereunder
shall not enlarge any rights of third parties under contracts or arrangements
with Buyer or Seller or any of their respective affiliates or subsidiaries. No
parties other than Buyer and Seller shall have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the Closing Date and Buyer shall not assume or have any obligations or
liabilities with
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respect to such terminations, including, without limitation, any severance
obligation. Seller acknowledges and agrees that Buyer has the right to
interview and discuss employment terms and issues with such employees
prior to and after the Closing.
(ii) Buyer agrees to employ after the Closing all of Seller's
employees; provided, however, that nothing in this Agreement shall be
construed as a commitment or obligation of Buyer to continue the existing
terms of employment of, any of Seller's employees, and no employee shall
be a third-party beneficiary of this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits. Seller shall retain
liability for benefits to all individuals entitled to benefits required to
be provided by the continuation health care coverage requirements of
Section 4980B of the Internal Revenue Code of 1986, as amended (the
"Code") and Sections 601 and 607 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or similar state laws as of the
Closing, including, without limitation, with respect to any individual
entitled to such coverage prior to the Closing.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any Employee Program (as
defined in Section 2.23 hereof) maintained by, or for the benefit of any
employees of Seller prior to the Closing Date, including, without
limitation, obligations for severance or vacation accrued but not taken as
of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date on which all of the
conditions to closing set forth in Sections 6 and 7 of this Agreement have been
satisfied or waived, or at such other time and place as shall be mutually agreed
upon in writing by Buyer and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, at the Closing, Buyer shall
deliver to Seller:
(a) Cash in an amount (as adjusted in accordance with Section 1.6
below, the "Cash Purchase Price") equal to $1,760,000 as follows:
(i) Buyer shall deliver to Seller by bank cashier's check or
bank wire transfer pursuant to payment instructions delivered by Seller to
Buyer at the
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Closing $1,584,000 plus or minus, as applicable, the Estimated Adjustment
(as defined in Section 1.6(c).
(ii) Buyer shall deposit the sum of $176,000 (the "Escrow
Deposit") with Boston Safe Deposit and Trust Company as Escrow Agent under
the Escrow Agreement in the form attached hereto as Exhibit A (the "Escrow
Agreement"). The Escrow Deposit shall be held, administered and
distributed in accordance with the terms of the Escrow Agreement, and
shall be a remedy of Buyer for any indemnification claims made pursuant to
Section 10 hereof.
1.6 Adjustments to Purchase Price.
(a) Net Working Capital. The Purchase Price shall be decreased, on a
dollar-for-dollar basis, by the amount of Seller's Net Working Capital (as
defined herein) if such amount is negative, or increased dollar for dollar by
the amount of Seller's Net Working Capital if such amount is positive. "Net
Working Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the Closing Date.
(b) Revenues Adjustment Amount. The Purchase Price shall be
decreased, on a dollar-for-dollar basis, by the Revenues Adjustment Amount (as
defined herein) in the event Recurring Revenues (as defined herein) are less
than $88,000 (the "Target Revenues"). For purposes hereof, the term "Revenues
Adjustment Amount" shall equal the product obtained by multiplying (i) $1,667 by
(ii) the quotient obtained by dividing (X) the Annualized Recurring Revenues
Deficiency (as defined herein), by (Y) one thousand dollars ($1,000). For
purposes hereof, "Recurring Revenues" shall mean revenues of Seller from
Subscribers (determined on an accrual basis), calculated by multiplying the
number of Subscribers as of the Closing Date by the average monthly rate in
effect for such Subscribers, by type, excluding one-time set-up fees and other
ancillary charges. For purposes hereof, the term "Annualized Recurring Revenues
Deficiency" shall equal the product of (i) the difference between (A) the Target
Revenues and (B) Recurring Revenues (ii) multiplied by twelve (12).
(c) Estimated Adjustment Statement. Prior to the Closing, Buyer and
Seller shall prepare a statement to be attached hereto as Schedule 1.6(c) (the
"Estimated Adjustment Statement") which sets forth (x) the estimated amount of
the Net Working Capital as of the Closing Date (the "Estimated Net Working
Capital") and (y) an estimated Revenues Adjustment Amount (the "Estimated
Revenues Adjustment Amount"). The Purchase Price payable at the Closing Date
shall be decreased on a dollar-for-dollar basis by the amount of the Estimated
Revenues Adjustment Amount. The Purchase Price payable at Closing shall be
further reduced on a dollar-for-dollar basis by the amount of the Estimated Net
Working Capital if such number is negative. The Purchase Price payable at
Closing shall be increased on a dollar-for-dollar basis by the amount of the
Estimated Net Working Capital if such number is positive. The net adjustment to
the Purchase Price calculated under this subsection (c) shall be referred to as
the "Estimated Adjustment."
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(d) Final Adjustment Statement.
(i) No later than sixty (60) days following the Closing Date,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital and
the actual Revenues Adjustment Amount. Subject to Section 1.6(d)(ii)
below, within ten (10) days following the delivery of such Final
Adjustment Statement to Seller, Buyer or Seller, as the case may be, shall
pay to the other party, by wire transfer of immediately available funds,
the net difference between (x) the Estimated Net Working Capital, as shown
on the Estimated Adjustment Statement, and the actual Net Working Capital,
as shown on the Final Adjustment Statement and (y) the Estimated Revenues
Adjustment Amount, as shown on the Estimated Adjustment Statement, and the
actual Revenues Adjustment Amount, as shown on the Final Adjustment
Statement.
(ii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital at the Closing Date.
Upon receipt by Buyer of such written objection, the parties shall attempt
to resolve the disagreement concerning the Final Adjustment Statement
through negotiation. Notwithstanding any other dispute resolution
procedure provided for in this Agreement, if Buyer and Seller cannot
resolve such disagreement concerning the Final Adjustment Statement within
thirty (30) days following the end of the foregoing 10-day period, the
parties shall submit the matter for resolution to a nationally recognized
firm of independent certified public accountants not affiliated with
either party, with the costs thereof to be shared equally by the parties.
Such accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such accounting firm to the parties.
1.7 Purchase Price Allocation. At or within sixty (60) days of the
Closing, Seller and Buyer shall determine the allocation of the Purchase Price.
Such allocation shall be binding upon Buyer and Seller for all purposes
(including financial accounting purposes, financial and regulatory reporting
purposes and tax purposes). Buyer and Seller each further agrees to file its
Federal income tax returns and its other tax returns reflecting such allocation,
Form 8594 and any other reports required by Section 1060 of the Code.
1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, Seller shall deliver to Buyer all of the Contracts, with such
assignments thereof and the consents listed on Schedule 6.3. Seller shall also
deliver to Buyer at the Closing all of Seller's files and records constituting
Assets.
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1.9 Sales and Transfer Taxes; Filing of Tax Returns. All sales, transfer,
use, recordation, documentary stamp, excise, and personal property taxes, fees
and duties under applicable law incurred in connection with this Agreement or
the transactions contemplated thereby will be borne and paid by Seller, other
than any such taxes imposed on Buyer as a result of Buyer's use or ownership of
the Assets after Closing, and Seller shall promptly reimburse Buyer for the
payment of any such tax, fee or duty which Buyer is required to make under
applicable law. Seller hereby covenants and agrees to promptly file final sales
tax, income tax, payroll tax, franchise tax, and all such other tax returns as
may be required by federal or state law as a result of the transaction
contemplated by this Agreement to reflect the operations of Seller prior to the
Closing Date.
1.10 Transfer of Assets. At the Closing, Seller shall deliver or cause to
be delivered to Buyer good and sufficient instruments of transfer transferring
to Buyer title to all of the Assets, together with the consents listed on
Schedule 6.3. Such instruments of transfer (a) shall contain appropriate
warranties and covenants which are usual and customary for transferring the type
of property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance reasonably satisfactory to Buyer
and its counsel, (c) shall effectively vest in Buyer good and marketable title
to all of the Assets free and clear of all Liens (as defined in Section 2.8
below), and (d) where applicable, shall be accompanied by evidence of the
discharge of all Liens against the Assets.
1.11 Post-Closing Audits. The Company and each of the Principal
Shareholders hereby agree to provide such assistance as Buyer reasonably
requests, at Buyer's expense, to enable Buyer and its accountant to complete an
audit of the pre-Closing financial statement of Buyer, including, without
limitation, providing access to books and records and executing management
representation letters.
1.12 Credit Card Transactions. During the 90-day period following the
Closing Date, Seller agrees to allow Buyer to deposit credit card payments from
Subscribers that are made to Seller's First Union bank account. Seller covenants
and agrees to transfer such payments to Buyer on a weekly basis or at such other
time as reasonably requested by Buyer. At the end of such 90-day period, Buyer
shall provide to Seller a statement of all such payments that were made. Buyer
agrees to indemnify Seller for all losses, damages, chargebacks and claims
arising from the arrangements described in this Section 1.12.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPAL SHAREHOLDERS.
In order to induce Buyer to enter into this Agreement, Seller and each of
the Principal Shareholders, jointly and severally, hereby represent and warrant
to Buyer as follows:
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2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Seller has all requisite
power and authority to conduct its business as it is now conducted or proposed
to be conducted and to own, lease and operate its properties and assets. The
copies of Seller's Certificate of Incorporation and By- Laws each as amended to
date, heretofore delivered to Buyer's counsel are complete and correct. Seller
is not in violation of any term of the Certificate of Incorporation and By-Laws.
Seller is duly qualified to do business in the state of its incorporation, and
is not required to be licensed or qualified to conduct its business or own its
property in any other jurisdiction, where failure to be so licensed or qualified
will have a material adverse affect on the operation of the Business.
(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority, except U.S.
Government securities, bank certificates of deposit and money market accounts
acquired as short-term investments in the ordinary course of its business.
Seller does not own or have any direct or indirect interest in or control over
any corporation, partnership, joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken or will have been duly and
validly taken prior to Closing, and this Agreement and each other agreement,
document and instrument to be executed and delivered by or on behalf of Seller
pursuant to, or as contemplated by, this Agreement (collectively, the "Seller
Documents") has been or shall be duly and validly authorized, executed and
delivered by Seller and no other action on the part of Seller or its officers,
directors or shareholders shall be required in connection therewith. Each of
Seller and the Principal Shareholders have full right, authority, power and
capacity to execute and deliver this Agreement and each other Seller Document
and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of each of
Seller and the Principal Shareholders enforceable in accordance with its
respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the Certificate of Incorporation and By-Laws of Seller, in each
case as amended to date, (ii) to the knowledge of the Seller and the Principal
Shareholders, constitute a violation of, or conflict with or result in any
breach of, acceleration of any obligation under, right of termination under, or
default under, any material agreement or instrument to which Seller is a party
or by which Seller or the Assets is bound, (iii) to the knowledge of the Seller
and the Principal Shareholders, violate any judgment, decree, order, statute,
rule or regulation applicable to Seller or the Assets, (iv) to the knowledge of
the Seller and the Principal Shareholders, require
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Seller to obtain any approval, consent or waiver of, or to make any filing with,
any person or entity (governmental or otherwise) that has not been obtained or
made (other than consents and approvals to assignment of Contracts not
identified on Schedule 6.3) or (v) to the knowledge of the Seller and the
Principal Shareholders, result in the creation or imposition of any Lien (as
defined in Section 2.8 below) on any of the Assets.
(b) The execution, delivery and performance by each of the Principal
Shareholders of this Agreement and each other Seller Document does not and will
not, to the knowledge of the Seller and the Principal Shareholders, (i)
constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which any or all of the Principal
Shareholders are a party or by which any or all of the Principal Shareholders
are bound, (ii) violate any judgment, decree, order, statute, rule or regulation
applicable to the Principal Shareholders, (iii) require the Principal
Shareholders to obtain any approval, consent or waiver of, or to make any filing
with, any person or entity (governmental or otherwise) that has not been
obtained or made (other than consents and approvals to assignment of Contracts
not identified on Schedule 6.3) or (iv) result in the creation or imposition of
any Lien (as defined in Section 2.8 below) on any of the Assets.
2.4 Taxes.
(a) To the knowledge of Seller and the Principal Shareholders,
Seller has paid or caused to be paid all federal, state, local, foreign and
other taxes, including, without limitation, income taxes, estimated taxes,
alternative minimum taxes, excise taxes, sales taxes, use taxes, value-added
taxes, gross receipts taxes, franchise taxes, capital stock taxes, employment
and payroll-related taxes, withholding taxes, stamp taxes, transfer taxes,
windfall profit taxes, environmental taxes and property taxes, whether or not
measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) To the knowledge of Seller and the Principal Shareholders,
Seller has in accordance with applicable law filed all federal, state, local and
foreign tax returns required to be filed by it through the date hereof, and all
such returns correctly and accurately set forth the amount of any Taxes relating
to the applicable period. A list of all federal, state, local and foreign income
tax returns filed with respect to Seller for taxable periods ended on or after
December 31, 1993, is set forth on Schedule 2.4 attached hereto. Seller has
delivered to Buyer correct and complete copies of all federal, state, local and
foreign income tax returns listed on said schedule, and of all examination
reports and statements of deficiencies assessed against or agreed to by Seller
with respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Principal
Shareholders, threatening to assert against Seller any deficiency or claim for
additional Taxes. No claim has
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ever been made by an authority in a jurisdiction where Seller does not file
reports and returns that Seller is or may be subject to taxation by that
jurisdiction. There are no security interests on any of the Assets of Seller
that arose in connection with any failure (or alleged failure) to pay any Taxes.
Seller has never entered into a closing agreement pursuant to Section 7121 of
the Code.
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. To the knowledge of Seller and the Principal
Shareholders, Seller's operation of the Business and the Assets is in compliance
in all material respects with all applicable statutes, ordinances, orders, rules
and regulations promulgated by any federal, state, municipal or other
governmental authority (including the Federal Communications Commission), and
Seller has not received notice of a violation or alleged violation of any such
statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets of Seller are
insured to the extent disclosed on Schedule 2.6 attached hereto, and all
insurance policies and arrangements of Seller in effect as of the date hereof
are disclosed on said Schedule. Said insurance policies and arrangements are in
full force and effect, all premiums with respect thereto are currently paid, and
Seller is in compliance in all material respects with the terms thereof. Said
insurance is reasonably considered by Seller to be adequate and customary for
the business engaged in by Seller and, to the knowledge of Seller and the
Principal Shareholders, is sufficient for compliance by Seller with all
requirements of law and all agreements and leases to which Seller is a party.
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2.7 Contracts. The Contracts, together with the Excluded Contracts,
constitute all leases, contracts and arrangements, whether oral or written,
under which Seller is bound or to which Seller is a party which relate to the
Business or Assets. Schedule 1.1(b) attached hereto contains a true, correct and
complete list of all Contracts. With respect to each oral agreement or
understanding involving and material to the Business, Seller has provided a
written summary of the material terms of each such agreement or understanding on
Schedule 1.1(b). Each Contract is valid, in full force and effect and binding
upon Seller and, to the knowledge of Seller and the Principal Shareholders, the
other parties thereto in accordance with its terms. Neither Seller nor, to the
knowledge of Seller and the Principal Shareholders, any other party is in
default under or in arrears in the performance, payment or satisfaction of any
agreement or condition on its part to be performed or satisfied under any
Contract, nor does any condition exist that with notice or lapse of time or both
would constitute such a default, and no waiver or indulgence has been granted by
any party under any Contract. Seller has not received notice of, and each of
Seller and the Principal Shareholders have no knowledge of, any fact which would
result in a termination, repudiation or breach of any Contract. Seller has
provided Buyer with true and complete copies of all of such Contracts, other
than with respect to the oral agreements or understandings described on Schedule
1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens"). Upon the
sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good, marketable and
indefeasible title to the Assets, free and clear of all Liens. The Assets
include all of the assets and properties (i) held for use by Seller to conduct
the Business as presently conducted and (ii) necessary or useful for Buyer to
operate the Business in the same manner as such business is currently operated
by Seller with the exception of Excluded Assets. All of the tangible Assets are
in good repair, have been well maintained and are in good operating condition,
ordinary wear and tear excepted, do not require any material modifications or
repairs, and comply in all material respects with applicable laws, ordinances
and regulations. Seller has delivered complete and true copies of all real
property leases (the "Leases") set forth on Schedule 1.1(b). To the knowledge of
Seller and the Principal Shareholders, Seller holds good, clear, marketable,
valid and enforceable leasehold interest in the real property subject to the
Leases (the "Leased Real Property"), subject only to the right of reversion of
the landlord or lessor under the Leases, free and clear of all other prior or
subordinate interests, including, without limitation, mortgages, deeds of trust,
ground leases, leases, subleases, assessments, tenancies, claims, covenants,
conditions, restrictions, easements, judgments or other encumbrances or matters
affecting title, and free of encroachments onto or off of the leased real
property. To the knowledge of Seller and the Principal Shareholders, there are
no material defects in the physical condition of any improvements constituting a
part of the Leased Real Property, including, without limitation, structural
elements, mechanical systems, roofs or parking and loading areas, and all of
such improvements are in good operating condition and repair, and have been well
maintained.
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2.9 No Litigation. Seller is not now involved in nor, to the knowledge of
Seller and the Principal Shareholders, is Seller threatened to be involved in
any litigation or legal or other proceedings likely to have a material adverse
affect on the Business or any Asset (including any Intellectual Property) or
which would prevent or hinder the consummation of the transactions contemplated
by this Agreement. Seller has not been operating the Business under, and the
Business is not subject to, any order, injunction or decree of any court of
federal, state, municipal or other governmental department, commission, board,
agency or instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately seven (7)
full-time employees and three (3) part-time employees. Seller shall provide to
Buyer a list of the employees of Seller in connection with the Business at the
Closing, including the name, date of hire and wages of such employees. Seller is
not delinquent in payments to any of its employees for any wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it to the date hereof or amounts required to be reimbursed to such employees.
Upon termination of the employment of any of said employees, neither Seller nor
Buyer will by reason of the transactions contemplated hereby or anything done
prior to the Closing be liable to any of said employees for so-called "severance
pay" or any other payments, except as set forth on Schedule 2.10 attached
hereto. Seller does not have any policy, practice, plan or program of paying
severance pay or any form of severance compensation in connection with the
termination of employment, except as set forth on said Schedule, or otherwise
required by law. Seller is in compliance in all material respects with all
applicable laws and regulations respecting labor, employment, fair employment
practices, work place safety and health, terms and conditions of employment, and
wages and hours. There are no charges of employment discrimination or unfair
labor practices, nor are there any strikes, slowdowns, stoppages of work, or any
other concerted interference with normal operations existing, pending or, to the
knowledge of Seller and the Principal Shareholders, threatened against or
involving Seller. No question concerning union representation exists respecting
any group of employees of Seller. No collective bargaining agreement is in
effect or is currently being or is about to be negotiated by Seller. Seller has
received no information to indicate that any of its employment policies or
practices is currently being audited or investigated by any federal, state or
local government agency. Seller is, and at all times since November 6, 1986 has
been, in compliance with the requirements of the Immigration Reform Control Act
of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at September 30, 1999 (the "Base Balance Sheet")
and the statements of income and expense of Seller for the nine (9) months ended
September 30, 1999 (collectively the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied consistently during the periods covered thereby (except for
the absence of footnotes with respect to unaudited financial statements), are
complete and correct and present fairly and accurately the financial condition
of the Business at the dates of said statements and the results of operations of
the Business for the periods covered thereby. As of the date of the Base Balance
Sheet (the "Base Balance
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Sheet Date"), Seller had no liabilities or obligations of any kind with respect
to the Business, whether accrued, contingent or otherwise, that are not
disclosed and adequately reserved against on the Base Balance Sheet. As of the
date hereof and at the Closing, Seller had and will have no liabilities or
obligations of any kind with respect to the Business, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet, other than de minimis ordinary recurring operating
expenses.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business, unless any disposed of assets have
been replaced;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated, the
absence of which would have a material adverse affect on
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the Business or Assets. All of the Authorizations are in full force and effect
and, to the knowledge of Seller and the Principal Shareholders, no licenses,
permits or authorizations of any governmental department or agency are required
for the operation of the Business which have not been duly obtained. As of the
date hereof, there is not pending or, to the knowledge of Seller and the
Principal Shareholders, threatened any action by or before any governmental
agency to revoke, cancel, rescind or modify any of the Authorizations, and there
is not now issued, outstanding, pending or, to the knowledge of Seller and the
Principal Shareholders, threatened any order to show cause, notice of violation,
notice of apparent liability, or notice of forfeiture or complaint against
Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller in connection with the execution and delivery of this Agreement
and the Seller Documents and the consummation of the transactions contemplated
hereby and thereby.
2.15 Customers and Suppliers. Seller's relations with its customers and
suppliers, including its Subscribers (as defined in Section 2.16 below), are
good and there are not pending or, to Seller's knowledge, threatened claims or
controversies with any customer, supplier or Subscriber that are material to the
Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers (as defined herein) of the Business as listed by
class, type and billing plan. For purposes of this Agreement, the term
"Subscriber" shall mean any active subscriber to Internet services offered by
Seller in the Business, including, without limitation, any person or corporation
who receives dial-up Internet access through the Business (a "Dial-up
Subscriber"), any person who receives dedicated Internet access from Seller
offering higher data transmission rates than available from dial-up access (a
"Dedicated Subscriber"), and any person with a web page or domain name on
Seller's server and to whom Seller provides Internet access (a
"Web-hosting/Domain-hosting Subscriber"); provided, however, that "Subscriber"
shall not include any person who is (i) more than thirty (30) days delinquent in
payment of such person's bill for such services provided by the Business and
(ii) any person receiving complimentary Internet services or Internet services
at a promotional discounted rate. Set forth on Schedule 2.16(b) attached hereto
is a listing of all such accounts which receive complimentary Internet services
or Internet services at a promotional discounted rate. Set forth on Schedule
2.16(c) attached hereto is Seller's policy and practice with respect to the
disconnection of Subscribers, with which Seller has, except as set forth on
Schedule on Schedule 2.16(c), at all times since its inception, complied in all
material respects.
2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
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2.18 Collectibility of Accounts Receivable. To the knowledge of Seller and
the Principal Shareholders, all of the Accounts Receivable of Seller are or will
be as of the Closing Date bona fide, valid and enforceable claims, subject to no
set off or counterclaim and are collectible in accordance with their terms.
Seller has no accounts or loans receivable from any person, firm or corporation
which is affiliated with Seller or from any director, officer or employee of
Seller, or from any of their respective spouses or family members.
2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are completely and accurately described in Schedule 2.19
attached hereto, indicating with respect to each of such arrangements the type
of arrangement maintained (such as checking account, borrowing arrangements,
safe deposit box, etc.) and the person or persons authorized in respect thereof.
2.20 Intellectual Property.
(a) All of the Intellectual Property of Seller is set forth on
Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) all patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names "Bitstorm Internet
Services, Inc.", "Bitstorm", all trade names, trade dress, logos, packaging
design, slogans, any and all Internet domain names used or useful in the
business of Seller, registered and unregistered trademarks and service marks and
applications (collectively, "Marks"); (iii) all copyrights in both published and
unpublished works, including, without limitation, all compilations, databases
and computer programs, and all copyright registrations and applications, and all
derivatives, translations, adaptations and combinations of the above
(collectively, "Copyrights"), (iv) all know-how, trade secrets, confidential or
proprietary information, customer lists, IP addresses, research in progress,
algorithms, data, designs, processes, formulae, drawings, schematics,
blueprints, flow charts, models, prototypes, techniques, Beta testing procedures
and Beta testing results (collectively, "Trade Secrets"); (v) Seller's web-sites
(including the domain name "www.bitstorm.net" and any other similar domain
name); (vi) all goodwill, franchises, licenses, permits, consents, approvals,
technical information, telephone numbers, and claims of infringement against
third parties (the "Rights"); and (vii) all contracts relating to the
Intellectual Property to which Seller is a party or is bound, including, without
limitation, all nondisclosure and/or confidentiality agreements entered into by
persons in connection with disclosures by Seller (collectively,"Assigned
Contracts").
(b) Except as described on Schedule 2.20, Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller and the Principal
Shareholders, threatened of any other person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of Seller and the
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Principal Shareholders, threatened against Seller and/or its officers, employees
and consultants which challenge the validity and enforceability of Seller's
rights in respect of the Intellectual Property. The Intellectual Property
represents all of the assets of Seller of such class or type necessary for the
operation of Seller's Business as currently conducted.
Except as set forth as Schedule 2.20, all former and current employees,
consultants and contractors of Seller have executed written instruments with
Seller that assign to Seller all rights to any inventions, improvements,
discoveries, or information relating to the business of Seller. To the best
knowledge of Seller after inquiry, no employee, consultant or contractor of
Seller has entered into any agreement that restricts or limits in any way the
scope or type of work in which the employee, consultant or contractor may be
engaged or requires the employee, consultant or contractor to transfer, assign,
or disclose information concerning his work to anyone other than Seller.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Patents. All of the issued Patents are
currently in compliance with formal legal requirements (including without
limitation payment of filing, examination and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Patent is held by Seller by assignment,
the assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re- examination or opposition proceeding.
To the knowledge of Seller and the Principal Shareholders, there is no
potentially interfering Patent of any third party. All products made, used or
sold under the Patents have been marked with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the United States Patent and Trademark Office and/or any other
jurisdiction are currently in compliance with formal legal requirements
(including, without limitation, the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety (90) days after the Closing Date. In each case where a
Mark is held by Seller by assignment, the assignment has been duly recorded with
the U.S. Patent and Trademark Office and all other jurisdictions of
registration. No Mark has been or is now involved in any opposition,
invalidation or cancellation proceeding and, to the knowledge of Seller and the
Principal Shareholders, no such action is threatened with respect to any of the
Marks. All products and materials containing a Mark bear the proper notice where
permitted by law.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Copyrights. All the Copyrights that have
been registered with the United States Copyright Office are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any fees or taxes or actions falling due within ninety (90) days
after the Closing Date. In each case where a Copyright is held by Seller by
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assignment, the assignment has been duly recorded with the U.S. Copyright Office
and all other jurisdictions of registration. All copies of works encompassed by
the Copyrights have been marked with the proper copyright notice.
(f) Seller has taken all security measures (including, without
limitation, entering into appropriate confidentiality and non-disclosure
agreements with all officers, directors, employees, consultants and contractors
of Seller and any other persons with access to the Trade Secrets) deemed
reasonable and appropriate by Seller to protect the secrecy, confidentiality and
value of all Trade Secrets. To the knowledge of Seller and the Principal
Shareholders, there has not been any breach by any party to any such
confidentiality or non- disclosure agreement. The Trade Secrets have not been
disclosed by Seller to any person or entity other than employees or contractors
of Seller who had a need to know and use the Trade Secrets in the course of
their employment or contract performance. Seller has the right to use, free and
clear of claims of third parties, all Trade Secrets. To the knowledge of Seller
and the Principal Shareholders, there is not any assertion that the use by
Seller of any Trade Secret violates the rights of any third party.
(g) Seller has the right to use, license, distribute, transfer and
bring infringement actions with respect to the Intellectual Property. Except as
set forth on Schedule 2.20, Seller (i) has not licensed or granted to anyone
rights of any nature to use any of its Intellectual Property and (ii) is not
obligated to and does not pay royalties or other fees to anyone for its
ownership, use, license or transfer of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, to the knowledge of
Seller and the Principal Shareholders there is no material default by any party
thereto, and all of the rights of Seller thereunder are freely assignable. True
and complete copies of all such licenses or other agreements, and any amendments
thereto, have been provided to Buyer, and Seller has no reason to believe that
the licensors under the licenses and other agreements under which Seller is
granted rights and has granted rights to others do not have and did not have all
requisite power and authority to grant the rights purported to be conferred
thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, and to the knowledge
of Seller and the Principal Shareholders there is no material default by any
party thereto. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to Buyer.
(j) Seller has reviewed the areas within its businesses and
operations which could be adversely affected by, and has developed a program to
address on a timely basis, the "Year 2000 Problem" (i.e., the risk that
applications used by Seller or its suppliers and/or providers may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any date after December 31, 1999). Seller and the Principal
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Shareholders reasonably believe that, to the extent Seller and the Principal
Shareholders can anticipate in a reasonably commercial manner, the "Year 2000
Problem" will not have any material adverse effect on the operation of Seller.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth on Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of Seller or, to the knowledge of Seller or the Principal
Shareholders, any of their respective spouses or family members owns directly or
indirectly on an individual or joint basis any material interest in, or serves
as an officer or director or in another similar capacity of, any competitor or
supplier of Seller, or any organization which has a material contract or
arrangement with Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program (as
defined in Section 2.23(c) below) that has been maintained by the Seller or an
Affiliate (as defined herein) at any time during the six-year period ending on
the Closing Date. Each Employee Program which has ever been maintained by the
Seller or an Affiliate and which has been intended to qualify under Section
401(a) or 501(c)(9) of the Code has received a favorable determination or
approval letter from the Internal Revenue Service ("IRS") regarding its
qualification under such section and has, in fact, been qualified under the
applicable section of the Code from the effective date of such Employee Program
through and including the Closing Date (or, if earlier, the date that all of
such Employee Program's assets were distributed). To the knowledge of Seller and
the Principal Shareholders, no event or omission has occurred which would cause
any such Employee Program to lose its qualification or otherwise fail to satisfy
the relevant requirements to provide tax-favored benefits under the applicable
Code Section (including without limitation Code Sections 105, 125, 401(a) and
501(c)(9)). With respect to any Employee Program ever maintained by the Seller
or any Affiliate, to the knowledge of Seller and the Principal Shareholders,
there has been no (i) "prohibited transaction," as defined in Section 406 of
ERISA or Code Section 4975, or (ii) failure to comply with any provision of
ERISA, other applicable law, or any agreement which, in the case of either of
(i) or (ii), could subject the Seller or any Affiliate to liability either
directly or indirectly (including, without limitation, through any obligation of
indemnification or contribution) for any damages, penalties, or taxes, or any
other loss or expense. All payments and/or contributions required to have been
made (under the provisions of any agreements or other governing documents or
applicable law) with respect to all Employee Programs ever maintained by the
Seller or any Affiliate, for all periods prior to the Closing Date, either have
been made or have been accrued (and all such unpaid but accrued amounts are
described on Schedule 2.23). To the knowledge of Seller and the Principal
Shareholders, each Employee Program ever maintained by the Seller or an
Affiliate has complied with the applicable
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notification and other applicable requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985.
(b) To the knowledge of Seller and the Principal Shareholders,
neither the Seller nor any Affiliate (A) has ever maintained any Employee
Program which has been subject to title IV of ERISA or Code Section 412,
including, but not limited to, any Multi employer Plan (as defined in Section
3(37) of ERISA) or (B) has ever provided health care or any other non-pension
benefits to any employees after their employment is terminated (other than as
required by part 6 of subtitle B of title I of ERISA) or has ever promised to
provide such post- termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) to the knowledge of
Seller and the Principal Shareholders, Seller has not generated, transported,
used, stored, treated, disposed of, or managed any Hazardous Waste (as defined
in Section 2.24(c) below) at any time; (ii) to the knowledge of Seller and the
Principal Shareholders, no Hazardous Material (as defined in Section 2.24(c)
below) has ever been or is threatened to be spilled, released, or disposed of at
any site associated with a structure presently or formerly owned, operated,
leased, or used by Seller, or has ever been located in the soil or groundwater
at any such site; (iii) to the knowledge of Seller and the Principal
Shareholders, no Hazardous Material has ever been transported from any site
associated with a structure presently or formerly owned, operated, leased, or
used by Seller for treatment, storage, or disposal at any other place; (iv) To
the knowledge of Seller and the Principal Shareholders, Seller does not
presently own, operate, lease, or use, and has not previously owned, operated,
leased, or used any site associated with a structure on which underground
storage tanks are or were located; and (v) to the knowledge of Seller and the
Principal Shareholders, no lien has ever been imposed by any
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governmental agency on any property, facility, machinery, or equipment owned,
operated, leased, or used by Seller in connection with the presence of any
Hazardous Material.
(b) Except as set forth on Schedule 2.24 and to the knowledge of
Seller and the Principal Shareholders, (i) Seller does not have any liability
under, nor has it ever violated, any Environmental Law (as defined in Section
2.24(c) below); (ii) Seller, nor any property associated with a structure owned,
operated, leased, or used by Seller, nor facilities or operations thereon are
presently not in compliance with all applicable Environmental Laws; (iii) Seller
has not entered into or been subject to any judgment, consent decree, compliance
order, or administrative order with respect to any environmental or health and
safety matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor any Principal Shareholder has any
knowledge or reason to know that any of the items enumerated in clause (iii) of
this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
By-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Principal Shareholders to Buyer pursuant to this Agreement do not
contain any untrue statement of a material fact, and, when taken together, do
not omit to state a material fact necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. There are no facts known to Seller or
the Principal Shareholders which presently or in the future are reasonably
foreseeable and likely to have a material adverse affect on the Business,
properties, Assets, prospects, operations or (financial or other) condition of
Seller which has not been specifically disclosed herein or in a Schedule
furnished herewith, other than general economic or market conditions affecting
the Internet services industry generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller and the Principal Shareholders as
follows:
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3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action: Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document, to deliver the Shares and to carry out the transactions contemplated
hereby and thereby. This Agreement and each other Buyer Document constitutes, or
when executed and delivered will constitute, the legal, valid and binding
obligations of Buyer enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document do not and will not (a) violate any
provision of the Certificate of Incorporation or By-Laws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a party or by which it is
bound, (c) violate any judgment, decree, order, statute, rule or regulation
applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver
of, or to make any filing with, any person or entity (governmental or otherwise)
that has not been obtained or made. The officers who execute this Agreement and
the other Buyer Documents contemplated hereby on behalf of Buyer have and shall
have all requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Except for fees payable to Rampart Associates, LLC, Buyer has
not retained any broker or finder or other person who would have any valid claim
against any of the parties to this Agreement for a commission or brokerage fee
in connection with this Agreement or the transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that from the date hereof until the Closing
Date:
4.1 Access to Premises and Records. Subject to Section 5.1 of this
Agreement and to the terms and conditions of the Mutual Non-Disclosure Agreement
defined in Section 4.8, from the date hereof until consummation of the
transactions contemplated hereby at the Closing, Seller shall give Buyer and its
representatives, at reasonable times and with reasonable prior notice, free
access to the properties, books and records of the Business and to
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the Assets and will furnish to Buyer and its representatives such information
regarding the Business and the Assets as Buyer or its representatives may from
time to time reasonably request in order that Buyer may have full opportunity to
make a diligent investigation consistent with this Agreement. In addition to,
and not in limitation of the foregoing, Seller shall provide Buyer with access
to and copies of the records of all: (a) Accounts Receivable, (b) Subscriber
billings, (c) pre-paid accounts, (d) accounts for which no remuneration is
received by Seller and (e) general reports with respect to each category of
service provided by the Business.
4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions of which Buyer has been advised and to which Buyer has consented to in
writing, and except as specifically permitted or required by this Agreement,
Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable efforts to preserve any beneficial business
relationships with Subscribers, customers, suppliers and others having business
dealings with Seller relating to the Business;
(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
(d) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(e) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with the procedures in effect on the date of this
Agreement;
(f) Perform and comply in all material respects with the terms of
the Contracts and keep such Contracts in full force and effect, except where the
failure to keep any such Contract in full force and effect would not have a
material adverse effect on the Business; and
(g) Use its reasonable best efforts to preserve the goodwill of the
Business.
4.3 Negative Covenants. Seller shall not, without the prior written
consent of Buyer:
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(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets outside the
ordinary course of business;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business or which otherwise obligates Seller
to perform in full or in part beyond the Closing Date (other than in the
ordinary course of business);
(c) Hire any new employees or enter into any employment arrangements
or otherwise increase the salary or compensation of any existing employees,
unless necessary to replace terminating employees;
(d) Renegotiate, modify, amend or terminate any Contract in
otherwise than the ordinary course of business;
(e) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
(f) Make any modifications or changes to the existing rate schedules
or product offerings in effect with respect to the Business;
(g) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions outside the
ordinary course of business and not consistent with Seller's past practices;
(h) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement; or
(i) Cause or permit the provision for any new and material pension,
retirement or other employment benefits for employees who perform services in
connection with the conduct of the Business or any material increase in any
existing benefits (other than as required by law).
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract; provided, however, that "reasonable best
effort" for this purpose shall not require Seller to undertake extraordinary or
unreasonable measures to obtain such approvals and consents, including, without
limitation, the initiation or prosecution of legal proceedings or the payment of
fees in excess of customary filing and processing fees.
4.5 Notification of Certain Matters. Seller shall promptly notify Buyer of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of
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Seller's representations or warranties under this Agreement, or the disclosures
in any schedules or exhibits attached hereto, not to be true in any material
respect and (ii) any failure on its part to comply with or satisfy in any
material respect any covenant, condition or agreement to be complied with or
satisfied by it under this Agreement. Seller shall promptly notify Buyer in
writing of the assertion, commencement or threat of any claim, litigation,
proceeding or investigation in which Seller is a party or in which the Assets or
Business may be affected and which could reasonably be expected to be material
or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any
materially adverse developments affecting the Assets or the Business which
become known to Seller, including, without limitation, (i) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii) any material notice
of violation, forfeiture or complaint under any material Contract, or (iii)
anything which, if not corrected prior to the Closing Date, would prevent Seller
from fulfilling any condition to Closing described in Section 6 hereof.
4.7 No Solicitation. Seller shall not, and Seller shall cause its
officers, employees, stockholders, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by
Seller) and all other employees who perform services with respect to the
operation of the Business not to, initiate, solicit or encourage, directly or
indirectly, any inquiries or the making of any proposal with respect to the
Assets or the Business, or engage in any negotiations concerning, or provide to
any other person any information or data relating to, the Business, the Assets
or Seller for the purpose of, or have any discussions with, any person relating
to, or otherwise cooperate in any way with or assist or participate in,
facilitate or encourage, any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any effort or attempt by
any other person to seek or effect a transaction, or enter into a transaction
with any person or persons, other than Buyer, concerning the possible sale of
the Assets or Business, or the capital stock of Seller. Seller shall promptly
inform Buyer of any such inquiries or proposals and provide all pertinent
documentation related thereto.
4.8 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction. The Mutual Non-Disclosure Agreement by and
among Buyer, Seller and
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Rampart Associates, LLC (the "Mutual Non-Disclosure Agreement") shall remain in
full force and effect.
4.9 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
names "Bitstorm Internet Services, Inc.," "Bitstorm", or "www.bitstorm.net" or
any other Internet domain name used or useful in the business of Seller or (b)
use or disclose any trade secrets, confidential information, proprietary
information or other intellectual property of Seller transferred pursuant to
this Agreement. Seller shall have the right to use the know-how that it has
developed in its operation of the Business in operations other than in
connection with providing internet access and web-hosting services.
4.10 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer or
Seller, such assistance as is reasonably requested by Buyer in order to effect
an orderly transition in the ownership and operation of the Assets; provided,
however, such post-Closing assistance shall not, in any event, exceed five (5)
hours per week. Further, Seller shall only be required to provide such
assistance during three (3) days of each week during the period.
4.11 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder and to endorse with the name of Seller any
checks received on account of such receivables or other items, and Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any cash
or other property that such Seller may receive with respect to any claims,
contracts, licenses, leases, commitments, sales orders, purchase orders,
receivables of any character or any other items included in the Assets.
4.12 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.13 Further Assurances. Seller, from time to time after the Closing at
the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens (as defined in
Section 2.8).
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Confidentiality. Buyer agrees that, from the date hereof until
consummation of the transactions contemplated hereby at the Closing, Buyer and
its representatives will hold in
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strict confidence, and will not use, any confidential or proprietary data or
information obtained from Seller with respect to its business or financial
condition except for the purpose of evaluating, negotiating and completing the
transactions contemplated hereby. Information generally known in Seller's
industry or which has been disclosed to Buyer by third parties which have a
right to do so shall not be deemed confidential or proprietary information for
purposes of this Agreement. If the transactions contemplated by this Agreement
are not consummated, Buyer will return, and cause its respective officers,
directors, agents and representatives to return, to Seller (or certify that they
have destroyed) all copies of such data and information made available to Buyer
(and its officers, directors, agents and representatives) in connection with the
transaction.
5.2 Assumed Liabilities. From and after the Closing Date, Buyer shall pay
and/or perform the Assumed Liabilities in the ordinary course as they become
due.
5.3 Notification of Certain Matters. Buyer shall promptly notify Seller of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Buyer's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Buyer shall promptly
notify Seller in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
5.4 Books and Records. After the Closing, Buyer shall retain all books and
records acquired from Seller pursuant to this Agreement (the "Records") for a
period of two (2) years and shall permit Seller to have access to and to copy,
at Seller's cost and expense, the Records during normal business hours for the
purpose of preparing financial statements, preparing income tax returns, the
prosecution and defense of litigation or for other legitimate corporate purposes
relating to periods prior to the Closing. Buyer shall reasonably cooperate in
all respects in furnishing or providing access to all records and information
relevant to any audit of Seller conducted after the Closing, relating to the
business of Seller conducted prior to Closing, provided that such furnishing or
access shall be done during normal business hours and so as not to cause undue
disruption to the business of Buyer.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
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6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the Seller's Articles of Incorporation, By-Laws, authority and the
incumbency of all officers executing the Seller Documents on behalf of Seller;
(c) A certified copy of Seller's Articles of Incorporation from the
Secretary of State of the State of Florida;
(d) An Amendment to the Articles of Incorporation and any other
required documentation, which effect a change of Seller's name, which name
change shall take effect not more than five (5) days following the date of
Closing;
(e) A Certificate of Good Standing from the Secretary of State of
the State of Florida; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) [Intentionally Omitted];
(d) An Assignment of Internet Domain Names in the form attached
hereto as Exhibit E; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
identified on Schedule
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6.3 hereto have been obtained in form and substance satisfactory to Buyer. All
such Contracts and Authorizations shall remain in full force and effect and
shall not have been amended, modified or repudiated in any material respect by
either party thereto. Neither Seller nor, to the knowledge of Seller and the
Principal Shareholders, the other party thereto, shall have breached or
defaulted under any Contract or Authorization. Seller shall not have received
notice of or have knowledge of any fact which could result in the termination,
repudiation or breach of any Contract or Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-competition Agreement. Seller and the Principal Shareholders shall
have executed and delivered to Buyer a Non-competition Agreement in
substantially the form attached hereto as Exhibit F.
6.6 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the Closing instruments (including payoff letters, bills of sale and
UCC-3 termination statements) releasing any and all Liens on the Assets.
6.7 Opinion of Seller's Counsel. Buyer shall have received the opinion of
Broad and Cassel, counsel for Seller, dated the Closing Date, substantially in
the form of Exhibit G attached hereto.
6.8 Closing Date Balance Sheet. No later than thirty (30) days following
the Closing, Seller shall provide to Buyer a balance sheet dated as of the
Closing, as determined in accordance with GAAP consistently applied, which
includes, but is not limited to, Seller's Accounts Receivable, accounts payable,
and all deferred and all unearned revenue.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, unless waived by Seller in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
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(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Buyer's Certificate of Incorporation, By-Laws, authority and the
incumbency of all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation, as
amended to date, from the Secretary of State of the State of Delaware; and
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Consents. Seller shall have received all of the consents and approvals
listed on Schedule 6.3 in connection with the consummation of the transactions
contemplated by this Agreement.
SECTION 8. TERMINATION.
8.1 Events of Termination. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing:
(a) By the mutual written consent of Buyer and Seller.
(b) By Seller, if it is not in breach or default hereunder:
(i) if any representation or warranty of Buyer made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Buyer's receipt of a notice from Seller that
such breach exists or has occurred;
(ii) if Buyer shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Buyer's receipt
of a notice from Seller that such default exists or has occurred;
(iii) subject to Section 8.4 below, if the conditions to
Seller's obligations to consummate the Closing as set forth in
Section 7 cannot reasonably be satisfied or performed on or before
October 29, 1999 (unless such failure of satisfaction,
non-compliance or non-performance is the result, directly or
indirectly, of any action or failure to act on the part of Seller);
or
(iv) if the Closing has not occurred prior to November 15,
1999.
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(c) By Buyer, if it is not in breach or default hereunder:
(i) if any representation or warranty of Seller made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Seller's receipt of a notice from Buyer that
such breach exists or has occurred;
(ii) if Seller shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Seller's receipt
of a notice from Buyer that such default exists or has occurred; or
(iii) subject to Section 8.4 below, if the conditions to
Buyer's obligations to consummate the Closing as set forth in
Section 6 cannot reasonably be satisfied or performed on or before
October 29, 1999 (unless such failure of satisfaction,
non-compliance or non-performance is the result directly or
indirectly of any action or failure to act on the part of Buyer); or
(iv) if the Closing has not occurred prior to November 15,
1999.
8.2 Manner of Exercise. In the event of the termination of this Agreement
by either Buyer or Seller pursuant to Section 8.1, notice thereof shall
forthwith be given to the other party in accordance with the provisions set
forth in Section 11 hereto and this Agreement shall terminate and the
transactions contemplated hereunder shall be abandoned without further action by
Buyer or Seller.
8.3 Effect of Termination; Liabilities. In the event of the termination of
this Agreement pursuant to Section 8.1 or Section 8.4 and prior to the Closing,
all obligations of the parties hereunder (other than pursuant to Sections 4.8
and 5.1 hereof) shall terminate, and neither Seller nor Buyer shall have any
further liability hereunder, including for losses, liabilities, obligations,
damages, deficiencies, actions, suits, proceedings, demands, assessments,
orders, judgments, costs and expenses (including attorneys' fees) of any kind
whatsoever; except upon termination of this Agreement pursuant to Sections
8.1(c)(i) and 8.1(c)(ii), Buyer shall be entitled to any remedy which it may
have, whether at law or in equity, and, except upon termination of this
Agreement pursuant to Sections 8.1(b)(i) and 8.1(b)(ii), Seller shall be
entitled to any remedy which it may have, whether at law or in equity.
8.4 Waiver; Extension of Time for Performance. Seller may extend the time
for the performance of any of the obligations or other acts of Buyer hereunder,
waive any inaccuracies in the representations and warranties of Buyer contained
herein or in any document delivered pursuant hereto, or waive compliance by
Buyer with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by Seller. Buyer may extend the time for the performance of any of the
obligations or other acts of Seller or the Principal Shareholders
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hereunder, waive any inaccuracies in the representations and warranties of
Seller or the Principal Shareholders contained herein or in any document
delivered pursuant hereto, or waive compliance by Seller or the Principal
Shareholders with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set forth in an instrument in writing
signed by Buyer. The agreement by Buyer to close the transactions contemplated
by this Agreement despite Buyer's actual knowledge at the Closing of a
misrepresentation, default or breach by the Seller or a Principal Shareholder
shall be a waiver of such misrepresentation, default or breach.
SECTION 9. SURVIVAL.
9.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing for a
period of six (6) months, except for the representations and warranties set
forth in Sections 2.1, 2.3 and 2.4 and the covenants set forth in Sections 4.12,
which shall survive until expiration of the applicable statute of limitations,
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto (i.e., a representation or warranty, other
than one set forth in Section 2.1, 2.3 or 2.4 shall only be effective for a
period of six (6) months from the Closing Date and after such six (6) month
period a suit for breach may no longer be brought unless written notice of
breach was given to the party making such representation or covenant within such
six-month period).
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Seller and the Principal Shareholders.
(a) Seller and each of the Principal Shareholders hereby agrees,
jointly and severally, to indemnify and hold harmless Buyer, its affiliates and
its and their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Principal
Shareholders in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement, unless such
breach has been waived, (ii) any breach of any covenant or agreement made by
Seller or the Principal Shareholders in this Agreement or in
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any schedule, exhibit, certificate, financial statement, agreement or other
instrument delivered pursuant to this Agreement, unless such breach has been
waived, (iii) any claim made by any person or entity which relates to the
operation of the Assets or the Business which arises in connection with or on
the basis of events, acts, omissions, conditions or any other state of facts
occurring on or existing before the Closing Date; (iv) any claim which arises in
connection with any liability or obligation of Seller, including, without
limitation, arising from a failure to pay any Taxes or file any Tax returns; (v)
any failure of Seller or any of its affiliates, service providers or agents or
any Employee Program to comply with any provision of ERISA, the Code or other
applicable law; or (vi) any claim which arises in connection with any liability
or obligation of Seller other than the Assumed Liabilities.
10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees, disbursements and expenses of attorneys and consultants), of
any kind or nature whatsoever, to the extent sustained, suffered or incurred by
or made against any Seller Indemnified Party, to the extent based upon, arising
out of or in connection with: (i) any breach of any representation or warranty
made by Buyer in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement, unless such
breach has been waived, (ii) any breach of any covenant or agreement made by
Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or
other instrument delivered pursuant to this Agreement, unless such breach has
been waived, (iii) any claim made against Seller which relates to, results from
or arises out of the operation of the Assets or the Business from and after the
Closing Date; and (iv) the Assumed Liabilities.
10.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost
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and expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right, with the
consent of the indemnified party, which consent shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled provided the indemnifying parties'
obligation to indemnify the indemnified party therefor will be fully satisfied.
The indemnifying party shall keep the indemnified party apprised of the status
of the claim, liability or expense and any resulting suit, proceeding or
enforcement action, shall furnish the indemnified party with all documents and
information that the indemnified party shall reasonably request and shall
consult with the indemnified party prior to acting on major matters, including
settlement discussions. Notwithstanding anything herein stated, the indemnified
party shall at all times have the right to fully participate in such defense at
its own expense directly or through counsel; provided, however, if the named
parties to the action or proceeding include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate under applicable standards of professional conduct, the expense
of separate counsel for the indemnified party shall be paid by the indemnifying
party. If no such notice of intent to dispute and defend is given by the
indemnifying party, or if such diligent good faith defense is not being or
ceases to be conducted, the indemnified party shall, at the expense of the
indemnifying party, undertake the defense of (with counsel selected by the
indemnified party), and shall have the right to compromise or settle (exercising
reasonable business judgment), such claim, liability or expense. If such claim,
liability or expense is one that by its nature cannot be defended solely by the
indemnifying party, then the indemnified party shall make available all
information and assistance that the indemnifying party may reasonably request
and shall cooperate with the indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.4 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party is entitled to indemnification from Seller or the Principal
Shareholders under this Agreement,
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in addition to all other rights or remedies that Buyer may have (including the
right to collect directly from Seller or the Principal Shareholders), such Buyer
Indemnified Party shall be entitled to receive in cash from the Escrow Deposit
an amount equal to the indemnification obligation in accordance with the
provisions of the Escrow Agreement.
10.5 Limitations of Indemnity Obligations.
(a) The aggregate indemnity obligations of the Seller and the
Principal Shareholders under this Agreement shall not in any event exceed the
Purchase Price, except to the extent that such losses arise from or in
connection with the Excluded Liabilities.
(b) The aggregate indemnity obligations of the Buyer under this
Agreement shall not in any event exceed the Purchase Price, except to the extent
that such losses arise from or result from Buyer's operation of the business
from and after the Closing Date or in connection with the Assumed Liabilities.
SECTION 11. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given when delivered in hand or mailed,
postage prepaid, by first class United States mail, certified return receipt
requested as follows:
If to Seller: Bitstorm, Inc.
301 Brown Avenue
Sanford, Florida 32771
Attn: Dan Frana
With a copy to: Broad and Cassel
390 N. Orange Avenue, Suite 1100
Orlando, FL 32801
Attn: Douglas E. Starcher, P.A.
If to Buyer: DURO Communications, Inc.
1211 Semoran Blvd., Suite 217
Casselberry, Florida 32707
Attn.: Peter B. Hopper, President
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn.: David F. Dietz, P.C.
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SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors and assigns.
12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees to make full and timely payment when
due of all amounts owed by such Seller to its creditors.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of Florida, without regard to conflict of laws principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
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12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
12.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
12.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the Rules of the American Arbitration Association (the "AAA Rules"). The AAA
shall appoint a neutral advisor from its national panel. The arbitration shall
be governed by the United States Arbitration Act, 9 U.S.C. ss.ss.1-16, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Orlando, Florida.
Such proceedings shall be administered by the neutral advisor in
accordance with the AAA Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of Florida for the purpose of enforcing the
award or decision in any such proceeding and (b) hereby waives, and agrees not
to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter
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hereof may not be enforced in or by such court, and (c) hereby waives and agrees
not to seek any review by any court of any other jurisdiction which may be
called upon to grant an enforcement of the judgment of any such court. Each of
the parties hereto hereby consents to service of process by registered mail at
the address to which notices are to be given. Each of the parties hereto agrees
that its submission to jurisdiction and its consent to service of process by
mail is made for the express benefit of the other parties hereto. Final judgment
against any party hereto in any such action, suit or proceeding may be enforced
in other jurisdictions by suit, action or proceeding on the judgment, or in any
other manner provided by or pursuant to the laws of such other jurisdiction;
provided, however, that any party may at its option bring suit, or institute
other judicial proceedings, in any state or federal court of the United States
or of any country or place where the other parties or their assets, may be
found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.10.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Principal Shareholders and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
BITSTORM, INC.
By: /s/ Daniel Frana
____________________________________
Name: Daniel Frana
Title: President
PRINCIPAL SHAREHOLDERS:
/s/ Dan Frana
_____________________________________
Dan Frana
/s/ Jason Rowley
_____________________________________
Jason Rowley
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
____________________________________
Peter B. Hopper, President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Intentionally Omitted
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Form of Non-competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Insurance
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.22 Transactions with Interested Persons
Schedule 2.23 Employee Benefit Programs
Schedule 2.24 Environmental Matters
Schedule 6.3 Consents
<PAGE>
Exhibit 2.13
ASSET PURCHASE AGREEMENT
Agreement made as of October 27, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), Internet of Western North Carolina, Inc.
(d/b/a Internet of Asheville) a North Carolina corporation ("Seller"), and
Willard B. Fishburne as the principal shareholder of the Seller (the "Principal
Shareholder").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with
Seller's Internet service business and the properties, rights and assets of
Primeline Interest Services, Inc. ("Primeline") acquired by Seller immediately
prior to the Closing of the transaction contemplated herein (collectively the
"Business"),
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment");
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined in Section 1.2(b) below)), including, without limitation,
original contracts for the provision of Internet connectivity, dedicated
service, web-hosting, web-domain, dial-up services, web-development and Internet
commerce, all leases with respect to real property and all co-location
agreements, a true, correct and complete list of which contracts is attached
hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
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(d) Licenses and Authorizations. All rights associated with the
licenses, licensing agreements, permits, easements, registrations, domains, IP
addresses and authorizations issued or granted to Seller by any governmental
authority with respect to the operation of the Business, including, without
limitation, those licenses and authorizations listed on Schedule 1.1(d) attached
hereto, and all applications therefor, together with any renewals, extensions,
or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller (the "Current Assets"), including cash, inventory, prepaid expenses,
security deposits, bank accounts, advance payments and all accounts receivable
of Seller incurred in the ordinary course of business and included on Seller's
balance sheet as of the Closing Date, as determined in accordance with generally
accepted accounting principles ("GAAP"), consistently applied; a complete list
of such accounts receivable is attached hereto as Schedule 1.1(e) ("Accounts
Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller (including the properties,
rights and assets of Primeline Interest Services, Inc. (Primeline) acquired by
Seller immediately prior to the Closing of the transaction contemplated herein
being sold to and purchased by Buyer under this Section 1.1 are referred to
herein collectively as the "Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
Closing Date as set forth on Schedule 1.2(c) attached hereto;
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined in Section 2.4(a) below) for
periods prior to the Closing Date as set forth on Schedule 1.2(d) attached
hereto;
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(e) Corporate Records. All of Seller's corporate and other
organizational records; and
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to: (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date; (ii) accounts payable, advance payments by Subscribers, accrued expenses,
all deferred revenues and any other current liability of Seller as of the
Closing Date (except the current portion of any bank debt or line of credit to
be paid pursuant to Section 1.5 and except Notes Payable of Seller, as set forth
on Schedule 1.3(a) fees for professional services rendered to Seller prior to
and as of the Closing Date by the law firm of Long, Parker, Warren & Jones, P.A.
and by Gould, Killian CPA Group, P.A. included on Seller's balance sheet, as
determined in accordance with GAAP consistently applied (the "Assumed Current
Liabilities"); and (iii) all obligations and liabilities of Seller which are to
be performed after the Closing Date arising under the Contracts, including,
without limitation, Seller's obligations to Subscribers (as defined in Section
2.16) under such Contracts for (A) Subscriber deposits held by Seller as of the
Closing Date in the amount for which Buyer receives a credit pursuant to Section
1.6(a) below, (B) Subscriber advance payments held by Seller as of the Closing
Date for services to be rendered in connection with the Business in the amount
for which Buyer receives a credit pursuant to Section 1.6(a) below, and (C) the
delivery of Internet connectivity service to Subscribers (whether pursuant to a
Contract or otherwise) after the Closing Date ((i), (ii) and (iii) together, the
"Assumed Liabilities"). The assumption of the Assumed Liabilities by Buyer
hereunder shall not enlarge any rights of third parties under contracts or
arrangements with Buyer or Seller or any of their respective affiliates or
subsidiaries. No parties other than Buyer and Seller shall have any rights under
this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
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(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the Closing Date and Buyer shall not assume or have any obligations or
liabilities with respect to such employees or such terminations,
including, without limitation, any severance obligation. Seller
acknowledges and agrees that Buyer has the right to interview and discuss
employment terms and issues with such employees prior to and after the
Closing.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the Closing. Nothing in this Agreement shall be construed as
a commitment or obligation of Buyer to accept for employment, or otherwise
continue the employment of, any of Seller's employees, and no employee
shall be a third-party beneficiary of this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits. Seller shall retain
liability for benefits to all individuals entitled to benefits required to
be provided by the continuation health care coverage requirements of
Section 4980B of the Code and Sections 601 through 607 of ERISA or similar
state law as of the Closing including, without limitation, with respect to
any individual entitled to such coverage prior to the Closing and any
individual who loses health care coverage as a result of the transactions
contemplated by this Agreement.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any Employee Program (defined
in Section 2.23 hereof) benefit plans maintained by, or for the benefit of
any employees of Seller prior to the Closing Date, including, without
limitation, obligations for severance or vacation accrued but not taken as
of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date on which all of the
conditions to closing set forth in Sections 6 and 7 of this Agreement have been
satisfied or waived, or at such other time and place as shall be mutually agreed
upon in writing by Buyer and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, at the Closing, Buyer shall
deliver to Seller:
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Cash in an amount (as adjusted in accordance with Section 1.6 below,
the "Cash Purchase Price") equal to $4,200,000 as follows:
(a) Buyer shall deliver the amount payable to Colonial Pacific
Leasing set forth in the payoff letters attached hereto as Schedule 1.5(a)
(the "Colonial Payment") by bank cashier's check or bank wire transfer
pursuant to the instructions set forth in Schedule 1.5(a).
(b) Buyer shall deliver the amount payable to Sunrise Leasing
Corporation set forth in the payoff letter attached hereto as Schedule
1.5(b) (the "Sunrise Payment") by bank cashier's check or bank wire
transfer pursuant to the instructions set forth in Schedule 1.5(b).
(c) Buyer shall deliver the amount payable to US Bank of WA, N.A.
set forth in the payoff letter attached hereto as Schedule 1.5(c) (the "US
Bank Payment") by bank cashier's check or bank wire transfer pursuant to
the instructions set forth in Schedule 1.5(c).
(d) Buyer shall deliver the amount payable to Heller Financial
Leasing, Inc. set forth in the payoff letter attached hereto as Schedule
1.5(d) (the "Heller Payment") by bank cashier's check or bank wire
transfer pursuant to the instructions set forth in Schedule 1.5(d).
(e) Buyer shall deliver the amount payable to GALCO set forth in the
payoff letter attached hereto as Schedule 1.5(e) (the "GALCO Payment") by
bank cashier's check or bank wire transfer pursuant to the instructions
set forth in Schedule 1.5(e).
(f) Buyer shall deliver the amount payable to The Bank of Asheville
set forth in the payoff letter attached hereto as Schedule 1.5(f) (the
"Bank of Asheville Payment") by bank cashier's check or bank wire transfer
pursuant to the instructions set forth in Schedule 1.5(f).
(g) Buyer shall deliver the amount payable to Centura Bank set forth
in the payoff letter attached hereto as Schedule 1.5(g) (the "Centura
Payment") by bank cashier's check or bank wire transfer pursuant to the
instructions set forth in Schedule 1.5(g).
(h) Buyer shall deliver the amount payable to First Citizens Bank
set forth in the payoff letter attached hereto as Schedule 1.5(h) (the
"First Citizens Payment") by bank cashier's check or bank wire transfer
pursuant to the instructions set forth in Schedule 1.5(h).
(i) Bank shall deliver the amount payable to Waller Capital
Corporation set forth in the payoff letter attached hereto as Schedule
1.5(i) (the "Waller Capital
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Payment") by bank cashier's check or bank wire transfer pursuant to the
instructions set forth in Schedule 1.5(i).
(j) Buyer shall deposit an amount equal to the sum total of the list
of checks referenced in Section 6.17 (to be delivered by Seller to Buyer)
and hereto as Schedule 1.5(j) (the "Accounts Payable List Payment") by
cashier's check or bank wire transfer in the Internet of Asheville bank
account listed on Schedule 1.1(e).
(k) Buyer shall deliver the amount payable to Kurt Schmitz set forth
in the payoff letter attached hereto as Schedule 1.5(k) (the "Schmitz
Payment") by bank cashier's check or bank wire transfer pursuant to the
instructions set forth in Schedule 1.5(k).
(l) Buyer shall deliver the amount payable to Sam Ammons set forth
in the payoff letter attached hereto as Schedule 1.5(l) (the "Ammons
Payment") by bank cashier's check or bank wire transfer pursuant to the
instructions set forth in Schedule 1.5(l).
(m) Buyer shall deliver the amount payable to Steve Moody set forth
in the payoff letter attached hereto as Schedule 1.5(m) (the "Moody
Payment") by bank cashier's check or bank wire transfer pursuant to the
instructions set forth in Schedule 1.5(m).
(n) Buyer shall deliver the amount payable to Systems Express set
forth in the payoff letter attached hereto as Schedule 1.5(n) (the
"Systems Express Payment") by bank cashier's check or bank wire transfer
pursuant to the instructions set forth in Schedule 1.5(n).
(o) Buyer shall deliver to Seller by bank cashier's check or bank
wire transfer pursuant to payment instructions delivered by Seller to
Buyer at the Closing $3,885,000 (i) plus or minus, as applicable, the
Estimated Adjustment (as defined in Section 1.6(c) below); (ii) minus the
Colonial Payment; (iii) minus the Sunrise Payment; (iv) minus the Heller
Payment; (v) minus the GALCO Payment; (vi) minus the Bank of Asheville
Payment; (vii) minus the Centura Payment; (viii) minus the First Citizens
Payment (viii) (ix) minus the Waller Capital Payment, (x) minus the
Schmitz Payment, (xi) minus the Ammons Payment, (xii) minus the Moody
Payment, and (xiii) minus the Systems Express Payment (the "Adjusted Cash
Purchase Price").
(q) Buyer shall deposit the sum of $315,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the
Escrow Agreement in the form attached hereto as Exhibit A (the "Escrow
Agreement"). The Escrow Deposit shall be held, administered and
distributed in accordance with the terms of the Escrow Agreement, and
shall be a remedy of Buyer for any indemnification claims made pursuant to
Section 10 hereof.
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1.6 Adjustments to Purchase Price.
(a) Net Working Capital. The Purchase Price shall be decreased, on a
dollar- for-dollar basis, by the amount of Seller's Net Working Capital (as
defined herein) if such amount is negative, or increased dollar for dollar by
the amount of Seller's Net Working Capital if such amount is positive. "Net
Working Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the Closing Date.
(b) Revenues Adjustment Amount. The Purchase Price shall be
decreased, on a dollar-for-dollar basis, by the Revenues Adjustment Amount (as
defined herein) in the event Recurring Revenues (as defined herein) as of the
Closing Date are less than $169,000 (the "Target Revenues"). For purposes
hereof, the term "Revenues Adjustment Amount" shall equal the product obtained
by multiplying (i) $1,406 by (ii) the quotient obtained by dividing (X) the
Annualized Recurring Revenues Deficiency (as defined herein), by (Y) one
thousand dollars ($1,000). For purposes hereof, "Recurring Revenues" shall mean
revenues of Seller from Subscribers, calculated by multiplying the number of
Subscribers as of the Closing Date by the average monthly rate in effect for
such Subscribers, by type, excluding one-time set-up fees and other ancillary
charges. For purposes hereof, the term "Annualized Recurring Revenues
Deficiency" shall equal the product of the difference between (A) the Target
Revenues and (B) Recurring Revenues multiplied by twelve (12).
(c) Estimated Adjustment Statement. Prior to the Closing, Buyer and
Seller shall prepare a statement to be attached hereto as Schedule 1.6(c) (the
"Estimated Adjustment Statement") which sets forth (x) the estimated amount of
the Net Working Capital of the Business as of the Closing Date (the "Estimated
Net Working Capital") and (y) the Estimated Revenues Adjustment Amount (the
"Estimated Revenues Adjustment Amount"). The Purchase Price payable at the
Closing Date shall be decreased on a dollar-for-dollar basis by the amount of
the Estimated Revenues Adjustment Amount. The Purchase Price payable at Closing
shall be further reduced on a dollar-for-dollar basis by the amount of the
Estimated Net Working Capital if such number is negative. The Purchase Price
payable at Closing shall be increased on a dollar- for-dollar basis by the
amount of the Estimated Net Working Capital if such number is positive. The net
adjustment to the Purchase Price calculated under this subsection (c) shall be
referred to as the "Estimated Adjustment."
(d) Final Adjustment Statement.
(i) No sooner than forty-five (45) days and no later than
sixty (60) days following the Closing Date, Buyer shall prepare and
deliver to Seller a statement (the "Final Adjustment Statement") setting
forth the actual Net Working Capital and the actual Revenues Adjustment
Amount. Subject to Section 1.6(d)(ii) below, within ten (10) days
following the delivery of such Final Adjustment Statement to Seller, Buyer
or Seller, as the case may be, shall pay to the other party, by wire
transfer of immediately available funds, the net difference between (x)
the Estimated Net Working Capital, as
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shown on the Estimated Adjustment Statement, and the actual Net Working
Capital, as shown on the Final Adjustment Statement and (y) the Estimated
Revenues Adjustment Amount, as shown on the Estimated Adjustment
Statement, and the actual Revenues Adjustment Amount, as shown on the
Final Adjustment Statement
(ii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital and/or Seller's actual
Recurring Revenue at the Closing Date. Upon receipt by Buyer of such
written objection, the parties shall attempt to resolve the disagreement
concerning the Final Adjustment Statement through negotiation.
Notwithstanding any other dispute resolution procedure provided for in
this Agreement, if Buyer and Seller cannot resolve such disagreement
concerning the Final Adjustment Statement within thirty (30) days
following the end of the foregoing 10-day period, the parties shall submit
the matter for resolution to a nationally recognized firm of independent
certified public accountants not affiliated with either party, with the
costs thereof to be shared equally by the parties. Such accounting firm
shall deliver a statement setting forth its own calculation of the final
adjustment to the parties within thirty (30) days of the submission of the
matter to such firm. Any payment shown to be due by a party on the
statement of such accounting firm shall be paid to the other party
promptly but in no event later than five (5) days following the delivery
of such statement by such accounting firm to the parties.
1.7 Purchase Price Allocation. At or prior to the Closing, Seller shall
determine the allocation of the Purchase Price, subject to Buyer's prior
approval. Such allocation shall be binding upon Buyer and Seller for all
purposes (including financial accounting purposes, financial and regulatory
reporting purposes and tax purposes). Buyer and Seller each further agrees to
file its Federal income tax returns and its other tax returns reflecting such
allocation, Form 8594 and any other reports required by Section 1060 of the
Code.
1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, Seller shall deliver to Buyer all of the Contracts, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
of the full benefit of the same. Seller shall also deliver to Buyer at the
Closing all of Seller's files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, personal property taxes, fees and duties under
applicable law incurred in connection with this Agreement or the transactions
contemplated thereby will be borne and paid by Seller, and Seller shall promptly
reimburse Buyer for the payment of any such tax, fee or duty which Buyer is
required to make under applicable law.
1.10 Transfer of Assets. At the Closing, Seller shall deliver or cause to
be delivered to Buyer good and sufficient instruments of transfer transferring
to Buyer title to all of the Assets, together with all required consents. Such
instruments of transfer (a) shall contain appropriate
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warranties and covenants which are usual and customary for transferring the type
of property involved under the laws of the jurisdictions applicable to such
transfers, (b) shall be in form and substance reasonably satisfactory to Buyer
and its counsel, (c) shall effectively vest in Buyer good and marketable title
to all of the Assets free and clear of all Liens (as defined in Section 2.8
below), and (d) where applicable, shall be accompanied by evidence of the
discharge of all Liens against the Assets.
1.11 Post-Closing Audits. The Company and the Principal Shareholder hereby
agree to provide such assistance as Buyer reasonably requests to enable Buyer
and its accountant to complete an audit of the pre-Closing financial statement
of Buyer, including, without limitation, providing access to books and records
and executing management representation letters.
1.12 Credit Card Transactions. During the 60-day period following the
Closing Date, Seller, as acquirer of Primeline's First Citizens bank account,
agrees to allow Buyer to deposit credit card payments from Subscribers that are
made to Seller's First Citizens bank account. Seller covenants and agrees to
transfer such payments to Buyer on a weekly basis or at such other time as
reasonably requested by Buyer. At the end of such 60-day period, Buyer shall
provide to Seller a statement of all such payments that were made. Buyer agrees
to indemnify Seller for all losses, damages, chargebacks and claims arising from
the arrangements described in this Section 1.12.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPAL SHAREHOLDER.
In order to induce Buyer to enter into this Agreement, Seller and the
Principal Shareholder, jointly and severally, hereby represent and warrant to
Buyer as follows:
2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. Seller has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of Seller's Certificate of Incorporation and By-Laws each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. Seller is not in violation of any term of the Certificate of
Incorporation and By-Laws. Seller is duly qualified to do business in the state
of its incorporation, and is not required to be licensed or qualified to conduct
its business or own its property in any other jurisdiction.
(b) Except as set forth on Schedule 2.1 attached hereto, Seller has
no subsidiaries and does not own any securities issued by any other business
organization or governmental authority, except U.S. Government securities, bank
certificates of deposit and money market accounts acquired as short-term
investments in the ordinary course of its business. Seller does not own or have
any direct or indirect interest in or control over any corporation, partnership,
joint venture or entity of any kind.
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2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken or will have been duly and
validly taken prior to Closing, and this Agreement and each other agreement,
document and instrument to be executed and delivered by or on behalf of Seller
pursuant to, or as contemplated by, this Agreement (collectively, the "Seller
Documents") has been or shall be duly and validly authorized, executed and
delivered by Seller and no other action on the part of Seller or its officers,
directors or shareholders shall be required in connection therewith. Each of
Seller and the Principal Shareholder have full right, authority, power and
capacity to execute and deliver this Agreement and each other Seller Document
and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of each of
Seller and the Principal Shareholder enforceable in accordance with its
respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the Certificate of Incorporation and By-Laws of Seller, in each
case as amended to date, (ii) constitute a violation of, or conflict with or
result in any breach of, acceleration of any obligation under, right of
termination under, or default under, any agreement or instrument to which Seller
is a party or by which Seller or the Assets is bound, (iii) violate any
judgment, decree, order, statute, rule or regulation applicable to Seller or the
Assets, (iv) require Seller to obtain any approval, consent or waiver of, or to
make any filing with, any person or entity (governmental or otherwise) that has
not been obtained or made or (v) result in the creation or imposition of any
Lien (as defined in Section 2.8 below) on any of the Assets.
(b) The execution, delivery and performance by the Principal
Shareholder of this Agreement and each other Seller Document does not and will
not (i) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which the Principal Shareholder is a party
or by which the Principal Shareholder is bound, (ii) violate any judgment,
decree, order, statute, rule or regulation applicable to the Principal
Shareholder, (iii) require the Principal Shareholder to obtain any approval,
consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made or (iv) result in
the creation or imposition of any Lien (as defined in Section 2.8 below) on any
of the Assets.
2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not
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measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal, state, local
and foreign income tax returns filed with respect to Seller for taxable periods
ended on or after December 31, 1993, is set forth on Schedule 2.4 attached
hereto. Seller has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by Seller with respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Principal
Shareholder, threatening to assert against Seller any deficiency or claim for
additional Taxes. No claim has ever been made by an authority in a jurisdiction
where Seller does not file reports and returns that Seller is or may be subject
to taxation by that jurisdiction. There are no security interests on any of the
Assets of Seller that arose in connection with any failure (or alleged failure)
to pay any Taxes. Seller has never entered into a closing agreement pursuant to
Section 7121 of the Internal Revenue Code of 1986, as amended (the "Code").
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date on which a tax return was or is to be
filed by Seller is in force, and no waiver or agreement by Seller is in force
for the extension of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and
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regulations promulgated by any federal, state, municipal or other governmental
authority (including the Federal Communications Commission), and Seller has not
received notice of a violation or alleged violation of any such statute,
ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets of Seller are
insured to the extent disclosed on Schedule 2.6 attached hereto, and all
insurance policies and arrangements of Seller in effect as of the date hereof
are disclosed on said Schedule. Said insurance policies and arrangements are in
full force and effect, all premiums with respect thereto are currently paid, and
Seller is in compliance in all material respects with the terms thereof. Said
insurance is adequate and customary for the business engaged in by Seller and is
sufficient for compliance by Seller with all requirements of law and all
agreements and leases to which Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate to the Business or Assets. Schedule 1.1(b)
attached hereto contains a true, correct and complete list of all Contracts.
With respect to each oral agreement or understanding involving the Business,
Seller has provided a written summary of the material terms of each such
agreement or understanding on Schedule 1.1(b). Each Contract is valid, in full
force and effect and binding upon Seller and the other parties thereto in
accordance with its terms. Neither Seller nor, to the knowledge of Seller and
the Principal Shareholder, any other party is in default under or in arrears in
the performance, payment or satisfaction of any agreement or condition on its
part to be performed or satisfied under any Contract, nor does any condition
exist that with notice or lapse of time or both would constitute such a default,
and no waiver or indulgence has been granted by any party under any Contract.
Seller has not received notice of, and each of Seller and the Principal
Shareholder has no knowledge of, any fact which would result in a termination,
repudiation or breach of any Contract. Seller has provided Buyer with true and
complete copies of all of such Contracts, other than with respect to the oral
agreements or understandings described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens"). Upon the
sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good, marketable and
indefeasible title to the Assets, free and clear of all Liens. The Assets
include all of the assets and properties (i) held for use by Seller to conduct
the Business as presently conducted and (ii) necessary or useful for Buyer to
operate the Business in the same manner as such business is currently operated
by Seller. All of the tangible Assets are in good repair, have been well
maintained and are in good operating condition, ordinary wear and tear excepted,
do not require any material modifications or repairs, and comply in all material
respects with applicable laws, ordinances and regulations. Seller has delivered
complete and true copies of all real property leases (the "Leases") set forth on
Schedule 1.1(b). Seller holds good, clear, marketable, valid and enforceable
leasehold interest in the real property subject to the Leases (the "Leased Real
Property"), subject only to the right of reversion of the landlord or lessor
under the Leases, free and clear of all other prior or subordinate interests,
including, without limitation, mortgages,
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deeds of trust, ground leases, leases, subleases, assessments, tenancies,
claims, covenants, conditions, restrictions, easements, judgments or other
encumbrances or matters affecting title, and free of encroachments onto or off
of the leased real property. There are no material defects in the physical
condition of any improvements constituting a part of the Leased Real Property,
including, without limitation, structural elements, mechanical systems, roofs or
parking and loading areas, and all of such improvements are in good operating
condition and repair, have been well maintained. To the knowledge of Seller and
Principal Shareholder all water, sewer, gas, electric, telephone, drainage and
other utilities required by law or necessary for the current or planned
operation of the Leased Real Property have been installed and connected pursuant
to valid permits, and are sufficient to service the Leased Real Property. Seller
does not hold or own a fee interest in any real property.
2.9 No Litigation. Except as set forth on Schedule 2.9 attached hereto,
Seller is not now involved in nor, to the knowledge of Seller and the Principal
Shareholder, is Seller threatened to be involved in any litigation or legal or
other proceedings related to or affecting the Business or any Asset (including
any Intellectual Property) or which would prevent or hinder the consummation of
the transactions contemplated by this Agreement. Seller has not been operating
the Business under, and the Business is not subject to, any order, injunction or
decree of any court of federal, state, municipal or other governmental
department, commission, board, agency or instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately 7 full-time
employees and 4 part-time employees (additionally Primeline employees 6
employees) and generally enjoys good employer-employee relationships. Seller
shall provide to Buyer a list of the employees of Seller in connection with the
Business at the Closing, including the name, date of hire and wages of such
employees. Seller is not delinquent in payments to any of its employees for any
wages, salaries, commissions, bonuses or other direct compensation for any
services performed for it to the date hereof or amounts required to be
reimbursed to such employees. Upon termination of the employment of any of said
employees, neither Seller nor Buyer will by reason of the transactions
contemplated hereby or anything done prior to the Closing be liable to any of
said employees for so-called "severance pay" or any other payments, except as
set forth on Schedule 2.10 attached hereto. Seller does not have any policy,
practice, plan or program of paying severance pay or any form of severance
compensation in connection with the termination of employment, except as set
forth on said Schedule. Seller is in compliance in all material respects with
all applicable laws and regulations respecting labor, employment, fair
employment practices, work place safety and health, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending or, to the knowledge of Seller and the Principal Shareholder,
threatened against or involving Seller. No question concerning representation
exists respecting any group of employees of Seller. No collective bargaining
agreement is in effect or is currently being or is about to be negotiated by
Seller. Seller has received no information to indicate that any of its
employment policies or practices is currently being audited or investigated by
any
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federal, state or local government agency. Seller is, and at all times since
November 6, 1986 has been, in compliance with the requirements of the
Immigration Reform Control Act of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at June 30, 1999 (the "Base Balance Sheet") and
the statements of income and expense of Seller for the month of June and the six
(6) months ended June 30, 1999 (collectively the "Financial Statements"). The
Financial Statements have been prepared in accordance with generally accepted
accounting principles applied consistently during the periods covered thereby
(except for the absence of footnotes with respect to unaudited financial
statements), are complete and correct and present fairly and accurately the
financial condition of the Business at the dates of said statements and the
results of operations of the Business for the periods covered thereby. As of the
date of the Base Balance Sheet (the "Base Balance Sheet Date"), Seller had no
liabilities or obligations of any kind with respect to the Business, whether
accrued, contingent or otherwise, that are not disclosed and adequately reserved
against on the Base Balance Sheet. As of the date hereof and at the Closing,
Seller had and will have no liabilities or obligations of any kind with respect
to the Business, whether accrued, contingent or otherwise, that are not
disclosed and adequately reserved against on the Base Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business, other than Seller's purchase of
certain rights, properties and assets of Primeline immediately prior to this
Closing, as previously set forth herein;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
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(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated. All
of the Authorizations are in full force and effect and no licenses, permits or
authorizations of any governmental department or agency are required for the
operation of the Business which have not been duly obtained. As of the date
hereof, there is not pending or, to the knowledge of Seller and the Principal
Shareholder, threatened any action by or before any governmental agency to
revoke, cancel, rescind or modify any of the Authorizations, and there is not
now issued, outstanding, pending or, to the knowledge of Seller and the
Principal Shareholder, threatened any order to show cause, notice of violation,
notice of apparent liability, or notice of forfeiture or complaint against
Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller in connection with the execution and delivery of this Agreement
and the Seller Documents and the consummation of the transactions contemplated
hereby and thereby. All of the approvals, consents and authorizations listed on
Schedule 2.14 shall be obtained by Seller at or prior to the Closing.
2.15 Customers and Suppliers. Seller's relations with its customers and
suppliers, including its Subscribers (as defined in Section 2.16 below), are
good and there are not pending or, to Seller's knowledge, threatened claims or
controversies with any customer, supplier or Subscriber that is material to the
Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers (as defined herein) of the Business as listed by
class, type and billing plan. For purposes of this Agreement, the terms
"Subscriber" shall mean any active subscriber to Internet services offered by
Seller in the Business (including Subscribers Seller acquired from Primeline
immediately prior to the Closing of the transaction contemplated herein) who has
subscribed to a service for at least one month and has paid at least one bill,
including, without limitation, any person or corporation who receives dial-up
Internet access through the Business (a "Dial-up Subscriber"), any person who
receives dedicated Internet access from Seller offering higher data transmission
rates than available from dial-up access (a "Dedicated Subscriber"), and any
person with a web page or domain name on Seller's server and to whom Seller
provides Internet access (a "Web-hosting/Domain-hosting Subscriber"); provided,
however, that "Subscriber" shall not include any person who is (i) more than
thirty (30) days delinquent in payment of such person's bill for such services
provided by the Business (thirty (30) days delinquent shall mean sixty (60)
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days have elapsed since the billing date, as stated on such bill), (ii) any
person who cancels their subscription for Internet Services offered by Seller
within sixty (60) days of the Closing (Buyer shall receive credit for any such
cancelled subscriptions in the Final Adjustment Statement) and (iii) any person
receiving complimentary Internet services or Internet services at a promotional
discounted rate. Set forth on Schedule 2.16(b) attached hereto is a listing of
all such accounts which receive complimentary Internet services or Internet
services at a promotional discounted rate. Set forth on Schedule 2.16(c)
attached hereto is Seller's policy and practice with respect to the
disconnection of Subscribers, with which Seller has, except as set forth on
Schedule on Schedule 2.16(c), at all times since its inception, complied in all
material respects.
2.17 Brokers. Except as set forth in Schedule 2.17 attached hereto, Seller
has not retained any broker or finder or other person who would have any valid
claim against any of the parties to this Agreement for a commission or brokerage
fee in connection with this Agreement or the transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller are or will be as of the Closing Date bona fide, valid and enforceable
claims, subject to no set off or counterclaim and are collectible in accordance
with their terms. Seller has no accounts or loans receivable from any person,
firm or corporation which is affiliated with Seller or from any director,
officer or employee of Seller, or from any of their respective spouses or family
members.
2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are completely and accurately described in Schedule 2.19
attached hereto, indicating with respect to each of such arrangements the type
of arrangement maintained (such as checking account, borrowing arrangements,
safe deposit box, etc.) and the person or persons authorized in respect thereof.
2.20 Intellectual Property.
(a) All of the Intellectual Property of Seller is set forth on
Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) all patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names (Internet of
Western North Carolina, Internet of Asheville, Cheetah Communications, Inc. and
Alph-Tech On-line, Inc., Primeline Internet Services, Inc. ), all trade names,
trade dress, logos, packaging design, slogans, any and all Internet domain names
used or useful in the business of Seller, registered and unregistered trademarks
and service marks and applications (collectively, "Marks"); (iii) all copyrights
in both published and unpublished works, including, without limitation, all
compilations, databases and computer programs, and all copyright registrations
and applications, and all derivatives, translations, adaptations and
combinations of the above (collectively, "Copyrights"), (iv) all know-how, trade
secrets, confidential or proprietary information, customer lists, IP addresses,
research in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, prototypes,
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techniques, Beta testing procedures and Beta testing results (collectively,
"Trade Secrets"); (v) Seller's web-sites (including the domain name ("ioa.com,"
"safe-t.net," "cheta.net," "a-o.com," "primeline.com," "internetofamerica.com"
and "ioa.net") and any other similar domain name); (vi) all goodwill,
franchises, licenses, permits, consents, approvals, technical information,
telephone numbers, and claims of infringement against third parties (the
"Rights"); and (vii) all contracts relating to the Intellectual Property to
which Seller is a party or is bound, including, without limitation, all
nondisclosure and/or confidentiality agreements entered into by persons in
connection with disclosures by Seller (collectively,"Assigned Contracts").
(b) Except as described on Schedule 2.20, Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller and the Principal
Shareholder, threatened of any other person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of Seller and the Principal Shareholder, threatened against
Seller and/or its officers, employees and consultants which challenge the
validity and enforceability of Seller's rights in respect of the Intellectual
Property. The Intellectual Property represents all of the assets of Seller of
such class or type necessary for the operation of Seller's Business as currently
conducted.
Except as set forth on Schedule 2.20 attached hereto, all former and
current employees, consultants and contractors of Seller have executed written
instruments with Seller that assign to Seller all rights to any inventions,
improvements, discoveries, or information relating to the business of Seller. To
the best knowledge of Seller after inquiry, no employee, consultant or
contractor of Seller has entered into any agreement that restricts or limits in
any way the scope or type of work in which the employee, consultant or
contractor may be engaged or requires the employee, consultant or contractor to
transfer, assign, or disclose information concerning his work to anyone other
than Seller.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Patents. All of the issued Patents are
currently in compliance with formal legal requirements (including without
limitation payment of filing, examination and maintenance fees and proofs of
working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Patent is held by Seller by assignment,
the assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re-examination or opposition proceeding.
To the knowledge of Seller and the Principal Shareholder, there is no
potentially interfering Patent of any third party. All products made, used or
sold under the Patents have been marked with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the United States
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Patent and Trademark Office and/or any other jurisdiction are currently in
compliance with formal legal requirements (including, without limitation, the
timely post-registration filing of affidavits of use and incontestability and
renewal applications), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Trademark is held by Seller by
assignment, the assignment has been duly recorded with the U.S. Patent and
Trademark Office and all other jurisdictions of registration. No Mark has been
or is now involved in any opposition, invalidation or cancellation proceeding
and, to the knowledge of Seller and the Principal Shareholder, no such action is
threatened with respect to any of the Marks. All products and materials
containing a Mark bear the proper notice where permitted by law.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Copyrights. All the Copyrights have been
registered with the United States Copyright Office and are currently in
compliance with formal legal requirements, are valid and enforceable, and are
not subject to any fees or taxes or actions falling due within ninety (90) days
after the Closing Date. In each case where a Copyright is held by Seller by
assignment, the assignment has been duly recorded with the U.S. Copyright Office
and all other jurisdictions of registration. All copies of works encompassed by
the Copyrights have been marked with the proper copyright notice.
(f) Except as set forth in Schedule 2.20 attached hereto, Seller has
taken all reasonable security measures (including, without limitation, entering
into appropriate confidentiality and non-disclosure agreements with all
officers, directors, employees, consultants and contractors of Seller and any
other persons with access to the Trade Secrets) to protect the secrecy,
confidentiality and value of all Trade Secrets. To the knowledge of Seller and
the Principal Shareholder, there has not been any breach by any party to any
such confidentiality or non-disclosure agreement. The Trade Secrets have not
been disclosed by Seller to any person or entity other than employees or
contractors of Seller who had a need to know and use the Trade Secrets in the
course of their employment or contract performance. Seller has the right to use,
free and clear of claims of third parties, all Trade Secrets. To the knowledge
of Seller and the Principal Shareholder, there is not any assertion that the use
by Seller of any Trade Secret violates the rights of any third party.
(g) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Except as set forth on Schedule 2.20, Seller (i) has not licensed or
granted to anyone rights of any nature to use any of its Intellectual Property
and (ii) is not obligated to and does not pay royalties or other fees to anyone
for its ownership, use, license or transfer of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, to the knowledge of
Seller and the Principal Shareholder there is no material default by any party
thereto, and all of the rights of Seller thereunder are freely assignable. True
and complete copies of all such licenses or other agreements, and any
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amendments thereto, have been provided to Buyer, and Seller has no reason to
believe that the licensors under the licenses and other agreements under which
Seller is granted rights and has granted rights to others do not have and did
not have all requisite power and authority to grant the rights purported to be
conferred thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, and to the knowledge
of Seller and the Principal Shareholder there is no material default by any
party thereto. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to Buyer.
(j) Seller has reviewed the areas within its businesses and
operations which could be adversely affected by, and has developed a program to
address on a timely basis, the "Year 2000 Problem" (i.e., the risk that
applications used by Seller or its suppliers and/or providers may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any date after December 31, 1999). Seller and the Principal
Shareholder reasonably believe that the "Year 2000 Problem" will not have any
material adverse effect on the business or operations of Seller.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth on Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of Seller or, to the knowledge of Seller or the Principal
Shareholder, any of their respective spouses or family members owns directly or
indirectly on an individual or joint basis any material interest in, or serves
as an officer or director or in another similar capacity of, any competitor or
supplier of Seller, or any organization which has a material contract or
arrangement with Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program (as
defined in Section 2.23(c) below) that has been maintained by the Seller or an
Affiliate (as defined herein) at any time during the six-year period ending on
the Closing Date. Each Employee Program which has ever been maintained by the
Seller or an Affiliate and which has been intended to qualify under Section
401(a) or 501(c)(9) of the Code has received a favorable determination or
approval letter from the Internal Revenue Service ("IRS") regarding its
qualification under such section and has, in fact, been qualified under the
applicable section of the Code from the effective date of such Employee Program
through and including the Closing Date (or, if earlier, the date that all of
such Employee Program's assets were distributed). No event or omission has
occurred which would cause any such Employee Program to lose its qualification
or otherwise fail to satisfy the relevant requirements to provide tax-favored
benefits under the applicable Code Section (including without limitation Code
Sections 105, 125, 401(a) and 501(c)(9)). With respect to any Employee Program
ever maintained by the Seller or any Affiliate, there has been
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no (i) "prohibited transaction," as defined in Section 406 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") or Code Section
4975, or (ii) failure to comply with any provision of ERISA, other applicable
law, or any agreement which, in the case of either of (i) or (ii), could subject
the Seller or any Affiliate to liability either directly or indirectly
(including, without limitation, through any obligation of indemnification or
contribution) for any damages, penalties, or taxes, or any other loss or
expense. All payments and/or contributions required to have been made (under the
provisions of any agreements or other governing documents or applicable law)
with respect to all Employee Programs ever maintained by the Seller or any
Affiliate, for all periods prior to the Closing Date, either have been made or
have been accrued (and all such unpaid but accrued amounts are described on
Schedule 2.23). Each Employee Program ever maintained by the Seller or an
Affiliate has complied with the applicable notification and other applicable
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985.
(b) Neither the Seller nor any Affiliate (A) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multi Employer Plan (as defined in
Section 3(37) of ERISA) or (B) has ever provided health care or any other
non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) To the knowledge of
Seller and Principal Shareholder, Seller has not generated, transported, used,
stored, treated, disposed of, or managed any Hazardous Waste (as defined in
Section 2.24(c) below) at any time; (ii) to the knowledge of Seller and the
Principal Shareholder, no Hazardous Material (as defined in Section
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2.24(c) below) has ever been or is threatened to be spilled, released, or
disposed of at any site associated with a structure presently or formerly owned,
operated, leased, or used by Seller, or has ever been located in the soil or
groundwater at any such site; (iii) to the knowledge of Seller and the Principal
Shareholder, no Hazardous Material has ever been transported from any site
associated with a structure presently or formerly owned, operated, leased, or
used by Seller for treatment, storage, or disposal at any other place; (iv)
Seller does not presently own, operate, lease, or use, and has not previously
owned, operated, leased, or used any site associated with a structure on which
underground storage tanks are or were located; and (v) no lien has ever been
imposed by any governmental agency on any property, facility, machinery, or
equipment owned, operated, leased, or used by either Seller in connection with
the presence of any Hazardous Material.
(b) Except as set forth on Schedule 2.24 and to the knowledge of
Seller and the Principal Shareholder, (i) Seller does not have any liability
under, nor has it ever violated, any Environmental Law (as defined in Section
2.24(c) below); (ii) Seller, nor any property associated with a structure owned,
operated, leased, or used by Seller, nor facilities or operations thereon are
presently not in compliance with all applicable Environmental Laws; (iii) Seller
has not entered into or been subject to any judgment, consent decree, compliance
order, or administrative order with respect to any environmental or health and
safety matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor the Principal Shareholder has any
knowledge or reason to know that any of the items enumerated in clause (iii) of
this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
By-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Principal Shareholder to Buyer pursuant to this Agreement do not
contain any untrue statement of a material fact, and, when taken together, do
not omit to state a material fact required to be stated therein or necessary in
order to make such representations, warranties or statements not misleading in
light of the circumstances under which they were made. There are no facts known
to Seller or the Principal Shareholder which presently or may in the future have
a material adverse affect on the Business, properties, Assets, prospects,
operations or (financial or other) condition of Seller which has not been
specifically disclosed herein or in a Schedule furnished
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herewith, other than general economic or market conditions affecting the
Internet services industry generally.
2.26 Non-Disclosure. Seller agrees that it and its representatives prior
to the Closing Date, except as and to the extent required by law, without prior
written consent of Buyer shall not make any public comment, statement, or
communication with respect to the transactions contemplated hereby.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action: Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document and the issuance and delivery of the
Shares do not and will not (a) violate any provision of the Certificate of
Incorporation or By-Laws of Buyer, as amended to date, (b) constitute a
violation of, or conflict with or result in any breach of, acceleration of any
obligation under, right of termination under, or default under, any agreement or
instrument to which Buyer is a party or by which it is bound, (c) violate any
judgment, decree, order, statute, rule or regulation applicable to Buyer, (d)
require Buyer to obtain any approval, consent or waiver of, or to make any
filing with, any person or entity (governmental or otherwise) that has not been
obtained or made. The officers who execute this Agreement and the other Buyer
Documents contemplated hereby on behalf of Buyer have and shall have all
requisite power to do so in the name of and on behalf of Buyer.
3.4 Brokers. Except for fees payable to Rampart Associates, LLC, Buyer has
not retained any broker or finder or other person who would have any valid claim
against any of the
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parties to this Agreement for a commission or brokerage fee in connection with
this Agreement or the transactions contemplated hereby.
3.5 Non-Disclosure. Buyer agrees that it and its representatives prior to
the Closing Date, except as and to the extent required by law, without prior
written consent of Seller shall not make any public comment, statement, or
communication with respect to the transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that:
4.1 Access to Premises and Records. Subject to Section 5.1 of this
Agreement and to the terms and conditions of the Mutual Non-Disclosure Agreement
defined in Section 4.8, from the date hereof until consummation of the
transactions contemplated hereby at the Closing, Seller shall give Buyer and its
representatives, at reasonable times and with reasonable prior notice, free
access to the properties, books and records of the Business and to the Assets
and will furnish to Buyer and its representatives such information regarding the
Business and the Assets as Buyer or its representatives may from time to time
reasonably request in order that Buyer may have full opportunity to make a
diligent investigation consistent with this Agreement. In addition to, and not
in limitation of the foregoing, Seller shall provide Buyer with access to and
copies of the records of all: (a) Accounts Receivable, (b) Subscriber billings,
(c) pre-paid accounts, (d) accounts for which no remuneration is received by
Seller and (e) general reports with respect to each category of service provided
by the Business.
4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions of which Buyer has been advised and to which Buyer has consented to in
writing, except for Seller's purchase of certain assets, properties and rights
of Primeline and except as specifically permitted or required by this Agreement,
Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable efforts to preserve any beneficial business
relationships with Subscribers, customers, suppliers and others having business
dealings with Seller relating to the Business;
(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
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(d) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(e) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those in effect on the date of this Agreement;
(f) Perform and comply in all material respects with the terms of
the Contracts and keep such Contracts in full force and effect; and
(g) Use its reasonable best efforts to preserve the goodwill of the
Business.
4.3 Negative Covenants. Seller shall not, without the prior written
consent of Buyer:
(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets outside the
ordinary course of business;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business (other than in the ordinary course of
business and other than the acquisition of certain assets of Primeline) or which
otherwise obligates Seller to perform in full or in part beyond the Closing
Date;
(c) Hire any new employees or enter into any employment arrangements
or otherwise increase the salary or compensation of any existing employees;
(d) Renegotiate, modify, amend or terminate any Contract;
(e) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
(f) Make any modifications or changes to the existing rate schedules
or product offerings in effect with respect to the Business;
(g) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions outside the
ordinary course of business and not consistent with Seller's past practices;
(h) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement; or
(i) Cause or permit the provision for any new and material pension,
retirement or other employment benefits for employees who perform services in
connection with
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the conduct of the Business or any material increase in any existing benefits
(other than as required by law).
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract; provided, however, that "reasonable best
effort" for this purpose shall not require Seller to undertake extraordinary or
unreasonable measures to obtain such approvals and consents, including, without
limitation, the initiation or prosecution of legal proceedings or the payment of
fees in excess of customary filing and processing fees.
4.5 Notification of Certain Matters. Seller shall promptly notify Buyer of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Seller's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Seller shall promptly
notify buyer in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any
materially adverse developments affecting the Assets or the Business which
become known to Seller, including, without limitation, (i) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii) any material notice
of violation, forfeiture or complaint under any material Contract, or (iii)
anything which, if not corrected prior to the Closing Date, would prevent Seller
from fulfilling any condition to Closing described in Section 6 hereof.
4.7 No Solicitation. Seller shall not, and Seller shall cause its
officers, employees, stockholders, agents and representatives (including,
without limitation, any investment banker, attorney or accountant retained by
Seller) and all other employees who perform services with respect to the
operation of the Business not to, initiate, solicit, entertain, or encourage,
directly or indirectly, any inquiries or the making of any proposal with respect
to the Assets or the Business, or engage in any negotiations concerning, or
provide to any other person any information or data relating to, the Business,
the Assets or Seller for the purpose of, or have any discussions with, any
person relating to, or otherwise cooperate in any way with or assist or
participate in, facilitate or encourage, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to, any effort
or attempt by any other person to seek or effect a transaction, or enter into a
transaction with any person or persons, other than Buyer, concerning the
possible sale of the Assets or Business, or the capital stock of Seller. Seller
shall promptly inform Buyer of any such inquiries or proposals and provide all
pertinent documentation related thereto.
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4.8 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction. The Mutual Non-Disclosure Agreement by and
among Buyer, Seller and Rampart Associates, LLC (the "Mutual Non-Disclosure
Agreement") shall remain in full force and effect.
4.9 Use of Trade Names. Except as set forth on Schedule 4.9, After the
Closing Date, neither Seller, nor any person controlling, controlled by or under
common control with Seller will for any reason, directly or indirectly, for
itself or any other person, except for Principal Shareholder, in connection with
his employment with Buyer, (a) use the names ("Internet of Western North
Carolina," "Internet of Asheville," "Cheetah Communications, Inc.," "Alph-Tech
On-line," Inc.," "Primeline Internet Services, Inc.," "ioa.com," "safe-t.net,"
"cheta.net" "a- o.com," "primeline.com," "internetofamerica.com" and "ioa.net")
or any other Internet domain name used or useful in the business of Seller, or
any other or (b) use or disclose any trade secrets, confidential information,
know-how, proprietary information or other intellectual property of Seller
transferred pursuant to this Agreement.
4.10 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer,
such assistance as is reasonably requested by Buyer in order to effect an
orderly transition in the ownership and operation of the Assets; provided,
however, such post-Closing assistance shall not, in any event, exceed ten (10)
hours per week.
4.11 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder and to endorse with the name of Seller any
checks received on account of such receivables or other items, and Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any cash
or other property that such Seller may receive with respect to any claims,
contracts, licenses, leases, commitments, sales orders, purchase orders,
receivables of any character or any other items included in the Assets.
4.12 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.13 Further Assurances. Seller, from time to time after the Closing at
the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively
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transfer and assign to, and vest in, Buyer the Assets free and clear of all
Liens (as defined in Section 2.8).
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Confidentiality. Buyer agrees that, from the date hereof until
consummation of the transactions contemplated hereby at the Closing, Buyer and
its representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Seller with
respect to its business or financial condition except for the purpose of
evaluating, negotiating and completing the transactions contemplated hereby.
Information generally known in Seller's industry or which has been disclosed to
Buyer by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transactions contemplated by this Agreement are not consummated, Buyer will
return, and cause its respective officers, directors, agents and representatives
to return, to Seller (or certify that they have destroyed) all copies of such
data and information made available to Buyer (and its officers, directors,
agents and representatives) in connection with the transaction.
5.2 Assumed Liabilities. From and after the Closing Date, Buyer shall pay
and/or perform the Assumed Liabilities in the ordinary course as they become
due.
5.3 Notification of Certain Matters. Buyer shall promptly notify Seller of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Buyer's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Buyer shall promptly
notify Seller in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are
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to be performed or complied with by Seller prior to or upon the Closing Date and
shall have delivered all documents and items required to be delivered at or
prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the Certificate of Incorporation, By-Laws, authority and the incumbency of
all officers executing the Seller Documents on behalf of Seller;
(c) A certified copy of Seller's Certificate of Incorporation from
the Secretary of State of the State of North Carolina;
(d) An Amendment to the Certificate of Incorporation and any other
required documentation, which effect a change of Seller's name, which name
change shall take effect not more than five (5) days following the date of
Closing;
(e) A Certificate of Good Standing from the Secretary of State of
the State of North Carolina; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit C;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit D;
(c) An Assignment of Patents and Trademarks in the form attached
hereto as Exhibit E;
(d) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit F; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
and approvals required in connection with the consummation of the transactions
contemplated hereby under any Contract or Authorization or otherwise shall have
been obtained in form and substance satisfactory to
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Buyer and without conditions materially and adversely affecting Buyer and which
do not require Buyer to pay money to any party to any such Contract or
Authorization in excess of amounts required to be so paid pursuant to the terms
and conditions thereof. All such Contracts and Authorizations shall remain in
full force and effect and shall not have been amended, modified or repudiated in
any material respect by either party thereto. Neither Seller nor, to the
knowledge of Seller and the Principal Shareholder, the other party thereto,
shall have breached or defaulted under any Contract or Authorization. Seller
shall not have received notice of or have knowledge of any fact which could
result in the termination, repudiation or breach of any Contract or
Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-competition Agreement. Seller and the Principal Shareholder shall
have executed and delivered to Buyer a Non-competition Agreement in
substantially the form attached hereto as Exhibit G.
6.6 Release of Liens. Seller shall have obtained and delivered to Buyer at
or prior to the Closing instruments (including payoff letters, bills of sale and
UCC-3 termination statements) releasing any and all Liens on the Assets.
6.7 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Long, Parker, Warren & Jones, P.A., counsel for Seller, dated the
Closing Date, substantially in the form of Exhibit H attached hereto.
6.8 Closing Date Balance Sheet. No later than thirty (30) days following
the Closing, Seller shall provide to Buyer a balance sheet dated as of the
Closing, as determined in accordance with GAAP consistently applied, which
includes, but is not limited to, Seller's accounts receivable, accounts payable,
and all deferred and all unearned revenue.
6.9 Employment Agreement. Buyer and Willard B. Fishburne shall have
entered into an Employment Agreement in a form mutually agreeable to both Buyer
and Mr. Fishburne.
6.10 Board of Directors Approval. Buyer shall have received at or prior to
the Closing the approval of its Board of Directors for this transaction and all
related documents.
6.11 Due Diligence. Buyer shall have completed to its satisfaction a due
diligence investigation of the Seller and of its Assets, liabilities, operations
and of the financial statements.
6.12 Consents. Seller shall have made all filings with and notifications
of governmental authorities, regulatory agencies and other entities required to
be made by such Seller in connection with the execution and delivery of this
Agreement, the performance of the transactions contemplated hereby and the
continued operation of the Business by Buyer subsequent to the Closing Date; and
Seller shall have received all authorizations, waivers,
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consents and permits, in form and substance reasonably satisfactory to Buyer,
from all third parties, including, without limitation, applicable governmental
authorities, regulatory agencies, lessors, lenders and contract parties,
required to permit the continuation of the Business and the consummation of the
transactions contemplated by this Agreement, and in connection with the transfer
of all assets, except the Excluded Assets, or Sellers' contracts, permits,
leases and licenses, to avoid a breach, default, termination, acceleration or
modification of any material indenture, loan or credit agreement or any other
material agreement, contract, instrument, mortgage, lien, lease, permit,
authorization, order, writ, judgment, injunction, decree, determination or
arbitration award as a result of, or in connection with, the execution and
performance of this Agreement.
6.13 No Material Change. There shall have been no material adverse change
in the Business or in the Assets, operations or financial condition of the
Business since the date of the Base Balance Sheet Date;
6.14 Operation of Business in Ordinary Course. The Business shall have, in
all material respects, been conducted in the ordinary course of business and in
substantially the same manner as it was conducted before the date of the Base
Balance Sheet Date, except as otherwise set forth in this Agreement.
6.16 Primeline Transaction. Seller shall have entered into an asset
purchase agreement with Primeline, Inc. ("Primeline") in which Primeline agrees
to sell, transfer and assign to Seller, and Seller agrees to purchase from
Primeline, all of the properties, rights and assets used or useful in connection
with Primeline's Internet service business.
6.17 Accounts Payable Payoffs. Seller shall have fully met its payment
obligations (in the form of checks delivered in the amount of the outstanding
balances remaining) with regard to the accounts payable amounts listed on
Schedule 1.5(j) attached hereto. Seller has agreed to provide Buyer, within
three (3) days of the Closing, with a full accounting of all checks (in the form
of a list of the checks executed and photocopies of the checks executed)
executed and delivered in connection with such payments of the outstanding
balances remaining with regard to the amount payable for each and every account.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, unless waived by Seller in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
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(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, By-Laws, authority and the incumbency of
all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Board of Directors and Stockholder Approval. Seller shall have
received at or prior to the Closing the approval of its Board of Directors and
stockholders for this transaction and all related documents.
7.4 Employment Agreement. Buyer and Willard B. Fishburne shall have
entered into an Employment Agreement in a form mutually agreeable to both Buyer
and Mr. Fishburne.
SECTION 8. TERMINATION.
8.1 Events of Termination. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing:
(a) By the mutual written consent of Buyer and Seller.
(b) By Seller, if it is not in breach or default hereunder:
(i) if any representation or warranty of Buyer made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Buyer's receipt of a notice from Seller that
such breach exists or has occurred;
(ii) if Buyer shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Buyer's receipt
of a notice from Seller that such default exists or has occurred;
(iii) subject to Section 8.4 below, if the conditions to
Seller's obligations to consummate the Closing as set forth in
Section 7 cannot reasonably
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be satisfied or performed on or before October 31, 1999 (unless such
failure of satisfaction, non-compliance or non-performance is the
result, directly or indirectly, of any action or failure to act on
the part of Seller); or
(iv) if the Closing has not occurred prior to October 31,
1999.
(c) By Buyer, if it is not in breach or default hereunder:
(i) if any representation or warranty of Seller made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Seller's receipt of a notice from Buyer that
such breach exists or has occurred;
(ii) if Seller shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Seller's receipt
of a notice from Buyer that such default exists or has occurred; or
(iii) subject to Section 8.4 below, if the conditions to
Buyer's obligations to consummate the Closing as set forth in
Section 6 cannot reasonably be satisfied or performed on or before
October 31, 1999 (unless such failure of satisfaction,
non-compliance or non-performance is the result directly or
indirectly of any action or failure to act on the part of Buyer); or
(iv) if the Closing has not occurred prior to October 31,
1999.
8.2 Manner of Exercise. In the event of the termination of this Agreement
by either Buyer or Seller pursuant to Section 8.1 notice thereof shall forthwith
be given to the other party in accordance with the provisions set forth in
Section 11 hereto and this Agreement shall terminate and the transactions
contemplated hereunder shall be abandoned without further action by Buyer or
Seller.
8.3 Effect of Termination; Liabilities. In the event of the termination of
this Agreement pursuant to Section 8.1 or Section 8.4 and prior to the Closing,
all obligations of the parties hereunder (other than pursuant to Sections 4.8
and 5.1 hereof) shall terminate, and neither Seller nor Buyer shall have any
further liability hereunder, including for losses, liabilities, obligations,
damages, deficiencies, actions, suits, proceedings, demands, assessments,
orders, judgments, costs and expenses (including attorneys' fees) of any kind
whatsoever; except upon termination of this Agreement pursuant to Sections
8.1(c)(i) and 8.1(c)(ii), Buyer shall be entitled to any remedy which it may
have, whether at law or in equity, and except upon termination of this Agreement
pursuant to Sections 8.1(b)(i) and 8.1(b)(ii), Seller shall be entitled to any
remedy which it may have, whether at law or in equity.
8.4 Waiver; Extension of Time for Performance. Seller may extend the time
for the performance of any of the obligations or other acts of Buyer hereunder,
waive any inaccuracies in
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the representations and warranties of Buyer contained herein or in any document
delivered pursuant hereto, or waive compliance by Buyer with any of the
agreements or conditions contained herein. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by Seller. Buyer may
extend the time for the performance of any of the obligations or other acts of
Seller or the Principal Shareholder hereunder, waive any inaccuracies in the
representations and warranties of Seller or the Principal Shareholder contained
herein or in any document delivered pursuant hereto, or waive compliance by
Seller or the Principal Shareholder with any of the agreements or conditions
contained herein. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by Buyer.
SECTION 9. SURVIVAL.
9.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto.
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Seller and the Principal Shareholder.
(a) Seller and the Principal Shareholder hereby agrees, jointly and
severally, to indemnify and hold harmless Buyer, its affiliates and its and
their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Principal
Shareholder in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller or the Principal Shareholder
in this Agreement or in any schedule, exhibit, certificate, financial statement,
agreement or other instrument delivered pursuant to this Agreement; (iii) any
claim made by any person or entity which relates to the operation of the Assets
or the Business which arises in connection with or on the basis of events, acts,
omissions, conditions or any other state of facts occurring on or existing
before the Closing Date, including without limitation the litigation set forth
on Schedule 2.9 hereto; (iv) any claim which arises in connection with any
liability or obligation of Seller other
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than the Assumed Liabilities; and (v) any and all claims, liabilities, losses,
damages, costs and expenses (including without limitation the reasonable fees
and disbursements of counsel) arising out of any failure of (i) Seller or any of
its affiliates, service providers or agents or (ii) any Benefit Program, to
comply with any provision of ERISA, the Code, or other applicable law.
10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its Principal Shareholders, officers, directors, managers, members,
employees, agents, and Principal Shareholder (individually, a "Seller
Indemnified Party" and collectively, "Seller Indemnified Parties") at all times
against and in respect of all losses, liabilities, obligations, damages,
deficiencies, actions, suits, proceedings, demands, assessments, orders,
judgments, costs and expenses (including the reasonable fees, disbursements and
expenses of attorneys and consultants), of any kind or nature whatsoever, to the
extent sustained, suffered or incurred by or made against any Seller Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Buyer in this Agreement or in
any schedule, exhibit, certificate, agreement or other instrument delivered
pursuant to this Agreement; (ii) any breach of any covenant or agreement made by
Buyer in this Agreement or in any schedule, exhibit, certificate, agreement or
other instrument delivered pursuant to this Agreement; (iii) any claim made
against Seller which relates to, results from or arises out of Buyer's operation
of the Assets or the Business from and after the Closing Date; and (iv) the
Assumed Liabilities.
10.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party gives (i) written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or
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expense that is subject or potentially subject to indemnification. The
indemnifying party shall have the right, with the consent of the indemnified
party, which consent shall not be unreasonably withheld, to settle all
indemnifiable matters related to claims by third parties which are susceptible
to being settled provided the indemnifying parties' obligation to indemnify the
indemnified party therefor will be fully satisfied. The indemnifying party shall
keep the indemnified party apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall furnish
the indemnified party with all documents and information that the indemnified
party shall reasonably request and shall consult with the indemnified party
prior to acting on major matters, including settlement discussions.
Notwithstanding anything herein stated, the indemnified party shall at all times
have the right to fully participate in such defense at its own expense directly
or through counsel; provided, however, if the named parties to the action or
proceeding include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the expense of separate counsel
for the indemnified party shall be paid by the indemnifying party. If no such
notice of intent to dispute and defend is given by the indemnifying party, or if
such diligent good faith defense is not being or ceases to be conducted, the
indemnified party shall, at the expense of the indemnifying party, undertake the
defense of (with counsel selected by the indemnified party), and shall have the
right to compromise or settle (exercising reasonable business judgment), such
claim, liability or expense. If such claim, liability or expense is one that by
its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.4 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party sustains or incurs damages, liabilities, losses, taxes, fines,
penalties, costs or expenses, including, without limitation, attorneys fees, for
which it is entitled to indemnification from Seller or the Principal Shareholder
under this Agreement, in addition to all other rights or remedies that Buyer may
have (including the right to collect directly from Seller or the Principal
Shareholder), such Buyer Indemnified Party shall be entitled to receive in cash
from the Escrow Deposit an amount equal to the damages, liabilities, losses,
taxes, fines, penalties, costs and expenses, including, without limitation,
attorneys fees, sustained or incurred by such Buyer Indemnified Party. In order
to receive payment from the Escrow Deposit such Buyer Indemnified Party shall
first deliver to Seller a written claim for damages arising under or by virtue
of this Agreement
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specifying the nature of the claim and the type and amount of damages,
liabilities, losses, taxes, fines, penalties, costs and expenses sustained or
incurred by such Buyer Indemnified Party. Within thirty (30) calendar days of
receiving a claim against the Escrow Deposit from or on behalf of any Buyer
Indemnified Party, Seller shall provide a written response to such Buyer
Indemnified Party with a copy to the Escrow Agent, which either accepts or
rejects all or any portion of such Buyer Indemnified Party's claim, the amount
accepted by Seller shall be paid to such Buyer Indemnified Party from the Escrow
Deposit by the Escrow Agent within ten (10) calendar days of the Escrow Agent's
receipt of Seller's acceptance of such Buyer Indemnified Party's claim. If
Seller rejects any portion of such Buyer Indemnified Party's claim, Seller's
written response shall specify the specific reason(s) for the rejection and the
amount, if any, of such Buyer Indemnified Party's claim which is accepted. The
amount of any claim rejected by Seller shall be retained in escrow and
distributed by the Escrow Agent only as directed by a written settlement
agreement signed by both Seller and such Buyer Indemnified Party or in
accordance with a judgement rendered in accordance with Section 12.11 of this
Agreement. The principal amount of the Promissory Note shall be reduced by the
amount of any disbursements to Buyer from the Escrow Account.
SECTION 11. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given (i) if delivered or sent by
facsimile transmission, upon acknowledgment of receipt by the recipient, (ii) if
sent by a nationally recognized overnight courier, properly addressed with
postage prepaid, on the next business day (or Saturday or Sunday if sent for
delivering on such days), (iii) or if sent by registered or certified mail, upon
the earlier of the date on which receipt is acknowledged and the date which is
three (3) days after deposit in United States post office facilities properly
addressed with postage prepaid.
If to Seller: Internet of Western North Carolina, Inc.
2270 Hendersonville Road
Arden, NC 28704
Facsimile: (828) 687-7829
Attention: Willard B. Fishburne, President
and Chief Executive Officer
With a copy to: Long, Parker, Warren & Jones, P.A.
14 South Pack Square
Suite 600
Asheville, NC 28801
Attention: Kimberly A. Lyda
Facsimile: (828) 253-1073
If to Principal Shareholder: Willard B. Fishburne
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27 Braddock Way
Asheville, NC 28803
With a copy to: Long, Parker, Warren & Jones, P.A.
14 South Pack Square
Suite 600
Asheville, NC 28801
Attention: Kimberly A. Lyda
Facsimile: (828) 253-1073
If to Buyer: DURO Communications, Inc.
1211 Semoran Blvd., Suite 217
Casselberry, Florida 32707
Attn.: Peter B. Hopper, President
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, Massachusetts 02109
Attn.: David F. Dietz, P.C.
SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors and assigns.
12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and
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reimburse Buyer for, any loss, cost, expense, liability or damage (including
reasonable counsel fees and disbursements and expenses) which Buyer may suffer
or incur by virtue of the non-compliance by Seller with such laws.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of North Carolina, without regard to conflict of laws
principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
12.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
12.11 Dispute Resolution.
(a) Each of the parties to this Agreement hereby unconditionally and
irrevocably submits to the jurisdiction of the United States District Court for
the Western District of North Carolina, Charlotte Division. To the extent that
jurisdiction is proper and allowed by the laws and rules governing such Court,
the parties agree that the Charlotte Division of the United States District
Court for the Western Division of North Carolina will be the sole and exclusive
forum and venue for litigation and adjudication of any disputes among the
parties to this Agreement. Otherwise, each of the parties to this Agreement
hereby unconditionally and
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irrevocably submits to the jurisdiction of the Superior Court of Mecklenburg
County, North Carolina for the purpose of enforcing the award or decision in any
such proceeding.
(b) To the extent that the laws or rules governing the above-named
Courts allow waiver or consent regarding jurisdictional matters, each of the
parties to this Agreement waives any claim that an action is not subject to the
jurisdiction of the above-named court, that its property is exempt or immune
from attachment or execution, that any civil action is brought in an
inconvenient forum, that the venue of any civil action is improper, or that this
Agreement or the subject matter hereof may not be enforced in or by such courts.
(c) Each of the parties waives and agrees not seek review by any
court of any other jurisdiction which may be called upon to grant an enforcement
of the judgment of the above-named Courts. Each of the parties to this Agreement
hereby consents to service of process by registered or certified mail at the
address to which notices are to be given. Each of the parties hereto agrees that
its submission to jurisdiction and its consent to service of process by mail is
made for the express benefit of the other parties to this Agreement. Final
judgment against any party hereto in any such action, suit, or proceeding may be
enforced in any other jurisdiction by suit, action, or proceedings on the
judgment, or in any other manner provided by or pursuant to the laws of such
other jurisdiction; provided, however, that any party may at its option bring
suit, or institute other judicial proceedings, in any state or federal court of
the United States or of any country or place where the other parties or their
assets, may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.10.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Principal Shareholder and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
INTERNET OF WESTERN NORTH CAROLINA
By: /s/ Willard B. Fishburne
-----------------------------------------
Name: Willard B. Fishburne
Title: President, CEO
PRINCIPAL SHAREHOLDER:
/s/ Willard B. Fishburne
-------------------------------------------
Willard B. Fishburne
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
-----------------------------------------
Peter B. Hopper, President
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LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Patents and Trademarks
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Form of Non-competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Form of Employment Agreement
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Accounts Receivable
Schedule 1.2(c) Excluded Insurance Contracts
Schedule 1.2(d) Excluded Tax Items
Schedule 1.3(a) Notes Payable for Professional Services Rendered
Schedule 1.3(b) Excluded Liabilities
Schedule 1.5 Payoff Letters
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Allocation of Purchase Price
Schedule 2.1 Subsidiaries
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.9 Pending or Threatened Litigation
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.17 Brokers
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.22 Transactions with Interested Persons
Schedule 2.23 Employee Benefit Programs
Schedule 2.24 Environmental Matters
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Schedule 4.9 Use of Trade Names
Schedule 6.17 Accounts Payable Amounts
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Exhibit 2.14
ASSET PURCHASE AGREEMENT
Agreement made as of December 10, 1999 by and between DURO Communications,
Inc., a Delaware corporation ("Buyer"), The Nashville Exchange, Inc., a
Tennessee corporation ("Seller"), and Ben R. Cunningham as the principal
shareholder of the Seller (the "Principal Shareholder").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with
Seller's Internet service business (the "Business"),
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, all as set forth on Schedule 1.1(a) attached
hereto (collectively, "Equipment"), including a brief description of each and
the current location thereof;
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined in Section 1.2(b) below)), including, without limitation,
original contracts for the provision of Internet connectivity, dedicated
service, web-hosting, web-domain, dial-up services, web-development and Internet
commerce, all leases with respect to real property and all co-location
agreements, a true, correct and complete list of which contracts is attached
hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
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(d) Licenses and Authorizations. All rights associated with the
licenses, licensing agreements, permits, easements, registrations, domains, IP
addresses and authorizations issued or granted to Seller by any governmental
authority with respect to the operation of the Business, including, without
limitation, those licenses and authorizations listed on Schedule 1.1(d) attached
hereto, and all applications therefor, together with any renewals, extensions,
or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller (the "Current Assets"), including cash, inventory, prepaid expenses,
security deposits, advance payments and all accounts receivable of Seller
incurred in the ordinary course of business and included on Seller's balance
sheet as of the Closing Date, as determined in accordance with generally
accepted accounting principles ("GAAP"), consistently applied; a complete list
of such accounts receivable is attached hereto as Schedule 1.1(e) ("Accounts
Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
Closing Date as set forth on Schedule 1.2(c) attached hereto;
(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined in Section 2.4(a) below) for
periods prior to the Closing Date as set forth on Schedule 1.2(d) attached
hereto;
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(e) Corporate Records. All of Seller's corporate and other
organizational records; and
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date; (ii) accounts payable, advance payments by Subscribers, accrued expenses,
all deferred revenues and any other current liability of Seller as of the
Closing Date (except the current portion of any bank debt or line of credit to
be paid pursuant to Section 1.5) included on Seller's balance sheet, as
determined in accordance with GAAP consistently applied (the "Assumed Current
Liabilities"); and (iii) all obligations and liabilities of Seller which are to
be performed after the Closing Date arising under the Contracts, including,
without limitation, Seller's obligations to Subscribers (as defined in Section
2.16) under such Contracts for (A) Subscriber deposits held by Seller as of the
Closing Date in the amount for which Buyer receives a credit pursuant to Section
1.6(a) below, (B) Subscriber advance payments held by Seller as of the Closing
Date for services to be rendered in connection with the Business in the amount
for which Buyer receives a credit pursuant to Section 1.6(a) below, and (C) the
delivery of Internet connectivity service to Subscribers (whether pursuant to a
Contract or otherwise) after the Closing Date ((i), (ii) and (iii) together, the
"Assumed Liabilities"). The assumption of the Assumed Liabilities by Buyer
hereunder shall not enlarge any rights of third parties under contracts or
arrangements with Buyer or Seller or any of their respective affiliates or
subsidiaries. No parties other than Buyer, Seller and the Principal Shareholder
shall have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) the
employees of the Business, including, without limitation, any obligation to
provide any amounts due to the employees under any pension, profit sharing or
similar plan, any bonus or other compensation plan, or related to vacation or
other similar employee benefits, or arising as a result of the transactions
contemplated hereby or (iii) any fact existing or event occurring prior to the
Closing Date or relating to the operation of the Business prior to the Closing
Date. The liabilities which are not assumed by Buyer under this Agreement are
hereinafter sometimes referred to as the "Excluded Liabilities."
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(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees relating to
the Business effective as of the Closing Date and Buyer shall not assume
or have any obligations or liabilities with respect to such employees or
such terminations, including, without limitation, any severance
obligation. Seller acknowledges and agrees that Buyer has the right to
interview and discuss employment terms and issues with such employees
prior to and after the Closing.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees who are
employed in connection with the Business or other applicants in its sole
and absolute discretion; provided that Buyer shall provide to Seller a
list of employees to whom Buyer intends to offer employment at the
Closing. Nothing in this Agreement shall be construed as a commitment or
obligation of Buyer to accept for employment, or otherwise continue the
employment of, any of Seller's employees who are employed in connection
with the Business, and no employee shall be a third-party beneficiary of
this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits. Seller shall retain
liability for benefits to all individuals entitled to benefits required to
be provided by the continuation health care coverage requirements of
Section 4980B of the Code and Sections 601 through 607 of ERISA or similar
state law as of the Closing including, without limitation, with respect to
any individual entitled to such coverage prior to the Closing and any
individual who loses health care coverage as a result of the transactions
contemplated by this Agreement.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any Employee Program (as
defined in Section 2.23 below) maintained by, or for the benefit of any
employees of Seller prior to the Closing Date, including, without
limitation, obligations for severance or vacation accrued but not taken as
of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date on which all of the
conditions to closing set forth in Sections 6 and 7 of this Agreement have been
satisfied or waived, or at such other time and place as shall be mutually agreed
upon in writing by Buyer and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the
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conditions contained herein, at the Closing, Buyer shall deliver to Seller an
amount (as adjusted in accordance with Section 1.6 below, the "Purchase Price")
equal to $1,600,000 as follows:
(a) Buyer shall deliver to Seller by bank cashier's check or bank
wire transfer pursuant to payment instructions delivered by Seller to
Buyer at the Closing $1,440,000 plus or minus, as applicable, the
Estimated Adjustment (as defined in Section 1.6(c) below) (the "Adjusted
Purchase Price"); and
(b) Buyer shall deposit the sum of $160,000 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the
Escrow Agreement in the form attached hereto as Exhibit A (the "Escrow
Agreement"). The Escrow Deposit shall be held, administered and
distributed in accordance with the terms of the Escrow Agreement, and
shall be a remedy of Buyer for any indemnification claims made pursuant to
Section 10 hereof.
1.6 Adjustments to Purchase Price.
(a) Net Working Capital. The Purchase Price shall be decreased, on a
dollar-for-dollar basis, by the amount of Seller's Net Working Capital (as
defined herein) if such amount is negative, or increased dollar for dollar by
the amount of Seller's Net Working Capital if such amount is positive. "Net
Working Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the Closing Date.
(b) Revenues Adjustment Amount. The Purchase Price shall be
decreased, on a dollar-for-dollar basis, by the Revenues Adjustment Amount (as
defined herein) in the event Revenues (as defined herein) for the 31 calendar
days prior to the Closing are less than $74,000 (annualized at $888,000) (the
"Target Revenues"). For purposes hereof, the term "Revenues Adjustment Amount"
shall equal the product obtained by multiplying (i) $1,780 by (ii) the quotient
obtained by dividing (X) the Annualized Revenues Deficiency (as defined herein),
by (Y) one thousand dollars ($1,000). For purposes hereof, "Revenues" shall mean
the sum of (i) the total recurring revenues of Seller, and (ii) the average
non-recurring revenues for the prior four (4) months of Seller, as set forth on
Schedule 1.6(b). For purposes hereof, the term "Annualized Revenues Deficiency"
shall equal the product of (i) the difference between (A) the Target Revenues
and (B) Revenues, multiplied by (ii) twelve (12).
(c) Estimated Adjustment Statement. Prior to the Closing, Buyer and
Seller shall prepare a statement to be attached hereto as Schedule 1.6(c) (the
"Estimated Adjustment Statement") which sets forth (x) the estimated amount of
the Net Working Capital as of the Closing Date (the "Estimated Net Working
Capital") and (y) the estimated Revenues Adjustment Amount (the "Estimated
Revenues Adjustment Amount"). The Purchase Price payable at the Closing Date
shall be decreased on a dollar-for-dollar basis by the amount of the Estimated
Revenues Adjustment Amount. The Purchase Price payable at Closing shall be
further reduced on a dollar-for-dollar basis by the amount of the Estimated Net
Working
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Capital if such number is negative. The Purchase Price payable at Closing shall
be increased on a dollar-for-dollar basis by the amount of the Estimated Net
Working Capital if such number is positive. The net adjustment to the Purchase
Price calculated under this subsection (c) shall be referred to as the
"Estimated Adjustment."
(d) Final Adjustment Statement.
(i) No later than seventy (70) days following the Closing
Date, Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital and
the actual Revenues Adjustment Amount. Subject to Section 1.6(d)(ii)
below, within ten (10) days following the delivery of such Final
Adjustment Statement to Seller, Buyer or Seller, as the case may be, shall
pay to the other party, by wire transfer of immediately available funds,
the net difference between (x) the Estimated Net Working Capital, as shown
on the Estimated Adjustment Statement, and the actual Net Working Capital,
as shown on the Final Adjustment Statement and (y) the Estimated Revenues
Adjustment Amount, as shown on the Estimated Adjustment Statement, and the
actual Revenues Adjustment Amount, as shown on the Final Adjustment
Statement.
(ii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital at the Closing Date.
Upon receipt by Buyer of such written objection, the parties shall attempt
to resolve the disagreement concerning the Final Adjustment Statement
through negotiation. Notwithstanding any other dispute resolution
procedure provided for in this Agreement, if Buyer and Seller cannot
resolve such disagreement concerning the Final Adjustment Statement within
thirty (30) days following the end of the foregoing 10-day period, the
parties shall submit the matter for resolution to a nationally recognized
firm of independent certified public accountants not affiliated with
either party, with the costs thereof to be shared equally by the parties.
Such accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such accounting firm to the parties.
1.7 Purchase Price Allocation. At or prior to the Closing, Seller shall
determine the allocation of the Purchase Price, as set forth on Schedule 1.7,
subject to Buyer's prior approval. Such allocation shall be binding upon Buyer
and Seller for all purposes (including financial accounting purposes, financial
and regulatory reporting purposes and tax purposes). Buyer and Seller each
further agrees to file its Federal income tax returns and its other tax returns
reflecting such allocation, Form 8594 and any other reports required by Section
1060 of the Internal Revenue Code of 1986, as amended (the "Code").
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1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, Seller shall deliver to Buyer all of the Contracts, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
of the full benefit of the same. Seller shall also deliver to Buyer at the
Closing all of Seller's files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise, personal property taxes, fees and duties under
applicable law incurred in connection with this Agreement or the transactions
contemplated hereby will be borne and paid by Seller, and Seller shall promptly
reimburse Buyer for the payment of any such tax, fee or duty which Buyer is
required to make under applicable law.
1.10 Transfer of Assets. At the Closing, Seller shall deliver or cause to
be delivered to Buyer good and sufficient instruments of transfer transferring
to Buyer title to all of the Assets, together with all required consents. Such
instruments of transfer (a) shall contain appropriate warranties and covenants
which are usual and customary for transferring the type of property involved
under the laws of the jurisdictions applicable to such transfers, (b) shall be
in form and substance reasonably satisfactory to Buyer and its counsel, (c)
shall effectively vest in Buyer good and marketable title to all of the Assets
free and clear of all Liens (as defined in Section 2.8 below), and (d) where
applicable, shall be accompanied by evidence of the discharge of all Liens
against the Assets.
1.11 Post-Closing Audits. The Seller and the Principal Shareholder hereby
agree to provide such assistance as Buyer reasonably requests to enable Buyer
and its accountant to complete an audit of the pre-Closing financial statement
of the Business, including, without limitation, providing access to books and
records and executing management representation letters.
1.12 Credit Card Transactions. During the 90-day period following the
Closing Date, Seller agrees to allow Buyer to deposit credit card payments from
Subscribers that are made to Seller's account at First American National Bank.
Seller covenants and agrees to transfer such payments to Buyer on a weekly basis
or at such other time as reasonably requested by Buyer. At the end of such
90-day period, Buyer shall provide to Seller a statement of all such payments
that were made. Buyer agrees to indemnify Seller for all losses, damages,
chargebacks and claims arising from the arrangements described in this Section
1.12.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND PRINCIPAL SHAREHOLDER.
In order to induce Buyer to enter into this Agreement, Seller and each of
the Principal Shareholder, jointly and severally, hereby represent and warrant
to Buyer as follows:
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2.1 Organization; Subsidiaries.
(a) Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Tennessee. Seller has all requisite
power and authority to conduct its business as it is now conducted and to own,
lease and operate its properties and assets. The copies of Seller's Certificate
of Incorporation and By-Laws each as amended to date, heretofore delivered to
Buyer's counsel are complete and correct. Seller is not in violation of any term
of the Certificate of Incorporation and/or By-Laws. Seller is duly qualified to
do business in the state of its incorporation, and is not required to be
licensed or qualified to conduct its business or own its property in any other
jurisdiction.
(b) Seller has no subsidiaries and does not own any securities
issued by any other business organization or governmental authority, except U.S.
Government securities, bank certificates of deposit and money market accounts
acquired as short-term investments in the ordinary course of its business.
Seller does not own or have any direct or indirect interest in or control over
any corporation, partnership, joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller in connection with the transactions contemplated by
this Agreement have been duly and validly taken or will have been duly and
validly taken prior to Closing, and this Agreement and each other agreement,
document and instrument to be executed and delivered by or on behalf of Seller
pursuant to, or as contemplated by, this Agreement (collectively, the "Seller
Documents") has been or shall be duly and validly authorized, executed and
delivered by Seller and no other action on the part of Seller or its officers,
directors or shareholders shall be required in connection therewith. Each of
Seller and the Principal Shareholder have full right, authority, power and
capacity to execute and deliver this Agreement and each other Seller Document
and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of each of
Seller and the Principal Shareholder enforceable in accordance with its
respective terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the Certificate of Incorporation and By-Laws of Seller, in each
case as amended to date, (ii) constitute a violation of, or conflict with or
result in any breach of, acceleration of any obligation under, right of
termination under, or default under, any agreement or instrument to which Seller
is a party or by which Seller or the Assets is bound, (iii) violate any
judgment, decree, order, statute, rule or regulation applicable to Seller or the
Assets, (iv) require Seller to obtain any approval, consent or waiver of, or to
make any filing with, any person or entity (governmental or otherwise) that has
not been obtained or made or (v) result in the creation or imposition of any
Lien (as defined in Section 2.8 below) on any of the Assets.
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(b) The execution, delivery and performance by the Principal
Shareholder of this Agreement and each other Seller Document does not and will
not (i) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which the Principal Shareholder is a party
or by which the Principal Shareholder is bound, (ii) violate any judgment,
decree, order, statute, rule or regulation applicable to the Principal
Shareholder, (iii) require the Principal Shareholder to obtain any approval,
consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made or (iv) result in
the creation or imposition of any Lien (as defined in Section 2.8 below) on any
of the Assets.
2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal, state, local
and foreign income tax returns filed with respect to Seller for taxable periods
ended on or after December 31, 1993, is set forth on Schedule 2.4 attached
hereto. Seller has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by Seller with respect to said returns.
(c) Neither the Internal Revenue Service nor any other governmental
authority is now asserting or, to the knowledge of Seller or the Principal
Shareholder, threatening to assert against Seller any deficiency or claim for
additional Taxes. No claim has ever been made by an authority in a jurisdiction
where Seller does not file reports and returns that Seller is or may be subject
to taxation by that jurisdiction. There are no security interests on any of the
Assets of Seller that arose in connection with any failure (or alleged failure)
to pay any Taxes. Seller has never entered into a closing agreement pursuant to
Section 7121 of the Code.
(d) There has not been any audit of any tax return filed by Seller,
no audit of any tax return of Seller is in progress, and Seller has not been
notified by any tax authority that any such audit is contemplated or pending. No
extension of time with respect to any date
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on which a tax return was or is to be filed by Seller is in force, and no waiver
or agreement by Seller is in force for the extension of time for the assessment
or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. To the best of Seller's and the Principal
Shareholder's knowledge, Seller's operation of the Business and the Assets is in
compliance in all material respects with all applicable statutes, ordinances,
orders, rules and regulations promulgated by any federal, state, municipal or
other governmental authority (including the Federal Communications Commission),
and Seller has not received notice of a violation or alleged violation of any
such statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets of Seller are
insured to the extent disclosed on Schedule 2.6 attached hereto, and all
insurance policies and arrangements of Seller in effect as of the date hereof
are disclosed on said Schedule. Said insurance policies and arrangements are in
full force and effect, all premiums with respect thereto are currently paid, and
Seller is in compliance in all material respects with the terms thereof. Said
insurance is adequate and customary for the business engaged in by Seller and is
sufficient for compliance by Seller with all requirements of law and all
agreements and leases to which Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate to the Business or Assets. Schedule 1.1(b)
attached hereto contains a true, correct and complete list of all Contracts.
With respect to each oral agreement or understanding involving the Business,
Seller has provided a written summary of the material terms of each such
agreement or understanding on Schedule 1.1(b). Each Contract is valid, in full
force and effect and binding upon Seller and the other parties thereto in
accordance with its terms. Neither Seller nor, to the knowledge of Seller and
the Principal Shareholder, any other party is in default under or in arrears in
the performance, payment or satisfaction of any agreement or condition on its
part to be performed or satisfied under any Contract, nor does any condition
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exist that with notice or lapse of time or both would constitute such a default,
and no waiver or indulgence has been granted by any party under any Contract.
Seller has not received notice of, and each of Seller and the Principal
Shareholder have no knowledge of, any fact which would result in a termination,
repudiation or breach of any Contract. Seller has provided Buyer with true and
complete copies of all of such Contracts, other than with respect to the oral
agreements or understandings described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens"). Upon the
sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good, marketable and
indefeasible title to the Assets, free and clear of all Liens. The Assets
include all of the assets and properties (i) held for use or used by Seller to
conduct the Business as presently conducted and (ii) necessary for Buyer to
operate the Business in the same manner as such business is currently operated
by Seller. All of the tangible Assets are in good repair, have been well
maintained and are in good operating condition, ordinary wear and tear excepted,
do not require any material modifications or repairs, and comply in all material
respects with applicable laws, ordinances and regulations. Seller has delivered
complete and true copies of all real property leases (the "Leases") set forth on
Schedule 1.1(b). Seller holds good, clear, marketable, valid and enforceable
leasehold interest in the real property subject to the Leases (the "Leased Real
Property"), subject only to the right of reversion of the landlord or lessor
under the Leases, free and clear of all other prior or subordinate interests,
including, without limitation, mortgages, deeds of trust, ground leases, leases,
subleases, assessments, tenancies, claims, covenants, conditions, restrictions,
easements, judgments or other encumbrances or matters affecting title, and free
of encroachments onto or off of the leased real property. To the best of
Seller's and the Principal Shareholder's knowledge, there are no material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property, including, without limitation, structural elements,
mechanical systems, roofs or parking and loading areas, and all of such
improvements are in good operating condition and repair, have been well
maintained. All water, sewer, gas, electric, telephone, drainage and other
utilities required by law or necessary for the current operation of the Leased
Real Property have been installed and connected pursuant to valid permits, and
are sufficient to service the Leased Real Property. Seller does not hold or own
a fee interest in any real property.
2.9 No Litigation. Seller is not now involved in nor, to the knowledge of
Seller and the Principal Shareholder, is Seller threatened to be involved in any
litigation or legal or other proceedings related to or affecting the Business or
any Asset (including any Intellectual Property) or which would prevent or hinder
the consummation of the transactions contemplated by this Agreement. Seller has
not been operating the Business under, and the Business is not subject to, any
order, injunction or decree of any court of federal, state, municipal or other
governmental department, commission, board, agency or instrumentality.
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2.10 Employees; Labor Matters. Seller employs approximately eleven (11)
full-time employees and no part-time employees. Seller shall provide to Buyer a
list of the employees of Seller in connection with the Business at or prior to
the Closing, including the name, date of hire and wages of such employees.
Seller is not delinquent in payments to any of its employees for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed for it to the date hereof or amounts required to be reimbursed to such
employees. Upon termination of the employment of any of said employees, neither
Seller nor Buyer will by reason of the transactions contemplated hereby or
anything done prior to the Closing be liable to any of said employees for
so-called "severance pay" or any other payments, except as set forth on Schedule
2.10 attached hereto. Seller does not have any policy, practice, plan or program
of paying severance pay or any form of severance compensation in connection with
the termination of employment, except as set forth on said Schedule. To the best
of Seller's and the Principal Shareholder's knowledge, Seller is in compliance
in all material respects with all applicable laws and regulations respecting
labor, employment, fair employment practices, work place safety and health,
terms and conditions of employment, and wages and hours. There are no charges of
employment discrimination or unfair labor practices, nor are there any strikes,
slowdowns, stoppages of work, or any other concerted interference with normal
operations existing, pending or, to the knowledge of Seller and the Principal
Shareholder, threatened against or involving Seller. No question concerning
representation exists respecting any group of employees of Seller. No collective
bargaining agreement is in effect or is currently being or is about to be
negotiated by Seller. Seller has received no information to indicate that any of
its employment policies or practices is currently being audited or investigated
by any federal, state or local government agency. Seller is, and at all times
since November 6, 1986 has been, in compliance with the requirements of the
Immigration Reform Control Act of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as of November 30, 1999 (the "Base Balance Sheet")
and the statements of income and expense of Seller for the eleven (11) months
ended November 30, 1999 (collectively the "Financial Statements"). The Financial
Statements have been prepared in accordance with GAAP applied consistently
during the periods covered thereby (except for the absence of footnotes with
respect to unaudited financial statements), are complete and correct and present
fairly and accurately the financial condition of the Business at the dates of
said statements and the results of operations of the Business for the periods
covered thereby. As of the date of the Base Balance Sheet (the "Base Balance
Sheet Date"), Seller had no material liabilities or obligations of any kind with
respect to the Business, whether accrued, contingent or otherwise, that are not
disclosed and adequately reserved against on the Base Balance Sheet. As of the
date hereof and at the Closing, Seller had and will have no liabilities or
obligations of any kind with respect to the Business, whether accrued,
contingent or otherwise, that are not disclosed and adequately reserved against
on the Base Balance Sheet.
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2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. As of the date of this Agreement, Seller is the holder of
all licenses, permits and authorizations with respect to the Business (the
"Authorizations"). The Authorizations constitute all of the licenses, permits
and authorizations required for operation of the Business as now operated. All
of the Authorizations are in full force and effect and no licenses, permits or
authorizations of any governmental department or agency are required for the
operation of the Business which have not been duly obtained. As of the date
hereof, there is not pending or, to the knowledge of Seller and the Principal
Shareholder, threatened any action by or before any governmental agency to
revoke, cancel, rescind or modify any of the Authorizations, and there is not
now issued, outstanding, pending or, to the knowledge of Seller and the
Principal Shareholder, threatened any order to show cause, notice of violation,
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notice of apparent liability, or notice of forfeiture or complaint against
Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto, no approval, consent, authorization or exemption from or filing with any
person or entity not a party to this Agreement is required to be obtained or
made by Seller in connection with the execution and delivery of this Agreement
and the Seller Documents and the consummation of the transactions contemplated
hereby and thereby. All of the approvals, consents and authorizations listed on
Schedule 2.14 shall be obtained by Seller at or prior to the Closing.
2.15 Customers and Suppliers. Seller's relations with its customers and
suppliers, including its Subscribers (as defined in Section 2.16 below), are
standard for the industry and there are not pending or, to Seller's knowledge,
threatened claims or controversies with any customer, supplier or Subscriber
that is material to the Assets or the Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers (as defined herein) of the Business as listed by
class, type and billing plan. For purposes of this Agreement, the terms
"Subscriber" shall mean any active subscriber to Internet services offered by
Seller in the Business who has subscribed to a service for at least two months
and has paid at least one bill covering at least a sixty (60) day period,
including, without limitation, any person or corporation who receives dial-up
Internet access through the Business (a "Dial-up Subscriber"), any person who
receives dedicated Internet access from Seller offering higher data transmission
rates than available from dial-up access (a "Dedicated Subscriber"), and any
person with a web page or domain name on Seller's server and to whom Seller
provides Internet access (a "Web-hosting/Domain-hosting Subscriber"); provided,
however, that "Subscriber" shall not include any person who is (i) more than
sixty (60) days delinquent in payment of such person's bill for such services
provided by the Business and (ii) any person receiving complimentary Internet
services or Internet services at a promotional discounted rate. Set forth on
Schedule 2.16(b) attached hereto is a listing of all such accounts which receive
complimentary Internet services or Internet services at a promotional discounted
rate. Set forth on Schedule 2.16(c) attached hereto is Seller's policy and
practice with respect to the disconnection of Subscribers, with which Seller
has, except as set forth on Schedule 2.16(c), at all times since its inception,
complied in all material respects.
2.17 Brokers. Seller has not retained any broker or finder or other person
who would have any valid claim against any of the parties to this Agreement for
a commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. Except as set forth on
Schedule 2.18, each of the Accounts Receivable of Seller are or will be as of
the Closing Date bona fide, valid and enforceable claims, subject to no set off
or counterclaim and are collectible in accordance with their terms. Seller has
no accounts or loans receivable from any person, firm or corporation which is
affiliated with Seller or from any director, officer or employee of Seller, or
from any of their respective spouses or family members.
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2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are completely and accurately described in Schedule 2.19
attached hereto, indicating with respect to each of such arrangements the type
of arrangement maintained (such as checking account, borrowing arrangements,
safe deposit box, etc.) and the person or persons authorized in respect thereof.
2.20 Intellectual Property.
(a) All of the Intellectual Property of Seller is set forth on
Schedule 2.20(a) attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) all patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names "The Nashville
Exchange, Inc.," "DAVINCI Web design," "Nashville.com," "nashville.com,"
"tnx.com," "nashex.com," "itmap.com" and "davinciwebdesign.com," all trade
names, trade dress, logos, packaging design, slogans, any and all Internet
domain names used in the business of Seller, registered and unregistered
trademarks and service marks and applications (collectively, "Marks"); (iii) all
copyrights in both published and unpublished works, including, without
limitation, all compilations, databases and computer programs, and all copyright
registrations and applications, and all derivatives, translations, adaptations
and combinations of the above (collectively, "Copyrights"), (iv) all trade
secrets, confidential or proprietary information, customer lists, IP addresses,
research in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, prototypes, techniques, Beta
testing procedures and Beta testing results (collectively, "Trade Secrets"); (v)
Seller's web-sites (including the domain names "nashville.com," "tnx.com,"
"nashex.com," "itmap.com," and "davinciwebdesign.com," and any other similar
domain name); (vi) all goodwill, franchises, licenses, permits, consents,
approvals, technical information, telephone numbers, and claims of infringement
against third parties (the "Rights"); and (vii) all contracts relating to the
Intellectual Property to which Seller is a party or is bound, including, without
limitation, all nondisclosure and/or confidentiality agreements entered into by
persons in connection with disclosures by Seller (collectively,"Assigned
Contracts") relating to the Business.
(b) Except as described on Schedule 2.20(b), Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller and the Principal
Shareholder, threatened of any other person pertaining to any of such
Intellectual Property and no proceedings have been instituted, or are pending
or, to the knowledge of Seller and the Principal Shareholder, threatened against
Seller and/or its officers, employees and consultants which challenge the
validity and enforceability of Seller's rights in respect of the Intellectual
Property. The Intellectual Property represents all of the assets of Seller of
such class or type necessary for the operation of Seller's Business as currently
conducted.
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Except as set forth on Schedule 2.20(b), all former and current employees,
consultants and contractors of Seller have executed written instruments with
Seller that assign to Seller all rights to any inventions, improvements,
discoveries, or information relating to the business of Seller. To the best
knowledge of Seller after inquiry, no employee, consultant or contractor of
Seller has entered into any agreement that restricts or limits in any way the
scope or type of work in which the employee, consultant or contractor may be
engaged or requires the employee, consultant or contractor to transfer, assign,
or disclose information concerning his work to anyone other than Seller.
(c) Except as set forth on Schedule 2.20(c), neither Seller nor the
Principal Shareholder owns any Patents relating to the Business.
(d) Schedule 2.20(d) sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the U.S. Patent and Trademark Office and/or any other
jurisdiction are currently in compliance with formal legal requirements
(including, without limitation, the timely post-registration filing of
affidavits of use and incontestability and renewal applications), are valid and
enforceable, and are not subject to any maintenance fees or taxes or actions
falling due within ninety (90) days after the Closing Date. In each case where a
Mark is held by Seller by assignment, the assignment has been duly recorded with
the U.S. Patent and Trademark Office and all other jurisdictions of
registration. No Mark has been or is now involved in any opposition,
invalidation or cancellation proceeding and, to the knowledge of Seller and the
Principal Shareholder, no such action is threatened with respect to any of the
Marks. All products and materials containing a Mark bear the proper notice where
permitted by law.
(e) Except as set forth on Schedule 2.20(e), neither Seller nor the
Principal Shareholder owns any Copyrights relating to the Business.
(f) Seller has taken all reasonable security measures to protect the
secrecy, confidentiality and value of all Trade Secrets. To the knowledge of
Seller and the Principal Shareholder, there has not been any breach by any party
to any such confidentiality or non-disclosure agreement. The Trade Secrets have
not been disclosed by Seller to any person or entity other than employees or
contractors of Seller who had a need to know and use the Trade Secrets in the
course of their employment or contract performance. Seller has the right to use,
free and clear of claims of third parties, all Trade Secrets. To the knowledge
of Seller and the Principal Shareholder, there is not any assertion that the use
by Seller of any Trade Secret violates the rights of any third party.
(g) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Except as set forth on Schedule 2.20(g), Seller (i) has not licensed
or granted to anyone rights of any nature to use any of its Intellectual
Property and (ii) is not obligated to and does not pay royalties or other fees
to anyone for its ownership, use, license or transfer of any of its Intellectual
Property.
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(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed on Schedule 2.20(h). All
such licenses or other agreements are in full force and effect, to the knowledge
of Seller and the Principal Shareholder there is no material default by any
party thereto, and all of the rights of Seller thereunder are freely assignable.
True and complete copies of all such licenses or other agreements, and any
amendments thereto, have been provided to Buyer, and Seller has no reason to
believe that the licensors under the licenses and other agreements under which
Seller is granted rights and has granted rights to others do not have and did
not have all requisite power and authority to grant the rights purported to be
conferred thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed on Schedule 2.20(i). All
such licenses or other agreements are in full force and effect, and to the
knowledge of Seller and the Principal Shareholder there is no material default
by any party thereto. True and complete copies of all such licenses or other
agreements, and any amendments thereto, have been provided to Buyer.
(j) Seller has reviewed the areas within its businesses and
operations which could be adversely affected by, and has developed a program to
address on a timely basis, the "Year 2000 Problem" (i.e., the risk that
applications used by Seller or its suppliers and/or providers may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any date after December 31, 1999). Seller and the Principal
Shareholder reasonably believe that the "Year 2000 Problem" will not have any
material adverse effect on the business or operations of Seller.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth on Schedule
2.22 hereto, neither Seller, nor any shareholder, officer, supervisory employee
or director of Seller or, to the knowledge of Seller or the Principal
Shareholder, any of their respective spouses or family members owns directly or
indirectly on an individual or joint basis any material interest in, or serves
as an officer or director or in another similar capacity of, any competitor or
supplier of Seller, or any organization which has a material contract or
arrangement with Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program (as
defined in Section 2.23(c) below) that has been maintained by the Seller or an
Affiliate (as defined herein) at any time during the six-year period ending on
the Closing Date. Each Employee Program which has ever been maintained by the
Seller or an Affiliate and which has been intended to qualify under Section
401(a) or 501(c)(9) of the Code has received a favorable determination or
approval letter from the Internal Revenue Service ("IRS") regarding its
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qualification under such section and has, in fact, been qualified under the
applicable section of the Code from the effective date of such Employee Program
through and including the Closing Date (or, if earlier, the date that all of
such Employee Program's assets were distributed). No event or omission has
occurred which would cause any such Employee Program to lose its qualification
or otherwise fail to satisfy the relevant requirements to provide tax-favored
benefits under the applicable Code Section (including without limitation Code
Sections 105, 125, 401(a) and 501(c)(9)). With respect to any Employee Program
ever maintained by the Seller or any Affiliate, there has been no (i)
"prohibited transaction," as defined in Section 406 of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or Code Section 4975, or (ii)
failure to comply with any provision of ERISA, other applicable law, or any
agreement which, in the case of either of (i) or (ii), could subject the Seller
or any Affiliate to liability either directly or indirectly (including, without
limitation, through any obligation of indemnification or contribution) for any
damages, penalties, or taxes, or any other loss or expense. All payments and/or
contributions required to have been made (under the provisions of any agreements
or other governing documents or applicable law) with respect to all Employee
Programs ever maintained by the Seller or any Affiliate, for all periods prior
to the Closing Date, either have been made or have been accrued (and all such
unpaid but accrued amounts are described on Schedule 2.23). Each Employee
Program ever maintained by the Seller or an Affiliate has complied with the
applicable notification and other applicable requirements of the Consolidated
Omnibus Budget Reconciliation Act of 1985.
(b) Neither the Seller nor any Affiliate (i) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multi employer Plan (as defined in
Section 3(37) of ERISA) or (ii) has ever provided health care or any other
non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
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2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) Seller has not
generated, transported, used, stored, treated, disposed of, or managed any
Hazardous Waste (as defined in Section 2.24(c) below) at any time; (ii) to the
knowledge of Seller and the Principal Shareholder, no Hazardous Material (as
defined in Section 2.24(c) below) has ever been or is threatened to be spilled,
released, or disposed of at any site associated with a structure presently or
formerly owned, operated, leased, or used by Seller, or has ever been located in
the soil or groundwater at any such site; (iii) to the knowledge of Seller and
the Principal Shareholder, no Hazardous Material has ever been transported from
any site associated with a structure presently or formerly owned, operated,
leased, or used by Seller for treatment, storage, or disposal at any other
place; (iv) to the knowledge of Seller and the Principal Shareholder upon
reasonable investigation, Seller does not presently own, operate, lease, or use,
and has not previously owned, operated, leased, or used any site associated with
a structure on which underground storage tanks are or were located; and (v) no
lien has ever been imposed by any governmental agency on any property, facility,
machinery, or equipment owned, operated, leased, or used by either Seller in
connection with the presence of any Hazardous Material.
(b) Except as set forth on Schedule 2.24 and to the knowledge of
Seller and the Principal Shareholder, (i) Seller does not have any liability
under, nor has it ever violated, any Environmental Law (as defined in Section
2.24(c) below); (ii) Seller, nor any property associated with a structure owned,
operated, leased, or used by Seller, nor facilities or operations thereon are
presently not in compliance with all applicable Environmental Laws; (iii) Seller
has not entered into or been subject to any judgment, consent decree, compliance
order, or administrative order with respect to any environmental or health and
safety matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor any Principal Shareholder has any
knowledge or reason to know that any of the items enumerated in clause (iii) of
this subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
By-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller and the Principal
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Shareholder to Buyer pursuant to this Agreement do not contain any untrue
statement of a material fact, and, when taken together, do not omit to state a
material fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. There are no facts known to Seller or
the Principal Shareholder which presently or may in the future have a material
adverse affect on the Business, properties, Assets, prospects, operations or
(financial or other) condition of Seller which has not been specifically
disclosed herein or in a Schedule furnished herewith, other than general
economic or market conditions affecting the Internet services industry
generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.
As a material inducement to Seller entering into this Agreement, Buyer
hereby represents and warrants to Seller as follows:
3.1 Organization. Buyer is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. Buyer has all
requisite power and authority to conduct its business as it is now conducted and
to own, lease and operate its properties and assets.
3.2 Required Action: Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer pursuant to, or as contemplated by, this
Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer. Buyer has full right, authority,
power and capacity to execute and deliver this Agreement and each other Buyer
Document and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Buyer Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligations of Buyer
enforceable in accordance with its respective terms.
3.3 No Conflicts. The execution, delivery and performance by Buyer of this
Agreement and each other Buyer Document does not and will not (a) violate any
provision of the Certificate of Incorporation or By-Laws of Buyer, as amended to
date, (b) constitute a violation of, or conflict with or result in any breach
of, acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer is a party or by which it is
bound, (c) violate any judgment, decree, order, statute, rule or regulation
applicable to Buyer, (d) require Buyer to obtain any approval, consent or waiver
of, or to make any filing with, any person or entity (governmental or otherwise)
that has not been obtained or made. The officers who execute this Agreement and
the other Buyer Documents contemplated hereby on behalf of Buyer have and shall
have all requisite power to do so in the name of and on behalf of Buyer.
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3.4 Brokers. Except for fees payable to Rampart Associates, LLC, Buyer has
not retained any broker or finder or other person who would have any valid claim
against any of the parties to this Agreement for a commission or brokerage fee
in connection with this Agreement or the transactions contemplated hereby.
3.5 Litigation. There are no actions, suits, proceedings or
investigations, either at law or in equity, or before any commission or other
administrative authority in any United States or foreign jurisdiction, of any
kind now pending or, to Buyer's knowledge, threatened involving Buyer that (i)
questions the validity of this Agreement or (ii) seeks to delay, prohibit or
restrict in any manner any action taken or contemplated to be taken by Buyer
under this Agreement.
3.6 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates and exhibits delivered by Buyer to
Seller and the Principal Shareholder pursuant to this Agreement do not contain
any untrue statement of a material fact, and, when taken together, do not omit
to state a material fact required to be stated therein or necessary in order to
make such representations, warranties or statements not misleading in light of
the circumstances under which they were made. There are no facts known to Buyer
which presently or may in the further have a material adverse affect on the
transactions contemplated by this Agreement which have not been specifically
disclosed herein or in any document furnished herewith other than general
economic or market conditions affecting the Internet services industry
generally.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that:
4.1 Access to Premises and Records. Subject to Section 5.1 of this
Agreement and to the terms and conditions of the Mutual Non-Disclosure Agreement
defined in Section 4.8, from the date hereof until consummation of the
transactions contemplated hereby at the Closing, Seller shall give Buyer and its
representatives, at reasonable times and with reasonable prior notice, free
access to the properties, books and records of the Business and to the Assets
and will furnish to Buyer and its representatives such information regarding the
Business and the Assets as Buyer or its representatives may from time to time
reasonably request in order that Buyer may have full opportunity to make a
diligent investigation consistent with this Agreement. In addition to, and not
in limitation of the foregoing, Seller shall provide Buyer with access to and
copies of the records of all: (a) Accounts Receivable, (b) Subscriber billings,
(c) pre-paid accounts, (d) accounts for which no remuneration is received by
Seller and (e) general reports with respect to each category of service provided
by the Business.
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4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions of which Buyer has been advised and to which Buyer has consented to in
writing, and except as specifically permitted or required by this Agreement,
Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable efforts to preserve any beneficial business
relationships with Subscribers, customers, suppliers and others having business
dealings with Seller relating to the Business;
(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
(d) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(e) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those in effect on the date of this Agreement;
(f) Perform and comply in all material respects with the terms of
the Contracts and keep such Contracts in full force and effect; and
(g) Use its reasonable good faith efforts to preserve the goodwill
of the Business.
4.3 Negative Covenants. Seller shall not, without the prior written
consent of Buyer:
(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets outside the
ordinary course of business;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business (other than in the ordinary course of
business) or which otherwise obligates Seller to perform in full or in part
beyond the Closing Date;
(c) Hire any new employees or enter into any employment arrangements
or otherwise increase the salary or compensation of any existing employees;
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(d) Renegotiate, modify, amend or terminate any Contract;
(e) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
(f) Make any material modifications or changes to the existing rate
schedules or product offerings in effect with respect to the Business;
(g) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions outside the
ordinary course of business and not consistent with Seller's past practices;
(h) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement; or
(i) Cause or permit the provision for any new and material pension,
retirement or other employment benefits for employees who perform services in
connection with the conduct of the Business or any material increase in any
existing benefits (other than as required by law).
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract; provided, however, that "reasonable best
effort" for this purpose shall not require Seller to undertake extraordinary or
unreasonable measures to obtain such approvals and consents, including, without
limitation, the initiation or prosecution of legal proceedings or the payment of
fees in excess of customary filing and processing fees.
4.5 Notification of Certain Matters. Seller shall promptly notify Buyer of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Seller's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Seller shall promptly
notify Buyer in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any
materially adverse developments affecting the Assets or the Business which
become known to Seller, including, without limitation, (i) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii)
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any material notice of violation, forfeiture or complaint under any material
Contract, or (iii) anything which, if not corrected prior to the Closing Date,
would prevent Seller from fulfilling any condition to Closing described in
Section 6 hereof.
4.7 No Solicitation. Seller shall not, and Seller shall use its best
efforts to cause its officers, employees, stockholders, agents and
representatives (including, without limitation, any investment banker, attorney
or accountant retained by Seller) and all other employees who perform services
with respect to the operation of the Business not to, initiate, solicit or
encourage, directly or indirectly, any inquiries or the making of any proposal
with respect to the Assets or the Business, or engage in any negotiations
concerning, or provide to any other person any information or data relating to,
the Business, the Assets or Seller for the purpose of, or have any discussions
with, any person relating to, or otherwise cooperate in any way with or assist
or participate in, facilitate or encourage, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to, any effort
or attempt by any other person to seek or effect a transaction, or enter into a
transaction with any person or persons, other than Buyer, concerning the
possible sale of the Assets or Business, or the capital stock of Seller. Seller
shall promptly inform Buyer of any such inquiries or proposals and provide all
pertinent documentation related thereto.
4.8 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction. The Mutual Non-Disclosure Agreement by and
among Buyer, Seller and Rampart Associates, LLC (the "Mutual Non-Disclosure
Agreement") shall remain in full force and effect.
4.9 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
names "The Nashville Exchange, Inc.," "Nashville.com," "DAVINCI Web Design" and
"davinciwebdesign.com" or any other Internet domain name used in the business of
Seller, or any other or (b) use or disclose any trade secrets, confidential
information, know-how, proprietary information or other intellectual property of
Seller transferred pursuant to this Agreement.
4.10 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer,
such assistance as is reasonably requested by Buyer in order to effect an
orderly transition in the ownership and
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operation of the Assets; provided, however, such post-Closing assistance shall
not, in any event, exceed ten (10) hours per week.
4.11 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder and to endorse with the name of Seller any
checks received on account of such receivables or other items, and Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any cash
or other property that such Seller may receive with respect to any claims,
contracts, licenses, leases, commitments, sales orders, purchase orders,
receivables of any character or any other items included in the Assets.
4.12 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.13 Further Assurances. Seller, from time to time after the Closing at
the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens (as defined in
Section 2.8).
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Confidentiality. Buyer agrees that, from the date hereof until
consummation of the transactions contemplated hereby at the Closing, Buyer and
its representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Seller with
respect to its business or financial condition except for the purpose of
evaluating, negotiating and completing the transactions contemplated hereby.
Information generally known in Seller's industry or which has been disclosed to
Buyer by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transactions contemplated by this Agreement are not consummated, Buyer will
return, and cause its respective officers, directors, agents and representatives
to return, to Seller (or certify that they have destroyed) all copies of such
data and information made available to Buyer (and its officers, directors,
agents and representatives) in connection with the transaction.
5.2 Assumed Liabilities. From and after the Closing Date, Buyer shall pay
and/or perform the Assumed Liabilities in the ordinary course as they become
due.
5.3 Notification of Certain Matters. Buyer shall promptly notify Seller of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Buyer's representations or warranties under this
Agreement, or the disclosures in any
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schedules or exhibits attached hereto, not to be true in any material respect
and (ii) any failure on its part to comply with or satisfy in any material
respect any covenant, condition or agreement to be complied with or satisfied by
it under this Agreement. Buyer shall promptly notify Seller in writing of the
assertion, commencement or threat of any claim, litigation, proceeding or
investigation in which Seller is a party or in which the Assets or Business may
be affected and which could reasonably be expected to be material or which
relates to the transactions contemplated hereby.
5.4 Consents and Approvals. Buyer shall use its reasonable best efforts to
obtain, as soon as practicable and at its expense, all consents, authorizations
and approvals under applicable laws and regulations required to be obtained by
Buyer in connection with the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby;
provided, however, that "reasonable best effort" for this purpose shall not
require Seller to undertake extraordinary or unreasonable measures to obtain
such approvals and consents, including, without limitation, the initiation or
prosecution of legal proceedings or the payment of fees in excess of customary
filing and processing fees.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Seller to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Seller's Secretary
as to the Certificate of Incorporation, By-Laws, authority and the incumbency of
all officers executing the Seller Documents on behalf of Seller;
(c) A certified copy of Seller's Certificate of Incorporation from
the Secretary of State of the State of Tennessee;
(d) An Amendment to the Certificate of Incorporation and any other
required documentation, which effect a change of Seller's name, which name
change shall take effect not more than five (5) days following the date of
Closing;
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(e) A Certificate of Good Standing from the Secretary of State of
the State of Tennessee; and
(f) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit D; and
(d) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
and approvals required in connection with the consummation of the transactions
contemplated hereby under any Contract or Authorization or otherwise shall have
been obtained in form and substance satisfactory to Buyer and without conditions
materially and adversely affecting Buyer and which do not require Buyer to pay
money to any party to any such Contract or Authorization in excess of amounts
required to be so paid pursuant to the terms and conditions thereof. All such
Contracts and Authorizations shall remain in full force and effect and shall not
have been amended, modified or repudiated in any material respect by either
party thereto. Neither Seller nor, to the knowledge of Seller and the Principal
Shareholder, the other party thereto, shall have breached or defaulted under any
Contract or Authorization. Seller shall not have received notice of or have
knowledge of any fact which could result in the termination, repudiation or
breach of any Contract or Authorization.
6.4 Escrow Agreement. Seller shall have executed and delivered to Buyer
the Escrow Agreement.
6.5 Non-Competition Agreement. Seller and the Principal Shareholder shall
have executed and delivered to Buyer a Non-Competition Agreement in
substantially the form attached hereto as Exhibit E.
6.6 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Gullet, Sanford, Robinson & Martin, PLLC, counsel for Seller, dated
the Closing Date, substantially in the form of Exhibit F attached hereto.
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6.7 Closing Date Balance Sheet. No later than thirty (30) days following
the Closing, Seller shall provide to Buyer a balance sheet dated as of the
Closing dated, as determined in accordance with GAAP consistently applied, which
includes, but is not limited to, Seller's accounts receivable, accounts payable,
and all deferred and all unearned revenue.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligation of Seller to consummate the transactions contemplated by
this Agreement is subject to the satisfaction, on or prior to the Closing Date,
of the following conditions, unless waived by Seller in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, By-Laws, authority and the incumbency of
all officers executing the Buyer Documents on behalf of Buyer;
(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
the Escrow Agreement.
7.3 Opinion of Buyer's Counsel. Seller shall have received the opinion of
Goodwin, Procter & Hoar LLP, counsel to Buyer, dated the Closing Date.
SECTION 8. TERMINATION.
Intentionally Omitted.
SECTION 9. SURVIVAL.
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9.1 Survival of Warranties. Each of the representations, warranties,
agreements, covenants and obligations herein or in any schedule, exhibit,
certificate or financial statement delivered by any party to the other party
incident to the transactions contemplated hereby are material, shall be deemed
to have been relied upon by the other party and shall survive the Closing for a
period of six (6) months, except for the representations and warranties set
forth in Sections 2.1, 2.3, 2.4 and 2.8 and the covenants set forth in Section
4.12, which shall survive until expiration of the applicable statute of
limitations, regardless of any investigation and shall not merge in the
performance of any obligation by either party hereto (i.e., a representation,
warranty or covenant, other than one set forth in Section 2.1, 2.3, 2.4, 2.8 and
4.12, shall only be effective for a period of six (6) months from the Closing
Date and after such six (6) month period a suit for breach may no longer be
brought unless written notice of breach was given to the party making such
representation or covenant within such six-month period).
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Seller and the Principal Shareholder.
(a) Seller and each of the Principal Shareholder hereby agrees,
jointly and severally, to indemnify and hold harmless Buyer, its affiliates and
its and their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller and the Principal
Shareholder in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller or the Principal Shareholder
in this Agreement or in any schedule, exhibit, certificate, financial statement,
agreement or other instrument delivered pursuant to this Agreement; (iii) any
claim made by any person or entity which relates to the operation of the Assets
or the Business which arises in connection with or on the basis of events, acts,
omissions, conditions or any other state of facts occurring on or existing
before the Closing Date; (iv) any claim which arises in connection with any
liability or obligation of Seller other than the Assumed Liabilities; (v) any
claim arising from Seller's failure to file any Tax returns or pay any Taxes;
and (vi) any and all claims, liabilities, losses, damages, costs and expenses
(including without limitation the reasonable fees and disbursements of counsel)
arising out of any failure of (A) Seller or any of its affiliates, service
providers or agents or (B) any Benefit Program, to comply with any provision of
ERISA, the Code, or other applicable law.
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10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees, disbursements and expenses of attorneys and consultants), of
any kind or nature whatsoever, to the extent sustained, suffered or incurred by
or made against any Seller Indemnified Party, to the extent based upon, arising
out of or in connection with: (i) any breach of any representation or warranty
made by Buyer in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Buyer in this Agreement or in any
schedule, exhibit, certificate, agreement or other instrument delivered pursuant
to this Agreement; (iii) any claim made against Seller which relates to, results
from or arises out of Buyer's operation of the Assets or the Business from and
after the Closing Date; and (iv) the Assumed Liabilities.
10.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party (i) gives written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim, liability or expense that is subject or potentially subject
to indemnification. The indemnifying party shall have the right, with the
consent of the indemnified party, which consent shall not be unreasonably
withheld, to settle all indemnifiable matters related to claims by third parties
which are susceptible to being settled provided the indemnifying parties'
obligation to indemnify the indemnified party therefor will be fully satisfied.
The indemnifying party shall
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keep the indemnified party apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall furnish
the indemnified party with all documents and information that the indemnified
party shall reasonably request and shall consult with the indemnified party
prior to acting on major matters, including settlement discussions.
Notwithstanding anything herein stated, the indemnified party shall at all times
have the right to fully participate in such defense at its own expense directly
or through counsel; provided, however, if the named parties to the action or
proceeding include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the expense of separate counsel
for the indemnified party shall be paid by the indemnifying party. If no such
notice of intent to dispute and defend is given by the indemnifying party, or if
such diligent good faith defense is not being or ceases to be conducted, the
indemnified party shall, at the expense of the indemnifying party, undertake the
defense of (with counsel selected by the indemnified party), and shall have the
right to compromise or settle (exercising reasonable business judgment), such
claim, liability or expense. If such claim, liability or expense is one that by
its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.4 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party sustains or incurs damages, liabilities, losses, taxes, fines,
penalties, costs or expenses, including, without limitation, attorneys fees, for
which it is entitled to indemnification from Seller or the Principal Shareholder
under this Agreement, in addition to all other rights or remedies that Buyer may
have (including the right to collect directly from Seller or the Principal
Shareholder), such Buyer Indemnified Party shall be entitled to receive in cash
from the Escrow Deposit an amount equal to the damages, liabilities, losses,
taxes, fines, penalties, costs and expenses, including, without limitation,
attorneys fees, sustained or incurred by such Buyer Indemnified Party. In order
to receive payment from the Escrow Deposit such Buyer Indemnified Party shall
first deliver to Seller a written claim for damages arising under or by virtue
of this Agreement specifying the nature of the claim and the type and amount of
damages, liabilities, losses, taxes, fines, penalties, costs and expenses
sustained or incurred by such Buyer Indemnified Party. Within thirty (30)
calendar days of receiving a claim against the Escrow Deposit from or on behalf
of any Buyer Indemnified Party, Seller shall provide a
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written response to such Buyer Indemnified Party with a copy to the Escrow
Agent, which either accepts or rejects all or any portion of such Buyer
Indemnified Party's claim, the amount accepted by Seller shall be paid to such
Buyer Indemnified Party from the Escrow Deposit by the Escrow Agent within ten
(10) calendar days of the Escrow Agent's receipt of Seller's acceptance of such
Buyer Indemnified Party's claim. If Seller rejects any portion of such Buyer
Indemnified Party's claim, Seller's written response shall specify the specific
reason(s) for the rejection and the amount, if any, of such Buyer Indemnified
Party's claim which is accepted. The amount of any claim rejected by Seller
shall be retained in escrow and distributed by the Escrow Agent only as directed
by a written settlement agreement signed by both Seller and such Buyer
Indemnified Party or in accordance with an award rendered by an arbitrator(s) in
accordance with Section 12.11 of this Agreement. The principal amount of the
Promissory Note shall be reduced by the amount of any disbursements to Buyer
from the Escrow Account.
10.5 Limitations on Indemnity Obligations.
(a) Indemnification Threshold. As to any claim for indemnification
pursuant to this Section 10, no party shall be entitled to such indemnification
until the total losses claimed by the other party equal in the aggregate $25,000
(the "Indemnification Threshold"), whereupon the entire amount of such
indemnified party's claim shall be recoverable hereunder; provided that the
Indemnification Threshold shall not apply with respect to any willful breach,
intentional misrepresentation, or the commission of fraud by the Seller, the
Principal Shareholder or Buyer.
(b) Indemnification Cap. The aggregate indemnity obligations of: (i)
the Seller and the Principal Shareholder under this Agreement shall not in any
event exceed the Purchase Price, except to the extent that such losses arise
from or in connection with the Excluded Liabilities; or (ii) the Buyer under
this Agreement shall not in any event exceed the Purchase Price, except to the
extent that such losses arise from or result from the Buyer's operation of the
Business from or after the Closing date or in connection with the Assumed
Liabilities.
SECTION 11. NOTICES.
All notices and other communications required to be given hereunder, or
which may be given pursuant or relative to the provisions hereof, shall be in
writing and shall be deemed to have been given (i) if delivered or sent by
facsimile transmission, upon acknowledgment of receipt by the recipient, (ii) if
sent by a nationally recognized overnight courier, properly addressed with
postage prepaid, on the next business day (or Saturday or Sunday if sent for
delivery on such days), or (iii) if sent by registered or certified mail, upon
the earlier of the date on which receipt is acknowledged and the date which is
three (3) days after deposit in the United States post office facilities
properly addressed with postage prepaid as follows:
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If to Seller: The Nashville Exchange, Inc.
2500 Hillsboro Road, Suite 107
Nashville, TN 37212
Attn.: Ben R. Cunningham
With a copy to: Gullet, Sanford, Robinson & Martin, PLLC
230 4th Ave. North, 3rd Floor
Nashville, TN 37219-8888
Attn.: George Crawford, Jr.
If to Buyer: DURO Communications, Inc.
1211 Semoran Blvd., Suite 217
Casselberry, FL 32707
Attn.: Peter B. Hopper, President
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn.: David F. Dietz, P.C.
SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors and assigns.
12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
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12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of Tennessee, without regard to conflict of laws principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
12.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
12.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute For Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute For Dispute Resolution
shall appoint a neutral advisor from its national CPR panel. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss.ss.1-16, and
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judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Atlanta, Georgia.
Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of Florida for the purpose of enforcing the
award or decision in any such proceeding and (b) hereby waives, and agrees not
to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter hereof may not be enforced
in or by such court, and (c) hereby waives and agrees not to seek any review by
any court of any other jurisdiction which may be called upon to grant an
enforcement of the judgment of any such court. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its submission
to jurisdiction and its consent to service of process by mail is made for the
express benefit of the other parties hereto. Final judgment against any party
hereto in any such action, suit or proceeding may be enforced in other
jurisdictions by suit, action or proceeding on the judgment, or in any other
manner provided by or pursuant to the laws of such other jurisdiction; provided,
however, that any party may at its option bring suit, or institute other
judicial proceedings, in any state or federal court of the United States or of
any country or place where the other parties or their assets may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.10.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
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IN WITNESS WHEREOF, Seller, Principal Shareholder and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
THE NASHVILLE EXCHANGE, INC.
By: /s/ Ben R. Cunningham
-------------------------------------
Name: Ben R. Cunningham
Title: President
PRINCIPAL SHAREHOLDER:
/s/ Ben R. Cunningham
------------------------------------------
Ben R. Cunningham
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Mark Heimbouch
-------------------------------------
Name: Mark Heimbouch
Title: Chief Financial Officer and Treasurer
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
EXHIBITS
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Internet Domain Name
Exhibit E - Form of Non-Competition Agreement
Exhibit F - Form of Opinion of Seller's Counsel
SCHEDULES
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Excluded Insurance
Schedule 1.2(d) Excluded Tax Items
Schedule 1.6(b) Adjustment to Purchase Price--Revenues
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 1.7 Purchase Price Allocation
Schedule 2.4 Taxes
Schedule 2.6 Insurance
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.18 Collectibility of Accounts Receivable
Schedule 2.19 Banking Relations
Schedule 2.20(a) Intellectual Property--Intellectual Property
Schedule 2.20(b) Intellectual Property--Title
Schedule 2.20(c) Intellectual Property--Patents
Schedule 2.20(d) Intellectual Property--Marks
Schedule 2.20(e) Intellectual Property--Copyrights
Schedule 2.20(g) Intellectual Property--Non-Licensing
Schedule 2.20(h) Intellectual Property--Licenses
<PAGE>
Schedule 2.20(i) Intellectual Property--Rights Granted to Others
Schedule 2.22 Transactions with Interested Persons
Schedule 2.23 Employee Benefit Programs
Schedule 2.24 Environmental Matters
Schedule 2.25 Disclosures
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Exhibit 2.20
ASSET PURCHASE AGREEMENT
Agreement made as of March 21, 2000 by and among DURO Communications,
Inc., a Delaware corporation ("Buyer"), DURO Holding Corp., a Delaware
corporation ("DURO"), Wave Communications, Inc., a North Carolina corporation
("Wave"), Wave Communications Acquisition Subsidiary, Inc., a wholly-owned
subsidiary of Wave and a North Carolina corporation ("Wave Acquisition"), Wave
Training Subsidiary, Inc., a wholly-owned subsidiary of Wave and a North
Carolina corporation ("Wave Training", and together with Wave and Wave
Acquisition, collectively, the "Seller") and each of Jeffrey P. Greer and Paul
Greer, the sole stockholders of Wave (the "Principals").
WHEREAS, subject to the terms and conditions hereof, Seller desires to
sell, transfer and assign to Buyer, and Buyer desires to purchase from Seller,
all of the properties, rights and assets used or useful in connection with
Seller's Internet service business (the "Business").
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
SECTION 1. PURCHASE AND SALE OF ASSETS.
1.1 Sale of Assets. Upon the terms and subject to the conditions set forth
in this Agreement, and the performance by the parties hereto of their respective
obligations hereunder, Seller agrees to sell, assign, transfer and deliver to
Buyer, and Buyer agrees to purchase from Seller, all of Seller's right, title
and interest in and to all of the properties, assets and business of the
Business of every kind and description, tangible and intangible, real, personal
or mixed, and wherever located, but excluding the Excluded Assets (as defined in
Section 1.2 below), including, without limitation, the following:
(a) Equipment. All free standing kiosks, servers, routers, modems,
computers, electronic devices, test equipment and all other fixed assets,
equipment, furniture, fixtures, leasehold improvements, parts, accessories,
inventory, office materials, software, supplies and other tangible personal
property of every kind and description owned by Seller and used or held for use
in connection with the Business, each such item with a value of $1,000 or
greater as set forth on Schedule 1.1(a) attached hereto (collectively, the
"Equipment"), including a brief description of each and the current location
thereof;
(b) Contracts. All of the rights of Seller under and interest of
Seller in and to all contracts relating to the Business (other than the Excluded
Contracts (as defined in Section 1.2(b) below)), including, without limitation,
original contracts for the provision of Internet connectivity, dedicated
service, web-hosting, web-domain, dial-up services, web- development and
Internet commerce, all leases with respect to real property and all co-location
<PAGE>
agreements, a true, correct and complete list of which material contracts is
attached hereto as Schedule 1.1(b) (collectively, the "Contracts");
(c) Intellectual Property. All of Seller's Intellectual Property (as
defined in Section 2.20), as set forth on Schedule 1.1(c) attached hereto;
(d) Licenses and Authorizations. All rights associated with the
licenses, licensing agreements, permits, easements, registrations, domains, IP
addresses and authorizations issued or granted to Seller by any governmental
authority or other third party with respect to the operation of the Business,
including, without limitation, those licenses and authorizations listed on
Schedule 1.1(d) attached hereto, and all applications therefor, together with
any renewals, extensions, or modifications thereof and additions thereto;
(e) Current Assets; Accounts Receivable. All current assets of
Seller (the "Current Assets"), including inventory, prepaid expenses, security
deposits, advance payments and all accounts receivable of Seller incurred in the
ordinary course of business and included on Seller's balance sheet as of the
Closing Date (as defined in Section 1.4), as determined in accordance with
generally accepted accounting principles as consistently applied; a complete
list of such accounts receivable is attached hereto as Schedule 1.1(e)
("Accounts Receivable");
(f) Goodwill. All of the goodwill of Seller in, and the going
concern value of, the Business, and all of the business and customer lists,
proprietary information, and trade secrets related to the Business; and
(g) Records. All of Seller's customer logs, location files and
records, employee records, and other business files and records, in each case
relating to the Business.
The assets, properties and business of Seller being sold to and purchased
by Buyer under this Section 1.1 are referred to herein collectively as the
"Assets."
1.2 Excluded Assets. There shall be excluded from the Assets and retained
by Seller, to the extent in existence on the Closing Date, the following assets
(the "Excluded Assets"):
(a) Other Assets. All other assets of Seller which are not used or
held for use in connection with the Business or otherwise necessary to the
operation of the Business now or after the Closing Date and which are set forth
on Schedule 1.2(a) attached hereto;
(b) Excluded Contracts. All of Seller's right, title and interest
in, to and under the Contracts listed on Schedule 1.2(b) attached hereto (the
"Excluded Contracts");
(c) Insurance. All of Seller's insurance contracts and all insurance
proceeds of settlement and insurance claims made by Seller on or before the
Closing Date as set forth on Schedule 1.2(c) attached hereto;
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(d) Tax Items. All claims, rights and interest in and to any refunds
for federal, state or local Taxes (as defined in Section 2.4(a) below) for
periods prior to the Closing Date as set forth on Schedule 1.2(d) attached
hereto;
(e) Corporate Records. All of Seller's corporate and other
organizational records;
(f) Cash. All of Seller's cash on hand and in bank accounts;
(g) Boone Online Stock. Wave's right, title and interest in any and
all of the shares of Boone Online, Inc., a North Carolina corporation ("Boone"),
owned beneficially or of record by Wave;
(h) Wave Acquisition Stock. Wave's right, title and interest in any
and all of the shares of Wave Acquisition, owned beneficially or of record by
Wave;
(i) Wave Training Stock. Wave's right, title and interest in any and
all of the shares of Wave Training, owned beneficially or of record by Wave; and
(j) Disputed Amounts. All claims, rights and interest in and to any
dispute Seller has with any third party regarding payment for goods or services
as of the date hereof (all such disputes, collectively, the "Disputed Amounts").
1.3 Assumed Liabilities; Excluded Liabilities; Employees.
(a) Assumed Liabilities. Buyer shall, on and as of the Closing Date,
accept and assume, and shall become and be fully liable and responsible for, and
other than as expressly set forth herein Seller shall have no further liability
or responsibility for or with respect to, (i) liabilities and obligations
arising out of events occurring on and after the Closing Date related to Buyer's
ownership of the Assets and Buyer's operation of the Business after the Closing
Date; (ii) accounts payable, advance payments by Subscribers (as defined in
Section 2.16), accrued expenses, all deferred revenues and any other current
liability of Seller as of the Closing Date (except the current portion of any
bank debt or line of credit to be paid pursuant to Section 1.5) included on
Seller's balance sheet, as determined in accordance with a tax accounting basis
which fairly and accurately reflects the financial conditions and results of the
Seller on a consolidated basis as consistently applied (the "Assumed Current
Liabilities"); and (iii) all obligations and liabilities of Seller which are to
be performed after the Closing Date arising under the Contracts, including,
without limitation, Seller's obligations to Subscribers under such Contracts for
(A) Subscriber deposits held by Seller as of the Closing Date in the amount for
which Buyer receives a credit pursuant to Section 1.6(a) below, (B) Subscriber
advance payments held by Seller as of the Closing Date for services to be
rendered in connection with the Business in the amount for which Buyer receives
a credit pursuant to Section 1.6(a) below, and (C) the delivery of Internet
connectivity service to Subscribers (whether pursuant to a Contract or
otherwise) after the Closing Date ((i), (ii) and (iii) together,
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the "Assumed Liabilities"). The assumption of the Assumed Liabilities by Buyer
hereunder shall not enlarge any rights of third parties under contracts or
arrangements with Buyer or Seller or any of their respective affiliates or
subsidiaries. No parties other than Buyer, DURO, the Principals and Seller shall
have any rights under this Agreement.
(b) Excluded Liabilities. It is expressly understood that, except
for the Assumed Liabilities, Buyer shall not assume, pay or be liable for any
liability or obligation of Seller of any kind or nature at any time existing or
asserted, whether, known, unknown, fixed, contingent or otherwise, not
specifically assumed herein by Buyer, including, without limitation, any
liability or obligation relating to, resulting from or arising out of (i) the
Excluded Assets, including, without limitation, the Excluded Contracts, (ii) any
liabilities associated with the Disputed Amounts, (iii) the employees of the
Business, including, without limitation, any obligation to provide any amounts
due to the employees under any pension, profit sharing or similar plan, any
bonus or other compensation plan, or related to vacation or other similar
employee benefits, or arising as a result of the transactions contemplated
hereby or (iv) except as specifically provided in Section 1.3(a) above, any fact
existing or event occurring prior to the Closing Date or relating to the
operation of the Business prior to the Closing Date. The liabilities which are
not assumed by Buyer under this Agreement are hereinafter sometimes referred to
as the "Excluded Liabilities."
(c) Employees, Wages and Benefits.
(i) Seller shall terminate all of its employees effective as
of the Closing Date and Buyer shall not assume or have any obligations or
liabilities with respect to such employees or such terminations,
including, without limitation, any severance obligation. Seller
acknowledges and agrees that Buyer has the right to interview and discuss
employment terms and issues with such employees prior to and after the
Closing.
(ii) Buyer specifically reserves the right, on or after the
Closing Date, to employ or reject any of Seller's employees or other
applicants in its sole and absolute discretion; provided that Buyer shall
provide to Seller a list of employees to whom Buyer intends to offer
employment at the Closing. Nothing in this Agreement shall be construed as
a commitment or obligation of Buyer to accept for employment, or otherwise
continue the employment of, any of Seller's employees, and no employee
shall be a third-party beneficiary of this Agreement.
(iii) Seller shall pay all wages, salaries, commissions, and
the cost of all fringe benefits provided to its employees which shall have
become due for work performed as of and through the day preceding the
Closing Date, and Seller shall collect and pay all Taxes in respect of
such wages, salaries, commissions and benefits. From and after the date of
this Agreement, Buyer shall assume the obligation for benefits to all
individuals entitled to such benefits as are required to be provided by
the continuation health care coverage requirements of Section 4980B of the
Code and
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Sections 601 through 607 of ERISA or similar state law as of the Closing
including, without limitation, with respect to any individual entitled to
such coverage prior to the Closing and any individual who loses health
care coverage as a result of the transactions contemplated by this
Agreement. The continuation period for group health benefits under Section
4980B of the Internal Revenue Code of 1986, as amended, by reason of an
employee's termination of employment with Seller shall be measured from
the actual date of termination of employment for such individual.
(iv) Seller acknowledges and agrees that Buyer shall not
acquire any rights or interests of Seller in, or assume or have any
obligations or liabilities of Seller under, any Employee Program (as
defined in Section 2.23 below) maintained by, or for the benefit of any
employees of Seller prior to the Closing Date, including, without
limitation, obligations for severance or vacation accrued but not taken as
of the Closing Date.
1.4 The Closing. The transactions contemplated by this Agreement shall
take place at a closing (the "Closing") to be held at 10:00 a.m., local time, at
the offices of Goodwin, Procter & Hoar LLP, on the date on which all of the
conditions to closing set forth in Sections 6 and 7 of this Agreement have been
satisfied or waived, or at such other time and place as shall be mutually agreed
upon in writing by Buyer and Seller (the "Closing Date").
1.5 Purchase Price. In consideration of the sale by Seller to Buyer of the
Assets, and subject to the assumption by Buyer of the Assumed Liabilities and
satisfaction of the conditions contained herein, at the Closing, Buyer shall
deliver to Seller an amount (as adjusted in accordance with Section 1.6 below,
the "Purchase Price") as follows:
(a) those amounts set forth on Schedule 1.5(a) attached hereto to
the persons set forth thereon;
(b) Buyer shall deliver to Seller by bank cashier's check or bank
wire transfer pursuant to payment instructions delivered by Seller to Buyer at
the Closing an amount equal to $6,917,580 (i) plus or minus, as applicable, the
Estimated Adjustment (as defined in Section 1.6(c) below); (ii) minus $38,180,
which is the amount of the Sprint set up fee previously incurred by Wave for the
benefit of Buyer and to be paid by Buyer; (iii) minus $1,377,483.50, which is
the aggregate of the amounts set forth on Schedule 1.5(a) hereto; and (iv) minus
the $40,000 in earnest money previously paid to the Seller pursuant to Section
5(g) of the Letter of Intent effective as of January 17, 2000 by and among the
Seller, Wave Acquisition Subsidiary and the Buyer (the "Adjusted Purchase
Price");
(c) DURO shall deliver to Seller 74,504 shares of DURO Class B
non-voting common stock (the "Shares"); and
(d) Buyer shall deposit the sum of $856,800 (the "Escrow Deposit")
with Boston Safe Deposit and Trust Company as Escrow Agent under the Escrow
Agreement in the
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form attached hereto and incorporated herein by reference as Exhibit A (the
"Escrow Agreement"), to be held, administered and distributed in accordance with
the terms of the Escrow Agreement, which, subject to the terms and conditions
thereof, shall have a term of one year commencing on the Closing Date. Interest
earned, if any, on the escrow account shall be payable and/or credited to the
Seller.
1.6 Adjustments to Purchase Price.
(a) Net Working Capital. The Purchase Price shall be decreased, on a
dollar-for-dollar basis, by the amount of Seller's Net Working Capital (as
defined herein) if such amount is negative, or increased dollar for dollar by
the amount of Seller's Net Working Capital if such amount is positive. "Net
Working Capital" means an amount equal to Current Assets minus Assumed Current
Liabilities as of the Closing Date.
(b) Revenues Adjustment Amount. The cash and stock portion of the
Purchase Price as set forth in Sections 1.5(b) and (c) above shall be decreased
on a pro-rata, dollar-for-dollar basis, by the Revenues Adjustment Amount (as
defined herein) in the event Recurring Revenues (as defined herein) for the 31
calendar days prior to the Closing are less than $340,000 (the "Target
Revenues"). For purposes hereof, the term "Revenues Adjustment Amount" shall
equal the product obtained by multiplying (i) $2,100 by (ii) the quotient
obtained by dividing (X) the Annualized Recurring Revenues Deficiency (as
defined herein), by (Y) one thousand dollars ($1,000). For purposes hereof,
"Recurring Revenues" shall mean revenues of Sellers from Subscribers (determined
on an accrual basis), calculated by multiplying the number of Subscribers as of
the Closing Date by the average monthly rate in effect as of the Closing Date
for such Subscribers, by type, excluding one-time set-up fees and other
ancillary charges. For purposes hereof, the term "Annualized Recurring Revenues
Deficiency" shall equal the product of (i) the difference between (A) the Target
Revenues and (B) Recurring Revenues, multiplied by (ii) twelve (12).
(c) Estimated Adjustment Statement. Prior to the Closing, Buyer and
Seller shall prepare a statement to be attached hereto as Schedule 1.6(c) (the
"Estimated Adjustment Statement") which sets forth (x) the estimated amount of
the Net Working Capital as of the Closing Date (the "Estimated Net Working
Capital") and (y) the estimated Revenues Adjustment Amount (the "Estimated
Revenues Adjustment Amount"). The Estimated Adjustment Statement shall
constitute a representation by Seller and the Principals as to the same being
materially true and correct as to the amounts set forth therein. The Purchase
Price payable at the Closing Date shall be decreased on a dollar-for-dollar
basis by the amount of the Estimated Revenues Adjustment Amount. The Purchase
Price payable at Closing shall be further reduced on a dollar-for-dollar basis
by the amount of the Estimated Net Working Capital if such number is negative.
The Purchase Price payable at Closing shall be increased on a dollar-for-dollar
basis by the amount of the Estimated Net Working Capital if such number is
positive. The net adjustment to the Purchase Price calculated under this
subsection (c) shall be referred to as the "Estimated Adjustment."
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(d) Final Adjustment Statement.
(i) No later than ninety (90) days following the Closing Date,
Buyer shall prepare and deliver to Seller a statement (the "Final
Adjustment Statement") setting forth the actual Net Working Capital and
the actual Revenues Adjustment Amount. Subject to Section 1.6(d)(ii)
below, within ten (10) days following the delivery of such Final
Adjustment Statement to Seller, Buyer or Seller, as the case may be, shall
pay to the other party, by wire transfer of immediately available funds,
the net difference between (x) the Estimated Net Working Capital, as shown
on the Estimated Adjustment Statement, and the actual Net Working Capital,
as shown on the Final Adjustment Statement and (y) the Estimated Revenues
Adjustment Amount, as shown on the Estimated Adjustment Statement, and the
actual Revenues Adjustment Amount, as shown on the Final Adjustment
Statement. The aggregate of any Disputed Amounts which are not finally
resolved by Seller to Buyer's satisfaction at or prior to the time the
Final Adjustment Statement is delivered will be subtracted from the actual
Net Working Capital amount.
(ii) In the event Seller objects to the Final Adjustment
Statement, Seller shall notify Buyer in writing of such objection within
the ten (10) day period following the delivery thereof, stating in such
written objection the reasons therefor and setting forth the Seller's
calculation of Seller's actual Net Working Capital at the Closing Date.
Upon receipt by Buyer of such written objection, the parties shall attempt
to resolve the disagreement concerning the Final Adjustment Statement
through negotiation. Notwithstanding any other dispute resolution
procedure provided for in this Agreement, if Buyer and Seller cannot
resolve such disagreement concerning the Final Adjustment Statement within
thirty (30) days following the end of the foregoing 10-day period, the
parties shall submit the matter for resolution to a nationally recognized
firm of independent certified public accountants not affiliated with
either party, with the costs thereof to be shared equally by the parties.
Such accounting firm shall deliver a statement setting forth its own
calculation of the final adjustment to the parties within thirty (30) days
of the submission of the matter to such firm. Any payment shown to be due
by a party on the statement of such accounting firm shall be paid to the
other party promptly but in no event later than five (5) days following
the delivery of such statement by such accounting firm to the parties.
1.7 Purchase Price Allocation. As of the date the Final Adjustment
Statement is agreed upon by the parties and payment, if any, is made pursuant to
Section 1.6(d), Seller shall determine the allocation of the Purchase Price,
subject to Buyer's prior approval. Such allocation shall be binding upon Buyer
and Seller for all purposes (including financial accounting purposes, financial
and regulatory reporting purposes and tax purposes). Buyer and Seller each
further agrees to file its Federal income tax returns and its other tax returns
reflecting such allocation, Form 8594 and any other reports required by Section
1060 of the Internal Revenue Code of 1986, as amended (the "Code").
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1.8 Records and Contracts. To the extent not previously provided to Buyer,
at the Closing, Seller shall deliver to Buyer all of the Contracts, with such
assignments thereof and consents to assignments as are necessary to assure Buyer
of the full benefit of the same. Seller shall also deliver to Buyer at the
Closing all of Seller's files and records constituting Assets.
1.9 Sales and Transfer Taxes. All sales, transfer, use, recordation,
documentary, stamp, excise taxes, real and personal property taxes (which shall
be pro rated between Buyer and Seller on a calendar basis), fees and duties
under applicable law incurred in connection with this Agreement or the
transactions contemplated hereby will be borne and paid by Seller, and Seller
shall promptly reimburse Buyer for the payment of any such tax, fee or duty
(except with regard to Buyer's pro rated real and personal property taxes as set
forth above) which Buyer is required to make under applicable law.
1.10 Transfer of Assets. At the Closing, Seller shall deliver or cause to
be delivered to Buyer good and sufficient instruments of transfer transferring
to Buyer title to all of the Assets, together with all required consents. Such
instruments of transfer (a) shall contain appropriate warranties and covenants
which are usual and customary for transferring the type of property involved
under the laws of the jurisdictions applicable to such transfers, (b) shall be
in form and substance reasonably satisfactory to Buyer and its counsel, (c)
shall effectively vest in Buyer good and marketable title to all of the Assets
free and clear of all Liens (as defined in Section 2.8 below), and (d) where
applicable, shall be accompanied by evidence of the discharge of all Liens
against the Assets.
1.11 Post-Closing Audits. The Seller and each of the Principals hereby
agree to provide such assistance as Buyer reasonably requests to enable Buyer
and its accountant to complete an audit of the pre-Closing financial statement
of the Business, including, without limitation, providing access to books and
records and executing management representation letters.
1.12 Credit Card Transactions. During the 90-day period following the
Closing Date, Seller agrees to allow Buyer to deposit credit card payments from
Subscribers that are made to Seller's account at Branch Banking & Trust Company.
Seller covenants and agrees to transfer such payments to Buyer on a weekly basis
or at such other time as reasonably requested by Buyer. At the end of such
90-day period, Buyer shall provide to Seller a statement of all such payments
that were made. Buyer agrees to indemnify Seller for all losses, damages,
chargebacks and claims arising from the arrangements described in this Section
1.12.
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SECTION 2. REPRESENTATIONS AND WARRANTIES OF SELLER AND THE PRINCIPALS.
In order to induce Buyer and DURO to enter into this Agreement, Seller and
each of the Principals hereby represent, jointly and severally, and warrant to
Buyer as follows:
2.1 Organization; Subsidiaries.
(a) Wave is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. Seller has all
requisite power and authority to conduct its business as it is now conducted or
proposed to be conducted and to own, lease and operate its properties and
assets. The copies of Wave's Articles of Incorporation and By-laws each as
amended to date, heretofore delivered to Buyer's counsel are complete and
correct. Wave is not in violation of any term of the Articles of Incorporation
and/or By-laws. Wave is duly qualified to do business in its state of
incorporation, and is not required to be licensed or qualified to conduct its
business or own its property in any other jurisdiction.
(b) Except for Wave Acquisition, Wave Training and ownership in
Boone, Seller has no subsidiaries and does not own any securities issued by any
other business organization or governmental authority, except U.S. Government
securities, bank certificates of deposit and money market accounts acquired as
short-term investments in the ordinary course of its business. Seller does not
own or have any direct or indirect interest in or control over any corporation,
partnership, joint venture or entity of any kind.
2.2 Required Action. All actions and proceedings necessary to be taken by
or on the part of Seller or the Principals in connection with the transactions
contemplated by this Agreement have been duly and validly taken or will have
been duly and validly taken prior to Closing, and this Agreement and each other
agreement, document and instrument to be executed and delivered by or on behalf
of Seller or the Principals pursuant to, or as contemplated by, this Agreement
(collectively, the "Seller Documents") has been or shall be duly and validly
authorized, executed and delivered by Seller or the Principals, as applicable,
and no other action on the part of the Principals or Seller or its officers,
directors or members shall be required in connection therewith. Each of the
Principals and Seller have full right, authority, power and capacity to execute
and deliver this Agreement and each other Seller Document to which it is a party
and to carry out the transactions contemplated hereby and thereby. This
Agreement and each other Seller Document constitutes, or when executed and
delivered will constitute, the legal, valid and binding obligation of Seller and
the Principals, as applicable, enforceable in accordance with its respective
terms.
2.3 No Conflicts.
(a) The execution, delivery and performance by Seller of this
Agreement and each other Seller Document does not and will not (i) violate any
provision of the Articles
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of Incorporation and By-laws of Wave, Wave Acquisition or Wave Training, as
amended to date, (ii) constitute a violation of, or conflict with or result in
any breach of, acceleration of any obligation under, right of termination under,
or default under, any agreement or instrument to which Seller is a party or by
which Seller or the Assets is bound, (iii) violate any judgment, decree, order,
statute, rule or regulation applicable to Seller or the Assets, (iv) require
Seller to obtain any approval, consent or waiver of, or to make any filing with,
any person or entity (governmental or otherwise) that has not been obtained or
made or (v) result in the creation or imposition of any Lien (as defined in
Section 2.8 below) on any of the Assets.
(b) The execution, delivery and performance by each Principal of
this Agreement and each other Seller Document does not and will not (i)
constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which such Principal is a party or by
which such Principal is bound, (ii) violate any judgment, decree, order,
statute, rule or regulation applicable to such Principal, (iii) require such
Principal to obtain any approval, consent or waiver of, or to make any filing
with, any person or entity (governmental or otherwise) that has not been
obtained or made or (iv) result in the creation or imposition of any Lien on any
of the Assets.
2.4 Taxes.
(a) Seller has paid or caused to be paid all federal, state, local,
foreign and other taxes, including, without limitation, income taxes, estimated
taxes, alternative minimum taxes, excise taxes, sales taxes, use taxes,
value-added taxes, gross receipts taxes, franchise taxes, capital stock taxes,
employment and payroll-related taxes, withholding taxes, stamp taxes, transfer
taxes, windfall profit taxes, environmental taxes and property taxes, whether or
not measured in whole or in part by net income, and all deficiencies, or other
additions to tax, interest, fines and penalties owed by it (collectively,
"Taxes"), required to be paid by it through the date hereof whether disputed or
not.
(b) Seller has in accordance with applicable law filed all federal,
state, local and foreign tax returns required to be filed by it through the date
hereof, and all such returns correctly and accurately set forth the amount of
any Taxes relating to the applicable period. A list of all federal, state, local
and foreign income tax returns filed with respect to Seller for taxable periods
ended on or after December 31, 1996, is set forth on Schedule 2.4 attached
hereto. Seller has delivered to Buyer correct and complete copies of all
federal, state, local and foreign income tax returns listed on said schedule,
and of all examination reports and statements of deficiencies assessed against
or agreed to by Seller with respect to said returns.
(c) Neither the Internal Revenue Service (the "IRS") nor any other
governmental authority is now asserting or, to the knowledge of Seller and the
Principals, threatening to assert against Seller any deficiency or claim for
additional Taxes. No claim has ever been made by an authority in a jurisdiction
where Seller does not file reports and returns
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that Seller is or may be subject to taxation by that jurisdiction. There are no
security interests on any of the Assets of Seller that arose in connection with
any failure (or alleged failure) to pay any Taxes. Seller has never entered into
a closing agreement pursuant to Section 7121 of the Code.
(d) Except as set forth on Schedule 2.4(d) attached hereto, there
has not been any audit of any tax return filed by Seller, no audit of any tax
return of Seller is in progress, and Seller has not been notified by any tax
authority that any such audit is contemplated or pending. No extension of time
with respect to any date on which a tax return was or is to be filed by Seller
is in force, and no waiver or agreement by Seller is in force for the extension
of time for the assessment or payment of any Taxes.
(e) Seller has never been (and has never had any liability for
unpaid Taxes because it once was) a member of an "affiliated group" (as defined
in Section 1504(a) of the Code). Seller has never filed, and has never been
required to file, a consolidated, combined or unitary tax return with any other
entity. Seller does not own and has never owned a direct or indirect interest in
any trust, partnership, corporation or other entity and therefore Buyer is not
acquiring from Seller an interest in any entity. Seller is not a party to any
tax sharing agreement.
(f) Seller is not a "foreign person" within the meaning of Section
1445 of the Code and Treasury Regulations Section 1.1445-2.
(g) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.5 Compliance with Laws. Seller's operation of the Business and the
Assets is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state,
municipal or other governmental authority (including the Federal Communications
Commission), and Seller has not received notice of a violation or alleged
violation of any such statute, ordinance, order, rule or regulation.
2.6 Insurance. The physical properties and tangible Assets of Seller are
insured to the extent disclosed on Schedule 2.6 attached hereto, and all
insurance policies and arrangements of Seller in effect as of the date hereof
are disclosed on said Schedule. Said insurance policies and arrangements are in
full force and effect, all premiums with respect thereto are currently paid, and
Seller is in compliance in all material respects with the terms thereof. Said
insurance is adequate and customary for the business engaged in by Seller and is
sufficient for compliance by Seller with all requirements of law and all
agreements and leases to which Seller is a party.
2.7 Contracts. The Contracts constitute all leases, contracts and
arrangements, whether oral or written, under which Seller is bound or to which
Seller is a party which relate
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to the Business or Assets. Schedule 1.1(b) attached hereto contains a true,
correct and complete list of all material Contracts. With respect to each oral
agreement or understanding involving the Business, Seller has provided a written
summary of the material terms of each such agreement or understanding on
Schedule 1.1(b). To Seller's knowledge, each Contract is valid, in full force
and effect and binding upon Seller and the other parties thereto in accordance
with its terms. Neither Seller nor, to the knowledge of Seller or the
Principals, any other party is in default under or in arrears in the
performance, payment or satisfaction of any agreement or condition on its part
to be performed or satisfied under any Contract, nor does any condition exist
that with notice or lapse of time or both would constitute such a default, and
no waiver or indulgence has been granted by any party under any Contract. Seller
has not received notice of, and neither Seller nor the Principals have knowledge
of, any fact which would result in a termination, repudiation or breach of any
Contract. Seller has provided Buyer with true and complete copies of all of such
Contracts, other than with respect to the oral agreements or understandings
described on Schedule 1.1(b).
2.8 Title. Seller has good and marketable title to all of the Assets free
and clear of all mortgages, pledges, security interests, charges, liens,
restrictions and encumbrances of any kind (collectively, "Liens"). Upon the
sale, assignment, transfer and delivery of the Assets to Buyer hereunder and
under the Seller Documents, there will be vested in Buyer good, marketable and
indefeasible title to the Assets, free and clear of all Liens. The Assets
include all of the assets and properties (i) held for use by Seller to conduct
the Business as presently conducted and (ii) necessary or useful for Buyer to
operate the Business in the same manner as such business is currently operated
by Seller. All of the tangible Assets are in good repair, have been well
maintained and are in good operating condition, ordinary wear and tear excepted,
do not require any material modifications or repairs, and comply in all material
respects with applicable laws, ordinances and regulations. Seller has delivered
complete and true copies of all real property leases (the "Leases") set forth on
Schedule 1.1(b). Seller holds good, clear, marketable, valid and enforceable
leasehold interest in the real property subject to the Leases (the "Leased Real
Property"), subject only to the right of reversion of the landlord or lessor
under the Leases, free and clear of all other prior or subordinate interests,
including, without limitation, mortgages, deeds of trust, ground leases, leases,
subleases, assessments, tenancies, claims, covenants, conditions, restrictions,
easements, judgments or other encumbrances or matters affecting title, and free
of encroachments onto or off of the leased real property. There are no material
defects in the physical condition of any improvements constituting a part of the
Leased Real Property, including, without limitation, structural elements,
mechanical systems, roofs or parking and loading areas, and all of such
improvements are in good operating condition and repair and have been well
maintained. All water, sewer, gas, electric, telephone, drainage and other
utilities required by law or necessary for the current or planned operation of
the Leased Real Property have been installed and connected pursuant to valid
permits, and are sufficient to service the Leased Real Property. Seller does not
hold or own a fee interest in any real property.
2.9 No Litigation. Except as set forth on Schedule 2.9 attached hereto,
Seller is not now involved in nor, to the knowledge of Seller or the Principals,
is Seller threatened to be
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involved in any litigation or legal or other proceedings related to or affecting
the Business or any Asset (including any Intellectual Property) or which would
prevent or hinder the consummation of the transactions contemplated by this
Agreement. Seller has not been operating the Business under, and the Business is
not subject to, any order, injunction or decree of any court of federal, state,
municipal or other governmental department, commission, board, agency or
instrumentality.
2.10 Employees; Labor Matters. Seller employs approximately 36 full-time
employees and 3 part-time employees and generally enjoys good employer-employee
relationships. Seller shall provide to Buyer a list of the employees of Seller
in connection with the Business at the Closing, including the name, date of hire
and wages of such employees. Seller is not delinquent in payments to any of its
employees for any wages, salaries, commissions, bonuses or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees. Upon termination of the employment
of any of said employees, neither Seller nor Buyer will by reason of the
transactions contemplated hereby or anything done prior to the Closing be liable
to any of said employees for so-called "severance pay" or any other payments,
except as set forth on Schedule 2.10 attached hereto. Seller does not have any
policy, practice, plan or program of paying severance pay or any form of
severance compensation in connection with the termination of employment, except
as set forth on said Schedule. Seller is in compliance in all material respects
with all applicable laws and regulations respecting labor, employment, fair
employment practices, work place safety and health, terms and conditions of
employment, and wages and hours. There are no charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work, or any other concerted interference with normal operations
existing, pending or, to the knowledge of Seller or the Principals, threatened
against or involving Seller. No question concerning representation exists
respecting any group of employees of Seller. No collective bargaining agreement
is in effect or is currently being or is about to be negotiated by Seller.
Seller has received no information to indicate that any of its employment
policies or practices is currently being audited or investigated by any federal,
state or local government agency. Seller is, and at all times since its
inception has been, in compliance with the requirements of the Immigration
Reform Control Act of 1986.
2.11 Financial Statements. Attached hereto as Schedule 2.11 are copies of
the balance sheet of Seller as at December 31, 1999 and January 31, 2000 (the
"Base Balance Sheet") and the statements of income and expense of Seller for the
twelve (12) months ended December 31, 1999 and the one (1) month ended January
31, 2000 (collectively the "Financial Statements"). The Financial Statements
have been prepared in accordance with a tax accounting basis applied
consistently during the periods covered thereby (except for the absence of
footnotes with respect to unaudited financial statements), are complete and
correct in all material respects and present fairly and accurately the financial
condition of the Business at the dates of said statements and the results of
operations of the Business for the periods covered thereby. As of the date of
the Base Balance Sheet (the "Base Balance Sheet Date"), Seller had no
liabilities or obligations of any kind with respect to the Business, whether
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accrued, contingent or otherwise, that are not disclosed and adequately reserved
against on the Base Balance Sheet. As of the date hereof and at the Closing,
Seller does not have and will not have any material liabilities or obligations
of any kind with respect to the Business, whether accrued, contingent or
otherwise, that are not disclosed and adequately reserved against on the Base
Balance Sheet.
2.12 Business Since the Base Balance Sheet Date. Since the Base Balance
Sheet Date:
(a) there has been no material adverse change in the Business or in
the Assets, operations or financial condition of the Business;
(b) the Business has, in all material respects, been conducted in
the ordinary course of business and in substantially the same manner as it was
conducted before the date of the Base Balance Sheet Date;
(c) there has not been any material obligation or liability
(contingent or other) incurred by Seller with respect to the Business, whether
or not incurred in the ordinary course of business;
(d) there has not been any purchase, sale or other disposition, or
any agreement or other arrangement, oral or written, for the purchase, sale or
other disposition, of any material properties or assets of the Business, whether
or not in the ordinary course of business;
(e) there has not been any mortgage, encumbrance or lien placed on
any of the Assets, nor any payment or discharge of a material lien or liability
of Seller which was not reflected on the Base Balance Sheet;
(f) there has not been any damage, destruction or loss, whether or
not covered by insurance, materially adversely affecting the Business or Assets;
(g) there has not been any change in Seller's pricing, marketing,
customer service, billing, operational or promotional activities in any material
way from that which Seller was providing these activities directly prior to the
Base Balance Sheet Date; and
(h) there has not been any agreement or understanding, whether in
writing or otherwise, for Seller to take any of the actions specified above.
2.13 Licenses. To the best of Seller's knowledge, as of the date of this
Agreement, Seller is the holder of all licenses, permits and authorizations with
respect to the Business (the "Authorizations"). The Authorizations constitute
all of the licenses, permits and authorizations required for operation of the
Business as now operated. All of the Authorizations are in full force and effect
and no licenses, permits or authorizations of any
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governmental department or agency are required for the operation of the Business
which have not been duly obtained. As of the date hereof, there is not pending
or, to the knowledge of Seller or the Principals, threatened any action by or
before any governmental agency to revoke, cancel, rescind or modify any of the
Authorizations, and there is not now issued, outstanding, pending or, to the
knowledge of Seller or the Principals, threatened any order to show cause,
notice of violation, notice of apparent liability, or notice of forfeiture or
complaint against Seller with respect to the Business.
2.14 Approvals; Consents. Except as set forth on Schedule 2.14 attached
hereto and to the best of Seller's knowledge (except that Seller shall be deemed
to have knowledge of the terms of any material contract or agreement to which it
is a party), no approval, consent, authorization or exemption from or filing
with any person or entity not a party to this Agreement is required to be
obtained or made by Seller in connection with the execution and delivery of this
Agreement and the Seller Documents and the consummation of the transactions
contemplated hereby and thereby. All of the approvals, consents and
authorizations listed on Schedule 2.14 shall be obtained by Seller at or prior
to the Closing, unless otherwise mutually agreed upon by Buyer and Seller as set
forth on Schedule 2.14.
2.15 Customers and Suppliers. To the best of Seller's knowledge, Seller's
relations with its customers and suppliers, including its Subscribers (as
defined in Section 2.16 below), are good and there are not pending or, to the
knowledge of Seller or the Principal, threatened claims or controversies with
any customer, supplier or Subscriber that is material to the Assets or the
Business.
2.16 Subscribers. Schedule 2.16(a) attached hereto sets forth, as of the
date hereof, the Subscribers of the Business as listed by class, type and
billing plan. For purposes of this Agreement, the term "Subscriber" shall mean
the Subscribers of the Business as listed by class, type and billing plan. For
purposes of this Agreement, the terms "Subscriber" shall mean any active
subscriber to Internet services offered by Seller in the Business who has
subscribed to a service for at least two months and has paid at least two bills
as of the Closing Date, including, without limitation, any person who receives
dial-up Internet access through the Business (a "Dial-up Subscriber"), any
person who receives dedicated Internet access from a Seller offering higher data
transmission rates than available from dial-up access (a "Dedicated
Subscriber"), and any person with a web page or domain name on Seller's server
and to whom Seller provides Internet access (a "Web-hosting/Domain-hosting
Subscriber"). Set forth on Schedule 2.16(b) attached hereto is a listing of all
accounts which receive complimentary Internet services or Internet services at a
promotional discounted rate. A list of those persons or corporations who, but
for the fact that they have not been active subscribers for at least two months
and have not paid two bills as of the Closing Date, otherwise would be
Subscribers is set forth on Schedule 2.16(c). Such persons and corporations will
be considered Subscribers solely for purposes of the Estimated Adjustment
Statement. A list of those persons or corporations who, but for the fact that
they are more than 30 days delinquent in payment of their invoice as of the
Closing Date, otherwise would be Subscribers is set forth on Schedule 2.16(c).
Such persons and corporations will be considered Subscribers solely for
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purposes of the Estimated Adjustment Statement. However, the persons and
corporations listed on Schedule 2.16(c) will not be considered to be Subscribers
for purposes of the Final Adjustment Statement calculation unless as of the 60th
day after the Closing Date they (i) have been active subscribers for at least
two months and paid at least two bills and (ii) have paid all invoices that were
outstanding and more than 30 days delinquent on the Closing Date.
2.17 Brokers. Seller has a relationship with Avalon Partners ("Avalon")
which is an Excluded Contract as set forth on Schedule 1.2(b) and Seller shall
be solely responsible for any monies owing to Avalon pursuant to any agreement
or understanding Seller has with Avalon. Except as disclosed in the previous
sentence, Seller has not retained any broker or finder or other person who would
have any valid claim against any of the parties to this Agreement for a
commission or brokerage fee in connection with this Agreement or the
transactions contemplated hereby.
2.18 Collectibility of Accounts Receivable. All of the Accounts Receivable
of Seller are or will be as of the Closing Date bona fide, valid and enforceable
claims, subject to no set off or counterclaim and, to Seller's knowledge, are
collectible in accordance with their terms. Seller has no accounts or loans
receivable from any person, firm or corporation which is affiliated with Seller
or from any director, officer or employee of Seller, or from any of their
respective spouses or family members.
2.19 Banking Relations. All of the arrangements which Seller has with any
banking institution are completely and accurately described in Schedule 2.19
attached hereto, indicating with respect to each of such arrangements the type
of arrangement maintained (such as checking account, borrowing arrangements,
safe deposit box, etc.) and the person or persons authorized in respect thereof.
2.20 Intellectual Property.
(a) All of the Intellectual Property of Seller is set forth on
Schedule 2.20 attached hereto. For purposes hereof, the term "Intellectual
Property" includes: (i) all patents, patent applications, patent rights, and
inventions and discoveries and invention disclosures (whether or not patented)
(collectively, "Patents"); (ii) Seller's rights to the names "Wave
Communications, Inc.," "The Wave," "Twave," "Abts," all trade names, trade
dress, logos, packaging design, slogans, any and all Internet domain names used
or useful in the business of Seller, registered and unregistered trademarks and
service marks and applications (collectively, "Marks"); (iii) all copyrights in
both published and unpublished works, including, without limitation, all
compilations, databases and computer programs, and all copyright registrations
and applications, and all derivatives, translations, adaptations and
combinations of the above (collectively, "Copyrights"), (iv) all know-how, trade
secrets, confidential or proprietary information, customer lists, IP addresses,
research in progress, algorithms, data, designs, processes, formulae, drawings,
schematics, blueprints, flow charts, models, prototypes, techniques, Beta
testing procedures and Beta testing results (collectively, "Trade Secrets"); (v)
Seller's web-sites (including the domain name "www.twave.net," "www.abts.net,"
and
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any other similar domain name); (vi) all goodwill, franchises, licenses,
permits, consents, approvals, technical information, telephone numbers, and
claims of infringement against third parties (the "Rights"); and (vii) all
contracts relating to the Intellectual Property to which Seller is a party or is
bound, including, without limitation, all nondisclosure and/or confidentiality
agreements entered into by persons in connection with disclosures by Seller
(collectively,"Assigned Contracts").
(b) Except as described on Schedule 2.20, Seller has exclusive
ownership of, and has good, valid and marketable title to, all of the
Intellectual Property, free and clear of any Liens, and has the right to use all
of the Intellectual Property without payment to any third party. Seller's rights
in all of such Intellectual Property are freely transferable. There are no
claims or demands pending or, to the knowledge of Seller or the Principals,
threatened by any other person pertaining to any of such Intellectual Property
and no proceedings have been instituted, or are pending or, to the knowledge of
Seller or the Principals, threatened against Seller and/or its officers,
employees and consultants which challenge the validity and enforceability of
Seller's rights in respect of the Intellectual Property. The Intellectual
Property represents all of the assets of Seller of such class or type necessary
for the operation of Seller's Business as currently conducted.
All rights to any inventions, improvements, discoveries, or information
relating to the Business created, invented or developed by former and current
employees of the Seller have been assigned to Seller. To the best knowledge of
Seller or the Principals after inquiry, no employee, consultant or contractor of
Seller has entered into any agreement that restricts or limits in any way the
scope or type of work in which the employee, consultant or contractor may be
engaged or requires the employee, consultant or contractor to transfer, assign,
or disclose information concerning his work to anyone other than Seller.
(c) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Patents. All of the issued Patents are
currently in compliance with formal legal requirements (including, without
limitation, the payment of filing, examination and maintenance fees and proofs
of working or use), are valid and enforceable, and are not subject to any
maintenance fees or taxes or actions falling due within ninety (90) days after
the Closing Date. In each case where a Patent is held by Seller by assignment,
the assignment has been duly recorded with the U.S. Patent and Trademark Office
and all other jurisdictions of registration. No Patent has been or is now
involved in any interference, reissue, re-examination or opposition proceeding.
To the knowledge of Seller or the Principals, there is no potentially
interfering Patent of any third party. All products made, used or sold under the
Patents have been marked with the proper patent notice.
(d) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Marks. All Marks that have been
registered with the U.S. Patent and Trademark Office and/or any other
jurisdiction are identified on Schedule 2.20, are currently in compliance with
formal legal requirements (including, without limitation, the timely
post-registration filing of affidavits of use and incontestability and renewal
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applications), are valid and enforceable, and are not subject to any maintenance
fees or taxes or actions falling due within ninety (90) days after the Closing
Date. In each case where a Trademark is held by Seller by assignment, the
assignment has been duly recorded with the U.S. Patent and Trademark Office and
all other jurisdictions of registration. No Mark has been or is now involved in
any opposition, invalidation or cancellation proceeding and, to the knowledge of
Seller or the Principals, no such action is threatened with respect to any of
the Marks. All products and materials containing a Mark bear the proper notice
where permitted by law.
(e) Schedule 2.20 sets forth a complete and accurate list and
summary description of all of Seller's Copyrights. All the Copyrights have been
registered with the United States Copyright Office, are identified on Schedule
2.20, are currently in compliance with formal legal requirements, are valid and
enforceable, and are not subject to any fees or taxes or actions falling due
within ninety (90) days after the Closing Date. In each case where a Copyright
is held by Seller by assignment, the assignment has been duly recorded with the
U.S. Copyright Office and all other jurisdictions of registration. All copies of
works encompassed by the Copyrights have been marked with the proper copyright
notice.
(f) Seller has taken all reasonable security measures (including,
without limitation, entering into appropriate confidentiality and non-disclosure
agreements with all officers, directors, employees, consultants and contractors
of Seller and any other persons with access to the Trade Secrets) to protect the
secrecy, confidentiality and value of all Trade Secrets. To the knowledge of
Seller or the Principals, there has not been any breach by any party to any such
confidentiality or non-disclosure agreement. The Trade Secrets have not been
disclosed by Seller to any person or entity other than employees or contractors
of Seller who had a need to know and use the Trade Secrets in the course of
their employment or contract performance. Seller has the right to use, free and
clear of claims of third parties, all Trade Secrets. To the knowledge of Seller
or the Principals, there is not any assertion that the use by Seller of any
Trade Secret violates the rights of any third party.
(g) Seller has the exclusive right to use, license, distribute,
transfer and bring infringement actions with respect to the Intellectual
Property. Except as set forth on Schedule 2.20, Seller (i) has not licensed or
granted to anyone rights of any nature to use any of its Intellectual Property
and (ii) is not obligated to and does not pay royalties or other fees to anyone
for its ownership, use, license or transfer of any of its Intellectual Property.
(h) All licenses or other agreements under which Seller is granted
rights by others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, to the knowledge of
Seller or the Principals there is no material default by any party thereto, and
all of the rights of Seller thereunder are freely assignable. True and complete
copies of all such licenses or other agreements, and any amendments thereto,
have been provided to Buyer, and Seller has no reason to believe that the
licensors under the licenses and other agreements under which Seller is granted
rights and has
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granted rights to others do not have and did not have all requisite power and
authority to grant the rights purported to be conferred thereby.
(i) All licenses or other agreements under which Seller has granted
rights to others in Intellectual Property are listed on Schedule 2.20. All such
licenses or other agreements are in full force and effect, and to the knowledge
of Seller or the Principals there is no material default by any party thereto.
True and complete copies of all such licenses or other agreements, and any
amendments thereto, have been provided to Buyer.
(j) Seller has reviewed the areas within its businesses and
operations which could be adversely affected by, and has developed a program to
address on a timely basis, the "Year 2000 Problem" (i.e., the risk that
applications used by Seller or its suppliers and/or providers may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any date after December 31, 1999). Seller reasonably believes that
the "Year 2000 Problem" will not have any material adverse effect on the
business or operations of Seller.
2.21 Absence of Restrictions. Seller has not entered into any other
agreement or arrangement with any other party with respect to the sale, transfer
or any other disposition or encumbrance of the Business or the Assets, in whole
or in part.
2.22 Transactions with Interested Persons. Except as set forth on Schedule
2.22 hereto, neither Seller, nor any member, officer, supervisory employee or
director of Seller or, to the knowledge of Seller or the Principals, any of
their respective spouses or family members owns directly or indirectly on an
individual or joint basis any material interest in, or serves as an officer or
director or in another similar capacity of, any competitor or supplier of
Seller, or any organization which has a material contract or arrangement with
Seller.
2.23 Employee Benefit Programs.
(a) Schedule 2.23 sets forth a list of every Employee Program (as
defined in Section 2.23(c) below) that has been maintained by the Seller or an
Affiliate (as defined herein) at any time during the six-year period ending on
the Closing Date. Each Employee Program which has ever been maintained by the
Seller or an Affiliate and which has been intended to qualify under Section
401(a) or 501(c)(9) of the Code has received a favorable determination or
approval letter from the Internal Revenue Service ("IRS") regarding its
qualification under such section and has, in fact, been qualified under the
applicable section of the Code from the effective date of such Employee Program
through and including the Closing Date (or, if earlier, the date that all of
such Employee Program's assets were distributed). No event or omission has
occurred which would cause any such Employee Program to lose its qualification
or otherwise fail to satisfy the relevant requirements to provide tax-favored
benefits under the applicable Code Section (including without limitation Code
Sections 105, 125, 401(a) and 501(c)(9)). With respect to any Employee Program
ever maintained by the Seller or any Affiliate, there has been no (i)
"prohibited transaction," as defined in Section
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406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
or Code Section 4975, or (ii) failure to comply with any provision of ERISA,
other applicable law, or any agreement which, in the case of either of (i) or
(ii), could subject the Seller or any Affiliate to liability either directly or
indirectly (including, without limitation, through any obligation of
indemnification or contribution) for any damages, penalties, or taxes, or any
other loss or expense. All payments and/or contributions required to have been
made (under the provisions of any agreements or other governing documents or
applicable law) with respect to all Employee Programs ever maintained by the
Seller or any Affiliate, for all periods prior to the Closing Date, either have
been made or have been accrued (and all such unpaid but accrued amounts are
described on Schedule 2.23). Each Employee Program ever maintained by the Seller
or an Affiliate has complied with the applicable notification and other
applicable requirements of the Consolidated Omnibus Budget Reconciliation Act of
1985.
(b) Neither the Seller nor any Affiliate (i) has ever maintained any
Employee Program which has been subject to title IV of ERISA or Code Section
412, including, but not limited to, any Multi employer Plan (as defined in
Section 3(37) of ERISA) or (ii) has ever provided health care or any other
non-pension benefits to any employees after their employment is terminated
(other than as required by part 6 of subtitle B of title I of ERISA) or has ever
promised to provide such post-termination benefits.
(c) For purposes of this section:
(i) "Employee Program" means all employee benefit plans within
the meaning of ERISA Section 3(3) as well as all other employee benefit
plans, agreements and arrangements of any kind.
(ii) An entity "maintains" an Employee Program if such entity
sponsors, contributes to, or provides benefits under or through such
Employee Program, or has any obligation (by agreement or under applicable
law) to contribute to or provide benefits under or through such Employee
Program, or if such Employee Program provides benefits to or otherwise
covers employees of such entity (or their spouses, dependents, or
beneficiaries).
(iii) An entity is an "Affiliate" of the Seller if it would
have ever been considered a single employer with the Seller under ERISA
Section 4001(b) or part of the same "controlled group" as the Seller for
purposes of ERISA Section 302(d)(8)(C).
2.24 Environmental Matters.
(a) Except as set forth in Schedule 2.24, (i) Seller has not
generated, transported, used, stored, treated, disposed of, or managed any
Hazardous Waste (as defined in Section 2.24(c) below) at any time; (ii) to the
knowledge of Seller or the Principals, no Hazardous Material (as defined in
Section 2.24(c) below) has ever been or is threatened to be spilled, released,
or disposed of at any site associated with a structure presently or formerly
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owned, operated, leased, or used by Seller, or has ever been located in the soil
or groundwater at any such site; (iii) to the knowledge of Seller or the
Principals, no Hazardous Material has ever been transported from any site
associated with a structure presently or formerly owned, operated, leased, or
used by Seller for treatment, storage, or disposal at any other place; (iv)
Seller does not presently own, operate, lease, or use, and has not previously
owned, operated, leased, or used any site associated with a structure on which
underground storage tanks are or were located; and (v) no lien has ever been
imposed by any governmental agency on any property, facility, machinery, or
equipment owned, operated, leased, or used by either Seller in connection with
the presence of any Hazardous Material.
(b) Except as set forth on Schedule 2.24 and to the knowledge of
Seller or the Principals, (i) Seller does not have any liability under, nor has
it ever violated, any Environmental Law (as defined in Section 2.24(c) below);
(ii) Seller, nor any property associated with a structure owned, operated,
leased, or used by Seller, nor facilities or operations thereon are presently
not in compliance with all applicable Environmental Laws; (iii) Seller has not
entered into or been subject to any judgment, consent decree, compliance order,
or administrative order with respect to any environmental or health and safety
matter or received any request for information, notice, demand letter,
administrative inquiry, or formal or informal complaint or claim with respect to
any environmental or health and safety matter or the enforcement of any
Environmental Law; and (iv) neither Seller nor the Principals has any knowledge
or reason to know that any of the items enumerated in clause (iii) of this
subsection will be forthcoming.
(c) For purposes of this Agreement, (i) "Hazardous Material" shall
mean and include any hazardous waste, hazardous material, hazardous substance,
petroleum product, oil, toxic substance, pollutant, contaminant, or other
substance which may pose a threat to the environment or to human health or
safety, as defined or regulated under any Environmental Law; (ii) "Hazardous
Waste" shall mean and include any hazardous waste as defined or regulated under
any Environmental Law; and (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
by-law at the foreign, federal, state, or local level, whether existing as of
the date hereof, previously enforced, or subsequently enacted.
2.25 Investment Representations. Seller represents to DURO that it has
such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the investment in the Shares
contemplated by this Agreement and making an informed investment decision with
respect thereto. Seller represents that it is an "accredited investor" as such
term is defined in Rule 501 under the Securities Act of 1933, as amended (the
"Securities Act"). Seller represents to DURO that it is acquiring the Shares for
its own account, for investment only and not with a view to, or any present
intention of, effecting a distribution of such securities or any part thereof
except pursuant to a registration or an available exemption under applicable
law. Seller acknowledges that the Shares have not been registered under the
Securities Act or the securities laws of any state or other jurisdiction and
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cannot be disposed of unless they are subsequently registered under the
Securities Act and any applicable state laws or exemption from such registration
is available.
2.26 Disclosure. The representations, warranties and statements contained
in this Agreement and in the certificates, exhibits and schedules delivered by
Seller to Buyer pursuant to this Agreement do not contain any untrue statement
of a material fact, and, when taken together, do not omit to state a material
fact required to be stated therein or necessary in order to make such
representations, warranties or statements not misleading in light of the
circumstances under which they were made. There are no facts known to Seller
which presently or in the future may have a material adverse affect on the
Business, properties, Assets, prospects, operations or condition, financially or
otherwise, of Seller which has not been specifically disclosed herein or in a
Schedule furnished herewith, other than general economic or market conditions
affecting the Internet services industry generally.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER AND DURO.
As a material inducement to Seller and the Principals entering into this
Agreement, Buyer and DURO hereby represent and warrant to Seller and the
Principals as follows:
3.1 Organization. Each of Buyer and DURO is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Each of Buyer and DURO has all requisite power and authority to conduct its
business as it is now conducted and to own, lease and operate its properties and
assets.
3.2 Required Action: Authority. All actions and proceedings necessary to
be taken by or on the part of Buyer and DURO in connection with the transactions
contemplated by this Agreement have been duly and validly taken, and this
Agreement and each other agreement, document and instrument to be executed and
delivered by or on behalf of Buyer and DURO pursuant to, or as contemplated by,
this Agreement (collectively, the "Buyer Documents") has been duly and validly
authorized, executed and delivered by Buyer and DURO. Each of Buyer and DURO has
full right, authority, power and capacity to execute and deliver this Agreement
and each other Buyer Document and to carry out the transactions contemplated
hereby and thereby. This Agreement and each other Buyer Document constitutes, or
when executed and delivered will constitute, the legal, valid and binding
obligations of each of Buyer and DURO enforceable in accordance with its
respective terms.
3.3 Issuance of Shares. As of the Closing, and after giving effect to the
transactions contemplated hereby, the Shares will have been duly authorized and
issued and will be fully paid and nonassessable and, assuming the accuracy of
the Seller's representations herein, will have been offered, issued, sold and
delivered in compliance with applicable federal and state securities laws and
not subject to any preemptive rights.
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3.4 No Conflicts. The execution, delivery and performance by each of Buyer
and DURO of this Agreement and each other Buyer Document to which it is a party
does not and will not (a) violate any provision of the Certificate of
Incorporation or By-Laws of Buyer or DURO, as applicable, as amended to date,
(b) constitute a violation of, or conflict with or result in any breach of,
acceleration of any obligation under, right of termination under, or default
under, any agreement or instrument to which Buyer or DURO is a party or by which
it is bound, (c) violate any judgment, decree, order, statute, rule or
regulation applicable to Buyer or DURO, (d) require Buyer or DURO to obtain any
approval, consent or waiver of, or to make any filing with, any person or entity
(governmental or otherwise) that has not been obtained or made. The officers who
execute this Agreement and the other Buyer Documents contemplated hereby on
behalf of Buyer or DURO have and shall have all requisite power to do so in the
name of and on behalf of Buyer or DURO, as applicable.
3.5 Litigation. There are no actions, suits, proceedings or
investigations, either at law or in equity, or before any commission or other
administrative authority in any United States or foreign jurisdiction, of any
kind now pending or, to Buyer's or DURO's knowledge, threatened involving Buyer
or DURO that (i) questions that validity of this Agreement or (ii) seeks to
delay, prohibit or restrict in any manner any action taken or contemplated to be
taken by Buyer or DURO under this Agreement.
3.6 Brokers. Except for fees payable to Rampart Associates, LLC, Buyer has
not retained any broker or finder or other person who would have any valid claim
against any of the parties to this Agreement for a commission or brokerage fee
in connection with this Agreement or the transactions contemplated hereby.
SECTION 4. COVENANTS OF SELLER.
Seller covenants and agrees that:
4.1 Access to Premises and Records. Subject to Section 5.1 of this
Agreement and to the terms and conditions of the Mutual Non-Disclosure Agreement
defined in Section 4.8, from the date hereof until consummation of the
transactions contemplated hereby at the Closing, Seller shall give Buyer and its
representatives, at reasonable times and with reasonable prior notice, free
access to the properties, books and records of the Business and to the Assets
and will furnish to Buyer and its representatives such information regarding the
Business and the Assets as Buyer or its representatives may from time to time
reasonably request in order that Buyer may have full opportunity to make a
diligent investigation consistent with this Agreement. In addition to, and not
in limitation of the foregoing, Seller shall provide Buyer with access to and
copies of the records of all: (a) Accounts Receivable, (b) Subscriber billings,
(c) pre-paid accounts, (d) accounts for which no remuneration is received by
Seller and (e) general reports with respect to each category of service provided
by the Business.
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4.2 Continuity and Maintenance of Operations of the Business. Except as to
actions of which Buyer has been advised and to which Buyer has consented to in
writing, and except as specifically permitted or required by this Agreement,
Seller shall:
(a) Operate the Business in the ordinary course consistent with past
practices, use its commercially reasonable efforts to keep available the
services of the employees who are involved in the operation of the Business, and
use commercially reasonable efforts to preserve any beneficial business
relationships with Subscribers, customers, suppliers and others having business
dealings with Seller relating to the Business;
(b) Use and operate the Assets in a manner consistent with past
practice and maintain the Assets in good operating condition, ordinary wear and
tear excepted;
(c) Maintain insurance upon the Assets in such amounts and types as
in effect on the date of this Agreement as set forth in Schedule 2.6 attached
hereto;
(d) Keep all of its business books, records and files in the
ordinary course of business in accordance with past practices, and provide Buyer
with access thereto upon its reasonable request;
(e) Continue to implement and enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those in effect on the date of this Agreement;
(f) Perform and comply in all material respects with the terms of
the Contracts and keep such Contracts in full force and effect; and
(g) Use its reasonable best efforts to preserve the goodwill of the
Business.
4.3 Negative Covenants. Seller shall not, without the prior written
consent of Buyer:
(a) Sell, transfer, lease, assign or otherwise dispose of, or agree
to sell, transfer, lease, assign or otherwise dispose of, any Assets outside the
ordinary course of business;
(b) Enter into any contract or commitment for the acquisition of
goods or services relating to the Business (other than in the ordinary course of
business) or which otherwise obligates Seller to perform in full or in part
beyond the Closing Date;
(c) Hire any new employees or enter into any employment arrangements
or otherwise increase the salary or compensation of any existing employees;
(d) Renegotiate, modify, amend or terminate any Contract;
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(e) Create, assume, or permit to exist, or agree to incur, assume or
acquire, any Lien, claim or liability on the Assets;
(f) Make any modifications or changes to the existing rate schedules
or product offerings in effect with respect to the Business;
(g) Offer or employ any sales discounts, free services or other
extraordinary marketing practices or extraordinary promotions outside the
ordinary course of business and not consistent with Seller's past practices;
(h) Take any actions or permit its employees and agents to take any
actions which would materially interfere with or preclude the transactions
contemplated by this Agreement; or
(i) Cause or permit the provision for any new and material pension,
retirement or other employment benefits for employees who perform services in
connection with the conduct of the Business or any material increase in any
existing benefits (other than as required by law).
4.4 Consents. Seller will use its reasonable best efforts to obtain, as
soon as practicable and at its expense, the consent of all third parties under
the Contracts for which the prior approval of such third party is required
pursuant to the terms of the Contract; provided, however, that "reasonable best
effort" for this purpose shall not require Seller to undertake extraordinary or
unreasonable measures to obtain such approvals and consents, including, without
limitation, the initiation or prosecution of legal proceedings or the payment of
fees in excess of customary filing and processing fees.
4.5 Notification of Certain Matters. Seller shall promptly notify Buyer of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Seller's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Seller shall promptly
notify Buyer in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
4.6 Adverse Change. Seller shall promptly notify Buyer in writing of any
materially adverse developments affecting the Assets or the Business which
become known to Seller, including, without limitation, (i) any damage,
destruction or loss (whether or not covered by insurance) materially and
adversely affecting any of the Assets or the Business, (ii) any material notice
of violation, forfeiture or complaint under any material Contract, or (iii)
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anything which, if not corrected prior to the Closing Date, would prevent Seller
from fulfilling any condition to Closing described in Section 6 hereof.
4.7 No Solicitation. Seller shall not, and Seller shall cause its
officers, employees, members, agents and representatives (including, without
limitation, any investment banker, attorney or accountant retained by Seller)
and all other employees who perform services with respect to the operation of
the Business to not, initiate, solicit or encourage, directly or indirectly, any
inquiries or the making of any proposal with respect to the Assets or the
Business, or engage in any negotiations concerning, or provide to any other
person any information or data relating to, the Business, the Assets or Seller
for the purpose of, or have any discussions with, any person relating to, or
otherwise cooperate in any way with or assist or participate in, facilitate or
encourage, any inquiries or the making of any proposal which constitutes, or may
reasonably be expected to lead to, any effort or attempt by any other person to
seek or effect a transaction, or enter into a transaction with any person or
persons, other than Buyer, concerning the possible sale of the Assets or
Business, or the capital stock of Seller. Seller shall promptly inform Buyer of
any such inquiries or proposals and provide all pertinent documentation related
thereto.
4.8 Confidentiality. Seller agrees that it and its representatives will
hold in strict confidence, and will not use, any confidential or proprietary
data or information obtained from Buyer with respect to its business or
financial condition except for the purpose of evaluating, negotiating and
completing the transactions contemplated hereby. Information generally known in
Buyer's industry or which has been disclosed to Seller by third parties which
have a right to do so shall not be deemed confidential or proprietary
information for purposes of this Agreement. If the transactions contemplated by
this Agreement are not consummated, Seller will return, and cause its respective
officers, directors, agents and representatives to return, to Buyer (or certify
that they have destroyed) all copies of such data and information made available
to Seller (and its officers, directors, agents and representatives) in
connection with the transaction. The Mutual Non-Disclosure Agreement by and
among Buyer, Seller and Rampart Associates, LLC (the "Mutual Non-Disclosure
Agreement") shall remain in full force and effect.
4.9 Use of Trade Names. After the Closing Date, neither Seller, nor any
person controlling, controlled by or under common control with Seller will for
any reason, directly or indirectly, for itself or any other person, (a) use the
names "Wave Communications," "Wave Training," "Wave Acquisition," "Twave," "The
Wave," "Abts," or any other Internet domain name used or useful in the business
of Seller, or any other or (b) use or disclose any trade secrets, confidential
information, know-how, proprietary information or other intellectual property of
Seller transferred pursuant to this Agreement.
4.10 Post-Closing Transitional Matters. For a period of ninety (90) days
following the Closing, Seller shall provide, without additional cost to Buyer,
such assistance as is reasonably requested by Buyer in order to effect an
orderly transition in the ownership and
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operation of the Assets; provided, however, such post-Closing assistance shall
not, in any event, exceed ten (10) hours per week.
4.11 Collection of Assets. Subsequent to the Closing, Buyer shall have the
right and authority to collect all receivables and other items transferred and
assigned to Buyer by Seller hereunder and to endorse with the name of Seller any
checks received on account of such receivables or other items, and Seller agrees
that it will promptly transfer or deliver to Buyer from time to time, any cash
or other property that such Seller may receive with respect to any claims,
contracts, licenses, leases, commitments, sales orders, purchase orders,
receivables of any character or any other items included in the Assets.
4.12 Payment of Obligations. Seller shall pay all of the Excluded
Liabilities in the ordinary course of business as they become due.
4.13 Matters Relating to the Shares. Seller hereby covenants and agrees
that, in the event DURO makes an initial public offering of shares of its common
stock, upon the request of the underwriters of such offering, Seller will enter
into a "lock up" or similar agreement (on substantially the same terms as those
entered into by other stockholders of DURO) that restricts the ability of Seller
to resell shares of DURO stock during a defined period following the closing of
such initial public offering.
4.14 Further Assurances. Seller, from time to time after the Closing at
the request of Buyer and without further consideration, shall execute and
deliver further instruments of transfer and assignment and take such other
action as Buyer may reasonably require to more effectively transfer and assign
to, and vest in, Buyer the Assets free and clear of all Liens.
SECTION 5. COVENANTS OF BUYER.
Buyer covenants and agrees that:
5.1 Confidentiality. Buyer agrees that, from the date hereof until
consummation of the transactions contemplated hereby at the Closing, Buyer and
its representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Seller with
respect to its business or financial condition except for the purpose of
evaluating, negotiating and completing the transactions contemplated hereby.
Information generally known in Seller's industry or which has been disclosed to
Buyer by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transactions contemplated by this Agreement are not consummated, Buyer will
return, and cause its respective officers, directors, agents and representatives
to return, to Seller (or certify that they have destroyed) all copies of such
data and information made available to Buyer (and its officers, directors,
agents and representatives) in connection with the transaction.
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5.2 Assumed Liabilities. From and after the Closing Date, Buyer shall pay
and/or perform the Assumed Liabilities in the ordinary course as they become
due.
5.3 Notification of Certain Matters. Buyer shall promptly notify Seller of
(i) any fact, event, circumstances or action the existence or occurrence of
which would cause any of Buyer's representations or warranties under this
Agreement, or the disclosures in any schedules or exhibits attached hereto, not
to be true in any material respect and (ii) any failure on its part to comply
with or satisfy in any material respect any covenant, condition or agreement to
be complied with or satisfied by it under this Agreement. Buyer shall promptly
notify Seller in writing of the assertion, commencement or threat of any claim,
litigation, proceeding or investigation in which Seller is a party or in which
the Assets or Business may be affected and which could reasonably be expected to
be material or which relates to the transactions contemplated hereby.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATION OF BUYER.
Buyer's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, on or prior to the Closing Date, of
each of the following conditions, unless otherwise waived by Buyer in writing:
6.1 Performance of Agreements and Deliveries. Seller shall have performed
in all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Seller prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Wave to the effect that the conditions set forth in Sections 6.1 and 6.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Wave's Secretary as
to the Articles of Incorporation, the By-laws and the authority and the
incumbency of all officers executing the Seller Documents on behalf of Seller;
(c) A certified copy of Wave's Articles of Incorporation from the
Secretary of State of the State of North Carolina;
(d) An Amendment to Wave's Articles of Incorporation and any other
required documentation, which effect a change of Seller's name, which name
change shall take effect not more than five (5) days following the date of
Closing;
(e) A Certificate of Good Standing from the Secretary of State of
the State of North Carolina; and
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(f) Such other certificates and instruments reasonably requested by
Buyer.
6.2 Asset Transfer. Seller shall have delivered to Buyer the following
instruments of transfer and assignment in accordance with the provisions hereof,
transferring to Buyer all of Seller's right, title and interest in and to the
Assets, free and clear of all Liens:
(a) A Bill of Sale in the form attached hereto as Exhibit B;
(b) An Assignment and Assumption Agreement in the form attached
hereto as Exhibit C;
(c) An Assignment of Patents and Trademarks in the form attached
hereto as Exhibit D;
(d) An Assignment of Internet Domain Name in the form attached
hereto as Exhibit E; and
(e) Such other instruments of transfer reasonably requested by
Buyer.
6.3 Assignment of Contracts and Authorizations; Approvals. All Contracts
shall have been duly and validly assigned to Buyer by Seller, and all consents
and approvals required in connection with the consummation of the transactions
contemplated hereby under any Contract or Authorization or otherwise shall have
been obtained in form and substance reasonably satisfactory to Buyer and without
conditions materially and adversely affecting Buyer and which do not require
Buyer to pay money to any party to any such Contract or authorization in excess
of amounts required to be so paid pursuant to the terms and conditions thereof.
All such Contracts and Authorizations shall remain in full force and effect and
shall not have been amended, modified or repudiated in any material respect by
either party thereto. Neither Seller nor, to the knowledge of Seller or the
Principals, the other party thereto, shall have breached or defaulted under any
Contract or Authorization. Neither Seller nor the Principals shall have received
notice of or have knowledge of any fact which could result in the termination,
repudiation or breach of any material Contract or Authorization.
6.4 Non-Competition Agreements. Seller and each of the Principals shall
have executed and delivered to Buyer a Non-Competition Agreement in
substantially the form attached hereto as Exhibit F.
6.5 Release of Liens. Seller shall have obtained and delivered to Buyer,
at or prior to the Closing instruments (including payoff letters, bills of sale
and UCC-3 termination statements) releasing any and all Liens on the Assets.
6.6 Opinion of Seller's Counsel. Buyer shall have received the opinion or
opinions of Tate, Young, Morphis, Bach and Taylor L.L.P., Seller's counsel,
dated the Closing Date, substantially in the form of Exhibit G attached hereto.
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6.7 Employment Agreement. Jeffrey P. Greer shall have entered into an
Employment Agreement with Buyer in substantially the form attached hereto as
Exhibit H (the "Employment Agreement").
6.8 Closing Date Balance Sheet. No later than 30 days following the
Closing, Seller shall provide to Buyer a balance sheet dated as of the Closing,
as determined in accordance with a tax accounting basis consistently applied,
which is true and correct in all material respects and presents fairly and
accurately the financial condition of the Business as of the date of the Closing
and the results of operations for the Business for the period covered thereby
and includes, but is not limited to, Seller's accounts receivable, accounts
payable, and deferred and unearned revenue.
6.9 Shareholders Agreement. Wave shall have executed a counterpart
signature page to, and agreed to be bound by the terms, of that certain Amended
and Restated Shareholders Agreement by and among DURO and the investor parties
thereto dated as of December 30, 1999.
6.10 Escrow Agreement. Seller and the Principals shall have executed and
delivered to Buyer an Escrow Agreement in substantially the form attached hereto
as Exhibit A.
6.11 Hickory Lease. Mr. Jeffrey P. Greer shall have entered into a lease
with Buyer relating to the Premises (as defined therein) located at NC 211
Highway 127 SE, Hickory, NC 28602, dated the Closing Date, substantially in the
form of Exhibit J attached hereto (the "Hickory Lease").
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATION OF SELLER.
The obligations of Seller and the Principals to consummate the
transactions contemplated by this Agreement is subject to the satisfaction, on
or prior to the Closing Date, of the following conditions, unless waived by
Seller and the Principals in writing:
7.1 Performance of Agreement and Deliveries. Buyer shall have performed in
all material respects all of its covenants, agreements and obligations under
this Agreement which are to be performed or complied with by Buyer prior to or
upon the Closing Date and shall have delivered all documents and items required
to be delivered at or prior to the Closing, including, without limitation:
(a) A certificate, dated the Closing Date, from the President of
Buyer to the effect that the conditions set forth in Sections 7.1 and 7.2 have
been satisfied;
(b) A certificate, dated the Closing Date, from Buyer's Secretary as
to the Certificate of Incorporation, By-Laws, and the authority and the
incumbency of all officers executing the Buyer Documents on behalf of Buyer;
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(c) A certified copy of Buyer's Certificate of Incorporation from
the Secretary of State of the State of Delaware; and
(d) A Certificate of Good Standing from the Secretary of State of
the State of Delaware.
7.2 Escrow Agreement. Buyer shall have executed and delivered to Seller
and the Principals an Escrow Agreement in substantially the form attached hereto
as Exhibit A.
7.3 Employment Agreement. Buyer shall have entered into the Employment
Agreement with Jeffrey P. Greer.
7.4 Opinion of Buyer's Counsel. Seller shall have received the opinion or
opinions of Goodwin, Procter & Hoar llp, Buyer's counsel, dated the Closing
Date, substantially in the form of Exhibit I attached hereto.
7.5 Hickory Lease. Buyer shall have entered into the Hickory Lease with
Mr. Jeffrey P. Greer.
SECTION 8. TERMINATION.
8.1 Events of Termination. This Agreement and the transactions
contemplated by this Agreement may be terminated at any time prior to the
Closing:
(a) By the mutual written consent of Buyer and Seller.
(b) By Seller, if it is not in breach or default hereunder:
(i) if any representation or warranty of Buyer made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Buyer's receipt of a notice from Seller that
such breach exists or has occurred;
(ii) if Buyer shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Buyer's receipt
of a notice from Seller that such default exists or has occurred;
(iii) subject to Section 8.4 below, if the conditions to
Seller's obligations to consummate the Closing as set forth in
Section 7 cannot reasonably be satisfied or performed on or before
March 31, 2000 (unless such failure of satisfaction, non-compliance
or non-performance is the result, directly or indirectly, of any
action or failure to act on the part of Seller); or
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(iv) if the Closing has not occurred prior to April 30, 2000.
(c) By Buyer, if it is not in breach or default hereunder:
(i) if any representation or warranty of Seller made herein is
untrue in any material respect and such breach is not cured within
thirty (30) days of Seller's receipt of a notice from Buyer that
such breach exists or has occurred;
(ii) if Seller shall have defaulted in any material respect in
the performance of any material obligation under this Agreement and
such breach is not cured within thirty (30) days of Seller's receipt
of a notice from Buyer that such default exists or has occurred; or
(iii) subject to Section 8.4 below, if the conditions to
Buyer's obligations to consummate the Closing as set forth in
Section 6 cannot reasonably be satisfied or performed on or before
March 31, 2000 (unless such failure of satisfaction, non-compliance
or non-performance is the result directly or indirectly of any
action or failure to act on the part of Buyer); or
(iv) if the Closing has not occurred prior to April 30, 2000.
8.2 Manner of Exercise. In the event of the termination of this Agreement
by either Buyer or Seller pursuant to Section 8.1 notice thereof shall forthwith
be given to the other party in accordance with the provisions set forth in
Section 11 hereto and this Agreement shall terminate and the transactions
contemplated hereunder shall be abandoned without further action by Buyer or
Seller.
8.3 Effect of Termination; Liabilities. In the event of the termination of
this Agreement pursuant to Section 8.1 or Section 8.4 and prior to the Closing,
all obligations of the parties hereunder (other than pursuant to Sections 4.8
and 5.1 hereof) shall terminate, and neither Seller nor Buyer shall have any
further liability hereunder, including for losses, liabilities, obligations,
damages, deficiencies, actions, suits, proceedings, demands, assessments,
orders, judgments, costs and expenses (including attorneys' fees) of any kind
whatsoever; except upon termination of this Agreement pursuant to Sections
8.1(c)(i) and 8.1(c)(ii), Buyer shall be entitled to any remedy which it may
have, whether at law or in equity, and except upon termination of this Agreement
pursuant to Sections 8.1(b)(i) and 8.1(b)(ii), Seller shall be entitled to any
remedy which it may have, whether at law or in equity.
8.4 Waiver; Extension of Time for Performance. Seller may extend the time
for the performance of any of the obligations or other acts of Buyer hereunder,
waive any inaccuracies in the representations and warranties of Buyer contained
herein or in any document delivered pursuant hereto, or waive compliance by
Buyer with any of the agreements or conditions contained herein. Any such
extension or waiver shall be valid if set
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forth in an instrument in writing signed by Seller. Buyer may extend the time
for the performance of any of the obligations or other acts of Seller, waive any
inaccuracies in the representations and warranties of Seller contained herein or
in any document delivered pursuant hereto, or waive compliance by Seller with
any of the agreements or conditions contained herein. Any such extension or
waiver shall be valid if set forth in an instrument in writing signed by Buyer.
SECTION 9. SURVIVAL. Each of the representations, warranties, agreements,
covenants and obligations herein or in any schedule, exhibit, certificate or
financial statement delivered by any party to the other party incident to the
transactions contemplated hereby are material, shall be deemed to have been
relied upon by the other party and shall survive the Closing until the
expiration of the statute of limitations applicable to such obligation or matter
regardless of any investigation and shall not merge in the performance of any
obligation by either party hereto.
SECTION 10. INDEMNIFICATION.
10.1 Indemnification by Seller and the Principals.
(a) Each of Seller and the Principals hereby agree, jointly and
severally, to indemnify and hold harmless Buyer, its affiliates and its and
their respective directors, officers, stockholders, partners, members,
employees, and agents (individually, a "Buyer Indemnified Party" and
collectively, "Buyer Indemnified Parties"), against and in respect of all
losses, liabilities, obligations, damages, deficiencies, actions, suits,
proceedings, demands, assessments, orders, judgments, costs and expenses
(including the reasonable fees, disbursements and expenses of attorneys and
consultants) of any kind or nature whatsoever, but net of the proceeds from any
insurance policies or other third party reimbursement for such loss, to the
extent sustained, suffered or incurred by or made against any Buyer Indemnified
Party, to the extent based upon, arising out of or in connection with: (i) any
breach of any representation or warranty made by Seller or the Principals in
this Agreement or in any schedule, exhibit, certificate, agreement or other
instrument delivered pursuant to this Agreement; (ii) any breach of any covenant
or agreement made by Seller or the Principals in this Agreement or in any
schedule, exhibit, certificate, financial statement, agreement or other
instrument delivered pursuant to this Agreement; (iii) any claim made by any
person or entity which relates to the operation of the Assets or the Business
which arises in connection with or on the basis of events, acts, omissions,
conditions or any other state of facts occurring on or existing before the
Closing Date; (iv) any claim which arises in connection with any liability or
obligation of Seller other than the Assumed Liabilities; (v) any claim arising
from Seller's failure to file any Tax returns or pay any Taxes; (vi) any and all
claims, liabilities, losses, damages, costs and expenses (including without
limitation the reasonable fees and disbursements of counsel) arising out of any
failure of (A) Seller or any of its affiliates, service providers or agents or
(B) any Benefit Program, to comply with any provision of
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ERISA, the Code, or other applicable law; and (vii) any claim arising from
Seller's agreement with Avalon Partnership effective as of July 6, 1999, or any
similar agreement, arrangement or understanding.
10.2 Indemnification by Buyer. Buyer agrees to indemnify and hold harmless
Seller and its officers, directors, managers, members, employees and agents
(individually, a "Seller Indemnified Party" and collectively, "Seller
Indemnified Parties") at all times against and in respect of all losses,
liabilities, obligations, damages, deficiencies, actions, suits, proceedings,
demands, assessments, orders, judgments, costs and expenses (including the
reasonable fees, disbursements and expenses of attorneys and consultants), of
any kind or nature whatsoever, to the extent sustained, suffered or incurred by
or made against any Seller Indemnified Party, to the extent based upon, arising
out of or in connection with: (i) any breach of any representation or warranty
made by Buyer in this Agreement or in any schedule, exhibit, certificate,
agreement or other instrument delivered pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Buyer in this Agreement or in any
schedule, exhibit, certificate, agreement or other instrument delivered pursuant
to this Agreement; (iii) any claim made against Seller Indemnified Parties which
relates to, results from or arises out of Buyer's operation of the Assets or the
Business from and after the Closing Date; and (iv) the Assumed Liabilities.
10.3 Notice; Defense of Claims.
(a) Notice of Claims. Promptly after receipt by an indemnified party
of notice of any claim, liability or expense to which the indemnification
obligations hereunder would apply, the indemnified party shall give notice
thereof in writing to the indemnifying party, but the omission to so notify the
indemnifying party promptly will not relieve the indemnifying party from any
liability except to the extent that the indemnifying party shall have been
prejudiced as a result of the failure or delay in giving such notice. Such
notice shall state the information then available regarding the amount and
nature of such claim, liability or expense and shall specify the provision or
provisions of this Agreement under which the liability or obligation is
asserted.
(b) Third Party Claims. With respect to third party claims, if
within twenty (20) days after receiving the notice described in clause (a) above
the indemnifying party (i) gives written notice to the indemnified party stating
that (A) it would be liable under the provisions hereof for indemnity in the
amount of such claim if such claim were successful and (B) that it disputes and
intends to defend against such claim, liability or expense at its own cost and
expense and (ii) provides reasonable assurance to the indemnified party that
such claim will be promptly paid in full if required, then counsel for the
defense shall be selected by the indemnifying party (subject to the consent of
the indemnified party which consent shall not be unreasonably withheld) and the
indemnified party shall not be required to make any payment with respect to such
claim, liability or expense as long as the indemnifying party is conducting a
good faith and diligent defense at its own expense; provided, however, that the
assumption of defense of any such matters by the indemnifying party shall relate
solely to the claim,
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liability or expense that is subject or potentially subject to indemnification.
The indemnifying party shall have the right, with the consent of the indemnified
party, which consent shall not be unreasonably withheld, to settle all
indemnifiable matters related to claims by third parties which are susceptible
to being settled provided the indemnifying parties' obligation to indemnify the
indemnified party therefor will be fully satisfied. The indemnifying party shall
keep the indemnified party apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall furnish
the indemnified party with all documents and information that the indemnified
party shall reasonably request and shall consult with the indemnified party
prior to acting on major matters, including settlement discussions.
Notwithstanding anything herein stated, the indemnified party shall at all times
have the right to fully participate in such defense at its own expense directly
or through counsel; provided, however, if the named parties to the action or
proceeding include both the indemnifying party and the indemnified party and
representation of both parties by the same counsel would be inappropriate under
applicable standards of professional conduct, the expense of separate counsel
for the indemnified party shall be paid by the indemnifying party. If no such
notice of intent to dispute and defend is given by the indemnifying party, or if
such diligent good faith defense is not being or ceases to be conducted, the
indemnified party shall, at the expense of the indemnifying party, undertake the
defense of (with counsel selected by the indemnified party), and shall have the
right to compromise or settle (exercising reasonable business judgment), such
claim, liability or expense. If such claim, liability or expense is one that by
its nature cannot be defended solely by the indemnifying party, then the
indemnified party shall make available all information and assistance that the
indemnifying party may reasonably request and shall cooperate with the
indemnifying party in such defense.
(c) Non-Third Party Claims. With respect to non-third party claims,
if within twenty (20) days after receiving the notice described in clause (a)
above the indemnifying party does not give written notice to the indemnified
party that it contests such indemnity, the amount of indemnity payable for such
claim shall be as set forth in the indemnified party's notice. If the
indemnifying party provides written notice to the indemnified party within such
20-day period that it contests such indemnity, the parties shall attempt in good
faith to reach an agreement with regard thereto within thirty (30) days of
delivery of the indemnifying party's notice. If the parties cannot reach
agreement within such 30-day period, the matter may be submitted by either party
for binding arbitration in accordance with the provisions of Section 12.11
hereof.
10.4 Claims Against Escrow Deposit. In the event that any Buyer
Indemnified Party sustains or incurs damages, liabilities, losses, taxes, fines,
penalties, costs or expenses, including, without limitation, attorneys fees, for
which it is entitled to indemnification from Seller under this Agreement, in
addition to all other rights or remedies that Buyer may have (including the
right to collect directly from Seller), such Buyer Indemnified Party shall be
entitled to receive in cash from the Escrow Deposit an amount equal to the
damages, liabilities, losses, taxes, fines, penalties, costs and expenses,
including, without limitation, attorneys fees, sustained or incurred by such
Buyer Indemnified Party in accordance with the provisions of the Escrow
Agreement.
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SECTION 11. NOTICES. All notices and other communications required to be given
hereunder, or which may be given pursuant or relative to the provisions hereof,
shall be in writing and shall be deemed to have been given (i) if delivered or
sent by facsimile transmission, upon acknowledgment of receipt by the recipient,
(ii) if sent by a nationally recognized overnight courier, properly addressed
with postage prepaid, on the next business day (or Saturday or Sunday if sent
for delivery on such days), or (iii) if sent by registered or certified mail,
upon the earlier of the date on which receipt is acknowledged and the dated with
is three (3) days after deposit in the United States post office facilities
properly addressed with postage prepaid as follows:
If to Seller or the Principals: Mr. Jeffrey P. Greer
211 NC Highway 1275
Hickory, NC 28602
With a copy to: Tate, Young, Morphis, Bach and
Taylor, L.L.P.
First Lawyers Building
400 2nd Avenue NW
P.O. Drawer 2428
Hickory, NC 28603
Attn: T. Dean Amos, Esq.
If to Buyer: DURO Communications, Inc.
1211 Semoran Blvd., Suite 217
Casselberry, FL 32707
Attn.: Peter B. Hopper, President
With a copy to: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn.: David F. Dietz, P.C.
SECTION 12. MISCELLANEOUS.
12.1 Assignability; Binding Effect. This Agreement shall not be assignable
by Buyer or Seller except with the written consent of the other, except that
Buyer may assign its rights hereunder either (a) to any affiliate of Buyer or
its owners, (b) as a result of any merger, reorganization or other
consolidation, or (c) in connection with the granting of a security interest to
its senior lender. This Agreement shall be binding upon and shall inure to the
benefit of, the parties hereto and their respective successors and permitted
assigns.
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12.2 Headings. The subject headings used in this Agreement are included
for purposes of convenience only and shall not affect the construction or
interpretation of any of its provisions.
12.3 Amendments; Waivers. This Agreement may not be amended or modified,
nor may compliance with any condition or covenant set forth herein be waived,
except by a writing duly and validly executed by Buyer and Seller or, in the
case of a waiver, the party waiving compliance. No delay on the part of any
party in exercising any right, power or privilege hereunder shall operate as a
waiver thereof, nor shall any waiver on the part of any party of any such right,
power or privilege, or any single or partial exercise of any such right, power
or privilege, preclude any further exercise thereof or the exercise of any other
such right, power or privilege.
12.4 Bulk Sales Law. Buyer hereby waives compliance by Seller of any
applicable bulk sales law and Seller agrees, to make full and timely payment
when due of all amounts owed by such Seller to its creditors. Seller agrees to
indemnify and hold Buyer harmless from, and reimburse Buyer for, any loss, cost,
expense, liability or damage (including reasonable counsel fees and
disbursements and expenses) which Buyer may suffer or incur by virtue of the
non-compliance by Seller with such laws.
12.5 Entire Agreement. This Agreement, together with the schedules and
exhibits hereto, constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes and cancels any and all
prior or contemporaneous arrangements, understandings and agreements between
them relating to the subject matter hereof.
12.6 Severability. In the event that any provision or any portion of any
provision of this Agreement shall be held to be void or unenforceable, then the
remaining provisions of this Agreement (and the remaining portion of any
provision held to be void or unenforceable in part only) shall continue in full
force and effect.
12.7 Governing Law. This Agreement and the transactions contemplated
hereby shall be governed and construed by and enforced in accordance with the
laws of the State of North Carolina, without regard to conflict of laws
principles.
12.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute the same instrument.
12.9 Expenses. Each party shall pay its own expenses incident to the
negotiation, preparation and performance of this Agreement and the transactions
contemplated hereby, including all fees and expenses of its counsel and
accountants for all activities of such counsel and accountants undertaken
pursuant to this Agreement, whether or not the transactions contemplated hereby
are consummated.
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12.10 Remedies. It is specifically understood and agreed that certain
breaches of this Agreement will result in irreparable injury to the parties
hereto, that the remedies available to the parties at law alone will be an
inadequate remedy for such breach, and that, in addition to any other legal or
equitable remedies which the parties may have, a party may enforce its rights by
an action for specific performance and the parties expressly waive the defense
that a remedy in damages will be adequate.
12.11 Dispute Resolution. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof shall be finally settled
solely and exclusively by arbitration conducted expeditiously in accordance with
the CPR Institute For Dispute Resolution Rules for Nonadministered Arbitration
of Business Disputes (the "CPR Rules"). The CPR Institute For Dispute Resolution
shall appoint a neutral advisor from its national CPR panel. The arbitration
shall be governed by the United States Arbitration Act, 9 U.S.C. ss.ss.1-16, and
judgment upon the award rendered by the arbitrators may be entered by any court
having jurisdiction thereof. The place of arbitration shall be Charlotte, North
Carolina.
Such proceedings shall be administered by the neutral advisor in
accordance with the CPR Rules as he/she deems appropriate, however, such
proceedings shall be guided by the following agreed upon procedures:
(a) Mandatory exchange of all relevant documents, to be accomplished
within forty-five (45) days of the initiation of the procedure;
(b) No other discovery;
(c) Hearings before the neutral advisor which shall consist of a
summary presentation by each side of not more than three hours; such hearings to
take place in one or two days at a maximum; and
(d) Decision to be rendered not later than ten (10) days following
such hearings.
Each of the parties hereto (a) hereby unconditionally and irrevocably
submits to the jurisdiction of any United States District Court of competent
jurisdiction located in the State of North Carolina for the purpose of enforcing
the award or decision in any such proceeding and (b) hereby waives, and agrees
not to assert in any civil action to enforce the award, any claim that it is not
subject personally to the jurisdiction of the above-named court, that its
property is exempt or immune from attachment or execution, that the civil action
is brought in an inconvenient forum, that the venue of the civil action is
improper or that this Agreement or the subject matter hereof may not be enforced
in or by such court, and (c) hereby waives and agrees not to seek any review by
any court of any other jurisdiction which may be called upon to grant an
enforcement of the judgment of any such court. Each of the parties hereto hereby
consents to service of process by registered mail at the address to which
notices are to be given. Each of the parties hereto agrees that its submission
to jurisdiction and its consent to service of process
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by mail is made for the express benefit of the other parties hereto. Final
judgment against any party hereto in any such action, suit or proceeding may be
enforced in other jurisdictions by suit, action or proceeding on the judgment,
or in any other manner provided by or pursuant to the laws of such other
jurisdiction; provided, however, that any party may at its option bring suit, or
institute other judicial proceedings, in any state or federal court of the
United States or of any country or place where the other parties or their assets
may be found.
Notwithstanding the foregoing, the parties may enforce their rights under
this Agreement in accordance with Section 12.10.
12.12 Third Party Rights. This Agreement is for the benefit of the parties
hereto and is not entered into for the benefit of, and shall not be construed to
confer any benefit upon, any other party or entity.
[Remainder of page intentionally left blank]
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IN WITNESS WHEREOF, Seller, each of the Principals, and Buyer have caused
this Asset Purchase Agreement to be executed as of the date first above written.
SELLER:
WAVE COMMUNICATIONS, INC.
By: /s/ Jeffrey P. Greer
--------------------------------------
Jeffrey P. Greer
President
WAVE COMMUNICATIONS ACQUISITION
SUBSIDIARY, INC.
By: /s/ Jeffrey P. Greer
--------------------------------------
Jeffrey P. Greer
President
WAVE TRAINING SUBSIDIARY, INC.
By: /s/ Jeffrey P. Greer
--------------------------------------
Jeffrey P. Greer
President
PRINCIPALS:
/s/ Jeffrey P. Greer
------------------------------------------
Jeffrey P. Greer
/s/ Paul Greer
------------------------------------------
Paul Greer
<PAGE>
BUYER:
DURO COMMUNICATIONS, INC.
By: /s/ Peter B. Hopper
--------------------------------------
Peter B. Hopper, President
DURO HOLDING CORP.
By: /s/ Peter B. Hopper
--------------------------------------
Peter B. Hopper, President
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
SCHEDULES
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Bill of Sale
Exhibit C - Form of Assignment and Assumption Agreement
Exhibit D - Form of Assignment of Patents and Trademarks
Exhibit E - Form of Assignment of Internet Domain Name
Exhibit F - Forms of Non-Competition Agreement
Exhibit G - Form of Opinion of Seller's Counsel
Exhibit H - Form of Employment Agreement
Exhibit I - Form of Opinion of Buyer's Counsel
Exhibit J - Form of Lease
Schedule 1.1(a) Equipment
Schedule 1.1(b) Contracts
Schedule 1.1(c) Intellectual Property
Schedule 1.1(d) Licenses and Authorizations
Schedule 1.1(e) Accounts Receivable
Schedule 1.2(a) Excluded Assets
Schedule 1.2(b) Excluded Contracts
Schedule 1.2(c) Excluded Insurance
Schedule 1.2(d) Excluded Tax Items
Schedule 1.5(a) Bank and Lease Payoff Amounts
Schedule 1.6(c) Estimated Adjustment Statement
Schedule 2.4 Taxes
Schedule 2.4(d) Audits
Schedule 2.6 Insurance
Schedule 2.9 Litigation
Schedule 2.10 Employees; Labor Matters
Schedule 2.11 Financial Statements
Schedule 2.14 Approvals; Consents
Schedule 2.16(a) Subscribers
Schedule 2.16(b) Complimentary Accounts
Schedule 2.16(c) Disconnection Policy
Schedule 2.19 Banking Relations
Schedule 2.20 Intellectual Property
Schedule 2.22 Transactions with Interested Persons
Schedule 2.23 Employee Benefit Programs
Schedule 2.24 Environmental Matters
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DURO Communications, Inc.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the registration statement.
/s/ KPMG LLP
KPMG LLP
Orlando, Florida
April 13, 2000
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DURO Communications, Inc.:
We consent to the inclusion of our report dated March 10, 2000, with respect
to the balance sheet of EdgeNet Network Services, (a division of EdgeNet
Media, LLC) as of April 23, 1999, and the related statements of earnings,
changes in members' equity, and cash flows for the period from January 1, 1999
through April 23, 1999, which report appears in the registration statement of
DURO Communications, Inc. dated April 13, 2000.
/s/ Lattimore, Black, Morgan, and Cain, P.C.
Lattimore, Black, Morgan, and Cain, P.C.
Brentwood, Tennessee
April 13, 2000
<PAGE>
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DURO Communications, Inc.:
We consent to the inclusion of our report dated February 19, 2000, with
respect to the balance sheets of Surf South, Inc. as of December 29, 1999 and
December 31, 1998 and 1997, and the related statements of operations,
stockholders' equity, and cash flows for the period from January 1, 1999 through
December 29, 1999, and for each of the years in the two-year period ended
December 31, 1998, and our report dated February 29, 2000, with respect to the
balance sheets of Opti-Link Communications, Inc. (a wholly owned subsidiary of
Telecom Group, Inc.) as of December 22, 1999 and December 31, 1998, and the
related statements of operations, stockholders' equity, and cash flows for the
period from January 1, 1999 through December 22, 1999, and for the period from
April 22, 1998 (date of inception) through December 31, 1998, which reports
appear in the registration statement of DURO Communications, Inc. dated April
13, 2000.
/s/ Bowen, Phillips and Carmichael, LLP
Bowen, Phillips and Carmichael, LLP
Tifton, Georgia
April 13, 2000
<PAGE>
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
DURO Communications, Inc.
The audited financial statements of iThink, Inc. as of December 31, 1998 and
1999 and for each of the years in the three-year period ended December 31, 1999,
included in this prospectus have been audited by Cordovano and Harvey, P.C.,
independent accountants, as stated in our report appearing in this prospectus,
and have also been so included, in reliance upon our authority as experts in
accounting and auditing.
/s/ Cordovano and Harvey, P.C.
Cordovano and Harvey, P.C.
Denver, Colorado
April 13, 2000
